Concerns over effect of BREXIT on expat pensions
By Graham Keysell
This article is published on: 5th July 2016
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
This article is published on: 30th June 2016
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
https://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
This article is published on: 28th June 2016
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
This article is published on: 23rd May 2016
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
Retirement Benefits
By Pauline Bowden
This article is published on: 21st April 2016
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.
Reasons To Invest
By Chris Webb
This article is published on: 8th April 2016
Have a think about how different our lives are compared to our parents or grandparents….. How often do we travel? How used to our luxuries in life are we? Well guess what ……. this all costs money and as we are all going to retire at some point it might be a good idea to start thinking about that cost now!
This is why investing has become increasingly important over the years. Gone are the days of relying on the state to look after you in your golden years, and I’m pretty sure leaving your cash in the bank isn’t going to get the results you need either.
Times are changing and more and more people want to insure their futures, and they already know that if they are depending on state benefits, and in some instances company pension schemes, that they may be in for a rude awakening when they no longer have the ability to earn a steady income.
Investing is the answer to the unknowns of the future.
You may have been saving money in a low interest savings account over the years. Now, you want to see that money grow at a faster pace. Perhaps you’ve inherited money or realised some other type of windfall, and you need a way to make that money grow. Again, investing is the answer.
Investing is also a way of attaining the things that you want, such as a new home, a university education for your children, or the longest holiday of your life………… retirement.
Of course, your financial goals will determine what type of investing you do.
If you want or need to make a lot of money fast, you will be more interested in higher risk investing, which will hopefully give you a larger return in a shorter amount of time. If you are saving for something in the far off future, such as retirement, you would want to make safer investments that grow over a longer period of time.
The overall purpose in investing is to create wealth and security, over a period of time. It is important to remember that you will not always be able to earn an income… you will eventually want to retire.
You cannot rely on the state system to finance what you want to do, and as we have seen with Enron, you cannot necessarily depend on your company’s pension scheme either. So, again, investing is the key to insuring your own financial future, but you must make smart investments.
Retiring abroad – BBC.com article featuring The Spectrum IFA Group
By Spectrum IFA
This article is published on: 29th March 2016
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
Retiring in Spain with a UK State Pension – How does it work?
By Chris Burke
This article is published on: 7th March 2016
Many people understand that the UK is in the EU (for now at least) and therefore when you retire, it should be simple to understand how you claim your State and personal pensions. The main questions people have are what pension will you receive, how will you receive this, where should you be paying your taxes and how when retired, can you receive your pension in Euros and what could happen if you don’t have this organised correctly?
Over the last few years this has changed and, as of now, works in the following way.
Never worked in Spain but retiring here
In this scenario, having never paid Spanish taxes you will receive the UK State pension by contacting the HMRC on the following links:
How to check what State pension you have
www.gov.uk/check-state-pension
How the State Pension works
How the new state pension will work
How to claim your state pension online
www.gov.uk/claim-state-pension-online
Early retirement and State Pension
www.gov.uk/early-retirement-pension
You will be able to find out exactly what you will be entitled to and how it works. UK State pensions are always paid gross and never taxed, it is your duty to report this in your annual earnings whichever country you are resident in and along with your income, pay the relevant tax. State pension does come under the tax bracket as income tax.
www.gov.uk/tax-uk-income-live-abroad
You can choose to have your UK State pension paid into a UK bank account in sterling, or into a Spanish account in Euros at the rate of exchange that day (i.e. almost no costs for doing this).
If you have a private or company pension scheme in the UK, you should register on the following link and make sure this is also paid gross to you:
Then, you should be declaring this income in your annual tax return here in Spain (Declaracion De La Renta) and pay the relevant taxes, it’s advisable to find a good gestor to guide you.
A word of note here, unlike in the UK where your accountant/tax advisor is accountable for the advice they give you, here in Spain YOU are liable, even if the advice you are given is wrong. This stems back from Spanish culture, which you may remember when you learnt Spanish that they say in essence ‘The pen fell from my hand’ whereas in English we would say “Oops, I dropped the pen”.
Worked in Spain & the UK, Retiring here
In this scenario, as the UK is part of the EU, you should approach the local tax office in Spain and inform them of your situation. They in turn, would then contact the other countries you have worked in and where you paid tax and National Insurance contributions. This would then be paid to you by them directly as they collect from the relevant countries.
Different countries have different ages that they start paying your State pension from, so you need to bear that in mind.
Failure to correctly declare your pension income
What if you are or planning to be a resident here in Spain, but collect your UK state and private pension directly from the UK and do not declare here and in essence pay no taxes here? Surely, as the UK and Spain have a Double Tax Treaty (DDT, which means that you will not pay tax twice on any income you receive) as long as you are paying tax somewhere it’s not a problem? Well, consider that you are living in Spain as a resident, using their services, taking advantage of the healthcare and all the other things that make living here so enjoyable. Yet, you are paying UK taxes even though you are not living there. As you can see this doesn’t seem right! And it isn’t! Therefore, if you are found declaring your income incorrectly, it could result in you being fined, maybe even substantially. What is more, there is usually a minimal difference in the tax you might pay, whether it be in the UK or here, depending on your situation and income.
