Maximising pension income is the main reason an expat should look at switching from a UK pension into an offshore Qualifying Recognised Overseas Pension Scheme (QROPS).
After all, everyone wants to convert their pension into as much cash as they can to make their retirement years more comfortable.
Determining pension income
The nitty-gritty of pension income in the UK comes down to two factors –
- Gilts – Most pension savers invest their funds in annuities that pay a guaranteed lifetime income. The value of annuities is mostly determined by returns on government gilts, which have slumped in recent years due to the Bank of England printing more money through quantitative easing (QE).
The Bank has pumped £375 billion into the economy with QE.
This has devalued gilts, which are returning lower than average yields compared with pre-recession years.
- GAD – Another financial acronym, this time for Government Actuary’s Department, which is home to the number crunchers who calculate how much of a pension fund can be paid out in benefits every year.
If the figure decreases, pension payments fall, and if the figure rises, payments increase.
GAD is expressed as a percentage. For many years, the figure was 120%, but recently, the amount dropped to 100%, causing pensions to drop by a sixth. Now, the amount has gone up to 120% again
Shifting an onshore pension into a QROPS takes away these two factors.
QROPS investors do not have to invest in an annuity, so their fund is not reliant on the performance of gilts but how the assets in the fund are managed.
Some QROPS jurisdictions match UK GAD, but most have their own figure, which is 120%.
In fact GAD rates are one of the most important factors to discuss with a QROPS advisor as the percentage makes a big difference to pension pay outs.
For instance, moving a UK pension to a QROPS provider in a financial centre allowing a 30% tax-free lump sum drawdown and at least 120% GAD means more cash coming in than if the pension was left on shore with a 25% maximum drawdown.
Retirement planning comes into play here, because GAD rates mainly apply in many financial centres in the first five years of non-residence for QROPS purposes.
Another factor to consider is QROPS funds are outside of the reach of British courts in divorce and can be passed on in full when the investor dies as they are exempt from UK inheritance tax as well.