Should you cash in your final salary pension?
By Chris Burke
This article is published on: 14th December 2016
Potentially millions of people with defined benefit or Final Salary pensions have seen their transfer values shoot up in the last year.
A transfer value, also known as a CETV (cash equivalent transfer value) can be exchanged for giving up the future projected benefits for your pension. In effect, the company buys back the pension.
Over the last 18 months in particular these values have soared.
In many instances people are being offered tens of thousands of pounds more than a year ago with some even being incentivised by their Pension scheme to leave, with a bonus given for doing so. The main reason for this is that the pension company no longer wants the responsibility of having to pay the pension when you retire. Life expectancy in Europe now is 84/85 and in effect people are living longer, meaning the pension scheme has to pay you longer.
For someone with an annual pension income worth £20,000, it is not uncommon to be offered 30 times that amount – in other words, £600,000 in cash.
However this is not the right thing to do for everybody, and there can be significant disadvantages.
‘Unique Circumstances’
Many people have seen their pension transfer values doubled since two years ago, now making it very worthwhile to re-visit these and see what the best advice would be, given this growth in values.
What is a defined benefit pension and the difference between these and a Defined Contribution pension scheme?
Workers with defined benefit pensions know exactly how much they will receive in retirement. Such schemes are either based on a worker’s final salary, or on their career average earnings. Workers with defined contribution (DC) schemes save into a pension pot, which they then use to buy a retirement income. The size of the pot depends on stock market performance. The reason for the increase in transfer values is continuing low interest rates, and particularly low Gilt Rates. Gilts are bonds issued by the Government to raise money, and the rate/interest of these is a major factor used to help calculate a transfer value for a DB pension scheme.
Pension schemes depend heavily on bond yields for their income, and with yields at record lows, many are struggling to meet their commitments to pay future pensions. So they have been offering larger and larger sums to people who are prepared to give up their pension rights.
Transferring your DB/Final Salary pensions can offer a more flexible retirement income, the possibility of extra tax-free cash and upon death the remainder of the pension can be paid out to any beneficiary’s rather than paying a reduced income only to a spouse/dependent partner and then ending.
However, keeping a DB/Final Salary pension can also offer you certainties such as an income for life with Inflation protection, Risk-free income, which does not depend on the ups and downs of the stock market.
There are currently major uncertainties surrounding Brexit and the UK leaving the EU, particularly for those people living outside of the UK. With the almost constant review and changes of UK pensions laws/taxes and the fact that 90% of UK DB/Final Salary schemes are underfunded, it’s important you review your options and the right decision with your pension.
In all circumstances, you should talk to a professional and have your own pension/situation evaluated and see what the best advice there is for you.
President Trump “The brand and businessman”
By David Hattersley
This article is published on: 15th November 2016
Firstly excuse the pun, but if one considers Donald Trump as a “brand” then he did one great job in getting elected as President of the USA. Somehow he sensed that the electorate had grown tired of the political elite and that the establishment needed to be changed and shaken up. That is common knowledge, after all Farage did it based on the cigarettes and beer outside a pub. The same applies to Margaret Thatcher.
Putting it into perspective though, others have gone on to challenge the established order in their respective business fields that then became global household names. The likes of Branson, Doug & Mary Perkins (Specsavers) , Michael O’Leary (Ryan Air) and James Dyson all challenged the status quo and vested elitist interests at the time, much to their dismay and their eventual demise. All the former have gone on to be recognized as global brands that have led a revolution in their fields in their own lifetimes.
In this respect President Trump has, forgive the pun, “out trumped” the recognized establishment in recognizing a true niche market that would follow him. He marketed a particular brand, appealing to a certain audience that felt that it had been left behind in the event of globalization and other ills.One now has to consider the impact on the rest of the world and its impact on investment. In his early days as President elect, he has already shown signs of an element of pragmatism, like a businessman would do towards the need to understand and temper the advertising campaign – for example, recognising what is good in Obamacare and what needs to be modified fiscally to make it a success.
