Should you consider transferring your Final Salary Pension Scheme?
There have been a number of recent changes within the UK economy and UK pension rules that make a review of any pension(s) essential for those living or planning to live outside the UK. Final Salary pension schemes (also referred to as Defined Benefit schemes) have long been viewed as a gold plated route to a comfortable retirement, however there are likely to be large changes ahead in the pension industry. The key question is; will these schemes really be able to provide the promised benefits over the next 20+ years?
Why Review now?
Record high transfer values
– Gilt rates are at an all time low. This has caused transfer values to be at an all time high, some transfer values have increased by over 30% in the last 12 months.
– Actuaries Hyman Robertson now calculate the total deficits on remaining final salary pension schemes as £1 Trillion!
– Recent examples show that these very large deficits cause a number of problems, in particular no one wants to purchase these struggling companies as the pension deficits are too big a burden to take on.
– Could the Government be forced to change the laws to allow schemes to reduce benefits? A reduction in the benefits will reduce the deficits and make the companies more attractive to purchasers. There is a strong argument that saving thousands of jobs is in the national interest, if that just means trimming down some of these “gold plated benefits”.
Pension Protection Fund (PPF)
– This fund has been set up to help pension schemes that do get into financial trouble, two points are key. Firstly it is not guaranteed by the Government and secondly the remaining final salary schemes have to pay large premiums (a levy) to the PPF in order to fund the liabilities of insolvent schemes. As more schemes fall into the PPF there are fewer remaining schemes that have to share the burden of this cost. Their premium costs will increase as there will be fewer remaining schemes to fund the PPF levy.
– It is likely the PPF will end up with the same problems as the final salary schemes, they won’t have the money to pay the “promises” for the pensioners. Additionally the PPF will most likely have to reduce the benefits they pay out.
Pension changes that have already happened
Inflationary increases have already been permitted to change from Retail Prices Index (RPI) to Consumer Prices Index (CPI), this change looks reasonably small, but over a lifetime this could
reduce the benefits by between 25% and 30%.
– In April 2015 unfunded Public Sector pension schemes have removed the ability to transfer out, so schemes for nurses, firemen, military personnel, civil service workers etc. can no longer transfer their pensions. Now these are blocked, it will be easier to make changes to reduce the benefits and no one is able to respond by transferring out.
– When this rule change was being discussed the authorities also wanted to block the transfer of funded non-public sector schemes, i.e. most corporate final salary schemes. There is therefore a risk that transfers from all final salary schemes could be blocked or gated.
Autumn Statement (Budget)
– This is on 23 November 2016. Could the Government make any further changes to Pension rules? When Public sector pensions were blocked there was a small window of time to transfer, however most people couldn’t get their transfer values in time as the demand was so high. People who review their pensions now may at least have time to consider options.
– Could Brexit end the ability to transfer pensions away from the UK? – this is still unknown, but Pensions are often a soft target of government taxation ‘raids’.
Reasons why schemes are in difficulty:
Ageing population – people now expect to live around 27 years in retirement, when these schemes commenced the average number of years in retirement was 13 years.
Lower Investment Returns – Investment returns have not been as high as expected, also there has been a very large reduction in equity (shares) content in final salary schemes, this is now around 33%, in 2006 the average equity content was 61.1%.
Benefits were too good – Simply, many of the final salary schemes were too good. In 2016, if you became a member of a 1/60th scheme then your company would need to add 50% of your salary to make sure the benefits can be paid. Clearly this is unrealistic.
What could happen in the Future?
– An end to the ability to transfer out of such schemes
– Increase the Pension Age, perhaps in line with the increase of the State Pension
– Reduction of Inflation increases, (already started as many now increase by CPI instead of RPI)
– Reduction of Spouse’s benefit
– Increase of contributions from current members
– Lower starting income
Warning – UK Pensions
In the UK the FCA and HMRC have been making frequent changes to Pension rules and the way pensions are taxed. It has been for this reason that many clients have moved their pensions out of the UK. Now with BREXIT around the corner I suggest we may see even more changes.
