Expat Pension Transfers and SIPP Pensions
Expat Pension Transfers for UK Expats
As an expat moving your UK pension pot from one scheme to another may at first glance seem like a lot of administrative hassle for little gain. But not all pension schemes were created equal, and a pension transfer to a better deal could help your money to work harder for you, or bring other meaningful benefits in years to come.
Have you ever gone fishing and cast your net in the water? If so you probably kept an eye on it, changed the bait it and dug out the occasional weeds that threatened to cover it. Had you walked away and come back many years later, you wouldn’t be too surprised that you hadn’t caught any fish or the fish you did catch was no longer useful.
This is exactly how millions of people treat their QROPs and SIPP Pension which is one of their most important assets – their pension. They take the important first step of setting up one, but then fail to follow this up by making sure their pension is performing and prospering. 1 in 4 people have never reviewed their pension plan, according to research. This will not affect their daily lives while they are still at work, but it could have serious implications for their comfort in retirement.
Keeping a regular eye on a pension can help ensure it is on course to provide the retirement income needed. It is absolutely essential to review your pension at least once a year and hold a regular yearly review with your adviser.
When to Transfer a Defined Contribution Pension
One key issue with pensions for expats is what a pension actually offers in terms of benefits. Many older schemes may restrict the way pension benefits can be taken, or the options if you die. Restrictions on retirement benefits can be dealt with at retirement, and that may be the best time to transfer, but restrictions on death benefits aren’t something that can be rectified at the time, so it makes sense to check your scheme offers the options you would choose in that event.
Another important consideration is the investment choices offered by your pension fund. You might decide to move if you can’t find what you’re looking for – a decent range of ESG-focused funds, perhaps, a selection of low-cost track funds, or a choice of investment trusts. Some UK based pension providers may only select a few overseas based funds within their funding panel. If you use an overseas based SIPP for expats specially designed for expats working outside the United Kingdom, they will generally offer a global universe of funds.
Transferring your pension may also enable you to reduce the fees you’re paying, for in admin charges to the scheme and your holdings. Older schemes in particular can be relatively expensive. Make sure you get a balanced view of all the charges involved, both for the existing scheme and for the proposed transfer scheme. In particular, keep an eye open for any punitive exit fees attached to older schemes.
There are also the administrative benefits of consolidation. By bringing all your old pensions together into a single portfolio, you can see exactly how much you have invested, how it’s performing and what you’re paying. Often people use a self-invested personal pension (SIPP) for this purpose, as it gives them full control over their retirement savings.
When to Transfer a Defined Benefit Pension
With expat pensions the reasons for transferring defined benefit (DB) pensions – often known as final salary pensions – are different. Transfers of DB pensions became big news after 2015, the year when pension freedoms were introduced.
Many savers have been attracted by the huge transfer values (the amount you get for transferring out of the scheme) on offer for their modest DB pensions. Another appeal is the relative flexibility of the rules of investment-based DC pensions into which their money is being transferred.
But a transfer may be worth considering in certain circumstances – for example, if you and your partner already have a decent retirement income and you want to be able to bequeath this pension to your children (which you can’t do with a DB pension); if you don’t expect to live long and therefore won’t get much ‘value’ from your DB pension; or if you wanted to retire significantly earlier than the DB pension age would allow.
A BRIEF EXPLANATION OF A PENSIONS AND (SIPPS) Self Invested Personal Pension Plan
Expat pension transfer schemes are essentially wrappers which follow a set of rules and contain one or more investment funds. Pensions come in a range of shapes and sizes including (but not limited to) Defined Benefit Schemes, State Funded, Final Salary Schemes and QROPS – with QROPS being specifically for people who no longer live in the UK.
Pensions carry certain tax advantages over traditional savings, but also follow the specific guidelines set by HMRC as to how they can be used. A SIPP is no exception.
One of the main tax advantages of pensions is that the money which is paid in can be done so before income tax is taken off, meaning that if you wanted to pay £100 into a pension scheme and you were a basic rate tax payer, in real terms it would only cost you £80 as the remaining £20 would, in essence, be paid by the government. The higher the rate of tax you pay, the less it costs to pay into a pension scheme.
Funds held in a pension are typically available once the holder of the pension reaches 55 years old, but can sometimes depend on the type of scheme. Once you decide you wish to take funds from your pension, you are able to take it in lump sum(s) – where the first 25% of each lump sum is tax free, or as an income over a regular period.
