The various advantagesof a Self-Invested Personal Pension
Your Guide to
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IntroductionAn increasing number of professionals of all
nationalities have been moving and working
abroad in the last decade. Whether a young
executive or a high net worth individual with a
diversified portfolio of global assets, investors have
specific financial requirements and objectives, and
need to structure their portfolios accordingly. As a
result of employment patterns changing in recent
years, many expatriates have built up UK pension
benefits across several schemes and structures,
which may not be suited to their specific retirement
needs and objectives.
In this guide, our aim is to provide you with
information for effective retirement planning as an
expatriate, and detail how a Self-Invested Personal
Pension (SIPP) may be beneficial to your retirement
needs.
SIPP?
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A SIPP is a UK registered pension scheme
regulated by the UK Financial Conduct Authority,
and allows investors to take additional control of
their pension, with the added benefit of greater
flexibility when compared to standard pensions.
Different forms of SIPPs have been around since
1989, but in a change of UK regulations in 2006,
pensions became less complex – therefore making
it easier for investors to decide on their own
form of retirement plans. SIPPs work in the same
way as other personal or stakeholder pensions
in terms of tax benefits, contribution limits and
retirement options. However, two key advantages
of using a SIPP are access to much wider choice
in investments and flexibility of income in
retirement.
What is a
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How does a SIPP work?
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Funding a SIPPAs an expatr iate investor, your
SIPP wil l most l ikely be funded
by transferring your existing UK
pension benef i ts . UK res idents
can add new money to a SIPP and
receive tax relief on contributions,
a l b e i t w i t h i n c e r t a i n l i m i t s ,
depending on earnings. Although
the amount of contributions to a
UK scheme is limited by earnings,
a non-UK resident can contribute
up to £2 ,880 per annum into a
UK pension scheme if they were
resident at some point during the
previous five tax years, and were
UK resident when they became a
member of the pension scheme.
Tax relief at 20% brings the total
contribution to £3,600.
Your Options at RetirementUp to 25% of the fund value can be taken as a Pension Commencement
Lump Sum which is not taxable in the UK, and can be phased between
the ages of 55 and 75. There are several ways to generate an income
from a SIPP, with the most popular being flexi-access drawdown as this
provides full flexibility in terms of the amount taken.
With flexi-access drawdown the amount withdrawn is variable along
with the frequency of payments. Some investors prefer a monthly
income, comparable to receiving a salary, whereas others prefer ad-
hoc lump sum payments. Choosing to take an income through flexi-
access drawdown allows the remaining funds to stay invested in the
markets. Typically, investors favour a higher income in the earlier years
of retirement when expenditure on holidays and luxuries may be higher,
and in later years when less active, decide to reduce their pension
income, and this is possible with a SIPP, subject to the fund size.
The Investments within a SIPP?
The investments within a SIPP grow free of capital gains tax and no tax is payable on any
dividends* or income produced by the investments. It is therefore possible to buy and sell
investments or flee to cash with no tax liability. A wide range of investments can be held in
a SIPP, and the main categories appealing to expatriate investors are as follows;
Cash and deposit accounts;
Fixed interest securities including government bonds; Collective investment funds;
Investment trusts;
Stocks and shares;
Structured products.
* aside from any irrevocable withholding tax.
I f you die before the age of 75, your entire SIPP can be passed onto your
beneficiaries free of UK taxes. If you die after the age of 75, the pension would
be taxable at the beneficiary ’s marginal rate of income tax. It is possible to
change the nomination of death benefits during your lifetime. A UK pension
does not form part of your estate for inheritance tax purposes.
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What Happens on Death?
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What are the Tax Advantages of a
• There is no tax when transferring
existing UK pension benefits into a
SIPP;
• The pension grows free of capital
gains tax and income tax (aside from
any irrevocable withholding tax);
• U p to 2 5 % o f t h e va l u e c a n b e
taken as a Pension Commencement
Lump Sum (subject to the Lifetime
Allowance);
• The income drawn from the SIPP is
taxable in most jurisdictions, with
the tax rate depending on local rules;
• Potential ease of administration
b y u s i n g t h e d o u b l e t a x a t i o n
agreements between the country of
residence and the UK;
• For death after age 75, the benefits
drawn are taxed at the beneficiary’s
marginal rate of income tax;
• A U K p e n s i o n i s f r e e f r o m U K
inheritance tax.
