Overseas Assignments and the Pensions Debate

Employees working away from home risk losing important investment and tax benefits if pension arrangements are neglected, writes David Fairs Many employees embarking on their first foreign assignment overlook the issues surrounding benefits, particularly pensions. More immediate issues, such as accommodation and finding schools often push pensions into the background. In some cases, the employee is told not to worry about pensions, with their employer ensuring that they are “no worse off”. Many a consultant has rubbed their hands with glee when trying to help employers unravel that one. From a UK perspective, for example, it might be assumed that an individual could maintain membership of a British pension scheme just as if they were working in the UK, particularly if they are working in another EU country. But in reality, the position is a lot more complicated. Although there have been many initiatives by employers and politicians to create a pan-European pension plan, the obstacles have so far largely proved insurmountable. Short-term overseas assignments The UK’s tax authority, the Inland Revenue, will allow employees to stay in an occupational pension scheme indefinitely, if the individual remains employed by a UK employer – despite the fact that they may be working outside of the UK. By contrast, if the individual moves to and is employed by an overseas subsidiary of the UK employer, then the Revenue imposes some conditions – such as the individual having a definite expectation of returning to the UK in the future. As a result, for shorter assignments from the UK perspective, there is the possibility of staying in the UK pension so that the individual can build up broadly the same pension as if they had not left the UK. However, although the occupational pension scheme is approved in the UK it is not likely to be recognised as an approved pension scheme by the tax authorities of the overseas country in which the employee now finds himself working. This is likely to mean that employee contributions are not tax deductible, employer contributions could be taxable as a benefit in kind, or the increase in benefit could be taxable. From the individual’s perspective the loss of tax incentives can be a real issue – unless the employer is prepared to operate a tax equalisation arrangement so that the individual is no worse off. UK Pension Scheme Issues The UK pension scheme is also likely to be designed in such a way that it takes account of UK social security benefits directly or indirectly – and this raises a further issue. If the employee begins to build up social security benefits overseas, then the company could find itself providing sizeable contributions to a UK occupational arrangement – whilst also having to contribute significantly towards an overseas social security system which provides a much higher level of retirement benefit than in the UK. It is feasible that the individual could then end up with a much higher retirement benefit than if they had just stayed in the UK. One obvious way round this is to offset the higher overseas social security benefit from the occupational pension. But defining precisely how this is done – and taking into account different currencies and potentially different retirement ages – is often difficult, particularly if it is not well defined at the outset. If the individual’s assignment turns out to be shorter than intended there is also the possibility that the individual will not have contributed for a sufficiently long time to the overseas social security system to build up entitlement to benefits. As a result, there are arrangements in place with many countries when looking at minimum contribution periods, which means that contributions to one social security arrangement can be recognised by another. Group Personal Pension or Stakeholder? So far we have assumed that the individual is in an occupational pension arrangement. But what happens if their employer operates either a group personal pension arrangement or a stakeholder arrangement? In such cases, it will not be possible for the individual or employer to continue to contribute to their UK pension arrangement unless their earnings are effectively subject to UK tax. As more and more companies are moving away from occupational pension arrangements, this has particular significance for the individual. In such circumstances the employee might have the opportunity of joining a pension plan in the overseas country or participating in some form of international pension plan. But the fact remains that many companies currently moving away from final salary arrangements fail to consider this issue. Advantages of joining an overseas pension plan If the individual joins the overseas pension plan then it is likely that the tax issues will be less significant although it should be recognised that not all countries provide tax relief on contributions into a pension plan. Some permit benefits to be provided tax free at retirement instead. However, careful attention will need to be paid to the vesting period – that is the length of time the individual has to be a member of the pension plan to gain an entitlement to benefit. In some countries, vesting periods can be quite lengthy, leaving the individual with a potential gap in their retirement savings. For the individual who expects to either move permanently to an overseas country or have a lengthy assignment in that country, joining the host country benefit arrangements might prove more attractive than remaining in the UK pension arrangement. It will certainly remove the obstacles imposed by the inland revenue and overcome the issues with tax incentives and integration with social security benefits. Issues still remain if there are lengthy vesting periods although it might be possible to reduce or waive these in special circumstances. An individual accustomed to a particular benefit package might find the one on offer in their new country very different to the one enjoyed in their home country. The UK, for example, tends to have much higher levels of life assurance provided by the employer than most other countries whilst medical insurance tends to be the preserve of white collar employees because of the comprehensive care provided by the National Health Service. As such, there may be a need for the employee to carry out a financial overhaul to make sure that there are no gaps in insurances, whilst at the same time eliminating any duplication of cover. Particular care needs to be paid to medical insurance and disability insurances. If a UK national becomes seriously ill or disabled he is likely to want to return to the UK, closer to family and it is important that the medical insurance will meet the costs of doing so. If the individual is permanently disabled then it is likely to be important that benefits will continue to be paid should the individual return from the country where they were working back to their home country. David Fairs is a partner in KPMG’s pensions groupPensions

The globetrotting internationalist The individual who moves from one country to another on a regular basis can represent a particular issue for employers. It might not be appropriate or tax efficient for them to remain in their home country pension arrangements but they might also not spend sufficient time in any one country to build up entitlement to social security or employer benefits. For these employees many employers will consider the use of an international or offshore pension plan, or a special UK approved pension arrangement called a section 615 scheme. Constructed appropriately, these types of arrangements can be constructed with many of the tax efficiencies of a UK-approved pension arrangement, while also providing a high degree of flexibility for the employee who is likely to be uncertain of his ultimate country of retirement. Retirement planning for the expatriate is therefore inevitably more complex than for the individual who spends his time in just one country and it can be difficult at the commencement of an assignment to decide which approach to retirement planning – home, host or international plan is the most appropriate. Most employees being seconded for the first time would benefit from advice on what they should look for when comparing the different options available to them and ensuring that they have sufficient and appropriate risk insurance coverage.