It also depends on who he appoints as his “Board of Directors”, to help him carry through the reforms that are needed for his “New Company” will succeed. No doubt and hopefully, the same will apply to business in general, the need to negotiate where need be, to gain better terms, but at the same time realize the greater picture. He is after all now the CEO of the USA, and that needs to be understood first and foremost.The old order is being replaced, old perceptions will no longer be relevant, and that too can have an impact. As much as Thatcher-ism and Reaganomics changed the world, the Brexit and President Trump’s election will change it too. One has to follow that the old order has been overturned and that whilst the new company has just started, it too needs to act like a company, a far cry from the current political elite. It is almost that a revolution is taking place.
In relation to investments, this means change, but change brings opportunities. Realising this takes skill, and the selection of funds and managers that recognise that change, rather than following old ideas that are now outdated, need to be considered. At the moment though, one cannot take knee jerk reaction as the inauguration does not take place until January 2017, so investors need to keep an eye on the near future, whilst considering other investments that are unlikely to be affected by the above changes.
The Brexit or Invoking the Law of Unintended Consequence.
By David Hattersley
This article is published on: 28th October 2016
Since the Brexit vote most news has been about potential Trade deals, and Sterling’s fall. However it perhaps has gone unnoticed, that from a variety of differing scenarios with outcomes by no means certain, a Constitutional crisis could be gathering steam.
It all stems back to the European Referendum Act 2015, that didn’t consider the variety of outcomes and was legally non binding. In addition, the power of the Royal Prerogative that was curbed when King John signed the Magna Carta in 1215 is being used by the Government, and in essence his successor Theresa May, to make or break treaties with other countries including the EU, in this case invoking Article 50 without the need for it to be passed into law via an Act of Parliament.
Critics of this say that the 1972 Act (based on the UK joining the Common Market) ceded power from the UK Parliament and allowed EU law to pass into UK law. This gave the British people protection under a new constitution based on EU law (based on Napoleonic Law). The UK has never had a written constitution that protects it citizens and gives them certain rights. It is being argued by a variety of bodies via legal challenges against the PM for using the Royal Prerogative to take away rights bestowed to Parliament. Some go as far to say “enforced removal” of citizenship rights from 65 million people would be “completely unprecedented “in modern democracy. Expat campaigners are also arguing that the “rights enjoyed by British citizens beyond these shores are so fundamental that legislation is required to take them away”.
The legal challenge has been mounted to the process of withdrawing the UK from the EU without a vote in Parliament and is going to the High Court, to be heard within the next two weeks. If the government lose due to Judges imposing their will (note unelected!), it would then be ironic for this eventually being heard by the European Court of Justice, the UK’s next step .
If the UK government win this current legal challenge on the basis “ Respecting the outcome of the referendum and giving effect to the will and the decision of the people “, that too could lead to further challenges for whom the right to vote was taken away i.e. a large percentage of Ex Pats and those Europeans citizens in the UK.
Additionally, working on that basis could give credence to Scottish Independence should they have a 2nd referendum and vote to remain in Europe. The same could be said of Northern Ireland, which has its own Parliament as well, and perhaps even Gibraltarians, as they overwhelmingly voted to remain.
The other major crisis in the making is the “Great Repeal Bill” debate that is due to be put to the House next year. A number of scenarios could occur. Many M.P.’s supported remain and the government still has deep divisions within its ranks. With only a majority of 10 seats in the House, a loss could force a vote of confidence, an early election, and a greatly disenchanted and potentially a disenfranchised electorate that voted to leave.
If they win then it passes to the House of Lords, who overwhelmingly wished to remain in the EU, and should they vote against it, take note Leave campaigners, an unelected body voting against the wishes of the majority!!
The Law of Unintended Consequence reigns supreme, or quite simply chaos. It makes Spain’s recent political turmoil insignificant, and I wonder how many of those that voted to leave or indeed did not vote at all, would have wanted these potential outcomes.
What would be even more ironic would be that the UK Government, in its current format, with many of the Ministers that supported the Leave campaign in positions of power, having to go to the European Court of Justice to overrule either singularly or both the UK Judges or the House of Lords to push through the Brexit, whilst at the same time preside over the breakup of the Union.
