Questions on overseas issues

Issues relating to overseas members and transfers are a common theme for queries from Aries members.

For this article, I will look at a couple of recent queries that have been raised with us.

How does the non-residence factor work under the LSA / LSDBA regime?

This query concerned the operation of a non-residence factor and how it applies under the new Lump Sum Allowance (LSA) / Lump Sum and Death Benefit Allowance (LSDBA) regime.

By way of background, a member who has been a relevant overseas individual during any period of their active membership of a registered pension scheme, may be able to apply for a non-residence factor which, prior to 6 April 2024, served to give the member an enhanced Lifetime Allowance .

The question was how such a non-residence factor works under the new LSA / LSDBA regime – specifically whether it serves to increase both the member’s LSA and LSDBA or not.

We were able to confirm that a non-residence factor only increases the member’s LSDBA, not their LSA. This arises under Paragraph 20B of Schedule 36 of the Finance Act 2004, which only provides for a LSDBA enhancement, not a LSA enhancement too.

Importantly here, Paragraph 20B (2) also says that:

A lump sum and death benefit allowance enhancement factor operates in relation to the relevant benefit crystallisation event mentioned in paragraph 6A (1).

This is significant because the Paragraph 6A (1) referred to here only:

applies, in relation to a relevant benefit crystallisation event occurring in relation to an individual, other than the individual becoming entitled to a pension commencement lump sum or an uncrystallised funds pension lump sum,

As such, a non-residence factor does not provide the member with an enhanced LSDBA for the purposes of taking a PCLS or a UFPLS.

In case it helps put the current legislation in perspective, under the old LTA regime, a LTA non-residence enhancement factor increased the member's LTA but did not increase the maximum PCLS available to them. To the extent that the LSA is intended to act as a possible limit on PCLS, whilst the LSDBA is intended to act as a limit on the overall benefits before a tax charge arises, then, the new position is very much a continuation of the principles that applied under the LTA regime.

Taking benefits and transferring to a QROPS

Our second query concerned the scope of a member’s ability to take some benefits from a registered pension scheme and then transfer overseas to a QROPS.

We were asked whether a member could either:

-????????? Take 25% tax free cash and transfer the remaining 75% into a QROPS; or?

-????????? Take 25% tax free cash, designate the remaining 75% into a UK drawdown and then transfer the UK drawdown into an overseas drawdown arrangement.

We were able to confirm that, for a member to become entitled to a PCLS - sometimes known as "tax free cash" - the member must become actually entitled to an associated "pension" under the scheme paying the PCLS. (The term "pension" here includes a scheme pension, a lifetime annuity or the designation of funds as available for income drawdown.)

?In simple terms, then, for the member to become entitled to the PCLS under the scheme in question, they must also crystallise the associated pension benefit under that scheme (see the PTM ).

?This means that the member could not simply take the PCLS from the scheme and then transfer the remaining benefits to a QROPS as a transfer of uncrystallised funds.

It is, however, possible for the member to take a PCLS in connection with becoming entitled to, say, flexi-access drawdown under the scheme and subsequently transfer the drawdown fund to a QROPS as a transfer of crystallised rights.?

Where crystallised rights are transferred, however, in addition to the usual transfer conditions, HMRC impose further conditions on the transfer. In the context of the transfer of a flexi-access drawdown fund, these include that:?

- The transfer must be made on a "like for like" basis, such that the receiving arrangement must use the transferred funds to provide a flexi-access drawdown fund in respect of the member;?

- The transfer must be to a new arrangement that does not hold any existing benefits in respect of the member;?

- The transfer must represent all of the member's flexi-access drawdown funds under the transferring arrangement - a partial transfer is not permitted (or, at least, it would not be a recognised transfer and would be an unauthorised payment instead).

?These additional requirements are considered in the PTM .?

It is also worth noting that no further PCLS would be available under the receiving arrangement in respect of the transferred funds. (This is to avoid the member being able to have "two bites at the PCLS cherry".)

Aries Insight ?provides comprehensive and detailed guidance on the application of LSA / LSDBA enhancements, as well as insight into the meaning and impact of UK pensions regulation and clear guidance on the practical implications for pension providers, trustees, administrators and consultants.? If you are not already an Aries member and would like to find out more about what Aries Insight can offer you, then please drop me a mail at [email protected] or give me a call on 01536 763352.

Please note that?we are not lawyers or financial advisers.?The information above sets out our best understanding of the legislation and how it applies, but should not be taken as constituting legal or financial advice.