UK Pensions - The Full Story
UK Pension Benefits generally fall into three categories.
- Those built up by paying National Insurance contributions (Basic and State Pensions)
- Final Salary Pensions. Typically, from the public sector such as The Civil Service, NHS, or large private companies such as utilities and transport.
- Private Pensions built up by personal and employer contributions into a Money Purchase Pension or Personal Pension scheme which can include protected rights which have received UK national insurance rebates.
This article deals with Money Purchase Pensions and Personal Pension Schemes. The names have varied over the years. They have also been called:
- Retirement Annuity Plans
- Retirement Annuity Contracts (RACs), or Section 226 Contracts
- Additional Voluntary Contributions (AVCs)
- Self-invested personal pensions (SIPPs)
- Small Self Administered Scheme (SSASs)
- Protected Rights
- Contracting Out
- Income Drawdown
Understanding the structure and rules of your pension is vital to ensure successful financial planning for Expats and people considering living abroad.
The introduction of Qualifying Recognised Overseas Pensions Schemes (QROPS) has changed how Expats and people considering moving abroad treat their valuable Personal Pensions. With QROPS, Her Majesty’s Revenue and Customs (HMRC) have created a pre-approved system whereby UK pensions rights can be transferred outside of the UK into a QROPS at the member’s request.
A QROPS provider, typically an Insurance Company, Merchant Bank or a Master Trust must meet a number of HMRC’s rules of when benefits can be taken, together with reporting requirements for five complete tax years after the member has left the UK.
Care and advice is essential as not all overseas pension schemes qualify as QROPS and therefore attempting to transfer into un-authorised schemes could be an expensive mistake. It is important to seek professional qualified and UK Financial Services Authority regulated Independent Financial Advice. The advisory firm should also be authorised by the FSA to give cross boarder advice. All reputable QROPS providers will insist you seek advice in this way.
To transfer a UK pension funds to a QROPS, the member must have left or intend to leave the UK for tax purposes. When benefits are transferred to a QROPS they do not suffer a UK tax charge.
UK Personal Pension funds can be transferred into QROPS either before the member takes pension benefit or even once they are receiving income from a Pension such as income drawdown currently in payment. However it is not possible to transfer an entitlement to the Basic UK state pension into QROPS, or to make a transfer after an annuity has been purchased or receiving payment of a Final Salary Pension.
The opportunity for those in QROPS when they start drawing their pension benefits is that payments will not be liable to any form of UK tax. The location of tax residence may have impact in terms of local taxes and the implications should be investigated before any transfer is completed.
Once resident outside of the UK for five or more complete tax years the reporting requirements to HMRC cease. This means that benefits include:
- No UK restrictions on the level of income taken at retirement after five full UK tax years.
- No requirement to buy an annuity.
- On death pass the fund intact to spouse and heirs’ UK inheritance tax free.
By moving UK pension benefits to a QROPS, Pension Funds are removed from the UK taxation system and UK legislative changes to the new tax environment depending on the member’s new residence.
For expatriates the avoidance of UK taxes on Pension income, the added flexibility and loan facilities to access your money and the dangers of additional UK Pension tax levies are essential planning tools which must be an integral part of Financial Planning.
UK Personal Pensions – Don’t leave them behind !