The Spectrum IFA Group exhibited at the Barcelona International Community Day
By Jonathan Goodman
This article is published on: 26th October 2016
For the third year running The Spectrum IFA Group exhibited and supported the Barcelona International Community Day held at the Maritime Museum in Barcelona. A great venue and well organised, many new contacts were made as well as the deepening of existing relationships. Chris Burke’s presentation was very well received by a large audience of expats.
The event is very informative and totally in line with The Spectrum IFA Group’s modus operandi and we are certain to be able to assist many new and some not so new expats with their overall long term financial planning.
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The Spectrum IFA Group co-sponsored NADFAS lecture
By Charles Hutchinson
This article is published on: 25th October 2016
The Spectrum IFA Group co-sponsored an excellent NADFAS (National Association of Decorative & Fine Arts Societies) lecture on 19th October at the San Roque Golf & Country Club on the Costa del Sol. The Spectrum IFA Group was represented by one of our local advisers, Charles Hutchinson who attended along with our co-sponsor Paul Ellis from Currencies Direct.
The National Association of Decorative & Fine Arts Societies is a leading arts charity which opens up the world of the arts through a network of local societies and national events.
With inspiring monthly lectures given by some of the country’s top experts, together with days of special interest, educational visits and cultural holidays, NADFAS is a great way to learn, have fun and make new and lasting friendships.
At this event, over 130 attendees (all our target market) were entertained by a talk on The Life and Work of Henry Murphy, one of Britain’s best but most neglected Goldsmiths. The presentation was given by John Benjamin of Antiques Roadshow fame, who kept the audience gripped with his knowledge and humour. We were fortunate enough to have him agree to private valuations of attendees’ jewelry and especially any Fabergé items before the lecture.
The talk was followed by a Spectrum sponsored drinks reception which included a free raffle for prizes including a CH obtained (very difficult to find, as out of print) glossy coffee table book on Henry Murphy and his works by John Benjamin himself which he gladly signed for the lucky first prize winner. Also bottles of Champagne and Cava. Currency Direct supplied a bottle of fine Brandy and a very useful car sunshade.
All in all, a great turnout and a very successful event at a wonderful venue. The Spectrum IFA Group are very proud to be involved with such a fantastic organisation and we shall be sponsoring the December lecture and drinks reception after, when we will have Tilney Bestinvest as co-sponsors.
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Dread and Brexit
By John Hayward
This article is published on: 24th October 2016
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.
The Spectrum IFA Group Award for their Technical Articles
By Spectrum IFA
This article is published on: 20th September 2016
Technical knowledge and a deeper understanding of tax, investments, pension and financial planning means a better outcome for our clients and also a more satisfying professional outcome for us. One of the ways we do this is to use a technical articles website called Mondaq for our research. We also contribute to this site by writing articles.
In August 2016, The Spectrum IFA Group was pleased and extremely proud, to have been awarded the ‘Top Communicator Award’ for Spain. Our posts have covered a series of topics such as “Brexit and Tax in Spain“, “Insight into Wealth Management“, “Final Salary Pension Deficits” and more. Our articles had the most reader response of any contributor.
This was no mean feat given that Mondaq publishes thousands of high quality articles each year from thousands of sources!
Changes in tax for International people living in Spain after the EU Referendum. What changes and what does not?
By Barry Davys
This article is published on: 6th July 2016
If the UK leaves the European Union what impact does this have on taxation for international people living in Spain?
The framework for taxation in all countries is based upon the following:
- Are you tax resident according to the laws of that country?
- Which tax authority is the controlling tax authority for your Worldwide income and gains?
- If you have income or gains outside of the country where you are tax resident, is there a double taxation agreement between the country where you are resident and the country where the income or gain is made?
For those of us living in Spain, the simple test is are we in the country for more than 183 days in any calendar year? If yes, then we will be Spanish Tax resident.
If we meet the residency requirement Spain is our controlling tax authority. This means we have to report our Worldwide income and gains to Spain and our main payment of tax is in Spain.
Double Tax Treaties
The OECD, UN and USA have set up model frameworks for Double Taxation Treaties. Most countries use these frameworks. However, the Treaties are between individual countries. Even if the country is in the EU there is NO EU wide double taxation agreements. Therefore, if the UK leaves the EU it will not affect the double taxation agreement between the UK and Spain. As an example, Spain has 88 tax treaties, 66 of them with countries outside the EU and even if the UK leaves the double tax treaty should stay. The tax treaty between Spain and the UK covers both income and gains.
