Blevins Franks Financial Tips - How Does Inflation Impact Your Retirement Savings?

With inflation surging in both the EU and the UK, now is the time to review your savings and investments to establish if they are suitably structured to provide protection from this threat. Even low levels of inflation can erode your spending power over time and retirees need to plan for this.  

“Inflation is when you pay fifteen dollars for the ten-dollar haircut you used to get for five dollars when you had hair”. 

This quote by American author and humorist Sam Ewing may make you smile, but it is a good example of the impact of inflation over the passage of time and underlines a serious threat to our long-term financial security.

Ronald Reagan used a more hard-hitting description: 
“Inflation is as violent as a mugger, as frightening as an armed robber and as deadly as a hit man”.  

Many people do not realise how damaging inflation is to their wealth over the longer term; it is easy to become complacent after years of low levels. But it is surging in many countries, causing concern among savers and retirees. In fact, you should always take inflation seriously as even low levels impact your wealth and retirement income over time – you may not notice the effects each year until it is too late.  

The impact of inflation 

You cannot just consider inflation rates on their own, you need to compare them to your earnings. If your savings generate a lower return than inflation, the real value of your money is falling and your income will buy less than it used to. 

Put very simply, and ignoring the impact of compounding, if your bank account pays 1% interest but inflation is 2%, after 10 years you will have 10% more money, but the goods and services you purchase will cost 20% more. In real terms you’ll effectively be 10% poorer.  The more time passes, the more damaging it is. 

Official Consumer Price Index (CPI) figures are based on a basket of goods containing a representative selection of items for people across all ages and incomes. It rarely reflects our own personal inflation rate.  As an illustration, a personal annual rate of 4% would reduce the spending power of 100,000 (Euros or Pounds) to around 67,000 after 10 years.  After 20 years it will have lost around 55% of its value and after 30 years your 100,000 would have the purchasing power of around 30,000 today.  

Inflation in Eurozone and France 

Across the Eurozone, the annual inflation rate reached a record 5.0% in December 2021, up from 4.9% in November. A year earlier, the rate was -0.3%. For the EU as a whole it was 5.3%.  The highest contribution to the annual euro area inflation rate came from energy, followed by services, non-energy industrial goods and food, alcohol & tobacco.

France tends to have lower inflation than the EU average and was 3.4% in December 2021.  A year previously it was 0%, but it first hit over 2% in August and has been slowly climbing since, with its Harmonised Index of Consumer Prices reaching 3.4% in November 2021 and maintaining the same rate in December. 

The biggest culprits were energy and petroleum products, but food prices have also seen a sharp increase year on year. 

UK inflation

In the UK CPI reached 5.4% in December 2021, the highest rate for almost 30 years. A year previously it was 0.3%.

In comparison, the Bank of England’s main interest rate was just 0.25% in December, an increase from November’s 0.1%.  It has been below 1% since March 2009.

Will inflation remain high?

Many of the factors behind the current surge are related to the pandemic and expected to be temporary. 

As economies opened unevenly after lockdowns, companies have been struggling to keep up with rapidly rising demand as they rebuild their supply chains.  Shortages of many goods like computer chips and building materials have pushed prices up. 

In addition, electricity prices rose sharply, hitting us both directly and indirectly as businesses pass on costs to customers. 

The Bank of England expects inflation could reach about 6% by spring 2022, but then start to come down. It warns, however, that some prices may remain higher than in the past. 

The European Central Bank also expects inflation to reduce over 2022 as supply gradually catches up with demand, but warns that as the pandemic is unprecedented in modern times this recovery may be different.

One particular uncertainty is wages. Prices and wages influence each other - if wages rise to compensate for higher costs of living, companies may recoup this expense by putting their prices up, so this an area to watch.

Protecting your retirement savings

Hopefully inflation will soon fall back to comfortable levels but, as mentioned earlier, even low levels will affect you by eroding your spending power year after year.  You always need to plan to protect your savings from inflation.

To generate returns that outstrip inflation, you need to invest in assets that historically generate returns in excess of inflation over time. Reduce risk to your capital by working with a wealth management adviser to follow a disciplined investment process:

·      Establish your goals and time horizon.

·      Determine your attitude to risk – your adviser should take you through a suitability process to calculate this objectively.

·      Construct a suitable, well-diversified portfolio to achieve your investment plan and objectives. 

·      Use quality investment managers.

·      Review your portfolio annually to keep it on track.

·      Be patient and stick with your plan – it is time in the market, not timing the market, that is likely to help you achieve your longer-term goals.

If you already have investments but without a carefully designed strategy tailored to your particular situation and appetite for risk, or have not reviewed them recently, look at your financial affairs to confirm if they are suitably structured to provide protection from potential future threats like inflation and taxation.

You need a tax informed investment strategy with the potential to provide capital growth higher than inflation and where your money is legitimately protected from unnecessary taxation. This can be achieved with a diversified investment portfolio, based on your objectives, circumstances and risk profile, held within a tax-efficient arrangement which is compliant in France.

CPI data is based on figures available on 20 January 2022. All advice received from Blevins Franks is personalised and provided in writing. This article, however, should not be construed as providing any personalised taxation or investment advice.

