British Expats at British Airways Can Now Transfer Their Pension Offshore for Tax Purposes
British expats who are working or who have worked at British Airways now have the option to transfer their pensions offshore to a Qualifying Recognized Pension Scheme (QROPS), so that their spouse or nominated beneficiaries can receive 100% upon death and they can avoid UK taxation. British Airways has a pension deficit of around £4bn and some reports are suggesting it will take 30 years for BA to plug the gap in their pension scheme leading some pilots to be worried about their future income stream.
Here is an article from the Telegraph in 2009 which ran a story on
pilots at British Airways moving millions of pounds out of the company’s lucrative pension scheme amid fears it would go bust. If the BA pension scheme collapsed, a lifeboat fund known as the Pension Protection Fund would step in. However, the fund pays out a maximum of only £29,000 a year. That could mean a huge loss for those on a higher pension income.
Final salary schemes are all but finished, with giants such as BA becoming a prisoner to their own schemes. British Airways schemes provide great pension benefits for its staff, so why would you want to transfer? If you are still working at BA you would get a lump sum which is 3x your pensionable pay at the time of your death plus the value of Additional Voluntary Contributions (AVC’s). Normally the wife would get a survivor’s pension dependent on the contributions you put in. If you die after leaving BA, a lump sum may be paid if no Adult Survivor’s pension is payable. Click here for more.
However, a transfer to a Qualifying Recognised Overseas Pension Scheme (QROPS) means that your entire pension pot gets passed on to your loved ones upon death as a 100% lump sum cash pay-out. That could mean paying off a mortgage or putting kids through school or university. Furthermore, you avoid UK taxes. That means avoiding taxes of between 20% and 50% on your income. The British Airways pension provides other benefits as well, so an analysis needs to be done, but with record low 15 year gilts which are used to calculate your pension, this means large final salary transfer values are being uncovered. This means a larger pension pot which you could transfer out of British Airways and be under a tax-free umbrella allowing investments in both the currency you want as well as the funds you want.
British Airways Pension Fund Deficit. How Big is It?
British Airways’ (BA) parent company International Airlines Group (IAG) have revealed a €997 million (£864m) loss after restructuring and merger costs hammered profits.
The British Airways pension deficit is continuing to be an albatross around its neck. BA’s £9 billion scheme currently runs a deficit of around £2bn. BA’s fuel bill also rose by 20.4% in 2012. British Airways merged with Iberia to form International Airlines Group in 2011 and operates both the Airways Pension Scheme and the New Airways Pensions Scheme. A rise in fuel costs, an ageing workforce accepting retirement money with better healthcare leading to higher liabilities could really spark trouble for BA.
BA’s pension scheme is being hit by falling 15 year gilt yields which are currently at a low 2.57%. This means BA may have to increase pension contributions for staff again.
Constant strike threats from both Iberia and BA staff will hamper the company going forward. In fact, the next Iberia strike is due to take place on Monday, 4 March.
British Airways has seen its combined defined benefit deficit increase despite asset increases of over £1.73bn. The APS and NAPS posted asset returns of 6% and 14% respectively but these were wiped out by liability increases of 9% and 17%.
The APS finished the year in surplus on €0.9bn, down from €1bn a year earlier. The NAPS’ deficit rose by over half a billion to €1.6bn. Both schemes are closed to new members.
British Airways Pension Increase Cut Due to CPI Link
The restructuring of public sector pensions to grow in line with the lower Consumer Price Index (CPI) rather than the Retail Price Index (RPI) is more bad news for BA’s staff and pensioners.
Having accepted a cut in their benefits in 2010 as part of a plan to reduce BA’s massive pension deficit, those 26,000 current scheme members have also found that their annual pensions increase will also be cut by 1/3rd on the basis of the differential between RPI and CPI.
This switch from CPI to RPI has effectively wiped £770m off that liability; a deficit which stood at approaching £4bn in 2009 is now less than £2bn. So, what has been bad for staff has been good for shareholders.
BA’s report for the nine months to December 2010 ominously pointed out: “Pension scheme members can opt to receive lower future benefits and keep their current levels of contribution, or pay extra to maintain their existing pension benefits.”
BA staff, in effect, agreed to a pay cut of around 4.5% due to additional salary contributions required to maintain pension benefits at the same level as before.
When BA pensioners received their annual increase in April last year, it was not the 4.6% suggested by RPI but the 3.1% based on CPI according to the Association of British Airways Pensioners (ABAP). This was more than a bone of contention and the unions took the government to court saying the switch to CPI as a measure of inflation was unlawful, but they lost on appeal.
British Airways has 26,000 active members of staff in the two final salary schemes that are at the root of the deficit. At the same time there are 48,000 pensioners who are suffering financially as a result of the switch and also 25,000 deferred pensioners (members of a BA scheme but now working elsewhere).
Justo Peral, head of Spanish pilots’ union Sepla, has publicly argued that Iberia assets had been used to plug a deficit in the BA pension scheme, estimated at £3.7bn at the time of the merger and that Iberia workers would be contributing to BA pensions until 2026, while a quarter of its workforce would be forced to join the ranks of Spain’s 5m unemployed.
British Airways Pension Management
British Airways pension management has actually increased the net asset value of the scheme from £6.7bn in 31 March 2011 to £7.3bn in 31 March 2012. It is the liabilities rather than performance which remain the root of the issue. However, a transfer out can increase your options.
Due to risk metrics, big pension funds like British Airways have to purchase large amounts of gilts. I know recently they have made a minor increase in equities, but with all the money printing in the world, surely some of your pension should be buying precious metals like gold or silver. In fact, if you look at the asset allocation, over 50% of the BA portfolio is made up of UK gilts. In fact bonds and cash make up 76.8% whilst equities only construe 11.7% of the portfolio with no precious metal holdings.
What Can I Do to Protect My British Airways Pension from Taxes as a British Expat?
This is a complex issue and due to the high benefits offered by British Airways, you need to get a proper analysis from QROPS Specialists. We can do a transfer analysis for you and compile a report on the various options you have at your disposal. BA pensions are not going back to RPI linked pension increases. Advances in medicine are going to make pension payments for current employees last longer than previously thought. Contributions are likely to increase.
The British Airways pension deficit is nearly the same size as its market cap at £4bn. You can avoid UK taxation with a QROPS pension transfer and take advantage of the low yield on UK gilts to get a high pension transfer value and avoid UK taxation. But, you need to get an analysis done to make a proper comparison.British Airways Pension Defecit Increases Again by Richard Malpass