A globally mobile workforce means that retirement planning requires modern solutions to keep your savings by your side. What are some of the biggest challenges facing retirement planning today? And how can portable retirement planning address these concerns?
- The reality of expat pension planning
- Retirement planning for expats: public pensions made easy
- Supplementary European pensions: the obstacles
- Tax: the main obstacle to pensions portability
- The EU pension debate
- Tips and solutions for portable expat pensions
AES is an award-winning global financial advisory organization that provides high-quality, personalized financial advice to expats from retirement planning and pension transfers to insurance, savings, and investments.
The reality of expat pension planning
“Retirement planning requires significant thought, particularly for expats who live abroad,” says Russell. “Over the last few years, many people are examining their retirement plans to make sure they can retire at the time and income level that they prefer. Gone are the days where your employer or the state would look after you in your golden years.”
If we skim through the press, we will find a mass of recent news articles reporting how a significant proportion of the population is retiring with insufficient funds. As a result, they’re unable to retire comfortably. They find themselves either needing to keep working (if, indeed, that is possible) or dependent upon family or charity in order to be able to make ends meet.
While it is true that expats will tend to earn more than their local counterparts, the fact that they move from place to place goes against them, as it will often prevent the forming of coherent financial plans, including retirement planning.
Retirement planning for expats: public pensions made easy
If you’ve worked in several EU countries, you may have accumulated state pension rights in each of them. Anyone who has made contributions to a state pension in more than one European Union (EU) country have long had the right to receive their state pension if they retire in another EU country. The payment procedures and calculations for multiple state benefits have been agreed upon and implemented.
When you claim your pension, you’ll need to apply for your pension in either:
- the country where you live
- the country where you last worked.
That country then processes your pension claim. They also bring together the records of your contributions from all of the countries that you worked in. An important point to remember is that you only receive pension rights from other countries once you’ve reached their legal retirement age.
If you’ve never worked in the country where you live, apply to the pension authority in the last country you worked in; your application will be processed there. Before you’ve reached the legal retirement age, that pension authority will send you an application form.
Easy enough! However, the situation isn’t quite so simple when it comes to totalizing supplementary EU pension benefits.
Supplementary European pensions: the obstacles
So, the consolidation of the multi-European state pension is pretty straightforward. Unfortunately, the same can’t be said for supplementary European pensions; at the moment, there is no common framework in the EU for transferring company pension rights.
Losing a company pension when changing jobs
A key issue affecting European company pension funds is that, depending on the employee’s age, pension rights may be lost along with a job change. In this case, employees only get their own contributions to the scheme back.
This age-related clause results in employees losing funds built up on the employer’s part of the pensions scheme. It was developed in some European countries as a way of rewarding company loyalty rather than purely to provide pensions.
If you use a domestic pension scheme, you may not access or move the funds before you retire. You might see this as a problem if you’ve only contributed for a short period of time. As such, you’ll be concerned that the value of the investment will dwindle due to administrative fees or poor management.
Pan-European pensions funds
“An emerging trend is for multinational firms to make pan-European pension funds for their staff in a single EU country,” says Russell. Due to tax advantages, several companies use Luxembourg as a base country for managing pension schemes.
According to the Federation of European Employers, a number of companies use the EU’s deregulated pensions environment by forming Pension Fund Pooling Vehicles (PFPV). These are tax- and management-friendly investment arrangements that permit companies and their employees to establish a common pooled fund for pension assets. This holds pension funds on the joint companies’ behalf.
The most popular locations for the central administration of pan-European pension schemes are Belgium, Luxembourg, the Netherlands, Switzerland, and the United Kingdom.
The difficult logistics of moving pensions abroad
According to Russell, “the reality for most European expats is that they’re collecting small bits of pensions in different places. With the logistical issues associated with monitoring these small pension sums, many lose track of what has been accumulated where, let alone how effectively the funds are managed.”
There are operational and logistical differences between one pension fund type and another. These differences block transfers of accumulated supplementary pension benefits across different EU member states.
Employees working across borders for the same firm may have their retirement savings administered through their pension fund, perhaps in a pan-European scheme. However, an employee who works for different employers in different countries could end up with less than an individual who stayed with the same organization. These small pensions are likely to reach a lower value than a pension accumulated through working in an equivalent role and for an equivalent period of time, but in one place.
“Why can’t these pan-European pensions be consolidated,” asks Russel? “One word: tax”.
Tax: the main obstacle to pensions portability
Despite the EU’s move toward pan-European pensions, tax regulations continue to be governed by bilateral treaties. Because of a lack of harmonized tax regulation between EU members, an individual’s pension could end up being taxed once, twice, or possibly not at all. Some countries tax on payments in (e.g., Germany) while others tax on payments out (e.g., UK). The lack of harmonization makes pension transfers unrealistic in most cases.
Even if you were physically able to take your money back and move it elsewhere, you’ll usually have to pay back the tax relief from the government that authorized your plan. What’s more, the tax paid back could be greater than the tax relief and a penalty might also be applied. The whole reason that any government grants you tax relief is because they think you’ll retire there.
“If you think about it, that makes perfect sense,” explains Russell. “They’ll only let you invest into retirement schemes that they sponsor if you actually end up sticking around. If you leave that country, then, quite frankly, you’re no longer their problem.”
