In a sentence or two, Osborne all but ended the decades-long requirements for enforced annuities, and rules which prevented most UK pension scheme members from accessing more than 25% of the funds from their UK pensions as a lump sum.
The ramifications of the planned changes, though, are in fact global, due to the widespread use of qualifying recognised overseas pension schemes (QROPS) by expatriates keen to avail themselves of this type of international pension product’s advantages.
Thus the shock waves continue to reverberate, as advisers and their QROP scheme member clients strive to determine exactly how the proposed changes will affect them.
That the changes will affect QROPS schemes was not immediately obvious, as the Chancellor didn’t mention the “Q word” specifically in his speech.
Thus it falls to pension experts and advisers, on behalf of their clients, to work out whether the proposed changes to UK pensions will change – and possibly diminish or even eliminate – some of the reasons for transferring one’s existing UK pension scheme into a QROPS.
Pre-commencement death benefits
It is clear to us that, based on what we’ve been told thus far, the goal posts have been moved.
However, let us start by looking at what has not changed.
A UK defined contribution – or “money purchase pension” – scheme, which is usually a private pension, has always offered the full, tax-free return of funds upon a member’s death, prior to crystallisation of benefits. Once the scheme member began taking some of his or her benefits, though, a potential 55% tax charge would kick in after the member’s death if the surviving beneficiary wanted to access the funds.
There has always been an option in such situations for the surviving beneficiary to take a full income from the funds remaining in the deceased’s UK scheme without any penalty, but in our experience this has often been ignored or forgotten by advisers.
Among the biggest changes post-Osborne’s 19 March Budget is that the self-invested personal pension scheme (SIPP) – a UK-only pension structure – becomes significantly more flexible. And the result of that is that the case for recommending a QROP scheme may now no longer be as clear-cut.
The onus of getting the advice right for one’s client, therefore, has been ramped up to another level
Cash flow
If UK private pension scheme members have free reign to take what they want out of their accumulated pension savings, subject to tax in some instances but not all – as they now will be able to do for the first time, as a result of the changes proposed by Osborne – there is no doubt that some will take advantage of this, and thereby deplete and spend their retirement fund.
Others may do this accidentally, by taking too high an income at the outset, and then getting hit by such unexpected setbacks as “reverse pound cost averaging”, whereby the market’s volatility works against them.
It is obvious, therefore, that one incontrovertible result of the 2014 Budget is to make the financial planner’s role significantly more important, whatever type of pension is ultimately chosen, in order to ensure that the client’s net income in retirement – after charges and fees – provides a sustainable fund that can provide protection against rising prices throughout his or her retirement years.
This can be a particular challenge for those who opt to take their pensions as early as age 55, the UK minimum, since the latest average life expectancy tables suggest that most people should plan for their pension to get them to age 85 at least.
In other words, the decumulation period may be longer than the accumulation period of the pension fund.
Getting the maths to work in a situation like this, therefore, will require financial advice of the highest order.
The ‘income for life’ rule
This brings us to the “income for life” rule: that is, the rule that stipulates that at least 70% of the funds transferred from a UK pension to a QROPS must be set aside at the time the scheme member commences taking benefits, in order “to provide an income for life”.
The question is now whether those QROPS providers that adhere to this rule on behalf of their clients will fall into line with the new UK pension rules.
While many overseas advisers are quick to insist they will, at this point, others remain skeptical about the eventual degree of compliance outside the UK. We are adopting a wait and see policy and believe people who have no need to crystalise benefits should pause and review before proceeding.
Certainly tax advice is going to move to the fore, as expats juggle with the pros of the new flexibility of SIPPs, and the cons of the potential, as-yet-not-fully-known, tax consequences of large withdrawals from a UK pension.
Key points to consider
There is no doubt that advisers need to now start considering:
- Are all of the QROPS transfers currently in the transfer pipeline, still in the clients' best interest, in light of the planned Budget changes to the UK’s pension rules? Should these pipeline cases be reviewed and discussed with the clients before they complete?
- Would those of their clients known to be interested in accessing large lump sums from their pensions – or else large incomes from them – be disadvantaged by transferring into a QROPS now, knowing that the new rules are coming into place?
- Should they advise clients who are not planning on taking benefits in the next 12 months – that is, prior to May 2015 – to not transfer into a QROPS before the new rules have been finalised and come into force, out of concern that they might be seen to be “rushing” the client, and possibly be found to have given the wrong advice?
- Should they set up a programme now for ensuring that all of their clients’ existing QROPS are routinely reviewed, to ensure that it is correct for them to remain in a QROPS and not be transferred back to the UK, to a SIPP?
The issues to be considered in all these cases are numerous, and typically include, among others, the annual running costs of a QROPS as well as tax, flexibility, domicile and residency.
QROPS back to SIPPS transfers
It will be interesting to see whether the pension rules changes will result in many pensions being transferred back to the UK, as SIPPs. Certainly for most advisers, the idea of moving a pension out of a QROPS and into a SIPP is uncharted territory.
In situations in which such a transfer would be clearly the best option, the adviser should first consider what is known as an “in-specie” transfer, whereby all the pension’s funds remain invested and intact.
In such a situation, the adviser would have to consider, and take into account, the fact that QROPS are generally able to hold a wider scope of investment types than SIPPs are allowed to. The UK regulator frowns on such asset classes as offshore property, storage units, wood plantations, traded life settlement funds and so on, largely because of their poor record and a historic higher-than-average tendency to fail.
In addition, if a client’s QROPS contains such investments, it may not be just the QROPS that has to be considered, but an inflexible bond wrapper inside the QROPS which holds the investments.
What’s more – and unfortunately, for the individual concerned – the UK’s rules covering QROP schemes may not permit such investments to be liquidated without penalties, prior to a transfer. So the penalty charges for such encashments would have to be considered when weighing up the pros and cons of the QROPS-to-SIPP transfer.
Meanwhile, one thing that is clear, with respect to UK SIPPs, is that proposed new capital adequacy requirements that SIPP providers are to be expected to meet, coupled with new rules governing the due diligence of funds held within them, will inevitably deter some UK SIPP houses from accepting in-specie transfers from QROPS.
Will they or won’t they…
Another, related question that some will be asking, in the weeks and months ahead, is to what extent UK SIPP providers will be willing to deal with some non-UK financial advisers.
Some, of course, will not hesitate to work with anyone who has clients with legitimate QROP schemes that they wish to transfer back to the UK.
But others will not be more wary, and may look for proof of the advisory firm being regulated by one or more entity, such as a local financial services regulator or a securities and exchange commission.
And if this proves to be the case, offshore advisers who are unable to convince the UK SIPP providing industry of their regulatory credentials may face certain difficulties in being able to argue that they actually offer true independent advice based upon “whole of market” principles.
So, it seems, the chancellor, in one budget, has set out a challenge for advisers of clients who look after expatriate Britons: to re-think how the best pension advice is to be provided, and what the future of pension advice for those leaving the UK for good is going to look like.
James Caldwell, managing director of Aisa Professional, founded the UK wealth advisory firm in 1998. Christopher Lean is a Czech Republic-based adviser with OpesFidelio, Aisa’s recently-formed overseas network arm.
