Pensioners planning to retire in Europe now face losing 25 per cent of their pension savings after a sudden tax rule change in Rachel Reeves’ October Budget.
The Chancellor closed a tax loophole that previously allowed retirees to transfer up to £1,073,100 to European pension schemes tax-free.
The immediate change has affected ex-soldiers and created major challenges for those managing overseas pensions, with experts warning it has left many retirement plans in tatters.
Over 7,000 savers had transferred over £1billion to overseas schemes last year before the rules changed.
Previously, savers could transfer a lot of pension funds to qualifying recognised overseas pension schemes (QROPS) within the European Economic Area or Gibraltar without facing penalties.
The system stemmed from changes introduced in 2017, when the Government brought in an overseas transfer charge to prevent tax avoidance through pension transfers abroad.
Over 7,000 savers had transferred over £1bn to overseas schemes last year before the rules changed
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This charge was changed following Jeremy Hunt’s abolition of the lifetime allowance in 2023, creating an exemption for transfers up to £1,073,100.
However, Reeves’s Budget eliminated this exemption with immediate effect, requiring pensioners to be resident in the same country as their QROPS to avoid the 25 per cent charge.
The rule change aimed to address what HMRC identified as a significant loophole that had allowed people to claim double tax-free allowances.
Under the previous system, retirees could take £268,275 tax-free from their UK pension, then claim another tax-free lump sum from their overseas scheme.
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John Clare, pensions consultant at QB Partners said: “Many retirees benefitted from this loophole that allowed them to double dip.”
HMRC reported the loophole was potentially responsible for around £1bn of UK tax-relieved pension savings being transferred overseas.
The changes have particularly impacted members of the Armed Forces, who are more likely to retire abroad.
Mike Ambery of Standard Life warned the new rules severely restrict retirement planning flexibility. He said: “It stops people planning in advance and it makes it difficult for the majority of people moving their finances around to where they want to live in the future.
“If members of the Armed Forces want to move their money, they will have to wait until they move to that country. If you were part of the way through the process with a financial adviser, it’s hard luck.”
Rachel Vahey, head of public policy at AJ Bell, warned: “One consequence is those who want to retire overseas, but where there are no QROPS registered in their new country of residence, will be forced to keep their pension scheme in the UK or face a 25 per cent charge on transfer.”
She highlighted that overseas residents may struggle to hold UK bank accounts and many UK pension schemes won’t pay to non-UK bank accounts.
This leaves retirees facing “a harsh choice whether to juggle currency risks when taking pension income or lose 25 per cent of their pension wealth on transfer.”
The new rules mean exclusions from the overseas transfer charge now only apply if the individual and QROPS are resident in the same country. The previous exemption for transfers within the EEA or Gibraltar has been removed entirely.
Andrew Tully, technical services director at Nucleus said: “The need for this QROPS change follows on from the abolition of the lifetime allowance.
“It’s a reminder of how poorly the abolition of the lifetime allowance has been implemented that we still need further regulatory change six months later.”
