UK private pension transfers—the final pieces of the puzzle

UK private pension transfers—the final pieces of the puzzle

This last of three articles on United Kingdom pension transfers will analyse the pros and cons of domestic versus offshore pension choices and provide the final pieces to a complex jigsaw of transfer options available to expats today.

Anyone who has ever worked in the UK, no matter what nationality, might have a UK private pension that might be transferable offshore to a qualified recognised overseas pension scheme (Qrops). Deciding whether such a transfer is the right thing to do is not easy, especially in light of the developing situation in the UK, which will have a significant effect on the future of pensions there.

In the final part of this trilogy we shall look at current developments and how they are affecting many expats who leave their frozen or deferred pensions in the UK.

In the previous column on June 9, we noted how the most recent transfer values of defined-benefit pension plans are currently far higher than they would have been several years ago. This is because in order to generate a pension benefit based on today's UK gilt rates, it takes a far higher capital sum than it would have done, let's say, five years ago when gilt rates were at least double their current rates. The capital sum is the current transfer value.

Having also discussed the current situation in the UK with many pension trustees, we have learned that an increasingly high number of plans are in deficit or even worse; they are technically insolvent. A number of readers pointed out that the UK Pension Protection Fund will help schemes in such situations. But its benefits are restricted as there is a ceiling on the amount of pension protection. Once pension payments begin, there are no annual increments. It is bad enough for expats to have to suffer from the UK state pension being frozen from the point they retire.

There are some cost benefits in transferring to a UK self invested pension plan (Sipp) instead of a Qrops. A Sipp has some similar advantages to a Qrops. These include extracting your funds from the UK scheme, which could be in trouble. Sipp fees and charges are normally less than for a Qrops, which attracts many who only look at the costs but never the longer-term value for money.

Despite the lower costs of administering a Sipp, there can be heavy tax penalties for beneficiaries when you die. There is also the question of income tax being payable in the UK on all benefits that are taken. Thus a Qrops would need to generate less income to achieve the same net result; or the amount of net income received will likely be far more than a UK-based taxed scheme.

Let's look at a real-life example. John is a 56-year-old married expat with a UK private pension. His current UK plan will generate an annual pension of 22,100 (1.1 million baht) when he retires in nine years. He consults an adviser on whether to leave it as is or transfer it to a Sipp or Qrops. The table at the top of the page shows what each approach will achieve.

By leaving his pension in the UK scheme, John is reducing the net pension amount he will receive after tax, no matter where he lives in the world. When he dies there will be a reduced spouse's pension for his wife, of 50%, and no further benefits once she dies.

In a Sipp, the pension benefits will also be taxed and, although there will be a spouse's pension once he dies, there will be a 55% death tax on the residual legacy, reducing this to 178,200.

With a Qrops the tax payable on pension benefits will be far less if John chooses the right jurisdiction for his Qrops.

Currently one of the simplest and lowest-tax jurisdictions is Gibraltar, where tax is payable at a flat rate of 2.5% on pension income.

Some readers have also asked what will happen if they return to the UK having transferred to a Qrops. Having created a Qrops as an expat, there is actually no danger of onerous taxation or penalty if you return home again. Your scheme remains valid and when you start to draw benefits they are taxed in the UK, which is fair enough if you are going to be living there.

When you die the benefits under your Qrops are assessed for taxes based on a formula. This uses the original transfer value as a starting point, and then a calculation of whatever benefits are paid out is deducted, resulting in the taxable amount. Death tax is payable on this amount at 55%. This tax would also be payable with a Sipp.

So, let's assume that John retired at 60 and moved back to the UK at 66. He has drawn his Qrops pension and continues to do so, paying UK tax on the benefits. Then he dies at age 80.

The trustee fees and charges for a Sipp amount to about 700 a year less than using a Qrops. If we assume that John's pension pot generated his income but did not grow further, he would still have his 396,000 available for his wife as a lump-sum benefit when he dies.

The death tax is calculated as:

- Sipp: 396,000x55% = 217,800, leaving a net legacy of 178,200 death tax.

- Qrops: 396,000 less total pension payments of 442,000 = zerox55% = zero death tax.

- Additional Qrops fees and charges: 700 per year x 25 years = 17,500.

By paying an additional 17,500 in fees, John has saved 217,800 in death tax.

The issues and considerations surrounding whether or not a Qrops is good for you need to be carefully considered. There are more facets to this decision than you might first think. Carefully choose the right adviser to help you through the web of intricacies.


Andrew Wood has been an expat in Asia for 33 years and is executive director of PFS International. His articles, which cover the A-Z of financial planning, are available through the PFS library to readers on request. Questions to the author can be directed to PFS International on 02-653-1971 or emailed to enquiriesthailand@fsplatinum.com.

Do you like the content of this article?
COMMENT