International Pension Plans | Everything You Need to Know
Explore the key benefits and considerations of international pension plans to make informed decisions for your financial future. Read more to gain insights.
- What an International Pension Plan is and how they work
- Understanding the different types of international plans
- The difference between a QROPS and an International SIPP
- The best pension options for UK expats
- Whether transferring your UK pensions is worthwhile
For UK expats, planning for a retirement abroad, and deciding what to do with your pension is one of the most important financial decisions. Proper retirement planning becomes crucial when you live abroad, as the UK pension laws and limitations may not fully align with your new life overseas, and may limit how you can access and manage your pension pot.
Fortunately, there are a few different types of international pension plans available to UK expats. These pension schemes may offer greater flexibility, ease of access, tax advantages and structures which are better suited to UK expats than traditional UK-based pension schemes.
Our guide will walk you through the different types of international pension plans, the advantages and disadvantages, as well as the type of schemes we recommend for UK expats planning a retirement abroad.
What is an International Pension Plan and How Do They Differ From UK Plans?
UK pension plans are typically designed for individuals who are tax residents of the UK, and who intend to retire in the UK. The rules around tax relief, contributions and withdrawals are structured around this domestic context for the most part. Therefore, once UK expats move abroad, they may often find the framework of their UK pensions to become incredibly restrictive. Tax complications, limits on access and currency exchange risk can all pose further challenges.
International pension plans, by contrast, are designed and tailored specifically for expats living overseas. These plans remain flexible and accessible no matter where you live, and some may even have multi-currency options for contributions and withdrawals, which can significantly mitigate currency risk.
Some international plans may allow adjustments for international tax considerations, and offer a wider choice of underlying investments compared to traditional UK pension schemes, allowing you to effectively manage tax brackets and potentially grow your retirement benefits.
Explainer:
All UK and International pension plans will fall into 2 categories. Defined Contribution and Defined Benefit.
Defined Contribution just means that your funds are invested in global markets (bonds, equities etc.) and the value can go up as well as down, with no guarantees.
Defined Benefit schemes are much less common, and these schemes will guarantee you a certain index linked monetary amount throughout your retirement. These schemes can be transferred to defined contribution schemes, but typically they are best left as they are as they offer such valuable guaranteed benefits in retirement.
What Are the Different Types of International Pension Plans?
International pension plans can vary greatly in their structure and offerings, and understanding the differences between them is essential to ensure you make the right choice for your retirement planning.
International Employer Plans
If you work for a multinational company, or simply have been relocated abroad for work, you may be offered an international pension plan by your employer. These types of pension plans are typically defined contribution (DC) schemes where both the employer and employee make contributions. These pension plans provide a centralised pension structure for mobile employees who may work in multiple countries or jurisdictions throughout the course of their career, and contributions may be made in multiple currencies.
The downside of these types of pension schemes is that since they are usually tied to an employer, if you were to leave that employment your access or contributions may be restricted. These types of pensions are not always as portable as other types of plans such as the international SIPP, and whilst they may work well during overseas employment, you may get more benefits from another type of international pension once your circumstances change.
QROPS (Qualifying Recognised Overseas Pension Schemes)
In the past, QROPS were often considered the go-to option for expats wanting to move their pension schemes abroad. These schemes were set up in jurisdictions recognised by HMRC, and allowed UK expats to transfer their retirement funds into a scheme outside of the UK without triggering an unauthorised payment charge, as long as the QROPS was on HMRC’s approved list. On the surface, these schemes offered flexibility, the option to hold investments in multiple currencies, as well as beneficial tax treatment in certain jurisdictions.
However, since recent changes in regulation, these types of schemes are unfortunately no longer a safe choice for most UK expats. Now, most transfers to QROPS from the UK have been subject to a 25% Overseas Transfer Charge, unless the individual and the scheme are located in the same jurisdiction. Since most QROPS are based in Malta or Gibraltar, these schemes are no longer a viable option for expats who do not reside in those jurisdictions, unless they are willing to part with a quarter of their pension pot.
Whilst HMRC does maintain a list of recognised overseas pension schemes, these are quite limited and rarely suitable for UK expats in practice.
The International SIPP (Self-Invested Personal Pension)
For many UK expats, the International SIPP has become the obvious choice when it comes to pension management. This is technically still a UK pension scheme, as it remains in the UK and retains the regulatory protection of the FCA (Financial Conduct Authority), but it has been designed specifically for UK expats living overseas.
The international SIPP is more cost-effective, transparent, flexible and tax efficient than other options, and since the scheme is UK-based, transferring to this pension product will not trigger the Overseas Transfer Charge.
This scheme allows UK expats to consolidate multiple UK pensions into one pot, and provides access to a wide range of investment options. It also offers multi-currency options as well as full flexible access draw-down.
At the Wealth Genesis, we recommend the International SIPP as the most advantageous pension scheme for UK expats who want ease of management, flexibility and the ability to grow their retirement savings.
Definition: Full Flexible Access Draw-down
When we talk about full-flexible access in pension draw-down, or FAD, we are referring to the ability to take your UK pension benefits as you see fit. This means you are not tied into any income, or have any restrictions as to how you access your pension money. For example, one year you may take a couple of lump sums, and the next year you take a monthly income. Full flexibility is vital when retiring to give your plans and future the flexibility to navigate changes in personal circumstances.
Should I Transfer My UK Pension to an International Pension Plan?
Transferring your pension to an international plan is a big decision and not one anyone should take lightly. For many people, a pension may be one of their largest financial assets, and transferring can have long term implications on your retirement and financial security.
For some expats, leaving a pension in the UK may well be the best option, depending on the circumstances. For example, individuals who have defined benefit (final salary) pensions, have a guaranteed income for life, which may be highly valuable, especially in the sometimes unpredictable life of an expat. Transferring a DB pension may still be the right choice in some cases, but this should always be done under the guidance of a regulated and expert financial adviser.
For defined contribution pensions, there may be more compelling reasons to consider a transfer to an international pension plan. Whether its to mitigate currency exchange risk, to consolidating multiple pension pots for ease of management, to having more control and flexibility, to ensuring your withdrawals are as tax-efficient as possible, an international pension plan can not only make life easier, but help to ensure you are getting the most out of your money.
When it comes to such big decision, seeking expert advice is essential. Its important to be aware of the potential costs and complications a transfer could incur, and to ensure you navigate local rules and regulations correctly. At The Wealth Genesis, we are highly experienced in helping expats make the right choice for their financial future, whilst protecting their savings from any tax traps and always remaining compliant.
Top Tip
Before even considering a UK pension transfer abroad, ask your existing provider these questions:
1. Will you allow me to have full flexible access as a non-UK resident?
2. Can I continue to manage my portfolio as a non-UK resident?
3. Will you be able to pay into international bank accounts?
4. Will UK tax be deducted from my pension payments?
If you're unhappy with any of these answers, consider engaging with an independent adviser.
Expert Advice for UK Expats Living Abroad
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