Last updated 1 August 2016

Building Your Overseas Retirement Portfolio

The purpose of this article is to introduce you to some of the issues and concepts of retirement planning while you are working overseas. 

A major attraction for expatriates working overseas is the opportunity to accumulate capital, by increasing savings due to reduced cost of living and enhanced earnings.  What to do with sums you are now able to set aside is a tricky issue, because the retirement and savings products available to you back home may not be available to you overseas, or in fact, may be completely unsuitable.

What drives overseas retirement planning is the taxation regime of the country where you work and how this interacts with your home country.  How these two tax regimes work together will affect your current retirement plans, investment portfolio and your regular contributions to them. 

Becoming a Tax Exile 

Most countries do not seek to tax their citizens if they are no longer resident; the rules for working out whether you are non-resident for tax purposes can be extremely complex.  Generally, they will take into account a number of factors, such as whether you maintain a home or whether you have income from sources in your home state.  There are numerous other factors which may operate but these are two major ones. 

One issue with becoming non-resident for tax purposes is that there are, usually, many tax reliefs and tax planning vehicles to minimise or eradicate any home state tax liabilities.  It is vital that you set the plans in motion well in advance of your departure. It is therefore essential for you to retain competent tax advice before you leave your home country.

Next is the issue of what taxation you will face in your new country of residence, and this will be determined by their domestic regime.  Frequently, it is the case that expats enjoy significant tax benefits from moving overseas with either lower income taxes, or in some cases, no income tax whatsoever.  This makes the financial decision to work overseas even more compelling. 

How Retirement Plans and Contributions Are Affected 

In your home country, you probably enjoy tax relief on the gains and contributions you make to approved pension funds.  You get this relief because you pay taxes in your home country, and the government wishes to encourage retirement provision so they do not have to foot the bill for looking after you in your old age.

The issue is that when you cease paying income taxes in your home country, or stop having earned income there, your tax relief also disappears.  It is also the case that many retirement plans will no longer accept your contributions, so you have to suspend them while you are overseas.  This can usually be done in a number of ways, so again, it is important to seek professional advice before you are in the position of not being able to contribute, or move your funds to another investment vehicle.

In respect of your overseas income, you are unlikely to want to continue to invest regular contributions into the retirement savings in your home-based retirement plans.  The reason is that in so doing, you will make those contributions subject to any tax imposed restrictions as to how the funds may be used.  For instance, it is common in many countries for retirement funds to only pay an income or restrictive lump sum at your retirement date which may still be some way off in the future.

The answer is to establish offshore pension and saving plans, which are commonly available.  You will recognise many of the companies who provide these plans, as well as see quite a few new names too.  The advantage of keeping your money offshore is these funds are typically based in tax havens where there is no tax charges being levied on your funds.  You are obviously losing your tax relief, but then you pay no tax. 

These plans are available for lumps sums and regular contributions, with fixed terms or no terms, but be aware that the charging structure may be very different from what you are used to and in any event, is likely to be higher because the company providing the plan is itself not getting the benefit of tax relief on its own expenses. 

A Word of Caution 

You must be aware that just because there is a low or no income tax regime in place, that there are not other taxes which can be charged against you, for example, capital gains or wealth taxes.

A very good example is Australia which provides an excellent environment for many expatriates with good earning potential, enjoyable climate and infrastructure and a low income tax regime.  This said, many expatriates are shocked to find that they can be caught by the Australian wealth tax provisions.  These provisions seek to tax an individual on total assets, irrespective of where they are located!  If you have suspended a pension fund in your home country, you may think you have done the right thing by making sure it is safe and continuing to enjoy tax-free growth back home.  Except the Australian tax authorities will seek to levy a tax charge on the full value of the plan, and even worse, you have to pay that charge from your own resources if you cannot free the funds from the pension plan!

This example is not extreme, though many expatriates have fallen foul of this kind of situation, which serves to underline the need for expert and professional advice when you come to make any financial decision.

Photo: American Advisors Group

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