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.
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.
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.