Home » Transferring A UK Pension Abroad

Transferring A UK Pension Abroad

Carlie: Hey there, it’s Carlie with the Expat Focus Podcast. We’re all about providing practical tips and advice on this show, and in this episode I’m joined by Jake Barber, Founder and Advisor at SJB Global, who is going to talk through transfer options for expats with UK defined contribution pensions.

Jake is based in Spain, and he’s worked with British expats – in fact anyone with a work history in the UK – for a decade. We’ll dive into how Brexit affected pensions, your options for transferring a UK defined contribution pension so you can access it abroad, and specific rules and transfer fees that you should be aware of.

Now for the usual caveat – Jake is providing only general information in this episode. If you want advice more specific to your situation, you should get in touch with him, or another professional advisor.

Jake, thanks for coming on the Expat Focus Podcast to share your knowledge with our listeners about pensions for UK expats. It’s a pleasure to have you here.

Jake: Yeah, great to be on here and look forward to running through the questions with you.

Carlie: Awesome. Well, let’s get straight into it. Can we start by broadly talking about how Brexit affected UK pensions?

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Jake: Yeah, so it actually had a huge impact because pre-Brexit anyone that had a UK pension could draw down the money however they want, but then post-Brexit there were a lot of restrictions placed.

So, for example, somebody actually taking money via withdrawal, a lot of these avenues were blocked because with the standard UK pension, which is a defined contribution scheme a lot of these pensions only offer an option, which is an annuity, and an annuity nine times out of ten can’t be taken as an option in Europe. So that means people then have to transfer with an advisor to be able to access their pensions.

Another impact would be investment platforms having a restriction on UK-based investments. So, for example, if the actual fund is located in the UK, these may no longer be available to people outside of the UK.

The third point would be the currency. So, when the referendum happened, we saw the pound significantly drop against the euro. It has stayed low for a considerable amount of time, but it hasn’t picked up. So a lot of that has just been impacted by the country’s GDP and just the forecast of the UK and how complicated things have been with Europe.

But if somebody is going to access the money as a retiree in Europe, then they’re taking this currency risk on for the rest of their lives. So, transferring their pension to an arrangement, which gives them access, of course, makes more sense. But also if they’re going to be spending the money in euros, it makes sense to have it in euros, as well. So those I would say are probably the biggest impacts that it has towards people with UK pensions.

Carlie: Jake, I’m wondering, in your position, if you’ve seen an increase or a decrease in inquiries in the years since Brexit from expats trying to sort out their finances, including pensions? Are people sort of getting their head around these issues or is it the case that there’s always education and knowledge-sharing to be done?

Jake: Yeah, a lot of times people don’t even realize these problems exist. Because if they were to get a statement from their pension provider, it doesn’t actually say anything about what happens when they leave the UK. So a lot of times it’s reactive. We would get people inquire from the website and they’ll say, “Right, I do not have access to my pension. Can you help?” So, that is a very common scenario, but a lot of it is education, but it’s not that simple because even if I look at someone’s statement, a lot of times it means I have to ring up their pension provider and ask these questions.

So I could ask, for example, it mentions here, for example, that they can fully access their pension. What about if they’re living in X country. No, there you can’t. What about this country? Okay, there they can. And they’ll have to refer that to a specialist within their team to give the answer. So, even these pension companies in the UK that have been dealing with this issue for many years now, post-Brexit, they still aren’t 100% clear.

And it often requires a lot of work ringing up the scheme every single time to find out the answer. And you could have the same pension company have multiple different schemes. So, for example, I had a married couple, they had the exact same pension provider; one of them had access and the other one didn’t. So it isn’t a case of if this pension provider allows you access, this one doesn’t, it really is a case-by-case basis.

Carlie: And why would it have been the case in that particular case, if you can share more details, that one could have access and the other couldn’t? Would it be about their occupation or when their pension started or?

Jake: Yeah. So you get a lot of consolidation in the UK. So, for example, one pension provider would have bought a number of different pension providers over the years. So they could have had 50-100 different pensions that had a different name initially, and now they’re all branded with the same company name. And generally speaking, that scheme that they bought the same rules would apply for that scheme moving forward. So if I was-

Carlie: It’s like grandfathered in kind of rules.

Jake: Exactly, yeah. And it often means the older the scheme, the worse the benefits in the scheme are. So if it’s a newer scheme, it often has more benefits to it than the ones that are from the 80s and 90s or the early-2000s.

Carlie: Jake, we’re going to drill down into UK-defined contribution pensions today. So, let’s start by you explaining to me, how do these differ from other types of pensions?

