Clients who are unprepared for an overseas retirement could feel the pinch, as Paul Davies discovers.
As winter nights draw in, and damp and dreary evenings render the summer’s sun a memory, it’s only natural many of us find our thoughts turning towards emigration.
Whether it’s the sun-kissed shores of California, the wild expanses of Canada, the coral strand of Australia or the dramatic sparse landscapes of New Zealand, plenty of people would prefer to start a new life – or to rest their rheumatic limbs in well-earned retirement – in a foreign country.
Bottom of the pile
No one takes the decision to emigrate lightly, yet it seems that most people seriously considering a move abroad are underestimating one of the most important factors that threaten to affect their autumn days in their adopted country.
This is the finding from our new study, which revealed that sorting out the pension is bottom of the list when it comes to pre-emigration tasks. Failing to take the appropriate advice in time could well leave many out of pocket when it comes to collecting their full financial entitlements.
An example of this is that an individual will have their UK pension fund held and benefits paid to them in pound sterling. However, by moving abroad a UK pension member’s lifestyle will be in a different currency to that of their pension funds.
This could make a huge difference in retirement where exchange rate fluctuations between sterling and the currency of the country they are living in leads to uncertainty of income levels in retirement.
Any detrimental effect in the exchange rate could leave the member with a shortfall in their pension income levels and may lead to them returning to the UK if they cannot meet that shortfall from other sources.
According to our study, 43% seriously considering a permanent move abroad said it was important to arrange their pension transfer before emigrating. It’s understandable, of course – in all the excitement of planning a move abroad, there are 1,001 other considerations, from finding a place to live (cited as “important” by 81% of respondents) to arranging visas (78%) and sorting out medical cover (61%).
Fools rush in?
In this rush, it can be easy for expats-to-be to neglect pension arrangements – but this could be a costly mistake. A pension is the lifeline that expats rely on to fund their later life, and moving overseas introduces further layers of complexity to issues such as taxation, currency risk and estate planning.
Other countries have different attitudes towards pension schemes from a tax perspective. Some jurisdictions, such as Australia, allow their schemes to pay benefits tax-free to Australian resident members at retirement age 60. But permanent residents of Australia with UK pension income would be assessed for tax on that income. Other jurisdictions, such as South Africa, may treat foreign pension income more favourably.
It is important for those moving abroad to take advice from a specialist advice firm that has knowledge not just of UK pension issues, but also understands the added complexities that emigration can bring. One consequence of failing to make adequate financial arrangements for retiring abroad is they will miss out on various entitlements and opportunities for maximising their pension income. These include:
• Maximising contributions to UK pensions (with any UK tax relief that is available) prior to leaving the UK;
• Taking appropriate advice as to whether a qualifying recognised overseas pension scheme is the best retirement vehicle for their funds;
• The timing of taking pension commencement lump sum entitlements (while still UK resident); or
• Investing in the most appropriate portfolio, with migration in mind.
For those with a UK defined benefit scheme, it is good to take advice regarding transferring from those schemes, as cash equivalent transfer values offered by defined benefits schemes are high. This is a key area of advice to seek guidance on, especially for someone who is moving overseas.
There are some countries, such as the US and Spain, where expats cannot transfer their pensions in the first place.
There is the possibility that those who do not pay attention to their pension could find themselves out of pocket.
While this might not be a major concern for those lucky few who, having made their millions, plan to retire on their wealth and sip caipirinhas in the Caribbean, only 13% of people in our survey said their existing pension would make up a “minor” part of their retirement income. A quarter (24%) of people said that they will totally rely on their pension income.
If pensions are such a critical lifeline for those who plan to retire abroad, it is a surprise that they are given such a low priority by those considering emigration. Of course, those of us in the industry know that clients tend to put off properly engaging with pensions for longer than they should.
The reason, perhaps, is revealed by our study’s findings that show a marked over-confidence when it comes to knowing how to make these vital arrangements.
Nearly half of future emigrants (48%) said they think know how to transfer their pensions, yet two thirds admitted they do not understand the rules involved in moving their pension overseas.
Furthermore, 28% have not considered how to manage their pension following emigration, while more than half do not know what returns they will get from their provider once they make the move.
Need for advice
As an industry, retirement planners and IFAs need to do better at saving our clients from themselves. There is a general education piece for the public not only around pensions in general, but specifically for those with travelling plans who tend to have considerable assets to manage effectively.
Our research found that soon-to-be emigrants underestimated the costs of specialist advice. The majority valued advice cheaply, with 87% feeling it would come at £100 per hour or below. A further 26% thought advice could be secured for £50 per hour.
We recommend that emigrants start the planning process six months before the actual move. Moving abroad is one of the biggest and most complex commitments one can make, but it is one where nothing should be left to chance.
As consultants, the industry has a duty to protect our clients, and prospects, from themselves to safeguard their futures.
Paul Davies is director at bdhSterling