Dependence on the UK stockmarket has damaged wealth
In the last 5 months, life has not been easy. We have all had to change our lifestyles to one extent or another and we don´t know exactly what lengths we will need to go to in order to remain safe. Hopefully the worst has passed and we can get back to thinking about our future in a positive way and not have to constantly worry about coronavirus.
Aside from the pain of having to wear a mask, in the last 5 months I have had concerns about work, I have learned new words and phrases linked to coronavirus, and I have obtained a new Spanish residence card. Certain things have not changed during this time. People read the same newspapers, watch the same television programmes, express their disdain for Donald Trump, and base their investment decisions on the performance of the FTSE100.
New investment trends
Whilst certain business sectors have suffered over the last few months, others have prospered and have a positive outlook. Technology has come to the fore, both in terms of purchasing goods and communication.
Investments and the FTSE100
Aside from the investment vehicle and the tax structure your investments and pension funds are held within, it is important that the investments themselves are well managed. Some people have held off investing through fear of coronavirus. There are also those who had previously delayed investment decisions until Brexit had been sorted out. The consequence of this has been that they have missed out on growth over the last 5 years, even with the downturn in March/April, as well as suffering from the real loss through inflation if they have left their cash in the bank.
Most UK nationals refer to the FTSE100 to find out what is happening with stockmarkets. This is mainly due to it being the one we, as followers of British financial news, are most familiar with. The FTSE100 has been lagging behind global stockmarkets in the last few months. However, the FTSE100, the index of the top 100 companies in the UK, only represents a small percentage of global stockmarkets. Almost 40% of the 100 are banks/financial, oil/energy and consumer staples which include retailers. All of these sectors have been hit by coronavirus. It is overweight in certain sectors and, although they are all big companies, their recent losses are reflected in the movement of the index. Banks especially have had a rough time. Therefore, it is far from being a stockmarket index which represents all global markets and sectors. I appreciate that it is an indicator, but it shouldn´t be used as a decision maker.
You will see from the chart below that by referring to, or even relying upon, the performance of the FTSE100 in order to make investment decisions could have been a mistake. It compares the FTSE100 with the US S&P500 and Nasdaq, and Japan´s Nikkei. The chart runs from the start of 2020. The FTSE100 is D, the blue line.
Not only has it been important to be aware of global stockmarket performance, but there are other sectors and assets to invest in. For example, gold, that was not immune to the panic in March, has shown itself to be in demand as a safe haven.
Well managed investment portfolios
I am pleased to say that all my invested clients are better off now than they were at the end of March. The most pleasing thing is that not only did they suffer relatively low falls in March but now many have made a complete recovery. We do not push people towards FTSE100 tracker funds. They may be cheaper but that is because there is little or no management. As is often the case, cheapest is not the best.
Active investment management has proven itself to be the best approach, certainly in problematic times. We recommend investment managers who are able to access global shares and other assets. They can buy and sell on a daily basis and not commit you to funds that can become restricted or illiquid. Many of my clients have been pleasantly surprised by the “bounce” of their investment value since March. The FTSE100 has struggled and it has been assumed that this is the case generally. They are also surprised how the United States stockmarkets, with all of the Trump and election issues, have done so well. At times there seems little or no correlation between day to day life and stockmarket performance. In fact, history has taught us that when there is panic and depression, stockmarkets tend to do well.
Over the next few weeks I shall be publishing more articles, so stay tuned: • The expense of using your bank for insurances • Life insurance for general living expenses and Spanish inheritance tax • Currency exchange – your ‘free’ facility could be costing you thousands • Applying for the new TIE – not compulsory for some but could be beneficial
Contact me today to find out how I can help you make more from your money, protecting your income streams against inflation and low interest rates, or for any other financial and tax planning information, at firstname.lastname@example.org or call or WhatsApp (+34) 618 204 731.
