Time to modernise your pensions?

From time to time, you may decide to upgrade your possessions; why not modernise your pensions? Our computer software programs are upgraded automatically (even if we’re not quite sure why). We improve our homes, cars, golf clubs and wardrobe, but how many of us check our pensions to make sure we’re maximising opportunities and minimising potential threats?Here’s a series of questions that everyone with pension plans should ask themselves, followed by my 5-point plan to help ensure you are making the most of what is arguably the largest single investment you will ever make.

Pension matters

1. What is your current position? Do you know the approximate value of your pension plans? Where is your money invested? Are you invested in the appropriate currency for your individual situation?
2. Will your pensions deliver a life-long income in retirement? No one knows how long they will actually live, and as such, this issue can be difficult to estimate. Similarly, no one wants to run out of money at a time when it is most needed.
3. Is the structure of your pension plan right for you? Defined Benefit (DB) schemes are very different to Defined Contribution (DC) plans. Benefits can sometimes be difficult to assess; there are also many different types of DB and DC schemes to complicate matters further.
4. Are you maximising tax benefits? Most pension plans attract tax benefits; are you sure that your plans qualify, and have you checked potential future taxation if, for example, you opt to take the maximum tax-free lump sum now? What is the position of your descendants upon your demise?
5. A suitably experienced and knowledgeable financial adviser will help you modernise your pensions. If you have one, you should be reasonably up to date with the questions above. If not, your choice is to either conduct your own research on pension planning or, alternatively, consider appointing an adviser.

Whilst these issues are hugely important to those who live and work in the same country their entire lives, the situation for expats and internationally mobile workers is even more complicated. During my time working in the financial industry over the last 25 years, I have rarely come across individuals who are fully on top of all issues related to their pension and retirement position.

A 5-point plan to modernise your pensions

The following 5-point plan below (addressing the above questions) will give you some pointers and information about how, as an expat, you can modernise your pensions in order to make sure that they are maximising benefits.

1. Check your current situation. Your pension providers should send you regular updates and valuations for your plans. If not, contact them straight away and find out how they operate:

• You may be able to register for online access, which would give you 24/7 information.
• DB schemes are notoriously difficult to assess accurately. If you have any doubts, contact an adviser who has the necessary knowledge to ‘translate’.
• There are approximately 30,000 investment funds available globally. How many are open to you for investment? Suppose you are restricted to a limited list of funds managed by only one insurance company or organization. In that case, I’d say that you really need to give further consideration to the options open to you.
• If you intend to retire outside the country where your pensions are situated you will be using a second currency in terms of your expenditure; you might therefore consider QROPS and/or offshore Self Invested Personal Pensions (SIPPs).

2. Calculate your future situation. This is usually a job for a professional, but if you want to do it yourself, you need to:

• Make certain assumptions in terms of expected future investment returns and assess whether the funds you are invested in are likely to achieve those levels (this mainly applies to DC schemes).
• Consider possible methods of income drawdown available for each plan you hold.
• Ask for an estimate of your personal life expectancy and potential future taxation.
• For DB schemes, you should ask for information about the strength of the cover ratio (a calculation designed to assess the scheme’s ability to cover all future liabilities), the strength of the employer’s balance sheet and whether there are any mergers in the offing, the scheme’s record on benefit payment, death benefits and guarantees.

3. Make sure that you are in the structure that works best for you. This applies mainly to DB schemes, which offer valuable guarantees that should never be underestimated. If you work for a large successful international company and are in their DB scheme, you should probably stay in it. Your individual situation, however, may mean that there is a good case to transfer out. Transfer values at the moment are very generous. This is due to a number of factors:

• Many DB schemes are underfunded and represent a significant financial drag on a company’s resources
• Financial Directors dislike uncertainty with a passion; company contributions to DB schemes are impossible to estimate for any length of time in the future.
• Your life expectancy may be limited; as such, you might prefer to transfer to an environment where you can access more of your money within a shorter timeframe.

4. Check your tax position. The new UK pension freedoms offer significant flexibility for you to modernise your pensions. What some may not fully appreciate is that without careful planning, they may be lining up unnecessary tax problems either for themselves or their dependents:

• You should either have a closer look at this issue yourself or sit down with an adviser to run through a number of ‘what if’ scenarios.
• For those interested in QROPS, check Dual Tax Treaties and how they may affect your planning.
• What about local taxation?
• Check succession issues.

5. Find a good adviser. Most advisers will offer an initial consultation free of charge. You can then negotiate remuneration for jobs you’d like him/her to undertake on your behalf. Careful questioning will help you decide whether this adviser is the right one for you:

• How long has he/she been in the industry?
• Is any of that experience relevant to UK pensions?
• What qualifications does the adviser hold?
• A good adviser will assess your overall family and financial situation before making recommendations.

At the end of this process, you should be confident that your pension plans are fully upgraded and that you are well set up for the future. Please bear in mind that when you modernise your pensions, it is not a one-off assessment; you should be prepared to regularly update and adjust, particularly when your situation changes.[xyz-ihs snippet="QROPS-Form"]