Did you ever wonder why the British Government decided to automatically opt-in all UK employees into a private pension scheme?
No I didn’t think you did either… but it’s actually quite important.
When you move overseas retirement planning is up to you, there’s rarely a good default option.
You have to figure it out yourself.
But understanding what would happen with your retirement savings at home, can offers some guardrails for growing your wealth overseas.
Let’s walk through two examples, to dig into the differences…
Expats save less by default than their UK counterparts
David lives in the UK, earning £80,000 per year.
Every month, 8% of his gross salary is contributed to his workplace pension.
5% of this is from his employer, and 3% is his own contribution.
The government also boosts this by another 2% of tax-relief.
David will pay some tax when he eventually accesses his pension.
However because of the 25% tax-free lump sum, if David retires as a basic rate UK tax-payer…
Net of tax he’s saved about 8.87% of his salary each year.
Simon lives in Dubai, also earning £80,000 per year, but with no tax worries.
He gets an end of service bonus of 70% of one month’s basic salary, for each year he works.
However his total compensation of £80,000 is split evenly across base salary and housing allowance.
This reduces the amount of EOSB he gets by 50%.
So his End of Service Bonus is equivalent to saving 2.92% of his salary each year.
Simon needs to invest 5.95% of his monthly salary just to keep up with David.
Expats are less likely to invest in assets that grow
David’s pension is invested into the default lifestyle investment strategy offered by his pension provider.
This means his portfolio will predominantly invest in the stock market until he’s within 10-15 years of retirement.
This is because stocks offer the most opportunity for growth.
Over the last 100 years, stocks have grown by 6.6% above inflation.
Whilst the value of Davids pension will fluctuate in the short-term…
By the time he reaches retirement, it’s reasonable to expect it will average around 6.6% per year of growth above inflation.
Over 10 years, David’s savings will be worth £92,195 adjusted for inflation.
Simon has never had any formal education on investing or growing his wealth.
So he doesn’t know, that he would automatically invest in the stock market, if he had a pension in the UK.
Instead he thinks the stock market is risky, and prefers to save his money in cash.
He has a fixed-rate deposit with his bank, so earns some interest.
However over the last 100 years, cash savings have underperformed the stock market by -6.1%.
Simon’s money will just about keep pace with inflation.
So Simon is saving less, and it’s growing less.
Over 10 years, Simon’s savings will be worth £23,893 adjusted for inflation – £68,302 less than David.
Less growth means you need to save even more
As David approaches retirement his pension will move from mostly stocks, to a split between stocks and bonds.
A long-term study has found that retirees with a portfolio allocated to 60% stocks and 40% bonds…
Need investments worth about 20-25x their annual expenditure when they retire.
Which should last 30 years, without them needing to worry about running out of money.
Assuming David wants to retire on £50,000 per year, he needs £1,000,000-£1,250,000.
Simon’s cash savings might keep pace with inflation, but they won’t provide inflation-beating growth.
So he’ll need significantly more to support his retirement.
If Simon keeps his savings in fixed-rate deposits with his bank…
For the same £50,000 of annual living costs, Simon will need about £1,389,702 to retire.
Simon will potentially need £389,702 more than David, because he doesn’t invest.
And if he lives 30 years beyond retirement, he is guaranteed to run out of money.
What really is a pension anyway?
This might be the biggest misconception in personal finance – most people see pensions as a magical black box for retirement savings.
But a pension is just an investment account, inside of a UK tax wrapper.
If you’re living outside of the UK, and are paid by a non-UK employer, you’re unlikely to be allowed to save into a UK pension.
But since you don’t need a UK tax wrapper, and it’s unlikely to benefit you living overseas – an investment account is the vehicle you need, to keep your savings growing for the future.
It can help you invest in stocks and bonds from over 10,000 companies around the globe, in one easy to manage place.
And unlike a UK pension, you can keep adding funds to your investment account as you move from one country to another.
If you found this useful, you might like our free 13 Step Financial Checklist for British expats living overseas.
Or if you’re looking for professional help with your life insurance, pensions & investments – click here to book your free initial consultation.
