A case study on UK final salary pensions
By Michael Doyle - Topics: Defined benefit pension scheme, Final Salary Pension, final salary schemes, France, Luxembourg, Pensions, QROPS, Uncategorised
This article is published on: 28th November 2016
I was recently asked to review one of my client’s UK pensions.
He had what is known as a Defined Benefits Scheme – more commonly referred to as a Final Salary Scheme.
My client had lost touch with this scheme a few years back and the last update he had from them was in 2006. On this statement the scheme offered him a transfer value of approximately £52,928, otherwise he could remain in the scheme until he was 65 and have a pension commencement lump sum (PCLS) of c. £27,000 and an income of £4,700 per annum.
If he remained in the scheme and took the lump sum and income, in the event of his death there would be no lump sum paid to his beneficiaries although an income payment of around £3,000 per annum would have been paid until the 10th anniversary of his 65 birthday.
On completing a review of my client’s pension I found that the scheme would now offer a transfer value just in excess of £180,000. In transferring this to a Qualifying Recognised Overseas Pension Scheme (QROPS), I was able to offer my client an initial PCLS of £45,000. This still left him with a fund of £135,000. Assuming we can provide a rate of return of 3.5% after charges then the client can have the same income as with his Final Salary Scheme.
Assuming the client only draws down the same £27,000 that his UK pension offered then we would only have to provide returns of 3.07%.
In the end, the client chose the transfer because:
- In the event of his death after receiving the PCLS, the remaining funds could be passed on to his children.
- He only needed the PCLS and not the income at 65. This was not an option under the final salary scheme.
- He can control the level of income he needs going forward (subject to the returns in the funds he was invested in).
With annuity rates being very low at this time, final salary schemes are offering a much higher transfer value and this can be beneficial for both you and your beneficiaries.
To review your pension options today please contact me for a no obligation chat and free analysis on your personal situation.
Tax Efficient Savings in Luxembourg
Two of the main concerns many of my clients have whilst living in Luxembourg are:
- The low interest rates they receive from saving in the bank.
- How can they save in a tax efficient way?
At the moment, as most of you will already know, whilst leaving your funds to accrue in a bank account in Luxembourg you can receive interest of around 1%. However, due to the European Savings Directive, you lose 10% of this as a tax, thus you will receive around 0.9% interest net.
Putting this in perspective, most of us have to save for the future, either for our pension provision or for our children’s further education. Based on the Liverpool Victoria Study in November 2007, it said that University costs increase at approximately 7.5% per annum (the current level of inflation for educational costs). This was further supported by an article in The Sunday Telegraph, (26th August 2007), which stated:
“School fees have risen 41% in the past 5 years”
Fees at many universities in the UK now stand at £9,000 per annum.
So the question we have to ask ourselves is whether or not by leaving our money in the bank, will we be able to meet all of our future goals?
One solution is to look at saving through a Life Assurance wrapper.
A wrapper is effectively an “investment platform” through which an enormous range of underlying investments can be purchased. Whilst the wrapper will be provided by a life assurance company, it is important to note that you are not paying a premium to purchase additional life assurance. It is, to all intents and purposes, an investment contract.
So what are the benefits of saving within a wrapper here in Luxembourg?
- All investments grow within the wrapper free of income tax and capital gains tax.
- As the wrapper is considered a life assurance contract it is not affected by the European Savings Directive.
- The premiums you pay could be tax deductible (subject to personal circumstances).
- You have access to investments perhaps only available to institutional investors.
- Lower minimum entry levels in underlying investments.
- Access to some of the top fund managers in the world.
- The flexibility to change your investment strategy at any time.
- The ability to access your funds if required.
- Higher bank rate. For example, there are currently bank rates offered within the wrappers of 4.25% per annum.
Every person’s circumstances are different and you should always seek Independent Advice before making any investment decision. Here at The Spectrum IFA Group we offer a no obligation Financial Review before offering any advice.
Luxemborg Business Lunch
The next Pecha Kucha evening will be held on Thursday, 19 June in Hotel Parc Belle-Vue from 19h00 – 22h00.
Pecha Kucha is an entertaining and informative event giving presenters the chance to “beat the clock”. The idea being that presenters have 12 PowerPoint slides, each lasting for 20 seconds, accompanying their verbal presentation. The slides move on automatically even if the presenter is not ready to move with them.
A free cocktail reception will be held at the end of the presentations to give guests the opportunity to meet the presenters at their trade table and to network. Please note that only registered guests can attend this event and there will be strictly no entry to the venue once presentations have started.
If you would like to register to be a guest at this event please click here.
Only a few presenters places remain, please contact firstname.lastname@example.org for information.
For a full list of presenters and for more information please click here
Irish Chamber Examines Luxembourg Pension Scheme
The pension system in Luxembourg is currently one of the best, however, the Irish Luxembourg Chamber of Commerce (ILCC) saw the importance of clearing up misconceptions with the organisation of an information evening that took place on Wednesday 23 October at the Banque de Luxembourgin Luxembourg city.
Around 50 people attend the event which was introduced by Ailbhe Jennings of the ILCC.
The two speakers at the event were Marco Moes of La Baloise as well as Michael Doyle, a Financial Advisor with The Spectrum IFA Group, and who is also the president of the Scottish Association and the founder of The Business Lunch in Luxembourg.
Mr Doyle addressed the issue of common misconceptions within the state pension scheme. Currently, the Luxembourg Government has a reserve of €11 million which will be exhausted in the next 25-30 years under the current system.
Marco Moes explained that the pension scheme can be broken down into three key pillars; the first is the Legal Retirement State Pension, the second is the Employer’s Pension Scheme and the third is a Private Pension Scheme. Complimentary pension schemes are also an option.
To qualify to receive a state pension in Luxembourg, an individual must have been employed in Luxembourg for a minimum of a year and a minimum of 10 years overall in any EU member state, Canada or Switzerland, countries with which Luxembourg has signed agreements. Currently, employees contribute 8%, employers contribute 8% and the state contributes another 8% towards an individual’s pension. For those who are self-employed, the individual’s contribution rises to 16% and the state contributes 8%. There are also Survivors Pensions and Orphans Pensions which family members may be entitled to after the claimant’s death. It is also important to note that this income is taxable.
Due to an increase in life expectancy and an increase in exported pensions, there have been concerns over the current pension schemes’ durability. This has brought many questions to light, including: will Luxembourg follow in the UK’s footsteps of increasing the retirement age? Will there be a percentage increase in contributions? Will there be a reduction in escalation of payment? Will there be a reduction in pension income?
Currently, salaries increase at a rate of 2-3% per annum whereas pensions lag behind with 1.9% which is not consistent with inflation. To combat these differences, alternative retirement funding options include relying on individual savings capital or creating independent and flexible saving plans which should be portable and, therefore, cross-border friendly, as otherwise these savings might then be liable for high taxes.
With regards to the second pillar, Employer Pension Schemes are on a voluntary basis and are more common in large financial companies, service providers for the financial sector and some industrial companies. Eligibility for these schemes is dependent on employers as is the level of benefits contribution. The categorisation of Employer Pension Schemes falls into the following main categories; a Defined Benefit Plan which is usually 10% of the last earned salary as annuity and 150% of the last earned annual salary, and a Defined Contribution Plan which is usually 5% of each earned salary and an investment in a classic insurance product.
Photo by Elizabeth Thompson (L-R): Michael Doyle, Ailbhe Jennings, Marco Moes