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Who
Can Benefit From Offshore Pension Investment |
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Unlike
most other forms of investment, pension investment is
normally tax-privileged in high-tax countries, meaning
that the contrast between onshore and offshore returns
may not be as marked as it is for many types of investment
activity. For residents of high-tax countries, therefore,
especially if they are intending to stay put in retirement,
it may well be the case that they should build their
pension provision inside the tax-net of their home jurisdiction.
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 of these tax-breaks
available simultaneously, but sometimes two of them
apply. Evidently, then, 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
Expatriate
executives, professionals, entertainers and similar
types of global wanderer have a considerable problem
with pension provision, since it is often the case that
while non-resident they cannot continue with tax-privileged
pension investment at 'home', ie in their original domicile,
to which they probably intend to return in the end.
It may well be that offshore investment is the only
practicable route, even though the income they eventually
receive in retirement is going to be taxed - and they
may decide to retire offshore, in which case they will
have preserved flexibility by not committing to any
particular high-tax jurisdiction.
Residents in high-tax countries intending to move abroad
at or before retirement are in a complex situation,
but one with good tax-planning possibilities in many
countries. If the move is planned sufficiently far in
advance, it may be a good idea to begin to build up
'capital growth' offshore assets which won't be subject
to much or any taxation at home, in the knowledge that
when the capital is converted into income, the recipient
will have already moved into low-tax residence.
The treatment
of existing tax-privileged pension plans on departure
varies very widely between countries and types of investment,
but will usually be a material factor in planning future
saving patterns. In some cases, a pension fund which
has been built up with tax-free contributions, or the
income from it, can be partly or entirely moved into
an offshore environment without incurring much or even
any taxation. Professional advice is an absolute necessity
for anyone with a pension fund considering a move offshore.
People
who already live offshore and have no intention of moving
onshore, are not really concerned with the distinction
between 'pensions' investment and 'non-pensions' investment,
since there are probably no taxes to consider either
way. They need to have regard to security of course,
and will no doubt be planning to maximise income in
retirement, so that offshore pensions products are still
relevant to them.
Description
Of Offshore Pensions Investment
In many
high-tax countries, much pensions investment is partly
or entirely insurance-based. This is due partly to the
need to incorporate disability and death benefits into
pension schemes (they are not suited to a fund-based
approach except when the fund is very large), and partly
to the favourable taxation environment of life assurance
companies, in which many pension schemes grew up.
Offshore
pensions provision is not much affected by tax considerations,
and a scheme combining insured benefits with retirement
savings is not necessarily the best way to go. That
said, there are many offshore insurance companies offering
such schemes, and they are a viable alternative.
Often,
the best route may be to buy death, disability and possibly
health insurance separately - for an offshore resident,
there probably won't be any taxation consequences of
choice of insurer (but check!) so that a world-wide
search for the best insurer is straightforward. Then
the question of providing income on retirement can be
addressed on its own. With tax not being an issue, the
criteria to be borne in mind are security, origin of
income flow in relation to location of residence (see
below), and value (getting the best return from investment).
Ensuring
security just means dealing with reputable firms, and
not putting all one's eggs in the same basket. Big insurance
companies are safe, but they are not usually very transparent
to the investor. Funds are mostly too volatile for pensions
investment, although large funds conservatively operated
by global insurance companies are safe enough, if rather
dull. Evidently, there are countless ways of investing
securely in a capital asset which will grow and which
can be converted into an income stream on retirement,
and it is not the purpose of this site to give advice
on that subject.
One important
question that needs to be addressed is whether to build
a capital fund which will eventually be used to buy
an annuity at retirement, or whether to buy deferred
income as you go along. The answer depends on second-guessing
the behaviour of the insurance companies, and the course
of interest rates between now and the time you retire.
If you know a friendly actuary, you can ask him or her;
otherwise you are making a bet on the future.
