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QROPS Pension Transfer

By Chris Webb - Topics: Company Pension Schemes, Final Salary Pension, final salary schemes, Pensions, QROPS, Retirement, Spain, United Kingdom
This article is published on: 20th March 2017

20.03.17

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.

Background

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.

Implementation

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

Advantages

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)
Scenario Death 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

 

QROPS- Malta
Scenario Death benefits
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.

Currency
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.

Disadvantages

Charges
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

15.03.17

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 derek.winsland@spectrum-ifa.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.

Retirement Benefits

By Pauline Bowden - Topics: Pensions, QROPS, Retirement, Spain
This article is published on: 14th March 2017

14.03.17

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 chose how you wish to receive your money on 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.

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.

Pensions Time Bomb

By Gareth Horsfall - Topics: Company Pension Schemes, Final Salary Pension, final salary schemes, Italy, Pensions, Retirement
This article is published on: 27th October 2016

27.10.16

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 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!

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)

 

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 gareth.horsfall@spectrum-ifa.com or on cell: +39 3336492356

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

Warning – UK Pensions

By Pauline Bowden - Topics: Defined benefit pension scheme, Pensions, Retirement, Spain, Uncategorised, United Kingdom
This article is published on: 25th September 2016

25.09.16

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!!!

Concerns over effect of BREXIT on expat pensions

By Graham Keysell - Topics: BREXIT, europe-news, France, Pensions, QROPS, Retirement, Uncategorised, United Kingdom
This article is published on: 5th July 2016

05.07.16

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.

Pension increases

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?

By Peter Brooke - Topics: Pensions, Retirement, Uncategorised, Yachting
This article is published on: 30th June 2016

30.06.16

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
www.gov.uk/government/publications/mariners-national-insurance-questionnaire

This article is for information only and should not be considered as advice.

When is a guarantee not a guarantee

By Derek Winsland - Topics: Defined benefit pension scheme, France, Pensions, Retirement, Uncategorised
This article is published on: 28th June 2016

28.06.16

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

By Spectrum IFA - Topics: France, Pensions, QROPS, Retirement, Uncategorised
This article is published on: 23rd May 2016

23.05.16

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 limoux@spectrum-ifa.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