This month I am not answering a specific question, but I feel that it would be useful to comment on the issue of pensions and retirement planning, as there has been a lot of discussion in the press about certain types of pension products and potential uses of these.

This is issue that has been covered before, but it is one that continues to confuse and concern people. This leads some people to panic and make good provision for their old age, for others it leads to making inappropriate decisions, while some people bury their head in the sand and make no provision at all.

Why do you need to worry about retirement and your future? This is an issue that will affect the vast majority of people. Eventually you are likely to reach an age where you cannot, or do not want work any more. So what do you when you reach this age? How will you continue to fund your lifestyle to the level that you have become accustomed to?

In the UK, and indeed many other countries that have established pension schemes, there are often clear and quite simple ways to start funding for your retirement. To use the UK as an example, there are compulsory pensions that your have to contribute to. These payments are taken out of the tax that is collected from your salary at source, so you have no choice in making the contribution. The State pension, while a useful benefit to have, would not be enough for the average person to survive on, and generally it is advisable to make further provision.

Most employers are required by law to offer their staff some form of pension to contribute into, and will often make a contribution as well to enhance the employees’ benefit package. Other countries also have similar schemes available.

But what about residents of the UAE – what can you do to plan for your retirement? To start with most employers are required to give their staff what is generally known as a ‘gratuity’ payment. This equates to twenty one days' remuneration for each year of the first five years of service, and then thirty days' remuneration for each additional year of service, subject to a maximum of two years' remuneration. However much like the UK State pension I would suggest that this not something to rely upon, and you should make further provision.

So how do you achieve this? I would suggest that the simplest way is to save a percentage of your salary while you are working, that will build over the course of time to a size that is sufficient for you to retire on. How much should this be? As I have mentioned before, as a very approximate rule of thumb I suggest to clients that you consider taking your age, dividing it by 2 and then using this as a percentage of your salary to save.

This money is then invested in a fund which can be a combination of assets, ranging from cash to property to shares. The key issue is that this fund has to be large enough so it can generate sufficient income for you to live on. The offshore environment gives an investor a lot more flexibility than onshore, but with that comes more responsibility to make your own retirement provision. If you prefer, and a lot of people have done so, your ‘pension fund’ can consist of a portfolio of properties, and the rental yield that they generate can be used income for you.

An issue that has been generating a lot of discussion recently are Qualifying Recognised Offshore Pension schemes, or QROPS. These are a type of pension that were set up initially to allow people with UK pensions who then emigrated to other countries, to transfer their pension to that country and combine with any benefits that they had accrued in the new country of residence. Generally the approved schemes had similar rules to the UK and so any benefits would also be structured in a similar way.

What has been happening of late is that a loophole has been spotted in these rules, which states ‘that if a pension scheme member is not resident in the UK when the payment is made and the member has also not been resident in the UK for the five years preceding the tax year the payment has been made then no member payment or a charge will arise or be reportable to Her Majesty’s Revenue & Customs (HMRC)’.

In plain English this has been interpreted to mean, that if you have been out of the UK for more than 5 tax years it is not a requirement to report where your pension has been moved to, and so you could if the new pension scheme was agreeable, take the entire fund as tax free cash.

To me this sounded too good to be true and so it proves to be. HMRC has reviewed a case and decided to apply income tax on the proceeds that have been paid out. So this is only one case, but to me it highlights the risks of trying to get around HMRC. Eventually they will work out what is going on and apply the rules as they see it, and ninety nine times out of a hundred you will lose.

With anything as complicated and as important as your future it is vital that you talk to a qualified, professional advisor to guide you through the subject impartially. The right advisor will be able to explain the issues and options to you in a clear and concise manner so that you can be confident in the decisions you make and comfortable that they have your best interests at heart.

As always we at Acuma welcome your questions and enquiries directly so please do not hesitate to contact us if you would like to discuss this or any other issue in more detail.