Most developed countries have aging populations, which means that the proportion of retired people to working people is getting higher. This will eventually lead to a crisis in the funding of state pensions, and the worst affected countries are likely to be Italy and France.
If an expatriate has been working in a number of places, he or she may end up receiving benefits from several different sources and in various currencies. Unfortunately, exchange rate fluctuations can wreak havoc on cross-border payments.
Expatriates are generally advised to stay in their company's pension plan, though this may not always be feasible. UK nationals can stay in their approved UK-company pension plans provided certain conditions are met:
* the employee must be transferred overseas to work for a subsidiary or branch office of the main UK employer.
* the overseas employer should reimburse the employee's pension costs to the UK parent company.
* the period of transfer overseas should not exceed 10 years.
A British individual living abroad permanently will have to leave his UK-company pension plan. However, he or she can get a lump sum of the accrued benefits transferred into an overseas pension fund. The Inland Revenue will provide you with details about this procedure.
Generally, most UK expatriates will not be able to contribute to a UK personal pension plan while abroad unless they have "relevant earnings" chargeable to British tax. It's possible to continue making contributions to a personal pension plan if the 365-day exemption rule applies. This rule states that if an individual goes abroad to work for 365 days or more and the job does not cover a full tax year, the individual will still be considered a resident in the UK.
US citizens are also strongly advised to maintain a connection with a corporation in the US, either directly or indirectly, through a secondment with a foreign company which will enable them to make private pension arrangements through an Individual Retirement Account (IRA) or 401K. These plans are available from insurance and mutual fund companies like Fidelity Investments and Merrill Lynch.
An IRA offers significant tax advantages. A deduction can be made for contributions to an IRA in an amount equal to 100% of earned income or $2,000, whichever is less. A non-working spouse may also make an IRA contribution and receive a deduction. If both of you work, up to $4,000 may be contributed. However, the IRA deduction does not apply if you are an active participant in an employer retirement plan and have an adjusted gross income (AGI) above a certain threshold.
Self-employed individuals can set up a Keogh Plan, which is similar to an IRA in many respects. Maximum contributions will depend on the type of plan chosen, but they generally exceed the IRA limitations.
The Channel Islands have gained a considerable reputation recently in the field of international personal pensions. Employee-sponsored plans in Jersey have been around since 1962, but it was the introduction of Article 131C in 1990 that created a stir in insurance circles. This legislation allows Jersey and UK non-residents to establish pension plans on an individual basis, provided the policy is arranged through a Jersey resident broker.
Guernsey offers non-residents the opportunity to invest in its own brand of personal pension. The contract must be handled by a company resident in Guernsey, but not necessarily through a Guernsey broker.
Due to the complex legislation that surrounds pension provision in most countries, offshore personal pension plans are proving popular with UK ex-pats and mobile European investors, many of whom suffer fragmentation of their pension funds and end up receiving benefits from several jurisdictions.
Offshore investors can put money into a "with-profits" contract or a "unit-linked" fund. The former is popular with continental European investors who traditionally have a lower risk profile than American and British investors.
Their policies include a large range of international annuities, designed for clients who want a regular income in retirement, and including level, increasing and with-profits options. There is also an International Personal Pension Plan, which is more flexible than its UK counterpart, as there is no upper limit on the amount you are allowed to contribute. Withdrawals can be made at any time, and current practice is to pay out the full fund value including a final bonus. Except for certain withholding taxes, investment funds for these policies are free of tax on income and capital gains.
Flexibility is one of the main advantages of holding a pension offshore. There is no official limitation on the retirement age and you can take the benefits as a cash fund without the pension, so the contract can be used as a straightforward savings vehicle.
Though the income of the pension fund and the benefits are not subject to Jersey and Guernsey income tax, policy holders may be liable for tax in their country of residence.
Personal pensions are not suitable for those intending to settle in France. Although life insurance policies are not taxed by the authorities, it is not certain that this ruling applies to offshore plans. A policy taken out in another EU country, however, would probably be given the same tax treatment as a French plan.
