Recently on 30 March, The Pensions Regulator (TPR) issued new guidance urging UK pension schemes to delay processing defined benefit pension (DB) transfer requests for up to three months. This new guidance is designed to allow pension companies in the UK to review transfer valuations, due to recent stock market falls.

With a defined benefit pension, it’s your employer or ex-employer’s responsibility to make sure there’s enough money in the scheme to pay your pension when you reach retirement.

With the current Covid-19 virus, employers with fund deficits will be looking for support from the Pension Protection Fund (PPF) to delay or reduce their pension deficit contributions.

The DB pensions deficit picture

In the current market conditions, the regulator noted that the transfer values of DB pensions may rise further. Whilst that’s potential good news for a member of a DB pension fund, the concern for the government is that for many UK companies, higher valuations will make the DB pensions deficit materially larger, as stated by the Pension regulator (TPR) in the UK.

At the end of February 2020, the PPF reported that amongst the approximately 5,000 defined benefit (DB) transfer funds in the UK today, there were almost 3,500 DB schemes in deficit. The combined total value of the deficit of these schemes at the end of February 2020 was £244.8 billion

(information from the www.ppf.co.uk March 2020 Update.)

Is your ex-employer in deficit or are they currently within the pension protection fund ?

It’s essential to know that once a company’s scheme enters the pension protection fund a member cannot transfer their DB pension out of the UK and out of the protection fund. The amount of pension payable from the fund is subject to the government’s capped limits, and whether the member has reached the scheme retirement age at the time the employer goes into liquidation (or when such pensions are transferred into the PPF). Some serious queestions are being raised today about the pension funds for Debenhams employees, for example.

Here you can read a list of the funds transferred into the PPF up until today: https://www.ppf.co.uk/schemes/index

Regulatory changes to transfers

This latest guideline from TPR means pension companies can defer processing or making a pension transfer for 3 months. It’s the latest in a series of changes that have slowed pension transfers out of the UK. For example, the requirements to involve only FCA-regulated advisers to review potential transfers and the imposition of a 25% transfer (exit) charge where the pension is transferred essentially to a place where the pensioner does not reside, or is outside the European Economic Area, where the pensioner has moved to Europe.

The laws allowing transfers were innovative when introduced by the UK in 2006, and they have been practical and useful in bringing portability to the pensions sector, in concert with European freedom of labour and freedom of movement values. Considering the recent and ongoing changes that have slowed the overall number of transfers, and considering the UK is no longer part of the EU, many in the industry are concerned the legislation allowing pension transfers, is at serious risk.

Anyone that has legitimately transferred the calculated value of their DB pension overseas will know the process is a complex and technical one, and regulatory impacts on the process are increasing.

UK pension-holders and British expats affected

You may be aware that the total value of your private pension can be transferred out of the UK if you satisfy certain conditions. This may be something of relevance particularly for EU nationals returning to the continent after Brexit, or British citizens who have left or have decided to leave the UK and intend to retire overseas.

Are you entitled to a defined benefit pension from a UK company and you have not yet started receiving your pension yet ?

An overseas pension transfer (or QROPS transfer) can provide an opportunity for those with a UK private pension to unlock significant benefits, including reducing or eliminating specific UK pension and inheritance taxes (if done correctly).

However the transfer option is not a simple case of deciding if one wants to transfer their retirement funds to the destination of their choice.

The suitability requirements and the strict guidelines required by the law to be used to compare current and future benefits of the existing pension (and future annuity) versus investing the transferred funds via a foreign pension, not to mention the increased legal responsibility placed upon advisers, does mean that in many cases transferring the pension is not advisable. It’s a case by case, largely technical analysis.

Why consider transferring a pension overseas?

The government requires that British expats or other foreign nationals with a UK pension (including Italians, Spanish, French and other nationals) can only transfer to registered pension schemes. You need to ensure the destination (QROPS) fund qualifies to receive your pension. Here is where you can review the Qualified overseas pension register: https://www.gov.uk/guidance/check-the-recognised-overseas-pension-schemes-notification-list#history

Once a UK private pension-holder has been non-resident for at least five tax years, the QROPS becomes subject to the laws of the overseas country in which it is based. Consequently, income can be withdrawn without usual UK limits, and there will be no deduction of taxes at source in the UK.

UK pension funds often have a bias towards investment in UK assets. QROPS provide the scope for diversifying, and for allowing the payment of pensions in currencies other than Sterling, and options for personalised investment management.

It’s also important to note for pensions with a value greater than £1million, a growing pension outside the UK will escape the UK 25% Lifetime Allowance excess tax charge. This charge would otherwise apply to any pension paid from a UK registered pension scheme to persons who are UK resident or non-resident for less than five years where the value of the pension exceeds the Lifetime Allowance.

Considering whether it’s possible to transfer a UK pension is not to be treated lightly, and requires the assistance of an experienced adviser who is focused on your interests. Such an adviser may not be easy to find, as it’s unlikely he/she will be calling frequently and urging you to transfer your pension.

To arrange a confidential review of your investment and pension arrangements and assess their suitability for you as an Italian resident, please send an email to clientrelations@unityfinancialpartners.com

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