The taxation of pensions differs between Australia and the UK. Because of this, it can be worth making contributions to a UK personal pension, especially if you’re planning to return to Australia in the near future.

This article explains the differences and outlines how to maximise your contributions.

Make the most of different regimes

In simple terms, the key difference between UK and Australian pensions is that you pay tax on UK pensions when you take money out, whereas super schemes are concessionally taxed when you put money in.

This creates an advantageous tax scenario for anyone contributing to a UK pension who is planning to retire in Australia. Once you are over 55, you can transfer your pension to an Australian super fund – as long as the super is authorised to accept such transfers.

If you receive higher-rate relief on your UK pension contributions, and then transfer the fund to Australia where you can access it tax-free, you are essentially benefiting from a 67% return on investment before accounting for any investment growth.

This is a significant wealth creation opportunity if you plan to work in the UK and then retire to Australia.

The Annual Allowance

The UK pension Annual Allowance is the maximum that you can contribute to your pension each tax year while still benefiting from tax relief.

In the 2020/21 tax year, the Annual Allowance is the lower of £40,000 or 100% of your annual earnings.

However, there are two reasons why your Annual Allowance may be lower:

• If your income is more than £240,000, it’s likely that the Tapered Annual Allowance will apply. This reduces your Annual Allowance by £1 for every £2 your income exceeds £240,000.
• If you have already flexibly accessed your pension, you may be subject to the Money Purchase Annual Allowance. This reduces your maximum tax-efficient contribution to £4,000 per tax year.

Using your Annual Allowance is important as it means you can make the most of your pension contributions by benefiting from the maximum amount of available tax relief.

Maximising your contributions

Tax relief

The UK government incentivise pension contributions with tax relief on all personal contributions made. Depending on how much you earn, you will be getting tax relief at your marginal rate of tax, either 20%, 40% or 45%.

Here’s an example:

• If you earned £100,000 this year you would have a marginal tax rate of 40%.
• If you use your full Annual Allowance and pay £32,000 into a personal pension, basic-rate tax relief of 20% is automatically added, so £40,000 is paid into your pension at outset.
• You can then claim a further 20% tax relief when you complete your tax return. This will normally be paid to you as a tax rebate, assuming you don’t owe any outstanding tax.

In simple terms, maximising your pension contributions means benefiting from an immediate uplift in fund value, thanks to the tax relief.

Carry forward

You can carry forward any unused Annual Allowance for up to three previous tax years. The maximum contribution allowable if you’re using carry forward is 100% of your earnings in the current tax year.

So, continuing the example above, you could pay up to a further net contribution of £48,000 into a pension by carrying forward any unused Annual Allowance from previous tax years. After the addition of further basic rate relief, this will make a total contribution of £100,000.

You can then apply for higher-rate tax relief through your UK tax return.

The importance of advice

As you can see, the different tax treatment of pensions in the UK and Australia creates a very advantageous situation if you are currently working in the UK but planning to move back to Australia to retire.

You can maximise your pension contributions in the UK and benefit from tax relief. You can then transfer your UK pension to an Australian super scheme and draw your income tax-efficiently.

The legislation and calculations can be complicated, so we would recommend you speak to a financial adviser.

Get in touch

Here at bdhSterling we have a wealth of experience in advising clients about their retirement planning in the UK and Australia. If you’d like to know more, please email enquiries@bdhsterling.com.