Client Affairs

How Are UK Expats Affected by Recent Pension Changes?

Alison Steed, 28 September 2006

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Pension changes made this year by the British Government have done little to help expats, and they are now, more than ever, reliant on their...

Pension changes made this year by the British Government have done little to help expats, and they are now, more than ever, reliant on their own retirement planning.

Sweeping changes to pensions legislation introduced to the UK in April were greeted in most cases as beneficial, but certain elements have proved particularly disadvantageous for expats. For example, the ability to nominate a qualifying year before leaving the UK to continue saving into a UK pension and benefiting from tax relief for up to five years while abroad, has been removed.

This had meant that an expat could have opened a stakeholder pension before leaving for an overseas posting, nominate that year as a qualifying year, and then pay as much as £2,808 into the pension from overseas for the next five years, and have that made up to £3,600 with tax relief.
Graham Barnes of independent financial advisor The Fry Group, said: “Removing the five qualifying years does make it more difficult for expats to save for their pensions. I don’t think the Government or the Treasury thinks about expats.”

Some benefit may be gained from the ability to put up to £215,000 into a pension – or 100 per cent of your salary – in a single year, and get tax relief if an expat returns to the UK at a later date. The important thing to remember is that no pension fund should breach a £1.5 million cap for this year, which includes investment performance.

How best to advise expat clients to deal with their pension planning will, as always, depend on their own circumstances. One key point to remember is that many expats will not be paying tax while they are working abroad, so can actually pay more into a savings plan than they would in the UK, and are effectively getting 100 per cent tax relief on those contributions. This should not be ignored when you are advising your clients to address their retirement planning while overseas.
Further changes to the UK state pension proposed in the Government’s pensions white paper in May will benefit expats to some degree, but it is not all good news.

One disadvantage is that the state pension age will increase for men and women to 66 in 2024, 67 in 2034, and 68 in 2044 – with each change being phased in during the preceding two years. But more appealingly, the state pension link with earnings, rather than prices, will also be restored, and the number of years of full National Insurance contributions needed to qualify for a full state pension will fall to 30.

Mr Barnes said: “For British expatriates the announcements mean that 30 years of national insurance contributions will be necessary to guarantee a UK state pension, rather than the current 44 for men and 39 for women. As a result, the state pension does provide a very cost-effective means of saving for retirement.

“The reforms address the fact that people are living longer and also ensure that women and carers do not lose out if they take time out from working to raise a family or care for a relative.
“Yet the changes, although welcomed, do not mean that people can rely on the state pension to provide an adequate fund for retirement. It is clear that additional provision must be made to guarantee as comfortable a retirement as possible.”

Retirement saving, especially for expats, should be a top priority. Richard Meek of IFAs Punter Southall Financial Management, said: “Put simply, at some point you will stop work. Unless you believe the state pension will be sufficient for your needs, or you plan to win the pools, or your house is worth a million pounds and you plan to sell at retirement and live in a caravan (which is extremely unlikely), you will need to save some of the income you earn now to live on then.”
If your client is able to save into an investment scheme from untaxed income, and then to move that money onshore – providing there is not too significant a tax disadvantage – and put it into a pension, it should be possible to maximise the tax relief.

Beware though, no more than the total amount of tax you pay in a year can be reclaimed in tax relief, so you may need to phase in payments from a client’s fund to generate the best effect.
However, the tax status of expats has become slightly blurred by changes to HM Revenue & Customs policy on residency and non-residency, which could make this strategy more complex.

Previously, the Revenue had considered you non-resident in the UK for tax purposes if, among other rules, you spent less than 91 days a year here, said Mr Barnes. But it appears that the Revenue has started to reinterpret the existing regulations.

Mr Barnes said: “The upshot is that HMRC seems to be adopting a stricter attitude towards endorsing expatriate status. In a recent tax case (HMRC vs Shepherd) the ruling indicated that a new, and more difficult, hurdle had to be cleared before the qualification for expatriate status was granted.

“The ruling indicated that in the absence of a ‘clear and distinct’ break from the UK, any move abroad will be regarded as only temporary. As a result, the guidance provided by HMRC’s own publication on the subject can no longer be regarded as representing its current thinking on the matter. Expatriates can no longer rely on non-resident status being granted purely because they are absent from the UK.”

One exception, said Mr Barnes, is if the individual moves abroad for full time employment which lasts for at least one full tax year, but even here all duties must be undertaken overseas to qualify for non-resident status. For example, if a director attended an occasional board meeting in the UK, he or she may not qualify.

Mr Barnes added: “This gives rise to all sorts of problems. For example, if a director of a UK company accepted a two-year appointment abroad and, for entirely understandable reasons, chose to leave his partner and children in the UK, this would be regarded as something other than a ‘clear and distinct break’ and non-resident status could not be assumed.

“Equally, if you were to retire abroad and retain a property in the UK, as a foothold in the market or a base during return visits, a claim to expatriate status could again be challenged. Pulling out of the UK property market altogether, or making the property unavailable by commercially letting, would be effective – but not everybody wants to take such drastic steps.

“Without doubt, simply moving abroad to avoid UK tax is becoming much more difficult than it used to be, and HMRC is likely to pay continued and careful attention to those wanting to adopt non-residence status. For those moving or living abroad a carefully planned strategy is vital if they want to achieve their objectives. It is critical to act sooner rather than later in this important area, to ensure that your client’s tax planning strategy works with the changing guidelines.”

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