The Spectrum IFA group held a pension seminar at the NH Hotel in Luxembourg. The guest speaker was David Denton, Head of Technical Division from Old Mutual International who flew in especially for the afternoon to join two of the local Advisers in Luxembourg, Dave Evans and David O’Donoghue.
Pension Presentation in Luxembourg
By Spectrum IFA - Topics: Company Pension Schemes, Final Salary Pension, final salary schemes, Luxembourg, non EEA residents, Pensions, QROPS, Spectrum-IFA Group
This article is published on: 24th May 2017
It was a sunny afternoon, which only happens a couple of times a year in Luxembourg, so it was great that the 39 guests still managed to turn up. It was hard to book David Denton in as he mentioned he had only just that month already been to Singapore and South Africa to give similar presentations.
David discussed the recent changes with the UK Budget and how this has affected non EEA residents when considering QROPS transfers, he mentioned the changes to the death benefits and the fact that unfunded Final Salary schemes can no longer be transferred. The changes to pensions over the last couple of years shows the UK Government are intent on narrowing down the option in the future, especially with regards to International Pension transfers to Qualifying Recognised Overseas Pensions (QROPS) and transfers from Final Salary schemes. Whilst these schemes do have good benefits, so should not be moved lightly, but with the very high transfer values at the moment and potential ban on transfers in the future, requests for transfer values are at record highs. With the general election coming up there could be another snap Budget and so why not review you pension plans now while you have time to think about the best way forward and before some retirement options are closed by the UK Government.
What can I do to minimise any potential impacts of a tough Brexit process?
By Amanda Johnson - Topics: Article 50, Assurance Vie, BREXIT, Company Pension Schemes, Defined benefit pension scheme, Final Salary Pension, final salary schemes, France, QROPS, Retirement, United Kingdom
This article is published on: 11th May 2017
This is a question many expatriates are mulling over, now positioning for the upcoming negotiations has started. First and foremost, I remind my customers that the process to leave the EU is widely anticipated to take the full two years set out in article 50, so the only immediate areas people should focus on are changes in the U.K. and French budgets.
As the negotiations progress however, there are steps you can take which will ensure that any effects to you are minimised:
- Does your adviser work for a French registered company, regulated in France?
Working with adviser who operates and is regulated already under French finance laws means that any change in the UK’s ability for financial passporting will not affect you.
- Is your Assurance Vie held in an EU country, not part of the U.K.?
Again, any issues the U.K. may have to solve regarding passporting are negated by ensuring your Assurance Vie is already domiciled in another EU country.
- Have you reviewed any U.K. Company pension schemes you hold, which are due to mature in the future?
The recent U.K. Budget saw the government levy a new tax on people moving their pensions to countries outside the EU. There is no certainly that this tax will not be extended to EU countries once the U.K. has left the union.
The process of leaving the EU is very much unchartered waters and whilst I certainly do not recommend anyone acts hastily, a review of your financial position in the next few months may avoid future headaches.
Whether you want to register for our newsletter, attend one of our road shows or speak to me directly, please call or email me on the contacts below & I will be glad to help you. We do not charge for reviews, reports or recommendations we provide.
QROPS Pension Transfer
If you ever worked in the UK, no matter what your nationality, the chances are you were enrolled in a private pension scheme. The UK government continues to tweak legislative changes affecting the expat’s ability to move this pension offshore. On the surface, these changes appear to limit transfer options, but in reality they have strengthened the legal framework offering expats continuing advantages.
When you leave the UK your private pension fund remains valid but is frozen, or deferred, until you reach retirement age. The pension income you then receive is taxable in the UK no matter where you are based in the world. Once you die the pension will continue in the form of a spouse’s pension if you are married; otherwise it will cease. When your spouse dies, all benefit payments come to an end.
If you take any part of your fund and then die before you fully retire, a lump sum can be paid to your spouse.
In April 2006 Her Majesty’s Revenue and Customs (HMRC) introduced pension ‘A’ day. This liberalised UK private pensions and allowed people leaving the UK to transfer them overseas, often to a new employer. In doing this the UK complied with European legislation which allows all citizens the freedom of movement of their capital. Thus ‘Qualified Recognized Overseas Pension Schemes’ (QROPS) were born.
