BREXIT & The Spectrum IFA Group
By Spectrum IFA
This article is published on: 24th June 2016
All of the Spectrum team and the majority of our clients are extremely disappointed with the result of yesterday’s UK BREXIT referendum.
What will the leave vote mean to our clients and potential clients?
In terms of dealing with Spectrum, we are an EU licensed IFA firm, not a UK or Gibraltarian firm trading under EU passporting arrangements.
Most of the products we recommend are individually EU compliant based in Dublin, so no change there.
Existing EU resident expatriates and new UK expatriates will now need our advice and services more than ever before. Once the UK actually leaves the EU there will be issues to solve in relation to Healthcare and Pensions, for example.
Many of our clients have opted to transfer their UK pensions to an EU jurisdiction (QROPS), the main reason being that they are fed up with frequent changes to UK rules. We now expect even more UK pension rule changes. We expect more people will be looking to transfer their pensions to achieve a degree of certainty in the future now that the UK are leaving the EU.
So for Spectrum, our clients and potential clients, we see it as “Business as usual”.
Our belief is “With Care, You Prosper” and we remain available to help where we can.
Michael Lodhi CEO
The Spectrum IFA Group
Planning for Certainty in an Uncertain World
By Spectrum IFA
This article is published on: 17th June 2016
At the time of writing this article, the UK Referendum on membership of the EU is only a week away. As the polls swing from one side to the other, uncertainty increases, in part driven by sensationalist media reporting. It seems that even football hooliganism might have the potential to affect the outcome of the Referendum, if England is disqualified from Euro 2016.
If the vote is to remain, in theory, life should go on as we know it. In practice, the schism created within the government over the EU question could make things unworkable. The next UK general election is scheduled for May 2020, but could we see this brought forward?
If the vote is to leave, no-one knows at this stage what this will mean in practice, as it will depend on any exit terms negotiated. If nothing is agreed within two years, then the UK will just exit the EU without any special terms at all, unless all the remaining countries agree to extend the deadline. However, will any of the Member States be favourable to granting special ‘club membership terms’ to any country that leaves the club?
For those of us living outside of the UK, how do we plan for our financial future, amidst all this uncertainty? Well the saying, “when in Rome, do as the Romans do”, comes to mind here. As difficult that thought may seem to be now, financial planning is for the long-term and part of that planning is managing through ‘events’ that occur – including the big political and economic ones.
So whether the UK is in or out of the EU, what really should be considered in planning for a secure financial future is what works best for us according to our country of residence. We already have many clients who are non-EU nationals living happily in France (and in the other countries in which we are based). Whilst there may be some different home tax issues to consider, the financial planning that we carry out for these clients is no different to what we do for our British clients.
Last month, I wrote about tax-efficient savings and investments in France and if you did not see this, the article can be found at https://spectrum-ifa.com/tax-efficient-savings-investments-france/. All the savings and investment products mentioned are widely used by people of all nationalities – being an EU national or not, makes no difference.
A very important part of planning for a secure financial future is to have an appropriate investment strategy for financial assets. Your attitude to investment risk and objectives for your capital are major factors to be taken into account when recommendations for any investments are made. For expatriates, it is also important to consider currency and mobility needs. Investment recommendations should only be made following an in-depth review of your personal situation. Everyone’s situation is different and there is no ‘one plan fits all’ facility.
In practice, financial advice is needed more than ever in uncertain times. Doing nothing can often be an expensive mistake. Hence, if you would like to have a confidential discussion with one of our financial advisers, you can contact us by e-mail at limoux@spectrum-ifa.com or by telephone on 04 68 31 14 10. Alternatively, drop-by to our Friday morning clinic at our office at 2 Place du Général Leclerc, 11300 Limoux, for an initial discussion.
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 the investment of financial assets or on the mitigation of taxes.
The Spectrum IFA Group advisers do not charge any fees directly to clients for their time or for advice given, as can be seen from our Client Charter here.
