When we compare pension schemes in the UK and Spain, it leads us as always to an analysis of how the transition to a ‘market-based’ approach to pension provision is being conducted. Like many countries, Spain has been going through a period of significant change in their pension system. The financial crisis of 2008 meant almost all EU countries had to address long-standing potential weaknesses in their economies, previously hidden by high growth and the apparent stability created by increased convergence within the Eurozone. Each country had their unique set of circumstances which lead to economic failure. In Spain’s case, the massive over-supply of property was exposed and changed the economy from a position of strength to one of weakness. When the property bubble burst the knock on effects ran through almost every aspect of life and created mass unemployment, negative growth and a lack of confidence in the economy.
Pension schemes in Spain
Spain’s pension system is paid for mainly from a payroll tax on salaries with those luckily enough to retire before the crisis enjoying significant benefits paid by the government. Employees pay 4.7% of their income and employers 23.6%. There is also a safety net for those on low incomes at retirement. This element is known as the non-contributory scheme and is available to those who haven’t been able to contribute or are disabled. The contributory scheme therefore forms the main source of retirement income for Spain’s almost 9m retirees and pays up to 81% of final salary.
The Spanish government is in the process of changing the system. It is almost certain that a lot more emphasis will eventually be put on personal provision. Normal retirement age has been increased to 67 from 65 and will be phased in between 2013 and 2027. The number of years’ service required to qualify for full benefits will also be increased from 15 to 25 and the age at which early retirement is allowed will change from 61 to 63.
Pension schemes in the UK
In the UK everyone qualifies for the ‘basic state pension’, with additional benefits depending on membership of company and/or personal plans. This means everyone is expected to make their own provisions for retirement, therein reducing the state’s role to a minimal one. Payroll taxes are lower in the UK than in Spain; as such the government is not expected to run an open cheque book system for future pensioners. The recent pension freedoms legislation has somewhat complicated the issue for UK retirees; many will require the services of a suitably authorised Independent Financial Adviser (IFA) to ensure their income and tax situation is optimised.
The transfer of Pensions from UK to Spain: QROPS
British retirees in Spain, along with other nationals who have pension benefits built up in the UK, can now benefit from recent EU pension legislation regarding QROPS (Qualifying Recognised Overseas Pension Schemes). As a result of these new rules, UK based pension assets held in either company or personal pension schemes can now be transferred to a more favourable environment overseas. Malta has adopted QROPS legislation in full and can provide a home for all pension assets, thus allowing individuals to keep all their plans in one place. QROPS also offer greater investment flexibility in terms of access to different currencies and markets. For expats in Spain, currency risk can be eliminated by converting their pension plan to Euros. A pension transfer to Spain may be the simple answer to many problems for retirees.