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Requirement for advising on a QROPS transfers from a UK Defined Benefit Scheme

Clients need expert pension’s 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 was no longer 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 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.

For a transfer from a defined benefit (final salary) UK pension scheme, an appropriately regulated UK financial advisor will need to obtain a TVAS report if recommending a transfer to a QROPS.

Considerations for transfers from final salary (or defined benefit) schemes

 

 

Final Salary Scheme 

QROPS

Benefit type

A final salary scheme is also know as a defined benefit scheme because the member knows what they will receive (other than inflationary increases) when they start to take the benefits.

Most QROPS are money purchase or defined contribution’ schemes where the member knows how much they are investing, but not what they will receive as a pension depends upon the performance of the assets.
If the funds perform well, then the pension may be higher than that provided by the final salary scheme, conversely if the performance is poor, this may be lower.

Scheme benefit
protection

A final salary scheme will be offered by an employer and held segregated from the employer’s other assets (usually by placing the funds in trust). This affords the member some protection against the employer becoming insolvent or unable to fund the pension payments.
Scheme members may also be entitled to compensation from the UK Pension Protection Fund, although this is not guaranteed.

Transferring to a QROPS breaks the link to the employer and any future issues they may have with funding. This includes no access to the UK Pension Protection Fund. Where the QROPS is set up using a trust arrangement then the funds are segregated from the assets of the QROPS provider and the funding will relate purely to the performance of the QROPS investments.

Investment
choice

The Trustees decide with their advisers where to invest to provide the benefits for the member.

The member (or their investment adviser) chooses where to invest the funds in the QROPS provided these meet the Scheme rules for acceptable investments.

 

Loss of
guaranteed
income

Normally, the final salary scheme guarantees to provide an inflation linked pension income for the member’s lifetime regardless of how long they live.

This guarantee is not provided by the QROPS scheme and the transfer value includes a cash equivalent of this guarantee which is calculated based on average life expectancy.

Loss of life cover

The scheme may offer a lump sum for the client’s dependents if the member died before retirement.

If required, the client will have to secure replacement life cover, which will be based on the client’s age and health now.

Pension
commencement
lump sum
available

Under a final salary scheme there is not a simple percentage to calculate the pension commencement lump sum, however it is possible for a member to commute some of the pension income to lump sum.

A lump sum of 25% to 30% (depending on the jurisdiction) of the transfer sum if taken within 5 years of the individual becoming non-UK resident (10 years for a transfer from 6 April 2017). Thereafter subject to the local jurisdiction.
Please read the QROPS Q&A document for further details.

Loss of spousal
pension

If the individual dies before or after retirement the final salary scheme may provide a pension for the spouse or civil partner.

The QROPS fund may be used to provide a spouses pension or benefits to other beneficiaries.

Retirement date

A member may retire early or late subject to agreement of the employer, the scheme trustees or both, and meeting the requirements of the tax rules.

Following transfer to a QROPS, early or late retirement is governed only by the pension scheme rules in the QROPS jurisdiction and HMRC requirements for QROPS.

Cost of
administering the
scheme

The administrative costs of providing a final salary scheme are covered by the employer. The member is not specifically charged.

Most QROPS providers charge fixed fees on setting up the QROPS and annually to cover the cost of providing the scheme.
Any costs of managing the QROPS are taken from the member’s funds.

Transfer
penalties

 
The cash equivalent transfer value represents an actuarial calculation of the value of the members’ rights under the scheme. Where the scheme is in deficit the transfer value may be reduced so that it reflects the member’s fair proportion of the scheme funds.

 
There may be encashment charges on transfers out from a QROPS.

 

Date Created: 28/04/17


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

It is based on Old Mutual Wealth's interpretation of the relevant law and is correct at the date shown on the title page. While we believe this interpretation to be correct, we cannot guarantee it. Old Mutual Wealth 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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