Published in the Bangkok Post, November 9, 2008
UK pension regulations permit the transfer of UK pension rights to overseas schemes provided the overseas scheme is a QROPS (Qualifying Recognised Overseas Pension Scheme).
There can be considerable benefits in transferring your UK pension rights to a QROPS including:
- The ability to legitimately mitigate or avoid the withholding tax that is applied to pension income received from UK based pension schemes
- Legitimately avoiding Inheritance Tax on the pension fund
- More flexible investment management
- Freedom to choose your pension fund beneficiaries
The potentially tremendous benefits that QROPS can offer, depending on personal circumstances, have been widely and enthusiastically promoted, not least to the expat community.
However one size does not fit all and depending on your circumstances, it may be in your best interests for your pension rights to remain in the UK.
The majority of QROPS schemes are ‘Money Purchase Schemes’.
Money Purchase Schemes do NOT provide a guaranteed income and neither do they guarantee the capital value of your pension fund so they are classified in the UK as ‘Unsecured Pensions’.
There are two types of secured pension arrangements for those whose pension rights remain in the UK.
Also known as final salary (or defined benefit) scheme pensions, these provide the greatest level of financial security.
Pension income is guaranteed for life, at relatively high (often double digit) effective rates of return and may also include statutory annual increases of up to 5%. They also provide the highest level of financial security for surviving spouses and civil partners.
These considerable benefits mean that there are relatively few cases in which a QROPS transfer would be considered to be best advice for someone with a UK defined benefit or final salary scheme pension arrangement.
Annuities are the other form of secured UK pension arrangement. Annuities also guarantee a pension income for life as well as providing pension income to surviving spouses or civil partners.
The guarantee provided by an annuity is achieved by investing in fixed interest Government securities and so the returns are significantly lower than those provided by scheme pensions. Annuities currently provide between one third and one half of the pension income that would be provided by a scheme pension of equivalent value.
One of the best kept secrets is that there is actually NO requirement to purchase an annuity at the age of 75.
However the effective returns provided by an annuity for someone aged 75 are quite attractive and involve no management charges. It is also the conservative and cautious option for those who are more risk averse, which many if not most 75 year olds are.
Arranging a QROPS transfer comes at a price.
While the charges and fees of most QROPS schemes are calculated as a percentage of money transferred, most QROPS schemes incorporate monetary maximum charges. This means that the greater the amount transferred to the QROPS scheme, the lower the effective cost of the QROPS arrangement. Conversely, those with relatively small transfer values would suffer disproportionately high charges.
Furthermore, QROPS schemes don’t provide financial planning advice to those wishing to transfer their UK pension rights overseas, so it is necessary to retain and pay for the services of a professional financial planner when selecting your QROPS scheme.
QROPS transfers are based entirely on UK laws and regulations.
Given the wide range of factors that need to be carefully considered and examined on a case by case basis when considering a QROPS transfer, it would seem sensible to choose a UK qualified financial adviser when reviewing your options and perhaps selecting your QROPS scheme.
In many countries in the Far East, not everyone in the financial services industry who is working with expats holds the professional qualifications necessary to give advice in the UK.
The UK Personal Finance Society (www.thepfs.org) recently confirmed that they have barely a handful of members in Thailand who hold these qualifications.
All that glitters…
Final salary or defined benefit scheme pensions really do take some beating. Personal circumstances may be such that a QROPS transfer might be beneficial but these are likely to be unusual exceptions and if things don’t go as hoped for, it will not be possible to transfer back from your QROPS scheme into your UK final salary scheme.
For those who are not fortunate enough to be members of final salary schemes (and most people are not), the only secure option is to purchase an annuity. For those with modest pension transfer values, the costs applied by the QROPS scheme and any other ongoing investment management charges can be more than the potential savings in UK withholding taxes.
There certainly are circumstances in which a QROPS transfer is appropriate but when considering your options it is important to consider both the sizzle AND the steak.
It’s your money and your peace of mind.
Richard Colburn: Cert PFS, is a UK qualified financial planner and Managing Director of Sterling Assets, a specialist wealth management consultancy, based in Thailand.
Questions to the author can be directed to 05 216 839 or email.
Further information is also available at the QROPS Bureau: www.qrops.org