Frozen Pension Plan Options – the facts and the myths
There are lots of websites that encourage expats to transfer their UK pensions offshore. Every week, we will look at the most popular reasons, often cited as 10 Reasons to use a QROPS by overseas websites for moving a UK pension to a QROPS, one by one. How many of these reasons for moving to QROPS are valid and how do they compare with using the UK counterpart- the SIPP? This week we focus on the extensive use of the term “Frozen UK Pension” and whether this is correct.
This is our third article, which discusses why people are told “transfer your British frozen pension plan”:-
Transfer your Frozen Pension Plan
Frozen gives the impression that the pension in the UK is fixed, unyielding, inactive and will not change in value. Is this true?
Let’s look at the two types of pension and your Frozen Pension Plan Options – Final Salary and Money Purchase*
Final Salary Pension
This is a pension promise for retirement, based on service and salary. When a person leaves employment, the pension is deferred. However, the value of the pension does increase from the date of leaving to retirement.
This increase in value is determined by the make-up of the scheme and legislation. Legislation pays a key part in the increases. One element, known as the GMP ( Guaranteed Minimum Pension ), also has increases laid out by legislation- depending on date of leaving.
This could be anything between 4.5% and 8.5% pa to the date of retirement – clearly, hardly frozen at all.
If a large part of the pension is GMP then this is quite a rate of increase that is not going to be matched if transferred to a QROPS or SIPP.
The non-GMP element also increases with inflation (or the consumer price index ) with some limitations depending on the scheme rules.
The only way to analyse this properly and understand your Frozen Pension Plan Options is to speak to a UK pension adviser directly- no one else is authorised to discuss this, whatever you may be told.
The FCA are clear on this with their Conduct of Business Rules
Far from being frozen, these pensions provide important protection against rising prices and these guarantees should not be given up lightly.
Money Purchase Pension
These are pension schemes such as SIPPs, personal pensions and company schemes with segregated accounts for each individual.
These are invested in various funds and will fluctuate daily with market conditions. ” Frozen ” pension plan options in this case are based around the existing charging structures, availability of funds, whether they are managed and any protections in place.
Summary
UK/British pensions are not frozen- Myth busted.
No UK based pension professional has used the term frozen for many years. Legislation put paid to the frozen pension over 30 years ago.
Indeed, frozen pension plan options are only a reality in the minds of people trying to suggest a frozen pension is the reason to move a British pension Overseas advertising, with little regard for the facts, promote QROPS on this basis.
* Due to the complexity of the UK pension rules, this is a very simplified explanation and should not be taken as advice.
This is the third article about 10 Reasons to use a QROPS- the facts and the myths and we will be publishing more soon
The views expressed in this article are not to be construed as personal advice. You should contact a qualified and ideally regulated adviser in order to obtain up to date personal advice with regard to your own personal circumstances. If you do not then you are acting under your own authority and deemed “execution only”. The author does not except any liability for people acting without personalised advice, who base a decision on views expressed in this generic article. Where this article is dated then it is based on legislation as of the date. Legislation changes but articles are rarely updated, although sometimes a new article is written; so, please check for later articles or changes in legislation on official government websites, as this article should not be relied on in isolation.
This article was published in 4th November 2016
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