What Is the Overseas Transfer Charge?
The overseas transfer charge (OTC) is a 25% tax levied by HMRC on pension transfers from UK registered pension schemes to Qualifying Recognised Overseas Pension Schemes (QROPS). It was introduced on 9 March 2017 through the Finance Act 2017, primarily to prevent people from using overseas pension transfers to avoid UK tax on their retirement savings.
Before the OTC was introduced, transferring a UK pension to a QROPS was completely tax-free. This led to widespread use of QROPS for tax planning purposes, sometimes by people who had no genuine intention of living overseas. The 25% charge was designed to remove this incentive while still allowing legitimate transfers by genuine expatriates.
When Does the 25% Charge Apply?
The OTC applies to any transfer from a UK registered pension scheme to a QROPS (or from one QROPS to another) unless a specific exemption is met. The charge is assessed at the point of transfer and is deducted from the transfer amount before it reaches the receiving scheme.
The charge also has a retrospective element. If you qualified for an exemption at the time of transfer but your circumstances change within five complete tax years following the transfer, the charge can be applied retrospectively. The QROPS is obliged to report relevant changes to HMRC during this period.
Exemptions from the Charge
There are four main exemptions from the overseas transfer charge:
1. Residency Match
The OTC does not apply if you are tax-resident in the same country where the QROPS is established. For example, if you live in Australia and transfer your UK pension to an Australian superannuation fund that is a QROPS, no charge applies.
2. EEA Exemption
The charge does not apply if both you and the QROPS are within the European Economic Area (EEA) or the UK. For example, if you live in France and transfer to a QROPS in Malta, both are EEA countries, so no OTC applies.
3. Employer Scheme
If the QROPS is an occupational pension scheme provided by your employer, the transfer is exempt from the OTC. This covers situations where you have moved abroad for work and your new employer offers a local pension scheme that qualifies as a QROPS.
4. Public Service Scheme
Transfers to overseas public service pension schemes are exempt from the OTC.
| Your Residence | QROPS Location | OTC Applies? |
|---|---|---|
| UK | Any overseas country | Yes (25%) |
| Australia | Australia | No (residency match) |
| France | Malta | No (both EEA) |
| USA | Malta | Yes (25%) |
| Spain | Spain | No (residency match + EEA) |
| Dubai | Malta | Yes (25%) |
| Dubai | Dubai (employer scheme) | No (employer exemption) |
| Canada | Canada | No (residency match) |
The Five-Year Clawback Period
Even if you qualify for an exemption at the time of transfer, HMRC monitors your circumstances for five complete tax years after the transfer. If during this period you move to a country that would not have qualified for the exemption, the 25% charge can be applied retrospectively.
For example, if you live in France and transfer to a Malta QROPS (both EEA, so no charge), but then move to Dubai within five years, HMRC can impose the 25% charge on the original transfer. The QROPS scheme manager is required to report this change to HMRC.
How the Charge Is Collected
The OTC is deducted at source by the UK pension scheme administrator before transferring the funds. The scheme administrator reports the transfer to HMRC and pays the charge directly. You do not need to pay it separately through self-assessment.
If the charge is applied retrospectively due to a change in circumstances during the five-year period, the QROPS scheme manager is liable for reporting and paying the charge. In practice, this usually means the amount is deducted from your QROPS fund.
Can You Get a Refund?
In limited cases, you may be able to claim a refund of the OTC. This might apply if:
- The charge was incorrectly applied because an exemption should have been recognised
- You can retrospectively demonstrate that your residency status qualified for an exemption at the time of transfer
- There was an administrative error by the scheme
Refund claims must be made to HMRC within specific time limits. Obtaining tax advice from a specialist in international pension transfers is essential if you believe the charge was applied incorrectly.
Strategies to Avoid the OTC Legitimately
There are several legitimate approaches to minimising or avoiding the overseas transfer charge:
- Transfer to a QROPS in your country of residence — the simplest exemption. If you live in Australia, transfer to an Australian QROPS
- Use the EEA exemption — if you live in an EEA country, choose a QROPS within the EEA (Malta and Gibraltar are popular choices)
- Keep your pension in the UK — you can still access UK pensions from overseas via drawdown or annuity without transferring to a QROPS. This avoids the OTC entirely
- Wait for the five-year period to pass — if you plan to move between countries, consider the timing carefully to ensure the clawback period has expired before any further moves
Keeping Your Pension in the UK Instead
For many expats, the simplest option is to leave their pension in the UK and access it from abroad. UK SIPPs and personal pensions can pay income to overseas bank accounts. You would be subject to the tax rules of your country of residence, but you avoid the OTC entirely and retain the protections of UK pension regulation.
This approach works well if you are comfortable with sterling-denominated assets, your UK pension provider offers good investment options and reasonable fees, and the tax treatment in your country of residence is acceptable.
For more on this decision, see our guide on QROPS explained and our retiring abroad pension checklist.