A current crisis in UK pensions could prove rewarding to expatriates with ‘final salary’ schemes, but the window of opportunity may be limited.
A current crisis in UK pensions could prove rewarding to expatriates with ‘final salary’ schemes, but the window of opportunity may be limited.
If you have chosen to retire in France, your pension funds can play a large part in determining your lifestyle and financial security over your retirement years. You need to keep up-to-date with developments that may affect your funds or offer new opportunities. Today, a crisis in UK pensions may prove rewarding to expatriates with ‘defined benefit’ or ‘final salary’ schemes.
Widely seen as the ‘golden’ pension, final salary schemes provide substantial benefits by guaranteeing a fixed, inflation-linked income for the whole of retirement. Now a tipping point has been reached, as astronomical pay-outs offered by some providers to cash-in early can far outweigh the benefits of drawing a guaranteed pension for life.
Crunch time for pension providers
Around 15 million people have final salary pensions. The income they provide depends on salary and time spent working for a company, but is usually quite generous. In this climate of all-time low interest rates and market uncertainty, however, providers are finding it increasingly difficult to fund pension payments promised to members.
The cost of providing final salary pensions has soared as returns from the assets underpinning them – mostly UK fixed interest bonds, or ‘gilts’ – have shrunk. The 4.5% yield you could expect from 15-year government bonds five years ago, for example, barely fetches 1% today. This, coupled with increased life expectancy, means many companies simply cannot afford to finance their pension liabilities over their members’ lifetime. Pensions consultants Hymans Robertson estimate that 57% of FTSE 350 companies – Britain’s biggest businesses – have pension funds in the red. As happened with BHS, with its £571m pension hole, companies with insurmountable deficits can fail alongside their pension schemes.
Opportunities for a record pay-out
To offload future pension liabilities, many companies are offering much larger than usual transfer values. Calculated as a multiple of the annual income due on retirement, it is not unknown for some pay-outs to increase from 20x two years ago to around 40x since the Brexit vote. In an extreme example, if you had a final salary of £30,000 per year, you may have been offered £600,000 two years ago – but £1.2 million today.
Although this example is unusual, most transfer values have risen significantly in recent times. Properly managed, even more modest sums could provide a retirement income that well exceeds the original scheme annual payment.
Opportunities for tax benefits in France
For expatriates resident in France, transferring your UK pension could have added tax benefits. Through the double tax agreement, UK personal and non-government service pensions are taxable solely in France at the income tax scale rates up to 45%.
However, it is possible to take your entire UK pension as a lump sum and pay a one-off tax of just 7.5% with an uncapped 10% allowance, so long you do not have access to the French health system. Otherwise, you may be liable for an extra 7.4% in social charges to bring your final rate to 14.9%.
Many expatriates find it beneficial to reinvest their pension into a tax-efficient assurance-vie. Alternatively, you could transfer your UK pension to a Qualifying Recognised Overseas Pension Scheme (QROPS) to take advantage of tax-compliant opportunities in France. While both approaches offer advantages, tax benefits can vary greatly between providers and jurisdictions. Carefully assess your options and use a regulated provider to avoid pension scams.
Note that if your total UK pension savings are worth over £1m, you will breach the UK lifetime pension allowance. Anything you access over the limit is liable to 55% UK taxation when taken as a lump sum or 25% as income, even if you are resident in France. If you are close to this limit, it may be worth looking into HMRC ‘protection’ options or transferring your funds to a QROPS before you attract tax penalties.
Opportunities for estate planning
Another consideration is what happens to your money when you die. While most final salary pensions are payable to your spouse on death, the legacy stops there. Transferring into a QROPS or other arrangement can give you the flexibility to put succession plans in place to account for additional heirs and roll your wealth across generations.
Potential limited window of opportunity
There is speculation that the UK government may stem the flow of pension transfers with law changes to make withdrawals more difficult. Some predict they may also start taxing pension transfers for non-residents. Currently, you can enjoy UK tax relief on pension contributions, receive tax-free growth and potentially pay no UK tax to access your funds – an ‘exit tax’ would put an end to this.
While changes may not happen, if they do, it could mean paying more taxes on your pension savings. Now is a good time to consider what could work for you, under current rules, before the window closes.
Establishing your best approach
Transferring from a final salary pension comes with risks and many members are better off staying where they are. Carefully weigh up the advantages and disadvantages of transferring to fully understand the long-term implications. If you have benefits worth over £30,000, the Financial Conduct Authority makes it compulsory to take regulated financial advice before transferring.
You should at least confirm your current transfer value and check if your scheme is in danger of falling into the government’s Pension Protection Fund. It will only compensate up to £33,678 a year at age 65, so if your pension offers more than this and your scheme is vulnerable, you should consider transferring.
Even if you do not have a final salary pension or have no intention of cashing in, this is still a good time to review your pension arrangements. You can help ensure peace of mind with a personalised plan of action that keeps up with any pension developments the post-Brexit landscape may bring.
Any questions? Ask our financial advisers for help
Tax rates, scope and reliefs may change. Any statements concerning taxation are based upon our understanding of current taxation laws and practices which are subject to change. Tax information has been summarised; an individual is advised to seek personalised advice.
