The lure of sunnier climes and a more relaxed lifestyle have long been key reasons why tens of thousands of Britons make the life- changing decision to move to Australia each year.
But coming reforms to the country’s superannuation, or retirement savings laws, could see more Britons urgently packing their pensions along with their sunglasses and shorts when heading Down Under.
Under a revamp of rules aimed at incentivising pension savings in Australia, those aged 60 and above will from July 1 be able to access their “super” funds tax free.
This is very generous compared with the UK, where typically just a quarter of a company or personal pension fund can be taken as tax-free cash. In a country where “annuity” is a foreign word to many, retirees in Australia will also be given greater flexibility as to how they draw their superannuation savings, taking it as a lump sum, income or combination of the two.
“The new rules are great for many migrants as they have received tax relief on their contributions in the UK through their working life and can receive their benefits tax free in Australia, giving them the best of both systems,” says Simon Harvey, an adviser with Montfort International.
But, if you are looking to join the estimated 1.3m Britons already resident in Oz, there is an added urgency if you want to take your pension with you – because from July 1, the amounts of money you will be able to transfer into the country’s “super” scheme will be dramatically reduced.
Under a special transitional arrangement, the Australian government is allowing individuals to make after-tax contributions of up A$1m, or about £450,000, but this must be done before a cap is imposed on July 1.
As part of the July reforms, a new cap on after-tax contributions to super funds will be put in place of A$150,000, or about £60,000 a year, with the possibility of rolling three years into one, giving a contribution of A$450,000, for those aged under 65. “The transitional arrangement of A$1m would only apply (in practice) if an individual is in Australia,” says Richard Curran, managing director of Global Destiny. “So individuals with bigger funds need to act quickly. There are some Australian schemes which will accept transfers if the individual is outside Oz but this is not for everyone.”
Advisers say those contemplating taking advantage of the transitional A$1m contribution payment could pump cash straight into existing Australian funds, but that there are still merits to making payments to a UK pension pot prior to transfer.
“The main attraction of paying additional contributions in the UK is that you will receive tax relief on them over here, and if you subsequently transfer them to Australia then they will be available to you tax free at retirement,” says Harvey. “There is no such incentive to invest after-tax income into superannuation in Australia. However, this advantage may be lost if the contributions take you in excess of the Australian cap.”
Aside from taking advantage of the transfer window, advisers say there are other reasons why expats should consider moving their pension. “UK pensions are potentially liable to Australian tax on an annual basis if left behind before benefits are taken and would come out of the individual’s back pocket not their pension fund,” says Curran.
“If the individual is retiring in Australia, they would also be subject to currency risk if benefits were left behind in the UK. Death benefits in Oz may be better than those available in the UK, with 100 per cent of the fund provided to the beneficiary in Oz rather than percentage benefits offered by some UK schemes.”
But while the coming reforms may make retiring in Australia more financially appealing, advisers caution that transfers may not be in every expat’s best financial interests.
In some cases transferring from a UK employer’s scheme might mean forfeiting valuable guaranteed benefits of UK final salary schemes or a guaranteed annuity, which may provide a generous income conversion rate at retirement. This will be further complicated if your pension fund is hit by transfer penalties or your employer offers poor transfer values on your final salary pension.
The proposed cap on yearly contributions of A$150,000 could also exclude most retirees with long periods of service in the UK, and subsequently chunkier savings, from transferring their pensions in one transaction
“The new rules will potentially be attractive to Brits who intend to retire in Australia or spend significant time there in retirement,” says George Yeandle of PricewaterhouseCoopers. “However, the position is complex and individual advice should be sought.”
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