HL UK Pensions Law Digest 18 August 2025

Welcome to our latest update, in which we cover:

Tax on benefits paid overseas

• A recent Tribunal decision that a transfer from a UK occupational scheme to a UK SIPP did not break the employment link for the purposes of a dual tax treaty;

Pensions Regulator: addressing the adequacy challenge

• A call to action for trustees to help members better prepare for retirement;

Pensions Ombudsman: blog from the new chair

• Further confirmation of TPO’s intention to drive improvement in dispute resolution.

Transfer to SIPP did not prevent pension benefits being "in consideration of past employment"

The First-tier Tribunal has held that transferring accrued benefits from an occupational pension scheme to a self-invested personal pension (SIPP) did not break the causal connection between the member’s employment and his subsequent withdrawals from the SIPP (see Masters v HMRC).

The SIPP withdrawals were made while the member (M) was resident in Portugal and non-resident in the UK. A dispute arose over whether the terms of a double tax convention (DTC) between the UK and Portugal meant that the withdrawals were to be taxed in the UK or in Portugal. M argued that the withdrawals were taxable in Portugal (and so would be tax-free, in accordance with generous Portuguese tax-breaks for new residents).

The interpretation and application of the DTC provisions is of wider interest, as the DTC is based on the OECD Model Tax Convention which has also been used as the basis for tax treaties between the UK and other countries.

Background facts

• M was in pensionable service in the Tesco Pension Scheme from 1983 until the scheme closed to future accrual in 2015. M’s employment with Tesco ceased in 2017.
• In 2016, M transferred the cash equivalent of his accrued benefits (£5.9m) from the Tesco scheme to a UK tax-registered SIPP.
• M became a Portuguese tax resident in March 2019 and qualified for Non-Habitual Resident (NHR) status, which exempted foreign-source pensions from Portuguese tax under certain conditions.
• During the UK tax year ending 5 April 2020, M withdrew £3.5m from his SIPP. HMRC declined his request for a non-taxable (NT) tax code and the SIPP provider withheld UK income tax of just over £1.5m.

Relevant provisions of the DTC

• Article 17 DTC: provides that pensions "paid in consideration of past employment" may only be taxed by the country in which the individual is resident.
• Article 20 DTC: applies to income not covered by other provisions of the DTC (such as Article 17) and which is “subject to tax” in the individual’s country of residence. Article 20 prevents such income from being taxed by another country.

Issue One: were the SIPP Withdrawals "paid in consideration of past employment" for the purposes of Article 17?

HMRC’s position was that the transfer to the SIPP broke any causal connection between M’s employment with Tesco and his subsequent pension benefits. HMRC argued that:

• The SIPP was an individual retirement scheme unconnected with M’s employment;
• M voluntarily took the transfer from the Tesco scheme and placed it in the SIPP; and
• The SIPP was fundamentally an investment product: the value of the amounts available for withdrawal was determined by investment performance, not by the length or nature of M’s service with Tesco.

The Tribunal rejected HMRC’s arguments and concluded that that the causal connection remained between M’s past employment and his withdrawals from the SIPP. In particular:

• Although SIPPs are not generally used for providing workplace pension benefits, it is in principle possible for payments from an individual retirement scheme (including a SIPP) to meet the condition for being “paid in consideration of past employment”;
• The transfer value was never held by M, but was instead passed directly from one registered pension scheme to another; and
• Where the length of pensionable service is short and the transfer value from an occupational scheme is relatively low, compared to the period of time the assets are held in a SIPP (or compared to the value of any subsequent contributions by the member), the causal connection with the previous employment may be too low for withdrawals from the SIPP to be “paid in consideration of past employment”. However, the facts in M’s case were very different:
• M had built up rights in the Tesco scheme for over 32 years;
• The cash equivalent transfer value was the only payment made to the SIPP; and
• The amount transferred was held in the SIPP for only four years before the first withdrawal was paid to M.

It followed that M’s withdrawals from his SIPP were “paid in consideration of past employment” and fell within Article 17. Since M was resident in Portugal when the withdrawals were made, taxation rights over the withdrawals lay with Portugal. In practice, this meant that M could take the withdrawals tax-free.

Issue Two: were the withdrawals "subject to tax" for the purposes of Article 20?

The Tribunal considered Issue Two for completeness, although it did not need to do so given its conclusion on Issue One.

If the SIPP withdrawals had not been within Article 17, Article 20 would have applied – meaning that the UK could tax the withdrawals if they were not “subject to tax” in Portugal.

• HMRC argued that the exemption under Portugal's NHR scheme meant that the SIPP withdrawals were not "subject to tax” in Portugal.
• M pointed out that, although no Portuguese tax was actually payable on the withdrawals, the amount of the withdrawals was taken into account when calculating his liability for Portuguese income tax generally. He argued that the withdrawals should therefore be treated as “subject to tax” for the purposes of Article 20.

The Tribunal indicated it would have found for HMRC on this issue: actual taxation is required for payments to be considered "subject to tax."

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Pensions Regulator: addressing the challenge of pension adequacy

In a recent blog, Patrick Coyne, Interim Director of Pensions Reform at the Pensions Regulator (TPR), asks trustees to take three steps now to address the challenge of pension adequacy:

• Engage with members: to understand members’ preferences, goals and gaps and to use this knowledge to shape strategies;
• Promote trusted guidance: by making reference to PensionsWise and MoneyHelper in core communications; and
• Prepare for change: in particular for pension dashboards, the new guided retirement duty and a more engaged membership.

The blog points out that recent research from the DWP shows that many defined contribution (DC) members are struggling to prepare adequately for retirement, especially if they are renting or without other savings. In particular, of the 4,000 people surveyed:

• Only 22% had a clear plan for how to access their DC pot (if they had not accessed it already); and
• 21% were unaware of the need to choose how to access their DC pot.

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Pensions Ombudsman: blog from the new Chair

In a recent blog, Deborah Evans, the new Chair of the Pensions Ombudsman (TPO), reflects on her first month at TPO. Key points include:

• The Operating Model Review (OMR) has been instrumental in helping TPO to resolve more cases, however more still needs to be done to reduce waiting times for customers;
• TPO intends to continue working with the pensions industry to reduce the volume of complaints it receives which could have been resolved under the scheme’s internal dispute resolution procedure (IDRP) or by a different body, such as the Information Commissioner’s Office; and
• TPO’s work includes aiming to raise standards of dispute resolution across the pensions sector by sharing guidance and good practice.

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Authored by Jill Clucas.