November, 09, 2016

Should I transfer my UK Defined Benefit Pension to QROPS or SIPP?

Should I transfer my UK Defined Benefit Pension to QROPS or SIPP?

The spiraling deficits of the 5,945 UK Defined Benefit (DB) pension schemes are widely reported. PwC put the latest deficit at an eye watering £710 billion after Brexit forced Gilts to historic lows and piled more misery on the 84% of UK Pension funds that are in trouble.

The pension schemes are in crisis after many years of poor investment performance, rising life expectancy, the failed de-risking of schemes by over investing in Corporate Debt and the continued annual tax raid on pensions started in 1997 by Gordon Brown. His removal of tax credits on dividends has cost UK pensions a staggering £200 billion so far!

So just how big a problem is this? The recent stockmarket and debt crises’ have rendered us immune to the enormity of figures like £710 billion which is the equivalent to the total market capitalisation of the top 9-10 companies in the FTSE100 index, a statistic that should shake us to our core. Companies are already seeing significant impact on their ability to honour dividends to shareholders. IAG, owners of British Airways, Air Lingus and Iberia have had to tether the payment of dividends to the repayment of their pension deficit; an alarming Board Room constraint, but hardly surprising for a company with a pension liability twice its total value on the UK stock market! Tesco have revealed their deficit has soared to £5.9 billion and is a trading constraint.

Can we trust Government to act, and is the crisis recoverable? Well, neither the Conservative nor Labour governments have a good record when it comes to pensions. Bonfire night this year saw the 25th anniversary of the death of Sir Robert Maxwell, the newspaper magnate accused of a £440 million raid on the Mirror Pension Scheme, and a quarter of a century later the regulators still appear powerless to protect BHS employees fearful of the £570 million hole they believe has been created by underfunding and greed.

Throughout these years we have seen the demise of a major insurer with the collapse of Equitable Life after they declared they were ‘unable to honour the guarantees made to investors’. We have also seen the pension schemes of household names such as Kodak, British Midland Airways, MG Rover Group, Royal Doulton, Woolworths and Findus (to name just a few) collapse and leave pensioners with broken promises and shattered retirements.

There are a few Government stalwarts like Frank Field MP and Baroness Roz Altman that call for action, but little is done, because although the Government knows there is a major pension’s crisis looming it is equally fearful that corrective action and reduced pensions will never be a vote winner.

So what are the recovery options? Increasing investment returns to stop liabilities and deficits growing faster than returns has already failed. In fact, most schemes have actually de-risked by increasing exposure to Corporate Bonds. But this has backfired, Bonds are trading at the extremes, yields have tumbled and many fund managers fear that rising inflation could trigger interest rate increases and capital losses on Bonds. Indeed, the ‘bursting’ of the Corporate Debt bubble could be the final nail in the Defined Benefit Pensions coffin!

It is clear that further regulation hasn’t helped. Many believe this has already proven a costly failure. But one alternative suggestion has been to allow schemes to report less frequently to give them some breathing space. A grave concern when 67% of FTSE350 schemes currently fail to report correctly as this would continue to allow the problem to be swept under the carpet.

One pension actuary suggested we pray for better Gilt rates, which we can all sympathise with, but should hardly form the basis for sound retirement planning. Although with Gilts continuing at these levels some firms have looked at ‘offloading’ their pension liabilities to Insurance Companies. However, with an estimated £420 billion potential buyout market the pension deficits are much larger than the insurance industry’s appetite for the problem.

So is the only option open to trustees to reduce benefits? The reaction to this statement by most deferred pension members is to immediately shout ‘foul, they can’t do that, my benefits are guaranteed!’ only to find out they are definitely NOT guaranteed, are merely a promise, that promises get broken every day and that schemes have started this process already. Changes such as age equalisation, cutting increments down to CPI instead of RPI and slashing the Lifetime Allowance by 80% were just the start. More recent suggestions have focussed on stopping future accruals or cutting spouses benefits and Government and Industry ‘task forces’ are looking at how they could implement these cuts, right now!

So, should you transfer your UK Defined Benefit pension to a QROPS or SIPP? You definitely need to make an informed decision, and can only do that when you have all the facts. This means that you must formally ask your frozen pension schemes for transfer value details and now is a very beneficial time to do this. Why? Because the flipside of low Gilt yields is a higher transfer amount and also because some companies are offering enhanced transfer values to incentivise people and reduce the effect on the company balance sheet.

Ask a UK Qualified Adviser to help you with the process, as they will not only be able to ensure the correct details are requested from your old pension company but will also be able to advise if a transfer is best advice for you. The benefits can be substantial, with no future Lifetime Allowance restrictions, better pension income for you and your spouse, better death benefits for spouse and/or children with full return of fund, no UK Income Tax or Inheritance Tax on the death benefits, earlier retirement date (any time after age 55) and total control of your future and your retirement income.

The next step? Make an informed decision. Call UKPensionGuru, now.

Mob: +41 (0) 79 891 51 34

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Should I transfer my UK Defined Benefit Pension to QROPS or SIPP?

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