INTERNATIONAL pension solutions for US non-residents
Contents OPTIMISING retirement potential for US non-residents 3 Current investment choices for retirement 4 WHAT IS AN INTERNATIONAL PENSION? 5 WHAT ARE THE BENEFITS OF AN INTERNATIONAL PENSION FOR A US NON-RESIDENT? 6 What kind of investments can BE INCLUDED WITHIN AN International Pension PLAN? 7 How does it work in practice? 8 WHAT ARE THE IMPLICATIONS IF YOU DECIDE TO RETURN TO THE US? 10 All references to Old Mutual International in this document mean Old Mutual International Isle of Man Limited or Old Mutual International Ireland dac. 2
OPTIMISING retirement potential for US non-residents For US citizens working and living outside the US, the annual tax reporting requirements of the US Internal Revenue Service (IRS) are an unavoidable fact of life. The introduction of the Foreign Account Tax Compliance Act (FATCA) in 2010 underlines how interested the tax authorities are in every aspect of their overseas citizens financial affairs. US expatriates, therefore, face a challenge when it comes to considering how best to build up a good retirement pot for the future while working overseas. The ideal solution must not only be flexible enough for your investments to grow tax-efficiently, but also offer complete peace of mind that it is compliant with US tax laws. Two traditional US retirement plans (summarized in the table on page 4) are the Individual Retirement Account (IRA) and the employee benefit pension plan, known as the 401K. Both of these have limitations, including: the age that benefits can be taken annual contribution limits accessibility and withdrawal restrictions. The 401K is only available in the US and not worldwide. Although the IRA is available for contributions worldwide, the maximum contribution limits still apply, together with constraints on the types of investment that are acceptable within IRA rules. So, once you have maximized your annual IRA funding, where can you turn to? INTRODUCING THE INTERNATIONAL PENSION One potential solution is what is known as an International Pension. There are various International Pensions suitable for different expatriates. However, here we are considering an investment scheme for retirement, designed especially for US non-residents. Old Mutual International does not offer an International Pension, but offers Offshore Bonds that are a suitable investment solution for your International Pension to invest in. This brochure describes how investing in an International Pension designed for US nonresidents, using an Old Mutual International Isle of Man Limited or Old Mutual International Ireland dac Offshore Bond as the underlying investment, can help alleviate some of the restrictions on your pension savings. It also gives you the opportunity to maximize the future potential of your investments at a time in your career when your earnings are likely to be relatively high. Establishing an International Pension might be the most appropriate option for you, but this is an important decision and we recommend speaking to a financial adviser about its suitability. This guide highlights the main benefits and some of the other factors to consider before deciding on a course of action. 3
Current investment choices for retirement This matrix compares the key features of two traditional US retirement savings plans. Individual Retirement ACCOUNT (IRA) 401K Traditional IRA Roth IRA What is it? A tax-advantaged retirement account that you own and control, made with pre-tax asset contributions. A tax-advantaged retirement account that you own and control, made with post-tax asset contributions. Where is it available? Worldwide Worldwide US only Can it be set up by an employer or individual? What are the contribution limits? Are contributions deductible? Individual Individual Employer The maximum you can contribute to your Traditional and Roth IRAs combined in 2017, is the lesser of: $5,500* or $6,500* if you re age 50 or older by the end of the year; or your taxable compensation for the year. However, if as a tax payer, your modified, adjusted gross income exceeds certain limits, you may be eligible to contribute a reduced amount or you may no longer be eligible to contribute to a Roth IRA. *this will remain unchanged for 2017 You can deduct your contributions but this may be limited if you or your spouse are covered by a retirement plan at work, or your income exceeds certain levels. Your contributions aren t deductible. An employer sponsored retirement savings plan. The employee s contribution is taken directly from their pay check, pre-tax, and the employer can match the employees contributions. $18,000 per annum for under 50s $24,000 per annum for age 50 and over. The total of all contributions to an employee s 401K plan, including matching funds and the employee s pre-tax and after-tax contribution, cannot exceed the lesser of 100% of the employee s compensation or $54,000 ($60,000 including catch up provisions) in 2017. Generally, no limit on the amount deductible from income (but may need to consider Highly Compensated Employees (HCE) rules). When can I withdraw money? You can withdraw money at any time. Generally not until you attain age 59½ but exceptions apply. Do I have to take required minimum