The definition of a State Pension is: ‘A regular payment made by a government to people above a specified age, to widows or to the disabled’. State pension schemes were first introduced in Germany by Bismarck in the late 19th century and in Britain by Lloyd George in 1908.

However the increasing longevity of individuals, together with other demographic issues, has for a number of years put a greater strain on these government (or State) pensions. This has resulted in measures, already being implemented, to limit the amounts payable and/or to increase the age at which they become payable.

It is therefore becoming increasingly necessary for individuals to make their own provision for retirement. Private Pension plans have evolved over a number of years and are increasingly being seen as the most important and significant provision for retirement.

A private pension plan is normally funded by regular contributions from the individual (or Company), and accrues a lump sum at a determined retirement age. The accrued lump sum is then available to pay a regular income - ‘pension’ (often referred to as an annuity).

Home Country Private Pension plans

Most pension plans are linked to the tax regime of the country where they are established. This can cause some lack of flexibility when individuals move from one country to another – ergo one tax regime to another.

As the levels of tax vary and rules differ, it is not possible to transfer pension contributions from one to another. This results in the inability to make continued contributions to the scheme in the country of ‘departure’ and the need to set up a new scheme in the new country, resulting in the ‘freezing’ of the departure country scheme – until and unless eventual possible return.

Although the ‘frozen’ pension will continue to ‘grow’ in value it will only be based on existing contributions. The continued administrative charges and inflation, coupled with the inability to continue contributions, will erode the eventual value.

This situation is compounded each time the individual moves and for an ‘internationally mobile individual, could result in a ‘string of frozen pension plans’ across many countries/tax regimes – not very cost-effective.

Suggested solution.

An Offshore/International Pension - or better - A Savings Plan which is more flexible and can be used for Reirement or any other purpose 'along the way' and is not linked to any specific country’s tax regime.

Although these plans are thus unable to take advantage of applicable tax relief, where this applies, the nature of an offshore plan is such that certain other taxes are either not levied, or are lower, resulting in a similar, if not better, eventual return on maturity.

International plans may be written to any age determined by the applicant at outset, but normally at least 10 years and no more than 25 years - but with extendable options at the 25 year point.

Bear in mind the longer the plan is held, the better the eventual potential return. Even if ‘written’ at outset to, say age 65 it is nevertheless possible to take the benefits earlier. This may however incur an early encashment penalty. You need to be aware of this when making your maturity date decision.

There is a further difference in the flexibility of an Offshore/International savings plan when compared to a normal Onshore (UK) Pension. The latter is restricted to a lump sum payment at retirement age of up to a maximum of 25% and the rest MUST be taken as regular income (Annuity). The options available from an offshore plan are as follows:

Annuities may be taken in a number of ways. Decisions on which annuity option to choose need not be made until the annuity is due to commence - (the end of the fund accruement period).

An Annuity can be paid monthly, quarterly or annually. Annuity options are as follows:

An Annuity for a defined guaranteed period – normally 5 or 10 years - or for Life.

If for life, the regular income will be lower than for a guaranteed period. If for a guaranteed period, the regular income is lower in proportion to the selected guaranteed period- i.e. the longer the guaranteed period, the lower the income.

An Annuity can be set up to be paid to the individual policy holder or to the holder and another named individual (normally Spouse or Partner).

If set up with a spouse or partner the annuity can be set up to expire on the death of the first or second. If on the ‘second’ the amount payable is reduced for the whole period.

If the ‘second death’ option is chosen, the annuity can be set up to pay the same amount, or a lesser amount (normally half or two thirds) to the survivor. In this event the payment made whilst both are alive will be proportionately less than if set up on a first death basis.

 

For Clients in Germany only

Private Pension Plans

Anyone registered as resident in Germany may take out a German private pension plan. As with UK plans however these plans are linked to the national tax system and are therefore liable to the ‘freezing effect’ described earlier. Tax relief applies on any gains made during the contribution period and payable at maturity.

Following recent reforms however this, 100% relief, will now only apply to plans taken out before 31 December 2004. Plans taken out after 1 January 2005 will qualify only for tax relief of 50%. There has been some discussion as to whether this 50% relief will at some time in the future be further reduced, or possibly removed altogether.

To qualify for any tax relief the plan must have been ‘running’ for at least 12 years. If you are therefore unsure as to your length of stay in Germany you should consider the effectiveness of such a plan.

Should you leave Germany you may still be able to make contributions, but this may not be convenient or cost-effective if currency exchange rates, and other currency transfer charges are involved. If at maturity you are not a German tax payer then it is also likely that you would not qualify for any available tax relief.

Pensions are a complex but important subject. Further individual advice and information can be obtained from Spectrum International.