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Inflation – Are you prepared?

By Gareth Horsfall - Topics: Inflation, Italy
This article is published on: 12th May 2017

12.05.17

Let’s face it Inflation is not the most interesting of topics and not when we can have more interesting heated and political debates about Syria, Brexit, Trump and Russia, but from a Government point of view that is just what they want. The almost invisible creeping force of inflation to go almost unnoticed.

For investments, retirement and people who have fixed incomes it is by far and away the most important consideration when making plans for the future.

My bet is that it is likely to be the most significant financial issue that will affect us all in the not so distant future.

This article is about being prepared!

What is inflation?
By definition Inflation is the rise in the cost of living or an increase in the money supply in an economy. They are both intricately linked.

Since 2008 central banks around the world have created $6 trillion worth of new money.

Imagine $1 trillion
If you spent $1 million a day since Jesus was born, you would have not spent $1 trillion by now, but $700 billion. This is the same amount the banks got during their bailout.

Inflationary Effect
We now know what it is but why is it so important right now? The policies the Governments around the world have taken to prevent financial depression and deflation were always likely to cause inflation and erode our standards of living. Governments have an incentive to distort real inflation rates because it allows them to keep their inflation-linked benefits and pension payments low. It also, magically, erodes the underlying debt of a country in the same way as a mortgage. For example the debt becomes proportionately less as the value of the house increases and wages grow as well.

A simple example would be someone who bought a house in central London in the 1980s for approx £40,000. A mortgage of £30,000 taken out at the time might have been a heavy burden, (75% – Loan to Value (LTV)) but in 2017 this would be considered very small and if the house is now worth £1 million, then proportionately the debt has been eroded to 3% Loan to Value.

The heavily indebted governments around the world have a huge incentive to allow inflation to run out of control for some time to come.

History repeats itself
I always find that there is some value to the phrase ‘History repeats itself’ and not forgetting it. In researching this article I found figures which show the inflation rates of countries around the world and in most developed economies inflation has been falling (with intermittent blips) since about 1980 and has fallen from its highs in approx 1974. I was born in 1974 and am 43 years old this year. I have never lived through a period of significant inflation.

Well, that might all be about to change!
Brexit and the fall in the value of GBP has certainly caused a marked effect on prices in the UK. Inflation is on the rise there and that is unlikely to stop soon. The true effects of Brexit were never going to be apparent straight away and real economic effects always emerge approximately 18 months after decisions have been taken. The UK can realistically expect more price rises. However, Europe is also seeing signs of recovery and inflationary markers are also turning up for the USA, Germany, Spain, Ireland and even Italy.

So the real question is…is this the start of a 40 year reversal in trend? or is it just another blip?

Wages must grow
I think it might be the start of a trend but which will not take off just yet. The biggest problem holding back inflation is wage growth. It makes sense that wages have to grow for inflation to take effect. The more money is in people’s pockets, the more they will spend. However wage growth has been stubbornly slow to take off.

Corporate greed and minimum wage
The EU have now started to look at ways in which people can receive a living wage. One way is by stopping state sponsored corporate tax evasion and fairly taxing the profits of large corporations. However, this might be more of a long term objective, Another option is to introduce a fair minimum wage and this is something the EU is pressuring all members states into imposing. So whilst it may be hard to see how wages could grow naturally they may be forced up through new regulation which in itself would in turn create an inflationary effect.

Inflation, investments and interest rates
So, you might be thinking that if inflation starts to rise then interest rates will rise as well. This is very likely to be true and then why the need to invest capital instead of leaving it in the bank account.

The answer to this is very simple
For as long as money measures have been recorded, and central banks have existed, they have never, ever been able to control inflation or deflation. Once the inflationary gun has been fired the central banks are always behind the trend. They are constantly playing catch up and trying to raise interest rates whilst real inflation rises. To make matters worse, this time round, they have a real incentive to be well behind the curve and allow inflation to spiral out of control. It will assist in deflating their debts away. So what incentive do they have to apply interest rates increases which will dampen the very effect which can erode the public debt.

And what about the personal saver and investor? Let’s look at the 2 things separately:

Savers: If you earn a fixed rate of interest at 1% (bank account of fixed rate Bonds) and inflation is at 2.3% (as is currently the case in the UK) then your net return on your money is -1.3%. On a deposit of £100,000 your net annual return is NEGATIVE £1300.

