What special tax treatment is given to pensions investment?

Governments in high-tax countries apply a variety of techniques to encourage saving towards retirement: sometimes, contributions into pension plans are tax-free; sometimes the investment gains within pension funds are wholly or partly tax-free; sometimes the proceeds of pension plans are wholly or partly tax-free. Nowhere are all three things true simultaneously, but two are sometimes available.

Who can benefit from offshore pensions investment?

For a resident in a high-tax country receiving tax breaks on domestic pensions investment, funds built up offshore are not likely to be able to do more than match growth in a domestic fund, and the resulting income or capital gain is sure to be taxed when it is remitted home, and for many jurisdictions, even if it isn't.

However, individuals in many other situations can gain advantage from offshore pension investment, for instance:

• Expatriate executives, professionals or entertainers
• Residents in high-tax countries intending to become non-resident on or before retirement
• Residents in low-tax countries

What is offshore pensions investment?

'Onshore' pensions usually bundle insurable benefits such as payments on death or disability together with pension fund contributions as such, for tax reasons. Offshore, there is no point in doing this, and pensions investment means simply building up a secure, tax-efficient fund which can be distributed when and where you want it in future. Buying deferred annuities is another way of achieving a pensions goal - this is obviously very secure, but the rates of return assumed by the annuity purchase are unlikely to be attractive to the average offshore investor. Insurable benefits can be bought separately wherever they are cheapest.

What is an annuity?

A series of annual (or monthly) payments offered by an insurance company in exchange for payment of a capital sum. A deferred annuity commences on a pre-determined date in the future, but the rate at which it is purchased is determined at the beginning of the contract. Therefore, a lump sum can be applied during a person's working life to purchase an fixed annuity on retirement, whatever is the movement in interest rates in the meantime.

What are defined-benefit and defined-contribution plans?

A defined-benefit pension plan is one in which the levels of benefit (pension, death benefit etc) are defined in advance. Usually this type of plan is not available on an individual basis, but only through company pension schemes, since variations in investment performance make it impossible to predict the behaviour of a fund in advance. A defined-contribution plan is the normal choice for individual pensions investment - contributions are pre-set, but the eventual result will depend on the behaviour of the underlying investments. This is the type of product normally offered by life assurance companies.

What is a 401-K plan?

In the US, pensions legislation allows deferral of tax on pension contributions through a number of methods, of which (section) 401-k is the most widely-used. Employers often set up individual pension arrangements for their staff under section 401-k. An individual with a 401-k scheme can use the assets it contains to make approved investments into mutual funds and other types of asset.

What is a Keogh plan?

In the US, a Keogh plan is a section 401-k plan (see above) for self-employed people or the owners of small businesses to make tax-exempt contributions up to quite generous maxima into pension plans. Money in the plan can be used to buy certain types of asset including certificates of deposit, mutual funds and listed securities. Direct offshore investment would not be permitted.

What is an MRD?

In the US, a pension fund which has benefited from tax-deferral must be paid out after a certain age as an income flow (which is taxable). The rules for calculating the Minimum Required Distribution (permitting the rest of the fund to remain tax-exempt) are complex and depend on the life expectancy of you and your spouse.

Can I transfer my pension plan offshore?

Complicated question! It depends on where you live, the type of plan you have, where you plan to go, when, etc etc. You need specialised professional advice. There are high-tax countries which permit part or all of a tax-privileged pension fund, or the income flow from it, to be transferred abroad (offshore) in a way which preserves some tax advantages, but it is not easy.

In many cases the answer will be yes, but you will pay at least the basic rate of income tax on the transfer. Even this may be advantageous depending on your present and future circumstances. If you are planning to live offshore, it is well worth looking hard at the possibilities for transferring your pension plan.