Stickman Readers' Submissions December 14th, 2007

Retirement Funding Update 2

My original submissions were posted by Stickman on 3rd December 2007 and again on 6th December 2007 and this is a further final follow up submission based upon the readers’ responses received.

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My 2nd submission prompted much feedback and a lot of it was about the state of the UK pension funds.

As I said in my 2nd submission I wanted to do some further investigation as to what the future pension situation entitlement would be. Here to help you are the findings.

The bulk of the 2nd part of this submission will be of great use to anyone originally from the UK who now resides in Australia.

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Australian Government Pension

The full State pension claimable for men at 65 is currently AU$537.70 per fortnight for a single person.

As a home owner you are allowed up to AU$166,750 in assets to be eligible to receive the full pension. Then a sliding scale pension until you receive nothing if you have assets of AU$529,250.

As a non-home owner you are allowed up to AU$287,750 in assets to be eligible to receive the full pension. Then a sliding scale pension until you receive nothing if you have assets of AU$650,250.

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The above “assets” include your Australian Superannuation fund, cars, boats, caravans, any other real estate etc.

The idea would obviously be to make sure that you have reduced your assets to below these numbers before you reach 65.

The pension is index linked when you live in Australia.

International social security agreement.

The pension is index linked when you live in the Philippines.

The pension is index linked when you live in Thailand.

Australian Superannuation (Super)

Employer contributions to your fund are taxed at 15% when put in to the Super account.

Personal contributions are not taxed, as you have already paid tax on them. The personal tax rates are higher than the 15%, so you can salary sacrifice monies into the Super fund to make the most of the tax benefit.

You can access Super at 55 but any withdrawals are taxed at normal rates as if it was earned income. You can access your Super at 60 and any withdrawals are NOT taxed whatsoever. Even if you took out $1,000,000 a year. (assuming you had that much money!!)

Your Super is classed as an asset when determining your eligibility regards the State pension.

If you die before you have spent all of your Super you can leave the balance in your will to your beneficiaries.

If you leave the monies to your son / daughter / wife etc, someone who is financially dependant on you, then the money is received by them tax free.

If they are not dependant on you, a friend, etc., then they pay tax on the money received as if it was earned income in that tax year.

UK Government Pension

In 2007-2008, the full basic State Pension is £87.30 a week for a single person and £139.60 a week for a couple, but your individual circumstances may affect the amount you get.

If you don't qualify for the full basic State Pension, currently obtained after National Insurance contributions for 44 years (soon dropping to 30 years), but have 25 per cent or more of the qualifying years, you'll get a weekly basic State Pension between the minimum (£21.83 in 2007-8) and the maximum (£87.30 in 2007-8).

I am advised by another reader that your total State pension can be reduced if you have other income, i.e. a private pension income. The UK Pension Service add to the basic pension ‘additional state pension’ and or ‘pension credit’ based upon your personal circumstances.

The pension is index linked when you live in the UK.

International social security agreement.

The pension is index linked when you live in the Philippines.

The pension is NOT index linked when you live in Thailand. It is fixed at the rate on the day that you leave the UK. One reader advises me that he believes this is currently being appealed in the European Courts.

UK Private Pension

I discussed the terrible problems with UK annuities.

Below is an example sent to me by another reader called Phil, who I thank for his input. He for his sins has unwisely bought one of these horrible things based on erroneous advice received from a ‘financial advisor’.

Pension fund total at age 55, when you can access it. Say £ 100,000

Less 25% tax free allowance, as UK statutes. £ 25,000

Balance to provide a pension. (annuity or draw-down) £ 75,000

With a capital sum of £75,000 invested, earning a very conservative 5% gain per annum, should provide an annual pension of £3,750, or £312-50 per calendar month. Not a huge amount but better than a poke in the eye with a sharp stick. If the money is invested off-shore, interest should come through tax free; there would be minimal admin charges though.

Under current legislation, private pension funds in UK must be compulsorily converted into annuities when the pensioner attains the age of 75. One does NOT have to buy an annuity at the typical retirement ages of 55 – 65. Pensioners can obtain monthly monies via the draw-down method until they are 75 and leaving the capital fund intact.

As pension contributions were taken from your salary before tax, the Government then claws it back at the other end, meaning personal pension income is taxable. However, the older you are the higher are your personal allowances before tax is deducted.

At over 65, the current personal allowance is £7,550. Therefore you can receive a total of £629 p.m. tax free, after which additional pension income becomes subject to tax – for this current tax year the rate is 10% on the first £2,230, then 22% on the next £32,370.

If you are younger then the tax free allowance would be less, currently £5,225.

There is so much more information to know and I will not bore you further. Below are some very useful links.

This says you can leave the monies in your will? But you still can not spend the pension monies! You need to find out more details.

