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FAQ’S PENSION TRANSFERS
How long are you going to be away from the UK?
How long have you been away from the UK for already?
Where will you be retiring to?
PENSION’S TIME BOMB
Many current British Pension Schemes are in deficit and are unable to pay Defined Benefit (Final Salary) schemes as they are not funded sufficiently. If a company goes bust or is unable to pay the pension the scheme is then passed over to the Pension Protection Fund. This is not funded by the government but takes over the assets of the pensions and then charges a levy each year and the aim is to invest these monies to hopefully fund each person in the fund when needed. It remains to be seen whether the PPF can invest the funds wisely enough and only the future will tell.
RISK PROFILE AND INVESTMENT PRODUCT SELECTION
One of the most important aspects of the investment recommendations should be matched against the clients risk profile to ensure that the investment fulfills and achieves the client’s retirement objectives. We will do this via a full financial fact find so we can determine the risk profile and establish a clear investment plan.
WHAT ARE THE RULES TO ALLOW YOU TO MOVE YOUR PENSION OVERSEAS!
The main qualifying rule is that you have been offshore for 5 years and you intend to retire abroad. You can still transfer into a ROPS even if you haven’t been offshore for 5 years but you can’t claim the benefits until you have and reach the age of 55.
COUNTRIES WHERE EXPATS ARE BASED THAT WE CAN HELP WITH RECOGNISED OVERSEAS PENSION SCHEME TRANSFERS
We can advise and assist UK Expatriates with a Recognised Overseas Pension Scheme transfer in the following countries Australia, New Zealand, United Arab Emirates, Bahrain, Spain, Italy, Greece, Portugal, United States of America, Canada, South Africa, Brazil, Mexico, Russia, India, Pakistan, France, Monaco, Germany, Switzerland, Yemen, Saudi Arabia, Panama, Costa Rica, Hong Kong, Macau, Belize, Indonesia, Japan, South Korea, Singapore, Taipei, Taiwan, Malaysia, Laos, Cambodia, Mongolia, Myanmar, Thailand, Phillipines, China and Vietnam.
Remember that in order for the ROPS transfer to be worthwhile the below 3 factors need to be addressed with a yes.
How long are you going to be away from the UK and will its be more than 5 years?
If its 5 years a QROPS is eligible!
How long have you been away from the UK for already?
If its 5 years a ROPS is eligible!
Where will you be retiring to?
If its not back to the UK a ROPS is eligible!
SIPPS (SELF INVESTED PERSONAL PENSIONS) EXPLAINED FOR EXPATS
As the name suggests, a Self Invested Personal Pension (commonly called a SIPP) enables someone to investment into a pension for retirement, but making their own decisions about the investment options held within or, in most cases, have access to greater investment choices when dealing with financial advisors.
In a nutshell, a SIPP carries the advantages and disadvantages of any other UK based personal pension scheme, except that in regular personal pension plans where the options for investments are limited to those available through the pension provider or fund manager. With a SIPP, you are free to choose which funds you put your money into – or even simply place cash.
There are a number of benefits as well as drawbacks to this option, and we will look into these below. We will also provide an overview of the circumstances where an expat may consider an SIPP over other schemes – and when they are less likely to be suitable.
The information contained in this article is intended as a guide only. As with any investment, you should always seek independent advice before making your decision.
A BRIEF EXPLANATION OF A PENSION AND SIPPS
Pension 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 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 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 and manage it themselves. Usually your financial adviser will have access to fund software such as Financial Express which has superior information regarding fund news and performance.
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, use the experience of an existing fund manager or your existing independant financial adviser.
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 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. Here at UK Expat Pension Reviews we have access to market leading online software that we can run a quarterly online review over the phone whilst showing the performance of the portfolio online to our clients and performing any switching in and out of funds as necessary all with a few clicks of a mouse. We have automated the whole process. We will help with portfolio construction, due diligence and ongoing monitoring to ensure that your investment portfolio is performing its best.
