EXPAT PENSIONS: The Ultimate Guide

Transcription

1 EXPAT PENSIONS: The Ultimate Guide All the FACTS YOU NEED to help secure a happy, FINANCIALLY HEALTHY RETIREMENT

2 Contents Why read this guide? 3 Using this guide 4 Part one for those with defined contribution (DC) schemes 5 Part two for those with defined benefit (DB) schemes 17 Part three investing for retirement 28 What s next? 37 Glossary of terms 39

3 Why read this guide? Your retirement years can be some of the happiest of your life. You have saved and worked hard to reach the point when you can relax and put all of life s little worries behind you. However, there are many pitfalls and dangers which can hamper your retirement dreams and unfortunately many people more than happy to relieve you of your hard earned cash. In this guide we will give you all the facts and information you need to help you avoid some of the common, costly mistakes which people reaching retirement are all too often victim of. This guide is specifically aimed at those who are British expatriates with a pension in the UK and are reaching retirement or are considering moving outside the UK either in the near future or in their retirement years. It is also for UK non-doms who have permanently and definitely left the UK but still have pension benefits there. Pensions can be very complex and it is important that you seek independent advice from a qualified financial adviser before making any decisions. Happy retirement! James McLeod Head of Pensions AES International USING THIS GUIDE 3

4 Using this guide The guide is split into three parts. Click below to jump to any of the parts, depending on which you feel is most relevant to your current situation. Part one» is for those with a money purchase pension scheme such as a personal pension, stakeholder pension, self invested personal pension (SIPP) or an additional voluntary contribution plan. These pensions are of the type known as defined contribution (DC) schemes and this is how we will largely refer to them throughout for ease. Part two» is for those who have a defined benefit (DB) also known as a final salary pension scheme. If you aren t sure what type of pension you have, ask your pension provider or contact us using the form at the back of the guide and we can help you. Part three» offers some guidance on how you may want to structure your pension investment portfolio so you can make your money last as long as possible. Specifically, we will look at decreasing your investment risks and how you can position your investments to provide income and protect against inflation. USING THIS GUIDE 4

5 Part one: For those with defined contribution (DC) schemes In the first part of the guide we will set out what options are available to you, if you have a defined contribution pension scheme. There are three main options: 1. Leave your pension pot in the UK and purchase a lifetime annuity» 2. Leave your pension pot in the UK and enter pension drawdown» 3. Move your pension pot outside the UK into a scheme known as a QROPS» ONE 5

6 Part one: For those with defined contribution (DC) schemes Option 1: Buying a lifetime annuity An annuity purchase is a transaction where an individual s DC pension savings, less any pension commencement lump sum which has been taken (sometimes called a tax free lump sum), is exchanged for a guaranteed income for life. Before you purchase an annuity, you can shop around to see how much annuity income is available from different annuity providers. It is quite likely that by doing so, you will get a better deal than any which may be on offer by your existing DC pension provider. If you do decide to take this route, make sure you thoroughly research your options, as the difference between the available rates of pension income can be considerable. ONE 6

7 Part one: For those with defined contribution (DC) schemes Option 1: Buying a lifetime annuity The indicative rates shown below are based on a notional fund value of 100,000 after taking tax free cash with payments made monthly in advance. Rates correct from 3 December 2015 Single life, no guarantee A single life annuity payable for your lifetime, and the annuity dies with you. Single life, level 5 year guarantee A single life annuity, with a 5 year guaranteed term. If you die before the end of the 5 year guaranteed period, payments will continue to your designated beneficiary for the rest of the period. Single life, RPI, 5 year guarantee A single life annuity, with a 5 year guaranteed term, increasing in line with the retail price index. If you die before the end of the 5 year guaranteed period, payments will continue to your designated beneficiary for the rest of the period. Single life, 3% escalation, 5 year guarantee A single life annuity, with a 5 year guaranteed term, increasing by 3% per year. If you die before the end of the 5 year guaranteed period, payments will continue to your designated beneficiary for the rest of the period. Joint life 50%, level, no guarantee A joint life annuity is payable for the lives of you and your nominee. Upon death, 50% will be paid to the nominee, for the remainder of their life. The annuity dies on second death. Joint life 50%, 3% escalation, no guarantee A joint life annuity is payable for the lives of you and your nominee, increasing by 3% per year. Upon death, 50% will be paid to the nominee, for the remainder of their life. The annuity dies on second death. ONE Age at which annuity starts ,669 5,111 5,754 6,575 7,827 4,665 5,100 5,734 6,532 7,715 2,281 2,683 3,276 3,951 5,183 3,068 3,334 3,904 4,701 5,867 4,380 4,822 5,357 6,014 7,001 2,798 3,149 3,481 4,120 5,090 7

