The Real Cost Of International Pension Plans

International pension plans for individuals (or IPPs) have historically been used as one of the ways to hire and retain talent. The schemes allowed investment banks to reward their employees handsomely for the work they’ve completed. They proved incredibly popular, until changes in the law meant that participants were no longer able to access certain benefits. 

Prior to the changes, UK Inland Revenue permitted attractive tax concessions to ‘foreign emolument persons’ working in the UK, who participated in ‘foreign retirement schemes’. In other words, a non-UK domiciled individual employed in the UK by a foreign company, and resident or ordinarily resident in the UK for tax purposes. 

Post-changes, the IPP option offers less advantages. As a result, many people who were previously enrolled in such schemes sought advice regarding retirement plans for expats and other individuals. Here, we shine a light on these schemes and provide an alternative. 

IPPs, often referred to as offshore pension plans for expats, are unique retirement schemes that were designed to attract an international workforce. They were hugely popular with companies that have employees who work abroad on international assignments. 

Unlike domestic UK pension schemes, IPPs offered no limit on earnings that could qualify for benefit purposes. This meant that highly remunerated employees could place significant contributions into the scheme, sometimes totalling several million a year, through what’s known as a ‘bonus sacrifice’. 

From an employers’ perspective, the scheme was invaluable. Employer contributions were fully deductible for corporation tax purposes in the year of the contribution. This meant that no national insurance (12.8% of the prospective bonus) was payable in respect to the employer’s contributions to an IPP. 

As a result of being an offshore investment, an international pension scheme for expats could accumulate largely tax-free income and gains. 

At the time, the benefits were unrivalled. Unlike traditional private pensions for expats, IPPs could be taken out as a cash lump sum. However, this has since been matched, as UK pensions can now also be taken out as a lump sum at the age of 55. 

When it comes to receiving the lump sum, if you were to take the retirement benefits after ceasing to be a tax resident in the UK, any liability on the payment would depend on the country you decide to retire in. Or, rather, the country you withdraw the payment in. 

Of course, the country you do take your pension out of could have a tax regime that’s unfavourable towards the lump sum. In this case, you would need to temporarily relocate to another country with a nil or low tax rate, before becoming a tax resident in the final country, in order to optimise your benefits. 

A-day is the phrase used to describe the time this form of UK expat retirement planning was brought to an end. In 2004, the then Chancellor announced a radical pension reform that would come into effect on 6th April 2006. On A-day, all pensions were affected, and as a consequence, large investment banks could no longer establish international plans for their employees. 

One rule stated that those who joined must have been members of the scheme before coming to the UK. Another, stipulated that individuals must have been entitled to tax relief on their contributions to the scheme in the country they resided in immediately before coming to the UK. The reality was that in most cases, these were offshore pensions for UK residents, meaning that the relief would no longer be available to them. 

Some could apply for the scheme that replaced the original international pension plan for expats, known as migrant relief. Generally, though, these schemes tended to trap those who had opted in pre-2006, and would continue to charge them for their usage. As the majority of account holders were unaware of their options, they continue to pay these charges today, despite old IPP schemes offering nothing in the way of the old benefits. 

 The IPP you were offered was largely determined by your employer, as well as which groups offered such a scheme. What we would instead suggest is that you seek out a review of any other IPP scheme you may currently be locked into, and see whether it’s possible for you to move your finances. This way, you can identify if there are any benefits to remaining in your current scheme since pensions were reformed.  

Yes, independent financial advisors (IFAs) such as ourselves are capable of transferring your assets out of these schemes. By working alongside you, and the organisation you’re currently using as a means of storing your pension funds, we’re able to relocate your wealth in a way that’s transparent and tax efficient. 

Unlike other IFAs, at Adsen Moore, our services offer no hidden fees and are completely accessible to any individual affected by A-day. We’re affordable, agile, and are prepared to talk you through any concerns you may have. What’s more, we also offer support with regards to lifetime allowance in the UK, so if you have any other queries about your retirement, we’re well-equipped to answer them. 

To speak to a member of our friendly team today, simply call 0203 432 5564. Alternatively, you can fill in our online contact form and we’ll get back to you as soon as possible.