The UK Government recently announced in the 2014 Budget radical proposals, which if enacted, will enable people from the age of 55 with UK occupational or personal pensions to access their pensions much more freely from next year. While the 13 million UK pension savers this impacts have no doubt welcomed this increased flexibility, the over 7MM savers in UK final salary schemes may be wondering if they are being left out and what action (if any) they should take before April 2015.
What is the UK Government Proposing for Final Salary Schemes?
From April 2015 the government is proposing that those with UK defined contribution pensions should not be forced into buying annuities at retirement. Those in such occupational (and personal) pensions will be able to access their pensions in full from age 55 (subject to applicable taxation).
While the government sees the benefit of extending more flexibility to savers, it is equally concerned that people in public and private sector final salary schemes will wish to transfer their pensions out of these schemes to gain access to their pension pots (through what is called a cash equivalent transfer value (CETV)) to take advantage of this increased flexibility. Final salary schemes, unlike other occupational pensions, provide a guaranteed income for life at retirement which is calculated based upon the number of years an employee worked and their final salary.
Given that the majority of public sector final salary schemes operate on an unfunded basis out of general UK taxation, if more people were to take their CETV, this could expose the UK Treasury to significantly higher annual costs. Initial government estimates suggest if 1% of public sector workers transferred their final salary schemes each year this would cost the UK government about £200MM extra per year. As a result, the government intends to introduce legislation banning people from transferring their public sector pensions out to schemes like personal pensions.
The government is also concerned that introducing this increased flexibility may give rise to a large scale transfer out by members of private sector final salary pensions. Such transfers could have a detrimental impact on the wider UK economy as UK pension funds are major investors in long term UK assets. For this reason, ministers are also consulting on whether to ban private sector final salary pension transfers. The government’s starting point is to extend the ban, unless the issues and risks can be shown as manageable.
What does this mean for your UK final salary pension?
If when you emigrated from the UK, you left behind a UK public sector pension and want to consider a pension transfer, you will need to act quickly. It can take months to obtain a CETV, receive financial advice and arrange for a transfer to a new scheme like a Self Invested Personal Pension (SIPP), or in some cases a Qualifying Recognised Overseas Pension Scheme (QROPS). If you have a private sector final salary pension back in the UK and are also interested in moving it to something like a SIPP or QROPS you may have more time, although possibly only by a few more months.
Careful consideration also needs to be given to whether it makes sense for you to transfer out of a final salary scheme. A final salary pension promises to pay you a pension for life, providing the pension has sufficient assets to meet its liabilities. Such a pension also increases to keep up with inflation (but often capped to 2.5% or 5% p.a.). A move to a personal pension, like a SIPP, offers much more flexibility in terms of benefits (particularly with the government proposals), but you must rely on its investment performance which is unguaranteed and could mean the risk of lesser income than if you remained in your final salary pension.
That said, some people do opt to transfer out their final salary pensions to meet their specific retirement objectives. Some examples include: if you are single and don’t need the benefits offered to a spouse/dependent; you want to take early retirement; you want to have access to your pension in amounts and at times under your control; you want to pass on to your spouse 100% of your death benefits; you have a long term partner, but are not married, and want that person (or any other relative for that matter) to inherit your pension on your death; or you have an important and immediate cash need.
If you have a private sector final salary pension, a good question to also ask is will your pension fund have sufficient value to meet your pension benefits in the future? Final salary schemes in the UK are in terminal decline. As at 31 December 2013, the FTSE 100 alone faced a total pension deficit of £57billion, a deterioration of £8billion from 12 months before. Companies like RSA, BAE and BT have pension liabilities that are approximately double their equity market value. These figures reflect the extreme pressure that private sector final salary schemes are under in the UK, largely as a result of low investment returns and increased longevity. The UK does have in place a safety net, in the form of the Pension Protection Fund, in the event that your old employer went bust and could not fund your pension scheme. However, the PPF provides compensation at a lower level than the full benefits promised by your original scheme. In addition, the PPF is not underwritten by the UK government.
With the UK pension landscape constantly changing, it makes sense to review your UK pension arrangements. When doing so, make sure you consult an advisor who understands the complexities faced by expatriates. It is also always advisable to consult a US/UK tax advisor to understand the US tax implications of any pension transfer you are considering.