DR. JOHNSSON'S ELIGIBILITY TEST™
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Your Defined Benefit Pension Pot
Security of your Defined Benefit Pension Pot
When you have a defined benefit pension there are a number of things to consider. Security of funds is referring to how secure your pension pot is where it currently is in the UK. If you have a Defined Benefit pension, the major concern is not necessarily how it is invested, like with normal superannuations here in Australia, but rather the solvency and funding of the pension scheme. If they don’t have the money they can’t live up to the promise.
Almost 10,000 pension schemes have already entered the Pension Protection Fund, which basically is where wrecked pensions schemes are parked. It is estimated that the overall deficit of UK defined benefit schemes is 1.5 trillion pounds and growing. Just google “UK Pension Deficit” to see. Given this, it is therefore imperative to investigate what the current funding rate of your pensions scheme is.
It is also important to see how the sponsoring company or institution can fund the scheme moving forward. There are major FTSE100 companies where the pensions scheme is 3 times larger than the market value of the company itself. If there is a deficit of 30%, the deficit would be of the same magnitude as the company itself. One CEO of such a company is supposed to have said that he was managing a pension scheme with a company on the side.
This is not to say that there aren’t decent defined benefit pensions out there. But if there’s a 30% deficit, maybe you will only receive 70% of what they have promised you. A transfer out of such pension schemes could be a considerable improvement.
→The point is that you need to know how secure your defined benefit pension pot is.
Death Benefits in your Defined Benefit Pension Pot
The Death Benefits in UK pensions are sometimes very different from the death benefits in an Australian superannuation. The largest difference would be in the defined benefit pensions. The standard in these is that only 50% of the annual pension is passed on to a spouse or partner. Sometimes it is as little as the member contributions, sometimes 1/3, and sometimes 2/3.
Nothing is normally passed on to adult children, and sometimes nothing at all to minor children.
In a worst-case scenario where the member outlives the spouse and any children are adults, the hard-earned pension pot would go back into the black hole in full. Unfortunately, this situation is not that uncommon at all when you think about it.
In the case where there is no spouse, partner or young children, the pension pot would go back to the pension scheme in its entirety. Some people in such a situation would rather have the money passed on to their favourite cause.
A transfer out of such pension schemes into a personal pension could be a considerable improvement, as 100% of what is in the pot could be passed on to your named beneficiaries.
→ The point is that you need to know how your death benefits operate in your pensions as there could be a lot at stake.
Accessing your Defined Benefit Pension Pot
Your defined benefit pension scheme has a normal retirement date, which would normally be age 60, 63 or 65. At that point in time you can start taking an income stream from the pension scheme. They would then pay a monthly amount to a bank account and this amount would be index linked so as to provide some basic protection against future inflation.
There are a few things worth highlighting with regards to this.
- The inflation protection that comes with these pensions often works well in times of low inflation but could turn out to be worth much less in times of higher inflation, as this protection often is capped by the pension scheme.
- The pension scheme might only pay the pension into a UK bank account. Make sure you keep your UK account as it is getting increasingly difficult to open an account when you are living overseas.
- The UK pension scheme might pay out a pension even if you don’t need it or want it at that time, for example due to tax purposes.
- The UK pension scheme might withhold UK income taxes. There is a double taxation agreement (DTA) in place so you could claim that tax back when you do your Australian taxes. This is all good in theory, but you could find this difficult as the tax years are different or you simply don’t have enough taxable income in Australia to offset the UK tax against. The best way is to get the UK pension scheme to not withhold any taxes, then declare it here in Australia and there is a way to do this.
The UK pension scheme might allow you to start taking an income before the normal retirement date, but they normally would lower your annual pension by 4-5% per year. So if you want to take a pension 5 years ahead of the normal date, your pension might be 20-25% lower than expected.
You often are eligible to take a pension commencement lump-sum from a defined benefit pension. While this might be tax-free at source, like in the UK, as an Australia resident there might be taxes that apply here depending on your situation. The key aspect is how much your pension has grown in term of pounds since you became a tax resident in Australia. It is in most cases hard to know exactly how much growth there has been, so there might be a need for a qualified third party assessment to take place. The ATO requires you to self-declare this, but they also expect a qualified third party assessment to back it up.