Jake: In the UK you have two types of pension schemes: you’ve got defined benefit schemes and defined contribution schemes. Defined benefit schemes, they’re also known as final salary pensions, and these were very common in the 80s and the 90s, and they provide a fixed income for life to the pension holder. They have death benefits attached as well, which is normally half. So, for example, let’s say you’ve now retired, you’re accessing a defined benefit scheme; if you pass away, normally half of that will go to your spouse, and then if your children are over 18 or over 23 and in full-time education, they don’t receive anything.

So that is one downside, but what’s happened in the last 15 years, because the interest rates have been so low, defined benefit schemes are funded by low-risk investments. So it’s had a real negative impact on the funding levels of these schemes. And a lot of these pension schemes are now underfunded.

There is a protection called the pension protection funds which if a scheme can’t make its liabilities, it would fall into that, but then people would start losing guarantees attached to the pension scheme. So, because they become really expensive to companies, they virtually all moved into defined contribution schemes, which is now the number one pension scheme that people would have in the UK.

And these are where you would pay a portion of your salary towards the scheme. The employer may match up to a certain amount, and this is invested directly into the market. So it’s very different because the defined benefit scheme is fully protected and inflation-proof, whereas in the defined contribution scheme, it has to be invested correctly and the amount of money that you take from that in retirement depends on the withdrawal rate that you decide.

Carlie: Okay, and so before Brexit, how would a UK expat have accessed this pension while living in Europe, this UK-defined contribution pension?

Jake: They would have had full access to everything. So if they wanted to take an annuity, they could have taken annuity. If they wanted to take the whole thing in one go, they could take it in one go. If they wanted to stagger their payments or make annual payments, they could have done whatever they wanted. So there was absolutely no problem pre-Brexit; but post-Brexit, of course, people then have to use an advisor to be able to transfer if they don’t have access. So it becomes much more problematic.

Carlie: So is the idea that you transfer everything or do you just need an advisor to get monthly payments? I’m guessing that would not be a very efficient solution to do that that way, though.

Jake: No, it wouldn’t. So it would almost always be a full transfer. You may have the option to do a partial transfer, but it’s scheme-by-scheme dependent. So, what the process would be moving forward for people post-Brexit is we would analyze what their scheme actually offers. So, first of all, can they access their pension? If they can’t, of course they have to transfer. If they have to transfer, they need to use a SIP that’s available to non-UK residents and they have to be transferred by a financial advisor.

The second thing we look at is the death benefits. So, within the defined contribution scheme you have two options: one is it’s paid out as a tax-free lump sum, and the other option is it’s paid into a dependence pension, which means if I own the pension and I pass away and the beneficiary would then inherit the pension and it stays in the pension; it’s not a taxable event.

But if it’s received as a tax-free lump sum in the UK, pre-75, if the pension holder dies pre-75, the beneficiary inherits that tax-free as a lump sum. Post-75, they pay tax at the marginal rate. Outside of the UK, it’s almost always taxed. So, we’ve had a scenario, for example, where somebody made an inquiry.=,

they inherited the pension as a lump sum from their partner and they were unaware of these rules and they had to pay tax on the whole amount and it was £400,000 and the tax rate was almost 50%. So that could have easily been avoided by going into a pension which allows a dependent pension.

So, this thing people almost never understand because it’s not written clearly on the paperwork. And again, it requires us to call up and find out exactly what are the options available, but it’s almost always a negative impact unless the beneficiary is a UK resident.

Carlie: Jake, this might sound like an extremely ignorant question, but where does your pension go when you’re transferring it out of the UK to whatever country you’re living in abroad? I’m guessing it can’t come straight to your bank account. So, where does it live so you can access it?

Jake: So, it’s a very, very regulated market. So, transferring your pension, there’s a lot of red tape, but there are two options. You’ve got a SIP, which is a UK-registered scheme, so it doesn’t leave the UK, it’s still registered in the UK. The only difference would be the investment platform where you buy and sell the investments is generally located offshore. So that could be in a place like Ireland, Jersey, Isle of Man, and the only difference that that gives you compared to the UK is it allows you to buy and sell investments in different currencies. So, UK pension, but people often refer to it as an international SIP as opposed to a UK SIP. But in theory, it’s the same thing apart from it gives you access outside of the UK.

The other option is a QROPS. So, this can be located in Gibraltar or Malta. These were really, really common many years ago. There have been a lot of changes over the years, but the most common reason for people in the past to have gone into a QROPS would have been to protect themselves against the lifetime allowance, which is, in simple terms, there’s a lifetime allowance in the UK, which is currently, or was, £1,073,100; if your pension was above that amount, then there would be a tax, which as a lump sum would be taken at 55%, as income it would be taken at 25%. So transferring into a QROPS meant that you could avoid having the lifetime allowance on any future payments above, because a transfer was actually what they called a crystallization event for lifetime allowance.

