Offshore pension schemes – Expats beware!

If somebody contacts you out of the blue about pensions, a little warning bleep should start sounding. If somebody contacts you out of the blue about offshore pension schemes that’s a full on screeching alarm bell!

Why? Because unfortunately many people have been, how to put it politely………. taken to the absolute cleaners when they’ve put their money in ‘so called’ offshore pensions.

Not everybody of course. My guess is, the vast majority have simply signed up for either high risk products, outrageously expensive products or more likely, a combination of the two.

But the fact remains that some have lost every single penny. Don’t let that happen to you.

Principal offshore pension options

There are four key ways you can grow your wealth for retirement overseas.

• Take your existing pension with you
• Open a pension account in your new country of residence
• Go for a DIY approach
• Find a decent offshore pension fund

The key to not paying over the odds or losing money is to get some serious due diligence done prior to taking any action.

Do I need one?

An offshore based pension may make sense for some but for others it absolutely won’t. Let me explain.

The first thing to realise is that existing pensions can be kept in the UK. Not only that, but there are often very good pension products in the country you move to.

And even if neither of those options apply to you, it doesn’t mean you necessarily have to go for a dedicated offshore product.

In many cases there’s nothing to stop you taking a DIY approach to your pension. We’ll cover this in more detail later, but the fact is, anybody with a brokerage account can put together their own pension these days.

Pensions are just stocks and bonds in a tax wrapper. Investment platforms open to expats and index tracking ETFs have changed the game for investing in stocks and bonds. You can be invested in a strong tax efficient investment portfolio in a couple of mouse clicks.

In other words, non everyone will need to put their money in a dedicated offshore pension scheme. (Spoiler alert even the good ones can be pricey!)

It all comes down to your current situation.

The most common groups of people that invest in offshore pensions are:

1. Those moving abroad to work
2. Those moving abroad to retire
3. Those already abroad working
4. Those already abroad retired

The options both available and suitable to you will depend more than anything on which group you fit into. So it’s worth looking at each of these in a bit more detail.

Options for people moving abroad to work or retire with existing pensions

It figures that people with plans to move abroad are still in the UK so you will still have certain protections and services that aren’t available to expats. Now’s the time to take advantage of them.

If you already have a pension, whether private or work based get in touch with them and see what your options are. This is a great starting point because any advice you get should be free.

If they don’t give you all the answers you need, this is one of those times when it will probably pay to get some regulated financial advice.

But a couple of things to bear in mind before you do.

Do I need to go offshore?

First, you don’t have to transfer your UK pension offshore. Lots of expats leave their money in the UK even if they never go back.

At one time this could get a little costly with currency exchange fees, but not any more. These days banks, especially some of these newer challenger banks make it very convenient for you to receive your money wherever you are in whatever currency you need.

Check out the exchange rates at your bank account. If you don’t like what you see it might be worth going with a new challenger. (We’ve looked at some bank accounts for expats here).

There are three key reasons why you might not want to leave your money in your current UK pension vehicle.

• You would like to keep contributing towards your pension
• You would like to minimises the taxes you pay when you start receiving income
• You want to avoid currency risk

Can you begin a new pension in your new destination? Unless you are unlucky, you’ll probably be moving to somewhere with their own pension plans or a low tax destination.

If you are moving to a low tax destination there’s nothing to stop you putting together a DIY pension yourself.

As already touched upon above, pensions are basically investment portfolios of stocks and bonds with some tax sheltering.

These days it’s not hard to find a good online investment platform open to expats, where you can put together a low cost, tax efficient investment portfolio with a couple of index tracking ETFs.

Can avoid paying tax on my pension?

For a lot of people it won’t be worth it to move your pension abroad simply to avoid paying income tax.

That’s because you will usually still be eligible for the personal allowance. That means you only pay tax above a certain threshold.

And even if your pension pot is paying out a high amount of income, you need to ensure the money you expect to pay in taxes is going to be more than the fees associated with your new pension plan.

Believe it or not there are plenty of people out there who pay so much in fees in their offshore products that they end up paying more than they would if they’d just left their money in the UK and paid tax.

Let’s be clear, if there is one thing offshore pension plans aren’t known for, it’s low costs.

And remember unless you are saving a lot of money, it may not be worth it. Your money may not get the same protections you enjoy in the UK overseas.

That said, if you find a good one, you’ll pay, but in certain situations the amount you pay will be worth it.

Do I need to move my pension overseas to avoid currency risk?

Some people may want to move their pension overseas to avoid currency fluctuations between the pound and the currency they use. It’s a reasonable concern.

