PENSION TRANSFERS A LEAP OF FAITH?
Obviously it's essential to consider moving your pensions to Australia if you plan to retire there one day, so exactly how does it work if you decide to transfer?
The first step is to understand what type of UK scheme you’ve got. The two main types are “Final Salary” schemes and “Money Purchase” schemes
“Final Salary Schemes”
These schemes provide you with a specific annual income promise in retirement. The level of income is based on how long you were a member of the scheme and what your salary was when you left the scheme. E.g. a pension income of £5,000 per annum from age 60, for the rest of your life.
All UK public sector pension schemes are like this, as is the State Second Pension, and many of the UK’s larger company schemes. The value of these schemes can be 10 – 30 times the annual pension income promise.
“Money Purchase Schemes”
These schemes act more like ‘managed funds’ up until the point of retirement. The member and employer pay contributions into a fund, which accumulates with investment returns based on the underlying investments. On retirement, the UK fund balance must be used to ‘purchase’ an income from a life insurance company.
Dividing your current fund by 10 – 30, will give you a feel for the level of income you might get in retirement based on what’s in your fund already. (The actual amount is based on your age, investment returns and annuity rates for your specific situation).
Transferring your Pension
When a pension fund is transferred, you give up your rights in the original scheme and a sum of money is paid into your new scheme (including an Australian scheme). The amount of money transferred is called the “CETV” – Cash Equivalent Transfer Value. This transfer amount becomes your “transfer in” benefit within the new scheme.
Calculating the CETV for a Final Salary scheme (which has promised you a pension income) is no simple matter. You need to take care that you are getting a fair deal for the pension income you are giving up. For example, what sum of money is a fair transfer value for a pension income of say £5,000 per annum….?
Fortunately there are systems in place to protect you from this being a complete ‘leap of faith’. The law requires Final Salary schemes to appoint an actuary to calculate CETVs for them. The actuary estimates what level of assets the scheme would have needed in order to meet the income promise they made to you. These CETV calculations are carefully governed by the Institute of Actuaries.
In the UK, the FSA (Financial Services Authority) only permits advisers to recommend pension transfers if they hold the advanced “G60” pensions qualification. Even then, for each case the adviser must undertake what is called a TVA (Transfer Value Analysis) exercise. This involves a detailed examination of your scheme’s precise benefits and rules by a Final Salary scheme expert. The analysis is done in light of your specific needs and circumstances and includes a look at things like early retirement provisions and death benefits provided by the scheme. This way the adviser knows whether or not the CETV you are being offered from the UK scheme is a fair deal for you.
For Money Purchase schemes, the process is simpler in that the CETV is based on your current fund value. However, there can be nasty termination penalties to watch out for on some older UK pension fund contracts.
What you will get in Australia
Most Australian schemes (called ‘superannuation schemes’) are Money Purchase. However, in Australia you have the choice of buying a pension annuity (as above) or taking your whole benefit as a lump sum when you retire. For very large balances, there can be tax penalties for taking the whole benefit as a lump sum, but in general, as an emigrant to Australia, the tax on Australian schemes is significantly more favourable than leaving your benefits in the UK.
It is important to seek advice on your exact situation before transferring your pension, to take into account:
* whether to contribute more/less before leaving the UK
* the taxes on each option, and benefit limits
* what type of Australian scheme to use
* exchange rate risks
* what investment choices to make in Australia
* other benefits such as spouses pensions and death benefits
* understanding a move out of a guaranteed Final Salary schem
to Money Purchase
Getting things right can significantly reduce your tax in retirement and enhance your standard of living.
Prism Xpat would be pleased to assist you in this respect. Please contact Darion Pohl on 0845 450 4004 for further information or visit www.prismxpat.com.