If you are French or Canadian, you are raised to expect the government to provide for your minimum standard of living in later years; of course, you can sweeten your old days by saving and investing along the way. You usually pay a lot of taxes, but the social pact is that you’ll have your basic needs covered when you reach retirement.

Meanwhile, if you are Americans or Malaysian, you know you have to save for their retirement as your country does not guarantee you with a defined income upon retirement – civil servant being a notable exception. Your government do help you with compulsory schemes like the 401K or the EPF, and other tax incentives on saving accounts and other investment platforms, which end up lowering the level of tax you pay to your government. But in the end you can only rely on yourself to continue living a decent life once retired.

Once you become an expatriate, whether you come from a social thinking country like France or Canada, or a more liberal one like the US or Malaysia, you are faced with a tough decision to make: How shall you prepare for your retirement now that you are abroad? Do you continue your social scheme back home – if you have the opportunity ? Do you take your 401K or QROPS abroad with you ? Where will your saving and investment plan be located – back home? in your new country? somewhere else?

Difficult questions for sure. Many do shy away from them, and end up having to start from scratch a few years later. So the incentive really is in taking the bull by the horn and asking you those tough questions. The good news is that your scope of opportunity is wider, and you can build your stash faster as a result. It certainly is more work and less comfortable – especially for French or Canadian – but it also is more rewarding !

What does this mouthful means?

Qualifying Recognised Overseas Pensions Scheme (QROPS) are a relatively new invention. In April 2006, the UK tax authorities approved that former British tax resident and British Expatriates could move their pension benefits to QROPS. The authorities improved their stand early this year, and since then, a steady increasing number of expat – and advisers – are seizing this opportunity.

What are the benefits of a GROPS?

• No UK income tax on the pension benefits after you start drawing (whereas most UK pensions are taxed at source – even if you are resident overseas in most cases)
• You have the option of draw-down directly from the fund  (means you don’t have to lock everything into an annuity)
• Upon death, the fund balance can be passed to your realatives – Spouse, children, etc.
• You can be actively involved in the management and strategy of your pension fund at all times
• Any death benefit to your estate can now fall outside UK IHT
• You can combine multiple pensions into one single scheme, thus saving considerable admin costs
• Tax Free cash element can now be 30% of the fund, subject to the jurisdiction for the QROPS (instead of 25%)
• You can take benefits from age 55 (instead of 65)

Sounds great doesn’t it?

Yest it does. It actually is one of the few expatriate tax schemes which is really popular with everybody. The benefits are important, and most can benefit from it. But you still need to go through your estate to evaluate whether it is beneficial to you or not.

Once instance where you may be better of staying in the British system is when you have subscribed to a pension plan with benefits such as guaranteed annuity rates which were subscribed when interest rates very high – or at least much higher than lately.

Should you wish more info, do not hesitate to drop me a line

This week extract from my Economist reading is the trouble with pensions article. It is on the lengthy side for an Economist article; yet its reading is, as always, a breeze. The subject describes the main pension system we find worldwide. Sometimes defined-benefit schemes will be supported by companies (UK / US), sometimes by government (France). The defined-contribution one is the preferred one for expats as it is seen as more flexible.

The article is on the pessimist side. Its conclusion speaks for itself.

When it comes to pensions, the buck has been passed from employers to employees. But too few workers realise how much they need to contribute to guarantee a decent retirement or feel confident enough about how to invest their funds. This will not lead to the headlines about bankrupt pension funds that marked the decline of the DB scheme. But it will be bad for many workers all the same.

My two cents worth: The only solutions to this problem is financial education. We need to help people realize the impact of their non-choice and lack of expertise in this area, and help them get the right attitude toward finance: pro-active! We need to start teaching our kids about personal finance from a young age, help students in high school and universities to make rational financial decisions (who said credit card?), and help workers and entrepreneurs allocate a slice of their regular income so that they not only pay todays bills, but also prepare for tomorrow’s ones.

There are two things giving me hope:

1. More and more people awakening to these facts – taking actions and planning ahead. Good examples are JD, Trent, and all their followings
2. There definitely is a strong increasing market need for my expertise

Your Risk Tolerance

Some may be afraid to invest; especially over uncertain times like presently; yet, studies have proved that investing is the best way to grow capital in the long run. To get started, you have to know what risk you are ready to take. You need to ask yourself what you want to achieve, and how comfortable you are with the potential value fluctuations of your investment. This will define your risk tolerance. To quickly define your risk tolerance, you can ask yourself the following questions:

• Your personality – Gambler or risk-averse?
• Your objectives – How critical to your well-being are your objectives?
• Your discipline – Can you stick to your plan in times of uncertainty?

Your Timeline is Everything

Knowing your risk tolerance is essential in defining what kind of investments you should go after. Yet, there is an even more important factor to consider once you defined your risk personality: your investment timeline. The shorter your timelines is, the less risk you should take.

For two or less years goals you should do your best to keep an easy access to your money. Keep it in cash; in a saving account or a fixed deposit. Your interest rate will be slightly higher; and you keep a clear control on your money. This is very secure.

For two to ten years goals you can start playing with your money a bit more. By having a few more years ahead you downplay your risk factor. Still, the market being what they are, you never know what the future may hold for your. Try to find a balance between easy-to-access investments and the stock market.

For longer than ten years goals you should really look into stock market; As long as you are not afraid of sticking to your plan over difficult times, you will enjoy good returns. In the long run, the stock market outplay all other passive investments.

Stock Market Kick-Start

The stock market can be quite frightening for a newcomer. Therefore, you should start with a few index-funds,managed by large investment houses. They help you kick-start your discovery process, while making sure you diversify your investment.

And should you really want to learn what the stock market is about, you should set aside a small sum to play with, and invest it yourself. By investing directly on the market you will discover what it really means to trade. You will experience the stress, and pleasures, associated with reviewing, selecting, and following your stocks. You may not outplay the market with your investments – yet you could surprise yourself – but you certainly will learn a few things on the way.

Mr Navone is happy to live a frugal life. He doesn’t own a phone or a television, he buys most of his stuff second hand, and drives an old car. Yet, he does not miss a thing. He is disciplined, and happy to be. His strategy is simple.

“My motto back then without realizing it, and it is now, is that I’ll work for the money, and then I want the money to work for me” -Paul Navone

As Mr Navone wants his money to work for him, he saves a fair share of his income every month. This enables him to invest regularly.

He started by building a steady stream of income from renting out properties; properties he bought with his savings. He then started to invest in the stock market.

His investments always are for the long term. He never acts on impulse, and do not panic when the market are tumultuous.

“Paul has always been the perfect client. He gave me money and never took it out” – R. Douglas Smithson – Broker

Mr Navone is a great example of a simple plan well executed. His strategy is to give his money the time to grow. And it did grow ! He was steady, he was consistent, and he is rewarded with a net worth in the millions.

Mr Navone became a paragon of Personal Finance Strategy in the recent month. Many have discussed his achievements over the past few months. You can follow some of them on the following PF blogs:
Life Well-Lived is Not About the Bling – get rich slowly
Seven steps to wealth – the example of Paul Navone – Lending Club
Case Study: Multi-Millionaire Made on $11/hr Job – Consumerism Commentary