Self Invested Personal Pensions (SIPPS) explained for expats

As the name suggests, a Self Invested Personal Pension (SIPP) enables someone to investment into a pension for retirement, but making their own decisions about the investment options held within or, in most cases, have access to greater investment choices when dealing with financial advisors.

A SIPP carries the advantages and disadvantages of any other UK based personal pension scheme, except that in regular personal pension plans where the options for investments are limited to those available through the pension provider or fund manager. With a SIPP, you are free to choose which funds you put your money into – or even simply place cash.

There are a number of benefits as well as drawbacks to this option, and we will look into these below. We will also provide an overview of the circumstances where an expat may consider an SIPP over other schemes – and when they are less likely to be suitable.

The information contained in this article is intended as a guide only. As with any investment, you should always seek independent advice before making your decision. If you would like to speak to a trusted pension specialist, please request a free introduction >

A brief explanation of a pensions and SIPPs

Pension schemes are essentially wrappers which follow a set of rules and contain one or more investment funds. Pensions come in a range of shapes and sizes including (but not limited to) Defined Benefit Schemes, State Funded, Final Salary Schemes and ROPS – with ROPS being specifically for people who no longer live in the UK.

Pensions carry certain tax advantages over traditional savings, but also follow the specific guidelines set by HMRC as to how they can be used. A SIPP is no exception.

One of the main tax advantages of pensions is that the money which is paid in can be done so before income tax is taken off, meaning that if you wanted to pay £100 into a pension scheme and you were a basic rate tax payer, in real terms it would only cost you £80 as the remaining £20 would, in essence, be paid by the government. The higher the rate of tax you pay, the less it costs to pay into a pension scheme.

Funds held in a pension are typically available once the holder of the pension reaches 55 years old, but can sometimes depend on the type of scheme. Once you decide you wish to take funds from your pension, you are able to take it in lump sum(s) – where the first 25% of each lump sum is tax free, or as an income over a regular period.

Any money drawn from a pension is considered as income, and is taxed as such. Therefore, whenever you take money from a pension, you should seek advice beforehand to ensure that you are doing it in the most tax efficient way.

Who manages a SIPP?

As previously mentioned, unlike other personal pension schemes a SIP can be managed by the investor (trustee permitting) and, not a fund manager and therefore it is the individuals’ responsibility to make decisions about what funds to choose. This means that it is highly recommended that only those with investment experience, or at least has a good understanding of investments, should really consider a SIPP.

Key to everything is understanding that an investment can both increase and decrease in value, and in extreme cases, it is possible to lose everything. It is also important to understand that, while there may be short term highs and lows, long term performance is far more important. As such, if you are kept awake at night by the performance of investments while you are asleep, a SIPP may not be for you.

How SIPPS are managed

While it is possible to manage a SIPP via the phone or by post, today it is far more common to managed a SIPP through a secure online account. As with other online accounts, it is possible to buy and sell your investments with a few clicks while you may also have dashboards and reports which enable you to track performance over time. However, for expats and other international clients it may not be as straight forward as it is for UK residents due to additional due diligence which is required to be carried out by trustees of the SIPP.

Depending on how you wish to manage your account there may also be additional fees to pay.

SIPP investment options

Through a SIPP you can invest in a wide range of assets and funds, including:

UK/Overseas stocks and shares

Stocks and shares essentially allow you to buy a percentage of a company. If the value of that company increases, so do the value of your shares.

Investment trusts

An investment trust is a collective investment which enables you to invest with a group of investors meaning that your investment risk can be spread.

Exchange Traded Funds (ETF)

Exchange Traded Funds are investment funds which are traded on the LSE and other European markets. Unlike individual stocks and shares, ETFs track the index on various stock markets. Examples of ETFs could include gold, silver, crude oil or the FTSE 100.

Bonds

A bond is a type of loan made to a company (aka a “company bond”) or government (aka “a gilt”) which is then repaid in full at a later date, with additional income provided at a specific rate.

Cash

Much like a savings account, you can simply hold cash in your SIPP however this is less desirable for many as the interest rates available will often be less than those available in standard savings accounts. However, saving cash provides a minimum risk for investment.

Costs of a SIPP

While the costs of a SIPP are often lower than that of other pension schemes, there are still some fixed costs which you are likely to have to pay, including:

• Set up fees (typically up to £500)
• Annual management fee (normally a percentage of your total investment)
• Ongoing charges, including transaction fees for each investment transaction you make
• Exit fees
• Income drawdown fees – you are likely to have to pay a small fee every time you wish to withdraw money from your SIPP

These costs will vary significantly between each SIPP provider. Much like a bank or credit card, you should always compare your options, taking into account what you may wish to do in later life.

