Looking forward to your pension
By Spectrum IFA
This article is published on: 21st January 2015
Welcome to 2015. Let’s all hope for a prosperous and, maybe optimistically, safe year to come. This is my 60th year on the planet, and the cracks are starting to show. Many thanks indeed to the many well-wishers who sent me messages of goodwill following my hip replacement in December. They were much appreciated. I am up and about again now and, whilst I may leave it a few more weeks before I resume training for the triple-jump, it is good to be able to get around freely. Bear with me, I will get to the financial stuff soon.
With the physical recovery going well, my mental state did take a knock however on an early foray back into the big wide world. Congratulating myself on being able to get around with only one crutch, I decided to take myself off to my local Bricomarché to buy some light fittings. With only one checkout open, I resigned myself to a long wait at the back of the queue. I suddenly realised that the people in front of me were moving aside, and I was being beckoned to the front by the cashier. How utterly charming and, yet, completely crushing. When I protested, I was told that this was normal treatment for ‘handicapped’ people. I was appalled. Not that a DIY chain should treat its clients this way, but at the fact that they should regard me as a ‘client in need’. It was like peering into my dotage. How many years before I will have a long grey beard, waving a walking stick, being pushed in a wheelchair?
Looking back on that day recently, it struck me that there is probably a link with my recent focus on old age and pensions. I know I’ve said before that the older you get, the more interesting pensions become, but I really think that it is true. What is worrying me now is the growing list of younger people who are getting very interested in our pensions, for all the wrong reasons. The younger crowd I’m referring to are politicians who are gleefully rubbing their hands and salivating over our pension assets. There seems to be no political argument over the new pension reforms due in April that are to sweep away all forms of prudent financial planning for old age. They’ve all got their eyes glued on the same pot.
Please allow me to get slightly technical for a moment and explain GAD to you. The initials stand for Government Actuarial Department. Actuaries are very clever people, mathematicians basically, who walk around wired into computers. One of their jobs used to be to come up with a formula that worked out how much you could draw from your personal pension per year without reducing your pension pot too quickly. In short, they were there to make sure that your pension outlived you. 100% GAD meant the maximum you could safely draw from your pension.
Then the politicians started to get interested. Wouldn’t it be a good idea if we let the old fogeys have more of their pensions to spend? That way we can boost the economy for the rest of us and we can tax them as they do it. It won’t be a problem because they’ll probably still die before the pension runs out! Let’s try 120% GAD and see how we get on? Well, OK, it helped a bit but we still need more capital spending. Let’s see how we get on with 150% GAD? The next logical step is of course about to take place in April. Forget GAD! You can have the lot. Use your pension as a bank account. Treat yourself to something special. A yacht? Ferrari? The world is your lobster.
This is, in my view, tantamount to criminal recklessness. You and I may be completely confident in our ability to run our own finances, and I trust that that is in fact the case, but who is going to protect the vulnerable amongst the older generations? Who is going to protect pensioners from double glazing salesmen; roofing contractors; cowboy builders; money grabbing children looking for early access to their supposed inheritances?
And then there are the annuities. These are financial instruments that you used to have to buy with your pension funds. These gave you a guaranteed income for life. You are no longer obliged to buy an annuity with your pension fund. I do agree with this. The fall in long term interest rates meant that annuity rates fell quite dramatically over the years, and the income you bought became less and less. I suppose then it should come as no surprise when we hear that pensioners are to be allowed to sell their annuities, and receive lump sums instead. More money to spend! More tax to pay! In twenty years’ time this could turn into a monumental national scandal, but by that time our current batch of politicians will be retired, enjoying their protected pensions.
My own personal pensions are now safely housed well away from further potential meddling. I will not be drawing out huge (I wish) sums to finance cars or cruises, and barring worldwide financial calamities there will be enough money to see me out. If I do last another 15 years, whatever is left will also go to my chosen beneficiaries without any tax deducted. Did I mention the 45% tax that will be payable in the UK?
Smoothing: Reduce Volatility and Increase Growth
By Jonathan Goodman
This article is published on: 15th January 2015
Investment Smoothing
Investment Smoothing is a process used in pension fund accounting by which unusually high returns in a given year are spread over a multi-year period. By taking an average of all the different values, smoothing can deliver a constant figure for shorter time periods.
