Friday, 22 August 2014

Why you MUST review your UK final salary pension before November 2014

What's changing? Why review now?
In this years budget announcement the UK government announced a raft of changes to UK pension schemes. For most clients this will result in more flexibility, however, for those with final salary pension schemes it has resulted in more restrictions. It is important for anyone with a UK final salary pension scheme to review the options available to them. As this new legislation comes into effect for the new 2015/1016 tax year  in April you MUST begin the review process before the end of November 2014 to allow time for the review (and if appropriate the transfer process) to be completed before the new rules take effect. 
It is also important to only take advice from a FCA regulated firm that can advise on both onshore (UK) and offshore transfer choices. From April 2015 only FCA regulated firms will be able to advise on final salary transfers.

Most people will be better off after the changes, in particular UK residents. They will have freedom of choice in terms of how to take their benefits at retirement age. Unfortunately members of Defined Benefit (final salary) schemes will lose this flexibility.

It seems likely that members of defined benefit schemes (particularly those from public sector schemes) will lose the ability to transfer their pension to something more flexible from April next year. It sort of makes sense because public sector final salary schemes are expensive for the government. If people are locked into them in the future they can, in subtle ways over time, alter the benefit structure inside the schemes and therefore reduce the cost to provide pension income to members.

Looking at the Private sector people transferring out of their Deferred Benefits / final salary schemes is good news because it takes the liability away from the scheme, most of which are in a negative position anyway. The consultation document proposes that the private sector may well be treated in the same way as the public sector, with either a ban on the ability to transfer out, or heavy restrictions on it. We expect the provision of benefits from the fund would be restricted. That makes consideration of transferring out of Deferred Benefits / final salary pensions, for both public sector and private sector deferred benefits, extremely important because if you transfer those benefits out now, before April 2015 you know what the position is going to be. If you wait till after 2015 you will have no idea what the tax position or options are going to be and there is a good chance the options will be worse than now.
What are my options?
Where to transfer? There are lots of options for transferring a UK final salary defined benefits scheme. If non-uk resident and living offshore a QROPS scheme could be a good place to move, equally if UK resident or intending to return to the UK within a few years then a UK based SIPP could be the answer. Why these options?
Firstly some people like to have the option of taking their benefit earlier than is allowable in the UK, say from the age of 50, and QROPS pension scheme will allow that.
Secondly – and this is a key driver for most people – people don’t like the thought that after they die their loved ones will have to pay a lump of UK tax, in particular when they actually die after they have taken benefits from a final salary scheme. If you transfer to a QROPS or SIPP, you don’t have the lump sum death benefit charge. We know the UK are looking at reducing the level of the charge, but we think they will likely reduce it from 55% to 40%; whereas with a QROPS or SIPP you have the certainty of knowing there will be no tax on the pension fund. (in some circumstance tax may be payable depending on full estate, discuss this with your adviser).
The Third reason is really a point about investment flexibility. QROPS and a SIPP allow people to have much more investment flexibility than a defined benefit scheme does.
A QROPS uses the individual’s tax certainty in relation to how the benefits will be dealt with in their own country of residence.         
As a company (and personally) regulated in the UK, EEA and Internationally i can advise people to transfer to a UK SIPP in exactly the same way that i can advise people to transfer to QROPS. For expats it’s usually the case that QROPS are a more compelling argument for non UK residents.
QROPS - Qualifying recognised overseas pension scheme (regulated by HMRC)
SIPP - Self Invested Peronal Pension
Pensions are a complex area. Speak to a specialist and get advice relevant to your own personal situation. If you have an individual questions please contact me. Have a great day.
Andrew Lumley-Holmes

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