Pension Management

As financial worries increasingly prompt Britons to attempt to review their finances and reduce their debts, one aspect that may be overlooked is the pension. With various surveys demonstrating the extent to which people are finding themselves having to cope with mounting credit card bills and loan payments, thoughts about saving for retirement could be pushed to the back of minds.Yet it could well be that the current economic problems highlight just how important careful financial planning is. This is certainly the view of the Association of British Insurers (ABI), which has produced a guide aimed at addressing the issues and concerns consumers may have.Simply entitled ‘People need pensions’, it intends to make just that point. The ABI observed that confidence is the most important factor in pulling through the recession, but investments and long term savings have taken a knock due to stock market falls.Director of consumer strategy at the organisation Maggie Craig explained that pensions remain an excellent prospect, particularly as savers can benefit from “free money” – both from the government and employers.”Saving for retirement is crucial both for individuals, as it helps to ensure they will have a more comfortable retirement, and for society, as it reduces the burden on future generations of taxpayers,” she remarked.And the importance of having a nest egg in place has been emphasised by a recent study by Help the Aged and Age Concern. Beginning early could be the key, as nearly half of those over the age of 50 told the charities that they are less confident their pension and savings will be enough to fund retirement than they were six months ago. The organisations also cited Office for National Statistics figures showing that the number of unemployed people in this group has risen nearly 50 per cent over the last year, which could mean even more people are relying on their investments.One provider that has recognised the need for investments to be made is Scottish Widows, which has announced the launch of two new multi-manager funds. Through these, customers are being offered the chance to see their money spread across a range of assets – including equities, commodities, bonds and property.This particular approach may not be to everyone’s liking, but the advice from various quarters does appear to be clear – consumers should not forget about pensions despite the economic problems currently taking hold around the world. To this end, Ms Craig stated: “In these difficult economic times, it is especially important that people make the right decisions about their finances, now and in the future.”

Changing jobs and bringing your pension with you can be awkward. You may change job for reasons such as career advancement, redundancy, travel etc. If each job has its own occupational pension Scheme, this can mean you end up at retirement with several pensions funds accumulated in lots of schemes. There are several problems with this:

One solution is a Personal Retirement Bond or Buy Out Bond. A Retirement Bond is a lump sum pension policy, chosen by you, into which an existing fund can be transferred from an Occupational Pension Scheme. You choose the fund manager and you choose the fund – from the various insurance companies. Self-directed Retirement Bonds are also available, although only really worthwhile where there is a large fund. Once the Trustee of the Occupational Pension Scheme has arranged for your fund to be transferred into your chosen Retirement Bond, you then have full control over your fund and the scheme Trustee has no further connection with it.

The process of transferring out the occupational pension fund into a retirement benefit is not difficult and transfers control to the pension holder. Check out our pensions page here and drop us a line and we can have a chat to you about your options. SmartQuotes.ie will deal with your previous employer and do all the work for you.

