Five reasons to start a SIPP
A SIPP is a self invested personal pension scheme, and involves you investing money into an area of your choosing with the aim of making a steady profit over time.
A SIPP holds many advantages over a regular pension scheme, so here are five reasons you might want to start one.
A SIPP provides ample flexibility, allowing you to take control of your financial decisions and investments. They can be paid into by you as well as your employer, and can usually be accessed through online platforms, meaning that managing them regularly is easy. You can also select your own fund manager to ensure your investments are being looked after by an experienced professional.
One of the best aspects of these schemes, and the part which attracts many people, is that you can choose where your money is invested for retirement. This opens up a range of markets for you to choose from, and you can manage investments regularly to maximise your potential returns.
Leading on from this, you can diversify with investments to reduce overall risk. You could, for example, invest in a range of asset classes such as equities, bonds and property. Financial services like SIPP Pension can help you decide which investments would best suit your objectives.
Another major benefit which SIPPs offer is tax relief. All money invested has 20% of its value added on top, and even more can be claimed back by those on higher income tax rates. Additional rate taxpayers, for example, have the ability to claim back up to 25% of their investment.
Higher Potential returns
Depending on which markets you choose, and whether investments are successful, you can make a decent profit from investments. This means you can stand to build a larger fund for retirement, and could potentially live more comfortably than you would on an income from a more restricted pension scheme. As with all investments, your potential returns will largely depend on how much you are willing to invest.
SIPPs are ultimately for those who are willing to take a slightly higher risk in order to build a better pension fund. They require attention and time, but successful investments are likely to yield good returns, and if you are unsure about how/where to invest, please contact us on our main page and a UK qualified and regulated SIPP Specialist will answer any questions you may have.
What Pension Options Are Available for expats
Moving overseas does impact on your retirement savings depending on how your pensions are structured and your status as an expat.
Despite freedoms in the UK promising to make pensions easier, the choices are confusing for many expats who manage their money from another country and time zone.
Add to that the complications of local taxes, different inheritance laws where you live and you can see why many expats like help from an independent financial adviser.
An important aspect of moving overseas for many expats is the benefit of paying little or no tax on income and savings.
Don’t forget your UK pension is not lost if you move overseas. The money sits safely in a vault until you decide what to do.
Expats have two choices:
Why do expats need a pension? A pension is simply a tax-efficient way of delaying the spending some of your income now to improve your lifestyle after retirement.
The money goes into an investment wrapper – the pension.
At the age of 55 or over, expats can then decide how to access the cash – which can also depend on the type of pension.
To urge people to save, the government offers tax breaks, such as topping up contributions and no tax on fund growth.
However, the money may be taxed on withdrawal from the pension.
What about the state pension? The state pension is paid to any British expatriate with enough qualifying years. The minimum is 10 years of full national insurance contributions or the equivalent, such as tax credits for parents absent from the workplace as they are bringing up a family.
The minimum number of qualifying years is 10 – and that buys 10/35 of the pension.
The maximum needed for a full pension is 35.
In 2017-18, the state pension for new retirees is £159.55.
The state pension overseas. The trap is the pension is only index-linked to increase with inflation each year in certain countries – elsewhere the payment sticks at the amount first paid for life.
The state pension can be paid to a British or overseas bank account and in a local currency, which cuts the costs of currency exchange.
A winter fuel payment is paid to pensioners in the European Economic Area country and Switzerland who still have a ‘genuine link’ with the UK. The payment is worth between £100 and £300 tax-free if you were born on or before 5 May 1953.
Expats can claim more than one state pension. If an expatriate has lived and worked in Britain and another country offering a state pension, they can claim a pension from each government, providing they have collected enough social security contributions in each company.
An expat with 15 qualifying years in the UK would receive 15/35 of the maximum payment, which is £159.55/35 x 15 = £68.37 a week.
If the expat had 20 qualifying years in another country, they would pick up a percentage share of that pension as well.
One country where this is not the case is New Zealand, where the local state pension is reduced by any amount received from overseas.
Retiring overseas with a UK personal pension. The most popular private pensions are personal pension plans and self-invested personal pensions (SIPPs).
These are often called ‘direct contribution’ pensions because the saver pays the provider directly.
The value of a direct contribution pension is based on the value of the underlying investment, which is generally stocks and shares. The fund value varies daily depending on stock market performance.
Personal pensions are not generally index-linked.
Most personal pensions pay benefits in Sterling into a UK bank account with tax deducted at source.
This can lead to currency juggling to find the best exchange rate, but specialist brokers offer discount fixed rates over 12 months to take away some of the stress.
Ask a broker how they protect your money. If they go bust holding your cash, the money is probably lost as brokers do not belong to the Financial Services Compensation Scheme like banks and building societies.
Retiring overseas with a QROPS
QROPS is short for Qualifying Recognised Overseas Pension Scheme and pronounced ‘Q-rops’.
The pensions started in April 2006 with the aim of letting expats have local, easier access to their pension cash.
