It is important to make a distinction between a personal or private pension plan in the UK and an international retirement plan.
Retirement Plans in the United Kingdom
Personal pension plans were introduced in the UK in 1988, providing individuals with a vehicle to build up a capital sum for retirement purposes. Both individual’s and employers can contribute to these plans Personal pension schemes can take two forms:
- Stakeholder pensions – these are generally provided by insurance companies, and have a set range of investment funds for planholders to choose from. Charges are generally capped at a low level
- Self-invested personal pensions (SIPPs) – These are UK government-approved schemes which allow individuals to make their own investment decisions from the full range of investments approved by HM Revenue and Customs (HMRC). Such investments can include equities and property.
Earners are allowed to contribute £3,600 per year or 100% of earned income if higher. The maximum contribution allowed for tax purposes for the year 2015 – 16 is £40,000.
UK Tax Incentives for Personal Pension Plans
The SIPP provider will claim a tax refund at the basic rate of 20% on behalf of the customer. This means that for each £2,880 paid by the individual, the fund contribution for the year will become £3,600. Higher rate taxpayers must claim any additional tax refund by contacting HMRC. In general, employer contributions are allowable against corporation or income tax. Income from assets held within the scheme is not taxed, and growth of the assets are free from capital gains tax. The maximum income that can be withdrawn is based on the pension fund value and calculated in accordance with Government Actuary’s Department (GAD) tables. This limit does not apply to plan holders who can demonstrate that they have arrangements in place to meet the Minimum Income Requirement in the form of a guaranteed income of £12,000 per year. In this case there are no restrictions on how much can be withdrawn from the fund i.e. you could encash the fund in its entirety should you wish to do so. It should be noted that any amount withdrawn over 25% will be taxed as if ‘earned income’ at the member’s marginal rate.
The current Lifetime Allowance (LTA) of £1 million is the maximum amount of pension savings an individual can build up over a lifetime that can benefit from tax relief. If pension savings worth more than the lifetime allowance are accumulated, the individual will be obliged to pay a tax charge of up to 55% on the excess if crystallized.
Taking retirement benefits
SIPP’s allow benefits to be taken at age 55, or earlier in the case of ill health. A tax free commencement lump sum of 25% of the fund may be taken upon crystallisation of the pension. The remainder of the fund can be used to provide a taxable income in the form of a drawdown facility, or by exchanging the fund for a secured pension income through the purchase of an annuity. One advantage of taking the drawdown option as opposed to an annuity purchase is the ability to pass on the assets of one’s pension fund upon death to loved ones.
International Retirement Plan
International retirement plans or offshore pension plans are an attractive option for executives of international companies and internationally mobile employees or contractors working outside their country of origin. The advantages and disadvantages relating to offshore retirement plan are as follows:
- Both standard and ‘open architecture’ investment solutions are available
- You can make contributions to an international retirement plan from anywhere in the world
- Contributions are flexible – you can increase, decrease, stop and restart contributions to suit your personal circumstances
- Premiums can generally be paid in Euros, Sterling, US Dollars, or Hong Kong Dollars
- You can choose to have the entire sum of your savings paid out at once.
- The plan can be structured to take advantage of the favourable tax treatment offered to investors in certain tax jurisdictions
- As an international retirement plan is investment-based, it can be affected by stock market volatility.
- There is no tax relief on contributions as in many domestic pension schemes
- Fees can be high for certain plans
Overseas Pension Transfers
For expatriates who have built up a UK pension and seek to retire abroad, it is now possible to take their plan with them by transferring it to a Qualifying Recognised Overseas Pension Scheme (QROPS). To find out if you are eligible for a QROPS Pension transfer, please click here.