Pension Awareness Week
This year’s Pension Awareness Week falls during a time of economic downturn. It is unsurprising then that nearly half of the population of the UK is likely to continue working even past their state pension age to meet their financial goals. Between 2018 and 2020, advice was sought for £30.3 billion of Defined Benefit (DB) pensions of which £20.1 billion was for transfers to a defined contribution scheme.
A DB scheme has specified benefits, where you can access different assets or funds in the scheme that will pay you a benefit as per certain terms. Based on your input into the fund, manner of investments, and pay-out, it can increase or decrease. In any case, the specified benefits remain constant.
For a DC scheme, the contribution is specified, not the benefit. From a pool of assets that you can claim, the amount of benefit is determined by how big or small the pool is. Pension transfers are a popular option, especially among those who live abroad. A few factors that go into considering a transfer are as follows:
1. Risk Appetite
Risk is something that people generally worry about regarding any investment. Pension schemes are no different. DBs are considered less risky because their performance does not affect the benefits that you can expect. It is possible that the scheme is unable to meet its payment obligations and consequently collapses. The scheme then falls into a Pension Protection Fund whereby you cannot transfer out and may receive reduced benefits.
The DC scheme is riskier because its benefits are reliant on asset performance. So, if you do not use a legitimate financial planner and it is poorly invested and managed, you stand to lose out. At the same time, if you use qualified financial advisers who will manage it well, you can expect sizeable benefits.
2. Retirement Plans
A transfer may also be determined by a transfer value, with those having a higher value being advised to go through with the transfer. A higher transfer value results from a higher income. If your pension makes up only a small part of your assets accumulated over the years, it also plays a smaller role in your retirement plan. In this scenario, a transfer allows the funds to become inheritable. Some may prefer receiving a lump sum over periodic payouts, particularly if they have loan liabilities and other obligations.
To retire abroad, you will have to account for currency differences. The exchange rate difference and inherent fluctuations may make budgeting challenging.
The DB does not offer flexibility regarding the fund’s investment strategy, whereas a Self-Invested Personal Pension (SIPP) does. A SIPP is often tailored to your needs by an adviser who understands the market and your goals. Both pension options have different benefits and characteristics. Your choice rests on your long-term goals. Whether by current income or expected savings goal, you can opt for the flexible pension plan.
It is important to bear in mind that retirement age, access to lump sum benefits, death benefits, and currency options vary between the DB and SIPP. If you are unsure of which option is suited for you, it is best to speak to a qualified financial adviser and draw up a systematic plan for your future.
While your deposit into a pension scheme may be tax-free, withdrawals may be subjected to a certain tax rate. This is another reason people consider transferring their pension. Depending on the UK’s agreements with other countries, you may have to pay little to no tax. A fixed amount received under a DB is subject to tax in the UK regardless of your country of residence. A DC scheme can reduce this liability.
Pension Awareness Week, highlights the importance of planning ahead for retirement and making sure you know what pension transferring entails if you are an expat. With one in five people unaware of how much they have contributed towards their pension, planning for retirement will be a challenge. Our golden advice is to start early. This gives you the time to adjust your plan if required and start building wealth early on. At Hoxton Capital Management, we can help you put together a plan to safeguard your future.