Mr and Mrs Smith, who demonstrate a proactive approach to their financial future, currently reside in an EU country and are preparing for retirement in five years. With their children now independent, the couple are keen to optimize their finances for the pre and post-retirement period.
They have several issues to resolve, but first on the list is to determine if they can do better with their pension plans.
Step one involves a meticulous review of all the paperwork and information available for each pension scheme. Mr Smith has four, while Mrs Smith has three, all accumulated over a long period of work in the UK. Some date back to the 1980s, others are more recent. While online access to information is possible, the unique nature of each plan makes it challenging to assess their fund values and potential retirement income. Undeterred, the Smiths are determined to navigate these complexities.
They decide to call the pension providers to learn about their options and how they will be able to access their pensions in the future.
However, their efforts are met with frustration. The first hurdle is the endless wait times to speak to a representative. The menu offers numerous options for finding answers, but after navigating this, they are left waiting for someone to pick up their call, accompanied by the ever-present lift music.
The next problem they encounter is the limited nature of advice which can be provided. One of the consequences of Brexit is that UK insurance companies and advisers can no longer provide advice to non-UK residents unless they have a physical office in the country in which the clients reside. They can give some information, including the value of their plans and illustrations of future investment returns and retirement benefits, but can’t advise on investment funds or portfolio allocation.
Furthermore, 2 of Mr Smith’s policies and 1 of Mrs Smith’s are ‘annuity only’ contracts. These plans were accumulated in the 1980s and were never changed to Flexible Access Drawdown (FAD). If they still lived in the UK, it would be easy for the insurance companies to transfer these plans into FAD policies, but as they don’t, the companies can’t change them as it would be considered giving advice, which isn’t allowable post-Brexit.
To make matters worse, the UK insurance companies can’t even pay the annuities to the Smiths when they retire as they aren’t UK residents. This also wouldn’t have been a problem pre-Brexit.
Mr Smith contacted his UK financial adviser and got the same response. The UK adviser recommended that he find a locally regulated company to take over servicing and ongoing investment advice.
The couple may not have found the answers they were looking for and consider their situation to be sub-optimal. The only saving grace is that they know this now, and their UK adviser has given them an idea to help improve their pension planning.
The Smiths decide to try to find a local adviser and see if anything can be done.
Their main concerns are as follows:
- Can they transfer the annuity contracts to a SIPP provider that accepts non-UK residents?
- Can they also transfer their other plans to the same provider and simplify their overall retirement position?
- They aren’t particularly happy with the funds they are invested in. Can they do better?
- Costs, particularly for investment funds, appear higher than necessary. Can this be improved?
- Can the currency position be changed to reflect their EU residency?
- Can pension benefits be paid under FAD rules and gross of UK tax? They don’t want to rely on HMRC to send them a cheque yearly as a rebate for tax overpayment.
- Can online functionality be improved? Due to the unreliability of services, they don’t want to conduct administration processes by post with multiple companies.
- They realise that it would be easier for their children to deal with one pension provider in the event of their deaths. What can be done to make this process as simple as possible for them?
The good news is that the answer to all of these questions is ‘yes’.
Non-resident Self-Invested Personal Pensions (NR SIPPs) have been specifically designed to solve the problems mentioned above. These plans are sometimes known as International SIPPs, but that is a bit of a misnomer as it implies the SIPP is located offshore. NR SIPPs are UK-based, but as providers only work with properly regulated EU advisers, a full range of services are available to the Smiths.
The UK FCA regulates NR SIPP providers and can, as such, accept almost any transfer from other providers. This means the Smiths can consolidate all their pensions into one easy-to-view pot, making retirement planning a much simpler exercise.
Another feature of NR SIPPs is the sophistication of their online investment platforms. Thousands of funds covering all global market sectors can be accessed and are available in various currencies. Direct equities can also be included in a portfolio.
Establishing an investment portfolio is straightforward. Once the Smiths are happy with their risk profile, the adviser can create the portfolio online and switch funds at any time in the future in the same way. Their investment strategy will be clearer; they don’t have to combine several plans.
Fund selection is linked to costs and charges. A good adviser will offer completely transparent and independent advice at this point. Exchange Traded Funds (ETFs) have become a popular way of allocating the part of a portfolio which invests in major markets. Most ‘active’ fund managers find it difficult to beat the index, so why pay more for, at best, a similar return? ETFs track a particular index and have very low costs (0.05% to 0.25% p.a.). Effectively, they are managed by an algorithm, considerably reducing management fees.
One distinct advantage of investing via a NR SIPP is that most providers offer excellent online administration systems. This means almost all paperwork can be completed using scans and digital signatures. No more waiting for weeks for a letter to be signed and returned. Even when it arrives at the insurance company offices, more delays ensue as it passes from the post department to the individual responsible for actioning the process.
The Smiths can nominate their children as beneficiaries. They will then have the option to adopt the pension plans or take an income/capital sum.
Finally, retirement benefits can be paid gross of UK tax. There is a process to complete, but it isn’t particularly complicated; the result is that the Smiths can receive their pensions without reclaiming tax. The drawdowns can also be paid in Euros, which fits in much better with their day-to-day financial management.
To recap, if the Smiths transfer their existing pensions into a NR SIPP, the result would be as follows:
- Old and unsuitable pensions consolidated into one easy-to-manage NR SIPP
- Flexible Access Drawdown available, which means they can manage their retirement income according to how much they need each year
- All administrative processes are undertaken online
- Vastly increased availability of funds
- Investment strategy in line with their risk appetite
- Lower overall costs
- Currency position reflective of their residence
- Retirement benefits paid gross of UK tax
It’s important to note that any individual element of financial planning should be considered in context with non-pension investment opportunities.
The next stage is to analyse their capital investment position and determine how to minimise taxation in their country of residence.
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