UK Pension Transfer Guide · 2019-07-03 · UK Pension Transfer Guide The essential facts for...

UK Pension Transfer GuideThe essential facts for Expats

In the UK, a final salary pension scheme was traditionally seen as the best type of pension scheme to have, so revered, it was often referred to as a ‘gold plated’ pension. Unfortunately, as the pension and economic landscape has developed in recent years, they no longer represent a safe bet for retirement and a growing number of schemes have closed their doors to new members.

One in six private sector final salary schemes are at serious risk, and with many representing an unwanted black hole on the company balance sheet, firms are actively trying to de-risk their liabilities by incentivising members to transfer their pensions. This is typically in the form of either a cash payment or an increase in the transfer value on the condition that those benefits are transferred out to another pension arrangement.

Recent events such as Brexit and the Bank of England’s lowering of the base rate, have prompted investors to turn to gilts in search of low risk investments resulting in some of the lowest gilt yields of all time.

A once in a lifetime opportunity?During the prolonged period of low interest rates that followed the global economic crisis, it was expected that rates would eventually begin to increase to their ‘normal’ level. The decision to cut rates by a further 25 basis points in August 2016 went against this long held belief and potentially signals that low rates are the new norm.

This change in thinking has had a substantial effect on the value of final salary transfers with increases of up to 35% reported.

These conditions will not last forever and while rates have reacted positively in light of Donald Trump’s presidential election victory, they still remain considerably lower than at any point in recent history.

However, as demonstrated in the recent UK Budget, pensions in the UK have become something of a political plaything and there always remains the risk of regulatory change closing this window of opportunity overnight.

Financial Planning FOR A BRIGHTER FUTURE

FINAL SALARY PENSION SCHEMESGOLD PLATED OR OUTDATED?


Firstly, a final salary pension is an investment vehicle that was often used as a recruitment tool, usually funded by contributions from both employer and employee and provides a number of benefits upon retirement that are promised by the employer.

A final salary transfer is the name given to the process of transferring the value of this pension into another HMRC registered pension scheme to achieve greater investment freedom for your savings.

When a transfer value is calculated, it is based on how much it would cost the scheme’s Trustees to buy an annuity capable of providing an income and any benefits that your scheme would provide in retirement.

The figure is calculated by the scheme actuary who follows pre-determined guidelines based on how many years you have left before retirement, your personal circumstances, the level of pension you were entitled to at the point your employment ended, average life expectancy and potential returns your investment could yield.

You may have noticed the use of words such as potential and average, this is because the transfer value is determined on actuarial principles, which requires standard assumptions to be made about your future as well as the performance of the scheme itself.

With a final salary scheme your employer (subject to remaining solvent) essentially promises an agreed level of benefits. However, when you move

away from this scheme, whether or not you improve your pension benefits will be determined by the results achieved by your chosen investment vehicle. If your investments under-perform, then you could end up with less money to draw income from, equally by transferring your final salary pension now, with an increased transfer value you can potentially achieve the same return at a lower level of risk.

Such an important decision should never be taken without receiving sound, regulated advice.

There are a number of choices to consider with your pension at retirement age and your financial planner should cover all the alternatives available to you. Two of the more common options are purchasing an annuity or taking a regular income via draw-down.

SO WHAT IS A FINAL SALARY TRANSFER?

What is an Annuity?

Purchased from an annuity provider with the cash you have accrued in your pension, an annuity is basically a guaranteed income for life. You can choose to add ‘extras’ into the agreement such as life insurance and income for your partner after your death, but each add on will be discounted from the potential annual income you can receive. Until very recently you had to buy an annuity with your pension, however this is no longer the case providing many more options for savers in retirement. An Annuity option can increase the cost and limits the potential for access to funds until retirement.

What is a drawdown?

Income drawdown is the name given to the process of taking money out of your pension pot to live on during your retirement. Your pension remains invested and as a result, your fund may rise or fall in value.

