International Pensions
by
Jeremy Hetherington-Gore, January 2006
IMPORTANT
WARNING:
The contents of this report have been compiled
in good faith by Investorsoffshore.com to provide
assistance to investors, but do not constitute
investment advice or recommendations. Investors
should not rely upon the information given in
order to choose types or routes of investment
but should make their own independent enquiries
before making choices. Investorsoffshore.com has
taken reasonable care in researching and presenting
the information herein but makes no representations
as to its accuracy and accepts no liability for
actions taken or not taken as a result.
This
Investors Offshore special report examines the
problem of pension provision for expatriates and
international executives. National schemes and
company schemes typically cause more problems
than they solve for such people.
Introduction
Considerations
affecting retirement provision
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.
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.
Although
EU legislation exists covering the transfer of
state (statutory) pensions within the EU, this
is typically difficult to achieve. Transfer between
state pension schemes into or out of the EU or
between other countries is generally not possible.
The
European Commission announced in October 2005
that workers switching jobs or countries will
no longer have to worry about substantial loss
of work pension benefits under the 'portability
of pensions' Directive that it has proposed.
At
present, changing job or country can mean losing
occupational pension benefits in some Member States.
But the proposal announced in October would mean
avoiding major losses and in many cases allowing
benefits to transfer with the worker across sectors
and countries in the EU.
The
Directive will help the growing numbers of EU
workers who are switching jobs, and is designed
to support the Commission's 'Jobs and Growth'
strategy by making it easier for workers to move
jobs and countries, but it will do little to help
people outside the EU or even those inside it
with above average incomes.
Vladimír
Špidla, European Commissioner for Employment,
Social Affairs and Equal Opportunities, explained
that the adoption of the proposal was coming shortly
before the beginning of the 2006 European Year
of Workers' Mobility.
"If
we expect workers to be mobile and flexible we
cannot punish them if they change jobs. Pension
rights must be fully transferable. This directive
has been long overdue.”
The
proposal was designed to reduce the obstacles
to mobility within and between Member States caused
by present supplementary pension schemes provisions.
These
obstacles relate to: the conditions of acquisition
of pension rights (such as different qualifying
periods before which workers acquire rights),
the conditions of preservation of dormant pension
rights (such as pension rights losing value over
time) and the transferability of acquired rights.
The proposal also seeks to improve the information
given to workers on how mobility may affect supplementary
pension rights.
Once
signed into law, a regular review will take place
to see how the Directive's provisions are working.
The
Directive does not deal with tax or indexation
of pension issues.
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.)
Unfortunately,
however, US expatriates and other expats that
have been relocated to the States are unable to
fully take advantage of international retirement
planning options in the same way as other expats,
due to the punitive US taxation regime. Offshore
providers view dealing with American clients as
something of a minefield, although some IFAs will
continue to deal with clients who have moved there,
and should be able to advise on an appropriate
course of action.
The Mechanics
of 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. In section
1.4 below there is a brief outline of the options
at the time of retirement in terms of how you
choose to receive that income.
1.1
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 |
|
1.2
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. A recently tabled EU Directive attempts
to rationalise such matters within the European
Community but this has not yet been approved,
and there will be 10 year exemptions in some cases
e.g. Germany for some company schemes that are
not fully funded.
1.3
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.
1.3.1
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.
1.3.2
DIY
The
do-it-yourself approach has many different possibilities
and the choices include how you own the assets
and just what those assets are. The general assumption
is that you are working (or at least earning)
in a low-tax environment so that monies can be
put into a pensions investment on a more or less
tax-free basis. Although high-tax countries often
allow pensions investments to be tax-free when
they are made (up to certain limits), the downside
is that the income is likely to be taxed when
it is taken after retirement, and it can be problematic,
to put it mildly, to move the income-earning assets
out of the high-tax jurisdiction when retirement
takes place without incurring a savage tax penalty.
Ownership
of the assets can be approached in a variety of
ways depending upon the local tax environment.
Direct ownership by yourself is possible may not
be the most tax-efficient option, especially for
individuals who are or may become resident or
domiciled in jurisdictions which tax world-wide
income and wealth (most high-tax countries, in
other words).
| 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, so that it's harder for creditors,
the taxman or your ex-spouse to get at
it! 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, like birds
of a feather, have tended to flock 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. Also, you avoid provider
and broker costs, but in exchange you
may have a heavy time overhead and there
are plenty of traps for the inexperienced.
All in all, it may be better not to go
it alone unless you are quite savvy and
have time on your hands.
|
| 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!
|
1.4
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. (Probably best not to go for
the lump sum if you are likely to blow it all
on fast cars and loose women - or men!) 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.
After
a decade of low interest rates and unexciting
equity markets, annuity rates are not wonderful,
and if you are of an adventurous turn of mind,
you may prefer to live directly off the income
from your investments. Some brave souls who think
they know how much longer they have on this earth
even make their own calculation, turning their
capital into a sinking fund, paying themselves
each year a proportion of the capital plus the
income on it, so that the money runs out (they
plan) just when they depart. Just remember the
story of Jean-Marie Calment, who did such a deal
with her landlord (the other way around) when
she was 75 and lived to be 122. He had to watch
her live 'free' for 30 years more than he had
bargained for.
|
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