Pensions Time Bomb
It could be said that uncertainty is the nemesis of good long term financial planning and living in today’s world you could be forgiven for throwing your hat in and tucking yourself away for a few years: Hard Brexit, Soft Brexit, Donald Trump, Italian Constitutional Referendum, German and French elections, the rise of nationalism, and the list goes on.
However, time always marches on and we either get left behind or plan forward. No one has ever complained to me (yet) about finding ways to legally save tax, finding ways to save money, getting better investment returns, or having more money then they had planned for.
So with this in mind I want to return to a subject which I have touched on a few times before but which has been hurled back to the top of the financial planning priority charts: UK Final Salary Pension Schemes.
This article is specifically for anyone who holds any type of corporate final salary pension plan. (It does not relate to the UK state pension or UK government pension schemes, eg Teacher, Doctor, Army etc).
Starting with the bad news
I want to break some bad news to holders of those historically ‘gold plated’, final salary pensions schemes. The schemes that promise you a certain level of income based on your last few years salary level with your employer.
They are no longer gold plated!
This is quite a complex area to try and explain, but let me try and sum it up in a nutshell.
When the population starts living longer and the pension scheme can’t ask anymore contributions from the new members (without crippling them financially), then the cost of looking after the existing retirees for a much longer time than the scheme had anticipated (due to medical advances), becomes much greater than the net new money being put into the scheme.
If this were a family, it would be in debt. A mortgage, it would have defaulted. A company, it would have gone bankrupt.
Another problem is that these pension schemes need such a secure income stream to pay the retirement incomes of the retirees that they have to invest the scheme assets in safe, but incredibly low yielding asset such as Government Bonds.
And there you have the problem. If you make very attractive promises to retirees, based on your calculations many years ago, but the financial landscape changes dramatically during that time, then your original calculations are now totally obsolete. More money out than coming in spells TROUBLE!
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 die.
There are benefits on both sides of the argument and we provide a FREE analysis to advise our client whether to transfer or not. If you want to look into this area of your retirement plans and potentially secure your long term income stream, then you can contact me
The Brexit or Invoking the Law of Unintended Consequence.
Since the Brexit vote most news has been about potential Trade deals, and Sterling’s fall. However it perhaps has gone unnoticed, that from a variety of differing scenarios with outcomes by no means certain, a Constitutional crisis could be gathering steam.
It all stems back to the European Referendum Act 2015, that didn’t consider the variety of outcomes and was legally non binding. In addition, the power of the Royal Prerogative that was curbed when King John signed the Magna Carta in 1215 is being used by the Government, and in essence his successor Theresa May, to make or break treaties with other countries including the EU, in this case invoking Article 50 without the need for it to be passed into law via an Act of Parliament.
Critics of this say that the 1972 Act (based on the UK joining the Common Market) ceded power from the UK Parliament and allowed EU law to pass into UK law. This gave the British people protection under a new constitution based on EU law (based on Napoleonic Law). The UK has never had a written constitution that protects it citizens and gives them certain rights. It is being argued by a variety of bodies via legal challenges against the PM for using the Royal Prerogative to take away rights bestowed to Parliament. Some go as far to say “enforced removal” of citizenship rights from 65 million people would be “completely unprecedented “in modern democracy. Expat campaigners are also arguing that the “rights enjoyed by British citizens beyond these shores are so fundamental that legislation is required to take them away”.
The legal challenge has been mounted to the process of withdrawing the UK from the EU without a vote in Parliament and is going to the High Court, to be heard within the next two weeks. If the government lose due to Judges imposing their will (note unelected!), it would then be ironic for this eventually being heard by the European Court of Justice, the UK’s next step .
If the UK government win this current legal challenge on the basis “ Respecting the outcome of the referendum and giving effect to the will and the decision of the people “, that too could lead to further challenges for whom the right to vote was taken away i.e. a large percentage of Ex Pats and those Europeans citizens in the UK.
Additionally, working on that basis could give credence to Scottish Independence should they have a 2nd referendum and vote to remain in Europe. The same could be said of Northern Ireland, which has its own Parliament as well, and perhaps even Gibraltarians, as they overwhelmingly voted to remain.
The other major crisis in the making is the “Great Repeal Bill” debate that is due to be put to the House next year. A number of scenarios could occur. Many M.P.’s supported remain and the government still has deep divisions within its ranks. With only a majority of 10 seats in the House, a loss could force a vote of confidence, an early election, and a greatly disenchanted and potentially a disenfranchised electorate that voted to leave.
