Overseas SIPPs Advice

Successful and productive members of society who have built up a decent sized pension pot and who have either left the UK to retire abroad or are thinking of doing so need to understand the tax effects of withdrawing pension payments from their UK self-invested pension plan or ‘SIPP’ after retiring abroad.

If you are planning to retire abroad or have recently done so you have a basic choice of leaving your pension pot here with your pension provider or of transferring your SIPP pension pot overseas into a Qualifying Recognised Overseas Pension Scheme or “QROPS”. You can read more about QROPS and their tax consequences here. This page focusses on the tax consequences of retaining your UK SIPP and taking money out of that once you move abroad because in many cases that will be more cost effective and less complicated compared with setting up a QROPS.

Flexible Drawdown and SIPPs

Before looking at the taxation of pension payments from a SIPP to a non-UK resident it is helpful to remember that under the Taxation of Pensions Act 2014, flexible pension drawdown was introduced from 6 April 2015. Flexible drawdown permits individuals aged 55 or over (increasing to 57 from 2028) to withdraw any sum from their SIPP at any time instead of having to use their funds to purchase an annuity or be restricted to capped drawdown. Subject to the individual’s 25% tax free lump sum allowance of up to £268,275, such withdrawals are treated for UK tax as pension income and charged to UK income tax at the rates appropriate to that individual in the tax year of receipt.

How are such withdrawals taxed when you retire abroad? In particular how is a large lump withdrawal of most, if not all, the pension pot treated for tax purposes? This is becoming an increasingly contentious issue with HMRC as explained below.

The OECD Model Treaty

In relation to private sector pensions, article 18 of the OECD Model Treaty provides that the country where the recipient resides has the exclusive right to tax the pension payment and the country from which the payment is made is not permitted to tax it. Article 18 provides that “pensions and other similar remuneration paid to a resident of a contracting state in consideration of past employment shall be taxable only in that state.”

This wording is pretty clear and seems to embrace not only regular pension payments but also arguably one-off lump sums out of a pension pot, although HMRC disagree. Further, not all the UK’s tax treaties adopt the precise wording of article 18 above and this has provided HMRC with additional scope to argue for restrictions on what pension payments qualify for the exemption from UK tax under particular double tax treaties.

HMRC’s Attack on Flexible Drawdown by Non-UK Residents

The recent Masters decision of the First-tier Tax Tribunal shows the attitude of HMRC to this issue even though the taxpayer was successful in his appeal against HMRC’s refusal to exempt payments out of a UK SIPP to him in Portugal under the UK/Portugal double tax treaty.

Mr Masters had a SIPP worth a substantial amount when he left the UK and took up tax residence in Portugal in 2019 where he was treated as a “non-habitual resident”, which meant that his non-Portuguese pension income was (at that time) exempt from Portuguese taxation for 10 years. Hence under the terms of article 17 of the double tax treaty he expected to be able to withdraw pension monies from his SIPP free of UK tax and pay no tax on the receipt of the monies in Portugal.

Mr Masters withdrew £3.5m in 2019/20 and his SIPP provider deducted £1.56m in UK tax under PAYE so he requested a tax refund from HMRC and that they issue a NT or “no tax” code to his SIPP provider for future payments. HMRC refused his request and argued that the payments were not “paid in consideration of past employment” so that article 17 did not apply to exempt them from UK tax and that because the payments were not actually taxable in Portugal, the exemption in article 17 did not apply and the UK was allowed to tax the payment as “other income” under article 20.

The tax tribunal held that the payments were “paid in consideration of past employment” so that article 17 applied to exempt them from UK tax. The tax tribunal said that if article 17 had not applied then the payments would probably have been taxable in the UK on the basis that the wording “subject to tax” which is the condition of article 20 that would have exempted UK tax if the payments were subject to tax in Portugal, meant actual taxation in Portugal and not merely taxable at nil rate.

Clearly, in defending Mr Master’s appeal HMRC were conscious of the fact that Mr Masters was seeking the holy grail of tax planning and would not be taxed on the payments in either country.

What of Other Tax Treaties?

HMRC seem to be looking at the wording of other double tax treaties as well in order to justify a refusal to issue an NT PAYE code when they believe that a significantly lower rate or a nil rate of tax will apply in the overseas country, especially when the SIPP holder is using flexible access to draw down large sums of money.

Article 17 of the UK/Australia tax treaty provides that “Pensions (including government pensions) and annuities paid to a resident of a contracting state shall be taxable only in that state.” Unlike the treaty between the UK and Portugal, this does not require that the pension payment be in consideration of past employment but it does not also refer to “other similar remuneration”.

It is clear that under UK tax law pension payments include amounts withdrawn under flexible drawdown so that for example a large sum withdrawn from a SIPP built up from self-employment should be exempt from UK tax under article 17 if paid to a resident of Australia. However, do not count on HMRC being in agreement with this.

The tax treaty with Dubai seems to be one of the most generous with pensions because article 17 of that treaty provides that “…pensions and other similar remuneration paid to a resident of a contracting state shall be taxable only in that state.” The reference to “other similar remuneration” makes it more difficult for HMRC to argue that flexible access drawdown lump sums are not exempt from UK tax and it is not a requirement that the pension be in consideration of past employment, as distinct from self-employment.

The 2025 tax treaty with Andorra which is now in force is similarly worded and article 17 provides that “…pensions and other similar remuneration paid to a resident of a Contracting State shall be taxable only in that State.”

Other tax treaties are not so generous however and, for example, the UK/Canadian tax treaty refers to “periodic pension payments” and this may enable HMRC to tax flexible access drawdown lump sums as not being “periodic pension payments”.

Specialist Overseas SIPPs Advice

If you are considering either retirement abroad or have retired abroad and have built up a substantial SIPP through success, self-denial and hard work and wish to withdraw funds from your SIPP be very careful with tax. You should check whether there is a double tax agreement between the UK and where you will retire or have retired to and if there is, what the wording of the pensions article provides for. Taking professional advice in this area could make all the difference.

The goal will normally be to persuade HMRC to issue an NT (“no tax”) PAYE instruction to your SIPP provider so that they can remit payments to you from your SIPP free of any UK tax. It will often be a good idea after researching the position to make some test withdrawals in order to gauge HMRC’s attitude before planning further flexible access drawdowns.

Frequently Asked Questions