Spanish Succession and Gift Tax boost for non-EU beneficiaries
Imagine that it is Saturday 1st February 2020. Britain has calmly left the European Union with trade deals in place with Australia, Canada, South Africa, the USA, China, Cuba, Afghanistan, Iraq, Iran, and Columbia (I did say imagine). It is possible that you have children who live in one of these countries and you are resident in Spain. 2 years ago your children would not have benefited from the European Court of Justice ruling (2014) which stated that children who live in an EU/EEA country should benefit from local Spanish rules and allowances when calculating Spanish Succession and Gift Tax. Since the decision in 2018 in favour of a Canadian (Canada is not due to join the EU), the Spanish Supreme Court have ruled that “connected” non-EU beneficiaries will also benefit from the rules of each Autonomous Region in Spain. What this means is that, even if there was a hard Brexit, your child in London would be treated as fairly as one in Valencia, Havana, or Beijing.
It is possible to reclaim overpaid Succession and Gift Tax. Please get in contact if you know anybody who has been a beneficiary of an inheritance using the allowances under the old rules. The claim could amount to many thousands of Euros.
Investing some time in estate planning now will help to make certain that your wealth is distributed the way you want it to be and not end up in the taxman´s pocket. One example is where we have helped parents in Spain gift their properties to their children, who live in the UK, whilst the parents continue to live in the property. This could save thousands in future inheritance tax.
Positioning investments in tax efficient structures can also help protect against inheritance tax. We have the solutions.
It was announced last week that Doris Day had passed. She died on May 13, 2019, at the age of 97, after having contracted pneumonia. Doris Mary Kappelhoff was born on April 3, 1922. Just imagine the changes Miss Day witnessed during her lifetime.
Don’t waste your time trying to second guess.
Whilst the ongoing saga of Brexit and the numerous delays can be frustrating, we really should make the best of the additional time this gives us.
Do you remember the panic across the Expatriate community on the initial Brexit announcement?
You must ensure you residency application is processed in time!
You must ensure your Social Security and Health Care are in place!
You must change your driving license!
We are likely to have until 31st October 2019 before we leave the EU, which means you have additional time to put these things in place.
There are, of course, other areas where we may want to use the extra time positively.
Did you know?
In the 2017 Spring Budget, HMRC announced a new 25% charge on overseas pension transfers. Most expats living in Spain were unconcerned by this as it did not apply to pension transfers within the EU.
This is likely to change post Brexit. It is widely thought that HMRC in the UK will apply this 25% charge to your pension transfer post Brexit.
Use this time wisely. If transferring your pension is suitable for your situation, you should act now and save the charge being applied to your pension.
Since the day David Cameron, the then Prime Minister, announced that there would be a referendum on the UK´s membership of the EU, people have been fearful due to the uncertainty as to what will happen post Brexit.
In the last three years, life has continued in the financial world and investment markets have risen significantly. At the same time, inflation hasn´t disappeared just because Brexit is on the menu.
With dividends reinvested, £100,000 would be worth around £136,000 as at 18th February 2019. If we allow for inflation, this would be more like £128,000 but still 28% up. If the £100,000 had been left in a bank account, with no interest, which is commonplace these days, the true value would now be more like £91,000. Waiting for Brexit has cost the wait and see person £9,000.
Brexit proof your investments using top UK financial institutions
If you are living in France, Spain, Luxembourg or Belgium, did you know that certain large, household name UK financial institutions offer products locally from
Dublin based sister organisations?
These products are both EU regulated and tax efficient in the country where you live.
For example, one of the largest Insurance companies in the UK offers a fully French compliant (Dublin based) Assurance Vie. Another offers a Branch 23 product, which is tax efficient in Belgium. Both companies offer a tax efficient solution for Spanish residents.
As a result, should the UK leave the EU, you can still invest with companies whose names you know and trust, in a tax efficient manner, in the country you call home.
Please feel free to contact me if you would like to discuss any of these points in more detail.
