Defined benefit pension while living overseas
A defined benefit pension can remain one of the most valuable assets an internationally mobile client owns.
Moving overseas does not remove the guarantees built into the scheme, and residence alone is not a reason to transfer away from those benefits.
Josh Clancey works alongside pension-transfer specialists, tax advisers and other professionals where an overseas client's defined benefit pension needs to be incorporated into a wider retirement plan.
Start with what the scheme already provides
Before considering alternatives, the client needs to understand the benefits they already hold.
These may include:
- guaranteed lifetime income
- inflation-linked increases
- spouse or dependant benefits
- guaranteed payment periods
- early-retirement options
- normal retirement age
- scheme-specific commutation terms
- other safeguarded benefits
For an overseas client, those benefits should then be considered alongside residence, taxation, other pensions, investments, currencies and retirement spending.
The question is not simply whether a transfer value appears attractive.
It is what the client would be giving up in exchange.
Common planning areas for overseas DB pension members
Guaranteed retirement income
A DB pension can provide an important foundation of predictable lifetime income.
That can affect how much investment risk the client needs to take with their other assets.
Transfer advice
Where a client is considering transferring safeguarded benefits, the appropriate regulated pension-transfer specialist should undertake the required analysis and recommendation.
Overseas taxation
The tax treatment of pension income can depend on the client's country of residence and any applicable double-taxation agreement.
Currency exposure
The pension may be paid in sterling while the client spends in euros, dollars, dirhams or another currency.
That currency mismatch should be reflected in the wider retirement plan.
Spouse and dependant benefits
The value of the scheme should include the benefits potentially payable to a spouse or other eligible dependant, not just the member's own pension.
Other retirement assets
The DB pension may sit alongside SIPPs, workplace pensions, overseas pensions, US retirement accounts and investment portfolios.
Questions to ask before considering a DB transfer
What guaranteed income is the client giving up?
The transfer value should be considered against the lifetime benefits being surrendered.
How does the scheme increase before and after retirement?
Inflation protection can be a significant part of the value of the pension.
What spouse or dependant benefits are included?
These can materially affect the suitability of retaining or transferring benefits.
What other secure income will the client have?
State pensions, other DB schemes and annuities can affect the role this pension needs to play.
What investment risk would a transfer introduce?
A transferred pension generally replaces scheme guarantees with investment and longevity risk borne by the client.
Where will the client retire?
Residence can affect taxation, currency and practical access to benefits.
Is the client's objective genuinely improved by transferring?
Greater flexibility alone does not automatically make a transfer suitable.
Useful resources for advisers working with overseas DB pension members
Defined Benefit Pensions for Internationally Mobile Clients
A focused technical brief covering the additional planning issues that can arise where a DB member lives outside the UK.
The Professional Adviser's Guide to UK Pensions for International Clients
A broader guide covering UK pensions for clients living, working or retiring internationally.
UK Pension Transfers for Overseas Residents
A practitioner-focused technical brief covering the wider considerations around pension transfers for non-UK residents.
UK Pension Access and Drawdown for Non-Residents
A resource covering the retirement-income considerations relevant to clients living overseas.
Overseas Client UK Pension Review Checklist
A practical checklist for reviewing the main pension and financial-planning issues affecting an overseas client.
The Professional Adviser's Guide to International Retirement Planning
A broader guide to coordinating pensions, investments, retirement income and future residence.
A CETV is not the same as the value of the benefits
A cash equivalent transfer value converts a package of future pension promises into a capital sum.
That capital figure can look substantial, particularly to clients who are accustomed to thinking about pensions as investment accounts.
But the comparison is not simply:
transfer value versus annual pension
The client may be giving up:
- guaranteed lifetime income
- inflation-linked increases
- spouse or dependant benefits
- protection from investment-market risk
- protection from the risk of outliving their capital
The transfer analysis therefore needs to compare the value and suitability of those safeguarded benefits with the risks and flexibility of the proposed alternative.
That specialist transfer advice should remain with the appropriately authorised pension-transfer adviser.
The wider retirement plan still matters
Even where a pension-transfer specialist is responsible for the regulated recommendation, the DB pension needs to be understood within the client's broader circumstances.
For example:
- a large DB pension may reduce the need for withdrawals from investments
- secure income may allow other assets to remain invested for longer
- sterling pension income may create currency exposure for an overseas retiree
- spouse benefits may reduce the amount of separate life cover required
- other pensions may change the client's overall capacity for investment risk
- the client's spending requirements may show that the guaranteed pension already meets a substantial portion of essential expenditure
This is where broader retirement cash-flow planning can add value around the specialist pension advice.
When should the referral happen?
A referral may be useful where the client:
lives overseas and holds a UK DB pension
is approaching scheme retirement age
has requested a CETV
has been approached about transferring
is considering a QROPS or other pension arrangement
wants to retire abroad
holds significant retirement assets outside the UK
The objective should be to understand how the DB pension fits into the whole retirement plan before major changes are made.
Have an overseas client with a defined benefit pension?
If a DB pension needs to be coordinated with overseas residence, other retirement assets, currency or wider retirement planning, an initial discussion can help establish where Josh can add value alongside the appropriate pension-transfer specialist.