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27 June, 2017
Financially, expatriates could be said to be in a uniquely privileged position - if a company chooses to send an employee overseas, it will usually compensate them with higher wages, expenses, and other perks. Expats may also find themselves with greater freedom when it comes to making investment decisions, as they are not usually caught in a restrictive regulatory net in the same way that domestic investors tend to be. However, every silver lining has a cloud, and that cloud, for many expatriates, is retirement planning.
Why should this be the case? Well although pension investment is usually tax privileged in high tax countries, internationally mobile professionals may find themselves unable to take advantage of this due to the peculiarities of the expatriate lifestyle. If you have a domestic pension plan in place prior to expatriation, you may find out after the event that it is not as mobile as you are.
Switching from plan to plan as you change host country doesn't always make a great deal of sense either, and can mean that the income you end up with in later life is fragmented, and whittled away by foreign exchange costs or cash-strapped governments.
Apart from the European Union there is no international organization with the power or the desire to ease cross-border transfers of occupational (ie non-State) pensions. As regards State pensions, which for many expats are so small as to be trivial, there is a growing number of country pairs which have reciprocal arrangements for payment of acquired pension rights. These are sometimes embedded in Double Tax Treaties, and sometimes covered by separate agreements; for instance, there is a Totalization Agreement between the US and Canada. Usually such agreements apply across a range of social security benefits, and cover contributions as well as benefits. But of course they don't extend to private or occupational pensions schemes.
The EU's equivalent of a totalization agreement is known as EULISSES as regards State pensions. But for most expats, occupational pension schemes are a much greater preoccupation.
Current EU rules protect the statutory pension rights of workers who move between member states, but these provisions do not apply to pension schemes that are financed or co-financed by employers. This has meant that workers have risked losing entitlements they have accrued in one member state, if the state to which they move deems that they were not built up over a long enough period.
Legislation on the issue was first tabled by the European Commission in 2005, and was revised in 2007. It was then blocked due to differences between pension schemes in different member states, and the need for a unanimous vote. However, the implementation of the Lisbon Treaty opened the way for the draft to pass by a qualified majority vote and prompted renewed negotiations.
Finally, in 2014, an EU directive was that will allow workers who have been part of a supplementary pension scheme for at least three years to maintain their entitlement if they move to another EU member state. The directive sets the following minimum standards for the protection of mobile workers' pension rights:
The directive, which EU member states must transpose into domestic law by May 21, 2018, applies to workers who move between EU countries. However, member states may extend the same standards to workers who change jobs within the country.
The Directive does not cover the transferability of supplementary pensions, i.e. the possibility to transfer one's pension rights to a new scheme in the event of professional mobility.
Multinational Company Pensions
Sometimes, an international company will offer a pension plan to expatriate employees as part of their benefits package. However, many companies seem to feel that it is not cost effective to offer decent benefits packages to more junior expatriates, and are more likely to concentrate on immediate benefits such as increased wages. So unless your employer is considerate enough to provide you with a benefits package tailored to suit your needs, the onus is on you as an individual to provide for your own retirement, even if your employer makes a financial contribution.
Several international pension providers also offer corporate pension schemes, for the aforementioned lucky souls whose employers are enlightened enough to offer retirement benefits as part of their expatriation package. These can usually be tailored to suit each expatriate employee, wherever they are based, and whatever their responsibilities within the company. For employees, they usually provide similar advantages and benefits as personal international pension plans, but they sometimes differ in that an optional vesting period can be set up by the company to encourage employee loyalty. This basically means that any contributions by the employer remain the company's property for a given number of years. However, the suitability of vesting periods will depend on the tax position taken on this issue by the company's country of origin.
Private International Pensions Provision
As we have seen, moving a pension across a national border can at best add a further layer of complication, and at worst be downright impossible. So what are you to do? The most sensible solution would seem to be to find a safe place to anchor your retirement savings and/or investments so that you can move from country to country if necessary, without this having any negative impact on your assets, but if you decide to do this, you need to decide exactly where that safe place should be. Offshore financial centers 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 pension funds in 'offshore' or 'low-tax' jurisdictions will grow partly or completely without taxation, and may have been established out of tax-free income in the first place, any retirement income eventually received in a high tax country will obviously be liable for taxation.)
Unfortunately, however, once again, 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.
Offshore pensions providers 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 have also come into favor as offshore locations from which to offer pensions, but these products are usually more specific to a European audience.
Although the difficult decision regarding which offshore jurisdiction to base your investments in has to some extent been taken out of your hands, then, there still remains the question of whether you want to go for a pre-wrapped (as it were) pension plan, or put together a portfolio of suitable investments yourself (with the help of a qualified professional of course!), with a view to providing retirement income in that way. Both forms of pension investment have their advantages and their disadvantages, and in the end, which path you choose will come down to your personal circumstances and preferences.
However, there are a number of brokers (both international and jurisdiction based) and Independent Financial Advisors (IFAs) out there who specialise in retirement planning, and can make the decision easier for you, taking some of the responsibility for overall investment and tax planning off of your shoulders. They can help you to decide, given your personal circumstances and responsibilities, whether it is best to self invest or go fully insured, how much you should be investing or saving to provide for your retirement, and if you choose to invest towards your retirement, can help you to structure your portfolio.
Putting together a managed portfolio with the help of an IFA has distinct advantages, but by the same token, distinct disadvantages. This form of retirement planning could be seen as more flexible, as the investment choices (to a certain extent) are in your hands. You can choose how varied you would like your investment instruments to be, and whether to include shorter-term investments, or savings schemes with no strings attached.
It also has the advantage that there are no penalties for reduction or discontinuance of investment if your circumstances change unexpectedly, and there are usually no limits as to the maximum or minimum investment, or the frequency of contribution. However, with this flexibility can sometimes come added risk (which is not ideal when investing for your retirement), which will necessitate more frequent checks and reviews. Therefore, you need to decide, with the help of your financial advisor or broker, whether the added flexibility is worth the potential risk and added responsibility.
Alternatively, you could opt for a ready packaged pension or retirement income plan. Many domestic insurers also offer international alternatives to domestic pension plans tailor made for expatriates, usually located in one of the offshore jurisdictions previously mentioned. Following this path will almost certainly take some of the worry and hassle out of saving for your retirement, and international pension plans are far less unwieldy than they used to be, offering greater flexibility of investment choice, and a wider range of funds than ever before. Putting your money in an international plan will also mean that you can usually invest in offshore funds at a much lower premium than you would otherwise be able to.
However, be careful not to lock into a long-term commitment if your income stream or circumstances are uncertain, as the penalties for temporary non-payment or discontinuance of premiums can be substantial. International pension plans can be accessed either through a broker or IFA, or in some cases (although not many) directly.
in making your choice, there are questions that you (or your IFA) will need to ask the provider:
This is obviously not a definitive list, and proper due diligence needs to be done before any decision is made.
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.
To conclude, then, whether your employer will provide retirement benefits as part of an overall package, or whether it is up to you to make provisions for your retirement, if you an expat, then it is probably necessary and desirable to take the international pensions option in order to avoid reduction or fragmentation of your income, and possible confusion in later life. And, whatever your eventual plans, the sooner you look into providing for your old (or middle!) age the better. Leaving your retirement planning until the last minute may mean that you are unable to provide a decent standard of living for yourself and your dependents.
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