While the outlook seems challenging for international pensions, there is a way for businesses and individuals to take advantages of some unique tax breaks on offer to expatriates and the companies which they work for
Pension provision can often be the last thing on the list when it comes to financial planning. This is perhaps not really surprising. Of necessity, many IFAs tend to concentrate on giving clients advice on the management of their day-to-day financial affairs, savings, investments, mortgages and so on, and for many people retirement can seem like a long way off in the far distant financial future.
While this is understandable, several factors are currently in play that are changing the way in which both companies and individual look at pensions in general and international pensions in particular.
Perhaps the most obvious factor is that world is going grey. Better nutrition and medical advances mean people are living longer, making pensions an increasingly vital and necessary element in financial planning. In addition, while there have recently been some moves to increase retirement ages (especially in the public sector) the trend in the past decade has been for employees to retire earlier.
Increased longevity, combined with a trend towards early retirement, means it is possible that some individuals can look forward to spending 30 years in retirement - almost as long as their working lives. Making adequate provision for this sort of scenario presents a challenge to both the individual and companies.
Pensions in crisis
Another factor is that pensions themselves are in crisis. For most people, relying on state provision alone is simply not a runner. Across the world, governments are considering the levels of support they are prepared to give to state-funded schemes. Most are not fully-funded but instead rely on current taxation to fund current pensions. Of course, it varies from country to country, but it is undeniable that state pensions are currently underfunded on a massive scale.
Demographical projections also show that there will be fewer young people in the workforce and increasing numbers of pensioners, making it unviable to maintain adequate pension provision.
Not surprisingly, therefore, the trend is for the state to withdraw from pension provision or at least reduce the level of pensions on offer. Whatever their political complexion, almost all governments are encouraging individuals and companies to increase their own provision - in effect to make their own arrangements.
That, of course, would be fine if all was well in the private sector when it comes to pension provision. In recent years, a major factor has been the reliance of many individual and company schemes on the growth of equities. In the 1980s, it looked to most observers that the stock market could only go one way - upwards. Pensions were sold as a one-way bet. The best projections available showed an inexorable rise in equity values boosting pension income in a most satisfactory way. As we all know, it didn't quite turn out like that.
Nor has it helped that there have been some high-profile scandals. Some employees who thought that their pension was ring fenced, whatever happened to their company, have found out to their cost that this is not always the case. While pensions scandals are mercifully rare, the media has given considerable exposure to a few high-profile cases and, as a result, many people have lost faith in pensions, or at the very least have become nervous about them.
Against this background, increasing globalisation has meant a growing number of multinational companies have realised it is time to look at new ways to arrange pension provision for their employees. And it is not only multinationals; as international trade barriers fall there has been an explosion in the number of small specialist companies (especially in the oil, IT and telecommunication sectors) that find their services are in demand around the world.
One of the biggest trends facing both multinational and smaller specialist firms is the need to fill the talent gap. There are only so many good, well qualified, people out there; and it is becoming increasingly harder to find people with appropriate skills. Salaries and other more obvious benefits used to play the biggest role in attracting the right people but, increasingly, pensions - especially international pensions - have come to fore and are playing a vital role in recruiting and retaining the right kind of employee.
Many companies are also realising that establishing an international corporate pension scheme has some additional and very significant benefits to them as businesses. In a dynamic and changing international economy, international pension schemes have two major advantages: they can protect retirement funds from adverse trading, economic or political conditions, and they can ring-fence the assets of the plan from the balance sheet of the sponsoring firm.
The unique attractions of a properly set-up international pension are also becoming increasingly apparent to individuals who work globally. The main benefit, of course, is the ability to make secure, long-term arrangements for their retirement by taking advantage of the unique tax advantages, that can apply to international pensions.
search for flexibility
The key word for both companies and individuals is flexibility.
Increasingly, people want the ability to maximise their options when planning for retirement. We are moving away from the bad old days when expatriate workers would attempt to transfer their pension fund to a new jurisdictions only to find this is only possible if the rules of both the transferring and receiving schemes allow such a transfer. There can often be a necessity to sell assets and transfer cash rather than the assets themselves, with an adverse effect on the value of the assets of the scheme. Also, the tax authorities in certain jurisdictions often set onerous criteria for these transfers, which frequently prove difficult to meet.
The worse-case scenario is that many people are left with different pension values, in various schemes, scattered between several different geographical locations. These individuals often find that their pension provisions are piecemeal, difficult to evaluate and costly to administer. Some pensioners may find that their retirement benefits are insufficient, or less than they expected.
It need not be like this. The good news is that, when it comes to pension planning, with a bit of help and advice expat workers and their employers can take advantage of some highly favourable tax regimes, plus a considerable degree of flexibility on offer from a variety of companies and jurisdictions.
It depends, of course, on the jurisdiction in which the pension is based, but in the Isle of Man, for example, typical advantages include no restriction on the level of benefits, or age at which they are taken, from an international pension plan. Normally, there is no upper limit to the size of a pension fund or restrictions on the level or frequency of contributions. Other benefits include the fact that the holder of an international personal plan can change jobs and/or jurisdiction and continue making contributions.
In most cases, assets and investments can be held, or invested, in a very wide range of financial vehicles, including quoted shares, fixed interest securities, bank and building society deposits, unit trusts, insurance policies, unquoted securities, commercial property and loans. Usually, the plan member can decide where in the world they are to retire, without their pension arrangements prejudicing, or unduly influencing, that decision.
Crucially, unlike in the UK, there is no mandatory requirement to purchase an annuity on retirement and, in most cases, pension funds can become part of a member's estate upon their death.
These and other advantages mean that companies and individuals are increasingly coming to realise that a well-drafted international pension plan based in a regulated tax-free environment, can make international pensions a must have.
Increased longevity, combined with a trend towards early retirement, means some will spend 30 years in retirement.
Multinational companies are realising it is time to look at new ways to arrange pension provision for their employees.
The main benefit of international pensions is to make secure, long-term arrangements for retirement by taking advantage of the unique tax advantages.
Head of UK intermediary distribution
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