Investors: Whilst the price of your asset will fluctuate, you could be earning interest and in the right assets this could be as high at 3-4%. In addition the value of your asset might also rise. History tells us that the stock market generally rises in an early inflationary environment. Inflation in developed countries has been at historically low levels,
but the outlook is picking up and this could bode well for projected investment returns.

Summary
My feeling about inflation, for what it is worth, is that we are going to see a reversal in trend and over the coming years it will start to move swiftly upwards with intermittent slow periods. It has to! There are no more monetary manipulation tools left for central governments to play with and therefore inflation must rise.

Equally governments have no incentive to slow it down, quite the opposite, and we could see the cost of living start to rise quickly once it starts.

It is hard to see when it will all start and how, but that is the joy of economics and finance. It just is and just does. (I sound like Forrest Gump).

The key for individuals like ourselves is to be ahead of the trend and start planning forward…NOW. There is no value in waiting for things to start to happen and then playing catch up.

What’s next for GBP versus EURO

By Gareth Horsfall - Topics: BREXIT, Inflation, Italy
This article is published on: 29th March 2017

29.03.17

Whatever you think about Brexit and the effects it is having and the effects it will have I can’t think of a more sudden and bigger impact on most people’s lives than the depreciation of Sterling.

An approximate 20% fall in the currency since the heights of 2015.

Most people I know are able to accommodate this in some way, cutting back on the non-essentials and saving in other areas. However, if it falls further how will that affect us?

So, I thought I would do some digging around and contact some financial institutions to find out their opinion on the future of Sterling.

Let me start with a caveat to this article: Currencies are notoriously unpredictable. Most industry professionals accept that they can’t control them and have little ability to predict them. Predictions are about as effective as looking at ‘Il Meteo’ to see what the days weather is going to be!

HEDGE FUND MANAGERS
Whilst it is impossible to predict currency movements you can guarantee that behind the scenes there is plenty of activity and big positions being taken. I avidly remember when I spoke with someone in the financial markets the morning of Brexit vote +1. The person on the other end of the line told me that he had no idea how the markets were going to react but that fortunes had been made the morning of 24th June 2016 with currency speculators betting against GBP v EUR and USD.

These same speculators love uncertainty as it gives them more influence over the market…in theory. However, given the fact that recent key announcements don’t really seem to be devaluing Sterling any further it gives you the impression that it may have found a level of equilibrium that prices in any current uncertainty…for now.

FAST FORWARD TO MARCH 29TH – BREXIT DAY
I think it is safe to say that post Brexit day Sterling is likely to suffer marginally, purely due to the negative economic notions associated with it. The news flow during this period is, in the main, likely to be negative (unless you read the Daily Express or Daily Mail) and therefore it is reasonable to assume this will have an impact on Sterling and push it further down.

LONG DRAWN OUT NEGOTIATIONS
The negative news is probably already being prepared as I write and therefore we can expect a gush of it next week. However, stretching the time horizon out further into the process the news flow will probably slow to a trickle with occasional floods, dependent on political news on any given day. It is absolutely clear that an advanced economy which has been involved in an economic union for the last 56 years cannot extract itself from this same union in only 2 years and therefore the negotiations ‘could’ continue a lot longer than expected. A long drawn out negotiation with the EU could work in Sterling’s favour and we could see a significant rally.

INVESTMENT PSYCHOLOGY
I think it is also useful to never forget the psychology of people and our cumulative tendency to be over anxious in times of stress and over confident when times are good. This is a classic investment bias and no one is immune to it, not even the greatest minds. Our currency biases are no different. We can easily anchor to an exchange rate that we feel is a ‘natural level’ based on our own experience, but on what basis are we making these assumptions? Are we seeking out all opinion, even that which is contradictory to our own thinking or are we making these assumptions based on information that we seek out to confirm our own opinion?

Maybe Sterling is overly devalued merely on the preconceived notion that its choice to leave the EU is a bad thing. Unfortunately for us we are about to enter uncharted territory and our biases will soon be tested.

LONG TERM FUNDAMENTALS
In reality, it is good to look at the facts, even though understanding our own psychological processes around exchange rates is probably more important. But BEWARE:

What I am about to write may just allow you to ‘anchor’ your perceived idea of where Sterling should be valued based on what you already think. I would encourage you to not let my musings influence your thoughts!

