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Personal Finance

MAJOR PENSIONCHANGES A WAKE-UP
CALL FOR EVERYONE

Colin Bloodworthof PPI Indonesia, has spent over 20 years inIndonesia If you have any questions on thisarticle or related topics you can contact him atcolin.bloodworth@ppi-advisory.com------IIn this year's spring budget
Chancellor George
Osborne stated the UK
government's intention todramatically reform theway in which membersof UK-registered defined
contribution pension
schemes could accesstheir savings. Up to now,savers are obliged to takean annuity upon retirement
and can access only 25% of
the value as a tax-free lumpsum. From 6 April 2015 it is
proposed that members will
be able to access the entire
amount subject to paying
tax at their marginal rate on
any amount above the taxfree allowance.
This would appear to be acomplete reversal of the previously
accepted wisdom of ensuring thatpensions would provide an income
for life and that pensioners would
therefore not become a burden

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to the state if their pensions ranout. The attitude the Chancellor
has taken is that the British public
are grown up and mature enoughto manage their retirement funds
without government inteference.
I would suggest the Chancellor
has little understanding of humannature or the temptation for people
who have never had an opportunity
to get their hands on a large sumof money.
If the proposals go ahead I
suspect that pension providers
will see a surge in requests fromindividuals at age 55 and over tofully withdraw the capital in theirpension funds, irrespective of the
30% or more they will have to
pay in tax. A massive drawdown
could also spell big trouble for thehundreds of pension schemes thatare already seriously underfundedin the UK. Some people willundoubtedly reinvest their money
wisely but a large number will
inevitably spend their windfall
irresponsibly and then turn tothe state for help when they aredestitute.
There is however a strong
argument for abandoning theannuity route. Since annuities arelinked to government bond rates
the income from annuities has
been miserably low for a numberof years. That, coupled to the factthat an annuity dies with the holder
and his spouse, has providedjustification to find a better option.
But that still leaves a stark choice
between having just a small
income for life or having more
now but nothing later. Then again,
one wonders to what extent thegovernment is licking its lips at thethought of the huge tax bonanza it
is going to collect from next April.
But who is going to pick up the tab
when millions of pensioners run
out of money? Future taxpayers?
Or perhaps no-one at all andpensioners will be left to their own
devices.

What about state pensior s?
There has been much fanfareabout the proposed flat-rate
pension in the order of GBP155
a week to be introduced in 2016.
But only a minority of pensioners
will qualify for the full amountaccording to recent reports in theBritish press. Anyone who has paidless than 35 years' contributions or
who was a member of a company

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scheme that contracted out ofpaying full contributions could findhimself receiving a much smaller
amount.
And there is unlikely to be any
respite for half a million UK
pensioners living in certain
countries including Indonesiawhose pensions will continue to befrozen at the level they received
when they left the UK. This would
be the perfect opportunity forthe government to bring thosepensioners in line but it seems
unlikely as successive governments
have shown little interest in theanomaly. One elderly lady inAustralia is reportedly receiving
six pounds a week even thoughshe, like many others, paid her
contributions to the state in full
during her working life. Fortunately
for her, the Australian government
has stepped in to help; the same istrue for cases in Canada. It should
be an embarrassment to the British
government but it seems not.
As far as Whitehall is concerned,
expatriates are out of sight andout of mind. A globally active
group, which has a branch in Bali,
has been fighting this injustice foryears but so far to no avail.

What about company
pensions and QROPS?
Once upon a time working people
could look forward to pensions
for life linked to their final salaries.
Such pensions were establishedin the days when life expectation
was much lower and returns on
stock market investments weremuch higher. Such pensions
are no longer sustainable andhave steadiliy been replaced bypensions where members sharethe market risk. It is impossible
therefore to predict what theeventual pension will be worth
until retirement time comes. Under
present rules the resulting lumpsum must be converted into anannuity. Under the proposed newrules the member will be free toeither convert to an annuity as
before or take as much of the lumpsum as he wishes, subject to ahefty tax on any amount above histax-free limit. Whether he takes thefull amount immediately or later
the tax will still apply.
Long term expatriates who

belong to UK company pension
schemes have for several years
been able to escape the shacklesof annuities by transferring theirholdings to an offshore OROPS(Oualififying recognised overseas
pension scheme). These schemes
will still impose limits on annual
drawdowns but those limits arebeing relaxed. Furthermore most .
schemes still have the attractionof allowing a 30% tax-free
drawdown as opposed to 25% in
the UK and perhaps above all an
ongoing tax rate which can be as
low as 2.5% per annum on future
withdrawals. A OROPS can also
mitigate tax liability on death. But
monitoring these schemes has
been a big headache for HMRC
and with the proposed pension
changes we may see the windowof opportunity for ORO PS closing.
The message is, if you belong to acompany scheme in the UK, lookat the options now before it is toolate.

What are the practical
implicationsfor all of us?
All the above may be of little
relevance to expatriates who have
no UK or home-based pensions.
In such cases it is critical to havealternative arrangements in place.
One of the most popular vehicles
for building up wealth over time
is a life company-linked savings orpension plan. These generally haveno restrictions and can be taken
as a lump sum or an income on
maturity with no tax deducted atsource (although gains are subject
to income tax depending on
country of residence at the time).
A downside is that they require
a commitment to the contractedperiod. Breach of the conditions
can be costly. Nevertheless they
do offer a disciplined means ofbuilding up savings.

What other alternatives
exist?
Any form of savings or investmentthat has retirement as an objective
may be considered as a form ofpension. Two of the favourites are:
•Portfolio Bonds. These are
vehicles provided by every
major life company and consistof an open platform which
can contain any number ofapproved funds (subject tominimum amounts) out of•

INDONES'a universe of thousands offunds. The portfolio can beestablished with a single
lump sum investment and cantopped up over time. 'Minibonds' are more economical
for investments below GBP
100,000.
Property. A good property inthe right location can provide
a regular income in retirement.
It does have its drawbacks inthat it may take a lot of yourtime to oversee. Managed
investment properties are analternative worth considering.
One company in the UK for
example offers purposebuilt apartments from only
GBP100,000 that require justa 30% deposit payable over
two years. A managementcompany then pays aguaranteed rental that covers
the mortgage. Once paid off
you have a property which
will have cost you, if all goesaccording to plan, just 30% of
the original price. From thenon you would have an incomefor life.
The risks of course of property
ownership must be considered
as well as those of financial
investments.

So which kind of pension is best?
If you are fortunate enough to haveone, the best pension is probably
one that is linked to your final
salary and indexed to inflation. But
such pensions are disappearing
fast.
Even with such a pension it is wise
to have several strings to your bow.
Expats should ideally have at leasta couple of regular savings plans
and a portfolio of stocks, bonds
and commodities together withproperty investments (apart fromthe family home) that can produce
a steady income. Plus of course
healthy cash reserves.

When should you startsaving for retirement?
The day you start working! Left it abit late? Better drop me a line.
Left it much too late? I'll be happy
to offer sympathy and a cup ofcoffee in Starbucks below myoffice!

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