My husband (66) and I (61) are Permanent Residents and are working taxpayers. We both have pension benefits from our careers in the UK before we emigrated here, me December 2015 and my husband in February 2016, although I believe we may have held TFN from an earlier date. They are both from Defined Benefit (DB) schemes so don’t have a fund value as such (They are not annuities/Money Purchase schemes). The rules of these DB schemes state that up to a quarter of our pension can be paid as a tax-free lump sum in return for a reduced annual pension. As we are hoping to renovate our home on our retirement we would like to use the tax-free lump sums for this purpose. We both still have UK bank accounts, so could the tax-free lump sums be paid into those for drawing down as we need it, therefore being considered tax-free World-Wide Income? Or if we draw it to buy goods and services here, would it become taxable? The remaining pension, we assume, would be taxable under the double-taxation agreement (DTA). We would be very grateful for this situation to be clarified.
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Hi @TinTacks,
The tax-free lump sum from your UK defined benefit pension schemes won't be treated as tax-free worldwide income in Australia. As Australian residents for tax purposes, you and your husband must declare your foreign income, including pension payments from the UK, in your Australian tax returns. The fact that these lump sums may be tax-free under UK rules doesn't mean they're exempt from Australian tax.
When you receive the lump sum payments, it doesn't matter whether the money goes into your UK bank accounts or is used directly in Australia. Australian tax residency means your worldwide income is assessable here, regardless of where the money is held or how you access it. The location of the bank account or how you withdraw the funds won't change the tax treatment.
The ongoing pension payments you receive after taking the reduced lump sum will also be assessable income in Australia. The Australia-UK tax treaty may provide relief from double taxation, which means you can generally claim a foreign income tax offset for any UK tax paid on the same income. This offset helps prevent you from being taxed twice on the same amount.
Hello Jay
I will be 66 in July. I emigrated in 2008 and have been an Australian Citizen since 2014. I am entitled to a UK pension from late November 2026. Reviewing information online I appreciate the UK pension is subject to tax in Australia; but, is that a flat 8%?
I have found the form for analysing income received Request for a determination of the deductible amount of UPP of a foreign pension or annuity If the tax deductible is 8%, fine, but if not, can I get a forecast?
Thanks for your help
Hi @sugaree,
Your UK State Pension is taxable in Australia at your marginal tax rate, not a flat 8%.
The 8% figure is not a tax rate. It’s a simplified method used in some cases to work out the deductible amount of the un-deducted purchase price (UPP) for certain foreign pensions. This deduction reduces the taxable portion of your pension.
As an Australian resident for tax purposes, you’ll need to declare your UK pension as foreign income in your tax return. It will then be taxed at your marginal tax rate based on your total income.
In some cases, you may be able to use the 8% method to calculate your UPP deduction. This represents the return of your personal contributions and reduces the amount of your pension that is assessable.
If you want a more precise calculation instead of using the simplified method, you can apply for a determination of your UPP. The form you’ve found is the correct one to use for this.
thank you
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