What is an International SIPP?
The sections outlined below examine the origin of International SIPPs and the processes involved in transferring UK pensions overseas. Topics include the following:
- The Self Invested Personal Pension (SIPP)
- International version of the SIPP
- What are the benefits of an international type SIPP?
- iSIPP rules
- Disadvantages of iSIPPs
- iSIPPs vs QROPS
- How do I transfer my pension to an iSIPP
1. The Self Invested Personal Pension (SIPP)
The UK government introduced personal pensions in the mid-1980s to encourage individuals to save for retirement. Insurance companies offered most personal pension plans. Although such schemes are well structured, plan-holders are often restricted to a small range of funds operated by insurance company investment managers. The modern-day SIPP, or International SIPP, offers a more flexible type of personal pension whereby plan-holders can invest in a much wider range of investments.
2. International SIPPs
International SIPPs are an extension of UK Self-Invested Personal Pensions. There are few differences between UK and International SIPPs. The structure is similar in that they are both pension plans regulated by the Financial Conduct Authority in the UK. The International SIPP was originally designed for non-UK residents who wish to keep their pension assets in the UK rather than transfer to an overseas pension solution. However, it is also used by foreign nationals residing in the UK to provide a wide choice of investment opportunities and flexible retirement benefit options.
How do International SIPPs work?
International Self-Invested Personal Pensions (iSIPPs) are regulated by the Financial Conduct Authority in the UK. They can be set up by UK citizens who are resident overseas to manage UK pension benefits. An international SIPP can provide a regular or variable income, and there is no obligation to purchase an annuity. They provide greater choice and flexibility regarding investments, tax benefits and currency choice. Where you have your main home will determine the tax treatment of contributions into the pension scheme.
International SIPPs were created to fill the gap in the market for UK pension transfers that Qualifying Recognised Overseas Pension Schemes (QROPS) could not cater for. Providers modified their systems to enable clients to denominate their investments in currencies other than Sterling. A key requirement was that International SIPPs needed to be relevant to the currency the individual is earning or will eventually be spending in retirement.
International advisers are invariably better placed to help with local tax issues that must be considered. In some cases, such as the implications of Dual Tax Treaties and general tax rates, this advice will be offered as part of a financial planning package. In other, more complex cases, an international adviser can direct expats to suitably qualified local and/or international tax advisers.
International SIPP providers are usually more conversant with expat financial planning and taxation issues. They, therefore, tend to provide products and services that reflect that difference.
3. What are the benefits of International SIPPs?
The International SIPP is a suitable pension vehicle for those retiring abroad. With a much wider range of product offerings, this form of SIPP offers more control over where your pension money is invested. Key features include:
Flexible investment choice
International SIPPs offer a wider range of investment funds which are more globally focused. This is in contrast to domestic SIPPs, where fund choices are more limited to the UK and are also denominated in Sterling.
Consolidation of pensions into an iSIPP
SIPPs are an ideal way of consolidating the various personal pensions that individuals accumulate during their working life. Such consolidation reduces administrative complications further down the line. This is true for both UK and International SIPPs, although arguably more important to expats.
What are the tax benefits of an iSIPP?
International SIPPs are based in the UK and qualify for tax relief in the same way as UK SIPPs. This means that if someone transfers into an international SIPP whilst abroad and then returns to the UK for either a short time or permanently, normal pension contributions can be made individually and/or by a new employer.
Available investments
The range of investments accessible to an International SIPP is as follows:
- Cash, cash funds and deposits
- Exchange-traded commodities
- Fixed-interest securities, including government and corporate bonds
- Shares registered on a recognised stock exchange
- Regulated collective investment schemes, including Unit Trusts, OEICs (Open Ended Investment Companies), mutual funds, SICAVs and investment trusts.
- Discretionary Fund Management agreements
- Physical Gold Bullion
- Real Estate Investment Trusts (REITS)
- National savings funds
- Alternative investments.
- Commercial property
Care must be taken when constructing a portfolio. Risk exposure can change as conditions alter. Therefore, regular reviews and monitoring are essential to ensure your investments accurately reflect your situation and financial objectives.
