UK: Pensions - Consider Your Options

So it's one month into the New Year. Might I be so bold as to ask how your 2013 resolutions are going? Fear not. Lest you've forgotten, this is a finance column - so your weight, consumption of alcohol and tobacco, and whether you've yet made any use of that trial gym membership you were given for Christmas, are not my concern. I'm conducting an audit of your financial resolutions.

You know how it goes. Spend less, pay off those credit cards, save more etc. And the resolution that has gained more currency in recent years - organise, or maybe re-organise, your pension arrangements.

Why are pensions taking up so many more column inches these days? I seem to be spending much more of my time these days speaking to individuals and intermediary firms about pensions and I think there are several straightforward reasons for the increasing level of interest.

Put simply, the realisation is dawning (or perhaps it dawned some time ago) that not only is life expectancy increasing, but the population itself is ageing. What I mean of course is that the proportion of older people compared to younger generations is increasing year by year. This is due to the double effect of a reducing birth rate coupled with advances in health care and a better awareness of health issues in general.

There is nothing revolutionary in any of this of course. What has changed in recent years - as always this is just my own personal opinion - is the impact of the financial crisis, which affects everyone in one way or another. Five years on and the global economy shows no sign of bouncing back. One of the consequences is that individuals have to take more responsibility for their financial arrangements to see them through later life after retirement. As we all know, more people are living well into their 80's, 90's and beyond, so even retiring at 65 generally means you are making financial preparations for a long time ahead. And, of course, for anyone wishing to retire earlier the situation becomes even more critical.

When considering pension arrangements, the general advice has always been that the earlier contributions are started the better the final result. But in reality do young people in their 20's actively consider pensions these days? When I was in my 20s the bank for which I then worked forced me to join their final salary scheme - more of which shortly. But these days, I can understand why "twenty somethings" feel that other things take priority. Paying off student loans, saving for deposits on first homes or even just rental contracts are just a few examples. And then life changing events such as marriage and children come along too.

I remember when I was 25 that my projected retirement age of 60 seemed a very long way away. But of course, as my fellow quinquagenarians will attest, it seems to catch up with you very quickly. So it's rather disconcerting to read in the press of poor investment performance, less than perfect advice being given (or even worse, no advice at all) and the like. Couple these negatives with the apparent complexity of available options and one can see why the whole issue of pensions can appear to be so off-putting.

So let's turn to a couple of terms you will see in the press and try to demystify these confusing acronyms. I begin with the most commonly seen - QROPS - which stands for Qualifying Recognised Overseas Pension Scheme. These can be used by British expatriates and others who have spent time working in the UK and have built up a pension there. QROPS enables them to transfer the value of such pensions into a non-UK scheme. But why would they do this? The reason is that leaving the pension behind in the UK means that it remains subject to UK pensions law. UK income tax may be deducted at source - regardless of where one might now be living; UK investment restrictions continue to apply; and, on death, succession issues cause real concern.

The legislation that governs QROPS was introduced in 2004 although it came into effect two years later. Eagle-eyed readers of the financial press may also have seen reference to a similar looking acronym - QNUPS. Again this refers to a pension governed by underlying UK legislation and the acronym itself stands for Qualifying Non-UK Pension Scheme.

The two types of scheme are similar but each is used for different reasons. A key differentiating factor is that funds that have not benefitted from UK tax relief should be used in a QNUPS. If one has a QROPS, it is always going to be a QNUPS. But a QNUPS is not necessarily going to be a QROPS. Are you still with me? It's not difficult to see why you should seek advice.

But why should this concern us in Gibraltar? In the case of QROPS, the answer is that these types of arrangements concern individuals with a UK pension who are living abroad (or are able to demonstrate an intention to emigrate), so one can easily understand why the English-speaking press in Spain is awash with pension service providers trying to promote their pension schemes.

But the same rules also apply to anyone who has a UK pension and who has now left the UK. My advice to anyone who has worked in the UK at some point and therefore has a UK pension, is to consider carefully whether or not a QROPS might be suitable. It may be that the UK pension is relatively modest. If one worked in the UK for just a few years this is likely to be the case. So you should check whether the QROPS' provider you are speaking to offers a "lite" version of their scheme - typically these are more keenly priced, although there may be restrictions on the investments allowed within the pension and so on.

As always, professional advice should be sought as early as possible because individual circumstances need to be considered. What works for your friend at the golf club may not work for you. For example, I am often asked if final salary pensions can be switched to a QROPS. They can, but one needs to consider very carefully whether this would be a wise move. Such pensions (if you can get them at all these days) are unusually highly-prized because the pension you receive is based on the final salary that you were drawing when you left the company concerned. Index-linked schemes, where future pension payments match inflation, are of course the best of all.

The one thing that is clear with pension planning is that you shouldn't wait until you retire to start considering your options. It could be that you are living on your pension and other investments for almost as long as you are living on a salary or running your own business. And that goes for your dependents too. It therefore makes sense to pay as much attention to your future needs in financial planning as you do your current ones. So organising, or re-organising, your pension arrangements is one New Year's resolution that you should stick to. Now off you go the gym!

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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