How to manage a pension gap and maintain your quality of life for the future

One of the unexpected issues facing international professionals is what we call the pension gap. This occurs when you move from your home country and for the time you are away, you cease to accrue the pension benefits you would have received at home.

There are a few scenarios to assess the impact of this.

Scenario 1: the not so bad: the country you move to has a pension system comparable with your home country and you accrue pension benefits at the equivalent rate. In this case, you may have two pension pots but, subject to the specific details of when and how you access the total pension benefit, the total may be similar to if you had remained in your home country.

Scenario 2: the not so good: in your new home country you either do not accrue any future pension benefits, or they are inferior to your home country. This can be a problem if not factored into your retirement planning.

The primary issue with scenario two is the future impact of not adding to your pension now. We often speak of the benefits of compound interest in investing. This is the inverse, it is the negative impact of the compounding gap to your future quality of life. 

There are ways you can address this gap.

The overriding and most important action is to ensure you have a financial plan that factors in all aspects of your global financial life. This is what we do for our clients. With a bespoke and tailored plan, you will know specifically what you need to do to protect your future quality of life.

A personal investment. You might manage the gap with a personal investment that you add to regularly. This may be a general investment sitting outside the pension framework. In this case you may forego potential tax benefits of pensions, but gain flexibility to move it as you move, and maintain liquidity so you can access the funds in the future if you need. Whether or not you have a pension gap, this is something that can be beneficial to many international professionals.

Optimising the local pension structure. This can potentially be tax effective and ensures you remain active in a pension system. You need to consider the conditions of when and how you can access these funds at retirement as the terms may be very different from your home country. If you plan to retire at 60 but you cannot access a local pension until you are 70, you will need to assess if this is the optimal route for you, or how you intend to fund that gap at retirement. This is where the personal investment plan above can be beneficial.

Topping up your home pension. The applicability and benefits of this will be specific to your particular situation and you should assess this with your financial planner. One example for those with a UK connection is topping up your UK National Insurance (NI) pension. For international professionals where this is an appropriate action, it can represent a healthy return on investment. There are limitations and specific conditions to determine your eligibility. These can be found on the UK government website, https://www.gov.uk/voluntary-national-insurance-contributions, and they are usually limited to the last six years. That is, if you want to make voluntary contributions for the UK tax years 2017 to 2018, you have until 5 April 2025 to pay. Note the UK has also extended the deadline for the 2016 to 2017 tax year until 5 April 2025. If this is you, it could be wroth looking into. As a first step, look at the website above and come and speak with us. You can arrange a meeting directly online at www.blackswancapital.eu or email us at info@blackswancapital.eu and we can set up a time to speak.

When you are thinking about the pros and cons of adding to your pension in either your home country, or your current country of residence, all pension investments carry the often unconsidered risk that you may be investing now for a future income stream long into the future, which is conditional upon future governments not changing the regulations. It is prudent to consider scenarios where you may have a deferred access, or only access to an income stream and not to the capital.

This is what we call a GAS assessment. GAS stands for growth, access, and security. In all investments, including pensions, the GAS principle states you can choose any two, but must forgo one other to do so. We write about in more detail here.

Finally, when you are thinking about whether to top up your home country pension, or commence a pension in your new home country, you need to think about how that pension will fit into your financial plan which should present how you want to live in the future. You need to consider the tax treatment in your country of residence, future currency impacts, the access age and whether that is planned to change, access to capital, the rate of drawdown, and estate planning i.e. what happens when you pass away.

Ensuring you plan for and take steps to prevent, a pension gap is a key part of a financial plan for expats and international professionals. There is much to consider after working out if you are permitted to add to a pension and therefore as a first step, we recommend you speak with a regulated professional like the team at Black Swan Capital.