Pension simplification came in to effect from 6th April 2006 to rationalise the British tax system in regards to pension schemes. One of the policies introduced was the lifetime allowance for all UK pensions. The lifetime allowance is the limit on the amount of pension benefits that can be taken without incurring a tax charge. As you can see in the chart below, the lifetime allowance, better known as LTA, was introduced in 2006 with a limit of £1.5m. The limit increased to £1.8m between 2006 – 2010 before decreasing between 2012 – today. The LTA reduced to £1m in 2016/17.
When taking benefits?
When you draw benefits, die before benefits are taken or transfer your pension overseas, a benefit crystallisation event (BCE) will occur and will be tested against your lifetime allowance. If you have a defined contribution scheme, the value of benefits will be tested against the value of your fund. If you have a defined benefit scheme, the value of benefits will be calculated 20x the pension you have accrued plus any tax free cash you have received. If you have been drawing benefits before April 2006, the calculation will be 25x. If the value of benefits exceeds the LTA, there will be a tax charge to pay. It is very important to plan effectively for your retirement to ensure this doesn’t happen. To talk to an advisor to discuss your retirement plan please enquire here today.
What if I’m over the LTA?
The amount of tax you pay on pension savings above the LTA depends how the money is paid to you. The two tax charges are as follows:
55% if you tax a lump sum
25% if you withdraw the money any other way e.g. pension payment
There are a number of protectors that you could have applied for that protects you against any drop in the LTA such as enhanced and primary protection, which is no longer available or fixed protection and individual protection. To find out more information regarding this please contact us today!
What benefits does a QROPS provide me?
A QROPS (Qualified recognised overseas pension scheme) provides many benefits to someone residing or looking to reside overseas. One of the benefits is that it has no lifetime allowance. The concern a lot of people have is that the limit has been reduced from £1.8m to £1m within the last 4 years, that’s a 45% reduction!! The new policies that will be implemented with UK’s new Prime Minister Theresa May following the Brexit vote to leave are not widely known. The likelihood that the LTA will fall is very high considering the decreases over recent years which means it could significantly affect pensions for anyone residing abroad. If your UK pension is near or exceeding £1m then it would be highly advisable to discuss to a regulated financial advisor to discuss your options. If you are concerned about the LTA decreasing further and you feel that your pension will be in excess of the LTA at retirement, then it would also be highly advisable to talk to a regulated advisor. To find out any information regarding the above article or if you would like to receive a NO cost NO obligation review of your options, please contact us today!
It seems to be going from bad to worse for the UK pension deficit. Across the 6,000 private sector defined benefit scheme pensions, 5,000 are now in deficit with roughly 1,000 close to insolvency, according to the Financial times. Pension schemes that go into liquidation will end up in the ‘Pension Protection Fund (PPF)’. Information regarding any UK Defined Benefit Scheme can be found on their website at http://www.pensionprotectionfund.org.uk/. The current UK pension deficit stands at £375 billion, £85bn larger since the Brexit vote.
Pension Protection Fund (PPF)
The PPF was created 12 years ago as an insurance policy for anyone with a Defined Benefit Scheme. It provides compensation when there is a qualifying insolvency event i.e. when there are insufficient assets to cover liabilities. The protection is as follows
Up to 90% of the pension fund value with a cap of £37,420 per year.
Benefits rise in line with inflation with a cap of 2.5% per year.
Survivors Pensions subject to the rules of your DB schemes.
It’s important to note that the PPF isn’t backed by the treasury. In fact, it is funded by levies from Defined Benefit Schemes which consists of a flat rate from all schemes as well as a risk based levy which requires a higher levy for companies with a higher underfunding deficit. Many argue this could have inverse affects as growth could be subdued by higher levies in times of economic hardship. Seeing as the UK pension deficit is 160 times larger than the PPF surplus, many are concerned the stability and longevity of the PPF.
How has this affected the UK?
Many UK schemes have already fallen into the PPF with the most major recent one being BHS in April this year worth £571m. Bloomberg have compiled the following chart outlining the best and worst 5 companies:
As you can see, the deficit is hugely different depending on the sector and company. It would be advisable to seek independent financial advice to decide whether your scheme is at risk of defaulting along with what options you currently have.
Pension deficit widens as BoE cuts interest rates and begins new £60bn QE programme
The Bank of England’s decision to slash interest rates and increase the UK stimulus package to £435bn may have adverse effects to pensioners. As if the average pensioner hasn’t got enough to worry about with record low annuity rates and gilt rates. We are now facing a further blow to the already huge pension in the UK.
