What the recent political turmoil could mean for your UK Pension savings (and what you can do about it)

Dec

01

  • Your UK Pension Savings might not be working as hard as you think.
  • By holding pension savings in GBP, you could get caught out by fluctuating exchange rates.
  • You could save up to 47% tax in retirement by transferring your UK pensions to Australia.

No matter where you are in the world, if you follow the news, you’ll almost certainly be aware of the recent events miring UK politics.  Those of you who have already left the UK may feel a sense of vindication.  For those who are weighing up their options, the prospect of retirement overseas may now seem more appealing.  Thankfully, the appointment of a new Prime Minister has brought a degree of stability, although the UK and its economy faces a tough road ahead.

You may be wondering how events back home affect you. If you have already brought your pension savings over from the UK, it is unlikely they will.  If not, I would encourage you to read on. 

Home Bias

If you have an old personal or workplace pension in the UK, odds are it will be what’s known as a Defined Contribution (DC) arrangement.  This type of pension is normally invested in one or more funds and you might see its value go up and down between statements.  If the investments in the pension were chosen for you or are managed on your behalf, they will likely have a “home bias”.  This means a large portion may be invested in the UK, whether in Stocks and Shares, Property or Bonds.  When I was advising UK clients, it was not uncommon to see up to 40% of the value of their retirement savings invested this way.   

Diversification is key when it comes to investing over the long term.  Having a high concentration of your savings in a single country can expose them to risks that are specific to that country.  Your savings will be riding on the fortunes of a single economy and you may miss out on opportunities for growth in other parts of the world.  UK investments have historically delivered above average returns when compared to other regions.  In recent years, several factors including Brexit, Covid and the Ukraine Conflict have affected it more than some of its neighbours. 

Currency and exchange rates

If you plan to retire in Australia, your expenditure is likely going to be in dollars rather than pounds.  Regardless of the type of pension you have, there are risks associated with holding your retirement savings in a different currency.  September’s turmoil saw the value of the pound drop to historic lows against the dollar, with £1 buying only $1.65.   At the time of writing, two months later, things have improved and £1 will buy you $1.79 dollars, almost the same rate as it was 5 years ago.

To put this in context, if you had a UK pension and drew £10,000 from it now, it would buy you $17,900, if you drew in September, it would have bought you $16,500, almost 8% less!

This may be an extreme example but if you look more closely at how the pound has compared to the dollar during this period, there have been several large peaks and troughs, often over short spaces of time.  

British Pound to Australian Dollar, November 2017 to November 2022. Source Google Finance 28 November 2022.

Withdrawals from a UK pension can take weeks, making it hard to predict what exchange rate you might get.  If you need funds in a hurry, you may have no choice but to draw them when the rate is particularly poor, potentially losing money in the process.

Tax

As you may know, pensions are taxed differently in the UK and Australia.  In the UK, pension contributions benefit from a government top up, known as tax relief.  Once in retirement, some of what you draw is tax free and the rest is usually taxable as income.  In Australia, personal contributions are taxed at the concessionally low rate of 15% but once you reach your preservation age (usually 60), you can draw your savings tax free.

Depending on your circumstances, if you draw income or a lump sum from a UK pension while resident in Australia, the withdrawal may be subject to income tax.   The risk here is if you need to take a large lump sum from your UK Pension you could end up paying up to 47% tax on it.

By transferring your UK pension to Australia, you can access those savings tax free from your preservation age.  This means you will not only have benefitted from a top up from the UK Government on your contributions, but you will have avoided paying tax on the money you take out in Australia – the definition of having your cake and eating it.

If you have pensions in the UK and plan to retire in Australia, there are several reasons why you should consider a transfer.  Whether it’s right for you will depend on your aims and circumstances so it’s always best to take advice.  If you have an old pension in the UK and would like to understand your options, book a free consultation or call our Sydney office on +61 2 9248 0169, or our Head Office in Edinburgh on +44 131 600 0625.


Please remember that past performance is no guarantee of future returns. The value of any investment can go down as well as up and you may receive back less than the amount invested’ performance is not a guarantee of future performance.

The Author

Ranald Hall

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