Using long term macro-economic modelling, Sterling looks very undervalued versus the Euro. Without Brexit, you could easily argue that fair value should be around 1.4 euros to the pound, taking into account structural economics only. Assuming Brexit, we can work on the basis of c.1.25 but it could take years to get there.

Productivity is the key driver of this long term model – particularly productivity in the tradable goods sectors. This is likely to suffer after Brexit due to non-tariff barriers to trade (think about the additional overseas regulation and customs regimes that need to be implemented post Brexit). That said productivity growth in the EU is and has been weak and it is unlikely to surge ahead whilst the UK economy recalibrates, which should ultimately limit the damage to Sterling.

Over the medium term, the exchange rate trades within a range of values where 2 or 3 year interest rate expectations would imply it should be.

So the next time you speak with someone and you hear yourself quoting a post Brexit level of 1.25 or a long term rate of 1.4. Make sure you remember where you heard it first and pinch yourself. It’s all theory. The rate is what it is on any given day and there is nothing you can do to influence it!

Currency swings have a major impact on people’s lives. Therefore, it is important to make sure that the rest of your financial affairs: investments, pensions, tax planning etc., are working to maximum effect. If you would like to ensure that all your other financial affairs are in perfect working order then don’t hesitate to contact me on gareth.horsfall@spectrum-ifa.com or call me on +39 333 649 2356 for a FREE consultation.

Taxation of UK rental income in Italy

By Gareth Horsfall - Topics: Exchange of Information, Income Tax, Italy, Property, Tax, taxation of rental property, UK property
This article is published on: 19th March 2017

19.03.17

Since the recent exchange of information between HMRC and the Italian tax authorities on UK rental property owners, I have been asked the question whether rental income (when taxed principally in the UK) will be taxed again in Italy as an Italian resident.

Rental income from properties is dealt with according to the law of the state where the property is situated. This means that you can deduct your expenses in the UK, in entirety and in line with UK law, and then the NET income is declared to HMRC in the UK.

When it comes to the Italian tax declaration the NET UK rental income needs to be declared, along with the tax paid in the UK.

This income is put together with any other income you may have for the year, to be declared in Italy,and a credit is given for the tax already paid in the UK, and the tax is calculated on the normal IRPEF rates (income tax rates in Italy).

In short the NET UK rental income position is what needs to be declared in Italy.

Given the recent clampdown on people who are not declaring their UK rental income in Italy, as Italian residents, this information should help to ease any thoughts of having to pay tax twice.

Of course, all this applies to properties held in other countries as well and not just the UK.

The bottom line is get your affairs ‘in regola’ because it is unlikely to cost you any more than it would in the UK, and you can sleep easy knowing you have done the right thing.

BRITISH IN ITALY

By Gareth Horsfall - Topics: BREXIT, Italy, Residency
This article is published on: 2nd March 2017

02.03.17

As you may already be aware I am now a part of the group called ‘British in Italy‘ which has been set up to protect and fight for the rights of Italian citizens living in the UK and UK citizens living in the EU.

As we move further through the BREXIT process no doubt more information will come to light regarding the protection that the UK and EU will grant us in these negotiations.

Our message is simple:

We should be granted all the rights that we have acquired and/or are entitled to before the UK chose to leave the EU.

I would ask you to get behind this movement and help us to fight for you in the UK and in Italy, in our discussions at the UK Embassy and also in our meetings with Italian MPs. It is very important that we are seen to be representing a large number of UK Nationals living in Italy. Numbers hold a lot of credibility for us.

In 2015 ISTAT (the Italian statistics agency) recorded approximately 27000 UK Nationals registered in Italy. We are in touch with about 1000. We have a long way to go!

If you have not yet made your presence known, and/or you know someone who hasn’t then feel free to get in touch with the British in Italy group at britsinitaly@gmail.com Your name and contact information will be registered and you will be added to a newsletter mailing list. (Your information will not be shared or used for corporate purposes).

