Introduction

The UK government decided in April 2007 that individuals who worked in the UK and had accumulated retirement benefits there may transfer these benefits to a South African Qualified Recognised Overseas Pension Scheme (‘QROPS’) when they resign or return to SA. This is applicable to all individuals who are currently working in the UK or who worked there in the past.

Preservation of pension investment for beneficiaries

The main benefit of transferring benefits from the UK to SA is that most UK retirement funds do not allow pensioners to leave behind any fund benefits to beneficiaries when they die. In SA you can structure your own pension when you retire in an Investment Linked Living Annuity (‘ILLA’) so that your beneficiaries can effectively “inherit” the investment when you die.

For example, Mr X retires under a UK retirement fund and his fund value of his pension is £300,000. He will now receive a pension of  £2,000 per month for the rest of his life, escalating by inflation. When he dies the investment balance will be repatriated into the retirement fund and his beneficiaries will most likely receive nothing of this.

If Mr X transfers his retirement benefits to a SA QROPS he will be able to purchase an ILLA when he retires. With this vehicle he will be able to choose the level of income that he requires and he will be able to leave behind the remaining portion of his investment value to his beneficiaries when he dies one day.

Income tax implications

1. You take the fund benefits in cash

If you withdraw the fund benefits Her Majesty’s Customs & Excise (‘HMR&C’) in the UK wil tax this withdrawal at predetermined rates.

What is more, individuals usually waste this payout on non-essential expenses like an overseas holiday or a new motor vehicle. As most individuals have a shortfall in savings at retirement this is definitely not the course of action that we recommend.

2. You transfer the fund benefits to a SA QROPS

When you resign or relocate to SA and you transfer the fund benefits to a SA QROPS you will pay no taxation on the fund value transferred.

When you become 55 you will be able to implement a pension with the fund benefits at that stage, again with no income tax implications.

Other benefits

Individuals return to SA and after a few years they forget that they ever worked in the UK. At that stage the UK retirement fund may have lost the individual's contact details and the benefits may never be enjoyed by that individual.

Future changes in legislation in SA or the UK can potentially make it very difficult to transfer benefits to SA when an individual reaches retirement age. For example, the UK government can decide to repatriate all foreing nationals’ retirement benefits into the State Pension Fund in the UK, and your accumulated fund benefits will disappear.

The correspondence costs between SA and the UK can be very high over the long term and it can also take up a lot of time to sort out administrative issues.

Allan Gray Retirement Annuity Fund (‘AGRA’)

There are several QROPS in SA who are able to accept transfers from UK retirement funds. Our preference product is the AGRA and the same terms and conditions apply with such an investment as with an AGRA of which the funds originate from a SA source.

Kindly refer to Allan Gray’s website for more information regarding the AGRA – www.allangray.co.za.

You can also refer to our newsletter entitled “Retirement Annuities in perspective” under the “Financial Literacy” link for more information regarding RAs as an investment vehicle.