Transferring from a UK Defined Benefit Scheme to a QROPS or UK SIPP

“The Pensions Regulator has revealed that 67,700 people transferred out of defined benefit pension schemes in the last year alone, as savers seek to take advantage of sky-high transfer values.”

In this article, we will look at issues regarding final salary pension transfer advice and defined benefit pension transfer advice.  We will describe examples of:

• Why people want to transfer from defined benefits pension schemes to defined contributions schemes (dc pension schemes)
• Which pensions can be transferred and which cannot
• Benefits of Transferring
• Benefits of NOT transferring
• Key factors that a pensions specialist must take into consideration
• Brief outline of the process and how Lawsons Equity Ltd can

It will provide a basis for comparing defined contribution vs defined benefit pension plans. 

Why Do People Want to Transfer Defined Benefit Pension to a SIPP or a QROPS

‘With increased pension flexibilities a greater number of clients are likely to find themselves considering some form of income withdrawal solution to their retirement income needs. With the availability of flexi-access drawdown (FAD) and its removal of the need to consider maximum GAD limits, the opportunity to take large, irregular and ad-hoc income payments creates further complexity in ensuring the sustainability of a client’s pension income.’ Just Retirement – Technical Bulletin – Critical Yield

People want advice and will want to transfer for different reasons, each person is different and we at Lawsons Equity Ltd treat each as different.  There are many factors that must be considered at the start, and these are covered in detail in our article on Top 3 Destinations for Pension Transfers.    These include attitude to risk, ability to absorb fluctuations in the value of the pension fund, personal circumstances, economic goals etc. Examples of why people want to transfer include;

• Flexibility over the nomination of beneficiaries, timings and benefit methods. With defined benefits (DB) schemes, beneficiaries may only be a spouse or civil partner, in some cases children up to 18 or 23 if in full-time education, or can prove they are dependent.
• In the case of single or divorced clients with no children, they may wish to transfer so that they can leave their pension to other relatives.
• Typically on the death of the pension holder, with DB schemes the beneficiaries get 50 or 60% of the pension benefits due to the pension holder. With a defined contribution scheme, the whole remaining pension pot can be left.  How it is treated for tax depends on the jurisdiction of the scheme and where the beneficiary is tax resident.  How pension pots are taxed on death are different for each jurisdiction and also depends where the beneficiaries are tax resident
• Potential lower taxes depending on where the client expects to be tax resident and type of scheme.
• Clients may wish to have more control over how their assets are invested thus giving them the prospect of greater capital and income payment (but understand this will bring greater risk). The current scheme may not reflect a client’s appetite for risk, benefits timing preferences or investment time horizon.
• Clients may want the ability to choose to convert the capital into an annuity at a more personally appropriate time and have potential to benefit from enhanced or impaired annuity subject to deterioration in health in later life. In summary, they want flexibility and more control.
• In some jurisdictions (i.e. Jersey) clients may want to take advantage of 30% tax-free cash lump sum payment versus 25% (if non-UK resident for more than 10 years);.
• Opportunity to retire before the normal retirement date of their current scheme should the client wish. Typically with a QROPS or a SIPP, retirement can be from age 55, in a few jurisdictions retirement can be at 50.
• Depending on the jurisdiction the client may elect to receive capped benefits between 0% and 150% of GAD between the ages of 55 to 75; it will give them more flexibility of drawdown to meet changing demands with age and changing lifestyle.
• Clients may wish to take advantage of current annuity rates /gilt yields because they think they may be higher when they decide to take benefits and so the cost of securing the same level of income in the future could be less.
• If clients are leaving the UK and will become tax resident in other countries they may want to take their pension in another currency to reduce currency risk.
• Leave UK tax environment
• Lock in high transfer value due to low-interest rates
• Removal of life expectancy gamble associated with Defined Benefit schemes
• Also if retiring abroad, there may be inheritance tax considerations to transferring a pension. 

Which pensions can be transferred and which cannot

If you’re in what’s called an ‘unfunded’ public sector pension scheme, you won’t be able to transfer your pension. Examples of an unfunded public sector pension scheme are the Teachers Scheme and the NHS scheme.

