USS vs QROPS

Niltava

I'm an Expat based in SE Asia, but working for a UK university and enrolled in the USS, currently as a beneficiary who would be entitled to a Final Salary-calculated pension. I've been in the USS Scheme for six years and am 42 years old, and I intend to stay with my employer ideally until I retire.

Today I had a meeting with an IFA that specialises in working with Expats. The IFA had contacted me to discuss the changes in UK law and (potentially) to the USS Scheme, with his propositions being that:

a) it is worth getting an estimate of the transfer value of my existing USS pension with a view to opting-out of the USS and moving the existing fund to a QROPS, probably in a tax efficient jurisdiction such as Isle of Man or the Channel Islands

b) after transfering money out of my USS, I could then transfer-in again and start accruing service years that would contribute to my USS pension (starting over with zero years service). I could repeat the transfer-out/in process periodically to add money from my USS pension to the QROPS at some later stage if UK legislation still allowed me to in years to come

c) reasons for doing include i) that once I retire the income I receive from my USS pension will be liable to income tax, even if I remain living overseas, ii) the benefits for my wife after I die would be substantially reduced under USS but would be unaffected under a QROPS.

d) changes in UK legislation mean that members of some existing defined benefit schemes (eg the NHS pension) will not be allowed to move money out to a QROPS after April 2015, and something similar may happen to the USS in the next few years.

In addition to my USS pension I also have a portfolio of funds (held in USD) that are earmarked by me as a private pension, and I contribute about the same amount to those funds each month as I and my employer do to the USS pension, so the USS is only part of my retirement planning - this means that I feel that I am relatively diversified by holding one DB pension pot in GBP and what is effectively a DC pension pot in USD.

Is the proposition of moving my existing USS pension into a QROPS really worthy of consideration?

Thanks for any advice your may be able to offer.

Best wishes,

Niltava

greenglide

Does the USS scheme allow you to leave, transfer out and then rejoin? Most schemes wouldnt let you.

If you rejoined from zero would you not get an "inferior" benefit as the scheme is being watered down?

dunstonh

c) reasons for doing include i) that once I retire the income I receive from my USS pension will be liable to income tax, even if I remain living overseas, ii) the benefits for my wife after I die would be substantially reduced under USS but would be unaffected under a QROPS.

1 - depends on the country and the tax rules.
2 - Depends on your date of death. If you live longer than you wife, its irrelevant. If she lives longer than you she gets 50% index linked guaranteed income for life.

Be wary of the tax red herring here. The transfer value will not be enough in its own right to make up the same pension income that the scheme would give. So, you may pay less tax but the income generated would be lower as well.

Is the proposition of moving my existing USS pension into a QROPS really worthy of consideration?

It is a high risk transaction which would require specialist advice if you want it done correctly. Statistically, you would expect over 90% of the cases to be told it is best to leave it where it is. you may fall into the minority where its best but the odds are against it. it is also an area which is heavily abused by overseas "advisers" without the qualifications or high regulation that exists in other places.

Really, until you are told the critical yield required to make up the same level of benefits by transferring, then its difficult to say. Typically, you are looking at needing double digit annual returns to match benefits and that is generally regarded as unlikely. Death benefits doesnt seem to be a valid reason in my opinion as you say its only a small part of your overall retirement planning. it seems more of an excuse than a justification. Tax maybe an issue but again, I would want to know the net position comparing the two options.

hyubh

Niltava wrote: »

b) after transfering money out of my USS, I could then transfer-in again and start accruing service years that would contribute to my USS pension (starting over with zero years service).

If you opted out and rejoined at present point in time, you would join the CARE section rather than the final salary one, with any subsequent transfer-in earning a CARE pension credit not a final salary service credit. That said, the final salary section is likely to be closed to everyone next year.

I could repeat the transfer-out/in process periodically to add money from my USS pension to the QROPS at some later stage if UK legislation still allowed me to in years to come

The USS rules explicitly give the trustees discretion on whether to accept a transfer in request, so even if shuffling around were opportune for you it wouldn't necessarily be allowed.

LHW99

Also watch out for an adviser that contacted you, rather than you initiating the contact.
Reputable ones generally don't do this.

Southend1

hyubh wrote: »

If you opted out and rejoined at present point in time, you would join the CARE section rather than the final salary one, with any subsequent transfer-in earning a CARE pension credit not a final salary service credit. That said, the final salary section is likely to be closed to everyone next year.
[\QUOTE]

It's probably worth pointing out in case other USS members are reading that while OP wouldn't rejoin the FS section as he would have transferred out, you can for now at least leave and rejoin the FS section in other circumstances:

"If you leave the Final Salary section of the scheme and elect to defer your benefits and rejoin in the following 30 months then you will automatically be re-entered into the Final Salary section. If you were already a deferred member before 1 October 2011 and rejoin before 31 March 2014, you will rejoin the Final Salary section; if you rejoin later than 31 March 2014 you will join the Career Revalued Benefits section.

If you are able to rejoin the Final Salary section, you can choose to have the two separate periods of service joined together. In most cases this is beneficial, assuming your salary by the end of your latest period of USS membership is worth more than the salary (plus price inflation increases) from your earlier period of membership.

If the option to link up different periods of service is available to you, you won’t have to make the decision until you either retire or you leave USS again.

Note: This option (of rejoining the Final Salary section) is not available if you transferred your benefits to another scheme or elected to receive a refund of contributions."

Niltava

Thanks for these comments. I'm obviously wary about any advisor who initiates contact, and I'm also concerned by the idea of opting-out of the FS scheme and opting-in to the CARE part of the scheme, though I know that the FS part might disappear for all.

Think I will wait to see how the USS changes in the the next year or so before making any decisions.

best wishes,

Niltava

DonM

One option is to remain in the scheme and transfer out closer to the time when transferring from the DSS will be suspended. One difference which will happen as of April, I think (need to check), is that schemes that are not fully funded can reduce their transfer value according to any pension shortfalls they are experiencing.

jamesd

Your plan to wait seems sensible.

The plan to bar transfers out is to apply to unfunded public sector schemes at least initially, and not to the private USS scheme, any other private schemes or any of the funded public sector schemes, like the local government one. No sign at all yet that there are to be restrictions on private schemes, in fact there's some focus on making sure that people keep the opportunity to transfer out of them, even if IFA advice is not to.

It's true that your spouse would have higher benefits from a personal pension pot, since a spouse gets to inherit the whole pot and hence receive a 100% pension, as well as the option of capital access. But with the USS available to you, if you want this it's better to stay in the USS and do some of this with additional pension or other investment contributions.