Expat pensions can be complicated as they come in different types that offer different outcomes for retirement savers.
If you don’t know the difference between a DB and DC pension and how they could impact your retirement income, you could miss out on a significant amount of money in your later years.
This guide helps expats cut their way through the A to Z of dense jargon that surrounds pensions to make understanding how they work easier.
Accrual rate – How a pension saver works out the value of their DB pension. The accrual rate is quoted as a fraction – generally 1/60 or 1/80.
The fund value is the accrual rate x pensionable earnings x pensionable service, which means a retirement saver gets 1/60 or 1/80 of pensionable earnings for each year of service.
For someone with the 1/60 accrual rate, a final salary of £40,000 and 25 years of pensionable service the formula is 1/60 x £40,000 x 25 years = a pension of £16,666 a year
Adjusted income – This is the total of any income received plus pension contributions in a tax year and is the trigger for the tapered annual allowance for pension savers when the amount totals £240,000 or more (2020-21 tax year)
Annual allowance – The most someone can save into one or more pensions in a year while receiving tax relief.
The amount is the sum of:
- Personal contributions
- Employer contributions
- Payments someone else makes into your pension
For 2020 – 21, the annual allowance is £40,00 a year
Annuity – An investment product that offers a guaranteed income for life or a fixed term
Capped drawdown – A product for taking retirement income from a pension. The scheme was closed to new retirement savers in April 2015, when flexible drawdown started. With capped drawdown, after taking a lump sum the remaining pension fund is invested to pay an income. The payment fluctuates with fund value and comes without any guarantees
Career average salary – Popular in local government and the civil service, a percentage of earnings is set aside each year and toted up on retirement to give an annual income.
Career Average Revalued earnings (CARE) – See career average salary
Defined benefit pension (DB) – A pension that pays a guaranteed retirement income based on your final salary or career average salary and the number of years you are in a job by using the accrual rate. DB pensions are generally index-linked and come with other benefits, like spouse pensions and guaranteed annuity rates
Defined contribution pension (DC) – A DC pension invests contributions to generate a pot of money for retirement. The value of the fund depends on the performance of the underlying investments and comes without a guaranteed retirement income or index-linking.
DC pension rules underly many personal pensions, such as SIPPs, QROPS and QNUPS for expats.
Drawdown – See flexible drawdown
Final salary – Generally found in local government or civil service pensions, final salary is calculated in various ways by different scheme administrators.
Some schemes won’t count overtime, bonuses, commission or benefits-in-kind.
How the final figure is calculated is laid out in the scheme terms and conditions.
That final salary figure goes forward to become the pensionable earnings amount for the accrual rate calculation.
Flexible access – See flexible drawdown
Flexible drawdown – Flexible drawdown sounds complicated but is quite straightforward.
The aim is to allow retirement savers to access their pension cash when they want while reinvesting the remaining fund to provide ongoing income.
Flexible drawdown allows someone to take 25% of their pension savings as a tax-free lump sum and leave the rest invested. This is drawn down as the saver wishes, either as a single lump sum, regular income or irregular payments.
Flexible income – See flexible drawdown
Guaranteed annuity rate (GAR) – Many older pension schemes offer a guaranteed annuity rate (GAR) to retirement savers until the 1990s.
The GAR is typically a lot higher than annuity rates available on the open market and a valuable benefit to savers that is lost if the fund is transferred to another scheme.
Index-linked – Financial advisers often refer to index-linked pensions without explaining what it means.
An index-linked pension takes the Consumer Price Index inflation reading for September each year and applies any increase from the following April 1. The intention is to maintain the pension’s spending power as the cost of living rises.
International SIPP – An international SIPP is the same as a UK self-invested personal pension (SIPP) but marketed to expats. Some international SIPPS may allow non-UK residents to hold investments in currencies other than Sterling, but that’s the extent of the difference.
Also see Self-Invested Personal Pension
Lifetime allowance (LTA) – The lifetime allowance is the cap on how much a person can save into one or more pensions during their lifetime.
For 2020-21, the LTA is £1.073,100, which should increase in line with inflation from April 6, 2021.
Pension savings excluding the State Pension that breach the LTA face a tax penalty
Marginal tax rate – The highest rate of UK income tax paid by an individual during a tax year ranging from 0% for the lowest earners to 45% for those earning the most
Money Purchase Annual Allowance (MPAA) – The MPAA applies to those who want to add money to their pension savings after drawing down from a DC fund.
Instead of the £40,000 contribution limit imposed by the annual allowance, contribution levels drop to the MPAA limit of £4,000 a tax year.
The MPAA aims to stop pension savers recycling money in their fund to gain extra income tax relief.
