Deciding the best way to save for retirement as an expat is not always easy – especially if you may want to return to live in the UK at some time. One of the problems is deciding whether you are a temporary or permanent expat.
The definition is of crucial importance as temporary expats are still considered tax resident in the UK, while long-term expats are likely to become tax resident in Dubai.
That definition also impacts on retirement saving. If you stay a UK taxpayer, most financial advisers would recommend you save into a self-invested personal pension (SIPP).
Tax breaks for expats
A SIPP offers all the tax advantages of saving into any other UK pension, even though you may live overseas for a time. For savers still building their pension funds, that means HM Revenue and Customs (HMRC) will top up contributions according to your marginal rate in the UK.
The same fund cap rules apply as if you lived in the UK as well – a lifetime allowance of £1 million, a limit of £40,000 a year contributions, unless you earn £150,000 a year or more.
For top earners, the amount of contributions allowed each year is tapered – £1 of the allowance is lost for every £2 earned down to a bottom limit of £10,000. Savers may draw SIPP benefits from the age of 55.
Zero tax in Dubai
They can take tax-free cash up to the value of 25% of their fund and decide how to spend the rest under flexible pension freedom rules. No tax is due in Dubai. Pension payments are gross of UK income tax for expats living in Dubai, where local zero-tax rules are applied.
SIPPs come with no obligation to buy an annuity at age 75 and the chance to pass any unspent funds onto partners or loved ones without any inheritance tax – although the beneficiary may have to pay a charge depending on their UK tax status.
SIPPs are standard UK pensions that allow retirement savers to take tighter control of their savings if they wish by offering a wide range of funds, shares and commodities to investors.