Should you transfer your UK pension to Australia?

With the advent of the new QROPS system, more and more UK residents departing are taking their UK pension with them. Each individual needs to do their homework, because there is no one size fits all answer.

If you don't anticipate returning to the UK in the foreseeable future, it's worth looking into whether transferring your UK pension to a QROPS in Australia could be of benefit to you.

Benefits of transferring a UK pension to a QROPS

• Preserve your pension savings for your beneficiaries
• Avoid hefty UK tax charge
• Under existing UK tax rules, your retirement savings will likely be significantly eroded by taxes in the event of your death. In many circumstances your pension savings will either be hit by a 35% tax charge before being passed onto your beneficiaries if you die, or may not be passed on at all.
• If you die once you've started drawing benefits out of your pension, but before your pension turns to an annuity (prior to age 75), the amount of your pension going to beneficiaries will be subject to a UK tax charge of 35%.

Consider this:

Transferring to an Australian superannuation fund means there is no need to pay a UK tax charge upon death. With the right planning, the full value of your Australian superannuation funds can be passed onto your dependent beneficiaries.

No requirement to buy an annuity
In the UK, upon retirement (until age 75), you are permitted to take up to 25% of your pension as a tax free lump sum and/or take a pension as income withdrawal directly from the scheme. At age 75, the balance must go either into an alternative secured income phase (ASP), or into an annuity (secured pension), and paid only for the life of the member.

An annuity is the guaranteed weekly or monthly income, sold by insurance companies, which you get in exchange for your pension (the capital value of which is normally determined by appointed actuaries for the fund).

Annuities are seen my many as poor value, and have several disadvantages. One of the major downsides of an annuity is that in many cases your pension does not get passed on to your beneficiaries when you die. This is because your pension has been ?exchanged? for a guaranteed income to the member, so it no longer technically exists.

Consider this:

By transferring to an Australian superannuation fund, there is no need to ever purchase an annuity. Upon death, the funds in their entirety go to your dependent beneficiaries. In addition, Australian regulations allow you/beneficiary to choose either a lump sum or an income stream - a choice which is not available to you under the UK pension rules.

Possibly no tax on pensions exceeding the Lifetime Allowance
UK residents can accumulate œ1.6 million (2007/2008) in pension schemes (known as Lifetime Allowance). Any pension savings in excess of this limit are taxed at 25% (or 55% if taken as a lump sum).
These limits and tax penalties do not occur in Australian superannuation.

Possibly no Foreign Investment Fund tax
Overseas earnings from a Foreign Investment Fund or Foreign Life Assurance Policy of an Australian resident may be taxed annually on an accrual basis (i.e. earnings of fund assessable to Australian tax resident annually, even if earnings are not realised). There are some exceptions:

• Employer-sponsored funds, such as UK occupational schemes
• Where total value of fund assets are less than $50,000.
• The exemption does not apply to personal/stakeholder schemes. ?

Greater investment freedom
Many people see UK pensions as too complex and restrictive. One of the most common criticisms is that UK schemes do not give you much - if any - control over your investments, particularly within a company pension scheme. The degree of control you have personally will depend on which type of scheme you have, be it an occupational scheme, a personal pension scheme or stakeholder scheme.

Consider this:

By transferring to an Australian superannuation fund, you have access to a wide range of choice over how your funds are invested. Being able to invest into a more diversified range of asset classes means more choice and control and potential to invest in better returning assets. You also have more flexibility in terms of how and when you receive benefits. And you can also take tax-free benefits if structured correctly. See an adviser to determine the most appropriate set-up.

Control and consolidate your retirement investment
You can consolidate all of your superannuation or retirement income into one fund.
With only one super account to keep track of, you're likely to pay less in fees, and therefore build your savings more quickly.

Avoid currency risk
Leaving your pension in the UK means that your retirement income is subject to exchange rate risks. If you were to draw your benefits from the UK, the amount received each payment would vary according to the value of the British Pound to the Australian dollar. This would place unnecessary risk on funding your retirement in Australia. By transferring, you eliminate the currency risk associated with your benefits.

Tax free income stream or lump sum

Transfers to an Australian super fund are preserved in the fund until the condition of release has been met. Generally, this is determined by reaching preservation age (55-60) and work status. See an adviser for further guidance on retirement planning strategies.

In Australia, once the condition of release has been met, you are permitted to receive your super balance as a lump sum or as an income stream - or as a combination of both.

Strategies can be formulated to reduce tax on lump sums and income streams to nil.