Workers from other countries who have spent time in the UK and paid into a pension can transfer the money to a QROPS as well.
Most UK personal or workplace pensions can be transferred to a QROPS without any tax penalties or loss of value.
A big QROPS advantage for wealthy expats is the £1 million lifetime allowance does not matter.
Although HM Revenue & Customs (HMRC) will test a pension on transfer out of the UK to make sure the £1 million threshold is not breached, once in the QROPS, the fund can grow to any size without fear of penalty.
Many QROPS also come with a larger tax-free lump sum than the UK 25% of fund value.
In many countries the figure is around 30%.
QROPS benefits can be made in one of several foreign currencies directly to a bank local to the expat.
A warning here is some countries view the payment as taxable in some circumstances – such as the USA, France and Spain.
In zero-tax countries, the QROPS benefits are paid in full with no deduction.
QROPS are souped-up direct contribution pensions and follow similar rules to a UK SIPP.
Are SIPPs or QROPS better for expats? The real question is not which pension helps an expat pay less tax, but which is best-suited to their personal circumstances.
The answer comes down to expat tax residence.
Expats overseas on a short to medium assignment, say two or three years, will likely keep their UK tax residency tied to a home and family in Britain.
That allows them to collect tax relief on pension contributions and other tax-incentivised savings and investments, such as ISAs and the Seed Enterprise Investment Scheme (SEIS).
For these expats, a SIPP is likely the best pension.
QROPS are for expats with a clean-break from the UK and settling overseas permanently.
Although losing UK tax residency results in losing pension tax breaks, a QROPS has other valuable features and benefits.
Always discuss these options with a professional IFA with offshore pension experience.
Retiring overseas with a final salary pension. Final salary pensions are typically gold-plated pensions offered by companies.
Final salary or ‘defined benefit’ fund values are calculated on length of service and either the salary on retirement or a career average calculation.
The pension rises each year in line with inflation and payment is guaranteed for life.
Workplace final salary pensions can be transferred to a QROPS or SIPP, but many professionals advise against the switch key benefits could be lost.
One attraction for transferring a final salary pension to a QROPS or SIPP is the freedom to draw down the money from the age of 55.
Many final salary schemes lock up funds until savers are 60 or older.
Golden goodbyes offered by some firms tempt many transfers. In some cases, firms are offering retirement savers up to 50 or 70 times fund value to transfer out.
For someone with a £20,000 fund, this means gaining a £1 million that can be accessed under pension freedoms and in some cases for expats, no tax.
Retiring overseas with a public service pension.
Public sector or civil service pensions cannot be moved into a personal pension or QROPS.
Pension freedom for expats. Pension freedom is a relaxing of the rules of how retirement savers aged 55 or over can take money from their pensions.
These rules were introduced for UK onshore pensions in April 2015 and extend to QROPS from April 2017.
Pension freedoms give four options for spending retirement cash:
Where normal pension funds are invested in the UK stock exchange, SIPP pensions have a much wider range of investments available. This wider range of investments can offer more stability and security due to a more diversified investment portfolio. Furthermore as the pension saver can cherry pick the investments, a SIPP can offer a higher return and more control. Since you do not need an investment manager, a SIPP is often cheaper and more cost effective than a standard pension.
You can transfer all your frozen and lost pensions in to one SIPP.
Below an example of permitted SIPP investments:
The types of investments open to you through our SIPP include the following:
The SIPP can buy or sell assets from / to the member or persons connected to them, and we can lease commercial property back to the member’s business.
But all connected transactions must be at market value (supported by an independent valuation) and on commercial terms.
A SIPP may borrow up to an aggregate limit of 50% of a member’s net fund value at the time of borrowing (including any Protected Rights).
Any breach is subject to a 40% tax charge (on your SIPP).
For example, if a member has a SIPP worth £300,000 they can borrow £150,000 (enabling them, for example, to buy a £450,000 commercial property).
For more information about the possibilities and opportunities a SIPP can offer, please complete the contact form on our main page:
should i transfer my Final Salary or defined benefit pension into a sipp
Many times per week we get asked "should i transfer my final salary or defined benefit pension into a sipp"
The answer to that question is as it often is "depends". It is a fact that currently the transfer values of Final Salary pensions or Defined Benefit pensions are at all time highs. This is due to the extremely low Gilt rates that have plummeted since the Brexit vote. Recently the Gilt rates have started to recover a little and it is widely expected that the transfer values will start to come down again.
In many, though not all cases now would be the right time to cash in a Final salary or Defined benefit pension scheme and transfer it to another pension such as a SIPP in order to take advantage of the current high transfer values or CETV which stands for Cash Equivalent Transfer Value.
Before you decide it is advisable to seek financial advice from a qualified and regulated pension advisor who will make an in depth analysis based on your personal circumstances.
Should you have any questions or would like a free assessment, please complete the contact form on our main page www.sipp-pension.co.uk