Foreign Pension Tax Relief: What to Know About Lump Sums

Many UK residents may be eligible for foreign pension tax relief if they have pensions overseas. If you decide to take some or all of that pension as a lump‑sum payment, you might have to pay UK income tax on it. Since April 2017, the UK taxes lump sums from foreign schemes more broadly, but two big considerations can reduce or even eliminate the tax bill: 

1. Does the double‑taxation treaty (DTA) give exclusive taxing rights to the other country? 

2. Did you already have the right to take a lump sum before 6 April 2017? – This is the “grandfathering” rule. 

Understanding these points could save you thousands of pounds, so let’s look at each in turn. 

Check the tax treaty first 

Before applying UK tax rules, it’s important to understand how foreign pension tax relief may apply under a double‑taxation agreement (DTA) between the UK and the country where your pension is based. Some DTAs say that lump sums from overseas pension schemes can only be taxed in the country where the scheme is established. In those cases, the UK cannot tax the payment. 

If the DTA gives the UK the right to tax the lump sum or allows both countries to tax, then you move on to the UK domestic rules. Not every treaty has a special clause for lump sums, and in some cases (such as the UK‑US treaty) both countries may still tax the payment. So, it’s essential to read the wording or get professional advice rather than assume the payment is tax‑free. 

How UK tax law applies 

If the DTA doesn’t provide relief, UK domestic rules on foreign pension tax relief kick in. Lump sums from overseas schemes are fully taxable unless they come from a: 

1. UK‑registered scheme, 

2. Relevant non‑UK scheme (RNUKS) or, 

3. Employer‑financed retirement benefits scheme (EFRBS) 

The UK rules allow up to three deductions to reduce the amount of an overseas pension lump sum that’s taxed. This article focuses specifically on one of them: the grandfathering rule. 

Grandfathering: Protecting Lump-Sum Rights pre-6 April 2017 

When the UK changed the pension tax rules in 2017, it included a safeguard for people who already had lump-sum rights in place. If you had a right to take a lump sum, or would have had that right if certain conditions (like age or length of service) were met, as at 5 April 2017, you may be able to deduct the value of that right from the lump sum you eventually receive. 

In simple terms, this means that only the part of the lump sum relating to growth or rights built up after 5 April 2017 is likely to be taxable in the UK. 

Key points: 

• The lump-sum right must have existed by 5 April 2017. This includes rights that were already exercisable or would have been if you’d met certain conditions, such as age or length of service. 

• Only the value as at 5 April 2017 can be deducted. Any increase in value or new contributions added after that date is taxable. 

• Foreign service makes a difference. If the pension was earned entirely through overseas employment before 6 April 2017, you may be able to deduct the full pre-2017 value. If some of your service was in the UK, only a portion may qualify based on the proportion of time worked abroad 

Example: 

You move back to the UK in 2024 and take a £150,000 lump sum from a foreign pension. You already had the right to take £130,000 on 5 April 2017. Under the grandfathering rule, you can deduct £130,000, leaving £20,000 taxable 

If 80 % of your pre‑2017 service was overseas, you’d deduct 80 % of £130,000. 

What information do you need: 

1. A valuation of your lump‑sum rights as of 5 April 2017. 

2. Confirmation of your overseas vs. UK service before that date. 

3. Evidence that the right was exercisable or would have been exercisable if age/service conditions were met at 5 April 2017. 

Other deductions and scheme types 

Two other deductions may reduce your taxable amount: 

1. If part of the lump sum commutes pension income that would itself be exempt (for example, some disability pensions), that part is not taxed 

2. If you could have taken the amount tax‑free under a UK‑registered scheme (for example, a pension‑commencement lump sum or a serious ill‑health lump sum), you can deduct it 

This is available only if the foreign scheme meets the definition of an “overseas pension scheme.” 

Different scheme types have different rules: 

• UK‑registered schemes can offer up to 25 % of the fund tax‑free. 

• RNUKS and EFRBS have separate tax rules; the grandfathering relief doesn’t apply. 

• Other foreign schemes are the ones usually affected by the 2017 changes and grandfathering relief. 

If you’re taking a lump sum from an overseas pension and you live in the UK, start by checking whether a double‑taxation treaty gives exclusive taxing rights to the country where the pension is based 

If it does, you won’t need UK relief. If it doesn’t, look at the grandfathering rule to protect any lump‑sum rights you had before April 2017 

Good records and professional advice will help you claim the foreign pension tax relief you’re entitled to.