Buying
a deferred annuity has the advantage of certainty, but
the disadvantage is that annuity rates can be quite
low. If you think that the insurance companies will
continue to reduce annuity rates as life expectancy
increases, that's another argument in favour of deferred
annuities. On the other hand, the rate of interest used
in calculating deferred annuities is probably lower
than the rate of growth you can get from even quite
conservatively managed funds. Again: this is not advice,
simply a question you may want to consider - independent
professional advice which will take account of your
personal circumstances is a necessity in planning offshore
pensions investment.
Where
To Make Pensions Investments Offshore
Many people
making offshore investments are doing so without having
made final decisions about where they will reside, and
simply make sure that for the time being their investments
are based in jurisdictions which won't impede future
movement of capital or income.
But investments
intended to provide pensions income need to take into
account the choice of jurisdiction for eventual retirement.
Many offshore jurisdictions provide tax exemption for
non-residents, but not for residents, or at any rate
not for the local income of residents, so that it may
be undesirable to locate an investment in the retirement
jurisdiction. Again, the choice of retirement jurisdiction
may be influenced by social, climatic and political
factors, while that of investment jurisdiction may be
influenced by the international tax regime it operates:
for example, an investment based on flows of dividends
or royalties from high-tax countries (equity funds,
for instance) needs to be based in a country that has
a good double-tax treaty network, to avoid too much
loss of income to withholding taxes levied by the high-tax
countries. Not many offshore jurisdictions have such
networks, and those that do often have moderately heavy
taxation of local income for residents. Malta and Cyprus
would be examples.
The introduction
of the European Savings Tax Directive (which came into
force in 2005) may also have implications for those
seeking to make as varied a provision as possible for
their retirement (i.e. looking to include some savings
element), and should be taken into consideration.
The choice
of an offshore jurisdiction is in itself a difficult,
and to some extent a circular task. You will not find
it easy to distinguish between the merits of different
offshore jurisdictions, or the facilities they offer,
until you have got to know them quite well. This is
the point at which you might think that an onshore adviser
in your own home country can help you - and it may be
so, but remember that only a very skilled, knowledgeable
and above all, objective, adviser is going to be useful.
Such a person is hard to find.
www.lowtax.net
is designed to help people who do not have access to
the perfect adviser we just described. www.lowtax.net
is not an investment adviser, and is no substitute for
professional advice, which is an absolute necessity
for anyone planning offshore investment, or a move offshore.
But the www.lowtax.net
site does contain a wealth of information about 35 offshore
jurisdictions, which is designed to help you to make
a preliminary choice of one or a few offshore jurisdictions
suited to your circumstances, which you can then explore
in depth. The section of www.lowtax.net
for each jurisdiction includes details of residence
permits, any special regimes for wealthier types of
immigrant, the double tax treaty network, the corporate
and individual taxation regimes, and an analysis of
the main offshore financial sectors.
Offshore
pensions investments will usually be made using one
of the three types of investment route described in
the three previous sections (Private
Banking, Offshore Equity
Investment, and Offshore
Investment Funds). Those sections contain lists
of jurisdictions which may be particularly suitable
for the three types of investment. Life assurance companies
offering pensions investments offshore are almost invariably
located in jurisdictions with good mutual fund legislation
(even if a pensions policy doesn't make use of funds)
so that the list of jurisdictions below is nearly the
same as the list for Investment Funds.
Purely as a factual guide,
here is a list (in alphabetical order!) of those offshore
jurisdictions with developed mutual fund regimes; in
most cases, this also means that they have stock exchanges
(an SE in parentheses) and, you may want to assume,
a fairly high level of sophistication in terms of investor
protection:
Bahamas
(SE)
Bermuda (SE)
British Virgin Islands
Cayman Islands (SE)
Cyprus (SE)
Guernsey (SE)
Hong Kong (SE)
Ireland (SE)
Luxembourg (SE)
Malta (SE)
Mauritius (SE)
Netherlands Antilles
Seychelles
Switzerland (SE)
Turks & Caicos Islands
www.lowtax.net
has information on each of the above jurisdictions.
Our section Gateways To Offshore
Information Providers will lead you to further sources
of such information.
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