- Tax efficient planning
An increasing number of professionals of all nationalities have been moving and working abroad in the last decade. Whether a young executive or a high net worth individual with a diversified portfolio of global assets, investors have specific financial requirements and objectives, and need to structure their portfolios accordingly. As a result of employment patterns changing in recent years, many expatriates have built up UK pension benefits across several schemes and structures, which may not be suited to their specific retirement needs and Objectives.
A SIPP is a UK registered pension scheme regulated by the UK Financial Conduct Authority, and allows investors to take additional control of their pension, with the added benefit of greater flexibility when compared to standard pensions. Different forms of SIPPs have been around since 1989, but in a change of UK regulations in 2006, pensions became less complex – therefore making it easier for investors to decide on their own form of retirement plans. SIPPs work in the same way as other personal or stakeholder pensions in terms of tax benefits, contribution limits and retirement options. However, two key advantages of using a SIPP are access to much wider choice in investments and flexibility of income in retirement.
Funding a SIPP
As an expatriate investor, your SIPP will most likely be funded by transferring your existing UK pension benefits. UK residents can add new money to a SIPP and receive tax relief on contributions, albeit within certain limits, depending on earnings. Although the amount of contributions to a UK scheme is limited by earnings, a non-UK resident can contribute up to £2,880 per annum into a UK pension scheme if they were resident at some point during the previous five tax years, and were UK resident when they became a member of the pension scheme. Tax relief at 20% brings the total contribution to £3,600.
Up to 25% of the fund value can be taken as a Pension Commencement Lump Sum which is not taxable in the UK, and can be phased between the ages of 55 and 75. There are several ways to generate an income from a SIPP, with the most popular being flexi-access drawdown as this provides full flexibility in terms of the amount taken.
With flexi-access drawdown the amount withdrawn is variable along with the frequency of payments. Some investors prefer a monthly income, comparable to receiving a salary, whereas others prefer ad-hoc lump sum payments. Choosing to take an income through flexi-access drawdown allows the remaining funds to stay invested in the markets.
Typically, investors favour a higher income in the earlier years of retirement when expenditure on holidays and luxuries may be higher, and in later years when less active, decide to reduce their pension income, and this is possible with a SIPP, subject to the fund size.
The investments within a SIPP grow free of capital gains tax and no tax is payable on any dividends* or income produced by the investments. It is therefore possible to buy and sell investments or flee to cash with no tax liability.
A wide range of investments can be held in a SIPP, and the main categories appealing to expatriate investors are as follows;
* aside from any irrevocable withholding tax.
If you die before the age of 75, your entire SIPP can be passed onto your beneficiaries free of UK taxes. If you die after the age of 75, the pension would be taxable at the beneficiary’s marginal rate of income tax. It is possible to change the nomination of death benefits during your lifetime. A UK pension does not form part of your estate for inheritance tax purposes.
There is no tax when transferring existing UK pension benefits into a SIPP;
For investors who retire outside of the UK, tax is usually paid in their country of residence, but this depends on the double taxation agreement between the two countries (if one exists). A double taxation agreement divides the taxing rights between the two countries involved and the UK has double taxation agreements for income tax with over 130 countries.
There are certain jurisdictions where pension income is taxed favourably for expats, and tax residents of these places can access their UK pension benefits free of tax or by paying low tax rates. Examples of these jurisdictions are Portugal, the UAE, Qatar, Malaysia, and South Africa. Investors should also consider the Lifetime Allowance, which is a cap on UK pension benefits which can be drawn without incurring a further tax charge.
As the Lifetime Allowance has fallen from a high of £1.8m (2011/12 tax year) to £1.055m in the 2019/20 tax year, several protections have been offered, some of which can still be claimed. If you are likely to be affected by the Lifetime Allowance Tax Charge, you should speak to a Financial Adviser.
If you have several pensions that you wish to consolidate into one scheme, a SIPP may be used to reduce ongoing administration and simplify performance tracking. If transferring to a SIPP from a defined benefit scheme, you will need to think about the income which you are giving up in exchange for the cash equivalent transfer value, and if you are transferring from a defined contribution scheme such as a personal pension, occasionally schemes have guarantees which would be lost upon transfer.
Naturally, I will analyse your pension benefits before providing a recommendation.
A SIPP is suitable for investors who are looking to grow their pension fund throughout their lifetime and invest into a wide range of investments which suit their appetite for risk. As well as the flexibility of income, investors use a SIPP to have control over their retirement fund and be able to consolidate existing pension schemes into one.
Depending on the investor’s circumstances and residency status, it may be possible to transfer the SIPP into a Qualifying Recognised Overseas Pension Scheme (QROPS), should the investor wish to remove their pension fund from the UK. Furthermore, some investors decide to fully withdraw their pension funds when resident of a jurisdiction which does not tax pension
income, and use the extracted fund as a capital asset.
If you are an expatriate who has worked in the UK and contributed to a pension, we recommend you take financial advice, and consider whether a pension transfer to a SIPP achieves your objectives. Effective planning for your retirement can make the difference between just being able to live and living comfortably.
If you would like to understand the suitability regarding your own pension, please contact me.