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Financial planning case study: Bringing it all back home

The problem. The client has worked abroad for a number of years and has built up a pension fund from overseas employment in Canada with a value

of $300,000. He has now returned to employment in the UK and has about £1m worth of pension funds. He is due to retire within five years. He has no intention of living permanently abroad after retiring. He is worried about the reduction of the lifetime allowance to £1.5m and how this affects him in relation to overseas pension schemes and wants to consider his options.

The solution
What first must be established is whether this Canadian-based pension scheme is a recognised overseas pension scheme in the eyes of HMRC. Under the Finance Act 2004, if the UK has a double-taxation agreement with that country or the scheme is open to persons resident in that country, benefits cannot be payable earlier than they would be under a UK- registered scheme.

Also, at least 70 per cent of the funds to be transferred would be used by the receiving scheme to provide an income for life. All this means the Canadian pension scheme would be considered a recognised overseas pension scheme.

In terms of the options available to the client in relation to his preserved pension in Canada, he can either:

  1. Leave these benefits in the overseas pension arrangement and potentially face issues such as increased complexity and potential currency volatility when the pension income becomes payable
  2. If allowable, potentially transfer the benefits to his UK registered occupational pension scheme
  3. If allowable, transfer benefits to a new or existing UK registered individual arrangement, with set-up and ongoing charges taken into consideration.

The potential transfer from this recognised overseas pension scheme to a UK registered pension scheme is not a recognised transfer. Therefore the inward transfer is not an unauthorised payment, which would incur a tax charge of 55 per cent. Subsequently, the transfer is not treated as a contribution, so it does not qualify for tax relief.

The client’s lifetime allowance, reduced to £1.5m as of April 6, is enhanced from the date of the transfer to take into account the fact the funds were not UK tax-relieved. The client must claim this enhancement by registering it with HMRC within five years after January 31 following the tax year in which the transfer is made.

In relation to the client’s annual allowance, if the transfer is going into a UK-registered defined-benefit scheme the transfer value is deducted from the value of benefits at the end of the input period. If the receiving scheme is any other type of scheme, then the transfer value is ignored because it is not classed as a contribution.

If is it established that the Canadian pension scheme is not a recognised overseas pension scheme in the eyes of HMRC, then the same rules apply as above. However, there is one notable exception – there would be no enhancement to the client’s lifetime allowance in relation to the transfer value. Therefore a potential tax charge of 55 per cent if the excess is drawn as a lump sum or 25 per cent if the excess is used to provide additional taxable retirement income.

Whatever the decision, the client and his adviser make in relation to these preserved overseas pension benefits, whether or not the Canadian pension fund is recognised in the eyes of HMRC would have a strong influence over the decision of what to do with these preserved overseas pension benefits.

Aj Somal is adviser at Aurora Financial Planning

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