International Self-Invested Personal Pensions
SIPPs explained for expats
Pensions
Pension schemes are essentially wrappers which comply with a set of rules and include one or more investment funds. Pensions come in various sizes and shapes including (but not limited to) Defined Benefit Schemes, State Funded, Final Salary Schemes and QROPS-- with QROPS being specifically for people who no longer live in the UK.
SIPP
Self-Invested Personal Pension (commonly called a SIPP) enables someone to invest into a pension for retirement, but making their own choices about the investment options held within or, in most cases, have access to greater investment choices when dealing with financial advisers.
SIPP Benefits
A SIPP carries the benefits and drawbacks of any other UK based personal pension scheme, with the exception of that in regular personal pension plans where the options for investments are restricted to those available with the pension provider or fund manager. With a SIPP, you are free to choose which funds you put your money into or even simply place cash.
Drawing down income from SIPPs
Funds held in a pension are usually available once the holder of the pension reaches 55 years old, but can sometimes depend on the type of scheme. Once you decide you want to take funds from your pension, you are able to take it in lump sum(s), where the first 25% of each lump sum is tax-free, or as an income over a regular period.
You can decide that you want to start drawing money from your pension when you reach pension age.
As with any pension, there are a number of ways of drawing your income from a SIPP. In fact, these options are dependent more on your personal situation.
Traditionally people have bought annuities which offer a guaranteed income for life. However, following the changes to the pension regulations in 2015 and the decline in the amount annuities will pay, annuities are far less popular.
Another option is simply to take lump sums from your pension. It is important to bear in mind that any money taken out of a pension is treated as income in most countries and is taxed both in the United Kingdom and in your country of residence.
This includes the starting pension lump sum, which means that the first 25 per cent of your lump sum will not be taxed in the UK. However, this will be taxable in your country of residence, so it is important to seek advice on the most tax-efficient ways to access your pension fund.
Important factors expats need to consider about SIPPs
Like other private pensions, you do not have to live in the UK to invest in a SIPP. However, there are a few important considerations to bear in mind if you are not living in the UK and are considering a SIPP.
Foreign Currencies
First, the payments and investments must be made in pounds sterling, as SIPPs are held in the UK. This means that if you are intending on drawing an income from your SIPP while you are overseas, you will be exposed to currency fluctuations, so you should factor this into your retirement planning. For people who plan to retire abroad and not return to the UK, there may be other options (such as a QROPS) which offer similar benefits, but enable you to invest in different currencies.
Conversely, the amount you actually invest will increase if you put in your SIPP while abroad and the value of the pound drops.
UK Pension Regulations
Secondly, SIPPs comply with UK pension regulations and are affected by any changes to pension rules made by the UK Government. One example of this would be the recent changes to the Lifetime Pension Allowance where the Government reduced the allowance from ₤1.25m to ₤1.073m.
UK Income Tax
Thirdly, if you take income from your SIPP, you will still be subject to UK income tax if you take money out of your pension in addition to the UK personal allowance and the 25 per cent basic rate pension lump sum. As touched on above, if you no longer live in the UK, your income may also be taxed in your country of residence, so it is important to understand the local tax rules and those in the UK before making a decision on how to draw an income from a SIPP.
What is an International SIPP?
International SIPPs are Self Invested Pension Plans that are specifically created for non-UK residents. They offer clients a wide choice of investment opportunities and are the preferred option for anyone living outside of the EEA that wishes to transfer/consolidate their UK pensions.
The UK government introduced personal pensions in the mid-1980s in order to encourage individuals to save for their retirement. Insurance companies offered most personal pension plans. Although such schemes are well-structured, plan-holders are often restricted to a narrow range of funds operated by insurance company investment managers. The modern day SIPP, or International SIPP, offers a more flexible type of personal pension whereby plan-holders invest in a much wider range of investments.
UK SIPP vs. International SIPP
There are few differences between UK and International SIPPs. The structure is similar in that they are both pension plans regulated by the Financial Conduct Authority in the UK. The International SIPP was originally designed for non-UK residents who wish to keep their pension assets in the UK, rather than transfer to an overseas pension solution. It is also used by foreign nationals residing in the UK to provide a wider choice of investment opportunities and flexible retirement benefit options.
How do International SIPPs work?
International SIPPs were created to fill the gap in the market for UK pension transfers that Qualifying Recognised Overseas Pension Schemes (QROPS) could not cater for. Providers modified their systems to enable clients to denominate their investments in additional currencies other than Sterling. A key requirement was that International SIPPs need to be relevant to the currency the individual is earning or will eventually be spending in retirement.
International SIPP Advice
International advisers are invariably better placed to help with local tax issues that need to be considered. In some cases, such as the implications of Dual Tax Treaties and general tax rates, this advice will be offered as part of a financial planning package.
In other more complex cases, an international adviser will be able to direct expats to suitably qualified local and/or international tax advisers. By the same token, International SIPP providers are usually more informed of expat financial planning and taxation issues. They therefore tend to provide products and services which reflect that difference. Finally, and perhaps most importantly, many expats will speak to a financial adviser when making a decision about their retirement plans.
Remember that if you are looking for advice from an adviser in the UK, they may not be fully aware of all the pension opportunities for expats. Likewise, if you seek advice from a non-UK based financial adviser, any advice they offer will not be regulated by the FCA and therefore your levels of protection are much lower
Need advice on a SIPP? Let us help you.
If you are thinking about setting up a SIPP, or have a SIPP and want to learn about all of your options, we can help you by introducing you to a UK regulated financial adviser. We have a wide network of UK financial advisers who are living and working in Europe, the Middle East, America and Asia, who have been overseeing pension transfers and advice for over 10 years. All the advisers we work with are also fully qualified to provide advice and work only for firms who are authorised and regulated by the Financial Conduct Authority.
The financial adviser will be able to answer any queries and provide unbiased guidance which will help you with the following.