I know it sounds really complicated. I think they make it complicated on purpose. It actually is quite complicated, but as of last year, they scrapped the lifetime allowance, so it’s no longer in play, which means that a QROPS versus a SIP is much more expensive, so it makes more sense normally to go into a SIP because it’s just a much cheaper alternative than a QROPS and there’s not really many benefits in the QROPs now, apart from all of the payments are paid gross of tax, whereas in a SIP, the 25% tax-free lump sum that’s available is paid out gross, and then the rest of it would be taxed in the UK, but you can file a special tax code to make sure that it ends up being paid gross of tax. Long-winded answer, but it’s quite hard to fully explain it in a short period of time.

Carlie: No, absolutely. And so no matter where you’re living abroad, the SIP is relevant to you if it’s a UK pension that you need to access outside of the country? Or does the country you’re living in come into it?

Jake: The country does. So, the SIP is available anywhere in the world, whereas a QROPS would just be if a QROPS is based in the country of residence or the person that’s looking to transfer to a QROPS is in the EEA. Outside of those jurisdictions, there will be a 25% tax charge to go into a QROPS. And if someone was to, let’s say, for example, you were living in a jurisdiction where a QROPS was available and you left within five years, that 25% tax charge would also happen, as well. So there are some downsides to a QROPS as opposed to a SIP where none of those things would apply.

Carlie: And this is where advisors like yourself come in to explain the options and facilitate that transfer.

Jake: Yeah. So we would always look at it from an objective point of view. But we would make clear why we would make the decision of a SIP or a QROPS but of course, outlining the reasons why the pros and cons for both.

Carlie: Jake, is it possible to DIY this? Like, can I figure out my UK pension transfer into a SIP myself, or do I really need to team up with a professional to get it done?

Jake: So if you were a UK resident, then you could DIY it yourself. And then if the scheme still allows payments outside of the UK. Then that’s not a problem at all. Sometimes these defunct contribution schemes do give access outside of the UK, as well. So in those scenarios, again, we may not be needed to make a transfer.

But apart from that, you pretty much need a financial advisor to do the transfer. So it’s a bit of a niche market, which is why there are a lot of companies like ourselves that are specializing in this particular area, because people do nine times out of 10 need an advisor to help them.

Carlie: So let’s talk fees, because nothing’s for free. So how much does it cost generally to sort out your pension transfer from the UK as a British citizen living abroad?

Jake: Okay, so this can vary significantly depending on which company you use. Some companies may go into really high commission structures, whereas some advisors may go really low. The average, I would say across the board would be a 3% initial fee, and then 1% ongoing. What we do as a company is we have a regressive fee-based model, which means the more money we manage, which could be pensions or investments, the lower the initial and the ongoing fees are.

Just to clarify as well on the transfer, it’s a very arduous process for someone to transfer their pension and it’s become more difficult every single year. So, from stage one to having the initial introduction to actually transferring the pension, that takes up a significant amount of time for the advisor, the administration back office, and the length of time to get that done, as well.

Carlie: I’m guessing Jake, there’s a minimum amount that you would want to see in a pension before you take on the work. I know I worked a few years in the UK and did email some advisors after I left about how I move that money and a couple of them asked me how much we were talking about and I told them the meager figure and they did not respond to me again. So I’m guessing you need to have a sizable pension to make this process work worth your while and worth the advisor’s while, would I be correct?

Jake: That is correct. So, our minimum threshold as a company is £100,000. Other companies could have different minimums, but generally speaking that is the rough minimum that most companies would work off. So, it does create a slight negative scenario for people that have smaller pensions. A lot of times people end up just cashing the whole thing in, which may not be the best decision, but if it’s the only option they’ve got, then they can’t really do anything else.

Carlie: I was speaking to an advisor the other year, even just about investment vehicles and joining one and the minimum for entry raised from like €50,000 to €100,000. And I thought, “Ah, even if you want to be responsible with your money, there is a threshold in which if you’re not privileged enough to have that much money, you’re not going to get in.”

Jake: Yeah, there may be a future where robo-advising takes over and people can do it from any amount.

Carlie: Okay. AI advisors, right. This is what I have to wait for.

Jake: It hasn’t quite kicked off. They were thinking it was going to be the next best thing, but I think five years on, a lot of the companies have closed down. I think just because there’s so much psychology surrounding advice that people don’t make logical decisions, they’ll often make emotional decisions and that’s where having a professional to help guide you through those situations-

Carlie: Human professional.

Jake: Yeah, exactly. It’s really important because people would often make the wrong decision. For example: markets dropped 20%, let’s move our money to cash, whereas the reality is that could have been the worst decision because markets may have already sold off and they may just go up for the next following years.

