The lifetime allowance freeze is a pensions time bomb waiting to explode

The Government published the 2020/21 QROPS (qualifying recognised overseas pension schemes) transfer statistics in July 2021. They show a steady decline in the number of transfers from UK pension plans to HMRC approved QROPS since 2014/15 . This year was no exception, with around 3,000 transfers occurring, down from a peak of 20,100 in 2014/15 . The significant reduction can partly be explained by successive tightening of the rules regarding QROPS, the introduction of a tax charge on transfers from 9 March 2017 (unless certain conditions are met), and by Brexit.

The total value of those 3,000 transfers was £416m. This means the average amount transferred per pensioner was just £138,000; surprisingly low, given the administration and effort required to undertake a transfer.  

However, a recent Government announcement could mean that QROPS come back into fashion. The Chancellor announced in April that the pensions Lifetime Allowance (LTA) will be frozen at £1,073,100 until April 2026. This affects anyone who expects the value of their UK pension savings to exceed the LTA by the time they come to take benefits or reach the age of 75. At both these points, the value of pensions savings is measured against the current LTA and, where it is exceeded, a financial penalty is due. The penalty is known as the Lifetime Allowance Charge, and it is 25 per cent of the excess for funds which remain in the pension (and which are then taxed as income, when they are actually received as pension income), but it is charged at the significantly higher rate of 55 per cent if the excess is paid out as a lump sum. 

So, the freezing of the LTA is storing up a potential LTA charge time bomb for many pension savers who have to guess how much their pension fund will grow over a long period to predict how much to save before they will potentially face a 55 per cent tax charge on the excess value over the LTA. In reality, most pension savers just make whatever contributions they can afford, without thinking too much about how the fund will grow over time.  

For those whose pension savings are nearing the value of the LTA, a transfer to a QROPS can have significant benefits. This is because the value of the pension fund is measured on the transfer to QROPS and then not measured again. This means for example a pension fund of £1m can be transferred to a QROPS without any tax or penalty and can then continue to grow without fear of a future penalty. 

Pension savers need to look at what their pension funds are worth, wake up to the implications of the LTA freeze and take advice on their options. As more realise the implications of exceeding the LTA, don’t be surprised if the QROPS transfer numbers start to creep up again in future years.