Recent Chamges 2017
During the March UK budget there was a very unexpected announcement regarding pension transfers out of the UK. The headline was :
“HM Revenue & Customs (HMRC) has announced that Qualifying Recognised Overseas Pension Schemes (QROPS) transfers for individuals not in the European Economic Area (EAA) will be hit with a 25% tax charge”.
At first glance it sent shockwaves through all concerned with pension transfers, after a moment to digest the news it became much clearer that there were exceptions to the rule, detailed below:
1. The QROPS Trustee is in the EEA and the client/member is also resident in an EEA country (not necessarily the same EEA country);
2. The QROPS and the member is in the same country; or
3. The QROPS is an employer sponsored occupational pension scheme, overseas public service pension scheme or a pension scheme established by an International Organisation (for example, the United Nations, the EU, i.e. not just a multinational company), and the member is an employee of the entity to which the benefits are transferred to its pension scheme.
It is also important to understand that if a client was to move outside of the EEA within 5 years of the transfer then the tax rate would apply.
In most of the cases I deal with this new tax ruling will not affect the transfer. Since moving to Spain all but one of the transfers I have implemented are EU based.
QROPS are not necessarily the right thing in every single case. In order to decide whether it would be advantageous to transfer your pension or leave it in the UK, with the intention of drawing the benefits in retirement, please contact me so that I can carry out a personalised evaluation. There may be compelling arguments, outside of the evaluation alone, which are often overlooked and may affect you in the future.
One of these is that a large number of UK schemes are currently in deficit to the point that they will be unable to pay future projected benefits. This would mean that even though it looks as though there are arguments to leave your UK pension in situ it may actually be wiser to transfer it.
In order for you to make the best decision you need to professional advice on what would be the best situation for you. This will entail seeking details of the current UK schemes, including transfer values, the types of benefits payable to you and options going forward when you get to a retirement date and when you die.
Advantages & Disadvantages of a Transfer Between a QROPS and a SIPP
Lump Sum Benefits
QROPS – If you transfer your benefits under the QROPS provisions to a Malta provider, in accordance with the rules of this jurisdiction, you may be able to take a pension commencement lump sum of up to 30% (unless you have already taken this lump sum from the UK pension). Under the current HMR&C (Her Majesty’s Revenue and Customs) rules to qualify for the lump sum option you must be age 55 or over. Your remaining fund is then used to generate an income without having to purchase an annuity. The 30% pension commencement lump sum is only available once you have spent 5 full, consecutive tax years outside of the UK (in terms of tax residence), if you are within the first 5 years, we strongly advise you to limit the pension commencement lump sum to 25%. From 6 April 2017 this 5 year period has been extended to 10 years.
SIPP – The maximum Pension Commencement Lump sum from a SIPP would be 25%.
No Liability to UK Tax on Pension Income
QROPS – This will be paid gross and you declare the income in the country you are resident in as long as the QROPS jurisdiction has a Double Tax Treaty (DTT) with the country that you are resident in. Transferring under the QROPS provisions ensures that, if tax is due on pension income, it will only be taxable in the country of your residence.
SIPP – This should be able to be paid gross, although many clients find this to be a very awkward process to solve as the pension company does not always talk to the HMRC and therefore at least for the first year or two the pension is paid net of basic rate tax and sometimes even on an emergency tax basis. This can be reclaimed, but will involve more paperwork than that of a QROPS.
No Requirement to Purchase an Annuity
There is no longer a requirement to ever purchase an annuity with either your UK pension or in the event you make a transfer under the QROPS provisions. Therefore the rules below are the same for a QROPS and a SIPP.
With both a QROPS and a SIPP the maximum age you must start to draw an income is from age 75. The Pension commencement Lump Sum must be taken by this age or the option to take it after this age is lost.
The budget changes in the UK has meant that from April 2015 the restrictions imposed from drawing a pension income from a UK Pension Plan will be scrapped. This means that investors will be able to take the whole of their pension as a lump sum if they wish from age 55. The first 25% would be the standard Pension Commencement Lump Sum but the remaining amount would be subject to your marginal rate of income tax. The Malta QROPS have now followed these changes to allow full flexibility also.