8 Part one: For those with defined contribution (DC) schemes Option 1: Buying a lifetime annuity They are also based on a number of different options and assumptions They aim to provide you with an indication of the annuity rates currently available. Please be aware that the table is indicative and that the rates may have changed since the table was last updated. These figures should not be used to calculate the income you will personally receive. The rates quoted from some providers may be an indication only and not be guaranteed. For a glossary of the terms above, click here. ONE 8

9 Part one: For those with defined contribution (DC) schemes Option 1: Buying a lifetime annuity Higher pension income is available for a wide range of health conditions and, for example, for being a smoker so make sure you fully understand your options before you buy a pension annuity. Generally speaking the annuity dies with the annuitant, although there are some exceptions: A joint life annuity will provide a continuing annuity on to a surviving spouse, dependent or other nominated person following your death; Where you have chosen to include a guaranteed period where your income is payable for a set number of years, and your lifetime thereafter. If you die within the guarantee period, the pension income would be paid to your beneficiaries for the rest of the guaranteed term; Where you have chosen to include an annuity protection lump sum. If you die before you have received income totalling at least the cost of the pension annuity then the balance can be paid as a lump sum to your beneficiaries. If you decide to buy a pension annuity, do not forget that the income will generally be taxed. This is normally based on the tax rules and tax rates in your country of residence, not the country in which your pension originates. However, those living in some countries will pay UK tax on their pension income, and it is not possible to offset against tax due in the country where they live. ONE 9

10 Part one: For those with defined contribution (DC) schemes For those with defined contribution (DC) schemes Option 2: Pension drawdown In pension drawdown, your pension fund (after taking any lump sum) remains invested and you can take an income from it. Because your pension pot remains invested it may continue to grow in value even after you have begun taking withdrawals from the fund. This depends on investment growth and the amount of any income you choose to take. Drawdown is more flexible than an annuity. With drawdown, you can take as much or as little as you like, whenever you like. You can even switch off income withdrawals altogether for as long as you wish. This is known as flexi access drawdown. You can also pass on any remaining fund after your death. This can be passed on without UK tax if you die before age 75. Flexi access gives you control over your pension pot. However, you will still have to pay any tax due on income withdrawals. This is normally based on the tax rules and tax rates in your country of residence. However, those living in some countries will pay UK tax on their pension income, and it is not possible to offset against tax due in the country where they live. You could even decide to take your entire pension pot as a single lump sum, but if you do this, only the first 25% will be free from UK tax. And tax may apply in your country of residence. The remainder will be taxed based on the tax rules and tax rates in your country of residence. The most important thing to remember is that the new pension flexibility rules mean that you can decide how much and how often you would like to withdraw from your pension pot, but that tax rules will apply as relevant in your country of residence. ONE 10

11 Part one: For those with defined contribution (DC) schemes Option 2: Pension drawdown Consider this before entering flexi access drawdown: Before entering flexi access drawdown, you may wish to transfer your existing pension pots into a Self-Invested Personal Pension (SIPP). There are four main reasons why this may be beneficial to you: 1. To consolidate your pension pots into one scheme to make it easier to manage 2. The ability to invest your pension more freely than many other pension schemes will normally allow 3. To make it easier to work with an adviser/advisory firm who can help you plan your retirement income or your inheritance 4. To maximise flexibility in how you can take an income from your pension, and the ability for it to cascade to others following your death. ONE 11

