BREXIT Looms: What Will You Do With Your Pension?

BREXIT Looms: What Will You Do With Your Pension?

The on-going Brexit negotiations and subsequent demise of the UK exchange rate have resulted in Brits who have moved to NZ (good choice!) swinging on the end of a pendulum; wondering if they should wait for a more favourable exchange rate, or bite the bullet and transfer now, because it could get far worse before it improves.

Should you transfer your pension now, or wait for a better exchange rate? Is Brexit making you feel concerned?

Should you transfer your pension now, or wait for a better exchange rate? Is Brexit making you feel concerned?

The answer? In most situations, transferring now is probably the better option. 

Why might it be better to transfer a pension now?

Firstly, if you’re worried about the exchange rate, you can keep your funds invested in GBP and convert them into NZD years in the future. 

More importantly, pension transfer values seem to be really high right now. A recent Lyford’s client saw her GBP transfer value increase by 25% in just six months, translating into an additional £145,168 for that client to transfer. 

This is increase is unlike anything we have ever seen before.  

About Cash Equivalent Transfer Values (CETVs)

What would you choose if you were presented with the option of a lump sum now, or a guaranteed yearly pension? 

In a recent example, a client was offered a Cash Equivalent Transfer Value (CETV) of £59,731, or a pension of £900 p.a.

She would have to receive £900 p.a. for 66 years before she broke even – before she would see any investment returns from her retirement savings. 

It is 100% illogical to accept such a lousy deal.

Why are CETVs so high at the moment? Is this normal?

These extraordinarily high transfer values are due to a drop in the Gilt rates in the UK which have led to record high Cash Equivalent Transfer Values (CETVs).

The FCA has not welcomed this huge windfall to the pension members and continues to discourage transfers from guaranteed final salary schemes. 

When we compare current CETVs with promised pensions there is little incentive to choose to have a taxable pension paid from the UK compared to receiving a far higher non-taxable income in New Zealand based on realistic investment projections.  

Brits really don’t like knowing that if they die prematurely, their spouse will only get half of the income. In some cases, the spouse gets nothing. Even people with no family tend to prefer their remaining pension funds being paid to their estate rather than being absorbed by a pension company.

The British Government and the FCA (Financial Conduct Authority) are concerned that some Brits will be scammed if they’re not protected by legislation. 

They may end up forfeiting excellent guaranteed pensions in exchange for cash. The pension guarantee is attractive, but the cost of the guarantee is usually high. You pay a premium (you get a smaller pension) if you want the certainty of a guarantee.  

What’s really the better option? 

Would you choose a guaranteed, non-taxable and non-inflation adjusted pension payable to you for life, even if you live into your hundreds?  


Would you take 20% more and forfeit the guarantee?  

Put simply, would you take an income of $80,000 a year with a promise that it will be paid to you even if you live into your hundreds? 

Or, would you take $100,000 a year with confidence that it could be paid to you until you are 91 - and even then there would be another five years income if you live longer than you thought you would.

How optimistic are you that you will live into your 100’s ? How much do you think you will need to live off at that time? 

Probably, realistically, a lot less than you will want to spend in your early retirement years.

What if I live longer than I expected?

Rather than taking a guaranteed income, if you invest your transfer value (prudently according to your investment risk profile) you could draw down your investment funds to age 91, using realistic and modest growth rates, while having a buffer fund of five times the annual income at age 91. 

You’re likely to spend more in the earlier years or retirement than you will later, but it makes sense to plan for if you live longer than you think you will.

You’re likely to spend more in the earlier years or retirement than you will later, but it makes sense to plan for if you live longer than you think you will.

If you live longer, there will be money available (in the buffer fund), or, if markets don’t perform as well as projected, the buffer fund can provide a cash injection. Your mortgage free home can probably be ‘eaten into’ by taking out a reverse mortgage.

Obviously, if you do not own your own home the guaranteed income for life might be more appealing to you.