This would not be possible with a Final Salary pension. It would need to be transferred to a SIPP or QROPS to utilise these options.
Secure Your UK Pension Pot
Some defined benefit schemes in the UK are in deficit. Since the deficit forms part of the balance sheet of the company, this can present a huge risk to your pension fund.
Transferring your UK benefits to a SIPP or QROPS provisions could enable you to have full control of these funds without worrying about the financial situation of your previous employer.
Ability to Leave Remaining Fund to Heirs
QROPS – All death benefits will be paid out from the Malta QROPS with 0% death tax no matter what age an individual is.
SIPP – The recent UK Budget has changed how death benefits will be paid to their heirs in the future. If death occurs before age 75 then any remaining balance in a pension fund can be paid tax free to any beneficiary. Otherwise if a member passes away after the age of 75 then there would be a tax charge, any lump sum benefit would be subject to the beneficiaries marginal rate of income tax.
A transfer under the QROPS provisions will allow the member to leave lump sums without deduction of tax to heirs no matter what age they pass away, so it is clear and simple. (this is not applicable to Defined Benefit schemes). The below table shows the situation more clearly.
Defined Benefit Plans
|UK Pension –
(generic pension benefits)
|SRA||Married couple 1st to pass away||50% income to Spouse|
|Married couple 2nd to pass away||0% of total plan|
|Single but with grown up children||0% of total plan|
|Lump sum to future heirs||0% of total plan|
|SRA||Married couple 1st to pass away||100% of fund value to any beneficiary|
|Married couple 2nd to pass away||100% of fund value to any beneficiary|
|Single but with grown up children||100% of fund value to any beneficiary|
|Lump sum to future heirs||100% of fund value to any beneficiary|
SRA – Selected Retirement Age
The tables are based on the usual death benefits being taken in retirement. Some plans may have slightly different death benefits which may be higher or lower than 50% income provided on death and guaranteed periods for the first 5 years. Please check the exact benefits within your scheme for a full exact comparison.
A standard UK pension will usually only be invested and pay benefits in Sterling, which means the member runs an exchange rate risk in respect of pension income, in addition to incurring charges in converting the pension payments to the currency of their country of residence.
A transfer under the QROPS provisions means that the pension payments can be made in the local currency, thus potentially eliminating exchange rate risk.
Lifetime Allowance Charge (LTA)
QROPS – There is no LTA charge within a QROPS so transferring larger plans to a QROPS may not be caught in this reduction in the future. Careful planning will be needed with your adviser if you are close to the limit in the UK. (a transfer to a QROPS is a crystallisation event, so will be tested against the LTA at that stage, any benefits above the LTA at time of transfer will be subject to a 25% tax liability.
SIPP – This is a restriction on the total permitted value of an individual’s total accrued fund value in UK registered pensions, currently £1m. Those who exceed this value face a potential tax liability of 55% on the excess funds on retirement at any time when there is a “benefit crystallisation event” that exceeds the LTA. A benefit crystallisation event is any event which results in benefits being paid to, or on behalf of, the member and so includes transfer values paid to another pension scheme, as well as retirement benefits.
QROP & SIPP If you have a pension(s) with a combined transfer value of less than £50,000 then the charges may be prohibitive.
Loss of Protected Rights
QROPS & SIPP – A transfer may result in the loss of certain protected rights, including Guaranteed Annuity Rates, Guaranteed Minimum Pension, a protected enhanced lump sum, or rights accrued under a defined benefit scheme. (These are shown in the section “Analysis of Your Existing Pensions”).
Returning to the UK
If you return to the UK, then the QROPS administrator will have to report this ‘event to HMRC and the pension scheme will become subject to UK pension regulations again.
If it is your intention to return to the UK in the near future then a transfer under the QROPS provisions is usually inappropriate. If this was the case then we can help with our UK SIPP offering which may be more appropriate.
When is a guarantee not a guarantee?
