Reasons To Invest
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
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
Company Pension/Final Salary funding update 31st January 2016
With most UK Final Salary schemes (also known as Defined Benefit) now closing their doors to new members, the schemes are concentrating on trying to manage to make sure there is enough money for those people still in them for retirement. This ‘closing of the doors’ also means there is no ‘New Money’ entering the schemes, which takes away the option of new contributions paying the pensions of those currently retired, as they used to. One of the biggest reasons for this, is that many years ago these often called ’Gold Plated’ schemes were made up on the following mathematics:
People retired at 55, then died at 67.
Thus, approximately 12 years of payments should they live to this point. However, now the mathematics are more likely to be the following:
People retire at 60, and the average life expectancy is 84 in Europe.
You don’t need to be a mathematician to work out why the schemes are faltering, and worryingly in many cases, heavily reliant on their companies contributing millions of pounds to keep them going.
The Pension Protection Fund (PPF) takes these schemes under its wing should the company scheme get to a point that it cannot realistically recover from poor funding. However, it is gaining more and more ‘members’ and will only cover pension income up to a point. Therefore, many client’s believe it is better not to be in the PPF if possible, and have your pension under your own control and in essence not at the mercy of a government body to bail you out. People thought that the Kodak pension scheme would always be ok; unfortunately it was not and left a lot of people with no or little pension benefits.
Below is a transcript of the update from the Pension Protection Funds own website updating what has happened and why. If you have any questions regarding this or what your options are, don’t hesitate to contact Christopher, the article writer (contact information is at the bottom of this article).
Update from the Pension Protection Fund (PPF) of its members
The aggregate deficit of the 5,945 schemes in the UK Pension Protection Fund (PPF) Index is estimated to have increased over the month to £304.9 billion at the end of January 2016, from a deficit of £222.4 billion at the end of December 2015. The funding ratio worsened from 84.9 per cent to 80.5 per cent. Total assets were £1,258.7 billion and total liabilities were £1,563.6 billion. There were 4,923 schemes in deficit and 1,022 schemes in surplus.
The aggregate deficit of the schemes in the PPF 7800 Index is estimated to have increased to £304.9 billion at the end of January 2016, from £222.4 billion at the end of December 2015. The position has improved from the previous year, when a deficit of £367.5 billion was recorded at the end of January 2015. The funding ratio of schemes decreased over this month from 84.9 per cent to 80.5 per cent at the end of January 2016. The funding ratio is higher than the 77.6 per cent recorded in January 2015.
Within the index, total scheme assets amounted to £1,258.7 billion at the end of January 2016. Total scheme assets increased by 0.9 per cent over the month and decreased by 1.2 per cent over the year. Total scheme liabilities were £1,563.6 billion at the end of January 2016, an increase of 6.4 per cent over the month and decreased by 4.7 per cent over the year.
The aggregate deficit of all schemes in deficit at the end of January 2016 is estimated to have increased to £338.4 billion from £265.8 billion at the end of December 2015. At the end of January 2015, the equivalent figure was £392.6 billion. At the end of January 2016, the total surplus of schemes in surplus decreased to £33.6 billion from £43.4 billion at the end of December 2015. At the end of January 2015, the total surplus of all schemes in surplus stood at £25.2 billion.
The number of schemes in deficit at the end of January 2015 increased to 4,923, representing 82.8 per cent of the total 5,945 defined benefit schemes. There were 4,679 schemes in deficit at the end of December 2015 (78.7 per cent) and 5,175 schemes in deficit at the end of January 2015 (85.4 per cent of the 2014 population of schemes). The number of schemes in surplus fell to 1,022 at the end of January 2016 (17.2 per cent of schemes) from 1,266 at the end of December 2015 (21.3 per cent). There were 882 schemes in surplus at the end of January 2015 (14.6 per cent of the 2014 population of schemes).