12 Part one: For those with defined contribution (DC) schemes Option 3: A Qualifying Recognised Overseas Pension Scheme (QROPS) What is a QROPS? A qualifying recognised overseas pension scheme (QROPS) is a pension scheme established outside the UK that is broadly similar to a UK registered pension scheme. QROPS were introduced from April 2006 to allow movement of pension pots to another country. QROPS are recognised by HM Revenue & Customs (HMRC) and are regulated by the relevant pensions regulator in the country in which they are based. You do not need to live in the same country as your QROPS is based. Why use a QROPS? There are a number of reasons why moving your pension into a QROPS could make financial sense. One of the biggest reasons is because you may pay less tax. This depends on how the tax rules work in the country where your pension pot is and in your country of residence. Double taxation agreements are designed to prevent your pension income being taxed both in the country where your pension pot is held and in your country of residence. However, not all countries have or rely on double taxation agreements and you will need specialist advice on this point. ONE 12

13 Part one: For those with defined contribution (DC) schemes Option 3: A Qualifying Recognised Overseas Pension Scheme (QROPS) In addition to the potential for lower tax bills, a QROPS will usually permit a wider range of investments than those available within a SIPP. As with a SIPP, you may also be able to take a lump sum the amount of which depends on the scheme you use and the country in which it is located. At the time of publishing this guide, only EU-based QROPS are able to offer clients access to 100% of their pension as in the UK. Outside the EU, QROPS must require at least 70% of the fund to be used to provide an income for life. At a glance: QROPS vs SIPP Investment flexibility QROPS Almost full autonomy over investment decisions SIPP High flexibility but still some exclusions such as residential property Tax Death benefits Lifetime allowance limit Flexibility Income either taxed at source or taxed as per rules of country one resides in, depending on QROPS jurisdiction and what tax agreement is in place between that country and the UK No tax fully protected both pre and post age 75 No Lifetime allowance limit: transfers-in count as a benefit crystallisation event 70% of pension must be used for income Taxed at marginal rate Protected pre 75; subject to taxation post m Full pension flexibility from April 2015 ONE 13

14 Part one: For those with defined contribution (DC) schemes Option 3: A Qualifying Recognised Overseas Pension Scheme (QROPS) Here are three tax advantages a QROPS may offer: 1. You may benefit from little or no taxation depending on the country where your pension fund is and your country of residence; 2. For those with larger pension pots, a QROPS transfer can ring-fence the fund from any lifetime allowance issues; 3. No tax on passing on benefits on death after age 75, if you are a long term non UK resident. Tax saving tip! You don t need to reside in the same country as your QROPS. Ask your financial adviser which QROPS country will work best with where you want to retire. You could save a lot of tax! ONE 14

15 Part one: For those with defined contribution (DC) schemes Option 3: A Qualifying Recognised Overseas Pension Scheme (QROPS) An example transferring from a DC pension into a Maltese QROPS Mr Shepherd had three pension pots with a combined value of 950,000. At age 50 he emigrated to Spain, took pension transfer advice and transferred to a Maltese QROPS. One of his objectives was to have more control over how he invested the fund, given there were a limited range of options available through his current schemes. ONE 15

16 Part one: For those with defined contribution (DC) schemes Option 3: A Qualifying Recognised Overseas Pension Scheme (QROPS) An example transferring from a DC pension into a Maltese QROPS By working with a financial adviser, he was able to place his pension pot into a wide range of funds which allowed the pension to grow. When the funds were transferred, it was a benefit crystallisation event, meaning that the fund was tested against, and did not exceed, the then lifetime allowance of 1.25m. This allowance will reduce to 1m from April As his pension pot grew beyond this limit by age 55, the decision to transfer into a QROPS may have saved him tens of thousands of pounds in tax. At age 55 he decided to use his entire pension pot for income and as he had other cash savings he was able to limit the amount withdrawn. He died at age 77 with around 500,000 left in his pension pot. Take note Because he was in a QROPS, he was able to leave this money to his children, completely tax-free. ONE 16