Instead of simply sharing out what the fund makes or loses each year, a smoothed growth fund aims to even out some of the variations in performance. This process is what we call ‘smoothing’.
How Smoothing Mitigates Volatility
The logic behind smoothing is that it lowers the volatility of profit and loss credit from pension fund returns. During positive markets, some profits are retained by the underlying fund manager as reserves to be paid out during market downturns. This process dampens the volatility typically seen when investing in other types of long term mutual funds.
Smoothing from the Pru
The PruFund funds are designed to deliver smoothed growth by investing in many different investment areas. By investing in a range of assets the fund is less exposed to significant changes in the values of individual assets.
Prudential’s investment specialists will constantly look for the best opportunities for growth within a wide range of investment areas. Prudential apply a unique smoothing process to these funds to provide a more stable return, than if you were directly exposed to daily changes in the fund’s performance.
Prudential Smoothing: Reduce investment volatility, but keep the potential for growth.
UK Pensions Reform Overview
By David Odonoghue
This article is published on: 31st December 2014
This year brings about major changes in UK pension rules. Under the reform of ‘Freedom and Choice in Pensions’, people will be provided with more choice about how and when they can take their benefits from certain types of pension arrangements.
Following proposals first made in March last year, subsequent consultation resulted in the Pensions Taxation Bill being published in August, with further amendments being made in October. Additionally, some provisions were clarified in last month’s UK Autumn Budget Statement. Therefore, subject to there not being any further changes before the eventual enactment of the legislation, we can be reasonably certain of the new rules.
To understand the reform, you need to understand the two main different types of pensions. The first is the defined benefit pension (DBP), where your employer basically promises to pay you a certain amount of pension, which is calculated by reference to your service and your earnings. DBPs are a rare breed now, as employers have found this type of arrangement too costly to maintain. This is because the liability for financing the scheme falls upon the employer (after anything that the individual is required to contribute) and if there is any shortfall in assets to meet the liabilities – perhaps because of poor investment returns – the employer must put more money into the scheme.
The second type of pension is what is known as a money purchase plan (MPP). You put money into an MPP, perhaps your employer does/did also, as well as the government in the form of tax rebates and in the past, national insurance contribution rebates. Maybe your ‘MPP’ was not through an employer at all and you just set up something directly yourself with an insurance company. They are several different types of MPP arrangements, but they all result in the same basic outcome, i.e. the amount of the pension that you get depends on the value of your ‘pension pot’ at retirement and so the investment risk rests with you. There is no promise from anyone and therefore, no certainty of what you might receive.
The proposed reform is all about the MPP, although there is nothing to stop a person from transferring their private DBP to a MPP, if they have left the service of the former employer.
The majority of the changes will be effective from 6th April 2015 and these will apply to ‘money purchase’ pension arrangements only. Therefore, people with deferred pension benefits in funded defined benefit plans, who wish to avail themselves of the changes, must first of all transfer their benefits to a money purchase scheme. Members of unfunded public sector pension schemes will not be allowed to have such a transfer.
Under the new rules, people will be able to take all of their ‘pension pot’ as a one-off lump sum or as several separate lump sum payments. For UK resident taxpayers, 25% of each amount will be paid tax-free and the balance will be subject to income tax at the marginal rate (the highest tax rate being 45%).
Alternatively, it will be possible to take 25% of the total fund as a cash payment (again, tax-free for UK residents) and then draw an income from the remaining fund (taxed at marginal rate). The commencement of income withdrawal can be deferred for as long as the person wishes. Furthermore, there will be no minimum or maximum amount imposed on the amount that can be withdrawn in any year.
The Annual Allowance, which is the amount of tax-relieved pension contributions that can be paid into a pension fund, is currently £40,000 per annum. For anyone who flexibly accesses their pension funds in one of the above ways, the Annual Allowance will be reduced to £10,000 for further amounts contributed to a money purchase arrangement.
However, the full Annual Allowance of up to £40,000 (depending upon the value of new money purchase pension savings) will be retained for further defined benefit pension savings.
