Expatriates often contemplate whether transferring their UK pensions is the right choice. In this article, we’ll delve into these questions and explore the considerations surrounding the decision. I will also point out some of the key differences between a SIPP and a QROPS and when it makes sense to transfer to either of them (if any at all).

Understanding the ‘Why to Transfer’:

When residing outside of the UK, managing a UK pension can become complex due to various factors. The most pressing concerns to be reviewed are, in my opinion, as follows:

1. Potential tax implications
2. A lack of accessibility/ drawdown options
3. Ongoing currency risk
4. A lack of advice
5. A limited selection of investments/ funds

You will first need to understand what the benefits/ negatives are to leaving the pensions where they are versus transferring them in the first place. Next, we need to look at which points apply to you and how they compare when considering the different options. These will depend on many factors including where you now reside, the pension providers you currently have, and the combined value of the pensions.

1. Tax implications

Double taxation can potentially be solved by transferring. You have the choice of transferring the pension offshore or to another provider in the UK and getting an NT (No Tax) Tax Code. The NT Tax Code could be a simple solution that could stop double taxation and allow for a wider range of options to consider when transferring the pension, including leaving it where it is.

You may need to withdraw the pension in full if you have not set it up efficiently. Why this happens is explained more in the “drawdown options” section below. This could cause a large tax implication as the pension could be taxed as income on the full amount in your country of residence. As most countries do not give you the 25% tax free (PCLS) this means the full amount could be taxable as income where you live. For context, based on the UK income tax system and a GBP 250K pension, this could be a taxable event of 40% costing you roughly GBP 100k+ (Source) and this assumes you receive no additional income in the given year. This can be easily avoided by transferring to a pension provider that offers flexi-access-drawdown for non-UK residents. Both International SIPPs and QROPS could potentially resolve this issue.

2. Drawdown options

Many providers in the UK are now unable to provide either flexi-access or annuity drawdown to non-UK residents. This can be down to the options they can offer or could be down to the provider just not being able to do so under the licences they hold. In these cases, the client is potentially left with 2 options, either you take the full pension amount out in one go and face tax the potential implications, or you transfer to another provider. This creates a dilemma for non-UK residents when trying to access their pensions. I recently came across a client who thought they would be forced to take the full amount out and would just have to take the hit on tax. If this is the case for you, you could instead consider transferring to either a SIPP or a QROPS to enable more drawdown options whilst living outside of the UK.

3. Currency risk

This is something you will be left to face unless you transfer the pension into the same currency as where you live. An example is, imagine you live in The Netherlands and that year local inflation was 4%, but in the UK they saw no inflation in the same year… this leaves you with a net 4% loss on the inflation alone when comparing the currencies. It is often a good goal to look to change the currency of the plan to that of where to plan to spend retirement. This is something that is typically only available to those who transfer to either a SIPP or a QROPS. By transferring, you get the option but not the obligation to change the currency of the pension.

4. Ongoing advice

Post Brexit, many advisers and pension providers are unable to provide ongoing advice to non-UK residents. This does not necessarily mean your pension stops being invested. However, this could mean that you cannot be given ongoing advice and could also mean that you are now unable to change the investments (unless moving them to cash). This can create a huge issue for non-UK residents as they could be left essentially blind to potential important changes that could affect them, or they could be left with investments that may not be best structured in an evolving market. Getting a set-up that still provides you with the best support is essential. You can resolve this by moving to an international adviser who specialises with UK pensions and by using pension providers that offer options for non-UK residents. Both SIPPs and QROPS’ could be used to resolve this.

5. Limited fund options

Many (if not most) UK pension providers offer a limited fund list to choose from for your investments. This has its benefits, such as it is much simpler to pick an investment selection for your pension from a limited list. But when you look under the hood, these simple options are often very heavily weighted towards the UK. Even so called “international funds” can in theory be invested over 80% into the UK and only the remaining percentage into the rest of the world. Having a good investment selection is often essential in ensuring the pension grows in line with your attitude to risk. Both SIPPs and QROPS can offer an open architecture selection of investments, giving you much more control and diversity.

The QROPS Option:

Following changes in the market, the main 2 QROPS options are now to transfer to either Malta or Gibraltar. Which one is better for you will depend on where you are resident and the types of benefits you are looking to receive.

