If it ever comes up in conversation with your friends or colleagues, you’ll know it’s common for people to transfer their pensions into a SIPP or QROPS.
Perhaps you have built up pensions over your career and are wondering if you should look to transfer yours too?
As an expat, this decision can be confusing – especially given the dangers associated with offshore advice (see our blog on conflicts of interest here).
Although you should always seek specific advice from a qualified pensions specialist to aid with such a decision, this article should demystify things somewhat and provide you with the key information you need to gain a better understanding of the two most common types of pensions held by expats:
What is a SIPP?
A SIPP is a Self-Invested Personal Pension.
It is a UK registered pension scheme, which means it’s based in the UK and is registered with HMRC.
They are what’s called “defined contribution” schemes, which simply means that the amount that goes into the pension is “defined”, while there is no guarantee in terms of income level coming out the other side.
They are generally funded by you as the individual.
SIPPs have become very popular due to the level of control and flexibility they can provide, particularly for higher net worth individuals with significant pension pots.
The Basics:
Is there an age limit? you must be under 75 to set up a new SIPP.
When can I access the money in my SIPP? from your 55th birthday. This will increase to 57 in 2028.
How will it be paid to me? this is completely flexible and essentially up to you. You can take regular income (e.g. monthly or annually), or one off amounts.
How is this taxed? You can take 25% of the pot tax free (known as pension commencement lump sum, or PCLS), with the remainder taxed at your marginal rate of income tax (if you are not UK resident at the time, then it’s worth seeking specific advice as local taxes may apply. This will depend on where you are resident and any double taxation agreement that exists between that country and the UK).
How is it reported? As a UK scheme, taxable events must be reported via Self-Assessment, while the SIPP trustee will also report to HMRC (e.g. when taking PCLS or drawing income).
Funding and Restrictions:
- As well as cash savings, most personal pensions, occupation pensions and workplace pensions can be transferred into a SIPP.
- However, it’s important to note that tax relief will be limited as an expat:
- if you move abroad with an existing pension, you can still contribute and receive tax relief in the year you leave the UK (assuming you have relevant UK earnings to support the contribution). However, for the next 5 years this will be limited to £3,600 p/a.
- if you are not UK tax resident, then you will not be able to contribute to a new SIPP established while overseas.
3. The lifetime allowance (LTA) of £1,073,100 will also apply.
The LTA is the maximum amount you can hold in a UK pension without triggering an extra tax charge.
The rate of tax you pay on pension savings above your lifetime allowance depends on how you access it:
- 55% if taken as a lump sum, or
- 25% if taken as income.
IHT & Estate Planning – what happens to a SIPP when I die?
Any money left in your SIPP can be left to your heirs/chosen beneficiaries free of inheritance tax.
The SIPP effectively lives on, and your beneficiaries can then choose whether to leave the pot invested or take it as a lump sum.
If you die before age 75:
- The pot is tested against the lifetime allowance before passing to your beneficiaries.
- Any withdrawals they make are usually tax free.
If you die at age 75 or older:
- There is no test against the lifetime allowance.
- Withdrawals will be taxed at your beneficiary’s marginal rate of income tax.
Summary of Pros & Cons:
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Pros: |
Cons: |
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Greater freedom and control over how your money is invested |
Can leave you open to UK tax |
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Wide variety of investment options |
More complex – advice is likely required |
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Low cost |
Exposure to Lifetime Allowance |
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Generally cheaper than a QROPS |
Typically, more expensive than workplace pensions, which are designed to be more limited and basic, therefore cheaper to run. |
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UK based – safe jurisdiction and maintains HMRC oversight |
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Can transfer in assets and consolidate other pension schemes |
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Increased flexibility in retirement |
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IHT Free |
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So is a SIPP suitable for me?
Although specific advice is needed, SIPPs are generally suited for you if:
- You’re a British national.
- You plan to repatriate or retire in the UK.
- You have existing UK pension assets.
- You want greater control and flexibility over your money, both in terms of access and investment options.
What is a QROPS?
A QROPS is a Qualifying Recognised Overseas Pension Scheme.
A QROPS is not UK based.
It is an overseas pension that meets certain HMRC requirements and thus can accept transfers from UK registered pensions.
Crucially, this does not mean that a QROPS has been approved by HMRC – HMRC does not vet individual schemes, the scheme trustees simply notify HMRC upon establishment and will self-certify that they meet the criteria to become “recognised”.
