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Newsletter 01/2015

Industry insights | Your UK pension fund –time to act fast

 

Have spent part of your career in the UK? Then it is possible that you have lost sight of your UK Pension (super) fund, and now need to act quickly on the back of the UK Pension changes that are effective from the April this year.

YOUR UK PENSIONS ARE UNDERFUNDED AND FROZEN FROM APRIL 2015…. ARE YOU IN FOR A SHOCK?

The UK pension model laid largely untouched – save for a few amendments to contributions tax structure – for 100 years until the burgeoning sense of overwhelming liability hit home. The increasing pension deficit has forced the Government to introduce an array of reforms aimed at trying to claw back some of the shortfall, and with more measures inevitably in the pipeline it is an uncertain time for those with plans for retirement that depend on stability in the pension.

The reforms of 2014 – set to be fully introduced in April 2015 – have, for the most part, made UK pensions a more attractive proposition. Many of the benefits offered to the UK’s expats in overseas pension schemes have been replicated with the express intention of trying to encourage those with significant sums invested in the UK to keep them invested there, but there is a sense of Government desperation surrounding these changes.

The future of the UK’s economy and pension sector is of real concern to those with both a vested interest in it, and the option to be removed from it. For many, the idea of assessing the options available is a no-brainer.The combined accounting deficits for the largest FTSE 350 companies with final salary pension schemes ballooned from £98bn to £107bn between November and December, compared with £56b a year ago, a survey published in January 2015 by Mercer.

Consequently, funding levels — or the ability of schemes to make payments as promised to members of final salary plans were at 86 per cent over the same period. This was “substantially” driven by a further fall in corporate bond yields, which are used to measure the pension. People are living longer – therefore needing a pension pot (super) which lasts longer – investments have gone awry, and profitability across so many companies offering defined benefit schemes has slumped (particularly on the high street), it means the only logical ways to attempt to claw back the deficit involve fast tracking the proposed extension of the retirement age, increasing contributions, the gradual and subtle reduction of benefits over the course of time, and of course, to try to make the UK pension market a more attractive (on the face of it) prospect to investors who may otherwise look to take their money and run.

It’s a torrid looking situation, and that’s before we even look at the public sector.This means that those working within any area of the public sector (firefighters, police, university employees, teachers, NHS and military, doctors, dentists) will no longer be allowed to transfer their benefits out of these schemes. Already pension cuts have been witnessed across the sector, and the likelihood of being made to work at least five years extra is now more or less a reality most are beginning to face up to.

If you have worked in this sector or know someone who has then it’s time well spent to have this examined. It will be the most valuable investment you will ever make and could save you thousands of dollars when transferring to an alternative pension which will give you future access and more flexibility without these risks. There are plenty more uncertain aspects of the UK pension market, which have in effect cancelled out any positivity felt after the extension of pension freedoms. The sad truth is that many of the new generation of employees will either never have a pension, or will simply take a look at the current model and decide there is more value in storing cash under the mattress.

WHAT HAPPENS IF MONEY IS LEFT IN MY UK PENSION FUND?

If you take a pension from your UK fund once you retire, this income is normally fully assessable in Australia. This means that you will pay tax on these pension payments at your marginal tax rate, which can be as high as 46.5% including Medicare Levy.

If you leave your super in the UK, say 20 years, and then move it to an Australian super fund, you'll be taxed on the growth of your super fund assets over those 20 years. So you may save $1000's in tax by transferring your UK funds as soon as you become an Australian resident.

Depending on where your super is held in the UK, you may have to pay tax every year as part of the Australian Foreign Investment Fund rules; and

Your super will still be subject to UK legislation, as well as volatile exchange rates between the Dollar and Pound. More reasons to review your UK PENSION, especially if you are an Australian who will retire back to “The lucky Country."

GREATER PROTECTION FOR YOUR ESTATE AND FAMILY

You may not know that if your super is based in a UK fund, and you are a resident of Australia, your assets might be lost if you pass away. There is generally no requirement that your assets be distributed to your beneficiaries. However, as an Australian resident with an Australian super fund, your assets can be passed on to your partner or beneficiaries as per your wishes.

After working to accumulate super during your life, who wants to have it lost? It is important that you are aware of the consequences of leaving your super in the UK after moving to Australia, and the alternatives available to maximise your Estate. Remember tax and death are the two certainties in life. Start planning now!

Kerrie Brearley

Australian Offshore Tax Expert & Financial Advisor at ACUMA and ABCD member

ACUMA are sponsors of the ABCD

kbrearley@acuma.ae

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