Transfer my pension into a QROPS?
|Retirement | Occupational Pension
Asked by firefletch, submitted
06 January 2010.
I have just asked for a transfer value for my occupational final-salary scheme pension with the Greater Manchester Fire Brigade, as I am considering moving it to a QROPS scheme because my main home is in Spain and I commute. I am still fiscally-resident in the UK - not by choice.
After 18 years of contribution at a rate of 11%, with an additional employer contribution of 7%, and at a current salary of 30,000 pounds, I am informed that the TR value is just 140,000 pounds. My IFA says it should be around 200,000 pounds but that it is typical with occupational fund providers to give a scandalously low transfer value.
Can this be legal? Is it challengeable? Your advice would be appreciated.
Answered by Justin on 10 January 2010
The transfer value from a final salary pension scheme should be equal to the amount you’d need to invest today to provide you with the same pension benefits as the scheme when you retire. This means making assumptions about investment returns and typical life expectancy. For example, assuming high investment returns would lead to a lower transfer value and vice-versa.
However, pension funds can’t simply assume whatever they want when calculating transfer values. They must follow the advice of the scheme actuary, someone whose job is to ensure the scheme remains in good health and come up with sensible figures for things like transfer values (in accordance with the scheme’s rules).
I’d ask the scheme for a breakdown of how they calculated the transfer value and double check that they’ve used the correct information re: your salary, length of service and expected retirement date etc.
If there’s a mistake then you can obviously get it corrected, but if the actuary has simply assumed reasonably high investment returns (technically called the ‘discount factor’) then I’m afraid there’s little you can do about it. You could try complaining that the assumption is unrealistic, but unless it assumes a very different mix of investments to those in the fund (e.g. assumption assumes 100% shares whereas fund is 50% shares and 50% gilts) then don’t hold your breath – sorry.
I’d need more information to estimate what a ‘fair’ transfer value should be, but assuming your IFA’s figure is correct then transferring looks a non-starter in this instance.
However, this may be no bad thing as I’m struggling to see how you could benefit from transferring your final salary pension in to a Qualifying Recognised Overseas Pension Scheme (QROPS).
Firstly, you’d be transferring your pension from a scheme where your employer shoulders all the investment risk into a scheme where you do. At the moment, if stockmarkets fall 20% it’s your employer’s problem, not yours. But transfer to a QROPS and any market falls will directly hit your pension fund, hence your eventual retirement income. Plus, you’ll have to pay QROPS charges and fees as well as those for any initial and ongoing financial advice.
Secondly, if you’re still working for the fire brigade then you’ll lose out on pension benefits for the remainder of your service. Yes, your 11% contribution is steep, but still likely to be reasonable value given the pension benefits you’ll get in return.
As long as you remain UK tax resident then you’ll be liable to UK income tax on any income taken from a QROPS and it’ll be subject to UK pension rules. Even if you become non-tax resident in the UK, the QROPS provider must inform HMRC of any income they pay to you for a further five years. Plus, if you’re tax resident in Spain then you’ll be liable to Spanish tax on QROPS pension income.
I’ve had a quick search on the web and am amazed at the number of financial advisers pushing QROPS, often citing very spurious tax benefits. I think this is a mis-selling scandal in the making and would be very wary of such ‘advisers’.
The benefits that most seem to push are not having to take pension income when you reach age 75 or pay loads of tax if you want to pass your pension pot onto your children. But unless you have an exceptionally large pension fund it’s unlikely this would be either a good idea or viable in any case.
Some also mention tax-free income. But make no mistake; if you’re tax resident in a country then you’ll almost always be liable to tax on QROPS income in that country, regardless of where the QROPS is based.
If you become non-tax resident in the UK and live in Spain (i.e. you’re a Spanish tax resident), then under Spanish tax rules your fire service pension (being a government service pension) will be taxed in the UK but exempt from Spanish tax. You’ll still enjoy a full UK personal income tax allowance, so the tax shouldn’t be too painful.
You’re very fortunate to have a good final salary pension – well deserved given your occupation. I’d almost certainly hold onto it and look forward to a happy, warm retirement in Spain. Currency risk is an issue, as your pension will be paid in Pounds while your living costs will be in Euros. But while transferring to a QROPS could help in this respect, I think there are far too many potential downsides to make it worthwhile.