Always seek qualified advice regarding your pension schemes. The differences between QROPS and SIPPs have gradually reduced but QROPS still retain key advantages in the correct circumstances. SIPPs still provide numerous features however, and as the benefits of QROPS do not apply for those who have been outside of the UK for less than 5 years, the cheaper SIPP option may be more suitable.
What is a SIPP?
A SIPP (self invested personal pension) is a personal pension that offers far greater freedom over how you can invest your retirement funds than other pensions. You have complete control of where and in what your money is invested and the decisions you and your advisor take determine how your pension will perform.
SIPPs in the UK offer tax benefits on contributions. For the majority of expats transferring frozen final salary schemes or consolidating pensions into a SIPP, further contributions will only attract tax benefits if certain criteria are met as a 'relevant UK individual' (see below). Contributions are accessible from age 55, so additional investments into products with greater flexibility may be more attractive.
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Pension advice can be less stringent outside the scrutiny of the UK. Many overseas trustees still accept securities in SIPPs that would not be allowed in the UK, such as commission paying funds and structured notes, so always ask for confirmation if in doubt.
SIPP investment guidelines are designed to ensure suitable levels of investment diversification, and classified as Standard Assets as defined in the FCA Handbook.
Permitted investments include:
Real estate investment trusts (REIT)
Government, local authority and other fixed interest stocks
Collective investment funds in the UK (or overseas and recognised by the FCA)
Equities, stocks and shares
Managed pension funds
Exchange traded products
Structured products (with a secondary market)
Restricted Investments include:
Movable property (such as art, wine, classic cars, antiques)
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Benefits can commence anytime from age 55 onward and also if still in employment. It may be possible to receive benefits before age 55 if you are in ill health.
A SIPP allows you to choose how you take benefits to suit your circumstances. You can first select how much of your benefits you wish to crystalise as a lump sum, and then how you would like the subsequent benefits to be paid – as pension income, lump sum or a combination of both.
A SIPP can provide income in either, or a combination of three ways:
Purchase of an annuity
Drawdown pension income
UFPLS (uncrystalised funds pension lump sum)
A PCLS (pension commencement lump sum) of up to 25% can be taken tax-free at the time you designate how you would like your pension income to be paid, with the remaining fund being taxed at your marginal rate.
On the death of the scheme member, benefits can be paid as a lump sum or to provide pension benefits for the individuals you have selected, either through flexi-access drawdown or annuity purchase. The administrators of the scheme will decide how and to whom the death benefits will be paid, taking into consideration the wishes noted in your application.
How remaining funds are distributed is determined by age at the time of death. Dying before or after age 75, regardless of whether benefits have been crystallised will affect the taxation of death benefits.
• Death before 75, payments to survivors will be free of UK tax whether taken as either lump sum or income.
• Death at or after 75, income payments will be subject to UK income tax and taxed at the survivor’s marginal rate of tax.
UK SIPPs are generally low-cost. Some providers charge set-up fees and ongoing annual charges, while others charge a percentage of the investment value as low as 0.25% per annum. Other costs may apply for holding direct shares and buying and selling assets, while some offer their own managed portfolios or discretionary fund managers.
SIPPs designed with expats in mind attract slightly higher costs in line with increased complexities. Set up costs generally range from zero to £300 with an annual charge of £250-£750. Cheaper 'light' versions are also available for smaller pension pots.
Tax Relief on Pensions
Contributions to a SIPP can be made by anyone under the age of 75. If residing in the UK and receiving UK earnings you should qualify for tax relief on contributions as a 'relevant' UK person, which under Section 188 of the Finance Act 2004 will not exceed in any one tax year the greater of:
• £3,600 - the basic gross amount for the current tax year, or
• 100% of all relevant UK earnings in the current tax year (see below)
Even if not employed, up to £2,880 can be paid in annually that still qualifies for tax relief (£3,600 less 20% paid by the government).
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A person is classed as a relevant UK individual for a tax year if they:
were resident in the UK during the five tax years prior to the tax year in question, and also UK resident when joining the pension scheme, or
have relevant UK earnings subject to income tax for that tax year, or
are resident in the UK at some point during that tax year, or
have earnings from Crown employment overseas subject to UK tax (defined in section 28 of Chapter 5 of Part 2 of the Income Tax (Earnings and Pensions) Act 2003, or
are the spouse of an individual (or civil partner) with general earnings from overseas Crown employment for that tax year subject to UK tax (also defined in ITEPA 2003).
An annual allowance applies to the amount of payments permitted to any number of your own registered pension schemes in a Pension Input Period that qualify for tax relief. For the current tax year (2018 / 2019) the allowance is £40,000.For individuals that do not have relevant UK earnings, the maximum contribution is the basic amount of £3,600 gross.
For honest guidance on pensions, contact us today and we'll help you achieve a smooth and efficient transfer.