Both types of pension scheme certainly have their respective disadvantages. For example, if a person dies under the terms of a final salary scheme the surviving spouse is entitled to only 50% of the pension, while children or other dependents receive nothing, even in the event that the surviving spouse also dies. This is hardly an ideal situation and does seem more than a little unfair, particularly given that final salary schemes are also inflexible and, furthermore, void if the company goes out of business – former employees of now defunct companies such as Woolworths can stand testament to the painful impact of these shortcomings.
On the other hand, in cases where the saver dies before turning 75, defined contribution schemes pass to beneficiaries tax-free. Furthermore, funds held under these schemes become available to savers when they reach 55 and can largely be used when and how the saver chooses. Although this might not sound drawback-free, the reality is that some savers have been shocked to learn that they must pay huge income tax on withdrawals from the fund – again, hardly an ideal situation for most.
Expats
The situation for expats is interesting. This is because they are eligible to transfer their pension funds to a Qualified Recognised Overseas Pension Scheme (QROPS).
Although QROPS have official status with HMRC, they provide an attractive level of flexibility and are very favourable from a taxation perspective.
For example, they can be converted into income with only minimal tax liability, qualify for tax-free lump-sum withdrawals of up to 30% of the fund value and can pass on to spouses, children and other beneficiaries tax-free. There is little doubt that a QROPS transfer represents a sound choice for qualifying British expats, whatever the level of their regular savings.
This communication is for informational purposes only and is not intended to constitute, and should not be construed as, investment advice, investment recommendations or investment research. You should seek advice from a professional adviser before embarking on any financial planning activity. Whilst every effort has been made to ensure the information contained in this communication is correct, we are not responsible for any errors or omissions.
To make the most of the rest of the year, one important wealth management question you should be asking yourself now is how diversified do you need your investment portfolio to be.
Pensions transfers for expats may become simpler if the Department for Work & Pensions follows through on plans to drop the requirement for consumers to receive accredited advice before making an expat pension transfer.