UK expats in the UAE and around the world will have been alarmed to hear the Pension Protection Fund (PPF), which protects salary-linked pension schemes, warn that retirement incomes are at risk and many expats will be wondering whether to transfer their pension.
The PPF says that many people expecting a ‘gold-plated’ final salary scheme have been misled and those pension schemes that are in jeopardy need to be honest with their members.The PPF offers a protection scheme which sees most UK pensioners receiving 90% of their promised pension should their pension provider fail to deliver or go bust.
However, for those pensioners who have larger pension pots, the PPF has a cap which means the pensioner will receive no more than £36,000 per year – regardless of how much they are expecting – and they will receive less if they retire before the age of 65.
The warning from the PPF will have come as a shock to many pension savers in their 40s and 50s who believe that their final salary pension will deliver what they are expecting. However, those savers should now be preparing for a 10% drop in their predicted retirement income.
Indeed, savers have been warned that five in six of the UK’s final salary pension schemes are now in the red and will struggle to pay their members a full pension.
The PPF’s chief executive, Alan Rubenstein, revealed that 11 million people who are saving for their inflation-linked guaranteed pension believe that it will be safe but ‘that is not the case for many’.
He told one national newspaper that should pensions be cashed in today, most pension funds could only pay out around 60% of their pension commitments.
Employer pension schemes
Employers offering final salary pension schemes are becoming increasingly rare because of the costs of delivering the generous schemes and the pension pay-out is worth, typically, around two thirds of an employee’s wages when they retire, dependent on how many years of service they have clocked up.
During their retirement, the employee will receive an inflation-linked pension and when they die, half of it will go to their spouse. For those who have already retired, their income will be protected but for those in their 40s and 50s their protection is at risk.
The PPF says that nearly 5,000 such pension schemes are now facing a shortfall in funding of around £300 billion – the biggest amount since 2012. Just 1,000 final salary pension schemes are in surplus.
The rules have also been tightened for pensioners who rely on their pension from an unfunded public scheme, known as defined benefits, and these will cover police, military, and teachers as well as NHS workers. They are now prevented from transferring their pension pot overseas though many will appreciate that the scheme offers them security.
Those who have a personal pension, a defined contribution scheme or a Self-Invested Personal Pension – also known as a Sipp – are free to transfer their pension pot to a Qualifying Recognised Overseas Pension Scheme (Qrops).
For anybody considering moving their pension it’s crucial that they speak with a UK-regulated adviser working under the Financial Conduct Authority’s (FCA) regime who will be able to give professional and impartial advice for the best possible results.
However, when an expat moves overseas to work or live, they may come under some pressure from financial advisers to transfer their pension into an offshore investment vehicle as a means to protect it. The UAE is one place where expats often feel pressured to take such measures.
What they may not say to the expat is that the adviser will be profiting from the sky high fees they will earn from the transfer and the expat will run the risk of having to pay a financial penalty for moving their pension scheme out of the UK. For many people who have a final salary pension scheme from a former employer, the best plan is to simply leave it in the United Kingdom rather than moving it abroad.
That’s because the pension pot may be worth tens of thousands of pounds and its value should not be jeopardised by switching to a pension scheme in another country.
There is also a difference between financial advisers in the UK, who must by law charge a fee for their time and advice, and those working in the UAE and other countries who charge a commission for their work which means there’s an incentive to urge expats to transfer out their pension and reinvest the money into an investment plan with high charges.
In addition, many of these financial advisers will not have any relevant financial qualifications and will be motivated by their own personal financial incentive to urge the transfer of the pension fund.
Indeed, many advisers in the UAE will be recommending that their clients invest in offshore investment bonds which will earn a 7% commission upfront as well as offering structured financial products and specialist investment funds but these also pay a 5% commission to the adviser.
It should be noted that the commissions paid to the adviser are deducted from the expat’s pension fund directly which means the fund itself has to work much harder to deliver profits once these costs have been deducted.
This issue has been further addressed in the Expat Focus article, ‘New Expat? Don't Become A Victim Of Bad Financial Advice‘ which highlights that expats are at particular risk when living abroad and looking for help with their savings and pensions.
However, news of the struggles facing final salary pension schemes has led to growing numbers of expats in the UAE approaching financial advisers to change their UK pension plans, says Guardian Wealth Management.
The firm says that they are being approached by lots of Gulf-based UK expats with pensions wanting to transfer their occupational pension to one with greater financial security and more flexibility over pay-outs.
The head of the firm’s Dubai operations, Hamzah Shalchi, said: “Final salary schemes lack flexibility in providing a specific amount every year until the pensioner dies but what if they want to do more with their money in the years after retiring and less when they are much older?”
Among the options for expats is to transfer their occupational pension into a Sipp because these are based in the UK and are regulated by the FCA. They also benefit from the legislation and rules covering pensions and give the saver access to their funds when they are 55.
