There are various tax implications involved with transferring your pension overseas. These can be split into three distinct sections: the first five years after transfer, the following years, and tax on your estate.
Tax charges in the first five tax years
If you move your UK pension to a QROPS the transfer will NOT incur any tax charge. However, this must be less than your lifetime allowance, which stands at £1.8 million for 2010/11.
Withdrawals after you reach retirement age are tax free in the first five years, providing you take no more than 25 percent as a lump-sum payment.
Tax charges after the 5 year period has ended
This depends on the jurisdiction in which your pension plan now resides. An IFA can give you information on the most tax-friendly jurisdictions, but in most cases there will be no tax charges after the first five years.
Tax Charges on your Estate
Whilst a UK pension scheme isn’t classed as an asset to be passed on to your heirs, most offshore pension schemes are. However, HMRC may make a claim on your estate if they consider you to be domiciled in the UK.
Please read our section on Estate Planning for further information. If not considered carefully, your pension scheme can potentially be taxed for capital gains and inheritance tax at the same time, so we recommend talking to an IFA for information specific to your case.