State pensioners lose savings after Labor plugs legal loophole | Personal Finance

State pensioners will lose 25% of their pension savings under changes to tax rules in Labour’s October budget.

Chancellor Rachel Reeves has closed a tax loophole that allowed £1,073,100 to be left in a UK pension and the rest transferred to a qualifying overseas scheme.

This meant pensioners could take a quarter of their pension pot (£268,275) tax-free from the UK scheme, as well as a tax-free amount of cash from an overseas scheme.

However, a rule change announced in the October Budget now means people sending money abroad will be hit by a 25% change to over-the-counter (OTC) transfers.

OTC was first introduced in 2017 for transfers from UK registered pension schemes to qualifying overseas pension schemes (QROPS) in the European Economic Area or Gibraltar to prevent tax avoidance through overseas pension transfers.

This charge was subsequently revised following the abolition of the lifetime allowance, creating an exemption for transfers up to £1,073,100. However, the October Budget eliminated this exemption with immediate effect, with Labor claiming that closing the loophole would raise up to £5 million a year.

Under the new rules, retirees will have to live in the same country as their QROPS to avoid the 25% levy. This will therefore be expensive for those who want to live in one country and transfer their pension to another.

The change was intended to solve the problem HMRC was considered an important legal loophole that made it possible to apply for a double tax-free amount.

Political document by HMRC identified this gap as a potential cause for around £1 billion of UK pension savings to be moved abroad tax-free.

Commenting on closing the loophole, Rachel Vahey, director of public policy at AJ Bell, warned: “One consequence is that those who want to retire abroad, but where there are no QROPS registered in their new country of residence, will be forced to keep their UK pension scheme or face a 25% transfer fee.

“As overseas residents may find it difficult to have a UK bank account, and many UK pension schemes will not pay into non-UK bank accounts, this could leave overseas retirees in a difficult position. “Even where they are able to have an account, they still face a difficult choice between juggling the currency risk in drawing down their pension income or losing 25% of their pension wealth as a result of the transfer.”