Many British expats fantasize about living the perfect retirement life overseas. However, making that dream a reality will require a well-structured pension and investment plan. Whether you have already made a move out of the UK or are in the process of booking your tickets, knowing how expats transfer pensions abroad is key to having a robust retirement plan.
This article will discuss certain things an expat who wishes to transfer their pensions overseas should know. If you are a UK expat, continue reading; you will find out that knowing how to transfer your UK pensions abroad isn’t the only thing you need for creating a well-structured pension and investment plan.
What is a Pension Transfer?
A pension transfer involves the movement of funds from one pension scheme to another.
Types of pension available in the UK
Here are two main types of pension available in the UK:
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Defined contribution scheme
The pensioner is paid based on how much is in the pension pot.
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Defined benefit scheme
The pensioner is paid a specific amount after retirement.
Whichever pension scheme you belong to, before making a pension transfer, it is always advised to contact a certified financial advisor if your pension scheme is worth more than £30,000.
Transferring a UK Pension Plan Abroad
In April 2006, the UK government established a new pension option, called ‘QROPS,’ allowing British expats full control over their pension schemes even when they travel abroad. This changes everything as pension schemes no longer have to be frozen if you leave the country.
QROPS (Qualifying Recognised Overseas Pension Scheme) allows UK expats to transfer their pensions into an authorised pension scheme overseas, helping them reduce tax liabilities and improve investment opportunities. However, before taking advantage of QROPS, it is best to consult a professional on expat pensions to weigh your options.
QROPS and Tax Planning
UK expats can improve their expat tax opportunities when they transfer their pensions into a QROPS. While pensions are usually part of the retirement planning process, a QROPS can grant expats more investment freedom and chances to minimise their tax liability.
Some benefits of QROPS pensions are;
- Tax-free withdrawals on lump sums up to 25%
- Ability to have income tax based on your country of residence
- In the event of your death, you don’t pay income tax
- Zero charges on lifetime allowances
- Assign pension to beneficiaries of your choice
- Exposure to multiple investment funds
- Ability to combine different pensions
- Ability to use pension benefits from 55 years of age without violating government rules
At any rate, it is always advised to seek the help of a financial advisor before you proceed in moving your pension to a QROPS.
Pension Rates and Contributions
Pensioners who qualify for full state pensions currently receive around £8,700 after tax. Although it is important to know that the rate is subject to change daily, your actual pension rate in the UK will depend on your National Insurance record. Pension earnings are usually lower for people who haven’t made up to 35 years’ worth of contributions.
Calculating Pension Contributions
Pension contributions are calculated against three factors in which the answer gives your pension rate. Typically, the government pays national insurance for low-income earners, ensuring everybody has a clean national insurance record.
Calculating your pension rate is the first step in knowing how to increase it. There are currently three factors, a ‘triple-lock system’, evaluated to determine the pension rate of an individual;
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Earnings
Your earnings are determined by the average increment in wages
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Prices
The prices are determined by the consumer price index (CPI)
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Interest rates
Interest rates and the lump sum amount of a participant are inversely related. Whenever the interest rate increases, the value of the pension lump sum reduces. When the interest rate decreases, the lump sum will increase.
While the above is true, you can also increase your pension rate by working past the state pension age. Doing this increases your rate by 1% every five weeks for up to 10.4%. Payments from the acquired pension rate are added to your regular pension amount.
Conclusion
UK laws have made it easier for British expats to transfer their pensions overseas. However, it’s always advisable to reach out to a licensed financial advisor before deciding to transfer your pension.
