For the Love of QROPS: What is the impact of the increase in the UK normal minimum pension age?

• What is the change?

• • The UK is increasing the minimum pension access age from age 55 to age 57. This change will take effect on 6 April 2028 being the start date of the 2028/29 UK tax year.  This change was introduced by the Finance Act 2022 section 10 which amended the definition of “normal minimum pension age” set out in s279(1) of the Finance Act 2004.

• • The amended definition is set out below:

“normal minimum pension age” means

1. 1. 1. in relation to, and in respect of, a pension scheme that is not a uniformed services pension scheme –

1. 1. 1. before 6 April 2010, 50,
      2. on and after that date and before 6 April 2028, 55, and
      3. on and after 6 April 2028, 57 and

(the uniformed services pension schemes are defence force and firefighters pension schemes – under these schemes, the change is from age 50 to 55)

• • The corresponding age in the Australian superannuation system is age 60.

• Are transitional provisions likely to be issued?

• • Yes (given the previous experience when normal minimum pension age increased from 50 to 55 in 2010), and they have not, so far, been issued. So, the comments below must be taken to be subject to the possibility that transitional rules may be issued.

• • Transitional rules may deal with “the time of transfer” of the UK Pension Transfer such that transfers which straddle the 6 April 2028 may be counted as having been effected before 6 April 2028 such that a transfer initiated before 6 April when the attained age of the member was 55 but completed after 6 April 2028 (when the attained age of the member may still be age 55 or may have progressed to age 56) will be treated as occurring before 6 April 2028.

• How does the change affect UK Transfers made on or after 6 April 2028

• • The SMSF must have QROPS status at the time of the transfer for the UK Transfer Amount to receive favourable UK tax treatment.

• • What is the time of a UK Pension Transfer? The most cautious approach would be the time the transfer amount is received by the SMSF.

• • Consequently, for SMSFs to receive UK Pension Transfers on or after 6 April 2026, the SMSF will have to adopt age 57 rule.

• Should SMSFs adopt the age 57 rule?

• • UK Pension Transfers can have a long fruition period. The SMSF obtaining QROPS status is just the first element, the SMSF then has to be listed as a QROPS, then the scheme manager of the UK pension scheme has to be satisfied that the SMSF does in fact have QROPS status and then the scheme managers requirements satisfied and then the money transferred.  All of this can take considerable time.

• • Consequently, if there is any possibility that a UK Pension Transfer could occur on or after 6 April 2028, then the SMSF must adopt the age 57 rule.

• • Also, the scheme manager of the UK transferring scheme may require the SMSF adopt the age 57 requirement before 6 April 2028 as a precaution.

• How does the change affect UK Transfers to be made before 6 April 2028

• • In short, they do not.

• • Any UK Pension Transfers received by the SMSF before 6 April 2028 are unaffected.

• • The current UK tax rules which apply to the UK Transfer Amount (the “10 year transfer period rule” and the “5 years from transfer” rule) continue to apply.

• Do SMSFs which are already QROPS status have to amend their trust deeds/governing rules

• • If the SMSF does not amend its rules to include the age 57 member rule – it will cease to have QROPS status from 6 April 2028.

• • The main consequence is that any UK Pension Transfers made on or after 6 April 2028 will not be recognised transfers for UK tax purposes (with significant adverse tax consequences for the transferring member and the scheme manager of the transferring UK pension scheme).

• • So, amendment is only required if the SMSF wants to accept UK Pension Transfers on or after 6 April 2028 (or where there is a possibility that pre 6 April 2028 transfers be completed on or after 6 April 2028).

• • If there is no possibility of the SMSF accepting UK Pension Transfers on or after 6 April 2028 – then the SMSF need not adopt the age 57 rule.

• What happens on loss of QROPS status

• • First, the scheme manager of the QROPS (typically the SMSF Trustee but not necessarily the SMSF Trustee) must notify UK Revenue that the SMSF has ceased to comply with ROPS requirements and therefore has ceased to be a QROPS.

• • Secondly, upon notification by the scheme manager, the name of the SMSF will be removed from the QROPS list.

