UK tax treatment of payments from foreign pension schemes

Complexity arises because foreign pensions are not singularly addressed in UK tax legislation (unlike UK registered pension schemes which are subject to tailored legislation and consolidated guidance). Certain payments from certain schemes in certain situations are directly covered but only once other tax aspects (especially employment income) have been deemed to not apply.

Is it a pension?

It does not help that there is no UK statutory definition of a pension to the exclusion of other structures.

Section 150(1) FA 2004 at least defines a ‘pension scheme’ as a scheme or other arrangement(s) that can provide benefits to a person/in respect of a person in any of the following circumstances:

•  retirement
• death
• having reached a particular age
• serious ill-health or incapacity
• or similar circumstances

However, that is too broad to be definitive. For example, a product branded an ‘executive retirement plan’ may, on closer inspection, be revealed to be an insurance company bond or other personal savings vehicle.

Employment related savings and vehicles may be regulated under the local ‘pension’ regime yet are more accurately interpreted by the UK as deferred employment income.

Income from a non-UK pension scheme

Foreign retirement income is relatively straightforward; in most cases it will be taxed in the UK as income. Some types of pension income are potentially exempt from UK tax e.g. certain disability and dependant’s pensions, although conditions apply. If the same income is subject to local tax in the country where the pension scheme is based, the relevant Double Tax Agreement should determine which of the two countries holds the taxing rights. It is often, but not always, the country of residence that gets to tax pension income.

Lump sum from a non-UK pension scheme

The main challenge is the UK taxation of a lump sum payment.

The default position is that a lump sum payment is taxed in the UK as income. It is then a lengthy process to establish how it is taxed and to what extent exemptions might apply:

•  What are the provisions of the Double Tax Agreement between the UK (where the individual lives) and the country where the pension scheme is based?
• Did a current or former employer contribute while the individual was living and working in the UK?
• To what extent have employer contributions previously been exempted from UK tax while UK resident or UK tax relief claimed on personal contributions?
• What is the timing of past contributions and any UK tax exemption/relief: pre/post April 2006/ pre/post April 2011/ pre/post April 2017?
• What are the specific rights under the scheme to receive a lump sum as at April 2011 and April 2017?
• Is there a system of regulation of pension schemes in the country where the scheme is based and is the scheme in question so regulated?
• Is there a system of tax incentives for retirement in the home country albeit with an element of taxation on at least one aspect: contributions, growth or benefits?
• Is the individual able to claim the remittance basis of UK taxation? If so, does the payment qualify as relevant foreign income?

We need to be thorough in looking at who paid what, when and where and the history of UK tax exemptions. We need to be clear on the tax and regulatory status of the plan both in the UK and the jurisdiction where the scheme is based as well as the specific detail of the options on the timing and form of retirement benefits.

How we can help

If you have any questions about the above, please get in touch with your usual Blick Rothenberg contact or with our pensions team using the form below.

Disclaimer:

This article is intended to give you an insight into the tax treatment of pension contributions. It is not a comprehensive technical paper and should not be relied upon in deciding the ‘right’ level of pension contributions for you, especially if total contributions are at or around the annual allowance, your income is high, or your proposed personal contributions are prospectively more than you actually earn.