By Derek Winsland - Topics: Company Pension Schemes, Defined benefit pension scheme, Final Salary Pension, final salary schemes, France, Pensions, QROPS, Retirement
This article is published on: 15th March 2017
On 20th February, the government issued its eagerly awaited Green Paper on reforming defined benefit occupational pensions, more commonly known as final salary pension schemes. This consultation document invites opinion from the pensions industry for giving the government powers to re-structure the benefits payable from such schemes in instances where the employer (and its pension scheme) are in financial difficulty.
For re-structure, read ‘water down’, as what the government proposes is that the scheme, with tacit government approval, can change the terms by which pensions are paid out to its pensioners.
The catalyst for this green paper is the situation surrounding Tata/British Steel, where the sticking point for any sale hinged on the deficit in the British Steel Pension Scheme. This deficit has been variously reported as between £300m and £700m and under current rules, any buyer would have to take on responsibility for addressing this shortfall. Negotiations between the trustees of The British Steel Pension Scheme, Tata and the government has resulted in the trustees amending the way pensions in payment are increased annually from Retail Price Index (RPI) to the lesser Consumer Prices Index. Experts believe this will save the pension scheme, on average £20,000 per member.
Fast forward to 20th February and the government now believes this would be beneficial for ALL schemes suffering from deficiencies in its funding to be able to water-down its benefits. But is this all bad news?
In the case of Tata/British Steel, the alternative was for The British Steel Pension Scheme, with £14 billion of assets, to enter the pension industry’s ‘safety net’ the Pension Protection Fund. If a scheme enters the PPF, its pensioners are guaranteed 100% of their pension entitlement up to a ceiling of £37,420 (at age 65), but with annual increases limited to 2.5% pa. For those members, yet to reach pension age, they are entitled to 90% of their pension.
The Tata deal gives its pension members better benefits than they would receive in PPF, and so received the approval of government and the unions.
The deal that Sir Philip Green struck with the Pensions Regulator for the BHS Scheme is structured along the same lines – the £363m that he ‘deposited’ alongside the BHS Scheme, which has entered PPF, will allow for the BHS pensioners to receive better benefits than would otherwise have been paid from the PPF. I say ‘deposited’, because it is a one-off, no-strings attached, contribution by this Knight of the Realm, to keep the Pensions Regulator happy, whilst preserving the number of yachts in his possession.
And the BHS deal adds to the uncertainty defined benefit pension scheme members must be feeling right now. Sir Philip’s ‘deposit’ has been labeled, within the industry, as a Zombie Pension Fund. In essence, it allows employers to deposit a chunk of money in a pot, separate to its pension fund, that will be called on to sweeten the pill if the scheme then enters PPF.
But why would an employer do this? Because a move such as Sir Philip Green’s puts a cap on the employer’s liabilities. If an employer can strike a deal where it can walk away from its continuing responsibilities to its pension scheme members, then it’s going to be attractive. We’re all going to hear a lot more about ‘sustainability’ of pension funds, with its open-ended responsibility and liabilities falling on the employer. This green paper is, I fear, going to open the flood-gates to more deals being struck by employers with their pension scheme trustees.
I may be wrong but I suspect Mergers and Acquisitions activity could reach unprecedented levels if the government gives the nod to these pension changes.
If you have preserved pension benefits held in a defined benefits pension scheme and would like to find out more about your pension entitlement and its funding position, then please contact me direct on the number below. You can also contact me by email at email@example.com or call our office in Limoux to make an appointment. Alternatively, I conduct a drop-in clinic most Fridays (holidays excepting), when you can pop in to speak to me.
Our office telephone number is 04 68 31 14 10.
Pensions Time Bomb
It could be said that uncertainty is the nemesis of good long term financial planning and living in today’s world you could be forgiven for throwing your hat in and tucking yourself away for a few years: Hard Brexit, Soft Brexit, Donald Trump, Italian Constitutional Referendum, German and French elections, the rise of nationalism, and the list goes on.
However, time always marches on and we either get left behind or plan forward. No one has ever complained to me (yet) about finding ways to legally save tax, finding ways to save money, getting better investment returns, or having more money then they had planned for.