Understanding the impact of market movements Equity markets and gilt yields are the main drivers of funding levels. Scheme liabilities are sensitive to the yields available on a range of conventional and indexlinked gilts. Liabilities are also time-sensitive in that, even if gilt yields were unchanged, scheme liabilities would increase as the point of payment approaches. The value of scheme assets is affected by the change in prices of all the major asset classes, not just equity markets. However, due to their weight in asset allocation and volatility, equities and bonds are the biggest drivers behind changes in scheme assets; bonds have a higher weight in asset allocation, but equities tend to be more volatile. Over the month of January 2016, liabilities increased by 6.4 per cent. Conventional and index-linked 15-year gilt yields fell by 34 basis points and 20 basis points respectively. Assets rose by 0.9 per cent in January 2016. The FTSE All-Share Index fell by 3.1 per cent over the month. Over the year to January 2016, 15-year gilt yields were up by 33 basis points and the FTSE All-Share Index was down by 7.9 per cent.
Retiring in Spain with a UK State Pension – How does it work?
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
How the State Pension works
How the new state pension will work
How to claim your state pension online
Early retirement and State 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.
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!
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 firstname.lastname@example.org. 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.
UK Pension Tax Changes 6th April 2016 (lifetime allowance)
Anyone who has a private or company pension in the UK could be affected by the changes being brought in on the 6th April this year. This may be anyone with private pension(s) whose combined value is around £1,000,000, or a company pension scheme which would give an income in retirement of approximately £40,000 per annum.
In essence, the changes affect the tax you would pay on this money. Up until now, any pensions combined under £1,250,000 in real value would not be subject to any further taxes than those of normal income or inheritance tax. However, any pension with a value higher than this would be subject to additional taxes. This allowance is called a ‘Lifetime Allowance’ (LTA). The tax on pensions over this value can be up to 55%.
As from April this year, this Lifetime Allowance Value is being reduced to £1,000,000. Therefore, any pensions combined worth more than this would now be liable to these potentially additional taxes.
If you have a Corporate, Company, Final Salary or Defined Benefits Scheme this will also be tested against the new Lifetime Allowance. These Schemes are based on your final salary when leaving your employer as opposed to contributions and investment growth, and the amount usually has to be multiplied by a factor of 20 in order to calculate the capital equivalent value. These Schemes also usually pay a tax-free lump sum, and this also has to be included in the LTA calculation. Therefore, depending on the pension(s) this new limit may affect you.
What are the key factors involved in the Lifetime Allowance testing?
Retirement after age 55: Once a lump sum/income is taken from a Pension, these are tested against the LTA.
At age 75: Any Pensions that have not been accessed will be tested against the LTA at this time. Pensions in drawdown will also be tested again at this time.
Death pre-age 75: Pensions will be tested against the LTA to ensure that the limit has not been exceeded.
Transfer to a QROPS (Qualifying Recognised Overseas Pension Scheme – when you transfer your pension outside of the UK): If a UK Pension Scheme’s funds are transferred into a QROPS, the value of the transferred funds are tested against the LTA.
Of course, the main point here for many people is death before age 75. If this happens, as is stands your pension will be subject to this potential tax from £1,000,000 and above.
What are the tax charges?
If the Lifetime Allowance is exceeded, then the tax charges will depend on how the excess is paid from the Scheme.
If as a lump sum (normally the case in inheritance): subject to a 55% tax charge.
If as a Pension Income: subject to a 25% tax charge.
Transfer to a QROPS: subject to a 25% tax charge on the excess above the LTA.
Is there any protection against Lifetime Allowance charges available?
The UK Government has confirmed that from April 2016, the following two protection regimes will be available, allowing individuals a fixed or individual LTA dependent on the value of their Pensions and/or the type of protection:
Fixed protection 2016: This ‘fixes’ the LTA at the current £1.25m. In order for this to apply, no further Pension benefits can be accrued in a Scheme on or after 6 April 2016.
Individual protection 2016: The LTA will be set at the value of the Pension on 6 April 2016, when the new £1m LTA is introduced, so long as it is valued between £1m and £1.25m. This protection does allow further contributions, but any Pension in excess of the protected LTA will be taxed on the usual way when tested.
What about a transfer to a QROPS/Overseas pension scheme?
