If you’re an expat working for IHG, the decisions you make today about your IHG International Savings & Retirement 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.
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 IHG International Savings & Retirement Plan
The IHG International Savings & Retirement Plan is an investment-linked savings plan, provided by Zurich International based in the Isle of Man.
Whilst Zurich provide the investment infrastructure for the plan, it’s held in trust by Boal & Co in Jersey to safeguard the benefits for employees.
It’s a common misconception that the plan is a pension, despite it’s appearance it is not a recognised pension structure 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 does IHG contribute to the plan?
The contribution from IHG to your plan, depends on your level of seniority.
- Executive Staff – IHG contribute 10% of your basic salary to the plan each year
- Non-Executive Staff – IHG contribute 5% of your basic salary to the plan each year
The amount contributed excludes bonuses, incentives and overtime pay. If you are paid net of tax, the contribution is based on your gross salary.
How much can you pay into the plan?
There’s no mandatory contributions to the plan, however you can make Additional Voluntary Contributions.
Before deciding whether additional voluntary contributions to your plan are a good idea or not, you need to consider:
- The limitations on accessing your funds.
- How much your money is likely to grow.
- Whether the investment options are right for you.
Will the plan alone be enough to fund your retirement?
If you rely on the savings with your plan for retirement, with nothing else, it’s unlikely to be enough. Let’s look an example:
Your contributions are based off your basic salary, so this will vary from employee to employee.
Let’s assume that your basic salary is $7,500 per month, your total income is $15,000 per month, and your living costs are $10,000 per month.
If you received a the 10% maximum contribution from IHG, and then personally contribution an extra 20% of your basic salary through AVCs you would be investing $27,000 per year.
Because the default investment option is a lifestyle strategy, you shouldn’t expect high returns over the long-term. These typically starting higher growth assets, and shift to low-growth assets as you age. For the purpose of demonstration we’ve assumed an average return of 4% per year.
So after 30 years of saving, you’d have around $804,000.
A safe spending rate in retirement is typically 3-5% of your investment capital, depending on how it’s invested.
So this $804,000 could support around $32,000 per year of retirement spending – a long way off the $120,000 of assumed annual living costs.
That’s why it’s essential to understand how your savings are really growing to support your future.
How is your money invested?
The default investment option that your contributions will be invested in is the USD Automatic Investment Strategy.
This is what is often referred to as 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.
However, 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 on investment growth, but also left them with highly volatile investments.
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.
Can you change your investment options?
Yes, but the options are quite limited. You have access to both the IHG approved fund range, and the wider Zurich fund range, although there are few options I would consider optimal.
The IHG approved fund range contains 20 investment funds, selected from the wider Zurich fund range which has 142 options. The wider fund range is not reviewed for appropriateness by either the IHG committee or Zurich.
The fees in the wider fund range can be as high as 1.95% per year, and in the IHG range as high as 0.87%. And that’s in addition to the Zurich platform fees of 0.35% per annum.
Will Zurich or IHG provide advice on your investment choices?
No. Zurich will not provide any investment advice on how your funds are invested.
Whilst IHG outlines an approved fund range, there is no guarantee these are suitable to your personal circumstances and objectives.
Can you withdraw your contributions at any time?
No. You normally can access the funds within your plan once your employment with IHG ends.
Or, if you’re still in service after age 55, subject to the consent of IHG, you can make an in-service withdrawal provided you’re not a US taxpayer.
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 once the money is paid into your plan, you can’t easily change your mind.
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.
What are your options at retirement?
When you either retire, or stop working for IHG, you have 4 options for your savings:
- Full Disinvestment – You can take the full value of your account as a cash lump sum.
- Partial Disinvestment – You can take withdraw some of the value of your account as a cash lump sum and leave the remaining funds invested.
- Regular Withdrawals – You can leave your funds invested but set a regular withdrawal from your plan (be careful to check the tax consequences).
- 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, partial lump sum, or a regular withdrawal.
What’s the best way to manage the funds when leaving IHG?
If you reside in a lower-tax or tax-free jurisdiction, when ending your service with IHG, you 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, in a tax efficient manner.
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.
What are the tax implications at retirement?
Whilst Zurich who provide the IHG International Savings & Retirement 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 in Thailand, 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 for IHG – 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 for IHG 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 many 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.
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 or ending your employment with IHG, we strongly recommend you seek a second opinion to ensure your arrangements are in the right place.
How could the money support your retirement?
It depends on how you invest the money, and also how markets perform over time.
Our latest ebook “What does a £500,000 retirement look like?” takes a deep dive into how to make the most out of a lump sump, that needs investing for retirement.
It looks at historical scenarios, using real asset class return data, to see what the probabilities of success would have been.
As a rule of thumb, if the money is invested in a mix of stocks and bonds, you should be able to spend 5% per year (increasing with inflation) without worrying too much about running out of money.
Looking for help to manage your investments?
Are you an expat with over £150,000 to invest? Arrange your complimentary initial consultation today.
