If you are an expat of age 55 or older and you are unsure about how to access your retirement savings, then the good news is there are a number of options open to you.
There is certainly a lot more flexibility in this respect than when I first started advising British expats on their retirement options 20 years ago.
However, alongside greater freedom in how you access your pension comes the need to make an informed decision as to which options to choose.
What we will cover in this post
Annuities
An annuity used to be the default method of receiving benefits from a pension pot.
However, as part of the “pension freedoms” rules which were introduced in 2015, it is now no longer obligatory to purchase one.
This does not mean they are not worth consideration. After all, they do pay a fixed income for life. This is regardless of how long you live for and this can be reassuring for some.
However, due to increased life expectancy and low interest rates, annuity payouts are now at historically low levels.
Uncrystalised Funds Pension Lump Sums (UFPLS)
One of the major changes which came about through the ‘pension freedoms’ in 2015, was to allow people age 55 or older to make ad-hoc withdrawals of any size from their pension pots.
These withdrawals are known as Uncrystalised Funds Pension Lump Sums (UFPLS).
Because you are allowed to make a withdrawal of any size from a pension held in the UK, this means it is possible to withdraw the entire pot in one go.
This potentially presents some incredibly interesting tax planning opportunities, dependent upon where you are resident.
Drawdown
Unlike UFPLS, an income drawdown plan is a formal product with a financial institution.
It allows you to withdraw some of your pension savings in order to provide you with an income. The remainder of the fund remains invested, and ideally, continues to grow.
It also provides the flexibility to vary the income you receive from your pension at different stages of your retirement, should you wish.
Pension Commencement Lump Sum (Tax-free cash)
If you access a UK-registered pension, you have the option to take 25% of the fund as a lump sum. This will be paid free of tax in the UK.
However, you should always check the tax status of taking this lump sum in the country you are resident in and the double taxation treaty between that country and the UK. The payment may not be treated in the same way as in the UK
If you use the UFPLS option to make ad-hoc lump sum withdrawals, then the first 25% of each withdrawal will be free of tax. The remainder will be taxed as income.
If you withdraw all of your pension pot at once, again only 25% will be tax-free and the remainder will be taxed as income.
Pensions accumulated pre-A-day (1st April 2006)
Many pension rules changed on 6th April 2006 (known as A-day). One of which was how tax-free lump sum amounts are calculated.
Prior to this date, it was possible to have tax free cash amounts greater than 25%. New legislation was also introduced to protect those who had already accumulated higher entitlements.
If you have pension benefits from before A-day you should always check your tax-free cash status before drawing them. You should also do this before transferring your pension to another scheme; doing so may mean that you forfeit your protected tax-free cash.
How might all of these options differ for expats?
If you have a UK pension and live overseas, you should have full access to all of the same pension freedoms as a UK resident would.
In addition, you may also be able to secure a larger slice of tax-free cash via a Qualifying Recognised Overseas Pension Scheme (QROPS).
These pension arrangements are specifically designed for expatriates. They normally allow you to take 30% of the fund as a tax-free lump sum, as long as you have been resident outside the UK for five consecutive years by the time of access.
However, not every QROPS will provide expats with access to flexible drawdown or allow unlimited withdrawals. This is a complex area, and it is usually prudent to seek professional financial advice.
Shopping around for the best pension option
If you choose an annuity or a formal drawdown arrangement, then this doesn’t have to be with the same company as your pension provider.
In most cases, you will be able to obtain significantly better results if you shop around.
Summary:
- There is a wide range of options available for expats who wish to access their UK pensions – e.g. annuities, drawdown, QROPS;
- Some of the choices you make will be irreversible, such as if you purchase an annuity, or make a large withdrawal;
- If you choose the drawdown option, you might need regular assistance going forward. For example, with the amount of income you can take each year without the risk of running out of money in later life;
- The legislation (and the jargon) can seem very confusing and has been known to change without warning.
It is therefore often much easier to explore your options when you’ve engaged a qualified and experienced financial adviser who has been through the process many times before.
