Defined benefit pension transfers have been hotly debated in the press lately, and many advisers have been castigated for their lax attitude to advice around this area of planning, writes Nicholas Toubkin, senior client director at Strabens Hall.
I am firmly of the opinion that the vast majority of individuals holding a defined benefit pension scheme should retain this valuable benefit.
That said, I currently see a window of opportunity for HNW and UHNW internationally mobile individuals who have worked for a period of time in the UK and who intend to or already have relocated back to their country of origin in retirement.
Who could benefit?
This type of client will have a significant asset base that they can draw on in retirement to fund their lifestyle, so won’t need to rely on their defined benefit scheme to fund their expenditure.
Their reference currency will typically not be GBP, meaning that the value of a sterling annuity stream to them might be less useful than to a UK-based individual.
For this type of person, it is worth seeking advice regarding the scope to transfer away from their defined benefit pension.
Some points to consider are:
- Defined benefit transfer values have rarely been higher. This is certainly a factor that might inform a client to consider transferring away from their scheme.
- Also, it is possible to transfer a DB scheme to a UK based pension, or alternatively to a recognised overseas pension scheme (Rops).
There are various possible advantages to transferring to a ROPS, namely:
- The ability to manage the underlying investments in a currency other than GBP, which can be difficult to achieve with a UK-based Sipp.
- Lifetime allowance benefits. A transfer to a Rops scheme triggers a lifetime allowance test at the point of transfer. This can be a benefit both for individuals with pensions currently under the lifetime allowance, as well as those already over it.
- The capacity to have the investments managed in a manner consistent with the individual’s other wealth.
- The defined benefit pension dies with the pensioner (or their spouse), whereas if transferred, any residual funds within a Rops scheme can be passed to the next generation in an inheritance tax efficient manner.
It is also worth bearing in mind that the capacity to transfer a pension to a Rops scheme was conferred as a result of the EU’s freedom of movement of capital legislation.
There is no clear visibility as to the future availability of the scope to transfer to a Rops once Brexit is fully completed, and so it is conceivable that this area of planning will be restricted or removed in the future.
Any internationally mobile HNWI with a defined benefit pension should take the opportunity to review their options as regards their pension whilst this planning opportunity remains.
This article was written for International Adviser by Nicholas Toubkin, senior client director at Strabens Hall.