Expat Retirement Accounts

Most people have differing ideas of how want to spend their retirement. Some people envision a beach or two, while others think of a range of pleasant cafés in which to plant themselves while finishing a book or new creative idea. Others see themselves working on interesting new projects, small business ideas, or charitable organizations to give back to society. Some people admit to themselves that they have no idea how they plan to occupy their time in their later years. However, one common denominator of all the above example retirees, including those without a clue what to do, is that everyone would like some form of financial freedom. Even those planning to continue working until their last day tend to transition from working because they must pay the bills, to working because they genuinely enjoy their occupation.

The strict truth of financial freedom is that for most people this means contributing to a retirement account with Spartan discipline for several decades. Having an international career which could potentially have you upend your personal and professional life once or twice, or in some cases a great many times, can make it quite difficult to steadily contribute to the normal domestic retirement plans that everyone else can consistently contribute towards while never moving to a different country. Running a simple simulation of two retirement savings plans: one steadily contributed to for 25 years, and another that sporadically skips a few years or has one or two large sections of several years with no contributions, will yield a rather staggering difference in the end results.

 

Total Retirement Savings after 25 years of saving $1,000 per month, returns averaging 10% p.a.: $1,300,000

Total Retirement Savings after 25 years of saving $1,000 per month, returns averaging 10% p.a., but on two occasions missing just three years of annual contributions, once near the beginning and once in the middle:   $840,000

Cost of failing to contribute to a retirement account while working overseas (in this example): $460,000

 

The good news is that there are several options available for expat retirement accounts in Japan. While managing a basic retirement account is something that could in theory be handled with a DIY approach, few people find they are able to successfully maintain the discipline required to stay on top of changing markets, or sustain the regular habit of saving and investing into a diverse portfolio month in and month out without fail for decades on end; all while juggling a career, a family, and a hobby. Accordingly, it would be invaluable to have this taken care of with a single turnkey solution that can be internationally portable, to keep up with a dynamic expat lifestyle. In addition to providing better access to international investments than local domestic accounts, expat retirement accounts in nearly all cases provide at the very least gross rollup (deferral of all tax on income and gains within the account until you withdraw funds, ideally two or three decades down the line in retirement). On top of the already impactful benefit of gross rollup, some nationalities have their own unique beneficial treatment of some expat specific savings accounts.

 

British Expats

Having perhaps the most extensive history of expats living abroad, British nationals are able to take advantage of tax legislation which could provide for receiving tax free income and distributions from their retirement account should they decide to move back to the UK. In addition, UK citizens and other nationalities which have at some point worked in the UK and contributed to a UK pension and are now living abroad could benefit from a government approved pension transfer known as the QROPS (Qualifying Recognized Overseas Pension Scheme). Primary benefits of a QROPS include better control over your investments, better tax treatment, and earlier access to your pension benefits.

Australian Expats

Recent changes to the Australian tax code have enabled multiple types of financial solutions to receive beneficial tax treatment. Depending on the length of term on the investment, Australian nationals could find themselves being subject to either substantially reduced rates of tax, or no tax at all on the distributions from their retirement account.

Swedish Expats

Slightly different from some of the other nationalities which receive tax deferral or tax reduction, Swedish citizens are able to benefit from a unique form of tax planning. Swedish tax legislation allows for certain types of accounts to pay a small annual fee based on the previous year’s central bank lending rate, and in exchange the investments within the account are then free of all taxes on income or gains. In addition, the tax-replacing fee only comes into effect if resident in Sweden. This simplifies and often greatly reduces the tax payable.

French Expats

Similar to British and Australian expats as described above, the French legal and financial system has a long history of providing tax benefits to those who hold their savings within insurance contracts; the most popular being the assurance vie structure.

American Expats

As elaborated in other articles within our Insights series, Americans living abroad have a much stricter set of rules to abide by when it comes to how and where to invest their money. Expat retirement accounts as mentioned above are accessible to Americans, but would first necessitate being wrapped in an IRS approved legal structure such as a trust or qualified pension. While this sort of arrangement is of interest to some, if legal structures are not to your taste then it would likely be best to instead hold your retirement savings with a USA Registered Investment Advisor domiciled in the states, while maintaining a working relationship with a wealth manager based in Japan that can meet with you face to face on an ongoing basis.

[Sources]

Financial literacy and retirement preparedness: Evidence and implications for financial education, A Lusardi, O Mitchelli – Journal of Business Economics, 2007

UK pensions simplification: Implications for overseas employees, S Tye, A Latrémolière – Pensions: An International Journal, 2007 – Nature Publishing Group

Heuristics and biases in retirement savings behavior, S Benartzi, RH Thaler – The Journal of Economic Perspectives, Volume 21, Issue Number 3

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Expat Retirement Accounts
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Expat Retirement Accounts
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Account options for expats in Japan
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