Or follow us on Facebook HERE

Our objectives are listed below:

  • British in Italy is a group of UK citizens resident in Italy concerned about the effect of Brexit on the many thousands of UK citizens in Italy and the half million or so Italians in the UK.
  • Our aim is to ensure that Brexit does not penalise these individuals, all of whom made the decision to move across the Channel in bona fide and relying on their EU right of freedom of movement.
  • UK citizens already in Italy and Italians already in the UK should therefore continue to have all the rights they had acquired or were in the process of acquiring while the UK was in the EU.
  • We have already lobbied the UK government hard not to take these rights away from EU citizens in the UK.

Remember to get in touch at britsinitaly@gmail.com

• We now call upon the Italian government, both as a national government and as a founding member of the EU, to ensure that in the negotiations over Brexit these rights are not taken away from expatriate citizens on either side of the Channel.

Remember to get in touch at britsinitaly@gmail.com

UK PUBLIC SECTOR PENSIONS, BREXIT AND ITALIAN CITIZENSHIP

By Gareth Horsfall - Topics: BREXIT, Italy, Pensions, public sector pensions, QROPS, Retirement, United Kingdom
This article is published on: 1st March 2017

01.03.17

I was watching a nature documentary with my son the other day and we were watching the foraging activities of grizzly bears in North America.

It was interesting from the perspective that they will forage across huge distances in search of different food types to ensure they get the proteins, minerals and vitamins they need to stock up for the long winter ahead of them.

In some ways this behaviour reminded me of the foraging that I sometimes embark upon, across the internet, to ensure that you have all the information you need to weather the seasons ahead. We have lived through some spring and summer seasons, metaphorically speaking, but politically we seem to be entering autumn and possibly winter, depending on your point of view of course. I imagine for those people I know who voted BREXIT, that this is a new dawn. However, I will stick with my view for the purposes of this blog.

FORAGING
I was foraging through the internet last week in search of some information on UK pensions and happened to stumble across an Italian fiscal website which had a summary of the Italian tax treatment of pensions from around the world.

To my surprise, my eyes fell across the following statement in relation to pensions paid from Argentina, UK, Spain, the USA and Venezuela:

‘Le pensioni private sono assoggettate a tassazione solo in Italia, mentre le pensioni pubbliche sono assoggettate a tassazione solo in Italia, se il contribuente ha la nazionalità italiana.’

WHAT DOES THIS MEAN?
In short, and what caught my eyes was specifically in relation to the tax treatment of public section pensions in Italy.

…….le pensioni pubbliche sono assoggettate a tassazione solo in Italia, se il contribuente ha la nazionalità italiana.’

(Public sector pensions would be those defined as local Government, doctors, nurses, police, firemen, armed forces, teacher etc).

If you are a holder of one of these types of pensions and are resident in Italy, you will likely know that under the double taxation treaty with the UK, in this case, that public sector pensions are only taxed in the UK, for those who are no longer UK resident and are therefore not subjected to taxation in Italy.

However, the above statement implies that if you are an Italian national then this pension would be taxed in Italy. (Taking into account any double taxation credit that would need to be applied). Therefore, Italian tax rates would apply and the pension would not benefit from the application of the UK personal allowance, in Italy, either.

This is clearly important, given BREXIT, and the number of people who were considering or making application for Italian citizenship as a means of resolving the issue of residency. Italian citizenship would define you as an Italian national and tax would apply to a UK public service pension.

DOUBLE TAXATION TREATY
Without wanting to take the words of a website as hard evidence, I did some more foraging and can confirm the words of the double taxation treaty (UK/Italy) as follows:

(2) (a) Any pension paid by, or out of funds created by, a Contracting State or a political or an administrative subdivision or a local authority thereof to any individual in respect of services rendered to that State or subdivision or local authority thereof shall be taxable only in that State.

(b) Notwithstanding the provisions of sub-paragraph (2)(a) of this Article, such pension shall be taxable only in the other Contracting State if the individual is a national of and a resident of that State.

THE BREXIT PROBLEM JUST KEEPS GETTING BIGGER
So, here we have another BREXIT problem which has now arisen as part of further investigation. I would suggest that Italian citizenship, for those with UK civil service pensions, needs to be thought out carefully and planned financially, before any action is taken.

Italy – Thinking about taxes?

By Gareth Horsfall - Topics: Banking, BREXIT, EU Select committee, Italy, Tax
This article is published on: 14th February 2017

14.02.17

Tax in Italy can seem complicated but with careful financial planning it needn’t be.