Brexit uncertainty, losing access to UK bank accounts, victims of mis-sold pension and investment plans, personal visits from HMRC, and kids (sort of) go back to school
Not for the first time, I was asked how Brexit would affect my work in Spain. My standard answer is I don´t know, in the same way I don´t know for sure what the weather is going to be like tomorrow, irrespective of the forecasts which are given. Based on warnings, especially from social media sources, the weekend should have seen us floating down to Masymas on a dinghy. As it turned out, we had a pretty heavy shower providing some surface water in which a toy dinghy would probably have avoided running aground. Of course, I understand that other parts of Spain have suffered; coastal areas have been hit with tornadoes and waterspouts. My point is, even if you have a good idea what is going to happen, it is rare that things will happen as predicted. In fact, I´m not sure that anyone actually predicted the tornadoes. This happens so often in the financial world. With Brexit, I do not know what will happen. Deal or no deal. Take the money or open the box. Perhaps just phone a friend when necessary. I will just continue to jump the hurdles as they are laid out and not base my actions, or those of my family, on media guesswork, which is often a mile off the result.
Losing access to UK bank accounts
Headlines, both in newspapers and on the television, gave a couple of elderly people a shock. They believed they would lose access to their UK bank accounts after a no deal Brexit. This story first appeared in August this year and was highlighted again this week on television. The fact is that there will be certain banking facilities which, if there is no deal, may or may not, be available for a person living outside the UK. This refers more to deposit and loan arrangements, not to the account itself. Receiving money in the form of a pension may also be an issue in that, according to those who appear to know, making a payment from a UK pension to an EU country will be illegal. The alternative will be to have the payment made to a UK bank account for onward transfer to, say, Spain. For those, especially pensioners, who do not have a UK bank account after moving to Spain, it would be a good idea to open one in readiness for what might happen.
Mis-sold pension and investment plans
Unfortunately, I am being asked to help more and more with people who are suffering from poor financial advice. They have savings and pension arrangements that contain investments which arguably are not suitable and, to make matters worse, have not performed leaving policyholders with significant losses. In some cases, there is little we can do. The damage has already been done. However, in other cases we can restructure without incurring additional large set up costs, which are often part of the reason why these plans have not performed. We are always willing to take a look at investments without charging anything. If there is something that we can do, it will be organised in a fair and equitable manner with the details, blood, guts, and all, explained before you commit.
HMRC comes to the Costa Blanca
There was a presentation in Moraira this week with representatives from Her Majesty´s Revenue and Customs focusing on the obligation for UK tax residents to declare income from assets they hold outside the UK such as rent from a property or interest (no joke intended) on bank deposits or gains on investments. People have up until 30th September 2018 to make this declaration. For more detail you can visit this page from the UK Government website: https://www.gov.uk/government/news/hmrc-warns-its-time-to-declare-offshore-assets
The concern for some people was that they, as Spanish residents, had to declare, having missed the point, understandably, that the declaration was to be made by UK residents for foreign assets outside the UK. We already have the asset declaration for Spanish tax residents in the form of the Modelo 720. At Spectrum we can show you ways to position money within investments in what will still be EU jurisdictions post Brexit so that a) you don´t have to worry about what happens once the UK leaves b) you don´t have to declare the investment separately as this is carried out on your behalf and c) the beneficial tax calculation will still apply.
Kids back to school
Friday 7th September was the last day of summer holidays for our children, although my son will argue that they will continue until Christmas when the festive season kicks in. Since they were last in school, what seems like 10 months ago, but is actually only (!) 10 weeks, it is guaranteed that there will be a book missing or a broken pink pencil, our daughter´s favourite. However, we cannot get too excited. For our daughter, September is only half days and so work/school juggling is still a skill we have to develop.
To find out how we can help you with our financial planning in a manner protecting you and your loved ones, contact me at email@example.com or call/WhatsApp 0034 618 204 731
Has your bank in Spain paid you over 3% p.a. interest on your savings recently?
The probability is that it hasn´t. However, you could have made more than 3% a year in a low risk savings plan with one of the biggest insurance companies in the world. We have many happy savers who have seen steady growth of over 3% a year for the last few years. How? Read on…
Saving money in a low interest world
Losing spending power to inflation
With special offers currently being offered by banks of 0.10% APR interest and inflation in Spain running at 1.6%, there is a guaranteed loss of the real value of money at the rate of 1.5% a year. There are some who would be disappointed, if not angry, if their money in an investment had lost 7.5% over 5 years yet this is exactly what has been happening to people over the last few years without them really appreciating it. 3% a year is not only an attractive rate of return but it is necessary to cope with inflation and provide real growth.