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For investors who retire outside of the UK, tax is usually paid in their country of
residence, but this depends on the double taxation agreement between the two
countries (if one exists). A double taxation agreement divides the taxing rights
between the two countries involved and the UK has double taxation agreements
for income tax with over 130 countries.
There are certain jurisdictions where pension income is taxed favourably for
expats, and tax residents of these places can access their UK pension benefits free
of tax or by paying
low tax rates. Examples of these jurisdictions are Portugal, the UAE, Qatar,
Malaysia, and South Africa.
Investors should also consider the Lifetime Allowance, which is a cap
on UK pension benefits which can be drawn without incurring a further tax charge.
As the Lifetime Allowance has fallen from a high of £1.8m (2011/12 tax year) to
£1.055m in the 2019/20 tax year, several protections have been offered, some of
which can still be claimed. If you are likely to be affected by the Lifetime Allowance
Tax Charge, you should speak to a Financial Adviser.
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Non-Tax Advantagesof a SIPP
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Fully accessible from age 55 (57 from 2028);
Allows existing pensions to be consolidated into one arrangement;
Flexible currency options to suit retirement needs;
Investment freedom with a wide range of investment options;
Flexi-access drawdown can be used to generate a flexible income, with no
restrictions on the amount withdrawn, this can be from 0% to 100% of the fund;
The ability to pass on pension funds to beneficiaries upon death (does not have to
be to financial dependents).
Transferring a Pensioninto a SIPP
If you have several pensions that you wish to consolidate into one scheme, a SIPP may be used to reduce ongoing administration and simplify perfor-
mance tracking. If transferring to a SIPP from a defined benefit scheme, you will need to think about the income which you are giving up in exchange for
the cash equivalent transfer value, and if you are transferring from a defined contribution scheme such as a personal pension, occasionally schemes have
guarantees which would be lost upon transfer. Your Financial Adviser will analyse your pension benefits before providing a recommendation.
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SIPP Suitability
A SIPP is suitable for investors who are
looking to grow their pension fund
throughout their lifetime and invest
into a wide range of investments
which suit their appetite for r isk .
As well as the flexibility of income,
investors use
a SIPP to have control over their
re t i re m e nt f u n d a n d b e a b l e to
c o n s o l i d a t e e x i s t i n g p e n s i o n
schemes into one.
D e p e n d i n g o n t h e i n v e s t o r ’s
circumstances and residency status,
it may be possible to transfer the
SIPP into a Qualifying Recognised
Overseas Pension Scheme (QROPS),
should the investor wish to remove
their pension fund from the UK .
Furthermore, some investors decide
to fully withdraw their pension funds
when resident of a jurisdiction which
does not tax pension income, and
use the extracted fund as a capital
asset.
The Best Solution for you
If you are an expatriate who has worked in
the UK and contributed to a pension, we
recommend you take financial advice, and
consider whether a pension transfer to a
SIPP achieves your objectives. Effective
planning for your retirement can make the
difference between just being able to live
and living comfortably.
If you would like to speak to a professional
financial consultant regarding your pen-
sion, please contact us.
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The reasons why you may transfer your defined benefit
scheme to a SIPP
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UK Regulated
Your Self-Invested Personal Pension
(SIPP) provider is highly regulated
by the Financial Conduct Authority
i n t h e U K . T h i s o f f e r s p e a c e o f
mind that your pension provider is
constantly assessed and conforms
to the substantial requirements of
UK pension legislation.
Investment Flexibility
A SIPP allows you, the member, to
invest your hard earned capital in a
wide range of assets that fits with your
own risk criteria and also enables you
to change investments depending
o n yo u r ow n c i rc u m s t a n ce s a n d
age. Therefore, with the help of your
Financial Adviser, many different
asset classes can be chosen which
allows you, the member, to select
the most suitable investments for
your needs and requirements in life.
