The latest QROPS news

Figures recently released have shown that final salary scheme deficits in the UK have increased from £40 billion to £48 billion throughout 2011, thus placing even greater question marks over the long term viability of final salary schemes, which will be of increasingly greater concern to scheme members.

The reasons for this increase are twofold. Firstly longevity has again increased, meaning that those guaranteed pensions are payable for a longer period, and are therefore more expensive to provide. In addition, increased longevity implies a significant increase in a schemes long term liabilities.

Secondly market volatility has meant that the assets of final salary pension schemes have fallen considerably, meaning that the gap between assets and liabilities I.e. the deficit, has increased.

If a final salary scheme is in deficit then it must agree a recovery plan to make good this deficit. This recovery plan cannot be for a period of more than 10 years. As any final salary scheme deficit must now appear on a company’s balance sheet as a trading loss, then companies are keen to remove or reduce deficits wherever possible. However, as companies have increasingly found profits and therefore cash flow increasingly difficult to achieve, it follows that their ability to reduce final salary scheme deficits has also reduced.

The greatest concern for members of final salary schemes is that their scheme becomes insolvent, and therefore unable to pay their members’ pensions. If this happens, then the scheme falls into the Pension Protection Fund (PPF), under which pensions not in payment are protected up to a maximum of £29,870 per annum. However, concerns have increasingly been expressed over the PPFs ability to meet future liabilities with regard to final salary pension schemes, if too many were to enter into PPF, as now appears more than likely.

As a result of the problems being encountered by final salary schemes, many more members are now questioning whether it is actually always in their interests to remain in these schemes, especially if they are living abroad, and therefore eligible to transfer into the highly tax efficient QROPS schemes. Whilst the guarantees offered by final salary pension schemes can never be overlooked (assuming they remain solvent), the additional advantages offered by QROPs schemes are now presenting a highly viable alternative, and are well worthy of consideration, provided that advice is provided by a fully qualified independent financial adviser.

Advantages such as being able to pass on a greater amount of pension to your family, income being able to be paid free of UK income tax, flexibility to vary income and the ability to take a much higher level of tax free cash are all reasons why a transfer into a QROPs scheme could be a viable alternative.