You may or may not be Asian, British or American, but three spots of news from those parts are relevant to all MoneyMatters readers. News headline number one: 2008 is the 100th anniversary of the UK Pension. Headline number two: the US this year witnessed the biggest demographic wave of people moving into retirement. Ever. Headline number three: Prudential, on the back of whopping 48% growth in Asia (selling pensions) in the first half of 2007, announced a first half operating profit of GBP 1.4 billion. Again, Asia features strongly. Final news flash: pensions are big business and everyone needs a pension; assuming everyone is seeking to outlive their day-job.

Pensions, retirement income, or whatever you want to call it, is a natural growth business on the back of expected improvements in general health and general wealth. In 1908 less than two million people qualified for the UK government pension; today the number is over 10 million. That means those government coffers have to stretch a long way. At least in the “old days” the authorities could take it away from those found “squandering money on drink”. Today, British pensioners are free to squander – as long as they have the money. The problem, of course, is that there are fewer people working (and getting taxed) to fill-up the pot, which pays out the basic pension. This is the so-called “pension time bomb”. Serious in the West, very serious in Japan, and soon to be even more serious in China and India once they get their statistics together. Commonality number one for everyone reading this article is, whichever country we end up in, we are all sitting on top of some form of pension time bomb.

 

The problem, of course is that there are fewer people working (and getting taxed) to fill-up the pot, which pays out the basic pension. This it the so-called “pension time bomb”

To protect ourselves from the ticking bomb, the best thing we can do is to avoid relying on the government and build our own pension pots. This is becoming increasingly awkward for the “sandwich generation”. This is the generation of people who have parents and grandparents at one end of the scale, and young children at the other. At one end, the old are getting older; they will need financial support to live and when they get ill they will need care. At the other end, the young need financial support that will increase as they move towards expensive educational aspirations. Handling this while managing and saving for your own “government-free” retirement income requires advanced level financial planning.

Now add-in the multi-cultural environment that most expatriates live in, and you can see that giving advice is fraught with difficulty. Aussies, Brits, Emiratis, Indians, South Africans, you name it – the sandwiches come with different fillings. It leads to the question: how much advice is “generic” to the issue of pensions and retirement; and how much advice is specific to the laws of the land to which you will retire? Rhetorical, of course, the degree to which specific advice is required is probably proportionate to the amount of rules and regulations pertaining to the country in which the retirement monies are to be dished out and spent.

This leads to “generic commonality number two”: tax! If you can legally avoid, say, 20-40% tax on income (or capital, or both) this is so far above reasonable performance return expectations that it sends a clear message: looking at the structure of your retirement vehicle is just as critical as looking at the factors that influence performance. Net performance matters more than gross performance. Naturally, “rules and regulations” vary from country to country. If your likely retirement is to be enjoyed in a “tax-rich environment” then structure, tax-on-capital and tax-onincome become fairly critical, for example.

Outside the taxed world the offshore world will suit the “don’t know” hordes who have yet to reconcile where their family is;where their current friends are; and what this globalised, go-anywhere world means. For these people the word “offshore” is used liberally to mean “no tax”. More accurately, offshore equates to environments where more than one jurisdiction applies. Your Isle of Man pension (jurisdiction one), your Indian passport (jurisdiction two), and your UAE residency (jurisdiction three) is a classic offshore investment. Environments such as the UK’s Offshore Territories, DIFC maybe, or anywhere that does not require automatic tax regulation, will clearly benefit from the increasing amounts of “the flexible” – those that don’t know where they will retire and those that will want to live in more than one jurisdiction.

Since you really ought to be focusing on jurisdiction, this leads to “generic commonality number three”: currency. Whether you see yourself in one, two or three jurisdictions it is important to get currency right. One Indian rupee will always buy one Indian rupee’s worth of goods and services in India. One Aussie dollar buys one Aussie dollar’s worth of goods and services in Australia. The point? It doesn’t make a great deal of sense planning an Indian retirement in US dollars if the currency relationship is prone to huge swings. Thinking of living part-time in France, part-time in the UAE? Surely the planning really ought to be split between a euro-based portfolio and a US dollar/dirham based portfolio.

One hundred years of UK pension planning in the UK has only seen the concept grow. This newly globalising world can learn much from such history.

 

Sean Kelleher is Chairman of the Financial Partners Group. For more information on strategic pension planning, please contact your local FP adviser.