When you begin a new career in a new country, you often leave something valuable behind.
For many British expatriates in the UAE, that special something is a final salary company pension scheme.
These pensions can be worth tens or even hundreds of thousands of pounds, and if you plan to return home at some point, often the best thing to do is simply leave them in the United Kingdom.
However, many UK expats come under intense pressure from commission-hungry UAE advisers to transfer the pension into an offshore investment vehicle so they can profit from the sky-high fees.
Julian Vydelingum, a chartered financial planner at IFAs Killik & Co in Dubai, says the UK regulator, the Financial Conduct Authority (FCA), is concerned about ill-advised pension transfers. “It states that the starting point for advice is that ‘a transfer will not be in the member’s best interests’.”
While advisers in the UK are obliged by law to charge a fee, many UAE advisers charge commission, which gives them an incentive to urge people to transfer out and reinvest their pension fund into a high-charging investment plan.
Mr Vydelingum says some advisers recommend offshore investment bonds to earn upfront commission of up to 7 per cent. “They may also recommend structured products or boutique investment funds that pay up to 5 per cent initially followed by ‘trail’ commission year after year,” he says, adding that local advisers can lack the relevant qualifications and have a personal financial incentive to recommend a transfer.
These charges are deducted directly from your funds, which makes it harder for them to produce a positive return after costs.
Mr Vydelingum says it also means that many savers seeking flexibility end up with the opposite. “Advisers often sell illiquid or unsuitable funds that don’t match their objectives or attitude to investment risk.”
So why is there so much interest in UK expats’ pensions in the UAE?
The Dubai-based financial planning firm Guardian Wealth Management says expats with UK final salary occupational pension schemes could be at risk from a “UK pensions explosion”.
The UK’s Pension Protection Fund (PPF) recently warned that many final salary schemes do not have enough funds to pay out retirement incomes in full.
Old-style employer-run final salary schemes are now increasingly rare because they are expensive to offer and the amount of pension a holder receives is guaranteed.
There was a total shortfall of £323 billion (Dh1.66 trillion) at the end of last month, with the average scheme having enough funding to cover just 80 per cent of its liabilities. Nearly all such schemes are now closed to new members.
A combination of slowing economic growth, volatile stock markets and rising life expectancy has put company pension pots under increasing pressure.
There are 4,956 UK schemes in deficit and just 989 in surplus, the PPF said.
Hamzah Shalchi, who manages Guardian Wealth Management’s Dubai operations, says expats who are concerned about their own final salary scheme should consider transferring their funds into a UK-regulated self-invested personal pension (Sipp) instead – a flexible plan that puts savers in charge of their own money.
However, James McLeod, the head of pensions at the UAE-based adviser AES International, says no expat should leave a defined benefit final salary pension scheme lightly.
Those lucky enough to have one that is not struggling typically receive 1/60th of their retirement income for each year of service at the company.
“This is a hugely valuable benefit and you need a really strong reason to give that up,” says Mr McLeod.
However, some British expats, such as Tim Hughes, have no desire to return to the UK, and are keen to access their pension pot and put it to better use.
Mr Hughes, 52, was posted to the UAE in May 2010 and left behind two final salary pension schemes, one with a former company and another with his current employer.
Now living in Downtown Dubai and working as a brand and marketing manager for a financial services company, he says their combined transfer value was worth several hundred thousand pounds.
Most final salary schemes stipulate that any death benefits can only go to a spouse, children or financial dependents, and that left Mr Hughes facing a dilemma.
“I have been happily divorced for 20 years with no children and was worried the scheme would absorb any remaining value when I died,” he says. “I would rather it went to my parents, brother, nephew and nieces, or even a charity.”
After taking independent financial advice, Mr Hughes transferred both his final salary schemes into a Sipp. “I have invested in a balanced mix of mutual funds, which I hope will grow steadily and provide a decent income in retirement,” he says.
The money is held in trust so Mr Hughes can pass it on to his chosen beneficiaries free of tax when he dies.
He is now in control of his own money, and under new UK “pension freedom” rules introduced in April last year, can draw cash from his funds from the age 55 if he wishes.
While Mr Hughes’ personal situation makes sense for him to transfer his pension, for others it is not.
To give an indication of how much the FCA advises against doing this, if your final salary pension has a transfer value of more than £30,000, the authority insists you take advice from a UK-regulated adviser with permission to advise on pension transfers and opt-outs.
The reason the FCA makes this demand is to prevent a feeding frenzy from pushy advisers, as in most cases people will be better off saying put.
Mr McLeod says that if you would like a guaranteed pension income in retirement and have few other savings, transferring would be a mistake. “There are advisers out there who will say otherwise – don’t believe them. A pension transfer is of value to their pockets, not yours.”
