Taxation of lump sums from overseas pension schemes


The global nature of employee mobility makes it increasingly common for UK residents to be in receipt of payments from an overseas pension scheme.

The UK tax treatment of regular income from an overseas scheme is straightforward – such income is now fully taxed in the UK (while previously only 90% was taxed, such income is fully taxed from 6 April 2017). Additionally, although the UK may have a double tax agreement ("DTA") with the country hosting the pension scheme that allows that country to retain the taxing rights, these can be drafted differently so some review is still required.

The UK tax position of any lump sum payments is considerably more complex. The April 2017 changes have brought some clarity (lump sum rights accruing post April 2017 are taxable in the UK, subject to the relevant DTA) but the correct treatment of pre-2017 lump sum rights remains a major challenge.

The starting premise is that all lump sums will be taxed in the UK if paid to a UK resident. The nature and amount of the UK tax charge and the extent of any exemption or relief will depend upon a number of specific points:

  • Were contributions paid before or after 6 April 2006?
  • Was UK tax relief claimed on personal contributions?
  • Was UK tax paid on employer contributions?
  • Have gains and income been taxed in the UK or locally?
  • What is the timing, form and local taxation of benefits paid by the scheme on retirement or death?
  • What is the split between UK and foreign service before 2017?
  • Is the lump sum defined as a benefit as such or is it merely a commutation of the right to a regular pension income?
  • What does the relevant DTA have to say on the matter?

If you are, or will be, entitled to a lump sum payment from a non-UK pension scheme, you may wish to review the situation as part of your overall retirement planning strategy.

For more information please contact Mark Abbs.