Gilt and annuity rates are at record lows and have been consecutively reaching new record lows for a considerable amount of time. The problem we now face is that rates are likely to drop even more. The UK central bank will be buying a further £60bn of government bonds which could further push gilt prices up and yields down, as supply falls (yields fall as prices rise). The question that we still have to ask ourselves is “who benefits from QE?”
We have seen more inequality, low inflation and larger pension deficits as a result of QE. So why do they keep flooding the market with more quantitative easing? Banks need liquidity and without more “free money” from the central banks, the banking system could collapse like we almost saw in 2008. Unfortunately, the average investor is forced to take a greater degree of risk for an average return as the search for yield becomes much harder. During the 1990’ and 2000’s, gilts returned above a 7% yield in return for a loan to the government. In today’s market the returns are below 1%.
What this means is that ‘defined benefit schemes’ are taking more risk to provide the guarantees needed to pay out their members. This has driven the pension deficit in the UK to a staggering £935bn which is expected to reach a trillion soon.
The growing deficit means more companies are paying higher levies to fund the deficit in their pension which reduces overall all growth thus negatively effecting the economy. The Bank of England need an alternative solution if they are ever going to get out of this alive.
It’s not all bad for defined benefit schemes
Low gilt rates do have one positive affect on members. Actuaries calculate the cash equivalent transfer values (CETV) for members who wish to transfer their defined benefit scheme to a normal defined contribution scheme based on current annuity rates. A lower annuity rate means you will need a greater amount of capital to provide the same amount of income on an annual basis. In fact, many people are transferring out their Final salary schemes for this reason while the transfer values are high and the schemes have enough money to pay them, however this may not last forever. If the schemes run out of money to pay out transfer values, they could reject the transfer out of the scheme or reduce the transfer values as they won’t have the money to do so.
Anyone with a defined benefit scheme needs to seriously consider their options if they are in a scheme that is seriously underfunded.
Pension freedoms was announced last year 6th April by George Osbourne, which gave people more flexibility to take pension pots as they wish. Rather than buying an annuity, pensioners were able to choose from a number of options including; taking a 25% lump sum, taking an annuity, accessing UFPLS or taking 100% of their pension pot as a lump sum. It’s important to remind people that 25% of the pension is tax free with the remaining balance subject to marginal rate of tax up to 45%.
Here we reveal how this has affected how people have access their pension.
According to the telegraph, £27m has been taken out of pensions every day. The latest data from HMRC indicated that a staggering 188,00 savers have withdrawn around £18,000 from their pension in the last 12 months bringing the total withdrawals to £3.5bn. Surprisingly 52% of pensioners have accessed all of the majority of their pensions according to the regulators retirement outcome review.
So what is the money being spent on?
Are people spending their money on Lamborghinis like Steve Webb so rightly encouraged? Of course not. The average pension pot in the UK in below £100,000. People have worked their entire life to save into a pension to provide the retirement they so rightly deserve. A lot of people have been encashing their pension in full to pay off debt. This may be sensible if you are paying excessive interest rates through a credit card or loan. Some pensioners are accessing their pensions to go on a world cruise or an around the world trip. This could be dangerous if you have no or little wealth. The motives behind the government’s policy is under serious scrutiny as many are left to wonder if it’s in the best interest of pensioners or the amount of taxes the government receive. With the average person in the UK living until 89, this could be a serious problem if people are blowing their entire pensions pot by 55! Thinking short term has become part of life in the 21st century.
Problems associated with 100% encashment of your pension
Tax – only 25% of the withdrawal will be tax free. The remaining balance will be taxed at your marginal rate, up to 45%. Tax planning is important when deciding how much money you take out of your pension as this could significantly affect the amount of money you receive after taxes are paid out.
Losing Benefits – You could lose benefits such as JSA, ESA, Income support or housing benefits if you take a lump sum from your pension. The DWP have that you need to announce any withdrawals to your local council.
Charges – There may be high early encashment charges if you access your pension early as well as exit fees for each withdrawal. Citizens advice published a report explaining how 160,000 pensioners lost 10% of their fund to charges.
What should I do?
It’s important to discuss your options with a financial adviser who can advise on the most suitable option for you. Things to consider would include whether you can access the money from somewhere else, what taxes will you pay, will you incur any exit penalties, are you giving up any valuable benefits and the list goes on…
What does Brexit mean for pensioners who live abroad?