Spanish compliant insurance bonds
ISAs, Premium Bonds, and some other investments in the UK are tax free for UK residents. They are not tax free for Spanish residents. We are licensed to promote insurance bonds in Spain which are provided by insurance companies outside Spain but still in the EU. In fact, even after Brexit, these companies will still be EU based and so Brexit will not have the impact on these plans that it could have on UK investments. As the bonds are with EU companies, and the companies themselves disclose information to Spain on the amount invested, as well as any tax detail, the bonds are Spanish compliant which makes them extremely tax efficient. We do not deal with companies based outside the EU as we are satisfied that the regulation within the EU is for the benefit of the investor. We do not have the same confidence in some other financial jurisdictions and neither do Spain.
What investment decisions do you have to make?
Although we have the facility to personalise an investment portfolio within the parameters laid down by the EU regulators, offering discretionary fund management with some of the largest and best known investment management companies, we can also use a more simple approach for those who do not require any input into the day to day investment decisions.
So what has happened over the last 5 years?
The chart below illustrates the performance of one of fund’s available to you compared to the FTSE100 and the UK Consumer Price index. The argument to stay invested when markets fall is valid when one looks at the FTSE100 roller coaster line with the increase we have seen over the last year or so since the Brexit vote. However, anyone accessing their money around the time of the vote could have seen a 25% drop in the investment values. Not so with the fund in the insurance bond.
Real case 1 – £40,000 invested 24/07/12. £50,770 as at 14/09/17. Up 26.92% in 5 years
Real case 2 – £356,669 invested 10/09/14. £431,177 as at 14/09/17. Up 20.88% in 3 years
Real case 3 – £316,000 invested 05/04/16. £334,422 as at 14/09/17. Up 5.82% in 18 months
Real case 4 – £80,000 invested 13/07/16. £86,160 as at 14/09/17. Up 7.70% in 15 months
Real case 5 – £20,000 invested 27/01/17. £20,712 as at 14/09/17. Up 3.56% in 8 months
These growth rates are not guaranteed but are published to illustrate what has actually happened and that the percentage returns on the fund are irrespective of the amount invested.
How can they produce such consistency?
Each quarter, the insurance company estimates what the growth rate will be for the following 12 months. This rate is reviewed based on the views of the underlying management company with people situated in all parts of the globe specialising in their own particular area. In good times, the company will hold back money that it has made so that, when things are not so good, they are still able to pay a steady rate of growth to their savers.
I don´t want to take any risk
It is difficult to avoid risk. In fact it´s practically impossible. A risky investment is seen by many as something which has a good chance of failure, either in part or completely. Stocks and shares are seen as risky whilst putting money into a bank deposit account is not. It is generally known that stocks and shares can go down as well as up but some people are unaware, or simply ignore, the risk of keeping money in a perceived “safe” bank deposit. Bank accounts have limited protection against the bank going bust. Then, if it came to the situation where a bank had to be bailed out by the government, it could take months, if not years, to access your money. As already mentioned, if the account is making less than inflation, you are losing money in real terms. So a bank account is far from risk free. The fund illustrated above is rated by Financial Express as having a risk rating of 22% of that applicable to FTSE100, much further down the risk scale and in an area that many people feel comfortable with.
What are the charges?
We explain in detail the underlying costs. In my experience, far too many people commit to a contract without understanding what they have, having received little explanation of the terms and conditions. This is where we differ to most. Different companies have different ways of charging and we run through all of the charges so that you are happy with what you have. The real examples above have had charges deducted and so these are the real values. Your bank may not charge you for the 0.10% interest (less tax) they are paying you but they are making money through investment but not passing anything on to you even though you supplied the money they invest.
What do I need to do next?
Contact me and I can review your savings, investments, and pension funds. I can then explain how you could arrange these in a tax efficient way whilst giving you the opportunity to access the growth that is available, for an improved lifestyle and to cope with rising costs.