Depending on how you wish to manage your account there may also be additional fees to pay.
SIPP INVESTMENT OPTIONS
Through a SIPP you can invest in a wide range of assets and funds, including:
UK/OVERSEAS STOCKS AND SHARES
Stocks and shares essentially allow you to buy a percentage of a company. If the value of that company increases, so do the value of your shares.
An investment trust is a collective investment which enables you to invest with a group of investors meaning that your investment risk can be spread.
EXCHANGE TRADED FUNDS (ETF)
Exchange Traded Funds are investment funds which are traded on the LSE and other European markets. Unlike individual stocks and shares, ETFs track the index on various stock markets. Examples of ETFs could include gold, silver, crude oil or the FTSE 100.
A bond is a type of loan made to a company (aka a “company bond”) or government (aka “a gilt”) which is then repaid in full at a later date, with additional income provided at a specific rate.
Much like a savings account, you can simply hold cash in your SIPP however this is less desirable for many as the interest rates available will often be less than those available in standard savings accounts. However, saving cash provides a minimum risk for investment.
COSTS OF A SIPP
While the costs of a SIPP are often lower than that of other pension schemes, there are still some fixed costs which you are likely to have to pay, including:
Set up fees (typically up to £500)
Annual management fee
IFA Fees to veryify a pension transfer is beneficial to the client.
Ongoing charges, including transaction fees for each investment transaction you make
Income drawdown fees – you are likely to have to pay a small fee every time you wish to withdraw money from your SIPP
These costs will vary significantly between each SIPP provider. Much like a bank or credit card, you should always compare your options, taking into account what you may wish to do in later life.
PAYING INTO A SIPP
You can pay money into a SIPP from many sources, and save as much as you want throughout your lifetime. However, there are limits to the taxable benefits of a SIPP, in line with other UK pension schemes.
From April 2016, you can save up to £1m into a pension over the course of your life time. This was reduced from £1.25m from previous years.
Overall, paying into a SIPP can be relatively straight forward. You can either pay lump sums, regular contributions or even transfer other pensions into a SIPP so you have one pension plane even if you have 5 or 6 different pensions and some people do with moving around jobs in their careers.
Before making a decision on transferring a pension, you should speak to your pension provider and even potentially seek an independent financial adviser as you may find that, not only are there exit penalties, your money may be better off being left where it is. If its a long term plan then there are many benefits to transferring and having your pension managed by a professional.
DRAWING AN INCOME FROM A SIPP
Once you reach retirement age, you may decide that you wish to start drawing money from your pension.
As with any pension, there are a number of options for drawing your income from a SIPP. In fact, these options are dependent more on your personal situation.
Traditionally people have purchased annuities which offer a guaranteed income for life. However, following the changes to the pension regulations in 2015 and the decline in the amount annuities will pay, annuities are far less popular.
Another option is to simply take lump sums from your pension. It is important to remember that any money received from a pension is treated as income in most countries and is subject to tax in the UK as well as in your country of residence.
This also includes the pension commencement lump sum which means that the first 25% of your lump sum will not be subject to tax in the UK. This will, however, be subject to tax in your country of residence, so it is important to seek advice about the most tax efficient ways for you to access your pension funds.
KEY CONSIDERATIONS ABOUT SIPPS FOR EXPATS
As with other personal pensions, you do not have to live in the UK to be able to invest in a SIPP.
However, there are a few important considerations to consider if you do not live in the UK and are considering a SIPP.
Firstly, as SIPPs are held in the UK, the investments and payments have to be in £GBP. This means that if you plan to draw an income from your SIPP while you live abroad you will be liable to currency fluctuations, so you may wish to factor this is into your retirement planning. For people who plan to retire abroad and not return to the UK, there may be other options (such as a QROPS) which offer similar benefits, but enable you to invest in different currencies.
Conversely, if you are paying into your SIPP while you live abroad and the value of the pound falls, the amount you are actually investing will increase.