If they win then it passes to the House of Lords, who overwhelmingly wished to remain in the EU, and should they vote against it, take note Leave campaigners, an unelected body voting against the wishes of the majority!!
The Law of Unintended Consequence reigns supreme, or quite simply chaos. It makes Spain’s recent political turmoil insignificant, and I wonder how many of those that voted to leave or indeed did not vote at all, would have wanted these potential outcomes.
What would be even more ironic would be that the UK Government, in its current format, with many of the Ministers that supported the Leave campaign in positions of power, having to go to the European Court of Justice to overrule either singularly or both the UK Judges or the House of Lords to push through the Brexit, whilst at the same time preside over the breakup of the Union.
Should you consider transferring your Final Salary Pension?
A big question and something that raised a lot of interest at our recent Tour de Finance event that took place at the Domaine Gayda. There have been a number of recent changes within the UK economy and the UK pension world that make a review of any pension(s) essential for those living or planning to live outside the UK.
Final Salary pension schemes (also referred to as Defined Benefit schemes) have long been viewed as a gold plated route to a comfortable retirement. However, there is wide opinion now that there are likely to be large changes ahead in the pension industry. The key question is will these schemes really be able to provide the promised benefits over the next 20+ years?
Why Review now?
Record high transfer values
The calculation of transfer values from these types of scheme is complex. One of the factors that determines how much the pension scheme has to pay to transfer a Member’ benefits is gilt yields, which are at an all-time low. This has resulted in transfer values to be at an all-time high and we are finding that some transfer values have increased by over 30% in the last 12 months.
Actuaries Hyman Robertson now calculate the total deficits on the remaining UK final salary pension schemes as £1 Trillion! Since the employers are ultimately responsible for funding the cost of the pension benefits, unless they have very deep pockets, this puts the security of the benefits at risk.
The final salary pension schemes of these two companies have been in the news. These recent examples show that the very large deficits of their final salary pension schemes cause a number of problems; in particular no one wants to purchase these struggling companies as the pension deficits are too big a burden to take on.
Could the Government be forced to change the laws to allow schemes to reduce benefits? A reduction in the benefits will reduce the deficits and make the companies more attractive to purchasers. There is a strong argument that saving thousands of jobs is in the national interest, if that just means trimming down some of these “gold plated benefits”.
Pension Protection Fund (PPF)
This fund has been set up to help the schemes that do get into financial trouble, but two points are key. Firstly, it is not guaranteed by the Government and secondly the remaining final salary schemes have to pay large premiums (a levy) to the PPF in order to fund the insolvent schemes. As more schemes fall into the PPF, there are less remaining schemes that have to share the burden of this cost. Their premium costs will increase, as there will be less remaining schemes to fund the PPF levy.
It is likely the PPF will end up with the same problems as the remaining final salary schemes, as it is unlikely to have the money to pay the “promises” for the pensioners. Additionally, the PPF will most likely have to reduce the benefits they pay out.
Pension changes that have already happened
Inflationary increases have already been allowed to change from Retail Prices Index (RPI) to Consumer Prices Index (CPI). This change looks reasonably small, but over a lifetime this could reduce the benefits by between 25% and 30%.
In April 2015, unfunded Public Sector pension schemes have removed the ability for transfers, so schemes for nurses, firemen, army personnel, civil service workers etc. can no longer transfer their pensions. Now these are blocked, it will be easier to make changes to reduce the benefits and no one is able to respond by transferring out of the schemes.
When this rule was being considered the authorities also wanted to block the transfer of funded schemes, i.e. most final salary schemes that are available. This could come back onto the discussion table in the future.
Autumn Statement (Budget)
This is on 23 November 2016. Could the Government make any further changes to UK pension rules? When Public Sector pensions were blocked, there was a small window of time to transfer. However, most people couldn’t get their transfer values in time as the demand was so high. People who review their pensions now may at least have time to consider options.
Could Brexit end the ability to transfer pensions away from the UK?
Reasons why schemes are in difficulty:
People now expect to live around 27 years in retirement, when these schemes commenced the average number of years in retirement was 13 years.
Lower Investment Returns
Investment returns have not been as high as expected. Also there has been a very large reduction in the amount invested in equities in final salary schemes; this is now around 33%, but in 2006, the average equity content was 61.1%.
