Foreign Perspectives

Archive for the ‘Investment’ Category

Although most people give this little thought, it’s potentially going to have a major impact on your life in Australia, depending on how close you are to retirement and what arrangements you have put in place ahead of that move.

Final salary pensions (technically called defined benefit pensions) are going to stay in the UK, because they can’t be moved. In some cases, you can have your company pay the pension directly into an Australian bank account, but check the charges before you do that: some may make the payment via Swift which could cost you £25 or more each month in charges, plus charges to exchange the pounds to Australian dollars. Much better it to have it paid into a UK bank account and do the transferring to Australia yourself e.g. if you have an HSBC UK account, you can transfer this instantly for almost no charges to an HSBC Australia account. Final salary pensions will almost always get the increases that you’d have received if you still lived in the UK.

The UK State Pension can’t be moved to Australia but they can pay it directly into an Australian bank account. As above, I’d be more inclined to get it into a UK bank account and do the transfer myself as you know what the charges are going to be. This pension will not increase after you move to Australia so no more triple lock or indeed any increase at all. Worth noting is that Reform are talking about eliminating state benefits for immigrants and they appear to include the state pension in that, therefore it would be prudent to get any non-UK nationals moving with you British citizenship before you move, which currently costs about £1600, but given that it could lock in the entitlement to a UK state pension of £10,000/year or more that seems like a good investment.

Defined contribution pensions, private pensions, SIPPs, and similar pensions generally can be moved to Australia. However, there are limitations applied by both HMRC and their Australian counterpart. HMRC requires any pension to move to a QROPS compliant pension scheme which means in practice for Australia a Self Managed Superannuation Fund (SMSF). This is similar to the UK SIPP scheme but with a lot more administrative overheads and therefore a lot more cost: typically the setup and annual fees run to around A$2000 or so. You can’t use an off the shelf SMSF due to the HMRC regulations, notably that no member of the scheme can be less than 55 (so you can’t transfer the pension until you are at least 55) and you will need to have the SMSF administrator create a scheme meeting those regulations. The other big limitation is that you can’t transfer more than A$120000 (about £60000) per year and can only do this up to age 75, which may mean that your SIPP can’t be transferred in one go and it may not be possible to transfer a larger SIPP in full even over a number of years e.g. a £600000 SIPP would likely take more than 15 years to transfer (not 10 because it will, one hopes, grow in value as time goes on). One way to accelerate the transfer is to transfer, say, £60000/year into your SMSF and simply withdraw another £60000/year, taking the Australian income tax hit on that second £60000, and just put it into an Australian investment account.

Australian state pension is means tested in two ways. The income test means that you get the maximum pension if you’re single and have less than A$109/week (£50), A$170/week (£75) for a couple and is reduced by 50c/25c for each dollar above those amounts, reaching zero when you’ve more than A$1287 (£643) single, A$1967 (£983 for a couple. Given that the UK state pension is currently £230/week, you’re not going to get the maximum Australian pension under the income test. They also have an asset test, so a single homeowner can have up to A$321500 (£160750), A$481500 (£240750) for a couple to get the maximum, reducing to zero when you reach A$714500 (£357250) or A$1074500 (£537250). The asset limits include everything except the home you’re living in, so notably it includes pension schemes of all types. Last, but not least, you need to have been an Australian resident for at least ten years, unless you’re Australian (in which case, you could pop your claim in as soon as you’ve arrived). Unfortunately, the UK no longer has a social security agreement with Australia (it did up to March 2001) so no exemptions from the ten year limit.

ISAs aren’t transferable and there doesn’t seem to be any Australian equivalent unfortunately. You can retain your ISAs but since Australia doesn’t recognise ISAs, they will be taxable; you can’t add any more money to them once you leave the UK. Australian tax law means that capital gains are taxed differently depending on how long you have held the asset, so it may be simpler to move the holdings from your ISA to a dealing account in Australia when you move. T212 operates in Australia in much the same way as it does in the UK, aside from the lack of an ISA and you seem to be able to transfer from a T212 UK account to an Australian one; it seems to be a lot cheaper than local Australian brokers.

