This article covers Private or ex-Company pensions along with Defined Benefits Pensions (or final salary schemes), and does not include the State Pension.
Private or ex-company pensions
If you are intending to stay abroad and not return to the UK, and you have one of the above then you should look at reviewing your current pension to see if it would be best to transfer this to a QROPS. There are many reasons for doing this, however the more pressing one is Brexit.
If Brexit goes ahead, then the industry believes that HMRC will not leave the current status of QROPS as is, because if we look at the figures, billions of Pounds in pensions have left the UK and this money that HMRC will not see any tax from and changes will more than likely be made to plug the leak.
Below are some suggestions of what could happen:
1. Revert to pre-QROPS conditions: This means that your pension stays in the UK and would be subject to UK rules.
2. Restrict QROPS to member’s country of residence: Not many countries have the knowledge and expertise to handle this, and in fact two schemes based in Luxembourg that were previously on HMRC authorised list have been removed; this could mean that those people that transferred their pensions to those QROPS could be facing a tax bill of up to 55% for an “unauthorised transfer”.
3. Restrict certain schemes from being transferred: This has already started; teachers, MOD etc. are now no longer allowed to be moved.
4. Apply a transfer tax to QROPS: HMRC are going to lose out on tax from Billions of Pounds from Pensions that have already been transferred, this is not an insignificant sum and they will not want that to continue post-Brexit
5. Stop QROPS being used for Lifetime Allowance planning: The LTA of £1m does not apply to QROPS; if an individual who is UK resident accrues over £1m in pension rights then HMRC can apply a 55% tax on the excess, in a QROPS it doesn’t matter how much is in the “pot”, so it makes sense to move it before the £1m is reached.
6. Leave the existing QROPS regime as it is: This is probably the least likely option.
If you have had a QROPS for more than a couple of years you should also check the current situation, many QROPS providers have been removed from the HMRC list and this could be dangerous.
Defined Benefits or Final Salary schemes
Bad news to holders of those historically ‘gold plated’ final salary pensions schemes. The schemes that promise you a certain level of income based on your last few years salary level with your employer.
Low interest rates and stress on the pension fund means that transfer values are at historical highs. The companies are happy to rid themselves of you and will pay handsomely to do so, and the low interest environment means the transfer values are much higher than you might imagine.
But low interest rates will not continue forever. Brexit and the fall of GBP will create inflation and that means interest rates will have to rise.
In many instances people are being offered tens of thousands of pounds more than a year ago with some even being incentivised by their Pension scheme to leave, with a bonus given for doing so. The main reason for this is that the pension company no longer wants the responsibility of having to pay the pension when you retire. Life expectancy in Europe now is 84/85 and in effect people are living longer, meaning the pension scheme has to pay you longer.
For someone with an annual pension income worth £20,000, it is not uncommon to be offered 30 times that amount at the moment – in other words, £600,000 in cash (as mentioned above, this is likely to reduce in the future when interest rates rise).
However this is not the right thing to do for everybody, and there can be significant disadvantages.
Transferring your DB/Final Salary pensions can offer a more flexible retirement income, the possibility of extra tax-free cash and upon death the remainder of the pension can be paid out to any beneficiary’s rather than paying a reduced income only to a spouse/dependent partner and then ending.
However, keeping a DB/Final Salary pension can also offer you certainties such as an income for life with Inflation protection, Risk-free income, which does not depend on the ups and downs of the stock market.
There are currently major uncertainties surrounding Brexit and the UK leaving the EU, particularly for those people living outside of the UK. With the almost constant review and changes of UK pensions laws/taxes and the fact that 90% of UK DB/Final Salary schemes are underfunded, it’s important you review your options and the right decision with your pension.
Worked for less than 10 years for the European Institutions?
Many people that worked for the EU Institutions for less than 10 years are not aware that they are not eligible for an EU pension when they retire. In order to not lose their entitlement they need to “transfer out” to a National or Private Pension scheme.
If that individual dies in between leaving the Institution and transferring out their pension, then those pension rights are lost, this means the money is lost, no spousal or orphan’s benefit and no lump sum pay out.
If you or someone you know has previously worked for any EU institution you should seek advice on the best way to save those pension rights from being lost.
The above information is based on Spectrum’s understanding of the situation on the day this document was produced (14/12/2016). We advise that before you take any action on any of the above subjects that you first check with a suitably qualified financial professional.