17 Part two: For those with defined benefit (DB) schemes Here we will set out what options are available to you if you have a defined benefit (DB) pension and are considering moving abroad. There are three main options: 1. Leave your pension in the UK in the existing DB arrangement» 2. Move your pension into a UK-based Self-Invested Personal Pension (SIPP)» 3. Move your pension outside the UK into a QROPS» TWO 17

18 Part two: For those with defined benefit (DB) schemes Option 1: Leave the DB scheme where it is Defined benefit schemes can be generous and intend to offer a guaranteed income for life. If you are very close to your retirement date or are not keen on investing your money, it may be best to leave well alone. In order to understand whether this is the best option, you need to make sure you fully understand how your DB pension works. Here are some questions you can ask your DB scheme to help you decide: How much will my pension be? At what age do benefits start? What are the spouse or civil partner benefits? Are there any other dependents benefits? Can I take a lump sum? How is my pension indexed (i.e. by how much is it likely to increase each year)? What is the current funding level of the scheme? How much is the transfer value? Once you know the answers to these questions, you will be in a much better position to speak with a qualified financial adviser who can help you decide which option is right for you. TWO 18

19 Part two: For those with defined benefit (DB) schemes Option 1: Leave the DB scheme where it is Consider this... If you transfer out of a DB scheme, you will be giving up what is intended as a promise of income. You will instead have access to a fund and therefore investment risk, and no guarantee of the level of income, unless you eventually use the fund to buy a pension annuity. TWO 19

20 Part two: For those with defined benefit (DB) schemes Option 2: Transfer to a Self-Invested Personal Pension (SIPP) By transferring your DB scheme into a SIPP, you will have much more freedom in terms of what you can do with your pension savings. One of the main benefits of using a SIPP is the investment freedom you will have over your pension pot. Because you are free to choose from a wide range of investments, such as shares and investment funds, you can aim to protect your eventual pension income from inflation and even continue to build your pension pot once in retirement. Another possible attraction of transferring to a SIPP is to have greater control over your pension benefit date. With a SIPP, you can begin taking benefits from age 55. If you do decide to transfer into a SIPP you will be able to use flexi access drawdown to take your pension benefits. If you select this option, you can take an income from your pension, while leaving it invested. Another benefit of transferring into a SIPP may be the death benefits available. On death before age 75 the pension pot can be passed on without UK tax to anybody. On death after age 75, the pension pot can still be passed on, but will be subject to the new beneficiary s marginal rate of UK tax, assuming they are UK resident. Most DB schemes will offer a continuing pension following the member s death for a surviving spouse or other dependents. This is usually 50% of the member s own pension. TWO 20

21 Part two: For those with defined benefit (DB) schemes Option 2: Transfer to a Self-Invested Personal Pension (SIPP) Pension flexibility By transferring into a SIPP, you will also be able to take advantage of the pension flexibility rules in the UK. This means you can access your entire pension from age 55. Flexi access gives you control over your pension pot. However, you will still have to pay any tax due on income withdrawals. This is normally based on the tax rules and tax rates in your country of residence. However, those living in some countries will pay UK tax on their pension income, and it is not possible to offset against tax due in the country where they live. You could even decide to take your entire pension pot as a single lump sum, but if you do this, only the first 25% will be free from any UK tax. And tax may apply in your country of residence. The remainder will be taxed based on the tax rules and tax rates in your country of residence. The most important thing to remember is that the new pension flexibility rules mean that you can decide how much and how often you would like to withdraw from your pension pot, but that tax rules will apply as relevant in your country of residence. TWO 21

22 Part two: For those with defined benefit (DB) schemes Option 3: A Qualifying Recognised Overseas Pension Scheme (QROPS) What is a QROPS? A qualifying recognised overseas pension scheme (QROPS) is a pension scheme established outside the UK that is broadly similar to a UK registered pension scheme. QROPS were introduced from April 2006 to allow movement of pension pots to another country. QROPS are recognised by HM Revenue & Customs (HMRC) and are regulated by the relevant pensions regulator in the country in which they are based. You do not need to live in the same country as your QROPS is based. Why use a QROPS? There are a number of reasons why moving your pension into a QROPS could make financial sense. One of the biggest reasons is because you may pay less tax. This depends on how the tax rules work in the country where your pension pot is and in your country of residence. Double taxation agreements are designed to prevent your pension income being taxed both in the country where your pension pot is held and in your country of residence. However, not all countries have or rely on double taxation agreements and you will need specialist advice on this point. TWO 22

