New requirement for advising on QROPS transfers

Clients will now need expert pensions advice before transferring UK Defined Benefit schemes to a Qualifying Recognised Overseas Pension Scheme (QROPS) which further emphasises the importance of independent advice in this area.

Changes to advice requirements for QROPS transfers

From 6th April 2015, it will no longer be possible to transfer a UK defined benefit (DB) pension scheme to a QROPS without the member receiving advice from a FCA authorised adviser with permission to advise on pension transfers and pension opt-outs.

This may lead to an increase in UK DB pension members seeking advice in the UK about QROPS transfers before they move abroad and require overseas advisers to look at advising in conjunction with UK appropriately regulated advisers.

This requirement is in addition to the existing requirement to obtain a Transfer Value Analysis System reports for UK DB pension transfers. These reports and when they are required is explained below.

What is a Transfer Value Analysis System (TVAS) report and how does it help?

A TVAS report is used to compare the benefits available under a current UK final salary scheme and a proposed pension scheme, taking into consideration the charges for both products; commission or fees payable. A TVAS report can also be used for money purchase comparisons if required.

The report will produce a figure known as the critical yield. This is the rate of annual growth required from the investments (net of charges) for the new product to achieve the equivalent fund value as the current pension scheme would have required to fund the benefits.

The reports will also compare tax free cash amounts, death benefits payable and pension income levels.

Unlike a transfer to another UK pension, with a transfer to a Qualifying Recognised Overseas Pension Scheme (QROPS) the report cannot compare like for like. The QROPS is a shell of rules with an underlying investment vehicle or vehicles which are not a pension product.

The report places no value on the other benefits a QROPS provides in terms of:

  • choice of jurisdiction and therefore the rules applying to the QROPS including the pensions commencement lump sum available and flexibility on income levels;
  • different taxation levels of pension death benefits;
  • investment flexibility through choice of currency, funds and investments vehicles available;
  • no restrictions on the level of contributions or limits on the fund size.

The report will generally not quantify areas such as the solvency and future funding of the current pension scheme.

When do I need to provide a TVAS report to my client?

Generally, TVAS reports are not required in order to recommend a transfer of a money purchase pension scheme to a QROPS.

If you are an appropriately regulated UK financial adviser, you will need to obtain a TVAS report if you are recommending a transfer from a defined benefit (final salary) UK pension scheme as part of your recommendation to transfer to a QROPS.

If you are not a UK regulated financial adviser, or you are a UK financial adviser without permissions to advise on pension transfers and pension opt-outs. There is generally no regulatory requirement to provide a TVAS report for transfers from money purchase (or defined contribution) UK pensions, but for DB pensions you will need to refer the member to a UK regulated financial adviser with appropriate permissions.

The information provided in this article is not intended to offer advice.

It is based on Old Mutual International's interpretation of the relevant law and is correct at the date shown at the top of this article. While we believe this interpretation to be correct, we cannot guarantee it. Old Mutual International cannot accept any responsibility for any action taken or refrained from being taken as a result of the information contained in this article.

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