Retirement Traps
Expats Can Avoid
As They Make Moves

Planning for a comfortable retirement is never simple. But for many expatriate workers, just thinking about the golden years brings on a headache.

"I have no idea where my retirement money is, or even how much I have, and I don't even know how to go about finding it," said Kartik Krishnaswamy, a consultant at Candesic Ltd. in London who has worked in India, the U.S., Switzerland and France.

Most people work in one country all their lives, saving for retirement by paying state social security and contributing to company-sponsored pension plans. They also may take out private retirement accounts and invest in stocks, bonds and property. Income from these investments is taxed according to familiar tax regulations.

Expatriates wish they had it so easy.

International professionals often pay into three or four social-security systems and contribute to a hodgepodge of company pensions. By spending only a few years in each country, some of their retirement plans never even reach maturity, causing contributions to vanish into thin air.

At retirement age, these nomadic workers -- an estimated 10 million working in Europe alone -- will face the challenge of collecting far-flung benefits and wading through foreign-tax obligations.

To be sure, many workers are employed by multinationals or large companies that take care of such logistics as paying employees' contributions to local social security systems, at least for a certain number of years. These workers can relocate to a number of countries over a period of many years and still only contribute to one retirement plan -- the one in their home country.

But, with increased job mobility and job cuts -- even among expatriate workers -- it is important to be aware of the countless issues surrounding expatriate workers' retirement planning.

With planning, expatriates can have as rosy a retirement as their home-dwelling counterparts.

"Expatriate workers should contact retirement authorities and discuss pensions with their employers when they arrive in a country, not wait until they retire," says Alexi de Saint Albin, an account manager at Groupe Taitbout, a company based in Paris that enables French professionals to continue accumulating a portion of state retirement benefits while abroad. "Lots of people just up and leave at 25 and don't even think about their retirement; when they get back to France 20 years later, they're in trouble," Mr. de Saint Albin says.

Before putting a retirement plan in place, expatriate workers should attempt to figure out how long they will be away. An American who works five years in Belgium and then returns to the U.S. has different retirement options than one who spends 15 years in various locations in Europe and Asia and isn't sure whether he ever will return home.

For people planning to work abroad for less than five years, the best idea is to keep paying into social security and private retirement programs in their home country, says Eric Bergamin, a lawyer who specializes in pensions at Loyens & Loeff, a Rotterdam law firm. Most countries allow expatriates a five-year exemption from local social-security taxes.

State Pensions

With the working population shrinking and the elderly population expanding, today's workers may collect next to nothing from the state upon retirement. But for now, social security still takes a chunk out of paychecks, so expatriates need to learn the basics of their home and host-country systems. Check whether the country you are going to has a bilateral agreement with your home country, enabling you to "count" your period abroad as part of your total working years. If you are headed to a country that doesn't have an agreement with your home country, the best bet would be to continue paying into your home social-security program, says Paul Brown, partner at H&N Associates, a financial services firm based in Eindhoven, the Netherlands. "If you are going back to your home country one day, you will probably want to retain your right to your maximum state pension," Mr. Brown says.

Due to social-security harmonization, U.S. and European citizens can maintain social-security benefits while working in either place. If a U.S. citizen pays social security for five years in Belgium and five years in Spain, he would collect a portion of his pension from Belgium, a portion from Spain and the remaining amount from the U.S.

If you don't work long enough in one country to meet its minimum eligibility requirements, you still can collect pro-rated benefits from that country, since it counts the time you worked in a bilateral-agreement country toward eligibility. However, each country has particularities. In some countries, such as Germany, U.S. residents can opt to get a refund of their contributions to the state retirement system if they pay into it for less than five years. In other countries, such as the United Kingdom and Ireland, state benefits are so minor that a few years' contributions to their social-security systems may yield next to nothing, making it hardly worth filling out the paperwork upon retirement.

