Pensions, getting started
The topic of pensions has never been more controversial. With deficits reaching all-time highs and greater flexibility than ever, scheme members are taking more interest in how their pensions are managed. Pensions provide an income when you are no longer working and are one of life's most important decisions.
Pension schemes generally fall into two categories:
Defined benefit pensions pay an income correlated to length of service or salary at retirement (final salary). Trustees manage defined benefit schemes and ensure that contributions are made by employers.
Also known as final salary schemes, many have become too expensive to maintain resulting in huge pension deficits and the gradual replacement by cheaper-to-run money purchase schemes.
Defined contribution schemes are paid into by employee and employer to build a fund that will create an income at retirement. The value is dependent on fund performance and charges deducted.
It is possible to create your own personal pension and in the UK, the government offers tax relief on contributions up to certain limits for personal, stakeholder and some workplace schemes. Budgeting is important to ensure that contributions are manageable so at retirement, you can draw on the funds to create an income and hopefully, live comfortably.
The government pays tax relief of 20% of contributions (possibly more for higher tax-rate payers) as long as you do not exceed:
£40,000 a year (the current annual allowance)
100% of your earnings in a year, the limit on tax relief
£1.073,100 million in your lifetime (the current lifetime allowance)
It is important for expats to note that as non-relevant UK individuals without UK earnings, tax relief on payments may not apply. Usually, the maximum available is £3,600 pa (£2,880 plus 20% tax relief). More about tax-relief can be found on our SIPPs page.
Legislative changes in 2006 made it possible to transfer final salary pensions into other schemes offering greater access, investment flexibility and the option to pass assets to loved ones after death. Transfers into qualifying recognised overseas pension schemes (QROPS) and SIPPS soared, with expats looking to convert their UK schemes in to 'expat pensions', often without fully understanding the potential consequences.
With less financial regulation, investor protection and relaxed investment guidelines in many overseas locations, the sale of unregulated and expensive investments has been prevalent at the expense of investors.
Remuneration for international IFA's is still largely commission-based and investments can be sold to benefit the advisor more than the client. So it is vital to ask how you pay for advice with clear explanations of both the benefits and the sacrifices you'll be making by transferring your pensions.
Despite numerous campaigns by the UK government warning of the risks, thousands of investors worldwide continue to fall victim to poor advice and unscrupulous salesmen. The exotic nature of some unregulated investments may appear attractive but often result in funds being suspended or loss of capital.
The Expat Advisors network operates without secrets or surprises, providing expert guidance and full disclosure on every aspect of the transfer process. To learn more, contact us today and we'll remove doubt from your pension transfer decision.