by Andrew & Rachel Ketley
Disclaimer: This information is based on our experience and research and does not constitute financial advice!
Originally published on https://britishingermany.org
This article is meant to support anyone who worked in the UK and has a private pension understand their options and decide how to manage that, with an eye on Brexit. It does not relate to public government pensions and does not constitute financial advice.
The Basics: Types of Scheme
Private pension schemes come in two flavours:
- Defined Benefit (DB)
Your employer guarantees a percentage of final or career-average salary on retirement, with the exact percentage dependent on years of service. DB schemes typically reward long service with one employer, and may provide other benefits such as inflation-protection on pension payments. DB schemes can usually only be moved by conversion to DC.
- Defined Contribution (DC): You pay your contributions each month. What you get on retirement depends on investment returns over the life of the scheme and annuity rates available on retirement. Modern ‘stakeholder’ DC schemes are designed to be easy to move and can be consolidated; older ones may impose exit charges.
In both cases, contributions reduce the employee’s taxable income
Typically each employer has their own preferred pension provider, and starting a new job means starting a new pension scheme. If you change jobs multiple times, you collect multiple schemes with multiple providers.
Under current legislation, you have the right to transfer any private scheme, though DB scheme providers may impose more onerous rules.
Transfers within the UK to another registered scheme are always free of tax. Closing a pension scheme early, on the other hand, attracts a tax charge which can be up to 55% of the scheme value.
The treatment of transfers abroad depends on whether the destination is functionally equivalent to a UK scheme – a Qualifying Registered Overseas Pension Scheme (QROPS). The basic rule is that you are not allowed to access funds before age 55. If the destination scheme does not meet this test, the transfer is deemed an unauthorised withdrawal and subject to a 55% tax plus penalties. This rule applies for 10 years after the initial transfer.
Transfers overseas are free of tax provided the destination scheme meets the rules and:
- The scheme holder and scheme are both in the EEA;
- The scheme holder and scheme are both in the country;
- You work abroad and the scheme is your employer’s occupational scheme.
All other otherwise valid transfers attract a 25% tax charge.
Additional Rules for DB
Transferring out of a DB scheme involves relinquishing your defined benefits. As this can be financially very disadvantageous, it is mandatory to obtain advice from a registered UK IFA (Independent Financial Advisor) before proceeding with the transfer. Fees for this this advice can be high, potentially running into the thousands, and IFA’s may not appreciate the additional complexities of Brexit.
The basic procedure is as follows:
1. Obtain a valuation from the scheme provider. This is the current value of your future benefits.
2. Obtain advice and proof that advice has been obtained.
3. Submit transfer request.
QROPS Transfers in Detail
- HMRC maintains a list of registered schemes. This list has only a semi-official status: A scheme on the list has provided information to HMRC that it conforms to requirements and has obtained a reference number, but HMRC makes no guarantee that any given scheme is a valid QROPS.
- The originating scheme’s transfer paperwork must be completed. The scheme will have separate forms for QROPS transfers than for UK transfers. Not all staff necessarily understand this, so it is important to be very explicit when requesting the paperwork. This must be completed partly by the pension-holder, and partly by the recipient scheme.
- The recipient scheme will have an application form which needs to be completed.
- The originating scheme will almost certainly want to see the recipient’s QROPS registration number, and may ask for further information, such as the recipient scheme’s governing rules.
- A completed form APSS263 must be submitted to the originating scheme.
- The two scheme administrators must then complete the transfer.
Why Should You Transfer?
- Eliminate currency risk during the investment phase – there is a significant risk that sterling will continue to decline in the longer term.
- Eliminate currency risk during the pension phase – if you transfer you scheme to a euro-area country, you will take your eventual pension in euros, not sterling.
- Eliminate political risk – the UK government is not above taking a goose-plucking approach to taxation (‘the most feathers for the least hissing’), and pension schemes of overseas citizens, especially ones who cannot vote, may be a tempting target. Once the UK is outside the common market, EU financial market regulation no longer applies to UK schemes.
- After Brexit, the 25% exit charge may apply to transfers to EEA and EU countries.
- The historically low interest rates can lead to unusually high valuations for DB schemes.
Why Should You Not Transfer?
- The UK is a very competitive financial market place. Germany is not. Pension scheme administration expenses are much higher in Germany, which can significantly reduce investment returns, lowering eventual pension payments.
- If you move to another country (particularly a non-EEA country) after transferring, this could invalidate the transfer and trigger a tax charge. Theoretically, the EU and EEA constitute a single jurisdiction for the purpose of this rule, but how the rules will be interpreted after Brexit is unknowable.
- Losing a DB guarantee may be too high a cost, especially if DB pension payments are inflation-protected.
Rachel has a modest local-authority DB scheme, and we each have two DC schemes. I have consolidated my pension funds as I have changed jobs.
We have a very pessimistic outlook on the future of the UK, and are highly confident that we will be staying in Germany.
I investigated companies offering a pension-transfer service, but found shark-invested waters. The companies I spoke to seemed unable to grasp the risks of Brexit. One recommended a scheme on the Isle of Man, which will not only be leaving the EU with the rest of the UK, but is also not regulated by the Financial Services Authority. I decided to stick to a DIY approach.
The QROPS list has five entries for Germany. Of these, I spoke to:
– Hamburger Pensionskasse: This is a membership-based organisation. Individuals can join only if their employer is a member.
– HUK Coburg: They have given up on the UK as too complicated to deal with.
– Alte Leipziger: Has considerable experience in QROPS transfers and one of the lower administrative cost ratios in the industry. They also have an online portal for managing funds choices.
The choice seemed clear.
The key contacts at Alte Leipziger for QROPS transfers are Martin Viebig and Astrid Köhler. They respond promptly to emails and are available for telephone calls when necessary.
The Alte Leipziger paperwork is extremely confusing. They like to use the same form for wildly different products, which makes it very easy to fill in the wrong boxes. On the other hand, it is easy to speak to someone on the phone to resolve queries.
Two transfers completed relatively smoothly, one is still in progress and one cannot be started yet. The process, however, is very like buying a house – you have to check in on both sides regularly to make sure that they are not waiting for each other, and prod them (politely but firmly!) if necessary.
The DB scheme we decided to leave in the UK. It is relatively small and inflation-protected on the one hand, and we did not think we could meet the strict timetable for quotation, advice and transfer request imposed by the local-authority provider on the other.
If you have specific queries not addressed above, please feel free to get in touch – your questions help us improve the information we provide, and we will do our best to answer (always under the proviso that we are not financial advisors and all answers are on a best-endeavours basis only!).