By Simon Swallow*
If you thought your UK pension assets were safe after the radical New Zealand foreign pension tax reforms – guess again.
Now the UK government is having a crack by entirely rewriting the UK pension landscape.
Everyone with a UK pension is affected by two proposed seismic changes:
· The removal of any flexibility and freedom on final salary/defined benefit schemes by locking people into these schemes into perpetuity
· Opening up access and benefit flexibility in defined contribution schemes
In this article we lift the hood on these changes and assess the impact that they are likely to have on UK pension holders and what actions they should be taking now.
Bye-Bye final salary scheme transfer rights – for public sector pensions
The first of these changes is perhaps the most significant. Under the budget it is proposed that members of unfunded public sector final salary schemes will not be able to transfer out of those schemes after 5 April 2015.
There are approximately 9 million holders of these pension rights, spread across the NHS, Teachers Pension, Local Government, Civil Service, Police, Armed Forces, Fire Service and others.
To legislatively remove the transfer rights of this many pension holders highlights the severity of the pension problem in the UK a problem created because with the exception of the local government these schemes are unfunded.
An unfunded scheme is one that does not have a pot of assets to pay members pensions in the future but rather relies on the contributions of the current members to pay for the benefits of retired members.
To give an idea of the size of the problem if the NHS pension scheme, for example, were to close today it is estimated that the amount that would need to be paid out to members that have accrued pension rights would be £250 bln – and the tax payer would end up footing the bill.
The UK government recognising this problem are from next year putting changes in place to stop a run on pensions being transferred out – because they require the Exchequer to write a cheque to fund transfers.
So, if you have one of these pensions come 6 April 2015 you will have no option with your pension other than to start receiving it at retirement age. So determined are the UK government to enact this legislation that they are not receiving any consulting on this proposed change in the budget – it’s a fait accompli.
Perhaps this elimination of the right to transfer might be the precursor to a more radical adjustment of the public sector pension liability in the UK that otherwise is going to be a significant burden on future tax paying generations. This may also mean a reduction of benefits in the future for existing members of these schemes.
And potentially bye-bye to the transfer rights for private sector final salary schemes as well
The only difference between the proposed changes for private sector final salary schemes and public sector schemes is that the UK government is prepared to accept consultation on the private sector schemes.
So why are the UK government meddling in private sector schemes we hear angry voices shouting.
So why are the UK government meddling in private sector schemes we hear angry voices shouting.
The consultation document gives some background on this: "If members of defined benefit schemes were to continue to be permitted to transfer to defined contribution schemes, then the stock of assets currently held by defined benefit schemes could potentially be affected... That might affect the demand for long dated and index linked Government and corporate debt in particular..."
"Given that defined benefit scheme assets exceeds £1.1 trillion, even relatively small changes could have a significant impact on financial markets. In turn this could impact on the wider economy, particularly through the gilts, corporate credit and equities markets. "
Of the £1.1 trillion of assets held by private-sector final salary schemes, some £290bn is held in Government bonds representing something like a quarter of the entire market. So locking down pension transfers keeps the Government's ability to fund it’s borrowing afloat as the pension funds are a big player in this market.
Accessing your defined contribution scheme – will it be sugarcoated arsenic?
So maybe you have a personal pension or contributory company pension that will not be affected by the defined benefit pension rules described above. So what changes are in store for you? Mainly they revolve around access with the biggie being given access to the entire fund at age 55 from April 2015.
That will have many people licking their lips in the anticipation of being able to access their funds, however, it is proposed that any such payments will be taxed in the UK at your marginal tax rate. Furthermore, although you live in New Zealand and are therefore not subject to UK taxes its possible that a special levy will be made on the payment to prevent tax being avoided altogether.
These changes are massive and these just two of the most significant changes, there is a raft of others that will all equally impact on people.
Putting the UK changes alongside the recent New Zealand changes to the taxation of foreign superannuation it creates a situation where people who may have just reviewed their UK pensions need to go back and again review their situation.
People who may for example think they have four years after arriving in New Zealand to transfer their pensions tax-free and therefore have shelved their paperwork may need to dust it off again and review their transfer decisions.
People who have decided not to transfer to New Zealand because of the tax obligation that the transfer would create will suddenly need to reevaluate their decision and look at alternatives such as transfer to a QROPS or a UK self-invested personal pension which would not crystallise a tax obligation in New Zealand but would provide more flexibility in the future.
So in essence it’s back to the drawing board for everyone and once again these are important decisions that are complex given all the variables involved.
To find out more on how these changes are going to effect you go to http://qropsnz.com/uk-pension-changes/
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Simon Swallow is a director of Charter Square. You can contact him here.
