What is Overseas Transfer Charge?

Full Definition

The Overseas Transfer Charge is a 25% tax charge introduced from March 2017 that applies to certain transfers of UK pension benefits to a Qualifying Recognised Overseas Pension Scheme (QROPS), a category of overseas pension scheme that meets HMRC conditions allowing it to receive UK pension transfers without the transfer itself being treated as an unauthorised payment. Before the charge was introduced, transfers to QROPS were generally tax-free regardless of where the member or the receiving scheme was located, which HMRC considered was being used by some individuals to move UK tax-relieved pension savings offshore purely to access funds more flexibly or avoid future UK tax, rather than for a genuine change in personal circumstances. The charge does not apply, and the transfer remains tax-free, where one of several exemptions is met at the time of transfer: the member is resident in the same country as the QROPS receiving the transfer; the member is resident in a country within the European Economic Area and the QROPS is established in a country within the EEA (though this exemption's practical scope narrowed following the UK's departure from the EU, and HMRC guidance should be checked for current treatment); the QROPS is an occupational pension scheme provided by the member's employer; or the QROPS is an overseas public service scheme and the member is employed by one of the relevant employers. Where none of these exemptions applies -- most commonly, where the member has moved to live in a country different from where the QROPS is based -- the 25% charge is deducted from the transfer value before it leaves the UK scheme, and is normally accounted for and paid by the UK scheme administrator. A further complication is that even a transfer that qualifies for exemption at the point of transfer can become retrospectively chargeable if the member's circumstances change within five tax years of the transfer -- for example, if they move to live in a different country from the QROPS shortly after an exempt transfer, the transfer can become liable to the 25% charge at that later point. This five-year "watch period" means individuals considering a QROPS transfer, particularly those who may relocate again in the near future, should take specialist cross-border pension advice before transferring, since an unexpected charge can significantly erode retirement savings.

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