Final salary schemes
Final salary pensions also known as defined benefit schemes have been the talking point over recent years due to over 75% of them being underfunded. This means they don’t have enough money to pay retirees their pensions. Guarantees for final salary schemes have been heavily under pressure since gilt rates and interest rates have hit record lows. This means employers have had to take more risk to meet these guarantees that were promised years ago. The deficit for defined benefit schemes increased by £80bn Friday and even further going into the start to the week. With the current funding required from UK companies to reduce this deficit, it is now under more pressure as a recession becomes ever more likely which in turn would mean less profit for companies, reduced amount of contributions to reduce the deficit hence a greater deficit. What does this mean for these pensions? There is no simple answer although for people who were concerned their pension wouldn’t have the money to pay them out before the Brexit vote certainly have more to worry about now. This is without even taking into account the reduced GBP which effects any expat living and drawing from their pension abroad.
Annuity rates are already at record lows due to an increase in life expectancy and a decrease in gilt rates. Life expectancy is only going to increase which means the important short term factor to consider is the gilt rate. After Fridays Brexit vote, UK gilt rates dropped to record lows which took a further blow to annuity rates. Even after the credit rating was downgraded in the UK, this did not stop the inflow into UK gilts which pushed yields to record lows. The once called safe retirement option has now become an unfavourable option even for the lowest risk taker retiree. For people living abroad you have the further risk of the falling GBP which dropped between 6-10% against its peers Friday. Since 2011, when it no longer became an obligation to take an annuity with your pension, it has become one of the most expensive and poor performing option for your pension. Below illustrate how low rates have gone with reference to the telegraph.
Currently, state pensions increase by either the average earnings, inflation or 2.5% – whichever is higher. The ‘triple lock’ is now under threat as David Cameron threatened to ditch this valuable benefit if UK voted out. This would save the government billions at the expense of retirees which is currently the UK’s largest concern – Too many people taking money without contributing taxes, even if they have earned it! For people living abroad this could mean that your state pension will no longer increase and will therefore be a flat rate for the rest of your life.
The GBP had its worst ever trading day since records began Friday falling over 10% against the USD and 7% against the EUR. Most UK pensions don’t have the option to have a mixed basket of currencies which would have seriously affected expats with GBP denominated pension schemes Friday. If you are an overseas expat it has never been more important to look at the options, you have with your UK pension for the above reasons. A QROPS will allow multi-currency portfolios to diversify away currency risk where needed. Having control over this could significantly affect your retirement pot. The long red bar below shows how much the GBP devaluated against the USD on Friday.
UK pensions of course have a bias toward favouring UK investments compared to overseas investments. For someone living in the UK or an expat living abroad it may not be the most favourable option. Firstly, since the Brexit vote last Friday, the risk that the UK will go into recession has increased. If you are exposed to UK equities only, then you could be facing a serious downturn in UK markets. UK gilt yields have also hit record lows which further confirms the argument that overseas investment strategies could become more favourable in the foreseeable future. If you live overseas then a QROPS will provide much greater flexibility on your investment choice.
UK legislation changes
With the ever growing deficit in pensions, gilts at record lows, annuities at record lows, growth in the UK substantially low and interest rates at record lows it is very difficult to see a way out of this pension black hole. It’s important to note that the PPF (pension protection fund) is not backed by the treasury hence there is no guarantee your pension will be saved if your pension provider goes into liquidation. Will legislation change to try and sort this crisis out? Only time will tell but one thing that looks imminent is that it will probably disfavour the pensioner. There have been talks of reducing the pension commencing lump sum, reducing the triple locked increase, reducing the guarantees in pensions, and many more. Most of the discussions about changes has been to un-favour the UK pensioner. By transferring your pension out of the UK into a QROPS you will set yourself free of any further changes to UK pension legislation.
What options do I have?
If you live abroad, you have a choice to leave your pension in the UK or transfer it overseas into a QROPS. Given the risks associated in the UK, this could significantly benefit your retirement.
QROPS could eliminate currency risk as you can choose the currency your pension is denominated in rather having one option – GBP.
Transferring away from an underfunded scheme means you no longer face the risk that the pension goes into the PPF.
You have greater choice of investments which would allow worldwide funds rather than favouring UK markets – this could diversify risk.
On transferring, you take your pension out of the UK legislation completely. This means if any further changes are made they won’t affect your pension. Concerns that are being talked about at the moment include taxing the pension commencing lump sum, removing double taxation agreements between the UK and other member states, removing valuable benefits in certain pension schemes and many more
Possible 30% tax free lump sum
100% passes down to your beneficiaries
Eliminates UK pension death tax which currently taxes you up to 45%.
