Now’s the Time to Protect Your Pension

Life may change for lots of British expats passing their days away sipping sangria in Spanish bars as the recession aftershock forces more and more businesses into liquidation.

The high street or industry may miss another name, jobs will go – but more importantly if the firm goes bust, it’s likely the pension scheme will go down as well. Then fixed income expats overseas are going to find they have to rely on the Pension Protection Fund (PPF) to cover their bar tabs.

The problem is the PPF is £1.2 billion in the red already and the deficit is growing. This is made worse by pension schemes closing because that means one less member to contribute to PPF assets by way of an annual levy on the scheme but more people needing a pay out as well. So every final salary scheme closing is a double whammy for anyone expecting to live on a certain level of income.

City analysts scoff there is no immediate worry because the fund has £3 billion of assets and is paying out £38 million a year. Then those guys don’t have to live off a fixed income and haven’t planned their life around their pension payments. Yes, the PPF will pay out, but probably at a reduced level to the original scheme.

Sad state of affairs

The PPF also says the scheme expects to pay out £300 million a year by 2012 and it doesn’t take a maths wizard to work out that if pay outs continue at that rate or more for too long, the fund will soon dwindle. The time has come when none of us can rely on the state to pay a reasonable pension to help us through old age and we have to start making plans for ourselves.

If you are in a final salary scheme protected by the PPF, now’s the time to look at securing your future. Benchmark the scheme against other options to see if you can transfer your pension elsewhere – and if you can is the likely return and change in benefits worthwhile.

Drawbacks of retiring on a UK pension

The drawbacks of drawing a UK pension in Spain or France, both popular places for Brits to retire, is currency fluctuation. Switching your Pound to Euros is subject to ever shifting exchange rates and can decrease your spending power.

Buying an annuity also presents a whole new set of problems with interest rates at rock bottom giving a poor return on cash in. Then men have to consider their partners. Women do not do well out of pensions because they often do not have the time at work to clock up a decent fund, so they rely on their husband’s pension to see them through.

Two factors make older women cash poor – any annuity dies with the husband and if the couple is not married, inheritance tax rules apply. This may change soon as the government has announced partners who live together may get the same IHT protection as spouses or civil partners.

Limited Parliamentary time before the next election may put paid to this depending on how many votes the government think they may wring out of legislation.

If you have UK pension rights and live overseas permanently, then a possible solution is a QROPS – short for a Qualifying Recognised Overseas Pension Scheme. QROPS are tax effective and flexible retirement schemes that wipe out most of the drawbacks of holding a UK pension.

Benefits of a QROPS

A QROPS can invest and pay out in many different currencies- including US Dollars and Euros. This removes the effect currency exchange fluctuations have on a pension’s spending power.

Retirement strategies can be planned without factoring in buying an annuity. No Qualifying Recognised Overseas Pension Scheme has any requirement to buy an annuity, which neatly moves on to inheritance rules.

No annuity means the QROPS does not die with the member and for tax purposes, the fund is outside of the member’s estate for inheritance tax, so can be passed on to any beneficiary tax-free. This resolves the problem of a man leaving his partner cash poor if she does not have enough retirement resources to support herself.

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