Overseas transfer charge – The overseas transfer charge is a 25% tax applied to exclusively to QROPS expat pension transfers if a retirement saver lives outside the European Economic Area (EEA) when transferring a pension fund to a scheme in a country where they are not resident.
Pensionable service – The number of years a saver has been a member of the pension scheme
Pensionable earnings – Pensionable earnings can be the how much you earned on retirement (final salary), career average salary or sometimes another calculation
QNUPS – See Qualifying Non-UK Pension Scheme
QROPS – See Qualifying Recognised Overseas Pension Scheme
Qualifying Non-UK Pension Scheme – A set of regulations that exempt an overseas pension from UK inheritance tax.
QNUPS are run on a DCC pension model
Qualifying Recognised Overseas Pension Scheme – A set of regulations that allows the transfer of UK pension funds to an overseas pension. QROPS offer investment and tax benefits to expats that are unavailable from UK pensions.
A QROPS is run on a DC pension model
QROPS List – A list of QROPS pensions that self-certify they meet the scheme rules published every fortnight or so by HM Revenue & Customs. Pension providers must not transfer funds to a QROPS which is not listed on the current list.
Self-invested Personal Pension (SIPP) – SIPPs are UK personal pensions that are sometimes referred to as ‘international SIPPs’ for expats.
SIPPs are run on a DC pension model.
They tend to offer savers direct control over a bigger range of investments that stand personal pensions.
SIPP – See Self-invested Personal Pension
Spouse pensions – Formerly known as widow pensions, they are arrangements within a pension to pay a surviving spouse pension benefits on a retirement saver’s death
State Pension – The State Pension is paid universally in the UK when someone reaches state pension age.
The payment depends on the National Insurance Contribution of an individual. Some with fewer than 10 years NIC history will not receive a state pension, while the maximum amount is paid to those with a NIC history of 35 or more years.
The state pension pays £175.20 a week to those who retired after April 5, 2015. The payment is index-linked.
Expats may receive a state pension payment frozen at the first amount they receive if they live in a country without a reciprocal social security agreement with the UK.
State Pension Age – Someone’s state pension age depends on when they were born and gives the date from when they will receive the state pension.
Tapered Annual Allowance – The tapered annual allowance reduces the standard £40,000 a year annual allowance for pension saving for high earners.
The taper starts when someone has an adjusted income of £240,000 and reduces by £2 for every £1 earned until the annual allowances reaches £4,000 a year.
Tax-free lump sum – The amount a pension pays out free of income tax. The standard UK tax-free lump sum is 25% of the value of a pension fund, while some expat pensions, such as QROPS may pay a tax-free lump sum of up to 30%.
Tax year – The UK tax year runs from April 6 in one year to the following April 5
Transfer value – The value of a pension fund that may be transferred to a QROPS or another UK pension
Triple lock – A government pledge to increase the state pension each year by the lowest of:
- The annual rise in the cost of living
- The annual rise in wages
Trivial commutation – The rules apply to DB pensions and allow retirement savers with small pots to cash them in. Generally, any number of small pots can be cashed in from occupational schemes but only three of up to £10,000 each from occupational schemes, providing the total does not come to more than £30,000.
Uncrystallised pension fund – An uncrystallised pension fund is a pension that has not yet been drawn down
Uncrystallised Funds Pension Lump Sum (UFPLS) – UFPLS is part of the flexible drawdown rules for flexible access. Under UFPLS, savers can take a lump sum which is treated as 25% tax free, while income tax is applied to the balance.
Expat Pensions – Understanding The Jargon FAQ
This list of jargon busters is by no means exhaustive for pensions. People running pensions and marketing the schemes seemingly have an unlimited capacity for confusing ordinary savers with impenetrable acronyms and double-speak.
Even if you understand the jargon, the rules that come with them are just as perplexing.
Here is a selection of responses to the most asked questions about expat pension jargon.
The UK minimum age unless special circumstances apply for withdrawing cash from a pension is 55 years old
No. Only DC pensions qualify for flexible drawdown, so you would have to think about transferring to a new pension to take advantage of the facility.
You may access your DB or DC pension under certain circumstances, if the rules of the scheme allow, but you cannot take the state pension early.
It’s never a good idea to react to short-term changes in the markets that may impact the value of your investments. Markets can rise and fall quickly and it’s hard to predict how they will move. If you are approaching retirement and worried about the impact coronavirus may have on your fund, then speak to an IFA.
No. Under auto-enrolment, you are automatically signed up to your employer’s scheme unless you opt out. The self-employed and those who don’t work do not have to save into a pension, however this could affect their state pension payment.
Find Out More About Expat Pensions
Speak to your financial adviser or pension provider for more information specific to your retirement savings.
A good source of free advice online is the government’s Pensions Advisory Service