UK pension changes for 2025
As is often the case, being non-UK resident does not always mean Brits abroad or those who have worked in the UK are not affected in some way or another by a UK Budget and UK pension changes. Of course, issues surrounding Income Tax, National Insurance and duties on things like cigarettes and alcohol are not really going to mean a lot. However, changes to UK pensions (and QROPS) often impact non-UK residents. In this case, I am not referring to the UK State Pension but the additional pension provision covered by DC (Defined Contribution) pensions such as SIPPs and most modern private sector pensions, and DB (Defined Benefit) pensions, which include most public sector pensions and many older private sector pensions.
What Changed?
Well, the devil will be in the detail and we can only go with what we know to date as there will be consultation on some of the changes. Of concern for this article are the changes to-
1. The Overseas Transfer Charge, and
2. Inheritance Tax(IHT).
The Overseas Transfer Charge (OTC)
This was originally introduced in 2017 and applied a 25% charge on pension transfers to QROPS if the pension member did not live in the EEA/Gibraltar or in the country where the QROPS was situated (examples include Australia and New Zealand). This has now been firmed up and the Government has announced the following:
1. From 30th October 2024, the exclusion from the OTC for members in the EEA/Gibraltar has been removed (apart from those already in the process of transferring)
2. The member must be resident in the country where the QROPS is based
3. Exceptions are if QROPS is an occupational pension scheme, and the member is an employee of a sponsoring employer under the scheme at the time of the transfer.
Effectively, as things stand, this really only leaves QROPS available to those with UK pensions that are resident in Malta or Gibraltar due to the lack of product providers in the EU. This change was introduced following the abolishment of the pensions lifetime allowance (LTA) and the introduction of the Overseas Transfer Allowance (OTA), the Lump Sum Allowance (LSA) and the Lump Sum and Death Benefit Allowance (LSDBA), which, as an unintended consequence, enabled pension holders to potentially benefit from “double-dipping” the lump sum and death benefit allowances.
Inheritance Tax on Pensions
This change was not widely expected. The government announced that unused pension funds and death benefits payable from a pension will form part of a person’s estate for Inheritance Tax (IHT) purposes from 6 April 2027. As part of this change, the government proposes that pension scheme administrators will become liable for reporting and paying any IHT due on unused pension funds and death benefits.
Up until now, pensions were not included in personal estates that were liable for IHT and this is a game changer and will bring many (who are UK domicile) into the IHT net. Given that a pension fund is often one of the biggest assets many people have, this will require those affected to review their planning where they have family or, perhaps, live with partners and are not married.
Further, the Government stated that these changes will apply equally to UK registered pension schemes and Qualifying Non-UK Pension Schemes (QNUPS). A QROPS, by definition, is a QNUPS and many QROPS were sold on the basis of the death benefits being ‘free of IHT’. Again, QROPS holders that may still be UK Domicile will also need to review their planning.
‘Residency Based’ Test
Whilst normally, only those with UK Domicile will be affected by IHT and it is also worth pointing out that the way UK Domicile is assessed based on both citizenship, but also changed to a more ‘residency based’ test, in future. So, this article refers to those Brits who currently would be classed as UK Domicile or Deemed UK Domicile. The changes can be another article for the future.
If you live overseas already you may not think this affects you, but it may. One example would be your pension, but others would include ill health or family crisis leading to you returning to live in the UK even for short periods. Watch out for “residency based” rules, especially if your beneficiaries live in the UK.
Summary
The IHT changes come into affect from April 2027 and will give time for individuals to look at their plans for the future. And, there is a Technical Consultation on draft legislation for these changes in 2025. One concern is the additional time it will take to obtain UK probate on estates. Previously, the pension funds could have been paid to the beneficiaries (free of IHT) and some/all of the funds could be used to pay the first IHT instalment to allow probate and the distribution of the estates. The loss of the liquidity of IHT free funds will frustrate the distribution process.
Finally, for most people, the opportunity to transfer to a QROPS has now gone. If you think you could be affected by these UK pension changes, please do not hesitate to contact us. Feel free to check out our blog for an upcoming post on the 2025 French budget.
The views expressed in this article are not to be construed as personal advice. Therefore, you should contact a qualified, and ideally, regulated adviser in order to obtain up-to-date personal advice with regard to your own personal circumstances. Consequently, if you do not, then you are acting under your own authority and deemed “execution only”. Additionally, the author does not accept any liability for people acting without personalised advice, who base a decision on views expressed in this generic article. Importantly, this article is dated and is based on legislation as of the date. It should be noted that legislation changes, but articles are rarely updated. Sometimes a new article is written; so, please check for later articles. Additionally, check for changes in legislation on official government websites. Finally, this article should not be relied on in isolation.
