Final salary pension schemes vs QROPS

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Written By Saeed Maleki

Final salary pension schemes vs QROPSDefined benefit pension schemes, also popularly known as a final salary schemes, are some of the most generous pension schemes available in the market today.

However, the generosity of these schemes has meant that most defined benefit schemes within the private sector have either been forced to close or alter dramatically; as they have become too expensive for employers to provide and maintain.

The market is therefore experienced a significant shift away from providing them, instead favouring defined contribution schemes, which shifts the risk and onus onto the individual, rather than the employer.

This movement has been exasperated by ongoing low-interest-rate environment within the UK, which creates further pressure on already strained benefits.

With the prolonged uncertainty surrounding these schemes, there are many reasons an individual may wish to transfer their fund into a Qualifying Recognised Overseas Pension Scheme (QROPS) – a HMRC-recognised overseas pension scheme.

As the name suggests, the schemes are only available to UK pension holders either living, or planning to live, outside of the UK.

Why transfer?

There are two main points to consider if you believe a transfer into a QROPS might be the best option:

  • The transfer means protection against your pension being jeopardised in the future. If, for example, the pension scheme defaults and is no longer able to pay out, the UK Pension Protection Fund (PPF) may be able to make payments to you, however only 90% of a fund will benefit from the PPF protection – with a cap set at GBP 33,219.06 per year. This means those individuals with a larger pension face losing a much larger overall sum.
  • If an individual holds a large pension, passing wealth onto their loved ones is probably a priority. Within final salary schemes there are two classifications of pension holders: Deferred member (no longer contributing and not yet taking benefits) or active member (someone who is contributing to their fund). Specifically with regards to the benefits of a QROPS transfer, if a deferred member who does not have a spouse or dependent dies, their pension dies with them. Transferring the fund into a QROPS means a person can distribute their wealth to a beneficiary of their choosing.

Death and taxes

To situate the differences more clearly, with UK pensions, if the individual is below 75 years of age and has not taken any pension benefits, the lump sum given to dependents is free from UK tax.

Though after reaching 75 years of age, drawn (i.e. taken) pension benefits are subject to a tax charge of up to 55% when paid as a lump sum to beneficiaries upon death.

With a QROPS, there is much more freedom, and regardless of whether the member has started taking benefits or not, there may be no income tax payable on the lump sum from age 55 onwards.

The next step

Whilst a defined salary pension scheme may hold out for the future, the slow eroding of benefits and schemes offered – including the recent defined benefits claw back seen at Lloyds Bank – means it may be wise to transfer your pension into a more secure fund.

To talk through the options, you should enlist the help of an experienced independent financial advisor who has worked with QROPS transfers before. They will be able to talk through the differences between a defined salary scheme versus a QROPS transfer and highlight which options suits your unique needs.