Switching a final salary pension to an offshore Qualifying Recognised Overseas Pension Scheme (QROPS) is a taboo topic for many IFAs for no good reason.
A final salary pension is undoubtedly one of the most generous pensions any retirement saver could expect.
Offered by a dwindling number of employers, the pension offers a retirement income based on the length of time an employee spends with the firm and their earnings at the time they leave their post – hence the term ‘final salary’.
The factors that make a final salary scheme ‘gold-plated’ are the retirement income is guaranteed and index-linked, so inflation does not erode the value of the benefit.
Pensions have changed
Some of these pensions come with other benefits, such as payments to spouses on the death of the employee and even guaranteed annuity rates from some older schemes.
None of these benefits are cost effectively replaceable with a QROPS.
However, the financial world has changed in the past decade, and some final salary expat savers might benefit from a switch.
Many employers are offering enhanced transfer values to persuade savers to leave their final salary schemes.
The offers are typically 30 or 40 times the projected final pension value – so a £20,000 a year pension can turn into a transfer fund worth £800,000.
Couple this with pension freedoms allowing easy access to cash and switching from a final salary scheme and the financial benefit of switching is worth considering for many.
Retirement savers expecting a shorter lifespan might also benefit from a switch. Where a final salary scheme offers a 50% spouse pension if the member dies, inheritance rules allow families to draw down all the unspent fund.
It’s easy to see that switching out of a final salary scheme into a QROPS is no longer taboo for some expats. The market is changing and when the guidance from the Financial Conduct Authority was published golden goodbyes and pension freedoms were unavailable.
All QROPS can offer pension freedoms after April 2017, when HMRC lifts the current rule that bars pensions based outside of the European Union from the scheme. That does not mean every QROPS will, but the change will bring more choice into the market.