And that’s it for pensions. You will need to get an adviser to set up an SMSF for you and the main banks have partnerships with companies that can do that (National Australian Bank seems the best offering).

Copyright © 2004-2014 by Foreign Perspectives. All rights reserved.

Up until last year, the clear answer was with an increasing proportion of bonds as you approached retirement. However, that advice assumed that you would be buying an annuity on retirement therefore the rising proportion of bonds was aimed at stabilising your pension fund as you got closer to the point of purchasing the annuity.

All that changed last March when the chancellor announced that you would no longer be required to buy an annuity and could continue to manage your pension fund as you saw fit.

But, what does that mean in practice? Well, you don’t have the cliff-edge of an annuity purchase therefore you can carry on running the fund as you would have done ten or twenty years earlier. This means, that you can carry on largely in equities and, in principle, should let you have a rising income over the years that you are in retirement. On a related note, since the fund will go to your dependents, there isn’t the push to spend it all as there would otherwise have been and, of course, you wouldn’t want to run out of money either.

What you can do depends a lot on your circumstances and temperament. For example, if you’ve got the average pension fund of around £30,000 then you’re quite limited. That’s not really enough to allow you to take many risks and probably only really enough to act as a top-up to your old age pension which, in practical terms, means that you might well be best with an annuity. Move up to £300,000 (which a surprisingly large number of people will have) and it’s a whole different ball-game. For a start, that’s well above the minimum that a range of investment managers will take you on and it’s enough to allow you to move more into equities i.e. to take on a bit of risk.

What’s key though is to know what your attitude to investment risk is. Could you sleep at night if your pension fund dropped 30% for instance? Could you convince yourself that it wouldn’t matter if it did? (and it doesn’t – it’s the income that matters on a pension fund, not the capital value)

 Copyright © 2004-2014 by Foreign Perspectives. All rights reserved.

As from April 2015, those in the UK will have the option of taking full control of their own pension fund which is a fantastic freedom from the shackles of the insurance companies that up to now have controlled almost all pensions investments.

Although there are many people who invest their own private pensions just as they do with their ISAs, there is also the option of transferring one’s company scheme and investing that too. That’s a much bigger deal as one’s company pension is often much more substantial than one’s ISA although, up to now, that was not terribly relevant as you couldn’t take full control of it.

How much more substantial? Well, I recently calculated roughly how much it might be for a colleague and the numbers were quite staggering. Taking a simple example of someone who’d worked 40 years for this employer, earning £40,000 per year, the total value was aroud £450,000. More interesting, the pension that the employer was paying on that equated to around 4.75% (say £22,000).

So, in principle, if he were to take the £450,000 and could get 4.75% or more from the investments, he would do better than his company scheme. However, that’s not the full story. When he died the £22,000 would be reduced to £11,000 for his widow and when she died, the payments would stop. If he took the £450,000 and invested it himself, the pension income wouldn’t reduce when he died and in due course his kids would get to keep the £450,000 (or whatever it was then worth).

It looks like a better deal, and the only question is: would many people actually do that? Although it may seem crazy not to, the amounts of money involved are quite scary, after all you’re getting to manage an investment fund more than 10 times your salary and that’s probably a good deal more than most people are used to dealing with.

One way to get the confidence that you’d need to take the money is to run a dummy portfolio over the 5 or 10 years preceeding your retirement which should give you an idea of how well (or badly) you would be running the investments. That way, when the day comes, you’ll know whether or not you could do it. Whether you’d have the confidence to take the money and run it is, of course, quite another matter.Copyright © 2004-2014 by Foreign Perspectives. All rights reserved.