Charges for International SIPPs
4. iSIPPs rules
Portability and transferability
Your SIPP can be transferred into another plan if desired. Similarly, different pension schemes, such as Defined Benefit plans, can be transferred into your SIPP. If you have lived abroad and hold a QROPS, this can be transferred into a SIPP if and when you return to the UK.
Lifetime Allowance (LTA)
The Lifetime Allowance is the maximum value of your pension before UK tax authorities impose a 25% tax. This tax is levied on the excess over £1,073,100 when benefits are crystallised. Strategies available can help reduce tax liability, including applying for individual or fixed protection. It should be noted that these options do not remain open forever. For those with funds approaching the LTA limit, it is important to consider your options as soon as possible.
Income Options and Tax Treatment
25% of a SIPP can be withdrawn as a Pension Commencement Lump Sum (PCLS) tax-free if you are a UK resident. The residual fund would then provide an income which would be taxed as per your status at the time of retirement.
Pension freedoms legislation was introduced in the UK in 2105. Individuals can now draw down their retirement funds under flexible access rules at whatever level of income required. It should be noted that any money drawn down will be taxed as income at your highest marginal rate after the PCLS has been used up. A combination of income and PCLS can be opted for. It is important to ensure that you are fully aware of the tax consequences in your country of residence before accessing your pension.
SIPP holders can begin taking benefits between age 55 and 75. Any residual fund can be passed to your beneficiaries tax-free on your demise up to the age of 75. After that, they will pay tax at their marginal income tax rate.
5. Disadvantages of International SIPPs
Whilst Self-Invested Personal Pensions (SIPPs) offer a flexible and tax-efficient way of saving for retirement and supplementing state pensions, policyholders should be aware of the risks of investing their money into the stock market. Therefore, it is advisable to seek qualified help along the way.
Administration
Very few people are employed by the same company throughout their careers. The effect on retirement planning is a gradual fragmentation of pensions as individuals pick up different pension plans from their previous employers. This makes administration more complicated as people have to deal with different providers while accumulating funds and being paid benefits. This problem can be solved by consolidating all pensions into one easy-to-manage alternative: the International SIPP.
Currency
Expats often hold a series of Sterling invested SIPPs and personal pensions. This can be a significant risk for those not retiring in the UK. We have witnessed such risk exposure at various times in recent years when the pound has come under pressure and devalued. However, a more flexible approach is available whereby the SIPP holder can either change to the currency they will eventually spend in retirement or create a natural hedge by diversifying currency holdings.
Investment Strategy
6. International SIPPs vs QROPS
International SIPPs and QROPS have similar characteristics allowing the individual a more flexible approach to managing their existing UK pensions. Regarding suitability, a QROPS is generally more appropriate for those with larger pension pots. A QROPS can also help protect against future tax liabilities for those nearing the UK Lifetime Allowance (currently £1,055,000). There is also the consideration of how the pension transfer would be taxed if you live outside Europe.
An Overseas Transfer Charge (OTC) in the form of a 25% tax on the transfer of UK pensions to a QROPS was introduced by the government in 2017. In general, residents of Europe/European Economic Area (EEA) countries are exempt from this charge on pension transfers.
Exceptions to the tax are granted under the following circumstances:
- The QROPS is in the EEA, and the Member is also resident in an EEA country.
- The QROPS and Member are in the same country or territory.
- The QROPS is an employer-sponsored occupational scheme, overseas public service pension scheme or a pension scheme established by an international organisation.
An International SIPP is now the preferred option for anyone resident outside of the EEA (e.g. Australia) who wishes to transfer their UK pension overseas.
7. How do I transfer my pension to an iSIPP?
You will need to ask your current pension scheme provider for a cash equivalent transfer value or CETV. You should also find out what benefits you will lose if you transfer from your current pension scheme. These facts can help you establish whether a pension transfer into a SIPP suits your circumstances.
The process for carrying out a transfer can be complex and lengthy and may take several months to complete. If your pension is eligible for a transfer, your pension adviser will be able to manage the transaction and ensure you are fully aware of the ramifications of the transfer. They will also handle all the paperwork.
Summary
As ever with financial planning, it is important to understand the implications of each element of your plan and make sure that everything works in context. Again, your financial adviser should be sufficiently experienced and qualified to help.