In some cases this may be justified, but in others it won’t be. It will depend what assets your pension is invested in. More specifically where your money is invested.

Many pensions will be invested internationally. At least they should be to avoid diversification risk.

Pensions usually invest in stocks and bonds and UK pensions specifically are either going to be invested in UK stocks and bonds or their international equivalents.

If the underlying investments within your pension are international in nature they should give you exposure to different currencies anyway so currency risk becomes less of a worry.

And even if your pension is filled with UK assets currency risk may not be quite as a big an issue as it first appears.

Think about it this way, UK companies big enough for pension funds to invest in are going to do a good percentage of their business abroad.

For example, if your pension is invested primarily in a FSTE all share tracker or similar, though it comprises UK companies, the bulk of your money will be concentrated in the big hitters or the FTSE 100. Think Shell or HSBC.

These large UK companies do a lot of their business abroad in various currencies.

In fact its a pretty safe bet that they generate more profits in foreign currencies than they do at home.

In other words currency risk should be minimised.

Of course you could be one of the unlucky ones where non of the above applies. If that’s you, read on.

Making the move

So if you’ve got this far and still want to move your pension abroad, there are a few things to be aware of.

Most importantly, you can’t just move your money to an offshore pension scheme.

Well you can, but not without a price. In fact, this would usually come with a minimum 40% tax charge on transfer. Ouch!

The standard way to avoid this is to transfer to a Qualifying Recognised Overseas Pension Scheme (QROPS).

What is a QROPS?

QROPS Meaning = Qualifying Recognised Overseas Pension Scheme

QROPS are overseas pension schemes that meet HMRC rules for receiving transfers from UK pension schemes.

They are specifically designed so you can take your UK pension with you when you move overseas.

And QROPS come with a number of benefits. The biggest of these are:

QROPS Benefits

• 1 The fact that you can move your money out of a UK pension scheme to an overseas pension without incurring a large tax charge
• 2 They are exempt from inheritance tax
• 3 It’s possible to avoid life time allowance tax

Number 3 is probably the main reason for opting for this solution. (Because an international SIPP may be a better option otherwise – which we are coming to)

There are a couple of things worth keeping in mind, though.

First up, even though QROPS are recognised by HMRC, it is more of a self certification affair than HMRC doing any kind of audit. This means not all QROPS are equal.

Some are very safe. Others less so. Some are reasonably priced. Others charge an arm and a leg.

I’m sure it goes without saying that you need one that is both reasonably priced and safe.

How reasonably priced it is going to be will come down to the fees you pay and the taxes you minimise.

How safe it is going to be will come down to what you are invested in and what safeguards and regulations are available where your QROPS is located.

If it’s too expensive or risky it probably isn’t going to be worth it.

So do please get some regulated financial advice before you take any QROPS action.

What is an international SIPP?

An often touted alternative to a QROPS is an international SIPP (iSIPP).

This is a dedicated UK pension product specifically for non residents. The key difference between an iSIPP and a QROPS is the fact this is an onshore product.

That is to say, you leave your money in the UK with all the advantages and disadvantages that arise.

An international SIPP is a Self Invested Personal Pension for people living overseas.

UK residents without work based pensions such as self employed and those lucky enough to have exhausted their work pension and ISA allowances often use SIPPs to grow their wealth.

An international SIPP provides something very similar, but not quite as tax efficient as its UK counterpart.

Basically, you get something very similar to a QROPs but a bit more straight forward and often cheaper but without the Lifetime allowance tax benefit.

In short an iSIPP is usually a cheaper version of a QROPS, with the added bonus of being UK regulated, but without the Lifetime allowance benefits.

In other words, unless you are approaching the lifetime allowance (currently £1,073,100 ) an international SIPP may be a better option for you than a QROPS. (Money Helper have a nice explanation of the lifetime allowance here if you are interested)

Unfortunately, we haven’t quite finished with the acronyms quite yet. There is one more you may come across in the world of offshore pensions: QNUPS.

What is a QNUPS?

QNUPS stands for Qualifying Non UK Pension Scheme.

You can think about a QNUPS as being something pretty similar to a QROPS but with one major disadvantage.

You can’t move your UK recognised pension into one. It would be for other money or assets you had outside a recognised UK pension scheme.

It does have one advantage, however. Flexibility.

A QNUPS is more flexible in terms of what you can invest in. In theory you can invest in many more assets than the other offshore pension vehicles we’ve looked at. Potential buy to let landlords take note, the big one being property!