Please visit our list of who we consider some of the best SIPPs for expats >

Paying into a SIPP

You can pay money into a SIPP from many sources, and save as much as you want throughout your lifetime. However, there are limits to the taxable benefits of a SIPP, in line with other UK pension schemes.

From 6th April 2024 the lifetime allowance for paying into a pension will be abolished which means your UK pension pot will have no limit to how much you can save in your lifetime, although there is an annual allowance of up to £60,000 per year. Until that point, there will also be no charge for anybody who goes over the current lifetime allowance of £1,073,100 after 6th April 2023.

Paying into a SIPP can be relatively straight forward. You can either pay lump sums, regular contributions or even transfer other pensions into a SIPP.

Before making a decision on opening a SIPP or transferring an existing pension to a SIPP, you should speak to your pension provider and even potentially seek independent advisor as you may find that, not only are their exit penalties, your money may be better of being left where it is.

Drawing an income from a SIPP

Once you reach retirement age, you may decide that you wish to start drawing money from your pension.

As with any pension, there are a number of options for drawing your income from a SIPP. In fact, these options are dependent more on your personal situation.

Traditionally people have purchased annuities which offer a guaranteed income for life. However, following the changes to the pension regulations in 2015 and the decline in the amount annuities will pay, annuities are far less popular.

Another option is to simply take lump sums from your pension. It is important to remember that any money received from a pension is treated as income in most countries and is subject to tax in the UK as well as in your country of residence.

This also includes the pension commencement lump sum which means that the first 25% of your lump sum will not be subject to tax in the UK. This will, however, be subject to tax in your country of residence, so it is important to seek advice about the most tax efficient ways for you to access your pension funds.

Key considerations about SIPPs for expats

As with other personal pensions, you do not have to live in the UK to be able to invest in a SIPP.

However, there are a few important considerations to consider if you do not live in the UK and are considering a SIPP.

Firstly, as SIPPs are held in the UK, the investments and payments have to be in £GBP. This means that if you plan to draw an income from your SIPP while you live abroad you will be liable to currency fluctuations, so you may wish to factor this is into your retirement planning. For people who plan to retire abroad and not return to the UK, there may be other options (such as a QROPS) which offer similar benefits, but enable you to invest in different currencies.

Conversely, if you are paying into your SIPP while you live abroad and the value of the pound falls, the amount you are actually investing will increase.

Secondly, SIPPs abide by UK pension rules and are affected by any changes the UK Government makes to pension rules. One example of this would be the recent changes to the Lifetime Pension Allowance where the Government reduced the allowance from £1.25m to £1m.

Thirdly, when drawing an income from your SIPP, while you will be subject to the UK personal allowance and the 25% pension commencement lump sum, you will still be subject to UK income tax when drawing funds from your pension. As previously mentioned, if you no longer live in the UK, your income may also be subject to tax in your country of residence as well so it’s important to understand the local tax rules, as well as those in the UK before making a decision about how to draw an income from a SIPP.

Finally, and perhaps crucially, many expats will speak to a financial advisor when making a decision about their retirement plans. If you are seeking advice from an advisor in the UK, remember that they may not be fully aware of all the opportunities for expats.

Similarly, if you seek advice from a non-UK based financial advisors, any advice they offer will not be governed by the FCA and therefore your levels of protection are much lower. Our recommendation is to always seek a second or third opinion about your options, especially if you are considering transferring funds from existing pension plans.

Request an introduction with an expat pensions specialist

If you are considering setting up a SIPP, or have a SIPP and want to know and understand all of your options we can help you by introduction you to a trusted expat pensions and retirement specialist.

As part of our introduction service you will be offered an initial free consultation during which our partner will answer any questions and provide impartial assistance which will enable you to:

• Understand the benefits and avoid the potential pitfalls of a SIPP vs other pension options
• Investigate all the options available to you as an expat or UK resident
• Clarify any costs, commissions or fees which you are unsure about
• Get a second opinion about any advice you may have received

At no time will you be pressured into making any decision, neither will you be under any obligation to proceed with any advice. Once you've entered your details, we will evaluate your enquiry before confirming the details of our hand-picked partner who will then get in touch with you directly.

Following the initial consultation, if you need further assistance or advice, our partner will propose next steps with all potential fees explained leaving you free to decide whether to proceed or not.

Request free introduction to an expat pensions specialist >