You can find other financial advisory articles by visiting our website here

UK Pension Benefits - the Lifetime Allowance Limits Explained by Blevins Franks - Wealth Management Advisors

Will your pensions get caught in the lifetime allowance trap? 

By Rob Kay, Senior Partner, Blevins Franks   

If you have several UK pensions, have been saving for many years or have a generous company pension, you could be at greater risk of 25% or 55% tax penalties following recent measures.

One key outcome of the 2021 UK Budget was that the pensions lifetime allowance (LTA) was frozen at its current level for at least the next five years. This measure alone is estimated to net the Treasury approximately £990 million by 2026, pushing an extra 10,000 people over the threshold. With LTA tax penalties as high as 55%, make sure you are not caught unprepared.

What is the lifetime allowance?

Since 2006, the UK government has capped how much you can hold in combined pension benefits without paying extra tax. Originally £1.5 million, the LTA peaked in 2011 at £1.8 million before gradually dropping to £1 million in 2016. Tracking inflation since then, the March 2021 Budget cancelled this year’s scheduled increase, freezing the LTA at its current level of £1,073,100 until at least 2026. 

Who is affected by the LTA?

While the current lifetime allowance of £1,073,100 sounds high, it does not just capture the ultra-wealthy. 

All UK pension benefits outside the State Pension are counted, including everything accumulated over a working lifetime. After decades of pension contributions, compounding interest, investment growth and tax relief, the limit may be closer than you think. 

For ‘final salary’ (defined benefit) pension schemes, the usual measure of value is 20x the annual income due. Generally this will mean those with pensions worth £53,655+ a year would be affected today. 

What are the LTA penalties? 

Once total pension funds exceed the allowance limit, extra tax is payable whenever you access your money – technically called a ‘benefit crystallisation event’. How much you pay depends on the way funds are withdrawn – rates are 55% for lump sums and 25% for income or transfers to an overseas pension. So at best, the cost of being over can be a quarter of your funds, at worst: over half. Note that this is on top of any other tax payable. 

Being non-UK resident offers no protection. Usually, under the double tax agreement, residents of France are not liable for UK taxes on British pensions (except government service pensions). However, for anyone over the allowance, these rules do not apply – the LTA tax is applied in the UK first and cannot be claimed back. 

How can you check your LTA position?

Calculating how much of your allowance you have used is not always straightforward, especially for final salary pensions, so check your position with your provider or pension adviser.

HM Revenue & Customs (HMRC) will first test your allowance status when you start drawing your pension, then every time you access funds and when you turn 75. If you die before 75, any lump sums paid to your beneficiaries will also be subject to the LTA test and subsequent tax penalties. 

How can you protect your pensions?

While it is possible to obtain ‘protection’ from HMRC to secure a higher limit, be aware that strict conditions apply, so take guidance.

Expatriates have the option of transferring UK pension funds to a Qualifying Recognised Overseas Pension Scheme (QROPS). If you transfer one or more UK pensions into a QROPS and your total benefits are under £1.073 million, you will not face LTA taxes on the transfer. However, make sure the QROPS is within the European Economic Area (EEA), otherwise you would still lose 25% through the ‘overseas transfer charge’. 

Once in a QROPS, funds are out of reach of LTA penalties, no matter how much you have or how you access it. A suitable QROPS can also provide tax-efficiency, currency flexibility and estate planning benefits. 

An alternative option is to explore taking your UK pension as cash and reinvesting it into a tax-efficient French-compliant arrangement. Again, this can unlock other benefits not usually available with UK pensions.

Reviewing your options 

Before making any major pension decisions, it is crucial to take regulated, personalised advice to avoid pension scams and determine the most suitable approach for you.

What if you are already over the limit? While you would trigger an immediate 25% LTA charge on a QROPS transfer, the funds become immune to further penalties. If you instead transferred to a UK scheme, like a Self-Invested Personal Pension (SIPP), you would not trigger immediate taxation but the funds would remain liable – with future charges increasing as funds grew. The 25% or 55% LTA penalties would then become payable whenever you take benefits and also apply to any heirs inheriting the pension.

If you are close to the threshold, consider acting sooner rather than later. Your pension funds should continue to grow while the lifetime allowance remains frozen, so you could potentially avoid unnecessary taxation by taking steps now.

Even if your pension benefits are within the allowance or you are not yet ready to access them, it is a good idea to review your situation. A regulated adviser with cross-border experience can help you explore your options and take advantage of tax-efficient opportunities to help secure a comfortable retirement in France.

Tax rates, scope and reliefs may change. Any statements concerning taxation are based upon our understanding of current taxation laws and practices which are subject to change. Tax information has been summarised; individuals should seek personalised advice. 

