Making the wrong pension transfer
decision when emigrating to
Australia could lose you money.
Knowing what to do with your pension when you emigrate to Australia can be one of the hardest decisions to make. However, read on for professional advice from Adam Roderick of pension and finance experts Prism Xpat:
Right, you are moving to Australia and there is a lot to do. It’s all finally going to happen now and you need to sort out the most important things first (jobs, schools, houses) and take short cuts wherever you can. Unfortunately, one shortcut many people take is to accept the apparently common view that UK pensions should just be moved to Australia without being given too much thought. In the current financial climate though, this is one shortcut you might just regret!
This current common view is almost a complete turnaround since just three years ago, when most people and advisers would not even consider giving up the valuable terms and conditions provided by UK employment pension funds.
A possible reason for this change of heart is Australia has recently dropped all superannuation (their word for pension funds) taxes after age 60. However, the retirement taxes weren't that high anyway, so a more likely reason is that many advisers (despite the Financial Service Authority's best efforts) still seem to operate a "salesy" approach to advice and get commissions only if their customer moves money (hence why many of them are still advocating a transfer regardless of the migrant's specific situation).
What do I need to know?
What migrants need to know is that there are important subtle factors with pensions that will have a significant effect on their final retirement income. For example, over a 25 year period just a 2% extra investment return each year, after tax, will mean 50% more retirement income to live off! That could mean enjoying $30,000 per year instead of just getting by on $20,000 per year for the rest of your life.
Did you know Australian superannuation funds have annual taxes on the investment returns within the fund each year? Or that Australian funds tend to have much higher annual charges than UK employer or stakeholder funds? You may have heard that even simple UK funds (money purchase funds) can have terms that provide a guaranteed income in retirement. These impacts can easily turn the tables on whether or not a cross border pension transfer is worthwhile. The list goes on and on...
What is my Critical Yield?
A Critical Yield tells you: "What investment return would my new fund need to earn between now and retirement, to be high enough to provide an income equal to what my employer’s fund will pay me?"
The Financial Services Authority suggests only high risk takers should consider a pension transfer unless the critical yield is under 7% per annum. By this, I mean that the mandatory "Transfer Value Analysis" that must be done would need to produce a result where you would only need 7% returns each year (or less) to buy an annuity equal to your final salary fund’s promise.
If you're interested in taking this route, then good luck but it is extremely rare that you’ll see critical yield calculations this low in the current market. Generally you’d need much higher returns to beat your final salary income.
What to do?
Despite all these examples, there are situations where it can be valuable to proceed. To avoid all the confusion you need to obtain top quality advice in analysing your pension scenario.
For more information on the key rules, including what happens if you miss Australia’s 6 month window for a tax free transfer, please use our online financial assessment or call +44 (0)845 450 4004.
- Prism Xpat is a trading style of Xpat Ltd which is authorised & regulated by the Financial Services Authority. They are a partner of Australian Visa Bureau, an independent company specialising in helping applicants emigrate to Australia.
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