Do you dream of retiring abroad?

Spain is the number one retirement destination for British people, as retiring abroad is still an ambition for many UK pensioners. France takes second place with Australia in third and Ireland fourth whilst Cyprus and the USA tie for fifth place.

So when you reach retirement, is it your hearts desire to jet off to warmer shores to while away the hours in your twilight years? With the lure of better weather, lower living costs and potentially cheaper property, it is a tempting thought to ‘up sticks’ and emigrate. But before jumping in at the deep end you need to consider the pros and cons of such a move. Some countries do not offer emigration routes for retirees. While British citizens should be able to live in any other EU country, they will need to show that they have sufficient financial resources to support themselves and not be dependent on the welfare state of that country. If you are still keen to make a move, here are a few useful points to bear in mind.

1 Firstly, do your homework on the cost of living, customs and way of life in the country you want to move to. This is not a two week holiday. Living in a foreign country is a big step to take and must

be thought through properly, as it can be a very expensive situation to unwind if you do not settle happily in your new home abroad.

2 Before leaving, get an estimate of your state pension if you are not receiving it already. Remember, if you are already getting your state pension, the value could be frozen, especially if you plan to live outside of the EU or the US. This means that you will not benefit from the same annual cost of living increases as pensioners living in the UK. For instance, if you retired to Canada ten years ago, your UK state pension would now be worth 42% less than if you had retired across the border in the US. Check what reciprocal agreements are in place regarding your UK pension and other social security benefits you may be claiming. Also check your welfare rights while abroad.

3 Notify HM Revenue and Customs that you are moving abroad, which will allow them to calculate any UK tax liability you may have even if you are living overseas. More importantly, this can allow any of your UK pensions to be paid gross (no tax deducted) so that tax can be deducted in your new country of

residence providing the country you will be living in has a double taxation agreement with the UK.

4 Do not assume that the country you will be moving to has similar tax rules to the UK. For example, in the UK there is no Inheritance Tax liability if a husband or wife dies and ownership of the house passes to the surviving spouse. However, this is not true in Spain where the widow or widower, could be faced with a significant tax bill when their partner dies. Inheritance Tax in Spain starts to become payable on an estate of €15,000. On a property with a value of approximately €120,000 there could be a tax liability of €10,000 and this must be paid within 6 months of the date of death.

5 Keep exchange rates under review when you are considering moving your financial assets abroad. You should start thinking about exchanging pounds early on in the process and it may be more prudent to move smaller amounts of money at a time. If you are moving larger sums of money, the exchange rate will have a huge bearing on your spending power in your new ‘home’ overseas. Your local high street bank is not really the place to go to for moving larger sums of money, as the best exchange rates are available through currency exchange specialists. It is important to secure a good rate so that your ‘nest egg’ is protected should there be any devaluation of the pound.

6 Check the cost of healthcare in the country you are planning to move to and consider some form of medical insurance, particularly in countries outside the EU.

7 If you decide to keep your property in the UK, you will need to let your mortgage provider and insurance company know if it will be rented, or remain empty.

8 Notify utility companies, financial institutions, your local council and electoral register when you are leaving and arrange for mail forwarding via the Post Office.

9 And finally, get some independent financial advice before you move.

O C T O B E R 2 0 1 3

‘Money’ to be taught in English schoolsFinancial Education has been confirmed as an official part of the English curriculum, including lessons on public finances, however, personal finance is already taught in schools in Wales, Scotland and Northern Ireland. The detail recently published by the Department of Education, includes financial education in mathematics and citizenship education for secondary school pupils. There have been further elements added since a draft curriculum earlier in the year opened to consultation, including lessons in how public money is raised and spent.

In Mathematics “financial mathematics” is emphasised for the first time and pupils will be asked to solve problems involving percentage change and simple interest, for example. Pupils will learn to manage their money and plan for future financial decisions in citizenship classes, which will also include lessons in financial products and how public money is raised through measures like income tax, according to the published curriculum. The curriculum will be rolled out across all government funded, or maintained, schools from September 2014. However, the national curriculum is only compulsory for about half of all schools, the rest being either academies, or due to be free schools that do not need to follow the curriculum, but hopefully they will choose to adopt it.

