As you may already be aware, it is possible to transfer your UK pension outside of the UK. Even as you sit in Tokyo, Japan it is possible to re-locate your old (often unloved) UK pension under certain qualifying conditions. As discussed previously in our article about UK pension transfers, there are a number of potential benefits of doing so. This is not restricted to UK passport holders. In fact, anyone that has lived and worked in the UK may have accumulated some pension benefits during their time spent there. Your adviser should be able to inquire on your behalf as to the accrued benefit, and assess whether or not it would be advantageous for you to look to unlock your pension. Some of the common reasons for looking to release pension funds are as follows:
Nobody knows when they are going to die. Death however is inevitable. UK domiciled pensions are subject to a 55% tax on death. Essentially, if you die before you get to spend all of your pension, your beneficiaries and heirs will have to give the lions share to the tax office. QROPS (Qualifying Recognised Overseas Pension Schemes) are not subject to a death tax. Even those years away from statutory retirement age will see the risk reduction benefits. Transferring out your pension when you’ve left the UK is done for the same reason that people sign up for life insurance coverage: you just never know, and it’s better to be safe than sorry.
Spending Your Pension
There is no such thing as a free lunch. This is especially true of tax-free pension benefits approved by the government. However, when electing to take a tax-free lump sum from your UK pension at age 55, you are able to take up to 25% of your benefits. Graciously, HMRC allow the initial draw-down from a QROPS pension to be up to 30%. That 5% could prove to be substantial, and every little helps.
Pension Performance and risk management
If you are like most people, your state or occupational pension is probably unloved and un-managed. Pension transfers have to be carried out by authorised professionals and advisory firms; who more often than not also offer investment advice. An account diligently managed by a qualified investment advisor is likely to outperform a dormant, unattended pension. Once your pension is unlocked you will often have global unrestricted access to invest in the assets of your choosing. In particular, you are no longer tied to one currency (GBP) and are able to diversify and further mitigate risk. If you have the time and expertise to self-manage your retirement portfolio, certain advisers also offer a “transfer only” service.
Caution: Pension Transfer Risks
As in investment, where there is a reward there is always a risk. The risk with pension transfers is that they are not suitable for everybody and a poorly assessed transfer could damage your asset base. Be aware of the following common mistakes and misconceptions about QROPS and pension transfers.
Early UK Pension Release
If somebody tells you that “pension transfer scheme X” allows you to unlock the money and spend it early (i.e before your 55th birthday) they are mistaken. Be especially sceptical of schemes involving “loans”, “advances”, and “cashback”. They are non-compliant and will be systematically shut down by the government as and when they are located. Accessing this money early and spending it (and even if you do not) will trigger a bill from the HMRC for 55% of the amount withdrawn. If you fail to notify the HMRC that you have accessed your funds prematurely, and they find out about it, this tax increases to 70%. As aforementioned, there is no such thing as a free lunch and the HMRC’s kindness is repaid with patience; you have to wait until 55 years of age to start spending.
UK Pension Types: Some Of Them Are Unbeatable, which is yours?
FINAL SALARY PENSIONS: This is a deferred pension benefit that relates to length of service and salary. The value of the benefit increases from the date of leaving the company to retirement day. The increase in value/benefit is determined by the scheme itself and the surrounding legislation of such schemes. One part, the Guaranteed Minimum Pension (GMP) is subject to annual increases as per supporting legislation, depending on when you left the company. This may be as much as 4.5% – 8.5% every year up until retirement age. Depending on what proportion of the pension benefit is in GMP, it may be extremely hard to beat, even with a QROPS pension transfer.
There are a few other commonly encountered pension types which also confer particular benefits to account-holders. Your adviser should be able to objectively assess whether the benefits will be eclipsed by transferring out, or whether or not you, and your money, should stay put.
Returning Your UK Pension
Commonly, once you have transferred out your UK pension, you are unable to move it back. If your circumstances change and you decide that you would like to repatriate to the UK, and that you would like your pension to move back onshore with you, many schemes will not permit this. The ones that do may also have fees and charges associated with the break-up. This should be included in your assessment when making the decision to move.
Pension Investment Freedom; The Good, Bad and Ugly
When your pension lived in the UK it was subject to all of the rules and regulations set out by the UK FCA. Transferring it overseas means that it is no longer subject to these rules. These rules outlined certain requirements regarding “suitability”- in simple terms, what are appropriate investments for a retirement account? Now, after unlocking your pension, if you are working with a capable firm with experience in managing overseas/multi-jurisdictional assets this should not be of issue. However, be aware that your money is now no longer subject to the restrictions that it was before and that theoretically, if you and your advisor decide that now is a fantastic time to invest in a highly-geared FX-trading hedge fund, and it goes to zero overnight, you are not getting that money back, and you have only yourself to blame.
All things considered, you should seek professional advice when deciding to transfer out your retirement benefits. A pension specialist will be able to objectively quantify the benefits of liberating your old pension and putting it back on track. Do not be tempted to just look at the tax saving, increasing spending allowance. There are scenarios where the pension will do more for you when you do less. That withstanding, if you are not currently aware of what you have, that’s probably a strong cue that the money is neglected and you can’t expect your pension to take care of you in the future if you are not willing to take care of it now.
– UK Financial Conduct Authority, Consumer Protection, Early Pension Release Primer
– The Pensions Advisory Service: Spotlight- QROPS
– HM Revenue And Customs: Qualifying Overseas Recognised Pension Scheme; transferring UK tax-relieved pension assets