Transfers out of most public sector schemes have been stopped– but not all, yet! That means that many former public sector workers; Teachers, Civil Servants, Nurses, Doctors, and many Local Government officers, have been unable to transfer their pensions.
More than 100 company pension schemes in the UK are in deficit i.e. they do not have enough money in them to pay out the expected benefits. Some schemes are good and have sufficient funds. Is yours?
In the past our firm have often advised clients to leave defined benefits schemes (final salary schemes) where they are as they usually provided a guaranteed income. Now that view is changing.
Transfer values are at a high at the moment because gilt returns are very low. This is the time to review your pensions before rules are changed yet again. There may only be a short window of opportunity to make sure you can take control over your existing pension funds.
Make sure you review your personal situation BEFORE article 50 is invoked i.e. before the UK start the process of leaving the EU. It is important to find out if your pension pot sitting in the UK is safe and well-funded.
A consultation with me is free. It will cost you nothing but time – I do not charge for a consultation. Although, I might let you pay for the coffee!!!
With the exception of a weakening pound and falling interest rates, we are yet to see the full impact of Britain’s vote to leave the European Union. Perhaps we may not ever see it if Teresa May and/or others decide against triggering Article 50 to herald the start of the process. We currently sit in a ‘phony’ period where no-one knows quite what will happen, causing doubt and uncertainty to set in. We await with bated breath the latest results to come out of the Treasury and the Bank of England.
The latter recently reduced interest rates to an historic low of 0.25%, at the same time announcing a new round of Quantitative Easing. Falling interest rates are either a good thing or a bad thing depending on which side of the saver/borrower fence you occupy. Clearly borrowers are happy, but for savers, especially those who rely upon their capital to supplement their retirement income, it’s not such a happy picture. Indeed, I am seeing this most days I speak to people about their finances. Thankfully, we are able to make investment recommendations that will generate higher levels of returns to counter falling interest rates, but these don’t suit everybody. But like most things I find in financial services, there’s generally a positive that accompanies a negative, if one looks close enough.
One such area relates to the impact falling interest rates has upon pension transfer values. In my last article I touched upon the way transfer values from occupational (defined benefit) schemes are calculated. Without going into chapter and verse, a fundamental part of the calculation process uses gilt interest rates to determine the transfer amount. Although the schemes have a certain amount of leeway in interpreting the rules, the bottom line is that low interest rates result in much higher transfer values having to be quoted by scheme trustees. This makes the decision on whether it suits an individual’s purpose to transfer somewhat easier to determine.
The observant amongst you will recall I mentioned TVAS in my last article, and the (somewhat out-of-date) rules that the FCA still clings on to. Remember critical yields? Well, a higher transfer value will result in a more achievable critical yield becoming attainable, so making the decision to move to a personal pension such as a QROPS, easier to make. Sure there are variables and these are more or less important depending on who you are and what your circumstances are. Carrying out a full analysis of your own particular situation, Spectrum’s advisers can place you in an empowered position to make your choices, so, if you have a defined benefit scheme that you’ve either never reviewed, or one that hasn’t been looked at for a while, perhaps now is the perfect time to do so.
Tin Hat Time at the FCA
In the wake of the fourth Parliamentary Review into the Financial Conduct Authority and its handling of high-profile incidents, comes the latest criticism from the Financial Services Complaints Commissioner who accuses the FCA of “an unwillingness to face up to and address its shortcomings”. He went on to say he had seen a tendency at the FCA to find reasons for excluding cases from the complaints scheme in circumstances where they should not have been excluded. Oh dear, smacks of Big Brother getting too big for his boots and believing itself to be above the law?
It is currently squirming with embarrassment over the antics of Sir Phillip Green and the BHS pension scheme, and this is fostering the belief in the industry that it is too focussed on the advisory sector and overlooking the problems that Pension Freedoms is having on occupational pension schemes, especially Defined Benefit (DB) or ‘final salary’ schemes.
