Retirement is the time to relax, explore, and travel. It’s the perfect time to enjoy life by doing everything you’ve always wanted to take part in. To finance this retirement dream, you’ll need a secure pension that’ll provide you with sufficient funds that’d, corny as it may sound, make your dreams come true.
For many people who initially started their working lives in the UK, they may have a sizable pension in their former home country. However, if you’re now living in Australia, what happens to your tax situation? Will moving your pension from the UK into Australia mean more tax or less tax?
Here are eight things to know about UK pensions in Australia’s taxability:
Pensions are complicated. This is especially true when moving your pension from the UK to Australia.
There are often new rules for British pension in Australia. If you’re planning on moving your pension to Australia, you must understand the tax implications. When you transfer or ‘roll over’ a foreign pension fund into an Australian superannuation fund, it becomes subject to taxation in Australia, like any other source of income. The rules relating to the tax treatment of foreign pensions vary depending on whether you’ve rolled them over into an Australian superannuation fund or not.
You can pay two types of UK pensions into an Australian bank account: a lump sum and income payments (annuities). Lump sum payments are the money you get when you retire or leave your job.
You can take this as a one-off or regular payment over time. They’re paid from your pension fund, so they’re taxable in the same way as any other income you receive from employment. Income payments (or annuities), on the one hand, are the money you get each year from your pension fund when you retire or leave employment. The Australian government taxes them as well, like any other income received for employment.
A separate bank account is the best way to keep your pension money separate from your funds. You should have one dedicated bank account for your pension fund and only use it for expenses. This includes any deductions made from their pension accounts, such as contributions for insurance cover or health care premiums.
Don’t use this account for anything else. If you do, it may be considered as income by Australian tax authorities—in which case, you’ll have to pay taxes on all the interest earned in that year. It’s also important not to use this account as a piggy bank. Don’t spend from it without first setting aside what you need or want elsewhere in another part of your budget.
If you’re looking to transfer your UK pension to Australia, it’s essential to understand what QROPS means. This acronym stands for Qualifying Recognised Overseas Pension Scheme, a pension scheme that the UK government recognizes. The phrase ‘qualifying’ refers to meeting specific criteria, such as an age limit or having worked for more than five years in the country where you live now.
QROPS can also be transferred from other countries, like Australia and Canada, if they have relationships with the UK government. If a country has a tax treaty with Britain (and many do), they can also apply it when calculating how much tax should be paid on overseas pensions in Australia and elsewhere. But, this only makes sense when someone doesn’t want their funds sitting abroad longer than necessary.
• You Could End Up Paying More Tax On Your Pension Income
Australian tax rates are progressive, which means your rate of taxation increases as your income rises. In contrast, UK tax rates are flat and don’t increase as your income increases. If you’re a high earner and move to Australia from the UK (or vice versa), even though the Australian tax system is more generous than its British counterpart, it may still be higher overall.
• Double Taxation Agreement With The UK
When you retire, the Australian government has a double taxation agreement with the UK. This means they decide which country will tax your pension and how much tax is payable to each country. If you’re a resident of Australia, your pension income is taxed at Australian rates, and vice versa.
For example, if you live in Australia but receive a UK pension taxed as income at 20%, this would be reduced by 80% to 10%. However, if the same person were living in England (or another country), they’d pay taxes on their 20% pension as they’re now considered a non-resident for tax purposes in Australia.
• There Are Options Available To Transfer Your UK Pension Into Australia
If you want to move your UK pension to Australia, a few options are available. One of them is to transfer it into a self-managed super fund (SMSF). This means you’re responsible for managing the fund yourself and investing the money in other assets.
If this sounds like something that’d be too complicated for you, then don’t worry. You can transfer your UK pension into an Australian superannuation fund instead. The process is much more straightforward than transferring it into an SMSF, and allows you to get started right away without having to wait around while everything gets sorted out by others.
• You’ll Need A Financial Adviser
A financial adviser can help you make the most of your pension and plan for retirement. They can also help you plan for investment and tax, as well as any other aspect of your life that’d be impacted by the move to Australia. Hiring a financial adviser can also help you decide how to best use your pension in Australia, whether a lump sum or regular payments. Moreover, they’ll assist with the various options available when accessing funds from overseas pensions.
If you’re looking to move your UK pension to Australia, there’s a lot to consider. Taxes must be paid on that pension in Australia. But, the good news is that you won’t have to pay double taxes as the Australian government has a double taxation agreement with the UK. If you aren’t sure how this all works, it’s best to consult a professional financial advisor who can guide you through what needs doing and what options are available.