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Now’s the Time to Protect Your Pension

Life may change for many British expats who spend their days sipping sangria in Spanish bars as the aftershocks of the recession force more and more businesses into liquidation.

The high street or industry may lose another name, jobs will go, but more importantly if the business goes down, the pension scheme is likely to go down too. Fixed income expats overseas will then find they have to rely on the Pension Protection Fund (PPF) to cover their bar tabs.

The problem is that the PPF is already £1.2 billion and the deficit is growing. This is made worse by the closure of pension schemes because it means one less member contributing to PPF assets through an annual levy on the scheme, but also more people needing a payment. So every final closure of the wage scheme is a double whammy for anyone hoping to live on a certain level of income.

City analysts scoff there is no immediate concern because the fund has £3bn in assets and pays out £38m a year. Then again, these guys don’t have to live on a fixed income and haven’t planned their lives around pensions. Yes, the PPF will pay, but probably at a reduced level to the original scheme.

Sad state of affairs

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

If you’re on a PPF-protected final salary scheme, now is the time to look at securing your future. Compare the scheme with other options to see if you can transfer your pension elsewhere and, if you can, whether the likely return and change in benefits is worth it.

Disadvantages of retiring on a UK pension

The downside to taking a UK pension in Spain or France, both popular places for Brits to retire, is currency fluctuation. Converting your pounds to euros is subject to constantly changing exchange rates and can reduce your purchasing power.

Buying an annuity also presents a new set of problems with the interest rates on the fund giving a poor return on cash. Then men need to consider their partners. Women don’t do well on pensions because they often don’t have time at work to build up a decent fund, so they rely on their husband’s pension to do so.

Two factors make older women cash-poor: any annuity dies with the husband, and if the couple is unmarried, inheritance tax rules apply. This may soon change as the government has announced that cohabiting couples can receive the same IHT protection as spouses or civil partners.

Limited time in Parliament before the next election may factor into that, depending on how many votes the government thinks it can clear the legislation.

If you have UK pension rights and live abroad permanently, then a possible solution is a QROPS, short for Qualifying Recognized Overseas Pension Scheme. QROPS are flexible and tax-efficient retirement plans that remove most of the drawbacks of having 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 that currency fluctuations have on the purchasing power of a pension.

Retirement strategies can be planned without considering purchasing an annuity. No recognized pension scheme abroad has any requirement to buy an annuity, which falls squarely under the inheritance rules.

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

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