As the latest statistics published by HMRC suggest, overseas pension transfers are on the decline. The rule change in March 2017, in which a 25% exit tax was introduced on any UK pension transferred into a jurisdiction other than that where the investor resides, has negated many of the financial benefits offered the world’s Qualifying Recognised Overseas Pension Schemes (QROPS).
And yet despite the new tax, designed to discourage British pension holders from removing their funds from the UK’s financial institutions, thousands are still looking for a way to get their savings out.
In the tax year 2016/17, a total of 9,700 QROPS transfers were completed with a value of £1.2 billion.
That was down from 13,700 transfers in 2015/16 with a value of £1.2 billion. The figures for 2017/18 are likely to show a far sharper decrease as the freedom of choice for British pension holders has continually diminished to such an extent that now, unless the expat is living in Europe, in which case a Malta QROPS is still an option, there are very few beneficial and viable QROPS left on the market.
In fact, if you live in America but have a British pension remaining in the UK, there are none in terms of QROPS.
However, this has done nothing to dampen the appetite for transfer options, in the face of a growing pension deficit that continues to result in reductions for pension income and other restrictions imposed on retirees that spent 50 years paying into a defined benefit scheme in the UK.
For expatriates or American passport holders residing in the USA but still holding a pension in the UK, a Self-Invested Personal Pension (SIPP) looks to be able to provide all of the freedoms and benefits of a QROPS on the face of it, but with extended freedoms in terms of investment choice that can either be managed by an investment manager or personally. The following is a guide to SIPPs, including the types, the advantages and disadvantages, and highlighting individuals best suited to the pension plan.
A Guide to SIPPS
- A SIPP will hold a selection of investments within a wrapper until retirement or a specified age the investor wished to draw on their pension.
- SIPPS are categorised closely to standard personal pensions, however they offer a higher level of control over investment choices. This makes them a perfect choice for someone with investment experience, or with a trusted financial advisor that can make investment choices on their behalf.
- Accessibility remains the same as with standard pensions. There is no flexibility in drawdown age. It remains at age 55.
- However, once you are able to access your pension, you are eligible to withdraw 25% as a tax-free lump sum. The tax-free element only applies to the UK, not the country of residence, so advice should be sought to ensure an optimal strategy for withdrawal is in place to minimise the tax implications. In addition, the remainder of the pension will then be subject to tax both in the UK upon withdrawal and in the country of residence as income. Much can depend upon the Double Taxation Agreement (DTA) in place between the UK and the country of residence, and the wording within it. Again, advice should be taken for this aspect of the SIPP route.
- SIPPs are held in the UK, and so the investments and payments have to be in British Pounds (£). The result of this is that you are exposed to currency fluctuations upon withdrawal and investment. However, as the pound continues to fall this works advantageously for those currently living abroad and investing into a UK SIPP as you are able to get more investing power for your money.
- SIPPS do follow UK pension rules, which are in a perpetual state of change. So the plan you sign up for today may not be the same plan you withdraw from in 10 or 15 years.
- Investments that can be selected within a SIPP include: UK & foreign government bonds, Gilts and bonds, Stocks and shares, Investment trusts, Exchange traded funds, Commercial property, Real estate investment trusts and Offshore funds.
- There are two main types of SIPP, a Low-Cost SIPP, and a Full SIPP. Full SIPPs offer a wider choice of investment but also have higher charges – particularly if you are seeking advice or assistance in investment choices. A Low-Cost SIPP puts all the control in your hands. It’s obviously a risk if you have no background in investments, but you will face lower fees.
- You are able to transfer existing pensions into your SIPP to consolidate them.
- Required monthly contributions into a SIPP tend to be very low.
While SIPPs have grown in popularity and the idea of taking back control of one’s financial future is ultimately appealing, they are not without risk. As suggested by the name, a Self-Invested pension is one for which you must accept and assume full control. Making investment decisions takes a great deal of time and knowledge, and is not recommended to be undertaken by those with no prior experience in finance. We do live in the information age, and the correct information can become available to us all at the click of a button. Because of this, there are those that may be tempted to give it a go, and consult a search engine for advice when there’s a decision to be made. But these are decisions that must be taken with the highest level of responsibility, and there is no single financial situation that can be 100% comparable to another.
The majority of expats choose to talk through their retirement plans with a financial advisor experienced in tax, pension transfers and investments overseas. This can provide personalised and tailored guidance applicable only for your unique set of circumstances.