British expats offshore pensions amid poor annuity rates

British expats offshore pensions amid poor annuity rates
27 May 2012

WITH annuity rates at an historic low, British expatriates are increasingly transferring their pension to an overseas scheme.

At present, the majority of people still choose to exchange their pension savings for an annuity, which pays an income for life, at retirement.

However, annuity rates have been tumbling on the back of rising life expectancy and government moves to boost the economy. The process of quantitative easing has driven up the price of gilts and, conversely, pushed yields lower. As gilts are used to provide income for annuitants, it has forced rates on new annuities down.

The MGM Advantage Annuity Index, which tracks the income paid on enhanced and conventional annuities on a quarterly basis, reveals average conventional and enhanced rates fell by 0.45% and 2.48% respectively between December 2011 and March 2012. Overall, rates have fallen by 11.22% since June 2009, when the index was started.

Aston Goodey, sales and marketing director at MGM Advantage, says: “These findings will continue to put pressure on people approaching retirement. They are faced with the triple whammy of making their income go further as life expectancy improves, high inflation continues to erode their purchasing power, while annuity rates continue on a downward trend.”

Growing trend

Since April 2006, when qualifying recognised overseas pensions schemes (QROPS) were first established, more than £1.3 billion has been transferred out of the UK and into offshore pensions, according to figures from HM Revenue & Customs.

Financial advisory firm deVere Group says more and more expatriates are consider transferring their pensions to an overseas jurisdiction.

“Low annuity rates are, without question, prompting retirees to take their pensions out of the UK,” says chief executive Nigel Green.

“Annuity rates are at rock bottom and we believe that it’s highly improbable that they will rise anytime soon, meaning taking out an annuity is a significant risk.

“As they are linked to interest rates, which are plummeting, many who have opted for an annuity in recent times have found themselves with a smaller pension than they had hoped for.

“To avoid taking this risk of buying an annuity, an increasing number of those who can – those who live abroad – are moving their retirement funds into a QROPS.”

Big benefits

There are big benefits of switching to a QROPS – such as tax savings, inheritance tax planning and investment control.

In addition, with a QROPS, your pension is paid gross in the currency that you choose, meaning your retirement income is not at the mercy of fluctuating exchange rates.

Green says: “The ongoing volatility of the currency markets is encouraging more and more expats to find ways to get the most out of their pensions. In addition to the currency benefits, QROPS also offer major tax advantages and a greater range of investments options for expatriates.”

Seek advice

However, offshoring your pension isn’t a decision to be taken lightly – and professional advice is a must.

“What many [expats] don’t realise is that this type of scheme is not the only option and, in many cases (if not most), might not be the best route to take,” says Richard Taylor a chartered financial planner at Acuma Wealth Management.

QROPS can be expensive, and can also make it more complicated to take benefits if you return to the UK and reacquire resident status, so weigh up all your options.

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Freelance editor and journalist
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