UK SIPP for Expats and International SIPPs
While QROPS have key advantages, international SIPPs offer a lower cost alternative and especially for schemes not likely to breach the current UK lifetime allowance of £1,073,100 (which is being abolished in April 2024). SIPPs (self invested personal pensions) can offer more flexibility and greater control over how funds are invested than many occupational schemes, with your attitude to risk, fund performance and policy fees all affecting returns.
SIPPs offer tax relief on contributions for UK residents, so expats transferring final salary schemes or consolidating multiple pensions into an international SIPP, won't usually benefit from relief on further contributions (unless they are a 'relevant UK individual' - see below). So if you are an expat looking to save for your retirement, using a flexible expat investment platform may be more appropriate as unlike a SIPP, access to capital is possible before age 55.
Investment guidelines of international SIPP providers vary and many still allow the purchase of commission-paying funds not permitted in the UK. These create a drag on performance and restrict liquidity, so seek clarification if in doubt.
Investment Flexibility
SIPP investment guidelines permit suitable levels of diversification, with the following defined as 'standard assets' in the FCA Handbook.
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Cash funds
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Real estate investment trusts (REIT)
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Government, local authority and other fixed interest stocks
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Collective investment funds in the UK (or overseas and recognised by the FCA)
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Equities, stocks and shares
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Cash deposits
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Managed pension funds
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Exchange traded products
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Structured products (with a secondary market)
Restricted Investments include:
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Movable property (such as art, wine, classic cars, antiques)
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Residential property
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Personal loans
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Ground rents
Taking Income and Flexi-access
A PCLS (pension commencement lump sum - aka tax free lump sum) of up to 25% can be taken from age 55 with the remaining fund taxed at your marginal rate. You may be able to draw on assets earlier if you are in poor health, but remember your PCLS may be taxed if you live outside the UK.
Income can be taken as a lump sum, income or a combination by:
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Purchasing an annuity
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Drawdown of pension income
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UFPLS (uncrystallised funds pension lump sum).
Death Benefits
On death of a member, beneficiaries can receive a lump sum or income using flexi-access or annuity purchases (the latter not possible for many expats). Scheme trustees decide officially who the benefits are paid to taking into consideration member's expression of wishes.
How remaining funds are distributed and taxed is determined by age at time of death:
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Death before 75 - payments are paid tax-free whether taken as either lump sum or income
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Death at or after 75 - payments are subject to UK income tax at the survivor’s marginal rate of tax
The Costs
SIPPs generally cost less than QROPS and although some SIPP providers still charge set-up fees, many don't and have reduced ongoing charges.
SIPPs cost as little £180 per annum regardless of the investment size, with fees applying for benefit crystallisation events (BCE) such as starting drawdowns.
Tax Relief on UK Pensions
SIPP contributions can be made until age 75. Returning expats with UK earnings qualify for tax relief on contributions as a 'relevant' UK person, which under Section 188 of the Finance Act 2004 will not exceed in any one tax year the greater of:
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£3,600 - the basic gross amount for the current tax year, or
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100% of all relevant UK earnings in the current tax year (see below)
If you are not employed, annual contributions of £2,880 can still qualify for tax relief (£3,600 less 20% paid by the government).
Individuals are classed as 'relevant UK persons' for tax year if they:
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were UK resident during the five tax years prior to the relevant tax year and also when joining the pension scheme, or
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have relevant taxable UK earnings for that tax year, or
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are resident in the UK at some point during that tax year, or
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have earnings taxable in the UK from Crown employment overseas (defined in section 28 of Chapter 5 of Part 2 of the Income Tax (Earnings and Pensions) Act 2003, or
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are the spouse of an individual (or civil partner) with general earnings from overseas Crown employment for that tax year subject to UK tax (also defined in ITEPA 2003).
An annual contribution allowance of £40,000 applies to SIPPs in any Pension Input Period that qualifies for tax relief. Without UK earnings, the maximum contribution is £3,600 gross.