Most expats will be planning or hoping to retire early. To make sure you can afford to stop working when you want, you will need to have thorough retirement planning in place and for most people this will mean creating and contributing into a pension.
Offshore Pension Planning
While expat salaries tend to be at the higher end of the scale, very often the package does not include a pension scheme as this is not a statutory requirement in many countries. Even where s pension does exist, an expat’s working situation tends to be changeable and may not last a lifetime, so to continually start, stop and freeze a pension when you move will create a major headache and erode pension capital when it comes to retirement.
Specific schemes exist to help expatriates with their retirement planning requirements. Expatriate pension plans are not the same as UK private pension schemes. There is normally no minimum age to start drawing income, or where there is it can be as low as 50.
The retiree may be able to take possession of the entire asset in cash if need be.
Planning your retirement using offshore financial products may hold significant benefits for British Expats living overseas.
Tax Planning and Your Pension
Tax mitigation is one of the keys to achieving growth. The point of a pension is to invest now so you have a big lump sum on maturity, both of which are designed to provide an income for you to live on when you retire. In the same way that compound interest or compounded returns produces superior returns on maturity, taxes paid every year produce inferior returns. A good quality investment wrapper will mean that you will enjoy gross rollup or zero tax during the course of the policy. A non-UK resident drawing an income from a UK pension will have to pay UK tax on that income unless they live in a country whose double taxation treaty has a pension-specific clause.
The tax breaks that were possible are becoming more and more limited. The rules have changed in recent years and restrictions have been placed on higher rate tax relief for those whose income is 150,000 GBP or more and those whose total pension savings exceed 20,000 GBP.
An offshore plan has none of those restrictions.
The lump sum issue can be problematic too. With a UK pension scheme, you can withdraw a lump sum of up to 25 per cent tax-free on maturity, typically when you are 65. With an offshore scheme you can withdraw 100 per cent tax-free, and typically you can withdraw the money when you wish, at a present maturity date, with no penalties.
Freedom and Flexibility
With an offshore pension, you have freedom and complete control. As it acts like any other investment vehicle, you are free to move money about within it, change and adapt where your money is going and withdraw all of it upon maturity. In an offshore scheme there is typically no minimum age, or where there is it can be as low as 50 before you can withdraw your cash.
Your UK pension isn’t in fact your asset. You simply have a small share of a large pot and have to share the financial prerogatives and risk profiles of perhaps hundreds of thousands of people. Moreover, you don’t know what you’re invested in or why. With an offshore retirement plan or pension you’re in control. In concert with your specialist financial adviser you’ll carefully formulate a portfolio strategy to suit both you and the market. The portfolio will be composed of award winning mutual funds, and the allocation will change with the market to avoid giving back precious gains. It’s not uncommon for the same contributions to be worth three times more on maturity for an offshore plan than for a UK pension plan.
Your UK pension doesn’t form part of your estate. This means that, because you don’t legally own it, you can’t pass it on. After your death your spouse might receive a reduced income, but then your UK pension will just disappear. There will be nothing to pass on to your children. An offshore pension can generate a significant lump sum which, if managed correctly will generate a good income while preserving the capital. You could pass on the capital, or wrap it in trust to provide an income to your relatives forever.
UK Lifetime Allowance Charge
With an offshore pension, you can build up as much of a retirement fund as you like, and because you’re able to properly diversify it across asset classes, it can be the only retirement plan you’ll ever need. Unfortunately the UK government will tax you on anything above 1 million GBP.
With an offshore plan you can build up a fund to whatever amount you deem necessary.
With a UK pension you’re restricted to just GBP, meaning you run a currency risk if you retire abroad. With an offshore retirement plan you’re able to invest in any currency of your choosing.
Things to Consider
What features are important to you with regards to your pension? These are the common requirements that we see in working with our clients:
- Increase or decrease your premiums
- Pause your premiums
- Choose a policy in the currency of your choice
- Pay your premiums by credit card or standing order
- The security of the plan to match or exceed that of the UK
- Reassess risk levels as you near retirement
- Assign beneficiaries to your policy for easy transfer
- Option for withdrawal of cash midway through the plan
- Invest ad-hoc lump sums to boost your pension
We would always recommend that you discuss all of this with one of our pension specialists.