Transferring a pension from a defined benefit pension in most cases allows you to access an income or a lump-sum earlier, at age 55 instead of 60 or 65, and the way that suits you best.
→ The point is that you could move into the driving seat.
All-time-high Transfer Values for Defined Benefit Pension Pots
Although, many defined benefit pension schemes are in trouble in the UK, there is a potentially massive benefit that comes with the current economic circumstances in the UK. This has nothing to do with your personal circumstances and very little to do with your UK pension scheme itself, but still produces transfer values at all-time-high almost across the board.
Whilst increased longevity certainly plays a role in producing higher transfer values over time. The main factor behind the all-time-high transfer values, however, is the historically low interest rates in the UK. When your UK pension calculates a transfer value they look at all your future pension payments, any potential payments to your beneficiaries, when these will start and for how long they are likely to continue. They then add them up and discount the payments to a cash equivalent transfer value in today’s terms.
It is basically the same process as calculating a net present value for an investment if you are familiar with this.
The lower the discount rate you get, or interest rate in general, the higher the cash equivalent transfer value. The Bank of England has worked hard to bring rates down ever since the financial crisis 2008-9, and they have dropped further after the Brexit vote in June 2016.
Here are a few real examples of what this can look like.
Example 1 – Adam age 49
- Date of leaving the pension: 1994
- Yearly pension at date of leaving: £1,500
- Transfer value: £228,000
- Comment: Adam was under the impression that he had very little back in the UK pensions. One reason for why this is a common perception is that the pensions often send out the pension amount at date of leaving, as they generally don’t update the value on a regular basis. Adam could not believe that he was offered that kind of money.
Example 2 – Alan age 50
- Date of leaving the pension: 2005
- Yearly pension at date of leaving: £8,800
- Transfer value: £375,000
- Comment: Alan was very surprised with the transfer value and it took a fair amount of convincing that it wasn’t a scam. Interestingly, he had the exact same quote from five years earlier, in exactly the same format, and it showed a transfer value of £100,000 so no wonder he couldn’t get his head around it.
Example 3 – James age 51
- Date of leaving the pension: 2010
- Yearly pension at date of leaving: £34,000
- Transfer value: £1,235,000
- Comment: James is very financially literate but still was very surprised with what this scheme offered him.
Example 4 – Phil age 44
- Date of leaving the pension: 2003
- Yearly pension at date of leaving: £4,900
- Transfer value: £52,000
- Comment: Just to balance things out, I have included a rather poor offer that this Phil received. Clearly, he is better off leaving things where they are.
→ The point is that you could be sitting on a fortune without knowing it. In order to find out, you have to actively seek out the relevant information.
Your Defined Contribution Pension Pot
Security of your Defined Contribution Pension Pot
When you have a defined contribution pension there are a number of things to consider. If you have a Defined Contribution pension, the major security concern is how it is invested. Most people probably ticked a default box 10, 20 or 30 years ago and are still invested in such a default option. We have seen people that ticked the “Japan” box in the 1980’s, as that was the latest fad at that time. Unfortunately, the Japanese stock market over there is lower now 25 years later. The Euro Zone stock market is lower now than in 2001 and the Australian stock market is still lower than before the Global Financial Crisis about 10 years ago.
Having no one to look after the investments could mean that your pension pot takes a nose dive when the market does, like when the FTSE dropped over 50% in the financial crisis. That could imply a substantial risk to you.
→ The point is that you need to know how secure your defined contribution pension pot is.
Death Benefits in your Defined Contribution Pension Pot
There are still death taxes that apply in the UK but they are now levied on your beneficiaries. The actual tax payable depends on where they live, what kind of payment it is and what age you pass away.
- If you pass away before age 75 the full amount would be passed on to your named beneficiaries, either as an ongoing income, as a lump-sum payment, or a combination.
- If you pass away after age 75 the full amount would be passed on to your named beneficiaries, either as an ongoing income, as a lump-sum payment, or a combination. The pension scheme might then withhold tax depending on the amount and the beneficiaries tax situation.
See the HMRC website for more details.
→ There are a few things to think about for this kind of pension.
Accessing your Defined Contribution Pension Pot
You often are eligible to take a pension commencement lump-sum from an overseas pension.