So with this in mind I want to return to a subject which I have touched on a few times before but which has been hurled back to the top of the financial planning priority charts: UK Final Salary Pension Schemes.
This Blog is specifically for anyone who holds any type of corporate final salary pension plan. (It does not relate to the UK state pension or UK government pension schemes, eg Teacher, Doctor, Army etc).
STARTING WITH THE BAD NEWS
I want to break some bad news to holders of those historically ‘gold plated’, final salary pensions schemes. The schemes that promise you a certain level of income based on your last few years salary level with your employer.
THEY ARE NO LONGER GOLD PLATED!
This is quite a complex area to try and explain, but let me try and sum it up in a nutshell.
When the population starts living longer and the pension scheme can’t ask anymore contributions from the new members (without crippling them financially), then the cost of looking after the existing retirees for a much longer time than the scheme had anticipated (due to medical advances), becomes much greater than the net new money being put into the scheme.
If this were a family, it would be in debt. A mortgage, it would have defaulted. A company, it would have gone bankrupt.
Another problem is that these pension scheme need such a secure income stream to pay the retirement incomes of the retirees that they have to invest the scheme assets in safe, but incredibly low yielding asset such as Government Bonds.
And there you have the problem. If you make very attractive promises to the retirees, based on your calculations many years ago, but the financial landscape changes dramatically during that time, then your original calculations are now totally obsolete. More money out than coming in spells TROUBLE!
If you want to know how bad this situation is, then take a look at these figures. (These show the market value of the company in billions, versus the liability of their long term pension obligations, ‘IN BILLIONS’. The figures are staggering)
These are the worst in the UK. If these companies had to legally honour their pension liabilities, they would be bankrupt.But, let’s not be silly about things. The Government would never let companies like this go bankrupt, so they allow them to continue to operate the pension funds off their balance sheets.And, to make it even more enticing they allow them another ‘get out clause’…outright default!, right into the UK Pension Protection Fund. A UK Government run scheme which guarantees to pay the pensions (up to certain limits) in the event that the company says it can no longer do so.The burden moves to the taxpayer!
However, as low interest rates and retirees living longer wreck their long term calculations, more and more pension schemes are opting to close down and place their members under the Pension Protection Fund. As more and more members apply the burden becomes greater on the UK public purse? Do they cut the maximum amount of pension you could receive? What about the benefits you might lose?These are all very serious questions for people who are currently members of final salary pensions.However, there is some potential light at the end of the tunnel. A transfer away from the scheme, with a lump sum from which you can invest and take income from, as though you had your own personal pension.The advantages and disadvantages have to be weighed up but with more schemes in financial difficulty there is a distinct possibility that it might be worth your while.NOW! is the time to find out the value of your pension
Low interest rates and stress on the pension fund means that transfer values out are at historical highs. The companies are happy to rid themselves of you and will pay handsomely to do so, and the low interest environment means the transfer out values are much higher than you might imagine.But low interest rates will not continue forever. Brexit and the fall of GBP will create inflation and that means interest rates will have to rise.Get the information now before it is too late
Lastly, let’s leave things on a good note. If the benefit of transfer out is clear and present after an analysis of the situation, then you can also pass your income onto your spouse/partner, and/or leave the asset to your family on death. The benefits are not lost when you dieThere are benefits on both sides of the argument and we provide a FREE analysis to advise our client whether to transfer or not. If you want to look into this area of your retirement plans and potentially secure your long term income stream, then you can contact me on firstname.lastname@example.org or on cell: +39 3336492356
Company Pension/Final Salary funding update 31st January 2016
With most UK Final Salary schemes (also known as Defined Benefit) now closing their doors to new members, the schemes are concentrating on trying to manage to make sure there is enough money for those people still in them for retirement. This ‘closing of the doors’ also means there is no ‘New Money’ entering the schemes, which takes away the option of new contributions paying the pensions of those currently retired, as they used to. One of the biggest reasons for this, is that many years ago these often called ’Gold Plated’ schemes were made up on the following mathematics:
People retired at 55, then died at 67.
Thus, approximately 12 years of payments should they live to this point. However, now the mathematics are more likely to be the following:
People retire at 60, and the average life expectancy is 84 in Europe.