23 Part two: For those with defined benefit (DB) schemes Option 3: A Qualifying Recognised Overseas Pension Scheme (QROPS) In addition to the potential for lower tax, a QROPS will usually allow a wider range of investments than those available within a SIPP. As with a SIPP, you may also be able to take a lump sum the amount of which depends on the scheme you use and the country in which it is located. At the time of publishing this guide, only EU-based QROPS are able to offer clients access to 100% of their pension as in the UK. Outside the EU, QROPS must require at least 70% of the fund to be used to provide an income for life. At a glance: QROPS vs SIPP Investment flexibility QROPS Almost full autonomy over investment decisions SIPP High flexibility but still some exclusions such as residential property Tax Death benefits Lifetime allowance limit Flexibility Income either taxed at source or taxed as per rules of country one resides in, depending on QROPS jurisdiction and what tax agreement is in place between that country and the UK No tax fully protected both pre and post age 75 No Lifetime allowance limit: transfers-in count as a benefit crystallisation event 70% of pension must be used for income Taxed at marginal rate Protected pre 75; subject to taxation post m Full pension flexibility from April 2015 TWO 23

24 Part two: For those with defined benefit (DB) schemes Option 3: A Qualifying Recognised Overseas Pension Scheme (QROPS) Here are three tax advantages a QROPS may offer: 1. You may benefit from little or no taxation depending on the country where your pension fund is and your country of residence; 2. For those with larger pension pots, a QROPS transfer can ring-fence the fund from any lifetime allowance; 3. No tax on passing on benefits on death after age 75, if you are a long term non UK resident. Tax saving tip! You don t need to reside in the same country as your QROPS. Ask your financial adviser which QROPS country will work best with where you want to retire. You could save a lot of tax! TWO 24

25 Part two: For those with defined benefit (DB) schemes Option 3: A Qualifying Recognised Overseas Pension Scheme (QROPS) An example transferring from a DB pension into a Maltese QROPS United Arab Emirates resident Mrs Fletcher decided to transfer out of her UK defined benefit scheme into a Malta-based QROPS. She was 54 at the time of the transfer and was able to begin taking benefits the following year at age 55. TWO 25

26 Part two: For those with defined benefit (DB) schemes Option 3: A Qualifying Recognised Overseas Pension Scheme (QROPS) An example transferring from a DB pension into a Maltese QROPS When she began retirement, Mrs Fletcher took a pension commencement lump sum of 30%, 5% more than is allowed in the UK. Mrs Fletcher was able to take this amount because she had lived outside the UK for more than five years and because the QROPS rules require 70% of the transfer value to be retained to be used as a retirement income. Over the next 10 years, Mrs Fletcher took an income worth 5% from her portfolio each year and, with her investments growing at around 5% per year too, her pension remained in good shape. Unfortunately, Mrs Fletcher passed away shortly after her 65th birthday Take note but, because she had transferred out of the DB scheme into a QROPS, she was able to leave the remainder of her pension to her husband, completely free of tax. TWO 26

27 Part two: For those with defined benefit (DB) schemes Option 3: A Qualifying Recognised Overseas Pension Scheme (QROPS) At a glance: QROPS vs SIPP vs DB scheme QROPS SIPP/Income drawdown DB scheme Tax Income either taxed at source or taxed as per rules of country one resides in, depending on QROPS jurisdiction and what tax agreement is in place between that country and the UK. Taxed at marginal rate Taxed at source as per UK marginal rate. Retirement income From age 55 From age 55 Most DB schemes will begin paying income at age 60 or 65 access can be earlier, but annual pension is reduced for taking early, and this reduction can be very substantial (often by 5% for each year taken early). Investment flexibility Almost full autonomy over investment decisions. High flexibility but still some exclusions such as residential property. None Death benefits 100% of benefits passed to next of kin on death, free of IHT. In most cases, the pension can be passed on tax free or subject to income tax at the beneficiaries marginal rate Scheme dependent, but will usually only allow a spouse/dependents pension. TWO 27

