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Why did the UK Pension Fund almost collapse in 2022? 

During the financial crisis of 2022 in the UK, the Bank of England was forced to bail out a number of pension funds facing an imminent collapse. To quote CNBC, “pension funds were just hours from disaster before intervention by the Bank of England.” While this was attributed to a number of factors, the majority of the blame has been put on Liz Truss’s disastrous “mini” budget that was criticized for the sheer scale of unfunded tax cuts. These are basically tax cuts that go into the billions and don’t feature any offsetting revenue or spending measures in place to make up for them. This not only led to the British Pound hitting an all-time-low against the US Dollar, but also the 10-year-return on gilts hitting an all-time-high since 2008

The issue was further exacerbated by the fact that the rapid increase in gilt yields led to a widespread selling-off of gilts which directly affected LDIs (Liability Driven Investments) that were forced to sell gilts in order to maintain liquidity and cash flow. These LDIs are typically owned by defined benefit, or final salary pension plans, that were then suddenly staring at insolvency as they did not have the cash to top-up their collateral in their LDI positions. This is because while pension funds typically have several days or weeks to arrange for cash by either rebalancing portfolios or asking investors for capital, the sudden and unprecedented spike in long-term gilt yields meant LDI fund managers were left scrambling for a large amount of cash before the start of the next business day.

This is where the situation became “dire” and the Bank of England had to step in to avoid a collapse of these pension funds which would without a doubt have further economic consequences. To ensure a number of pension funds avoided collapse, the Bank of England went on a two-week buying spree of long-dated government bonds or gilts. According to CNBC, this was apparently done in order to “restore orderly market conditions,” further adding that they would be willing to scale this up to “whatever scale necessary” to stabilize market conditions. The Bank of England also mentioned that it intended to purchase about £5 billion worth of gilts (per day) with a maturity of over 20 years within the next 2 weeks while also putting off any new gilts sales till the next month. 

QROPS FAQs

What is the penalty if a transfer proceeds and the new scheme turns out not to be a QROPS?

If the transfer proceeds and the new scheme is not HMRC-compliant you will be charged a minimum of 40% on the transfer plus an additional 15% for unauthorized withdrawal.

How do I know which schemes are HMRC-compliant?

The team of financial experts at QROPSdirect.in are well-versed in HMRC compliance and even provide training to a number of private banks on the subject. Please contact us to find the best compliant plan for you based on your age, vesting age, and risk profile.

Does it cost anything to transfer my pension fund from the UK to India?

Not only is the transfer of pension funds to approved pension schemes in India tax-free, but you also nullify any loss that would potentially be incurred due to currency exchange rates and similar complications.

 

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