Europeans working within the European Union should have little problem upon retirement -- provided they haven't done stints further afield. Within Europe, social-security harmonization laws allow EU residents to count all years worked within the EU towards their total eligibility, and to gather pension money from each country. But for those who also have worked outside the EU, some benefits likely will be lost.

That is because workers either have to choose to count all years worked in Europe, or to count years worked in their home country and abroad in another bilateral-agreement country, Mr. Saint Albin says. "The authorities either look at the European harmonization agreement or they look at the Franco-U.S. agreement, but not both," he says.

Employer-Sponsored Plans

The real headache for expatriates are employer-sponsored pensions. For now, there are no international, or pan-European, pensions. When an employee works in three countries, he will have three retirement plans that are next to impossible to consolidate due to discord in international tax laws. In addition, short periods spent in various countries can mean a loss of long-term benefits.

"People who move on a regular basis do not stay in one place long enough to build up their benefits," said David West, a senior consultant with AON Consulting, a human-resources consultancy owned by AON Corp. "They have bits and pieces of pensions built up in different countries, none of which are fully vested."

The best bet is to talk to your employer before you start working abroad. It may be possible to opt out of the local plan and to continue paying into your home country's program, such as a 401(k) in the U.S. If not, make sure there is no minimum vesting period for the foreign plan that would exclude you from collecting benefits down the road. If you leave the company, keep track of how much money you have contributed, when the retirement program will begin to pay out and where you will be taxed on the benefits at retirement age.

"I'm just hoping the European Union does something to harmonize pension plans in the next 30 years," says Michael Carty, an Irish citizen working in Belgium as a technical director of an Internet firm. He has contributed to employer-sponsored retirement plans in Ireland, France and Belgium and would like to be able to roll all the money into one international pension fund.

For now, he'll have to wait. An EU directive will become law during September 2005 that will allow financial institutions to offer pan-European pension funds for the first time. Aimed at internationally mobile employees, these funds wouldn't be based in any one country and would enable individuals to transfer their retirement savings from one country to the other without losing the original tax benefits, Mr. Bergamin says.

Unfortunately, the European directive won't solve the tax headache completely. Some countries, such as the U.S., the U.K., the Netherlands and Belgium, have passed tax treaties that attempt to avoid double taxation of retirement benefits. But it still is up to individuals to figure out how to pay taxes on their retirement earnings once they reach retirement, since some countries tax earnings as you go and some tax them upon withdrawal.

"For the time being, until there are international pensions, it's better to leave your money in a country even if you move," says William Jacques, a financial adviser at Dual Conseils in Paris. If you have worked at several companies, rolling separate retirement accounts into a fund from a single investment firm -- usually possible within a country -- can make collecting benefits much simpler 20 or 30 years later, Mr. JAQUES says.

Offshore Programs

An additional option for expatriates, especially those who aren't sure where they will end up, are offshore pension funds. Instead of taking out a retirement account in one country, an individual can invest in an offshore tax haven, such as the Isle of Man. Returns accrue over the years tax free and the investor pays tax on the earnings in his country of residence at retirement.

"Offshore pensions roll up in a tax-free environment and allow the person to choose where to pay taxes when they repatriate the money," says Mr. Brown of H&N Associates, who advises expatriates to look at pension funds from providers such as Scottish Provident International, Royal Skandia and Zurich International Life.

Sound likes an easy solution -- until you read the fine print. Technically, investors in offshore funds are required by law to report all earnings to local tax authorities, though few do so. International financial bodies don't regulate offshore financial firms, making fund performance tough to trace. In addition, some offshore investments are illegal, especially for U.S. citizens. U.S. citizens are permitted to invest in offshore funds if they aren't residing in the U.S., but usually must cease investing if they return home, which can incur early withdrawal penalties.

Still, the lure of a pension plan not tied to any one country is tempting for some expatriates. Mr. Krishnaswamy, who has bits of retirement savings in the U.S., the U.K. and India, is looking for one place to stash his retirement cash. "I may end up in India, the U.S. or anywhere else, and having all my retirement savings in one place would be ideal."

Updated October 31, 2003