It has never been more important to analyse your options. To have a free overview on your options please contact us.
How will the weak Pound affect UK pensions for expats overseas?
The day people never thought would come…. Britain decide to leave Europe! The campaigns and reasons for the leave vote have been heavily under scrutiny since the referendum date of the 23rd June leading to a petition for a revote. Behind the eye of the needle a lot of people will now feel as if they have been robbed of your vote. How this will impact the people of Britain and Expats living abroad is likely to have positive and negative effects. It is likely to make expats rethink their savings and investments to gain more control and certainty to secure a better retirement.
What concerns do people now face?
The first most obvious affect expats will have noticed will be the impact on the exchange rate. For anyone living abroad that has a UK pension could be significantly affected through the devaluation of the Sterling. If you are currently taking benefits from your pension, then you will have noticed the affect directly. This might haven’t even spurred you to not withdraw any money from your pension until the Pound appreciates as has been the case with many expats. The below chart shows the exchange rate between GBP and the EURO. The big red bar indicates the impact on the day of Brexit (7.5% fall).
Chart taken from CMC markets.
How will this affect the average person living in the UK?
If you live in Europe with a UK pension and are currently living from the income from your UK pension you will now get a lot less Euro’s from each withdrawal. Please see the impact below, assuming you withdraw £2,000 each month to cater your lifestyle:
December 2015: €2,800 (£2,000 with an exchange rate of 1/1.40 – GBP/EUR)
22nd June 2016: €2,600 (£2,000 with an exchange rate of 1/1.30 – GBP/EUR)
14th July 2016: €2,380 (£2,000 with an exchange rate of 1/1.19 – GBP/EUR)
Within 1 year your pension value in terms of Euro’s has dropped by 15%. There’s a common phrase used by financial advisors which says “If something can affect your investments that you have no control over then it poses a bigger risk than anything you have control over”. In a nutshell this means risk can be mitigated and controlled with investments but if you live abroad and have a UK pension, you will have no control over the currency.
How can a QROPS help me?
The beauty of a QROPS is the ability to hold funds in the currency of your choice. This means you can have your funds denominated in GBP, EUR, USD or any other major currency worldwide. This gives you greater control over your retirement fund. So if you live overseas and have been affected by the current devaluation of the Pound or are concerned that it will affect you when you start to withdraw your funds, QROPS may be the solution you’re looking for.
Sam Barber, a Chartered Advisor at Alexander Peter Wealth Management commented “This has always been a compelling reason when looking at the benefits of a QROPS compared to leaving it in the UK. People have the impression that the Pound is always strong which just isn’t the case. Many clients who were due to take their pension commencement lump sum have put this on hold due to the poor exchange rate and in fact has increased the demand for QROPS significantly”.
For more information about QROPS and the benefits it provides, please download our QROPS guide or request a Free call from one of our advisors.
Deflation has not been seen in the UK since 1960 so why are we threatened by this today and what does it mean for our pensions? It’s a very common question at the moment with very little answers which makes the importance of this article extremely demanding. Low inflation and deflation concerns could be blamed on a number of factors such as low oil prices or supermarket price wars. Usually deflation is associated due to a reduction in money or credit. How can this be when mostly every central bank in the world are increasing money supply through quantitative easing (QE)? The question as to why we are in this mess is debatable but the question as to how it will affect us is what we need to know.
Thankfully for any of you who will or have qualified for a state pension will never see their state pension fall due to negative inflation as it is currently protected by the ‘triple lock’. This means the state pension will increase each year by the higher of inflation, average earnings or 2.5%. The ‘triple lock’ policy is fairly new which is now under review with Theresa May stepping in as the new Prime Minister for George Osborne, although the government have assured the public that it will remain until 2020.
Defined Benefit Schemes
Defined Benefit Schemes are designed to pay you a salary on retirement until death based on your final salary and years in service which increases by CPI (inflation) each year. The first question that springs to mind is “If we have deflation, does that mean my pension will fall in value each year?”. The short answer is no. Most Defined Benefit Schemes have a 0% floor, although this can differ depending on scheme rules. This means that if inflation stays low for a long time like seen in Japan, the increase in your pension will be very limited or even non-existent. The opportunity cost of a defined contribution scheme may become more attractive for a lot of people who believe low inflation (low returns for scheme members) is here to stay.
Of course this could be a blip but with the ever concerning deficit in defined benefit schemes, many people are transferring their scheme’s to a personal pension scheme. It is important to seek independent financial advice before considering a transfer as many factors need to be taken into consideration to ensure it is in your best interest.