UK Expatriates Retiring Information on how to manage and make the most of the various pensions schemes available:
Private Pensions
UK pension funds
QROPS
Most UK citizens retiring abroad will have some entitlement to a UK State pension, along with various private and company pensions.
UK State Pensions
If a retiree is entitled to a state pension from the UK only, the pension will be paid by the Department for Work and Pension (DWP).
Entitlement to a UK State pension depends on the number of years of National Insurance contributions made.
An individual needs only 30 years of contributions for a full basic State pension.
A retiree with contribution gaps in the most recent ten years can make additional contributions to top up the entitlement.
By 2018 men and women would have the same state pension age of 65.
From November 2018 the UK state pension age of both men and women will be gradually increased, to reach age 66 from 2020.
The basic state pension currently stands at around £5,000 gross per annum although an increase to around £7,000 gross per annum from 2015 has been mentioned (referred to as the “citizen’s pension”).
Qualifying for State pension
Generally, the DWP will contact an individual qualifying for pension approximately four months before they reach State pension age.
A retiree should contact the Department if they do not receive written notice.
Private Pensions With the exception of Government Civil Service pensions is taxed in the country the expatriate lives in.
Final Salary schemes
In Final Salary schemes, employers pay a pension based on the member's salary and years of service.
Many have been closed by employers due to decline in investment returns increased charges and peoples' increased lifespan.
Pensions provided by the Final Salary schemes are usually better value for money than the alternative (in which the scheme offers a lump sum to be transferred into an alternative pension), so in the vast majority of situations irecommended are made that benefits are kept within a Final Salary scheme.
Money Purchase Plans
The alternative to a Final Salary pension is a Money Purchase Personal Pension Plan arrangement which includes many different pensions such as Money Purchase Occupational Schemes,
Personal Pensions,
Executive pensions and
Stakeholder Pensions.
Regular contributions - employee's and employer's - are invested in funds, which fluctuate as the markets rise and fall. At retirement, the level of income is determined by the value of the fund as well as interest rates at the time.
At retirement a member may be entitled to a lump sum from a pension fund. Although tax-free in the UK, recent changes to French legislation now mean that this lump sum is taxable.
At present, as UK pension arrangements do not have a surrender value (where an individual can have access to the whole fund), they are not liable for Wealth Tax.
Using a Private UK Pension Fund
A person approaching retirement and looking to draw income from UK Money Purchase plans has several options:
SIPP is a type of personal pension. Contributions or transfers are invested in selected funds. A SIPP is a "wrapper" in which there is a trustee bank account which acts as the control centre. It is from here that income is paid, and investments are bought and sold.
It is possible to have a trustee bank account which is euro denominated, but the majority of SIPP providers are not able to accommodate this. If the SIPP bank account can be Euro denominated, a UK- based pension fund can hold (and pay income in) Euros, and if an appropriate Euro-denominated investment is held, the entire plan is Euro denominated, which removes any currency exchange rate risk from the income.
Transferring a Pension Abroad Qualifying Recognised Overseas Pension Scheme (QROPS)
Qualifying Recognised Overseas Pension Schemes (QROPS) were introduced in 2006 to simplify the process of transferring pension funds abroad.
A transfer to an overseas scheme from a UK pension fund can only be done if the scheme has registered to be a Qualifying Recognised Pension Scheme (QROPS) with her Majesty's Revenue and Customs . For the scheme to qualify, various caveats must be satisfied, such as it must be recognised as a pension scheme in the country where it is based, and the benefits must be subject to taxation.
If any payments are made which are not allowed in the UK (a lump sum greater than 25%, payments resulting in income greater than that allowed in the UK, or benefits accessed earlier than age 55) then there may be a tax charge applied if the individual has been a UK resident in either the current or any of the previous five tax years.
The majority of overseas transfers have focused on a transfer of a UK pension fund to a QROPS in an offshore location, such as Isle of Man, Malta Gibraltar In 2012 The HMRC reduced the availability of certain jurisdictions. This has acted as a reminder that with any QROPS transfer there is additional risk that HMRC may subsequently amend legislation or remove the benefits of QROPS status of any schemes without warning.
The advantages of QROPS Transferring a pension fund abroad has several advantages:
It enables a pension fund to be Euro-denominated.
It can provide income payments in Euros reducing exposure to currency exchange fluctuations.
An offshore scheme offers greater investment control of the fund
Funds to children free from UK taxes.
When the recipient dies pension does not die with them. The fund passes to nominated beneficiaries.
QROPS advisers are unregulated (and therefore there may be no recourse if the advice is incorrect), and unfamiliar with UK pensions legislation.
A QROPS is similar to an Income Drawdown plan in the UK, in that income is not secure, and based on the investment performance of the fund.
Summary There are a number of options available, both in the UK and overseas.
Where an existing pension is from a final salary scheme and therefore guaranteed and inflation linked, the guaranteed benefits would be lost by moving to QROPS.
There are options available within the UK that may be able to meet an individual's requirements for security and flexibility of income but with regulatory protection and a cheaper costing structure. The amount of income required, acceptable level of risk, and requirements to preserve a pension for a spouse should be taken in to account.
Private Pensions
UK pension funds
QROPS
Most UK citizens retiring abroad will have some entitlement to a UK State pension, along with various private and company pensions.
UK State Pensions
If a retiree is entitled to a state pension from the UK only, the pension will be paid by the Department for Work and Pension (DWP).
Entitlement to a UK State pension depends on the number of years of National Insurance contributions made.
An individual needs only 30 years of contributions for a full basic State pension.
