TRANSFER YOUR UK PENSION TO AUSTRALIA
The decision to migrate to Australia requires a lot of planning, thought and consideration. In addition to emotional decisions, there are several significant financial decisions that require consideration.
Whilst most of us think of the most prominent financial decisions such as buying a house and a car, and transferring savings accounts, not everyone considers the implications of transferring pension funds to Australia.
There are some sizeable issues relating to your pension funds that need to be considered when immigrating to Australia. This web page is designed to raise some of the issues relating to your pension that you need to consider.
The Australian Pension /superannuation ("Super") system is different to many pention systems throughout the world. There are nine major characteristics of Australian Super:
1) Compulsory Contributions
At present, 9% of your salary must be contributed to your Super fund by your employer on an annual basis. This rule applies to ALL employees and employers.
Typically, your Super can not be accessed as a lump sum until you:
- Reach age 65; or
- Reach age 60 and retire from gainful employment.
However, you may be able to draw a pension from as early as age 55 (provided certain conditions are met).
3) Taxation Advantages
While the tax implications on Super are complex, there are generally significant tax benefits of investing through the Super domain.
Contributions are taxed at 15% (instead of your marginal tax rate of up to 46.5%), the normal earnings are taxed at 15% and any capital gains in your Super can be taxed as low as 10%.
4) It’s Your Investment
The Australian Super system, typically provides you with more control over your Super than any other country in the world.
Whilst there are some restrictions on what type of investments you can make, you have a broad range of investment options and styles that you can implement to suit your needs and objectives.
The freedom of choice may range from choosing an investment style within a Super fund, to investing in property, direct shares, managed funds, and other investments that you select and feel comfortable with.
5) Lump Sum vs Pension
In Australia, Super benefits may be taken at retirement or upon meeting another condition of release, in one of the following ways:
- As a pension; or
- As a lump sum; or
- As a combination of both lump sum and pension
6) Tax Free Income & Lump Sum, after age 60
Unlike the UK, all Super benefits are able to be taken as a lump sum if so desired. A lump sum can be received from as early as age 60 (provided you retire from gainful employment). The lump sum received is tax-free.
7) Non-Concessional Contributions (NCC)
From 1 July 2007, the rules with respect to transferring Super to Australia have changed.
You are entitled to transfer up to $150,000 per financial year into an Australian Super fund, tax free. The Australian government has granted a concession to this, by allowing individuals under age 65 to transfer $450,000 tax free in one financial year, if they bring forward 2 years of future entitlements. Any NCCs that are made are taxfree to the Super Fund. Amounts in excess of the NCC limits are taxed at 46.5%.
So, if you transferred A$450,000 from the UK Pensions to Australian Super, you could take the A$450,000 as a tax free lump sum upon retirement.
8) Superannuation upon Death
Upon your passing, Super in Australia may be passed onto beneficiaries:
- Through your will; or
- By nominating beneficiaries with your Super fund.
Unlike other countries in the world Australia recognises the importance of enabling Super to be passed to spouses, family members and other beneficiaries. This issue should be considered with your entire estate plan and will.
Under the Super system, death benefits can be paid as a lump sum or a pension. This is particularly advantageous if you wish to provide for your spouse or for minor children who may require financial assistance.
It is advisable to transfer your superannuation funds into a QROPS registered fund (Qualifying Recognised Overseas Pension Scheme), which is required to report to Her Majesty’s Revenue and Customs (HMRC). Transfer of funds to a non-QROPS registered fund may result in adverse tax implications for your UK pension scheme.
What are the Tax Consequences?
Assuming that you are to become a permanent resident in Australia, and that you endeavour to remain in Australia for a long period of time, you will be subject to Australian tax. Any income or capital gains that you make from your employment in Australia and your investments in Australia and overseas, will be subject to Australian tax.
If you receive a pension from your UK pension fund whilst you are an Australian resident, it is generally fully taxable in Australia.
The tax consequences for UK Pension funds are complex and varied.
For foreign pension funds that are greater than A$50,000 in value, the growth on the fund will be taxed on an annual basis at either your marginal income tax rate (up to 46.5%) and this tax is payable from your cashflow.
Alternatively, if an election is made to count the transfer as part of your taxable Super, then the growth will be taxed at 15% per annum.
Further, if an election is made, the tax can be paid from the Super fund, rather than out of your cash flow.
Whilst at the surface this seems relatively simple, the long term consequence of this initial decision will impact the future tax efficiency of your Super, particularly when you come to access your Super in retirement.
If you have an Employer Sponsored Pension Fund, it becomes exempt from Foreign Investment Provisions in terms of having the income or growth component included in your tax return each year. However, when the Employer Sponsored Pension Fund is eventually drawn upon (at retirement), or if the status of the Fund changes, the amount of growth of the fund from the date that you became an Australian resident for tax purposes to the date of drawdown will be subject to tax at the Australian Superannuation rate of 15%.
Overcoming The Tax Burden
Transferring your pension(s) to Australia within 6 months of becoming an Australian Resident can eliminate the tax burden and future tax implications of the Foreign Pension Fund.
UK Pensions are a specialist area that can be very complex. Poor advice now can lead to burdensome tax consequences and reduce the efficiency of your financial position.
If used effectively, UK Pensions can provide substantial retirement benefits, however, incorrect advice can be very costly.
Benefits of Transferring Your Pension to Australia
There are several benefits of transferring your pension funds to Australia within 6 months of your arrival, including:
- Remove foreign tax implications;
- A tax effective environment in Australia..pay Super tax rates of 15%;
- Consolidating your Super/pension funds;
- Increased control over your Super - It’s your investment;
- Increased choice of investments and investment styles;
- You can benefit from nonconcessional contributions (up to $450,000 per person is tax free);
- You can take tax-free lump sum payments upon retirement;
- You can use your Super to pay life insurance and disability insurance;
- You can appoint beneficiaries to your Super fund, allowing you to leave finances to your spouse, children, immediate family, and other