This currently enables an individual to safeguard their Pension Fund against this tax charge and allows the fund to carry on growing. As detailed above, the fund is tested against the individual’s Lifetime Allowance at the point of transfer, rather than at the point of each pension being tested as per above scenarios, i.e. death before pension accessed etc.
Perhaps the most important information to know regarding this, is that not so long ago the Lifetime Allowance for pensions was £1,800,000 in the UK. It is consistently reducing, which is worrying considering every twenty four years historically inflation doubles, and yet the Pension Lifetime Allowance is dramatically being reduced instead of increased, such as the tax bandings for income tax have been after years of lobbying by the general public. This could lead us to one main conclusion, the UK governments’ need to collect more and more taxes. Therefore, as the years pass by it could be this differential continues to grow and grow, in real terms meaning individuals will pay more and more tax.
The key points to consider with this are:
Having your pension(s) in the UK will enable them to be liable to the UK rules and the government’s ability to change them, including the uncertainty of what these changes may be in the future.
The Lifetime Allowance is consistently decreasing, meaning taxes are consistently increasing.
Understanding of these changes and how it might affect you could save you or your loved ones considerable money in potential taxes.
If you have no plans to retire in the UK and have pensions there, it could be worth having these evaluated to see whether it would be beneficial for you to transfer them securely outside of the UK.
Talking your personal circumstances through will put your mind at rest, or enlighten you on what your options are and how you can best plan for this eventuality.
If you would like to ask any questions regarding this subject, or speak to Christopher, a UK pensions expert who wrote this article, feel free to contact him on the details below.
To QROPS or Not?
The rapidly changing landscape of pension schemes in the UK has led to a great deal of confusion, and it’s not just UK pensioners who are affected. The rule changes also impact expats living outside the UK, especially those considering the benefits of a Qualifying Recognised Overseas Pension Scheme (QROPS).
As an expat, it’s hard to know which route to take. Should you transfer to a QROPS or leave your pension in the UK? What are the benefits and drawbacks? What impact have recent changes had on your options?
Let’s look at the QROPS facts…
- Up to 100% of the pension pot is available, depending on the jurisdiction. 25% could be tax-free if you are UK resident but could be taxable if resident outside of the UK.
- Uncertainty of more UK tax changes, with several ideas being muted which all in essence make you liable to pay more tax or have less allowances on your pension.
- No pension death tax, regardless of age, in Gibraltar and Malta.
- Greater investment freedom, including a choice of currencies and investments which could make a difference to the amount of money you receive.
- Retirement from age from 55.
- Income paid gross from Malta (with an effective DTT), and only 2.5% withholding tax in Gibraltar.
- Removal of assets from the UK may help in establishing a Domicile outside of the UK (influences UK inheritance tax liability).
What will happen if you leave your personal pension in the UK?
- On death over the age of 75, a tax of 45% on a lump sum pay-out.
- Income tax to be paid when receiving the pension, with up to 45% tax due, likely deducted at source.
- Registration with HMRC and the assignment of a tax code which could start as a higher emergency tax code.
- Proposed removal of personal income pension allowance for non-residents. Although this is still on the agenda, it has been confirmed that there will be no change to non-residents’ entitlement to personal allowance until at least April 2017.
- Any amounts withdrawn will be moved into the client’s estate for IHT purposes, if this is retained and not spent.
- As the client will be able to have access to the funds as a lump sum, these could potentially be included as an asset for care home fees/bankruptcy etc.
What Does All This Mean?
Regardless of the proposed legislation amendments, transferring to a QROPS still provides certain benefits that the UK equivalent would not be able to offer, although it’s fair to say that both still hold a valid place in expatriate financial planning. The answer to which pension is more suitable for you will ultimately depend on your individual circumstances and long term intentions. It is vital you talk to a Financial Adviser who can advise you correctly on this.
Personal Financial Planning in France – if I knew then what I know now…
A British National, I came to France in 1996 for what was meant to be a 3-year local contract. But here I am, still living in France 20 years later. Sound familiar?
This year, at the age of 57, I stopped full-time employment, though I expect to stay in France for some years to come. Here are a just few of the useful things I’ve learned over the years, as an expat in France, focusing on tips for those of you who are still relatively new to France.