For those not planning to stay in France, there may still be tax benefits depending on where you officially reside. US citizens, however, are unlikely to benefit from the plan as they are taxed on their worldwide income. Of course, there could be an investment advantage. Offshore pension plans are easy to understand and provide access to a variety of funds.
US & UK estate planning
As a US citizen abroad, you will probably be subject to federal estate and gift taxes on all worldwide assets, and perhaps foreign inheritance and gift taxes if you own assets in the host country. US law allows for a number of provisions in the estate and gift tax areas. These include:
* Ability to give an unlimited amount to a spouse without incurring an estate and gift tax liability (the annual exemption from tax on gifts to a non-citizen spouse is limited to $100,000).
* Ability to give up to $10,000 annually to any individual free of gift tax.
* A unified tax credit to offset estate and gift tax liability (effectively exempting taxable estates of up to $600,000 from estate tax).
It is unlikely that US citizens will be subject to estate and gift tax in the US and France because of a double taxation treaty between the two countries. If estate or inheritance taxes are, in the event, imposed by the French tax authorities on property or assets located in France, a credit may be claimed against US taxes.
If you plan to buy property in France or hold French investments, pay special attention to the French laws on forced heir-ships. These laws effectively prohibit you from leaving your assets to the beneficiaries of your choice. When drawing up your French and US wills, it is imperative to seek advice from a specialist knowledgeable about the laws of both jurisdictions.
Domicile is a concept of UK law and has important implications for inheritance tax (IHT) planning. Your domicile of origin is usually that of your father, regardless of your birthplace. It is difficult to change your domicile, no matter how long you intend to stay in France and, as a result, you may be liable for UK death duties. Unfortunately, you will also incur death duties under the French tax regime if you are resident in France or own property in France.
It is unlikely that you will have to pay taxes to more than one jurisdiction because of the double taxation agreement. However, UK inheritance tax is high, and if you have not managed to sell your home it is worth exploring moves that will reduce your eventual tax liability.
Basically, IHT is payable on the value of all the assets you own at the time of your death, including those that you have given away in the previous seven years. No tax is payable on these assets if their combined value is less than £150,000. Above this, tax is levied at 40 percent.
There are several ways to avoid an IHT liability. You can shelter your assets offshore (though this may give rise to French death duties), or you can take out life insurance.
Don't let the thought of losing your pension put you off spending a pleasant retirement in the warmth of the south of France. Every UK citizen has the right to claim back the insurance contributions they have paid from when and where they used to work. About four months before you reach retirement age (65 for men and 60 for women- but in the process of being increased to 65) the DSS will send you a claim form - so keep the Benefits Agency informed of any address changes. In this form you must declare any insurance paid in other countries and state whether or not you want to receive a UK pension.
No matter where you have worked in the EU you are eligible for a pension from that country. Each country will calculate how much money you are entitled to according to your payments into their social security scheme. That country adds together all the contributions you have ever made and calculates how much pension you would receive under their scheme. Then, each of the countries you have worked in pays you a pension allowance according to what percentage they make up of your previous insurance payments. For example if you paid a quarter of your total social security contributions to France, they will pay a quarter of the pension you would be eligible for in France.
Normally pensions are sent by payable orders every four or thirteen weeks. They can be sent directly to your house or into a bank or building society account. While the various countries are calculating how much you have paid whom, where, and when, and who owes you what, etc., you shouldn't lose out on any money. You will receive money in the meantime based on how much you can get, just from what you have paid into that country's scheme. If when they have finished the calculations you are eligible for a higher pension, you will receive it without having to ask.
There are various extra allowances that you are entitled to if any adult is dependant on you- even if they are not resident in the same country as you. The extra amount is calculated in the same way as the personal allowance. Benefits for people with dependent children will be paid by the country that pays the bulk of your pension (the country where you were insured for longest).