Also, give the fact that WILLS have now changed as of last August, meaning in essence you can choose which jurisdiction (country, laws) your estate would apply to, there seems little reason to risk this and not declare and pay your taxes as they should be. It would certainly stop a nasty knock at the door at some point down the road, especially as of next year when Common Reporting Standards come into rule (CRS – where countries around the world will be sharing information on the finances of their passport holders) meaning it’s even more likely you could be ‘found out’. Please note, this does not change where you are taxed for succession issues.
Therefore, we recommend making sure you are doing things properly, whether this involves you declaring this yourself or through a gestor, as well as making sure your WILL is up to date.
Pensions Back on the Government’s Agenda Again!
By Spectrum IFA
This article is published on: 4th March 2016
The date that is etched in everyone’s mind at the moment is 23rd June, when the referendum on the UK’s membership of the EU takes place.
However, if you still have pension benefits in the UK to claim, there is another date that you should be focused on – 16th March – the date of the UK Budget.
Last summer, the government launched a consultation on pension tax relief and this is what the Chancellor said ……….
“With increased longevity and the changing nature of pension provision, the government needs to make sure that the system incentivises more people to take responsibility for their pension saving so that they are able to meet their aspirations in retirement.”
Incentivising people to save for retirement? Well that’s not new. The current system of the tax-free Pension Commencement Lump Sum (PCLS) and tax-relief on pension contributions is already a good incentive, even though the latter has been capped and steadily reduced since 2006. So what more does the government think should be done?
The chancellor goes on to say ……..
“That is why the government is today publishing a consultation on pensions tax relief. If people are to take responsibility for their retirement, it is important that the support on offer from the government is simple and transparent, and that complexity does not undermine the incentive for individuals to save.”
Now “simple” and “transparent” are not words that appear in my dictionary on the UK pension system. On the other hand, “complexity” does, particularly as concerns the new State pension system coming into effect in April, something that I will cover in another article.
The most radical idea that the chancellor floated was the introduction of the Pension ISA, where all pension contributions would be paid on post-taxed income, but thereafter, no tax would be payable – either on the investments in the pension fund or on the pensions in payment. Definitely attractive to a cash-strapped chancellor who wants to at least ‘balance the books’ during the remainder of this government’s term of office, but hugely short-sighted for future generations, when demographic pressure on public spending and the need for tax revenues is likely to be more severe.
The system would also be hugely complex as, in effect, two separate pension pots would have to be kept – the old system ‘post-tax pot’ and the new system ‘pre-tax pot’. Maybe the government would introduce some transitional arrangements to convert ‘post-tax pots’ into ‘pre-tax pots’ and if so, for sure there will be some losers. Costs for administering the new arrangements would increase and for the dwindling number of remaining defined benefit pension schemes, this could lead to these ending up in the ‘pensions graveyard’ – who will pay the levies to the Pension Protection Fund then?
An alternative idea proposed is for pension contributions to be paid out of post-taxed income and for a flat-rate of tax relief to be paid by the government into the pension pot or into the defined benefit scheme. If the tax-relief is limited to the basic rate of 25%, higher tax rate payers will lose out – some incentive!
The government’s current thinking on this to incentivise people is – ‘if you pay into your pension, the government will top it up’. This is spin, the tax-relief at source already exists for occupational pension schemes and a delay in getting the government’s so-called ‘top up’ into the pension scheme would be detrimental for the pension member.
The effect on the employer of defined benefit pension schemes should also not be underestimated, where the employer is legally obliged to ensure that the pension assets can meet the liabilities. Any delay on getting the tax-relief due into the defined benefit scheme is in effect, an interest-free loan to the government. My pensions career started more than 40 years ago and I remember well how long we had to wait for National Insurance rebates to be paid by the government into occupational pension schemes. Another nail in the coffin, on route to the pensions graveyard?
I save the ‘best’ to last – the abolition of the tax-free PCLS. Of course, I am being cynical because there is nothing good that could come out of taxing the beloved PCLS and definitely not the best way of incentivising people to save more for retirement. Receiving a tax-free cash sum has been at the heart of the UK pension system for decades. To take this away now, when people have saved for years and planned for retirement on the basis that they would receive this tax-free PCLS is quite simply wrong.
Of course, the government could just tinker with the existing system more by reducing the maximum amount that people can pay into tax-relieved pension funds and perhaps also by no longer allowing employers tax-relief on National Insurance contributions. The latter would hurt employers, particularly with the abolition of contracting-out of the State Second Pension from April, which anyway results in increased National Insurance Contributions (another nail in the coffin?).
The first organised UK pension scheme can be traced back to the 1670s, when the Royal Navy put in place provision for its officers. Other public sector pensions followed over the centuries, but it was in the 1950s and 1960s that corporate pensions became a prominent part of the remuneration package. In the good old days of easily understandable pension schemes, we were encouraged to pay Additional Voluntary Contributions – after all you got tax-relief and so were incentivised to save more for retirement. When I started work, the maximum amount that we could contribute was simply limited to 15% of earnings – regardless of whether you were a basic rate or higher rate taxpayer.
Do you trust future politicians not to change the UK pension rules again?
If you would like to have a confidential discussion about your pension or any other aspect of your personal financial situation, you can either contact us by telephone on 04 68 31 14 10 or by e-mail at limoux@spectrum-ifa.com. Alternatively, drop-by our Friday morning clinic at our office at 2 Place du Général Leclerc, 11300 Limoux, for an initial discussion.
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.