You will no doubt be aware that the legislation passed in April 2015 relaxed the rules over how benefits could be taken from pensions. Gone was the insistence that a “pension is a pension – its job is to provide your income in retirement.” Although this is true, the old-fashioned rules take no consideration of lifestyle and personal choices. A casualty of this new form of thinking is the annuity, where you handed over your pension pot to an insurance company in return for an income for the rest of your life. A great concept except that the insurance company kept your money when you died. Under the new rules, you could use your pension pot to draw income off in retirement (or even before retirement now). This ‘income’ could be regular or ad-hoc in support of other income like state pensions for example.
Crucially, the new rules addressed the world in which we live and choose to live. An example of this could be where a member of a DB pension scheme (or a number of schemes over his/her working life) may decide on a change of career, to move to France to buy a property with an attached Gite to rent out. That is a lifestyle choice that perhaps suits that individual. Personal choice.
Under current (and out of date) FCA thinking, the default assumption is that it would not be appropriate for that individual to transfer the accrued benefits from such DB pension schemes, unless it can be proven that such a transfer is in that client’s best interest. How is this tested? Through the Transfer Value Analysis System or TVAS. Results are shown in the form of critical yields and hurdle rates. Sound complicated? You bet! Except it doesn’t allow for lifestyle choices or individual circumstances, which to the member are of far more importance. As advisers we’re told we must advise and inform the client of what’s in his or her best interest, even if it doesn’t gel with that person’s view. Believe me, those conversations are not easy. The FCA, meanwhile, sits in Canary Wharf, navel-gazing while all this is going on. The more cynical amongst us think the FCA has far more on its plate like finding ways to boost its coffers now it’s been told to stop bank-bashing and fining them for their latest misdemeanours.
There is hope on the horizon, however. The new chief executive of the FCA, Andrew Bailey has promised a greater focus on pensions, hopefully this won’t be an exercise in covering their backsides, but rather a genuine attempt to move with the times, providing much-needed and valuable guidance to the people they serve, the consumer. Let’s all hope that this is sooner rather than later and that the FCA doesn’t get distracted too much wrestling with the bear called Brexit.
If you would like more information on our view of how the investment markets are likely to play out into the future, ring for an appointment or take advantage of our Friday Morning Drop-in Clinic, here at our office in Limoux. And don’t forget, there is no charge for these meetings.
Concerns over effect of BREXIT on expat pensions
The decision by UK voters to leave the European Union could have far-reaching consequences for pensioners living abroad.
This is especially the case for those receiving UK state pensions, but who are living in another EU member state.
The main uncertainty is whether state pensions will continue to benefit from annual increases.
As at September 2014 there were 1.24 million people receiving British state pensions but living outside the UK.
Approximately 560,000 expat pensioners live in countries such as Australia, New Zealand, Canada and South Africa, where their state pension is frozen at the amount it was when they left the UK.
Is it going to be the case that British expats living in EU countries such as France or Spain will find themselves in a similar position?
Since 1955, pensions have been paid worldwide, but there was never any mention of annual increases.
However, in the period to 1973, reciprocal arrangements were made between the UK and 30 other countries, which allowed for annual increases to be paid in certain countries. This was seen as making it easier for people to move freely between countries during their working life without suffering penalties in retirement for doing so.
Very few new agreements have been signed since, possibly because the EU rules meant that there was no need for them between EU countries.
Pensioners living in the EU, Norway, Iceland and Liechtenstein do get increases, but there is no guarantee that this will continue following Brexit.
Inevitably, the UK government will be tempted to save money by ending the increases to pensioners living in the EU.
It is already estimated that the Treasury saves around half a billion pounds a year from pensioners excluded from the increases. This could easily double if pensioners in the EU were to be treated similarly.
The number of overseas voters still on the UK electoral register is negligible, so the government might decide that upsetting these people would have a very modest negative effect. One result could be that more expats would get themselves back on to the UK electoral register (if it were possible for them to do so).
There is also the question of people who are planning to retire to a EU country in the future. They might show their dissatisfaction at the ballot box.
Another reason for the government might not stop the increases is the possibility of large numbers of pensioners living in the EU finding that they have no choice but to return to the UK
If access to free healthcare in the host country was also abolished, the UK government could easily find that significant numbers of pensioners return to the UK, which is a situation it would want to avoid.