28 Part three: Investing for retirement Your retirement savings have taken you a lifetime to build and, while you may still want to invest, you cannot afford to lose significant sums of money. You will not get another chance to build your pension savings. There are unscrupulous salespeople out there who are more than happy to take your cash and to invest it into high risk, high commission funds, which often fail. The only winners in these cases are the salespeople who are paid vast commissions and will then disappear as soon as there is trouble. Before you begin planning your pension investment portfolio, make sure you discuss your attitude to risk with your financial adviser. There are three big considerations you must take into account when setting up your portfolio for retirement: 1. Income generating enough income for your desired lifestyle» 2. Longevity making sure your money lasts through your retirement» 3. Inflation stopping your capital from losing real value» THREE 28

29 Part three: Investing for retirement Consideration 1: Income There are two main ways that you can generate income in retirement. One traditional method is to invest in an income paying equity fund. These funds will invest into dividend paying companies. These dividends are paid into the fund which is then able to produce an income. Another method of generating income in retirement is through investing in a bond fund. These operate in a similar manner as an equity fund, except rather than owning company shares, the fund owns debt issued by a company. The issuing company pays the fund a set rate for lending it money, which generates an income. THREE 29

30 Part three: Investing for retirement Consideration 2: Longevity Clearly, if your investment strategy is no good, your money is going to run out. It will be particularly damaging if you lose a substantial sum of money through a stock market crash or other unexpected events, as there is no way to get your money back quickly. This is why the asset mix within your portfolio is important. As well as generating the required amount of income, you also want to ensure you do not have too much risk. Consider allocating some of your portfolio to very highly rated government bonds UK and German government bonds are currently two of the best or very strong blue chip companies. By purchasing bonds from these companies, or investing in funds which do, you will offer your portfolio some stock market protection, while also growing your capital. Warning! Be wary of structured products Structured products are often sold as ideal for pensions with capital guarantees and incomeproducing features. Be wary! When these products fail, they can be catastrophic for your finances. THREE 30

31 Part three: Investing for retirement Consideration 2: Longevity In practice when an investment fails Mr and Mrs Smith moved to Spain around six years ago with 152,858 in savings to see them through to retirement. They bought a property and set up a small B&B business. In addition to their savings, Mr Smith had a UK pension worth around 425,000, with which he planned to fund their income in retirement. While in Spain, they were contacted by a financial adviser and took his advice to transfer Mr Smith s pension into a QROPS to allow more investment freedom. So far, so good. They were in a strong position, with enough to comfortably retire on. Their pension commencement lump sum would have been enough to clear the business mortgage on the property. With minimal ongoing costs, they would only need an income of around 15,000 per year to live a comfortable retirement, which the remaining pension pot would have easily provided. THREE 31

32 Part three: Investing for retirement Consideration 2: Longevity In practice when an investment fails However, their financial adviser had his own retirement in mind. He found it easy to persuade them that a series of structured products was the right way to invest their money. Headline features like capital protection and quarterly income paying on these products make them sound low risk, as does the fact that they re underwritten by large well-known banks. The structured products performed badly. Some of them were linked to individual stocks which plummeted in value, while others were linked to assets such as gold which also fell significantly in value. Despite the adviser s promise of capital protection and income payments, the Smiths lost 60% of the value of their pension savings. As a result, their dreams are in tatters and they have had to push their retirement plans back several years as they return to work in the UK to replenish their savings. While the decision to transfer into a QROPS is sound enough, extra care needs to be taken as to what your adviser invests your cash into. THREE 32