We normally recommend having a
diversified strategy and typically use
multi- asset mangers to achieve this.
A UK Company Pension Scheme is
likely to be invested at the discretion
of the Pension Trustees, and as the
member, you are unlikely to have any
say in the investments or knowledge
of where the scheme invests.
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Lower ChargesIt is generally accepted that SIPP charges are slightly lower than Qualifying Recognised
Overseas Pension Scheme (QROPS) charges. However, when selecting what type of pension
solution you require, the most important factor should be to question whether it provides the
right solution to your specific requirements in retirement.
Tax MitigationThe UK has over 130 double taxation agreements in place for income tax. Expatriates can take
advantage of such tax agreements to ensure they do not pay tax on the same income in both
the UK and the jurisdiction where they are retiring.
Indeed it is often possible to take advantage of lower taxation rates in your new country of
residence.
Retirement AgeA SIPP allows flexibility when it comes to retirement age, allowing the member to select an age
that suits their needs from a minimum of age 55. Under most UK Company Pension Schemes,
there is a fixed retirement age of 60 to 65, and usually a penalty applies for taking benefits
early.
High Transfer ValuesWhen transferring from a defined benefit pension scheme, it is important to understand what
you may be sacrificing, which assuming the scheme or sponsoring company remains solvent,
could be a guaranteed income. However, with gilt yields and interest rates at a historic low,
transfer values have never been so high, and such high values need to be considered when
deciding on a pension transfer along with other objectives.
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Scheme SolvencyMany UK defined benefit pension schemes are in deficit due to poor investment
returns and ever increasing
life expectancy. It has become very expensive for an employer to run a defined
benefit scheme, hence scheme assets have not matched liabilities. The promise to
pay
a future income is only as strong as the pension scheme and the company who
ultimately underpin that promise. If a scheme does become insolvent, it can apply
to join the UK Pension Protection Fund (PPF), but there are limits to the level of
compensation that the PPF pays. The PPF is not guaranteed by the UK government,
so if an individual has major concerns about the solvency of their scheme, they may
consider a transfer to a SIPP to take control of their own fund.
Again, various exemptions are in place and can be found on the CGT section of the
SARS website. After subtracting aggregate losses from aggregate gains for the year
in question, 40% of the net capital gain is added to
income for that year. This is known as the inclusion amount. The effective capital
gains tax rate for top- rate income tax payers is 18% (45% on 40% of the gain).
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Benefits for your DependentsMost defined benefit schemes offer reduced spousal benefits on death and
generally offers no benefits to dependents after the age of 23. Once the spouse
passes away, the pension usually ceases. Likewise, for a single person who has
no spouse or dependents, the pension would also cease upon their death. An
increasing number of defined benefit schemes are imposing substantial pension
reductions should the surviving spouse be more than 10 years younger than
the member. By transferring to a SIPP, you can rest assured that the remaining
fund will pass onto your spouse, and if you die before the age of 75, without a
tax charge.
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ConsolidationBringing all your historic pensions under one roof
makes administration and investment management more efficient and much easier to monitor. You can
also make strategic alterations to your pension fund in order to benefit from future growth.
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Early Retirment from a defined benefit scheme
Important Note
When considering a pension transfer, it is
important you take professional advice
as your pension is likely to be one of your
largest assets. There are many factors to
take into consideration based on your in-
dividual circumstances and needs, your
attitude towards risk, income objectives
and potential tax consequences.
The above offers guidance only and in
no way constitutes advice. It is crucial to
obtain a professional recommendation
before making any decisions.
A defined benefit scheme will often
have quite punitive early retirement
penalties for those who wish to draw
their pension prior to the normal
r e t i r e m e n t a g e o f t h e s c h e m e .
Typically, a scheme may impose a
penalty of 3% to 6% for each year the
pension is taken early. This means if
you were to retire five years early, the
penalty could result in a reduction of
30% of your annual income. As
a n a l t e r n a t i v e , a m e m b e r m a y
consider a SIPP to provide more
flexibility in retirement without a
penalty for taking benefits early.
* Note
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