Tuesday, September 7, 2010

Dear Graham, I have what I thought to be a ‘gold plated’ pension back home in the UK. It was to be paid to me as a percentage of my final salary and I now understand that it is not as good as I have been led to believe. Would there be any benefit in moving my pension overseas out of the grasps of the UK authorities?

The state of the UK economy is far worse than was thought when the new coalition government took over. The debt figure of £1 trillion is actually closer to £5 trillion. In simple terms, if each household in the UK coughed up £200,000, that would just clear the debt. There is £2.5 trillion missing from the state pension scheme and all the public sector (civil service) pensions. However, it is the state of UK pensions that is a real mess.

Whether your final salary scheme is a company scheme or a civil service one, when you receive any of these pensions, they were paid to you with annual increases linked to increases in the Retail Price Index (RPI). However, in future, the link is going to use the Consumer Price Index (CPI), which is on average 1.5 per cent lower than the RPI. This may not sound like a lot but over a lengthy period, it will compound up into a significant drop in retirement income. The nuts and bolts of this change are going to save final salary pension providers, public and private sector pension schemes about £100 billion a year.

The UK has, as do many countries, an aging population and there are more people retiring than are starting work. Presently, according to the ‘dependency ratio’, 25 per cent of all adults in the UK are retired and over the next 30 years, this figure is predicted to increase to 45 per cent. If this was the case today, as there is no UK government funding for private sector and state pensions, 55 per cent of the taxpaying population will be paying the pensions of the other 45 per cent. A very scary thought indeed.

All that pretty much explains what the state of the UK economy is with regard to pensions and this is not isolated to the UK. Europe is in a much worse place, as most of their schemes are unfunded. The simple fact is, with medical advances, we are living longer and therefore we are going to be retired longer.

Final salary company pension schemes are not the safe haven they were once thought to be as they rely upon the solvency of companies to be able to pay their former employees in the future. Many company schemes are underfunded and this is not necessarily because they are being cheap, it is because actuaries (number crunching people with big calculators) have to work out how much money needs to be in the pension pot to be able to pay all the pensions in the future.

As we have have said, people are living longer so more money is needed and it is hard to find this extra cash in a recession.
You asked if there would be any benefit in moving your pension overseas and we can’t ans-wer that here without reviewing your situation.

Many people have moved their pensions, not necessarily overseas, but to simply allow them to have control over their own futures.

The overseas route does get your money totally outside of the UK but there have been recent obstacles in doing this. The UK National Health Service (NHS) and the Armed Forces have recently announced that all requests for transfers from them have been suspended as they need to calculate what the lump sum transfer value is now using the CPI. This is obviously a smaller amount. Also, some pension schemes are making it difficult for scheme members to move their own money overseas and out of the grip of the UK tax authorities saying it is ‘immoral’ which is complete tosh.

We have stressed this many times, when considering your pension and where to put it, it is your future that you will be influencing. Do not jump into this without considering all the options.

Graham Wolverson is an independent financial adviser with Pinnacle Asset and Wealth Management.
Email him at: graham@yourmoney-matters.com