80% increase in pension fund in last 5 years?

vistaman_2

How are transfer values of pension funds calculated?

I moved abroad in 2008 and requested a transfer valuation of my (final salary) pension fund from the (blue chip) company where I worked for 20 years.
My intention is to transfer all of the pot into a qualifying Australian scheme.

In 2007 the transfer fund was valued at £210k but the 2011 valuation is £410k. A substantial increase given the economic climate!


I left the company in 1995 my differed pension was £10500
It is indexed linked and so they said (in a letter in 2008) that I could expected to get around £16500k in 2018.


It raises the following question.
Can the transfer value of a final salary pension pot not actually relate to the a final salary, but instead be the actual value of all of my contributions PLUS the value of their growth?

OR

Is the transfer value of the pension pot simply a multiple of the final salary, factored for inflation and life expectancy? if it is why is the 2011 valuation so high?





Vistaman

oldvicar

Neither really.

The massive rise in transfer value is due to the masive decline in annuity yields.

Because your pension is guaranteed based on final salary plus inflation, it now costs nearly twice as much to buyan annuity that yields so much.

Life expectancy has had a bit to do with it. But the Bank of England's decisions to reduce Base Rates and indulge in creating an artificial market in Gilts through its QE programmes have been much bigger influences..

It shows the value (to the pensioner) of defined benefit (final salary) schemes where the employer takes all the risks, and illustrates how those with definined contribution (money purchase) pensions have lost nearly half the value of their potential pensions.

atush

TBH, given it is a FS scheme, I would not transfer it now. It you had transferred it back in 2007, it wouldn't be near what it is now. I would wait until just before retirement myself.

Cook_County

How have you been reporting this to date on your Australian tax returns? Is reporting a much bigger number going to give you tax problems?

JasX

Also bearing in mind the £ to australian dollar exchange rates are about as bad as they've been for quite sme years at the moment. In your position I'd be leaving a final salary scheme well alone.

You are guranteed your former employer will be payign 'whatever it costs' to deliver the agreed pension on retirement. Vs you wanting to take a heap of risks on exchange rates, investing in the current economic climate, spiralling cash cost of delivering pensions as reflected in ever worsening annuity rates.... ? not sure what the upside could possible be?

vistaman_2

Thank you for the replies.

Some more background.
Current UK tax rules would enable us to use the fund according to Oz super rules, 5 years after we arrived in oz. During this qualifying period then we would have to abide by the UK rules
However this qualifying period may be extended to 10 years in April which removes our ability.

There is a A$150k cap per annum on transferring pension funds into oz. However $450k can be transferred in a single transfer if no transfers have been made for three years. There are legal ways of holding parts of a pension transfer above this cap.

We would have to pay Oz tax in growth of the fund since we have been in Oz. ( I don't know how the Oz tax office figure out the 2008 value and there is no requirement to detail fund growth on a personal tax return)


Im learning that the transfer value could also go down! It is possible to transfer the fund into a qualifying UK sterling account scheme (that earns 0% interest).

My personal hunch is that the A$ will be high for at least three years.

So is it likely that the fund has seen the most significant growth or could it rise further?


The benefits of transfer to oz are ability to self manage with very low fees, draw on it immediately if we need it (rather than have to sell our £1.3M property in UK in a soft market).

I'm pondering if the 80% increase is worth banking and that if we put the money into self managed pension (blue chips and bonds) when the exchange rate improves and we will be far better off when the market turns in a few years, compared to leaving it in the fund where it could actually go down in value?


cheers

Vistaman

Cook_County

What are the Australian tax implications of your plan. Have you a legal opinion?

Andrew_Williams

vistaman wrote: »

Thank you for the replies.

Some more background.
Current UK tax rules would enable us to use the fund according to Oz super rules, 5 years after we arrived in oz. During this qualifying period then we would have to abide by the UK rules
However this qualifying period may be extended to 10 years in April which removes our ability.

There is a A$150k cap per annum on transferring pension funds into oz. However $450k can be transferred in a single transfer if no transfers have been made for three years. There are legal ways of holding parts of a pension transfer above this cap.

We would have to pay Oz tax in growth of the fund since we have been in Oz. ( I don't know how the Oz tax office figure out the 2008 value and there is no requirement to detail fund growth on a personal tax return)


Im learning that the transfer value could also go down! It is possible to transfer the fund into a qualifying UK sterling account scheme (that earns 0% interest).

My personal hunch is that the A$ will be high for at least three years.

So is it likely that the fund has seen the most significant growth or could it rise further?


The benefits of transfer to oz are ability to self manage with very low fees, draw on it immediately if we need it (rather than have to sell our £1.3M property in UK in a soft market).

I'm pondering if the 80% increase is worth banking and that if we put the money into self managed pension (blue chips and bonds) when the exchange rate improves and we will be far better off when the market turns in a few years, compared to leaving it in the fund where it could actually go down in value?


cheers

Vistaman

Hi Vistaman

In relation to how the ATO assess the increase in value, it is basically down to you to tell them, tax is self assessment.

Therefore as you have a historic value already this is the figure you could use.

However that said, it could well be worth asking the company themselves to calculate a historic value (at the date you became tax resident) based on the factors that they are currently using (they may charge you for this).

That way you are using like for like and should find the historic CETV comes in higher.

You can then do a private ruling to establish whether the ATO are happy with this.

If your company refuse to give a historic CETV you could use an Actuary to do this (happy to give you details of one that provides this service in Oz).

In relation to these legal ways of transferring more than the $450k (2 yr bring forward cap) are you referring to a reserve account within an SMSF?

The ability to transfer to a sterling account, is this also within an SMSF that you are referring to or is it through Pension Transfers Direct?

Lastly, you say about drawing an income immediately, if you are still witihin the 5 year rule you need to consider the UK limits.

You are right in that the value could change again in the future but also factor in the benefits of holding this money in the Oz Superannuation system as they could outweigh the final salary benefits especially due to the tax free nature of income after age 60 (some modelling should be done to give a rough idea of the return required).

Regards

Andy