Since 9 March all qualifying recognised overseas pension schemes (QROPS) transfers will have to pay a charge of 25 per cent of their value unless the transfer meets certain exemptions.
The transfer will not incur the charge if:
• the individual and the pension savings will be based in the same country,
• both are within the European Economic Area (EEA) or
• the QROPS is provided by the individual's employer.
The tax charge can also be imposed on anyone who initially meets one of these criteria, but whose circumstances change within five tax years of the transfer, meaning they are no longer exempt. Conversely, if someone initially does not meet any exemptions and pays the charge, but their circumstances change within five tax years so they do meet an exemption, the government will refund them.
The suddenness of the change could cause disruption. Les Cameron, head of technical at Prudential, says: "Some transfers will still be able to go ahead, but others will need to be stopped. Many will no doubt pause transfers until the detail can be fully considered."
All current QROPS schemes must inform HM Revenue & Customs by 13 April if they plan to remain a QROPS and operate the overseas transfer charge. So Mr Cameron suggests you check with your scheme if they are planning to remain a QROPS.
If they are not, your UK pension scheme may refuse to make the transfer or you'll have to pay an unauthorised payments charge of at least 40 per cent of the value of the transfer - the penalty for transfering your pension savings to an overseas pension scheme that is not a QROPS or a registered pension scheme.
"The last thing anyone wants is to incur an unplanned 25 per cent tax charge or possibly more if their intended QROPS decides to deregister," adds Mr Cameron.
The 25 per cent charge diminishes the case for using a QROPS, according to Gary Smith, chartered financial planner at Tilney Group, especially as they tend to be more expensive than UK pension schemes. And the government's ability to claw back the 25 per cent charge during the following five tax years if your circumstances change adds an additional risk.
Mr Smith says: "This is likely to be an issue for those seeking to move abroad in retirement to a European Union (EU) country, as they don't have any surety at the moment that they will be able to remain in that country once the Article 50 negotiations [on the UK leaving the EU] have been completed."
He suggests considering postponing the transfer of a pension overseas for the next two years, while the terms of the UK's exit from the EU are worked out.
However, Kate Smith, head of pensions at Aegon, points out that pension fraudsters often persuade investors to move their pension overseas, commonly to Malta or Hong Kong, telling them that doing this will double their money in 10 years' time. The 25 per cent charge should reduce this type of fraud, especially as it won't apply to people who are genuinely moving overseas and want to take their pension with them.
"The 25 per cent charge will crack down on those looking to exploit any loop holes in the tax system, but should not impede anyone with genuine retirement planning aspirations," adds Nathan Long, senior pension analyst at Hargreaves Lansdown. "Those retiring abroad still have potential to transfer to an appropriate scheme if it meets certain criteria. Even if they can't, [pension freedoms mean] they have the ability to take their pension entirely in cash once they are over 55, which should ensure pension savings can be accessed easily irrespective of where they retire."
