I am soon to reach retirement age and when I do my plan is to move to the Murcia region of Spain, where I own a second home outright – I'm currently renting in the UK. When I retire my state pension will be complemented by my company pension plan, which has a current fund value of around £100,000. Savings-wise, I have around £40,000 in ISA accounts. Could you offer some guidance on my options for maximising my income when I move to Spain? Should I consider an annuity in the UK?
You have the option to take the benefits from your company pension in the UK, or transfer its value overseas and take benefits from there. Taking your benefits in the UK should be your first consideration. Twenty-five per cent of the value of the pension fund can normally be taken as tax-free cash and in most cases this is a good idea. If you seek a guaranteed income you should buy an annuity.
An annuity is a simple arrangement: in exchange for the remaining 75 per cent of your pension fund, the annuity provider will pay you a guaranteed income for your lifetime and for your spouse's life if you die first. You can shop around to see which annuity company might offer you the best income rate and this is best done using a specialist annuity company such as www.betterannuities.co.uk. Occasionally company pension schemes pay attractive annuity rates and you should check this with the administrators. You should also benefit from a higher annuity rate if you are a smoker or in poor health.
When choosing your annuity you need to factor in inflation. A level annuity will pay the same rate for your lifetime and over time this will gradually lose its spending power. An inflation linked annuity starts with a lower level of income initially, however increases annually to offset the effects of inflation. The downside of a UK annuity is your income will be paid in pounds and when converted to euros will be subject to currency fluctuation and the costs of conversion. To reduce the currency risk you could use a service that allows you to fix the rate of exchange in advance, normally for up to two years. Also choose a foreign currency service which will not charge a commission.
Note, your high street bank rarely offers the best deals.Transferring your pension overseas eliminates the risk of currency movements on the income payments. However, these types of transfers are expensive and complex. It is unlikely to be cost effective for the size of pension fund you have.
I'm self-employed and keen to start a personal pension plan. I've heard Self Invested Personal Pensions (SIPPs) are one way of doing this and come with highly advantageous tax benefits. I've also seen overseas property developments advertised as “SIPP approved”. Does this mean I can incorporate a property investment abroad into a SIPP? What are the pros and cons of doing this?
A Self Invested Personal Pension (SIPP) has the same tax benefits as any private pension. Contributions to the pension attract tax relief at the basic rate, meaning a £1,000 investment costs you just £800. Higher rate taxpayers can reclaim up to a further £200 in tax relief, reducing the net costs as low as £600. The fund grows almost free of tax and at retirement, at age 55 or over, 25 per cent of the value can be taken as tax free cash with the balance used to provide a taxable income.
Property purchase can work well in a SIPP but there are risks. You cannot buy residential property (overseas or otherwise) in a SIPP. Schemes that claim you can buy residential property are not working within the spirit of the rules and should, in my view, be avoided. Property purchases are usually UK-based commercial properties, such as offices or shops, where ultimately your pension income will depend on how the property performs as a rental investment. This works best when the properties in the scheme are your own business premises – you are the tenant paying rent to your pension fund rather than to a third party and your pension benefits from the increase in value.
Property transactions are expensive and in order to buy a commercial property you need to have sufficient money in the SIPP to make the purchase and cover the costs. A mortgage is possible under some circumstances but this cannot be for more than 50 per cent of the value of your pension fund. In the short term you may need to build up your pension savings before considering this route.
The vast majority of SIPP investors do not buy property in their pensions and are therefore more suited to a low cost SIPP where they can save from as little as £50 per month in the stock market or property funds.