The End of Final Salary Scheme Transfers to QROPS
HMRC clearly stated in the budget on April 6th 2014, that public sector final salary schemes will not be allowed to be transferred to a QROPS in future.
This is to come into effect in April 2015, but since QROPS transfers can take 3 – 6 months, this means that there are really less than six months left to transfer your pension out of a public sector final salary scheme and into a QROPS.
So, if you are in the armed forces, worked in the MI5 or MI6 or if you are a doctor, nurse, teacher, firefighter, policeman, educator, professor, councilor, civil servant, train driver, bus driver or worked for British Gas, British Rail, the United Nations (UN), Tech First, The European Commission, the NHS, British Universities or GCHQ, this is your last chance to transfer out your pension from a UK scheme into a QROPS (Qualifying Recognized Overseas Pension Scheme) to get out of the UK tax net.
A transfer to a QROPS isn’t for everyone, but especially for those with larger pensions who are seeking a higher degree of control over their pensions, particularly with respect to choosing the currency of their choice and investing in the funds they want, it is important to seek an analysis through a TVAS (a transfer value analysis).
A Guide to QROPS Transfers for Final Salary Schemes 2014
Here are some of the important changes for final salary schemes in respect to transfers to a QROPS:
- Transfers out of public sector final salary schemes will be prohibited, except in ‘exceptional circumstances’.
- Transfers out of private sector final salary schemes may also be stopped, although this is being put out to consultation.
- Government will consult on the tax % applicable on death post-retirement, with the expectation that the current charge of 55% may be reduced (and probably to the marginal income tax rate)
- The ‘normal minimum pension age’ (NMPA), currently age 55, is proposed to increase to 57, at the same time as the State Pension Age increases to 67 in 2028.
- The maximum tax-free cash available from a QROPS at retirement is generally higher – 30% or more vs 25% from a final salary scheme and
- UK schemes are subject to 25% lifetime allowance cap for large funds.
A full consultation on these changes will take place in June and perhaps an announcement in the Autumn statement. But, none of these changes will likely take effect until after 2015.
At the moment, yields on 10 year gilts are at very low interest rates, providing high pension pot values for transfers out of UK final salary schemes.
Getting a TVAS (Transfer Value Analysis Service) for Your Final Salary Scheme
We make sure that anyone transferring out of a final salary scheme into a QROPS get a full transfer value analysis via a TVAS.
We ensure the TVAS:
- Accurately reflects the fact that your QROPS pension is provided through drawdown, as opposed to purchasing an annuity
- Accurately reflects the transferring scheme’s pension revaluation in deferment and your pension increases in retirement
- Accurately reflects your marital status and the age of your spouse, as we factor in your spouse’s pension on death
- Accurately reflects the charges of the QROPS scheme and the underlying investments
- Is signed off by a qualified actuary and prepared by an actuarial team
We use a highly experienced technical team who are qualified actuaries to make sure you have the correct, accurate comparisons, so you can decide whether you wish to transfer out of your final salary scheme to a QROPS or not.
What is the Total Tax Take on a UK Final Salary Scheme Vs a QROPS
The table below show the massive different in tax take over the lifetime of a member comparing leaving a pension in the UK vs transferring out to a QROPS in Gibraltar.
Overall Tax Take on Pension
Pension value (now) £100k £300k £500k £1m
1. Gibraltar QROPS 1.75% 1.75% 1.75% 1.75%
Expat retires overseas
2. Gibraltar QROPS 2% 8% 14% 18%
Expat returns to UK to retire
3. Leave pension in UK under 9% 16% 31% 44%
normal UK drawdown rules
4. 2015-style UK pension, 34% 38% 47% 56%
100% cash-out at retirement
Assumes IHT tax threshold of 325k is exceeded
– table courtesy of Boal & Co.
The above analysis takes into account the total impact of tax in the form of income tax on any benefits payable, any potential Lifetime Allowance (LTA) excess tax charges applicable (standard lifetime allowance = £1.25m in the projections), the effect of death taxes on the residual fund where relevant, and IHT at the rate of 40% in a cash-out scenario.
The Future of a QROPS in Regards to Final Salary Schemes
- The ability to transfer from UK Government defined benefit (final salary) schemes will cease within the next 12 months.
- The ability to transfer from UK private sector defined benefit schemes is also likely to cease within the next 12 months.
- Transferring funds from UK schemes protects clients against future reductions in the lifetime allowance (LTA).
- Transferring now guarantees that the transfer can happen without a tax penalty, an option which could disappear within the next 12 months if QROPS are taken off the table.
- Once transferred, clients are no longer subject to the ever changing UK pension landscape. You will be out of the UK tax net as long as you stay non-resident and will avoid UK taxation.
Clients interested in moving from a public sector final salary scheme to a tax efficient, flexible QROPS should contact us for a full transfer value analysis.The End of Final Salary Scheme Transfers to QROPS? by Richard Malpass