Should you transfer UK pension funds when the exchange rates are so low.
We received a request from a prospective client asking whether he could transfer his funds over to Australia at this time but retain them in Pounds Sterling rather than convert them to Aussie dollars due to the incredibly low exchange rate on offer just now.
This is a question that is being asked more and more as we see the value of the pound against the Aussie Dollar fall to what has to be the lowest level for many many years. The rate hit a low of 1 pound buys $1.48 Aussie over the weekend of 2nd 3rd July, 2011.
The answer to this dilemma has a number of aspects all of which are quite important but all of which are very different so we will try to address each aspect separately in this article.
If you do not need to transfer your funds immediately, and your fund value is not significant, and you think the exchange rate will improve within a reasonable time frame, then you probably should seriously consider holding off for a time but review that decision say every few weeks. Remember that if you have been in Australia for more than 6 months you will have to account for any fund growth since your date of permanent residency under section 305.70 of the Australian Tax Act.
Tax under that provision can be either your marginal rate of tax or at a flat 15% on the increased value of the funds since your date of residency.
Suffice to say that if your UK funds are increasing in value by say CPI then even allowing for say 15% tax on the growth when they are transferred will still give you a positive result, even if not that attractive.
If, on the other hand your circumstances are such that you do need to transfer the funds then a completely different set of questions and options arise that need to be considered.
Depending on the level of funds in question it may be possible to establish a Self Managed Superannuation fund (SMSF) in Australia, gain QROPS approval to that fund, and set up a foreign currency bank account within that fund to receive the transferred funds in Sterling. That will work but will take some time to establish, and the rate of interest you achieve on the Sterling account will be similar to that of a UK bank, 1 maybe 2 percentage points only. For many smaller pension funds this option is in relative terms an expensive option but on larger funds becomes very attractive indeed. A SMSF is the Australian equivalent of a UK Based SIPP.
There is now a fund in Australia that is QROPS approved that will accept funds in Pounds Sterling, however, it currently does not pay any interest on the funds received whilst held in Sterling. So, depending on the circumstances and expectations for the currency and rates of exchange, this may be an option if you anticipate that the exchange rates will improve fairly quickly. Having no fund earnings at all but still having fees debited to the account each monmth will be an acceptable option for a short time only but is no long term solution.
The other option available may involve moving the UK funds from one provider to another to lock in the benefits in Sterling but at the same time retaining them in the UK and therefore in Sterling to protect against the exchange rates on offer. This option can be a UK SIPP which includes an account that will allow the funds to be converted to Aussie dollars at any time. This is certainly an attractive option that allows you to manage the exchange rate you achieve in the process.
We do know that the changes announced last year on Pension funds and more recently the additional proposed changes to UK pension funds once again will place some downward pressure on UK fund values themselves quite apart from any exchange rates.
All of that said, the variables in each instance warrant a closer examination of the options in each case to determine what the best outcome will be.
To recap, the options become :
Leave the funds in the UK and accept the indexation or earnings paid on each fund. This will be taxable in Australia but is still a positive result.
Transfer the funds to an Australian scheme and convert at the market rate but then earn around 6% per annum on the funds with relative security and pay no tax on the drawings when converted to a pension.
Transfer the funds to a SMSF, for larger funds, and hold the funds in a currency account in sterling but earn very little by way of interest and eventually convert to Australian dollars when the exchange rate improves.
Transfer to an Australian Public offer superannuation fund which accepts transfers in Pounds Sterling but pays no interest on the monies whilst held in Sterling but still charges ongoing management fees from the balance each month.
Transfer the funds to a UK SIPP and convert to Aussie dollars at your discretion and then transfer in Aussie dollars when ready.
Clearly the matter is one of what is best for the client and what needs to happen.
There can be occasions when the decision is forced upon you by virtue of a restructure of your funds, an age barrier is about to be breached, or you just simply need to begin to draw a pension from the funds and if you leave them in the UK you will pay tax on the income whereas if you transfer they will be tax free.
The Australian superannuation laws are a little more flexible than the UK, however there are still rules that have to be adhered to in both countries and it is certainly no straight forward matter.
The overriding dilemma of course is, how long will the exchange rate remain at such low levels? The answer is “how long is a piece of string”
If we knew that we would all be multi millionaires and probably not working or worrying about transfers and exchange rates.
An interesting dilemma with many right answers.