In my book on the 6 steps to financial freedom, I mentioned one often forgotten aspect of financial planning; tax minimization. More specifically, I spoke about some often forgotten tax minimization strategies.
Everybody knows you don’t want a huge tax bills and many people living in the UK know about the benefits of investing in ISAs. For expats living overseas, however, I have noticed there is a lot of confusion about this topic. Is it better to keep investing at home whilst overseas? Is it better to transfer your pension when you live overseas?
I know tax is a complex topic, and not an exciting one, so I will try to not be too dry in this blog. For Americans living overseas, there are benefits in just investing in America, even whilst living overseas, due to new regulations such as FATCA which came in during 2014.
For other expats, it often doesn’t make sense to invest in your home country when you are living overseas. Firstly, ISAs are not allowed for UK citizens, and many countries (including Australia) have even bought out regulations that means that the tax authorities assume Aussies living overseas and investing in Australia must be Australian residents.
In other words, for some expats, if you continue to invest in your home country when living overseas, the tax authorities may want you top prove you are actually living overseas and therefore don’t need to pay local taxes.
Whilst living overseas, there are significant tax benefits that can be taken advantage of. You can’t invest in ISAs if you are from the UK, but you can invest in tax-efficient wrappers which are particular good for UK, South Africa and Australian expats.
Potentially even more importantly, you can transfer your pension (in certain circumstances) if you are from the UK, Belgium, Holland and Belgium.
Let’s start with my native country, the UK, as the country I know best. SIPPS can be used to transfer your pension overseas. Some people cannot transfer their pension overseas, such as some public sector workers.
What are the advantages and disadvantages of transferring a pension overseas? There are two huge factors to consider. One is whether your pension is a final salary scheme (defined benefit) or a defined contribution scheme. And one is how big the pension pot is.
Final salary schemes should only be transferred with caution, as they are usually generous, and you don’t have any market risks associated with them. That doesn’t mean final salary pensions should never be transferred. You need to ask questions like:
– What is the current funding situation with the pension? Do any black holes exist?
– How is it indexed according to inflation?
– Can I take a lump sum on retirement?
– Do my dependents get any benefits?
– At what age do the benefits start?
If the answer is unfavorable to any of these questions, for example, your kids won’t get any benefits once you die, it may be worth taking the market risk for the benefits. Moreover, if the pension pot is big, it may be big enough to avoid the lifetime allowance and therefore it will reduce tax.
That brings us on nicely to the size of the pension pot, which is also relevant for the defined contribution pensions. Defined contribution pensions are already invested in the markets anyway, and the benefits to transferring them whilst living overseas are huge.
However, if the pension is small, the gains of the transfer will be eaten up by fees. So I would say most defined contribution pensions are worth transferring, HOWEVER the value has to be at least 100,000 or 150,000 Pound Sterling to make it worthwhile.
The same is true for citizens of Ireland, Belgium and Holland who can also transfer their pensions overseas due to the EU’s EURBS program. The same considerations apply though, as transferring overseas is only worth it if your account is worth about 150,000euros or so.
If you are an expat from the UK, Ireland, Holland or Belgium, don’t hesitate to reply in the comments section below or via email, and I will be in touch. For other expats who may not be from those nationalities, always be on the lookout for tax efficiency as it really does make a difference long-term.