Tax efficient investment vehicles
The ISA doesn’t exist in France, but the Plan d’Epargne en Actions (PEA) and the Assurance Vie (AV) do. One can invest 150k euros in a PEA, and after 5 years the gains are free from Capital Gains Tax (CGT). There is no limit to the number or amount invested for AV’s, and after 8 years, any gains on withdrawal attract only 7.5% tax (over 9200 euros/yr). Both PEA’s and AV’s attract Social Charges on investment gains. With present interest rates low, an AV older than eight years is a much better option than a savings account (Compte Epargne). Your employer might also offer you a Plan d’Epargne d’Enterprise (PEE) where investment gains are free from CGT after 5 years.
My advice to anyone becoming tax resident in France is to open a PEA and an AV as soon as you arrive, with just a small initial investment, just to get the clock ticking. You can always close them if your short term contract turns out to be just that!
Pensions, QROPS & PERPs
Years worked in the UK can be transferred to the French system, and additional years purchased at little cost, which can greatly increase the value of your French Pension.
With the 15-year Gilt Rate presently so low, UK pension pot valuations are very high. If you are thinking of staying overseas, it is a good time to consider the Pro’s and Con’s of transferring your pot to a Qualifying Recognised Overseas Pension Scheme (QROPS).
Each year you can invest up to 10% of your salary free of income tax (within the maximum of 8 times the Social Security ceiling) in a Plan d’Epargne de Retraite (PERP), and you can accumulate up to 3 years if you do not use this 10% annual allowance. If you have been made redundant, at the end of the 3-year period of unemployment benefit, you can withdraw all the funds from a PERP free of CGT, so avoiding taking an annuity. Investments in a PERP are not subject to Wealth Tax (ISF).
Getting good, in-depth financial advice
I have always worked with one of the big French Banks and whilst they offer a range of products, their understanding of the needs of Anglo-Saxons is not always high. They recommend mainly in-house products and could be a lot more pro-active.
My employers were kind enough to offer me big consultancy companies to help fill out my annual French tax forms. The introductory meetings with senior directors always went well, but it was clear the forms were filled out by very junior staff, and their aim was to fulfil a service to the employer as much as to me – they are not at all there to offer advice and optimise tax.
Whilst it’s taken me a while to realise, it’s best to seek the assistance of specialist independent financial advisers, people who really understand both the UK and French financial space. I like to have more than one, in addition to the bank, to ensure several points of view/proposals on which to base decisions.
From experience, I can certainly recommend Jon Cooper (The Spectrum IFA Group) and Thierry Mandengue (VIP Partner) – they have undoubtedly saved me tens of thousands of euros.
In my next article, I will share my knowledge of Stock Options, PEE’s and Inheritance planning. I’d be happy to discuss expat finance further if anyone is interested (email@example.com).
*This article has been written by Dr. Martin Powell, a retired, British, Senior Corporate Executive living in France and a client of Jonathan Cooper
Why a Pension audit is vital for your wealth. (Part 2)
In the previous article, I referred primarily to Pre-Retirement Planning. This article is devoted to Post-Retirement Planning ie. when you are already drawing your pension and are tax resident in Spain. For those that are lucky enough to be in receipt of a Defined Benefits Scheme (ie Civil Service / Company Final Salary Pension) most of this article will not apply to you. The same applies to those taking income from a SIPP/ Drawdown plan. This will be covered in a future article.
Primarily this article deals with “Money Purchase Arrangements” ie. Group or Personal Pensions, Stakeholder Pensions and Contracting Out of SERPs, where benefits are being taken and the tax free lump sum has been paid.
It is important to understand the taxation of income in Spain. Unlike the UK, “Earned Income” and “Capital Gains and Investment Income” are not added together to determine the highest rate of tax payable. They are kept separate with “Earned Income” taxed at the highest marginal rate, and “Capital Gains and Investment Income” capped at rates of between 20%, 22% and 24% for the tax year 2015. When one considers a person that has a State Basic Pension of £8,000 p.a. and Earned Pension Income of £12,000 (with the current rate of exchange of 1.4) it is quite easy to slip into the next highest rate of marginal tax of 31% for “Earned Income”.