Benefits were too good
Simply, many of the final salary schemes were ‘too good’. In 2009, around 24% of employees’ salaries was needed to fully fund final salary schemes that provided the standard level of benefit of 1/60th for each year of pensionable service. In 2016, that rate is now 50%! Clearly, it is unrealistic to expect an employer to meet the liability.
What could happen in the Future?
- An end to the ability to transfer out of all final salary schemes?
- Increase the Pension Age, perhaps in line with the increase of the State Pension?
- Reduction of Inflation increases, (already started as many now increase by CPI instead of RPI)?
- Reduction of Spouse’s benefit?
- Increase of contributions from current members?
- Lower starting income?
Act now! Review your pensions.
It does no harm at all to at least have a review of your pensions. In fact, it is prudent to do so. At The Spectrum IFA Group, we carry out a full transfer analysis, which is in accordance with the UK Financial Conduct Authority rules, before making any recommendation to transfer pension benefits. Doing nothing at all can often be an expensive mistake.
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 pensions, 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 .
Time to Review Your Final Salary Pension
Final Salary pension schemes, also known as Defined Benefit schemes, have long been viewed as a gold-plated route to a comfortable retirement. In the past, many advisers, including ourselves, would have been sceptical about people transferring out of such a scheme. However, there have been huge changes in UK pensions legislation and there are likely to be further changes ahead. The key question here is; will these schemes be able to provide the benefits they have promised over the next 20+ years?
Why Review Now?
In many cases, it may still be best advice to leave the pension where it is. And a transfer out requires highly specialised and regulated advice. However, there are many compelling reasons why a review makes sense.
Record high transfer values
UK gilt yields are at an all-time low and this has pushed up transfer values to be an all-time high; some transfer values have increased by over 30% in the last 12 months. Many clients are quite surprised to learn their scheme which projects an income of GBP 10,000 per annum in retirement offers a transfer value of over GBP 330,000!
Actuaries Hyman Robertson now calculate the total deficits on remaining final salary pension schemes as £1 trillion.
Recent examples show that very large deficits cause several problems. No one wants to purchase these struggling companies as the pension deficits are too big a burden to take on. Could the Government be forced to change the laws to allow schemes to reduce benefits? A reduction in the benefits will reduce the deficits and make the companies more attractive to purchasers. There is a strong argument that saving thousands of jobs is in the national interest, if that just means trimming down some of these “gold plated benefits”.
Pension Protection Fund (PPF)
This fund has been set up to help pension schemes that do get into financial trouble. Two points are key. Firstly, it is not guaranteed by the Government and secondly, the remaining final salary schemes must pay large premiums (a levy) to the PPF to fund the liabilities of insolvent schemes. As more schemes fall into the PPF there would be fewer remaining schemes that must share the burden of this cost. Their premium costs will increase as there will be fewer remaining schemes to fund the PPF levy.
It is possible that the PPF will end up with the same problems as the final salary schemes; i.e. they won’t have the money to pay the “promises” for pensioners. Additionally, the PPF will most likely have to reduce the benefits they pay out.
Pension Changes Already in Place
Inflationary increases have already been permitted to change from Retail Prices Index (RPI) to Consumer Prices Index (CPI). This change looks reasonably small, but over a lifetime this could
reduce the benefits by between 25% and 30%.
In April 2015, unfunded Public Sector pension schemes have removed the ability to transfer out, so schemes for nurses, firemen, military personnel, civil service workers etc. are no longer transferable. Now these are blocked, it will be easier to make changes to reduce the benefits and no one can respond by transferring out.
When this rule change was being discussed the authorities also wanted to block the transfer of funded non-public sector schemes, i.e. most corporate final salary schemes. There is therefore a risk that transfers from all final salary schemes could be blocked or gated.
Autumn Statement (Budget)
This is expected on 23 November 2016. Could the Government make any further changes to Pension rules? When Public sector pensions were blocked, there was a small time window to transfer. People who review their pensions now may at least have time to consider options.
Could Brexit end the ability to transfer pensions away from the UK? This is still unknown, but pensions are often a soft target of government taxation ‘raids’.
Reasons Why Schemes Are In Difficulty
Ageing population. People now expect to live around 27 years in retirement. When these schemes commenced the average number of years in retirement was 13 years.
