George Cochrane on making the most of overseas funds.
MY FATHER has a British pension. The fund has decided to transfer the money and purchase an annuity for pensioners. They have a once-only choice to take a lump sum instead of the annuity. It is #80,000 ($164,000) and he gets a #7000 pension per annum, reduced to half when my mother dies. Dad is 77 and mum 75. They have other small British pensions that are being eroded by the higher Australian dollar. I think the options are as below and am trying to weigh up what to do. 1. He can accept the income from the annuity, which will give him income certainty but there is no increase. Any interest may be taxed as income and he may suffer from exchange rate movement. 2. He can take the lump sum and invest it in Britain which would preserve his capital but interest is taxed as income. He may suffer from exchange rate movements and also possibly Australian tax.
3. He can transfer it here into a complying fund registered as a Qualifying Registered Overseas Pension Scheme (QROPS). There is probably no increase in the balance value since he left Britain three years ago and he would then receive a tax-free income as an Australian pension.
4. He can transfer it here and invest it, which would preserve capital, but would he be taxed on the balance transferred and is the interest taxed as income? I. R.
I suspect your mother would get 50 per cent of the pension if your father predeceases her.
Better check that. Looking at the choices:
1. The annuity would give him the maximum certainty of income but, when you say there is no increase, it sounds as though the annuity is not indexed to inflation. This is somewhat unusual in Britain. Check this, just to make sure you've got the facts straight. Any lack of indexation would decrease the purchasing power of the annuity. You might be better off investing in a fund that will, hopefully, keep up with inflation or even surpass it.
2. I'm not an expert on British pensions, but I understand that, if taken as a lump sum, the first 25 per cent will be tax free and the balance will attract a 40 per cent tax rate in Britain. I don't see how investing a lump sum in Britain would necessarily preserve his capital unless he placed it into a capital guaranteed fund, in which case he could just as readily place the money into a guaranteed fund in Australia and overcome the currency exchange problem. However, I suspect that, if the resource boom slows down the Australian dollar will fall for a while.
3. A QROPS has the approval of the British Government to accept a British pension fund transfer and agrees to abide by certain British restrictions.
However, since May 2006, a transfer from a non-Australian fund is seen as a contribution, not a rollover between complying Australian funds. Hence it is subject to the local contribution rules which mean that a person aged 75 or older cannot contribute into an Australian super fund.
4. If your father brought the money into Australia he could invest it in the non-super sphere such as buying an annuity (possibly with a higher return than a British annuity), or shares or managed funds.
Tax return for British payout
MY 65-YEAR-OLD wife has recently been granted a British pension of $180 per four weeks. Does she have to declare this pension in her Australian income tax return? A.A.
If she is an Australian resident then, if her total income exceeds $6000 a year, she is required to submit a tax return, unless she also received an Australian Government pension and earned less than $10,000. If she is a non-resident she should put in a tax return. Check the Tax Office website.
To stick or to bite the bullet?
I PURCHASED 300 MFS shares back in 2006 at $3.27, and then again in 2007 when I bought another 150 at $5.55. They stayed quite stable until January this year when they fell to 99c and stayed there. The latest news is a renaming, Octaviar (OCV), and apparent plans (?) for stabilising the business. My question is, should I stick with them and hope for an improvement in the situation, or bite the bullet, sell and take the loss. E.R.
The MFS/Octaviar group is an amazing story of rags to riches and back to rags in three years. The stock rose from a low of $1.30 in 2005 to a peak above $6.50 in early 2007, and last traded in late June at 99c. The lessons of history would discourage any great chance of recovery but I wouldn't fancy your chances of finding any buyers.
If you have a question for George Cochrane, send it to Personal Investment, PO Box 3001, Tamarama, NSW, 2026. Helplines: bank ombudsman 1300780808; pensions 132800.