+ Larger Font | + Smaller Font- When do you intend to retire?
- Where are you going to retire to?
- What form and amount of income do you want to have in retirement?
- Are you confident of a regular income throughout your working life or do you anticipate that your earnings will fluctuate considerably?
- Are you going to work in the same country for the remainder of your working life or are you going to be in a number of as yet unspecified countries?
Some of these questions can be impossible to answer. For instance at the age of 30 one country may appear an idyllic potential final place in the sun. However thirty years later your expectations and views may well have changed, and the country in question may be very different. Few people can have any degree of certainty about the path that their working life will take.
The idea of a job for life with the same employer is now almost completely redundant. Working in different countries for a significant period of time is an increasingly common experience for many and may be the reason that you are reading this piece in the first place. However if you are going to make adequate provision outside your current home country, then it will aid your decision making process if you can identify answers to some or all of these questions
.The Expat Solution
When you are looking for an expat pension you need to realise that there really is no such thing as an International Pension Plan that is able to take advantage of the tax breaks offered to approved retirement schemes in your home jurisdictions.
Almost without exception, the "retirement savings" products are duplicates of the regular savings plan with a different label. These products all fall into the contractual savings plan variety.
Of course, it is generally not possible to invest in the home schemes, which offer tax breaks as you almost always need to have earnings in that country to qualify and those earnings would be taxed. However, an expat pension plan will be more flexible and will not suffer tax on the funds as they accumulate in a tax haven, so this is an area that many expatriate clients look at closely. When do you intend to retire? At 60? At 50? The target date for your retirement and the amount of income that you would like to receive will have an impact of how much you need to save. Inflation and fate will have an impact on the eventual accuracy of these estimations but they still need to be done so that your expectations are realistic.
Where are you going to retire to? If you have identified your perfect retirement beach, then the location of your pension funds may be affected by the eventual ease of transfer of funds to such a place. If you are unable to identify a perfect location then it is worthwhile to identify the characteristics of the ideal location (as well as a suitable climate and political environment) again in terms of the local taxes and the ease of money transfer. This may have an impact on your choice of location for your pension funds.
Are you confident of a regular income? Some people work in professions in which they will probably have a regular monthly income. Other work in a more haphazard environment (entertainers, sports-people, entrepreneurs) where income may be more variable. The likely pattern of income should affect the choice of pension instrument.
Pension Portability
Individuals who work or live in a number of countries are faced with a complex situation and one that is continually changing as legislation and commercial products evolve in response to each other.
Private Pension Schemes
State schemes, even at their most generous, and many company schemes will not provide travelling executives or expatriates with more than a minor supplement to an adequate retirement package. In many cases, companies are however prepared to pay into private schemes set up by individuals, or may even help with the setting-up of such schemes.
An individual, private scheme, whether or not supported by an employer, is therefore a necessity for most executives and expatriates. Given the uncertainty over future working and living locations, a retirement scheme will ideally be located in a low-tax jurisdiction and will not be subject to significant taxation either in terms of contributions or in terms of pay-outs. This effectively rules out most high-tax countries.
In addition, individual private pension schemes obtained from commercial providers in high-tax countries are normally very specific to those countries, and are not at all flexible if the beneficiary later needs to move a pension or a pension fund. Many companies impose severe penalties or charges on such transfers.
Many insurance companies and pension providers recognize this, and offer highly flexible schemes suitable for expatriates and executives from subsidiaries in low-tax jurisdictions such as the Isle of Man and Gibraltar. Offshore financial centres may present a viable alternative, especially if you are undecided as to your eventual retirement destination, as basing pension investment offshore should mean that future movement of capital or income is not impeded. (Although any retirement income received in a high tax country will obviously be liable for taxation.)
The Different Pension Provision
This section first identifies the various means of pension provision. These are taken to be instruments that will provide income to live on in retirement and some of these are ordinary investment methods with no specific pension association.
National Pensions
| Type | Description | Comments |
|---|---|---|
| Basic | Countries in the developed world typically provide some form of retirement pension to those defined as eligible. | These schemes are typically called state pensions. |
| Additional contributions | Some countries allow individuals to make additional contributions to the basic state pension scheme | In the UK this is the second state pension |
Company Schemes
These are also called Occupational Pensions
| Type | Description | Comments |
|---|---|---|
| Final Salary Schemes | These offer a guaranteed pension amount based on the salary at retirement and the length of time served with an employer. | Also known as Defined Benefit schemes |
| Money Purchase Schemes | Contributions are invested and the final pension is based on the performance of the fund. | Also known as Defined Contribution schemes. |
In some cases national legislation requires the pension fund to be held separately from the main company funds and these are described as being fully-funded. National rules and individual schemes vary greatly as to the ease of preserving pension rights or transferring those rights to other schemes. There are often penalties or costs involved in such transactions.
Individual Pensions
For individuals who decide to create a pension in addition to any national or company provision there are a number of different options and generally these can be used in almost any combination. One major choice is between using commercial pension instruments or doing it yourself - or doing both. This choice will be affected by the availability or otherwise of suitable pension schemes in your chosen jurisdiction.