Please note that the above information is relevant to Irish residents only

Early projections indicate the City of Monroe likely will face a $1.5 million budget shortfall next year unless it can reduce costs and spending.City Manager George Brown says it will be “extremely difficult to make those adjustments without instituting further employee layoffs and service reductions.”That is why the city is reviewing possible alternative cost reductions, such as a pension plan administration proposal from the Michigan Employees Retirement System (MERS).The research still is in its early stages, but officials say rumors are flying around the city hall.”The city is only in the research phase of looking at the MERS system,” said Councilman Edward Paisley. “Any proposed change to the pension system would be subject to collective bargaining negotiations. The city will take any appropriate steps and do what is right before they jump and take any action. People want to jump to conclusions.”To quell some of the rumors, Mr. Brown drafted a letter that will be attached to retirees’ and employees’ paychecks. He said the city’s only motivation is to minimize personnel and public service reductions as much as possible.”If there appears to be advantages, we will ask council to hold informational meetings with city employees and retirees,” he said. “Any change in pension administration would have to be negotiated.”The city manager calls the financial crisis facing state and local government probably the greatest experienced since the Great Depression.”Because this crisis continues to deepen, the mayor and council have directed city staff to continue to explore and identify potential cost reductions and efficiencies, especially those that would help us to lessen the number of additional employee layoffs,” Mr. Brown said in his letter.”During budget work sessions early this year, I told the mayor and council that staff would explore several options, including services from outside vendors such as insurance and pension administration. Among other things, we have been exploring whether our health insurance and pension administration costs could be reduced while providing the same or better benefits, service and performance.”Monroe has a self-insurance plan. The city pays out the costs for prescriptions and doctor’s visits except for catastrophic claims, but the plan is administered by Blue Cross/Blue Shield.City officials recently reviewed proposals from health insurance providers/administrators and found there would be no cost benefit to change from Blue Cross/Blue Shield.”We are waiting for a pension plan administration proposal from the Michigan Employees Retirement System (MERS) so that we can review and analyze that potential option for pension administration,” Mr. Brown reported.He will report back to the council as soon as the preliminary research is concluded. Proposals, reports and other data regarding the analysis will be provided to city union representatives and will be made available to employees, retirees and the public.Mr. Brown said the process, which would require collective bargaining negotiations, would be somewhat time-consuming.Factors that will be considered include pension administration costs, investment performance, security of city pension funds, quality of service for employees and retirees and possible impact on the city’s bond rating.

A QROPS Pension Transfer is a transfer of a UK Pension, or a “frozen” UK pension into another HMRC approved pension scheme, in a jurisdiction outside of the UK. QROPS means Qualifying Overseas Recognised Pension Scheme, and is a fantastic option if you have left the UK or are planning to leave the UK within 12 months.

If you have the option and qualify for a QROPS Pension Transfer, it is something that you should definitely consider as the benefits far exceed the costs, and it is an easy way to increase the value of your estate.

The reason that a QROPS Pension Transfer is such an attractive option is due to the limitations and restrictions placed upon an existing UK Pension or “frozen” UK Pension. Most people have a minimal understanding of UK pensions, and as a result are ignorant of the limitations. Once they understand the limitations of their current pension scheme and how a QROPS works, it becomes apparent why 90% of people who qualify for a QROPS Pension Transfer, utilise the option.

Each existing scheme is limited both by UK Pension Regulations, as well as the specific regulations of the individual pension scheme. These regulations can be summarised as follows:

In 2006, the UK Government introduced QROPS Pension Transfer legislation. If you qualify, this allows you to transfer your UK Pension to another jurisdiction with greater flexibility and less restrictions. For the first five tax years (6 Apr to 5 Apr), the QROPS Trustees are required to report any withdrawals or contributions to the HMRC. However, after these 5 years, they are no longer required to report to the HMRC and you will now have effectively 100% control of your pension.

One of the most important considerations of a QROPS is the jurisdiction of the QROPS Pension Transfer. You need to ensure that it is safe, secure and has similar financial principles to the UK. Many individuals have moved their UK Pension to a jurisdiction such as Thailand or New Zealand, and have found that they have lost much of the value, due to a weak currency. Other jurisdictions have a higher tax charge, or even more restrictions than the UK. Thus, you need to carefully consider the jurisdiction that you want to transfer your UK Pension to, and this should be discussed with an adviser.

One of the most popular jurisdictions is Guernsey, due to their strong investor principles, established financial security, and the fact that they have worked closely with the HMRC to ensure a robust QROPS framework.

Guernsey was recently voted the top financial jurisdiction in the world, even ahead of the UK! If you do a QROPS transfer to Guernsey, you can keep your pension in a safe, neutral jurisdiction, in a currency of your choice. Thus, wherever you are in the world, or how often you may move, you know that your pension will be safe.

Who Qualifies for a QROPS Pension Transfer?

If you are between the age of 18 and 75, and are a non-UK tax resident, or are planning to leave the UK within the next 12 months, you can qualify for a QROPS Pension Transfer.

If you are a citizen of either Canada or the US, you will require specialist financial advice and will need to discuss this specifically with your financial adviser.