So I think we can summarise the acronyms like this:

• QROPS – Offshore vehicle for people with an existing vanilla pension
• iSIPP – Onshore vehicle for people located offshore with an existing vanilla pension
• QNUPS – For people who have other pension assets

What can I do if I don’t already have a pension?

But of course there are plenty of people out there that don’t already have a pension or at least one with enough money to move abroad.

And there are also those who decide to leave their existing UK pension in the UK, but start something new when they move abroad.

If that’s you, then you need to find an alternative.

There are some other offshore pension products available that we haven’t yet covered. But let’s be clear. They certainly aren’t for everyone. Some people just won’t need them.

We’ve already touched on this but its worth saying again. If you live in a low tax destination or a place with good alternatives then why bother?

Anybody can put some money aside or invest with a view to using that money in retirement whether through income or drawdown.

The advantage of pensions is that they come with tax relief, so right off the bat, there’s a big group of expats that probably don’t need a pension product per se because they don’t need tax sheltering.

If you live in a low tax destination tax sheltering becomes less important. Open an expat investment account and use a couple of index tracking ETFs to grow your wealth.

You can read more about ETFs here. But the headline being they are a really simple, really low cost and highly tax efficient way to invest for your retirement.

ETFs are a simple, low cost and tax efficient way to invest available to all.

And by the way, it’s not beyond the realms of possibility that you live in a low tax destination and don’t know it.

If you do nothing else, please make sure you are clear about the tax situation where you live before you start moving your money into an offshore pension fund.

Going local

Along similar lines, anybody in a place with good local pension schemes or tax sheltered accounts can just use those. It’s not just the UK government that has things in place to encourage saving.

Keeping things offshore is primarily tax sheltering. If there are tax shelters available to you locally you are probably better off using those.

Lots of people living in low tax destinations or with good UK pension alternatives don’t even realise it, so it’s worth getting to the bottom of that before you go for an offshore pension.

Other options

If you can’t leave your money in the UK, or move it to a recognised overseas pension scheme, you don’t live in a low tax destination or have local products available you should still check the local tax situation.

It still maybe a better option to take the DIY general investment account approach.

But if you don’t have other options then other offshore pension products are available and could be worth a look.

These may or may not be sold as pensions. Expats are often pointed in the direction of offshore bonds or life insurance policies as a means of tax sheltered saving and investment for retirement.

These typically work a little bit like standard pension products in that you lock some money away for a set period of time with tax sheltering and then withdraw an income in retirement.

You just need to avoid unnecessary risks, namely:

• Bad actors
• High Fees

Lots of expats have lost some if not all their money by investing with bad actors and others lucky enough to get their money back have found there was a lot less than they were expecting due to extremely high fees.

It doesn’t need to be this way. Just make sure you are giving your money to a reputable offshore product that doesn’t charge high fees.

To do that, you need to make sure you do your due diligence, get some financial advice and ask a lot of questions.

How about starting with these three:

Questions to ask about pensions providers

• Why is this offshore pension scheme suitable for me?
• What fees do your offshore pension schemes attract?
• What exactly am I investing in?
• How can I trust you?

And beware of opaque answers. These should raise warning bells. You should be looking for reassurance through clear explanations.

Paying national insurance when living abroad

Just a little house keeping before we finish.

All Brits should be eligible for the state pension. And it shouldn’t matter where you are as to whether you receive it or not.

Just make sure you’ve paid enough contributions to receive it and don’t overpay on your international transfers. (We’ve reviewed some banks that do cheap international transfers here)

And paying national insurance when living abroad is relatively straight forward. There are various ways to do it, but for most it’s as simple as setting up a direct debit.

If you want to make contributions abroad you can get in touch with HMRC about that here.

Then as long as you have made the minimum number of contribution years (usually 30) and reached the minimum retirement age (now 66 but likely to increase in the near future) you should be able to receive your state pension wherever you are.

Offshore pension schemes – the bottom line

There’s a lot to digest there, but if pushed I think there are just a handful of takeaways.

Offshore pension funds let you save for retirement but you may not need one. The following groups being prime examples.

• Those who live in low tax destinations
• Those who live in countries with their own tax sheltered products
• Those who can leave their money in their existing UK pension
• Those who don’t live in low tax destinations but who wouldn’t end up paying enough tax to bother with an offshore pension

The bottom line being, unless you are saving money through tax sheltering why bother with an offshore pension scheme?

Investment platforms open to expats enable just about anybody to put together a low cost tax efficient alternative to grow their wealth.

And if you do take the offshore pension approach, make sure you get some professional financial advice.