The ‘small pots’ rules will still apply for pension pots valued at less than £10,000. People will be allowed to take up to three small pots from non-occupational schemes and there is no limit of the number of small pot lump sums that may be paid from occupational schemes. 25% of the pot will be tax-free for a UK resident. Accessing small pension pots will not affect the Annual Allowance applicable to other pension savings.
The required minimum pension age from which people can start to draw upon their pension funds will be set as age 55, in all circumstances (except in cases of ill-health, when it may be possible to access the funds earlier). However, this will progressively change to age 57 from 2028; subsequently, it will be set as 10 years below the State Pension Age.
The widely reported removal of the 55% ‘Death Tax’ on UK pension funds has been clarified. Thus, whether or not any retirement benefits have already been paid from the money purchase fund (including any tax-free lump sum), the following will apply from 6th April 2015:
- In the event of the pension member’s death before age 75, the remaining pension fund will pass to any nominated beneficiary and the beneficiary will not have any UK tax liability; this is whether the fund is taken as a single lump sum or accessed as income drawdown; or
- If the pension member is over age 75 at death, the beneficiary will be taxed at their marginal rate of income tax on any income drawn from the fund, or at the rate of 45% if the whole of the fund is taken as a lump sum. From April 2016, lump sum payments will be taxed at a beneficiary’s marginal tax rate.
There will be more flexibility for annuities purchased after 6th April 2015. For example it will be possible to have an annuity that decreases, which could be beneficial to bridge an income gap, perhaps before State pension benefits begin. In addition, there will no longer be a limit on the guarantee period, which is currently set at a maximum of 10 years.
French residents can take advantage of the new flexibility and providing that you are registered in the French income tax system, it is possible to claim exemption from UK tax under the terms of the Double Taxation Treaty between the UK and France. However, there are French tax implications to be considered, as follows:
- you will be liable to French income tax on the payments received, although in certain strict conditions, it may be possible for any lump sum benefits to be taxed at a fixed prélèvement rate;
- if France is responsible for the cost of your French health cover, you will also be liable for social charges (CSG & CDRS) of 7.1% on the amounts received;
- the former pension assets will become part of your estate for French inheritance purposes, as well as becoming potentially liable for wealth tax (i.e. if your net taxable assets exceed the wealth tax entry level).
Therefore, as a French resident, it is essential to seek independent financial advice from a professional who is well versed in both the UK pension rules and the French tax rules before taking any action. Such advice should also include examining whether or not a transfer of your pension benefits to a Qualifying Recognised Overseas Pension Scheme (QROPS) could be in your best interest.
Note, that for those expats who already have transferred pensions to a QROPS or are thinking of doing so? the Pension Taxation Bill makes provision for the proposed UK pension reform to follow through to such schemes.
However, a complication exisits, due to the fact that the separate UK QROPS Regulations do not necessarily allow people to fully cash in their pesion funds in all circumstances.
The Pensions Taxation Bill does already make some provision for the proposed UK pension reform to follow through to Qualifying Recognised Overseas Pension Schemes (QROPS). However, a complication exists, due to the fact that the separate UK QROPS Regulations do not necessarily allow people to fully cash in their pension funds, in all circumstances.
Therefore, before the new flexible rules could apply to QROPS, the UK Regulations must be amended and it is understood that there is on-going work in this regard. Whether this work will be completed before 5th April 2015 is not known.
However, even if the UK does amend the QROPS Regulations, it will then fall to individual QROPS jurisdictions to make the necessary changes to their own internal pension law. For the well-regulated jurisdictions, it cannot be ruled out that their own Regulators may not agree entirely with the UK’s ideas of flexibility! In effect, there could be a preference to ensure that pension funds are used only for the purpose of providing retirement income for life, with the possibility of income continuing to a member’s dependants.
In any event, the taxation outcome of someone fully cashing-in their pension fund (whether whilst still in a UK pension arrangement or if later allowed, from a QROPS) is likely to be a sufficient practical deterrent for anyone actually wanting to do this. Therefore, for someone who has left the UK, a QROPS should continue to be a viable alternative to retaining UK pension benefits, particularly since the advantages of a QROPS have not changed. However, everyone’s situation is unique and this is why seeking advice from a competent professional is essential.
