The new UK pension rules could be great for individuals but are a real headache for others
November 21, 2014
So pensions are in vogue again, the media tell us. And with groundbreaking changes being introduced to the UK pensions regime from next Spring, that is a fair assumption to make. We are going to see more people using their pension plans as a flexible and tax efficient savings plan, with the promise of unfettered access to funds at 55 too good an opportunity to ignore. Retirees will never have had it so good; retirees in UK pension schemes that is.
But what of non-UK schemes and mobile employees? What do these changes mean for them? For many years, offshore plans have often been more flexible than the UK equivalents. Coupled with the demands of employees to remain in their home country schemes, offshore plan membership has been the 'no brainer' option for the vast majority of these individuals.
However, things are changing and now might be the time to consider if that approach needs a re-think. No longer will individuals simply accept the simplest approach; instead they want their employer to offer something market-leading, innovative and attractive...the sort of deal the locally employed person sitting next to them is getting.
And what of the employer's position? In today's environment of cost control and risk mitigation, would it not be simpler to have all employees in one pension plan? What's more, does a single plan provide the kind of harmonisation of pension benefits that is consistent with the organisation's reward philosophy?
In broad terms, employers reviewing their pension strategy for expatriates will need to consider the pros and cons of three main options:
Leave employees in their home country scheme - it's the simplest approach but guarantees neither tax efficiency, cost efficiency or flexibility. And is this what the individual wants today?
Move employees to a local country plan - on the whole it's less simple for both parties but you can at least replicate UK tax efficiency and flexibility. The main problem here is whether you want to create a policy of moving employees to local schemes each time they move location - something that very quickly gets very difficult to manage?;
Establish a plan in a third country - using, for example, a Jersey plan could well be the compromise approach required.
Whatever approach is adopted, the one certainty is that on some level there are additional complexities for employers. And, in a nutshell, that remains the biggest challenge of operating pension schemes for mobile employees. It has never been a simple regime because of the fact that pension schemes - and so the tax reliefs and features associated with pension schemes - are very specific to the territory in which the plan is established.
The new rules in the UK don't really affect that complexity one way or another. What they do is make individuals more driven to forcing employers to consider the complexities in much greater detail as they demand a different deal. And that means a whole lot more risk, cost and administration risk that needs to be dealt with sooner rather than later.