Offshore, Pensions and Taxes

Question: What is a 401-K plan?

Answer: In the US , pension legislation allows deferral of tax on pension contributions through a number of methods, of which (section) 401-k is the most widely used.

An individual with a 401-k plan can use the assets it contains to make approved investments into mutual funds and other types of asset.

Question: What is an MRD – Minimum Required Distribution?

Answer: In the US , a pension fund that has benefited from a tax-deferral must be paid out after a certain age as an income flow, which is then taxable. The rules for calculating the Minimum Required Distribution (permitting the rest of the fund to remain tax-exempt) are complex and depend on the life expectancy of you and your spouse.

Question: What are offshore pensions investment?

Answer: Offshore pensions are based on secure, tax-efficient funds that can be distributed when and where you want it in the future as opposed to onshore pensions that are generally bundles of insurable benefits with payments and disbursements based on certain qualifications such as death and disability.

Another way to achieve pension goals is to buy deferred annuities; however, the rate of return is generally unattractive, though it is considered very secure. To the average offshore investor this is likely to be considered undesirable.

Question: What is an annuity?

Answer: An annuity is a series of annual (or monthly) payments offered by an insurance company in exchange for payment of a capital sum. A deferred annuity commences on a pre-determined date in the future, but the rate at which it is purchased is determined at the beginning of the contract. Therefore, a lump sum can be applied during a person's working life to purchase a fixed annuity on retirement at whatever is the movement in interest rates in the meantime.

Question: What are defined-benefit and defined-contribution plans?

Answer: A defined-benefit pension plan is one in which the levels of benefit (pension, death benefit etc) are defined in advance.

Question: Can I transfer my pension plan offshore?

Answer: It depends on where you live, the type of plan you have, where you plan to invest and what is available. You need specialized professional advice to investigate this.

In many cases the answer will be yes, but you will pay at least the basic rate of income tax on the transfer. Even this may be advantageous depending on your present and future circumstances. If you are planning to live offshore, it is well worth looking hard at the possibilities for transferring your pension plan.