distributions? You must start taking distributions by 1 April following the year in which you turn the age of 70½. Not required if you are the original owner. You must start taking distributions by 1 April of the first year after the later of the following: calendar year in which you attain age 70½ calendar year in which you retire. What about early withdrawals? A 10% tax penalty applies for payments made before age 59½, though some exceptions apply. A 10% tax penalty applies for payments made before age 59½, though some exceptions apply. A 10% tax penalty applies for payments made before age 59½, though some exceptions apply. Are withdrawals and distributions taxable? Any deductible contributions and earnings withdrawn or distributed from your Traditional IRA are taxable. Not if it s a qualified distribution (or a withdrawal that is a qualified distribution). Otherwise, part of the distribution or withdrawal may be taxable. Any deductible contributions and earnings withdrawn or distributed from your 401K are taxable. Please note, this matrix aims to give a high level comparison of the two main savings schemes available to US non-residents. Please refer to your financial adviser for more detail. Note that specific detail of the 401K will vary depending on the employer scheme. For additional information, please see www.irs.gov/retirement-plans/traditional-and-roth-iras 4
WHAT IS AN INTERNATIONAL PENSION? International Pension is a global term for arrangements that are available to expatriates around the world to enable them to invest for their future retirement. A number of providers in different jurisdictions offer International Pension plans that are serviced from many financial service centres around the globe. An International Pension for a US non-resident allows you to continue to make the most of your offshore earnings, save for retirement, and have your money work as hard as you do. It offers tax-efficiency regardless of where you are living when you start to take benefits, even if you plan to retire as a US resident. Among its advantages are that it offers: a wider range of funding options a larger choice of assets and investments earlier access, to capital and growth, than is generally available with traditional IRAs/401Ks. Importantly, the providers of International Pensions for US non-residents should offer the reassurance that their plans: incur no annual US Federal Income Tax liability on dividends and interest are fully Internal Revenue Service (IRS) compliant and can pay out lump sum benefits, regular income or even death benefits to named beneficiaries offer tax deferral, and access to an almost unconstrained range of investments. As US tax payers pay tax worldwide, regardless of where they are resident, such plans work globally on the same basis. Any distributions are subject to the same Federal Income Tax rules, for the same reasons, regardless of where you retire. 5
WHAT ARE THE BENEFITS OF AN INTERNATIONAL PENSION FOR A US NON-RESIDENT? The tax position of an International Pension for a US non-resident will depend on the jurisdiction the arrangement has been established in. Considering its benefits, we have used Malta to demonstrate a jurisdiction that offers such schemes. Based on legislation agreed between the US and Maltese governments, Malta provides a popular and tax efficient solution for US non-residents. Malta is a full European Union and Commonwealth member and an internationally recognized financial services centre. Your financial adviser will help you to decide if this is the most appropriate arrangement for your needs. Should they recommend a Maltese-based International Pension, you can take advantage of the benefits that Malta has to offer, including: english law principle-based business legislation economic, political and social stability communications in English as one of its primary languages being regulated by the Malta Financial Services Authority (MFSA) over 70 Double Taxation Agreements (DTAs) in place with other countries, including the US and UK allowing exemptions for retirement schemes from income and Capital Gains Tax other than on immovable property in Malta. The DTA that exists between Malta and the US allows retirement savings to be rolled up /accumulated with no immediate tax liability and US tax deferred until retirement. Best of all, tax deferral means that dividends and interest can be reinvested which could really make a difference to the size of fund you retire with. WHAT ARE MY REPORTING REQUIREMENTS? Maltese International Pension schemes for US non-residents have no reporting requirements for FATCA, as long as the retirement plan itself meets the criteria identified in the DTA. As such, any investment made on your behalf by the trustees of these pension schemes would not need to be reported under FATCA. Usual IRS tax reporting applies for membership of an International Pension plan. Compared to other personally held assets, holding assets within the International Pension plan may allow for reduced annual reporting requirements which can mean lower accountancy fees, and less annual paperwork. Please note we are considering here the tax implications of holding an International Pension in Malta. Please seek specialist advice if you need help with Estate Tax and Capital Gains Tax. Please also note that Old Mutual International does not recommend Malta as a preferable jurisdiction to any other jurisdiction. With the help of your financial adviser, you should satisfy yourself regarding the suitability and integrity of any particular International Pension plan and its provider. 6
