The importance of focusing on the big retirement picture

In photography, as well as financial planning, you have to get the whole picture to make sense of it all.

Bill Davey with the fake Russian soldier, in front of the
Brandenberg Gate WITHOUT the bronze horses on top
Credit: Bill Davey
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Readers of this column over the past few months will be aware of my new approach to stimulating interest in the normally turgid subject of financial planning.

Essentially, I go on holiday, tell a few amusing stories and hope that it leads naturally to a subject that is vaguely related to investment or personal finance.

The reader is sucked in by exotic tales of travel and when I get his interest, I hit him with some mind-numbing subject, such as the UK government's recent legislation to change the obligation of pension members to buy an annuity by the age of 75: will this be the end of the Qualifying Recognised Overseas Pension Schemes (QROPS)?

This approach was developed in the summer, when I was dude-ranching in Montana, and reached unparalleled heights two weeks ago, when I attempted to maintain reader interest with a column on how to calculate a percentage growth rate. (Surprisingly, this generated more reader response than usual.)

This week's subject is especially strong on the less-riveting qualities of financial planning, so I felt obliged to travel to a location that would give me maximum stimulation: Berlin.

And what a good choice it was. It is a vibrant, efficient city of delightful cafes and restaurants and has a strong sense of being at the centre of 20th-century historical events.

Checkpoint Charlie was an especially emotive spot, where many East Berliners lost their lives in their dash for freedom and where the late US president John F Kennedy and Soviet premier Nikita Krushchev played out their power struggles with brinkmanship and tank stand-off tactics.

Inspiration for my writing came not from these emotive subjects, but from my wife's attempts to photograph me at the Brandenberg Gate while standing next to a man in a Russian army uniform, whose friendship had cost me €1 (Dh5.02).

Knowing her tendency to dip the camera down to shoe level, I cried out the advice: "Be sure to get the horses in." And instead of panning upwards to get the bronze ones on top, she panned sideways to get ones that she claimed were in the crowd. Whoever heard of tourist horses?

Consequently, my proud moment with a fake Russian soldier in front of the Brandenberg Gate is recorded without the famous bronze horses on top.

And the point is, in photography as well as in financial planning, you have to get the whole picture to make sense of it all. Yes, in April next year, the UK government will scrap the obligation for pensioners to take an annuity in a pension scheme by the age of 75 (and, as an interim measure, the maximum age is immediately raised to 77).

But this will probably not reduce the interest among investors in wanting to transfer their pensions to overseas locations. It is true that in transferring your UK pension to a QROPS, there will now be no advantage in avoiding the need to buy an annuity. However, the other benefits, which are significant, will still remain.

If you are transferring out of a defined benefit, or final salary, scheme, then the trustees are obliged to prepare a transfer value-analysis system report that estimates the investment growth rate at which the new scheme must grow to provide the same benefits as the old one.

This type of report is useful when transferring from one plan to another in the UK, but fails seriously to value the full range of benefits when transferring to an overseas scheme, such as a QROPS.

To qualify for a QROPS, you must have a UK-funded pension scheme. Most importantly, you must have been, or intend to be, overseas for a minimum period of five years. Ideally, you should also expect to remain overseas for many more years, but this is not necessary. If you meet these requirements, your transferred pension will attract the following benefits:

Ÿ Retirement income will be subject to tax at the rate imposed by the new country in which your pension is domiciled. In Guernsey, this is zero. If left in the UK, it will be charged at your marginal income tax rate, even if you are living overseas at the time;

Ÿ You can invest your pension assets to meet your own specific requirements and, importantly, your own attitude to risk. If, for example, you choose to retire in Spain, then you can give your investments a euro flavour. If left in the UK, funds will be invested to suit the needs of the pound sterling investor;

Ÿ When you die, the remaining money invested in your QROPS will pass to your beneficiaries with no liability to UK inheritance tax. Inheritance tax on UK pension schemes can be as high as 82 per cent;

Ÿ There is no limit on the level of contributions or limits on the size of the funds. In fact, new legislation in the UK will reduce maximum lifetime pension contributions to £1.5 million (Dh8.87m).

Although QROPS are especially beneficial to many people who are contemplating overseas retirement, they are not appropriate for everyone. Of special concern is the high cost (typically, they will cost about £300 per year to £1,000 per year to administer, although I have seen some that are even higher). And it is very important to choose a highly regulated domicile that is fully approved by HMRC. Currently, Guernsey is probably the best.

Bill Davey is a financial adviser at Mondial-Financial Partners Dubai. If you have any questions about this column or any other financial matter, contact him at