• • Thirdly, any UK Transfer made after the SMSF has ceased to have QROPS status will not be a recognised transfer for UK purposes and the transferring member/scheme manager of the transferring registered pension scheme will be liable to unauthorised payment charge, surcharge and scheme manager charge – so there will not no further UK Transfers.

• • The SMSF will no longer be a QROPS but will remain a Recognised Non-UK Pension Scheme (once an SMSF becomes a RNUKS it is always a RNUKS).

• • As the SMSF remains a RNUKS, both the 10 year transfer period rule and the 5 year transfer rule continues to apply.

• What are the Age 55 and Age 57 Rules?

• • The age 55 Rule requires that only individuals who have attained age 55 (or 57 in the case of the Age 57 Rule) can be admitted as members of the SMSF. The rule does not apply to individuals who become members of the SMSF by reason of receiving a death benefit in the form of a pension.

• • For an SMSF to be a QROPS, the SMSF must first qualify as a Recognised Overseas Pension Scheme (ROPS) which, in board terms, requires the SMSF to mirror the benefit access conditions which apply to registered pension schemes: that is no benefits before minimum pension age, except in the case of death or serious ill-health (which broadly corresponds with “permanent incapacity”).

• • As complying superannuation funds can provide some benefits to members before age 55 (or 57) in circumstances which registered pension schemes cannot (without penalty provide), for example severe financial hardship and compassionate grounds, and as the UK Revenue Authorities have taken the view that the trust deed/governing rules of the SMSF cannot override these access conditions, SMSFs can only mirror the benefit access conditions applying to registered pension schemes by imposing a minimum age requirement for membership.

• What are the 10 year transfer period rule and the 5 year transfer rule?

• • If, when, and to the extent that, the SMSF receives a UK Pension Transfer the SMSF will then become a Relevant Non-UK Pension Scheme (RNUKS) and potentially be liable for UK tax if the fund pays any part of the Transferred Amount in circumstances which would give rise to an unauthorised payments charge (such as paying all or part of the UK Transferred Amount to a superannuation fund which is not a QROPS or the member ceasing to be an Australian resident while the Transferred Amount remains in the SMSF).

• • In general terms, the member will be directly liable (and the scheme manager for the SMSF indirectly liable) to a UK tax charge if an unauthorised payment is paid to or in respect of the member when the member is a UK tax resident or is treated as being a UK tax resident.

• • The benefit will be authorised payment if it is paid in circumstances permitted by the UK benefit access rules such as access on or after the member has attained the normal minimum pension age and will not be subject to Australian tax if the payment has been paid when the member has satisfied an unrestricted release condition.

• • The member will be treated as being a UK tax resident if any of the following situations apply:

• • 1. the member is a UK tax resident at the time of the payment of the benefit; or
    2. the member has been a UK tax resident at any time, on or after the 6 April, immediately preceding the time of payment of the benefit;
    3. the member has been a UK tax resident in any of the 10 years preceding the 6 April referred to above; or
    4. the benefit has been paid within 5 years of the transfer date (being the date on which the payment was made by the registered pension scheme to the SMSF).

• • If the benefit arose from a transfer made before 6 April 2017, then the situation (c) applies as if a 5 year period applied rather than a 10 year period and situation (d) is not applicable.

What are UK Pension Transfers?

• UK Pension Transfers are lump sum payments from a UK registered pensions scheme to an SMSF in respect of an individual representing all or part of their benefit in the UK pension scheme. From the UK perspective, the transfer payment is a member benefit paid in respect of the individual.  From the Australian perspective, the transfer is a non-concessional contribution made for the individual by the trustee of the UK pension scheme.

• If the UK Transfer Amount is paid to an SMSF which is a Qualifying Recognised Overseas Pension Scheme (QROPS) then the payment will be a “recognised transfer”, and so will be an authorised payment for UK tax purposes, and therefore not liable to the unauthorised payment change (40%) and the unauthorised payments surcharge (15%) and the scheme manager may not be liable to the scheme sanction charge (40% but reduced to 15% if the authorised payment change has been paid).

