Six things you should know about pensions today
If you have chosen to retire in Spain, your pensions can be the key to a comfortable retirement. But with Brexit looming, global uncertainty and more options than ever for how you can access your funds, pensions can be a source of concern and confusion.
By getting to grips with the current issues, you could find opportunities ahead, especially if you have a final salary (‘defined benefit’) pension.
1. Pension providers are vulnerable
Employers that provide final salary pensions guarantee a known percentage of your salary throughout retirement. While income depends on salary and length of service, it is usually generous, especially compared to expected benefits from other types of pensions.
With today’s low interest rates and increased life expectancy, however, the cost of funding these benefits has soared, making it harder for many companies to afford the promised pension payments. Like BHS and its £571 million pension deficit, companies with significant shortfalls can fail, and so could their pension schemes.
There is, however, a safety net for members of final salary pensions in the form of the UK government’s ‘Pension Protection Fund’ (PPF). This offers compensation of 90% of members’ pension rights if a scheme fails, capped at £33,678 a year at age 65.
2. Transfer values have never been higher
To offload pension liabilities, many companies are offering members large sums (‘transfer values’) to leave. Calculated as a multiple of the future pension payment, some pay-outs have doubled from 20x two years ago to 40x today – sometimes hundreds of thousands of pounds. Properly managed, such high pay-outs can potentially provide a retirement income that exceeds the original annual payment, outweighing the benefits of drawing a guaranteed pension for life.
3. Expatriates can access tax-efficient alternatives
Expatriates may benefit from reinvesting UK pension funds into more tax-efficient arrangements for Spain or transferring to a Qualifying Recognised Overseas Pension Scheme (QROPS). Doing this can unlock tax-compliant opportunities and other benefits, such as estate planning advantages. While many UK pensions are payable to your spouse on death, other structures like QROPS offer flexibility to include other heirs, even across generations. QROPS or other arrangements can also offer currency flexibility. Holding investments in different currencies will spread currency risk and may therefore potentially insulate your pension income from volatility in the Pound and the Euro during Brexit uncertainty.
However, tax benefits of QROPS vary greatly between providers and jurisdictions. Also, on 9th March the UK government introduced a 25% tax on overseas transfers to QROPS in certain circumstances. This charge will not affect you if both you and your QROPS are in the European Economic Area (EEA) or are both based in the same country outside the EEA.
It is important to take professional, regulated advice to establish if this approach is suitable for you, navigate the numerous options and avoid pension scams.
4. A lower pension allowance could catch you out
Today, UK pension savings (excluding the State Pension) totalling over £1 million will breach the lifetime pension allowance. Anything over this threshold triggers UK taxation of 55% when taken as cash or 25% as income or transferred to a QROPS, wherever you are resident.
Calculating your lifetime allowance is complex. While £1 million sounds like a lot, after years of saving, employer contributions and investment growth, you could go over without realising. Those close to the limit should consider HMRC ‘protection’ options or transferring to a QROPS before attracting tax penalties.
5. Advice is essential
Despite tempting pay-outs and other potential benefits, transferring from final salary pensions is not suitable for everyone. Transfers are also a target for pension scams, so it is essential to employ due diligence and use a regulated provider. For benefits worth over £30,000, the Financial Conduct Authority makes this compulsory.
You should at least confirm your current transfer value and check if your scheme is at risk. If it is and your annual benefits are worth more than the maximum £33,678 government compensation, you should explore the merits of transferring.
6. The window of opportunity may close
If you decide transferring is right for you, now may be the time to act as such high transfer values may not be available for long. Also, some speculate that the UK government may change the rules to make withdrawals more difficult, or start taxing pension transfers for non-residents post-Brexit.
With so much speculation and uncertainty ahead, there has never been a better time to review your pension arrangements and consider what could work for you now, under current rules, before the window closes. Take personalised, professional advice to ensure you are on the right track to continue enjoying the retirement lifestyle of your choice in Spain.
Summarised tax information is based upon our understanding of current laws and practices which may change. This article is general in nature and should not be construed as providing any personalised taxation and/or investment advice. Individuals should seek personalised advice.
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