Pensions that are left in the UK may be subject to unique tax liabilities. Since new pension rules implemented by the HMRC in 2006, under the Qualifying Recognised Overseas Pension Scheme regime (QROPS), you may be able to transfer your pension funds to another jurisdiction and protect your investment from UK tax obligations.
In simple terms, if you’re a Holland based expat, there is a simple solution that allows you to, effectively, transfer a UK pension to Netherlands through a kind of UK Netherlands double tax treaty.
Furthermore, UK pension members residing outside of the UK can benefit from various advantages in terms of flexibility and control.
In our Netherlands office, we will provide you with the expertise to guide you into making the right decision when transferring your UK pension both from a local and UK perspective.
See below for frequently asked questions to learn more on the subject and how transferring to a QROPS could benefit you.
Why should you transfer a UK Pension into a QROPS Regime?
- QROPS gives you the option to denominate your pension fund in a choice of all major currencies.
- There is greater investment choice and control. Within QROPS you can have access to all major asset classes.
- There is access of up to 30% commencement lump sum of your pension value at the age of 55.
- Possibility to consolidate numerous pensions into one single scheme
- No obligation to buy an annuity, therefore greater flexibility when you begin to drawdown.
If you do not transfer your UK pension to another jurisdiction, such as Malta, into a QROPS regime, it will be subject to the 45% lump sum charge as part of UK inheritance tax.
Under the DTA, you will not have to pay UK income tax on pension payments in most circumstances, but will have to pay income tax in the Netherlands at progressive rates up to 52%. This only applies to individuals who were not UK residents in the five years prior to death or payment.
What are the benefits of transferring my Pension Plan to Malta under QROPS?
There is a Double Tax Agreement between the Netherlands and Malta, so that pension payments are only taxed in the country where the individual has residence. Under the DTA, payments from a QROPS pension transferred to Malta would generally not be taxable in the UK or Malta.
If the pension was not paid in consideration of past employment and is not annuity income, the pension will only be taxable in the Netherlands and not Malta, under the Other Income Article.
Social insurance pensions and Government Service pensions have different rules and provisions. There are several advantages to transferring your pension to Malta under the QROPS regime:
- Payments Not Subject to UK Income Tax
- No Inheritance Tax in Malta
- Not Subject to UK Inheritance Tax
- Not Subject to the 45% Tax for Lump Sum Payments
There are two important exceptions to these protections. Obviously, protection from UK income tax, only applies if you are not a UK resident and are instead a resident of the Netherlands. In addition, the 45% tax on lump sum payments after death will still apply if you have been a UK resident in the 5 years before the payment.
Where will your Pension and its underlying Assets be held?
To ensure further protection on your pension pot, whilst your retirement scheme is administered in Malta, the investments will typically be held within a bond or wrapper with some of largest life assurance companies based in the Isle of Man. Of all the major offshore centres, the Isle of Man is one of only a few that has a statutory compensation scheme for life assurance companies, thus being one of the most secure locations globally. The compensation scheme is a result of the Isle of Man Life Assurance (Compensation of Policyholders) Regulations 1991.
This protection scheme is regarded as a safety net for policyholders to claim for compensation in the unlikely event that the company becomes insolvent. The compensation scheme offers investors up to 90% of the policy value.
How will your Pension be taxed in the UK?
Pension payments in the UK are taxed as earned income in most cases. Under the current rules established in April 2006, all types of approved schemes have the same tax treatment as registered pension schemes. This includes small self-administered schemes, personal pensions, self-invested pension plans, and occupational schemes.
UK Inheritance Taxes IHT
Lump sum payments out of pension plans after death are no longer taxed if the dependents are under 75 years of age, as specified by new rules in 2011. However, there are still many situations when pension payments will be subject to UK inheritance tax or other taxes.
- As of April 6, 2015, if the dependent is 75 years of age or older, lump sums will be taxed at 45%. Lump sums paid after drawdown has started are also taxed at the same rate. In either situation, there is no further inheritance tax liability after the 45% has been paid.
- Drawdowns received by the dependent after 75 years of age may be subject to a 40% inheritance tax if they are not spent before death.
- If the death occurred before age 75, and no drawdowns or lump sums had been withdrawn previously, the lump sums after death are not subject to tax.
How does the Double Tax Agreement between the UK and the Netherlands work?
The DTA signed between the UK and the Netherlands provides that pension payments will only be taxable in the state where the individual has residence. This principle also applies to similar remuneration including annuity payments.
Though this is generally how pensions are taxed, they may be taxable in the UK in certain circumstances such as:
- UK Tax Relief Claimed on Contributions, and Payments not Taxed in Netherlands at Applicable Employment Rate
- UK Tax Relief Claimed on Contributions, and Less than 90% of Gross Payments Taxed in Netherlands
- Lump Sum Payment Received Before Pension Commencement Date
These conditions continue to apply even if the pension has already been transferred to another jurisdiction because the UK retains taxing rights as the first mentioned state.
Typically, pension payments will not fall under these circumstances, and the pension income will only be taxable in the Netherlands under the DTA.
In order to protect your pension payments from income tax as well as the 45% lump sum death charge, you may decide to take advantage of QROPs and transfer your pension to another jurisdiction with lower rates and no inheritance tax such as Malta. This is an attractive choice because it offers very favourable terms.
How does your Foreign Pension affect Netherlands Personal Income Tax?
In the Netherlands, personal income tax is determined by the box system. There are three income boxes with different tax rates. You should be aware which box applies to you when transferring a UK pension to Netherlands. Box 1 income is taxed under progressive rates, while Box 2 and Box 3 are taxed at fixed rates.
Box 1
This includes income from enterprise, employment, and housing. Pension payments are considered employment income. This income is taxed at progressive rates from 5.1% to 52%.
Box 2
Income derived from substantial interest in companies, 5% shares or more, is taxed at 25%. Dividends and capital gains income are both included in Box 2.
Box 3
This includes income from savings and investments. Non-residents who have savings and investment income originating from the Netherlands will be taxed under Box 3 rules. This income is taxed at a rate of 30%, attracting a fixed presumed yield of 4%.
Netherlands Taxes on Foreign Pensions
Typically, foreign pensions are taxed as Box 1 income paid in consideration of past employment, as long as the pensions benefitted from tax deductions or exemptions. In the case that there were no tax deductions or exemptions claimed, the pension may be taxed as Box 3 savings and investment income.
Other Important considerations:
- No Foreign Pension Exemptions
- Lump Sum Payments are Taxed the Same as Periodic Pension Income
- No Net Wealth Taxes in the Netherlands
Inheritance and Estate Taxes
Inheritances received from Dutch tax residents are subject to taxation. If a foreign pension does not qualify for an exemption, it could be subject to inheritance tax. The tax rates on inheritance range between 10-40%.