In this article David Denton, Head of International Technical Sales at Quilter, considers the past and future of pensions and the important need to understand one’s options.
Human nature is that we want what we can’t have, and this manifests itself in all walks of life. Making difficult or complex decisions in a timely manner can be very difficult, even though the direction of travel is obvious, meaning we may lose some of the options we had permanently.
Complexity abounds in the world of pensions, best highlighted in the words of Andy Haldane, Chief Economist of the Bank of England, who commented in 2016, “I consider myself moderately financially literate. Yet I confess to not being able to make the remotest sense of pensions”.
2006 the start of something big
In pensions speak, 2006 was called ‘A day’. Over the post-war decades, a number of disparate pension regimes had evolved. When sweeping changes to personal and workplace pensions came into force on 6 April 2006 – forging 8 regimes into one – with consistent tax rules, retirement ages and benefit regimes, the aim was to make pensions simpler and more appealing. It also introduced caps for tax relief on contributions (the annual allowance) and for the total savings pot before penalties applied (the lifetime allowance),
More positively, it heralded the ability for UK pension scheme members to transfer, without individual HMRC approval, to an overseas arrangement, known as QROPS. This was the start of something big, with the trend accelerating rapidly for the best part of a decade, offering a number of interesting benefits, particularly for those abroad or retiring there. This wasn’t an act of deliberate generosity, but born out of EU freedoms legislation, which at the time as good European citizens, Parliament embraced.
2015 greater flexibility … but not for all
It all started in 2014, with George Osborne looking to balance the books between membership appeal and cost to the Treasury. The resulting ‘pensions freedoms’ saw death benefits in UK money purchase schemes greatly improved, alongside flexible access during one’s lifetime after 55. For those with defined benefit schemes, exchanging an income stream for life for a store of flexible wealth, combined with high transfer values and number of high-profile scheme failures, hardly surprisingly fuelled demand. For some, particularly the millions in unfunded public sector schemes, the opportunity to transfer to a more flexible scheme was placed out of bounds, in order to protect the public purse.
2017 – the beginning of the end
With huge numbers transferring to flexible international schemes, often denying the Treasury revenue, March 2017 saw the introduction of the Overseas Transfer Change, imposing a 25% penalty for taking one’s pension overseas, with specific exceptions. One such valuable exception that remains, at least until the end of the transition period that we are very rapidly approaching, is for European Economic Area (EEA) residents transferring to EEA schemes.
20** – the end for overseas transfers (within the EEA)?
Although the end isn’t definite, many consider it imminent, with several forces at play.
Firstly, the European political imperative. When the UK’s transition period ends
on midnight 31 December 2020, with the possible removal of one line of the Overseas Transfer Charge regulations, it would be immediately uneconomic for almost all European residents to transfer, effectively removing the option overnight.
Additionally, the rapidly growing concern by politicians that pensions are generous in terms of tax breaks, and that international schemes can and have since the introduction of QROPs, facilitated tax leakage, creates incremental pressure for change.
And finally, potentially impacting any final salary member, possible further changes to restrict or remove what was once the very valuable statutory right to transfer have been hinted at. The proposals, though primarily designed to prevent pension scams may have the effect of slowing down the administration of a legitimate transfer.
Now or never?
Is it now or never, for transferring a pension overseas? Of course, history tells us we are unlikely to know until too late, so with a hard Brexit increasingly likely, combined with a COVID induced debt that will need to be dealt with, understanding one’s pension options and making a conscious decision to act or otherwise was never more important.
The information provided in this article is not intended to offer advice.
It is based on Quilter International’s interpretation of the relevant law and is correct at the date this blog was published. While we believe this interpretation to be correct, we cannot guarantee it. We cannot accept any responsibility for any action taken or refrained from being taken as a result of the information contained in this article.
