Tax-Saving Pension Transfers for Expats: What Changed - and What Still Works
Subscribe to our newsletter for latest expatriate news, view & analysis.
Quick Take
Three different taxes now bite UK pensions
Income tax up to 45% on withdrawals,
Inheritance tax (IHT) now applied to pension funds on death (40%),
25% transfer charge if you move the pension fund offshore.
Key insight: You may avoid the 25% transfer hit by moving yourself (your tax residency), not the pension fund. Where a treaty allows, pension income can be taxed in your new country - in some places at 0–5% - while you keep the structure compliant.
Estate planning amplifier: Pair overseas pension taxation with a properly drafted family trust (English-law trust in a suitable jurisdiction) to manage probate, capital gains exposures, and IHT across borders.
This is strategy, not trickery: use the rules as written, in the right order, with clean residency and filing.
The Policy Backdrop (Why this matters now)
The current UK policy direction is toward higher tax take across income, assets, and estates.
Pensions were tightened: offshore fund transfers face a 25% charge; government service pensions are UK-taxed; IHT now reaches pension pots at 40% on death.
Future levers to watch: possible caps on tax-free lump sums, tweaks to IHT allowances, and VAT threshold/rate moves that affect small businesses and landlords.
Bottom line: If you’ll retire abroad or already live overseas, getting your sequencing and residency right can mean six-figure differences over a lifetime.
Pension Tax: The Three Doors
Stay UK-resident with a UK pension
25% lump sum tax-free (subject to any future cap), balance taxed up to 45%.
On death, pension value now within IHT 40% net.
Transfer your UK pension fund offshore
Triggers 25% transfer tax on the pot (under current rules), plus ongoing local rules.
Only suitable in specific, narrow cases.
Relocate yourself (change tax residency) and keep the fund
Under a double tax treaty, your pension income can be taxed where you live.
Example: Cyprus currently offers a flat 5% regime for qualifying overseas pensions. Drawdowns can be taxed at ~5%, not 45%.
No UK pension transfer needed, so no 25% transfer charge.
After drawing, you can re-invest via a family trust for probate/IHT efficiency.
Heuristic: If your destination taxes foreign pension income at a low flat rate and has strong trust infrastructure, Door #3 is often the cleanest, lowest-friction path.
Trusts: The Cross-Border Engine
What they are: Under English law, a trust is a distinct tax entity that can hold cash, portfolios, property, and business shares.
Why they help:
Continuity: A trust doesn’t “die,” so no probate on the trust assets.
IHT planning: Properly settled, can reduce or defer inheritance tax exposure and simplify succession.
Capital strategy: Enables family investment policies without surrendering control to retail platforms.
Key is competent drafting, correct situs of assets, and trusteeship that matches your residency footprint and objectives.
Healthcare & Social Insurance: Don’t Miss the S1/A1
If you’ve built UK/EU contributions, the S1/A1 framework can export state healthcare rights to another country when eligible.
This is separate from private medical insurance needed for some residence permits, but it can reduce living costs and ensure continuity of care.
Worked Illustration (Simplified)
Profile: UK SIPP of £1,000,000, age 55+, wants to live abroad.
Stay UK-resident: Draw £1,000,000 → effective tax up to 45% (on amounts above allowances); pension IHT exposure 40% on death.
Transfer fund offshore: Immediate £250,000 (25%) transfer charge - before you start.
Move residency (e.g., Cyprus treaty route): Register correctly → pension withdrawals taxed at ~5%. £50,000 tax on £1,000,000 drawn; proceeds can be contributed/gifted into a family trust for long-term IHT/probate efficiency.
Same pot, radically different outcomes - purely by sequencing and jurisdiction.
Action Checklist
Residency first: Establish genuine tax residency abroad (days, home, centre of vital interests, filings).
Treaty mapping: Confirm your destination’s treaty treatment for UK pensions and the local tax rate on foreign pension income.
Pension type audit:
SIPP/PP: flexible.
Defined Benefit & Government service pensions: often locked to UK taxation.
Trust blueprint: Decide whether to seed a family trust (purpose, trustees, letter of wishes, banking/brokerage).
Estate plan refresh: Wills in each relevant jurisdiction + trust coordination.
Compliance kit: Register, file, and document everything (NINO, S1/A1 if eligible, TINs, CRS/FATCA where applicable).
Business owners: Align dividends/retained profits planning with the new residency (some jurisdictions allow 0%–low% dividend extraction).
Frequently Asked
“Isn’t the 25% charge unavoidable?”
Only if you transfer the fund. If you move yourself and draw under a treaty in your new country, that transfer charge doesn’t arise.
“Do I lose UK benefits?”
You keep your UK state pension entitlement built to date. Taxation and indexing can vary by country - plan it.
“Can HMRC change this again?”
Policy can change anywhere. The defence is a portable structure (residency + treaty + trust) that can adapt.
Common Pitfalls
Half-moves: spending most time abroad but failing residency tests → double trouble.
Drawing before residency is secured → UK rates apply.
DIY trusts without specialist counsel → adverse tax events or sham risk.
Ignoring withholding and reporting rules in both countries.
We Can Help
ProACT advises expats and internationally mobile families on cross-border pensions, trusts, and business structuring - compliant, documented, and optimized for where you actually live.
Book a free review consultation with one our expatriate experts, or;
Contact us for help & guidance