Preparing your loved ones for life after your death
Having recently attended a funeral for a good friend of mine, I was reminded of the problems a death can create, aside from the actual act of dying. It appeared that, although he had organised a funeral plan, he had not made it clear where his Will was. Even if the Will was found, most Wills are written to distribute unspecified assets. An heir needs to know what assets there are before claiming anything. A draw full of files might appear organised but much of the content may be out of date or even completely irrelevant.
Who is the household´s financial controller?
In my experience, when dealing with couples, one party, normally the husband, deals with all things financial. This has resulted in many widows having a hard time with finances on the death of the husband. The thought of picking a phone up to contact their bank is daunting enough. Forgetting one of the six security questions is fatal. Logging into the online banking system is totally out of the question, even if they knew what the user ID and password were.
What can you do?
It is a really good idea to make a list, with company name and reference number, of all the bank accounts, insurance policies, investments (insurance bonds/unit trusts/shares), premium bonds, and anything else which would make life easier for those looking after your affairs on your demise. Here is a link which illustrates just how much information could be required. Are you confident someone will easily be able to put all of this together?
How can we help?
Many years ago, I was a “Man from the major UK insurance company”. I still tend to work on the home service principle. Meeting people in their homes has always been more attractive to me as paperwork will often be to hand. There is also the possibility of a cup of tea and a digestive. There have been times when I have found investments that people were unaware of and also helped to cull the collection of paperwork, creating more storage space, and possibly room for a new sofa (from the proceeds of the policy they didn´t know about). Obviously, I do not wish to major in house clearance but I am happy to help people organise their paperwork, review existing investments and pensions, and make life easier for those with the task of dealing with everything later. Hopefully much later.
Fun financial fact
According to several reports, in 2012, in the USA, a 1 cent coin cost 2.4 cents to make. By 2016, the cost had reduced to 1.5 cents. Making cents still does not seem to be making sense.
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.
Many UK nationals resident in Spain will have premium bonds, ISAs, unit trusts, and other vehicles which, although tax efficient in the UK, are not in Spain and are therefore non-compliant for tax purposes. Tax on the growth on these investments may need to be paid in Spain each year, whether withdrawn or not. The advantage of a Spanish Compliant investment, “wrapped” within an insurance policy, is that tax is only payable on gains when these are withdrawn. The gains are charged at SAVINGS TAX rates and NOT INCOME TAX rates. Tax savings can be significant when investments are organised in line with Spanish regulations.
Tax increase on pension funds
The lifetime allowance on pensions will reduce from 6th April 2016. For those who have pension funds over £1 million, 55% tax will be payable on the excess taken as a lump sum. A 25% charge will apply to income although, for a higher rate taxpayer, this extra tax could mean an overall rate of 55% as well. For every £10,000 of income, £5,500 would go in tax. There are people who have not reached this level of pension fund. However, let´s say that there is currently £800,000 in pension savings. With 5% increases each year, in 5 years´ time the funds will be worth over £1 million. There are ways to protect against this charge, up to certain limits and with restrictions. This is one of the reasons why a QROPS arrangement could be suitable for those living overseas as these additional tax charges do not apply to QROPS. Source: https://www.gov.uk
Additional Spanish Succession Tax for non-EU membership
With effect from 1st January 2015, any non-resident who inherits a Spanish asset, and is an ascendant (parent or grandparent), descendent (child or grandchild), or a spouse of the deceased, will be treated in the same way as a Spanish resident, receiving the same allowances and benefits. The tax will then be dependent on the autonomous region in Spain where the deceased was resident or where the asset is situated. This treatment only applies to EU citizens. The EU referendum on 23rd June in the UK could have a serious impact on what future taxes could be due for residents of the UK who inherit Spanish assets. Source: http://www.legaltoday.com
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
Why a Pension audit is vital for your wealth Part 1
I have been trained in the UK and have been specialising in Pensions since 1987. As well as keeping up to date with the subsequent (and numerous) changes in legislation, I also have a good understanding of the variety of pensions offered since then. In this article I am concentrating on Pre-Retirement Planning ie. those people that have yet to take their pensions. With ever changing careers in private industry and the end of the idea of “jobs and pensions for life”, which was part of the revolution in the late 70’s, most people acquire a number of pensions and different types of pensions over a period of 30 to 40 years. In some cases, they are not even aware of their entitlement, in particular, Defined Benefits Schemes to which the rules changed from the late 80’s (my Father in Law being a case in point who was not aware he was entitled to benefits under such a scheme until well into his retirement) and Contracting Out of SERPs plans.
