Local Employer Pension: Should You Sign Up When Working Abroad?

Picture this: you’re working abroad in another country, for a temporary period. Everything is set up in your new location; housing, schools etc but one thing you’ve not thought about? Signing up for a local employer pension plan. So, someone asks would you like to? And it’s a great question, do you?

Local employer pension plan, can I not just stay on my home employer plan?

The answer is- it depends. Generally, for an employee to remain in their home country plan, they would need to remain an employee of the home country entity, meaning that their temporary work in another country would need to be on a secondment basis i.e. seconded from home country entity to host country entity.

Even then, it isn’t that simple. Other considerations depend on whether the home country’s local legislation and home country plan rules would even allow such a situation. So, seeking advice ahead of time is key to understanding whether it is possible.

If an employee ceases employment with their home entity and is either transferred or hired in the host country, they would generally not have a home plan employer pension option.

So, I am a secondee and therefore eligible to remain in my home employer plan, but should I?

There are benefits to keeping a home plan while you are temporarily located in another country, such as employer contributions and continued contributions for your retirement, although this depends on the specific employer pension plan.

It is worth noting that the tax relief you receive on your home plan while working in your home country is often not mirrored in the host country. Therefore, remaining on a pension plan in your home country may not be as tax efficient. This all depends on the relevant country tax treaties and local tax laws in both countries, so it is important to understand the relief available before deciding. If your circumstances mean that your home country plan does not receive tax relief in the host country, then any employer matching and plan growth could be taxable and/or subject to employee social security.

Home Plan vs Local Employer Pension Plan too- is there a benefit to one over the other?

If an employee remains a home country employee and is seconded to another country, they may be eligible to choose between a home or host (local employer pension) country plan.

Aside from tax considerations mentioned throughout, the employee should compare the allowable contributions for an employee and the value of employer matching contributions available in the home and host. They should also look at the expected return on investment through plan growth, as this may differ from country to country.

If I’m not a secondee and am transferring to another country on a local contract, should I sign up for the local employer pension plan?

On the basis you do not have access to your previous home plan, you may wish to enrol in the local employer pension plan to pick up the benefits.

In most countries, local employer pension plans provide a tax-efficient way to save for retirement in that country. This means that participants will likely receive tax and/or social security savings on their contributions in the new location. In addition, many employers offer matching contributions. If an individual employee does not enrol, then they may be missing out on that compensation.

That being said, you will be required to track the local plan in the host country up until retirement and if you are only in the host country for a temporary period, this can be a burden. A question that is often asked when an individual is returning to their home country is “Can I transfer or cash out the pension to take the funds back home”. It is often difficult or in some cases impossible to transfer pension plans from one country to another, and there can be taxation and penalties if a pension plan is cashed in ahead of retirement.

Depending on your home country and/or citizenship, you may also need to factor in home tax rules when deciding to go on a local plan in another country. If you are from a country (for example the USA) which holds its citizens to worldwide income reporting for tax purposes, understanding your home country’s position on the host country pension is key.

Furthermore, there could be income tax issues, such as double or punitive tax, at retirement that are often not anticipated. Planning advice should be considered on the tax treatment at payout for both the pension country and the retirement country.

Final thoughts

Any potential benefits of contributing to a home and/or host country pension scheme whilst temporarily in another country should be considered on an individual basis. Consideration should be given to the individual circumstances of the employee, including their investment intentions. We would always advise that investments should be discussed with a regulated investment advisor.

From a tax perspective, employees should seek to understand the tax relief available when contributing and upon payout. An employee may also want to explore the retirement age under the local plan, the mechanism to withdraw funds at retirement, and what happens if they decide that they want to exit the plan before retirement.

At AAB, we have the cross-border expertise to review and advise on individual pension plans to maximise tax relief and plan ahead to ensure the most beneficial tax treatment including being able to support those in the US with their payroll and employment queries through our AAB Payroll Inc team. Please reach out to Niamh McKenna or your usual AAB contact if you have any questions.