The total value of transfers to overseas pension schemes has fallen by 14 per cent in the past year partly due to the introduction of a 25 per cent tax charge, according to new data.
Data published by HMRC today (July 31) showed that although the number of transfers to qualified recognised overseas pension schemes (Qrops) increased slightly to 5,000 in 2018/19, up from 4,700 in 2017/18, the total value of these transfers was £640m, down from £740m.
The drop in value is likely to be down to the 25 per cent overseas transfer charge which was introduced by HMRC in March 2017.
The charge was introduced as a way to stop people from exploiting tax loopholes when transferring pension funds out of the UK to avoid UK tax.
However, scheme members can claim back this charge if circumstances have changed and they are now exempt, for example, if the person transferring the funds becomes a tax resident in the country that the Qrops is based in.
Andrew Tully, technical director at Canada Life, said: “The transfer charge has largely done its job in quelling the appetite of people who may have been considering moving their pension under a Qrops arrangement.
"There may be limited circumstances where transferring a pension overseas, even with the 25 per cent tax charge, can make sense.
“This is where seeking specialised financial advice is critical to ensure all relevant rules are adhered to from both a UK perspective but also for the receiving arrangement."
Between 2014/15 and 2017/18, the number of transfers declined quicker than their value, which resulted in increasing average values over time.
However, in 2018/19, the average value of transfers decreased for the first time since 2011/12 to £128,000 while the number of transfers actually rose.
This led to a fall in average transfer values.
Rachael Griffin, tax and financial planning expert at Quilter, said: “The market peaked in 2014/15 with more than 20,000 transfers to overseas schemes. The rapid decline in the scale of foreign transfers since then is down to a combination of factors, in particular the drop in defined benefit transfers.
“Following the introduction of pension freedoms, thousands opted for the flexibility of a personal pension and sought to transfer out, with the overseas market experiencing a ripple effect as a result.
“DB transfers have since begun to decline in popularity and advice in that area has come under increased scrutiny, with advisers facing increased costs to participate in the DB transfer market.”
There is also now a requirement for a UK regulated pension adviser to approve an overseas transfer, as well as the new tax charge.
Ms Griffin said: “Moving assets into a Qrops can still offer useful flexibility, especially for those people planning to leave the UK permanently that want to simplify their finances by taking their pension with them.
“At the moment the rules refer to the EEA regarding exemptions from the 25 per cent tax charge, meaning no tax applies on a transfer to another scheme within the EEA. This situation will need to be clarified once the terms of the UK’s departure from Europe are resolved.”