The overseas transfer allowance (OTA) is one of three new allowances introduced, in replacement of the lifetime allowance which was abolished with effect from 6 April 2024.
Under the lifetime allowance regime, which applied up to 5 April 2024, a transfer of your UK pension savings into a qualifying recognised overseas pension scheme (QROPS) was tested against your lifetime allowance. This, in turn, determined how much of your lifetime allowance was used up or, if you exceeded your lifetime allowance as a result of the transfer, whether you were subject to a UK tax charge at that point.
Background
The lump sum allowance (LSA) and lump sum and death benefit allowance (LSDBA replaced the lifetime allowance on 6 April 2024. At the same time, the overseas transfer allowance (OTA) was introduced, which is a separate allowance that is also set at £1,073,100, the same level as the LSDBA.
Where you have a specific form of lifetime allowance protection or enhancement your LSDBA (and consequently your OTA) will be uplifted. Please click on the link below for more information.
Protective elections and enhancements
Similarly, if you have applied for a transitional tax-free amount certificate, which increases your LSDBA, this will also increase your OTA. Please click the link below for further background on the transitional tax-free amount certificate.
The overseas transfer allowance
The OTA limits the amount of your pension savings you can transfer into a QROPS from 6 April 2024 without tax charges applying. Any amount you transfer after 6 April 2024 that exceeds your OTA will be subject to an OTA charge, a flat rate tax charge of 25%.
It is important to be aware that the OTA is a separate allowance, which will be reduced by the value of any transfers into QROPS that you make from 6 April 2024. Whilst the value of your OTA is linked to the value of your LSDBA when set, any overseas transfer from 6 April 2024 is assessed against the OTA only, does not have an impact on your LSA or LSDBA.
If there has been a reduction in your lifetime allowance before 6 April 2024, when you now seek to transfer your pension savings into a QROPS under the new regime, there is a standard calculation that is completed to identify the ‘lifetime allowance previously used amount’.
Your OTA is then reduced by 100% of this ‘lifetime allowance previously used’ amount. If you have not accessed your pension savings before 6 April 2024, the standard OTA will be £1,073,100.
You should be aware that additional tax charges may apply on the transfer of your pension savings overseas into a QROPS, even if the value transferred does not exceed the OTA. These tax charges can also apply in priority to the OTA charge on any transfer in excess of your OTA. As such, you should consider your personal facts and circumstances before making any decision to transfer, and seek professional advice as required.