Secondly, SIPPs abide by UK pension rules and are affected by any changes the UK Government makes to pension rules. One example of this would be the recent changes to the Lifetime Pension Allowance where the Government reduced the allowance from £1.25m to £1m.
Thirdly, when drawing an income from your SIPP, while you will be subject to the UK personal allowance and the 25% pension commencement lump sum, you will still be subject to UK income tax when drawing funds from your pension. As previously mentioned, if you no longer live in the UK, your income may also be subject to tax in your country of residence as well so it’s important to understand the local tax rules, as well as those in the UK before making a decision about how to draw an income from a SIPP.
Finally, and perhaps crucially, many expats will speak to a financial adviser when making a decision about their retirement plans. If you are seeking advice from an adviser in the UK, remember that they may not be fully aware of all the opportunities for expats.
Similarly, if you seek advice from a non-UK based financial advisers, any advice they offer will not be governed by the FCA but the pension transfer has to be signed off by an FCA regulated financial adviser so the level of protection is the same as if the advice were being given in the UK. Our recommendation is to always be clear with your adviser and if needed ask again and again about your options if you are not totally clear, If you are considering transferring funds from existing pension plans your transfer is signed off by an FCA adviser in the UK who can advise you not to transfer if it isnt beneficial for you to do so.
REQUEST A FREE PENSION CONSULTATION
If you are considering setting up a SIPP, or have a SIPP and want to know your options in full request a free pensions consultation with an independent adviser by entering your details using our contact form.
During the free consultation the adviser will answer any questions and provide impartial assistance which will enable you to:
Understand the benefits and avoid the potential pitfalls of a SIPP
Identify whether a SIPP is suitable for you
Investigate all the options available to you as an expat or UK resident
Clarify any costs, commissions or fees related to a SIPP which you are unsure about
Have peace of mind about any decisions you make
At no time will you be pressured into making any decision, neither will you be under any obligation to proceed with any advice. Once you’ve entered your details, we will evaluate your enquiry before having one of our experienced advisers to contact you.
EXPAT PENSION TRANSFER BENEFITS
BENEFITS OF PENSION TRANSFERS USING A RECOGNISED OVERSEAS PENSION SCHEME
UP TO 30% TAX FREE LUMP SUMS COMPARED WITH 25% IN THE UK
The are pension transfer benefits to using an Recognised Overseas Pension Scheme rather than a UK pension scheme. With a UK pension scheme typically 25% can be taken as a tax free lump. With a ROPS you can be eligible to 30% as a tax free lump sum. The pension transfers benefits using a Recognised Overseas Pesnion Scheme can be vastly benificial to assisting your pension by tax benefit reduction and also pension planning for the future. Some of the Benefits of Pension Transfers Using an Overseas Recognised Pension Scheme means you can access a larger lump sum than that which would be available drawing down your pension in the UK.
THE LIFETIME ALLOWANCE
One of the pension transfer benefits of using an Overseas Recognised Pension Scheme is that if the Lifetime Allowance is exceeded the excess is taxed at 55% if taken as a lump sum or 25% if taken as income. There is still income tax to also be applied. So for a pension pot of £2,000,000 in 2016/17 for exceeding the LTA the pension holder will pay £550,000 to the HMRC for working hard and saving more for their pension. Transferring to a Recognised Overseas Pension Scheme avoids this penalty
INCOME TAXED IN COUNTRY OF RESIDENCE
A non-UK tax resident can request for pensions payment to be paid out gross. One of the Benefits of Pension Transfers Using an Overseas Recognised Pension Scheme are clients can transfer to a more favourable tax jurisdiction such as Malta, Isle of Man or Gibraltar. For example if your pension is held in Gibraltar the income tax rate there is 2.5%. So for a higher rate taxpayer that would have paid 40% at source on their pension in the UK now pays 2.5% saving 37.5%.
