If you’ve worked in the UK and now live in South Africa – whether as a British expat or a South African who spent time in the UK – then you might be considering how to incorporate your UK pensions into your long-term retirement plans.
This article examines how UK pensions and QROPS work for South African residents and explores the options available to you to help you to optimise your pensions for the best retirement possible.
Broadly speaking UK pension schemes fall into one of two categories: either a defined benefit or a defined contribution.
DEFINED BENEFIT PENSIONS
These are also known as ‘final salary schemes’ because they are paid to you in the form of a salary in your retirement based on the number of years you worked and the salary you were paid when you left. They are typically calculated by the number of years you worked as a fraction of 60 then multiplied by your final salary.
For example, if you worked for a company for 20 years and earnt a salary of £90,000 when you left then your pension is likely to be calculated as follows:
(20/60) x 90,000 = £30,000
*20 is 1/3 of 60 so therefore you will receive 1/3 of your final salary as a pension when you retire.
DEFINED CONTRIBUTIONS
Although there are different types of defined contribution pensions they are all essentially pots of money invested into different funds which you can draw from when you retire. They are funded by contributions from your salary – e.g. 5% of your salary is deducted from your payslip to go into the pot and your employer then pays in another 5% or 10% on top.
Defined contribution schemes are easier for employers to manage as they are a defined amount of money. Their only commitment is to paying the money in rather than worrying about how to pay you your defined benefit pension until you die.
How you draw the money is up to you with full access from the age of 55. At this age you can either defer and leave the money where it is, withdraw 100%, draw down in ad hoc amount, purchase an annuity or work out a plan to take a regular amount to make the money last across your retirement years.
CAN I TRANSFER MY UK PENSIONS INTO SOUTH AFRICA?
The answer is “Yes, you can” but the question is whether this is a good idea.
The first thing to point out is that if you want to transfer your pensions away from the UK then the only option is to transfer to the country in which you are resident – i.e. South Africa. Transferring to any other country would incur a tax of 25% on the transfer.
The next box to tick is to check where there are any South African schemes recognised by the HMRC (the UK’s governing tax department) as having the required qualifying status to accept UK pensions.
Currently (July 15th, 2019) there are NO South African schemes listed on the HMRC’s published list (https://www.gov.uk/guidance/check-the-recognised-overseas-pension-schemes-notification-list).
It is possible that schemes may be included in the future but for the time being a UK pension transfer to South Africa is NOT AN OPTION.
Furthermore, you have to question whether you want to transfer your UK pension to a scheme where it will be subject to South African pension rules and denominated in a ZAR which is a weaker and less stable currency than British pounds.
HOW CAN I MANAGE MY UK PENSIONS BETTER?
One type of defined contribution pension is known as a SIPP – a Self-Invested Personal Pension.
SIPPs are a great vehicle to allow you several benefits such as:
- Consolidate multiple pensions into one single manageable pot
- Increase investment choice
- Improve ease-of-use through online access and greater transparency
- Work with a professional advisor to manage investments
- Invest in different currencies (other strong currencies such as USD or EUR)
- Better value for money and cost effective
CAN I TRANSFER MY DEFINED BENEFIT PENSION?
Yes, you can. However this can only be done with qualified expert advice from a UK financial advisor. There are several benefits to transferring a defined benefit pension such as greater control and management. Given that transfer values have been at all-time highs it is a good time to take a look at an offer and weigh up the pros and cons (as an example, we have recently seen a client offered a transfer value 45 times the size of the benefits of his defined benefit).
A qualified UK advisor is a requirement given the risks involved and helping you understanding what you are giving up versus what you have to gain.
This is not a decision to be taken lightly but if you have a defined benefit pension and want to evaluate your options without charge or obligation then get in touch with us on the form below.
I PREVIOUSLY TRANSFERRED MY UK PENSIONS TO A QROPS, WAS THIS A GOOD IDEA?
In most cases, no! The 25% tax on transfers was introduced in 2017. Before then it was common for residents in South Africa to be advised to transfer their pensions to Qualifying Recognised Overseas Pension Schemes in jurisdictions such as Gibraltar, the Isle of Man, Malta, New Zealand or Guernsey.
The majority of these transfers were unnecessary and based on opaque benefits.
Any argument in favour of transferring based on tax is largely false. The double taxation agreement (DTA) in place between the UK and South Africa means that you will not pay any income tax at source in the UK. Furthermore, if you have completed the correct paperwork then you will not pay any income tax in South Africa either.
If your QROPS is in Gibraltar, for example, then you must pay 2.5% tax at source which cannot be recouped.
If you have transferred your UK pensions to a QROPS in any of those jurisdictions then you may still be able to reverse the process and transfer back to the UK prior to retirement. A UK SIPP will serve you better from a tax perspective in retirement and is usually significantly cheaper than an expensive QROPS.
If you live in South Africa and want independent, transparent, 100% fee-based advice on your UK pensions and a review of your financial plans then please contact us via the form below. A professional advisor will contact you for a free and confidential meeting to discuss your situation.