A summary

As a fiscally resident individual in Italy you are subject to taxation on your worldwide income (from employment, pensions or investments), assets, realised capital gains and the capital itself.  The rates depend on the types of income you generate and which assets you hold.  This means you are required to declare all your financial affairs no matter where they might be located or generated in the world.

Tax on Income

If you are in receipt of a pension income and it is being paid from a private pension or occupational pension provider overseas or you are in receipt of a state pension then that income has to be declared on your Italian tax return.  Certain exemptions apply for Government service pensions.

It is a similar picture for income generated from employment. This is a slightly more complicated issue that depends on many factors. If you have any questions in this area you can contact Gareth Horsfall on gareth.horsfall@spectrum-ifa.com

Investment income and capital gains

Interest from savings, income from investments in the form of dividends and other non-earned income payments are taxed at a flat percentage rate.  The same applies to realised capital gains.

Some wealth tax may apply on the value of your investments each year as well.  This is charged on the capital value as at the 31st December each year

Property Overseas

Property which is located overseas is taxed in 2 ways. Firstly, there is the tax on the income itself and, secondly, a tax on the value of the property.

1. The income from property overseas.

Overseas net property income (after allowable expenses) is added to your other income for the year and taxed at your highest rate of income tax in Italy.

2. The other tax is on the value of the property itself.  

The value on which this is calculated is the equivalent of the Italian cadastral value of the overseas property.   The value, on which the tax is charged, depends on whether the property is located inside the EU or not.   A credit may be applicable depending on where your property is located.

Taxes on Assets

1. Banks accounts and deposits 

A fixed charge is applied, per annum, per bank account, held overseas.  Minimum balances apply.

2. Other financial assets

The wealth tax on other foreign-owned assets (IVAFE), covers shares, bonds, funds, cryptocurrencies, gold, art or other portfolio assets  that you may hold. The tax is charged on the value as of 31st December each year.

Placing your assets in a suitably compliant Italian investment structure can help reduce taxes and adminstrative burden and aid in your financial planning in Italy.

You might pay more than you need to?

This is a general list of the taxes that could affect you when resident in Italy.  If you haven’t conducted a financial planning exercise before moving to or since moving to Italy, you could be paying more than you need to.  Our experience is that most people are.

We can, in most cases, identify a number of financial planning opportunities for individuals looking to move to, or already living in Italy, to protect, reduce, and avoid certain taxes.

Residency rights in Brexit negotiations examined

By Spectrum-IFA - Topics: BREXIT, EU Select committee, europe-news, Exiting The EU Select Committee, Italy, Spectrum-IFA Group, The Exiting the European Union Committee, Uncategorised, United Kingdom
This article is published on: 19th January 2017

19.01.17

Yesterday on 18th January The Exiting the European Union Committee met in the ‘Boothroyd Room’, Portcullis House, London. The committee looks at the rights of EU citizens living in the UK and UK nationals living in EU member states as part of the negotiations for exiting the EU.

Witnesses in attendance included Gareth Horsfall from The Spectrum IFA Group, representing Expats living in Italy.

The Purpose of the session

The questioning focuses on the terms of reference for the inquiry, in addition to:
The concerns of EU citizens currently living in the UK, and UK nationals currently living in the EU
What approach the UK Government should take in the negotiations to safeguard the rights of both EU nationals in the UK and UK nationals resident in the EU
The process for identifying and clarifying the status of EU nationals in the UK

Witnesses in attendance

  • Nicolas Hatton, Founding Co-chair, the3million
  • Anne-Laure Donskoy, Co-chair, the 3million
  • Barbara Drozdowicz, Chief Executive Officer, East European Resource Centre
  • Florina Tudose, Information and Outreach Coordinator, East European Resource Centre
  • Debbie Williams, British citizen resident of Belgium
  • Gareth Horsfall, British citizen resident of Italy (The Spectrum IFA Group)
  • Sue Wilson, British citizen resident of Spain
  • Christopher Chantrey, British citizen resident of France

The session was broadcast on Wednesday 18 January 2017, from the Boothroyd Room, Portcullis House.
The recording can be viewed here

A full commentary from the session can be viewed on the Guardian Newspapers website here

The Spectrum IFA Group representing Expats in the ‘Exiting the EU Select Committee’

By Gareth Horsfall - Topics: BREXIT, EU Select committee, europe-news, Italy, Spectrum-IFA Group, Uncategorised
This article is published on: 2nd January 2017

02.01.17

Gareth Horsfall from The Spectrum IFA Group in Rome, Italy, will be one of four UK citizens living in the EU who will be representing us at the House of Commons, Westminster, in the ‘Exiting the EU Select committee’, which will be broadcast live on the BBC Parliament and also streamed live over the internet on January 18th between 9am and 12pm. GMT

What is this?

