A defined contribution pension scheme is one where the employee, employer, or as in most cases, both contribute towards an account every month and the employee gets the total plus any investment earnings post retirement. This implies the government tries to maximize your earnings by investing your pension fund in appropriate ventures while you are still of working age. Once you get close to that retirement age, however, the controversial process of “de-risking” begins, which basically means pulling your money out from high risk/reward investments and putting it in more “stable” assets.
This typically involves shifting assets from equities which are considered unstable, to gilts (government bonds issued by the UK). These gilts then produce a cashflow which is used to make pension payments, after which comes the “endgame” stage where the risk and liabilities of your pension fund are insured through an insurance company. This is typically through a bulk purchase.
Now while the intentions behind de-risking may without a doubt be benign, the procedure has been criticized for a number of reasons, the most important of which is the notion that government bonds are the safest investment. This theory has proved to be a myth as long term gilt yields in the UK fell into negative territory over a decade ago and have remained there ever since.
Many believe this was caused by the financial crisis of 2007-2009 where the Bank of England lowered its interest rate to less than 1% in order for people to spend more and save less. Incidentally, in 2020 during the pandemic crisis, the rate was lowered to 0.1%. This directly affects gilts and at one point in 2021, the return on a 10 year index-linked gilt was -3%, yes that’s a negative 3%, on a 10 year investment.
Some experts even link this problem to the problem of having an aging population with not enough young consumers to support the economy. They believe the issue stems from a major chunk of the population approaching retirement at the same time and since “de-risking” occurs about 10-15 years before retirement, the implications have been much bigger than expected,
This de-risking caused a huge amount of money to be pulled from the UK equities market and poured into government bonds without really thinking about the consequences. This caused a decline in the “risk appetite” of the UK economy and a subsequent decline in UK equities when compared to other markets. Additionally, every account that underwent de-risking from 2008-2021 bought into an overvalued bond market which has translated to huge losses after the recent normalization of interest rates.
If you’ve lived and worked in the UK and have since moved or are planning to move back home to India, you can avoid the de-risking procedure altogether by opting for QROPS and investing your pension in one of the world’s fastest growing economies.
QROPS FAQs
When can you opt for QROPS?
You can opt for QROPS if you have a pension fund in the UK which you wish to transfer to India, under the condition that the Indian pension fund you choose to transfer to, is registered as QROPS with HMRC.
How do I know if I’m eligible to apply for QROPS?
The following pension schemes are eligible for QROPS transfer:
- Occupational scheme
- Final salary scheme
- Defined benefit scheme
- Defined contribution scheme
- Self-invested personal pension scheme
- Small self-administered scheme