Beckham Rule
It is not expected that there will be any changes to the Beckham rule (Impatriate Tax Regime). It is available to people from around the World. Therefore people moving from the UK to Spain should still be able to benefit from the lower rate of taxation for five full tax years.
Where we do expect changes
There is a potential economic impact in both Inheritance Tax and Exit Taxes if the UK leaves the EU.
Inheritance Tax
In September 2014, the European Court of Justice instructed Spain to change its rules regarding Inheritance Tax where the deceased person or the person receiving the inheritance was in another country in the European Economic Area (EEA). The effect was to allow these people to claim the allowances that are available to inhabitants of Spain, rather than them being taxed on a special “National” rate. This was because the National Rate resulted in higher taxes.
If Britain is now longer a member of the EEA, it is quite possible that we will have to return to paying the national rate of inheritance tax. Please note, it is possible for the UK to leave the EU but not the EEA and therefore will still qualify. Whilst the loss of the local allowances will only put us back to the situation two years ago it will still be a backwards step.
There are several pieces of Inheritance Tax planning that you can do to reduce the burden of Inheritance Tax. HOWEVER, we have not left the EU, there is some debate about whether we will ever leave the EU and we may yet become part of the EEA. We strongly recommend, therefore, that you discuss the possible planning methods now but do NOT implement any planning on the basis of the UK leaving the EU. This is because once taken, many of the planning steps cannot be undone.
Exit Tax
Exit tax is chargeable to all taxpayers that have been in Spain in at least 5 years of the last 10 years whilst Spanish Tax Resident if:
The market value of the shares and collective investments held exceeds a joint value of Euro 4 Million
or
Only Euro 1 Million if the person holds 25% or more of the shares in a company.
However, currently, if the person moves to another country in the European Economic Area with whom an effective exchange of information exists, the gain will only need to be declared and Spanish Exit Tax paid if during the next 10 years the shares are sold or the person loses his residency in the EU or in the EEA.
It the UK leaves the EU and does not get EEA membership, Spanish Exit Tax would become payable on departure.
CRS – Automatic exchange of information between countries
The OECD has also introduced a common framework for the automatic reporting of information from one country to another of the financial affairs of people who live in the second country, for example UK to Spain where a British person lives in Spain. This framework has been updated and common formatting of reporting leads to common software and much easier analysis of the information.
Please be aware that these reports will still take place even if the UK leaves the EU. Currently there are 101 countries using this common software and standards.
British Chamber of Commerce, Spain and The Spectrum IFA Group
By Spectrum IFA
This article is published on: 3rd July 2016
Here in Spain, the British Chamber of Commerce (BCC) is a very strong and successful organisation. In fact, it has just won an award for being the best Chamber in the World for promoting British trade! It was therefore no surprise to hear that the Summer Cocktail was UK themed and included Mini Cars, Scottish Beers and British Gins, amongst other things.
At the party, The Spectrum IFA Group were honoured to be presented with a plaque to thank us for 20 years of membership of the Chamber. The award was presented to Jonathan Goodman, Development Director of Spain, who has overseen our business here for the last 20 years. During this time we have worked closely with the Chamber on a large number of matters and events. In addition to the more formal associations it is always a pleasure to meet other members at their many social gatherings.
We would like to thank the BCC for their recognition of The Spectrum IFA Group and we look forward to working with them for at least another 20 years!
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Making a Will and EU Succession Planning in Spain/Europe
By Chris Burke
This article is published on: 15th June 2016
The Laws on making a Will in Spain/Europe changed on the 17th August 2015. These changes could greatly affect what would happen to someone’s estate/inheritance when they die and it’s therefore important you understand what these are and how they could affect you.
The reason for these changes in that is essence European states have differing laws on who inherits an estate. Many of these are complicated and unclear, making it uncertain who will inherit exactly what.
For this purpose, EU Succession Regulation introduces common rules on which State’s laws apply if there is a conflict between countries’ succession laws.
