Guide to retirement
APRIL 2020
retirement | APR 2020
overview
Mike Foxall on combining tax wrappers to deliver greater tax efficiency in retirement
SILVER SURFERS
Forthplus shares its vision of providing a safe haven for expat pensions
ROAD TO RETIREMENT
Investors Trust has the roadmap for making clients’ retirement dreams a reality
Best Laid plans
Thinking of retiring abroad? Do your homework first, says RL360
Freedom to move
Pension decisions are more important than ever for UK expats, and Trireme is here to help
Contents
intelligent machines
Artificial intelligence is no longer the stuff of science fiction, says Praemium. Are you ready for it?
Towards enlightenment
Combining several investment tax wrappers helps deliver greater tax efficiency in retirement
By Mike Foxall
As Acuity Consulting’s Simon Willoughby pointed out in his introduction to last year’s supplement, the lines between pension planning and other forms of financial planning have become blurred and, in whichever form later life income is created, it is vital to start preparing for retirement as early as possible. Improved healthcare and advances in medical science have led to increased life expectancy. There is also increased requirement to be more mobile during our careers and, with UK government-driven interventions such as pension freedoms, the need for top-quality financial advice is greater than ever. As such, most financial advisers have long since realised that the traditional savings vehicle for retirement, the trusty old pension, is on its own unlikely to deliver the best ‘net income’ for those aiming to retire over the next 5-15 years. For some, this changing view has been driven by the steady reduction in the amount each of us can contribute to our UK pension pots, both on an annual basis and during our lifetime. From April 2020, the annual allowance remains stuck at £40,000 and the lifetime allowance at £1,055,000. This is index linked but, with inflation currently running around 1.4%, it will increase quite slowly. This means that even middle earners, who have thought ahead and started planning early, will be ‘capped out’ on their pension contributions, long before their planned retirement day. A pension fund of £1m may sound quite reasonable but, using current assumptions, this will typically provide a pension of around £50,000 pa in retirement. Further, the more enlightened advisers have also realised that a pension, on its own, simply cannot achieve the flexibility and tax control that can be engineered by a combination of investment tax wrappers. In the UK, we are blessed with a variety of options, each with different reliefs, deferrals and final tax outcomes.
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Max your income
For the purpose of this article, we will briefly consider just four: the pension, an Isa, an unwrapped general investment account (GIA) and the offshore insurance bond. Of course, the pension is the only one that receives – albeit increasingly restricted – tax relief on contributions, a strong reason why historically it was the retirement wrapper of choice. Along with Isas and offshore bonds, the pension also benefits from tax deferral/gross roll-up on the underlying assets (the GIA can achieve similar on a buy and hold basis but, alternatively, use of the annual CGT exemption might add even greater tax efficiencies). However, it is on exit that we find the best reasons for combining these wrappers, carefully spreading a client’s assets across all four and using little if any of the pension assets to deliver income in the early retirement years. An appreciation of the order of taxation is helpful here, along with the belief that, because pension income is treated as earned income and the trust it sits within delivers preferential IHT benefits, the pension is best parked near the back of retirement income queue. By ignoring the pension and taking ‘income’ from the offshore bond and the GIA alone, we can maximise the UK tax allowances. From April 2020, the UK personal income tax allowance will remain at £12,500 and the starting rate for savings band at £5,000. One of the oft-overlooked minor gifts of the UK chargeable event tax regime is that the gains generated through offshore bonds are taxed as savings income. By flexing the CGT exemption, we might then generate up to £12,000 of tax-free gains from the GIA, and let’s then throw in £2,000 of tax-free dividends for good measure. We thus arrive at £31,500 of retirement income without a penny paid in tax. In addition, we still have tax-free Isa savings, tax-deferred 5% withdrawals, a 10% CGT rate and a 7.5% dividend tax rate. Creating several years of ‘pre-pension’ £100,000 retirement income, while paying less than a 5% pa composite tax rate, is certainly achievable. Clearly, for each client, the actual splits will need to be different in order to meet their own specific circumstances so advisers can assist clients to maximise tax efficiency in retirement, both by using all of their allowances in the correct manner and using them in the correct order. Mike Foxall is head of insurance services at QB Partners.
