Important Changes to Contracted Out Benefits and QROPS Consequences
Posted: 06 September 2009
Important Changes to Contracted Out Benefits and QROPS Consequences
QROPS are Qualifying Recognised Overseas Pension Schemes and are increasingly becoming the most suitable option in many retirees, returning nationals and migrants financial strategies. It is essential that your current retirement planning factors in the UK’s “reducing free benefits”, one of which is Contracting Out.
Are you Contracted-Out of the State Second Pension (previously known as the State Earnings Related Pension Scheme or SERPS)?
If the answer is yes then there are important changes to your benefits that you should be aware of.
If you have “Contracted-Out” it means that you have selected to receive a contribution from the Government to a suitable personal, occupational or stakeholder pension scheme instead of building up additional pension under the State Second Pension. These contributions are commonly known as rebates.
There are a few changes due to take place but perhaps the headline change is that the Government will soon cease to make rebate payments to the current suitable personal, occupational and stakeholder pension schemes. It is estimated that this change will take place from 6th April 2012; however the exact date is yet to be fixed.
How Will This Affect Me?
Once your Contracting-Out rebates cease in 2012, the Contracted Out benefits in your personal, occupational or stakeholder pension scheme will cease to accumulate with the exception of investments returns. Instead, you will build up State Second Pension benefits.
To the individual, the downsides of this action are that you will only be able to access this income from “State Retirement Age” (SRA) where if Contracted-Out it you can draw an income from age 55 (from 6th April 2010). As you could have seen in the press over the last few years, the pundits are suggesting that the SRA will increase; this is Offshore QROPS belief as well. Our International connections in countries such as Australia and New Zealand, have confirmed this is clearly not just a UK phenomenon
Furthermore you will not be able to claim a portion of your State Second Pension benefits as a tax free lump sum, a valuable benefit that is currently available from your personal, occupational or stakeholder scheme. As a potential migrant you should also be aware that currently payments from the State Pension benefits received by residents of such countries as Australia and New Zealand are not index linked and will reduce in real value terms.
Once these rebate payments cease, those migrating after that date will see reduced transfer values that could be made to QROPS. In addition, you may find that more of your income in retirement in the country you migrate to is taxable as income. This is particularity the case for Australia and New Zealand.
The following forthcoming changes which take place prior to April 2012 need consideration.
Tax Year 2009/2010
Changes will take place to the way in which the UK’s Department of Work and Pensions calculates State Second Pension benefits as will the way in which contracted out rebate payments are calculated.
For those who are basic rate tax payers, there is likely to be little or no change. But, if you earn around £40,000 per annum and upwards you will find that the maximum reduction in your contracted out rebates could be up to 10%. Benefits available under the State Second pension will also reduce in a similar fashion.
Tax Year 2010/2011 – 2011/2012
In addition to the above, there will be a further change to the contracted out rebates calculation and State Second Pension if your earnings are around £31,000 per annum and upwards. The actual reduction will depend upon the level of your earnings over £31,000 but it is likely that the maximum reduction in contracted out rebates will be approximately 20%. The reduction in State Second Pension will also be similar.
What Should I Do Now?
Everybody’s situation is different so there is no simple answer. As a migrant or returning national, these changes could significantly affect your retirement income, its tax efficiency and your possible future QROPS benefits. You should ensure you speak to a suitably qualified and experienced financial adviser.
It is essential that you plan carefully and check the credentials of those giving advice, here are a few checks
1. How long have they been in business? There are a lot of new companies springing up, some may well have the very best intentions, but do you really want to be dealing with a start-up? Look on the Financial Services Authority web site register http://www.fsa.gov.uk/register/home.do
2. Where are they registered? Ensure they are UK based.
3. Check their web site. Don’t be fooled by the glamour factor. Look for names and contact details.
4. If you are lucky enough to get through to a voice, (avoid at all costs email only, PO Box Number and addresses outside of the UK) – make sure that they have the right support team and you are not just speaking to a marketer.
5. Will they meet you face to face or will they want to conduct matters all by email and by the phone – we suggest that you opt for face to face meetings where possible.
6. Moving a pension to a QROPS may be fine as regards your pension, but the real acid test is what advice can they give you about the other issues such as Wills, Non-Pension Assets and ongoing service in your new country of residence?
You really need to do your homework on this before entrusting your financial future to an advisory firm.
Planning your finances in good time prior to your migration will help make your migration a success.
For further information on your emigration finances, pensions and QROPS, please contact the team of specialist advisers at Offshore QROPS on 01483 202072 who will be happy to assist you.
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