On April the 6th 2006, pension rules were simplified by the UK government.
Many retiree’s or future retiree’s remain uncertain what these changes are and how best to take advantage of them.
For UK citizens based abroad
Wherever you may have lived in the world, now be settled or thinking of emigrating to, your pension will play a large part in enjoying your retirement years.
Through so many tax regimes to contend with and different ways of drawing your pension scheme, it is now more important than ever to ensure you research thoroughly all your retirement options.
For many UK citizens, who have chosen to enjoy their retirement years abroad, they can look forward to receiving tax free benefits.
Received pension and retirement plans back in the United Kingdom?
All emigrants leaving the UK should review their pension arrangements. There are possibilities for pension and retirement plans to be invested in a more tax efficient manner and opportunities to take advantage of utilising your pension life time allowance. A pension check is an easy process to undertake for a qualified advisor. They will be able to provide you with a retirement report detailing your best way forward.
This report should include items such as your state pension, private pensions, additional contributions and company pension schemes.
Don’t worry if you have already moved it, it is never too late to carry out a review.
Expatriates living and working abroad
For many expatriates working abroad, employers do not offer any form of company pension scheme, the onus therefore falls on the individual to cater for their retirement income. This makes it more important then ever to have correct retirement plans in place.
There are a number of benefits available to expatriates, their situation calls for expert financial retirement and tax planning.
What is a self invested pension?
This was one of the areas simplified in the 2006 pensions review. This allows pension plan holders to take more control of their retirement funds, where there pension money is invested and alternative ways of drawing an income from it.
What about my UK state pension?
Often many years of contribution have been paid via national insurance contributions into the UK state pension fund. It is always advisable to obtain a state pension forecast, to establish whether you are entitled to a full state pension or whether further contributions must be made. For an online pension forecast please click here.
It should be noted that for some countries the retirement benefit payable ‘freezes’ at the level it is paid out initially if they are living ion another country.
What are frozen pensions?
Frozen pensions are old pension arrangements that are no longer contributed to. Very often the terminology ‘frozen’ provides the incorrect impression that there is no growth in the retirement fund and no benefits can be accessed. This is not the case and they should be thoroughly reviewed as to the best options for them. Estimates are that over 5 billion GBP lies unclaimed in UK pensions.
Frozen pension schemes (commonly referred to as preserved pensions) occur when an employee leaves their employer and therefore ceases to be a paying member of the company a pension scheme.
They are pensions that will become payable in the future, hence the terminology frozen or preserved pensions or annuities.
It should be noted, the terms frozen pension and preserved pension are often misunderstood to mean that the pension/retirement fund that has been accrued whilst contributing to the employer’s scheme will remain at that level and not benefit from any further growth. This is not the case and various rules dictate minimum growth levels.
With effect from the 6th April 1975 it was made a legal requirement to provide a preserved pension (subject to certain conditions) for employees who had completed 2 years membership of an employers occupational pensions scheme.
If you left an employers scheme before 6th April 1975, there is every chance that the pensions scheme did not provide any preserved benefits. Many schemes that were contributory pension schemes simply provided a refund of the contributions made by the member (employee) and for non-contributory schemes there was often no benefit at all.
For employees, leaving employers pension schemes, after 1975, if you had completed more than two years membership you may have been ,or be eligible to, reclaim any contributions made.
If you have been a member for more than two years the law makes no provision for a refund however, for preserved benefits (a preserved annuity). This two year rule came into effect on the 6th April 1988, before then it was for 5 years period.
The transfer act of 1995 provided more flexibility for employees leaving company schemes by calling for companies to provide a transfer value as opposed to a preserved annuity for all leavers (subject to certain rules). The exception to this was final salary scheme, known as defined benefits that protected the value of the preserved pension.
Leaving members have certain rights under the Pensions Act of 2004 that stipulates leaving options should be given to the member within a reasonable period of leaving their employment. This is expected to be within 3 months by the pension regulator.
What should I do if I think I have a preserved or frozen pension?
If you think you have a preserved or frozen pension scheme it is always worth checking it out. Experts estimate there are some 10 billion pounds of unclaimed pension money.
Self Invested Pensions were introduced in 1989 by the then Chancellor of Exchequer, Nigel Lawson. He proposed to make the managing of peoples investments in pensions easier with the introduction of the Self Invested Personal Pension Plans (SIPPS).
Self Invested Pensions (SIPPS) are basically personal pension plans that allow the investor to directly manage the investments, held within the pension.
Prior to the introduction of SIPPS, it was common for individuals to save for retirement via personal pension schemes. The investor would select a company with which they would take out the personal pension and would then receive advice, or opt for, which type of investment fund their pension money, would be invested in. This could range from with profit funds, through to managed funds and a variety of other specialist funds such as property, equity and bond funds.
What these investments (underlying investments) shared in common usually was the pension plan holder may have had little influence on where their actual money was invested. For some, personal pension holders, the array of underlying investments they could select from may be somewhat restricted, for example only funds supplied by the company providing the personal pension plan.
In real meaning, the legislation is aimed at providing the retirement saver with a much wider array of choice and control over the underlying investments their retirement savings is invested into.
What is the purpose of a SIPP?
A SIPP is set up for the sole purpose of investing to gain an annuity, income drawdown and/or cash lump sums on retirement of the pension holder.
The self invested personal pension plan benefits are perceived by many to focus on one of the main criticisms’ of personal pensions – that they under perform – by allowing the pension investor to have more control over where their funds are invested.
Although self invested personal pension plans (SIPPS) have been around for over a decade it has only recently come of age, due to changes in the regulations governing them.
Other advantages include:
- Paying less tax – SIPPS qualify for tax relief at your highest rate.
- Contributions – there is no maximum to the amount you can pay into a SIPP.
- Transfers – where appropriate transfer from other schemes can be made into the SIPP.
- Investment choice – pension investors can choose from a range of different investments including commercial property.
Flexible Benefits – on reaching retirement age pension holders are no longer restricted to traditional annuities but select from cash lump sums, income drawdown and different options pertaining to spouses or dependants benefits.
Is a SIPP suitable for me?
To answer is a SIPP suitable for me? Professional advice should always be sought. It is imperative that when saving for retirement, whether by means of lump sums, regular contributions or a transfer of some existing arrangements, care is taken to ensure the correct advice is sought and given.
A SIPP might be suitable if you are: -
- Self employed
- Your employer does not offer a pension scheme for you to join
- You have a number of personal pension plans which you may wish to transfer so they are all under one scheme.
- You are an international worker.You are immigrating to a new country.
For retirement savers seeking the below it can also be very attractive:
- The freedom to invest into a wide range of investments via your retirement plans.
- A range of options available to your dependants in the event of your death.
- More flexibility in how you take, or draw, your retirement income.
Please note that SIPPS are available to UK residents under the age of 75.
Incompass are able to provide expert advice from our UK pension qualified advisor. Your pension represents one of the biggest assets you have saved for over the years so it is always worth ensuring it is in the best possible environment for growth, taxation and drawing of benefits.
Contact us if you would like to learn how we can help UK Pension Holders South Africa.
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Contact us now for information for UK Pension Holders South Africa.
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