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retirement | apr 2020
More than just a pension
‘By ignoring a pension and taking “income” from an offshore bond and general investment account alone, we can maximise UK tax allowances’
Silver surfers
In association with
Six years ago it started as a simple idea; to bring an uncomplicated product to an unruly market. By putting compliance at the heart of what we do and by using cutting-edge technology, our aim was to disrupt that market. We would achieve this by working with, and providing great service to, the regulated financial advice firms who shared our vision to provide a safe, secure haven for the expat community’s pensions. These points are still in our core ethos today. The international pensions world had next to no representation for UK pension products, with choice and competition being virtually non-existent, and technology, even what we had in the UK five years previously, not even being a consideration. We set out to develop the Forthplus Sipp with the principles that it had to be simple, transparent, written in plain English and as easy to understand as possible, for both advisers and members alike. Nothing hidden; no 10-page fee schedules or vague investment policies. Our fee schedule is transparent, clear and fits on one page. Our investment policy is straightforward and designed to give as much protection to our members that, as administrators, we can. Crucial to our vision was to develop our own in-house technology. Starting from scratch, we asked what the market wanted and set about building a system to satisfy their requests. This was to build a back-office system, with compliance at its core, that would allow as much automation of the processes as possible. Without the legacies of the past. Having the flexibility that being a relatively new business brings, we have a constantly evolving framework built on solid foundations.
Growth value
‘Our purpose was to grow steadily and carve out a place for ourselves, where our name stands for something different in the international pensions world’
previous article
Although operating in the international market, being UK-based and offering a UK FCA-regulated product was always our priority to provide stability and confidence in the market. We quickly outgrew the small serviced office we started in, located in Edinburgh’s famous Princes Street. We moved to our own offices in October 2018, 20 times the size of our original home, in George Street. We have more than quadrupled our staff over the last few years, ensuring that those who joined us were good people, experienced and proficient in what they do, and creating a place to work where everyone feels valued and part of the business. Of course, there have been a few bumps along the way and growing pains, as the demand for our product outstripped our capacity to provide the superior level of service we strive for. However, these days are behind us, as our incredible IT team continue to amaze with their constant developments to automate our processes and as the administration team expands, being fully trained in what the market and our members expect from them. We would never have arrived where we are without the help of our investors. One of the first questions asked when we raised the idea of Forthplus was ‘What is the exit plan?’. The answer was simple … we don’t have one! Forthplus was never meant to be a quick win, a way to make money or a way to glean advantage from an unloved market. Our purpose was to grow steadily and carve out a place for ourselves, where our name stands for something different in the international pensions world. We believe we have punched well above our weight and have been directly and indirectly responsible for so many positive market developments in a short space of time, that can only help both adviser firms and their clients. We now sit with over £300m assets under administration, next to no non-standard assets, our principles intact and a bright future ahead. This year will see our expansion into the Australasian market, with the opening of our Singapore office. The Forthplus international team, led by Chris Holyoak, our MD, ably assisted by our international sales and relationships manager Pippa Dilley, will continue to seek out new, like-minded businesses throughout the world, in the knowledge they have the full support of a very professional, capable and enthusiastic team back in Edinburgh. As our slogan says ‘Forthplus Pensions – fresh approach, built to last’.
Disrupting the market
‘Having the flexibility that being a relatively new business brings, we have a constantly evolving framework built on solid foundations’
Built to last
Can you afford to retire? This is the question that interrupts any dreamy thoughts you might have about your post-career freedom, which can become easily clouded by the challenging road to get there. Planning for retirement has become more complex over the years, as the burden is now placed more on the individual, rather than solely on your employers. Humans worldwide also have longer lifespans, which means you’ll have to stretch your money out for a longer period of time. How much you’ll need depends on many things: your income, lifestyle, age and more, but chances are that number will be pretty high and you’ll want to be prepared. To make your retirement dreams a reality, you should first consider all the crucial factors, including your expected lifespan. With today’s evolving and innovative technology, along with advanced medical discoveries, it’s not a shock that life expectancies have improved in the past years and could continue to rise around the globe in the coming decades. This means you’ll need to take into account the possibility of extra years of necessary funding, taking into consideration that the older you get, the more vulnerable you are to certain illnesses that may negatively impact your quality of life. You can’t predict the future, but you can make sure to not underestimate healthcare costs. Then, calculate your current spending habits and be realistic about how much you will need to cushion a comfortable lifestyle. The planning process will be more straightforward once you recognise your spending habits and save yourself the chance of being blindsided by falling short on your retirement funds. While analysing past data and learning from history could offer you a financial formula that estimates your needs and goals, it is important to acknowledge there is no standard path to retirement. However, keeping these factors in mind can provide a guide map for the journey there.
