UK non resident pension simplified

Imagine a parallel universe where setting up a UK non resident pension takes minutes, is tax efficient and requires next to no work on your part.

And then imagine, you don’t have to hand your money over to somebody else for a hefty fee. Instead, you control your money. And even better, you have hardly any work to do for your trouble.

This is a universe where you are responsible for your own pension.

Here’s the thing! You could be living in that universe right now if you want to.

I know what you are thinking. That can’t be right. Pensions are complicated. Pensions are expensive, and pensions are hard. And isn’t the situation even worse for non resident pensions?

I’ll forgive you for thinking that way because to be perfectly honest all the above was true in the not too distant past. But here’s the good news. That was then and this is now.

Nowadays just about anybody anywhere can put together a UK non resident pension.

Let’s get into it.

Pensions for non residents vs pensions for residents

Most people know a pension is money for retirement, but after that things can quickly start to get hazy.

But they shouldn’t. UK pensions are basically investments in shares and bonds. We’ll cover these in a bit more detail later on, but the key being pensions and investments are two sides of the same coin.

The real difference (in the UK anyway), is that pensions get some tax sheltering.

Back in the day a UK non resident pension was something very similar but with two key differences.

• They were inferior products
• They came with much higher prices

Nowadays things are different. And that’s because something big came along and that something changed the game altogether.

In fact, if truth be known, two related big things came along to changed the game. The fact most people have heard of them doesn’t lessen their impact in the slightest.

Here they are:

• ETFs
• Low cost UK non resident investment platforms

Let’s deal with the last one first.

Low cost investment platforms open to non residents

Once upon a time investment platforms that dealt with non residents were rarer than hen’s teeth and low cost options simply didn’t exist.

Luckily for us, that isn’t the case anymore. We have plenty of options. We’ve looked at some of the better ones in more detail here.

But suffice to say, just about anybody anywhere can open an investment account these days.

Isn’t investment complicated when you live overseas?

But isn’t investment complicated and isn’t it even more so if you are classed as non resident I hear you ask.

In short, it used to be, it still can be if you let it, but there’s a big juicy BUT……. it absolutely and utterly doesn’t need to be.

I know that’s hard to believe, because I’m going against the mainstream narrative that says it is.

A.K.A. the financial services marketing industry.

They’d have you believe it’s rocket science. Those peddling non resident products will have you believe its rocket science squared with bells on.

Because let’s face, they won’t make any money from saying investing is so simple that anybody can do it.

The fact of the matter is, there are mountains of research out there that shows simple beats complicated every day of the week three hundred and sixty days a year every year.

OK that’s a slight exaggeration but not much.

If you have your doubts about that you may want to take a trip over to S&P Global and take a closer look at their renowned SPIVA research.

Essentially they compare simple against complicated by comparing simple indexes against their actively managed counterparts. More on this below but suffice to say simple triumphs hands down.

Why ETFs make investing a walk in the park no matter who you are or where you live

Exchange Traded Funds (ETFs) are a game changer for everyone. They are especially so for non residents.

You can read a lot more about them here, but in short they enable you to invest in a basket of securities (shares or bonds) simply and easily.

As the name suggests you can trade (buy or sell) them on stock exchanges which is important for us non residents as we’ll see below.

But first, here’s a quick run through of the key benefits that make them great for UK non resident investment and in turn our pensions.

• Stellar investment returns
• High tax efficiency
• Simple
• Available (to us non residents)
• Hardly any input required from you
• You control your money
• Can get to your money quickly
• Low fees

Now there are some other types of funds that offer at least some of the above. The problem is, they aren’t usually available to non residents.

The magic ingredient for us, is the fact these excellent investment vehicles are available no matter who you are, no matter where you are.

In short, anybody with an investment account should have access to a wide range of ETFs and can then use them to put together an excellent UK non resident pension with ease.

Stock picking

I’d be remiss if I didn’t make it absolutely clear right from the off that we are certainly not picking individual shares here.

Unless your names Buffett that’s likely to be a mug’s game that’s paramount to gambling.

Instead, we choose a handful of ETFs and more or less set it and forget it (for most of the time anyway).

Some people get away with one fund. Others two, but more likely you’ll need three. One for shares, one for bonds and one for cash.

And it’s worth taking a look at each of these in a bit more detail.

Shares

Shares are the driving force for our UK non resident pension because they provide the big returns.

Though nobody knows what the future holds, somewhere in excess of 9% annually has been the norm throughout history.

