This is perhaps the most tax advantageous of the three articles about international pensions that we have written and it should be of interest to all expats who are on executive pay levels. Not many people would believe that sacrificing a large proportion of a salary would make them better off!

Overseas appointments are not always compensated by higher remuneration packages, contracts are usually short term and, as a result, often no thought is given by employers to the provision of employee benefits, including pension funding.

Habitual expatriates are, therefore, potentially at a disadvantage to those who remain in their country of origin. The majority of overseas appointments do not offer a panacea to tax problems; in fact these often result in exposure to a significantly higher combination of tax and social security charges, especially within the European Union.

Now expatriates have a unique opportunity to maintain continuity and to secure tax deductible investment contributions to a gross fund.

How can they do this? By sacrificing part of their salary that they don’t need for day to day living.


Overseas activities

Any type of worker can take advantage of this planning if they carry out some or all of their work duties outside of the UK. The four  categories are:

• any employee of a UK limited company whose duties are conducted wholly outside the UK
• executives of multi-national employers of overseas parentage with a UK presence
• self-employed or contracting expatriates, of any nationality, who are working in any country other than the UK
• UK-resident executives of a UK limited company who conduct specific duties outside the UK amongst their other UK duties.

So, these categories cover a large number of expats. Let’s look at the summary of the benefits.

• Substantial employer contributions are permitted and are fully allowable against corporation tax in the UK.
• Usually no tax liability or social security costs on the employee on the contributions made.
• Benefits may be taken entirely as a  lump sum ( possibly tax free , depending on residency).
• Benefits available from age 55, although they may be taken earlier than 55 if the member is leaving service or a material change is made to employment terms.
• Funds grow in a tax-free environment.
• The plan assets do not form part of the member’s estate for UK inheritance tax (IHT).
• The plan assets can be invested in a very wide choice of assets.

This type of pension scheme satisfies the criteria established by the Pension Scheme Office Overseas Schemes Section in the UK. Every scheme is submitted to, and accepted by, the Overseas Scheme Section, ensuring that the benefits will not subsequently be subject to challenge. This grants full pension scheme status to The Pension Trust, which is recognised internationally as a genuine pension arrangement.

The Trust is for individuals of any nationality who are carrying out duties outside the United Kingdom for a UK company or associated company elsewhere in the world irrespective of domicile or residency.

Let’s look at an example of a well paid executive in Prague, on a salary of 200,000 Euros per annum*

Without pension scheme in place-

Total cost to employer ( incl social/income taxes )      224,720  Euros p.a.

Net income received by employee                                  159,620  Euros p.a.


With pension scheme in place-

Total cost to employer (incl social/income taxes)       213,600  Euros p.a.
  
Net benefit to employee                                                   183,950  Euros p.a.


Result-

Employer saves                                                                11,120  Euros p.a.

Employee has an extra                                                     24,690  Euros p.a.

Total savings                                                                     35,810  Euros p.a.

Summary

Effective international planning for expats in senior positions, of all nationalities, can be an important planning tool.

This will surely also be of interest to professional recruitment firms and firms that require the services of professional and mobile employees.

Henry Ward Beecher
It is not what we take up, but what we give up, that makes us rich.

Christopher Lean is a consultant at Square Mile Financial Services (http://www.squaremilefs.com) and an Associate of the Personal Finance Society (Chartered Insurance Institute).


The Small Print*

Depending on the expats’ circumstances, special employment structures need to be may set up in the UK and this will require the pension advisers working closely with local accountants , and the local employer( if applicable), to ensure that the scheme is set up correctly. These calculations are for guidance only and do not take account of marital status/children.