What are the Benefits of a QROPS Pension Transfer?

The benefits of a QROPS Pension Transfer are numerous, and depend upon the jurisdiction chosen. These benefits can be summarised as follows:

Thus, if you consider the benefits, as opposed to keeping your Pension in the UK, you can now understand why a QROPS is so popular.

What are the Costs of a QROPS Pension Transfer?

The costs of a QROPS Pension Transfer depend on the value of your UK Pension. If you consider costs as a percentage of the pension value, then the higher the pension value, the lower the costs.

Each specific QROPS scheme varies and has different costs and flexibility. Generally, costs are comprised of three components:

If you consider the benefits of a QROPS Pension Transfer, the costs should not be the consideration. However, there are many advisers who advise schemes with extortionate costs, that aren’t necessary. The key thing that you need to consider is the flexibility and restrictions of the QROPS scheme that you are transferring your UK Pension or “frozen” pension into. These restrictions depend on the jurisdiction, and we have found Guernsey to be the most favourable. Due to the fixed setup costs, it is generally advisable that pensions in excess of £25 000 be considered. If you have multiple pensions you can combine these to reach this figure, and if your value is a little less, you can make an additional contribution. Remember, that you will now have a tax-efficient, structure with diverse funds and flexibility that are generating a better return. This structure is a good savings vehicle and adding additional funds, would be putting those funds to good use.

How do I go about a QROPS Pension Transfer?

The process of a QROPS Pension Transfer is a lengthy one, and one that you can’t do by yourself. You will need to be in contact with an authorised provider.

The first step of the process is to obtain a Pension Valuation, and the specific details of your pension plan. To do this you can complete a very simple form that provides authority to obtain a valuation. This form is completely safe, as it does not authorise for any transfers, but merely authorises the pension company to provide the information. The Pension Company will respond to this within 90 days.

You can either get your financial adviser to do this (which is expensive), or you can utilise the services of http://QROPS-Pension-Transfer.co.uk. They will obtain this information on your behalf and provide it to you or an accredited financial adviser of your choice. They offer you two options:

Due to the fact that they are global and assist financial advisers around the world, they can also introduce you to an accredited financial adviser in your region/city, if you don’t already know one.

Once your adviser has this information, they can asses your specific situation and decide if it is in your best interests to utilise a QROPS Pension Transfer. If it is in your best interests, they will assist you to choose a jurisdiction, and setup the QROPS scheme/structure. Once this is complete, you can then discharge your existing pension and transfer the funds into the new structure.

90% of the time, it is in a client’s best interest to transfer their UK Pension or “frozen” UK Pension to a QROPS. However, some of the defined benefit, or final salary schemes were set with higher interest rates, and it may not be advisable to transfer in this instance. This however, is something you will need to discuss with your accredited financial adviser.

In Conclusion

If you have a UK Pension or “frozen” UK Pension and qualify for a QROPS Pension Transfer, it is important that you understand how it works, what are the pro’s and especially, what are some of the costs and restrictions. Most of this information is on the internet and if you spend a few evenings you should have a rudimentary knowledge. This article offers a high-level overview and is by no means comprehensive. Unfortunately, there are far too many sites with less information than this article on a QROPS Pension Transfer, and the only information they really provide is how to contact their adviser. The site that we mentioned above (QROPS Pension Transfer), that offers to obtain the information on your existing pension, also offers a wealth of knowledge, in an easy to understand and simple layout. They strive to be the most comprehensive QROPS Pension Transfer resource on the internet, and have either achieved this goal, or are extremely close. For those who have the time and inclination to delve further into a QROPS Pension Transfer, they have also offer a wealth of detailed information.

