24 The Guide
19 May - 02 June, 2010
MONEY MATTERS
by Colin Bloodworth
PENSIONS – GOOD NEWS AND BAD NEWS
First the good news: Improved medical care and new drugs should ensure we will all live much longer than previous generations. The bad news? For the vast majority of people on the planet old age will come hand in hand with abject poverty.
Of course, most of the world’s population is accustomed to living in poverty. But people in developing countries still have strong family support and traditionally take care of their old folks. Not so in the West where the elderly are more and more frequently shepherded into care homes. The cost? Upwards of US$3,000 a month. If you have no money you may be lucky enough to be placed in a state run institution but don’t expect room service. It is not diffi cult to understand why many westerners with limited means choose to see out their days in Bali.
HOW COULD GREECE AFFECT YOUR PENSION?
Now we are coming to bad news that is affecting not just Greece but the whole of Europe and global stock markets, not to mention the Indonesian Rupiah! Whilst creative investment products based on unrealistic real estate values were the root cause of misery in the US, in Greece it has been more the European culture of working practices and retirement laws that has crippled the country. The burden on the working population of an expensive bailout programme has already led to large scale social unrest. Public employee salaries and pensions were among the fi rst items to be slashed.
But the problems are not confi ned to Greece. The fear is that the contagion could spread to Spain, Portugal, Italy and Ireland. One of the problems of being a member of the Euro zone is that individual countries cannot adjust interest rates or print money to get out of a hole. The strains imposed by this straightjacket result in an inability to spend one’s way out of trouble. The UK is fortunate at this time because it has more fl exibility to adjust but it is far from being free from problems. The hung parliament is going to make it even harder to make
unpopular but necessary decisions. But at some point these decisions have to be made and pensioners will almost certainly be among those hurt. One solution to Britain’s debt woes is to print money which in turn means a dilution of the value of fi xed incomes such as annuities and pensions.
DEMOGRAPHICS ARE NOT ON OUR SIDE
All western countries are faced with ageing populations. The great social benefi t structures that emerged after the Second World War are crumbling. In the UK when people worked to 65 but lived to less than 70 the working population could comfortably support both pensioners and a national health service that was the envy of the world. Today the health service is creaking at the seams. Rumour has it that even abortion clinics have 10-month waiting lists! The government is increasingly pressing people to take responsibility for their pensions. The offi cial retirement age is being increased in stages. Private companies that once had generous fi nal salary-linked pensions have found that funding those schemes has driven them close to bank- ruptcy. People in western countries are very worried about how they can afford to live once they have retired. Many expats, however, are out of touch with what is happening. They are still under the impression that if they return home with minimal savings their country will support them. It may be worth noting that the average weekly state pension in most western countries is now just enough to fi ll your petrol tank once and cover a restaurant meal for two! You could stretch the same amount out further in Bali but don’t fall sick!
ANY MORE BAD NEWS?
Yes! The European Court of Human Rights has recently
rejected an appeal from a group of British pensioners to force the government to increase state pensions of expatriates in line with UK infl ation to bring them into line with pensioners resident in the UK and certain other countries. There are an estimated 500,000 UK retirees living abroad. There is no hope left that this position will ever be changed. This means if you are entitled to a UK state pension, when you receive it there will be no further increments if you choose to remain in Indonesia. Imagine you retired and came to live in Bali in the 1970’s. You would now still be receiving around 6 pounds per week, whilst the current pension in the UK is 95 pounds. Could you live on less than Rp100,000 a week? Further bad news is coming out regarding new interpretations on UK tax residency and domicile. Brits need to be aware that Her Majesty’s Revenue and Customs are on the lookout for ways to bring in more money that is urgently needed to help plug the budget defi cit. Brits of course are not alone. Governments throughout the world are endeavouring to increase their revenues by whatever means possible and have their eyes very much on expats. Americans in particular are feeling the heat. Don’t mention Swiss bank accounts!
ENOUGH! IS THERE ANY GOOD NEWS?
For some, yes. For example, if you are British and don’t need to draw your state pension immediately on reaching 65 you can delay taking it and in return it will be increased by 10.4% for every year you defer it. It sounds very generous but bear in mind actuaries will have calculated the increase in relation to expected life span. So if you live a long time you can be a winner. Die before you take it and the British Treasury wins!
There is one area where British expatriates can score heavily if they left behind one or more company pensions. This is thanks to QROPS (Qualifying Recognised Overseas Pension Schemes). Without going into too much detail, the schemes allow funds to be taken out of rigid domestic structures and be placed into more fl exible offshore structures where the
investment can be more easily accessed and passed on to one’s estate on death. The same facility may be available to other European nationals in due course. Nationals of all countries should see what opportunities exist to enhance their income in retirement.
There is also good news for anyone with at least 20 years left before retirement. That good news is that you have time to accumulate wealth so you will not need to rely on faltering state schemes or bankrupt company pension funds. But it does mean addressing fi nancial planning seriously and understanding the pros and cons of different assets and products.
And if you are single and have no-one else to worry about you can aim for the perfect fi nancial planning strategy which is to save hard while you can, then spend your wealth frugally in retirement so that your money runs out on the day you die and the cheque to the undertaker bounces!
Colin Bloodworth has worked as a fi nancial adviser in Indonesia since 1992 and is now Director of PPI Indonesia, based in Jakarta. He visits Bali regularly and can be contacted for advice at indonesia@
ppi-advisory.com or
colin.bloodworth@yahoo.co.uk or 021 3004 8024.
by Colin Bloodworth
MONEY MATTERS
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Copyright © 2010 Colin Bloodworth
C/R/I-17 June 09
FULL SIZE STATUES OF THE FAB FOUR
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