There’s a fair amount of confusion on the subject and no little trepidation when it comes to accessing the funds you have built up over the years.
If you then, quite understandably, decide to spend your retirement in the sunny climes of Portugal, what then becomes of your pension? Having left the UK, you are faced with three options. First, do nothing: leave your pension funds in the UK. Second, transfer it to a HMRC recognised overseas pension fund (QROPS). Third, transfer it to an international or UK based self-invested personal pension (SIPP).
There are pros and cons for all of these of course but the success of these schemes over the years has been undeniable. This is due in large part to the exceedingly high transfer values that members have been offered, and also to the more favourable tax regimes of countries where people elect to retire.
Leaving your pension in the UK
If you do choose to leave your pension in the UK, it’s worth knowing that it could be subject to the frequent changes in regulation that occur there. Post-Brexit this could mean income tax of up to 45%. If your pension is valued in excess of the lifetime allowance (LTA), this will be liable to an excess charge of 25% (or 55% if taken as cash). Another potential drawback with this option is that your pension is prone to currency fluctuations should you receive payments in a non-GBP currency. Transferring to your local currency will guarantee a fixed regular income allowing you to plan finances with more security in the long-term.
Transferring your UK pension
There are good reasons therefore to consider transferring your UK pension, not least of which are the possible tax benefits. With a potential tax rate of up to 45% taken by the UK on any payments received from your fund even when living abroad, transferring begins to look like a good option. Other benefits include increased tax-free lump sum availability of up to 30% on transfer to a QROPS and early access to your pension at 55 years of age, with no penalty on benefits.
What is a SIPP?
A SIPP (self-invested personal pension) is a pension ‘wrapper’ that holds investments until you retire and start to draw a retirement income; it works in a similar way to a standard personal pension. The main difference is that with a SIPP, you have more flexibility with the investments you can choose. SIPPs give you the freedom to choose and manage your own investments, although it is common to have an authorised investment manager to make the decisions for you.
What is a QROPS?
A QROPS is a qualifying recognised overseas pension scheme – as such it is registered with Her Majesty’s Revenue and Customs (HMRC). There are a great many similarities between SIPPS and QROPS, but there are some advantages to transferring to a QROPS scheme. For instance, you will be able to control the timing and amount of any income and Pension Commencement Lump Sum (PCLS) that you draw from your fund up to 30% of the total amount. A QROPS fund unlike a SIPPS is always located outside of UK territory, which means the UK Lifetime Allowance (LTA) will not be levied on your pension, which is pertinent if you have a fund valued over £1.073m.
With many benefits to be had, and increasing reports of high-profile UK Defined Benefit (Final Salary) schemes being closed due to underfunding, transferring your UK pension is demonstrably a wise move. As a bonus, being able to consolidate all of your funds into one scheme makes administering your funds that much easier too. For peace of mind that you are choosing the best options for your particular circumstances, it’s always best to speak with somebody qualified to offer the best advice in your country of residence.
The above information was correct at the time of preparation and is not intended to constitute, and should not be construed as, investment advice, investment recommendations or investment research. You should seek advice form a professional adviser before embarking on any financial planning activity.