From 2012 all employers, including small businesses, will be compelled to make pension contributions – a bit of financial news that appears to have been overlooked, says Kent financial adviser Simon Ludden. Simon, financial planning manager at leading regional law firm Furley Page, said: “The Government is acting on the Pension Commission’s Report which told us what we already knew – that most people are not saving for retirement. For those who are, the majority of pension funds are below the level required at retirement, hence the mandatory contributions or soon to be introduced ‘personal accounts’. Employees will be able to opt out. “The intentions may be worthy but it’s a bitter pill for many employers – particularly those with a high turnover of staff – who will be struggling to come out of recession.” Individuals over 22 and under state retirement age will automatically be enrolled into the existing work-based pension schemes or if there isn’t one available, personal accounts which Simon describes as “cheap-to-run retirement schemes”. There will be one scheme for which companies will be invited to tender – in much the same way as the Lottery. Firms running occupational or group schemes will be allowed to retain them – providing the legal minimum contributions are maintained. Employees outside the stipulated age range will have the option to opt in and receive the same benefits as the other employees. The target contribution to the scheme will be eight per cent of basic band earnings (of which at least three per cent must be funded by the employer) – made up by an employer’s contribution of three per cent; an employee’s contribution of four per cent plus one per cent tax relief. Earnings on which these contributions apply should start at £5,000 with a maximum of £33,500 (calculated in 2006 and likely to increase). “On this basis all full-time workers – even those on the minimum wage – will be included,” says Simon. “The bandings should increase annually and employee contribution levels will be phased in over three years but the expected start date is October 2012.”

The Pension Protection Act, signed into law on August 17, 2006, is designed to address the nation-wide problem of under-funded pension plans. The law penalizes noncompliant companies and encourages employee contributions, but many of the changes directly impact taxpayers of all ages, regardless of retirement status.

“Taxpayers will benefit from many of the act’s provisions, some of which come in the form of tax breaks, but individuals cannot take full advantage of the tax breaks until the new laws are fully understood,” said Michael Smith, Managing Authorized Taxpayer Representative at tax services firm FSI Tax Corp. (www.fsitax.com).

The following is a rundown of the most important tax code changes and how they will likely affect taxpayers, as well as retirees.

1. Direct IRA Tax Return Deposits

Taxpayers can now have their tax returns deposited directly into their IRA accounts. The IRS already offers taxpayers the option to automatically deposit returns into checking and saving accounts. By adding IRA accounts, legislators hope taxpayers will contribute more funds toward their retirement accounts.

2. 529 College Savings Plans

Many temporary tax laws enacted by the 2001 tax cuts were made permanent by the Pension Protection Act. This includes the ability to make withdrawals from 529 college savings plans without suffering tax penalties.

“Tax-free college savings withdrawals may seem inappropriate in a pension law, but this provision is welcomed by parents who would otherwise resort to tapping their IRAs to fund their children’s education,” said Smith.

3. Saver’s Credit

Another 2001 tax break that was set to expire this year is the Saver’s Credit, a tax credit matching up to $2,000 for lower-income workers who put money into their retirement accounts. This tax break benefits workers who earn less than $25,000 because pre-tax contributions lower the taxpayer’s reportable income and the Saver’s Credit provides additional tax relief with its matching funds.

4. Increased Contribution Levels

In 2001, the IRS temporarily raised employee-sponsored retirement plan contribution levels from $2,000 to $4,000 this year, $5,000 in 2008 and then adjusted by inflation. The higher limits were set to expire in 2010, but the act made them a permanent increase.

This change, also intended to encourage increased contribution amounts, applies to 401(k)s, IRAs, 403(b)s, 457s and catch-up contributions for workers aged 50 and older.

5. Direct Rollovers from a 401(k) to a Roth IRA

Employees who move from one workplace to another were previously permitted to transfer their 401(k)s to traditional IRAs, both of which require taxes to be paid once money is withdrawn. Only then was the individual allowed to transfer the account into a Roth IRA.

The law now permits former employees to transfer their employer-funded retirement accounts directly into a Roth IRA, a popular option due to the fact that contributions are made after taxes are taken from earnings, which means that there are no taxes due upon withdrawing funds.

“The tax code changes enacted by the Pension law benefit taxpayers and steer them toward contributing to their own retirements,” explained Smith. “While companies should be held accountable for funding employee pensions, each taxpayer should take advantage of changes that make it easier to ensure a secure retirement.”