Known Unknowns
By Derek Winsland
This article is published on: 16th June 2016
Individual investors may face many “known unknowns”—that is to say, things that they know they don’t know. The UK’s referendum on EU membership is one of them, confronting people with a large degree of uncertainty. But as we’re witnessing, it’s not just the investor that’s afflicted by this Known Unknown condition – the markets are really uncomfortable as evidenced by the fall in the value of the pound.
We have though been here before; perhaps not having to make decisions that could affect our financial stability for years to come, but as the chart below shows, major global events that have impacted on our lives to a greater or lesser effect. Through all of them, the markets have shown a remarkable resilience over the longer term and that is one of the most important lessons the individual investor can learn.
You see, it’s not necessary to “make the right call” on the referendum or its consequences to be a successful investor. Our approach is to trust the market to price securities fairly; to take account of broad expectations of future returns.
In arguing for the status quo, the “remain” campaign is able to point out familiar characteristics of membership.
The “out” campaign, however, is based on intangibles that can only be resolved after the result of the referendum is known. It is impossible for any individual to predict the implications of these unknowns with certainty.
But this is no cause for concern. While the referendum is imminent and its implications are potentially vast and unpredictable, it is not necessary for individual investors to make any judgement calls on the outcome. We have faced many uncertainties in the past—general elections, market crises, recessions, wars—and throughout all of them, the market has done its job of aggregating participants’ views about expected returns and priced assets accordingly.
And while these events have caused uncertainty, volatility and short-term losses and gains, none of them has altered the expectation that stocks provide a good long-term return in real terms.
We have a global view of investing, and we know that the market is very good at processing information that is relevant to future returns. Because of this view, we don’t attempt to second-guess the market. We manage well-diversified portfolios that do not rely on the outcome of individual events or decisions to target the expected long-term return.
These events are not offered to explain market returns. Instead, they serve as a reminder that investors should view daily events from a long-term perspective and avoid making investment decisions based solely on the news. Past performance is no guarantee of future results. MSCI data © MSCI 2016, all rights reserved.
Research has demonstrated time and again that the best returns are achieved through ‘Time in the Market’ and not by trying to ‘Time the Market’; in other words, stay invested rather than guess the best time to invest and disinvest.
If you would like more information on our investment philosophy, please ring for an appointment or take advantage of our Friday Morning Drop-in Clinic here at our office in Limoux. And don’t forget, there is no charge for these meetings.
Le Tour de Finance spring events
By Spectrum IFA
This article is published on: 16th June 2016
The final three Le Tour de Finance events of the spring season finished in Pezenas, Nimes and Frejus. The venues for these past three events were spectacular bringing even more enjoyment to the days events for the attendees. The weather was kind and the events were a huge success.
So far, Le Tour de Finance in 2016 is proving to be the most popular series of events ever. The seminars offer English speaking expats a chance to meet various experts from fields including; specialist expat independent financial advice, wealth management, currency exchange, QROPS/pensions and expat tax advice. The experts represent a range of international institutions giving attendees unprecedented access to ask those nagging questions about living as an expat in France.
Representatives from a wide range of international companies such as Tilney BestInvest, SEB Life, Standard Bank, Rathbone Brothers plc, Prudential International, Momentum Pensions and AXA attend the events for a small presentation but more importantly, the events allow attendees to ask direct questions to these experts. This unprecedented access to the experts is what really sets Le Tour de Finance events apart.
The events will re-commence after the summer break in September and October. Keep an eye open for events in France, Spain and Italy or contact us here to receive updated information on events in your region.
The objective of Le Tour de Finance is to provide expatriates with useful information relating to their financial lives. We try and cover frequently asked questions that we receive from our clients, however, it would be helpful for us to know what your particular areas of interest might be.
If you have any specific question please contact us here – Le Tour de Finance Questions
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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.
Tax cuts in Italy…?
By Gareth Horsfall
This article is published on: 14th June 2016
Before you have to steady yourself at the mere thought of tax cuts in Italy, I have to warn you, (sorry, I am so used to warning people about tax increases that it comes naturally to use the word, ‘warn’), or I am pleased to inform you that if you can hang in there a little longer they may be on their way.
