What to do with your super fund if you’re retiring in the UK

Category: News & Retirement

If you’re an Australian now living in the UK, or even a Brit returning home from Australia, it’s likely that you could have a significant amount of money in your super pot.

If you’re planning to return to Australia at some stage, then you can leave the super invested, and aim to take retirement income from it when you return.

But if you’re looking to retire in the UK and need to access it now, there are various issues that you should take into account around your retirement income planning.

Differences between the UK and Australian pension regimes

UK pensions are designed to be very tax-efficient while you are making contributions. You get tax relief at your marginal rate of tax, which makes them an attractive savings vehicle.

You’ll pay Income Tax on whatever you take out – lump sums or income – aside from a 25% tax-free entitlement.

The Australian system is effectively the mirror image of that. You pay tax on contributions into your super but can then take income and lump sums free of tax.

Age factors

UK pension access is normally available at 55 regardless of whether you are still working. This is due to rise to 57 in 2028.

The equivalent age is 60 in Australia, assuming you are fully retired. Full access is available at 65, even if you’re still working.

Transferring your pension fund between countries

It’s usually possible to transfer your UK pension fund to an Australian super by using a qualifying recognised overseas pension scheme (QROPS). This means that someone moving from the UK to Australia gets the best of both worlds – tax relief on contributions in the UK, then the ability to take money from their fund free of tax in Australia.

However, it is not possible to transfer your accrued super to a UK pension, making retiring to the UK more complex. For UK tax residents, Australian superannuation income will be fully taxable in the UK except in certain circumstances.

It is possible to extract lump sums from an Australian super in a very tax-efficient manner. This could be a substantial financial planning opportunity if you have accrued a large super fund in Australia and now plan to retire in the UK.

Taking your super in the UK

If you take income from your super while you are resident in the UK, it is taxed as income in the UK by HMRC.

You are, however, entitled to take lump sums from your super and, in most instances, these will not be subject to tax.

It can therefore make sense to take lump sums, then put together an investment portfolio from which you can take income as tax-efficiently as possible.

Investing your super

Just leaving your lump sums in a bank or savings account makes little sense if you’re looking for any kind of investment return on your money. Savings rates are at historic lows, which means that inflation is likely to reduce the value over time. You could also end up paying tax on even the limited interest your money does earn.

It is therefore advisable to consider putting together an investment portfolio, using the range of tax-efficient vehicles and investment opportunities available in the UK.

Tax-efficient investing

How you put together your investment portfolio will depend on your personal circumstances, and factors such as your attitude to investment risk, how long the money will remain invested, and how much you will want to take to provide an income stream.

There are a variety of tax-efficient investment options and exemptions, including:

  • Everyone can invest £20,000 a year into an ISA. You pay no Income Tax on the interest or dividends you receive from an ISA and any profits from investments are free of Capital Gains Tax (CGT). ISAs are not included in your CGT exempt amount.
  • The annual CGT exempt amount is similar to the Personal Allowance for Income Tax in that the amount of investment gains covered by the annual exemption is not chargeable to CGT. The annual exemption is £12,300 for the 2021/22 tax year.
  • The government are keen to encourage investment into new businesses, and schemes such as Venture Capital Trusts and Enterprise Investment Schemes offer different levels of tax incentive depending on how long you invest for. Be aware, however, that such investment can carry a high element of risk, and you should take professional advice before considering this type of investment.

The threat of currency risk

If you are transferring substantial amounts from Australian dollars  into UK sterling, currency risk will clearly be a factor. You should clearly be making every effort to avoid the erosion of some of your accrued value.

Using a specialist currency provider, rather than straightforward bank transfers, can help reduce the cost of transferring.

Planning is key

Using lump sums from your super to create a diverse portfolio, which will provide you with a tax-efficient retirement income, can be a complex process.

There are many different variables that you need to consider. You should also be prepared for changes to your portfolio as your personal circumstances, and financial needs, change.

All investments carry a level of risk – some more than others. There is no such thing as a “one size fits all” investment plan. Getting it wrong may be costly so we would strongly recommend that you work with a professional financial adviser.

Get in touch

We are sure you’ll agree that some of the details we’ve set out here are complex. We would strongly recommend that professional advice is essential.

At bdhSterling we have licences in both the UK and Australia for full financial planning and can help you develop a clear plan.

Get in touch to find out more.