British Airways Pension Transfer – QROPS to Avoid UK Taxes
British Airways’ pension deficit has ballooned to £3.7bn according to an article in March in the Independent. This leads us to the question, should I transfer out of the British Airways pension scheme to a QROPS or a SIPP? Whilst at first this seems irrational given the benefits from BA’s final salary scheme, when you look into the factors holding back British Airways, it starts to become a tenable option.
An article on MSN in August 2010 titled, ‘Is British Airways Doomed?’ highlighted the fact that BA cabin staff get paid at least 50% more than their counterparts and BA pilots are amongst the highest paid pilots in the industry. Whilst I believe in calls for BA’s demise are exaggerated, the merits of staying in their pension scheme should be considered. British Airways has two final salary schemes, both of them are now closed to new members, but are still too expensive and the company is grappling with employees in order to reduce the massive pension burden.
Following strikes by BA staff, British Airways’ chief financial officer, Keith Williams revealed that:
“The trustees understand that the airline is unable to increase its contributions in the current financial climate but we have agreed a recovery plan that avoids closing the pension schemes.”
Whilst the final salary benefits are excellent, when you take into account that JAL, Delta Air Lines, Northwest Airlines, US Airways, United Airlines and Air Canada have all gone bust in the last 8 years, the picture looks less rosy. When you add to that their massive pension burden and the increasing threat that the budget airlines bring, you have to question the security of their pension scheme.
In fact, pilots were the first to question whether BA would be able to deliver on their pension promises. Pilots who have spent their entire career with British Airways can expect to retire on a pension of more than £100,000 a year, according to pension advisers.
If the BA pension scheme collapsed, a lifeboat fund known as the Pension Protection Fund would step in. But the fund pays out a maximum of only £29,000 a year.
One leading pensions’ adviser has been approached by more than 40 pilots and other pension scheme members at BA in the last few days about transferring their money – with one worker asking to move a pension pot of £2.2 million out of the company’s pension scheme.
Up to 100,000 workers at BA enjoy the company’s generous final salary scheme, which is now closed to new members. Anyone joining the company pension after 2003 will have a defined contribution scheme based on the performance of the stock market.
Whilst British Airways are preparing a battle plan to reduce the pension funds’ deficits, it isn’t surprising that pilots who have worked all their lives for a decent pension aren’t taking the risk. For those living outside the UK, pilots are turning to pension transfers through a QROPS (Qualifying Recognized Overseas Pension Scheme). It also helps to reduce their tax burden. Employees living outside the UK who have been offshore for at least 5 years have no tax reporting requirements to the Inland Revenue. BA employees who are already in drawdown will not be able to transfer out.