If you’re an expat working offshore, the decisions you make today about your International Seafarers Retirement Savings Plan, will make a substantial difference when you hit retirement.
It’s not just about how much money goes into your plan, but also the investments you choose – the default options simply aren’t designed to maximise your money.
And once you reach retirement, or separate from the company, it’s important to carefully navigate both the retirement options, and tax consequences.
This guide will explain everything you need to know – in plain English.
What is the International Seafarers Retirement Savings Plan?
The International Seafarers Retirement Savings Plan is an investment-linked life assurance plan, provided by Zurich International based in the Isle of Man, and held in trust for members of the plan.
It’s a common misconception that the plan is a pension, despite its appearance and structure, it is not a recognised pension and is instead treated as an investment-linked life assurance policy.
It’s a ‘defined contribution’ plan, which means how much you get depends on the level of contributions and investment performance.
How much can you pay into the plan?
As the plan caters to a range of employers, the levels of employer contributions will vary.
The International Seafarers Retirement Savings Plan can accept regular and one-off payments from both members and employers, which are held in separate accounts.
There’s no mandatory employee contributions to the plan, however you can make Additional Voluntary Contributions (AVCs) as an ad-hoc lump sum, once per year, or a regular monthly payment.
The minimum amount to make AVCs is an annual contribution of $1,000 per year, or $100 for regular monthly payments.
You can change the amount you contribute or stop making contributions for a while if you need to (known as a
‘contribution holiday’). If you cease contributions you can’t restart your contribution until your next policy anniversary.
Before deciding whether additional voluntary contributions to your plan are a good idea or not, you need to consider:
- The costs of your plan.
- The limitations on accessing your funds.
- And, how much your money is likely to grow.
Can you withdraw your contributions at any time?
No you can’t. You normally can access the funds within your plan once you reach your selected Normal Retirement Age. This can vary across members, but is usually age 60.
In times of financial hardship, you can apply to make an early withdrawal from the fund, but this subject to the trustee’s discretion, and is not guaranteed. The intention is to allow you some flexibility to meet the costs of key events, like medical expenses, education costs or property purchases. The minimum access amount is USD 5,000.
This means you need to be certain investing within the plan is the best solution for you, not just in terms of flexibility but also investment options. Because the money is paid into your plan, you can’t easily change your mind.
How is your money invested?
The default investment option that your contributions will be invested in the Seafarers Retirement Savings Fund, is range of active and index-tracking investment funds managed by an external asset manage.
It is a “lifestyle investment approach” where your funds are invested in high-growth assets in the early years, and move into low-growth investments as you age. Whilst this may sound sensible, it has been proven to have significant drawbacks.
There has been a lot of recent controversy about lifestyle investments, as the low-growth approach doesn’t also mean low-volatility. This has caused people to not only lose out investment growth, but also left them suffering high levels of market volatility.
Before leaving your funds in a lifestyle approach I recommend reading this article from The Telegraph – ‘I was told my pension was safe – then I lost £300,000’ – or our blog on lifestyle investments.
Aside from the risk of volatility, you also need to consider if you really want your investments to stop growing as you age. Chances are you’re planning a 20-30 year retirement, and you’ll need your wealth to keep growing to support this. Your investing journey is unlikely to stop at age 60.
The funds lifestyle approach puts your pension in 100% cash (money market funds) at your retirement age.
Can you choose your own investment?
To some extent. You can switch your investments from the default investment strategy, however you are still limited to a range of funds identified by the plan’s external asset manager.
This means you’re unlikely to access there variety of investments you could, on an open-architecture investment platform.
Will Zurich provide advice on your investment choices?
No. Zurich will not provide any investment advice on how your funds are invested.
Is there a minimum amount you’ll receive at retirement?
No. The amount you receive depends on the level of contributions, and the performance of the investments you choose.
How much does the International Seafarers Retirement Savings Plan cost?
Each year there is an annual percentage charge of 1.85% of your savings.
Considering you receive no investment advice or financial planning, this cost is relatively high compared to the alternatives.
What are your options at retirement?
When you retire you have 3 options for your savings:
- Full Disinvestment – You can take the full value of your account as a cash lump sum (be careful to check the tax consequences).
- Remain Invested – You can leave your funds invested until you choose to withdraw the full value, however you can’t make further contributions.
- Transfer Out – You may be able to transfer the full value of your plan to another employer savings plan.
Unless you move to an employer which also offers an employee benefits plan provided by Zurich, it’s unlikely you’ll be able to transfer your benefits.
So in practice your options are to take a cash lump sum, or to remain invested.
What are the tax implications at retirement?
Whilst Zurich who provide the International Seafarers Retirement Savings Plan are based in the Isle of Man, and don’t pay tax locally, this does not automatically make your plan tax-free.
The tax treatment of both employer contributions to your plan, withdrawals from your plan, keeping your funds invested, and the purchase of an annuity, all depend on your tax residence at the time.
Let’s look at a few examples:
1. You end your employment in the UAE, and become a UK tax resident before surrendering your plan for a cash lump sum – Your plan would be treated as a non-qualifying life assurance policy in the UK. This means any gain in value of your plan (relative to the contributions made) would be assessed for UK Income Tax at rates of up to 45%.
2. You end your employment and become a Spanish tax resident before taking a regular withdrawal – The structure doesn’t comply with local tax regulations, so on an ongoing basis you would be subject to tax on any interest, dividends or capital gains within your plan (e.g. from switching funds), as well as additional tax reporting. Each time a regular withdrawal is paid to you, it would also create a taxable event.
3. You become tax resident in the UK whilst continuing to work – Your plan is not a recognised pension scheme in the UK, so any employer contributions would be considered taxable income and assessed for UK Income Tax.
4. You end your employment in Singapore, and surrender your plan for a cash lump sum whilst still resident in Singapore – As a tax resident of Singapore the proceeds from your plan can be taken free of tax.
5. You stop working but keep your funds invested within your plan – This depends again on the jurisdiction you settle in, the best case if the structure continues to act as a tax-wrapper and you only pay tax when making withdrawals from the policy. However in some countries the structure may be ‘looked-through’ meaning you owe tax on any dividends, interest and gains if you switch funds.
To avoid any unwelcome surprises, it is best practice to ensure you surrender your savings plan, whilst still resident in a tax-free or low-tax jurisdiction.
What’s the best way to manage the funds when retiring?
If you reside in a lower-tax or tax-free jurisdiction, when ending your service, you may have a significant tax planning opportunity.
You could surrender your policy, receiving a cash lump sum, that can then be reinvested elsewhere for the future. This means you have no stored gains which could be taxed if you retain the policy, when making any future withdrawals or fund changes.
If you’re working in Asia or the Middle East, this is something you should explore.
Are there any other tax planning opportunities to consider?
Yes, but the right answer depends on where you currently, and if you’re planning to move. Before retiring, we strongly recommend you seek a second opinion to ensure your arrangements are in the right place.
What’s our verdict on the Seafarers Retirement Savings Plan?
Any retirement plan which an employer contributes to is worthwhile, however the International Seafarers Retirement Savings Plan may not be the best vehicle for your own savings.
Where your contributions aren’t matched by your employer, the high charges, limited fund range, and lock-in until retirement means there are lower-cost and more flexible alternatives.
Looking for help to tax-efficiently structure your investments?
Are you an expat with over £150,000 to invest? Arrange your complimentary initial consultation today.