Since 6 April 2006, pension savers have been able to ignore the option to buy an annuity altogether. (appears to work if you have over £100,000.

Instead, people can now drawdown an income direct from their pension fund; leaving their pension cash invested.

However, any money left in their pension fund on death could be liable to an Inheritance Tax (IHT) charge.

It would take around 14 years for the 3% escalating annuity to catch up with the level annuity.

It would take 26 years before the total you received from the 3% escalating annuity exceeded the total paid by the level annuity.

This next weblink, to me is the most scary. If you do not read any of the annuity links you should read this. It puts into perspective what a waste of time it is saving monies into your pension fund, to then lose the State pension benefits, as well as lose the pension funds monies when you die.

Transferring UK Private Pension Funds in your Australian Superannuation

This is something I did not know about before this week, and for me, and any other UK people who now live in Australia, this is an amazing piece of legislation!

If you have migrated or returned from working in the UK, there can be significant financial advantages to be gained from transferring your UK personal and company pension funds to Australia as soon as possible:

  • Pay NO TAX in retirement.

  • Access to lump sums anytime in retirement.

  • Control the investment of your funds now and in retirement.

  • Protect your estate by leaving your funds to your family – not your UK pension provider.

The vast majority of UK pension funds can be transferred to Australian superannuation as a lump sum, including personal, stakeholder, company and AVCs funds, so long as they haven’t commenced in payment (i.e. you are not receiving an annual pension/annuity).

This also includes deferred, frozen or paid up benefits.

The UK state / age pension cannot be transferred to Australia as a lump sum. The benefits can only be received as a regular income at retirement age

When you transfer your UK pension funds to Australia as a lump sum, tax is only payable on the earnings of your UK pension funds whilst you are a resident of Australia.

The tax rate can be capped at 15% and deducted by the receiving superannuation fund, meaning that you will not be taxed personally and will have no out-of-pocket expenses.

Example: You became a resident of Australia on 1st January 2000 and the transfer value of your UK pension fund at that time was £50,000.

The fund when transferred to Australia was worth £55,000. The fund grew by £5,000 and would be taxed at 15% (i.e. £5,000 x 15% = £750).

Only £750 tax would be deducted by the receiving superannuation fund.

There are special exemptions to this tax for newly arrived residents of Australia and also for temporary visa holders.

By transferring your UK pension funds to Australia all of your retirement benefits will be within the one country, and will be subject to only one set of pension and taxation rules.

You can withdraw your benefits tax free on retirement from age 60. Generally speaking, benefits paid from an Australian superannuation fund, either as a lump sum or as income, will be tax free for retirees aged 60 and over.

The tax free amount will include any UK pension benefits transferred to your Australian Superannuation fund.

This represents a significant incentive to transfer given the benefits would be treated as taxable income on withdrawal if retained in the UK.

There is no requirement to purchase an annuity.

Your funds can remain in the Super fund of your choice for as long as you choose. This allows for greater flexibility with your income, investment choices, and death benefits.

Any benefits remaining on death can be passed to your nominated beneficiaries. This represents a significant advantage over the UK, where the rules dictate that the benefits are lost once any surviving spouse has passed away.

Since April 2006, all transfers of UK pension funds to Australia must be approved by Her Majesty’s Revenue and Customs (HMRC) and be transferred to a Qualifying Recognised Overseas Pension Scheme (QROPS) in Australia. Failure to comply will result in a severe tax penalty of up to 55% deducted by the UK pension fund prior to the benefits being transferred to Australia.

A QROPS is basically an Australian superannuation fund that has been registered and approved by the HMRC to receive pension monies from the UK without penalty.

My Super is currently with a company called MTAA. They are not a QROPS. So I can not transfer the UK private pension monies to them.

I have found a company over here called Perpetual that are QROPS. There are a number of others.

I am about to open up a Perpetual account and start the process to move my UK Standard Life Stakeholder pension over here. I understand that the process can take up to 9 months.

Once the money is here I can then 6 months or so later, move the money from Perpetual into my MTAA fund, or any other fund of my choosing!

I just have to use a QROPS fund manager to get it out of the UK!

I know that I will lose 15% in tax on the amount my fund has grown since I left the UK 10 years ago. However I think that the 15% (and I will earn growth on the 85% balance) I will lose is much better than only getting my hands on 25% of the money if I left it in the UK, and then getting taxed on the 75% annuity income, and then losing the annuity to the thieving gits called UK pension companies.

If you wanted help in moving the monies there are companies that you can pay a fee to. Here is 1 example.

I hope the above is of help to some people to help them maximise their retirement funds.

Stickman's thoughts:

It's a confusing business, but this is a great submission that sheds a lot of light on it all.

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