The Euro Pension dream: negotiating a collective agreement
While British pensioners have the possibility for a portable, ready-made option (QROPS), this isn’t the case for all EU citizens.
To protect those who have built up pension rights in one EU country and want to leave them there, the European Commission is taking action to prevent discrimination between domestic and foreign pensions. If an expat builds up supplementary benefits in one EU state and then moves away, the previous country of residence may ask that the tax rebates be paid back. This is now illegal; any such claims should be referred to the European Consumers Centers Network.
The Commission consulted European social partners and suggested that they negotiate a European collective agreement. However, there is diverging opinion on the need to start negotiations. “For now, the EuroPension dream remains only that: a dream,” deplores Russell.
The EU pension debate
In the European Commission’s view, the real issue with the lack of portability of supplementary pensions is the obstacles it places to the free movement of workers. EC policymakers recognize that people need to be able to move around and switch jobs without complications. In order for Europe’s labor market to remain dynamic, stumbling blocks to mobility must be removed.
As a result, the European Commission first published a proposal for a directive on 20 October 2005. Originally, the directive aimed to improve conditions related to building your pension rights, especially for the pensions left behind in another country. It also sought to increase the possibility for employees to transfer the rights to their new job.
The ability to transfer supplementary pension schemes between EU member states was part of the proposal; it’s been a hotly debated topic ever since. EU pension transfers are wrapped up in long-running points of disagreement.
Those arguing against the desire to transfer pension rights cross-EU make a case that, as long as supplementary pension rights are maintained well and paid quickly, having the possibility to transfer those rights is not vital.
“That’s all well and good,” says Russell. “But what about controlling the value of your international pension rights? Without an accurate overview of what you’ve built up and where, it’s hard to sort out whether you’re on target to retire at the required income level. Reconciling these is vital for pension shortfall analysis.”
Tips and solutions for portable expat pensions
Saving for retirement
In days gone by, your employer’s pension scheme would make up most of what you lived off during retirement. The state provision came next, with your own provision topping up your retirement nest egg. This, however, has been turned on its head; companies can no longer afford to properly pay their benefit schemes.
“Expat or not, you must take responsibility for saving as part of your retirement planning,” advises Russell. “Consider future benefits payable from company schemes and the state as the icing on the cake. You must buy the ingredients and make the main part of the cake yourself; no one else will do it for you.”
A state-sponsored pension is a pension plan where the government provides a tax break to encourage you to save for your retirement. Just how attractive this break is depends upon where you are in the world. Gross income is the source of any investments into state-sponsored pensions. Depending on contribution limits, tax authorities deduct this amount from taxable income. These schemes have different names depending on the country, including a 401k (United States), Third-Pillar Scheme (Spain), or a Self-Invested Pension Plan (United Kingdom). The tax break you receive here is less a tax relief and more of a tax deferral. When you retire, you’ll pay tax on the income that your pension pot will produce.
“The problem for expats,” adds Russell, “is that they may not be able to predict that they will retire in any particular place. Ask a 35-year old expat where they’ll retire and few have any idea. Deciding where and when we will retire is very much dependent upon our situation at the time. As there are so many unknown factors that influence where we retire, the lack of flexibility while retirement planning make them unattractive.”
Offshore retirement plans
What is the real solution to expat retirement needs? “Having worked as a financial adviser to expats for many years”, says Russell, “I have often been asked about a pan-European or even a global retirement plan solution. Is such a solution available? Yes, and it’s not even just suggesting to move somewhere cheaper. It’s not about making use of individual state-sponsored retirement plans; it’s about using offshore private investment plans that exist outside of the standard, domestic, state-sponsored solutions.”
This type of retirement plan works in a similar fashion to a locally-based one. You contribute into your retirement plan each month. You select whether you wish the fund to grow in the currency of your choosing (maybe not bitcoin, though). Money that goes into your plan is divided between different underlying funds. These funds put your money to work, building your future retirement nest egg.
With offshore retirement plans, you pay into them from your net income; therefore, there is no tax deferral. However, you can minimize the future taxation on any gain that you make within your plan. With offshore investing, because the plan is in a tax-neutral area, you control when and where you pay tax on the gain; it’s normally dependent upon where you’re fiscally resident at the point of cashing in your plan.
You’re also free to access your fund at whatever time you set. In addition, you’re not committed to buying a life assurance income plan when you get to retirement.
Offshore retirement planning is geographically portable; moving to different places around the world won’t affect your plan. The plan stays in the same place, all while growing tax-free in a tax-efficient investment area. According to Russell, “it’s the ideal solution to any expat’s long-term retirement investment need.”
The first rule: start early!
As with any financial plan, decide with your financial adviser how much you need to save each month to reach your target. Consider is the effect of inflation on future spending power. Want to retire on an equivalent income of €30,000 in 30 years? You’ll have to generate an income of around €60,000 to maintain your lifestyle.
“Not everyone can start saving as much as they should immediately; the important part is putting a plan in place,” says Russell. “You can always increase what you pay each month when your salary rises in the future. Making a start is the golden key to retirement planning.”
After working as a stock broker in London, Russell Hammond started advising expatriates and internationals on financial planning, investments, and pension transfers in 2005. As a Chartered Fellow of the Chartered Insurance Institute and Chartered Member of the Chartered Institute for Securities and Investment, Russell provides high quality, fee-based, advice to his diverse international clientele.Contact Russell