Pensions and working abroad – enhanced Lifetime Allowance

16 April 2018

Over the years, we have met a significant number of clients and enquirers who have worked abroad for at least a period of their working life – some for a few years, some for much of their career, usually for UK PLCs, and who are accruing UK pension benefits whilst overseas.

Generally speaking, where an individual is working abroad, they would not normally receive UK tax relief on contributions to (or accrual of benefits within) a registered pension scheme. However, where an individual does accrue UK benefits, and when the individual comes to draw benefits and has returned to the UK, these are likely to be tested against the UK HMRC Lifetime Allowance (LTA – currently £1.0M)*.

For this reason, in specific circumstances, HMRC has established a facility to add the value of all/part of the pension benefits accrued during overseas service after 05 April 2006 to the individual's LTA so that the value of these benefits is not subject to the LTA charge. This is achieved by applying a non-residence factor that is then used to adjust the LTA figure.

To qualify for this non-residence LTA enhancement, an individual must be a relevant overseas individual during any part of an active membership period of a registered pension scheme. The enhancement can apply to multiple periods spent abroad – for example, if an individual worked overseas for four years, returned to the UK for three years and worked overseas for another six years, their LTA could be enhanced by the value of ten years of accrual in total, although the non-residence factors would be calculated separately for each period spent abroad. The non-residence factor is calculated in different ways, depending on the type of pension scheme (e.g. defined benefits / money purchase / hybrid arrangement).

A link to the detailed notes on this opportunity from HMRC can be found below and it is possible to apply online for an enhanced LTA for time spent working abroad if the LTA is an issue here:

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Where applicable and appropriate, such an enhancement can be of significant benefit to individuals who have accrued pension benefits to a level that exceeds either the current LTA or their own protected LTA (e.g. holders of Individual or Fixed Protection) and could thus be exposed to a tax charge. The LTA tax charge on pension benefits in excess of the standard or protected LTA is currently 55% if benefits are paid as a lump sum, or 25% if paid as an income (which is also taxed at the individual's marginal rate of income tax).

Individuals applying for this facility will need to provide information on the period for which they wish to claim enhancement and on the value of their pension entitlement / pension fund at the start and end of the period. As you will appreciate, HMRC specifies strict definitions for these values and we would always recommend that you seek financial advice before finalising your application. In addition, there is a time limit for submitting the form to HMRC and this is no later than five years after the 31 January following the end of the tax year in which the accrual period ends.

If you would like to know more about this opportunity as part of your pension and retirement income planning, then please contact the team at Chapters Financial. No individual advice is provided during the course of this blog.

*From the new tax year 2018/2019, the current Lifetime Allowance limits increase to £1,030,000 in line with inflation.

Keith Churchouse FPFS


CFP Chartered FCSI

Chartered Financial Planner

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