One also needs to consider the rules for Lifetime Annuities by the Spanish Law “Renta Vitalicia” and its subsequent tax treatment of said income.
So why the need for a Pension audit when one is already receiving it and declaring it to the Hacienda? Are you paying too much tax as a result of the word Pension?
So does this apply to you? Possibly, and the likely reason why, is that your pension provider at retirement converted your pension to an annuity. You may have taken all the pension pots, used an open market option and transferred this to another annuity provider that offered better rates?
It is also vital to understand both the documentation sent by the UK provider on an annual basis and the treatment of pensions and annuities by the UK HMRC. Unlike the Spanish, the UK HMRC treats both pensions and annuities as one, and they are taxed under income tax rules. It is vital that this is understood. Even if you have previously informed the provider that you are living in Spain and are receiving your pension gross, due to UK HMRC rules, you will still receive a “P60 End of Year Certificate” from the provider. This clearly states under the heading “Pension and Income Tax details”.
In these cases you could be paying too much tax without realising it! As an honest citizen, one presents the P60, without having the original policy document translated into Spanish, to your local Abagado / Gestor, who in turn presents the documentation to the Hacienda. It is hard enough for them to fully understand English, let alone the tax laws relating to the UK re. pensions and how they differ to Spain. The same could be said if one is receiving advice from a UK based adviser or an “Offshore Adviser”, who are very unlikely to understand or be able to assist with the complexities of Spanish Tax law.
And the reason for this is that Spain’s tax rules treat the purchase of a Lifetime Annuity as “Investment Income” even when a “Pension Pot” is used. The full income tax law is LEY35/2006 de 28 de noviembre, del Impuesto sobre la Renta de las Personas Físicas (LEY IRPF) The specific part relating to the taxation of Annuities is found in Articulo 23 as follows:
- The taxation of lifetime annuities– Articulo 25.3 a) 2º LEY IRPF
- The taxation of temporary annuities – Articulo 25.3 a). 3º LEY IRPF
Instead of being taxed on the full income amount, a discount is applied based on the age of the recipient when the original annuity was purchased. So for someone between the ages of 60 to 65 at the time of purchase, this represents 76%. Therefore referring to the above example the taxable “Investment Income” is only £12,000 x 24% = £2,800. The £2,800 will then be subject to the lowest “Investment Income” rate of 20% (assuming no other income) ie. tax payable of £576 p.a. A very substantial saving when compared against being taxed under “Earned Income” rules. For ease, I have not calculated the rate applied if one moves into the next highest rates of marginal tax!
I have come across a number of clients in this exact situation and I am in the process of correcting this error. Already one client has had a rebate, backdated 4 years (due to the statute of limitations) and now pays substantially less tax as a result. But it is both time consuming and hard work having to track down the likes of Pearl, Equity and Law, Equitable Life, Commercial Union, Scottish Equitable, Sun Life, Clerical Medical and Eagle Star (to name but a few) who were the major providers of pensions in the 80’s and 90’s, and then confirm it was a Lifetime Annuity that was purchased.
This is further complicated by those in Final Salary Schemes like the Teachers Superannuation Scheme, who at the same time contributed to the Group AVC, and considers that the pension income comes from one source. There is the possibility that the AVC under a default process purchased an Annuity offered by the same provider.
This is a service provided for existing clients, although at some stage they will need an official translator to translate the documents into Spanish if the UK provider will not do so.
In some instances though, either because of a lack of understanding by 3rd parties ie. the Hacienda or a Gestor, some people are claiming their pension income from a QROP/ SIPP as a temporary annuity whilst still retaining control over the investment and have not actually used cash to purchase an annuity ie it is still a pension in drawdown.
This is incorrect and will be explained why in a later article. Further articles will also include “The Treatment of Small Pension Pots”, “Pensions Flexibility” and “Pensions in Drawdown”. What I have learned time and time again over the course of many years experience in the pensions industry is that the “Devil is always in the detail” and why a pensions audit is vital.