You will be able to transfer your pension if you’re in a:

• Private sector defined benefit scheme sometimes called final salary schemes or
• Funded public sector pension scheme (such as the local government pension)

Benefits of Transferring

Not all benefits will apply to all clients, some depend on the jurisdiction of the new scheme, the tax residency and domicility of the client, where funds are remitted to, etc.

• With flexible drawdown clients can control the rate at which they withdraw funds to optimize their tax situation and to match their lifestyle changes over time.
• In some countries, clients can take advantage of the lower taxes provided that they are a tax resident but we are not tax advisors so clients must ensure that they will not be treated as a UK tax resident (see below section on tax).
• 30% tax-free cash lump sum payment (depending on jurisdiction) versus 25% (if non-UK resident for more than 10 years);
• If client dies before they reach the age of 75 and before taking any benefit (uncrystallised), they will be able to pass the value of their defined contribution pension interests as a lump sum completely tax-free.
• They can select who they wish to nominate as their beneficiaries.
• Pre-age 75, they can decide when to draw benefits and how much up to a statutory maximum each year.
• Clients can elect drawdown or purchase an annuity with their new pension fund assets at a time that suits them better, perhaps when rates are more favorable. Annuity rates/gilt yields may be higher when they decide to take benefits and so the cost of securing the same level of income could be less;
• Potential to benefit from enhanced or impaired annuity subject to deterioration in health in later life;
• Clients can select where and how they invest; i.e. what asset class, what funds etc. So that they can take back control and have the potential to generate greater longer-term gains.

Benefits of NOT Transferring out

• Reduced exposure to investment, inflation and longevity risks.
• Direct costs and more complexity than a lifetime annuity.
• The value of investment capital and/or the income produced may fall as well as rise;
• There is no guarantee that annuity rates will improve in the future. If you choose to purchase an annuity, the level of pension you receive when you purchase the annuity may be lower or higher than the pension available under ‘income drawdown’;
• Receiving benefits from your personal pension may erode the capital value, especially if investment returns are poor and a high level of income is taken. If income withdrawals near, or are at, the maximum permitted are taken, such income withdrawals may not be sustainable. The higher the pension withdrawals you choose to receive, the higher the probability that your pension benefits may reduce in the future;
• The lifespan of a member of a personal pension and the investment performance of the assets held in a personal pension are impossible to predict. As a result, once a member has started to draw down benefits from their personal pension and depending on the level of benefits paid, the assets in the pension may be exhausted before the death of the member.
• There is no guarantee that annuity rates will improve in the future. If you choose to purchase an annuity, the level of pension you receive when you purchase the annuity may be lower or higher than the pension available under ‘income drawdown’;
• A small number of defined benefit schemes have safeguards or guarantees that cannot be achieved in a defined contribution scheme. For example, some schemes allow members to take the pension after age 50, this is not available in any scheme that is currently available to transfer into.  Of course, the value of the pension would be reduced based on the recommendation of the Scheme’s actuary to reflect the increased number of years the pension would be paid.

Key factor that a pensions specialist must be considered

All the factors in our article on the Top 3 Destinations for Pension Transfers, however a small number of key ones are here:

• Attitude to risk.
• Your defined benefit pension value. Capital Equivalent Transfer Value (CETV).
• Ability to absorb losses and/or accept variations up and down of the value of the new pension fund.
• The funding status of your current DB pension scheme.
• Cash flow to reduce the probability that you might ‘run out’ of funds if you draw down at too fast a rate.
• The cost to buy the same benefits as the DB scheme with another scheme
• Your financial and personal objectives.
• In general the suitability of the proposed new pension in the light of your personal and economic circumstances and what you want to achieve.
• The total cost (setup, IFAs fees, annual management fees etc) of the new scheme and underlying assets 

Brief outline of the process and How can Lawsons Equity help.

The process is straightforward but not simple. There are many dangers including the risk of pension scam, making illegal transfers that later lead to your fund being taxed as a non-qualified fund.  Lawsons Equity will work with your pension administrator to get the information needed for the analysis.  They will spend the time to understand your personal and economic objectives and your situation.  From this, they will develop a proposal with you for what type of pensions suits your needs, what underlying investments can help you meet your objectives and arrange financial advice from an FCA regulated pension specialist if required. Then once you have an agreed plan we will take responsibility for its implementation.  We are fully regulated and abide by the Malta Financial Service Authority code of ethics, our cost will be given up front, and we will treat you as an individual.