16 Comments
I transferred my UK pension to NZ... I was able to take 5K straight away but the balance had to remain in a NZ scheme for 5 years before it was paid out to me. When it was paid out in NZ it was tax free.
I wonder if the transfer changes also restrict international transfers.
UK faces ‘crippling’ tax rises and spending cuts to fund pensions and healthcare
Britain faces “crippling” tax rises and spending cuts if it is to meet the needs of an ageing population, according to the Institute of Economic Affairs. The IEA calculated the Government would need to slash spending by more than a quarter or impose significant tax hikes because official calculations had failed to factor in future pension and healthcare liabilities. “As populations age, tax bases will grow more slowly while government spending rises faster,” the report said.
… the think-tank said Britain faced tax rises equivalent within just two years to more than 17% of GDP – more than £300 billion ($500 billion) – in order to meet all future spending commitments. This is larger than the entire annual NHS budget and would increase taxes from 38% to 55% of national income.[..] … tax increases of this magnitude would be “impossible” to implement “without choking off economic growth and actually reducing tax revenues”.
In the absence of further tax hikes [..] total spending would have to be cut by more than 25% or health and welfare expenditure by 53%compared with the current implied level if all future spending was to be met out of tax revenue.
[..] … it said policies were being implemented too slowly and were “inadequate” on their own [..] … policies to address pension saving and healthcare costs were needed now or the problem would quickly grow out of control. “Without significant changes to spending levels, huge sacrifices will have to be made by future generations either through significantly higher taxes or reduced benefits [..]
The IEA calculated that delaying crucial pension and healthcare reforms by just a few years would dramatically increase the burden because of growing debt interest payments. It said the ratio would increase from 13.7% of GDP in 2010 – already higher than the EU average of 13.5% – to almost 17.1% by 2016 if no policy adjustments were made.
http://www.theautomaticearth.com/debt-rattle-mar13-2014-the-demise-of-t…
Hi Andrewj, could not agree with your posts more. This is why people should not view their public sector pensions as 'guaranteed' which is the mistake that many people make. Indeed for many years the UK government has tinkered with adjustment factors and the like to change the value of people's pensions.
A number of people fall back on the argument that their pension promise is enshrined in legislation, to that I point out so was the right to transfer, and guess what they are about to change that with new legislation. So legislative protection should not offer any solice.
People really need to look hard at whether they are going to rely on the government to fund their retirement or themselves.
This is such a slow motion train wreck that is unfolding. And nothing to do but watch on and see just how bad the aftermath will be. Don't worry, I'm sure we'll get ours soon enough. As much as we seem to blindly follow where the UK has already been, and shown to be folly, we seem to keep on going down the same paths.
Time for some balance, I think.
Could it be that UK public sector pensions are being locked up to stop them being raided by overseas providers? In the 90s British providers had to pay out billions in compensation to people who had been missold personal pensions that were far better to stay where they were i. e. the public sector schemes referred to above. This is why there isn't a flourishing transfer industry in the UK. You'd think there would be, eh?
The legislative protection that these pension funds give members is far more valuable than absolutely none at all - which is what would happen when you transfer away.
The final salary schemes that are run by the Civil Service, the Police and the NHS are so generous that they make KiwiSaver look miserly. And those schemes have been around for a very long time.
I could ramble on forever, but businesses making these arguments supporting transfers don't make any money if you leave the money where it is.
In respect of balance, I would point out the following:
If there is not a flourishing pension transfer industry in the UK then why the need to change the legislation in the first instance, surely choice is better than the removal of choice (especially choice that was previously legislatively enshrined and is now being forcibly removed)
The decision to transfer a pension out of a public sector scheme is a serious one and not determined solely by the benefits on offer from the scheme but a multiplicity of factors, including the tax consequences of transferring versus leaving where is, the size of the funds and annual payments (small versus large), the transfer value on offer, the current and future country of residency of the individual, exchange rate protection as well as many others. Therefore, the decision to transfer is an entirely personal one and it is a right that is being removed.
Thus the thrust of the article is given that the right is being removed perhaps now is a prudent time to review your options - as it could be last chance saloon to do so.
The thrust of the article is clearly to get people transferring. A company set up to transfer people's UK pensions is going to struggle to be reasonably seen as a detached and neutral source of advice.
Now that there is an end date, I am expecting more frantic/desperate activity from these organisations.
The arguments about "choice" are exactly the same as those used by providers transferring UK pensions in the 90s. It turned out to be a giant mess and providers had to compensate those who were missold.
Occupational pension schemes in the UK, particularly public sector ones, are very good value for the member. Casting doubt over their sustainability amuses me a bit. I think the Civil Service scheme began in the 1800s!
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