FINAL SALARY SCHEMES
A defined benefit, also known as a final salary scheme, is the most generous pension you can receive. The schemes have meant most close, restrict access or reduce benefits because as they are expensive to operate. If the pension scheme collapses or the employer becomes insolvent the UK Pension Protection Fund (PPF) takes over the scheme. The PPF is not Government backed and functions by charging a levy on pension schemes it looks after. 90% of your pension will be protected with a cap of £32,761 per annum. Larger pensions are impacted more by this. If you have a large pension passing this on to your beneficiaries is an option with a QROP’s as passing away with a final salary scheme your pension can die with you or your spouse may receive 50% of the payments. Benefits of Pension Transfers in this case would be you could protect your pension from UK Inheritance Tax.
NO INCOME TAX CHARGE ON DEATH- OUTSIDE THE SCOPE OF THE 45% TAX CHARGE
With a UK pension should a person aged below 75 pass away they can pass their pension to a nominated person tax free. If they die over age 75 there is a tax charge of 45% on passing this to the beneficiary. With a Recognised Overseas Pension Scheme the holder can take the benefits at 55 and pass on their pension upon death with no tax liability.
EXCHANGE RATE RISK
A good rule of thumb is to have income in retirement paid out in the country currency where you plan to retire. The constant changes in currency rates would leave the pension pot open to currency exposure and constantly changing rates meaning you could receive sufficiently less over time with each rate change.
WORLDWIDE INVESTMENT FUNDS AND STRATEGIES AND ONGOING ADVICE
A QROPS 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.
RETURNING TO THE UK (90% OF THE PENSION IS TAXABLE)
On returning to the UK if a person is drawing their pension from a ROPS in retirement then tax is only paid on 90% of the income. This is because it is classed as foreign income so less tax is payable.
PORTABILITY, FLEXIBILITY AND CONSOLIDATION
Recognised 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. ROPS allows the pension holder to consolidate all of the pensions under one roof so to speak and again make them work harder. ROPS gives the flexibility to tailor your pension for where you plan to retire to even if that’s the UK. A ROPS can be considered similar to a SIPP (Self Invested Pension Plan).
MAXIMISING A SPOUSES 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 ROPS it is possible to transfer 100% of the fund to provide a spouses pension. This may be through an annuity or income drawdown 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.
With a ROPS its possible to retire and draw on you pension funds from the age of 55 which can be earlier than in the UK. The transferor 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 utilising the correct country to invest the pension pot
INHERITANCE TAX (IHT)
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 ROPS 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
EARLY RETIREMENT FROM A FINAL SALARY SCHEME
Final Salary Schemes often have q early retirement penalties for those who wish to draw their pension before the normal retirement age. Typically a scheme may impose a penalty, known as an actuarial reduction, of 0.5% per month. This means if you retire 12 months early the penalty is a 6% reduction in your annual pension income. If you retire 5 years early the penalty increases to 30% of your annual pension If you are looking to retire early then transferring to ROPS is a big advantage.
UK PENSION LEGISLATION
The UK government is constantly changing the regulation of pensions, changing allowances and invariably taxing them more. Moving to a ROPS would avoid this as you would effectively just be managing a fund of your own for retirement. Judging by the last few years and the unexpectedness of the UK government they can continue to severely limit the benefits current ROPS owners receive. The UK has serious deficit in the pensions area and who know what changes they could make to deal with its deficit.
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 ROPS 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.
Courts can place a pension sharing order in the UK against your pension. With a ROPS 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 ROPS with much more ease.
WHAT CAN BE HELD IN A QROPS?
