All About UK SIPP Pension Withdrawals for Expats

27/6/2022.  SIPP stands for Self-Invested Personal Pension.  A SIPP gives you control and flexibility over how your pension savings are invested, and ultimately how you make withdrawals.

A UK SIPP falls under the same regime as other UK pensions, and similar tax rules apply.  For expatriates, there are some additional considerations.  This article aims to give a broad overview of the key points, without going too much into technical details.

How to Open a SIPP

Any UK resident can open a SIPP, and most UK pension providers make the process easy.   However, if you are not tax resident in the UK, there are restrictions on how you can fund a SIPP, and different tax treatments for SIPPs depending on where you live.  Due to these operational and compliance requirements, as well as local authorisations needed for promoting schemes in a foreign market, most UK providers will refuse a SIPP application from a non-UK resident.

Fortunately, there are a small number of UK pension providers with international SIPP products that are specifically designed for expatriates (and foreign citizens with a UK pension, having worked in UK in the past).   Because of duty-of-care and compliance risks involved in serving international markets, most if not all of these SIPP providers require new clients to be supported by a financial advisor.

Transferring Your Existing Pension(s) to a SIPP

International SIPPs are opened by holders of existing UK pension schemes - which may be either defined benefit (also known as final salary) or defined contribution (also known as money purchase) - to access the better control and flexibility provided by a SIPP.   Additionally, because many people acquire several different pensions during their career, a SIPP is useful to consolidate these together under one scheme.   Most international SIPPs do not allow additional contributions that are not transfers-in from other schemes, though some do.

Withdrawals from a SIPP – The Basics

Once you are aged 55 or over (or 57 from 2028), you are able to start withdrawing from your SIPP.  You do not have be ‘retired’.   If you have no financial need for withdrawals, it’s a good idea to keep your pension pot invested and let it continue to grow.

You are allowed to take up to 25% of your pension pot as tax-free cash.  Once you’ve taken your tax-free entitlement, remaining withdrawals will be taxed at your marginal rate – i.e. taking account of your total UK taxable income from all sources.

You are entitled to cash in your pension pot in full, which might be appropriate if the total sum is small.  For larger amounts, tax considerations are likely to be important.

You also have the option to buy an annuity with your pension pot, although annuity rates have been extremely poor in the last few years, due to low UK gilt rates.  However, converting part of your pension to a guaranteed future income could be appropriate depending on your age, health, and the size of your pension pot.  Professional advice is important. 

Crystallised Pension Drawdown / Income Drawdown / Flexi-Access Drawdown (FAD)

‘Crystallisation’ simply refers to the process of cashing in a pension.  You can take a tax-free lump sum of up to 25%, known as a pension commencement lump sum (PCLS), with remaining 75% earmarked (‘vested’ or ‘crystallised’) for retirement income via ‘flexi-access drawdown’ (or for annuity purchase as mentioned above).  Flexi-access means you can decide the frequency and level of regular income and/or ad-hoc lump sums.  Such pension payments will be taxed at your marginal income tax rate (without National Insurance liability).  

Another form of income drawdown, known as ‘capped drawdown’, was closed in 2015.  You can still use capped drawdown if you had it established prior to then.   

Uncrystallised Funds Pension Lump Sum (UFPLS)

As an alternative, you could choose to take your tax-free entitlement gradually, a bit at a time.  Through the Uncrystallised Funds Pension Lum Sum (UFPLS) method, each time you withdraw funds from your pension pot, 25% of it is tax free, and 75% is taxable.  Note there’s no PCLS element to a UFPLs withdrawal; UFPLS is a way of making cash withdrawals without designating funds as crystallised to be available for drawdown.   

Tax Considerations

If you live in the UK, the taxable part of your pension withdrawals are taxed as income at your marginal rate - so it’s important to understand whether those withdrawals will push you into a higher tax band, when combined with your other income.  Depending on your circumstances, rationing withdrawals may be more tax-efficient than a larger amount in one particular tax year.

Here’s a table briefly summarising the taxation of your pension withdrawals.

Withdrawals from your Pension when you Live Abroad

If you are not UK tax resident, then ordinarily you won’t need to pay tax on your UK pension withdrawals.  However, you might have to pay tax in the country where you live.  It’s easy to confirm whether there is a Double Taxation Treaty (DTT or DTA, double taxation agreement) between the UK and your country of residence.  (Note that DTA’s also typically cover tax relief on your UK state pension payments.)

