Pension fears for public workers who plan to move overseas

Pension fears for public workers who plan to move overseas

Time is running out for public sector workers – such as soldiers, doctors and nurses – in unfunded defined benefit pension (DB) schemes who may wish to transfer their pension overseas when they retire.

Changes to UK legislation that come into force from April 6 mean those in such DB schemes should act fast if they want to move their money into a defined contribution (DC) scheme, which would allow them to move their pension overseas when they retire. The same deadline looms if they want to move their pension directly overseas.

It was announced in the Budget that those in DC schemes will be able to take their entire pension pot as a lump sum at age 55, with 25pc tax-free and the remainder taxed at their marginal income tax rate for the tax year that they withdraw it.

This does not apply to those in unfunded DB schemes where the contributions today go to pay pensioners directly tomorrow. And those in unfunded DB schemes will soon be banned from transferring their pensions “to protect the Exchequer and taxpayers”, according to the Government.

This means that retiring overseas would continually expose them to currency risk from their UK pension as payments need to be transferred from sterling to the local currency. This could affect their quality of life in retirement. Experts warned that those affected by the ban should seek advice as soon as possible.

This comes after a warning about DB schemes – also known as final salary schemes – from Alan Rubenstein, chief executive of the Pension Protection Fund. He said that five in six schemes have fallen into deficit and that 11m people expecting a guaranteed inflation-linked pension may find themselves with less than expected in retirement.

Mr Rubenstein told the Telegraph: “It is misleading to allow people to expect promised pensions when in fact there is only money enough to pay about 60 per cent of those pensions [should they be cashed in today] and where nothing is being done about the shortfall.”

Part of the concern about pension shortfalls relates to accounting standards that insist schemes present figures as if all pensions were to be cashed in at one time. In reality, this is very unlikely to happen, but that does not mean that concerns over shortfalls can be ignored.

Justin Harris, managing director of Chase Belgrave, an expat specialist financial advisory firm, said: “There is a solution. All final salary pensions will provide a cash equivalent transfer value that enables expats to convert their increasingly risky defined benefit scheme into a potentially more stable and lucrative Qualifying Recognised Overseas Pension Scheme (Qrops).

“Because of the parlous nature of a lot of DB schemes, in many circumstances they will offer an extremely generous transfer value such is their desire to reduce their liabilities. For many expats this can mean a significantly increased retirement income alongside the other tax and flexibility benefits inherent when transferring to a Qrops.”

Mr Harris said that political unpredictability in the UK is also a threat to British expat retirees.

“The coming election in May 2015 still looks too close to call but it seems that pension holders might be under even more threat if Ed Miliband finds himself on the steps of Downing Street in less than three months,” he said.

“With Labour struggling to find the money to fund their commitment to cut university tuition fees it has been reported that they will look to raid pensions in order to raise the cash.”

According to Mr Harris: “These proposals will cause a rapid increase in the number of non-UK residents looking to transfer their pensions overseas before April when many public sector schemes will stop transfers for good.”

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