Lower Investment Returns. As schemes have become underfunded, they have invested more conservatively. Average exposure to equities (shares) is now around 33%, whereas in 2006 the average equity content was 61%.
Benefits were too generous. In simple terms, many of the final salary schemes were too good. In 2016, if you became a member of a 1/60th scheme then your company would need to add 50% of your salary to make sure the benefits can be paid. Clearly this is unrealistic.
What Could Change?
· An end to the ability to transfer out of such schemes
· An increase to the Pension Age, perhaps in line with the increase of the State Pension
· Reduction of Inflation increases, (already started as many now increase by CPI instead of RPI)
· Reduction of Spouse’s benefit
· Increase of contributions from current members
· Lower starting income
What Are The Alternatives?
QROPS schemes have proven very popular in recent years as they offer expats excellent flexibility. While a QROPS is not the only alternative, and each individual case needs properly reviewed by a suitably qualified adviser, the benefits are clear;
· The ability to pass the pension fund on to heirs
· The option to change currency
· You can access the benefits flexibly via income drawdown (can vary the income you take)
· Wide investment choice to suit your risk profile.
At The Spectrum IFA Group, your locally-based adviser will work together with our internal Pensions Review team and conduct a full analysis of your current arrangements.
The Spectrum IFA Group exhibited at the Barcelona International Community Day
For the third year running The Spectrum IFA Group exhibited and supported the Barcelona International Community Day held at the Maritime Museum in Barcelona. A great venue and well organised, many new contacts were made as well as the deepening of existing relationships. Chris Burke’s presentation was very well received by a large audience of expats.
The event is very informative and totally in line with The Spectrum IFA Group’s modus operandi and we are certain to be able to assist many new and some not so new expats with their overall long term financial planning.
[Gallery not found]
The Spectrum IFA Group co-sponsored NADFAS lecture
The Spectrum IFA Group co-sponsored an excellent NADFAS (National Association of Decorative & Fine Arts Societies) lecture on 19th October at the San Roque Golf & Country Club on the Costa del Sol. The Spectrum IFA Group was represented by one of our local advisers, Charles Hutchinson who attended along with our co-sponsor Paul Ellis from Currencies Direct.
The National Association of Decorative & Fine Arts Societies is a leading arts charity which opens up the world of the arts through a network of local societies and national events.
With inspiring monthly lectures given by some of the country’s top experts, together with days of special interest, educational visits and cultural holidays, NADFAS is a great way to learn, have fun and make new and lasting friendships.
At this event, over 130 attendees (all our target market) were entertained by a talk on The Life and Work of Henry Murphy, one of Britain’s best but most neglected Goldsmiths. The presentation was given by John Benjamin of Antiques Roadshow fame, who kept the audience gripped with his knowledge and humour. We were fortunate enough to have him agree to private valuations of attendees’ jewelry and especially any Fabergé items before the lecture.
The talk was followed by a Spectrum sponsored drinks reception which included a free raffle for prizes including a CH obtained (very difficult to find, as out of print) glossy coffee table book on Henry Murphy and his works by John Benjamin himself which he gladly signed for the lucky first prize winner. Also bottles of Champagne and Cava. Currency Direct supplied a bottle of fine Brandy and a very useful car sunshade.
All in all, a great turnout and a very successful event at a wonderful venue. The Spectrum IFA Group are very proud to be involved with such a fantastic organisation and we shall be sponsoring the December lecture and drinks reception after, when we will have Tilney Bestinvest as co-sponsors.[Gallery not found]
The 113th Le Tour de Finance event at Domaine Gayda
On Friday 7th October, 62 invited guests attended the 113th Le Tour de Finance event, once again staged in the beautiful setting of Domaine Gayda, in Brugairolles in the Aude. This is the seventh time The Spectrum IFA Group has returned to Domaine Gayda, and after the presentations guests were able to sample some of the wines produced there.
On arrival, guests were treated to coffee and pastries before listening to six presentations on a range of financial subjects including Assurance Vie, Pensions, Financial Markets and Currency Exchange and French Tax issues. The presentations were delivered by industry professionals and commenced with a presentation by Michael Lodhi CEO of The Spectrum Group who immediately drew the attention of the attendees by addressing the issue uppermost in the guests’ minds, that of the EU Referendum result and how it would impact the expat community. Michael then went on to highlight the other main theme of the day, that of the state of the UK pensions industry, scheme deficits and the options open to pension members.