When you buy a share, you become a part owner of a business. For sure, you’ll only own a tiny weeny little bit of said business, but you’ll be an owner nonetheless.

And as an owner you’ll get a share of any money the company makes approximately proportional to your ownership.

When you invest in an ETF your money is shared among a basket of companies to avoid putting all your eggs in one basket.

In fact, these days you can pick ETFs that contain shares of all the companies that matter if you choose one that tracks a global index. These kinds of funds split your money across something like 90% of the global investment universe.

In other words, your money will be working for you 24/7, 360 days a week across the globe.

But won’t some of my money be invested in rubbish companies I hear you ask?

It sure will, but the fact of the matter is, it really doesn’t matter. Let me explain.

Whilst one share in one company can loose 100% of its value, that same share has the potential to grow thousands of percent.

Nobody knows which companies’ share prices are going to rocket, but it doesn’t matter. Pick all the shares and you’ll own the rocket ships and they will more than make up for any losers.

The one downside of shares, is their volatility. Simply put, they have a nasty habit of plunging double digits from time to time.

Just to be clear, they have always bounced back in the past, but that doesn’t negate a wild ride in the short term.

And this is why we need to supplement our shares with some other things to keep the ship on a steadier path even though the investment returns from those are usually lower.

An example of a suitable Shares ETF is Invesco FTSE All-World Accumulating*.

(Just in case you aren’t new to the space, and so are expecting to see Vanguard’s FTSE All World here, this new fund from Invesco is a much cheaper version of the same thing. Come on Vanguard get your act together!)

Bonds

A bond is basically a loan. You hand over your precious cash to some company or government and they’ll pay you back in the future and give you some interest payments for your trouble.

Bonds don’t usually provide the big investment returns you get with shares. It’s more around the 4-5% mark depending on where you look.

However, all things being equal, bonds are usually a bit less volatile than shares and as a bonus they can act as a nice counterbalance.

That’s because, though not always, bonds often go up in value when shares drop.

Bonds are considered to be much less of a risk than shares. Now risk is a tricky concept in investing. It basically means risk of loosing money, but with a caveat. That risk is usually short rather than long term.

Now bonds are a massive topic that you may want to dive into more. We’ve covered them in a lot more detail here.

The key being there are three risks you need to understand with bonds. I like to call them the three Ds: Duration, Denomination and Default.

3D

Let’s take a closer look at each one of these.

Duration: Strictly speaking, duration measures interest rate sensitivity on bond prices. The longer the duration the more interest rate changes can impact bond prices (though we’d expect this to be a temporary affair usually). However, to cut a long story short, the shorter the duration the lower the risk of bond prices going down.

Denomination: I’ve cheated with this one to ensure all three of these risks begin with D. It probably should say currency. But you know these two are highly related so I’m sticking with it. Anyway, bonds in the currency of the country where you are living or intend to retire tend to remove currency risk. Investing in bonds in another currency could mean the value of that currency moving against you. Avoiding that, avoids currency risk.

Default: Whilst rare, there is always a chance the entity you lend your money to goes bankrupt and doesn’t pay you what they owe. All things being equal governments trump companies and developed market governments (US, UK, Germany, Japan etc) trump those from developing markets.

Once again, you can find a bit more on this here but I often find a quick example of what I invest in with a quick summary of why tends to explain things better.

With that in mind here we go.

Why I invest in short term UK government bonds

I invest in short term UK government bonds for the following reasons.

• Short term means the price is pretty stable.
• UK means pounds so I’m not taking on currency risk (I don’t live there now but I intend to in the future).
• Government means the chance of me not getting my money back is almost zero (I mean they own the printing machines!)

An example of a suitable Bond ETF based on this example is iShares UK Gilts 0-5 years

Cash

It is not beyond the realms of possibility that shares and bonds can both have a bad year.

A bad year meaning they both loose value simultaneously. And the problem is, that when this happens it can be an indication that there is trouble in the wider economy. This could be national or global.

Though small, there is a risk that you could loose your job when both shares and bonds are having a bad year.

That would be a nightmare if you didn’t have any other means of supporting yourself. It could mean you would need to sell some of your shares or bonds or both at exactly the wrong time.

Just about the worst thing you can do in investing is sell when the prices have dropped. Remember, we expect a full recovery at some point in the not too distant future so selling at a temporarily low value simply crystallises losses that really don’t need to be crystallised.

That is, as long as you’ve got some other means of paying for life expenses while you wait for a full recovery.