1. Commercial pension providers
Insurance companies typically offer a range of products which will appeal to different individuals according to individual circumstances including fund location, type of investment and thus the level of risk or certainty, the manner of receipt of funds on completion or termination, and the necessary timescale. Independent professional advice is strongly recommended before making any commitment.
| Type | Description |
|---|---|
| Offshore Trust | An offshore trust can be set up by an expat to serve the same basic purposes as an offshore company, namely confidentiality, tax minimisation, asset protection, and estate planning. The principal difference between the two structures is that with an offshore company, ownership is maintained, whereas with an offshore trust, ownership is transferred. This has the effect of creating more distance between you and your wealth, Trusts used to be primarily aimed at tax avoidance, but in recent years the tax authorities in many high-tax countries have passed 'anti-avoidance' legislation that lets them attack trust assets while you are alive, although they are still effective against inheritance taxes. Trust assets won't be taken into account during the probate process, so that the death of the settlor does not affect the administration of the trust, which still remains under the custodianship of the trustees. This also allows a settlor to maintain confidentiality over the size of the estate, and avoid the delays and possible publicity which would come as the result of a lengthy probate procedure, not to mention the saving on inheritance tax. Trust assets will remain in the trust for as long as the original Trust Deed prescribed (in perpetuity, if necessary, or for lesser periods), or until the terms of the trust permit or require the Trustees to distribute them. Another area in which the use of trusts is growing is asset protection, so if you have a fairly substantial liquid net worth that you would like to protect, before, during, and after your expatriation, an offshore trust may be the way to go. A basic trust structure consists of three entities; the settlor, who sets up the trust, the trustee, who acts as custodian, and the beneficiary/ies, who can receive income from it. |
| Offshore holding company | This can be used to hold investment portfolios, and is useful in providing enhanced privacy. It can be particularly useful in some offshore jurisdictions if you want to become locally resident, and need not to receive income yourself, although you may have a problem with ownership restrictions on residents. (This leads people to set up strings of holding companies in different jurisdictions). If the income of a holding company is used to make further investments, it may be that you won't be taxed on it even if you return to a high-tax domicile. |
| Offshore personal service company | If you are engaged in providing a personal or professional service, you may be able to achieve considerable tax savings, as you can contract to supply the service regardless of residence, and the fees earned can accumulate offshore while you work for a low salary in the country where you are taxed. It only works in some countries, and you may have to do something more complicated than just owning the company yourself, if it is not to be 'looked through' by the taxman. |
Any form of investment can be used to contribute to a pension albeit without the tax benefits associated with specific pension schemes. The different forms of potential asset are almost unlimited and the following can only be indicative.
| Type | Description |
|---|---|
| Pre-packaged pension scheme | Choosing a ready-packaged pension plan will naturally take a lot of the worry and hassle out of the equation, as your investments will effectively be managed for you. On the other hand, locking your money into such a scheme on a long term basis means you lose some flexibility if your circumstances - income, place of residence employment, etc - happen to change, and penalties are likely to be incurred if you do not stick to the payment schedule or cease contributions altogether. Usually a pre-packaged scheme means what is termed an 'insured' scheme, ie that it is provided by a large insurance company through an offshore subsidiary, and you can usually choose the types of underlying investment in the sense that the provider will offer a range of investment funds - based on equity, cash, real estate etc - as is the case onshore. Offshore pensions providers, tend to be together in well-regulated jurisdictions with stringent investor protection legislation, such as Jersey, Guernsey, and the Isle of Man. As a result, these jurisdictions have developed responsive regulatory regimes and highly efficient business infrastructures. Dublin and Luxembourg are also coming into favour as offshore locations from which to offer pensions, but these products are usually more specific to a European audience. |
| Direct fund investment | Direct ownership of fund units is an alternative to an insured scheme, although obviously riskier, and can make use of the same offshore jurisdictions as are inhabited by the insured scheme providers. Some of these jurisdictions have installed legislation tailored specifically to the needs of expatriates, notably the Isle of Man. The major benefit of direct investment (direct means not through a pensions provider, but still may involve the intermediate use of a company or trust, see above) is flexibility. |
| Private funds | Suitable for those expats with a longer term investment horizon, and more capital (usually not less than $1,000,000, although individual investments may be as little as $50,000). These are usually closed-end funds, involving up to 50 investors, and often generate greater returns than public funds. Quite often they would use a 'see-through' or 'tick-the-box' structure known as a Limited Partnership which allows residents of higher-taxed countries (eg the US) to repatriate untaxed profits to offset against losses or expenses at home. A large number of offshore jurisdictions offer regimes suitable for private investment funds. |
| Share equity | Equity investment used to mean investing in securities listed on your local stock exchange to the exclusion of foreign stocks, but of recent years, all this has changed. There is a growing number of stocks that are listed offshore - dividends and capital gains will of course be tax-free and they can be bought through local brokerages. As long as you have a satisfactory non-resident tax situation, you can also buy onshore equities without risking capital gains tax, but you will find that dividends have sometimes been subject to withholding tax, which you may not be able to reclaim. This is an area in which the Internet has opened up new possibilities for investors, as online brokerages and some investment sites and exchanges allow you to manage your portfolio quickly and easily wherever you are in the world. |
| Others | The physical barriers to international investing of a few years ago simply do not exist for today's expatriate investors. Expatriate investment is therefore not limited to funds and equities, but can also include other types of onshore investment activity such as real estate, derivatives trading (futures and options), and their cousins spread-betting and contracts for differences. But it must be said that risk doesn't diminish with distance: arguably, if you are away from a particular market-place, with even the best on-line information sources you are somehow missing knowledge you might have had if you were present. These more exotic types of investment are not for the faint-hearted! |
Retirement Income Options
Most international pension providers will offer you the opportunity to take your retirement income as a cash lump sum, guaranteed annual or monthly income, or a combination of the two. Which you decide is best will probably depend on the potential tax implications for you at that time, and your intended lifestyle.
However, if you decide to opt for a steady income, you must decide in advance whether you want to receive a fixed annuity, or to buy deferred income as you go along. If you feel that insurance companies will reduce annuity rates as life expectancy increases, then you may want to go for the deferred income option.
