Retirement planning tips for anyone considering moving abroad. Steve Travis, Manager of The Fry Group’s International Division, explains what people need to know about their existing pension provision if they move overseas.

More and more people are planning to emigrate abroad, with the lure of warmer climates, a slower pace of life and lower cost of living appealing to many. Recent research from the Office of National Statistics shows a record number of people left the UK during 2006 for the long term, including 196,000 British Citizens.

For those individuals considering retirement in another country, it is important to fully review the financial implications of a foreign move. Here, Steve Travis, Manager of The Fry Group’s International Division provides a number of interesting tips regarding pension planning for those individuals looking to retire abroad over the coming months:

Retirement Planning & Moving Abroad: What should someone do with their existing pension provision if they move overseas?

If the existing pension is a personal arrangement the first thing to consider is that they can top up their contributions for five years after leaving the UK and still get tax relief. In other words, they can pay the premium net of UK tax and get a HM Revenue & Customs (HMRC) tax rebate, which tops up the contributions. As an example, a net payment of £116 per month would be equivalent to a £150 gross contribution with the tax relief.

If the individual’s existing pension is a corporate or a company arrangement and they are ‘seconded’ abroad by the UK employer then they can stay in the pension for up to three years automatically and for 10 years with HMRC approval. Beyond that it needs individual approval on a case by case basis. The advantage of staying in the scheme is that the employer’s contribution is maintained. The disadvantage is that quite often the pension is based on a notional UK salary which may be lower than that actually earned abroad. This is useful however if there is no offshore company scheme available.

Finally in some cases, particularly with quasi-governmental jobs such as NATO, UN, the EU etc, it may be possible to transfer out of a UK scheme into an approved overseas employer’s scheme on a case by case basis.

Retirement Planning & Moving Abroad: I understand there is a new scheme that enables individuals to access UK pensions, tax free, whilst abroad – please tell me more about this?

ST: In all cases, if the individual is moving abroad they could consider a transfer under the ‘Qualifying Recognised Overseas Pension Scheme’ or QROPS. Briefly if they are going to be abroad for five years or more they could take advantage of the commutation features, particularly attractive if they are planning to stay abroad. Under QROPS, the UK pension funds can be transferred without tax deduction and ultimately drawn without UK tax consequence once the 5 year period is up.

QROPS is a relatively new area of expatriate pension planning so it follows that a certain level of caution should be exercised. Current legislation is not clear on whether the ‘5 complete tax years rule’ applies to the period of UK non-residence, or the length of time that the funds have been in the QROPS. Therefore, until clarification is issued, it seems prudent to leave the funds in the QROPS for 5 complete tax years and then withdraw whilst non-resident.

Furthermore, it remains to be seen how the Revenue tackles early withdrawals and whether it will introduce anti-avoidance legislation when it sees that non-residents are taking full lump sums after 5 years, without tax.

The benefits of a QROPS are clear. For example, James Olney is 58 years, and married with children. As a pilot, he left the UK in 2000 for income tax reasons. Mr Olney now lives in Singapore and intends to retire to France (where he owns a property) within five years.

His current UK pension will provide him with just over £115,560 per annum after tax. We suggested that Mr Olney moves his UK pension into a QROPS (Qualifying Recognised Overseas Pension Scheme), which means his pension will be held overseas and hence will not attract UK tax or local tax. As a result, his pension per annum will rise to over £146,540, representing a 26% increase on his income.

Retirement Planning & Moving Abroad: How should someone save for retirement (if they have emigrated within EU)?

ST: Within the EU it is sensible first to look at any employer’s scheme on offer. That way we can benefit from the employer contributions plus local tax relief on personal contributions into the plan as well. Broadly speaking the EU provides more scope for transferring and amalgamating pensions benefits following recent changes in legislation.

The same comments would also apply to QROPS mentioned in the previous paragraph.

Retirement Planning & Moving Abroad: How should someone save for retirement (if they have emigrated outside the EU)?

ST: If there are no employer’s schemes on offer, then it is imperative that they do something positive toward building up capital for retirement. The criterion would be that the investment is growth orientated, flexible, tax efficient and, crucially, cost effective. We would therefore recommend that people avoid offshore insurance linked schemes which require fixed five, 10 or 20 year saving regimes. As yet there is little available in truly portable personal pension plans so there is little help from the taxman. As a result, they fail at least three out of four tests above. Therefore, the solution would be to consider a unit trust or an investment trust regular saving plan which would meet all of the above criteria.

Retirement Planning & Moving Abroad: What should someone do if they return to UK before retirement?

ST: If individuals retire to the UK before retirement with an offshore pension in place, our advice would be to keep it offshore. That way when they are ready to activate the plan, the foreign scheme rules may allow for 100% commutation. This could be paid free of UK tax even when resident by virtue of Extra Statutory Concession A10. Depending on the years of service abroad, the client would only have to qualify for one of three rules to ensure that the foreign pension lump sum can be enjoyed tax free in the UK and at the same time if there is a double tax treaty, gain exemption in the host country too.

If the foreign pension cannot be commuted then, when it is paid to a resident of the UK, the individual can claim double tax treaty relief to have the foreign pension taxed in the UK. In that case 10% of the pension will be tax free to those resident and domiciled here under UK rules.

Keeping the foreign pension separate they would then re-activate any UK personal or corporate schemes and try and shoehorn any additional savings by means of additional voluntary contributions.

At The Fry Group, we always recommend that individuals seek good quality personal advice when planning for retirement to ensure they reap the financial rewards in future. An expert will review the individual circumstances of all involved to ensure the best outcome is realised. That way, individuals can then concentrate on enjoying a comfortable retirement abroad and not have to worry about any unnecessary financial concerns.

Telephone: +44 (0)1903 231545. www.thefrygroup.co.uk

The level and basis of taxation are subject to change.