Financial Education is not due to start until September of next year but in the meantime iCHILD.co.uk the educational resource provider, has partnered with F&C Investments, to kick start the school year with a series of programmes and toolkits for parents and children about ‘Money’ and ‘Savings’, after research showed that children start to receive pocket money from around the age of 5. The F&C Superstar Programme offers a series of practical and useful tools for parents of younger children to help initiate financial conversations in an interesting and informal way from an early age. There are a range of activities aimed at different age groups for the under 5’s, 5-7 and 7-11 year olds. The programme is free and the worksheets can be downloaded including reward charts and matching stickers to chart your child’s progress. The topics are wide and varying and cover everything from the very basics of the different currency amounts of the coins and notes that we use, to savings, debit and credit cards, budgeting, buying online and the weekly shopping. As an example of the latter, it shows a picture of various shopping items and asks you to choose the cheapest way to buy the items. One option shows a Star Special offer of 2 cans of cola for £1.20, or you can buy 2 individual cans for 55p each. How many of us would just opt for the Special Offer without really looking at the detail!!

Annuities – The cost of delayAccording to a new report, annuity rates would have to improve by 6% to make a delay in purchasing your pension income worthwhile. Over the years many people have postponed taking their pension in the belief that the annuity rate they could achieve would improve the older they became. For years this was the case but with the impact of lower gilt yields, affects of quantitative easing, people generally living longer and the affects of Solvency II yet to be fully realised, there can be no guarantee that better rates will be achieved by delaying the purchase of an annuity.

Retirement specialists MGM Advantage, calculate that the ‘lost’ income as a result of delaying the purchase an annuity by two years could take anywhere between 37 and 41 years to recoup if annuity rates do not improve over the next few years. The report looked at whether it could pay to delay the annuity purchase in the hope that it would improve your chances of achieving a better rate in future years.

Andrew Tully, pensions technical director of MGM Advantage said, “We have seen annuity rates improve

over the first half of the year, from their historic lows in 2012, but the long-term outlook for rates is uncertain. It would take a betting man to take a punt on annuity rates improving by at least 6 per cent over the next couple of years to make any delay worthwhile. If rates improved by 6 per cent from today, it would be around 19 years into your annuity being set up for you to breakeven on your total income.”

If you are considering buying an annuity it is advisable not to accept the first offer made to you by your pension company and you should always shop around before making any decision. We at Birchwood are happy to assist with this and we can research the market to find the right type of annuity to suit your personal circumstances as well as achieving the best rate possible.

Pension Pot £25,000 £50,000 £100,000 £150,000 £200,000

Annual Pension Income at age 65 £1,456 £2,962 £5,870 £8,816 £11,767

Annual Pension Income at age 67 £1,531 £3,108 £6,192 £9,298 £12,412

Income lost from 2 year delay £2,912 £5,924 £11,740 £17,632 £23,534

Time taken to recoup lost pension income39 years at£75 a year

41 years at £146 a year

37 years at £322 a year

37 years at £482 a year

37 years at £645 a year

Matching the total income over an average retirement would require an increase in annuity rates at 67 of:

6% 6% 6% 6% 6%

MARKET REPORT

Financial markets, typified by a decline of 11.5% in the FTSE 100, fell heavily in reaction to the US Federal Reserve’s statement in May that outlined the conditions required for the tapering of quantitative easing. The falls prompted a further announcement from Chairman Ben Bernanke to assure investors that there was no set timetable for the withdrawal of liquidity and policy was still very much dependent on the strength of the economic recovery. This was enforced by the decision in September to continue with an $85bn monthly injection rather than a reduced $75bn as had been widely expected.

Equity markets recovered following Bernanke’s clarification and were further buoyed by the lack of tapering in September. The latter news pushed the S&P 500 to new all time highs with the US index returning over 22% year-to-date in dollar terms. There was also better news from China with the latest data suggesting a stabilisation in the world’s second largest economy and any fears of US intervention in the Syrian conflict were allayed by a deal to surrender the country’s chemical weapons.

