For many years, particularly during the 1960s and 1970s, Defined Benefit Schemes were the pension planning model of choice for many in the UK.
In fact, by the final years of the 1970s, more than 90% of company pensions were Defined Benefit – the schemes were viewed as both secure and incredibly tax efficient in an era of relatively high income taxation.
However, the success and appeal of the schemes slowly began to wane in the 1980s and by the middle part of the next decade the decline became marked, so much so that by 2015 only 3 FTSE 100 companies offered this type of pension; in contrast, throughout the 1980s and early 1990s, all 100 provided their employees with Defined Benefit Schemes.
What are the problems with Defined Benefit?
Quite simply, in an age of increased life expectancy, reduced investment growth expectations, greater market uncertainty and diminished confidence in gilt yields, Defined Benefit Schemes are too expensive and too risky to run.
There have also been numerous high profile examples of Defined Benefit Schemes going belly-up and jeopardizing both the hard work and life plans of members.
For example, in the 1990s Mirror Group boss Robert Maxwell plundered £400 million from his company’s pension funds. This affected around 30,000 workers and prompted John Major’s government to set up The Pensions Act 1995 in response. However, this act failed to properly address the problem because it did not set an adequate minimum funding requirement and actually drove up the cost establishing a successful pension. Later government interventions also proved unhelpful, so much so that there was a feeling of inevitability to the many pension crises that followed.
2016 – a nadir year for DB Schemes
In 2016 the Defined Benefit Scheme of now liquidated retail giant BHS was found to be £207 million in deficit. The same year also witnessed the revelation that RBS required £1.6billion of taxpayer’s money to help fill a £4.2billion shortfall in its Defined Benefit Scheme.
These historical realities have helped scare off employers, employees, investors and the market in general. Defined Benefit is no longer thought of as the “gold plated” scheme it once was.
The Pension Protection Fund
The Pension Protection Fund (PPF) was established on 6 April 2005 to protect members of Defined Benefit schemes which have been declared insolvent, on or after this date, and are not able to pay out to members.
For a failed scheme’s members to qualify for compensation under PPF rules, the scheme must be unable to pay out to at least the PPF level of benefits.
If a member’s scheme qualifies, compensation is paid at a level of 90% of benefits for members below Normal Retirement Age (NRA). However, some are eligible for 100% payment. These include:
- Those above the NRA
- Those on ill-health early retirement pensions
- Those receiving survivor’s pensions
Expats’ options – QROPS
Unfortunately, if you have a public sector defined benefit pension, you are no longer able to transfer into a QROPS (Qualifying Recognised Overseas Pension Scheme) – this is because the government did not consider it a financially viable proposition.
However, if you are an expat or are thinking about becoming an expat and are a member of a private sector final salary scheme and/or have significant expat regular savings it is still possible to make a QROPS transfer from the scheme provided that it has not been brought under the auspices of the PPF.
Making a QROPS transfer is a serious undertaking and anyone considering the step is legally required to receive formal advice from an accredited specialist who is authorised by the Financial Conduct Authority.
It is possible to make a QROPS transfer of a UK private or corporate pension without any form of penalty charge. For investors who have been resident in the UK for five tax years before the time of transfer, the QROPS must be analogous to a similar UK-based pension. Additionally, if the investor decides to return to the UK, the QROPS automatically falls under the regulation of UK pension rules.
Advantages of a QROPS include the following:
- It is not subject to capital gains tax or income tax
- Investors can access up to 30% of a fund’s value as a tax-free lump sum
- The fund is not subject to UK income tax
- QROPS is free from UK IHT or a Lump Sum Death Benefit Tax liability
- Investors can enjoy access from age 55 or earlier, depending on the QROPS’ jurisdiction
- The fund is in the currency of your choice and therefore not subject to exchange rate fluctuations
- There is no need for an annuity
- It is easy to nominate your beneficiaries
- It is not subject to a Life Time Allowance Charge
- The majority of QROPS operate on a fixed fee basis
- You can consolidate multiple UK schemes into a single QROPS
- There is greater choice and flexibility
Expat options – a SIPP
A SIPP (Self Invested Personal Pension) is another option for an expat looking to transfer their fund into a vehicle that works for them. A SIPP brings many benefits, not least more freedom and flexibility regarding greater investment choices – for example, cash, bonds, Exchange Traded Funds, investment trusts or overseas stocks and shares.
However, with this freedom and flexibility inevitably comes greater responsibility. As such, it may be a good option only for those with considerable experience of making prudent investments – it is, theoretically, possible to lose everything.
Both a SIPP and a QROPS are types of Defined Contribution Scheme and both may make sense if you have multiple schemes from your long work history and are looking to consolidate them into a single vehicle.
Expat pensions help from Blacktower
Blacktower can help you ensure that your pension planning arrangements help you achieve your future security and prosperity with confidence.
We are a fully regulated firm and can help you make the most of your options, wherever you are in the world we are specialists in pension planning for expats.
Contact us today using the contact form above and we will be in touch to make sure you receive the best advice for your needs.