what kind of investments can BE INCLUDED within an International Pension plan? An International Pension plan is designed to give maximum protection to your pension savings. You also want to be sure that within your plan, you can build a versatile portfolio that meets your specific financial needs, without restricting your asset allocation or currency options. Subject to our acceptance criteria, using an Offshore Bond can help meet that investment need. It provides the flexibility and diversity to enable you and your financial adviser to manage your assets according to your own criteria and attitude to risk. You can ask your pension plan provider to switch between markets and asset groups as and when you want all within a tax-efficient environment. Benefits of an Old Mutual International Offshore Bond With an Old Mutual International Offshore Bond there is the convenience of amalgamating a variety of existing or new investments into one product as some of our Offshore Bonds have the flexibility to hold a wide range of different investments including cash, unit trusts, investment trusts, openended investment companies, exchange traded funds and shares. Holding multiple assets in one wrapper can offer simplified, consolidated reporting, removing individual asset paperwork, dividend receipts and tax certificates. This could result in cost savings as well as reduced time and effort. Who is Old Mutual International? It s vital for you to have confidence in the company to which you are entrusting your savings and pension investments. Part of that confidence comes from knowing it s a strong, established company. Old Mutual International is part of Old Mutual Wealth Limited, a leading wealth management business in the UK and internationally with 127.3 billion in assets under management (as at 30 June 2017). Their offering includes platform-based investments and protection, asset management solutions and discretionary management, as well as financial advice services in the UK and Singapore. Please speak to your financial adviser to find out which of Old Mutual International s Offshore Bonds is most appropriate for you. Old Mutual Wealth is a leading retail investment business, with 127.3 billion funds under management*. Old Mutual International is the collective name for the companies that provide offshore and cross-border investment solutions within Old Mutual Wealth. OLD MUTUAL INTERNATIONAL IRELAND dac was formed in 2003 to provide cross-border solutions for European investors, so you can be confident that you are investing with a company that understands the needs of investors. OLD MUTUAL INTERNATIONAL ISLE OF MAN LIMITED has operated from the Isle of Man since 1984 and manages more than 133,000 policies** in tax-efficient investment and savings products. It also provides access to Old Mutual International Trust Company. Company figures are as at: * 30 June 2017 ** 31 December 2016 7
How does it work in practice? In these case studies, Malta is used to illustrate the current taxation position. You will need to satisfy yourself as to the taxation position with your local International Pension plan provider. Case Study 1 Brad is 35 and works as an IT specialist in Hong Kong. He is a US non-resident tax payer. Brad has wealth of over $3 million and would like to add to his pension so that he can improve his chances of retiring when he reaches his fifties. His adviser recommends that he opens a US International Pension plan in Malta, with an Old Mutual International Portfolio Bond as the underlying asset. He has selected a retirement age of 50 and makes an initial contribution of $500,000. If his plan grows by 5% per annum, at the age of 50, Brad s pension will have doubled in value to over $1 million and he feels he can afford to retire. How much can he take from his pension when he RETURNS TO the US? As the pension is made up of 50% capital and 50% growth, Brad can take up to 30% as a lump sum (ie up to $300,000) split equally between the capital and growth pots. The good news is, no US Federal tax or Maltese tax is payable on the $300,000. What happens next? The plan is now worth $700,000 and the International Pension provider calculates Brad s life expectancy to be 85 which generates a maximum pension income of $40,000 * per annum. International Pension value Growth just over $500,000 Capital $500,000 30% lump sum available No US Federal tax or Maltese tax payable on the $300,000 lump sum. $150,000 $150,000 $700,000 $40,000* Per annum pension income * a US Federal tax liability may arise on any pension income that is deemed to be taken from the pension growth. However, this will depend on the structure of the International Pension plan selected and the individual s own marginal rate of tax. Please speak to your financial adviser to discuss the most appropriate International Pension plan for your needs. 8
