Pension bomb for sandwich generation

Dubai: You may or may not be Asian, British, or American, but three spots of news from those parts are relevant to all Gulf News readers.

News byte No 1: Last week was the 100th anniversary of the UK Pension.

News byte No 2: The US, this year, witnessed the biggest demographic wave of of people moving into retirement - ever.

News byte No 3: The Prudential, on the back of whopping 48 per cent growth in Asia (selling pensions) in first-half 2007, announced a first-half operating profit of £1.4 billion. Again, Asia features strongly.

The story for The Prudential: 'Pensions are big business'.

The story for the Gulf News: 'Everyone needs a pension, assuming everyone is seeking to outlive their day-job'.

Pensions, retirement income, whatever you want to call it, are a natural growth business on the back of expected improvements in general health and general wealth.

In 1908 less than 2 million people qualified for the UK government pension; today the number is over 10 million. That sounds like two UAEs' worth of people with fixed incomes. The lowest being at around £90, even if this is a per-week amount, it's not a lot.

At least in the "old days" the authorities could take it away from those found "squandering money on drink". Today, British pensioners are free to squander as long as they have the money. The problem, of course, is that there are fewer people working (and getting taxed) to fill the pot which pays out the basic pension.

This is the so-called "pension time bomb". Serious in the West, very serious in Japan, and it will be even more serious in China and India as soon as they get their statistics together.

Commonality No 1 for all Gulf News readers is: Wherever we end up, we are all sitting on top of some form of pensions time bomb.

Where the "bomb" is the handout from government because you are old enough; and the "time fuse" is the growing population of the aged, and the declining number of people funding the pot from which the income is derived. It means that if we want to avoid relying on government, we must build our own pots.

This is becoming increasingly awkward for the "sandwich generation". This is the generation of people who have parents and grandparents at one end of the scale and have young children at the other. At one end, the old are getting older; they will need care as they get ill, all without enough money. At the other end, the young are gaining educational aspirations. Handling this together with managing your own "government free" retirement income requires advanced level financial planning.

Now add the multicultural environment that is the UAE and you can see that the advice side is fraught with difficulty. Aussies, Brits, Emiratis, Indians, South Africans, you name it - the sandwiches come with different fillings.

It leads to the question: how much advice is generic to the issue of pensions and retirement; and how much advice is specific to the laws of the land to which Gulf News readers will retire? Rhetorical, of course, the degree to which specific advice is required is probably proportionate to the amount of rules and regulations of the country in which the retirement cash is to be dished out and spent.

This leads to Generic Commonality No 2: Tax. If you can legally avoid, say, 20 to 40 per cent tax on income (or capital, or both) this is so far above reasonable performance return expectations that it sends a clear message: Looking at the structure of your retirement vehicle is just as critical as looking at the factors that influence performance. Net performance matters more than gross performance.

Naturally, "rules and regs" vary from country to country. For those looking for a part-time retirement on The Palms, or overlooking the Dubai Marina, the "vehicle structuring" might be more important for "the other vehicle", the one required for the rest of your part-time retirement. However, if all your likely retirement is to be enjoyed in a "tax rich environment" then structure, tax on capital and tax on income become fairly critical.

Outside the taxed world the offshore world will suit the "don't know" hordes who have yet to reconcile where their family is; where their current friends are, and this new globalised, go-anywhere world. For these people the word offshore is used liberally to mean no tax. More accurately, offshore equates to environments where more than one jurisdiction applies. Your Isle of Man pension (Jurisdiction 1); your Indian passport (Jurisdiction 2); your UAE residency (Jurisdiction 3) is a classic offshore investment. Environments such as the UK's offshore territories, DIFC maybe, or anywhere that does not require automatic tax regulation will clearly benefit from the increasing amounts of "the flexible": those who don't know where they will retire and those who will want to live in more than one jurisdiction.

Since you really ought to be focusing on jurisdiction, this leads to Generic Commonality No 3: Currency. Whether you see yourself in one, two or three jurisdictions it is important to get currency right. One Indian rupee will always buy one Indian rupee's worth of goods and services in India. One Aussie dollar buys one Aussie dollar's worth of anything in Oz. The point: it doesn't make a great deal of sense planning an Indian retirement in US dollars if the currency relationship is prone to huge swings.

Thinking of living part-time in France, part time in the UAE? Surely the planning really ought to be split between a euro-based portfolio and a US dollar/dirham based portfolio.

One hundred years of UK pension planning has only seen the concept grow. This newly globalising world can learn much from such history.

- The writer is Chairman of Mondial Financial Partners.