Recently, The UK Pensions Regulator (TPR) gave trustees of about 5,500 UK pension schemes the right to suspend transfers of defined benefit schemes for up to three months (note this affects final salary-style, or defined benefit pensions) to allow pension companies to review transfer valuations, and the administrative impact of a potential increase in demand for transfers.
With a defined benefit pension, it’s your employer or ex-employer’s responsibility to make sure there’s enough money in the scheme to pay your pension when you reach retirement.
Considering the current Covid-19 crisis, employers with fund deficits will be looking for support from the Pension Protection Fund (PPF) to delay or reduce their pension deficit contributions.
The DB pensions deficit picture
At the end of February 2020, the PPF reported that amongst the approximately 5,000 defined benefit (DB) transfer funds in the UK today, there were almost 3,500 DB schemes in deficit. The combined total value of the deficit of these schemes at the end of February 2020 was £244.8 billion
In the current market conditions, the regulator noted that the transfer values of DB pensions may rise further. The government’s concern is that higher valuations will make the DB pensions deficit materially larger, as stated by TPR.
Is your ex-employer in deficit or are they currently within the pension protection fund ?
It’s essential to know that once a company’s scheme enters the pension protection fund a member cannot transfer their DB pension out of the UK and out of the protection fund. The amount of pension payable from the protection fund is subject to the government’s capped limit of £41,461, and if a member has not reached the scheme retirement age at the time the employer goes into liquidation (or when such pensions are transferred into the PPF), this amount is further reduced by 10%.
Frequent and impending regulatory changes to transfers
This latest guideline from TPR means pension companies can defer processing a final salary of defined benefit pension transfer for 3 months. It’s the latest in a series of changes that have slowed pension transfers out of the UK. For example, the requirements to involve only FCA-regulated advisers to review potential defined benefit transfers, increased activity to remove overseas pensions from the HMRC approved list, and the imposition of a 25% transfer (exit) charge where the pension is transferred essentially to a place where the member does not reside (or a place outside the European Economic Area where the member has moved to Europe).
The laws allowing transfers were certainly innovative when they were introduced by the UK in 2006, in concert with the freedom of labour and freedom of movement principles of the EU at the time. They have been practical and useful in bringing portability to the pensions sector, and flexibility in retirement and tax planning for those who have left the UK.
Considering the recent and ongoing changes that have slowed the overall number of transfers, and considering the UK is no longer part of the EU, many in the industry are concerned the legislation allowing pension transfers, is at serious risk.
Anyone that has legitimately transferred their pension overseas will know the process is a complex and technical one, and regulatory impacts on the process are increasing.
UK pension-holders and British expats affected
You may be aware that the total calculated value of your private pension can be transferred out of the UK if you satisfy certain conditions. This may be something of relevance particularly for EU nationals returning to the continent after Brexit, or British citizens who have left or have decided to leave the UK and intend to retire overseas.
Are you entitled to a defined benefit pension from a UK company and you haven’t started receiving your pension yet ?
An overseas pension transfer can provide an opportunity for those with a UK private pension to unlock significant benefits, including reducing or eliminating specific UK pension and inheritance taxes (if done correctly).
However the transfer option is not a simple case of deciding if one wants to transfer their retirement funds to the destination of their choice.
The suitability requirements and the strict guidelines required by the law to be used to compare current and future benefits of the existing pension (and future annuity), versus investing the transferred funds via a foreign pension, not to mention the increased legal responsibility placed upon advisers, does mean that in many cases transferring the pension is not advisable. Each pension transfer is a case by case, and somewhat technical analysis.
if you are considering your UK pension options now, request assistance here.
Why consider transferring a pension overseas?
The UK government requires that British expats or other foreign nationals with a pension (including Italians, Spanish, French, German, Dutch etc and other nationals) can only transfer to registered pension schemes. You need to ensure the destination (QROPS) fund qualifies to receive your pension. Here is where you can review the Qualified overseas pension register: https://bit.ly/checkUKpensionregister
Once a UK private pension-holder has been non-resident for at least five tax years, the QROPS becomes subject to the laws of the overseas country in which it is based. Consequently, income can be withdrawn without usual UK limits, and there will be no deduction of taxes at source in the UK (pensions are currently taxed from the UK).
UK pension funds often have a bias towards investment in UK assets (and investing in GBP). Transferring the pension can provide the scope for diversifying, and for allowing the payment of pensions in currencies other than Sterling, without UK tax deductions, and often a pension fund member can opt for personalised professional investment management by UK companies.
It’s also important to note for pensions with a value greater than £1million, a growing pension outside the UK will escape the UK 25% Lifetime Allowance excess tax charge. This charge would otherwise apply to any pension paid from a UK registered pension scheme to persons who are UK resident or non-resident for less than five years where the value of the pension exceeds the Lifetime Allowance.
There are many pros and cons of transferring pensions, and it’s not something to be considered lightly, it essentially requires the assistance of an experienced independent adviser who is focused on your interests.
Such an adviser may not be easy to find, as it’s unlikely he/she will be calling you frequently and urging you to transfer your pension.
The above information is not personal financial advice adapted for your personal situation and hence can only be considered general information and is not to be relied upon for your own situation – you should seek advice from a qualified adviser for personal advice.