For this reason, it is to be hoped that state pension increases will be paid, and there will almost certainly be considerable pressure on the government to find a way to preserve the existing system.
Can you work on yachts and still get a UK state pension?
Even if you are (or have been) a UK tax resident and religiously file your Seafarers tax return every year (which you probably should), does it mean you benefit from such things as the UK State Pension? Unfortunately not…. in order to qualify for any UK state pension (currently approximately £155per week from around age 67,) you need to pay National Insurance contributions (NIC). You need at least 10 qualifying years to receive any of the ‘new state pension’ (for those born after 1951).
In order to be eligible to pay NIC and therefore build up some allowance for UK state pension you must have a NI Number.
There are 4 main classes of NIC
- Class 1 – paid by UK based employees earning more than £155 a week and under State Pension age
- Class 1A or 1B – paid by employers
- Class 2 paid by self-employed people
- Class 3 – voluntary contributions
- Class 4 – paid by self-employed with profits over £8,060p.a.
For yacht crew, who very rarely have any social security contributions in any country, due to the flag state not collecting them from employing companies or due to not having social security systems as we know them, it is highly likely that you will have gaps in your NI record. If you do have a gap it is possible to pay ‘voluntary’ contributions to top up your NI record and receive more pension income later.
We believe that crew should be paying the Mariners Class 2 NICs which are considerably cheaper than Class 3 and have the additional benefit of ‘contribution based employment and support allowance’ when they return to the UK, which is not available if you pay class 3 NICs.
Currently it costs £2.80 a week for Class 2 (£145.60p.a.) or £14.10 a week for Class 3 (£733.20p.a.); either way, the cost is very low to secure an income for life later.
To put this into perspective… if you were to theoretically only pay Class 3 for 35 years you would invest a total of £25 662; you then receive £155per week from, say, 67 which is £8060p.a. which equates to a yield on investment of 31% per year – a no brainer, assuming of course the UK government can continue to pay! *also it is unlikely you can only pay Class 3 for all 35 years, but the point is clear!
However, the form to apply for a review of the NI gap and to register to pay voluntary NICs is complicated and quite detailed which can put some people off from even applying to see if they are eligible to pay it. This is also another great reason to keep a seaman’s discharge book up to date at all times, right from the start of your career.
I would like to thank Clare Viner from Marine Accounts, who are experts in yacht crew taxation, for her assistance in researching this article.
There is also a wealth of information on the UK government website and a Mariners NI Questionnaire which can be filled out for a review of the situation
This article is for information only and should not be considered as advice.
When is a guarantee not a guarantee
When is a guarantee not a guarantee? Members of the BHS Pension Scheme must be wondering that after news broke that the scheme, into which both they and their employer diligently contributed into, is £571 million in deficit. Questions are being asked as to how it ended up in this situation, given that the Trustees of the scheme were supposed to operate within quite strict guidelines, within a regulatory regime that doesn’t usually miss much. It is at this point that a short history lesson is perhaps needed.
The more mature reader will no doubt remember the Robert Maxwell Affair. The former owner of Mirror Group Newspapers (under rules that were allowed at that time) regularly dipped into the wonderfully overfunded Mirror Pension Scheme to prop up his ailing business, to the tune of around £500 million. When this didn’t work, he (allegedly) took a swallow dive off the back of his boat, leaving others to clear up the mess he’d created.
Much hand-wringing in the corridors of power resulted in more stringent rules being put in place to avoid a repetition and to which pension scheme trustees would henceforth have to abide by. Bear in mind, that the employer was generally the trustee of its own scheme, being told to conform to new rules limiting what they could and couldn’t do was a challenge; in the end the regulator focused on policing the funding position of schemes….no more than 110% overfunded and no less than 90% underfunded. This led to overfunded schemes using imaginative ways to reduce its funding position such as providing contribution holidays to its members or giving discretionary increases to retiring members’ benefits for example. Another bright idea was the introduction of reporting requirements that insisted on pension fund deficits being carried through to the company balance sheet – that’ll stop those pesky company executives from massaging their company’s financial position.
