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UK Pensions Q&A

The Q&A below is to help answer the burning questions you have, but please do not hesitate to contact UK Pension Guru for guidance on your particular situation as we are here to help.

Take me to the first question below  

Q. Who is UK Pension Guru for?

UK Pension Guru is for anyone living outside the UK that still has pensions in UK schemes, especially those with 'frozen' Final Salary pensions.

Q. What is the truth behind the pension deficits highlighted in the newspapers?

Many pension funds in the UK are in major trouble as the promises made cannot be met and upheld. Out of *5,588 schemes two thirds are in deficit and the average deficit is over 20%. That means that the scheme can only actually afford to pay you 80% of what it has promised. Unfortunately, in 'buy-out' terms (a straight forward assets verses liabilities calculation) funding of UK schemes is only **49% of liabilities! 

Do not fall into the trap of thinking that a Final Salary or Defined Benefit scheme 'guarantees' the benefits on your statement, it does not! It is a promise, but unfortunately promises to pensioners are being broken every day as benefits are not affordable and 50-60 funds a year fail. In fact there was over 6,000 schemes only 3 years ago!

 "more schemes will need to be bailed out", "it's like a slow speed train crash" - Alan Rubebstein, CEO of PPF.

The UK pension deficit is a massive £220 billion at latest valuation and even major FTSE companies do not escape the problem, indeed 90% of FTSE company schemes are in the red. For example, BP has plummeted to a £6.7 billion deficit recently and Shell has followed with a £9.6 billion black hole. Another alarming figure is that 7 FTSE100 companies have pension liabilities greater than their total value on the London FTSE Stock Exchange. 

Tesco hit the news after irregularities with its 'accounting' but it has also opened up a £5 billion abyss in its pension and is only 67% funded. A debt that equals 74% of Tescos value on the Stock Exchange and an amount unlikely to ever be recouped, especially in current volatile markets.

Is UK Pension Guru very worried about the future of Final Salary pensions - absolutely, and as the deficit has grown from £23 billion to £220 billion in only 10 years and only 13% of Final Salary schemes remain open UK Pension Guru believes matters are only going to get worse.

* Source- Pension Protection Fund Purple Book 2017  **Source- PwC Skyval Index of UK Pensions   

Q. What is a QROPS?

 Compliant under HMRC

A QROPS is a Qualifying Recognised Overseas Pensions Scheme. This name has been changed and the 'Q' dropped by HMRC so that YOU and transferring trustees are responsible to check if a scheme 'qualifies' and is compliant under UK HMRC rules and is 'recognised' and registered on the HMRC website as such.

ROPS are overseas pensions trust 'wrappers' that were introduced in 2006 to allow those living abroad the facility to move their UK Pensions overseas with them and avoid unnecessary UK taxes. 

However, since the UK Budget on March 8th 2017 a ROPS can attract a 25% tax charge for those not resident in the EEA, so caution is advised. However, a ROPS can still offer substantial tax benefits to those living in the EEA, with larger pension funds, facing the punitive Lifetime Allowance tax.

Q. What is a SIPP?

A SIPP is a Self-Invested Personal Pension, essentially a UK personal pension 'wrapper' that gives you personal control over the pension assets and death benefits. A SIPP is still UK registered rather than overseas and similar to a ROPS can be used to hold the transfer value from 'frozen' Final Salary pensions.

A SIPP has huge capital and tax benefits in comparison to Final Salary pensions in that the full fund can be passed to your spouse or children on your death totally free of UK Income or Inheritance tax, whereas a spouses pension from a Final Salary scheme is typically half your pension and still taxed as income. There is no capital to pass to children. 

 A UK pension 'wrapper'

Q. Can I pass the full capital value of my pension to my wife or children?

Absolutely. This is one of the outstanding benefits of SIPP or ROPS over Final Salary/Defined Benefit schemes. It is no longer a level playing field in the UK pensions market and the recent Pensions Freedom changes have put Final Salary/Defined Benefit Schemes at a major disadvantage in comparison with SIPP & ROPS plans when they are correctly set up and advised on.