Road to retirement
Start from the beginning
The earlier you prioritise contributing to your retirement savings, the more allocated funds you’ll have to not only survive your retirement but to thrive and live a stress-free lifestyle. Retirement doesn’t have to equal to giving up the luxuries you’ve worked your whole life for. Through investment products and stocks that provide flexible solutions and the power of compounding, you can always be a few steps ahead. Working alongside knowledgeable advisers can help you grow your portfolio and focus on proper asset allocation, spreading it throughout different stocks and bonds. Recognising market trends, committing to savings targets and focusing on your nest egg are ways you can ease your concerns over funding a comfortable retirement. Retirement may be a distant thought, with other financial goals taking its place, but saving early is key to navigating its bump-free road. Planning for your future can be overwhelming, Investors Trust makes it easy. Our cutting-edge products provide you with the tools you need to save money and retire peacefully.
And most importantly ...
‘Retirement may be a distant thought, with other financial goals taking its place, but saving early is key to navigating its bump- free road’
Best laid plans
As we get older, we invariably give more thought to the place we hope to live out our retirement years. For expats who have spent much of their working lives abroad, this may involve choosing to stay in their current location; or it could mean returning to their country of origin. For others, it might be somewhere completely new. These days people need to plan on supporting themselves in retirement for at least 30 years, or even longer. This is normally a daunting prospect even for those with a good defined-benefit pension plan and a sizeable savings pot – let alone the average person.
Another issue that Britons contemplating an EU retirement may need to consider is whether UK state pensions – which have always risen in line with inflation for those retirees living in Europe, the way they do for British citizens who remain at home – will start to be ‘frozen’. This is already the (highly controversial) case for British pensioners resident in Canada, Australia, New Zealand and some 45 of the other 54 British Commonwealth countries. Again, only the outcome of the Brexit negotiations, due to complete with or without a deal by the end of this year, will yield an answer. Currency swings can also be difficult to predict. Thousands of British investors were hit some years ago, for example, when properties they bought in Cyprus, with the intention of retiring to one day, became a financial nightmare, after the Swiss franc mortgages they had been advised to take out to pay for them suddenly became unaffordable, after an unexpected leap in the relative value of the Swiss franc to the pound.
Family roots
‘How foolish to think that one can ever slam the door in the face of age. Much wiser to be polite and gracious, and ask him to lunch in advance’
Number of years you must plan to support yourself in retirement
30
Money matters
Medical attention
State pension
Noel Coward
‘The first question those planning for retirement need to consider is: do I have enough money to maintain the retirement lifestyle I envisage?’
Of course, your hard earned pension pot will go further in some locations than others, so make sure you understand the cost of living in your chosen destination in comparison to where you currently live. So the fundamental first question those planning for retirement need to consider is: do I have enough money to maintain the retirement lifestyle I envisage, for 30 or more years, in the place I am planning to retire to? Healthcare quality and costs is another consideration. And as we get older, we are more likely to need access to high quality medical services. A growing number of countries are introducing mandatory health insurance requirements for foreigners who wish to become resident, or introducing new charges for foreigners that locals don’t have to pay. Many Brits used to free healthcare through the National Health Service tend to underestimate the level of health insurance they could require. It’s also important to consider what the standard of healthcare provision is in your chosen retirement destination and how easy is it for expats to access those services. At present, an estimated 190,000 British citizens who retired to Europe are on tenterhooks since the British government confirmed they will no longer have their healthcare covered by the NHS in the event of no Brexit deal. Currently, pensioners can get treatment reimbursed by the NHS under an EU-wide set of reciprocal arrangements.
Plan carefully, get expert advice
Grandchildren, who may not have even been thought a possibility when individuals move overseas to retire, are another not-uncommon factor in introducing an unexpected pull on individuals or couples who have put down their retirement roots. Homesickness for your home town and/or culture is apparently another unexpected issue for some retirees, often manifesting itself well into an individual’s overseas retirement sojourn. This can arise unexpectedly when an expat retiree’s spouse or partner dies first. It is so important to do your homework on the business of retiring overseas well before you put down a deposit on a house, or even choose your location. And it’s worth considering renting a home first before you decide to buy – the reality of living in a new country can be very different to what you had imagined. For the last word here, we’ll turn to Noel Coward, who, possibly without meaning to, made an elegantly-reasoned case for retirement planning in 1956: “How foolish to think that one can ever slam the door in the face of age,” he said. “Much wiser to be polite and gracious, and ask him to lunch in advance.”
Decisions on where to hold and how to draw a pension have never been so important, particularly for UK expats
We certainly live in interesting and fast-moving times. There are few things in our financial life that we hold close to our hearts and even fewer we can rely on to help us through world changes, economic instability, pandemics (!) and to make sure we are adequately provided for in our retirement. At least we can help you with the last point, welcome to the world of pensions… It’s never been a more complicated environment in the UK pension space, with restrictions on tax relief, reduction of lifetime allowance, historic low gilt and interest rates to name just a few of the current issues. Add in the freedom of flexible pension arrangements and the unfortunate demise of the annuity as a beacon of stability and decisions on where to hold and how to draw a pension have never been as important to get right. Throw into the mix that your client has taken the decision to leave the UK for their retirement, too, which then brings in a whole new set of complexities As a UK expat based in the European Economic Area (EEA) it is possible and it can often be beneficial to take a pension into the EEA. HM Revenue & Customs has specific rules in place to allow clients to do this by transferring to a Qualifying Recognised Overseas Pension Scheme (Qrops). This could be for currency reasons, for extended investment options, the ability of the plan to distribute gross funds on a regular basis and indeed to benefit from removing the pension from a UK inheritance tax estate. It is always worth bearing in mind that UK inheritance tax can still be incurred regardless of your clients’ new residence, particularly on UK-based assets or wealth. It is worth noting that the Qrops legislation was initially introduced to allow the UK expat to take his or her pension on leaving the UK to an alternative jurisdiction for their retirement. Part of the reason was to align with EEA freedom of movement of people and wealth. In the 2017 Budget it was announced that restrictions were to be put in place on the ability to transfer pensions to some jurisdictions but this did not affect transfers within the EEA. This therefore maintained the principle of freedom of movement of people, capital, goods and services. So, what is the likelihood of the Qrops provisions surviving Brexit? Well there is some very good news here. One of the first finance related actions taken by the UK government post-31 January was to update the pension scheme manuals on the first working day thereafter, 3 February (Brexit was midnight on Friday). This move protects the position of transfers to Qrops and expands the definition of the residence of the individual member to include the UK and Gibraltar as well as the wider EEA. Good news indeed as this not only protects new and existing transfers but also provides protection if the pension holder returns to the UK.
Competitive choice
This was important as otherwise there could have been a potential tax charge, called the Overseas Transfer Charge, which can apply if a member transfers to a pension outside of the EEA (a transfer which now includes the UK and Gibraltar specifically for these purposes) of up to 25% of the plan if the member has not been resident within the relevant area for at least five (UK) tax years. This means the pension holder is free to move around the EEA without fear of this charge and indeed return to the UK on the same basis if this becomes desirable or necessary. Trireme offers a competitive choice of Qrops solutions principally from Malta. We can write the pension under contract or trust and apply reduced fees for pensions under £200,000 in value and where we have a joint transfer of, for example, a husband and wife pension. The contract pension is an important consideration in many of the civil law European jurisdictions that either do not recognise or have additional tax or reporting issues around the use of trusts. Examples for varying reasons include France, Portugal and Spain. If your client has a smaller pension or an inheritance tax estate within the nil-rate bands it may not be cost effective to use a Qrops. Also if they are already planning to return to the UK or simply reside outside of the EEA and therefore do not have the ability to use Qrops, then it may be viable to also consider a transfer to an International Self Invested Personal Pension plan (International Sipp). The Sipp will allow for enhanced investment flexibility (especially if you are a member of a defined benefit plan) and although it will remain within UK pension restrictions it is of course portable wherever they decide to retire including a return to the UK. It is also an attractive option for those looking to continue to contribute to or invest further funds to their pension while they are overseas. Note that any such contributions are unlikely to attract UK or local tax relief. Trireme is pleased to announce the recent launch of its international Sipp in conjunction with respected and Moneyfacts 5 star-rated UK pension Sipp trustee Hartley Pensions. It is the first international Sipp to be fully digitalised and is attractively priced to suit the needs of the overseas marketplace. In conclusion, while the marketplace is changing and the rules are clear for the duration of the Brexit transitional period at least, then now may well be the time for your clients to seriously consider the transfer of their UK pension to a suitable international plan.
‘Advisers who fail to adapt to the technological revolution are putting their livelihoods at risk’
Overseas option
Good news for Qrops
