How do I Transfer my UK Pension to Mexico?

Understanding your UK pension scheme

Of course, verifying its form is vital before you can transfer your UK-registered pension to any overseas country when retiring abroad. Most people who have lived or worked in the UK will have at least one of the three basic types: workplace, personal, and state.

Contributions to all UK workplace and private pensions are eligible for tax relief at your marginal income tax rate, and their investment growth is free of capital gains tax. Those earning £200,000 or less may contribute a total of £60,000 each tax year, including tax relief and employer top-ups. For higher earners, the UK government tapers the yearly contribution limit accordingly. Please note that tax years run from April 6 to April 5 in the UK.

UK taxes only become payable if you breach your annual contribution allowance and when you commence receiving income from your pension benefits as a UK resident if it exceeds your UK income tax code.

It is not unusual to have pension funds scattered across several schemes, but I can help you consolidate these through transfer into one manageable pot for Mexico.

Workplace Pensions

UK employers must automatically enrol employees in an occupational retirement plan, but employees may opt out. If you’ve had more than one British employer since 2012, you could easily have lost track of some of your retirement savings. Try the government’s official Pension Tracing Service to help you locate these.

Your workplace pensions will be defined benefit (DB) or defined contribution (DC) schemes. Here’s how to tell the difference between them.

Defined Benefit

Defined benefit, also known as ‘final salary’ schemes, are occasionally offered by a few private sector employers, but they are most widespread within the UK public sector. Depending on the number of years you work for the employer, you receive a guaranteed proportion of your former salary at retirement. Additional benefits may include a tax-free lump sum, early retirement and spousal pensions.

I urge extra caution when transferring out of a defined benefit plan, as its safeguarded benefits may not be reproducible with any other scheme and will be subject to market fluctuations. Even if your UK scheme provider agrees to make the transfer, it may not mean this is in your best interests; always consult an independent financial adviser about your personal circumstances and consider a second opinion if something doesn’t feel right.

Your defined benefit pension may be ‘unfunded’, wherein you may only transfer your pension savings to another defined benefit scheme in the UK even if you are retiring abroad. Speak with your pension provider first. If you are unsure which specific type of defined benefit plan your workplace offers, you can always ask the employer’s pension manager.

What happens to your NHS pension if you move abroad?

The UK pension scheme administrator should agree to directly credit your British, Mexican, or other offshore bank account. The value of each payment will fluctuate in line with varying exchange rates, and you may incur additional processing fees.

Defined Contribution

Every other workplace arrangement and all personal UK pensions will be some form of defined contribution plan. These are often called ‘money purchase’ schemes and some older versions force you to buy an annuity out of your pension savings in return for a guaranteed income.

With most defined contribution schemes, your pension provider invests your contributions for you, and their investment performance determines how much money you receive when you retire. Exceptions to this are small self-administered schemes and group self-invested personal pensions (group SIPPs).

Small Self-Administered Scheme

Directors and senior executives of private companies may avail themselves of a small self-administered scheme (SSAS), which may not have a traditional pension provider. Up to eleven people, including family members, may form a trust and take responsibility for all investing decisions. A vital advantage of this scheme is the facility to invest in commercial property to help grow the business, which a group SIPP also permits.

Group Self-Invested Personal Pension, Group SIPP

Professionals working together, like accountants or vets, may aggregate their pension funds by sharing a SIPP provider. A SIPP is a pension wrapper that grants virtually limitless investing opportunities, except for residential property.

Group SIPPs can allow for the purchase of commercial property from which to operate, and the SIPP holders may manage the investments directly or through a stockbroker, independent financial adviser or other expert.

Personal Pensions

If you are self-employed or decided to make extra preparations for retirement, you may have opened a personal pension via an insurance company, bank or other pension providers.

You will receive a yearly statement detailing how well your investments are performing and outlining how much income you can look forward to when the time comes. There are many variants of private pensions, but two of the most popular are stakeholder and self-invested personal pensions.

Stakeholder

The low-cost and low-risk stakeholder scheme is most popular with those on higher incomes despite being aimed at incentivising people on lower incomes to save for retirement. It is a straightforward plan, guaranteed free of exit penalties, and the provider invests your pension contributions across a narrow but safe range of funds.

Self-Invested Personal Pension, SIPP

While a SIPP is similar to standard pension plans regarding contributions, tax relief and withdrawals, it allows you to take complete control of the investments you save for retirement. You can manage them entirely by yourself or pay someone to help if you need more experience or confidence.

The range of permitted investments is all but unlimited, barring only certain types of residential property. Watch out for higher charges if you are researching the best SIPP provider, as more complex strategies require extraordinary management expertise, which you may not even need with your pension funds. Some SIPPs are only accessible via a financial adviser, as certain providers will not work with members of the public.

SIPPs can be an excellent choice for anyone who plans to be offshore during retirement, as we may convert them into an internationally mobile product. I can negotiate the lowest possible fees for you if this is the way you’d like to transfer your UK pension for access in Mexico.

UK State Pension

The UK state pension can enhance many people’s overall retirement income. You become eligible for this by making sufficient qualifying National Insurance contributions. Ten years is the minimum amount you must pay to receive at least some UK state pension, but these do not have to be consecutive years.

Check your eligibility, determine your state pension age and whether or how you can increase your UK state pension income on the British government’s pensions forecasting website.

You can receive your state pension income overseas via direct credits into a bank account in the UK or offshore, but please note the UK state pension is frozen in Mexico. The British government does not index the state pension up in line with inflation for residents of Mexico in the same way as it does if you are a UK resident, as there is no social security agreement between the two nation-states. Please visit the International Pension Centre section of the UK government website for further information and advice about your UK state pension abroad.

Can I transfer my pension internationally?

Most UK pensions are eligible for transfer to a qualifying recognised overseas pension scheme, QROPS or ROPS, or to an international SIPP. Never undertake either of these courses of action lightly, but only with advice from a global pension transfer specialist. The pension transfer process can become complicated, and without guidance, you’d have no recourse if anything went wrong, potentially jeopardising your retirement income.

You may choose not to transfer your pension abroad and simply receive it via direct credits to your UK or overseas bank account. You only need your international bank account number (IBAN) and bank identification code (BIC). Still, currency risk may adversely affect how much money you receive while living abroad through costly fluctuations in exchange rates and commissions. Feel free to contact me to discuss your situation, and I will help you find the most cost-effective pension scheme solution.

QROPS (or ROPS) and international SIPPs share multiple expat-friendly features, including but not limited to:

• Flexible drawdown
• Reduction of currency risk
• Consolidation of multiple schemes in one easy-to-manage pension fund

However, there are essential differences between pension transfers to a QROPS or an international SIPP.

Qualifying Recognised Overseas Pension Scheme

Any qualifying recognised overseas pension scheme, QROPS or ROPS, can receive UK pension transfers. They must satisfy His Majesty’s Revenue and Customs (HMRC) regulation requirements test unless they are exempt, such as public service pensions overseas, making them broadly similar to UK pension schemes regarding taxes, contributions and withdrawals.

You can transfer your pension to a ROPS or QROPS tax-free, provided you base it in the same financial jurisdiction you reside in, for example, countries within the European Economic Area (EEA). Always check the list of providers on HMRC’s website, which they update on the first and fifteenth of every month, to ensure any scheme you are considering is there and to avoid pension scams. Most UK pension providers will block attempts to transfer to an overseas pension scheme that is not on the list, or it could cost you 55% of the transfer value as an unauthorised withdrawal.

Previously, you only had to be a non-UK resident for five consecutive tax years before accessing your QROPS, but now the rule is ten years.

There are no Mexican ROPS or QROPS at the time of writing, but you could choose a recognised overseas pension scheme based in a European Union country such as Malta. However, you would incur a 25% overseas transfer charge by residing in Mexico instead of an EEA country.

Before the abolition of the lifetime allowance of £1,073,100 by the UK government in spring 2023, the tax charge on transfers to a QROPS or ROPS was sometimes viable when the pension fund neared or exceeded the limit. If this applies to you, please note that the opposition has promised to reinstate the lifetime allowance should they win the next general election in 2024. Feel free to ask me how this might concern you when retiring abroad in Mexico.

International SIPP

An international SIPP is a pension scheme that allows non-UK residents to enjoy their pension overseas. It is not affected by the lifetime allowance, nor does it incur an overseas transfer charge as you are not moving your UK pension overseas. Your money remains in the UK, where the Financial Conduct Authority, which regulates all SIPP operators and every DC UK pension provider, keep it safe and secure.

Yet, you may still denominate a robust global currency in which to accrue and spend your pension abroad. The transfer process to an international SIPP is often vastly cheaper and quicker than to a QROPS or ROPS. However, you can still access the broadest possible global investing opportunities.

You are also free to be as internationally mobile as possible in your circumstances, with no requirement to reside in any single jurisdiction for any number of tax years. If you are contemplating returning to the UK or moving to other parts of the world in the future, do consider transferring your pension to an international SIPP rather than an overseas scheme like a QROPS or ROPS.

Before making a final decision, you can always ask me for advice about how the potential return of the lifetime allowance might affect your plans. I can help you determine the safest and most suitable way forward as you prepare to retire abroad.

Will I pay UK tax on my pension in Mexico?

The double taxation agreement between the UK and the United Mexican States should protect you from UK income tax if you are not a UK tax resident. However, if you pay tax twice, you can reclaim all or most of it via HMRC. However, when living abroad during retirement, the tax implications are always subject to your residential status.

Mexcian Permanent Resident Card

You may need to apply for a retirement visa if you are not a Mexican national. You can do so at a Mexican embassy where the process generally takes up to a month, provided you satisfy the financial and other requirements. It can often be a good idea to consult a reputable immigration lawyer in Mexico.

To fully understand the tax treatment of your UK pension in Mexico I recommend seeking professional advice before or after moving abroad. I can help you understand how to remain within the tax rules whilst safeguarding your UK pension overseas.

Please note

A pension is a long-term investment. The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Your pension income could also be affected by the interest rates at the time you take your benefits.

Overseas pension transfers can be complex. Make sure you take financial advice before you transfer your funds.