Residents leaving the UK to move abroad, the last thing on their mind is “what happens to my UK pension?” However, it is worth remembering that very often a person’s pension is the second or third most valuable asset after their property. It is therefore very important for people to know whether their pension is being managed to its full potential and is not losing them money.

Those who hold a final salary pension with a former UK employer, as a deferred member, it is entirely possible that the pension fund’s growth is restricted, or otherwise known as ‘frozen’. Such pensions will almost certainly be linked to the inflation indicator, the Retail Price Index (RPI), so future benefits will increase accordingly. But, there is a catch. Following the financial crisis at the end of 2008, RPI fell to zero and a few years prior to that it only varied between 1.8 percent and 2.4 percent per annum; not a very exciting growth rate for a pension. Further, pension funds will perfectly legally cap the maximum growth of a pension to five percent per annum. As with any investment, the value of a fund could fall, but history has shown that top rated investment managers have, over the long run, outperformed bank or building society deposits and provided returns of eight to 12 percent per annum, on average, and sometimes even better.

For those who hold a UK personal pension, the key question to be asked is “do you know how your fund is performing relative to its peers, and if all the additional benefits from recent pension legislation are available?” Investment performance between pension providers can vary enormously and it should be remembered that this is what determines the income people receive when they take retirement.

Whether it’s a final salary or a personal pension scheme, those who move out of the UK may have left their UK pensions quite literally on ice. While retirement might seem a long way off, or even if it is just around the corner, ignoring a UK pension could leave a person legally short-changed. The good news is that UK pension legislation now gives people the opportunity to take back control and maximise the benefits received at retirement.

Options people should consider with their pension advisors include transferring a UK pension out of its final salary or personal pension scheme to a UK regulated Self Invested Personal Pension (SIPP) or a Qualifying Recognised Overseas Pension Scheme (QROP). SIPPs and QROPs are essentially “pension wrappers” that can hold invested funds. Key benefits of a SIPP include:
• Enabling the full growth of a pension, not restricted to RPI or a maximum of 5 percent per annum
• Allowing a spouse to have 100 percent of his/her death benefit rather than 50 percent as is often the case under final salary schemes
• Ensuring a person has the option of taking 25 percent of the value of a pension free of UK income tax at age 50 (to change to age 55 in April 2010), an option not always available under final salary schemes

In most cases QROPs offer similar benefits to SIPPs, sometimes better when taking tax into consideration, depending upon the jurisdiction of the QROPS and the country of residence of the expatriate.

If this all sounds complex, that’s because it is. Consequently, it is important to obtain the right pensions advice from a pension advisor that specialises in advising expatriates living abroad with UK pensions.

For more information please contact Charles Cockerton on charles.cockerton@kestrelint.com