Be very wary of anyone promoting a QROPS as “HMRC approved” as a reason to convince you to transfer your UK pension benefits into a QROPS – whilst a QROPS might be suitable in some specific circumstances, they are also easier to abuse and are therefore often promoted by unscrupulous offshore advisers to remove assets from the UK (where regulation is very tight).
The Basics:
Is there an age limit? you must start income drawdown before age 75.
When can I access the money in my QROPS? from your 55th birthday. This will increase to 57 in 2028.
How will it be paid to me? To qualify as a QROPS, rules around how you take income must be similar to the rules regarding UK pensions.
However, the scope of flexibility will depend on the jurisdiction of the scheme and can range from full access (pension freedoms, in line with UK pensions) to the selection of a withdrawal amount each year from the permitted amount calculated by the pension trustee – this can be anywhere from 0%-150% of GAD (Government Actuary Department) rates each year.
How is this taxed? You can take up to 30% of the pot tax free – after the 10-year reporting period, UK payment rules no longer apply, and you can access 30% PCLS tax free.
The remainder is taxed at your marginal rate of income tax. Most UK pensions (and registered schemes) pay income out net of basic rate tax, but if you are not UK resident then you can apply to HMRC to have income paid out gross – and some QROPS jurisdictions pay out gross automatically – so you only pay tax, if any, in your country of residence.
How is it reported? As alluded to above, there is a 10-year reporting period following the transfer-out of a UK registered pension, during which time the QROPS trustees must report payments to HMRC.
Funding and Restrictions:
- UK pension schemes can be transferred into a QROPS.
- Lifetime allowance (LTA) test – because a QROPS is not a UK pension, it is outside the scope of the LTA.
Transferring a UK pension to a QROPS is considered a “benefit crystallisation event” and triggers a test against the LTA at the time of transfer. Any future growth after this is then outside the scope of the LTA.
3. Overseas Transfer Charge – since March 2017 transfers to a QROPS trigger a tax charge of 25%, unless:
- You are resident in the same country as the QROPS receiving the transfer, or
- You are a resident in a country within the European Economic Area (EEA) and the QROPS receiving the transfer is also based within the EEA.
Note that if you are exempt from the Overseas Transfer Charge on the transfer, but your circumstances subsequently change within 5 years of making the transfer (e.g. you move to another country, or you move to another QROPS), then you may have to pay the tax charge at that point.
IHT & Estate Planning – what happens to a SIPP when I die?
Like UK pensions, any money left in your QROPS can be left to your heirs/chosen beneficiaries free of UK inheritance tax.
However, you will also need to consider local rules, as there may be equivalent taxes or death duties due in your country of residence.
Summary of Pros & Cons:
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Pros: |
Cons: |
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Greater freedom and control over how your money is invested |
Not UK Regulated |
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Wide variety of investment options |
Often mis-sold |
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Can transfer in assets and consolidate other pension schemes |
Potentially high transfer costs |
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Currency options – unlike UK pensions (which typically only pay income in GBP), some QROPS will allow you to invest and draw income in other currencies, which can be useful as an expat. |
Can attract additional (and heavy) tax charges if used incorrectly, such as the 25% Overseas Transfer Charge. |
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Up to 30% tax free PCLS |
Typically higher ongoing charges |
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Useful tool for LTA and tax planning |
Potentially less flexible than a SIPP |
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IHT Free |
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So is a QROPS suitable for me?
Again, specific advice around your personal situation is needed, but a QROPS is generally suited for you if:
- You have UK pension benefits.
- You are no longer tax resident in the UK.
- You plan to retire permanently overseas.
- You’re pension pot is approaching the LTA of £1,073,100.
- You have existing UK pension assets.
- You want greater control and flexibility over your money, both in terms of access and investment options.
Summary
Pension planning can be complex, especially as an expat with further overseas considerations.
Our experience with international clients and cross-border advice means we can help navigate you through the noise and confusion to demystify pensions and make this area of financial planning far more comfortable for you. You can even read about David here, one of our valued clients who’s situation might be similar to your own.
To speak to one of our pensions specialists, please get in touch -we would be delighted to discuss through your own specific personal circumstances with you.
By Adam Dalby – Chartered Financial Planner & Pension Transfer Specialist
Please keep in mind that, whilst we aim to update these articles periodically, the content could be subject to future rule changes. Always make sure to speak to a qualified professional to ensure you have the most up to date information and are taking regulated advice around your specific circumstances.
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