Suggestions of a global economic recovery were echoed by improving data in the UK. The Office for National Statistics increased its estimate for growth in the second quarter to 0.7%, an acceleration from the 0.3% estimated for the first three months of the year. The official figures show a positive contribution from all areas of the economy. However, a review of

2008/09 revealed that the recession had hit harder than previously thought and even with the latest uplift UK GDP still stands 4% below the pre-Financial Crisis peak.

In his first meeting as Governor of the Bank of England, Mark Carney also employed forward guidance to direct markets by declaring that “the implied rise in the expected future path of the Bank rate was not warranted by recent developments in the domestic economy”. All members of the Monetary Policy Committee also voted against further quantitative easing at the meeting. This sets the tone for future monetary policy whereby any change in direction will need to be well signposted to avoid market turmoil.

Similarly, Ben Bernanke has now placed himself in a position to dictate the direction of global financial markets. Any tapering of the current $85bn per month programme will ratchet down stock prices should market expectation of economic growth fall short of that implied by Federal Reserve policy. However, the credibility of forward guidance is already being questioned following the Committees failure to reduce the level of current stimulus under their own rules, as happened in September, and could render this useless as a policy tool.

Accelerating economic growth and falling unemployment were interpreted as the main conditions under which the Federal Reserve would begin to taper. The US economy expanded at an annualised rate of 2.5% in the second quarter, more than double that of the first three months, and unemployment fell to 7.3%, its lowest level for almost five years. This, combined with some members of the Federal Open Market Committee calling for a reduction in stimulus, led to the consensus view that tapering would begin in the fourth quarter.

Economic output in the eurozone was ahead of expectations with aggregate growth of +0.3% in the second quarter signalling an end to the longest ever recession in the region. However, this remains a two tier recovery with GDP in the peripheral nations still falling. Whilst Germany (+0.7%) and France (+0.5%) contributed positively, Spain (-0.1%) and Italy (-0.2%) are still contracting with economic activity in Italy, the eurozone’s third largest economy, now 8% lower than in the last quarter of 2007. This prompted Standard & Poor’s to further downgrade the country’s credit rating to BBB, just two notches from non-investment grade.

Portugal surprised with growth of +1.1% in the second quarter, although government projections suggest that GDP will contract 2.3% during the year as the country is forced to meet the conditions of its €78bn bailout. The political will to continue with austerity measures will be tested after the resignation of two key government ministers in protest against the failure of policy to deliver economic growth. Following the precedent set by Greece, some softening of the conditions may be granted but the likely requirement for a second bailout next year would come with stricter controls attached.

As widely predicted, the Liberal Democratic Party and its junior coalition partner secured a comfortable majority in the parliament’s upper house elections in July. This was a vote of confidence in Prime Minister Shinzo Abe’s economic reforms introduced

following his emphatic victory in the lower house elections last year. It also ends six years of political deadlock, a period in which the upper house has been under the control of the opposition party, clearing the way for the ‘third arrow’ of ‘Abenomics’ targeting structural change.

The first and second arrows of massive monetary and fiscal stimulus have provided a kick start to the economy with annualised estimates for GDP of 4.1% and 3.8% in the first and second quarters respectively. This has not come without a cost as the national debt exceeded ¥1,000tn for the first time in August, confirming Japan as the most indebted nation in the world relative to GDP. This may bring forward planned tax increases to bolster government finances.

The award of the 2020 Olympic Games to Tokyo, a new government in Australia and better than expected export numbers in China all boosted Asian equity markets in September. The region has been suffering due to concerns that the Chinese economy is rapidly decelerating despite estimates for expansion of 7.5% this year. Poor trade figures, a slump in industrial activity and disappointing retail numbers have supported this view and forced the government to reverse measures designed to stem the growth in credit.