While this might be tax-free at the source, like in the UK, as an Australia resident there might be taxes that apply here depending on your situation. The key aspect to this, is how much your pension has grown in term of pounds since you became a tax resident in Australia.
It is in most cases hard to know exactly how much growth there has been, so there might be a need for a qualified third party assessment. The ATO wants you to self-declare this, but they also expect a qualified third party assessment to back it up.
Transferring a pension from a defined benefit pension in most cases allows you to access a lump-sum earlier, at age 55 instead of 60 or 65. This could be used for anything from paying down a mortgage to investing in property.
→ The point is that you could move into the driving seat.
UK Life-time Allowance
One major storm cloud on the tax horizon is the so-called Life-time Allowance (LTA). This used to apply to only very large pensions but has now dropped by £250,000 each year for a number of years. More people will be hit by the extra taxes that apply if you breach this cap. It currently sits slightly over £1m or £50k annually, but there is talk about further drops to £750k (£37.5k annually) and even £500k (£25k annually). It is not the current pension amount that matters, but the future value (whether after inflation-adjustment or investment growth).
If you breach the LTA allowance cap, an extra tax of 25% is added to the regular income tax, or 40% tax is added on any lump-sum apply (i.e. added to amounts above the LTA cap).
You can apply for LTA protection, but that might not protect the full future amount. See the HMRC website. There is of course also an element of risk in gaining such protection, to rely for such protection on the very same institution that is imposing the tax, to begin with. The LTA alone could be reason enough for a pension transfer out of the UK.
It is important to note that you wouldn’t necessarily be worse off from a tax perspective in case you did move back to the UK for some reason. Plans change, and people do end up back in the UK for various reasons.
→ The point is that there might be threats lurking around that you aren’t even aware of and improved tax efficiency is reason enough to look into things.
Exchange Rate Control
Having an important asset in another currency makes you exposed to the currency swings.
As we have seen the GBP/AUD rate rise 50% in the last couple of years, after the Brexit vote it has now dropped about 30%. In fact, it dropped as much as 8% in one day on the day of that vote. The GBP/AUD currency pair is one of the most volatile so we can expect this volatility to continue into in the future too.
Movements like these in the exchange rate will override any indexation in a defined benefit pension, and even the investment returns in a defined contribution pension. There is nothing defined about it when you live in Australia.
Transferring a single-currency (GBP) pension into a multi-currency (GBP, AUD, etc) pension could be one way to take control of the currency swings. You could convert the pot or parts of it at any time and reverse it as well.
Even though you perhaps aren’t too worried about it at this time, there might come a day when you want this kind of control but maybe can’t do anything about it then. There might come a day when you want to plan for retirement and when you want a fixed amount to hit your bank account every month. You might get lucky, like the person I met that transferred at a rate of 2.56, but why gamble?
→ The point is that being able to control the currency exposure could turn out to be a crucial ingredient for a no-worries retirement.
Consolidation could be a good idea from several perspectives.
- From a cost perspective, having several smaller pension pots of retail character could mean you are paying more than you need to, both in fixed and variable charges.
- It could also be difficult to keep up with all the different pensions, especially when changing your address.
- The UK pensions often change names or are taken over, making it even harder.
- Having a number of smaller pots also makes it hard to set up and maintain an overall strategy for the investments. This could have a large impact on the performance over time.
- Having a single pension pot certainly makes life easier for a spouse, partner or children in case something would happens to you.
Transferring into one single pension pot could be a solution to look into.
→ The point is that consolidation often makes a lot of sense.
View on iPhone or Android Phone
Having a superannuation in Australia often means that it’s relatively easy to follow online or to consolidate several supers into one. This isn’t always the case in the UK. In an era where we are getting increasingly used to accessing information even on our smart phones, maybe it’s time to upgrade your pension in the same manner.
→ Brite offers online viewing of the pension pot and the individual investments on your iPhone or Android mobile.
High Quality at Low Costs
The financial services industry has been generally well known for offering low quality products at high costs rather than the other way around. Fortunately, Australia has some decent consumer protection laws in place when it comes to financial services, and one aspect is the fee transparency. Unfortunately, it is often very hard to know how much you are paying for your UK pensions, with the many hidden layers of fees in so-called mirror funds, etc.
Modern financial technology has, however, opened up new ways to increase the quality of financial products and to lower the costs of those products at the same time. Brite is at the forefront in this field, currently being the only company that fully applies this new technology to UK pensions.