Any money drawn from a pension after a UK pension transfer is considered as income, and is taxed as such. Therefore, whenever you take money from a pension, you should seek advice beforehand to ensure that you are doing it in the most tax efficient way.
WHO MANAGES A SIPP?
As previously mentioned, unlike other personal pension schemes a SIPP for expats can be managed by the investor (trustee permitting) and, not a fund manager and therefore it is the individuals’ responsibility to make decisions about what funds to choose. This means that it is highly recommended that only those with investment experience, or at least has a good understanding of investments, should really consider a SIPP.
Key to everything is understanding that an investment can both increase and decrease in value, and in extreme cases, it is possible to lose everything. It is also important to understand that, while there may be short term highs and lows, long term performance is far more important. As such, if you are kept awake at night by the performance of investments while you are asleep, a SIPP may not be for you.
HOW SIPPS ARE MANAGED
While it is possible to manage a SIPP via the phone or by post, today it is far more common to managed a SIPP through a secure online account. As with other online accounts, it is possible to buy and sell your investments with a few clicks while you may also have dashboards and reports which enable you to track performance over time. However, for expats requiring expat pension advice and other international clients it may not be as straight forward as it is for UK residents due to additional due diligence which is required to be carried out by trustees of the SIPP.
WORLDWIDE INVESTMENT FUNDS AND STRATEGIES AND ONGOING ADVICE
A Qualifying Recognised Overseas Pension Scheme can be invested a huge range of investment funds across many different currencies using various fund platforms or offshore bonds. This gives the pension holder the chance to monitor and make these funds work harder rather than not closely monitoring the performance as many don’t do. The investment can be tailored to the investor’s individual needs. Is the money invested in the correct areas, and with the best Fund Managers or have highly regarded managers left the company as with Neil Woodfords decision to leave Invesco Perpetual. Transferring your pensions to a QROPS will bring your assets together and a wealth manager can help to advise and monitor the pension investments.
PORTABILITY, FLEXIBILITY AND CONSOLIDATION
Recognized Overseas Pensions are designed for the 21 st century expatriate in that the government understands that hardly any people work for one company for their whole life and work in the same country anymore. With people picking up pensions in many different jobs before they leave the UK it can be difficult to keep track and monitor these pensions. QROPS allows the pension holder to consolidate all of the pensions under one roof so to speak and again make them work harder. QROPS gives the flexibility to tailor your pension for where you plan to retire to even if that’s the UK. A QROPS can be considered similar to a S.I.P.P Self Invested Personal Pension.
MAXIMIZING A SPOUSE'S PENSION
With a UK pension if the pension holder dies the pension is usually passed to their spouse but at a reduced 50% rate until they die. With a QROPS it is possible to transfer 100% of the fund to provide a spouse's pension. This may be through an annuity or income drawn arrangement. Many people may wish to consider transferring to a QROPS to ensure the pension asset is able to provide a more substantial retirement income for their spouse.
EARLY RETIREMENT
With a QROPS its possible to retire and draw on you pension funds from the age of 55 which can be earlier than in the UK. The transferal has to be a non-resident from the UK for at least 5 years though.
PENSION INCOME TAX PLANNING
The income payable from a pension is fully taxable as income and is therefore taxable at a member’s highest marginal rate of between 0-45%. Is using a QROPs this can be limited to 2.5% if utilizing the correct country to invest the pension pot
INHERITANCE TAX (I.H.T)
If a client is planning on never returning to the UK and lose their Domicile of Origin this can help them in not having to pay Inheritance Tax. The person would have to take legal advice from a professional but a QROPS is an ideal vehicle as it takes your pension out of the UK. All ties have to be cut to enable this but many people are doing this and enjoying better retirements in cheaper countries.
BANKRUPTCY
In the UK in the event of bankruptcy a court can order a charge against your pension. Hence when you start drawing this tax-free sum and them part or all of your monthly income could be paid to a creditor. With a QROPS this would be outside of the jurisdiction of the UK so this would severely limit that option to reclaim monies back from your pension pot.
DIVORCE SETTLEMENTS
Courts can place a pension sharing order in the UK against your expat pension. With a QROPS it would be up to the trustees of the scheme to allow or deny this. Also, if a client wishes to settle a cash amount agreed with an ex-spouse, they could do this via a QROPS with much more ease.