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Whether or not you plan on retiring soon, like many others across Deutschland you may already be saving for your pension.
Offshore pension plans differ from usual pension plans in that they specifically allow people who live abroad or frequently move from country to country for work to contribute to a retirement plan outside of their usual place of residence.
But how beneficial (if at all) are they particularly for foreigners in the Bundesrepublik?
The costs for maintaining an offshore pension plan for foreigners here can be quite high, both on the commissions side and administrative costs side, financial advisor Patrick Ott told The Local.
As such, Ott usually advises expat clients in Germany to set up a new pension plan or use one which they have already set up in their own country, such as the 401(k) plan in the US, which is a retirement savings plan sponsored by an employer. Yet there are a few exceptions, Ott added.
“It makes more sense to just open an account with a German or international platform for investing into investment funds directly rather than using an overly expensive offshore pension plan,” he said.
“There are only very few that do not work based on commissions and therefore the vast majority come with very high closing and running costs,” Ott added. One key criticism of offshore pension plans is that they're an expensive way to invest in the world stock market.
German pension plans are moreover usually tax subsidized, which isn't the case for many offshore retirement plans, according to Ott. Some of the big names in Germany include RIESTER (a pension plan specifically designed for families), RÜRUP (a pension for the self-employed) and betriebliche Altersvorsorge, or a company pension scheme.
While even simple private retirement plans in Germany - if set up correctly with high enough coverage for biological risks like sudden death - can be used for tax deferral, the vast majority of offshore pension plans fail to comply with the relevant German tax rules, Ott said.
When an offshore plan makes sense (and when it doesn't)
Nevertheless, for globetrotters who know they’ll stay mobile in their work, such a plan could be wise. “An offshore pension plan would most likely be a huge advantage for someone who works globally and will move on to many countries for many years to come,” the tax expert said.
Ott recommends seeking out commission-free plans in which the advisor charges fees directly and only to the client. He finds them a "much more transparent and cost-reduced solution." He also recommends passive investment funds, which are lower in costs than pension plans which are actively managed.
But even if you decide to go with an offshore plan, Ott warns that "you won't have special tax advantages if you reside in Germany." This is because German tax legislation - much like many other countries around the world - does not recognize offshore plans in their own tax legislation.
Starting this year, Germany has introduced a so-called ongoing taxation, meaning that a person “has to report profits even if they are only on paper every year.” This basically means that on your tax declaration, you would need to list the price of the fund at the beginning of the year and the price of the fund at the end of the year, with the difference being taxable profit in Germany.
In this regard, an offshore plan can have a slight advantage if it can work to defer those ongoing tax payments. But most of the offshore pension plans lack certain criteria under German law. Furthermore, since they undergo “transparent taxation” in Germany, their profits also need to be declared and taxed yearly.
Even if an offshore pension plan is not taxed at a high rate, the costs of setting one up can be prohibitively expensive, Ott emphasizes. Some plans could also cause serious problems among tax authorities, depending on the country of origin of the foreigner.
For example, there’s a German-US double tax recognition agreement, meaning that pension plans set up in Germany would not cause any issues for Americans, whereas an offshore plan could be problematic.
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Looking at a foreigner's country of origin
If an expat snags a job in Germany, but is unsure whether they want to plant roots in Deutschland, they can simply continue to invest in their home country's plan, advises Ott. They wouldn’t have any tax advantages but wouldn’t have any disadvantages either, with the ability to pay into the already established plan of their native country.
Yet even some employees who aren't here for the long haul can take advantage of a German pension scheme, according to the advisor. For example, if someone moves to Germany as an employee with a very high income, "it would make sense to use tax-subsidized company pension schemes in order to minimize tax exposure for three or four years."
It’s also possible to turn to a tax advisor to set up these often low cost, commission-free plans.
In general, if a person comes from America or elsewhere and does not know if they’re going to stay for longer, Ott recommends paying into the old pension plan if it’s legally possible. If not, a person is usually better off setting up an investment plan where they funnel savings directly into investment funds.
Once they choose the country they want to stay in for the long run, they can move that capital into either the pension plan in their home country or the one in Germany.
But for expats, the tax expert says he wouldn't recommend setting up a new pension plan "if you only have a short term perspective" with regards to your country of residence.
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