These details are an overview of the non-residence enhancement factors for money purchase schemes. The rules are similar for other types of schemes although you need to check. A comprehensive guide can be found on the HMRC pension tax manual pages.
There will be cases where a member of a UK registered pension scheme will be resident overseas (e.g., airline pilots or international banks) and classed as a relevant overseas individual. In certain circumstances pension contributions will be made without gaining tax relief as the client is a non-resident. However, upon taking benefits through any benefit crystallisation event these pension funds will be tested against the client’s lifetime allowance. As there has been no tax relief granted on these contributions it would be unfair to test these against the standard lifetime allowance. To counter this, HMRC will allow the client to apply for a non-residence enhancement factor to allow an increase to their available lifetime allowance.
What is a relevant overseas individual?
Section 221(3) Finance Act 2004 states a relevant overseas individual is someone who either:
- Is not a relevant UK individual under section 189 Finance Act 2004 - meaning they don’t meet the definition in PTM044100 or,
- Is a relevant UK individual in only the following specified circumstance:
- They are only a relevant UK individual because of the five-year rule in section 189(1)(c) Finance Act 2004, that is the third bullet point in the definition of a relevant UK individual linked above, and
- They are not employed by a UK tax resident employer.
It would be possible to be a relevant overseas individual on more than one occasion during the active membership of a scheme. For example, the client could be overseas for 3 years, return to the UK for 2 years and then be overseas again for 4 years. In these circumstances the aggregate of the two non-residence factors calculated would be applied. Further details of a relevant overseas individual can be found on gov.uk.
What benefits and contributions can be applied for?
The enhancement will be based on the physical contribution (or benefit accrual) that has occurred during the period the client was classed as a relevant overseas individual. The client will have to have had active membership of the relevant pension scheme to be able to apply for the protection.
Active membership will start with the later of the date they joined the registered pension scheme and 6 April 2006. Active membership will end on the date the client crystallises benefits or when they leave the pension scheme if sooner.
Calculation of the protected amount for a money purchase scheme
1. Determine the active membership period for the individual (date they joined the scheme or 6 April 2006 if later to the date benefits were crystallised or they left the scheme).
2. Establish the contributions made by or in respect of the member into the scheme between two dates:
a. The first date is the later of:the second date is the earliest of:
- the date when the member became a relevant overseas individual
- the date when benefits first began to accrue for the member under the pension arrangement, and
- 6 April 2006.
b. the second date is the earliest of:
- immediately before the benefit crystallisation event,
- the date when the member ceased to be a relevant overseas individual, and
- the date when benefits ceased to accrue to or in respect of the member under the pension arrangement.
Take the total of the contributions paid and divide by the relevant standard lifetime allowance applicable at the date under bullet 2b above.
There are slightly different methods of calculation for non-money purchase schemes. A comprehensive guide can be found on the HMRC pages.
Last updated June 2023