Thursday 19 September 2019

What's best way to transfer UK pension?

Your questions answered

Gerry Stewart Fagan & Partners

Query: I worked in the UK for a number of years and have a frozen British defined benefit (DB) pension scheme from my time there. I want to transfer this scheme into an Irish-based Qualifying Recognised Overseas Pension Scheme (QROPS). What are the pros and cons of transferring a pension into a QROPS? Are there any QROPS rules and restrictions which I need to play by? Also, I have quite a substantial pension fund built up in Ireland too - from an Irish defined contribution (DC) scheme I am in with my current employer. If I transfer the British pension to a QROPS, will that eat into the standard fund threshold (the maximum pension an individual is allowed at retirement for tax purposes) I'm entitled to in Ireland? Martin, Co Kerry

Answer: The QROPS may be more convenient and easier to administer and there will be no currency issue. If your UK pension scheme has a value in excess of £30,000, you will also be required to take advice from an adviser regulated by the UK's Financial Conduct Authority - which will have an additional cost.

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You also say that the UK pension is a DB pension - meaning that you will get a guaranteed pension income based on your salary and service (subject to the solvency of the UK pension scheme). You will have to weigh up the guarantees a DB pension provides as you will only be able to transfer the pension to the equivalent of a DC scheme here in Ireland. Therefore, you may have to consider investment risk as you would be losing the DB guarantees but bear in mind these guarantees are only based on the solvency of your UK pension scheme.

A lot of the pension differences between UK and Ireland have been harmonised - however, sometimes one jurisdiction may be more beneficial than the other. The maximum tax-free lump sum from all pensions in Ireland is €200,000 per person. If the potential tax-free lump sum on retirement from your UK fund that is transferred to Ireland brings you over this maximum, then the part of the lump sum in excess will be taxed in Ireland - whereas it could be paid tax-free in the UK.

You may be able to retire earlier than the normal retirement age of the UK pension, subject to a minimum age of 55.

If you transfer your British pension to Ireland, your transfer value is tested against the UK lifetime allowance of £1m. If your fund is higher than this, there may be an immediate exposure to UK tax and this would be deducted before the transfer is made. The UK transfer does not however eat into your Irish standard fund threshold of €2m. If you keep your pension in the UK, a paid-up DB pension will only provide a pension for a dependent in the event of premature death so there is no death benefit entitlement. If you move it to Ireland, the transfer value or value of the pension on date of death is payable to your estate and your pension won't be liable to UK inheritance tax. If you have been resident in the UK in the current tax year or any of the previous 10 UK tax years, you may be liable to UK tax on your transfer payment to Ireland. If you withdraw from your QROPS within the first five years, the transfer will be subject to UK tax rules.

Move out of defined benefit?

Query:  I work for a semi-state company and I have a defined benefit (DB) pension. We have the option of changing to a defined contribution (DC) pension. I am 35. New recruits to the company are automatically enrolled into the DC pension scheme - they don't have the option of joining the DB scheme. My employer doesn't have as many workers paying into the DB pension as before - because many of the workers in the DB scheme are now retired, or are approaching retirement. Should I stay in the DB scheme - or change to the DC scheme? John, Dublin 3

Answer: A DB pension will normally pay a guaranteed tax-free lump and guaranteed pension upon your retirement. The monetary amount of the benefits will be dictated primarily by your salary and service. The risk of providing these benefits remains with the employer. On premature death, there may be a dependant's pension.

In general, the most common issue for DB schemes is solvency - that is, the ability of the DB pension (or employer) to pay the proposed guaranteed benefits.

A DC fund will be made up of your contributions, your employers' contributions, and any positive or negative investment returns on these contributions during your working lifetime. The investment returns will be based on your attitude to risk - so the risk of providing retirement benefits switches from the employer to you. Retirement benefits are not guaranteed.

At retirement, the benefit choices will be different. For example, one benefit of a DC fund is you will normally be able to withdraw up to 25pc of your accumulated fund as a tax-free lump sum and the balance can be used to provide you with a pension. There are Revenue Commissioner limits which need to be considered.

Another benefit of the DC scheme is that the full value of the accumulated fund would be paid to your estate as a tax-free lump sum on premature death before retirement and any balance after retirement would become part of your estate.

Compulsory pensions

Query: I'm concerned about the Government's plans for a mandatory pension. I understand that under that plan, workers who do not yet have a pension will have to put up to 6pc of their salary into that mandatory pension from 2022. My husband and I have a joint income of €55,000. (My husband earns €30,000 and I earn €25,000). We have high mortgage repayments each month and high childcare bills. Add this to the cost of living (electricity bills, groceries and so on), and we have little or nothing left in our wages by the end of each month. We simply could not afford to pay into a pension at the moment - and I don't imagine things will improve by 2022. What happens if we can't afford to pay into the mandatory pension? Do we have any way out of the pension? Anne, Lusk, Co Dublin

Answer: The Government plans for a mandatory auto enrolment (AE) pension scheme may change between now and the proposed implementation date. They have provided no details on how your concerns about affordability will be assessed but there is an opt-out clause after six months.

Presently, the plan will be compulsory for all private sector workers aged over 23 and under 60 who are not in a 'prescribed minimum standard' private pension arrangement and whose gross earnings are over €20,000. This €20,000 limit will be fixed for the first five years. Each employer will compulsorily enrol their employees into an AE Scheme. The required contribution will be 1pc of gross earnings in the first year - taken from your net income (up to an earnings limit of €75,000). This 1pc will rise by a further 1pc in each of the first six years - to reach 6pc after six years. The proposal is that each employer will pay a matching contribution and the Government will also pay a contribution up to one-third of your contribution (up to the same earnings limit of €75,000). As mentioned already, these are proposals for the moment and may well change by the time compulsory pensions are introduced (if they are).

  • Gerry Stewart is partner with Fagan & Partners (f-p.ie)
  • Email your questions to lmcbride@independent.ie or write to ‘Your Questions, Sunday Independent Business, 27-32 Talbot Street, Dublin 1’.
  • While we will endeavour to place your questions with the most appropriate expert for your query, this column is not intended to replace professional advice.

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