Pension workshops in 2015 – Deux-Sèvres
By Amanda Johnson
This article is published on: 14th December 2014
In November 2014, I was invited by Micala Wilkins of the “Ladies in Business in France” Facebook group to present a pension workshop to those within the group who have moved to France, are working here and wanted to know more about planning for their retirements. Choosing a small venue so that I could focus on the individuals present, we covered the following areas:
- What pension am I likely to receive from the UK when I retire?
- How is the French state pension calculated?
- What income will I require when I retire?
- How can I make up any difference between what I would like to receive and what I can expect to receive?
The delegates all found the information very useful and informative, as you can see from these event testimonials:
“It was a really useful meeting, thanks for organising it – Amanda Johnson gave us some interesting information and plenty to think about:)”
“It was a great session and certainly gave lots of food for thought!”
“An informative session on how, as expats, we can find out what our UK pension entitlement is, how we can maximise our full UK pensions and the steps we can take to get as much of a French pension as possible”
Subject to sufficient interest, I will be happy to conduct more workshops covering pensions, or any other areas of financial planning that readers of The Deux–Sèvres Monthly magazine or any others may want. If you email me your name, postcode and area of interest, I will endeavour to arrange local events throughout 2015.
Whether you want to register for our newsletter, attend one of our road shows or speak to me directly, please call or email me on the contacts below and I will be glad to help you. We do not charge for reviews, reports or recommendations we provide.
Looking forward to 2015
By Spectrum IFA
This article is published on: 9th December 2014
The end of the year is always a good time for reflection and this year we have had much to think about for our clients. However, as well as managing current financial risks for our clients, we are also forward looking. So I thought it would be a good time to do a quick review of some of the things that are on the horizon for 2015.
The UK Pensions Reform is big and we now have a reasonable amount of certainty of the changes taking place in April and it is unlikely that there will be any more changes of substance between now and then. The reform brings more flexibility, which is good, but the reality is that for many, the taxation outcome will be a deterrent against fully cashing in pension pots. This is likely to be even more so in France, where it is not just the personal tax and possible social contributions that are an issue, but also whatever you have left of the pot will then be taken into account in valuing your assets for wealth tax, as well as being potentially liable for French inheritance taxes.
The EU Succession Rules will come into effect in August. While the EU thinking behind this is good, i.e. to come up with a common EU-wide system to deal with cross-border succession, the practical effects will still have issues. The biggest issue for French residents is, of course, French inheritance taxes. Therefore, it may not necessarily be the case that the already tried and tested French ways of protecting the survivor and keeping the potential inheritance taxes low for your beneficiaries should be given up in favour of selecting the inheritance rules of your country of nationality. More information on the ‘French way’ can be found in my article at https://spectrum-ifa.com/inheritance-planning-in-france/ and on the EU Succession Regulations at https://spectrum-ifa.com/eu-succession-regulations-the-perfect-solution/
There is the UK General Election in May and who knows whether or not that will actually be followed at some point by a referendum on the UK’s membership of the EU. Nor do we know what the outcome of such a referendum would be and so there is really no point in speculating, at this stage.
For UK non-residents, we are expecting the introduction of UK capital gains tax on gains arising from UK property sales from April, subject to there not being any changes in the next budget. We had also expected that non-residents would lose their UK personal allowance entitlement for income arising in the UK, but we now know that this will not happen next year. The Autumn Statement confirmed that it is a complicated issue and if there are to be any changes in the future, these will not take place before 2017. Of course, there could be a change in government and so it might be back on the agenda sooner!
We will also have the usual round of French tax changes, although this year the expected changes are much less extensive than in previous years. The French budget is still winding its way through the parliamentary process and I will provide an update on this next month.
Turning to investment markets, my personal opinion is that the main factor that will have an impact in 2015 is central bank monetary policy. Whether this results in tighter or looser policy from one country to another, remains to be seen. What is clear is that the prospect of deflation in the Eurozone remains a real threat and not only needs to be stopped, but also needs to be turned around with the aim of eventually reaching the target of being at or just below 2%. Other central banks around the world have a similar target and in areas where recovery is clearly underway, the rate of price inflation and wage inflation also needs to increase before we are likely to see the start or interest rate movements in the right direction.
