Pensions
Last Updated: 6 Apr 24 10 min read
The Overseas Transfer Allowance was one of three new allowances introduced on 6th April 2024 to replace the previous Lifetime Allowance.
What is the Overseas Transfer Allowance?
What level is the allowance and how is it used up?
How does the Overseas Transfer Allowance interact with the other allowances?
Further to the abolition of the Lifetime Allowance three new allowances were introduced to limit the tax privileged amounts that could be taken from UK pension schemes.
The Overseas Transfer Allowance was introduced to replace what was previously BCE8 - transfers to Qualifying Recognised Overseas Pension Schemes.
The Overseas Transfer Allowance only applies to transfers that are otherwise outside the scope of the Overseas Transfer Charge, first introduced in 2017, and explained in our Transfer to or from QROPS article.
The taxation is being linked to the existing overseas transfer charge (OTC). Any transfer to a QROPS that is not subject to the existing OTC will be tested against the OTA.
Where a relevant transfer exceeds the available OTA there is a charge of 25% on the excess.
The OTA is set at the same level as the individual's Lump Sum and Death Benefit Allowance.
It is the level before any deductions are made. The levels are included in our Lump Sum and Death Benefit Allowance Article.
The OTA for those with no protection is £1,073,100.
As at 6th April 2024 the allowance is only reduced by two things:
However, in Pension Scheme Newsletter 158 the government said they will bring forward legislation to provide that the transitional reduction to a member’s OTA includes pre-A day pensions in payment as if they had not had a deemed BCE they would not be included in the deduction in 1. above.
In the same newsletter HMRC also confirmed that the government will bring forward legislation to provide that funds designated to drawdown prior to 6th April 2024, i.e. have been LTA tested and included in 1 above would not be double counted against the OTA.
For the two regulatory amendments above HMRC stated that "Until the legislation is effective, affected members may wish to defer their request to transfer rights held under a registered pension scheme to a QROPS".
Quite simply, it doesn't!
Unlike the BCE 8 under the LTA regime, which used up the LTA available for any future UK pension benefits, using the OTA does not use up LSA or LSDBA, and vice versa.
The overseas scheme has it's own LSA and LSDBA which is only reduced by tax free payments from the overseas scheme. Likewise the UK allowances are not reduced by any tax free amounts paid from the overseas scheme.
In the lead up to the abolition of the LTA this non interaction of the two regimes led to a concept known as "Double Bubble". So called, down to the fact that someone who had never taken any benefits before would be able to get two tax free lump sums of £268,275.
Example Roy does not have any protections. He had used up 60% of the LTA at 5th April 2024. This leaves Roy with a LSA of £107,310. Roy has uncrystallised funds of £900,000 remaining. As he is limited to 25% tax free he only needs to vest £429,240 to use up his LSA. His OTA is reduced by 60% to £429,240. He has £470,760 of uncrystallised money. Roy could transfer up to his OTA overseas thus giving him an extra £107,310 in tax free cash. |
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