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Funding into UK schemes for non-UK residents

Many individuals move overseas and want to continue to fund a pension in the UK, but the ability to do this depends on: 

• the type of pension scheme
• whether the member is going overseas permanently or on secondment
• whether the employee still has relevant UK earnings and
• whether the contributions are from the employer or from the individual member

Eligibility and contribution limits

Occupational pension schemes

Employer contributions can continue on the same basis as when the employee was based in the UK provided the employee is on secondment. But if the employee goes overseas permanently, contributions must stop at the time they leave the UK, unless the provider allowing scheme membership is satisfied that it's meeting the regulatory requirements (if any) of the specific country. As a result of this, many providers or trustees won't accept pension business for non-UK residents.

Contributions for employees (either paid as personal contributions or by salary sacrifice) can continue if the employee is on secondment. But, if they no longer have relevant UK earnings, they should seek expert tax advice.

(Group) Personal pension schemes (including SIPPs and stakeholder schemes)

If the individual/employee still has relevant UK earnings, their personal contributions may continue as when they were UK resident. But if they no longer have relevant UK earnings, relievable contributions will be limited to £3,600 a year for the five tax years after the one in which they leave the UK.

Employer contributions can continue as when the employee was in the UK, but if the contract of employment is now with the overseas company, UK corporation tax may not be granted, since it may not be regarded as a genuine expense of the UK business. There's no five year restriction and no £3,600 limit, as applies to employee contributions.

If the individual wants to pay by salary sacrifice, they should seek expert tax advice.

Secondment

Employees working on secondment should satisfy the following conditions:

• They're being sent to work overseas from the UK
• They're providing services on behalf of the UK employer
• They're going for a limited period and 
• There's an expectation that they either return to the UK or to retire (not necessarily in the UK) at the end of that period

A limited period will normally end on a specified date, although it could be when a specific event ends - for example, completing a project.

Employees who are working overseas and don't satisfy these conditions can't be treated as though they're UK employees. They'll be subject to the social and labour laws of the country in which they work.

Joining a UK occupational pension scheme if living overseas

Individuals can become a member of a UK registered occupational pension scheme, sponsored by a UK based employer when they're resident overseas, only if they're on secondment - not based there permanently. This is because the pension contract is with the employer, as opposed to the individual.

But if the employee is to be situated in another jurisdiction* permanently, occupational pension scheme trustees must be satisfied that their scheme is meeting the regulatory requirements (if any) of the specific country.

Post-Brexit it's no longer possible for an occupational pension scheme to apply for authorisation from The Pensions Regulator (tPR) to enable them to operate outside the UK.

Starting a UK Personal Pension if non-UK resident

An overseas resident* can set up a UK personal pension plan (at least in theory), but there are difficulties in doing so.

HMRC now allows anyone worldwide to start a UK pension. However, as personal pension contracts (including SIPP and stakeholder pensions) are between the provider and the individual, Financial Conduct Authority (FCA) selling rules mean that providers need to be satisfied that it's meeting the regulatory requirements (if any) of the specific country in which the proposed member is living. As a result of this, many providers or trustees won't accept pension business for non-UK residents - even if they have relevant UK earnings and, as a result, are relevant UK individuals and able to get tax relief on their contributions.

These requirements apply even where an overseas resident only wants to set up a new pension plan to accept a transfer from an existing UK registered pension scheme.

The individual's financial adviser will also need to ensure they meet the regulatory requirements (if any) of the specific country in which the proposed member is living if they plan to advise the member whilst they are overseas.

Retirement and death benefits

On reaching retirement, many consider moving abroad to enjoy their UK pension savings in sunnier climes. How they can access this will depend on the retirement options offered by the scheme(s) – for example: income drawdown, annuity purchase, scheme pension etc. The same choices should apply to all members, irrespective of where they live at the time they take the benefits.

