How many times have I heard someone say, "I don't understand pensions"?
Pensions can be confusing, and what should be a simple and effective long-term savings vehicle is often made more complicated by the various rules and regulations that apply. A pension is a crucial element of your overall financial plan and can be one of the best ways to build wealth efficiently over the long term.
Pension basics
A pension is a way of saving money to live on when you decide to retire. You typically pay in a portion of your earnings each year and can access that money after the age of 55 (or 57 from April 2028).
Depending on when you or your employer start to pay into your pension, that collective money could be invested for many years, so it has the opportunity to grow, and that growth is protected from tax.
When you reach retirement age, you'll have various options to access your money, and depending on the value of the pension, it could provide an income for the rest of your life.
If you're living offshore, your ability to make additional pension contributions is likely to be limited. That said, relocating can also present an opportunity to review your existing arrangements and align them with your current objectives. In certain situations, expats who have been offshore for more than five years and reach retirement age may be able to access their pension without paying income tax, although this depends on a careful, personalised assessment of circumstances.
Retirement Planning
A pension isn't the only way to fund your retirement. Many people rely on a combination of income sources, such as:
- Cash savings
- Investments, including ISAs, Onshore/Offshore Bonds
- Rental or property income
- Potential inheritance
Effective retirement planning looks at how these different potential income streams work together and aligns them with your long-term lifestyle goals.
It's important to remember that all investments, including ISAs and Pensions carry risk. The value of your investments can go down as well as up, meaning you may get back less than you put in, and any income you draw can also fluctuate.
A personalised approach is essential. This involves understanding your financial position, clarifying what you want from retirement, and building a tax-efficient strategy whilst you are offshore designed to support the lifestyle you're working towards.
Pension & Retirement Planning FAQs
The simple answer is as soon as possible. Time is a huge advantage where your retirement strategy is concerned. The longer you give yourself to plan ahead the better.
There may be a very good reason to consolidate pensions, particularly if fees and charges are running away with a pension you've perhaps left behind in your old country of residence.
This is also represents a great opportunity to review the investment allocation within the pension, which maybe in a default or old 'lifestyling' fund that is no longer tailored to your objectives now your circumstances have changed.
Caution should be taken with older schemes that sometimes have guarantees attached, as well as Defined Benefit/Final Salary Schemes, which require specialist advice.
Technically speaking yes, however if you are no longer a UK resident and have no UK 'Relevant Earnings' (Which is highly unlikely) you are restricted to a net contribution of £2,880, which HMRC then top up to £3,600, giving you basic rate tax relief. You are able to do this for the first five years after leaving the UK.
A Defined Contribution (DC) pension is based on how much you or/and your employer pay in and how those contributions are invested. You build up a pot of money, and the eventual value depends on investment performance and charges. At retirement you can decide when to draw an income, making DC schemes flexible but not guaranteed.
A Defined Benefit (DB) pension promises a set income for life, usually calculated using your salary and years of service. The employer or scheme takes on the investment and longevity risk, giving certainty and often inflation protection, but far less flexibility and generally only 50% of income can be passed onto a surviving spouse.
Current UK pension age is 55 and this is increasing to 57 (from April 2028).
Yes. If you’re working abroad, you can usually pay voluntary UK National Insurance contributions to keep building your State Pension. This is done via Class 2 or Class 3 payments, depending on your circumstances.
Making voluntary contributions can be good value, as each qualifying year increases your future State Pension. For full State Pension you need 35 years of National Insurance Contributions.
You can take your UK pension, however will likely pay tax if you haven't obtained an NT Code (No Tax).
You also need to check the terms of the Double Taxation agreement in place between the UK and your country of residence to avoid the risk of being taxed twice.
This special tax code allows you to receive your UK pension payments without tax being deducted at source.
You start by taking a nominal withdrawal from your pension before applying directly to HMRC with evidence that you are non-resident for tax purposes.
In the earlier years, retirement savings are typically invested mainly in equities to target long-term growth. As retirement approaches, this should be reviewed to ensure the asset allocation remains aligned with retirement objectives. Traditionally, as people get closer to making significant withdrawals from their pension, they shift their focus towards capital preservation by moving into less volatile assets, such as bonds. This approach is known as 'lifestyling'.
However, there is no single correct strategy. The appropriate asset allocation depends on your retirement objectives, time horizon, and your attitude to take investment risk.
A SIPP is a flexible pension plan that offers greater control and a wider range of investment options for building your pension pot. Unlike standard UK pension schemes, where investment choices are often limited, a SIPP allows you to choose how and where your pension savings are invested.