You don’t need to be a mathematician to work out why the schemes are faltering, and worryingly in many cases, heavily reliant on their companies contributing millions of pounds to keep them going.
The Pension Protection Fund (PPF) takes these schemes under its wing should the company scheme get to a point that it cannot realistically recover from poor funding. However, it is gaining more and more ‘members’ and will only cover pension income up to a point. Therefore, many client’s believe it is better not to be in the PPF if possible, and have your pension under your own control and in essence not at the mercy of a government body to bail you out. People thought that the Kodak pension scheme would always be ok; unfortunately it was not and left a lot of people with no or little pension benefits.
Below is a transcript of the update from the Pension Protection Funds own website updating what has happened and why. If you have any questions regarding this or what your options are, don’t hesitate to contact Christopher, the article writer (contact information is at the bottom of this article).
Update from the Pension Protection Fund (PPF) of its members
The aggregate deficit of the 5,945 schemes in the UK Pension Protection Fund (PPF) Index is estimated to have increased over the month to £304.9 billion at the end of January 2016, from a deficit of £222.4 billion at the end of December 2015. The funding ratio worsened from 84.9 per cent to 80.5 per cent. Total assets were £1,258.7 billion and total liabilities were £1,563.6 billion. There were 4,923 schemes in deficit and 1,022 schemes in surplus.
The aggregate deficit of the schemes in the PPF 7800 Index is estimated to have increased to £304.9 billion at the end of January 2016, from £222.4 billion at the end of December 2015. The position has improved from the previous year, when a deficit of £367.5 billion was recorded at the end of January 2015. The funding ratio of schemes decreased over this month from 84.9 per cent to 80.5 per cent at the end of January 2016. The funding ratio is higher than the 77.6 per cent recorded in January 2015.
Within the index, total scheme assets amounted to £1,258.7 billion at the end of January 2016. Total scheme assets increased by 0.9 per cent over the month and decreased by 1.2 per cent over the year. Total scheme liabilities were £1,563.6 billion at the end of January 2016, an increase of 6.4 per cent over the month and decreased by 4.7 per cent over the year.
The aggregate deficit of all schemes in deficit at the end of January 2016 is estimated to have increased to £338.4 billion from £265.8 billion at the end of December 2015. At the end of January 2015, the equivalent figure was £392.6 billion. At the end of January 2016, the total surplus of schemes in surplus decreased to £33.6 billion from £43.4 billion at the end of December 2015. At the end of January 2015, the total surplus of all schemes in surplus stood at £25.2 billion.
The number of schemes in deficit at the end of January 2015 increased to 4,923, representing 82.8 per cent of the total 5,945 defined benefit schemes. There were 4,679 schemes in deficit at the end of December 2015 (78.7 per cent) and 5,175 schemes in deficit at the end of January 2015 (85.4 per cent of the 2014 population of schemes). The number of schemes in surplus fell to 1,022 at the end of January 2016 (17.2 per cent of schemes) from 1,266 at the end of December 2015 (21.3 per cent). There were 882 schemes in surplus at the end of January 2015 (14.6 per cent of the 2014 population of schemes).
Understanding the impact of market movements Equity markets and gilt yields are the main drivers of funding levels. Scheme liabilities are sensitive to the yields available on a range of conventional and indexlinked gilts. Liabilities are also time-sensitive in that, even if gilt yields were unchanged, scheme liabilities would increase as the point of payment approaches. The value of scheme assets is affected by the change in prices of all the major asset classes, not just equity markets. However, due to their weight in asset allocation and volatility, equities and bonds are the biggest drivers behind changes in scheme assets; bonds have a higher weight in asset allocation, but equities tend to be more volatile. Over the month of January 2016, liabilities increased by 6.4 per cent. Conventional and index-linked 15-year gilt yields fell by 34 basis points and 20 basis points respectively. Assets rose by 0.9 per cent in January 2016. The FTSE All-Share Index fell by 3.1 per cent over the month. Over the year to January 2016, 15-year gilt yields were up by 33 basis points and the FTSE All-Share Index was down by 7.9 per cent.