33 Part three: Investing for retirement Consideration 3: Inflation One factor often not considered by retirees is the impact of inflation on their income. Over the course of your 10, 15 or even year retirement, the value of each pound in real terms will fall. This is because the price of most goods and services will rise. For example, factoring in an average rate of inflation of 3%, after just 10 years, a 500,000 portfolio would be worth 375,000 25% less than at retirement. Factoring in inflation is therefore crucial when looking at pension portfolio investing. Growth is going to be critical to ensure your portfolio remains of sufficient size to produce the yield you require, as you will also likely be taking an income from this portfolio. We would suggest therefore that a pension portfolio focuses on strategies with low, smooth volatility (stock market ups and downs) to soften the impact of capital reduction. This would typically include a wide mix of investments, some more risky than others, which should hopefully provide income, preservation, and growth. THREE 33

34 Part three: Investing for retirement Consideration 3: Inflation In practice the effect of inflation (example 1) Mr Jones is a self-made businessman with an independent retail store and has always been sensible and saved hard into his pension, which has grown to 500,000. He sold his business at the age of 55, after repaying his mortgage and other outstanding debts. He is afraid of investing his money and losing it, so he leaves his 500,000 pension in cash. As he wants to use his pension pot as an income, he decides not to take a 25% tax free lump sum, leaving the entire 500,000 available for an income. He decides then to take an annual income of 17,500. However, assuming a 3% rate of inflation, after just five years he will have eaten away 100,000 worth of his pension. At this rate, he will have used up his entire pension pot before his 80th birthday and will certainly leave nothing for his family after he dies. If he had taken his 25% tax free lump sum, as most people do, he would use up his pension well before his 75th birthday. Take note If he invested his money, even cautiously, it would mean he could have helped to protect his pension from the effects of inflation, as a 4% return would have seen him comfortably past his 85th birthday. THREE 34

35 Part three: Investing for retirement Consideration 3: Inflation In practice the effect of inflation (example 2) Mr Heath is 59 and is planning to retire next year, with a pension pot of 500,000. He plans to use 100,000 to complete a property purchase abroad. Having been sensible with money, Mr Heath has cleared his mortgage in the UK and has no other outstanding debts. He plans to let his property in the UK and intends to sell if he ever needs the capital. By combining his savings and his pension lump sum he has enough to purchase his dream retirement home outright. However, he still needs to protect his money from inflation, provide an income and ensure it lasts. To do this we would recommend: 1. Investing between 60% - 65% of his portfolio into a mixed-asset incomeproducing strategy, to generate the income and to provide some capital preservation; and 2. Investing the remaining 30% - 35% into a balanced strategy, pushing the overall risk level up slightly but with the aim of keeping volatility under 4%. This gives him a balance of income, preservation and growth, with a long term targeted yield of 5%. THREE 35

36 Part three: Investing for retirement The table below shows how his pension fund would reduce, taking him through to age 85 (assuming inflation of 2.5%). AGE BEGINNING BALANCE INFLATION- ADJUSTED BALANCE ANNUAL INCOME , , , , , ,160 26,347* , , , , ,713 57,209 *Not adjusted for relevant tax rate of residency If this is compared to some average income figures for common retirement locations, it leaves Mr Heath quite well off: COUNTRY USD GBP* Global average $23,938 $16,038 Spain $22,799 $15,275 Italy $24,724 $16,565 France $29,322 $19,646 UK $25,828 $1,7305 *Exchange rate 24 March 2015 Mr Heath is in quite a common position, having cleared his major expenses and needing a modest income to be comfortable in retirement. Using his pension savings in this way allows him to generate the required income, and be reasonably confident that his portfolio will stand the test of time. THREE 36

37 What s next? What are the charges for transferring to a SIPP or QROPS? We have looked at the options for those of you with DC schemes and DB schemes, but naturally by this point you will be asking yourself: How much is this going to cost me? Charges will vary across the marketplace and according to the size of pension pot, but below we outline what we at AES International believe to be the initial and ingoing fees you should expect to pay. If you have been quoted more than this, proceeding. get a second opinion before Initial adviser fee Ongoing adviser fee QROPS charge** 1-3%* 1% pa 645 initial 845 ongoing SIPP charge** 400 initial 400 ongoing Investment solution*** Passive: c0.31% Active: 1.11% *depending on the size of your pension **depending on the provider ***based on our own cautious model portfolios TWO 37

