When expatriates relocate to another country, their pensions can remain accessible from the UK (or their place of citizenship), be transferred into an overseas fund, such as a Recognised Overseas Pension Scheme (ROPS), or be restructured into products like Self-Invested Personal Pensions (SIPPs).

It’s common to make these pension management decisions based on factors like investment flexibility, fund performance, fees and currency exchange risk, but less obvious to think about the ramifications of the way your pension is structured, and how that will be interpreted in a new place of residence.

The issue isn’t necessarily about the returns expat pension funds will deliver, but about how retirement incomes will be subject to tax and the reporting obligations foreign nationals living abroad will be required to comply with. 

Understanding the Legal Complexity of International Pension Products

At first glance, many pension products and funds designed for global accessibility appear fairly similar in terms of the benefits. However, depending on where you live or plan to relocate, it’s just as important to consider how the tax authorities in the relevant country will categorise your scheme.

That’s because tax offices don’t interpret financial structures in the same way, and a product that is clearly a pension in one place might be classed as an investment account or a trust in another, which is an important distinction.

Expats who leave their home country can’t assume that their pension structure and its tax treatment will remain the same, because moving means they need to understand both:

• The rules of the country where their pension fund is based
• The treatment of that scheme in their place of residency

While some countries have reasonably consistent rules, others don’t, which can lead to unexpected exposure to higher taxation, extra reporting requirements, complexities in administering or drawing on a scheme, and penalties for non-compliance, even when inadvertent.

A Recap of Common Law vs Civil Law

Broadly speaking, legal systems fall into one of two categories: common law and civil law.

The relevance of this lies in how trusts are viewed: although they’re widely used and understood in common law countries, like the UK, they aren’t recognised in the same way in civil law jurisdictions. Therefore, they also aren’t taxed in the same way and attract scrutiny and the additional reporting expectations we’ve mentioned.

Expats who have a pension with a trust-based structure must understand what that means, and whether reinvesting or transferring their fund might prove beneficial.

Contrasts Between Trust-Based and Contract-Based Pension Structures

Trust-based pensions mean that a trustee holds the assets on behalf of scheme members, and that each individual with a pension fund is a beneficiary, not a direct owner of the trust. This is how trusts are perceived in most cases in the UK.

However, in places where trusts aren’t accounted for in law, or where tax authorities have specific rules governing the classification and treatment of trusts, they might not decide that a pension is, indeed, a pension, but that it’s an investment.

Contract-based pensions differ in that they are agreements between the pension provider and the beneficiary, without reliance on a trust framework.

This type of product is more comparable to other financial products, which means they’re typically easier for tax authorities to interpret, reducing the risk of a pension being misclassified as something else, and potentially simplifying reporting.

That doesn’t necessarily mean that a contract-based pension structure is better, or always advantageous, but that there are considerable differences to be conscious of.

Practical Implications Linked to Expat Pension Fund Structures

Of course, in real-world terms, most expats want to ensure they know how their pension will be taxed, are able to forecast their retirement income to verify it is sufficient, and be comfortable that their retirement income, savings, and investments are tax-efficient and well-managed.

The best advice is to check that you have a complete understanding of what types of pension funds and products you hold, and to review the following factors before making any long-term financial decisions:

• How your pension will be taxed, and whether the classification of a fund will give rise to a higher tax burden than necessary
• The reporting you’ll be expected to submit, such as additional disclosures, and any higher administration costs associated with that

Certainty is vital because in any scenario, whether an expat is already resident overseas or intending to move, there should be no ambiguity about whether a pension structure will be clearly recognised, or whether they’ll find themselves in a debate with a tax office, which is never a comfortable position to be in.

Additional Aspects of Overseas Pension Taxation

To add to the complexity, the structure of a pension isn’t the only element that will influence how retirement income is taxed, since tax authorities around the world may also need to consider where a pension product is based.

Double tax treaties, for example, might come into effect to offset taxes deducted at source from localised tax liabilities. Treaties can also include clauses and bilateral agreements that define how pension income arising from the other country will be treated.

Therefore, two identical pensions could be treated and taxed differently depending on where they were established and where the beneficiary lives.

Advice for Expats Unsure Of Their Pension Structures or Whether Their Retirement Products Will Be Tax-Efficient Abroad

As a starting point to secure, stable and well-funded retirement planning, expats should review their assets, tax residency position, circumstances and plans. Pensions are usually just one aspect of a larger portfolio, and the right options will always depend on a detailed assessment.

During a review, wealth managers will assess how pensions are likely to be viewed in a planned retirement destination, whether they will be recognised as legitimate pensions, and the protections granted under any applicable tax treaties.

From there, strategic and tax-efficient changes can be suggested, if necessary, to support confident pension planning, focusing on mitigating unnecessary tax burdens, ensuring full compliance across all relevant jurisdictions, and providing long-term certainty.