Workplace pensions were seen as the icing on the cake after years of working and saving hard for retirement. Offering a tax-free cash lump sum and a regular monthly income topped up by the state pension, the aim was to fund the later years of hard working men and women.
Today, the reality is a little different.
Final salary benefits
Workplace pensions come in two types –
- The old-fashioned gold-plated scheme now more or less confined to public sector workers and civil servants. These pensions offer a guaranteed retirement income based on the member’s final salary and length of service
They also come linked to any rise in the cost of living, a spouse pension and sometimes, a guaranteed annuity rate that beats those offered on the open market
- The more modern direct contribution scheme offering no guarantees and a pension based on the return from gilts or the stock market. These workplace pensions also lack the bells and whistles that make the gold-plated schemes so attractive, such as index linking and guaranteed annuity rates
Even though expats live overseas, they still have the same access to a workplace pension as their counterparts remaining at home. Some pay out in local currencies, but most are denominated in Sterling and have income tax deducted at source on monthly payments.
The disadvantage is spending power changes as the Pound rises or falls against local currencies, while income tax is a hassle when trying to deal with HM Revenue and Customs (HMRC) from a different time zone which is hundreds if not thousands of miles away.
The bonus is the 25% tax-free lump sum is still paid in full and UK pension freedoms, such as partial or complete drawdown are still optional. For expats still working for British firms but living overseas, a key fact is unless they are tax resident in the UK, no tax relief is allowed on pension contributions.
The determining factor is the statutory residence test.
Expats should take the test before opening or making other decisions about their pensions. If they are UK resident, then all the pension features available to anyone in Britain are available to them as well – including tax relief on contributions.