However, some benefit options may not be available to members who are living overseas if it involves the need to set up a new contract for that individual. For example, if a pension provider doesn't offer annuities, the member would need to buy an annuity from another provider and, as that would be a new contract, it would depend on whether the annuity provider is prepared to offer a contract to someone outside the UK. Many won’t because there may be regulatory and tax reporting requirements that they would need to meet to be able to do so.

While the retirement options available may differ between schemes, all UK pension schemes can pay directly to a pensioner living abroad.

Direct payment options for UK pension benefits

There are potentially three different payment options available, although they won't all apply in every case. These are as follows:

• The pension can be paid directly to a bank in the pensioner's country of residence, in the local currency, using the Transcontinental Automated Payment Service (TAPS). This is the easiest way to guarantee prompt, readily accessible pension payments.
• The pension payment can be sent to the pensioner by airmail in pounds sterling (by sterling draft or cheque). This isn't a very satisfactory method as it can take a while for the payments to arrive and the payments aren't in the local currency.
• The pension can be paid in pounds sterling into a UK bank account. The pensioner can then arrange transfers to a bank in the country of residence as and when they choose (for example, when the exchange rate is favourable). Alternatively, if they return to the UK regularly, the pensioner could leave the money invested in the UK bank and use the funds when in the UK.

Transcontinental Automated Payment Service (TAPS)

Direct TAPS

The Transcontinental Automated Payment System allows payments (including pension payments) to be transferred from the UK to overseas bank accounts, in the local currency.

The TAPS system works by agreement between UK banks and banks in a number of countries. These tend to be countries in Western Europe and the Commonwealth, as well as the USA.

As each payment is converted from sterling to the local currency, there's a charge for the currency exchange as well as a charge for using the TAPS network.  In addition, the recipient must accept the currency exchange rate in place at the time of transfer, which may not be favourable.  However, as the process is automated, the costs are lower than if the individual transferred the monies abroad personally from a UK bank account.

Indirect TAPS

Even if the pensioner's country of residence isn't on the direct TAPS list, it may still possible to make payments using an indirect TAPS service. The process is similar to direct TAPS but, because no formal agreement exists, the UK bank has to arrange the transfer independently with a bank in the country of residence.

This will lead to higher transaction costs and the process will take longer.

Death Benefits

On the death of the member, some of the death benefit options may not be available to beneficiaries who are living overseas if it involves the pension scheme setting up a new pension plan for that beneficiary.

For example, to access inherited drawdown the beneficiary may need to transfer to another UK registered pension scheme that can accept an inherited drawdown transfer for someone living where the beneficiary lives. Or they may need to go to a QROPs if they can source one that accepts inherited drawdown transfers.

Lump sum death benefits and survivor's pensions (either via a dependant's scheme pension or an annuity where the member had bought a joint life annuity with the survivor specified) can be paid even where the recipient is non-UK resident.

Taxation of UK pensions for overseas residents

Most UK pensions, regardless of how they're paid, are taxable as earned income. This means that they must be paid, and taxed, under the PAYE system.

However, on moving abroad, a pensioner often becomes a non-UK taxpayer, so they could be eligible to receive their UK pension gross without deduction of UK income tax. This also applies where the overseas resident is a beneficiary of a pension. 

To find out if this possible, the pensioner can call 0300 322 7657 - this is an HMRC helpline for non-residents with UK PAYE tax queries.

• If a pensioner is resident in a country which has a double taxation agreement with the UK. it's possible for the pension income to be taxed only in the country of residence. Pensioners should complete a double taxation agreement claim form for the country they live in, and have it approved by the tax authorities in that country, before submitting it to HMRC for authorisation.
• Claim forms are available from GOV.UK or from the tax authorities in the pensioner's country of residence. Once HMRC authorisation is received, the pension provider will be able to pay the pension as a gross payment without UK income tax being deducted.
• If the pensioner lives in a country that doesn't have a double taxation agreement with the UK, income tax will be deducted in the UK.