International Retirement Plans need to ‘do exactly what they say on the tin’
There are many similarities and common issues in respect of retirement planning provision across the world. It is essential in most countries, for instance, that individuals should make adequate provision for their own retirement through pensions or savings plans because already overstretched state-funded benefits systems are at risk of being overwhelmed.
As a result, governments generally encourage saving and investment by offering generous tax breaks, either in the form of tax relief on contributions, tax-free interest and gains on capital invested, inheritance or wealth tax exemptions or specific tax-efficient investment schemes. It is therefore inevitable that an important element of retirement planning in respect of any domestic pensions or savings plans will be tax related.
The same will also be true for expatriates and internationally mobile people. The downside to international retirement or savings plans is that, in most cases, contributions will not qualify for any form of tax relief so it is likely that, at least until any available tax reliefs or allowances have been fully realised, utilising a domestic plan will be more favourable.
Expatriates and internationally mobile people will also need to pay close attention to the existence and scope of any double tax agreements that may apply between the places where their pensions or savings plans are located and their current or projected places of residence.
Regardless of whether a pension or savings plans is domestic or international, however, there are a number of features that provide the basis for any favourable treatment being granted.
Typically, the requirements for a scheme to qualify as a pension plan apply to age, particularly the minimum age from which an individual member can start to access the funds held. There may also be conditions around the maximum age at which an individual member is required to start taking money from their pension.
These measures are largely in place to ensure that a pension plan is used for its intended purpose; to provide financially for an individual later in life. There has always been the potential for misuse of pension plans and the incentives offered, which is why you will often see restrictions placed on the availability of tax reliefs. Otherwise, the scheme could become more of a tax planning arrangement than a retirement plan. There may also be less ability to contribute, or attract any tax benefit when contributing, beyond a certain age.
Despite the absence of tax relief available to international retirement plans, there may still betax benefits afforded to such arrangements. These might include tax-deferred investment growth and, potentially, estate or inheritance tax exemptions.
It is reasonable to expect that for any scheme to benefit from any tax-favourable treatment, the same fundamental principles should apply. This is why international retirement plans should have similar restrictions in place in respect of the minimum and maximum ages for accessing benefits, and potentially around the timing and amounts being contributed into the plan.
For anyone advising clients in this area, it is essential that you provide a substantive rationale for the use of a retirement plan, particularly if you are recommending that your client utilises an international retirement plan. This should include a justification for the amount being contributed, how this will support the client’s retirement needs and the age from which they intend to start taking benefits.
It may seem obvious but the purpose of either an international or a domestic retirement plan should first and foremost be to enable an individual to save to provide financial support to them in their retirement. In some countries, part of the appeal may also be to ringfence assets, save in a major currency or invest outside of the home country, but there should always be a legitimate need to save for retirement. If the purpose or rationale is anything different, it is unlikely that a retirement plan will be the appropriate recommendation.