In the wake of the recent announcements following the UK pension consultations, teachers, as well as the majority of public sector employees are facing up to an uncertain pension future. As of April 2015, restrictions will be put in place which essentially prevents the transfer of any unfunded defined benefit schemes into a more beneficial alternative.
This is bad news for Britain’s teachers, NHS employees and the Armed Forces amongst others, who will see their savings locked into a deficit-laden British landscape where the only realistic option for recovery – according to many industry commentators – would be a gradual reduction on benefits paid, as well as the inevitable retirement age extension.
The initial Budget 2014 announcements were heralded as representing some kind of a watershed moment for the British Pension industry, however, the only change of benefit to anybody holding a UK scheme was simply the removal of the enforced requirement to purchase an annuity with their savings – a change which was quite frankly long overdue. The rest of the legislation has been implemented simply to try to rescue the deficit, which currently stands in excess of £100bn.
Expats Have the Advantage…. For Now
Since 2006, thousands of British pension holders now residing away from the UK have been benefitting from transferring their savings into a Qualifying Recognised Overseas Pension Scheme (QROPS).
The scheme was introduced by the Government to allow the growing number of UK expats to be able to be closer to their money, however, the main reason that most cite for transferring into an overseas scheme is the uncertainty of the UK market, the constantly moving goal posts and regulation changes, and the restrictive nature of keeping savings in a UK pension pot perceived to be so far beyond repair, that to keep money there would be akin to playing Russian Roulette with a lifetime’s worth of savings.
This outlook is perhaps a touch on the melodramatic side, but the truth is that QROPS do offer extremely good benefits for Public Sector expats, and in just 8 months, the door to these benefits will be closed and locked forever.
Benefits of a QROPS
There are many benefits to a QROPS when compared with a UK scheme:
Lump Sum Flexibility
Many schemes within certain jurisdictions allow for a larger tax-free lump sum to be withdrawn than the 25% available in the UK. This varies between the 42 different locations where QROPS are available.
No Exposure to Currency Fluctuations
All UK-based pension schemes are denominated in UK sterling, with the exception of very few. QROPS offers the option of the funds being denominated and distributed in every currency, this means that savings are not exposed to the risk of currency fluctuations.
The maximum and minimum amounts of drawdown on QROPS are really rather wide, and although these are calculated on life expectancy, the performance of the investment part of the fund will often impact on the figure which will be targeted at providing an income for life.
Inheritance & IHT
The entire QROPS fund will be passed to direct family if the scheme holder dies. QROPS are not subject to UK Inheritance Tax. There is also no liability for income tax on dependants drawing from a pension left to them (providing they are not in the UK). In Britain, this would be at 55%.
Freedom of Choice
QROPS holders can remain invested for as long as they wish. There has never been the requirement to purchase an annuity, and the investment part of the scheme is transparent, and can be decided upon by the pension holder, although it is advisable to take advice on this.
Reduced income tax
In the UK, PAYE applies to all pensions. QROPS savers can however use a jurisdiction which charges little or no income tax, and will only be liable for tax applicable in the country in which they reside – if there is any.
UK pensions are designed to meet the needs of those residing in the UK, they are not so flexible when it comes to meeting the requirements of somebody based abroad. As QROPS were designed in the 21st century, they have the advantage of being created with the modern-day saver in mind.
It also means that advisors are completely familiar with these types of products, because the way in which they work has been very clear from the beginning, and has been subject to minimal legislative amendments in comparison with the UK.