TOP TIPS - Pension Drawdown for Expats
For all but the highest net worth individuals, a pension pot will be the most valuable retirement asset in the long-term financial plan. Despite this, many retirement savers take a passive approach to pension planning and ultimately fail to realise the benefits inherent in considering all the options and opportunities available to them.
One such opportunity is to transfer pension savings into a Self Invested Personal Pension (SIPP) and then drawdown to access your money.
But what exactly is drawdown and what are some of the things to be mindful of when considering this retirement planning option.
Here are our three top pension drawdown tips for expats.
1. Diversify your drawdown
Drawdown can be a flexible way to use your pension savings the way you want to. By investing your drawdown you can unlock growth, but you must be aware that returns are never guaranteed.
In most cases you can take up to 25% of your pension as tax-free cash while leaving the rest invested.
If you choose to do this, it is absolutely essential that any portion of your pension you allocate to drawdown is sufficiently diversified. If you are overly invested in any single country, region, asset class or sector, you risk losing all or a significant part of the fund in the event of any seismic or even isolated political, economic or market event which affects the markets.
However, this doesn't mean that you should keep your fund entirely in cash savings. Doing so is little better than keeping money under a mattress and can result in significant loss of opportunity. The Financial Conduct Authority (FCA) has said that it will look into the possibility of preventing SIPP holders from investing solely in cash. Instead, the FCA suggests an asset allocation of 50% equities, 20% government bonds, 20% corporate bonds, 7% property and just 3% cash.*
Having said this, the needs of expat retirement savers are individual, so you should always speak with an accredited and regulated expat pension adviser before making any decisions regarding pension transfers and drawdown. This brings us neatly to our next point.
2. Seek Regulated Pensions Advice
According to data from the Financial Conduct Authority, between April 1 2018 to March 31 2019 (2018/19), 34% of individuals who took pension drawdown did so without taking regulated advice; an improvement on the 31% seen in 2017/18** but still well short of where the situation should be.
However, retirement savers with larger pension pots are more likely to take advice; 7 in 10 consumers with funds worth £100,000 or more sought regulated advice. This compared favourably with the 2 in 10 advice-uptake rate seen in consumers with pots worth £10,000 or less.**
The truth is that unless you are a seasoned wealth manager, pension planner or expat financial adviser, you are unlikely to posses the necessary expertise to take pension drawdown without the benefit of professional advice. So, our tip is: Don't! The stakes are simply too high.
3. Preserve your future cashflow
One of the most common and most serious mistakes people make when accessing a fund via drawdown is to quickly erode its value without consideration for their future needs.
Figures from the FCA reveal that in the 2018/19 period, 4 out of 10 individuals taking drawdown took more than 8% of their fund each year***. Contrast this with guidance from the Institute and Faculty of Actuaries which advises a sustainable annual drawdown rate to be 3.5%**** and it is easy to see how some retirement savers can inadvertently and significantly reduce their future spending power in just a few years.
This is not to say that account holders cannot take more than 3.5% a year; it is simply the case that advice should be taken to ensure they have a drawdown plan in place which aligns with their future retirement goals and cashflow needs. See, point 2; Seek Regulated Pensions Advice.
Pension advice for expats
Blacktower Financial Management (International) Limited can help you make sense of your pension planning options and help you determine whether a SIPP transfer and pension drawdown might be in your best interest.
We can help you negotiate the tricky SIPP rules, avoid unregulated investments, ensure a diverse and beneficial asset allocation and make the most of your unique cross-border tax restrictions and opportunities. Contact your local Blacktower Financial Management office today for more information.
Disclaimer: The provision of information in this communication is not based on your individual circumstances and does not constitute investment advice. Blacktower makes no recommendation as to the suitability of any of the products or transactions mentioned.
* https://www.fca.org.uk/publication/consultation/cp19-05.pdf Page76. Accessed 08-11-19
** https://www.ftadviser.com/pensions/2019/09/25/half-of-pension-pots-accessed-without-advice/ Accessed 08-11-19
*** https://www.fca.org.uk/data/retirement-income-market-data Accessed 08-11-19
**** https://www.actuaries.org.uk/news-and-insights/public-affairs-and-policy/ageing-population/defined-contribution-pensions Accessed 08-11-19