This guide aims to inform holders of private sector final salary pensions, primarily those who are no longer employed by the company which sponsored the scheme meaning they have become deferred members. This guide is not meant to represent advice due to the complex and important nature of pension transfers.

WHO CAN TRANSFER?ARE YOU ELIGIBLE?Members of most final salary schemes can transfer to another scheme, although this is usually only advantageous if you are what is known as a deferred member. This means you are no longer employed by the company sponsoring the scheme and are yet to draw any benefits from their pension.

There are two instances when a final salary transfer is not possible. Public sector unfunded defined benefit scheme members are prohibited from transferring and where an employee is within one year of their retirement age, it is left to the discretion of the trustees of the scheme.

You can choose to transfer away from a final salary scheme if you are still working for the employer and although this is less common, some companies such as Rolls Royce are actively incentivising members with cash payments or salary enhancements offered in return for members agreeing to surrender their final salary benefits.


SHOULD YOU TRANSFER?

*Source: http://www.pensions-institute.org/reports/Greatest_Good_Release-141215%20FINAL.pdf

There are many reasons why a final salary transfer might be advantageous to you, here we have listed six of the most common…

Concerns over final salary schemes

The Pension Protection Fund (PPF) is a lifeboat that covers Defined Benefit schemes (DB) where the employer has become insolvent and where there are insufficient assets in the pension scheme to cover the PPF level of compensation. The PPF is sponsored by the government that provides cover for workers with final salary-style pension schemes.

If your pension scheme enters the PPF before you have reached the schemes normal retirement date, you generally would receive 90% of your entitlement

based on what your pension was worth at the time. The maximum amount you can receive is also capped, leaving scheme members with a significantly reduced pension in retirement.

Record high transfer valuesAs mentioned previously, record low bond yields combined with companies incentivising members to move are leading to record high transfer values being offered. This could see the value of your pension pot increase substantially. However, there are no guarantees of investment success and investing involves risk including periods of investment declines.

Flexibility

Whilst a final salary scheme gives you a fixed income, taking control of your investment allows you to decide when and how much you draw throughout your retirement, for example; you can choose to take more in the earlier stages when faced with higher living costs or opt for a lower income to conserve your wealth for when its needed most. In some schemes you can also increase the percentage you take as a tax-free lump sum.

‘Paid up’ pension

With most final salary schemes, there will be an agreement that when you leave a company your pension becomes ‘deferred’. This usually means any money invested will continue to increase at predetermined levels, this is usually a very conservative percentage of your fund.

Investment control

A UK scheme will typically be invested in sterling

and UK based assets, by transferring away from

your existing arrangement you are able to choose the location

and which currencies to use for your investment, both of which can be a valuable benefit to international workers seeking to achieve a greater return on their investment.

Improve tax efficiency

If you intend to permanently become a non UK resident, transferring your pension offshore potentially could allow you to take a larger tax free lump sum (subject to new QROPS rules - see page 8 of this e-guide,) when you reach 55 and can reduce the amount of tax your loved ones would pay when you pass away.

By transferring your pension offshore, your wealth becomes subject to a lifetime allowance test based on the value at that time. This could be advantageous if your retirement fund looks likely to exceed £1m in the future as otherwise you will pay tax on anything above that amount.

If you hold assets that will attract inheritance tax, such as property, you could choose to cash these in (whilst being mindful of any Capital Gains Tax you may incur) and spend the funds allowing you to defer drawing down on your pension until later, reducing your inheritance tax liability.


With increases of up to 35% reported on transfer

values and with 1 in 6 final salary schemes under pressure many

people are reviewing their future provisions.

**A comprehensive review of your short, medium and long term plans that outlines the pros and cons of all available options is strongly recommended**


Final Salary schemes do remain a great benefit for some people to hold. If any of the following points apply to you, transferring might not be the best route to take.

WHY STAY IN A FINAL SALARY SCHEME?

