A Money Unspun guide to transferring your pension overseas while avoiding paying too much tax

Retiring to a foreign country from the UK brings up a whole host of things to sort out. One of the most important things is making sure your pension can be transferred without losing too much of its value in taxes and fees.

When transferring your pension overseas as an expat, you should consider the following factors.

• Your pension structure
• The country you’re moving to
• Your current pension status
• The type of scheme you want to transfer your assets to
• Tax implications and possible penalties

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The process is pretty complicated, so we recommend speaking to a specialist adviser first. If you don’t, there’s a good chance you’ll end up paying too much tax and getting hit with exorbitant fees.

In this Money Unspun guide, you’ll find out the basics of transferring your pension overseas without losing too much money in the process.

RECEIVING YOUR UK STATE PENSION ABROAD
As you’d expect, transferring your pension to a different country isn’t simply a case of moving funds from one place to another. You have to jump through a lot of hoops first. How you structure the transfer depends on the country you’re moving to, your current UK pension type, and how the tax rules in both countries affect your funds.

As a non-UK resident, you have the ability to maintain National Insurance contributions to build state pension entitlement whilst working overseas, these contributions count towards your qualifying years.

As it stands, UK State Pensions are not allowed to be transferred. Same applies to some employer schemes, especially those you’re still paying into or ones you’ve already received payments from – Civil Service and Armed Forces pensions, for instance.

Occupational pensions, or workplace pensions, are set up by your employer. They are categorised into two main types.

• Defined benefit (DB) pensions: You get a fixed payout based on your salary and number of years worked. These payments can increase yearly, depending on the scheme rules.
• Defined contribution (DC) pensions: The payout depends on how much you and your employer contributed and how well your investments have performed.

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Both of these occupational pension types are usually transferable. However, some unfunded public sector pensions (NHS, teachers, etc.) are non-transferable. If you’ve already started drawing down your pension, then the transfer might be blocked. If you’re thinking of transferring an occupational pension, you should enlist the help of a financial adviser. It’s actually a legal requirement for DB pensions sums over £30k.

If you have a personal pension fund, like a SIPP or stakeholder pension, then in most cases there’s no problem taking them abroad, although be prepared to pay some fees and taxes. To get the best possible deal, then you should consult a financial adviser ahead of the transfer.

TAX IMPLICATIONS OF EXPAT PENSION TRANSFERS
Some countries have double taxation agreements that stop you getting taxed twice on your pension, such as the UK and Spain. Other countries might hit you with extra charges.

MAJOR COUNTRIES WITH UK DOUBLE TAXATION AGREEMENTS

• Australia
• Canada
• France
• Germany
• Ireland
• Spain
• United States

ADDITIONAL COUNTRIES WITH UK DOUBLE TAXATION AGREEMENTS

• Bahrain
• Cayman Islands
• China
• Hong Kong
• India
• Italy
• Japan
• Kuwait
• Netherlands
• New Zealand
• Qatar
• Saudi Arabia
• South Africa
• Switzerland
• United Arab Emirates

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If you live overseas, your UK state pension will be frozen from any annual increases that are made in line with the triple lock increase system. Private pensions are not frozen but may be dormant if you are overseas, you may be able to continue to pay a small amount into your private pension on an annual basis for retirement savings.

Additionally, transferring a UK pension to an unrecognised overseas fund might make it liable for a transfer tax which can be up to 40%. You might be able to avoid this by using a ROPS (Recognised Overseas Pension Scheme). A ROPS is a pension scheme that’s based outside the UK but recognized by HMRC.

Don’t forget that foreign currency exchange rate fluctuations might also impact the value of your pension over time.

BEWARE OF THE OVERSEAS TRANSFER CHARGE (OTC)
If you’re moving your pension outside the European Economic Area (EEA) or Gibraltar, a 25% charge is applied, known as an OTC.

You can get around the OTC by transferring your pension to a ROPS, but you might still have to pay the charge initially and request a refund within the first five years. This only works if you move to an EEA country and your ROPS has been established in an EEA country, don’t be tempted to try and game the system.

HOW TO PROTECT THE VALUE OF YOUR PENSION WHEN MOVING ABROAD
If you want to stop your pension fund from dwindling away, we recommend diversifying your investments and funds. Try to balance your assets between funds, stable bonds, and blue-chip stocks (companies with a good track record).

You should also look to reduce the risk of currency fluctuations, by allocating a portion of your portfolio in the currency of the country you’re moving to and the rest in other stable currencies. This gives you a degree of protection, as if one currency drops in value, another may balance it out.

It’s also worth considering placing some of your pension pot in index funds or ETFs (exchange-traded funds). ETFs let you select a diverse range of companies across various sectors, reducing risk and insulating you somewhat from market shifts.

QROPS VS SIPPs – WHICH IS RIGHT FOR YOU?
QROPS (Qualifying Recognised Overseas Pension Scheme) are overseas pension schemes approved by HMRC. A QROPS lets you transfer your UK pension within the EEA, which gives you certain tax benefits and avoids the 25% OTC, as mentioned earlier.

The downside of a QROPS is that you’ll most likely face higher setup fees. It also limits how much you can withdraw and when. A QROPS has a 10 year reporting period, where the QROPS provider must report to HMRC any unauthorised withdrawals from the scheme, which if breached can result in a 40% tax charge.

SIPPs (Self-Invested Personal Pensions) are UK-based and cheaper than QROPS, offering more investment flexibility. However, because they’re tied to the UK, you have to abide by UK tax laws. Following the recent abolition of the LTA, a new allowance system is in place, Lump Sum Allowance & Lump Sum Death Benefit Allowance, which may require a test to determine the allowance amount.

If you’re unsure whether you’ll stay abroad over the long-term and need more flexibility, then a SIPP might be the better and safer option.

THE IMPORTANCE OF SEEKING FINANCIAL ADVICE FOR EXPATS
The rules around pension transfers, taxes, and international laws are complex. If you want to get the most out of your pension when you move abroad, then it pays to seek expert financial advice.

A good fund adviser will help you avoid any unnecessary charges and taxes. They’ll also make sure you stay compliant with all relevant UK and overseas tax laws, so you don’t make any costly mistakes.

Together, you’ll create a tailored strategy that takes advantage of things like double taxation treaties and portfolio diversification.

We have a team of pension experts ready to help you plan your pension transfer in the most efficient way possible  – talk to one of our experts today.