Boosting pension income as an expat is not always easy in a financial world of low interest rates and volatile stock markets, but some effective tax breaks still available.
Although most people living or working overseas may consider themselves expats, a clear line divides them in to two groups:
- Expats who are temporarily living away from the UK who intend to return – and are keeping a home and other ties open, like bank accounts and investments. These expats remain UK taxpayers and pick up reliefs and allowances in the same way as any taxpayer living in the UK.
- Expats who have left the UK and do not intend to return other than for occasional visits. These expats are taxpayers in another country and typically cannot claim UK tax reliefs or allowances.
Expats who fall in to the first group can still take advantage of UK tax breaks, like ISAs, seed enterprise investment schemes and pension contribution relief, while the others are excluded.
Expats can keep UK tax reliefs
Most expats with a UK pension can take 25% of the fund tax-free on retirement no earlier than the age of 55 years old.
The problem with taking the money is the pension fund is seriously diminished, which can reduce the amount of income paid.
Instead of spending the cash, expats can reinvest the money in an ISA, annuity or range of other investments. Current ISA limits are £11,280 for each individual – which can be doubled up for couples.
For non-resident expats, the first consideration is often whether to consolidate UK pension pots in a qualifying recognised overseas pension (QROPS). Or a qualifying non-UK pension (QNUPS). There is a great deal of information on the internet about expat pensions, but not most of the information is incorrect.
Both offer significant tax and investment advantages to expats.
Timing a QROPS pension transfer
Both are outside the inheritance tax net, which means any unused funds are not subject to the UK’s 55% tax charge on the death of the member – even if nothing is drawn from the fund.
These expat pensions also offer a 30% tax-free lump sum, benefits paid in a range of major currencies to avoid losing money to exchange rate fluctuation and the option of basing the pension in one of nearly 50 financial jurisdictions regardless of where the expat lives or works.
Popular QROPS jurisdictions include Australia, New Zealand, Gibraltar and Malta.
One method of boosting pension income is to remain a British taxpayer until the point of retirement to gather pension contribution relief – then switch a pension in to a QROPS when becoming an expat permanently living abroad.
Pension rules let expats take all their tax-relieved contributions with them when switching penion pots from the UK in to a QROPS or QNUPS.