Inheriting a UK pension can be quite a challenge for a non-UK resident.
We recently had an enquiry from a British citizen, resident in the Czech Republic, who is to inherit a British pension. He has asked us to explain his options.
Inheriting a UK pension depends on the type of pension scheme, the deceased’s choices, and the rules of the specific plan. In this instance, we are focussing only on defined contribution pensions (where the deceased had a pension fund and there are no dependents).
Here are the main options for inheriting a UK pension:
- beneficiary’s lifetime annuity,
- beneficiary’s drawdown,
- lump sum,
- or a combination of the above.
Options for non-UK residents
Unfortunately, while the options above may all be available for residents in the UK, they may not necessarily be available for non-UK residents.
Annuities are not available to non-UK residents from UK pension schemes. And, the UK pension provider may decide that drawdown (post- Brexit) is cross-border business and so may not offer this either.
A lump sum in the event of the deceased being over 75 is taxable, but may be the only option on the table.
The dilemma:
Many UK pension providers will not deal with non-UK adviser firms.
The UK adviser firms they will deal with are unwilling to deal with non-UK residents.
This can leave the non-UK resident, who is the beneficiary, with limited options.
Even if the UK pension does allow drawdown, the UK pension providers will not deal with non-UK adviser firms and UK adviser firms are unwilling to deal with non-UK residents. This can leave the beneficiary with limited options.
Further, it is now becoming more common that UK pension companies will not communicate at all with non-UK advice firms – even with a letter of authority from the client.
As Aisa International’s owners also have a UK FCA registered company, we are able to obtain the relevant information in order to help our clients understand the options and provide advice accordingly here in the Czech Republic and within the EU.
What about a transfer to a UK pension that will allow non-UK residents and non-UK advisers to provide ongoing advice?
A transfer is not an allowable death benefit. To inherit a UK pension, the non-UK beneficiary would, in the first instance, go into drawdown in the inherited pension scheme. If the current scheme doesn’t offer drawdown, then the only options are a lump sum or a dependant’s annuity in line with what the schemes are offering (the latter most likely not available to non-UK residents).
It may be that the deceased’s pension scheme does offer a beneficiary income option on a ‘notional’ basis within their scheme and then allows a request to transfer to another provider.
This is referred to as ‘blink of an eye’ drawdown. This is not mandatory and will depend on each scheme’s own rules and the provider’s business processes. But, it is a question the beneficiaries or their advisers should ask!
Tax Implications
When inheriting a UK pension, the age of the deceased can affect the beneficiary’s tax burden:
- If the deceased was under 75: Inherited pensions are usually tax-free (lump sum or income).
- If the deceased was 75+: Withdrawals are taxed as income at the beneficiary’s marginal rate.
- Lump sums from uncrystallised funds may be tax-free if the deceased was under 75.
Summary
Due to the complexities of UK pension arrangements and restrictions on advice and options from the UK, it is always worth consulting advisers with the relevant experience and licences to deal with such cases.