38 What s next? So, now what? If you have reached this far, it is likely that you are ready to start making some serious decisions about your retirement. But be careful. Although we at AES International are firm believers that not everyone requires financial advice you may be different. We ve written this guide for people approaching retirement or for those who are starting to give it some serious thought. If you relate to many of the points in this guide, you are likely to have slightly more complicated circumstances than someone who has just started saving for retirement, or who has just moved abroad. We believe you will require the expertise of a professional and, as of April 2015, if you have a UK pension above 30,000 (defined benefit scheme), this professional must be an FCA-authorised pension transfer specialist. Just like us. A pension transfer is a big decision and needs to be weighed up carefully and your adviser needs to be responsible for this in a regulated environment. Why not get in touch today for a free 30 minute consultation. WHAT S NEXT? 38

39 Glossary of terms Benefits Any payments made to a pension scheme beneficiary, including tax-free lump sums, pension payments and death benefits. CETV Nearly all defied benefit schemes allow you to transfer what is known as the cash equivalent transfer value, which represents a value in cash terms of your existing benefits. Defined benefit scheme A scheme in which the benefits are defined in the scheme rules and accrue independently of the contributions payable and investment returns. Most commonly, the benefits are related to members earnings when leaving the scheme or retiring, and the length of pensionable service. Often also known as final salary or salary-related schemes. Defined contribution scheme A scheme in which a member s benefits are determined by the value of the pension fund at retirement. The fund, in turn, is determined by the contributions paid into it in respect of that member, and any investment returns. Also known as money purchase schemes. Dependant A person who is financially dependent on a member or was so at the time of death or retirement of the member. Scheme rules will define a dependant precisely, e.g. age at which children cease to be dependants. Escalation, pension increase The percentage by which your pension annuity income increases per annum. GLOSSARY OF TERMS 39

40 Glossary of terms Guarantee This means an annuity will continue to pay an income for at least that period of time (i.e. 5 years), even if you should die before that time. Indexing, revaluation The annual increase in value (before retirement) of your defined benefit pension, linked to inflation. This means that your money will grow at the same rate as the cost of living. Joint life An annuity that pays until the death of the second of two annuitants. Joint life 50% This means that upon your death 50% of the income will continue to be paid to your spouse or civil partner. Different percentages are available up to 100%. Where a joint life annuity is shown, this is based on a named spouse/civil partner. Level This means the income will remain level and not increase over time. Lifetime allowance You usually pay tax on any private pension savings above the lifetime allowance. This is currently 1.25m but is set to be reduced to 1m from April Marginal tax rate The percentage of tax applied to your income for each tax bracket to which you qualify. In essence, the marginal tax rate is the percentage taken from your next pound of taxable income above a pre-defined income threshold. GLOSSARY OF TERMS 40

41 Glossary of terms No guarantee The annuity dies with the annuitant. PCLS Pension commencement lump sum. The lump sum of money you can withdraw from your pension at the date you retire. Pension Crystallisation When members take benefits from registered pension schemes. RPI This means the income from your annuity changes in line with inflation as measured by the Retail Prices Index. Single life annuity This means the income is payable to you only and will not continue to be paid to your spouse/civil partner upon your death. Trustee/manager The owner of your pension. All pension arrangements must be administered by a trustee (or manager), either in the UK, or abroad in the case of a QROPS. The trustees set the access and taxation parameters as per local pension legislation. GLOSSARY OF TERMS 41

42 Our Offices Serving our clients from 10 offices and 36 jurisdictions across Europe and the Middle East Our Expertise International Investment International Pensions Non Domicile UK Resident Planning Financial Planning Expatriate Financial Planning International Estate Planning Investment Management Offshore Private Banking Credit and Lending Insurance IMPORTANT NOTE: This guide aims to provide general information on the financial product set out herein. It is not intended as personal advice but as a short and simplified summary of a complex subject, and so please do not make any decisions based solely on the contents of this guide in isolation. Whether or not a particular investment is appropriate to you will depend on many factors, including your individual needs, circumstances, approach to risk, and capacity for loss. For a personalised recommendation, please contact AES International.