The tried and tested solution is having some cash stored away somewhere for a rainy day.

How much you need is a personal decision but somewhere between 3 months and 3 years is common.

3 months being a typical job securing period and 3 years being the approximate length of time it took the financial markets to recover from the mega crash in 2008.

In one respect cash is great because it can’t lose money. In another respect, it’s terrible because in reality it absolutely does lose money when you start taking account of inflation.

Over the long term inflation destroys the value of cash. (Which is why we put as much money as we can in shares and bonds by the way).

Of course financially literate UK residents use high interest savings accounts to put up as stern a defence as they can, but alas they aren’t usually an option for non residents.

That said, all is not lost thanks to something called the money market fund. We’ve covered these in more depth here, but the headline is this.

Money Market funds make a compelling alternative to a savings account for non residents.

They are low risk, you often get higher interest rates than banks pay and they are available to anybody with an investment account.

Again, you can read more about them here, but there is one small risk to be aware of as far as I am concerned.

Essentially, in times of severe market stress you may not be able to access your money at precisely the time when you want it. I think we are talking about days rather than weeks here but nevertheless I think it always pays to expect the best but prepare for the worst.

In other words it’s probably prudent to keep a couple of weeks to a months worth of cash to supplement your money market fund.

An example of a suitable Money Market Fund is Lyxor Smart Overnight Return GBP

ETFs in a nutshell

We’ve covered ETFs in a lot more detail here, but here’s a few pointers you should be aware of.

Ongoing Charges Figure

Ongoing Charges Figures or OCFs are the annual cost of your fund. You want to keep them as low as you can.

Some actively managed funds charge in excess of 2%. And whilst that doesn’t sound that high, remember that number comes off your return.

In other words, if you make 6% one year, 2 from 6 means you only really make 4% after fees. That’s not a good way to grow your wealth. Real numbers help explain this better.

• £100K increasing 6% annually over thirty years leaves you with £574K
• £100K increasing 4% annually over thirty years leaves you with £324K

That two percent ends up costing you quarter of a million! Ouch.

But the good news is you can get your hands on ETFs with much lower fees than that.

None of our examples have an OCF above 0.16%. I’d try and keep them below 0.3%.

Domiciles

Like people, ETFs have domiciles. For UK non residents it usually makes sense to choose ETFs domiciled in Ireland because they are usually the most tax efficient option.

You can read more on this here if you want, but here’s a quick summary.

There are a couple of ways of finding out where a particular ETF is domiciled. First up, it should be written somewhere on the provider’s website or on a fact sheet that should itself either be visible or downloadable from the website.

Because it’s not always written in an obvious place, you may need to use another method that involves looking for the ISIN code.

You can also get this from the ETF fact sheet which again should be visible or downloadable from your ETF provider’s website.

Here’s an example ISIN code:

IE000716YHJ7

All we really need to know is the first couple of digits. In this case IE. This means Ireland.

Now, at this point you maybe thinking this is starting to sound like a bit of a faff.

Don’t worry. I’m probably making it sound more complicated than it needs to be. All the big ETF providers have ETFs domiciled in Ireland. They all provide factsheets with the relevant info.

Trust me. It’s no big deal.

Dist v Acc

You may have noticed our example shares ETF, Invesco FTSE All-World Accumulating ends with the word ‘accumulating.’

Sometimes ‘Accumulating’ is written ‘Acc’ for short.

This tells us that the dividends are automatically reinvested into our fund. If they weren’t it would be called a ‘Dist’ or ‘Distributing’ fund.

If you want ‘Dividends’ regularly paid into your investment account you choose a Dist/Distributing ETF, but if you want them automatically reinvested into your fund choose Acc/Accumulating.

For most people, most of the time, it makes sense to choose an ‘Accumulating’ ETF for the simple reason, it gives us one less thing to think about.

However, I know people who like to see the income going into their account even though they always reinvest it.

I guess just knowing that income is available to them if they want or need it makes them feel more comfortable.

And whilst others insist you could just sell some shares in your ETF if you need money, many prefer to avoid doing that at all costs.

Sounds good but how much work to I have to put in to all this?

When you first come across the idea of putting your own pension together you can be forgiven for thinking it looks a teeny weeny bit difficult.

I’m here to tell you it isn’t. Whether you are UK resident or non resident doesn’t matter.

Yes, you’ll need to do a bit of research in the beginning so you know which funds to choose. Yes, you’ll need to spend a bit of time choosing an investment platform, but after that things start to get a whole lot easier.