And ‘I am’ talking about ‘Income tax Cuts’ (IRPEF)!
Renzi and Padoan have realised that the way that the tax rates are structured in Italy basically choke the sector of society which provides the most, the middle earners i.e any income from €15000 upto €55000p.a
Therefore, proposals to restructure the current tax bands are currently on the table. The proposals are as follows:
1. Lower the tax rates by 1% on the tax bands of gross income from €15000 – €28000 and €28001 – €55000p.a. The bands would effectively lower to 26% and 37% respectively.
On an income of €35000 p.a, this would equate to an annual saving of €210 p.a.
That doesn’t sound very interesting does it? Although it would cover my 6 monthly TARES bill.
The other proposal which is also on the table is to radically alter the existing tax bands from 5 tax bands to only 3, as follows:
- The first €15000p.a of income to be taxed at 23%
- Between €15001p.a and €75000p.a taxed at 27%
- Over €75000p.a. at 43%
Certainly the savings would be much more interesting. Using the same example above, someone with an annual income of €35000p.a would make an annual saving of €770p.a.
In reality the first option, a 1% reduction in the 2 tax bands, is likely to be introduced in ‘la Legge di Stabilità 2017’ and to be actioned from January 2018.
At the end of 2016 a proposed cut in corporation tax and a freeze on IVA is expected to be introduced.
Obviously, we should not hold our breaths because all these cuts are Renzi’s proposals and should the public not vote in favour of his Constitutional Reform in October this year, then he has already stated that he would stand down as Prime Minister and then I would imagine the proposed tax reforms would go ‘out of the window’.
In the meantime let’s all get through the BREXIT vote and take one step at a time.
Common Reporting Standards
By Chris Burke
This article is published on: 13th June 2016
What is it and what does it mean?
Common Reporting Standards is also known as automatic exchange of information (AEI). It originated in May 2014 with 47 countries tentatively agreeing to share information on residents’ assets and incomes automatically as standard practice.
It is the Brainchild of the OECD (Organisation for Economic Co-operation and Development). Previously this information was shared at request, however this was not effective and largely unsuccessful. The main emphasis of this is to battle against tax evasion.
How will it work?
Countries will transfer all the relevant information automatically and systematically including:
- The name, address, TIN (Tax Identification Number) date and place of birth of each reportable person
- Account number
- Name and identifying number of the Reporting Financial Institution
- Account balance or value at end of calendar year, or if closed during that year
- Each country is allowed to determine which accounts are reportable
When will it start?
Most European countries will start reporting in 2017, including Spain and the UK. For note of interest, other countries will report in 2018 including Andorra.
Starting to report in 2017:
Anguilla, Argentina, Barbados, Belgium, Bermuda, British Virgin Islands, Bulgaria, Cayman Islands, Colombia, Croatia, Curaçao, Cyprus, Czech Republic, Denmark, Dominica, Estonia, Faroe Islands, Finland, France, Germany, Gibraltar, Greece, Greenland, Guernsey, Hungary, Iceland, India, Ireland, Isle of Man, Italy, Jersey, Korea, Latvia, Liechtenstein, Lithuania, Luxembourg, Malta, Mexico, Montserrat, Netherlands, Niue, Norway, Poland, Portugal, Romania, San Marino, Seychelles, Slovak Republic, Slovenia, South Africa, Spain, Sweden, Trinidad and Tobago, Turks and Caicos Islands, United Kingdom
Starting to report in 2018:
Albania, Andorra, Antigua and Barbuda, Aruba, Australia, Austria, The Bahamas, Belize, Brazil, Brunei Darussalam, Canada, Chile, China, Cook Islands, Costa Rica, Ghana, Grenada, Hong Kong (China), Indonesia, Israel, Japan, Kuwait, Marshall Islands, Macao (China), Malaysia, Mauritius, Monaco, Nauru, New Zealand, Qatar, Russia, Saint Kitts and Nevis, Samoa, Saint Lucia, Saint Vincent and the Grenadines, Saudi Arabia, Singapore, Sint Maarten, Switzerland, Turkey, United Arab Emirates, Uruguay, Vanuatu
What do I need to do?