Since the Finance Act of 2004 pensions have come under that legislation. The general wording of this legislation was “Pensions Simplification”. As advisers at the time, we knew full well that this would not be the case and we have been proven correct, with the subsequent attacks on pensions by a variety of governments seeking to raise revenue and reduce tax advantages at the same time.
Since moving here to Spain, I have come across many clients who were not aware of the benefits that they were entitled to. It has required a vast amount of work tracking down both providers and employers that no longer exist. In some instances it has proved to be fruitless, but others have benefited from plans that they are not aware of. That is the first stage of my role as a Financial Adviser, which is to question a potential client’s work history and seek full details. That however is the easy bit as the options available at retirement have been given greater flexibility, but the irony is that independent advice is hard to come by in the UK unless you are prepared to pay a fee on a time cost basis.
The first question is, do you plan to become tax resident in another European country? For those that plan to still maintain a home in the UK (even as a holiday home), that is further complicated by ever changing rules regarding residency in the UK vs tax residency in the chosen country.
What do you need to do before you leave the UK and become tax resident in an EU country? A simple question perhaps, but the tax free lump sum available in the UK now referred to as “Pension Commencement Lump Sum” or PCLS (one can see the tax free status of that being restricted in the future) is liable to be taxed certainly in France and Spain once you become tax resident. There are legitimate rules reducing this, but once again, these need advice. How does one therefore get your PCLS to take advantage of the current UK tax free status, without having to take the pension too? Perhaps you want to stagger your pension income as a result of continued part time work or “consultancy”. Many of my generation want to still work past normal retirement age, but at a slower pace.
Currency also has an impact, within the last 5 years the £ to the € has gone from 1.07 to 1.42 Euros. If one thinks that will be maintained, consider that in 2002 when the Euro was launched the £ to Euro was as high as £1 to 1.56 Euros. The impact to those that budgeted on that basis over the ensuing 8 years was detrimental to their wealth, so how does one hedge against currency fluctuation?
Does all your pension come from a UK source or have there been earnings and pension entitlements from overseas employment? Do you have a mixture of Final Salary schemes and personal money purchase pots? Is there a need to consolidate these, or treat each individual arrangement on its relative merits?
With recent legislation, trustees of Final Salary schemes (Defined Benefits), with the exception of transfers less than £30,000, now need the involvement of a fully qualified UK financial adviser who has passed his recent exams. This is all very laudable but how can that adviser be aware of the tax rules in your new country of residence? In any analysis carried out by a Spectrum Partner, it is vetted and checked by a Spectrum Fully Qualified Chartered Financial Planner, and if need be by a UK Financial adviser if part of your pots are as above. It is important to note that no UK Government funded pension eg. Civil Service can be transferred.
Then there is the reduction in the Lifetime Allowance, the passing of your pension pot to your chosen heirs and beneficiaries, the correct selection of good quality properly regulated funds and fund managers dependant on an individual needs, regular reviews as needs change, and the changes to the amount one can take on an annual basis due to recent pension flexibility rules. These are all areas that are vital to consider.
Even after the audit, and a decision to potentially transfer part or all of one’s pots, care needs to be taken in the selection of the QROP/SIPP Trustee and the jurisdiction that it comes under.
Having mentioned the above it may be in some cases that not all your pension pot should be considered for a transfer.
It may be beneficial to consider the purchase of a Lifetime Annuity from a UK provider as these have substantial tax advantages over pension payments in Spain. This will have to be carried out before one moves abroad on a permanent basis and, as stated earlier, for every potential client advice is given on a case by case basis.
In many cases, a lifetime of pension saving can result in funds being equal to or greater than the value of a property purchased abroad. Should one not take the same planning, care, advice and due diligence when planning your retirement for an income that may have to last 30 years? That is where we can be of help.
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