Pension Protection Fund (PPF)
Fast forward a few years to the start of the millennium when three years of turmoil in equity markets had a disastrous impact on those funding positions…whoops! This resulted in the creation of the Pension Protection Fund (PPF), a funding mechanism put in place to safeguard the benefits of pension scheme members in the event of company failure. The government of the day decreed that PPF should be funded by the family of pension schemes themselves…..anyone spot the flaw in this? At some indefinable future date, it will fail because the ratio of fully funded schemes will reduce, whilst the number of failing companies increases. Interestingly, one of my colleagues in Spain has analyzed the funding position of the PPF, the results of which are on the Spectrum IFA Group’s website. To the end of January 2016, there are 5,945 member schemes in the PPF, 4,923 of which are in deficit, and only 1,022 in surplus. The average funding position across all companies is 80% (remember the ‘no less than 90% underfunded’ rule?); the deficit position of the PPF is £304.9 billion.
Perhaps, this is the real reason why Pensions Flexibility was introduced? Encourage pension policyholders including members of final salary pension schemes (also known as Defined Benefit or DB Schemes) “to take control of their own retirements”, or buy a Lamborghini if you prefer! The lure of that invitation has not been lost on the Great British pension public, which has resulted in meaningful conversations being had between them and their IFA’s. In some cases, it really is beneficial to take the transfer value offered and put it into a personal pension arrangement, but I stress this does depend on individual circumstances.
Are you a member of a Defined Benefit Pension Scheme?
If you are a member of a defined benefit pension scheme and would like us to carry out an analysis to determine how valuable it is to you and your circumstances, ring for an appointment or take advantage of our Friday Morning Drop-in Clinic, here at our office in Limoux. And don’t forget, there is no charge for these meetings. There is also no charge for the gathering of information from your pension scheme administrator, after which we will put you in a much more-enlightened position as to your benefits.
The New UK State Pension
The new UK State pension scheme has now come into effect from 6th April 2016. Widely publicised by the government as being easier to understand, based on the questions we are getting, this is not the case!
If you reached State Pension Age (SPA) before the start of the new scheme, then you are not affected by the changes – even if you have decided to defer taking your State pension. Under the ‘old scheme’, the basic State pension is £119.30 per week for 2016/17, based on having 30 years of National insurance Contributions (NICs) or credits. You may also be entitled to some additional State pension and the amount varies according to your earnings during your working life and whether or not you were ‘contracted-out’ of the State Earnings Related Pension Scheme (SERPS) or the later State Second Pension (S2P). The maximum additional pension entitlement is around £164 per week.
The new State pension scheme introduces a ‘single-tier’ pension of £155.65 per week for 2016/17, based on having 35 years of NICs (or credits). So anyone starting work today, who retires with a 35-year NIC record, can expect to get the full amount of the single-tier pension and nothing more. Of course, this is subject to the rules not being changed for the next 35 years!
However, for people who have already built up a NIC record before 6th April 2016 and have not yet reached SPA, the transitional arrangements are complex. Some will get more than the single-tier pension, others will get less, and here is where the confusion begins!
If you fall into this ‘transitional group’, as a first step, your State pension under the old system is calculated as at 5th April 2016. This includes your basic pension plus any additional pension that you are entitled to receive and this known as your ‘Starting Amount’. You cannot get less than this amount.
So even though you may not have 35 years of NICs, it could be that under the old system, your Starting Amount is actually more than £155.65 per week. If so, you will receive the higher amount, but you cannot build up any more State pension, even if you continue to pay NICs. The difference between your Starting Amount and the single-tier pension is known as your ‘Protected Amount’ and this will be increased by reference to inflation.
However, there are many people who have a Starting Amount that is less than £155.65 per week. Typically, these are people who were contracted-out of the additional State pension scheme and thus, paid a lower rate of NICs and/or do not have the 30 years of NICs required under the old scheme. Hence, many of these people are asking if they should pay voluntary NICs to increase their State pension entitlement up to the single-tier amount.
For those over age 55, it is possible to get an estimate of your new State pension entitlement from the Department of Work & Pensions. One of my clients (let’s call her Jane) did this recently.