There is another danger to be aware of. Under UK pension freedom rules, savers can convert their pension into cash from age 55 rather than being forced to buy an annuity, an income for life.
One in three Britons over 55 in the UK has been targeted by potential pension scammers in the past three months alone, according to new research from the UK advisers Retirement Advantage.
They have been offered free pensions advice or investment opportunities by phone, text or email.
Several thousand UK residents have already lost their lifetime savings after being lured into crooked get-rich-quick investment plans.
So if a UAE adviser claims to know of a loophole that allows you to access your cash before 55, you are being targeted by a scam. This is known as pensions “liberation” and will almost certainly lose your pension savings and face a large tax bill on top.
“Pension scams do exist and you can’t undo what has been done,” says Mr McLeod.
Many bogus firms are operating from overseas. They lure their victims with get-rich-quick investment schemes, usually involving property, more rarely small-company stocks with a supposedly big future. They dazzle people with promises of double-digit returns, but once they have taken the money you will typically never see it again.
However, Mr McCleod says there are some advantages to transferring defined benefit schemes into a qualifying recognised overseas pension scheme (QROPS), approved by Her Majesty’s Revenue and Customs.
“The main advantages are flexibility, choice and the offshore tax benefits,” he says.
There are dozens of these schemes around the world. They differ from country to country, but are typically run by local pension companies, insurers and advisers. The HMRC list includes traditional investment jurisdictions with low tax regimes for non-residents in established offshore locations such as Jersey, Guernsey and the Isle of Man.
You do not have to be a UK citizen, but you do need to have a UK pension to qualify. The tax treatment can be favourable, but there is no guarantee that you will avoid UK income tax on the money altogether.
Mr McLeod says those who transfer their pension should continue to invest for their retirement in a new savings vehicle such as a Sipp or QROPS. “Others may use it to buy a property, or possibly to pay off a mortgage or other debts. It depends on you.”
Keren Bobker, a senior consultant at Holborn Assets and The National’s On Your Side columnist, says pension transfers may be justified if somebody has no dependents, if they belong to an underfunded final salary scheme or if they are in poor health with a low life expectancy. They may get a better deal by transferring out and reinvesting their funds on the open market. “This depends on your circumstances, so you need to seek trusted financial advice,” Ms Bobker says.
You should not, however, view a pension transfer as the chance to get your hands on lots of cash, she warns. “Don’t splurge the cash, as you could deplete your savings and run out of pension income in retirement.”
Instead, Ms Bobker advises reinvesting the money across a range of assets such as shares, bonds, cash and property.
You also need to make sure that any money transferred into a Sipp or QROPS is properly managed on an ongoing basis to ensure it is still invested in the right place, she adds.
Ms Bobker points out that not every Briton with a final salary scheme is free to transfer. “Those in certain ‘unfunded’ public sector schemes, such as the NHS, firefighters, army and teacher’s schemes, cannot transfer their benefits.”
Self-invested personal pension (Sipp)
As its name suggests, a self-invested personal pension, or SIPP, is a UK personal pension that allows you to choose exactly where you invest your money.
SIPPS were launched in 1989, allowing you to invest in a wide range of investments approved by the UK’s tax office, Her Majesty’s Revenue & Customs (HMRC).
These include cash, bonds, mutual funds, individual company stocks and exchange traded funds (ETFs), commercial property and derivatives. They are ideal for those who want to manage their own pension portfolios. By comparison, you cannot hold direct stocks or property within a standard personal pension.
SIPPS are subject to UK pension and tax legislation and may work better for expatriates who ultimately plan to retire in the UK.
On death, any value will be passed to your nominated beneficiaries and can be paid tax-free if death occurs before the age of 75.
Qualifying Recognised Overseas Pension Scheme (QROPS)
Expatriates who plan to retire outside the UK may do better with a Qualifying Recognised Overseas Pension Scheme, or QROPS, which were launched in 2006.
This is an overseas pension scheme that can accept transfers from UK pension schemes recognised by HMRC, which allows expats to shift their UK pension offshore.
Your QROPS can be moved to the tax-efficient offshore jurisdiction such as the Isle of Man or Malta, provided they meet HMRC’s qualifying criteria, and paid to the country you retire in.
QROPS offer both currency and investment flexibility, as well as tax advantages when drawing pension benefits, depending on where you reside at the time you draw money from your pension.
This may be more tax-efficient than a SIPP for expats retiring outside the UK, although the set-up and annual charges on QROPS may be higher.
On death, your funds will be passed to your nominated beneficiaries.