Types of Drawdown Pension UK for Expats
If you are an ex-pat with one or more UK pensions and either in drawdown or looking to drawdown, there are 2 main types available to you. They may not currently be available through your existing plan in which case you will need to transfer. Or, you may be able to internally transfer within the existing scheme and save on fees. In any case, within this article, we will assess the different types of drawdown options available. We will also look at the options available for those requiring flexible access as a non-UK resident.
Types of Drawdown Pension UK for Expats
Only available before April 2015. Allows you, the member to invest remaining funds for income generation once you have taken your PCLS (25% tax-free lump sum). Income withdrawals can then be made with a maximum limit in line with GAD rates (Government Actuary’s Department). The exact amount is capped at 150% of the income a healthy person of the same age could get from a lifetime annuity. In reality, this usually equates to between 4% and 7% of the pension’s total value. You cannot take more than this under any circumstances. It is reviewed every 3 years if you are under 75 years of age, and yearly thereafter. Upon review, a new maximum income is calculated based on the current fund value and prevailing GAD rates and set for the next period. If you do not take the maximum level of income in one year, the difference can’t be taken in a subsequent pension year to make it up.
What Changed in April 2015?
If you held a capped drawdown pension prior to 2015 then nothing changes. Thereafter no capped drawdown arrangements can be created unless it is solely to accept a capped drawdown to capped drawdown transfer. The existing scheme must match the previous scheme in every detail such as income limit and review cycle.
Flexible Access Drawdown:
Introduced in April 2015 via the Pension Freedoms Act, from age 55 you are able to withdraw as much or as little as you wish. The first 25%, of this known as your Pension Commencement Lump Sum, (PCLS) is tax-free (in the UK only – applicable tax rates may apply in the country you reside in). This can be withdrawn in one go or gradually as and when required. It allows you total control over how and when you utilise your pension pot. Thereafter, the remaining 75% can be invested in line with your requirements whether that be long term capital growth, capital preservation, or income generation. Unlike an annuity, with flexible drawdown, you are not getting a guaranteed income for life and unlike capped drawdown, you are not limited with the amount that can be withdrawn. Importantly, any monies withdrawn after the 25% tax are taxed in the usual way in the country you reside i.e income tax and potentially social charges too.
Can funds in capped drawdown be transferred to flexible access drawdown? (As an Expat)
The majority of all UK pension schemes will allow you to transfer from a Capped drawdown scheme to a Flexible access scheme. In general, the process is as follows;
- Take an income greater than the maximum GAD limit
- Contact your existing scheme administrator and request an internal transfer/conversion from capped to flexible access pension. Note that this option is usually not available to non-UK residents even if the scheme has written to your foreign address stating this is an option. As such, if flexible access if your desired option this should be the first question to ask your pension scheme.
- Transfer to a new arrangement that will allow flexible access. This requires notifying your existing scheme that you wish to transfer out and where you wish to transfer to. Complete the relevant documentation and the transfer can then go ahead. Note this can only be done with the assistance of a financial adviser.
Which new arrangement can / should I transfer to for flexible access?
There are 2 options available to you when deciding upon the best pension to transfer to. They are:
Qualifying Recognised Overseas Pension Scheme – For flexible access, a Maltese solution would suit best. This would allow up to 30% PCLS to be taken and with over 60 DTA’s (Double Taxation Agreement) with neighboring countries allows gross payment of pension monies. You would then need to declare this to the relevant tax authorities where you reside. The key advantage, however, is that there is no LTA (Lifetime Allowance). If your pension is not nearing the LTA limit it would not make sense due to the additional setup and ongoing cost. There is also jurisdictional risk to consider as you are removing your pension from UK regulation. Important to note if you live outside of the EEA (European Economic Area) you would incur an Overseas Transfer Charge (OTC) of 25% and as such a QROPS would not be an option.
Self Invested Personal Pension. Offers full flexible access whilst retaining the regulation of the FCA ( Financial Conduct Authority) and UK Pension Legislation. Due to the double tax treaty between the UK and the majority of countries throughout the world by obtaining an NT code you can ensure to have your pension monies paid out gross and declare to the relevant tax authorities in the country you reside.
Other advantages of utilising an International Pension Plan?
- By utlising a pension scheme and structure, that has specifically been created for those residing outside of the UK it offers some key advantages:
- Ability to hold cash and invest in all major currencies including GBP, EURO and USD
- Extensive fund ranges (unlimited) including passive index-tracking funds. active and ESG
- FCA regulation
- Ongoing management of pension fund
- Low cost
Where do I start?
The first move should be to contact a regulated, independent, financial adviser. They can discuss your requirements and the possible solutions with you before deciding the best route forward.
Harrison Brook was born out of a desire for greater transparency in the offshore world of Financial Advice. For years, a lack of rules and regulations has allowed for commission-based
investments, confusing fees, and poor client servicing. Our mission is simple – to bring the highest standard of regulated UK advice to Expatriates. No commission payments, no lock-in periods, no ties to products or providers. We are proud of our independence. Our goal is to create strong, long-lasting relationships with our clients.
Why stay in capped drawdown?
Capped drawdown may suit your existing retirement needs if you do not need to withdraw more than the allowed amount.
How are income payments taxed?
Income payments are usually taxed as income in line with the country that you live in with the usual tax brackets applicable. i.e up to £12,5000 tax-free, thereafter basic rate. Some countries will also have social charges such as France
Can I avoid being taxed twice?
Yes, you can. Any country that has DTA with the UK which covers pensions will allow you to withdraw your monies gross from your pension scheme by obtaining an NR code. You can find more information on how to obtain an NT code here. If the country you reside in does not hold a DTA with the UK, then any tax due will be taken upon withdrawal such as Thailand.
How much does a Pension Transfer cost?
An internal transfer within the same provider should be free. As discussed, however, usually this is not an option for a non-resident. You can find a full breakdown of associated costs along with case study here.