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.
One of the most common questions asked of expat financial services firms is what should clients do with their pensions. Some wish to keep all their money in a UK-based pension, some will look to transfer to a Qualifying Recognised Overseas Pension Scheme (QROPS) and others will want to take a tax-free lump sum from their fund. In short, what an individual chooses to do will depend heavily on their personal circumstances together with any advice they receive from their expat financial services professional.
The start of a new decade, and with it the beginning of a new era for Britain and its citizens in the form of Brexit, represents the perfect time to review your wealth management plans. From taking a look at the suitability of your asset allocation and your pension savings to reviewing your tax and estate planning, now is an especially pertinent time to develop a clear path into the future.