As Financial Advisers we are not professional tax advisers, but we work closely with said professionals, and in this instance the tax advice has been provided by HCS Accounting of Denia
What are the main financial risks as an expat in France?
Age and wealth are often linked. One increases inexorably in a linear fashion, and the other tends also to increase over time, but always in a non-linear way. Following this traditional route, we tend to become more affluent as we get older, barring financial mishaps and accidents of course. This may have something to do with the notion that as we get older we become wiser. That may well also be true up to a point, but then it can occasionally go horribly wrong. Leaving that unfortunate possibility to one side, how can we expats best contribute to our own financial well-being?
All a bit deep that, but here is what I’m getting at. If I were to attempt to present a snapshot of my average client to you, it would be of a couple in their late 50’s to early 60’s who have retired early after successful careers and family building, based either on employment or their own business. Avid Francophiles, they are now ‘living the dream’ funded by the fruits of their former labours. All is well in their world; or at least that is how it appears on the surface. Underneath though, there are concerns, and these concerns are common to all of us. Age and money.
I think very few of us actually like getting older; I certainly don’t. It is becoming more and more difficult to ignore those ‘milestone’ anniversaries. I think of them more as millstones these days. As I suspect is the case with many of us, I tend these days to look my accumulated ‘wealth’ (cough), and wonder if it will last me out. I think it will, and I certainly hope it will, but I’m pragmatic enough to realise that it isn’t a ‘gimme’ (in Solheim cup parlance).
So then I start to look at the variables. What can possibly go wrong? What can I do to defend myself against the risks? What are the risks? I am after all a financial adviser; all this should come naturally to me. To an extent it does, but knowing what is out there doesn’t mean that you necessarily know how to beat it. It does help though. Here is my top three on my list of risks to worry about:
Institutional Risk – Basically this means that you put all of your money under the floorboards in the attic, but next year your house burns down, floorboards and all.
Market Risk – How could putting all your money into VW shares possibly go wrong?
Exchange Rate Risk – This is where Murphy’s Law comes into play. Whatever the rate is; whatever you do will be wrong. Otherwise known as Sod’s Law.
Obviously, it is a good idea to work on avoiding these risks wherever possible. I thought long and hard before listing them in this order, but I do think that Institutional Risk stands out. After all, it can wipe you out completely. It can also be avoided completely. The other two cannot be eradicated, although some would argue about F/X risk.
Indeed there was a time when I would have argued that F/X risk can be avoided. In a former life (I’ve told you this before I know), I used to be a foreign exchange dealer in the world of international banking, before it became unfashionable. One of my jobs was to explain to corporate and private clients that F/X risk was the enemy, to be identified and eliminated at all costs; unless of course your job was to make money trading (gambling) in it.
Ten years ago I brought this dogma into my new career as an IFA in France. How long do you intend to stay in France? (forever). Where are your savings? (in the UK, in sterling)… Over the years, the subtleties started to emerge. The collapse of sterling against the Euro; the resulting exodus of thousands of UK ‘snow birds’ from Spain because their UK pensions wouldn’t support them anymore, and the growing realisation that our old enemy ‘age’ was always going to play its trump card; they all contributed to the much changed conversations that have with my clients these days. Strangely though, it is another banking term that now dominates my thinking, namely hedging. ‘Hedge your bets’. To be honest, I tend to question anyone these days who says that they will never return to the UK. Statistics show otherwise. We tend to base our current view on our current circumstances, preferring not to think about what will happen if we end up on our own. How many UK expats are there, I wonder, in French care homes?
Since the Euro came into existence the £/€ exchange rate has been as high as 1.7510 and as low as 1.0219. In anyone’s language that is an enormous range. Coincidentally we currently sit at almost exactly the half way point between those two extremes, but I don’t see that as any reason for complacency. We need to take this risk very seriously, especially if we accept the possibility that we will one day have no more use for Euros. I have a firm view on the best way to manage this risk, but I’ve run out of space in this edition. If you want to discuss it, you know where to find me.