Make sure you have ALL your assets:
- Reported correctly
- Tax compliant i.e. not in investments/properties that will mean you pay more in tax
- Understand your personal situation, and what your options are.
Declaracion De La Renta
By Chris Burke
This article is published on: 25th May 2016
Impuesto Sobre La Renta De Las Personas Fisicas (IRPF)
Declaracion de la Renta, also known as IRPF is the annual income tax return that individuals have to submit/pay to the state/region of Spain where you are tax resident. In Spain the tax year is from 1st January to 31st December and you have to declare all your worldwide income. This is essentially very similar to the annual tax return you have to complete every year in the UK.
The period to submit your tax return is from the beginning of April to the end of June depending on whether you are self employed, employed or retired. During April you can submit your tax return only if your income is from a salary or a state or private pension from Spain. In May and June you can submit all other returns.
The procedure to submit your Declaracion De La Renta is as follows:
You can ask for a draft of your tax return from the tax office, check it and if needed change the details and then submit it. All this can be done online and this system can also be used if you declare a salary.
If you have a professional activity or a business you cannot get a draft, but you can ask for your fiscal information, that is all the information the tax office already have for you. You should always check this information is correct.
If you want to prepare the tax return yourself, in the tax administration web site (www.aeat.es) you can download a program to prepare and submit it (programa PADRE).
If you are a professional or have a business/self employed (what in Spain we call an “autónomo”) it is strongly advisable that you have a digital signature. It will be useful to submit your Income Tax Return and other paper work with the tax office, for both Taxes and Social Security.
Not everybody has to submit a tax return. If you have a salary under €22,000 paid by a Spanish company or income from capital/interest under €1,600 annually, you don’t need to submit it. Nevertheless it could be advisable to check if you are entitled to have some money back, which can happen.
If you are self employed, you don’t have to submit a tax return if your annual income is below €1,000 including income from all sources. As there are other higher limits for income from capital and capital gains only, the key thing here is being self employed.
No matter what, if your capital losses are above €500 you also have an obligation to declare. This, for, example would mean if you disposed of an asset and made a €500 loss on it. Therefore, if you have a salary of €20,000 and capital losses of over €500 you have to declare it/submit a tax return.
If you receive income from outside Spain you have to submit a tax return no matter how much you have earned in one year. So, if your income is below all the limits said before, and you have monies from a bank outside of Spain that has been subject to retention or withholding tax (see EU savings directive) no matter the sum, you have to submit a tax return even if there is no tax to pay.
It might be easier and safer for you to submit a tax return via a Gestor (accountant/tax adviser) so that it is done correctly, on time and perhaps most importantly hassle free.
Tax-Efficient Savings & Investments in France
By Spectrum IFA
This article is published on: 24th May 2016
Some of you reading this article have just completed your first French income tax return. Well done if you achieved this without difficulty – ce n’est pas facile!
Whether you are new to France or not, the annual tax return is an opportunity to take stock of your financial situation. In particular, if you had to declare interest from bank deposits (including ISAs), dividends from shares (even if these were reinvested), and perhaps also gains from financial assets, then your tax and social charges bill will be higher than necessary. No-one likes paying taxes and so now is a good time to consider alternative tax-efficient savings and investments, if you want to avoid reduce your future tax bills.
For short-term savings, France has a range of tax-free accounts. The Livret A for deposits up to €22,950 and the Livret Développment Durable (LDD) for deposits up to €12,000, both paying interest of 0.75% per annum. For households with taxable income below certain limits, there is also the Livret d’Épargne Populaire (LEP) for deposits up to €7,700, which pays 1.25% per annum. You have full access to your capital in these accounts at any time.