• Even if the UK Pension Amount is a recognised transfer, it may be liable to the Overseas Transfer Charge (25%). If the individual in respect of whom the payment is made is also a resident of Australia, the payment will not be subject to the Overseas Transfer Charge (25%) at the time of payment (as in this circumstance an exception to the payment of the Overseas Transfer Charge applies).  The payment may be latter subject to the Overseas Transfer Charge if the payment (or part of it) is within, the “transfer period” relating to the original payment paid to a complying super fund which does not have QROPS status at the time of payment.  Also, if the member, subsequently, ceases to be an Australian resident while the UK Transfer Amount remains in the SMSF (even if the fund has QROPS status) then an Overseas Transfer Change will apply.

What is the Acronym QROPS all about?

• The first element is “PS” which stands is for “pension scheme”. For an SMSF to be considered as a pension scheme – the benefit access conditions must broadly correspond to the benefit access conditions applying to registered pension schemes.  As benefits provided by SMSFs are retirement benefits payable on retirements on or after age 60, incapacity before age 65 and death whether before or after 65, they broadly follow the benefits payable registered pension schemes.  The ability of SMSFs to provide benefits in other circumstances (eg severe financial hardship, compassionate grounds or first home super saver requests) is sufficiently insignificant to preclude an SMSF from being within the UK concept of a “pension scheme”.

• The second elements is “O” which stands for overseas. If an SMSF is created in Australia and qualifies as a resident Australian superannuation fund, it will satisfy the requirement.

• The third element is “R” which stands for recognised. An SMSF will be “recognised” when it broadly matches or mirrors the benefit access condition for registered pension schemes.  As SMSFs can provide some benefits prior to the UK normal minimum pension age, an SMSF will not qualify as being “recognised” unless the SMSF adopts the minimum member age requirements which matches the UK normal minimum pension age.

• The last element “Q” is for qualifying. An SMSF will be qualified when the scheme manager for the SMSF (typically, the Trustee but not necessarily the Trustee) gives certain undertakings to the UK Revenue Authority that it will comply with various provisions of the UK revenue legislation in respect of any UK Pension Transfers.

• If all of the above elements are satisfied, the SMSF will be a QROPS and as such any UK Pension Transfer will be treated as a “recognised transfer” to which the overseas transfer change will not apply at the time of transfer, so long as the individual in respect of whom the transfer is made is both a member of the SMSF and also an Australian resident.

Once an SMSF which is a QROPS receives a UK Pension Transfer, the SMSF will become for UK tax purposes a Relevant Non-UK Pension Scheme (RNUKS). 

Once an SMSF is a RNUKS it will remain a RNUKS (even if the SMSF has ceased to be a QROPS).  However, the pre-conditions which are required to be satisfied before UK tax charges can apply to the SMSF (because it is a RNUKS) will cease to be satisfied if the UK Transfer Amount is either:

• paid to another QROPS (in circumstances where the overseas transfer charge does not apply) or paid to a registered pension scheme; or

• the individual in respect of whom the UK Transfer Amount has been paid satisfies an unrestricted release condition.

Why 6 April?

• Lastly and possibly the most interesting, why does the UK tax year begin on the 6 April? Originally, the UK tax year began on Lady Day (which was styled the 25 March under the Julian Calendar). 

• When England moved from the Julian Calendar to the Gregorian Calendar in 1752 (pursuant to the Calendar (New Style) Act 1750 the 11 day difference between the Julian dates and the Gregorian dates (with the Julian Calendar trailing the Gregorian Calendar) was eliminated by Parliament declaring that the Thursday immediately following Wednesday 2 September 1752 was to be styled Thursday 14 September 1752.

• Consequently, the dates 3rd to the 13^th of September 1752 do not, by force of law, exit. This resulted in Lady Day becoming 5 April (as per the Gregorian Calendar).  Consequently, the legal year started on 5 April while the fiscal year started on 6 April.  Further, the same Act declared that the calendar year was to commence on 1 January rather than 25 March.

For further information, please do not hesitate to contact our helpdesk on 02 8296 6266 or email info@supercentral.com.au.