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