Many members of UK defined benefit (final salary) schemes are contracted out. How does this change a migrating member’s thinking when looking at a pension transfer to Australia?
Not everyone who is in a contracted out defined benefit scheme knows exactly what this means or the nature of the benefit. For those considering a UK pension transfer to Australia they would need pre-migration advice to be aware of the benefit they are potentially giving up from their existing UK scheme.
The final salary scheme benefit referred to as ‘contracting- out’ is the element of the pension that the employer has funded by redirecting the employees national insurance contributions, that were to provide them with the State Earnings Related Pension Scheme (SERPS), to the employer’s scheme.
In a defined benefit scheme, the pre 6th April 1997 benefits are known as GMP (Guaranteed Minimum Pension) and the post 6th April 1997 benefits are known as Section 9(2B) Rights.
Although the precise calculation of these pension rights is complicated, they could form a significant part of a member’s final salary income. The guaranteed nature of a defined benefit pension is lost when transferring to an Australian QROPS and, with it, the contracted out element.
An individual with a UK defined benefit scheme, on a permanent visa to Australia, may consider the tax free benefit gained from a transfer to an Australian QROPS appealing but they would need to weigh this against the benefit of guaranteed income for life from their UK Contracted Out Defined Benefit scheme.
Posts Tagged ‘Australian QROPS’
A Defined Benefit (Final Salary) pension transfer to Australia – What if I’m contracted-out?
Friday, October 23rd, 2009An Unsecured (Drawdown) Pension Transfer to Australia
Monday, October 19th, 2009From A-Day (6th April 2006) the UK Her Majesty’s Revenue and Customs (HMRC) has permitted unsecured pension funds to be transferred to another pension scheme after income drawdown has commenced. For migrants looking at a pension transfer to Australia, where income drawdown has commenced on their UK schemes, the option to transfer is still available.
The main restriction, for those looking at an unsecured pension transfer to Australia, is that the receiving scheme has to be an Australian QROPS (Qualifying Recognized Overseas Pension Scheme). There are, however, many superannuation schemes that are approved as QROPS by HMRC so, with the appropriate advice, this should not be a problem.
A second restriction would be on the benefits that can be taken during the QROPS reporting period. Should an unsecured pension transfer to Australia be completed, any benefits paid from the Australian QROPS would have to be in line with the UK GAD (Government Actuary Department Rates). Any payments to the member, in access of UK maximums during this period, would be subject to an unauthorized payment charge.
After the QROPS reporting period, which is 5 complete UK years tax years of a member’s overseas residency, payments made from the scheme can revert to the local Australian rules. UK pension members should, therefore, be aware of all benefits and restrictions before they affect a pension transfer to Australia – especially if they are already drawing an income or tax free cash from their UK pension fund.