The ‘UK Exiting the EU Committee’ (consisting of 20 MP’s) is appointed by the House of Commons to examine the expenditure, administration and policy of the Department for Exiting the European Union and matters falling within the responsibilities of associated public bodies.

Why have I been considered as a witness?

I have been involved with a few people in Italy who have been taking a very active part in working behind the scenes to try and safeguard our present rights as UK citizens residing in Europe.  A couple of these people thought that because of my particular situation: Italian wife, Italian child, providing financial advice to, mostly, British people living in Italy, being the legal representative of an Italian Ltd company and passporting my UK qualifications into Italy on an equivalence basis, that I might be a good candidate to sit before the select committee and explain the problems that I will face when the UK exits from the EU. I agreed!

It is also an opportunity to explain some of the problems that you will also be facing.

This will be quite an experience and an opportunity for me at the same time. I would be lying if I said it wasn’t a little overwhelming. However, there are human and economic rights that I feel we must make an effort to try and retain as part of the UK divorce from the EU. On that basis I was willing to put myself forward.

So with this in mind, I would invite you to write to me at gareth.horsfall@spectrum-ifa.com and let me know what your worries are about the UK’s exit from the EU. I will read everything before I leave next Tuesday (I may not get chance to reply to everyone, but thank you in advance for any views/opinions you have) and I will use whatever information I can to present a strong case for everyone in Italy and all other British citizens living in Europe.

Time to Unite……

….and Wish me luck!

EU Citizenship Rights for Brits?

By Gareth Horsfall - Topics: eu citizens, Italy
This article is published on: 17th November 2016

17.11.16

The EU Parliament is to discuss the possibility of EU membership for citizens of countries that vote to leave the EU. A proposal was made by an MEP in Luxembourg.

The idea is to guarantee those who want the same rights as full EU citizens, including the right of residence in the EU, to be able to vote in European elections and be represented by an MEP.
I have to admit that the proposal sounds a nice idea but I don’ t see it being accepted.

Human capital will be a big political maneuvering tool in the BREXIT negotiations and if they offered any UK citizen the opportunity to have EU rights then I don’t see how this would aid the UK’s bargaining position. Equally, it may be a incentive for other EU countries to vote to leave as well.

I will follow developments and report them as they arise…

SANCTIONS FOR UNDECLARED ASSETS IN ITALY
This is a subject which I haven’t touched on for some time. What are the penalties for undeclared, and subsequently discovered, assets for residents of Italy?
The penalties for non declaration range between 3% and 15% of the value of the asset, plus any fines for late payment. The percentage is determined by the investigating tax officers depending on the gravity of the misdemeanour.

If you have undeclared money in tax privileged regimes or countries where there is not an adequate exchange of fiscal information then the sanctions are doubled: 6% – 30%, plus fines for non declaration.

This is relevant given the automatic exchange of financial information which is now in force under the OECD Common Reporting Standard.
I know that a number of you have been receiving letters from non ItalIan banks asking you to quote your Tax Identification Numbers (TIN) for reporting purposes. This is your Codice Fiscale for Italian residents. By completing this letter it allows the foreign financial entity to report your information, automatically, to the Italian authorities.

Pensions Time Bomb

By Gareth Horsfall - Topics: Final Salary Pension, final salary schemes, Italy, Pensions, QROPS, Uncategorised, United Kingdom
This article is published on: 3rd November 2016

03.11.16

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 article 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 schemes 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 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!

Examples:
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)

      VALUE       PENSION LIABILITY
BAE Systems       £15.802bn       £29.236bn
RSA Insurance       £4.332bn       £7.126bn
British Telecom       £36.657bn       £51.210bn
Sainsbury       £4.946bn       £7.696bn
Rolls Royce       £10.572bn       £11.564bn
RBS       £39.954bn       £35.152bn

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 die.

There 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