A] What does Transfer of Pension Claim Mean?
Expats relocate often and thus can have Workplace Pension Claims (Pillar 2) in many countries. Such an accumulation is not ideal for the Expat:
- It does not provide a quick and easy oversight on the total of all claims;
- It can result in additional costs as each claim might result in additional costs;
- It might lead to a lower pension claim regarding certain types of coverages;
- As each country might have different regulations about how to prevent international double taxation as of retirement age, this easily leads to many complications and high advisory costs.
Thus it seems logical to look into the possibility and desirability to transfer already acquired Workplace Pension Claims to the active current Workplace Pension Claim.
A transfer of pension claim is about such a switch if it means that there are no negative legal nor tax implication and thus that there is no loss of value.
B] Exact Definitions Matter
Please distinguish between individual versus collective transfers and a legal entitlement versus just the possibility to ask for a transfer.
C] Excluded Pensions
For sake of completeness it be mentioned that Transfer of Value does not include State Pensions (Pillar 1) nor Private Pensions/Annuities (Pillar 3) as they each have their own regime.
D] Are there Legal/Tax Barriers?
A Transfer of Value is only possible if the legal and tax system of both countries makes no objections to such a switch.
Many countries tend to have their own view on this and also can make a difference between incoming and outgoing capital. For the procedure it can be relevant if the transfer is within or outside of the EU.
One often sees that countries with high quality pension systems have stricter regulations about value leaving the country than for value coming to the country.
Whereas countries like for example The UK are not (yet) very restrictive, countries like The Netherlands are rather restrictive regarding outgoing capital which makes an outgoing transfer in most instances not always possible. Even though due to EU influence this is getting less strict in recent years.
When looking into these aspects, please make sure that you differentiate between the legal versus tax requirements and authorities.
E] Nature of Active Plan
A Transfer of Value means that the existing already build up pension claim is translated into a certain amount of capital after which this capital is being infused in the existing active pension plan.
Thus several main aspects are relevant:
- How is the existing claim being translated into a capital? If the current claim has a Defined Contribution (DC) nature and is investment based, you have to look at related costs. If the current claim is a guaranteed Defined Benefit (DB) pension claim, then the transformation means the loss of the guarantee and maybe even also the loss of (conditional) indexation rights. You will have to ask yourself if this is indeed a wise approach.
- Likewise you will have to check at what amount of costs the transferred capital will be infused into the current active plan. If that plan has a DC nature, you look at the costs of acquiring additional funds. It that plan has a DB nature, then you will have to look carefully at what interest rate the purchase will be made. As the interest rate is currently not that stable and changing, this aspect is highly relevant.
- In case the existing pension claim is being translated into the current active plan by means of a certain legal mandatory interest rate, you will have to look carefully at all implications of the possibly difference between that legal transformation rate versus the contract interest rate of the old and current pension plan.
- In case the former and current plan have a DC nature, please carefully compare the costs and investment options. Life Cycle Funds which automatically reduce risk as age increases sound great but are not always implemented in a great manner. Life Cycle Funds might also have a risk profile which does not correspond with your risk profile.
- Additional attention is required for a comparison of the (too often forgotten) pay-out flexibility in the old versus current pension plan. The differences can be very substantial and can vary from complete Lump Sum options versus mandatory lifelong annuities.
- Besides the capital based Old Age Pension aspect please also pay attention to the possible effect of a transfer on the risk or capital based Next of Kin coverage.
Finally also please watch out for the existence of often too expensive mandatory additional clauses.
F] Example of Impact Interest Rates
We will now give you an example of a real case that shows the relevance and impact of the height of the interest rate used to transfer a guaranteed defined benefit (DB) pension claim.
Our client had acquired a guaranteed DB old age pension claim. As he had started to work for another company and participated in a new occupational pension plan, he wished to investigate if a transfer of pension from the existing claim to the new plan was possible and advisable.
In 2022 the pension provider informed our client that the cash transfer value (CETV) amounted to € 82.000,-. In 2024 our client again requested to be informed of the transfer value and was now informed that it amounted to € 37.000,-.
Due to the increase of the interest rate between 2022 and 2024 the transfer value had decreased with € 45.000,-. Needless to say that our client did not transfer and we advised him to at least wait for the expected decrease of interest rate in the near future.
This example shows that it is advisable to be careful regarding implementing a transfer of value. Mistakes can be costly.
G] Conclusion
Due to the many technical, legal, tax and product aspects of international transfer of value, it seems advisable to obtain advice beforehand.