→ Who wouldn’t be interested in higher quality at lower costs?
Transfer from the UK to Australia
NB! This was written on April 20th 2018 and there is no guarantee the rules are still the same.
Under the current UK rules, you have to have turned 55 to be able to transfer a pension to an Australian superannuation. However, a transfer isn’t as straight-forward as it used to be for a number of reasons.
If you have a defined benefit pension, the UK authorities require you to seek personalised financial advice from an FCA regulated financial advisor. This comes at a cost and it could be difficult to find someone willing to give advice in the UK to a non-resident.
The number of superannuations in Australia that are recognised by the HMRC in the UK dropped to nil when they introduced the 55+ requirement. Setting up a self-managed superfund (SMSF) and getting it recognised by the HMRC is almost the only option. The good thing is that you could use the SMSF also for your existing superannuation, as well as that of your spouse or partner.
On the Australian side of the transfer, the authorities have imposed a cap on how much you can into the pension face in your super and still enjoy the tax free environment.
There is also a cap of $100,000 that you can contribute every year to a super under the Non-Concessional Cap (NCC). This could be carried forward another two years so in practice you could contribute $300,000 over a three year period. A UK pension transfer counts towards the NCC cap.
The Australian authorities would also tax you on the growth element of your pension transfer, i.e. the growth you have had in terms of pounds in your UK pension since you became a tax resident in Australia. This is often hard to establish. The default is that the tax is paid at your marginal tax rate, but you could elect the superannuationto pay the tax at the concessional rate, normally 15%. One good thing, though, is that the growth element wouldn’t count towards your NCC cap.
The Australian authorities also require you to fully leave your UK pension scheme when you transfer it to Australia. This could turn out to be difficult if your pension pot exceeds the amount you can transfer to the UK. This is one reason why it’s standard procedure today to first set up a UK personal pension that could handle the splitting up of the pension pot to suit the Australian rules.
There is another important reason for first setting up a UK personal pension and that is because the HMRC has now placed the burden of qualifying the receiving superannuation in Australia. This is easier said than done and they can deny a transfer (and good luck challenging them). A personal pension used to international transfers could be the best way around this issue.
Transferring a pension from the UK to Australia is getting increasingly more difficult. It definitely requires a process of full financial advice in Australia.
→ Brite is fully licensed to provide such advice should it be required.
Transfer from the UK to Australia
NB! This was written on April 20th 2018 and there is no guarantee the rules are still the same.
Under the current UK rules, you have to have turned 55 to be able to transfer a pension to Australia. There is no way you can do this until you turn 55 or the rules change.
→ There are however a number of reasons to still look into your situation more closely. The main reasons are explained here under separate headlines.
What is Next?
We can help you to straighten any question marks. Please select the option that suits you best.
Letter of Authority
A Letter of Authority (LOA) is a letter signed by you that authorises us to speak directly to your UK pension scheme. This allows us to obtain all the relevant details and up-to-date facts. The LOA only authorises us to request information on the named pension scheme and does not constitute an authority to make changes to the named scheme, nor does it constitute an application to move your pension to another provider or Scheme.
You can fill out LOAs for a single or multiple pensions and sign them online following the link below. Fill out as much as you can and we will see if it suffices.
About the Eligibility Test
and its creator
This eligibility test was born out of necessity. So many Australia residents have pension rights in the UK, yet it’s so hard to find up-to-date general information. Having run bi-weekly seminars and webinars over the years just to inform people of the current rules and the latest changes in both the UK and Australia, Dr. Johnsson decided to use modern technology instead. This this provide the same kind of information, it’s slightly more tailor-made, is available on demand and in a very accessible way.
Dr. Richard Johnsson earned his doctorate in economics after studies at Uppsala (Sweden), Oxford and Sydney Universities. He has worked and lived in 7 countries, has been active in the financial services industry as an executive financial advisor, as a President & CEO of a wealth management company, as a private banking executive and has worked with international cross border pensions since 2005.
Richard has lived in Sydney since 2014 and is well-known for his professionalism, his ability to explain things in plain language and his down-to-earth attitude.
He will personally take care of all incoming contacts following this eligibility test.
Dr. Richard Johnsson
Country Manager | Brite Australia