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Last modified: 04/03/08

Chris_7Portable Pensions Plans

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By Chris Cleary, Banner Japan K.K. |August 3, 2005|

Portable pensions plans are a means for people working abroad to build up a lump sum for their retirement when their employment circumstances will not automatically provide them with a pension. This article looks at who such plans are suitable for and how they work. The following month’s linked article will look at the issue of rogue advisers and the questions you should ask when considering taking out a portable pension plan.

Portable pension plans are pension plans for expatriates, i.e. people working abroad. They are suitable for:

  • people whose jobs do not offer a pension
  • people whose jobs do offer a pension but which will be inadequate
  • people who will change employer and/or country of employment from time to time.

They may not be suitable for:

  • people who are about to become resident again in the country of their own nationality (‘about to’ meaning within the next year or so)
  • people approaching retirement (‘approaching’ meaning within the next three to five years).

They are particular suitable for people in their late twenties and early/mid thirties who have a career path in front of them but have not yet made any significant investments and do not want to spend much time on looking after and managing their investments.

They work like this:
In signing up for a portable pension plan you agree to a contract. This will be a minimum of five years but is best aimed at your earliest foreseeable retirement age. This will normally be between 55 and 60. You also agree a monthly amount to put away. The more you put into the plan, the more there will be for your retirement. However, you should not take on an obligation you cannot fulfil. All plans have a minimum contribution period, ranging from five to thirty-six months, in which you must make the contributions. Beyond that you are free to discontinue, but discontinuation makes the plan less efficient financially. The flexibility to miss a few payments, if you lose your job or decide to go round the world, is there, but in taking out the plan you should not set the contribution level unrealistically high - your income might increase, but then so might your responsibilities. You should choose a level you are completely comfortable with. A simple method for doing this is to take your annual disposable income (how much you have left over after you accommodation and living expenses are paid for, including an annual holiday/trip home) and divide this by two. Allocate the annual amount into twelve monthly portions: you should be comfortable with that (and the minimum is US$150 monthly).

This sum is best paid off using a credit card - this is convenient, is cheaper than using a bank to make transfers, and after a few months you don’t really notice the money going out. Your monthly contribution is then invested into a series of mutual funds. Doing things this way gives you four advantages:

  • Access to diversified range of funds. The days of opaque mystery funds and lack of choice are long gone. You can be in range of funds which will sustain overall performance and cushion you from the gyrations of the markets. Yes, you can be in a wide variety of stock funds; you can also be in high-grade or high-yield bond funds, in gold stocks, in resource stocks, or in property income funds. Diversified portfolios do better in the long run.
     
  • Free switching. You can change your funds at any time, switching at zero cost. Diversification matters, but your portfolio can be re-balanced at any time.
     
  • Averaging. Investing monthly gives a huge advantage over lump-sum investment. If the price of a fund falls, you buy more units the next month, and so on, until the unit price turns around. As you have a large number of units, your gains will be much greater than with a simple lump-sum investment.
  • Compounding. These plans are long-term, part of the financial structuring of your life. Anything over ten years affords you the power of compound interest (dubbed by Einstein ‘the eighth wonder of the world’). A return of 9% doubles your money in eight years and quadruples it in sixteen. Your money makes money and the profits make money too. (This is why these plans are particularly suitable for people in their twenties and early thirties.)

As mentioned, these plans are portable. You can take them to where you live next, even if that is the country of your own nationality (there will be some restrictions for residence in the USA). As they are written technically as life insurance contracts the investments are held by an insurance company with whom you have a contract for the value of those investments. There are no dividends or distributions. The whole value sits in your plan. There are no taxes to diminish the power of compounding and therefore the full value of the plan until you take the benefits at the end of the plan.

And don’t forget - all the money you put in is your money.

Chris Cleary
Director
Banner Japan K.K
Integrated Investments, Tax & Estate Planning Services

Further information on portable pension plans is available free from Banner Japan at:
 +81 (0)3 5724-5100; questions@bannerjapan.com