Expats: avoid costly pension transfers
The weaker pound has been bad news for expats living in the European Union. David Prosser explains what that means for pensions.
The dramatic fall in the value of the pound since the UK voted to leave the European Union in June has been bad news for expatriates drawing UK pensions. Six months ago, a US-based expatriate drawing a £2,000-a-month pension built up in the UK was getting $2,940 once the income was converted into dollars. Today, the pension is worth only $2,500 almost 15% less.
This drop may prompt some expatriates to consider whether they should transfer their UK pension benefits into a scheme in the countries where they now live. This would require them to find a qualifying recognised overseas pension scheme (QROPS) that is willing to accept the cash. A QROPS is a pension scheme recognised by HM Revenue and Customs as one that broadly operates according to the same rules as apply in the UK.
Around 1,200 schemes have been set up in more than 40 financial centres around the world, though you don't have to take out a scheme from a provider in your country of residence. It is possible to transfer most private pensions set up in the UK to a QROPS without having to pay tax penalties or other charges to HMRC (though unfunded workplace schemes, the norm in much of the public sector, are generally excluded).
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However, while moving your pension to the country where you are now resident may sound logical, financial advisers urge caution. One problem is that QROPS tend to be expensive. Many feature fixed upfront costs that will take a chunk out of your savings, and hit smaller funds disproportionately hard.
Remember too that financial advisers operating in many jurisdictions are not bound by the commission ban that applies in the UK, so the cost of advice on a QROPS may further eat into the transfer value. "Increased charges could negate any advantages associated with transferring out of a sterling-denominated pension fund," warns Gary Smith, a financial planner with wealth manager Tilney Bestinvest.
Moreover, even if charges are not too onerous, there will be no currency advantage in transferring now unless the pound falls further. In fact, you'll be locking in the decline in sterling we've already seen since the Brexit vote and the pound may yet bounce back. Protecting yourself from future exchange-rate volatility may still be a sensible option, but transferring won't let you turn the clock back.
You should also know that the advantages of using a QROPS in the place of an appropriately invested UK-based self-invested personal pension (Sipp) are often very limited. Many Sipps allow investors to hold their savings in overseas currencies, points out Smith. That will protect you from exchange-rate volatility without having to transfer your pension out of the UK.
Sipps also let you hold a wide range of assets stocks, bonds, funds, commercial property and more meaning that transferring to a QROPS is unlikely to give you greater investment flexibility. It's also important to bear in mind that the UK offers a robust regulatory system with extensive consumer protection rules. Many QROPS are based in countries with far fewer safeguards, so your pension savings could be at greater risk.
Ultimately, expatriates need to consider their personal circumstances and the rules in their country of residence. What you'll pay on any income you withdraw from a QROPS or a Sipp in the country of your residence will depend on the local tax system and it is possible that a QROPS may be a better option in certain countries. However, you'll need advice from a reputable local tax specialist to be sure. Be wary of pushy financial advisers (in reality, commission-driven salesmen) who will be keen to convince you that a QROPS is always the best solution.
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David Prosser is a regular MoneyWeek columnist, writing on small business and entrepreneurship, as well as pensions and other forms of tax-efficient savings and investments. David has been a financial journalist for almost 30 years, specialising initially in personal finance, and then in broader business coverage. He has worked for national newspaper groups including The Financial Times, The Guardian and Observer, Express Newspapers and, most recently, The Independent, where he served for more than three years as business editor.
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