CETV gives you access to your money when you need it

A major benefit of taking control and investing your transfer value to provide you with a retirement income is that you can access your money if you need to.  

If your roof blows away, or your house explodes (as one did on 25 July 2019 in Christchurch), or you need major surgery (that you do not have insurance to pay for and the Public Health system will not provide), there’s no access to your retirement pot if you’ve elected to take a pension. Once you take a guaranteed income the deal has been done.

What are the risks of transferring now?

Brits and returning Kiwis are best not to transfer their pension funds if they are uncertain where they’ll live for the five years after they have transferred their pension funds to NZ. 

An Overseas Transfer Charge (OTC) of 25% of the transferred funds will be made if you transfer them to NZ but within five years of transferring you move to live permanently in another country. You’ll need to be committed to living in New Zealand for at least five years before you transfer your pension here.

Before deciding to transfer, you’ll need professional advice to ensure that all your options have been considered.  

Maybe you are one of the few who have a very attractive pension and converting to cash would be madness. 

Finanical planning firms have access to sophisticated software that costs millions to develop and extensive research for which they pay hefty annual fees.

Individuals simply cannot access the information they need to make an informed choice.  It’s very important to seek independent advice from a New Zealand investment adviser specialising in pension transfers before making the decision to transfer. 

How Safe is Your UK Pension?

It has been estimated that there is around £103 billion over 3,700 UK pension schemes in deficit compared with 1,800 in surplus. There are close to 11 million Brits holding defined benefit pensions. Out of that number it is estimated that 3 million will encounter problems and potentially have only a 50% chance of receiving their promised pension.

The Guardian reported in January 2018 the impact of the failure of the Construction firm Carillion and the implications on the security of other UK Pension schemes.

Carillion’s liquidation has fuelled concern about the financial stability of other big companies. The sprawling construction and outsourcing firm had a pension deficit of £580m but is now likely to rise to at least £800m because it no longer has a solvent business standing alongside it. The company’s crash into liquidation has thrown the spotlight on other firms with huge pension scheme deficits such as IAG, BT and BAE

The Guardian article also discusses the lower returns that UK pension funds are now facing. Deficits have swollen because companies have to calculate their future pension liabilities using safe assets, such as gilts (government bonds).

The companies with the biggest deficits, according to a
report last year from pension consultants LCP, are Royal Dutch Shell, BP, BT and BAE Systems. The four FTSE 100 companies each had a deficit of more than £6bn in 2016.

For Brits who were in UK occupational schemes instead of receiving the actual return of your pension investments, you may have only been credited with the lesser of 5%pa, or the Consumer Price Index (CPI). In the last few years CPI has averaged around 2%pa. Your former employer can legally keep any additional increase. For example, a well-managed pension fund could easily have earned 8-12%pa since 2015 and your pension account may have only grown by effectively 2-5%pa.

By moving your UK pension funds to New Zealand there are major benefits around control of your returns and security.
November 2018

Pension Transfers Too Generous

Pension transfers too generous, says regulator

The BBC ran an article in August that the UK Pensions Regulator has written to 14 pension companies providing "defined benefit" retirement schemes encouraging them to consider making reductions in payouts. Some schemes have been offering higher payouts to decrease their risk as people are living longer. The problem can be those left in the schemes, the companies may not be able to meet their commitments.

While there are disadvantages to transferring out of a defined benefit scheme there are also some major advantages to. We will discuss these with you.

The 4 Year Tax Free Rule

What is the 4 Year Rule

A key reason British Immigrants transfer their UK Pension as a lump sum to New Zealand is to reduce the expected amount of tax they are liable to pay. In New Zealand, versus the UK, money withdrawn from a QROPS superannuation scheme (from the age of 55) is tax free.

If you transfer your UK Pension within four years of becoming a New Zealand resident you will not pay tax on the amount transferred. If you transfer later there is a sliding tax liability, Refer to our Tax Liabilities Table