Last but not least, with effect from 1st January 2015, under the terms of the EU Directive on administrative cooperation in the field of direct taxation, there will be automatic exchange of information between the tax authorities of Member States for five categories of income and capital. These include income from employment, director’s fees, life insurance products, pensions and ownership of and income from immoveable property. The Directive also provides for a possible extension of this list to dividends, capital gains and royalties.
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 investment of financial assets or on the mitigation of taxes.
If you are affected by any of the above and would like to have a confidential discussion about your situation or any other aspect of financial planning, please contact me using the details or form below.
Should I stay or should I go?
By Spectrum IFA
This article is published on: 25th November 2014
Quite frankly I’ve been struggling to think of what to write about this week, but then it suddenly struck me that there has been a recurring theme in a number of my client meetings recently. That theme put simply is, ‘Where will I end my days; in France, or in England?’ This isn’t a popular topic of conversation amongst vibrant, exuberant, middle aged expatriates, but we’re not the only people here. We are in the company of many seasoned expats who’ve been here longer than we have; seen it all; done it before we did, and are feeling a bit tired. Many of them are ‘going home’.
We should pay a lot of attention to this group, because we are going to inherit their shoes. We need to learn from their experiences, and take the opportunity to plan for the time when we will experience what they are going through.
Five years ago, when writing on a similar theme, I think I proffered the theory of the three ‘D’s as the principal reason to return to the UK: death, divorce and debt. I still think that they are valid causes, but I now think that there are many subtle variations to be taken into account, and the biggest addition to the equation is age. Age changes your perceptions; often for the better, but age often also brings insecurity and loneliness. Add to that illness, and maybe bereavement, and you have a powerful reason to examine your reasons to continue to live hundreds of miles away from a family that (hopefully) continually worries about you. In short, no matter how much we pooh-pooh the idea now, the chances are that we may eventually end up being cared for in our final years in the UK rather than in France.
OK, that’s enough tugging at the heartstrings. Why is a financial adviser (yours truly) concerned about where you live, and where you may live in future? The answer is currency, specifically Sterling and Euro. In a previous existence, I was responsible for giving advice to corporate and personal clients of a major High St bank regarding exposure to foreign exchange risk. The basic advice was simple – identify and eliminate F/X risk wherever you can. F/X risk is for foreign exchange dealers; it is gambling. Don’t do it unless you know what you’re doing, and even if you do, prepare to lose money.
On a basic level, eliminating exchange rate risk is easy. Faced with a couple in their 50’s relocating to France with a healthy investment pot behind them and good pensions to support them in the future, I will always ask ‘Where do you intend to spend the rest of your days?’ The answer is usually an enthusiastic ‘France, of course. We have no intention of going back to the UK. In fact wild horses wouldn’t drag us back.’ I know this for a fact – I’ve said it myself.
The foreign exchange solution is simple. Eliminate your risk. Convert your investment funds to Euro (invest in a Euro assurance vie). Convert your pension funds to Euro (QROPS your pension and invest in Euro). Job done! Client happy, for now! But what happens 25 years later, when god knows what economic and political shenanigans have transpired, and the exchange rate is now three Euro to the pound and the surviving spouse wants to ‘go home’?
As it happens, I will no longer be his or her financial adviser. The chances are that I will have popped my clogs years ago, but If not, I will most likely be supping half a pint of mild in a warm corner of a pub somewhere in the cheapest part of the UK to live in. (In fact that is poetic licence, as I know full well that I’d probably be being spoiled rotten in my granddad flat in one of my sons’ houses). To draw this melancholy tale to a close, I’d just like to round up by saying that things are rarely as simple and straightforward as they seem. My job is not always to take what you tell me at face value. I know people who’ve been here longer than you. My advice may well be ‘hedge your bets, spread your risk’. I will give you the best possible investment tools for your money and pensions, but I might just surprise you with my recommendation as to what currency those funds should be invested in.
What New Year’s Resolution can I make for 2015?
