UAE-UK tax rule frees up offshore pension transfers

Under the new UAEUK double taxation convention that came into force on January 1, if you are a UK expat over 55 and have pension funds in Britain, then it is now possible to cash out the full pension pot entirely tax-free.

The Financial Conduct Authority (FCA), the UK financial regulator, has recently warned expats to be very wary of schemes being offered by local advisers, such as those based in the UAE, that in many cases then put them into high-risk investments not suitable for pension money.

That is good advice. If you are not happy with making your own large investments then don’t read any further.

But it is not necessarily true that expats will always be best off leaving their pensions locked up in the UK.

First, pension pots are currently in something of a bubble. Pensions known as “defined benefit” that have to pay a pre-agreed income to the member during their retirement also require equally large notional pots to pay out benefits that used to require far lesser amounts to be available.

It is no exaggeration that cashing out in the current asset price bubble might secure you a windfall that will never be available at this level again, especially if the UK Treasury acts soon to close this window of opportunity to protect pension firms from their own prior commitments.

But as the FCA warns, beware of financial advisers who just want your pension fund to make investment commissions; to be candid I have met very few honest ones in 20 years in the Gulf.

That said, pension funds may not be acting entirely in your best interest either. If you look at many pension funds then they are what is technically known as “underfunded”.

So if in the future they actually try to pay out what they are now committed to providing then they just will not be able to find the money. One way or another an excuse will have to be found for offering you a lower pension, perhaps many years from now.

This has already happened in several states in America, and it is likely to become more and more of a problem as ageing populations reach retirement age and find that there is just not enough saved in their pension pots.

In short, many pension funds are classic Ponzi schemes where the first to leave get paid in full and those who try later may be in trouble.

But how do you actually dissolve a pension as an expat? Can this be done tax efficiently? This is actually a good third reason for UK expats with pensions locked up in the UK to consider moving them offshore.

Normally UK pensions are taxed when they are paid as income, but if you live abroad and are not benefiting from the services provided by the British government, then you do not usually pay tax if you live in a jurisdiction that holds a double taxation treaty with the UK, or at least only pay the rate set by wherever you live.

To exit your defined benefit pension first you need to get a report by a qualified independent financial adviser. And in fact this report is also a compulsory requirement for the next stage in transferring these pension pots as a tax-free lump sum.

Earlier this month the UK government released comments noting that pension savers can take up to £1,500 (Dh6,862) from their pension pot to pay for this advice.

What you have to do is write to the old pension fund trustees to request a pension transfer and set up a pension elsewhere to receive the money.

A normal self-invested pension plan product is sufficient for the UAE now that the new joint taxation convention is in place. Formerly going via a Maltese Qualifying Recognised Overseas Pension Scheme, or Qrops, was the best route but more complicated.

As every over-55 UK citizen is now entitled to their pension at this age it is perfectly in order to immediately liquidate it, provided your Sipp has this facility. And as the UAE now has a double taxation treaty, no UK tax should be withheld, although a form will be lodged with Her Majesty’s Revenue and Customs just in case you return to the UK to live within five years. What would you do with that money? True, you no longer have a pension manager charging 1.75 per cent per annum to invest it for you. True you have lost the annual pension you would have otherwise enjoyed probably from the age of 65.

But what sort of pension would you actually get by sticking with these schemes? Not nearly as much as you might think is my best guess.