I am a 37-year-old UK citizen living in South Africa and have no intention of returning to the UK. Before I left the UK in 2005 I was contributing to a number of different pension schemes and I have since consolidated them all into one scheme with Scottish Widows.
During my time in South Africa, I have not made any contributions and each year I get my annual statement informing me of its current value. It is growing slowly and is currently worth £15,000.
With the new pension laws introduced this year, I want to know if I can transfer this pension to South Africa and cash it in. Given the small amount and my age, I do not see how a UK pension will benefit me as the eventual pension amount is projected to be very little.
MC, Port Elizabeth
Shannon Currie, of financial advice firm Perceptive Planning, says while a UK pension might seem irrelevant, there are a number of factors to consider before you act. "You can move your pension pot to South Africa via an approved scheme, known as a qualified recognised overseas pension scheme," Ms Currie says. "And, as someone who made the reverse journey a few years ago, I know it will buy a lot of rands.
"But beware of inflation and taxation. South Africa does experience higher growth than the UK, but also has higher inflation. This can be reflected in changes in exchange rates. So the money may grow faster, but not increase its real purchasing power in either pounds or rands over time. In other words, there may be little real gain."
Ms Currie says you should check how much tax you would have to pay before taking action.
She says it is wise to speak to a local highly qualified financial planner about any transfers.
"There have been more than a few instances of advisers in this area not giving the best advice to clients," she says. "A list of qualified advisers is available from the Financial Planning Institute of Southern Africa [fpi.co.za]. After all, while it's a relatively small amount, there is no point in moving it only to lose it."
You should also consider very carefully if you might return to the UK. "Many who leave South Africa to return to the UK wish they had kept more of their UK assets, as the changes in exchange rates in recent years have made the transfer of assets to the UK more expensive," Ms Currie says. "After 10 years you sound settled, but I suggest you make this a conscious call to sever one more link with the UK before you change anything."
If you leave the money in the UK, even for a while, it is worth reviewing the existing scheme to ensure you have taken as much cost out of the system as possible. Higher costs will diminish your eventual returns.
"Lastly, while retirement seems a long way away, the day will come," Ms Currie says. "So I would encourage you to regard this small pot as the seed of a larger one in the future, and urge you to save for retirement in the most disciplined and taxefficient way you can find, using both pension arrangements and the new tax-free savings plans in South Africa."
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I have a pension with Prudential worth about £52,000. I want to withdraw 25pc but I was told I need to transfer into a drawdown fund first. They want to charge me £1,300 to do this. Is that typical of the price I should pay or would I be better off switching to another pension provider?
ENW, via email
Tom Kean, of Thameside Financial Planning, says if the fee is a simple administration charge then it is "eye-wateringly high". But if it includes a full financial advice service then it could save you thousands in lost value.
"This is because you could have valuable benefits such as a guaranteed annuity rate attached to your pension which would be lost if you transferred your money away," Mr Kean says. "This feature typically gives you a guaranteed rate of around 10pc, so it is worth holding onto in many cases. But there are strings attached. Usually you only get the guaranteed annuity rate at the plan's original maturity date and it normally only comes in one flavour - single life with no escalation in payment."
If you are considering transferring to another provider you also need to consider whether you would be giving up a guaranteed rate of return. "Some funds still have a guaranteed return of 4pc per annum," Mr Kean says. "Also check if there is a financial penalty for transferring."
If these issues are not a factor, then it could be sensible to move your funds into a decent plan that will enable you to do what you want under the new pension freedoms.
"There are plenty of things private investors can do for themselves, but this sort of transaction really does warrant professional advice. You can limit the cost of this by agreeing a fixed fee with your adviser in advance so that there are no surprises. Expect to pay around £500 for a very basic service."
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If your pension pot takes you over the lifetime allowance and you don't need all the funds immediately, what is the best way to manage the part in excess of the allowance limit? Also, what are the different tax rates applicable to the part over the lifetime allowance?
DE, via email
Alan Higham, retirement director at Fidelity Worldwide Investment, says that your pension pot will be assessed against the lifetime allowance a number of times, including when you access your money for the first time, if you buy an annuity and when you turn 75, for example.
"Generally, the best way to reduce the lifetime allowance charge is to access your pension as soon as possible," he says. "That way the fund is assessed before it has chance to grow any further. You do not have to take the entire fund to trigger an assessment; you can just designate the funds for drawdown without drawing any.
"You will be assessed again at the age of 75 (or earlier if you buy an annuity) but only on the investment growth of the funds since the previous assessment. So one way to avoid paying extra tax is to withdraw money from your pension fund so that you remain underneath the limit."
The penal tax charge is 25pc on the funds in excess of the lifetime allowance that are kept within the scheme to pay a pension later on. If the scheme rules permit, the excess benefits over the lifetime allowance can be paid as a lump sum instead with a tax charge of 55pc.
"If you are a 40pc taxpayer then the two are the same," Mr Higham says. "Consider £100,000 subject to the lifetime allowance, then after the 25pc tax charge there is £75,000 left which, when paid as income with 40pc tax deducted, leaves £45,000. If you draw the pension when you are a basic rate taxpayer, then you would be left with £60,000."
Set against this strategy though, money taken from a pension then comes into your estate for inheritance tax (IHT) purposes, thus possibly suffering 40pc further tax. Money in a pension is currently paid free of IHT.
If you die before taking any benefits, then your pension fund is assessed for the lifetime allowance charge on any lump sum paid out. No assessment occurs on death where income from the fund is paid to a dependant or on a pension fund that has already been put into income drawdown, even if no money has been taken from it.
"Generally, the best way to reduce the lifetime allowance charge is to access your pension as soon as possible.
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