The Indian government has also backtracked on previous policy in an attempt to boost both economic growth and the rupee. GDP forecasts have been cut from 6.4% to 5.3% for the current fiscal year as the rupee hit a 20-year low versus the US dollar. It is unclear whether the removal of restrictions on foreign investment will bolster flows at a time when capital is retreating from emerging markets.

25 September 2013

GLOBAL REVIEW EUROPE

ASIA

JAPAN

UK

US

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The Treasury targets pension tax reliefThe Treasury has now set its sights on pension tax relief following an independent report’s findings that the current system is biased in favour of high earners.

Recently published analysis from the Pensions Policy Institute (PPI) indicates that there is “little evidence” the £35 billion a year spent on tax relief on pension contributions actually encourages pension saving among low and medium earners. The PPI says that pension tax relief is “poorly understood” by savers and favours higher rate taxpayers. The report examines a range of alternative pension tax regimes, including introducing a single rate of tax relief at 30% and capping the tax-free lump sum that you can take at retirement to £36,000.

In response to the report’s findings, a Treasury spokesman says “Pension tax relief is designed to

encourage and support saving for retirement and that is why we offer a generous level of tax relief on pension contributions and investment growth. However, the government understands that the cost of tax relief is rising and there is a legitimate public debate to be had about how the government can best support people to plan for their future. We therefore welcome the PPI’s report on tax relief for pension saving in the UK as part of a debate about the wider role for government in supporting saving for retirement.”

An ‘EET’ (Exempt-Exempt-Tax) pension tax system is currently employed by the UK, with contributions and investment growth exempt from tax and pension payments taxed at the individual’s marginal rate. Savers are also entitled to a tax-free lump sum of 25% of the pension fund at retirement.

The government has faced repeated calls, mostly from Labour, to review the pension tax regime due to concerns that the current system unfairly favours high earners.

However, the coalition government has already brought in a series of changes to the pension tax system and in 2011, the yearly cap on tax-free pension contributions was reduced from £255,000 to £50,000, while the lifetime allowance was lowered from £1.8m to £1.5m the following year.

In the 2012 December Autumn Statement, Chancellor George Osborne confirmed further reductions in pension tax incentives, with the annual allowance cut to £40,000 and the lifetime allowance reduced to £1.25m and these changes will be introduced in April 2014.

Workers in favour of auto enrolment

Over 90% of people who have joined a workplace pension under the auto-enrolment initiative are intending to stay in, according to new research.

The Department of Work & Pensions (DWP) revealed the figure on 8 August, as part of research carried out with the 50 biggest employers to join the automatic enrolment programme. The findings

also suggest that young people are leading the way in the savings revolution, with more under 30’s staying in a pension scheme than other age groups. The average opt-out rate in the study was 9%, with most individual employers reporting rates of between 5% and 15%.

The duty of enrolling workers into a qualifying workplace pension scheme started with the largest employers in October 2012 and will be extended to all employers by 2018. By then, it is expected that between 6 and 9 million people will be saving more into a pension or joining a scheme for the first time.

The workplace scheme an employer has to use to automatically enrol its workers needs to be a qualifying scheme, which means that it must meet certain government standards.

Employers need to choose a qualifying scheme, which meets certain minimum standards and can be either a defined benefit scheme or a defined contribution scheme. To qualify, minimum contribution must be made into the pension, or it must provide a minimum rate at which benefits will build up.

Options available to an employer when choosing their scheme are to:

• use an existing pension scheme if it qualifies

• amend an existing scheme to meet the qualifying criteria – employers with an existing scheme that does not meet the minimum qualifying criteria may decide to amend the scheme so that it qualifies

• set up a new pension scheme which meets the qualifying criteria and/or

• use NEST (National Employment Savings Trust) – any employer can choose to use NEST for some or all of their staff

• use a combination of these options for different areas of their workforce.

Regardless of the scheme an employer adopts, it must supply all the basic information about the scheme and how it works. However, only eligible workers will receive information such as: that they are going to be enrolled into a workplace pension and what that pension scheme is and the amount of contributions they will have to pay.