Few current political issues attract as much controversy as immigration. Previously little known political parties have sprung up all over Europe voicing their concerns on the subject. Established parties are desperately trying to modify their policies to reflect the variety of public opinion, whilst the EU stands firm on the founding principle of freedom of movement. Perhaps the EU will decide to amend the current legislation; it remains to be seen how individual countries interpret any such changes. One thing is for sure though, people are on the move. And when people move they tend to want to take their possessions along with them. European migration also includes retirement abroad, and with retirement comes the desire to transfer one’s pension rights.
There’s nothing new in this, we’ve been on the move since time immemorial. Take a wide enough view of human migration over a long enough period of time and most of us will find that we were once immigrants ourselves. We don’t have to delve too deeply into history to discover that Royal families married into money, influence and power across the continent. If it’s good enough for them, surely it’s good enough for everyone else! EU freedom of movement legislation offers Europeans the right to work anywhere in the EU. Recent EU enlargement has added a new factor to the equation, with large numbers of people moving to countries where there is gainful employment; this is sometimes only on a seasonal basis.
People in, people out
The reality of EU migration, however, is that it is like a revolving door. People come and go and the demographics of individual countries change accordingly. If a given country attracts a lot of young workers, that country is likely to benefit through their tax and insurance contributions. Pressures may arise on housing and health services, but state pension systems benefit wherein today’s workers pay for today’s pensioners. This means governments can avoid the need for what would be extremely controversial cuts in countries where the population has an imbalance of older retired people. Many pensioners from the EU’s colder countries retire in warmer southern countries, again creating pressures on health services and housing. As a result, it is often a case of ‘people in and people out’ with each country having to balance its books accordingly. In my view, the winners in this scenario will be those countries who make the most of the freedoms and increase overall prosperity as a result.
The following link shows how many EU migrants live in each country: who lives where The statistics were compiled by Eurostat, the EU’s statistics branch. More than 300,000 British people now live in Spain and, apparently, 426 Austrians live in Portugal.
European migration and pensions: capital in, capital out?
Another founding principle of the EU is the freedom of movement of capital. Given that we now have a single currency in Europe and companies can trade without barriers across the continent, few if any restrictions should still exist. However, the freedom of movement of capital can be either an opportunity or a threat depending on the perspective. For citizens of the EU that take advantage of ‘open borders’ and work in several different countries, then retire to the one of their choice, there are still many barriers to the freedom of movement of capital.
We still do not have the freedom to choose whichever savings or investment plans we would like from a selection of all European providers, and we certainly are not allowed to create a logical and fully portable pension/retirement plan. Contrast that with the choice we now have with food, cars, consumer goods etc.
Back to perspective, it appears that most EU countries only look at the issue of the freedom of movement of capital from their own protectionist view. As an example, for those currently living in the Netherlands, there is little or no choice in terms of the organization of one’s financial affairs. It’s Dutch or nothing. If and when you leave, don’t expect to take your pension plan with you either. It never seems to occur to the politicians that leaving it in the Netherlands has almost no practical use to you; all that matters is that your hard-earned money stays in the Dutch economy. This is a significant problem that will become worse and worse unless something is done about it. Instead of creating optional legislation, it is high time that the EU grasped the nettle and made it compulsory for all EU countries to allow instant, cost-free movement of an individual’s pension capital. There may well be problems surrounding this approach, in particular those involving unfunded pension promises, but these issues are self-created by countries with this type of pension system; change is needed ASAP! Pensions need modernising and adapting to the real EU we live in today.
A shining light – the solution
The UK approach is to be applauded in this instance. Anyone who has a UK pension plan has the right to transfer it to a QROPS. Please click here for more information. This means that they can move their retirement capital into one plan which more effectively reflects their personal situation. This is important for numerous reasons:
- Currency – Sterling might be strong at the moment, but this won’t always be the case. No one wants their pension purchasing power reduced as a result of holding benefits in the wrong currency at the wrong time.
- Investment portfolio – There are in excess of 300,000 investment funds available globally. Why would anyone restrict their pension capital to only one or two funds managed by a single insurance company? It makes little sense.
- Local tax regulations – This is a particularly important issue when assessing matters relating to inheritance and succession taxation. In France for example, Assurance Vie investment products are very popular for retirees, as they offer investors significant tax breaks along with succession planning benefits.
- Freedom of how to take benefits –QROPS offer much greater freedom than traditional pension plans. More money can be taken tax-free, and income payments are not linked to compulsory annuity purchase.
- Ease of administration – Being able to aggregate all of your pension plans into one easy to understand environment is almost always better than holding several different plans with a variety of providers. EU take note; such a facility should be possible for all pension plans from every EU country without exception!
QROPS offer additional benefits depending on individual circumstances, however, the key issue is that people now have choices that were previously not afforded to them. We think nothing of modernising almost every part of our lives, so why not pensions also? It’s time to unblock the revolving door of capital movement. Indeed, certain countries may think they will lose out initially, but in time national systems will be adjusted and modernised and tomorrow’s EU migrant workers and retirees will thank us for it.
Phil Loughton (Axis Strategy Consultants)