Following the recent UK Budget, major changes have been announced for pensions. From next April, it will no longer be necessary to draw an income. Instead the whole fund can be cashed-in. The first 25% will be tax free to UK residents (but not necessarily to residents of other countries) and the balance will be subject to tax at the pensioner’s marginal rate. So far so good. At the same time, the Chancellor has announced, since this might encourage a lot more people to take their pension funds as a lump sum and, since government pensions are unfunded (that is to say they are paid out of annual tax revenue as they arise), he would be enabling such pension schemes to no longer offer transfer values.
This leads me to the reason for the title to this article, as clients of ours have already been approached by ‘advisers’ recommending that they get on and transfer their pension to a QROPS before the opportunity to do so runs out. The question is, just because you might not be able to do something in future, does that mean you should do it now?
On our travels, we see all sorts of extremely poor advice regarding pensions, amongst other things. All manner of completely spurious reasons are given for transferring. These include, that the UK pension is ‘frozen’, it will be subject to UK tax, it might all be lost if the employer goes bust, to name but a few.
Lets start with what you are giving up by transferring out of a UK defined benefit scheme, such as the Teachers Pension Scheme or any major employer’s scheme. Under long standing UK legislation, such benefits are effectively inflation proofed both before and after payment. They are guaranteed by the government in the case of public sector schemes. For private sector schemes, in the first instance, they are backed by the financial strength of a major corporation but even if they go bust, there is the mandatory Pension Protection Fund (to which all UK pension schemes must subscribe) , which provides protection for 90% of the benefits for most people. It is therefore completely untrue that UK pensions are ‘frozen’ once you leave or that they are at risk of being completely lost if your ex-employer goes bust. There is there no justification to transfer out on the grounds that the benefits will be static or somehow at risk.
Furthermore, UK pensions can be paid anywhere in the world and due to the large number of double taxation treaties between the UK and other countries, in many instances, the income can be paid free of UK tax. Even if it is subject to UK tax, British citizens still have their personal allowance of over £10,000 per year, which covers most people’s pensions. So, there is no justification for transferring in order to improve the tax treatment.
Of course, there are circumstances when a transfer may be worth considering. These include: funds in excess of the lifetime allowance, the need to secure benefits on a different basis to the original scheme or sometimes improve death benefits, or to use the fund for specific purposes perhaps by a business owner wanting to use it to acquire trading premises.
Occupational Pension Transfer advice is a very specialist area. It requires a balancing of the benefits to be secured with those which will be lost and a determination as to whether the proposed transfer is worth it, or not. This involves the carrying out of a transfer value analysis calculation which determines the rate of return (the critical yield) needed by a private scheme to match the benefits being given up. It also analyses and compares things like tax free cash entitlement and death benefits in the existing and proposed schemes. You would usually expect to receive a pretty comprehensive suitability letter either recommending that you transfer or, actually more likely, that you do not. Prior to receiving the advice, you should expect to be asked lots of questions about your requirements and preferences and most likely be required to complete a range of questionnaires on your investment risk and on your specific attitudes to your pension arrangements. UK advisers are required to presume that the default, most appropriate course of action is for pension benefits NOT to be transferred and therefore when giving advice, the case for transferring must be made, not the other way round.
In the UK, advice on occupational pension transfers may only be provided by financial advisers with specialist qualifications. It is actually a regulatory offence, liable to result in a fine, striking off and possibly even a criminal conviction for a non-regulated adviser in the UK to provide advice in this area. Such restrictions do not apply to people operating in this market from outside the UK. Here is a summary of the FCA’s requirements.
Which leads me to my conclusion. If you have been been approached by an adviser based out of an office in Eastern Europe, Spain, Malaysia, Thailand or, anywhere other than the UK, suggesting that you should transfer your UK pension to a QROPS – think twice. You might want to ask them what specific pensions qualifications they hold. Ensure that you obtain a proper report from them covering all of the points above. If they don’t burden you with lots of questions and send you a lengthy and probably tedious report with lots of numbers crunched, ask yourself why. How can they possibly know that the transfer is good for you and having perhaps determined that it is, how without a proper report, can they be sure that you are making a properly informed decision? Better still, seek advice in the UK from a properly qualified and regulated adviser. As an expatriate, you may not benefit fully from UK regulation but the adviser is obliged to conduct himself in a fit and proper way and to provide advice to the required standard, no matter where they are based.
This is only a brief summary of the issues. The UK regulator is so concerned about the shenanigans that have been going on and the predatory activity, particular from offshore, I hesitate to call them ‘advisers,’ that it has issued a fact-sheet, which you can access here.
Our associated UK regulated independent advisory firm provides qualified specialist pension transfer analysis service to UK clients and expatriates. It also assists other advisory firms who don’t hold the required qualifications or regulatory permission to provide such advice to their clients. If you have a UK pension are concerned about whether it is suitable for your needs, or have been approached by someone suggesting that you transfer it, they would be happy to help. For further details please contact Phill or myself.
Christopher Wicks ACII FPFS CFP
Chartered Financial Planner