Pension Transfers for Expats Living in China
If you are living or working in China, should you leave your pension in the UK in GBP or transfer your pension into a Chinese pension fund or Chinese Bank account in Remnimbi, the Chinese currency?
Whilst transferring your pension to China is not an option, you can transfer your pension to a tax efficient jurisdiction whilst having your pension paid into a Chinese or offshore bank account.
British expats and Chinese professionals in the UK or Chinese who have worked for a British company can actually transfer their UK pension out of the UK and would no longer have to pay UK taxes as long as you decide to retire abroad, but even if you return, you can mitigate taxes.
But, where would this cash move to? A bank in Shanghai? Mutual funds in Beijing? No, the common choice for expats moving to work in China is to transfer their pensions offshore to a third secure jurisdiction outside of both China and the UK.
This offshore destination can then pay your pension into a Chinese or offshore bank account, but with much lower tax rate than in the UK. We prefer a Gibraltar QROPS for clients moving to China. We will explain more below.
Firstly, do you move your pension into the Chinese currency, the Yuan or Remnimbi or keep your pension in Pounds Sterling or move to another currency such as the EUR or US Dollar?
Over time, the Remimbi will gain strength against the US Dollar and the Pound as population growth and an emerging middle class over a 10 or 20 year period, but the move in the short term will be very slow as China wants to keep its exports competitive globally. What can happen on a year to year basis depends on what happens with currency flows and Central Bank moves on each side of the Pacific and the Atlantic.
Look at the two charts below for the currency movements of the Chinese Remnimbi (CNY) against the Pound Sterling (GBP) and the US Dollar (USD) over the last 10 years.
The Pound is very choppy against the Remnimbi. However, if you see the chart below, as the Chinese and the Americans own so much of each others’ treasuries and as the Chinese market exports a lot to China, you see a much smoother relationship.
This is because an overnight 10% increase in the Yuan would translate into a $130 billion notional loss on China’s U.S. dollar-denominated Treasury holdings and to keep exports competitive, the Chinese will let the Yuan slowly appreciate against the USD over time.
China does not have a free market exchange rate system and you can see the close relationship with the US Dollar below. It is no longer pegged to the US Dollar, but is in a “managed float system” against a basket of currencies including the USD.
You can see the loose currency peg of USD/CNY in the chart above, especially see how it is flat from 2008 – 2010.
As you can see, the Chinese currency, the Remnimbi (CNY) will continue to gain traction against the US Dollar for years to come. So, how do you play this out when considering a pension transfer to China.
Well, you can keep a part of your pension in Remnimbi or you can transfer your pension to US Dollar and buy Chinese stocks or Chinese currency ETF such as CYB which is up 7% against the US Dollar (nov 2014) over a 3 year period.
Here are 3 chinese currency ETFs and their returns vs USD.
Another alternative is to use an investment management company which specializes in ETF strategies.
We recommend moving your pension money into US Dollars in a managed strategy either via mutual funds or via a managed ETF strategy in US Dollars. You can then have your pension paid into your local bank account in China when exchange rates are favourable. We feel this gives you the best chance to get higher returns on your money.
However, you could also just transfer your money into cash in Remnimbi or into Chinese equities and bonds or keep it in Pounds or transfer to EUR or any other currency of your choice.
The second consideration for your pension is to look into where to transfer your UK pension to avoid tax if you are moving to live and work in China. We will look at this now.
Where to Move Your UK Pension if Working in China
If you are working in China and will retire outside the UK, you should look into the options of how to avoid taxation back in the UK. Also, what the taxation is back in the UK. For our clients, we recommend moving a pension to a QROPS in Malta to avoid taxation in the U. You won’t even pay tax on growth or in Malta.
British Citizens Resident in China
Transferring UK Pension to Malta to Avoid Tax in the UK
If you were born in the UK or hold a British passport , but live and work in China, you can transfer your UK pension to the island of Malta, a former British colony in order to avoid UK & Maltese taxes on your pension.
China signed a Double Taxation agreement with Malta on the 2nd February, 1993 and under ‘article 22’, any foreign pension in Malta is only taxable in China and not in Malta.
The benefits for resident in China of a Maltese QROPS is as follows:
- No tax on growth of your pension
- No UK income taxes or death taxes
- No Maltese taxes
- You do pay some tax, but only Chinese income tax if you are drawing a pension in China. So, if you are working in China, but decide to retire in Thailand or the Philippines for instance, you would only pay income tax in the country you retire in. Meanwhile, your pension grows tax-free.
Leaving Your Pension in the UK
The UK signed a DTA with China in 2011 which only came into force in December of last year. Article 18 covers pension provisions.
“…remuneration paid (including annuities paid as part of a pension arrangement) to an individual who is a resident of a Contracting State shall be taxable only in that State. “
In other words, if you have a UK pension and RESIDENT in China, it would be taxed on income in China and not in the UK.
If you are working in China and decide to take your pension in China, you would be open to the following taxes.
- Income tax in China only, not the UK
- You would still pay the tax on death after 75 of up to 45% in the UK
- Your pension would be subject to any further tax raids on your pension in the future in the UK
What is a resident of China? You are resident of China if you have a permanent house there and your economic interests are in China. If you are not resident in China, i.e. you rent in China and only work there partially during that year you would be taxed in the UK on your pension.
Conclusion for British Citizens in China
You cannot transfer a pension to China as a British citizen resident in China, so you have two options, either leave your pension in the UK or transfer your UK pension offshore to a QROPS. We recommend Malta as the best option.
If you have a UK pension and are working in China for less than 5 years, then returning to the UK, we suggest leaving your pension where it is or exploring the possibilities of opening up a UK SIPP.
If you are a resident of China or working in China temporarily and intend to retire outside the UK, we recommend exploring the costs and benefits of looking into a QROPS transfer to Malta. This means your pension won’t be exposed to any future tax changes in the UK and the only tax you will pay is the income in Malta. You also get to pass your entire pension pot onto your Chinese wife/husband or partner on death with no tax deducted from HMRC.