If that happens – and it seems unavoidable – it will scupper the retirement dreams and plans of many pensioners.
For those UK expatriates living abroad, but who still have their pensions in the UK, now would be a very good time to consider moving their UK pensions into a QROPS (Qualifying Recognised Overseas Pension Scheme).
The pressures on the UK pension environment have been many and long in the making, and are likely to continue for quite some time. Over the last two years, UK pensions have been subjected to various potentially erosive threats and shocks.
First came a new regulatory regime in April 2015, but which failed to close the so-called “advantage gap” associated with QROPS. Then came Brexit in 2016, with all the economic and political uncertainty it created, and the possible, negative longer-term implications it might have for all, including pensioners.
And, more recently, upward of 11 million UK pensioners have been faced with a final salary pension schemes funding deficit that is now close to a staggering £1 trillion (£1,000bn), according to an article published online by The Telegraph on 31 July 2016.
Unless the shortfall can be almost miraculously funded, these millions of pensioners will see their promised payouts shrinking to substantially less. Who can afford to stand by idly and watch part of their life’s savings go down the tubes because of stifling and unfair regulations, adverse economic conditions, unrelenting government decisions or poor fund management – all of it beyond your control?
As Richard Dyson, Personal Finance Editor at the Telegraph Media Group, explains in his article, the almost £1 trillion shortfall is the gap between the investments UK final salary pension schemes own and the likely eventual cost of the pensions they have already promised to pay.
The pressure is on the British government to completely overhaul Britain’s company pension schemes that, in July 2016, registered their biggest-ever funding shortfall.
At risk are those pension schemes that have committed to paying a set income, known as final salary or “defined benefit”, in retirement, and which is linked to workers’ wages and length of service. Fewer new workers contribute to these schemes these days, but millions of workers have done so in the past when these schemes were more common. They have built up entitlements in them that are now at risk. Of the 6 000 such schemes in the UK, some 5 000 are currently in deficit.
Shortfalls have recently worsened because investment returns are, at present, extremely low. Some of the contributing factors to this situation include high pension fund costs through the duplicity of many small funds, and funds pledging higher, rather than lower-measure, inflation-linked annual increases.
When a company operating such a ‘final salary’ pension scheme cannot meet its promises to pensioners, the Pension Protection Fund (PPF), a UK lifeboat scheme, steps in. The PPF then manages the assets of the scheme according to its rules and limits, and pays reduced pension payouts to these retired workers caught up in the shortfall.
Experts have calculated that if schemes were to pay out the full amounts initially promised, the schemes would be faced with a shortfall of £935bn. The PPF has calculated that, if it had to step in and provide the lower level of pension payouts, the deficit would be £383bn.
Compromise deals may become possible, as are being pushed for and which, at the time of writing, were to be considered in two major pension reviews in Britain. In such a compromise, members of a scheme could, for example, be required to forego some of their benefits and accept less than what they were entitled to, but more than what a PPF rescue may offer them. But, either way, affected pensioners are still in a losing situation.
Under PPF rules, writes Dyson, the majority of already retired members of the scheme will continue to be paid as before, but most yet-to-retire members will receive only 90% of what they were promised, while some groups – such as those who retire early or have big pensions – might even get less.
It makes much more sense for expat UK pensioners caught up in this storm to move their pensions into a QROPS. The value of UK pensions is being threatened by a range of factors, and not only the pension schemes deficit, although the latter certainly projects a nightmarish scenario. In a QROPS you will be able not only to defend your retirement wealth but also grow it further.
Among the advantages of QROPS is the increased flexibility of underlying investments and currencies. Through a QROPS, depending on the chosen jurisdiction, it is also possible to utilise 100% of one’s pension for your beneficiaries.
You do not have to live in the country where your pension will be placed in a QROPS. For example, expats and returnees living in South Africa can move their pension to a third country.
If you are an expat with a pension in the UK that is facing these serious threats, is it not time you considered moving your pension savings into a QROPS?
Don’t delay. Simply fill out our contact form and one of consultants will get in touch with you.