Scheme funding â Internationally mobile employees. This fact sheet accompanies the tenth episode of Pensions in. 30 Po
10
Scheme funding Internationally mobile employees
Scheme funding – Internationally mobile employees This fact sheet accompanies the tenth episode of Pensions in
relief because he or she is a 'relevant overseas
30 Podcasts and provides an overview of internationally
individual' or a transfer has been made into the
mobile employees in respect of pension scheme funding.
scheme from a 'recognised overseas pension scheme'.
This is a series of 30 podcasts covering some of the most important and relevant issues in pensions today. It is brought
A registered pension scheme may only make a
to you by the Pensions team at Wragge Lawrence Graham &
transfer into an overseas pension scheme that is
Co.
approved for the purpose by HMRC (a "qualifying recognised overseas pension scheme").
This series has been created to provide an overview of these subjects for anyone who is new to pensions, for those who
A member who comes to the UK as an existing
deal with pensions at work or for people with some experience
member of a qualifying overseas pension scheme
but who want a high level refresher.
may benefit from migrant member relief on UK income tax.
We've put together additional resources, including the podcast of this episode, at:
A scheme may only accept contributions from a "European Employer" if it is authorised to act as a
www.wragge-law.com/pensionpodcasts.
cross-border pension scheme. Onerous funding requirements apply to cross-border defined benefit
You'll also be able to download all of our other pension
schemes.
podcasts and find links to the team's latest alerts, briefings and webinars.
The European Commission has announced proposals for a revised IORP Directive which will
Key points
make changes to cross-border pension scheme arrangements.
There are no statutory restrictions on membership of a UK pension scheme by persons who do not
Main sources
live or work in the United Kingdom.
Pensions Act 1995
Pensions Act 2004
Restrictions on benefits accrued or provided under a registered pension scheme may be relaxed where a member does not benefit from UK tax
Finance Act 2004
Occupational Pension Schemes (Cross-border
is permanently employed to work abroad in another EEA state
Activities) Regulations 2005
unless it is authorised by the Pensions Regulator to act as a
An occupational pension is not permitted to accept contributions from an employer in respect of an employee who
“cross-border” pension scheme. A modified regulatory regime
Institutions for Occupational Retirement Provision
applies to cross-border schemes, which is particularly onerous
(IORP) Directive
where defined benefits are provided.
Overview
Irrespective of the statutory position, a scheme’s own rules may impose restrictions on overseas membership.
There are no statutory restrictions on membership of a UK pension scheme by persons who do not live or work in the
Restrictions on tax relief
United Kingdom. The Finance Act 2004 allows relief from UK income tax on an Indeed, the Pensions Act 1995 disapplies any provision of an
individual's contributions to a UK registered pension scheme if
occupational pension scheme which has a discriminatory
he or she is a “relevant UK individual” during a tax year. An
effect as against persons who are not wholly or partly
individual will be a relevant UK individual for a tax year if he or
employed in the UK.
she:
Where somebody who does not live in the UK accrues benefits
under a UK pension scheme, the following consequences may
has relevant UK earnings chargeable to UK income tax for that year;
follow:
UK tax relief may not be available on the person’s
is tax resident in the UK at some time during that year;
contributions;
was tax resident in the UK both at some time
The person may be relieved from restrictions on
during the five tax years immediately before that
the size of the benefits that he or she may accrue
year and when he or she became a member of
under the scheme (this is known as “international
the pension scheme; or
enhancement”);
has, or his or her spouse or civil partner has, for
Where the scheme is an occupational scheme
that year general earnings from overseas Crown
and the person is employed in another state which
employment subject to UK tax.
is within the European Economic Area, the trustees of the scheme may be obliged to obtain
In any tax year relieved contributions may not exceed
authorisation to operate as a cross-border pension
the greater of:
scheme.
Where a person comes to live in the UK from abroad, he or
the individual's relevant UK earnings which are chargeable to UK income tax for the tax year; and
she may continue to contribute to an existing overseas pension arrangement and receive tax relief if certain conditions are met.
the ‘basic amount’ of £3,600 where “relief at source” is provided (broadly speaking this means that the contributions must be made to a personal
Benefits may be transferred into a UK pension scheme from
pension scheme).
any overseas arrangement; but benefits may only be transferred abroad from a UK scheme if the overseas scheme
The employer’s contributions will be tax relievable
is a “qualifying recognised overseas pension scheme”.
provided that the “wholly and exclusively” test is met.
Restrictions on benefits and ‘international enhancement’
Persons migrating to the UK: migrant member relief and relief under double taxation treaties
The Finance Act 2004 restricts the amount of benefits that may be accrued or provided under a registered pension scheme
If a person comes to the UK as an existing member of a
and the form in which those benefits may be taken.
qualifying overseas pension scheme he or she may make contributions to that scheme and receive relief from UK income
10
Scheme funding Employer covenant
Those restrictions are the “price” that the member pays for the
tax provided that certain conditions are met. This is known as
tax relief that he or she has benefited from.