Michael then made way for Jeremy Ferguson of SEB Life International who spoke about Assurance Vie, its tax advantages in France both for income and inheritance tax, and demonstrated the product’s flexibility in adapting to changes in the policy-holder’s circumstances. This is always a popular presentation, and didn’t disappoint.
Following Jeremy, we heard a presentation on the current situation in the financial markets delivered by Robert Walker from Rathbones, who shared the ‘house’ view on the impact of Brexit on the investment markets, and on the value of the pound. Of particular interest were his views on where the true value of the pound lies and the timescales before those values are likely to be restored.
Following Robert came a short presentation by George Forsyth of Prudential who presented the Prudential International Assurance Vie and how it differs from the SEB Life International contract. Majoring on the strength of Prudential’s investment funds and how this allows the returns to be smoothed out, rather than suffer the periodical fluctuations of the investment markets, George was able to convey the view that the volatility in global markets can be successfully managed without causing the investor sleepless nights.
There was a noticeable sitting up in seats when the next speaker stood up to speak – Paul Foreman from Momentum Pensions. Speaking about the developments in pensions brought about by last year’s change in legislation, it was clear this was a subject of great importance to the attendees. There is clear concern being expressed currently and this was confirmed to us in feedback received after the event. Paul delivered a highly informative presentation that inevitably raised more questions than answers, but an opportunity to ask those questions came over lunch.
Pippa Maile of Currencies Direct then delivered a typically entertaining presentation on the different transaction opportunities available through the Currencies Direct online portal. Once again this was of particular interest to the room.
Finally, guests were introduced to Rachel Thomas-Bonnet whose company Perfide Albion provides help and support in a whole range of aspects to ex-pats, ranging from help with property purchase, entering the French healthcare system and (noticeably more reluctantly) re-registering your car in France. Rachel also helps with completion of tax returns, and through her work with Notaires coupled with her legal training she has built up a reputation as the go-to person for all aspects legal. It was clear that Rachel was a popular speaker by the comments made by the attendees and the number of people who made a bee-line for Rachel over lunch.
The presentations were then wound up by Michael Lodhi who invited all to stay and enjoy the lunch provided by Domaine Gayda and to sample some of its wines.
To all of us there, it was evident that the guests had found all the presentations highly informative and of value to them. Once again, a very successful Tour de Finance.
Dread and Brexit
Fear causes thousands to hold off making decisions pre-Brexit
Uncertainty over what will happen once the UK has left the European Union has led people to make one important decision. Not do anything until it happens. This means delaying actions for around two and a half years. This could be a really disappointing, if not dangerous, decision to make. As much as we intend being around in two and a half years, there is no guarantee we will be. Who knew two and a half years ago what was going to happen next week?
Brexit is another event in our lives. None of us, not even the politicians, know exactly what is going to happen but you can plan for all eventualities. If there is a full-on Brexit, then you need to be in a position whereby your money is not exposed to future monetary restrictions. You need to do this BEFORE the shutters come down. Waiting two and a half years may be too long and too late.
If there is a “soft” Brexit, as I suspect there will be, with deals being done over a gin and tonic in Le Chien et Le Canard, it will still be important that your investments are recognised as being tax compliant in the country you live in. It will also be important that any financial planning advice you are receiving is coming from a company registered in your country. Some financial advisers in Spain are allowed to operate using a UK licence because the UK is in the EU. The professional indemnity insurance which they (may) have could become invalid.
Another change likely to cause a big problem post-Brexit is Spanish inheritance tax. UK inheritors are benefiting from Spanish rules introduced in 2014. These rules only apply to EU residents. Therefore, it is now time to look at how to distribute wealth in readiness for these changes.
Interest rates are low and will stay that way for some time to come, probably for at least two and a half years. The pound has collapsed in value meaning that income in euro terms has reduced dramatically. Banks have little or nothing to offer. We can help you with this NOW. We do not charge for a chat, or even for investigating what you have. We tick all the boxes regarding licences and compliance and we live in Spain.
Supporting Women in Business 10th November
Jointly organised by Costa Women Barcelona and MumAbroad, Anne Ollerenshaw and Chris Burke of The Spectrum IFA Group are delighted to be presenting short talks on ‘Empowering Women to take control of their finances’ and ‘Working mothers – overcoming your demons’.