The changes in pensions announced in the recent UK budget were quite staggering in their scope and I suspect that it will be several years before the full implications of them dawn on most people.

Ignoring the minor, but quite significant, changes the biggie was that as from April 2015 your pensions savings effectively becomes a proper savings plan ie one where you can take the money out. Up to now, pensions often seemed to be an insurance company scam whereby you paid them money over your working life and when you retired they kept that money and paid you out an allowance from it. As of April 2015, so long as you are over pension age (usually 55), you can withdraw those savings.

That to me changes significantly how I consider my pension. Money put into it is no longer lost to some insurance company but is available to me just as my other savings are. One of the effects of that is that I’m much more willing to save money in the pension which can only be a good thing.

Another effect is that it somewhat muddies the waters as regards the difference in a pension and an ISA. In effect both are now fairly equivalent places to invest your money. With the pension, you get tax relief on the way in (ie put in £100 and it becomes £120 in the pension but income paid out is taxable) whereas with the ISA there’s no upfront tax relief but you don’t pay tax on any income paid out. This means that, for most people, a pension is a better savings vehicle as they are likely to be paying higher tax when working than when retired. Also, the limits are different with the pension being, largely, limited to your total income whereas the ISA is limited to £15,000 ie there’s, for most people, no practical limit on pension savings.

Combined with the new freedom, it would seem that it’s best to put your investments in a pension and your cash in an ISA.

A final point to note is that with pensions effectively becoming jumbo ISAs, there are likely to be a lot more investment companies offering them which, hopefully, will reduce the charges in due course.

What I suspect will throw many people is that all of a sudden their pension has become a, hopefully, large savings account. What you need to remember is the reason behind pensions which was always to create a large savings account which paid you an income for the rest of your days ie lifting the lot and spending it as soon as you retire could cause you considerable financial difficulty later on.Copyright © 2004-2014 by Foreign Perspectives. All rights reserved.

With the world economy falling apart around us this is one of those times where many people wish that they had invested in gold as, of course, with everything else falling gold is doing quite nicely as usual.

The key thing is to keep your savings and investments diversified and moreover to keep to a regular savings and investment programme. If you’re doing that, it shouldn’t really matter whether the price of gold is sitting around the $200 mark or if it’s sitting at the $900 mark since, as with all investments, it’s pretty much impossible to hit the bottom of the market when you’re buying and it’s equally difficult to hit the top when you’re selling. That said, the gold price is currently off the top achieved in May.

But if you’ve decided to buy some gold bullion for a rainy day, how do you go about it? In principle there are all kinds of investment schemes around these days which let you buy a share in a pile of gold and that’s a sensible way to go about it in that the costs are lower than they are if you some gold bars. However, that lower cost comes at a price, namely that you’re trusting that some intermediary actually has that piece of gold for you and that, should they go bankrupt, that you’ll be able to get your little piece of gold. Certainly these firms have all kinds of reassuring things to say about that but at the end of the day, to my mind, there’s nothing to beat having a lump of gold in your hand.

If you’re aiming at looking after the gold yourself it’s relatively easy to buy it these days by way of Bullion by Post who offer the usual range of investment sizes of gold bars. In terms of bars, the smallest that you can get is the one ounce bar which weighs in at around £600 these days (the price varies throughout the day) or you can get the one kilo bars that you see in photos of Fort Knox and the like for around £19000. The larger bars carry less of a premium over the spot price for gold (ie they are cheaper per ounce of gold) but unless your portfolio is really large the larger bars aren’t going to be terribly practical purchases for you.

One thing to bear in mind if you’re collecting these things in your house is the security and insurance aspect. Clearly if you are stockpiling gold in your house you’re building up a major asset and your insurance company would want to see it adequately protected. It’s possible to avoid this hassle by using a safety deposit box in your bank which will save on the insurance and you may be able to get it free too depending on your bank.Copyright © 2004-2014 by Foreign Perspectives. All rights reserved.