Most people leave the country to live somewhere warmer with a cheaper cost of living without giving a thought to what happens to their pension.
But before you wave goodbye to Britain, it’s worth taking some time to find out how the move may impact retirement savings and the tax paid on them.
Most people have two pensions – the one from the state and another taken out personally or through work.
Claiming the UK state pension from overseas
How Brexit might alter how the state pension is paid is unknown.
Currently, anyone qualifying for the UK state pension who moves to the European Economic Area – essentially the European Union plus Norway, Iceland and Liechtenstein – and Switzerland or Gibraltar are guaranteed the annual cost of living increases generated by the triple lock.
Outside Europe, 17 countries with a social security payment agreement with the UK also offer the annual increase.
Elsewhere, such as Australia, South Africa, Canada and New Zealand, the state pension payment is frozen at the amount first paid.
So, in 2017,18, if an expat draws the state pension in Australia and they stay there for good, the monthly payment sticks at £159.55 for life.
If an expat with a frozen state pension returns to live in the UK, index-linking starts again.
Brits abroad can still collect their state pension wherever they are. The money can be paid into a local bank without any tax deducted, but expats might have to pay tax on the income in the place where they live.
Claiming a work or personal pension
The basic rule of thumb is pension savings belong to the person whose name is on the account, not the company or provider, so if someone moves overseas, the money is still there to call on.
Expats also have the same pension freedom options as their counterparts in the UK –
- Taking all or part of the fund as cash
- Buying an annuity to provide a guaranteed income for life
- Taking an income
Or a combination of all three.
A pension provider will also make payments overseas or an expat can move the money offshore.
Paying pension tax as an expat
How much tax someone living overseas pays depends on their residence status.
Someone who is UK resident pays income tax and capital gains tax (CGT) on their worldwide income, while special rules exempt non-residents from paying tax on money paid by UK pensions, but they may have to pay taxes in their new home.
This is where an expat enters the twilight world of double taxation treaties and how cross-border regulations may affect their finances.
The first task is determining residence status. Once that is done, tax rules and obligations are set and expats can make their financial plans.
Don’t forget that residence status is not a choice but a statement of fact arrived at by examining a number of factors, such as where someone has their main home, where their family lives and where they spend most of their time.
Which pension is best for an expat?
Picking the right pension starts with determining residence, which is why working this out early on is so important for making financial plans.
While a SIPP might prove the best option for an expat on assignment who intends to return home to the UK, a QROPS may prove a better choice for someone leaving Britain permanently to settle abroad.
QROPS are also worth considering for workers from overseas who have spent some time in the UK and have retirement savings in a workplace or personal pension but are now leaving the country.
Besides considering tax, SIPPs and QROPS also treat paying pensions in foreign currencies differently.
While SIPPs are likely to make payments in Sterling with basic rate tax deducted, QROPS make payments in a choice of several international currencies without tax deducted at source.
Transferring a pension overseas
Since 2006, the British government has allowed expats to transfer their UK pension funds to an offshore Qualifying Recognised Overseas Pension scheme (QROPS).
A QROPS is similar to a UK self-invested personal pension or SIPP.
The latest HM Revenue & Customs statistics show around 110,000 expats have shifted £8.8 billion into QROPS pensions.
Often, these offshore pensions come with improved investment options and tax benefits for expats.
Expats should choose where to host their QROPS carefully. Although 29 financial centres offer around 1,000 schemes, a draconian 25% transfer tax may apply to transfer outside the EEA if retirement savers are not careful.
The government has banned the transfer of civil service or public sector pensions.
Taking professional pension advice
Moving a pension overseas involves some expert professional tax and financial planning.
The Financial Conduct Authority, the body that regulates financial services in the UK, says expats should have two pension advisers – one in the UK to give guidance about the benefits and risks of moving the fund and another in the country where they propose to live to help with choosing the right QROPS.
Some international IFA firms will provide this advice as a one-stop shop, while others will have arrangements with other consultants.
Check out their credentials – especially the overseas IFA who may be subject to less regulation than his colleague in the UK.