“migrant member relief”. The annual allowance and lifetime allowance apply in respect of contributions that have received
These restrictions are generally eased or disapplied where the
migrant member relief. Where the relief is available, employer
member has not benefited from UK tax relief either because he
contributions will be tax deductible.
or she has been a member of the scheme whilst a “relevant overseas individual” or a transfer has been made to the
Alternatively, tax relief may be available under a double
scheme from a “recognised overseas pension scheme”. In
taxation treaty, depending on the country in which the scheme
particular, the member may gain an enhancement to his or her
is established.
“lifetime allowance”. Occupational schemes: overseas employees and “crossIf a person is not a relevant UK individual (see above) he or
border” authorisation
she will be a “relevant overseas individual”. Where a person is a relevant UK individual, he or she may nonetheless also be a
The Pensions Act 2004 prohibits trustees from accepting
relevant overseas individual but only in limited circumstances
contributions from a “European employer” unless the scheme
and for limited purposes.
is authorised to act as a cross-border pension scheme.
Legislation permits a scheme to have separate rules for
An employer will be a "European employer" if it employs and
members who have not benefited from UK tax relief, under
makes contributions in respect of:
which it need not comply with the rules relating to authorised pensions and lump sums. This is seldom encountered in
"a person who is employed under a contract of service and
practice.
whose place of work under that contract is sufficiently located in an EEA state other than the United Kingdom so that his
Transfers
relationship with his employer is subject to the social and labour law relevant to the field of occupational pension
A registered pension scheme may only make an overseas
schemes of that EEA state, but, for the purposes of this
transfer to a scheme approved for the purpose by HMRC
definition, a seconded worker is not to be regarded as being so
(known as a “qualifying recognised overseas pension scheme”
sufficiently located in an EEA state other than the United
or “QROPS”). A list of QROPS is published on the HMRC
Kingdom".
website. The essential question is whether the nature of any member's HMRC warns that the list is not exhaustive and that it will not
employment means that the scheme has to comply with any
be bound by it if it transpires that a scheme has been wrongly
other EU state's social and labour laws in respect of that
included (say because of false information provided by the
member.
scheme manager). An employee who is engaged to work permanently abroad will A transfer into a registered pension scheme may be made
generally be a cross-border employee for this purpose. The
from any type of overseas scheme, but it will only lead to an
place of registration of the employer (if it is a company) is not
enhancement to the member’s lifetime allowance if the
relevant.
scheme is what is called a “recognised overseas pension scheme” (broadly, an overseas pension scheme that is established in one of a prescribed list of countries).
An employee who is seconded to work abroad will not be a
"Trustees and employers should be mindful of the position of
cross-border employee. The Pensions Regulator (in its
all members, including deferred members and pensioners,
Guidance on Cross-border Schemes) says that the
when considering whether their scheme should be seeking
characteristics of a secondment are:
authorisation and approval."
the employee being sent to work overseas from
(A previous version of the Guidance indicated that benefits
the UK;
could be retained in respect of certain deferred members where pensionable service had ceased before a date in 2006.)
the employee providing services on behalf of the UK employer;
Scheme rules
the intention that this should be for a limited
Subject to limited exceptions, a provision in the rules of an
period; and
occupational pension scheme which has the effect of discriminating between members by reference to whether or
the expectation that the employee will either return
not they are employed wholly or partly in the UK is not
to the UK or retire at the end of that period.
effective. This can make it challenging to terminate a crossborder member’s pensionable service.
It is up to the trustees to determine whether any members of the scheme who work in EU member states other than the UK
This provision does not apply to personal pension schemes
are seconded employees.
and in fact personal pension scheme providers almost invariably only allow “relevant UK individuals” to join their
Where an occupational scheme includes an active member
arrangements.
who is a cross-border employee, the scheme will either need to be authorised as a cross-border scheme or the member will
Proposals for change
have to leave pensionable service. The European Commission has published proposals for Authorisation as a cross-border scheme is not attractive,
revision of the Institutions for Occupational Retirement
particularly where defined benefits are provided as an onerous
Provision (IORP) Directive. Once finalised, member states will
funding regime applies to cross-border defined benefit
have to implement the revised Directive in national legislation
schemes.
by 31 December 2016.
According to the 2014 European Insurance and Occupational
Whilst some of the proposals are designed to make it easier
Pensions Authority (EIOPA) report on market developments in
for occupational pension funds to operate across a number of
cross-border Institutions for Occupational Retirement Provision
member states, the requirement for cross-border schemes to
(IORPs) as at June 2014 there were only 29 authorised cross-
be fully funded at all times is not being relaxed.
border schemes in the UK and only 86 in the EEA as a whole. Of the 86 EEA authorised schemes, just 75 were actively operating cross border. It is a vexed question whether it is sufficient to simply terminate pensionable service or whether the members deferred benefits also need to be transferred away from the scheme. The Regulator's Guidance states (unhelpfully) that:
Reviewed as up to date to March 2015
More information Find out more about our Pension team at www.wragge-law.com/services/pensions. You can listen to or download the other episodes and get additional material at www.wragge-law.com/pensionpodcasts. You can also stay up to date with the latest pension developments at www.wragge-law.com/insights.