The following countries are bound by the new regulation:
Austria, Belgium, Bulgaria, Croatia, Cyprus, the Czech Republic, Estonia, Finland, France, Germany, Greece, Hungary, Italy, Latvia, Lithuania, Malta, the Netherlands, Poland, Portugal, Romania, Slovakia, Slovenia, Spain, and Sweden.
Notable Absentee’s are the UK, Ireland and Denmark.
Where you are ‘habitually resident’ that country’s laws will apply
To give you an example, a person dies leaving assets in France, Spain, and Germany and resides here in Spain. Due to the fact they are resident in Spain, the assets will be governed by Spanish law.
So what are the rules of Habitual Residence?
How long you are in and how often you visit a state/country as well as the conditions and reasons for you being there. Simply put, for most people, more than 183 days in one country, living or retired there makes it your main residence.
Making a Choice of Law
This default position can be overridden if you choose to apply the law of your nationality via a Will. For example – a German national dies leaving assets in France, Spain, and Germany. They are habitually resident in Spain but have stated in their Will that German law will apply to their estate. All of their assets will be governed by German law.
What about the UK?
As the UK is not bound by the Regulation, UK assets can never be governed by the law of another EU state. However, those states bound by the Regulation have to allow the application of UK laws to assets in their state if someone so chooses.
How might this affect me?
Many EU states have laws of ‘forced heirship’ under which certain assets (such as holiday property) can only be inherited by certain people. The inheritance laws in England and Wales allow you greater freedom to leave your estate to whomever you wish when you die. If you have assets in any of the states bound by the Regulation it may affect which laws will apply to them.
Who does it affect?
All foreigners who have their habitual residency in Spain and die on or after the 17th of August 2015. Spanish nationals may disregard these changes as they are unaffected by the changes.
Examples of which Will you may need
• I am a British/Irish national and NOT resident in Spain. I Don’t Plan to become Resident in Spain.
In such a case this Regulation does not affect you. It only affects existing residents in Spain or else those who at some point in the future plan to take up residency in Spain. There is no need for you to make a new Spanish Will.
A WORD OF WARNING HERE! If you are not truly a resident in Spain i.e. spend less than 183 days a year here, then that’s perfectly ok and you have nothing to worry about. However, if you are PRETENDING you are not resident in Spain, be very careful. More and more people are getting caught out by various means, and fines can be punitive. The reasons for wanting to be UK resident are currently negligible compared to being a Spanish Resident. Inheritance tax is almost nothing if anything in many cases here in Catalonia at present, and the other taxes you pay here are again currently very similar to that of the UK. Why run the risk of getting caught?
Examples of who this may affect?
• A non-resident Scottish man who inherits Spanish assets will also pay Spanish inheritance tax.
You cannot opt out or choose your own national Inheritance tax laws on inheriting assets located in Spain. You have to pay Spain’s IHT.
Other potential questions might be:
• Can I choose my own national tax law besides opting for my national succession law? The short answer is no
The regulation entitles you is to choose freely the Succession Law of your own nationality (i.e. England and Wales or Scotland’s) in lieu of Spain’s compulsory heir rules which, following this new Regulation, applies by default if your habitual residency is in Spain at the time of your death on or after the 17th of August 2015.
VERY IMPORTANT – PLEASE NOTE!!!
You CANNOT choose which Inheritance Tax Laws apply to your Spanish estate. It is mandatory to pay Spanish inheritance tax on Spanish Assets, still.
For example, an Englishman resident in Spain and inherits Spanish assets will pay Spanish inheritance tax.
To clarify on Wills……
You are simply choosing the rules of which country you wish the Will to follow. Either way, Spanish assets will STILL be liable to Spanish Taxes.
For example, in Spain assets left automatically go to certain relatives, whether you want them to or not e.g. the husband dies, 25% of any Property goes to any children, whether you want it to or not. This could then cause problems with selling properties, realising assets etc.
What do I need to do?
It is essential to co-ordinate Wills and Tax Planning (look no further) in each country concerned to ensure that your estate will pass to your chosen beneficiaries in the way that is best for you and your estate.
Chris, a partner of the Spectrum IFA Group, makes sure that not only are his clients assets managed correctly, but they are kept up to date and given the best advice for most eventualities that affect many people almost daily, that they do not think about or aren’t aware of.