An adviser at UAE-based AES International, James McLeod, said that expats should think very carefully about leaving a defined benefit final salary scheme since those that are not struggling will see the retiree receiving 1/60th of their retirement income for every year of service with their former employer.
He added: “This is a valuable benefit and you will need a strong reason to give it up.”
Obviously, a lot depends on an expat’s own personal financial situation though they need to be aware that the FCA insists that an expat with a pension worth more than £30,000 should take advice from a regulated adviser who has permission to advise on pension opt outs and transfers.
Pension ‘liberation’ scams
The other potential problem facing expats wanting access to their pension is to be told that a financial adviser knows of a loophole so the saver can access their pension pot before the age of 55, but this is likely to be a scam.
There’s a growing problem with the issue of pensions ‘liberation’ since thousands of British people have lost their lifetime pension savings because they have been hoodwinked by scammers; to make matters worse they also face a large tax bill for withdrawing their money before the age of 55.
Just to make this issue of scamming abundantly clear: there are no loopholes and anyone who accesses their pension pot before the age of 55 will face a tax bill from HMRC. Also, once the money has been taken out and ‘re-invested’ it’s unlikely the saver will see their cash again, which means their retirement plans will be put in jeopardy.
There are however some advantages for expats transferring a defined benefit scheme into a Qrops – but only into one that has been officially approved by HMRC.
To help expats decide, HMRC regularly publishes its list of recognised schemes. There are dozens to choose from around the world and not all offer the same benefits. Again, specialist financial advice from an FCA-regulated adviser will be money well spent.
The main attraction for Qrops is that the money can be moved to a tax efficient offshore jurisdiction, such as the Channel Islands or Isle of Man as well as Malta, and they offer flexibility as well as tax advantages depending on where the saver is living when they draw down their money. As mentioned previously, public sector pensions, for instance those for police and teachers, cannot be transferred into a Qrops and neither can Civil Service pensions. The State Pension is also ineligible for transfer.
Qrops or Sipp?
While a Qrops may be more tax efficient for expats who are retiring overseas than a Sipp, the annual admin charges and set up fees for a Qrops may be higher. Most providers of Qrops do not deal directly with savers and someone wanting to set up a Qrops will need to use an experienced and suitably qualified international independent financial adviser.
Also, most Qrops will not consider a pension fund worth less than £40,000, because the administration and setup fees are too high for a fund of that size, though there is no upper limit to the size of a fund transfer.
The advantage of a Sipp is for the saver to choose where they want to invest their pension money and this include bonds, stocks and shares, cash as well as exchange traded funds (ETFs).
The Sipp will be subject to tax and pension legislation in the UK and may provide a better savings vehicle for those expats who are planning, ultimately, to retire in the UK.
There are other issues to consider too. UK expats thinking of retiring overseas need to plan ahead and while their UK pension has a current lifetime savings limit of £1m, not all countries have this.
Indeed, the Australian government has announced that with immediate effect their lifetime cap on pension contributions will be £250,000 (or A$500,000). Many Brits thinking of retiring Down Under may need to rethink how they will finance their lifestyle since they may have saved £1m over their lifetime into a pension but can only take £250,000 with them.
Whichever route an expat decides on taking or leaving their pension safely in the UK or to transfer abroad, it might be worth bearing in mind a recent Prudential survey of pensioners asking what their three main regrets are.
According to the financial firm, pensioners in the UK regret not beginning to save seriously soon enough, not having saved enough money for their retirement and also not setting a retirement budget.
While nine out of 10 respondents say they are enjoying their retirement, 40% of them regretted their financial decisions that they got wrong, which has left them struggling to pay their bills.
The survey questioned those who retired within the last five years and how they would handle their retirement plans differently if they had a chance to do so.
It should come as no surprise that most pensioners admitted over-estimating the value of the state pension and overspending their savings too early in their retirement.
This meant one in three pensioners admitting they are less well off financially in retirement than when they were working and that their saving and spending decisions both after and before retiring had affected their current standard of living.
However, two thirds of those who responded said they were enjoying a final salary pension scheme’s benefits which is unlikely to be available for those retiring in the future and three quarters had the state pension as an additional source of income.
Nearly half of pensioners said they had cash saved up for their retirement with 28% having money in stocks and shares and 21% relying on their pension annuity.
Nearly all of them say that anyone considering retirement should begin saving as soon as possible because the long-term benefits will make it worthwhile and people should take professional advice about how to plan for a financially comfortable retirement.
Essentially, the sentiment of planning for a life without work is crucial when considering the question of whether an expat in the UAE should transfer their pension since it highlights there is not a straightforward answer; all pension savers have different circumstances and plans for their own retirement.
For all expats everywhere – regardless of whether they are from the UK or not – good, professional financial advice is key and it's important that expats are not taken in by the wonderful promises being made by a local financial adviser who receives a commission as an incentive because they are working for their own rewards and not an expat's future and could, potentially, be putting the expat's pension savings at risk.