Pension provisions can be confusing to an employee working only in his home country. But for someone changing jobs, employers and countries during their career, it can be downright bewildering.

With a fluid marketplace and the ease of working across borders for European nationals, accumulating retirement savings becomes even more complex.

Nest egg: lack of EU tax harmonisation can see a pension taxed several times

"People are collecting a lot more small bits of pension with different employers," said Bob Sperl, senior international consultant with Watson Wyatt. "The question then becomes is the individual really monitoring what he is collecting and really aware of all the little bits? Or, is perhaps their current employer taking some effort to try to consolidate all the little bits? The latter is very exceptional."

Though an employer may offer means to help prepare for retirement, it is ultimately up to the individual to manage their retirement planning.

"From an employer perspective, they want to say here's how we are going to manage that situation," he said. "Some people will win. Some will lose. Most will end up with only an education and still be left with a decision on what they want to do."

Employees working across borders for the same firm are likely to have their savings protected through the organisation's pension scheme. But someone who works for different employers in different countries could well end up with less than an individual who stayed with the same organisation.

"When you add up the different pensions, this is going to be a much smaller amount than someone who has stayed in the same country with the same employer," said Joseph Verlinden, a Brussels-based consultant who is an expert on pension issues.

 Despite the European Union move toward pan-European pensions, tax regulations continue to be governed by bilateral treaties.

"It's going to be very difficult," said Verlinden. "One of the biggest hurdles you are faced with in Europe is the tax hurdle."

 The lack of harmonised tax regulation between the 25 members means an individual's pension could be taxed once, twice or not at all – depending on the situation.

Verlinden gave two examples. In Luxembourg and Germany, contributions are taxed but not payments. If a German resident then relocates to a country where pension income is taxed, he will pay twice. On the other end of the spectrum, an individual could end up paying nothing in tax if he moves to a country where the benefit is not taxed and was from a nation that did not tax contributions.

Other tax issues remain for expatriates and those wishing to transfer pension schemes between countries within the EU. An employee changing jobs and countries may want to shift the transfer value of his vested pension to his new employer's scheme but several member states tax the transfer value before the move takes place, said Verlinden.

Though the money will not necessarily be taxed a second time in the new country, "it reduces the total value substantially, since the transfer value will in most cases be taxed at the marginal tax rate," said Verlinden.

The European Commission is not in a position to enforce tax harmonisation but it is putting pressure on member states through initiating proceedings against several nations in the European Court of Justice. And the EC "will take action so that discrimination between domestic plans and foreign plans will be forbidden," said Verlinden, who is an active member of the Brussels-based European Federation of Retirement Provision (EFRP).

"Obviously, with the Directive on Pension Funds approved, which allows pension funds or insurance companies to develop cross-border activities, this new situation will give a new boost to the issue," he said. "But it will still take some years before we will see pan-European funds, since we also have to bear in mind that the employees need to benefit from a decent legal protection."

Even after the tax issues are ironed out, it could still be complicated to manage funds throughout the EU.

Tim Roberts, managing director of Talking People, a benefit's compensation communications consultancy that is a Mellon Financial Company, suggests learning from good practices of member states.

For example, he said, the United Kingdom has a system by which individuals can access all of their pension details through their national insurance number.

"Clearly that needs to be a European standard," said Roberts, who is based in London. 

For non-EU nationals, the ability to transfer schemes across borders hinges on whether or not a bilateral treaty on social security between the home and host country exists.

For example, an Australian working in Belgium who returns home before he begins receiving his pension will not be entitled to it because no bilateral treaty between the two nations exists, said Verlinden. But Belgium does have such a treaty with the United States and, therefore, an American would be able to draw upon his pension after repatriation, he said.

Embassies, HR departments, tax consultants and employment commissions should be able to assist an individual in understanding the specifics of their situation, added Verlinden.

February 2005

Jennifer Hamm is a freelance journalist based in the Netherlands.

Subject: Benefits