• If you are looking for a low risk, guaranteed lifetime income and your existing pension willprovide this, then you may be better staying with your final salary scheme.

• If your employer has stated that transferring will result in a substantial reduction in thevaluation of your benefits?

• If you aren’t confident that opting for a different investment strategy would result in inflationbeating returns due to the critical yield needed being too high.

The decisions you make, or fail to make now will potentially have a profound effect on shaping your future plans.

A comprehensive financial review can highlight any shortcomings as well as identifying any unexpected increases and allow time to adjust your plans accordingly.

Transfer Values Soar

The past 12 months have seen Cash Equivalent Transfer Values (CETV) for final salary schemes hit new highs. A CETV is essentially the cash value placed on a person’s future pension benefits if they were to move to a different plan and surrender any further rights they would be entitled to. The cash value represents a lump sum that would be paid in lieu of those benefits and is determined by how much would be needed in today’s money to ensure those benefits were provided at retirement.

When calculating a CETV, the most important investment return factor used by a scheme actuary is the risk free investment return based on UK gilt yields which are currently at a record low level.

Gilt yields in the UK have been in decline since the global economic crisis. With so much uncertainty in the markets, investors seeking safe havens for their money poured into government backed bonds traditionally seen as low risk investments.

Brexit and a further reduction in the Bank of England’s interest rates has meant the expectation of yields remaining low for longer has increased. This has resulted in a further increase in CETV’s.

As you can see from Chart A below, Gilt rates continued to reduce as the recession played out with the world entering what has become a prolonged period of low interest rates, quantitative easing and

struggling economies. Yields did recover somewhat and during most of 2014 & 2015, 15 year bonds (the ones most commonly used by actuaries) settled around the 2% mark before crashing down to a record low level in August, when

in the aftermath of the UK Brexit decision, the Bank of England

reduced the base rate by 25 basis points to a new record low of 0.25%

In the days after Donald Trump won the US presidential election, bonds around the globe rallied due to investor expectations that liquidity will improve with

his policies leading to increased economic growth and inflation, and that his plans for infrastructure spending will be subsidised by further bond issues.

Companies encouraging transfers

Final salary schemes represent a vast black hole on the balance sheets of countless businesses. Even though the employer would most likely have to take a hit in terms of initial costs, it would take away any long-term liability and risk presented to the future of their company.


SO WHY TRANSFER NOW?Transferring your final salary pension isn’t a new choice, it is however, an option that is often not discussed with scheme members and the general opinion historically has been you are better to remain in a scheme.

THERE ARE TWO FACTORS MAKING TRANSFERRING A CREDIBLE OPTION TO CONSIDER- Inflated transfer values - The 2015 Pension reforms

WHY STAY IN A FINAL SALARY SCHEME?

The figures displayed in both graphs refer to past performance and results are not inclusive of any fees, commissions or other charges. Past performance should not be used as a reliable indicator of future results. Source http://davidstockmanscontracorner.com/good-luck-with-that-junk-bond-spreads-at-all-time-low-uk-gilt-yields-lowest-since-1750/

Chart A: UK 15-year Gilt yields Feb 2007-Feb 2017

Chart B: UK long bond yield, 1750 to 2014UK gilt yields increased sharply in the 1960-70s as a result of rising inflation before falling as inflation has reduced in recent times.


RECENT UK PENSION CHANGES

So, what does this mean for UK expats?

Any UK expat residing in the European Economic Area (EEA) is still able to transfer their UK based private pension to a QROPS scheme in another EEA country free of tax (Subject to lifetime allowance limits) However, if they move to a non-EEA country within 5 years of the date of transfer and withdraw pension income, a 25% tax will be applied retrospectively.

