Questions on UK Pension

Hi,

I'm sure some of you may already have gone through this, and I'm hoping for some thoughts and advice.

My Situation:
I recently received a booklet from my company on a personal group pension and an option to opt out of the 2nd state pension.
I'm wondering if it's worth taking up the personal group pension and contract out of the 2nd state pension?

The reason I'm asking is, I don't intend to stay in the UK forever. 5 years max, and I intend to return to the US thereafter.
I heard stories about people having trouble transferring UK pension to the US and I really want to avoid this headache. Not to mention, there's an annual management fee on the personal pension, and if I stop my contributions after leaving UK, I still have to pay for the annual fee till I'm 55.

On the other hand, my employer will be contributing an equal amount of what I put into the pension and it just seems silly for me not ot take up this plan.

I'm hoping someone can help reason this through and provide some of your thoughts.

Thanks!

Right now, there isn't a way.   That's because the brokers in the US aren't set up to receive such payments, and the brokers in the UK aren't set up to make such payments.  But as the treaty recognizes US/UK pensions as interchangeable, it may be that one day in the future they will be.  I doubt that future day is too far away.  There's possibly even a way around it today, but I'd have to do a lot of research on it.  I charge for research time, so it' s not a topic for the forum. 

There's a lot of tax benefits for paying into a plan; these benefits may far outweigh any fees associated with keeping your account active.  Another major benefit is any matching your employer may provide to the plan.

Further, if you are doing this yourself rather than using your employer's plan, you can shop around for lower and/or fairer fees.  Don't buy from ANY so-called IFA who charges commission.  Only buy from people who charge a % of assets under management.  These are the only fee structure that align your interests (growing your money) with theirs (making a lot of money off of you).  Commissions incentives them to invest you in something that pays a high upfront commission rather than the product with the best long-term growth record.  Further, the I of IFA may stand for "Independent", but in fact many brokers are tied to providing a single company's product, or a small range.  Only buy from a real broker who can any company's product.  Even better, opt for one who can also sell stocks, shares, and bonds as well as Unit Trusts and Investment Trusts.

I think the questioner is asking some of the right questions but may not yet know all of the possibilities.

1. I assume you are resident in the UK at this point, and seeing that you intend to be here for 5 years you are therefore ordinarily resident as well.  Consequently because you are not domiciled here your main investment structures to minimise tax should be offshore.  However if you can invest in something such a pension that is favourably taxed in both jurisdictions and where your employer invests too then you are thinking along the right lines.

2. Contributions to US pension plans are potentially deductible in the UK under the double tax treaty so shouldn't be dismissed either, but you'd need advice on this from a UK adviser.

3. Almost no IFAs recommend contracting out of S2P at this stage; but you'd have to speak to an IFA on this issue if you can't decide for yourself.

4. Given that you can't even transfer a Canadian pension plan to a US qualified plan - let alone a UK plan - as well as the UKs onerous QROPs regime; I doubt it will be feasible to transfer a UK registered plan to a US qualified plan at any time within the forseeable future.  Lizzit is clearly more hopeful than me.  I am not sure why you perceive this a a problem rather than an opportunity to obtain a tax favoured investment outside of the United States?

5. IFAs do not charge based on funds under management, because they do not manage funds.  They typically charge either based on commissions or fee-based.  It is up to you to decide which route to take if you need advice.  It is a criminal offence in the UK to provide financial advice if not FSA registered, so you would need a registered adviser.

6. Don't forget your employers contributions are going to be reportable as taxable income on your annual US returns.   

Lizzit, are you available for consultations?  My problem is, I'm nearing 57, got a great job here in London, BUT I am a Swedish citizen (American dual actually) and will be retiring to Sweden.  I also know that I can't get a pension here because I haven't worked here the mandatory number of years, but I am still paying into the system so there must be a way to transfer some of that contribution to Sweden, isn't there?  If you have any advice or would like to set up a consultation or refer me to somebody who knows the answer to this, you can send me a PM.  Thanks.

Thank you Lizzit / Guya - especially for pointing out the potential tax benefits for such contributions. I have not thought of that!

Lizzit - What is deemed to be a fair fee based on % of assets under mgt?
Right now, I have 2 options in the current plan. 1. To invest in a "Lifestyle" portfolio, of which all funds are selected by the fund manager or 2. In a "Freestyle" portfolio, where I choose the funds they manage. If I go for the lifestyle portfolio, that would mean that I have no control over the funds chosen, and thus, subject to high mgt fees?

Guya - Is there a reason why no IFAs would recommend contracting out at this moment? I was under the impression that contracting out was a better route!?

I may be asking a stupid qn here, but has anyone who stayed in the UK for a short term opted out of the company pension because it was just not worth it?

S2P has become a misselling "scandal" with the FSA saying that most people should never have contracted out.

Consequently an IFA would be worried about recommending something that might backfire.  The following link is current:
http://news.bbc.co.uk/1/hi/business/6647067.stm

Typical management fees for a managed portfolio should be between .5 - 1.5% per annum, with the higher end of the fees being charged for smaller balances.  You need millions under managment to get the .5% fees. 

For a self-managed portfolio, anything over .5% per annum is highway robbery.

Usually, for stays of two years or less, people tend not to pay into a plan.  It all depends on how much you pay in, and the timescale before you retire.