So, those types of things are really important, not just from looking at the pension, but also the investments within the pension schemes. Because one point I haven’t touched on is that a lot of UK pensions have a UK bias, okay? I used to be a trader in London and I had a UK bias because I was from the UK, it was the only market I traded. It was FTSE 100 or UK stocks. Never touched anything in America. But if you look at the FTSE 100 since the Millennium, it’s up maybe 10-15%. Compare that to the S&P 500, which is up over 250%. There’s a big difference. So, having an international look on the investments is really, really important, and not just choosing a country based on where you’re from. Because we all have these biases but they’re important to get rid of so you can look at where the best place to actually invest your money is.

Carlie: I want to talk timeline, Jake, I guess, looking at a couple of different scenarios, you have the expat with a UK pension who’s already abroad, who might not have retired yet, but is staring down the barrel of retirement. When should they start sorting out a pension transfer? For someone who already is trying to get access to their pension, how long should they expect that process to take? And then what if you’re planning a move from the UK and you know you’re going to want to access your pension, when should you start turning those wheels, get things going so that you’re not going to have a problem?

Jake: So, first of all, if you’re in the UK it would be important to make sure you look at things before you go. And that’s not just for the pensions, but it’s for every single asset you have, because let’s just take an ISA as an example. It’s a tax-efficient vehicle in the UK, but once you leave the UK, it may not be the case.

So a scenario would be, you’ve got £50,000 in an ISA, no capital gains tax at all if you’re a UK resident, so you could cash that all in without paying any tax. If you move outside of the UK to another country, that could all be taxed as capital gains. So just by leaving that, and you’re now a tax resident in a different country, it could mean that you could be paying a lot more tax. So, for people looking to leave the UK, sorting out their finances before they go is really, really important.

From a pension point of view the best point is to plan as soon as possible because the longer you leave it, the longer things can change. So, an actual transfer, it’s tough to give an exact timeframe because it could be three months, it could be two years. It really can drag on that long because it’s not a case of right, paperwork signed, we’re just waiting for the pension transfer. It is paperwork signed, the scheme will then send a questionnaire to fill in, the client has to go through what’s called a money helper call, which is a new requirement that was brought in by the pension regulators in 2021, I believe. And on that call, they then have to go through all the information on the recommendation. So that can be quite overwhelming for people. And then once the questionnaire is sent over, they may send another questionnaire and then it just seems to be things that get prolonged time and time again.

They also brought in a red and amber flag system, which was if, for example, someone isn’t regulated, it would be a red flag, they’ve stopped the transfer. And the flag could be something as simple as having overseas investments. And this gets flagged all the time. Imagine I have a fund which has stocks that are located all around the world, they could flag that as amber and then there are more hoops to jump through before the pension transfers. So, paperwork signed is far from being the end of the process. And often it’s just dragging on and taking forever to actually get pensions transferred, which is unfortunate for us and unfortunate for the person transferring the pension.

Carlie: So, if you’re not retiring for a couple of years, start now.

Jake: Yeah, because it really could take a couple of years to get it completely transferred.

Carlie: Jake, what’s the fastest you’ve been able to make a transfer happen?

Jake: Three years ago, there was a transfer done in two days.

Carlie: Ooh, nice.

Jake: They have it’s called the Origo system, which was set up to be able to do the transfers online, but often it doesn’t work. So then they have to use the paper format. But yeah, it’s been a long time since there have been transfers that quick. I wish it was still like that.

Carlie: I mean, well, you mentioned two years, so on the other hand, what’s the longest you’ve seen a transfer take? I

Jake: Probably two and a half years. Yeah.

Carlie: All right. Sounds like I need to look at my paperwork, Jake.

Jake: I guess the one thing with the timeframe is it still remains invested, so it’s not like the money’s not sitting there invested during that time period, it’s just a period where the money gets transferred to the receiving scheme and then invested, that could be a short window. So, people don’t need to be worried about the money just sitting on the sidelines for that period because it will remain invested until the last minute

Carlie: Jake, if anyone watching this podcast on the Expat Focus YouTube channel, listening to us via their favorite podcast app is interested in asking you some more specific questions about their circumstances, where can they find you?

Jake: Yeah. So, our website is www.sjb-global.com. You can go on there, put your details in and somebody would call you within 24 hours. Likewise, I’m on LinkedIn. Any of the advisors within the company are on LinkedIn, as well. So, it would be finding us directly on there or on the website.

Carlie: Jake, thanks so much for coming on the podcast and explaining UK-defined contribution pensions and how to transfer them if you’re an expat living outside the UK.

Jake: Thank you.

Carlie: That’s it for today. If there’s another expat finance subject that you’d love to hear about, let us know on social media, we are ‘Expat Focus.’

Head to expatfocus.com and click on the ‘services’ tab for a list of our trusted partners, who can help you with everything from expat health insurance, to money transfers and moving your belongings. Remember to like, subscribe or follow us to never miss an episode, and I’ll catch you next time.