Many people in the expatriate community talk about the high cost of living in the UK and how much money is paid in taxes.  One very effective way that the local nationals use to get back as much tax as possible is through pension plans.  This is something that it is not only fully available to the locals, but to everyone who pays taxes in the UK.  Today, we all lead very busy lives and, unsurprisingly, focus our attention on the here and the now.  But it is more important than ever to look carefully at the future too. Sooner or later, you will retire. But the decisions you make today are the ones that will dictate the standard of living you will enjoy tomorrow.   The earlier you make a start, the easier it will be to have the lifestyle you want and deserve when you retire.

These days, people are living longer than ever before.  This is great news, but means that when you retire your money has to last for longer.  In simple terms, retirement is like a holiday.  Indeed, it could last 20, 30 or even 40 years – you could spend longer in retirement than you did working.   And every one those retirement years need to be paid for.  Normally until people reach their 40’s, retirement seems an awfully long way away.  Spending cash straight away looks a lot more fun.  This is a shame in pension terms, because of the miracle of compound interest. Invest £3,600 year at age 55 (earning an annual return of 7%) and by age 65, you will have a pension fund of only £56,600.  Start at age 45 and your fund will nearly reach £177,000, more than 3 times as much.  But start at 25 and your pension fund will be worth £875,000.(Assumes Growth Rate of 7% pa and annual plan charges of 1.80%.  These figures are only examples and are not guaranteed- they are not minimum or maximum amounts.  What you will get back depends on how your investment grows and the tax treatment of the investment.  You could get back more or less than this.)

For those people paying UK taxes, private pensions represent an excellent investment opportunity, irrespective of their nationality or domiciliary status. Pensions are long-term investments with special tax rules – for example, you get tax relief on contributions. This means in practical terms that if you are a high rate tax payer, £100 invested in a pension will effectively cost you just £60. This translates into a 66.6% return on the initial investment. What other investment offer such a benefit? In addition, the money invested will have the opportunity to grow in the different funds over time with the same tax treatment within the fund as the money invested in ISA’s.

Investing in pensions has also the following advantages:

• The person doesn’t have to be tax resident or even live in the UK when taking the pension benefits.
• Taxes from the income generated will be paid according to the legislation where the individual lives at the time.
• The pension fund can be transferred to some schemes in different countries. They need to be part of the approved list by the Her Majesty Revenue and Customs (HMRC).
•  Individuals can contribute the maximum of £3,600 or their annual salary (up to £235,000 for tax year 2008/9) and get  tax relief
•  When crystallizing the pension, 25% tax free cash lump sum can be taken from the pension fund. The balance will provide an income for life which will be subject to tax. The tax will depend on the country where you are resident at the time of taking the income.
•  After leaving the UK and becoming a non-resident, the person can still contribute for another 5 years enjoying the tax relief. During this time the maximum contribution is £3,600 a year.

(Please note that the tax treatment of pensions depend on your tax bracket and may be subject to change in the future)

Saving for retirement is something that most of us put off for as long as we can. We always find it difficult that the money is not going to be accessible in case of need. But the reality is that the sooner you start paying into a pension the higher your income in retirement is likely to be.

Guadalupe Montes de Oca is one of my clients in British American Tobacco.  Guadalupe is from Mexico and has been in the UK for over a year.  When we met to discuss her financial planning, she was not convinced at all about starting a pension plan in the UK.  “The main reason for this was because I knew the money would be “locked” in the pension plan until I was 55 years old”, says Guadalupe. “ But after comparing Pension Plans to other types of investment, I decided that it made more financial sense to maximise the investment in retirement plans as I would get the tax relief (despite being a non UK national and not planning to retire in the UK) and give time for the pension pot to grow.   Besides, pension plans back home are not as generous as those in the UK”.

HOW PENSIONS WORK
Pensions can sometimes seem a confusing subject, full of financial jargon and complicated rules. So let’s start with the basics. Starting a private pension is simply a way of building up a tax efficient sum of money to provide an income when you retire. The pension you choose and the level of contribution you make will depend on your individual circumstances.

A good starting point might be to ask yourself these key questions:

•  Do I believe that the plans that I have in place will give me enough income to maintain my current lifestyle?
• How much will I need in retirement?
• Is there a pension scheme in place for me?
• How much can I invest in a pension plan

At the age of 55 - even if you are still working- you will be able to take your pension if you want to.  You can take 25% of the fund as a tax free lump sum and there are a number of options to generate an income with the balance.  The option you choose will depend on a number of factors like your attitude to risk, personal circumstances at the time, etc.

If you want to learn more about pensions in the UK, I would be delighted to meet you. Alternatively you can come to one of the free seminars that we conduct in London every month.  There are only 10 places available at each one.  The seminars last one hour (including a Q&A session) and are held at St. James’s Place offices in Mayfair.  The next  seminar will take place on 4th November at 6:30 PM. 

If you want to book a place, just send an email to

This e-mail address is being protected from spambots. You need JavaScript enabled to view it

Please include your name and contact number

.Reinaldo Soto-Rosa

www.sjpp.co.uk/sotorosa

Associate Partner of the St. James’s Place Partnership