Key Benefits of QROPS:

• Avoiding Lifetime Allowance Charges: Whilst the LTA has been scrapped for now, you may want to safeguard for the future in case it is reintroduced. Once your pension funds are transferred to a QROPS, they are no longer subject to the UK’s Lifetime Allowance. This means any growth in the value of these funds won’t incur the LTA charge of 25% on income or 55% on lump sum withdrawals that exceed the allowance.
• Benefit Crystallisation Events (BCE): Transferring into a QROPS counts as a BCE, where the value is tested against the LTA at the time of transfer. If the transfer value is within your unused LTA, then future growth in the QROPS is not tested against the LTA, potentially saving significant tax charges.
• Currency Flexibility: QROPS enables pension holders to manage their funds in their local currency, mitigating currency risk and enhancing financial planning.
• Tax Efficiency: Depending on the jurisdiction, QROPS may offer tax advantages such as reduced income tax liabilities or inheritance tax benefits.
• Investment Freedom: QROPS typically provides a broader range of investment options compared to traditional UK pension schemes, allowing for more tailored investment strategies.

Considerations Before Opting for QROPS:

• Jurisdictional Regulations: Different countries have varying regulations governing pension schemes, impacting factors such as taxation, withdrawal rules, and reporting requirements. If you plan to leave the EEA in the next 5 years, you could also be opening yourself up for more tax implications by going into a QROPS.
• Transfer Costs: QROPS transfers may incur fees, including setup charges, administration costs, ongoing management fees, and potentially some hard to see commissions. It’s essential to evaluate these expenses against the potential benefits.
• Financial Advice: Seeking professional advice from a qualified financial adviser with expertise in international pensions is crucial to assess the suitability of QROPS based on individual circumstances. Be sure to check this advice until you are confident that it is the best for you, and not for those recommending it.

The SIPP Option:

Some expatriates may opt to retain their UK pensions and manage them through a SIPP. A SIPP could offer the same flexibility and investment choices as QROPS but operate within the UK regulatory framework. This can be a better option for people will less than the LTA as a SIPP could be the cheaper option whilst still offering the flexibility needed as a non-UK resident.

Advantages of SIPP:

• Familiarity: For individuals comfortable with the UK pension system, retaining a SIPP may offer simplicity and familiarity in managing their retirement savings.
• Regulatory Oversight: SIPPs are regulated by the Financial Conduct Authority (FCA), providing a level of consumer protection and oversight.
• Currency Flexibility: some SIPPs enable the pension holders to manage their funds in their local currency, mitigating currency risk and enhancing financial planning.
• Investment options: SIPP providers can offer a wider range of investment options than what some UK pension providers could offer.
• Potential Tax Benefits: SIPPs may offer tax advantages such as tax-free lump sum withdrawals and tax relief on contributions, subject to UK tax laws.
• Cost: A SIPP is often much cheaper than the QROPS option and also has less commission options available to be recommended. This could allow for a much cheaper set-up with largely the same benefits.
  

Considerations Before Opting for a SIPP:

• Jurisdictional Regulations: Different countries have varying regulations governing pension schemes, impacting factors such as taxation, withdrawal rules, and reporting requirements. You may not need to make any changes to the UK pension(s). But if a change is needed, a SIPP could offer the perfect solution.
• Transfer Costs: SIPP transfers may incur fees, including setup charges, administration costs, ongoing management fees. It’s essential to evaluate these expenses against the potential benefits.
• Financial Advice: Seeking professional advice from a qualified financial adviser with expertise in international pensions is crucial to assess the suitability of a SIPP based on individual circumstances. Be sure to check this advice until you are confident that it is the best for you, and not for those recommending it.

Making an Informed Decision:

Ultimately, the decision to transfer a UK pension when living abroad depends on various factors, including individual preferences, financial goals, tax implications, costs, and future goals. The benefits of both SIPPs and QROPS’ have a lot of overlap. Navigating these 2 options can be difficult for anyone. It is advisable to seek professional advice. Take care in selecting the adviser you choose to help you do so, as you will need to be confident that they are recommending what is in your best interest and not theirs.

Expatriates should carefully assess the pros and cons of QROPS vs SIPP, considering their specific circumstances and seeking professional advice where necessary. Take what you are told with a pinch of salt and follow-up with your own research. Some advisers could have conflicting interests/ goals, such as trying to earn as much as possible. Check the charging structures recommended and how much this means the adviser will earn, versus what they could earn with other recommendations.

In Conclusion:

It can be very confusing and complicated when trying to understand what your best options are. Navigating the pension options as an expatriate requires careful consideration and expert guidance. Whether opting for QROPS or a SIPP, individuals should conduct thorough research, weigh the benefits and drawbacks, and consult with reputable qualified advisers to make informed decisions regarding their retirement planning.

Written by: Alex Gover – Independent Financial Adviser