Finance: Untangling international pensions
PHUKET: I have never had so many questions and so many misunderstandings of the current options with regard to pensions for international expats as have arisen over the last year. It doesn’t help that governments are changing their rules faster than ever. Today I will give a brief overview of the current situation for UK expats.
First I will address those needing to save now.
There is really no need to save for retirement in a specific “pension”, because unless you are being matched by an employer, you don’t actually receive the tax deferral benefits that you normally would in your home environment. Even if you do, I still believe freedom to direct your savings as you please is a benefit that far outweighs any advantages of saving in the various government schemes that lock your access away.
You can start with a dedicated bank account or a low cost online brokerage platform and dollar cost average into index funds. You don’t need an advisor to do this. If you accrue a significant sum, you may want to find someone to manage your portfolio then, but always start with a small amount and see how they perform for a while.
If you have a government sponsored pension, it becomes more complicated as to what your options are. The UK “pension freedoms” were really a tax grab in disguise. However, if you have a small pension this allows you to access it and actually get some value as opposed to being forced to take an annuity that pays a whopping 1-2K GBP per year. Still, I would stay under the limit of 10,500 GBP that they allow you to take tax free. Unfortunately, it appears that for expats that allowance is soon to be removed. Stay tuned for details when that happens, but for now it is pushed back another few years.
Transferring to a low tax jurisdiction like Gibraltar, where you can access your money with a negligible 2.5 per cent income tax rate and shelter the pension from inheritance tax, still makes sense once you start talking about serious sums of money. However, for anything under 100,000 GBP the costs will certainly outweigh the benefits. The government has done a temporary U-turn on allowing full flexibility to offshore pensions, but they’ve announced that this is coming.
However, as Guernsey has lost its Qualifying Recognized Overseas Pension Scheme (QROPS) status and voted for flexibility, it appears you can draw all of your money out of a Guernsey QROPS totally tax free. Don’t go and do it just yet though, or you may find HM Revenue & Customs chasing you for a 55 per cent unauthorized payment penalty. I am sure they will make a statement clarifying their stance on it soon, so be patient and wait or you may be sorry.
The main thing to consider with this is your likely estate value and that in the future anything you draw out of a pension and into your estate becomes fair game for inheritance tax. Many people make the mistake of legally avoiding massive amounts of tax only to make poor investment decisions that offset this. QROPS has had a lot of bad press over this, but remember that tax saving decisions and any subsequent investment decisions are two completely separate issues. I realize we are still in a low interest rate environment, but the best performers I have seen are those that have been conservative and forgone profits now in return for future value when things go back to a more normal environment for fixed incomes.
So, regardless of your situation, your options may be confusing. There is no single best way to save for retirement; many avoid the financial markets all together and only acquire real estate. Those who have pensions may find their choice of options very dependent on their overall net worth and whether they even have children to whom they want to leave assets. In any event, make sure you understand what you are doing fully before you do it and never let anyone pressure you into making snap decisions. And don’t worry, as soon as you have your head around the current rules, the various governments will be sure to change them again.
David Mayes MBA resides in Phuket and provides wealth management services to expatriates around the globe, focusing on UK pension transfers. He can be reached at david.m@faramond.com or 085-335-8573. Faramond UK is regulated by the FCA and provides advice on pensions and taxation.
— David Mayes
