Every final salary pension has a Cash Equivalent Transfer Value (CETV), which is the cash equivalent sum you would receive in exchange for replacing the pension from your old company with a qualifying overseas scheme.
Right now, transfer values are the highest they have ever been since QROPS became an option for final salary holders back in 2006. Most analysts also agree that we are not likely to see valuations this high ever again. That is because the inflation and interest rate assumptions trustees must use to calculate a transfer value have never been more favourable.
Although anyone who transfers a final salary pension does give up their rights to the final salary, they do receive in return a personalised pension with a significant sum of cash from which to fund that same pension income. Not only are they able to lock in this cash value now, but they will receive full control of how that money is allocated both now and throughout retirement. And provided they transfer to a jurisdiction and provider recognised by HM Revenue & Customs (HMRC), there are many other advantages that a QROPS can offer.
Every individual’s situation is unique, but there are many reasons why someone would consider transferring their pension. Consider for example an individual who is not married and is in ill health. If they remained in a final salary scheme and died two years after they began drawing benefits, then the entire balance of the pension pot would disappear into the coffers of the trustees. With a QROPS that person instead has the option of passing on the full cash value of their pension to other relatives, or even to a charitable cause.
An individual with a spouse and children will probably want to ensure that something is passed down after both their death and that of their spouse. Most final salary schemes pay half (sometimes two-thirds) of the original pension income to a surviving spouse, but after he/she dies all benefits cease. With a QROPS, the balance of the pension pot can be passed on to the family.
Irrespective of any health or family considerations, many expatriates like the fact that a QROPS allows them the possibility of taking their tax-free lump sum before age 65 (typically after age 55). And most QROPS jurisdictions also allow for larger lump sums than those available to UK pensions – usually up to 30 per cent, as opposed to 25%.
Some pension owners also wish for more flexibility and/or control over their pension investments. Rather than have company committees, trustees or a pension provider manage – or in the case of so many UK schemes, MIS-manage their money – those who prefer to choose exactly how their pension monies are invested may consider a pension transfer with an open-architecture investment platform. Open-architecture not only means investment freedom, but also currency freedom, i.e. they are not required to leave their money in Sterling, unless they consider it advantageous to do so.
Another issue for pension holders right now – and perhaps a deciding factor when considering whether or not to leave a scheme – is the current state of UK pension deficits. The combined deficits of FTSE 100 company schemes has doubled over the last year, and now stands at a staggering GB£63 billion (B2,831 trillion), according to pensions specialist LCP.
It is important to be aware that the same falling interest and bond rates, which have created extremely beneficial transfer values for scheme members, have simultaneously – and somewhat paradoxically – increased the pension deficits faced by their companies.
Last but certainly not least, are the tax implications on the income itself. Instead of paying a minimum of 20% taxation on income should the pension remain in the UK, a QROPS can reduce this to as little as 2.5%, if the pension is moved to a jurisdiction such as Gibraltar.
The rise in transfer values has also moved many final salary scheme owners close to – or even above – the Lifetime Allowance. If you obtain a current transfer value and it has risen above GB£1 million, then you must act to protect your lifetime allowance. In 2010, the Lifetime Allowance was £1.8 million. In his most recent budget, however, George Osborne lowered the LTA once again from £1.25 million to £1 million, and further reductions are expected in the future.
Hence, if Inland Revenue determines you are liable for tax on your excess pension contributions, you would be paying 55% on the excess monies taken as a lump sum and 25% tax on excess monies taken as income. This tax is levied before you even receive your income, after which you are taxed on the pension income itself.
This should be addressed as soon as possible as some final salary scheme members with substantial CETVs may be able to save hundreds of thousands of pounds in unnecessary taxes. Depending on the size of the pot, some expats may be able to avoid this tax altogether.
Some scheme members are scurrying to act now because they also fear that the recent Brexit vote could mean that the UK leaves the EU and must no longer abide by EU legislation. Because QROPS was born from an EU Directive, if the UK leaves it could theoretically scrap all pension transfers, leaving those who have already moved their pensions the lucky ones.
Some expatriates have been holding off transferring their pensions until they either leave the company or decide whether or not they will retire abroad. But current transfer values make it worth at least obtaining an up-to-date CETV. This may prove to be the ideal time to make the move out of a defined benefit scheme.
If you are the owner of a UK final salary scheme, it is highly advisable to obtain a current transfer value right now. Obtaining a CETV does not commit you to move your pension, it simply gives you an indication of what you would receive as a cash lump sum, should you decide to move into a personalised scheme.
Phuket Expat Finance can help you obtain a valuation and provide you with a risk-free assessment of your final salary scheme. We would be happy to provide you with a no-obligation written report, and advise you on all the options available to you should you wish to consider a transfer. Email us at firstname.lastname@example.org