UK expats residing anywhere else who choose to transfer their UK based private pension to a QROPS will be taxed 25% of their transferred funds with immediate effect unless:

- The transfer is to a QROPS based in the same jurisdiction as that where they reside

- The QROPS is set up by an international organisation for the purpose of providing benefits for or in respect of past service as an employee of the organisation and the member is an employee of that international organisation

- The QROPS is an overseas public service pension scheme and the member is an employee of an employer that participates in the scheme

- The QROPS is an occupational pension scheme and the member is an employee of a sponsoring employee under the scheme

Other recent announcements

• From 6th April 2017, 100% of the incomefrom a QROPS will be subject to UK taxfor UK residents. This increase from 90%brings QROPS in line with UK registeredpension schemes.

• The member payment provisions willextend from 5 to 10 years and the pensioncommencement lump sum will be limitedto 25% of the UK tax relieved funds for 10years instead of 5.

• QROPS providers will no longer be requiredto ring-fence 70% of a member’s fund foran income in retirement allowing expatsaccess to the same freedoms as UKregistered pension schemes when it comesto accessing their pension money.

Pension reforms

These changes follow on from the UK pension reforms announced by George Osborne in 2014, George Osborne that allowed anyone with a final salary scheme that opts to transfer out of their scheme to benefit from greater investment freedom upon reaching 55.

Philip Hammond’s first Budget offered a positive assessment for the future of the British economy against a backdrop of Brexit uncertainty. However, the Chancellor announced significant changes to the rules around foreign pension schemes.

YOUR RETIREMENTREVIEW


WHAT IS A QROPS?A Qualifying Recognised Overseas Pension Scheme is an international pension plan, recognised by HMRC. While it is recognised and authorised to accept transfers of pension funds in from UK plans, it must only report toHMRC for its first 10 years. Even after the recent changes, expats within the European Economic Area or those residing in the same jurisdiction as

a QROPS provider, such as Australia, can still benefit from such schemes.

For those that don’t meet these requirements, there are a number of other solutions that provide expats with greater investment freedom and tax benefits. Our team of pension transfer experts are on hand to help identify which product suits your personal needs.

SO, WHAT ARE MY OPTIONS?Contrary to what some might say, QROPS is not the be all and end all for UK expats when planning for retirement. Indeed, with the recent changes announced by UK Chancellor Philip Hammond, the instances when a QROPS is suitable have considerably reduced. Depending on your circumstances and retirement goals, solutions such as a SIPP or a regular savings plan may be more suitable.

What is a SIPP? • A Self-invested personal pension is effectively a

straightforward UK-based private pension plan thatallows you, with the help of your financial adviserto invest in a wide range of products to build a

pension that suits your attitude to risk and long term financial goals.

• A SIPP is simply a pension ‘wrapper’,your financial adviser acts as the SIPP

administrator to ensure the pension structure you require is in place, and that your plan adheres to all of the UK’s rules and regulations surrounding pensions and retirement planning.

What do we mean by a PENSION wrapper?

• A wrapper is the name given to tax friendlyinvestment products. With a Pension, this affords you

a tax rebate on your income in return for restricted access to your funds i.e. until your 55th birthday.

• Within your ‘pension wrapper’ you can invest ina wide range of opportunities, and design yourpension plan to best suit you, both leading up toand through your retirement.

YOUR RETIREMENTREVIEW

?

• Is a UK based plan, subject to all thebenefits and drawbacks of UK legislation

• Is fully UK friendly, and will continueto function for you whether you are UKresident or living overseas

• Can invest in a wide range of opportunitiesincluding commercial property and land,direct company shares and has access tothousands of investment funds

• Upon taking income, it may be taxed in theUK. However, double taxation agreements

may be in place which can benefit you depending on your country of residence at retirement

• Can be better for those -- Retiring in theUK or a jurisdiction with a double-taxationagreement*

• With total pension funds that are unlikelyto exceed the lifetime allowance (currently£1.m)


SIPP KEY POINTS


WITHOUT THE RIGHT HELP, THE PROCESS CAN BE COMPLICATED

STEP INTO THE FUTUREWhat happens next

It’s a bit tricky and can require some deep thinking but the importance of what happens next can’t be stressed enough. No longer shackled by the one size fits all scheme of your old employer; you have the opportunity to formulate a plan bespoke to your own personal circumstances.

