Providing an exhaustive financial plan for expat clients has its challenges, as advisers have many factors to take into consideration; such as what jurisdiction the customers are (or will) be moving to, tax regimes, savings, and investments to name a few.
They also need to understand whether their client will want to move back home in retirement and how their later life will be funded.
For UK expats, in particular, many will have one or more pension pots in Britain plus any they may have contributed to while working overseas.
Not that all jurisdictions have comparable pensions on offer. But that’s where international savings plans (ISPs) and international pension plans (IPPs) have started to fill the gap in the market.
To understand how they work and fit in within a client’s financial plans, International Adviser spoke with industry players about the advantages for those living far away from home.
Multi-currency flexibility
Anton Seatter, director of employer solutions at JTC, told IA: “ISPs and IPPs offer significant benefits – in particular for expats. Having a single centralised retirement pot, rather than fragmented retirement provision across a number of jurisdictions, can really help simplify their affairs from a personal administration standpoint.
“The fact that a member can continue to pay into it regardless of their country of residence is also a real benefit – subject to local tax advice of course.”
Thomas Goldie, senior financial adviser at Hoxton Capital Management, told IA that another benefit is that they are not affected by different currencies.
“Most standard domestic savings plans, and pension plans only offer limited fund ranges that are denominated solely in the home currency. This, of course, can have serious implications for those that are still unsure where they will reside when they come to draw assets upon retirement.
“Typically, ISPs and IPPs offer a far wider range of investments that can be denominated in many currencies such as GBP, USD, Euro, and AUD. This can be seen by the expatriate investor as a very effective way to make currency gains on top of investment gains and also mitigate currency risk upon drawdown.”
Location-proof
Seatter added: “The fact that assets are already ‘offshore’ in a tax transparent location limits risk of double taxation on distribution or drawdown – the ability to take a lump sum drawdown, without annuity, is also attractive.
“There’s also an element of minimising risk, with assets invariably being held in a secure and stable international financial centre, compared to a perhaps riskier location of the expat.”
Additionally, ISPs and IPPs help expats living in jurisdictions where pensions contributions are not required, Goldie said.
“[Some countries] will offer end of service benefits that, in many cases, can be squandered. As a result, expat investors are found looking for suitable savings vehicles that provide structure and savings discipline while bridging that retirement pot shortfall.”
Compare and contrast
Other than savings versus pensions – what are the key differences between ISPs and IPPs?
Goldie continued: “One of the main differences between an ISP and an IPP, such as an international Sipp, is the age in which you can access the benefits. An ISP is not held within a trust so it can be access by the owner at any age, whereas a Sipp can only be accessed from the age of 55 – although this is changing to 57 from April 2022.
“Typically, ISPs are structures that can be set up on either an ad-hoc basis or contractual basis whereby monthly, quarterly or annual payments can be made.
“On the other hand, IPPs are geared toward receiving lump sum payments from one or multiple pension schemes as a way of lowering costs, managing currency risk, and improving investment returns.”
Seatter added that ISPs are usually paid out upon leaving service, unlike IPPs.
“This means companies operating pensions can end up with large numbers of ‘deferred’ members – or members who no longer work for the company who are not yet eligible to take receipt of their pension,” he said.
“Whilst costs are generally passed back to the members, deferred members are still part of the member base and the company will need to have regard for them as part of the governance process.”
All about tax
Seatter said that one of the biggest differences between international and domestic plans is tax treatment.
“Onshore pension plans often attract tax relief at contribution whereas this is not available for IPPs/ISPs. However, as employment taxes have been paid, withdrawals may be more efficient – though, of course, this will depend on the member’s personal circumstances.
“There are a number of people who could benefit from ISPs and IPPs – international assignees, employees in locations where there is fragmented retirement provision such as the Middle East, or expats who cannot access a local scheme, such as in Singapore.
“Companies determine the plan design based on their employee base and the strategic objectives for the plan – often companies like savings plans as they do not have to worry about deferred members.
“Sometimes the company will build specific requirements into the plan which will, by default, determine whether it is going to be a savings plan or pension. It’s worth noting that some locations – such as South Africa – are very clear about the use of pensions compared to savings plans, with pension structures being a more tax efficient structure.
“Operationally, ISPs and IPPs are similar to more standard savings and pension solution in a number of ways. The main differences are tax treatment and exit options, with IPPs/ISPs generally being more flexible than domestic equivalents.
“As far as ISPs and IPPs are concerned, member assets are held in notional accounts by a trustee in an offshore discretionary employee benefit trust. IPPs/ISPs are held outside the member’s estate and the member will need to name beneficiaries when they join the plan.
“The trustee will take these wishes into consideration if there are assets within the plan post-death,” he said.