Case Study 2 Brian, 48, and his wife Jennifer, 45, are US non-residents who have been living in Cyprus for eight years. They have two children who are still at school and hope to go to university. Brian is keen to build his pension pot as much as possible, so that he can retire early and help protect his family should the worst happen. He has an accrued wealth of $2 million and additionally has invested $1.75 million into his US International Pension in Malta with a Portfolio Bond from Old Mutual International, which has now grown to $3 million. At age 50, he can take up to 30% of his pension tax-free and then leave the remainder to grow for his family s future. However, should he die, any residual value within the plan can either be taken by his beneficiaries as one lump sum or continue to be invested and withdrawn as income. In either case, no US Federal tax or Maltese tax will be payable but the value will form part of his estate on death. Please note: all case studies and diagrams detailed are fictional and used purely to illustrate possible real-life scenarios. They also assume that the individuals are non-maltese residents. the value of investments can fall as well as rise and investors may not get back what they put in. Growth figures do not include Old Mutual International Portfolio Bond and International Pension plan charges. Speak to your financial adviser to see if Estate Tax or Capital Gains Tax would apply on death. 9
WHAT ARE THE IMPLICATIONS IF YOU DECIDE TO RETURN TO THE US? On returning to the US, you will need to check with your provider but generally, you will not be able to top up your International Pension plan. However, your International Pension provider can continue to manage your assets as before. If they are holding your investments in an Old Mutual International Offshore Bond, they can continue to review your portfolio on an ongoing basis to ensure your investments continue to work for you and continue to build towards your retirement goals. If you leave the US again what happens? If you leave the US again, you can start to make additional contributions to your International Pension plan. If your assets are held in an Old Mutual International Offshore Bond, your International Pension plan provider can top up this investment as many times as you wish with your additional contributions as long as your additional investments meet our minimum requirements at the time. As an Old Mutual International Offshore Bond is portable, you can take it with you wherever you move to outside the US. 10
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This document is based on Old Mutual International s interpretation of law and tax practice as at March 2017. We believe this interpretation is correct, but cannot guarantee it. Tax relief and the tax treatment of investment funds may change. The value of any tax relief will depend on the investor s financial circumstances. Old Mutual International cannot accept responsibility for any losses or liabilities arising from actions taken as a result of the information contained in this document. Full details of the products available from Old Mutual International can be obtained from your financial adviser. This document was last updated in September 2017. Please confirm with your financial adviser that this is the most up-to-date document for your product or servicing needs. Your investment may fall or rise in value and you may not get back what you put in. www.oldmutualinternational.com www.oldmutualinternational.com/hk Calls may be monitored and recorded for training purposes and to avoid misunderstandings. Old Mutual International Isle of Man Limited is registered in the Isle of Man under number 24916C. Registered and Head Office: King Edward Bay House, King Edward Road, Onchan, Isle of Man, IM99 1NU, British Isles. Phone: +44 (0)1624 655 555 Fax: +44 (0)1624 611 715. Licensed by the Isle of Man Financial Services Authority. All promotional material is approved by Old Mutual Wealth Limited. Old Mutual Wealth Limited is authorised and regulated by the Financial Conduct Authority. Financial Services register number 165359. The rules made under the Financial Services and Markets Act 2000 (as amended) for the protection of retail clients in the UK do not apply. Old Mutual International Isle of Man Limited is a member of the Association of International Life Offices. Old Mutual International is registered in the Isle of Man as the business name of Old Mutual International Isle of Man Limited. Old Mutual International s Hong Kong office: 24th Floor, Henley Building, 5 Queen s Road Central, Hong Kong. Phone: +852 3552 5888 Fax: +852 3552 5889 E-mail: askhk@ominternational.com Authorised by the Insurance Authority of Hong Kong to carry on long term business. Old Mutual International Ireland dac is regulated by the Central Bank of Ireland. Registered No 309649 Administration Centre for correspondence: King Edward Bay House, King Edward Road, Onchan, Isle of Man, IM99 1NU Tel: +353(0)1 479 3900 Fax: +353(0)1 475 1020. Registered and Head Office Address: Hambleden House,19-26 Lower Pembroke Street, Dublin 2, Ireland. VAT number for Old Mutual International Ireland dac is 6329649S. Old Mutual International is registered in Ireland as a business name of Old Mutual International Ireland dac. SK11789/INT17-0862/September 2017