Tax Deductions for Charitable Giving

Non-pension-related tax code changes include several provisions that significantly increase charitable giving regulations, some of which are unlikely to please donors.

5. Documenting Items

To discourage taxpayers from inflating the value of non-monetary charitable donations for inflated tax deductions, the IRS now requires taxpayers to fill out a form detailing the gifts. Additionally, any significant household item, valued at more than $500, must be appraised before the taxpayer can take a deduction.

Many charitable organizations, including Goodwill Industries International, say the new provisions will guard against worthless donations more suitable for the trash bins, but critics argue that increased regulation will discourage would-be donors and cause a decrease in charitable giving.

6. Documenting Monetary Gifts

Monetary donations will also require documentation. Regardless of the amount, a taxpayer should retain proof of any donation. Appropriate documentation can be a bank record, canceled check, credit card statement or receipt from the charity.

“These records are not required to be included in the tax return but they should be kept on hand should the IRS request proof,” advised Smith.

7. Direct Donations from IRAs for Seniors

Another tax law that many charities support affects only seniors. For the next two years, donors 70 ½ or older will be able to donate to charities directly from their IRAs, an accommodation that keeps the donated amount tax-free and avoids tax penalties for early withdrawals.

This provision benefits eligible taxpayers who take the standard deduction, which many older filers do because they receive larger standard deductions. This can also benefit individuals facing donation limits. Generally, people cannot donate more that 50 percent of their incomes, but the money does not count as income when it comes directly from the IRA.

Officials at charities such as United Way claim that despite being temporary, this provision will likely bring in tens of millions of dollars.

Other Pension Provisions

8. Automatic 401(k) Sign Up

Employers are allowed to automatically sign up employees for a 401(k). This change encourages participation from people who may not otherwise bother to sign up for the plan in the first place, though they will have the option to opt out.

9. Investment Advice

Because employees often choose safer investments for their 401(k)s, which generally result in modest returns, the act allows them to receive investment planning advice to encourage riskier investments with the potential for higher returns. The act also provides protection against dishonest advisers who steer employees toward decisions that could increase their own profit.

10. Non-Spousal Benefits

Two provisions that expand allowable withdrawals are pleasing gay rights activists. The non-spousal rollover lets retirement account assets be transferred to a designated beneficiary upon the retiree’s death and the hardship distribution allows retirement account assets be used for a medical or financial emergency of a beneficiary other than a spouse or a dependent.

The majority of the Pension Protection Act aims to ensure that companies fully fund traditional pension plans over a seven-year period, starting in 2008. But many provisions promote increased individual employee participation in retirement planning.

Smith said that while the new law expands allowances and makes it easier for individuals to increase retirement savings, it may be a step toward employee-funded retirement plans – a move that has many critics concerned.

The World Bank estimates that diasporas remittances into their home countries economies have assumed a significant international capital flow into developing countries.

In most of these countries, including Sierra Leone, diasporas remittances constitute a greater percentage of individual and household incomes as compared to monthly salaries of workers and have far outpaced foreign direct investments in most national economies.

Most of these remittances however are channeled through informal and unregulated syndicates and normally are intended to cover the recipient’s basic needs in health care, education, housing, food and general up-keep of families.

The design of creative and innovative measures to utilize diasporas resources and remittances as development tools and instruments and at the same time providing a vehicle for participation in the country’s social security pension scheme is the focus of this proposal.

The participation of Sierra Leone’s diasporas in the country’s pension scheme, the NASSIT, would represent one such creative and out of the box thinking that management and the government must urgently explore.

For example, Sierra Leone diasporas participation in the NASSIT pension scheme could be achieved through a system of purchase of credits in foreign currencies. The credit purchases can be modeled on the concept of “Diaspora Bonds”; where countries raise financing from their overseas diasporas through a debt instrument.

However, unlike a debt instrument, the sale of credits into the NASSIT pension scheme allows diasporas to participate in the nation’s social security system with benefits inuring to both the diaspora participant and the NASSIT.

In the case of the diasporas it ensures:

In the case of the country and NASSIT, it provides: