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Could payments to expat pensions stop after Brexit?

The news may seem particularly frustrating to some because it comes at a time when British expat pensioners had just started to breathe a sigh of relief over their financial futures.

News broke recently that seemed to allay several areas of concern: expats’ pensions will continue to uprate in line with inflation (settling some fears that pensions would become frozen). Plus, Britons abroad will still be entitled to healthcare as the EHIC scheme is reportedly staying put.

These things were encouraging to hear for expats living in the EU, whose pensions have up until now been protected from the damaging effect of inflation by the triple lock mechanism. However, if the current arrangement were to be abolished after Brexit, it could have disastrous repercussions for many expats.

So, what exactly is the latest problem?

Currently, UK insurance companies and pension providers use “passporting rights” to sell pensions, insurance and savings products across borders to customers in the EU. If a deal is not made that allows passporting rights to continue post-Brexit, then the insurers will not be able to continue to pay out to EU customers. If providers were to pay pensions to expat customers without passporting rights, they would be breaking the law.

In the letter, Morgan stated that the issue concerned “hundreds of thousands of insurance contracts sold under passporting arrangements”. At the moment, with no preventative measures put in place by the British Government, the insurers who made these contracts will be forced to cut off payments on 29 March 2019 – the day of Brexit.

“The possibility that UK providers may not be legally able to pay out pensions or insurance contracts to citizens in the EU – including UK expats – is a stark example of the consequences of a ‘cliff edge’ Brexit,” wrote Morgan.

The Association of British Insurers (ABI) has confirmed that insurers and pension providers need to be authorised in an EU country to make payments to customers living in the EU. The ABI is suggesting an arrangement that allows for contracts made before Brexit to follow the same regulations in a post-Brexit world.

There are some other solutions, as reported in the Guardian, such as selling existing pension contracts to EU-based insurers and for insurers to set up offices in the EU so that their business dealings can continue uninterrupted, but these would be lengthy processes, requiring approval from UK courts and national regulators in each EU state respectively.

Whatever resolution is reached, it needs to be decided upon soon, as the ABI has stressed that the problem needs to be addressed as a matter of urgency. Praising Nicky Morgan’s efforts to raise awareness about the problem, the ABI warned that there may not be enough time to reach an effective solution if the matter isn’t dealt with early on in Brexit talks.

With many British citizens inhabiting EU countries, this has the potential to be a very large-scale problem. Spain, as the most popular EU destination for British retirees (with over 300,000 pensioners living there), is likely to be the country most affected. If the worst were to happen and private pension payments could no longer be made to UK citizens in Spain, their wealth management plans for retirement are likely to be completely ruined, requiring them to make drastically different wealth management plans in Spain or else struggle financially.

But this is the worst-case scenario. Any expats concerned by the prospect of being left with no pension payments should be reassured that it’s unlikely the British government will leave their citizens in such a difficult situation. As Morgan mentioned, the UK and the EU both desire a “smooth and orderly Brexit”, and it is likely the two sides will easily reach an agreement that will ensure the current system continues. Brexit is a complicated business – that’s for certain – but as long as the British government remains vigilant of all possible complications and how they will affect all British citizens (not just the ones still in the UK), no one should be left behind.

However, as Morgan noted, it is somewhat surprising that, given how the government is supposedly prioritising the lives of expats in negotiations, there have so far been no position papers from either side proposing a solution to this pressing problem. Hopefully, this letter to Philip Hammond is the first step to getting the matter sorted.

If you’re a British expat living in the EU, you may be worried about the impact Brexit could leave on your life. Blacktower’s financial advisers keep abreast of all Brexit updates and will be able to offer you advice based on your individual circumstances. If, for example, you feel you may need to make adjustments to your wealth management in Spain, we can help you make solid plans.

And if you are concerned about a frozen of lost pension, read our blog to find out how a Blacktower adviser could potentially help you.

This communication is for informational purposes only and is not intended to constitute, and should not be construed as, investment advice, investment recommendations or investment research. You should seek advice from a professional adviser before embarking on any financial planning activity. Whilst every effort has been made to ensure the information contained in this communication is correct, we are not responsible for any errors or omissions.

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House and CalculatorHMRC proposals to dispense with private residence relief (PRR) could be a stumbling block for expat’s wealth management plans as significant amounts of capital gains tax relief could be lost if the proposals become law. But what is PRR, and what does PRR mean for new expats?

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Final salary pensions – why now is a good time to cash in

Juicy lottery-sized sums are being offered to savers to tempt them out of gold-plated workplace pension schemes and into personal plans. We’ve explored whether you should consider taking a final salary pension, as well as the benefits and drawbacks of withdrawing.

What is a final salary pension?

A final salary pension, sometimes referred to as a gold-plated pension, is a special style of retirement fund that is based on your final or average salary.

The main difference between this and a defined contribution pension is that a final salary scheme gives you a guaranteed sum annually for the rest of your life when you retire.

To work out the value of your final salary scheme, consider a few factors: 

  1. Your final or average salary at your place of employment (confirm this with your employer)
  2. Your length of service
  3. The final salary scheme’s accrual rate (this is often 1/80th)

Your final salary pension will take each factor into account, and the resulting figure will be the guaranteed annual sum you are entitled to.

For instance, if you worked somewhere for ten years, and leave on a salary of £100,000, with an accrual rate of 1/80th, you will have a guaranteed retired annual income of £12,500.

It is possible to undertake a final salary pension transfer. Depending upon how long you expect to enjoy retirement, this could be a favourable choice. However, it’s important to consult a financial advisor to make your final salary pension transfer values work harder.

What are the benefits of transferring a final salary pension?

Assessing your final salary pension transfer value, you might consider it worthwhile to withdraw. We’ve outlined the main benefits of taking your final salary pension:

Receive the cash value of your final salary pension

Withdrawing from a final salary scheme allows you to receive a cash lump sum in return for forfeiting your guaranteed income in retirement. This final salary pension transfer value is the main reason to withdraw from a scheme, as it offers you financial freedom.

Remove ties with your employer

This is an especially important point if you’re concerned that your employer may not exist throughout your full retirement. For most, the pension protection fund (PPF) will cover your pension, but, for especially high earners, there is a PPF ceiling of £41,461 (as of April 2020).

Enjoy a flexible income in your retirement

A final salary scheme entitles you to a guaranteed annual income when you retire, but if you go down the route of transferring your final salary pension you will be able to enjoy a little more flexibility in how you receive your income. Usefully, by withdrawing from your final salary scheme, you can choose to take more out in your younger years.

Choose how you want to invest your pension

A final salary scheme is controlled tightly to accommodate all employees and their interests. When withdrawing from the scheme, however, you can take complete control over how your pension fund is invested.

The considerations you should make before transferring your final salary pension

While there are certainly benefits of going down the route of transferring final salary pension funds into various other pots, it’s important to consider what you’ll be giving up:

  • Entitlement to a fixed annual income for the rest of your life
  • A safe income that doesn’t fluctuate with volatile markets and share prices
  • Spousal and family benefits that come with a final salary scheme

 Example: Should I cash in my final salary pension?

An example is Mrs Dee (not her real name), 4 years ago she asked for her final salary transfer values, which came in at £250,000 – a nice sum, you may think. After reviewing all the facts and figures available, however, I advised Mrs Dee to leave her final salary pension where it was, which she duly did.

Towards the end of last year, because of favourable market conditions, I applied again to see the value of transferring her final salary . This one came in at just under £600,000.

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