Ask yourself; when will you need to pay your children’s education fees? How will you buy your holiday home? When do you plan to stop working?

If you are married, it’s wise to involve your partner in any decision making as should the worst happen, it is them who will be left to pick up the pieces, and at a time when they don’t need any additional stress or pressures.

Get it in writing

Contact your scheme administrator in the first instance to request a written transfer offer. You can do this yourself or via a financial adviser. At GWM, our dedicated pension specialists will always request two copies, one sent to us and one direct to you.

Each offer is usually guaranteed for three months, which gives you a reasonable window to seek advice and explore your options before completing the transfer. If for some reason your offer expires, you can request a new valuation but there is a possibility that you will incur a charge for this.

Don’t rush

Although your transfer offer may only be valid for three months, this doesn’t mean you must have decided where you are going to reinvest your money within this timeframe too. The decisions you make now will probably shape the rest of your life so taking a while to consider your options is only natural.

Get advice

You are required by law to take qualified advice before any transfers above £30,000 can take place. Although with something as important as your retirement plans it could be argued that any transfer, regardless of size should only be completed after receiving advice.


Fees

The pension transfer industry has become highly competitive and such competition has had a positive effect on the fees you can expect to pay. Make sure you understand what fees you will be charged, whether one-off or ongoing from the start. By accepting the transfer value, you begin an irreversible process where you surrender your existing benefits in return for a cash lump sum.

Reduced offers

One word of warning; Schemes in deficit have the right to reduce the value of your fund on transfer. So it is possible you may face a penalty if you did decide to transfer. Depending on the level of penalty, it may still be worth moving as this could be offset by strong growth in a new investment vehicle.

As the saying goes ‘With freedom comes great responsibility’ so now you must decide what kind of investments and where you will invest your transfer.

THINGS TO WATCH OUT FORTAKE CARE WHEN MOVING YOUR NEST EGG

GWM use UK Crown Dependencies or territories with similar protection and the same transparent regulations. This allows us to offer tax efficient investments and savings with high levels of investor protection which gives peace of mind to our clients.


A TIMELY REMINDERWhen undertaking such a big decision and while your mind is focused, this presents a perfect opportunity to review all your investments.

GWM are specialists in pension and retirement

planning for international

workers.

We help clients arrange their affairs to best position themselves for their future, and support them along the way. We are here for you up to and throughout your retirement. Any financial adviser will admit that the hardest conversation to have with a new client comes when we audit their pensions and find that they need to make serious cutbacks or cancel their grand plans for retirement. This often affects the first few years of retirement when big plans involving big expenditure is high on our client’s retirement to do list.

For most, retirement can’t come quickly enough, but can you really afford to retire at the age you desire? Even if you’re of the mind-set that “I’ll work ‘till I’m dead” but.. have you thought of a backup plan just in case things don’t work out?

The typical age a new client enquires about his/her retirement is fifty, with a mortgage, teenage children and a desire to retire within 10 years. Unfortunately, most have no idea where their pensions are, what they are worth or how much income they may generate and when. Most don’t know how much they are entitled to from the state, when they can draw it or how it actually works.

WORKING TOGETHER for a Brighter future Independent and Professional Financial Planning Designed with you in mind

About usGWM has been providing lifestyle financial planning to clients around the globe for almost 20 years, originally

opening in the UK and retaining a strong presence there helping expats repatriate their savings in the

most tax efficient way possible, if and when they decide to return home.

From modest beginnings GWM has grown to become one of the world’s leading providers of lifestyle

financial planning, which in itself remains a specialism in international finance, and now looks after over

10,000 international clients, managing over $1 billion of client savings.

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