•Pension Assets •Cash •Alternative Investments •Land •Shares •Commercial Property •Investments
THINGS TO REMEMBER
If a pension holder has a large pension income that was to go into the Pension Protection Fund. For example if the holder was to receive £50,000 per annum on retirement then they would lose millions because the PPF would only protect up to a maximum of £32,761.07. The PPF is funded by a levy on pension schemes (which many are in trouble themselves) and the scheme is not guaranteed by the UK Government, its ability to make pension payments could be seriously troubled. By taking a ROPS and doing a cash equivalent transfer they take control of their own pension funds and removes it from the risk of the pension scheme going bust. Since their launch in 2006, the popularity of QROPS (Qualifying Recognised Overseas Pension Schemes), an HMRC-recognised overseas pension, continues to grow amongst expatriates and individuals considering a move overseas. Demand for QROPS has experienced annual growth – which looks set to continue throughout the future as the market continues to mature, and more people become aware of their considerable benefits. The recent ‘Pension Flexibility 2015’ changes to UK pensions have also had a limited but important impact on the 20 benefits of QROPS set out below.
UK Expat Pension Reviews helps UK Expatriates to review their UK pensions schemes. We offer individual advice which is tailored to each individual as we understand that every persons circumstances are different. Our relationship based advice service with our pension review process means that we are committed to helping you to manage your pension in a way that’s best for you and your retirement plans.
If you have a UK pension plan and are leaving the UK for a short period of time you may be likely to stop or halt your pension while you are away from the UK. UK Expat Pension Reviews has been formed to help UK expats with their retirement and pension needs and help them find their way through the maze of pension rules and what you can and cannot do. Its of paramount importance that the decision you make is the correct decision from the start as this can have a profound effect on the likely value of your pension on retirement should the incorrect decision be made. These Pension Transfer Benefits can make all the difference butween retiring happy with a great pension pot or retiring with an under valued pension pot meaning a lower standard of living.
TYPES OF UK PENSION SCHEME – DEFINED BENEFIT PENSIONS AND DEFINED CONTRIBUTION PENSIONS
There are two types of pensions available at to UK based onshore residents and these are Defined Benefit or better known as a Final Salary scheme. The second type is a Defined Contribution scheme which is a self-contributory scheme which is sometimes termed a Self-Invested Personal Pension Plan (SIPP). The former is what used to be considered a gold plated pension scheme as your employer invested contributions in to a pension for you and then upon your retirement you would receive a pension amount until you pass away. The latter is where you would take out a pension scheme and contribute your own money and your company would match this amount to a certain limit and then on retirement you would have your pensionable pot of money to buy an annuity. In light of the recent pension changes in 2015 no UK pension holders have to purchase an annuity scheme if they don’t want to anymore and there are a number of options available to them. One of them is an Expat Pension UK which can accommodate your pension savings.
WHAT ARE THE PENSION OPTIONS FOR QUALIFIED RECOGNIZED OVERSEAS PENSION SCHEME’S (QROP’S), SELF INVESTED PERSONAL PENSIONS’S (SIPP’S) AND RECOGNIZED OVERSEAS PENSION SCHEMES (ROP’S)?
In 2006 Britain’s pension framework was overhauled and to simplify the transfer of a pension the Qualified Recognized Overseas Pension was created. This was done to comply with an EU directive in order to allow people to take their pensions to where they to retire if that are overseas and not in the UK.
3 PENSION OPTIONS AVAILABLE
1: LEAVE YOUR PENSION/SIPP/QROPS WHERE IT IS WITH THE CURRENT PROVIDER
The charges and costs of your current pension provider and the funds it is held in are competitive and do not warrant changing.
2: CHANGE PENSION PROVIDER – High Charges
The charges in your current pension plan are expensive which will have the effect of reducing your pension pot value. Cheaper options are available enabling your pension pot to grow faster and better offering increased funds for your retirement. Also the funds chosen for your pension may not be growing or may be left dormant so the funds are not producing good returns. Funds are similar to single stocks in that they may not always perform so switching funds is vital to keeping the pension pot growing and performing.
3: LOOK AT MOVING YOUR PENSION TO A RECOGNIZED OVERSEAS PENSION SCHEME Or SIPP
You have established that you are not retiring to the UK or you are going to be offshore from the UK for 5 years or more. A Recognized Overseas Pension Scheme is a stronger alternative to keeping a UK pension.