British ex-pats face new Aussie rules on pension cap

British ex-pats face new Aussie rules on pension cap

The Australian government has confirmed it will scrap a plan to limit lifetime pension contributions to AU$500,000, instead raising the cap to $1.6m.

That means UK expats would be able to transfer pension pots worth £900,000, rather than £280,000, according to today’s exchange rates.

However, the new lifetime cap applies to pot size rather than contributions, meaning if investment returns push the total to $1.6m – regardless of how much has been contributed – the member cannot contribute any more.

As a compromise to those in favour of stricter controls on tax relief, Australian Treasurer Scott Morrison also lowered the annual after-tax contribution limit from $180,000 (£102,000) to $100,000 (£57,000).

That meant (ignoring investment returns) it would take a British expat 16 years to transfer the full $1.6m.

Given the UK government only allows transfers to Australian superannuation funds after age 55, an expat would be 71 before the full amount had been transferred to an Australian fund.

The government’s decision to back down on the $500,000 lifetime allowance came as a result of fierce opposition from the right wing of prime minister Malcolm Turnbull’s own party – a faction that includes former prime minister Tony Abbott.

This group had long supported the use of Australia’s superannuation as essentially a tax haven for the very wealthy, a function that Mr Turnbull’s original policy sought to address.

Geraint Davies, a financial planner who specialises in advising clients moving from the UK to Australia, said the new rules “made more sense” than those originally proposed, because the $500,000 cap “would be easily filled by people with relatively low wealth”.

However, he stressed that the system remained “scarily complicated”.

He pointed out that, not only are expats limited to transferring $100,000 a year to an Australian superannuation fund, but they are also only allowed to begin after age 55.

That’s because Australian primary legislation allows super fund members to withdraw their cash before 55 in the case of financial hardship or terminal illness, something which contravenes UK law, he explained.

“It is now an extremely complicated financial planning advice area … and it’s getting more and more complicated,” he said.

He urged the UK and international regulators to “look at advice that has been delivered in this area”.

He said many providers – particularly those offering Qrops as over-simplified products – were not adequately alerting their clients to the tax implications, burying disclaimers that they are “not tax advisers” in the small print.

“Advice should not be given if you do not understand the tax implications,” Mr Davies said.