Cutting ties with the UK? Don’t neglect pension, FIG and IHT rules

“I’m leaving, and I’m cutting all ties to the UK” is a phrase that many advisers to mobile families have heard over the last 18 months. Usually, my first question in response is to carefully consider “what would make you come back?” Most people think of the next generation, having a child or business ties. Few consider elderly relatives who might need their support. And I’ve seen some families come back, or unwillingly reacquire British residence, simply because of the number of days spent here.

This is because since April 2025, residence is the determining factor for UK tax exposure. Beyond this, many don’t think that cutting all ties means all ties – including pensions. I can’t blame them, pensions are often seen as a financial investment, and the UK ‘situs’ asset element easily escapes us.

Pensions have changed over the years. From pension freedoms to auto-enrolment and, more recently, the incorporation of pensions in Inheritance Tax (IHT) from April 2027. If, like me (and long before I became a financial adviser), you were told from an early age to save for retirement – that last evolution’s a sting in the tail… or is it?

It’s important to look at these changes on a personal level and not make generalisations. Equally, the government’s role is to look at these from a general rather than an individual perspective. Any changes will always both favour and disadvantage different people.

Pensions are intended to be a savings vehicle for spending when you no longer have an income from work. So, investing in a pension initially does give you some tax benefits. Throughout a pension’s lifetime, it’s exempt from income and gains taxes. And when it comes to retirement, there are several ways to use a pension. This is when cash flow planning can be useful. Some providers allow you to remain invested while taking benefits and even vary the amount taken monthly or ad hoc. This gives you a tad more control over pension tax by letting you take out only what’s needed.

From April 2027, unused pensions will count towards UK Inheritance Tax, no matter where you live. Like properties, pensions are classed as UK ‘situs’ assets. Even with the new foreign income and gains (FIG) rules focusing solely on residence rather than domicile. So, even after removing the IHT link to the UK, which for long‑term residents may take up to ten years abroad – without any major returns to the UK, the UK will continue to claim IHT on UK situs assets.  A few countries’ tax treaties offer relief, but only a small number include these rules (only 10). So, in most cases, pensions are likely to remain taxable in the UK, regardless of your residence.

Many mobile clients will be thinking about using a qualified recognised overseas pension scheme (QROPS) to transfer their UK pension abroad. This has also been tightened since April 2024 and may be more difficult to achieve than before. In fact, you can only move £1,073,100 tax-free, anymore and the excess will attract an immediate tax charge of 25%. It’s important to know that if you try to transfer to a QROPS in a different country to the one you live in, this will trigger a 25% tax charge on the entire amount.

As with any big decisions affecting your finances, seek advice. Moving abroad or coming back from being abroad can be a tricky decision not to be taken lightly.

For more information and guidance on pension rules and expat planning, you can speak to our adviser Adrien Landreau or any of PWM’s specialist international advisers.

Tax treatment depends on individual circumstances and may change in future.