The interest rates for the tax-free accounts are set by the French government, taking into account average short-term interest rates and inflation – both of which are very low at present. Realistically, the current tax-free interest rates could be lower, however, even the French say that it would be political suicide for the government to reduce these rates now! Whatever the tax-free rates are, however, these are better than comparable standard deposit rates for other accounts with instant access. Hence, the tax-free accounts are very useful for depositing cash that you need for an emergency fund, or to meet other short-term capital needs. The accounts do not create any tax issues and earning some interest is better than none at all.
For medium to long-term savings, the most popular type of investment in France is the Assurance Vie (AV). This type of investment is very tax-efficient as there is no income tax or capital gains tax on any income or growth, whilst the monies remain within the AV. Annual deduction of social charges is also avoided, except when investing in fonds en euros, which are offered by French banks and insurance companies.
When you do take a withdrawal from the investment, part of this is considered to be a withdrawal of capital and this part is therefore free from any tax. For the taxable element, you can opt for a fixed withholding tax rate, in which case the insurance company will take care of the necessary deduction, declaration and payment of the tax and social charges. Alternatively, you can opt to declare the gain through your annual income tax return, in which case the company will not make any tax or social charges deductions and will provide you with notification of the amount that you need to declare. The taxable gain will then be added to your other sources of taxable income and taxed at marginal rates.
Over time, AVs become even more tax-efficient and after eight years, the gain in amounts withdrawn can be offset against an annual tax-free allowance of €9,200 for a couple who are subject to joint taxation, or for ‘one-person households’, the allowance is €4,600.
Millions of French people use AV as their standard form of savings and investment and many billions of Euros are invested in this way via French banks and insurance companies, which offer their own branded product. In addition, there is a much smaller group of companies that are not French, but have designed French compliant AV products, aimed specifically at the expatriate market in France. These companies are typically situated in highly regulated financial centres, such as Dublin and Luxembourg. However, before choosing such a company, it is important to establish that the company has complied with all the formal French tax registration procedures, so as to ensure that you will receive the same tax and inheritance advantages as the equivalent French product.
Some of the advantages of the international product, compared to the French product, are:
- It is possible to invest in currencies other than Euro, including Sterling and USD.
- There is a larger range of investment possibilities available, providing both access to leading investment managers, as well as capital guaranteed products and funds.
- Documentation is in English, thus helping you better understand the terms and conditions of the policy.
- The AV policy is usually portable, which is particular benefit if moving around the EU, since in many cases, the policy can be endorsed for tax-efficiency in other EU countries.
AV is also highly beneficial for inheritance planning, both as concerns freedom to leave your financial assets to whoever you wish, as well as providing valuable additional inheritance allowances for your beneficiaries and I will cover this in a later article.
Everyone’s situation is different and any decision to invest in assurance vie should only be considered as part of a wider review of your overall financial situation, as well as your plans and objectives for the future. Hence, if you would like to have a confidential discussion with one of our financial advisers, you can contact us by e-mail at limoux@spectrum-ifa.com or by telephone on 04 68 31 14 10. Alternatively, drop-by to our Friday morning clinic at our office at 2 Place du Général Leclerc, 11300 Limoux, for an initial discussion.
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 the investment of financial assets or on the mitigation of taxes.
The Spectrum IFA Group advisers do not charge any fees directly to clients for their time or for advice given, as can be seen from our Client Charter.
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The New UK State Pension
By Spectrum IFA
This article is published on: 23rd May 2016
The new UK State pension scheme has now come into effect from 6th April 2016. Widely publicised by the government as being easier to understand, based on the questions we are getting, this is not the case!
If you reached State Pension Age (SPA) before the start of the new scheme, then you are not affected by the changes – even if you have decided to defer taking your State pension. Under the ‘old scheme’, the basic State pension is £119.30 per week for 2016/17, based on having 30 years of National insurance Contributions (NICs) or credits. You may also be entitled to some additional State pension and the amount varies according to your earnings during your working life and whether or not you were ‘contracted-out’ of the State Earnings Related Pension Scheme (SERPS) or the later State Second Pension (S2P). The maximum additional pension entitlement is around £164 per week.