Jane has paid NICs for 25 years before coming to live in France. She has about 10 years to go until she reaches SPA and before the new scheme was introduced, she had planned to pay 5 years of voluntary NICs to secure entitlement to the full basic State pension, but to do this closer to her retirement. However, now she is 10 years short of the full 35-year record and so she is not sure now what she should do.
The letter that she received from the DWP confirmed that she was entitled to a State pension in the new system of £138 per week, based on her existing NIC record to 5th April 2016. As she only had 25 years of NICs, around £96 of this was basic pension and £42 was additional pension.
Under the new State scheme, you get £4.44 per week for each year of NICs (£155.65 / 35). Jane thought that she needed to pay 10 years of NICs to get the full single-tier pension of £155.65. However, this would add £44.40 per week (£4.44 x 10) to her Starting Amount, resulting in a total amount of £182.40. As this is greater than £155.65, the excess would be lost. Therefore, the maximum amount that Jane can purchase is £17.65 per week and so she only needs to purchase 4 years.
To purchase extra years, you have to pay voluntary Class 3 NICs and the rate for 2016/17 is £14.10 per week. A full year of NICs at this rate of £733.20 would increase your State pension by £230.88 per annum. In effect, this is not a bad ‘annuity rate’ and one has to question whether or not such generosity from the government is really sustainable over the long-term? A problem to be faced by a future government and not the current one!
In Jane’s case, it is 10 years until she will receive her State pension and we have seen constant change in the UK pensions arena – last year the major reform in private pensions and now the reform of the State pension. It cannot be ruled out that more changes will take place in the future, particularly as concerns the period needed to qualify for full pension and the age at which the State pension starts. There is every possibility that Jane could pay the voluntary NICs now, only to find that the ‘goalposts’ are moved again during the next 10 years.
Everyone’s situation is different. Hence, whether or not it is a good idea to pay voluntary NICs to increase your State pension will vary from one person to another. In any event, such a decision should only be considered as part of a wider review of your overall financial situation and taking into account other retirement provision that you already have in place.
If you would like to have a confidential discussion with one of our financial advisers, you can contact us by e-mail at email@example.com or by telephone on 04 68 31 14 10. Alternatively, drop-by to our Friday morning clinic at our office at 2 Place du Général Leclerc, 11300 Limoux, for an initial discussion.
The above outline is provided for information purposes only and does not constitute advice or a recommendation from The Spectrum IFA Group to take any particular action on the subject of the UK State pensions system, the investment of financial assets or on the mitigation of taxes.
The Spectrum IFA Group advisers do not charge any fees directly to clients for their time or for advice given, as can be seen from our Client Charter
For people in all walks of life, retirement can be an uncertain prospect. At the very least it raises all kinds of questions concerning personal financial stability and the maintenance of living standards.
For those whose work takes them to a number of different countries during their career, the uncertainty is increased.
Until recently, retirement plans have traditionally offered a restrictive and inadequate package which was expensive to implement and complicated to arrange.
Most people require a simple yet flexible retirement benefits package, offering the possibility of a secure and prosperous retirement. An investment programme that allows you to decide exactly what you want and when you want it, how much and which type of protection you feel is appropriate for your own personal circumstances.
A plan where you can have the flexibility to take it with you from employer to employer and country to country, where you can increase or decrease or even temporarily suspend payments. You want to choose at what age you wish to retire and choose how you wish to receive your money upon retirement.
Flexibility and choice are the key words to most people when they start a retirement plan. Gone are the days when you worked for one company for 40 years, religiously paying into the company pension scheme. It is each individual’s responsibility to make sufficient provision for their retirement and which route to take to achieve future financial security can be a complicated search of bewildering facts and figures when comparing products available.
To get personal and confidential advice regarding your retirement provision, it is necessary to discuss your own individual future financial needs, together with your full financial planning objectives.
Retiring abroad – BBC.com article featuring The Spectrum IFA Group
Daphne Foulkes was recently asked to contribute to an article by the BBC.com on what to consider if you’re thinking about retiring abroad or to a warmer climate.
You can read the full article here