Switching to an offshore pension for expatriates

Expats enjoying the climate, culture and lifestyle of a new country can get more out of their retirement savings by transferring the money to an offshore pension.

Two popular offshore pensions for expats are an international SIPP and a QROPS. Both have different tax and investment rules depending on the expatriate’s tax residency.

Read on to find out which expat pension is right for you and how to transfer your pension overseas.

International SIPPs for expats

SIPP is short for Self-Invested Personal Pension and works as an inflated place to hold retirement savings.

Despite its title, an International SIPP works the same way as a UK SIPP. The international SIPP also carries the same tax relief for an expat who is still a UK tax resident as an onshore pension.

SIPP points to consider:

  • The money contributed is topped up at the highest rate at which an expat pays taxes. For example, a higher rate taxpayer (40%) wishing to save £1,000 per month contributes £600, and the tax authorities add £400.
  • Expatriates can receive a cash pension from the age of 55
  • Pension withdrawals are taxed
  • Expats can manage their investments or appoint an advisor to do the job
  • The maximum an expat can save in an international SIPP is the lifetime allowance of £1.0731 million for 2021-22, frozen until 2025-26
  • Money in an international SIPP counts towards the lifetime allowance
  • Transfers into a SIPP are tax exempt from QROPS or other UK pensions
  • Tax resident expatriates outside the UK lose the tax benefits of an international SIPP

Starting an international SIPP

Starting an international SIPP is easy – just with an independent financial adviser for advice on your best pension.

Investments in overseas pensions are often made through offshore bonds, which may have few tax advantages for expats.

Transfer of funds from another pension

If you already have one or more pensions or a QROPS, you can consolidate the funds into an international SIPP – including funds from most onshore personal or occupational plans.

You cannot transfer the state pension or certain civil service or public sector schemes.

Although a pension is described as an international SIPP, the product is often similar to a UK-based SIPP.

To transfer pension funds into a SIPP, talk to an IFA who has experience in overseas pension transfers.

Once you have decided which system you want to transfer to, ask your current provider for a Cash Equivalent Transfer Value (CETV) report. This report sets the value of the fund for the transfer. If you have several pensions, you need a CETV for each scheme.

If the funds are worth £30,000 or more, you should discuss the move with an IFA or follow government advice. MoneyHelper website.

Where can expats invest their SIPP savings?

Each international SIPP provider will have a list of funds, stocks and investment funds that investors can choose from. Some online platforms offer thousands of choices, while others limit the number of options. The fund may hold assets and currencies suitable for expatriate clients.

Which Expats Should Consider an International SIPP?

  • Expats living outside the European Economic Area (EEA).
  • Expats on assignment remain UK tax residents, so they can continue to receive pension tax relief
  • Expats who are tax residents outside of the EEA but not in a country hosting a QROPS to avoid QROPS overseas transfer fees
  • Overseas workers with UK pension savings now living overseas

QROPS offshore pensions for expats

QROPS stands for Qualifying Recognized Overseas Pension Scheme overseen by HM Revenue & Customs.

The scheme has been in effect since April 6, 2006. Since then, HMRC has recorded over 136,000 transfers to QROPS worth over £12.3 billion. The average transfer is £95,294.

While it is true that many QROPS transfers are worth more than international SIPP transfers, the main reason for this is that the QROPS fees are higher, which lowers the price of the funds needed to make the move.

QROPS points to consider:

  • If pension savings are below the Lifetime Allowance (LTA) cap of £1.0731 million when transferred into a QROPS, they can grow without LTA savings limit once into a QROPS
  • Savings in a QROPS are not included in the LTA calculation
  • QROPS withdrawals are taxed according to the rules of the place where an expat is tax resident
  • QROPS savers can access their pension fund from the age of 55
  • Transfers to certain QROPS outside the EEA may be subject to an overseas transfer fee equivalent to 25% of the transferred funds
  • Expats can manage their investments or appoint an advisor to do the job
  • Pension transfers in a QROPS are tax exempt

Starting a QROPS

Starting a QROPS goes through the same process as setting up an international SIPP, with one important difference.

Pension savers should not transfer pension money to a scheme that is not on HMRC’s QROPS list. The list is published online approximately every fortnight. Transferring money to an unlisted system is considered a unauthorized pension transfer and is liable to a tax penalty.

The retirement saver is responsible for QROPS list check even if an IFA sets up the transfer.

Transfer of funds from another QROPS or pension

QROPS can accept transfers from UK onshore repos and other QROPS. There are no maximum or minimum levels for fund transfers.

Offshore expat pensions are available in 28 countries, according to the latest QROPS list.

Fifteen of these countries are part of the EEA. Pension savers can live in any EEA country while depositing money into a QROPS hosted in another EEA country without triggering the overseas transfer fee.

The rest are outside the EEA. Savers must live in the country where their QROPS is based. If this is not the case, for example, a saver lives in Dubai but has a QROPS in the Isle of Man, overseas transfer fees apply.

Where can expats invest in a QROPS?

QROPS offer a much wider range of investment opportunities than a standard UK Repo in a variety of markets, currencies and commodities. They also pay in several major currencies.

Which expats should consider a QROPS?

  • UK expats who are no longer UK tax residents
  • Overseas workers with UK pension savings now living permanently outside the UK
  • Expats whose lifetime savings approach or exceed the LTA

Which offshore pension is the best for expats?

Pensions are personal and must be adapted to the financial objectives of each expatriate. The choice between an international SIPP and a QROPS is not so much the one that is the best, but the one that is most suited to the needs of the retirement saver.

The best way to choose between a SIPP and a QROPS is to forget the cost and look at the features and benefits

Am I an expat if I live abroad?

Tax and financial law has no definition for an expat, so determining if you qualify for a QROPS is sometimes complicated. The first step for your IFA is to establish your tax resident status.

Once you know whether you are a UK tax resident or not, the choice of savings and investment products falls into place.

The general rule is that if you work on an assignment for a few years but keep your UK home, driving license and bank accounts etc. intending to return at the end of your contract, you are a UK tax resident.

However, if you pay taxes in the country where you live and have cut your personal ties with Britain, you are probably an expat.

HMRC uses legal residency test to determine expatriate status.

Moving with an offshore pension

Weird rule can get expats in trouble if they move while saving in a QROPS.

For example, if you currently live in France and have a QROPS in Ireland, it does not matter. But if you move to Dubai, you become liable for overseas transfer fees. If you have an international SIPP, you are not limited to where you can live and no tax charges are levied wherever you move.

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