The new State pension scheme introduces a ‘single-tier’ pension of £155.65 per week for 2016/17, based on having 35 years of NICs (or credits). So anyone starting work today, who retires with a 35-year NIC record, can expect to get the full amount of the single-tier pension and nothing more. Of course, this is subject to the rules not being changed for the next 35 years!
However, for people who have already built up a NIC record before 6th April 2016 and have not yet reached SPA, the transitional arrangements are complex. Some will get more than the single-tier pension, others will get less, and here is where the confusion begins!
If you fall into this ‘transitional group’, as a first step, your State pension under the old system is calculated as at 5th April 2016. This includes your basic pension plus any additional pension that you are entitled to receive and this known as your ‘Starting Amount’. You cannot get less than this amount.
So even though you may not have 35 years of NICs, it could be that under the old system, your Starting Amount is actually more than £155.65 per week. If so, you will receive the higher amount, but you cannot build up any more State pension, even if you continue to pay NICs. The difference between your Starting Amount and the single-tier pension is known as your ‘Protected Amount’ and this will be increased by reference to inflation.
However, there are many people who have a Starting Amount that is less than £155.65 per week. Typically, these are people who were contracted-out of the additional State pension scheme and thus, paid a lower rate of NICs and/or do not have the 30 years of NICs required under the old scheme. Hence, many of these people are asking if they should pay voluntary NICs to increase their State pension entitlement up to the single-tier amount.
For those over age 55, it is possible to get an estimate of your new State pension entitlement from the Department of Work & Pensions. One of my clients (let’s call her Jane) did this recently.
Jane has paid NICs for 25 years before coming to live in France. She has about 10 years to go until she reaches SPA and before the new scheme was introduced, she had planned to pay 5 years of voluntary NICs to secure entitlement to the full basic State pension, but to do this closer to her retirement. However, now she is 10 years short of the full 35-year record and so she is not sure now what she should do.
The letter that she received from the DWP confirmed that she was entitled to a State pension in the new system of £138 per week, based on her existing NIC record to 5th April 2016. As she only had 25 years of NICs, around £96 of this was basic pension and £42 was additional pension.
Under the new State scheme, you get £4.44 per week for each year of NICs (£155.65 / 35). Jane thought that she needed to pay 10 years of NICs to get the full single-tier pension of £155.65. However, this would add £44.40 per week (£4.44 x 10) to her Starting Amount, resulting in a total amount of £182.40. As this is greater than £155.65, the excess would be lost. Therefore, the maximum amount that Jane can purchase is £17.65 per week and so she only needs to purchase 4 years.
To purchase extra years, you have to pay voluntary Class 3 NICs and the rate for 2016/17 is £14.10 per week. A full year of NICs at this rate of £733.20 would increase your State pension by £230.88 per annum. In effect, this is not a bad ‘annuity rate’ and one has to question whether or not such generosity from the government is really sustainable over the long-term? A problem to be faced by a future government and not the current one!
In Jane’s case, it is 10 years until she will receive her State pension and we have seen constant change in the UK pensions arena – last year the major reform in private pensions and now the reform of the State pension. It cannot be ruled out that more changes will take place in the future, particularly as concerns the period needed to qualify for full pension and the age at which the State pension starts. There is every possibility that Jane could pay the voluntary NICs now, only to find that the ‘goalposts’ are moved again during the next 10 years.
Everyone’s situation is different. Hence, whether or not it is a good idea to pay voluntary NICs to increase your State pension will vary from one person to another. In any event, such a decision should only be considered as part of a wider review of your overall financial situation and taking into account other retirement provision that you already have in place.
If you would like to have a confidential discussion with one of our financial advisers, you can contact us by e-mail at limoux@spectrum-ifa.com or by telephone on 04 68 31 14 10. Alternatively, drop-by to our Friday morning clinic at our office at 2 Place du Général Leclerc, 11300 Limoux, for an initial discussion.
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 the UK State pensions system, the investment of financial assets or on the mitigation of taxes.
The Spectrum IFA Group advisers do not charge any fees directly to clients for their time or for advice given, as can be seen from our Client Charter