Civil servants and public sector workers thinking of retiring overseas and taking their pensions with them will shortly be barred from switching to a Qualifying Recognised Overseas Pension Scheme (QROPS).
Chancellor George Osborne has made clear that any transfers out of unfunded defined benefit schemes for thousands of public sector workers will stop from April 2015.
The pronouncement came in a bundle of pension rule change documents presented to MPs for discussion in Parliament.
Who can transfer…and who can’t
This measure splits pension transfers for public and civil servants.
- Some pensions are funded – they have an investment fund backing payments. Any public servant with this category of pension can transfer to a defined contribution scheme to take advantage of early access rules
- Unfunded pensions – where contributions collected now pay pensioners directly face the ban
The aim is to remove currency and financial risk from the Treasury.
Any unfunded transfers would need financing from the public purse and a major outflow of funds could require borrowing at a time when bringing down the deficit is a priority.
The announcement leaves local government funded pension savers likely to be able to switch their funds to a QROPS, but other public servants who serve in the armed forces, police, as firefighters, as teachers or National Health Service workers must remain with a UK scheme.
For unfunded schemes, this means breaking free of currency exchange fluctuations and the chance of a larger tax-free lump sum draw down, as some QROPS providers offer up to 30% against the standard UK limit.
QROPS transfer advice hurdles
The Chancellor has also announced funded transfers will also need the backing of a professional pension review from a Financial Conduct Authority (FCA) regulated independent financial adviser.
This is because public sector pensions generally come with extra benefits that would either be impractical or expensive to replace in a QROPS.
The retirement pay-outs are guaranteed against final salaries, plus benefits are index-linked and include widow payments.
The likelihood of an FCA regulated advisor recommending a switch from an unfunded public direct benefit scheme is low following guidelines from the FCA expecting a stack of written reports justifying the transfer.
The new rules banning the transfers come into force from April 2015, leaving little time for retirement savers to plan their departure from the UK and subsequent pension transfer.
