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.
|
