When in employment in the UK, most employees join their employer’s pension plan which is likely to be a “defined benefit” (otherwise known as “final salary”) or a “defined contribution” (otherwise known as “money purchase”) pension scheme. Whether final salary or money purchase, the pension plan may be non-contributory or contributory depending upon the scheme rules.

A final salary scheme provides pension benefits at normal retirement date (NRD) which is usually between age the age of 60 and 65. The pension benefits received are calculated based upon a person’s number of years employment and their salary at the date of leaving. The value of the pension at the date of leaving is usually indexed to the Retail Price Index (RPI) to a maximum of 5% p.a.

A money purchase scheme invests on behalf of the employee in funds approved by the pension scheme trustee. The pension benefits at NRD (usually between the age of 60 and 65) will be used to provide pension benefits whether a lump sum with a pension income or pension income. The pension benefit will depend upon the investment performance of the invested funds. This type of pension is often called a “group personal pension” and is administered by a life insurance company.

A personal pension is usually offered by a life insurance company, with funds invested in their “with profits” fund or unit trust funds. As the name implies, a personal pension is owned and funded by an individual and attracts income tax relief. A retirement date can be selected between the age of 50 (to be age 55 from 6 April 2010) and age 75.  A personal pension is a money purchase scheme and retirement benefits will depend upon the value of the fund when taking retirement benefits. Personal pension plans often go by other names, including:

• a stakeholder pension, which is a form of personal pension launched by the UK government in 2001, in which fees are capped at 1.5% p.a. of assets for 10 years, 1% p.a. thereafter. Very few companies now offer a stakeholder pension; and

• a self-invested personal pension (SIPP) is a very flexible personal pension introduced by the UK government initially in 1989. It allows for greater individual control and transparent investment management in a greater range of assets to form the investment, including quoted shares, unit trusts cash and commercial property. 

These pensions are in addition to both the mandatory contribution to the UK state pension via National Insurance, and the state second pension which are made when you were a U.K. resident. You can continue to make voluntary contributions as a non-UK resident.

People who have worked in the UK and participated in occupational or personal pension plans are able to transfer out their pension savings into a QROPS since 6 April 2006. QROPS are schemes approved by the UK government to receive the transfer of UK pension plan assets, if this is permitted by the jurisdiction of the QROPS approved pension. Transfers of UK pensions to the US are not permitted by the IRS, see HMRC pages for more information. A US resident may, however, transfer their UK pension to an approved jurisdiction other than the US. Such a transfer may in certain circumstances have tax benefits and remove the pension assets from UK inheritance tax liability.

Further information on QROPS is available here from HMRC, part of the UK government.

A professional pension fund trustee ensures that a pension is operated in accordance with the Trust Deed and Rules of the pension. He or she has a responsibility to ensure that the pension assets are protected from fraud or improper use and that the scheme complies with HMRC pension legislation. The professional pension fund trustee often also acts as the administrator of the pension fund.

A professional pension fund trustee in the UK is authorised by the UK Financial Services Authority (FSA).