This is the question asked by many Irish residents who have worked in the UK in the past and have, as a result, preserved workplace pensions. Very often they have little idea as to the pension’s true worth, how the funds are invested and their options under ‘pension buy out’ and ‘pension freedom rules’. These concerns are particularly pertinent in the light of Brexit and sterling weakness.
There are two principal types of pension in the UK:
1) Defined benefit or final salary
So called defined benefit schemes promise that you will receive a regular pension based on a number of factors, such as final salary, years of service, etc. The pension may increase over time as a function of some inflation index. Upon death a reduced pension (typically 50 – 60%) is payable to your spouse or children under 18 after which the payment stops.
2) Defined contribution or money purchase
So called defined contribution schemes generate a capital value from which an income in retirement is drawn. The level of income is dependent on investment performance. Upon death at age 75 or under, the remaining balance can be passed tax free to beneficiaries – not just family. After 75 years of age, the amount is taxed at the beneficiaries’ marginal rate of tax.
Under ‘pension buy out’ and ‘pension freedom rules’ there are a number of options available to maximise your pension benefits. The options depend on whether the scheme in question is a defined benefit or defined contribution.
Broadly speaking the options are:
1) Do nothing (unfortunately too often this is the default option).
2) Consolidate pensions into a UK based scheme, such as a Self-Invested Personal Pension (SIPP).
3) Transfer the pensions into an Irish authorised Buy Out Bond
4) Transfer the pensions into a Recognised Overseas Pension Scheme (ROPS) based in an EEA country, such as Malta.
For reasons of space, I’ll focus on the last option, known as a ROPS. (Please accept my apologies for the inevitable jargon.) In my experience, a ROPS is most often the best alternative to maximise outcomes. In summary, the key benefits of a ROPS are:
Benefits
1) A full 100% of the pension can be passed on to named beneficiaries as opposed to, typically, 50% of the pension to spouse only and nothing to other beneficiaries with defined benefit schemes.
2) A number of pensions can be consolidated into one pension for ease of management.
3) Pension income can be drawn as required from the pension rather than a defined amount on a regular basis – this can help with income tax planning.
4) A wider choice of investments and currencies are available rather than just sterling so you can set your pension in Euros.
5) Some UK pension schemes are in financial difficulty and your pension could be restricted or deferred if the fund becomes insolvent and is transferred to the Pension Protection Fund.
6) You can access all the capital if you need it – taxation needs to be carefully considered.
7) You can access pension benefits at 55 years of age.
8) Transfer to a ROPS can help to ensure that you are not subject to the Lifetime Allowance Charge. This is the case if your pension is below the current threshold of £1,055,000 - so a transfer could result in tax savings.
9) Income is paid gross in Malta.
Drawbacks
1) Pension is subject to market fluctuations and not guaranteed per a defined benefit scheme (as long as the scheme remains solvent). Therefore, it is important that investments are made in line with your risk profile.
2) Careful analysis of your existing scheme needs to be undertaken to ensure that the benefits of the ROPS outweigh the benefits of your existing pension. For defined benefits schemes in excess of £30,000, a report will need to be written by a UK authorised adviser.
3) You need to be sure that you will remain in Ireland for at least five years, otherwise the UK tax authority (HMRC) will impose clawbacks.
Dr. Graham Brown QFA is Managing Director of Forth Capital Europe Limited. Forth Capital have been advising on wealth management issues including Pension Transfers for more than 15 years.