Want to support Global Action on Aging?
UK: Sun, sea and a lump sum keeps
the sangria flowing
By Nina Montagu-Smith, Daily Telegraph
June 20, 2003
and do what you've always wanted.
London - If you do not wish to comply
with Inland Revenue rules forcing you to spend three-quarters of your
pension savings on an annuity, why not retire abroad and decide for
yourself how to spend your money?
Many people retire to countries such as
France, Spain, Ireland and even Australia where the rules about what you
can spend your pension fund on are much more relaxed.
In the UK, the man from Whitehall still
thinks he knows best. At least 75 per cent of a personal pension fund or
money purchase occupational fund must be spent on an annuity, and 100 per
cent of top-up funds or additional voluntary contributions (AVCs) must be
spent on annuities by age 75.
By contrast, Australia allows
pensioners to spend their retirement funds on anything they please. If
they spend it all, they still have the universal pension to keep them off
the bread line, but are entitled to no more than that.
Closer to home, Ireland requires
pensioners to spend enough of their retirement funds on annuities to keep
them off state benefits, but the rest can be spent as you please. All
other countries offer annuities, but do not make them compulsory. However,
Italy is set to move to a system where 50 per cent of a retirement fund
must be annuitised and it is thought compulsion will be introduced in
Although the Inland Revenue would
prefer you did not move your pension fund at all, it has become easier to
do so recently and may be an attractive option for people who do not wish
to buy annuities, where yields are at or near their lowest levels in half
Mike Warburton, from accountants Grant
Thornton, said it ought to be easier still to transfer your pension fund.
The difficulty is that unlike many other countries, the UK provides
generous tax relief on pension contributions, but then taxes you when you
receive benefits. Countries such as Australia have no such tax relief and
therefore the tax rules at the other end are more relaxed.
Mr Warburton said: "The Revenue
does not want you to get out of repaying the tax relief and has not
publicised the ability to transfer pension funds. But there is a lot of
movement between EU countries in particular these days and many more
people would do it if they knew they could.
"Many people feel they have worked
hard in this country all their lives and would like to retire to the sun
and to countries like Spain and France where properties are cheaper. If
they can avoid having to buy annuities with their pension funds too, then
so much the better."
However, this is not a quick-fix option
and professional advice about the legal and fiscal systems of the country
chosen for retirement should be taken. Nick Flynn, of pensions specialist
Wentworth Rose, said you must work in the country of your choice and make
contributions to the new foreign pension scheme for at least two years.
"There is a strict issue of
timing, you cannot transfer your scheme on the point of retirement,"
Mr Flynn said. In the case of transferring an occupational scheme, you
would need to find employment. However, it is acceptable to be
self-employed and transfer a personal pension provided you show some proof
of self-employment and make contributions to your new pension scheme for
two years, said Mr Flynn.
There are other strict rules governing
the transfer of a pension fund, but according to a Standard Life briefing
note on this subject, since April 2001 you no longer have to seek
permission from the Inland Revenue to transfer a personal pension as long
as you are not a controlling director or a very high earner.
Gaining permission to transfer benefits
from an occupational scheme is trickier, however. Mr Flynn said: "You
have to get permission from the trustees. They have to vouch for you to
the Inland Revenue and say they are satisfied you will not return to the
country and have severed all links with the UK employer. If you
subsequently come back, the trustees could face losing the pension fund's
tax status and may not be willing to take that risk. They have to work in
the best interests of the scheme."
Jane Samsworth, pensions partner at
Lovells, the City law firm, said: "It is much harder to transfer an
occupational scheme, because you have to work for the company sponsoring
the new occupational scheme. Not only must you comply with the
requirements of the Inland Revenue, but also with statutory regulations
made by the old Department for Social Security."
Ms Samsworth referred to the 1997
Waterside Inn case, where the Inland Revenue eventually withdrew the
retrospective tax benefits from a transferred occupational scheme after it
transpired the new scheme it was being transferred to was incapable of
You have been warned. Transferring a
pension fund overseas is extremely complicated - do not attempt it without
the assistance of an accountant, lawyer or specialist independent
financial adviser who will be able to find a recipient for your personal
pension, or arrange the transfer of your occupational pension.
The main restrictions are as follows,
however this list is not exhaustive, particularly in the case of
occupational pension scheme transfers.
To qualify for a transfer, you must not
yet be in receipt of a pension or benefits from your scheme or fund.
The transfer must be made directly from
the provider or trustees of your UK scheme to the provider or trustees of
your new overseas scheme.
You should be intending to work in the
country of your choice in order to transfer your fund to another fund you
are paying into. If you are employed, you will need a letter from your
employer. If you are self-employed, you can provide invoices as proof.
You must be emigrating with
"absolutely no intention of returning either to work or retire in the
The overseas scheme you transfer to
must be authorised and recognised as a pension scheme by the relevant tax
or supervisory authority of the country you are moving to.
A spokesman for the Inland Revenue
said: "If you fulfil all the criteria, then you can go ahead with a
transfer. However, whether or not it would be financially advantageous to
do so is not a matter for the Revenue."
The Inland Revenue website says:
"It may be possible to transfer your personal pension fund to an
overseas pension scheme. You have to be resident, working and a member of
a pension scheme in the country you now live."
Brian Dennehy, from independent
financial adviser Dennehy Weller & Co, said there are many risks
involved with moving a pension fund offshore. "Transferring to a
legitimate overseas insurance company should be undertaken with care.
Understand the charges on new policies, as the disclosure regime for
charges may be nothing like as clear as the UK. The funds of the new
company need to be researched and the publicly-available information may
be poor. Investor protection is vital - what happens if your insurer
fails, or the advice was poor?"
Mr Flynn added: "You need a large
amount of understanding of pensions legislation. It is a challenge enough
to understand the UK pension system, let alone another country's as well.
You also have to be very careful about choosing which insurer you transfer
to. You wouldn't want to transfer to a weak insurer."
Graham Duckett, pensions specialist at
independent adviser The Millfield Partnership, said: "For UK
residents it may not be advisable to transfer because of the ability to
draw tax-free cash from pensions in this country. Not all countries will
However, lack of publicity about the
possiblity of exporting pensions has led to even more risk-taking, with
people desperate for cash being taken in by "trust busters",
said Mr Dennehy. "Be very wary if you are offered the chance to
liberate your pension scheme, and turn it into a lump sum - often called
trust-busting. A typical trust-busting exercise would involve offshore
companies and bank accounts and a fictitious new employer. You could have
20 per cent to 30 per cent of your fund taken in commission and risk a 40
per cent tax charge as well."
A spokesman for the Occupational
Pensions Regulatory Authority (Opra) said: "Typically, the
individual's existing pension scheme will receive a request from the
pension liberator to transfer their pension money to a scheme in the name
of a fictitious new employer created solely for the purpose of
trust-busting. The rewards are questionable to say the least. As well as
paying up to 30 per cent of your money in commission, you could also end
up paying as much as 40 per cent tax on the total amount as well."