With leading newspaper headlines announcing that UK pension schemes are at breaking-point post-Brexit, it is important to analyse your options carefully. One interesting possibility, depending on your situation, are QROPS – Qualifying Recognized Overseas Pension Schemes. So, let’s consider your QROPS Brexit options.
To start, let’s review why Brexit puts Pensions at risk. First, pensions weren’t in very good shape even before it: with life expectancies increasing and interest-rates at all-time lows, the amount that they have to pay out has been increasing, while the amount they receive has been falling. Brexit compounded this by leading the Bank of England to reduce rates even further, meaning that the bonds in the UK pension schemes’ portfolios provide even less income. Also, if the UK faces economic difficulties in the coming years, the stocks and property that they hold also aren’t likely to perform very well.
Of course, we’re referring to Defined-Benefit pensions – those that promise a specific income. Defined-Contribution pensions, which only invest the money you contribute, don’t make that commitment – you’re the one who bears these life-expectancy and market risks. For the past years, Defined-Benefit pensions have been considered the ‘gold standard’ – something to hold on to if you were lucky enough to have one, because no Defined-Contribution pension is likely to provide you with as much income as a Defined Benefit one.
However, Defined Benefit pensions may reach a point where they are insolvent and simply don’t have the funds to keep their commitments, and Brexit has made that a little more likely. Also, although Defined Contribution pensions aren’t at risk in the sense of becoming insolvent, your investments in them are subject to market swings and could suffer if the UK economy continues suffering as a result of Brexit.
QROPS – Qualifying Recognized Overseas Pension Schemes, may be an option if you qualify for them. These are pension schemes that are not in the UK, but have been deemed by HMRC as being, to a degree, comparable to UK pension schemes, and thus it is possible to transfer funds from UK pensions to QROPS, without incurring penalties that apply if you transfer to non-qualifying schemes.
Apart from being located outside the UK, QROPS usually offer pensioners much greater flexibility in how the underlying funds are invested. So, if you have a negative view of the UK Economy post-Brexit, for example, or if you want to ensure that you’ll have an appropriate income to retire abroad, you can choose to diversify your investments globally, rather than invest mostly in UK stocks and bonds.
If you are tax-resident outside the UK, QROPS also offer tax advantages, because they can be based in low-tax jurisdictions.
There are also a number of other additional flexibilities in the details of how QROPS operate, as well as some important points to be aware of in terms of restrictions, so we’ve written extensively about QROPS and even have a short video to make things easier
QROPS and Brexit are topics to be seriously considered in your financial planning. The implications can be complex, making decisions in such a volatile environment can be challenging, and just the thought of one’s pension being at risk can be frightening, but it is important to consider your options.