If you are an expat and a tax resident in South Africa with your pension in the UK, you may be liable to pay tax in the UK. However, with the right international pension advice, it might be possible to transfer your pension fund out of the UK into a Qualifying Recognised Overseas Pension Scheme (QROPS) allowing you to benefit from advantages. Our independent financial advice regarding transferring pensions offshore is specifically aimed at those who plan not to return to the UK as a resident.
From 6th April 2006, the rules for UK pension schemes including; retirement annuity contracts, small self-administered schemes, self-invested pension plans, personal pensions and occupational schemes; have been consolidated under ‘Registered Pension Schemes’. These come under either Defined Benefit or Defined Contribution Schemes.
More flexibility was offered to pension holders in April 2015 meaning that in most defined contribution cases, 25% of pension pots can be withdrawn tax free whilst the remainder (no matter drawdown, lump sum or annuity income) is taxed at the pension holder’s marginal rate of up to 45%.
If income is sourced in the UK, as is the case with a UK pension, then even non-UK residents are liable to pay UK income tax on those earnings in the same way as UK residents. Your UK pension, counted as UK source income, will therefore be taxed at your marginal rate. Tax is applied to the 75% that is not included in your tax free sum.
A Double Tax Agreement (DTA) between the country in which you are resident and the UK can mean that you are exempt from UK tax. If the DTA exists between the country in which your pension is held and the country in which you are resident, than you can choose, instead, not to pay tax where your pension is held in favour of being taxed where you are resident. International pensions transfer is a potentially complex business and we would always recommend bespoke independent financial advice to expats considering this option.
There exists a DTA between South Africa and the UK. This means that pensions paid ‘in consideration of past employment’, including annuities, are taxed according to South African tax laws for tax residents with UK pensions. The maximum rate of income tax in South Africa is 40%.
Government pensions are treated a little differently.
Some pension income may be assessed as taxable in the UK instead. This applies where the income is not paid ‘in consideration of past employment’. In this case it is treated as ‘Other Income’ not ‘Pension Income’.
This results in the UK being the default tax jurisdiction. We recommend that reliable and bespoke international pension advice be sought in the case of South Africa.
Legislation in April 2015 affects UK taxation on defined contribution scheme benefits. For instance, taxes on death benefits are now influenced by whether the pension scheme member passes away before or after reaching 75 years of age. Passing pensions onto beneficiaries after the death of the pension holder is now, in general, less costly. Tax rates are still up to 45% in some cases.
Non-UK residents with a QROPS can, in some circumstances, pass on benefits at a lower tax rate when they die. Independent financial advice with a qualified pension specialist should be sought for individual cases.
Gibraltar taxes of 2.5% apply to QROPS held in the jurisdiction as no DTA exists with South Africa. UK income tax does not apply if the person has been non-resident for at least five years or withdrawals are below £100,000.
Inheritance tax does not apply in Gibraltar and you are protected from UK inheritance tax.
Gibraltar QROPS holders are protected from UK death benefit charges if the member is not, and has not been for at least 5 years previously, a UK resident.
Independent financial advice should be sought in all pension transfers to Malta. South Africa and Malta do have a DTA in place which states that pensions will be taxed in the individual’s country of residence and Malta. The highest rate of tax in Malta is 35%.
Maltese Social Security and Government Pensions are treated differently but are not relevant to QROPS.
UK income tax does not apply if the person has been non-resident for at least five years or withdrawals are below £100,000.
Inheritance tax does not apply in Malta and you are protected from UK inheritance tax.
Malta QROPS holders are protected from UK death benefit charges if the member is not, and has not been for at least 5 years previously, a UK resident.
Residents in South Africa are subject to tax (up to 40%) on their total income no matter the source-country. Foreign pensions are exempt from this.
Any UK pension, as long as it was not ‘received or accrued’ from or in South Africa, and is ‘in consideration of past employment’ elsewhere, is exempt from income tax.
This specifically excludes anyone whose pension has arisen from time in public office in South Africa.
For residents of South Africa, therefore, any foreign pension income is tax free with the exclusion of those whose pension has benefitted from their position in public office in the country.
Leave the Pension in the UK
Under the DTA, pensions left in the UK (as long as it is ‘in consideration of past employment’) will be paid to South African residents and taxed in South Africa with the highest level at 40%. If, however, the pension is exempt from tax in South Africa as is likely, the UK will not allow for no tax to be levied, and will charge UK tax. If the pension income cannot be classed as ‘in consideration of past employment’, then it is subject to tax in the UK. The pension fund will be subject to UK death benefit charges.
Transfer to a Gibraltar QROPS
For those members who have been non-UK residents for five years or more, transferring a pension to a Gibraltar QROPS will mean not being exposed to UK taxes on income of up to 45%. The member will pay 2.5% tax in Gibraltar and zero tax in South Africa providing they are a resident and the pension does not fall into the ‘public office’ exclusion. No DTA exists to provide for a Gibraltar tax credit. The QROPS protects from UK inheritance tax and (assuming 5 years as a non-resident in the UK) it will also protect from UK death benefit charges.
Transfer to a Malta QROPS
Again, assuming the member has been a non-UK resident for five years or more, this option will ensure the pension is not subject to income tax (up to 45%) in the UK. The member will pay up to 35% tax in Malta and zero tax in South Africa providing they are a resident and the pension does not fall into the ‘public office’ exclusion. The QROPS protects from inheritance tax in the UK (also with a zero rate of inheritance tax in Malta) and assuming a minimum of 5 years as a non-resident in the UK, it will also protect from UK death benefit charges.
This general information has been provided on the basis of our understanding of the current legislation in the UK, Gibraltar & Malta as of April 2015. Should any of the information provided be inaccurate, incomplete or misleading, we take no responsibility for any reliance placed on it. We recommend that individuals always seek specialist multi-jurisdictional (where relevant) tax advice so that their individual circumstances can be fully considered.