Blevins Franks Group is represented in France by the following companies:  Blevins Franks Wealth Management Limited (BFWML) and Blevins Franks France SASU (BFF). BFWML is authorised and regulated by the Malta Financial Services Authority, registered number C 92917. Authorised to conduct investment services under the Investment Services Act and authorised to carry out insurance intermediary activities under the Insurance Distribution Act. Where advice is provided outside of Malta via the Insurance Distribution Directive or the Markets in Financial Instruments Directive II, the applicable regulatory system differs in some respects from that of Malta. BFWML also provides taxation advice; its tax advisers are fully qualified tax specialists.  Blevins Franks France SASU (BFF), is registered with ORIAS, registered number 07 027 475, and authorised as ‘Conseil en Investissements Financiers’ and ‘Courtiers d’Assurance’ Category B (register can be consulted on www.orias.fr). Member of ANACOFI-CIF. BFF’s registered office: 1 rue Pablo Neruda, 33140 Villenave d’Ornon – RCS BX 498 800 465 APE 6622Z.  Garantie Financière et Assurance de Responsabilité Civile Professionnelle conformes aux articles L 541-3 du Code Monétaire et Financier and L512-6 and 512-7 du Code des Assurances (assureur MMA). Blevins Franks Trustees Limited is authorised and regulated by the Malta Financial Services Authority for the administration of retirement schemes. This promotion has been approved and issued by BFWML. 

Planning for Retirement - It Is Never Too Early To Start Thinking About How You Will Finance Your Golden Years

Whether you are nearing retirement or it is several years away, it is never too early to start thinking about how you will finance your golden years. Even if you are already retired, you should regularly review your arrangements to ensure you continue meeting your retirement goals. It might be that you enjoy spending time in France or Monaco and would like to retire in the sun, now or a few years down the line. Or maybe you are already living here and are unsure what your options are. Whatever your situation, what do you need to think about to secure the retirement of your choice?

Why retirement planning matters at any age 
By Rob Kay, Senior Partner, Blevins Franks

Approaching retirement

Even if retirement is a way off, there are certain things you need to consider – the earlier the better – to make sure you are on the right track financially. There may be steps you can take today to help make your dream retirement a reality.

Questions you should ask include: 

·      Will I be able to afford to retire when I want to?

·      What is the best strategy for withdrawing from my business or employment?

·      What options do I have for my pensions? Are they likely to change?

·      Will I be able to retain my existing wealth and assets?

·      Do I want to spend some or all of my retirement abroad?

Let’s say that you plan to retire within the next five years and move permanently to France. You may have concerns about whether you can afford your preferred lifestyle without having to sell existing assets. You may not want to have to downsize your home, for instance, as you would like this to eventually pass on to your family. Perhaps you have a business to sell and are unsure how best to convert your years of hard work into a retirement nest egg. Then there are the complex residence and tax implications of living in a different country.

Here, professional financial advice can prove invaluable. An adviser can take a holistic view of what you have– your savings, investments, assets, pensions – together with what you want – your timeline, income requirements, legacy wishes – and an objective assessment of who you are – your circumstances, goals, risk appetite – to design a personalised retirement plan for you. 

Already retired

If you have already reached retirement age or stopped working, that doesn’t mean you should forget about retirement planning. After all, you could be retired for thirty years or more! 

Regular reviews allow you to adapt your strategy to suit your changing circumstances and goals, such as incorporating new family members, addressing health issues or relocating. It also enables you to keep up with the ever-changing tax and pensions landscape, including new opportunities that could work in your favour.  

Your pension options

Pensions are usually the foundations of retirement, so deciding what to do here may be one of life’s most important financial decisions. Pensions are complex anyway, but with greater freedom and choice than ever – and an increase in sophisticated pension scams – you must take extreme care.

You might benefit from consolidating several UK pensions into one to provide a coherent, more cost-effective investment platform for your retirement income. However, this may not be the most tax-efficient approach if you live in France. By receiving pension income in sterling, you would also be exposed to conversion costs and exchange rate risk.

Britons resident abroad have the option of transferring UK pensions to a Qualifying Overseas Pension Scheme (QROPS). Doing so can unlock advantages you do not always get with UK pensions, such as flexibility to take income in euros and more freedom to pass benefits to chosen heirs. Transferred funds would also be protected from UK lifetime allowance charges and future UK pension rules that may adversely affect you – an increasing possibility after Brexit.

If you transfer UK pensions to an EU-based QROPS as an EU resident, you can currently do so tax-free, but transfers outside the EU/EEA invite a 25% UK tax penalty. Once outside the bloc, the UK government could potentially widen this taxation net to capture EU-based QROPS in the future. 

Transferring is by no means a one-size-fits-all solution and the benefits of a QROPS can vary greatly between providers and jurisdictions. Be sure to take regulated, specialist advice before making any significant pension decision to protect your benefits and establish the most suitable option for you.

Retiring abroad

If moving permanently to France is on the cards, it is especially important to review your retirement strategy early. Not only will you need to consider your residence status and cross-border tax implications in a post-Brexit world, you will need to adapt your estate planning to suit the very different local succession rules. 

In any case, careful planning is the key to minimising taxation and maximising the available opportunities so that you can enjoy the retirement you want for as long as you need. For the best results, take specialist, cross-border advice.

Tax rates, scope and reliefs may change. Any statements concerning taxation are based upon our understanding of current taxation laws and practices which are subject to change. Tax information has been summarised; individuals should seek personalised advice.

You can find other financial advisory articles by visiting our website here