Moving overseas does impact on your retirement savings depending on how your pensions are structured and your status as an expat.
Despite freedoms in the UK promising to make pensions easier, the choices are confusing for many expats who manage their money from another country and time zone.
Add to that the complications of local taxes, different inheritance laws where you live and you can see why many expats like help from an independent financial adviser.
An important aspect of moving overseas for many expats is the benefit of paying little or no tax on income and savings.
Don’t forget your UK pension is not lost if you move overseas. The money sits safely in a vault until you decide what to do.
Expats have two choices:
- Leave the money in a British onshore pension
- Move to a Qualifying Recognised Overseas Pension Scheme (QROPS)
Why do expats need a pension?
A pension is simply a tax-efficient way of delaying the spending some of your income now to improve your lifestyle after retirement.
The money goes into an investment wrapper – the pension.
At the age of 55 or over, expats can then decide how to access the cash – which can also depend on the type of pension.
To urge people to save, the government offers tax breaks, such as topping up contributions and no tax on fund growth.
However, the money may be taxed on withdrawal from the pension.
What about the state pension?
The state pension is paid to any British expat with enough qualifying years. The minimum is 10 years of full national insurance contributions or the equivalent, such as tax credits for parents absent from the workplace as they are bringing up a family.
The minimum number of qualifying years is 10 – and that buys 10/35 of the pension.
The maximum needed for a full pension is 35.
In 2017-18, the state pension for new retirees is £159.55.
The state pension overseas
The trap is the pension is only index-linked to increase with inflation each year in certain countries – elsewhere the payment sticks at the amount first paid for life.
The state pension can be paid to a British or overseas bank account and in a local currency, which cuts the costs of currency exchange.
A winter fuel payment is paid to pensioners in the European Economic Area country and Switzerland who still have a ‘genuine link’ with the UK. The payment is worth between £100 and £300 tax-free if you were born on or before 5 May 1953.
Expats can claim more than one state pension
If an expat has lived and worked in Britain and another country offering a state pension, they can claim a pension from each government, providing they have collected enough social security contributions in each company.
An expat with 15 qualifying years in the UK would receive 15/35 of the maximum payment, which is £159.55/35 x 15 = £68.37 a week.
If the expat had 20 qualifying years in another country, they would pick up a percentage share of that pension as well.
One country where this is not the case is New Zealand, where the local state pension is reduced by any amount received from overseas.
Retiring overseas with a UK personal pension
The most popular private pensions are personal pension plans and self-invested personal pensions (SIPPs).
These are often called ‘direct contribution’ pensions because the saver pays the provider directly.
The value of a direct contribution pension is based on the value of the underlying investment, which is generally stocks and shares. The fund value varies daily depending on stock market performance.
Personal pensions are not generally index-linked.
Most personal pensions pay benefits in Sterling into a UK bank account with tax deducted at source.
This can lead to currency juggling to find the best exchange rate, but specialist brokers offer discount fixed rates over 12 months to take away some of the stress.
Ask a broker how they protect your money. If they go bust holding your cash, the money is probably lost as brokers do not belong to the Financial Services Compensation Scheme like banks and building societies.
Retiring overseas with a QROPS
The pensions started in April 2006 with the aim of letting expats have local, easier access to their pension cash.
Workers from other countries who have spent time in the UK and paid into a pension can transfer the money to a QROPS as well.
Most UK personal or workplace pensions can be transferred to a QROPS without any tax penalties or loss of value.
A big QROPS advantage for wealthy expats is the £1 million lifetime allowance does not matter.
Although HM Revenue & Customs (HMRC) will test a pension on transfer out of the UK to make sure the £1 million threshold is not breached, once in the QROPS, the fund can grow to any size without fear of penalty.
Many QROPS also come with a larger tax-free lump sum than the UK 25% of fund value.
In many countries the figure is around 30%.
QROPS benefits can be made in one of several foreign currencies directly to a bank local to the expat.
A warning here is some countries view the payment as taxable in some circumstances – such as the USA, France and Spain.
In zero-tax countries, the QROPS benefits are paid in full with no deduction.
QROPS are souped-up direct contribution pensions and follow similar rules to a UK SIPP.
Are SIPPs or QROPS better for expats?
The real question is not which pension helps an expat pay less tax, but which is best-suited to their personal circumstances.
The answer comes down to expat tax residence.
Expats overseas on a short to medium assignment, say two or three years, will likely keep their UK tax residency tied to a home and family in Britain.
That allows them to collect tax relief on pension contributions and other tax-incentivised savings and investments, such as ISAs and the Seed Enterprise Investment Scheme (SEIS).
For these expats, a SIPP is likely the best pension.
QROPS are for expats with a clean-break from the UK and settling overseas permanently.
Although losing UK tax residency results in losing pension tax breaks, a QROPS has other valuable features and benefits.
Always discuss these options with a professional IFA with offshore pension experience.
Retiring overseas with a final salary pension
Final salary pensions are typically gold-plated pensions offered by companies.
Final salary or ‘defined benefit’ fund values are calculated on length of service and either the salary on retirement or a career average calculation.
The pension rises each year in line with inflation and payment is guaranteed for life.
Workplace final salary pensions can be transferred to a QROPS or SIPP, but many professionals advise against the switch key benefits could be lost.
One attraction for transferring a final salary pension to a QROPS or SIPP is the freedom to draw down the money from the age of 55.
Many final salary schemes lock up funds until savers are 60 or older.
Golden goodbyes offered by some firms tempt many transfers. In some cases, firms are offering retirement savers up to 50 or 70 times fund value to transfer out.
For someone with a £20,000 fund, this means gaining a £1 million that can be accessed under pension freedoms and in some cases for expats, no tax.
Retiring overseas with a public service pension
Public sector or civil service pensions cannot be moved into a personal pension or QROPS.
Pension freedom for expats
Pension freedom is a relaxing of the rules of how retirement savers aged 55 or over can take money from their pensions.
These rules were introduced for UK onshore pensions in April 2015 and extend to QROPS from April 2017.
Pension freedoms give four options for spending retirement cash:
- Cashing in the fund to buy an annuity providing a guaranteed income for life
- Flexi-access drawdown that pays a regular pension income
- Cashing in the fund
- Taking cash as and when needed
The 25% tax-free lump sum is available in each case.
Only an annuity comes with an income guarantee that pension money will not run out.