Depending on where you are resident, a UK DTA can be quite beneficial.  For example, if you are tax resident in the United Arab Emirates, the UAE-UK DTA gives full UK income tax relief, with UAE having taxing rights.  Since the income tax rate in UAE is zero, you are effectively able to cash in 100% of your UK SIPP with no tax to pay.  It is a somewhat complicated process, so important to get professional advice.  (A similar situation exists if you live in UAE with a QROPS domiciled in Malta – the UAE-Malta DTA mean it’s possible to access 100% of your pension pot, tax free.)

On the other hand, some countries, such as Australia, have a rigorous tax regime and not uncomplicated methods for calculating applicable earnings from your UK pension fund.  Do note your 25% ‘tax-free’ PCLS will be taxable in Australia.  Again, professional advice is recommended.

Legacy Planning with your UK Self-Invested Personal Pension

Like a regular trust, your UK SIPP is considered outside of your estate for inheritance tax purposes; IHT (inheritance tax) does not apply.  Furthermore, there is no requirement to liquidate the SIPP investments on your death.  This means your SIPP can be a tax-efficient vehicle for passing wealth to the next generation.

If a SIPP owner dies before the age of 75, there is no tax to pay on death benefits paid from the SIPP – regardless of whether it is paid as a lump sum or taken as income by the beneficiaries.  (Noting that any tax-free lump sum payments must be designated within two years of the SIPP owner’s death, or tax will apply.)

If a SIPP owner dies after the age of 75, death benefits paid from the SIPP are taxed at the recipient’s marginal income tax rate.  

Depending on your income needs and financial circumstances in retirement, it may be better to draw down from other investments if available, rather than take funds out of the tax-efficient environment of your SIPP.

Note that the beneficiaries of the original SIPP can themselves nominate beneficiaries, to further pass remaining SIPP assets on to the future generation.  If you like the idea of such inter-generational planning, specialist advice is recommended to make sure everything is set up correctly.

If You have a Larger Pension Pot – The Lifetime Allowance (LTA)

If your pension pot (or combined pots, if you have more than one) is worth more than the ‘lifetime allowance’, then you will have tax to pay, regardless of how you choose to take withdrawals.  

Before you get paid your pension, tax will be deducted on the excess pension amount over the lifetime allowance, at the following rates (2022/23):
  • 55% if you take your payment as a lump sum;
  • 25% if you take it any other way, for example pension payments or cash withdrawals.
The lifetime allowance is currently £1,073,100.  This limit has been substantially reduced over the years – it was as high as £1.8m in 2012, and £1.25m in 2016.  

You may have previously protected your lifetime allowance at a higher level, although you can lose this protection for several reasons, including making any further savings into a pension.  Also, you cannot use UFPLS if you have lifetime allowance protection.

Your pension provider will carry out a lifetime allowance calculation, triggered by the ‘crystallisation event’ of you starting to take withdrawals before the age of 75; they’ll send you a statement of how much tax you owe.  

If you haven’t yet taken withdrawals, the calculation is triggered automatically when you reach age 75, which is also considered a crystallisation event.

Death is another crystallisation event.  If you haven’t taken withdrawals by the time of your death, before age 75, your personal representative is required to calculate if there is an excess over the lifetime allowance and tell HM Revenue and Customs (HMRC) if so.  HMRC then sends the beneficiaries a tax bill, which they’re responsible for paying.

If there is an excess over the lifetime allowance, it would be better, from a tax charge point of view, for the beneficiary to take the death benefits as a 'beneficiary drawdown' rather than a lump sum as the tax charge will then be 25% rather than 55%. A lump sum can then be taken from the beneficiary drawdown plan at any point if required.  Beneficiary drawdown works in a similar way to flexi-access drawdown for an individual but without the age restrictions in relation to access. Someone of any age can receive a beneficiary drawdown.

If death is after age 75, there’s no crystallisation event, because a final check against the lifetime allowance will have been made at age 75.

For information only, believed correct at time of writing.  Rules can change at any time without notice.  Not tax advice.  Always consult your financial advisor.