Anyone who holds an existing pension fund or final salary scheme pension may become a member of an Expat Self Invested Personal Pension (SIPP’s) from a UK registered pension scheme regardless of where they are resident. However, depending on their personal circumstances and residence status, tax relief on contributions into the pension scheme may be available.
How does a SIPP work?
A SIPP is a personal pension or stakeholder pension that can in theory be run by the pension holder. Traditional personal pensions limit your investment choice to a shorter list of funds normally run by the pension company’s own fund managers. With a Self Invested Personal Pension (SIPP) you can invest pretty much anywhere you like and choose your own investments. These are known as ‘execution only’ meaning you take no fund switch advice from the firm where you keep your expat S.I.P.P.
With that flexibility comes responsibility. A S.I.P.P is for someone who understands investing, prepares research and has the time spare to work out their different investment vehicles and options. If you make the wrong investment decisions, you’ve only got yourself to blame, so you must be adept at managing your own investments and picking your own funds. If not just leave this to your financial adviser who can use their own experience or recruit the talents of experienced asset managers to manage your and other clients SIPP pensions.
Aside form the state pension the UK Government provides, there are two different types of pension; a private pension and an employer pension known as a defined benefit pension. A S.I.P.P falls under a private pension, as it’s something you set up yourself or transferred your existing pension/s in to. With an employer pension the company you work for will likely contribute to your pension each month as well.
What types of investments can be held in a S.I.P.P?
Self Invested Personal Pensions provide a massive investment choice and make accessing better funds and alternative investments a way better option than keeping your money in a defined benefit company pension. For example you can access the below types of investment when using a S.I.P.P as your pension holding vehicle.
- Gilts and corporate bonds
- Unit trusts and Open Ended Investment Companies (OEICs)
- Exchange traded funds (ETF) (Lower costs than funds)
- Investment trusts
- Commercial property
Can a S.I.P.P be started from scratch or does money have to be transferred in from existing pensions held?
You can start your S.I.P.P from afresh with earnings or money that is held in an existing pension or pensions if you have changed jobs a number of times.
New S.I.P.P contributions
If you don’t have a pension already and decide you want to start investing in a S.I.P.P, you can start a new one either by making monthly/quarterly or yearly contributions. Or or if you have a big lump sum you can invest that to start the S.I.P.P contributions off.
Transfer in from existing pension/s
If you already have a few existing pension pots, you can consolidate them all into a S.I.P.P so they’re in one place and a lot more easy to manage and this will probably reduce costs instead of paying fees on each separate pension fund. Its always best to check with your financial adviser that there are no exit penalties when leaving your existing pension funds.
When can you start drawing down from your S.I.P.P?
If your money is held in a S.I.P.P since April 2015 you can take money from your pension from age 55 when you want, how you want. This means you can take a monthly pension or even draw down each quarter or each year if you like. Alternatively if your funds in your S.I.P.P are performing well and you dont have to access this money you can allow the Self Invested Pension Plan to keep growing. Most people will carry on working until after 55 enabling the S.I.P.P to keep appreciating.
The first 25% of the draw-down from the pension will be a tax free lump sum and you’ll get charged tax on the rest as if it were income at the basic rate or higher tax rate.
Inheritance of the SIPP Proceeds?
If you die before taking any money out of your pension or during the draw-down phase, it’ll be passed on tax-free your spouse or common law partner. But there are a few caveats:
If you die before age 75
Your beneficiaries can take the whole pension fund as a pension lump sum tax-free payment. Dependents (but not other beneficiaries) can also choose draw-down or to buy a pension annuity to take an income tax-free.
If you die after age 75
Your beneficiaries have three options:
1. Take the whole fund as cash in one go: If they choose this, the pension fund will be subject to their income tax rate at the time.
2. Take a regular income: If they chose this through income draw down or an annuity (option available only to dependents, the income will be subject to income tax at their income tax rate at the time. Annuities at present are not paying good returns because of low interest rates so this would be a good option.
3. Take periodical lump sums: the lump-sum payments will be treated as income, so subject to income tax at their income tax rate at the time so lower or higher rate income tax.
Self Invested Personal Pension Charges
S.I.P.P charges differ from SIPP provider to provider and some can be expensive. You need to think about what sort of investor you’re going to be so you don’t get overcharged.
Entry and exit charges
You need to look at how much the S.I.P.P will cost you while you’re putting money into it, and then how much the platform will charge you when you want to get access to your money again.
There’s no point having a really cheap platform for your money on the way in, which costs you the earth when you come to take it out. However, like with a lot of things, how much this will impact you will depend on how much money you’re investing and for how long.
The main charges you need to keep an eye out for are:
Annual administration charge
Also sometimes referred to as the ‘platform fee’, this is a charge for having the pension wrapper. It can be either a flat fee, for example £80/yr, or a percentage which is usually tiered in accordance to your investment – for example, 0.30%. Some platforms don’t charge anything for this.
Annual charges for funds
Platforms have an annual charge for funds and why shouldn’t they as they are giving you access to institutional funds that would have a high costs to buy in to normally. Some charge £25,000 to access their funds but as your funds are pooled through an institution the aggregate funds help meet the minimum charge. Funds charge anywhere from 0.5% up to 1.5%.
Platforms charge an annual fee for investing in funds and this can be anywhere from £500 upwards.
If you’re moving money into a personal pension from another company pension you may be charged to move the funds into an investment bond. The investment bond is the platform to access the different funds and the private pension wrapper is the trustee making sure that your personal pension complies with the HMRC pension rules.
Income draw-down charges
When it comes to taking the money from your personal pension for example to commence draw-down there will be a charge payable. This can cost anything up to £800 for the initial set-up, then up to £150 a year in ongoing charges.
Can a Personal Pension receive pension transfers from outside of the UK?
Yes a personal pension can receive transfers from both UK registered pension schemes and overseas pension schemes including Qualifying Recognized Overseas Pension Schemes (QROPS). The overseas pension scheme will need to confirm that they are willing to grant the transfer.
Is Holding a Personal Pension safe?
Personal pensions are very safe in the fact that there is a trustee making sure the pension fund is run in accordance to the H.M.RC pension rules. In each fund there could be 100 or more individual different stocks and shares of each company. For there to be a risk it would mean a large number or all of these companies going bust for you to lose your money.
The institutions perform regular checks on each fund to ensure that it is meeting their strict requirements. Generally any funds that dont show reasonable performance are taken off the institutions platform to make sure that investors have the best choice of best performing investment funds available.
Is financial advice required?
Yes its recommend that individuals seek appropriate pension transfer advice whether this concerns the management of an existing pension arrangement or a pension transfer and also the funds that the pension arrangement will be transferred in to.
Click here for next page Expat Qualified Recognised Overseas Pension Scheme (QROPs)