In fact, you’ll not have much to do at all. Perhaps half an hour a month at most. Oftentimes a lot less.

And that’s because a lot of this stuff is more or less a set it and forget it affair.

The biggest decision most people will ever need to make is how to split your money between your funds.

Monetary Division

Now I have to admit this can be a big question if you let it.

To answer it, it’s worth breaking it down into three smaller questions:

• How much is enough for you?
• How much risk do you feel comfortable with?
• And how much time have you got?

When you look under the hood, each one of these is dealing with the same issue in their own way.

That issue is this.

Shares can drop in value pretty dramatically in the short term and bonds aren’t immune to the odd plunge either, but over the long term we’d expect them to recover.

With that in mind let’s have a look at each one of those questions in a bit more detail.

How much is enough for you?

If you already have enough money, you don’t need to risk investing it shares (or bonds for that matter).

You could just have all your pension in cash.

Of course, most people don’t have enough. Moreover, most people don’t even know how much is enough for them.

If that’s you, there’s a calculator here that maybe able to help you with that.

How much risk do you feel comfortable with?

Historically, global shares as a whole, have always bounced back from a crash.

In 2008 it took about three years, so as long as you are in it for the long term the idea that the value of your investments can drop double digits if not half in value from time to time should not be an issue.

But of course it is. It’s a big issue. In fact, it’s just about the biggest issue in investing, because it is the thing that is most likely to screw everything up for you.

And that’s because most people watching their savings plummet 50% get a horrible feeling. They feel sick. They also feel very depressed and worse still they start to panic.

And if there’s one thing you don’t want to do when your investments have dropped in value it’s panic because that leads to panic selling and panic selling is just about the worst thing you can ever do.

If you sell your investments when they’ve dropped in value you crystallise the losses, when in reality, all you needed to do was wait for the markets to recover.

The worst thing about this is, you can’t prepare for it. Crunching numbers on spread sheets, completing risk forms and reading all about it doesn’t give you that horribly sickly feeling of panic you are likely to get when the proverbial hits the fan.

So what’s the solution then?

Well, for most people, most of the time, it’s taking a conservative approach.

However much risk you think you can take on, simply take less. In fact, it nearly always makes most sense to take on the least amount of risk you can that enables you to meet your goals. (We are coming back to this a bit later on).

How much time have you got?

Whilst most people overcook the amount of risk they can take on, they tend to undercook the amount of time they have to invest.

There are a couple of reasons for this.

First up. We simply live longer than we used to do.

But second and perhaps more importantly, retirement age isn’t the goal.

Say what!

Let me explain.

Say you are 50 and want to retire when you are 65. How many years do you have to invest?

Most people would say 15 years, but nine times out of ten that’s not going to be right.

In fact, it’s going to be way off the mark.

This is because white collar workers in developed countries should be planning to live until 90 (ish).

And here’s the key: We remain invested into retirement. This is true whether you continue to add money or not.

You see pension numbers are based on being invested in shares and bonds. You need to keep invested to make them work. If you don’t you may run out of money.

Splitting hairs

Once you’ve answered those three questions you should be in a much stronger position to decide upon how your money gets split between your funds.

99 times out of 100 you’ll start with cash.

Try to have a think about what could go wrong in your life.

And more importantly, how that melancholy might cost you.

Usually, loosing your job is going to be the big one.

With that in mind, you could do with having enough money to cover all your expenses until you find new employment.

Some people will be confident that they would be able to do this in a few months. Others not so much.

As mentioned above, 3 months to 3 years cash savings are all common suggestions.

If in doubt go for more. Having more than you need is always better than not having enough. Not having enough can lead to having to sell your pension investments or even going bankrupt.

It usually makes sense for non residents to have most of their cash in a Money Market Fund to take advantage of higher interest rates, but also to hold on to a couple of weeks to a months worth of real cash to cover you in the event the financial markets have a break down.

Rebalance

Once you’ve got your cash sorted, you are now ready to move on to the split between shares and bonds.

There are endless rules of thumb on this topic. We’ve gone under the hood with this here.

However, here are three of the most popular ways of making your decision:

• Age in bonds
• 120 minus your age = % in shares
• 60/40
• 50/50

And here’s an example for a 30 year old based on the above.

30% of your money in bonds / 70% of your money in shares
10% of your money in bonds / 90% of your money in shares
60% of your money in shares / 40% of your money in bonds
50% of your money in bonds / 50% of your money in shares

On the face of it, we get four very different results there.