A retiree with contribution gaps in the most recent ten years can make additional contributions to top up the entitlement.
By 2018 men and women would have the same state pension age of 65.
From November 2018 the UK state pension age of both men and women will be gradually increased, to reach age 66 from 2020.
The basic state pension currently stands at around £5,000 gross per annum although an increase to around £7,000 gross per annum from 2015 has been mentioned (referred to as the “citizen’s pension”).
Qualifying for State pension
Generally, the DWP will contact an individual qualifying for pension approximately four months before they reach State pension age.
A retiree should contact the Department if they do not receive written notice.
- UK Department for Work and Pensions
International Pension Centre
At: Tyneview Park, Newcastle Upon Tyne, NE98 1BA, United Kingdom
Tel: +44 191 218 7777
Fax: +44 191 218 7381
Textphone (for those with speech or hearing difficulties): +44 191 218 7280
Open: Monday to Friday 08:00-20:00 (GMT)
Private Pensions With the exception of Government Civil Service pensions is taxed in the country the expatriate lives in.
Final Salary schemes
In Final Salary schemes, employers pay a pension based on the member's salary and years of service.
Many have been closed by employers due to decline in investment returns increased charges and peoples' increased lifespan.
Pensions provided by the Final Salary schemes are usually better value for money than the alternative (in which the scheme offers a lump sum to be transferred into an alternative pension), so in the vast majority of situations irecommended are made that benefits are kept within a Final Salary scheme.
Money Purchase Plans
The alternative to a Final Salary pension is a Money Purchase Personal Pension Plan arrangement which includes many different pensions such as Money Purchase Occupational Schemes,
Personal Pensions,
Executive pensions and
Stakeholder Pensions.
Regular contributions - employee's and employer's - are invested in funds, which fluctuate as the markets rise and fall. At retirement, the level of income is determined by the value of the fund as well as interest rates at the time.
At retirement a member may be entitled to a lump sum from a pension fund. Although tax-free in the UK, recent changes to French legislation now mean that this lump sum is taxable.
At present, as UK pension arrangements do not have a surrender value (where an individual can have access to the whole fund), they are not liable for Wealth Tax.
Using a Private UK Pension Fund
A person approaching retirement and looking to draw income from UK Money Purchase plans has several options:
- Buy an annuity: The pension fund is exchanged for an annuity - this is a guaranteed income - which is payable for life. A pension to a spouse, a guarantee period, or a yearly increase can be built in. Annuities are suitable for people who want a secure income, and do not require control over their pension fund.
- Drawdown: Income is taken directly from the pension fund which remains in place although contributions are no longer paid. This offers several advantages:
- the pensioner retains control of their fund
- there are more options for a spouse in the event of death
- an annuity can be bought at any time if circumstances change and a secure income is required.
SIPP is a type of personal pension. Contributions or transfers are invested in selected funds. A SIPP is a "wrapper" in which there is a trustee bank account which acts as the control centre. It is from here that income is paid, and investments are bought and sold.
It is possible to have a trustee bank account which is euro denominated, but the majority of SIPP providers are not able to accommodate this. If the SIPP bank account can be Euro denominated, a UK- based pension fund can hold (and pay income in) Euros, and if an appropriate Euro-denominated investment is held, the entire plan is Euro denominated, which removes any currency exchange rate risk from the income.
Transferring a Pension Abroad Qualifying Recognised Overseas Pension Scheme (QROPS)
Qualifying Recognised Overseas Pension Schemes (QROPS) were introduced in 2006 to simplify the process of transferring pension funds abroad.
A transfer to an overseas scheme from a UK pension fund can only be done if the scheme has registered to be a Qualifying Recognised Pension Scheme (QROPS) with her Majesty's Revenue and Customs . For the scheme to qualify, various caveats must be satisfied, such as it must be recognised as a pension scheme in the country where it is based, and the benefits must be subject to taxation.
If any payments are made which are not allowed in the UK (a lump sum greater than 25%, payments resulting in income greater than that allowed in the UK, or benefits accessed earlier than age 55) then there may be a tax charge applied if the individual has been a UK resident in either the current or any of the previous five tax years.
The majority of overseas transfers have focused on a transfer of a UK pension fund to a QROPS in an offshore location, such as Isle of Man, Malta Gibraltar In 2012 The HMRC reduced the availability of certain jurisdictions. This has acted as a reminder that with any QROPS transfer there is additional risk that HMRC may subsequently amend legislation or remove the benefits of QROPS status of any schemes without warning.
The advantages of QROPS Transferring a pension fund abroad has several advantages:
It enables a pension fund to be Euro-denominated.
It can provide income payments in Euros reducing exposure to currency exchange fluctuations.
An offshore scheme offers greater investment control of the fund
Funds to children free from UK taxes.
When the recipient dies pension does not die with them. The fund passes to nominated beneficiaries.
QROPS advisers are unregulated (and therefore there may be no recourse if the advice is incorrect), and unfamiliar with UK pensions legislation.
A QROPS is similar to an Income Drawdown plan in the UK, in that income is not secure, and based on the investment performance of the fund.
Summary There are a number of options available, both in the UK and overseas.
Where an existing pension is from a final salary scheme and therefore guaranteed and inflation linked, the guaranteed benefits would be lost by moving to QROPS.
There are options available within the UK that may be able to meet an individual's requirements for security and flexibility of income but with regulatory protection and a cheaper costing structure. The amount of income required, acceptable level of risk, and requirements to preserve a pension for a spouse should be taken in to account.