Got a business idea but not sure how to make it pay? Or perhaps your business is up and running but you’re meeting barriers – language, culture, legal issues – associated with operating in a foreign country? Or maybe you’re having challenges finding the right customers and getting your message across? Whatever the difficulties you’re experiencing, this half-day conference is for you.
Each speaker throughout the morning are experienced business entrepreneurs who have all succeeded in business. This conference is your chance to get close to the experts and drive your professional live forward.
And the amazing thing is that you’ll be helping Syrian refugee children by attending! All proceeds from the conference will be donated to a scholarship fund for needy refugee children to attend the Al Nokhbar School in Istanbul, Turkey. This means that you’ll be helping rescue children from the abuses of child labour, as well as from the risks of social exclusion, criminality, potential radicalisation and, not least of all, you’ll be helping young girls escape the perils of early marriage. What better way to spend your time?
Date: 10th November 2016
Time: 11.00 – 15.00
Where: Crew Lounge, One Ocean, Moll de la Barceloneta, 1, 08003 Barcelona
For more information and to purchase a ticket please click here
Will BREXIT have an effect on your Pension Plans?
By Susan Worthington - Topics: BREXIT, Defined benefit pension scheme, Final Salary Pension, final salary schemes, Mallorca, Pensions, QROPS, Spain, Uncategorised, United Kingdom
This article is published on: 20th October 2016
Brexit could have an effect on your Pension whether it is a Private Plan or Final Salary Scheme that is waiting to be paid. There are many various pension plans these are just two examples
Do you have a Private Frozen Pension in the UK?
Pensions are driven by HMRC ruling not EU Membership and a QROPS (Qualifying Recognised Overseas Pension Schemes) which allows you to transfer your pension overseas. This option may not be available in the future as there is talk that HMRC may pull the plug, make restrictions or even insert transfer tax.
Do you have a Final Salary Pension Scheme in the UK?
There have been a number of recent changes within the UK economy and UK pension world that make a review of any pension(s) essential for those living or planning to live outside the UK.
Final Salary pension schemes (also referred to as Defined Benefit schemes) have long been viewed as a gold plated route to a comfortable retirement, however there are likely to be large changes ahead in the pension industry. The key question is; will these schemes really be able to provide the promised benefits over the next 20+ years?
Why Review now?
Record high transfer values
- Gilt rates are at an all-time low. This has caused transfer values to be at an all-time high, some transfer values have increased by over 30% in the last 12 months.
- Recent examples show that very large deficits in pension schemes cause a number of problems, in particular no one wants to purchase these struggling companies as the pension deficits are too big a burden to take on
- Could the Government be forced to change the laws to allow schemes to reduce benefits? A reduction in the benefits will reduce the deficits and make the companies more attractive to purchasers
Pension Protection Fund (PPF)
- This fund has been set up to help the schemes that do get into financial trouble, two points are key. Firstly it is not guaranteed by the Government and secondly the remaining final salary schemes have to pay large premiums (a levy) to the PPF in order to fund the insolvent schemes. As more schemes fall into the PPF there are less remaining schemes that have to share the burden of this cost.
- It is likely the PPF will end up with the same problems as the final salary schemes, they won’t have the money to pay the “promises” for the pensioners
- In April 2015 unfunded Public Sector pension schemes have removed the ability for transfers, so schemes for nurses, firemen, army personnel, civil service workers etc. can no longer transfer their pensions. Now these are blocked, it will be easier to make changes to reduce the benefits and no one is able to respond by transferring out of the scheme
Autumn Statement (Budget)
- This is on 23 November 2016. Could the Government make any further changes to Pension rules? When Public sector pensions were blocked there was a small window of time to transfer, however most people couldn’t get their transfer values in time as the demand was so high. People who review their pensions now may at least have time to consider options
What could happen in the Future?
- An end to the ability to transfer out of such schemes
- Increase the Pension Age, perhaps in line with the increase of the State Pension
- Reduction of Inflation increases, (already started as many now increase by CPI instead of RPI)
- Reduction of Spouse’s benefit
- Increase of contributions from current members
- Lower starting income
Act now! Review your pensions
Susan Worthington of The Spectrum IFA Group has been giving investment advice here in Mallorca and Menorca since 1994.
If you wish to have a chat with Susan about any frozen or paid-up pension.
Contact: firstname.lastname@example.org or telephone 670 308987.