What You Need to Know About Pensions Today
by Thomas Marron
06 14 24 61 29
Pensions are complex, yet often the cornerstone of a comfortable retirement. Today, with Brexit looming and more options than ever for what you can do with your funds, it is difficult to establish the best approach – there is no ‘one size fits all’ solution.
Here, we take a look at current pension issues that could affect you. While there may be some cause for concern, expatriates could find opportunities ahead.
Pension providers are feeling the pinch
Around 15 million Britons have ‘final salary’ company pensions, where an employer guarantees to pay a fixed amount for the whole of retirement. Widely considered ‘golden’ pensions, the income provided depends on salary and length of service, but is usually quite generous.
The biggest issue facing these pensions is how they are financed. The cost of providing them has soared as returns from the assets underpinning them – mostly UK bonds – have shrunk. With historically low interest rates and increased life expectancy, many companies face significant shortfalls in funding payments promised to members. Like BHS, with its £571 million pension deficit, companies with insurmountable deficits can fail alongside their pension schemes.
Transfer values are at an all-time high
To offload pension liabilities, many companies are offering members large cash sums to leave. Calculated as a multiple of a member’s future pension payment, it is not unknown for pay-outs to double from 20x two years ago to 40x since the Brexit vote. In an extreme example, if you had a final salary of £30,000 per year, you may have been offered £600,000 two years ago – but £1.2 million today.
Although this example is unusual, even more modest sums could provide a retirement income that well exceeds the original annual payment. Today’s unusually high transfer values can outweigh the benefits of drawing a guaranteed pension for life, but professional advice is essential.
Expatriates can access tax-efficient opportunities
Many expatriates in France benefit from reinvesting their UK pension funds into a tax-efficient ‘assurance-vie’. Alternatively, you could transfer to a Qualifying Recognised Overseas Pension Scheme (QROPS) to unlock French-compliant tax benefits. This can also offer estate planning advantages. While most final salary pensions are payable to your spouse on death, QROPS and other arrangements offer the flexibility to include additional heirs and roll your wealth across generations.
These options can be advantageous, but tax benefits vary greatly between providers and jurisdictions. Taking regulated advice is crucial to determine if this approach is suitable for you, navigate your options and avoid pension scams.
Advice is essential before transferring
As tempting as inflated pay-outs are, transferring from a final salary pension comes with risks and many members are better off staying where they are. An adviser can help you weigh up the advantages, disadvantages and long-term implications. For benefits worth over £30,000, the Financial Conduct Authority makes it compulsory to take regulated financial advice before transferring.
You should at least confirm your current transfer value and check if your scheme is at risk. The government’s Pension Protection Fund offers some protection but only compensates up to £33,678 a year at age 65, so if your pension offers more and your scheme is vulnerable, consider transferring.
A lower pension allowance could catch you out
If your total UK pension savings (excluding the State Pension) are close to £1 million, you could breach the UK lifetime pension allowance. Anything you access over the limit is liable to 55% UK taxation when taken as a lump sum or 25% as income, even if you are resident in France.
Calculating your lifetime allowance is complex and you could go over without realising it, for example through investment growth. Those close to or over the limit should consider HMRC ‘protection’ options or transferring to a QROPS before attracting further tax penalties. Once in a QROPS, funds are out of reach of lifetime allowance charges.
The window of opportunity may be limited
If you decide transferring is right for you, now may be the time to act. Some speculate that the UK government may change the rules to make withdrawals more difficult, or start taxing pension transfers for non-residents. While changes may not happen, if they do, there may be a limited time to transfer without penalties.
With so much uncertainty ahead, there has never been a better time to review your pension arrangements. Take personalised, professional advice to establish what makes financial sense for your individual circumstances and objectives. A locally-based adviser can keep you up-to-date with any developments that may affect you as an expatriate so you can enjoy the retirement lifestyle you want in France.