If we use the example of a person with a £50,000 a year Final Salary pension. If they take benefits from a Final Salary scheme then on their death the spouse will typically only receive £25,000 pa. After the spouses death there is nothing to pass to children. However, if that scheme was transferred to your control, not only does the 'whole fund' pass to spouse, meaning they continue to receive £50,000 pa instead of a half pension, but the capital value, which could be circa £1,000,000 can be passed to children 100% Inheritance Tax free!

So with Final Salary schemes it is only the company pension fund that benefits from your death, with ROPS and SIPPS it is your family that rightfully receives what you have worked hard to accumulate!

 Death benefits are 100% Tax free

Q. When is a QROPS or SIPP better than the other?

Since 8th March 2017 there is a 25% tax charge for non EEA residents on ROPS, so only a SIPP will make sense for non EEA residents. Otherwise, in  general terms, up to when you take benefits (min age 55 for both) they are the same. However, a ROPS becomes a very valuable option for those close to or exceeding the Lifetime Allowance (LTA) as a ROPS, in HMRC  terms, is a BCE (Benefit Crystallisation Event) and so 'measures' or  'freezes' your liability against the LTA. This route is therefore 'capping' your tax liability but allowing the fund to continue to grow! But don't worry, UK Pension Guru will advise on which is best for you.

Q. What is the LTA?

The LTA (Lifetime Allowance) is the HMRC limit on the maximum amount of pension that you can receive from all sources, excluding State Pensions. This was set at £1.25 million from 6th April 2014 but reduces again on 6th April 2016 to only £1m, and if exceeded, the amount above the Lifetime Allowance will be taxed. At any point in time that an individual crystallises (takes benefits from) one or more pension scheme, which is known as a Benefit Crystallisation Event (BCE), it is a requirement to carry out a Lifetime Allowance 'test'. This is simply a calculation to test how much of the LTA has been used, and to see if a tax charge needs to be applied by HMRC.

 A penalty tax is levied when the LTA is exceeded

Q. How is the LTA tax applied?

For Defined Benefit/Final Salary schemes, the value used is the amount of accrued pension multiplied by a factor of 20. For example, if you have a Final Salary pension accrued of £50,000 pa when you take benefits, this would use up £1 million (£50,000 x 20) of the LTA. A tax penalty is then taken at 55% on any lump sums and 25% on income. However, this is a penalty tax so do bear in mind that the 25% on income is before the income tax rate is applied! So a 40% taxpayer will still have a 55-65% tax charge depending which way you take the excess over the LTA!

Q. Can I take benefits earlier than 65?

Yes, from a ROPS or SIPP the age for access to benefits (without penalty) is age 55.

Accessing pension benefits from a Final Salary/defined benefit scheme before the schemes normal retirement age will result in very punitive reductions in the benefits you receive. This is not the case with ROPS or SIPPS.

This means that many international professionals and expats transfer their UK benefits out of the Final Salary regime so that they can access these pension monies earlier and without penalty, to fund an early retirement before, for example, current employment benefits commence at age 65.

 Take benefits from age 55 without penalty

Q. Which of my pensions can I transfer?

Any Personal Pension (sometimes called Money Purchase or Defined Contribution) along with 'funded' Final Salary or Defined Benefit schemes can be transferred.

Unfunded pensions such as the Teachers' Pension, Police or NHS Superannuation can no longer be transferred as Government no longer has the Cash to pay these and stopped their transfer in April 2015. You also cannot transfer the Basic State Pension, which is also 'unfunded'.

Q. Can I transfer my UK pension into my Swiss Company Pension/Second Pillar?

No. This was stopped in 2015 as the Swiss employers schemes were deemed incompatible with HMRC's 'tighter' rules and are no longer 'qualifying' or 'recognised' as compliant ROPS. However, you can transfer to other qualifying UK or EU based plans and UK Pension Guru can advise on how you best do this along with which scheme is best advice for your circumstances. 

 Swiss pensions are incompatible with QROPS

Q. What happens to my ROPS if I return to the UK?

ROPS can still be effective if you return to the UK

Caution is advised if you may return to the UK with a ROPS within 5 years and you must take advice. 

Essentially, the ROPS will realign with UK rules.

Q. Can I protect my pension from future changes?

Certainly. Where your Final Salary/Defined Benefit scheme has already reduced benefits as part of the recent changes you can opt out of these changes in future by taking control of the benefits yourself. Where your Final Salary scheme has a funding deficit (as 63% of schemes do) a transfer out can prevent you suffering a reduced pension in the future. UK Pension Guru will advise you on this.

