All around the world pensions can be funded in three different manners:
Pillar 1: Governmental Pensions
- In some countries expats are obliged to participate in the National Social Security Services and acquire State Pension Claims. In other countries they can choose whether or not to participate and can even acquire additional rights due to a lack in the past.
- Regarding the desirability of participation it seems advisable to beforehand calculate the cost versus pension claim ratio. As these days the interest rate is historically low, this often makes participation expensive.
- The height of existing coverages can differ substantially per country. The coverage is for example rather modest in the U.S. and more elaborate in certain parts of Southern Europe.
- Regarding the UK and Brexit is relevant that it is not yet decided if UK expats who receive UK State Pensions while based in the EU will still receive annual indexation after Brexit implementation.
Pillar 2: Corporate Pensions
The nature of corporate pensions differs per continent/country. Essential issues are:
- Is participation voluntary or mandatory?
- Is the coverage individual or collective?
- Is the coverage standard or a special expat plan?
- Is the nature i.e. DB/DC/CDC/Hybride?
- Is there a maximum for the amount of pension earning wages?
- Is the next of kin coverage risk and/or capital based?
- In case of guaranteed pension claims, is there (un)conditional indexation?
- Does the employer finance the whole premium?
- Is there substantial tax benefit?
- Is there the possibility to invest additionally in case of tax benefit?
- Is it possible to transfer pension capital from or to another expat plan?
Even though corporate pension plans differ substantially on global level, there is a trend towards the decrease of guaranteed Defined Benefit (DB) plans and the increase of not guaranteed Defined Contribution (DC) plans. The latter often still combined with a guaranteed next of kin coverage before retirement age.
Pillar 3: Private Coverage
The most common private coverages all around the world are:
- Private life annuities
- Death risk insurances
- Investment plans
- Real estate and life based mortgages
- Bank savings
New EU Plan
In 2017 the EU proposed a new kind of private coverage: The Private European Pension Plan.
The idea is that as many countries have different corporate pension systems, it is wise to introduce a within the EU transferable private annuity plan. We will wait and see if this idea will materialize and if the cost/claim ratio is interesting.
Relevant issues to determine how desirable these coverages are:
- Is there a tax benefit?
- Is it possible to determine the profit/cost ratio?
- Is it difficult to judge the nature and content of these possibilities?
- Are advisors by law required to have a license?
- How is the reputation of each possibility?
It is in the interest of the expat to compare the after tax gain/cost ratio of the 3 pillars per residency.