We are now in the new age of UK pensions. While the new pension regime is generally welcome, it is more complex than many realise, with various myths about what you can and cannot do, and you need to understand the tax implications in your country of residence.
We are now in the new age of UK pensions, where you have complete freedom to do whatever you wish with your funds… depending on what type of pension you have.
While the new pension regime is generally welcome, it is more complex than many realise, with various myths about what you can and cannot do, and you need to understand the tax implications in your country of residence. There is a concern that people will make the wrong decision, because they have not weighed up all their options or were encouraged to transfer into an unsuitable scheme.
Note that the new pension freedom only applies to defined contribution schemes. This is the industry term for money purchase schemes, such as personal or stakeholder pensions, Self-Invested Personal Pensions (SIPPs), Executive Pension Plans etc.
It does not apply to defined benefit schemes – i.e. final salary – though you could potentially transfer to a defined contribution scheme.
Here is an update on the pension news leading up to 6th April.
The UK Financial Conduct Authority (FCA) confirmed that all transfers from defined benefit schemes can only take place if the member has received advice from a pension transfer specialist who is regulated by the FCA. This is regardless of when the transferred benefits are being accessed. The exception is for funds of under £30,000, or where the benefits are used to buy an annuity.
The FCA explains that the new regime makes advising on pension transfers significantly more complex. Defined benefit schemes pose particular issues and those considering moving to other arrangements must be fully aware of the potential benefits they are giving up. In many cases transferring may not be in the member’s best interests.
The rule also applies to non-UK residents. So if you live in Spain, France, Portugal, Cyprus, Malta or elsewhere, you still need to take advice from a UK regulated pension transfer specialist. Most advisers here are not regulated by the FCA.
Overseas advisers who are not FCA regulated and transfer pensions into Qualifying Recognised Overseas Pension Schemes (QROPS) will need to pass cases onto UK firms to provide the advice. The UK adviser becomes responsible for the advice even though they may never meet or speak to the client.
Since advice is important for all pensions, the government has introduced a free service called “Pension Wise”. Provided by the Pension Advisory Service and Citizens Advice Bureau, its offers impartial guidance to people with defined contribution schemes on the new pension freedom.
Indeed, the best advice is to carry the FCA’s rule on taking regulated advice forward to all your pension decisions. This is a highly complex area; getting it wrong could have serious consequences.
Scam proof your pensions
The Pension Regulator launched a campaign warning people not to get stung by pension scams, which are on the increase following the new freedom.
Scammers try to lure members with promises of one-off investments, pension loans or upfront cash. They may try to flatter and tempt you into transferring into an investment with guaranteed returns. Once the transfer has gone through it is too late. You need to be wary of cold calls; promises of returns of over 8%; proposals to put money into a single investment and claims you can access your pension before age 55.
The FCA also stepped up consumer warnings and launched a “ScamSmart” campaign amid growing fears that retirees will fall victim to fraudsters or make poorly informed decisions. Pension savers face new risks with new complex and difficult to compare products. Those who have not taken proper advice could lose out from providers shielding them from the full range of options.
In December HM Revenue & Customs issued a draft statutory instrument which proposed removing the “70% rule” on QROPS (where 70% of the funds should provide an income for life) from April.
However, in mid-March HMRC confirmed that the rule will remain in place for now, which means many QROPS cannot provide full flexibility on withdrawals. This is temporary, but there was no indication of a time scale.
This 70% rule does not apply to EU schemes. So QROPS in, for example, Malta, can offer the new pension flexibilities.
From April 2016, pension freedom will be extended to people who have already bought an annuity.
Retirees will be able to sell the income they receive from their annuity and have the freedom to use the capital as they wish – so they could take it as a lump sum, or place it in drawdown.
You need to be extremely careful about what you do with your pension fund, and take regulated professional advice for peace of mind. Just because pension freedom exists, does not mean you have to use it; certainly there is no hurry. Take the time you need to research all your options and take advice to make the best decision for you.
For more information on the pension reforms and what you can do with defined contribution schemes, read our previous article Your Pension Options From April.
27 March 2015