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QROPS: Avoiding Lifetime Allowance Charge (LTA)

QROPS: Avoiding Lifetime Allowance Charge (LTA)

QROPS: Avoiding Lifetime Allowance Charge (LTA). A lifetime allowance charge is somewhat of a double edged sword. Firstly, you’ve done extremely well with your contributions over the years to have a pot with a value nearing or exceeding £1 million. However, this also means HMRC view it as an opportunity to tax you substantially for getting there.

It’s therefore important to look at solutions to mitigate the effect of the lifetime allowance charge. 

How can a QROPS assist in avoiding the Lifetime Allowance (LTA) charge?

Qualifying Recognised Overseas Pension Schemes (QROPS) can be an option for wealthy expats residing in the European Economic Area (EEA). It particularly concerns individuals whose UK pensions are nearing the current lifetime allowance of £1,073,100.

The problem for wealthy retirement savers is anyone who has a pension fund that exceeds the cap faces the lifetime allowance excess tax charge of 25% on income and a 55% tax on lump sums. As the economy and rates of return on investments increase, there is a risk your pension could exceed this amount and be subject to the charges mentioned. 

How has the Lifetime Allowance altered over the years?

Tax Year Lifetime Allowance
2022/23 £1,073,100
2021/22 £1,073,100
2020/21 £1,073,100
2019/20 £1,055,000
2018/19 £1,030,000
2017/18 £1,000,000
2016/17 £1,000,000
2015/16 £1,250,000
2014/15 £1,250,000
2013/14 £1,500,000
2012/13 £1,500,000
2011/12 £1,800,000
2010/11 £1,800,000
2009/10 £1,750,000
2008/09 £1,650,000
2007/08 £1,600,000
2006/07 £1,500,000

The lifetime allowance has varied over the last 15 or so years, however the current allowance of £1,073,100 has been frozen by the UK Government until 2025/26. For individuals with UK pensions nearing this amount, the investments will potentially grow over the coming years to exceed the allowance. 

How can QROPS legislation assist?

A pension transfer to a QROPS is a benefit crystallisation event (BCE 8), and the funds will be subject to a lifetime allowance test at that time. This is regardless of whether you as the member have reached pension age or intend to take an immediate income following the transfer.

Luckily, the lifetime allowance only has significance in the UK (pre-transfer), and taking retirement benefits from former UK pension funds held in an overseas pension scheme will not trigger a BCE. This allows a client to use a QROPS to benefit from no maximum lifetime allowance.

Moreover, any growth in value of the QROPS above the value of the UK Lifetime Allowance (£1,073,100 2021/22) paid as a pension, will escape the 25% Lifetime Allowance excess tax charge. This charge would otherwise apply to any pension paid from a UK registered pension scheme to persons who are UK resident or non-resident for less than five years where the value of the pension exceeds the Lifetime Allowance (£1,073,100 2021/22).

What if the value of my pensions are over £1,073,100 before transferring into a QROPS?

When the transfer takes place, HMRC will value your pension and compare it against your lifetime allowance (£1,073,100 for 2021/22). If the transfer value exceeds your unused allowance, you will be liable to the tax charge.

However, if you have registered your UK pension savings for primary protection, enhanced protection, fixed protection 2012, fixed protection 2014 or fixed protection 2016, you will be able to transfer the value of your UK pensions and protect the majority, if not all, of those savings from a tax charge if they exceed the standard lifetime allowance that applies at the time the transfer takes place.

Also, the UK Government still allow you to apply for Fixed Protection 2016 as long as you haven’t contributed to your pension savings since 5 April 2016. This would increase your lifetime allowance to £1.25 million and could help avoid an lifetime allowance charge if the pension was valued less than this amount. 

What if you decide to retire back in the UK after transferring into a QROPS?

If your pension fund is close to or exceeds the lifetime allowance, it is possible to apply for an enhancement from HMRC. The enhancement factor will ensure that the investment growth attained in the QROPS and any amount previously tested against the lifetime allowance on transfer to the QROPS, will not be subject to a lifetime allowance tax charge in the future. Additionally, clients can benefit from the Harrison Brook Transfer Out / Switch Back Service.

Are you concerned by your pension Lifetime Allowance (LTA)? Interested in avoiding lifetime allowance charge?

Harrison Brook is your perfect cross border partner to understand what is best for your current situation. Simply Get Started, speak to an adviser today for free, no obligation, financial analysis and information tailored for your situation.

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The information contained herein is for informational purposes only which is subject to change and should not be relied upon. You should seek advice from a professional adviser before embarking on any financial planning activity.

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