“To transfer, or not to transfer?”
That is the question. A question that many expats have wrestled with in the past and many more are and will wrestle with in the future. Even though the majority of questions asked concerning overseas UK pension transfers are quite similar, the answers and advice given are by no means consistent. HMRC figures reveal that 13,700 overseas UK pension transfers, with a combined value of £1.5bn, were completed into a QROPS (Qualifying Recognised Overseas Pension Scheme) during the 2015/2016 financial year. Compared with the 2,500 transfers during the 2006 to 2007, the interest in pension transfers has significantly increased.
When analysing the pros & cons of overseas UK pension transfers, it is also important to look at the types of pension(s) that are being transferred; Final salary DB (defined benefit), or defined contribution (DC). A final salary pension pays a defined income for life and nothing after the death of the member, or their spouse. A defined contribution pension offers flexible access and any unused savings can be passed to beneficiaries free of inheritance tax.
The result of transferring a defined benefit pension to a QROPS means foregoing the guaranteed income for a lump sum and bearing in mind how the transfer value is calculated. This could, in many cases, be very beneficial.
UK Pension schemes deficits keep rising!
Aside from the potential benefits, another and quite alarming issue is the current combined deficit of the UK’s 6,000 defined benefit pension schemes. Recent research conducted by the accountants PricewaterhouseCooper found that DB pension schemes have total assets of £1,450bn against liabilities of about £2,160bn. This translates to a total current deficit of £710bn, according to the report.
As pension companies use the interest rate on gilts to estimate how much they will have to pay out in pensions in the future, the lower the gilt yield, the more the companies have to set aside to meet their future liabilities. With the collapse of the 10 year gilt rate and the recent EU referendum, the deficits are growing.
Is it time to cash in?
With that in mind…. is now the right time to cash in your final salary pension?
A recent article in the Telegraph (Money section) looked at that exact question and makes for interesting reading.
Although focused on UK transfers, the same scenario is relevant for expats considering overseas UK pension transfers.
Pension freedoms, what does it mean?
There is also the question of ‘Pension Freedoms’, introduced in the UK in April 2015. This has seen tens of thousands of pension holders cash in their pension pots to the tune of over £9bn. However, DB pension schemes are excluded from pension freedoms. They are designed to pay out gradually over a period and not in a single lump sum. Although DB schemes can be more generous than DC schemes and in many cases worth keeping. However to take advantage of pension freedoms they have to be transferred to a DC scheme. Also, if the transfer value is above £30,000 appropriate advice has to be taken and evidenced to the scheme trustees.
In general, pension freedoms has been broadly welcomed. It does present a number of challenges bearing in mind that the more flexibility available today, the less flexibility will be available in the future. With people living longer, it is important to seek impartial advice and have an appropriate strategy in place to address these concerns in later life. Retirees (over age 55) now have more options available to them; Should I leave my pension pot untouched?; What is and how does flexi-access work?; Are annuities worth considering?; Can I take ad-hoc lump sums?; Should I cash in my whole pension pot?
With more options comes more complexity and equally important for expats, when considering an overseas UK pension transfer, is ensuring the appropriate trustee is selected in a regulated jurisdiction that is in line with HMRC guidelines and able to offer ‘flexi-access’ to their members.
Get appropriate advice on pension transfers
The pension landscape has and will continue to change and this will undoubtedly bring more challenges and pose more questions. With only a few of the major questions addressed above, the need for straightforward unbiased advice is crucial. This is not only relating to an overseas UK pension transfer, but also beyond. So, if you are currently living overseas and have a UK pension(s) and would like a free, no obligation consultation, we are here to help.
“To transfer, or not to transfer…..?” If that is your question, then Harrison Brook will guide you through and explain the various options available based on your personal situation so you have the necessary information to make an informed decision. Get in touch today!
The information contained herein is for informational purposes only which is subject to change and should not be relied upon. You should seek advice from a professional adviser before embarking on any financial planning activity.