By Amanda Johnson
This article is published on: 18th November 2014
As 2014 draws to an end and we look forward to spending the festive period with family and friends, there is one New Year’s resolution that you can make which will benefit both you and your family and that is to make sure that you review your finances in 2015.
2014 has seen the UK Government make changes to pensions, the French Government levy Social Charges on areas not previously charged and a joint agreement on Wills which is due to come into effect during 2015. On top of this, there is constant media concentration on whether the UK is better off in or out of the EU. Bearing all of this in mind, it is worth taking advantage of a free financial review to ensure your savings, investments & pensions are working for you in the most tax-efficient manner and that they match your goals and aspirations for the future.
A free financial review will include the following areas:
- Investments – to ensure they are as tax efficient as possible
- Inheritance tax – to minimise the amount of inheritance tax imposed and increase your say in where you money goes after you die.
- Pension planning – putting you in better control of planning for your future
Whether it has been a while since you last looked at your finances or you are unaware of how changes both in the UK & France could affect you, a decision to take a free financial review could be one of the best New Year’s resolutions you can make.
Whether you want to register for our newsletter, attend one of our road shows or speak to me directly, please call or email me on the contacts below and I will be glad to help you. We do not charge for reviews, reports or any recommendations we provide.
Have a Merry Christmas and a very Happy New Year.
How my Independent Financial Adviser in Spain saved me 82,947euro in tax!!
By Barry Davys
This article is published on: 5th November 2014
Mr Blood has lived in Spain for eight years. However, as a result of a pension mis-selling review in the UK by a large UK bank he received compensation to cover a pension shortfall. The client was extremely satisfied with the amount of the compensation. Advice was requested from his Independent Financial Adviser (IFA), Barry Davys of The Spectrum IFA Group, on how to invest this compensation to ensure that his pension fund returned to its true value.
Whilst this payment of compensation is tax free in the UK, Mr Blood is resident in Spain. In Spain these types of payment are taxable. Fortunately, the IFA knew the differences in the tax regimes. Barry had a tax lawyer calculate the amount of tax due on the compensation payment and Mr Blood was, not surprisingly, horrified to find that the tax to be paid was 82.947,91€.
Despite the client having signed a letter of acceptance with the bank and the compensation having been paid, Barry reviewed the case and found that the letter of acceptance did not sufficiently identify the issue of Spanish tax, having only emphasised the UK tax situation. Barry opened negotiations with the bank. As the regulatory requirements in the UK required the bank to put the client in a “no loss” position, the payment of tax resulted in a loss. To be fair to the UK bank they accepted this principle and agreed to pay a further compensation to cover the loss from having to pay tax.
The payment of a further 82,947€ could have seemed like a satisfactory outcome. However, any payment to cover the client’s loss as a result of the tax payment would be subject to taxation on the additional payment too. Our adviser again instructed a tax lawyer for the calculation of the gross amount required to ensure the client was put back in a no loss situation. Further negotiation by the IFA resulted in a grossed up additional payment to the client of 178,000€. This resulted in Mr Blood being recompensed in full for the loss.
Case Study Key Points
The key points in this case study show that a knowledge of UK and Spanish tax law was required to identify the problem. Secondly, knowledge of regulatory requirements helped ensure a successful negotiation between the bank and the IFA. Using specialist tax lawyers to calculate liabilities strengthened the client’s position. Finally the IFA’s knowledge of UK and Spanish pension law helped to identify what options were available for reimbursement.
On payment of the additional compensation Mr Blood commented;
“I was frankly shocked to learn that the Spanish Hacienda doesn’t recognize compensation for a loss as exactly that; a compensation. My initial dealings with the bank quickly highlighted my lack of experience with financial matters, and I was relieved that Barry agreed to negotiate on my behalf. His in-depth knowledge of the financial services industry and his negotiation style delivered for me the best possible outcome I could have wished for me and my family. I sincerely believe this outcome was only possible with his support.”
Barry Davys was also pleased. “It is extremely gratifying to be able to help someone in this way. The years of studying taxation, pensions, regulations etc. feel worthwhile in situations such as these. It is an extremely interesting time in Spain with many changes in taxation from 1st January 2015. I look forward to the challenge of helping international people with their financial planning to put them in the best possible position”.