Moving a United Kingdom pension to Australian superannuation is complicated enough after big changes over the past few years. But a further worry for those wanting to transfer their UK entitlements is how much it can cost to do this.
A reader has less than £100,000 ($177,000) in a UK pension plan managed by the Friends Life group since 2012 that he wants to add to his Australian super savings.
Originally a top-up plan for the UK basic state pension, he is concerned about the likely transfer costs. He’s also worried about what might happen to its value in the lead-up to the UK leaving the European Community – Brexit – in 2019.
His concerns are quite valid, says Brian Bendzulla, managing director of financial consultant Net Actuary. On top of potentially further changes to UK pension transfer rules, he will have to deal with the interaction between UK rules and Australia’s super reforms, including changes to Australian contribution entitlements.
Governments in both the UK and Australia have made major changes to retirement savings arrangements – especially at the retirement income end. They are changes that anyone planning to transfer UK pension savings to Australia must become familiar with.
When a UK pension amount is transferred, it is treated as a non-concessional (or after-tax) contribution to super.
As far as the UK is concerned, the most important of these changes is a restriction imposed from April 2015 on allowing transfers before a member has reached the UK minimum pension age (currently 55).
This is the most immediate condition the reader must satisfy.
If he can’t, says Sydney super adviser Liam Shorte of Verante Financial Planning, he will have to wait until he is 55.
Shorte says he has a list of about 10 people in their early 50s with UK pension savings they want to bring to Australia. They have an arrangement to come back to him when they turn 55.
Until then, he has advised them to ensure their UK super is managed properly. They should concentrate in particular, he says, on ensuring they don’t pay too much in fees and charges which can be a trap for many.
His additional advice is to build up their Australian super.
If the reader satisfies the age condition and wishes to transfer the UK pension, he will not be able to transfer this to his Australian super fund if it’s a retail or industry fund.
Another key change to UK pension transfer rules in 2015 was a host of big Australian super funds losing their right to accept UK pension amounts because they couldn’t unconditionally satisfy the age 55 restriction. That’s because their rules can allow early access to super on hardship and compassionate grounds.
To be able to accept a UK pension transfer, an Australian super fund must be registered with the UK pension regulator, Her Majesty’s Revenue and Customs (HMRC), as a Qualifying Recognised Overseas Pension Scheme (QROPS).
Self-managed super funds (SMSFs) can accept a UK pension transfer.
If the reader satisfies the age 55 condition and has an established SMSF, says Brisbane barrister Jeremy Gordon, the fund’s trust deed can be amended so that it complies with the QROPS rules.
Gordon offers a legal documents service DirectDocs.com.au that includes an online QROPS conversion kit for a cost of $145.
Using an SMSF is not a simple process, cautions Olivia Long, chief executive of Adelaide-based SMSF administrator SuperGuardian.
Get the deed right
To start with, she says, you must ensure the SMSF trust deed is worded appropriately to comply with UK pension regulations. In particular, there must be no access prior to the age of 55.
The next step is to lodge a request to HMRC to be registered as a QROPS. This application can be done online and includes providing SMSF details, information on SMSF legislation and the SMSF’s trust deed.
Applying for QROPS status requires patience, says Long, as this can take four to eight weeks to be acknowledged.
A key consideration for anyone contemplating the SMSF route is the likely cost, especially if specialist advisory services become involved. This makes researching the costs of any exercise a very important part of the UK transfer process. Some specialist services charge a per cent of the transfer amount plus the cost of establishing an SMSF.
While an SMSF is one option, there is an alternative in the form of a boutique public offer retail superannuation fund, the Australian Expatriate Super Fund (AESF).
Established just over 12 months ago with South Australian based Tidswell Financial Services Ltd as the trustee, managing director Dannie Fox says the AESF is the only public offer retail superannuation fund in Australia able to receive UK pension transfers.
Keep costs down
Judging by the reader’s balance, says Fox, it will likely be more cost-effective to transfer directly into a retail fund than to establish an SMSF for this purpose. The AESF has more than 100 members. For a pension transfer it initially charges $880 (including GST) to contact the UK pension scheme, obtain, assist and lodge the discharge paperwork and then receive the money.
Once it is in the fund, says Fox, the UK pension amount is treated like normal Australian superannuation for access purposes, although there is an annual $264 charged for QROPS reporting.
While some of those who transfer their UK pension to an SMSF run it as an additional super account, says SuperGuardian’s Long, others use this as a “means to an end”.
Many roll out the funds to a retail or industry fund at the first opportunity, or cash it out if they have met a condition that allows them to withdraw their super.
They use the SMSF, she says, as a vehicle to bring the pension funds across but don’t want to deal with the ongoing administration requirements of being SMSF trustees.
AFR Contributor, John Wasiliev, Fairfax Media