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30/07/2003How to manage finances while working abroad

How to manage finances while working abroad Moving to another country can create a tangle of bank accounts, investments and pensions, along with tax issues and bills due back home. Here's expert advice on how to handle your financial issues.

Career Journal Europe
 
Moving to another country creates a tangle of bank accounts, investments and pensions that can play havoc with your finances. As you struggle to find a landlord who accepts pets or hunt for your dream home near an international school, it's easy to forget about the currency your pension will be in or how you're going to continue to pay bills back home.

But ignore these details at your peril. Not that such issues are easy to disentangle. Individuals may be more and more mobile now, but managing finances across borders remains dauntingly complex.

There is no such thing as a European pension, for example, that allows you to pay into the same pot of money while travelling around, and tax regimes, of course, still vary enormously from country to country.Here's what the experts advise on how globally mobile executives can best manage their finances, save taxes, and handle retirement savings. The upshot? By paying attention to differing exchange rates and tax laws, it's possible to get a better deal.

Managing a pension for people on the move becomes a complicated issue. As a rule of thumb, individuals should always invest their pension in the currency of the country they plan to retire to. That reduces the foreign-exchange risk, but is not always possible.

Individuals who leave the UK to work in Germany, for example, can usually only continue to pay into their UK company pension plan for a limited period after they leave the country, says Raymond Morris, senior financial consultant at Personal Investment Consultants in Brussels.

After that, if they pay into the German company pension plan, they find themselves exposed to currency fluctuations. "They just have to hope the euro doesn't fall too much against sterling by the time they retire," says Jonathan Bourne, a financial planner with UBS Private Banking in Zurich.

Individuals relocating within the euro zone obviously no longer have to contend with a currency risk with when it comes to their pension. But even within Europe, paying into different state pension programmes for short periods of time can result in low returns without the possibility of switching the money into another plan when you move on — and so should be avoided if possible.

Morris says he has several clients who paid into state retirement systems in France, Sweden or Italy for between three and five years and then left the country. "That money is now frozen and can't be transferred or withdrawn until the individual reaches the retirement age," Morris says.

Nigel Upton, the 37-year-old head of investment consulting for offshore clients at Credit Suisse Private Banking, faces a similar problem. Almost eight years ago, Upton moved from Britain to Zurich with his family. Despite having moved all his finances over to Switzerland and bought a house there, Upton still has a company pension in the UK that he cannot touch.

"If I could cash in the money I would," he says. "But I have to wait until I retire." Upton had another UK pension that he could cash in and decided to do so since he had no plans to return to the UK. "I felt I could better use that 20,000 pounds (EUR 32,274) to improve our standard of living in Switzerland," he says.

Now, Upton has a company pension with Credit Suisse and pays into the obligatory state pension plan. One solution to the pension problem for people who move from country to country, says Morris, is to set up a private offshore pension programme.

"The funds are invested offshore where there is no tax deduction at source on income," says Morris. "And it's easier for the spouse or next of kin to claim the money in the event of death than if the pension is invested onshore."

The downside is that the individual receives no tax breaks on money paid into the fund, as they would with an onshore retirement plan. Take advantage of tax breaks in the country you move to Individuals resident but not domiciled in Britain, for example, can exploit the favourable tax regime there compared to many other countries in Europe.

In particular, they can find ways to pay little tax on income or capital gains on assets held outside the country. One method is to convert income earned outside the UK — from dividends on shares in France or interest earned on a foreign bank account, for example — into capital.

That can save individuals up to 40 percent in UK income tax, says Jamie Apold, wealth adviser at JPMorgan Private Bank in London. It works like this, aided by the so-called "source-ceasing" rules in UK tax legislation: Individuals switch the income from, say, their French dividends from one bank account to another just before the end of the UK tax year.

The switch converts the income into capital, which can be brought into the UK tax-free. "Because the account housing the money was closed, the source of the income has ceased, and so the money is not liable to UK income tax when it is remitted," Apold says.When it comes to inheritance tax, non-UK domiciles get an even better deal. They are exempt from inheritance tax as long as they haven't lived in the country for more than 17 of the last 20 tax years. Another way to profit from the tax systems in different countries is to exploit dual tax treaties.

Anyone who moves to France, for example, and owns shares in a Finnish company, such as Nokia, will receive the dividend free of the 29 percent withholding tax normally payable on Finnish dividends. "The Finnish tax authorities will apply the double tax treaty rate directly at source, so that no claim is needed," says Jonathan Bourne, a financial planner with UBS Private Banking in Zurich.

Similarly, German residents owning Finnish shares only have to pay 15 percent of that withholding tax, which can also be offset against income tax liabilities under German law.

Negotiate hard with your company on the relocation package Company relocation packages are normally standard, but the more senior you are the more room you have to negotiate, says Rita Wagner, vice president in charge of Europe for Karen Dean Relocation, a subsidiary of Prudential Insurance Company of America.

Wagner estimates it costs a whopping USD 1 million to move a top-level executive, taking into account all costs such as language training, transportation of goods and other moving expenses, housing allowance to allow the executive to maintain two homes, school fees, medical care and pension costs.

So don't be shy about asking for the maximum benefits. Many companies also offer help with integrating into a new culture, says Wagner. Her company, for example, helps children of expatriates with special training before they start school, by telling them what sports teams are popular and how the other children dress.

It's also worth taking into consideration any extra costs associated with leaving your home country that might not be immediately obvious. Some countries, such as Holland or Canada, for example, charge capital-gains tax on assets when you leave the country. Watch out for taxes you are still liable for in your domicile of birth.


No matter how much you move around, domicile of birth remains hard to shake for tax purposes. UK-domiciled people are liable to 40 percent inheritance tax on all assets above 242,000 pounds, for example, no matter where they move to, unless they can prove they have acquired a new and different domicile.

That can mean selling their homes, assuming citizenship of another country or even buying a burial plot there, says Apold. And US citizens, who continue to be liable to US income tax, inheritance tax and capital gains tax no matter where they live in the world, have an even tougher time if they want to get rid of their citizenship.

They have to do something regarded as anti-American, such as joining a foreign army, if they want to escape the tax authorities back home. Even then, it takes 10 years before their US tax exposure fades away. Consider offshore banking for greater flexibility.

Financial adviser Morris recommends offshore banking for people on the move. An offshore account, with a bank based in one of the offshore centres such as the Channel Islands, Bermuda or the Isle of Man, offers the advantage of tax-free interest on deposit accounts and investments.

It also makes it simpler to transfer money from one account to another than with individual domestic banks in several countries. Morris says that some offshore accounts, such as with UK bank Abbey National, require a minimum of just GBP 5,000 to get started and don't have to be maintained at that level.

Another advantage is favourable mortgage rates, he says, citing the example of a British information-technology consultant in Paris who recently got a 3.8 percent interest rate mortgage fixed for 15 years. Offshore banks will also typically offer multiple-currency accounts that can help expatriates manage their finances.

Experts say you should try to split your salary into different currencies if you have bills to pay in, say, dollars, when you are living in Europe, to eliminate the exchange-rate risk. "You can get killed on exchange-rate differences," warns relocation specialist Wagner.

Jo Wrighton is a staff reporter of the Wall Street Journal.


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