When the pension’s lifetime allowance was taken down in 2023, savvy savers had the unique opportunity due to some inconsistencies in the rollover to the new rules and legislation which allowed them to move as much money as they wanted from their pension into overseas pension schemes.
They could do this for a few months without incurring any tax bills.
The lifetime allowance put a limit on the amount of savings people could pile on in their pension funds without triggering a tax charge.
This was set at £1,073,100. Going over this sum would mean you have to pay tax anytime you accessed pension benefits, a 55% tax charge if you took a lump sum and 25% if you withdrew as income.
This is aside from the regular income tax that can be due on pensions every year. It also added a 25% tax charge on moving savings over the allowance to overseas pension.
The tax charges were removed last year and the lifetime allowance cap was abolished completely at the start of the 2024/2025 tax year. However, for a brief few months, this also meant there was no cap in transferring funds abroad without tax charges.
As a result, over 7,000 savers took advantage of the opportunity and moved £1.14billion to recognised overseas pension schemes according to data from HMRC as obtained by the Telegraph. This figure is nearly double the £680million moved abroad last year by 3,300 savers.
The Overseas Transfer Allowance was implemented in April, the allowance for OTA at the moment is £1.073million or could be higher if the saver had registered for LTA protection. Moving funds beyond this sum will incur a tax of 25%. Unsurprisingly, the move from LTA to OTA had bee dubbed as “messy” by finance experts.
Tom Selby, head of public policy at broker AJ Bell, noted this unique situation had “created a one-off opportunity investors and their advisers have taken advantage of”. And this wasn’t the only quirk affecting pension rules this year.
Savers were able to exploit a similar loophole that allowed them to nearly double the amount of tax-free cash they could pull from their pensions if they had overseas pots. There are rules in place now capping how much people can pull from all of their pensions before the 25% lump sum tax charge kicks in, but this wasn’t in place at the time for overseas pots.
Essentially, savers could take 25% of their British pension and 25% of their overseas pension without incurring tax.
Steven Cameron, pensions director at Aegon, warned: “Anyone considering exploring transfers overseas should definitely seek expert financial advice. This is a highly technical area with big tax implications. Of course, the new Government might want to revisit these rules in future.”