 63% of UK schemes are in deficit

Q. Can I take a higher lump sum?

We advise great caution here. Even though many advisers, websites and international trustees offer the prospect of higher lump sums, such as 30%, there are reasons to be very cautious when a Pension Commencement Lump Sum (PCLS) of more than 25% is taken, UK Pension Guru will advise you on this based on your personal circumstances.

Q. What is a PCLS?

This is the new term for the 'lump sum' you can take from your pension. It is now called a Pension Commencement Lump Sum.

Q. Can I be taxed on the lump sum/PCLS?

There is no tax to pay on your PCLS up to 25% in the UK. However, you CAN be taxed in some countries based on their tax rules and so need to both be careful and take appropriate advice.

This is one reason why the term 'tax free cash' from your pension has been changed to PCLS as it is not always tax free! UK Pension Guru can advise on what the position will be in your country of residence. 

 Take advice before taking benefits

Q. Can I choose the currency that I take benefits in?

Not from a UK Final Salary/defined benefit scheme as these are always paid in GBP, but from a UK SIPP or ROPS you can choose whatever currency you prefer for your pension income. You can also choose which currency the portfolio is invested in both now and in retirement.

 Choose the currency for your pension income

Q. What changes have affected my pension?

Both legislative changes born from the UK Government seeking ways to take tax revenue from pensions and market factors have combined to change the face of pensions forever.

The golden age of pensions is over and pensions are now a burden on both companies and the State as investment returns and Gilts are poor and medical science is keeping us alive longer. This means that while companies cannot afford to upkeep the promises they made to you when you worked there and are facing massive pension deficits, Government is looking for ways to take extra tax from those in Final salary pensions because they are an easy target and trustees are looking at ways to reduce benefits.

Legislation and market factors have changed the face of pensions forever! Your only solution is to take advice and take control of your pension so you can avoid any problems in the future. 'Knowledge is power' and you could save your retirement!

 Get the facts and make an informed decision. Contact UK Pension Guru, now!

Q. What are the UK pension myths?

Myth 1. Final Salary/Defined Benefit pensions are guaranteed.

Unfortunately this is NOT true. They are merely a promise to pay and more schemes are breaking the promises every week as they do not physically have enough money to pay what was promised. Some schemes have small GMP or guaranteed minimum pension elements for employment service pre 1997, but these are typically a few pounds a week and this is sometimes where people get the idea that the whole scheme is guaranteed.

The only real guarantee with Final Salary schemes is that more will go bust and thousands of people will lose pension benefits.

 Don't fall into this trap - The Pensions Titanic is sinking

Myth 2. The Government PPF (Pension Protection Fund) will bail the scheme out if there is a problem.

The mere fact that the PPF exists adds to the point made in Myth 1. Many schemes are failing. However, Myth 2 is equally dangerous because the PPF is only funded by a small pension levy on the existing 5,588 schemes, most of whom are in deficit themselves! 

Another 50-60 schemes go bust and end up with members relying on the PPF each year. There are over 230,000 people in PPF from schemes like British Midland Airways, Kodak, MG Rover Group, Woolworths and Findus that are already in PPF. Only 3 years ago there were over 6,000 schemes and this is now just 5,588.

There is no 'Government Fund', it doesn't exist, and the PPF has itself stated that it will not be able to cope if a scheme like BHS defaults to the PPF. 

 And the lifeboat has a gaping hole in it!

Myth 3. A ROPS is the best vehicle for everyone living abroad.

Certainly not. With the new ROPS tax for those in non-EEA counties great care must be taken and UK Pension Guru has always advised both SIPP and ROPS must be considered ONLY on merit. Our position is unchanged and you should consult UK Pension Guru for advice on your specific circumstances.

Myth 4. My Final Salary/Defined Benefit pension MUST pay me the benefits I am due!

The scheme can only pay out what it has and with many schemes in debt/deficit, future benefits will undoubtedly be cut or defaulted on in many more schemes in the future.

People are finding out the truth every day and suffering drastically reduced pensions when it is too late to correct matters. Don't let this happen to you or your loved ones. Contact UK Pension Guru today and we will give you the facts, so you can make an informed decision before it is too late!

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