UK Pension Transfer Solutions
British expatriates with pension savings in UK based plans have historically had very few options but to remain in their existing scheme. This left them with little control over their investments or how they receive benefits from them. In many cases, this can lead to inappropriate investment and currency choices or benefit options which may not be appropriate given the country in which they now live.
Following the introduction of new UK legislation, these problems can now be addressed through the use of a QROPS (Qualifying Recognised Overseas Pension Scheme), established outside of the UK and recognised by Her Majesty’s Revenue and Customs (HMRC), to accept all UK Pension Savings.
QROPS represents, for many, a highly attractive tax-efficient retirement planning option.
Once an individual becomes an expatriate, their UK pension schemes typically become frozen. This means that no further contributions can be made. In addition, the investment strategy is in most cases a standard one and certainly not tailored for the individual.
By the age of 75 UK pension plan holders must buy an annuity so they lose ownership of the investment, in return for an annual payment, which can then be subject to UK tax. On death, a spouses or widows pension can be up to half the original sum and on their death the benefit often cannot be passed on to children or other beneficiaries.
Rather than a domestic scheme in your country of residence, a QROPS plan can be based in a neutral fiscal jurisdiction where the relevant pension rules allow significant advantages and greater flexibility than UK plans.
The key benefits of a QROPS include:
- No requirement to purchase an insurance company annuity which means you retain control of the pension assets.
- The ability to pass on remaining pension assets to nominated beneficiaries on death.
- A wider choice of acceptable investments offered over UK plans.
- Greater flexibility around the level and manner of income payments which can be taken from the plan.
- The underlying investments and income payments can be denominated in a choice of currencies to reduce the risk of currency fluctuations.
- Where held offshore, income payments made without the deduction of UK income tax with income tax payable as appropriate in the jurisdiction in which it’s received.
QROPS and Tax Planning
The appropriate use of QROPS can provide substantial tax planning opportunities. The tax deduction from the residual value of a UK pension contribution on death can be as high as 82 per cent. QROPS can mitigate such taxation.
Many people only think of their pension in terms of retirement income, due to legacy issues with life annuities and the rigid framework of many products. But the flexible structure of QROPS regarding the investment content, benefit type and the way any assets remaining in the scheme can be distributed, brings a new dimension to their use in financial planning.
A QROPS will generally offer the following:
- Optional tax free lump sum.
- Lifetime annuity
- Regular drawdown
- An income for spouse or dependants.
- Payment of the proceeds to a trust(s) for Named beneficiaries
- Payment of the proceeds to an international pension plan(s) for Named Beneficiaries.
- Retention of the assets in the plan for distribution at a future date but within two years of the Member’s death.
- Winding up of the plan and payment to the Member’s estate.
- Winding up of the plan and payment directly to Named Beneficiaries.
The ability to control structured income payments and distribution gives you a new dimension for succession and estate planning. Also, the plan has no cap on contributions and distribution of assets is currently not subject to UK IHT, which makes the QROPS an efficient vehicle for providing income and passing on assets to dependants.
Pension Risk Management
Managing your pension portfolio requires more attention than a traditional UK-based pension scheme, but the benefits far outweigh the negatives.
The key here is adapting your portfolio allocation that comprises your retirement plan or pension to suit your needs. This will be a periodic discussion topic for you and your Forth Capital adviser. It usually makes more sense for a young person starting a pension scheme to take more risk than someone who is about to draw their pension. The reason is that the early stage retirement fund has much more time to recover from a steeper dip than one that is nearing maturity. Over the longer term, higher risk strategies may provide greater return, though the volatility of the value will be higher. Closer to retirement age your adviser will look to reduce risk, thus lowering volatility and so lock-in the gain you’ve made over the last couple of decades.
Your adviser will understand risk management and have experience with cultivating risk strategies. They will keep up with new products and services and thoroughly research your options for you.
What to do next
With years of experience and collaboration with some of the world’s leading financial institutions, this has given us the opportunity to offer our clients Retirement Plans that meet their changing needs throughout the many stages of life.
Working with Forth Capital
You are guaranteed to receive impartial advice with no obligation on your part, and confidentiality is always assured. Our expert advisers will also give you the best advice for your unique situation and not just tell you about the benefits, but also any potential pitfalls you should consider regarding your Retirement Planning.
As well advising on Retirement Plans, our team are equipped to help you review all financial areas, including Education Planning, International Tax Advice, and Pension Transfers to help you achieve your financial goals. This makes us the perfect choice for you to discuss your needs.
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