Steve Travis, manager of The Fry Group's international division, explores the financial implications of choosing to retire abroad
The lure of warmer climates, a slower pace of life and a lower cost of living are attracting more and more people to emigrate every year. The most recent information available from the Office of National Statistics has shown that a record number of people left the UK during 2006 for the long term, including 196,000 British citizens.
For those considering retirement in another country, it is important to appreciate fully the financial implications of a foreign move. Here, we answer some of the most pressing questions in the area of pension planning for individuals looking to retire abroad from the UK.
Q: What should someone do with their existing pension provision if they move overseas?
A: If the existing pension is a personal arrangement the first thing to consider is that they can top up their contributions for five years after leaving the UK and still get tax relief. In other words, they can pay the premium net of UK tax and get an HM Revenue & Customs tax rebate, topping up the contributions. As an example, typically a net £116 per month would be equivalent to £150 gross invested into the plan with the tax relief.
If the individual's existing pension is a corporate or a company arrangement and they are 'seconded' abroad by the UK employer then they can stay in the plan for up to three years automatically and for 10 years with HMRC approval. Beyond that it needs individual approval on a case-by-case basis. The advantage of staying in the scheme is that the employer's contribution is maintained. The disadvantage, however, is that quite often the pension is based on a notional UK salary, which may be lower than that actually earned abroad. This is useful, however, if there is no offshore company scheme available.
Finally in some cases, particularly with quasi-governmental jobs such as Nato, the United Nations or the European Union, it may be possible to transfer out of a UK scheme into an approved overseas employer's scheme on a case-by-case basis.
Q: I've heard there is a new scheme that enables individuals to access their UK pension, tax-free - please can you tell me more about this?
A: In all cases, if the individual is moving abroad they could consider a transfer under the 'Qualifying Recognised Overseas Pension Scheme' or QROPS. Briefly, if they are going to be abroad for five years or more they could take advantage of the commutation features, particularly attractive if they are planning to stay abroad. Under QROPS, UK pension funds can be transferred without tax deduction and ultimately drawn without UK tax consequence once the five-year period is up.
QROPS is a relatively new area of expatriate pension planning and it follows that a certain level of caution should be exercised. Current legislation is not clear on whether the 'five complete tax years rule' applies to the period of UK non-residence, or the length of time that the funds have been in the QROPS. Therefore, until clarification is issued, it seems prudent to leave the funds in the QROPS for five complete tax years and then withdraw while non-resident.
Furthermore, it remains to be seen how the Revenue tackles early withdrawals and whether it will introduce anti-avoidance legislation when it sees that non-residents are taking full lump sums after five years, without tax.
Q: How should someone save for retirement if they have emigrated within the EU?
A: Within the EU it is sensible first to look at any employer's scheme on offer. That way we can benefit from the employer contributions plus local tax relief on personal contributions into the plan as well. Broadly speaking the EU provides more scope for transferring and amalgamating pensions benefits following recent changes in legislation.
The same comments would also apply to QROPS mentioned in the previous paragraph.
Q: How should someone save for retirement if they have emigrated outside the EU?
A: If there are no employer's schemes on offer, then it is imperative that they do something positive toward building up capital for retirement. The criterion would be that the investment is growth-orientated, flexible, tax-efficient and, crucially, cost-effective. We would therefore recommend that people avoid offshore insurance-linked schemes that require fixed five, 10 or 20-year saving regimes. As yet there is little available in truly portable personal pension plans so there is little help from the taxman. As a result, they fail at least three out of four tests above. Therefore, the solution would be to consider a unit trust or an investment trust regular savings plan, which would meet all of the above criteria.
Q: What should someone do if they return to UK before retirement?
A: If individuals return to the UK before retirement with an offshore pension in place, our advice would be to keep it offshore. That way, when they are ready to activate the plan, the foreign scheme rules may allow for 100% commutation. This could be paid free of UK tax even when resident, by virtue of extra statutory concession A10. Depending on the years of service abroad, the client would only have to qualify for one of three rules to ensure that the foreign pension lump sum can be enjoyed tax-free in the UK and at the same time, if there is a double tax treaty, gain exemption in the host country too.
If the foreign pension cannot be commuted, then when it is paid to a resident of the UK, the individual can claim double tax treaty relief to have the foreign pension taxed in the UK. In that case 10% of the pension will be tax-free to those resident and domiciled here under UK rules.
Keeping the foreign pension separate, they would then reactivate any UK personal or corporate schemes and try to shoehorn in any additional savings by means of additional voluntary contributions.
Q: What steps should someone take if they return to UK for their retirement?
A: Broadly similar rules would apply. My advice would be to keep the foreign schemes separate so that the tax advantages listed above can be activated.
Q: Can I still access the basic UK state pension if I am moving abroad?
A: I would always urge individuals not to forget the importance of maintaining their entitlement to the basic state pension. From July 2007 the rules have become more favourable for expatriates building up their state pension entitlement. Those working abroad can make a contribution on a voluntary Class 2 basis, which costs only £2.20 per week (£114 a year). From 2010, the qualification for a full pension would reduce to 30 years. So an expatriate could contribute on a voluntary basis at current rates of £114 a year for 30 years - and, for a total outlay of £3,434, obtain a state pension benefit of £4,539 a year. In other words they will get their money back in just one year - which is outstanding value for money.
Also do not forget that many overseas countries have reciprocal arrangements with the UK concerning National Insurance, and this ensures that the individual will get a full credit of contributions from each member country.
Ultimately, we would always recommend that individuals seek good-quality personal advice when planning for retirement to ensure they reap the financial rewards in future. That way, individuals can concentrate on enjoying a comfortable retirement abroad and not have any pension-related headaches.
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