Pension expert reveals why it could be vital to consolidate savings

Throughout a person’s working life, many pension arrangements can be accumulated through workplace schemes and other alternative arrangements. However, this can often make pension savings difficult to track and could end up convoluting the process of putting money aside. Starting the process to get your pension or SIPP working is essential!

Being an expat is exciting, as you get to explore various countries while building your career. However, it is easy to get carried away with the excitement of living in the moment and lose track of your pensions. Working in several companies can also make it challenging to manage pension contributions.

Fortunately, you can consolidate your retirement savings into Self Invested Personal Pensions (SIPPs) for effective management. Unlike personal and company pensions, you have the freedom to select the investments held within the package. So, let´s discuss how we can get your SIPP working!

What Is a Self-Invested Personal Pension (SIPP)?

Before we find out how to get your SIPP working, we must first understand what a SIPP is.

SIPPs, like other pensions, hold your investments together until you retire. They work similarly as personal pensions and are the UK government’s approved schemes under the HM Revenue and Customs. With SIPPs, you have the freedom to choose investments while in private pensions, since the retirement savings are managed in a pooled fund.

SIPPs are understandingly popular among expats due to the flexible, and straightforward way of consolidating retirement savings. Its major selling point is the investment freedom since many people want to monitor and control more of their savings.

Most expats can open a SIPP with very simply, but the tax treatments for contributions depend on their permanent residence. For instance, any UK resident living abroad is entitled to a pension contribution relief as long as they remain UK taxpayers. Those who are non UK resident  can still maximize their pension with a SIPP but do not qualify for tax relief on future contributions.

What Are the Investment Options for Expats?

SIPPs are often considered very powerful pensions due to their broad investment powers. An expat can invest in a range of assets and stocks, including:

  • UK and International shares: These allow you to buy shares from various companies and when their value increases, your pension increase.
  • UK and International funds: When you want wider and global opportunities, both passive and active
  • Exchange-Traded Funds: You can also put your savings in ETFs traded on LSE and top European markets.
  • Bonds: When you buy a bond, you loan money to a company or government, which is repaid later with interest.
  • Cash: And can also save and invest money in your SIPP when you return to the UK.

The investments above are mainstream, but a SIPP can also allow you to invest in cash, real estate funds, commodities, structured products and be further upgraded to hold commercial physical property in the future. The rental income will service the commercial property mortgage and cover the costs of managing the scheme.  Selecting the right SIPP is obviously very important and your adviser will guide you through this process.

How to Pay Into and Draw Income From SIPPs

In the UK, you can build your SIPP by contributing money from various sources. Your employer also contributes to the SIPP. While the plan has zero restrictions on the savings, it has limits to taxable benefits. For instance, since 2016, the amount you can build throughout your life was reduced to £1 million from £1.25 million.

Apart from paying lump sums or contributing regularly, expats can transfer pensions from previous companies to a SIPP. However, you should seek expert advice to ensure you benefit from the tax reliefs. You can start drawing money from your SIPP account from the age of 55, and you do not need to retire to enjoy the benefits.

In a SIPP, the value of your pension relies on contributions, duration of investment, increase in value over time, and the charges on the pension. However, you will get tax relief for up to 25% of your retirement savings withdrawn in a lump sum. The tax relief is only effective in the UK, but it may be subject to tax in some other countries of residence.

Similar to other pensions, you have a range of options for withdrawing your retirement income. Often, people purchase annuities that guarantee an income for the rest of their life. However, with the recent decline in income from annuities, this option is losing popularity. Another alternative is taking sums when the need arises. You should remember that pensions are treated as income. For expats, the pension may be subject to tax in the UK and the country of residence but your adviser will guide you around double taxation agreements to maximize the SIPPs efficiency.

What Expats Should Consider Before Using SIPPs

Michelle Gribbin, Chief Investment Officer at Profile Pensions has recently stated it is often best to consolidate multiple pensions when asked which options are better for savers.

She said: “People tend to, on average, move jobs 11 times throughout their life.”

“That would potentially give them 11 different pensions all over the place that are perhaps in older schemes, with charges that are not as good, or in the wrong profile.

“It is definitely worth people who have multiple pensions to look at potentially consolidating these down into one scheme.

Ms Gribbin said that for the most part, creating one easy access fund allowed people to more efficiently monitor their savings to keep on top of charges and flexibility.

Ms Gribbin highlighted that there are over 10,000 pension schemes, and 40,000 funds in the UK, therefore consolidation of pensions appears to be the best solution for those looking for easy management of their pot.

Her colleague, Simon Vella, the Chief Marketing Officer at Profile Pensions, however, highlighted there was another pressing reason to consolidate.

He said: “Where people aren’t actively thinking about consolidating and keeping on top of this, the unintended consequence, is that there are £20billion in lost or missing pensions in the UK at the moment.

“There is no better business case for people actively consolidating their pension than billions lost, and sat in the coffers of businesses across the UK. It really is very important.

Important factors to get your SIPP working

If your permanent residence is in a foreign country, there are some factors to consider before you invest in a SIPP, and to make sure you get your SIPP working for you. Apart from the lack of relief on the contributions, you should figure out if SIPPs are recognised pension wrappers in the foreign country where you reside. If not, you may have to figure out another way to fund your retirement if you do not plan to move back to the UK.

SIPPs are held in the UK, which means your investment funds and drawing should be in GBP. If you live abroad, your retirement income will be affected by currency fluctuations. Therefore, you need to factor it in your planning. If you have no plans of returning to the UK, you can dependant on residency take advantage of other plans like QROPS, which permit the use of different currencies.

SIPPs abide by the law and pension regulations of the UK government. Any changes will affect your retirement savings, irrespective of where you are. The recent changes in lowering the pension allowance to £1 million could affect the quality of your life. You should consider if the amount is adequate for your pension. If you exceed the limit, how will you deal with the significant tax charge?

While SIPP has numerous benefits, the decision to open one should be made with knowledge of the implications of tax and investments. Don´t forget, you must get your SIPP working for you, and for this you must understand the implications. You should also seek financial advice on the most affordable ways to move your pension to SIPP but in the hope that a better outcome awaits you.

For more insights, further advice or guidance, you can get in touch HERE.

Blog published by Mike Coady.

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Categories: Pension