And for sure, the one with 90% of their money in shares will nearly always get better investment returns over the long term.

But it comes back to the taking on risk business we covered before.

Although we’d always expect the wider global stock market to rebound after a plummet, the fact that it may take a while, and I suppose the fact that just because it has always rebounded before doesn’t emphatically guarantee that it will in the future brings us back to the point about taking on risk we don’t need to.

• If you don’t need 90% of your money in shares to reach your goals why bother?
• If you don’t need 90% of your money in shares to reach your goals and there’s any chance you are going to panic sell why bother with bells on!

It’s all a trade off between how much money you are going to need in retirement vs how much risk you want or need to take on.

Lots of investors go with 60/40s or 50/50s no matter their age and I think they are great solutions providing they enable you to reach your goal.

There’s a calculator and discussion of what sized pension pot is needed to fund various levels of income here.

One final point on this. If it all sounds too complicated I’d just go 50/50. You can always change it later. Whist there is a chance there isn’t enough allocated to shares to get you to your goals, it’s nearly always going to be better than having your money sitting in cash loosing out to inflation.

Zen and the art of the rebalance

Once your split has been decided you can allocate your money accordingly.

Most people will add money at regular intervals, say monthly. Others will wack it all in right at the start.

No matter which category you choose you’ll have a task to do called rebalancing.

You do this to maintain your split between shares and bonds.

Though not always the case, your shares allocation usually grows more, so you either need to trim it back or buy more bonds.

Let’s say you’ve opted for a 50/50 split and you find it’s actually increased to 60/40 because your shares have increased in value.

In other words, you now have 10% more shares than you should do.

You can either sell some of your shares and use the money to buy bonds or if you are regularly adding money you can keep using that money to buy bonds until things even themselves out.

If you are adding money regularly such as every month it usually makes sense to simply add money to the laggard.

Otherwise just pencil a date in your diary where you check how things are doing.

If things have got out of wack significantly. Say more than 5% I’d sell the one that’s over allocated and use the money to buy the other one.

You could check every month, but most people do it less regularly. Say every quarter or annually is fine. Just whatever you are comfortable with.

Just make sure you do it at some point because there is a bit of hidden magic to it.

Essentially when you rebalance you are selling the one that has gone up in value and buying the one that has gone down in value.

In other words, you are selling at a high price and buying at a low price automatically.

You are essentially automatically buying things on sale and selling stuff that is overpriced.

How many funds do I need?

Up to this point, I’ve assumed you need three funds, but actually you may not.

You may have done your research crunched the numbers and decided 100% bonds will get you were you need to be.

Similarly it’s possible, particularly if you are very young and very brave, that the same number crunching and research has lead you to put all your money in shares.

In either case, you’d then just need one fund for your cash or bonds and one for your money market fund.

However, most people won’t fall into either category. They will need cash, shares and bonds.

But even some of them may be able to get away with less than three ETFs.

And that’s thanks to a little something called Life Strategy.

These are a range of funds from Vanguard that contain both shares and bonds. More on them here if you are interested but suffice to say if you invest in one of these you don’t have to bother with any rebalancing. It’s all done for you by the guys at Vanguard.

Now, there are some alternatives out there that do something similar but they aren’t usually available to non residents for the simple reason that they aren’t in ETF format.

In fact, Vanguard’s UK versions don’t come as ETFs for that matter.

But I mention them because the European versions are ETFs and this means anybody with an investment account can invest in them.

Whilst these are a fantastic product that have all the advantages we’ve already talked about and a major bonus of no rebalancing required, they aren’t for everyone.

And that comes back to currency risk we already covered when talking about bonds above.

You see these funds are aimed at Europeans, and are weighted accordingly with Euros.

In simple terms this means they are only suitable for people who either live in Europe or are planning to live there in the future.

But if that is you, then Vanguard’s Life Strategy could be an excellent choice because they give you one less thing (or fund) to have to think about.

UK non resident pension simplified – the bottom line

So just when you were thinking pensions were complicated, it turns out they aren’t.

And just when you were thinking non residents need to pay some financier in a fancy suit a load of money to get one, it turns out they don’t.

The fact of the matter is, anyone with an investment account can put strong pension together using ETFs these days.

Here’s a quick summary of the steps you should take:

• Open a non resident investment account
• Choose your shares/bonds split
• Select your exchange traded funds
• Add money every time you have some available
• Rebalance occasionally where required
• Go and enjoy the important things in life