Transfer deadlines: Do you need to race the clock?
In a world of ever increasing advertising noise, how often do we hear the words time is running out, act now? But what happens when there is a legitimate reason to move quickly? How do you decide what is sales spin and what is reality?
In the case of cross border financial advice, legislative risk (i.e. the governments changing the rules) is an ever present reality, especially as we are playing by the rules of multiple jurisdictions.
At bdhSterling, we view legislative risk as both a challenge and an opportunity, but we ultimately embrace it as our reality. Governments - regardless of jurisdiction - just cannot help themselves and will always keep changing the rules. We, as a practice, focus on always being on top of any legislation that pertains to our clients and make it a priority to ensure they’re aware of deadlines that could affect them and their financial wellbeing.
The last time we experienced an impending deadline that affected our clients was the pension ban that came into effect on 6 April 2015 when the UK government banned all transfers out of ‘unfunded’ government schemes such as the NHS. As the pension ban was not communicated to the members of these funds by the UK government (largely to stop a stampede of transfers out), we made an effort to speak to and educate as many people at the time of the deadline to outline their options. Even two years on, there is not a week that goes by when we don’t have someone contact us looking to transfer out of those funds, unaware that bans are now in place.
This year, we have another deadline looming and it will have a profound effect on some people. Once again, we recommend that everyone gets objective advice on their individual situation so they can make an informed decision on their options.
Firstly some background
In handing down its annual budget on 3 May 2016, the Australian government proposed a range of changes relating to superannuation. However, in the period post the announcement, there was public and political backlash against many of these measures and the government was forced to buckle and relent on some of the proposals, including those relating to superannuation.
In this blog piece I will focus only on those changes that affect UK pension transfers – those being the changes to the non-concessional contribution cap (NCC).
So what are these changes and who will they affect?
Prior to the Budget of 2016, the NCC rules stated that if you were under age 65 in the financial year of contribution, not only were you able to make a non-concessional contribution up to $180,000 p.a. but you were also able to ‘bring forward’ two additional years so that $540,000 in total could be contributed.
If you were over 65, you had to meet the work test in each year of contribution, but were denied the ability of the ‘bring forward’ provisions. As a UK Pension transfer is considered a non-concessional contribution, any UK pension transfer advice was subject to the NCC rules. It meant that any clients with balances over the cap needed a multi-transfer or phased transfer strategy over many years to get all their funds into superannuation.
Broadly speaking, the proposed budget changes introduced a ‘lifetime’ cap of $500,000 on any NCCs made since 2007, but also removed the work test requirement for anyone over age 65. This threw the transfer strategy of many clients into jeopardy. On the flipside, it did present an opportunity for anyone over 65 and not working to make contributions to superannuation each year.
The proposal was met with backlash as it was considered to negatively impact the average Australian’s efforts to save for retirement and as such, the government amended the proposal. While they reverted to the previous system of NCCs, with ‘bring forward’ provisions and work tests, they also decreased the NCC limit from 1 July 1 2017. From this date forward, you will only be able to contribute $100,000 p.a. as an NCC with a ‘bring forward’ provision of an extra two years (to total $300,000).
So why the rush?
There are two main reasons to act now:
- Decreased non-concessional contribution (NCC) caps
Decreased NCC Caps
Consider this scenario: You have worked all your life and saved an equivalent of $500,000 in your UK pension fund (assuming no applicable fund growth in the time since you became an Australian tax resident). If you don’t act prior to 1 July, and decide to transfer next financial year, then you are going to be subject to the decreased NCC limit and it will take you a minimum of four years to get your funds here, rather than one under the current system. If you turn 65 during the transfer period, and are not working – either due to retirement or ill health – then you won’t be able to transfer the remainder of your funds here at all. The remaining funds will be locked in the UK system; the income will be subject to tax in Australia; and the balance on your death may not pass on to your beneficiaries at all. Not a great outcome if you have made a decision to spend the rest of your life in Australia.
If you do decide to act now, you will need to receive written advice from a licensed UK adviser that a transfer of your UK pension funds to Australia is deemed in your best interests. From there, you will be able to transfer all of your pension funds over to your new homeland and benefit from the generous tax free status of retirement income streams in Australia, as well as being able to pass the majority of your funds to your beneficiaries.
With Article 50 now being voted on in the UK Upper House, we do not know what the future holds for the transfer of UK pension funds to Australia. This is an example of ongoing legislative risk and it is possible that one day, UK pension transfers to Australia could cease altogether.
In the meantime, while the intricacies of Brexit are being nutted out in the courts, you are still able to transfer your pension so it’s timely to seek professional advice.
So what’s the solution?
Breaking through the sales spin and talking in real terms, it is recommended that anyone who has a UK pension fund, regardless of value, should get advice now. Specifically the following groups of people:
- Anyone that has a UK pension fund, and who hasn’t had advice.
Even after engagement, a transfer can take several months – even longer for a QROPS SMSF. It is therefore essential to get an advice document now and make an informed on your options, taking advantage of the higher NCC before 1 July 2017.
- Anyone that has already received advice but hasn’t acted on the transfer.
As stated in point 1, any pension transfer takes time. It is important then that any transfer be completed prior to 1 July 2017. If you have already received advice, agreed to transfer but haven’t begun the process, then it is important to get it under way as soon as possible.
Concerned about transferring with a bad exchange rate?
Delaying a transfer due to exchange rate concerns is a thing of the past. It is true that years ago pension transfers had to occur in AUD, however it is possible to now transfer any UK pension fund to Australia in GBP, and invest it in GBP post transfer. You can then convert your transferred funds to AUD at a time when you are comfortable with the rate of exchange – but with the security of having your funds based in the same country in which you plan to retire.
Disclaimer: Simon Barwick is an Authorised Representative and bdhSterling Pty Ltd (ABN 65 169 977 413) is a Corporate Authorised Representative (No 462704) of Wealthsure Financial Services Pty Ltd.
General Advice Warning: This advice may not be suitable to you because it contains general advice that has not been tailored to your personal circumstances. Please seek personal financial advice prior to acting on this information.