Who Can Benefit From Offshore Pension Investment

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.