The expat pension pitfalls

From Expat-Village.com

Expat News
The expat pension pitfalls
By
Oct 27, 2006, 13:23

Expat Village is edited and published by Iain Williams in Caracas, Venezuela.

A Times Online story by Mark Atherton at http://www.timesonline.co.uk

Most overseas workers find out about retirement provision too late and end up losing out. Travelling abroad to work as an expatriate can make your fortune — but it can also leave a nasty hole in your pension pot.

Overseas workers have traditionally lost out to their home-based colleagues when it comes to retirement provision, and this was even more true in the 1960s and 1970s.

Dennis Hall, of Yellowtail Financial Planning, an independent financial adviser, says that though pension provision was improving for the average UK employee, there was no real solution to the needs of the expatriate.

He says: “Many UK companies sending employees abroad 40 years ago expected them to make their own pension provision out of their often higher, often tax-free, expatriate salaries. Inevitably many didn’t.”

In other cases, overseas workers believed that they would be receiving a pension from their employer, only to find at retirement that no such pension was forthcoming.

On top of that, companies often chose not to make UK national insurance (NI) contributions on behalf of their expatriates, thus creating a further gap in their pension savings, which employees were expected to plug themselves.

Often they fell between two stools. They would be obliged to contribute to the local state pension (where one existed) but would not build up enough years’ contributions to be able to draw on it at retirement. Then, when they returned to the UK, they would find that their patchy record of NI contributions here meant that they qualified only for a much reduced UK state pension.

At the moment, a man needs to have built up a record of 44 complete years’ NI contributions to obtain a full single person’s state pension of Ł84.25. A woman requires 39 full years, though the Government has announced that it plans to bring this down to 30.

This means that a man can miss only five complete contribution years between the ages of 16 and 65 if he is to qualify for a full state pension. If, as a result of working overseas, he ends up 11 years short of a full record, he would receive only three quarters of the basic pension — a loss of Ł21 a week.

John Whiting, of PricewaterhouseCoopers, the accountant, says that the simple way to avoid this is to keep up your NI contributions while abroad. You can do this by paying Class 3 (voluntary) contributions, which cost Ł7.55 a week or a little less than Ł400 a year. Mr Whiting says: “This is a pretty modest sum to pay for keeping your contributions record intact. If you are part of a couple, it may make sense for both of you to do this, though you would need to take advice on this.”

He adds that it is also worth checking on the precise position in the country to which you are going. You could be fortunate and end up in a country, such as Germany, that has a reciprocal agreement with the UK so your contributions to the German state scheme count as contributions to your UK pension.

However, Mr Hall says that the situation for many expatriates today is much the same as it was for their predecessors in the 1960s, despite the many pension reforms of recent years. A fortunate few will work for large global employers with a well-structured remuneration package that is geared towards an equalisation of benefits worldwide.

But pensions are a potential minefield for most workers in small and medium-sized firms, as well as the increasing number of freelance expatriate workers.

Mr Hall says: “For the UK expatriate there is still no real universal international pension plan to replicate schemes at home. For a large number of expats, especially in Asia, the Middle East and the former Soviet countries, the first thoughts they will give to making further pension provision will come after meeting an offshore financial adviser, often in a bar in Moscow or Tokyo. Many of these are paid by commission only and often there is little or no regulation to control what they are selling.”

The lack of a truly international pension does not stop offshore financial advisers from marketing plans dressed up as international pensions. These are often little different from regular savings plans offered by UK insurers. But they come with very generous commission for the adviser and hefty penalties for investors who want to get out early.

Mr Hall says that expats should beware of committing themselves to a savings plan that has a term of ten years or more. For one thing, emergencies such as the Russian rouble crisis of 1998 can mean that expats have to return home sooner than expected. For another, many of the longer-term deals on offer are very poor value for money. He says: “I have come across several instances where expats in their twenties have been encouraged to take out savings plans that mature when they are 60.

When the overseas worker returns home and tries to cash in the plan, he or she finds that there are substantial surrender penalties and the adviser has moved on.”

Those working abroad do not have to set up an offshore pension automatically. For those on short-term contracts who plan to return to the UK, it is possible to build up a decent onshore pension.

For example, expats can save money in a deposit account while overseas and then make a large pension contribution (plus tax relief) once they are back home, making use of the more generous limits on pension contributions that came into force on April 6.

CASE STUDY: An 18-year fight with a company that 'refuses to honour a pension guarantee'

JOHN LARKE spent 21 years of his working life with the Vestey Group. Most of this was spent in Argentina, where he became a senior executive in Vestey’s meat production business.

While he was in Argentina, Vestey’s London head office stopped his contributions to the UK state pension scheme because it did not want to pay these in addition to the obligatory Argentine social security contributions.

Mr Larke says: “When I questioned this, they told me not to worry as the group would guarantee my pension no matter where I was.”

Mr Larke was transferred home after 17 years, so he did not meet the 30-year qualifying requirement for an Argentine pension and also had a 17-year gap in his UK state pension contributions.

Mr Larke adds: “When I left Vestey shortly after returning to England, I was promised an appropriate pension settlement on reaching retirement age. But when, at the age of 60 and now living in Canada, I wrote to ask what pension I could expect at age 65, I was told that there was nothing due to me.

“The company said that I did not qualify for a pension because I was an overseas employee. But I believe that my contracts with the company show clearly that I was a UK-based employee who was periodically sent abroad.

“I am now 78 and have been fighting for 18 years to secure from the Vestey Group the pension which it promised me back in the 1950s. I have written many times to the group’s chairman but the response has been that the company’s pension manager advises that nothing can be done.

A spokesman for Vestey Group says: “Pension benefits did not form part of Mr Larke’s overseas contract of employment. There was an informal policy of awarding an ex-gratia allowance to employees who remained in service up to their 65th birthday, but Mr Larke left when he was only 45. The company was under no obligation to pay national insurance contributions towards his UK state pension, although he could himself have made voluntary contributions.”

Expat Village is edited and published by Iain Williams in Caracas, Venezuela.