FT941-12478 _AN-EA3BCAEBFT 940129 FT 29 JAN 94 / Finance and the Family: Double tax: the pension trap - Expatriates By DEBBIE HARRISON Britain's long winter makes the idea of retiring in the sun ever more appealing. Where to go is one major decision. But the most important task is to arrange for all your pensions to be paid abroad without double taxation penalties. Expert advice on pension and inheritance tax planning is essential, but there are several important steps you can take in advance to reduce administrative headaches - as well as your adviser's fees. Essentially, there are three main sources of pension: state schemes, company schemes, and private individual plans. State pensions* The UK state pension, which builds up through payment of national insurance contributions, has two elements - a basic, flat-rate benefit and an earnings-related supplement known as Serps (state earnings-related pension scheme). The pension is paid at 65 for men and between 60 and 65 for women, depending on when they retire. The Department of Social Security (DSS) says state pensions and benefits for widows can be claimed from anywhere in the world. But annual cost-of-living increases are paid only if the pensioner lives in a European Union country or one with which Britain has a social security agreement which provides for uprating (see table). These do not include Australia, Canada or New Zealand. For people retiring to these, or to any country not mentioned in the table, state pensions are frozen either when they leave the UK or, for those already abroad when they reach state retirement age, at the time of the first payment. Clearly, loss of the cost-of-living increases will erode the value of the pension rapidly over a long retirement and extra income from other sources will be needed to compensate. If, however, you return to live in the UK, your state pension will be paid at the full current rate. Expatriates on a temporary visit home can also claim the full rate, but only for the period spent in Britain. Company and private pensions Company and private individual pensions also can be paid abroad. If you want to check the value of your pension, contact either the manager of the company scheme or the life office, in the case of a personal pension or similar contract. Most scheme benefit statements will assume, however, that retirement is within the UK. Robin Arnold, international partner with actuary Bacon & Woodrow, says: 'It is essential to check how your UK pension benefits will be treated for tax purposes in your country of retirement. For example, North America does not recognise the concept of the tax-free cash lump sum we have in the UK and will tax it along with the pension.' Many people change jobs several times before reaching retirement, so it will be necessary to contact previous employers to check the value of deferred pensions. Where a company has been taken over or collapsed, and it is difficult to locate trustees, the Pensions Register** will trace your benefits free of charge. Foreign pensions If your career included overseas employment, with foreign state and company pension entitlements, the tracing problems could be much more complicated. Alastair McLean, principal with actuary Towers Perrin, says: 'As a general rule, whether it is state or company pensions, outside the UK the onus is on the employee to keep track of benefit rights and to make the claims. There is no central source for information about foreign state pensions - you will have to contact each authority.' Bear in mind also that state and private pensions derived from any source outside your retirement home (including the UK) will be subject to currency fluctuations which, in turn, will affect your income. Dealing with the tax man When you have checked your sources of pension, you should examine how the money will be taxed. Expert advice is essential and, clearly, the adviser must know all about the relevant rules in the country of retirement. Obviously, the aim is to pay tax on pensions and investment income just once -usually in your country of retirement. Where the country you choose has a double taxation agreement with the UK (there are more than 80), the Inland Revenue will allow pensions to be paid gross. First, though, you will need a declaration from the foreign tax authorities that they are taxing you on your world-wide income. This declaration should be sent immediately to your UK tax office, since any delays will result in your pensions being taxed twice - once in the UK, at the basic rate of income tax (now 25 per cent), and again in your country of retirement. If, however, there is a delay in sending the form, the Revenue says the withholding tax can be reclaimed when it gets the declaration from the foreign authority. Do not make the mistake of thinking that, if you move to a no-tax environment such as the Caymans or Bermuda, your pension will be tax-free. As Arnold warns: 'If the Revenue does not receive the statement from the local tax authority that you are being taxed on your world-wide income, it will withhold tax in Britain.' *To get an idea of what your future state pension will be, ask your local DSS for the pension forecast form BR19. **Contact the Occupational Pensions Board, Pension Schemes Registry, PO Box 1NN, Newcastle-upon-Tyne, NE99 1NN. Tel. 091-225 6393/6394. ----------------------------------------------------------------------- COUNTRIES WITH WHICH THE UK HAS SOCIAL SECURITY AGREEMENTS ----------------------------------------------------------------------- Australia (1) Gibraltar Netherlands Austria Guernsey New Zealand (1) Barbados Iceland Norway Belgium Ireland Philippines Bermuda Isle of Man Portugal Bosnia-Hercegovina(2) Israel Slovenia (2) Canada(1) Italy Spain Croatia(2) Jamaica Sweden Cyprus Jersey Switzerland Denmark Luxembourg Turkey Finland Macedonia (2) USA France Malta Yugoslavia (Serbia Germany Mauritius and Montenegro) ----------------------------------------------------------------------- Notes: (1) No uprating agreement - pensions will be frozen if paid to these and any other country not included in the table. (2) The independent states of Bosnia-Herzegovina, Croatia, Macedonia and Slovenia have been recognised by the UK and all have confirmed to the UK government that they will honour the terms of all the treaties between the former Federal Republic of Yugoslavia and the UK including the social security agreement. ----------------------------------------------------------------------- Countries:- GBZ United Kingdom, EC. Industries:- P6371 Pension, Health, and Welfare Funds. P9311 Finance, Taxation, and Monetary Policy. Types:- GOVT Taxes. The Financial Times London Page VII