Should you leave your money in an overseas pension fund, or transfer it to South Africa?
If you’ve ever worked overseas, there’s every chance you contributed to a pension fund – and if you did, you might now be considering whether you should leave that money in the overseas pension fund or transfer it “home” to South Africa. Anthony Palmer, Carrick’s Group Commercial Director, says that many clients ask for this advice, – those who contributed to a defined contribution pension as well as a defined benefit pension in the United Kingdom.
“We always start with the client’s personal circumstances, as proper planning entails matching assets with liabilities,” he says. “A client needs to ensure they have sufficient rand income, from a salary or being generated from rand assets, to match their expenses.”
Group Commercial Director
Before you ask whether you should transfer your UK pension, it’s wise to ask whether you can. It’s a complex question, because when you (or your employer) contributed to the UK pension scheme, you might have received significant tax relief on that contribution (up to 45%, in some cases). If you did, it means that the money that would have gone to the UK government as tax went into your pension instead. Because UK pension income is taxable, Her Majesty’s government gets some of that money back when you draw your pension. As you can imagine, they’re not hugely excited about that potential tax revenue leaving the country.
The only way to get your pension out of the UK without collecting a nasty tax bill is to transfer it into a Recognised Overseas Pension Scheme. A ROPS is an overseas pension scheme that is officially recognised and approved by the UK government (specifically Her Majesty’s Revenue & Customs). Transfers to ROPS do have their advantages but need to be properly understood and as of the time of writing this article there were no schemes in South Africa that had informed HMRC that they meet the specific conditions required to be included on the HMRC’s official ROPS list, but this list does change from time to time.
Once you have determined whether you can transfer your overseas pension to South Africa, the next question to ask is whether you should. Palmer is clear in his advice here: “If a client has sufficient rand income from other sources, we would generally advise them not to convert the foreign pension into a South African pension,” he says.
He has a number of reasons for saying this, including South Africa’s well-documented political risks, and the benefits of having money in the UK as a currency risk hedge. Two other two key considerations are access and investments.
“A UK pension has flexi access from age 55 which means you can access the entire pension if needs be, whereas a South African pension needs to be retired to a living annuity from age 55, whereby you can then take a lump sum of one-third with the remaining two-thirds being available to provide income for retirement,” Palmer explains. “The minimum drawdown on the remaining two-thirds is 2.5% per annum and the maximum drawdown is 17.5% per annum.”
Foreign pensions generally have what’s known as open architecture investing, which means you can have a diversified portfolio of international assets. You would lose that advantage if you brought your pension to South Africa. “If you bring the assets into the South African pension system, you are governed by Regulation 28 (of the Pension Fund Act), which limits your international exposure and equity exposure,” says Palmer.
An option often utilised is to transfer a pension into a UK SIPP (Self Invested Personal Pension). Carrick works with a number of specialist providers in this space and SIPP’s provide access to excellent international investments solutions as opposed to being more UK centric.
Of course, everybody’s circumstances are different, and what works for other people may not work for you. Speak to your Carrick Wealth Private Wealth Manager for expert opinion and advice that’s tailored to your unique needs.