This article expands on one of the points we made in our previous article titled financial challenges facing employees of the United Nations where we concluded that a private pension would not be suitable for most UN employees. However, we are well aware that this is an issue which many are concerned about within the agencies, especially those who are not members of the UNJSPF, so we decided to go into more depth on this subject.
Working for the UN has a great many benefits, however from a financial perspective one of the ways some UN employees are disadvantaged is the possibility of reaching retirement with little or no pension provision, including state pension.
For example, the way in which consultancy contracts have been used by some agencies over recent years to reduce costs will leave a large number of long term consultants with no UN pension (as they are unable to contribute towards the UNJSPF) or a state pension as they will not have made a sufficient number of qualifying years of social security contributions to be eligible for a state pension in their country of residence.
We have heard from a number of our clients in Rome that they have been contacted with offers of supplementary private pension schemes, which on the face of it sound like a good idea particularly for the aforementioned consultants. However, a private pension scheme is totally unsuitable for a UN employee and we will explain why.
When you put money into a pension you lock it away until you are of retirement age (typically 60 or above). Governments want to encourage people to save money for retirement to reduce the future burden on the state. In order to make private pensions attractive, tax relief is applied to money paid into private pensions (up to limits which are country dependent). In addition to this, employers often also make contributions into private pensions, in some cases matching what the employee pays in. In most countries, companies are incentivised to do so through tax credits and additionally are able to attract higher quality staff through offering such benefits.
So the basic premise of a pension is that you receive tax relief on the contributions that you make, although you will pay tax on the future withdrawals, once of pensionable age, which will generally be subject to income tax. If a UN employee starts a private pension, contributions will only be made by them, rather than also receiving the benefit of additional contributions from their employer. Therefore there can only be a benefit if there is tax relief on the contributions made, however, unlike ordinary tax residents, UN employees cannot receive tax relief on pension contributions from local tax authorities as they are not generally paying income tax to those authorities.
The definition of a pension is to provide income in retirement, when you would no longer be covered by the Convention on the Privileges and Immunities of the United Nations, which you might be as a UN employee. Once retired as an ordinary tax resident, withdrawals from the pension would be subject to income tax. There are variations on how much tax you will pay depending on where you retire, but in most countries you would pay between 20% and 40% income tax. If you had not received tax relief on the contributions into the pension then this is essentially an avoidable direct tax of your capital.
Therefore, by paying into a private pension as a UN employee you are not only locking away money for no benefit but you are possibly also building an unnecessary and not insignificant future tax liability on your capital.
To make matters worse these pension schemes tend to be expensive as there are typically many layers of fees: a trustee fee, setup fee, an advice fee, an ongoing advice fee, the cost of the investments, dealing fees and after all that there will likely be fees when you come to take benefits from the pension such as calculation fees, fees for arranging payments etc…
There is no reason that we can discern as to why a UN staff member or Consultant would benefit from using a private pension scheme, especially if the trustee is located in a jurisdiction with questionable reputation and regulation such as Malta.
One should also question why a pension is being recommended when there is no actual benefit, they are not efficient and bearing in mind that a pension represents an excellent way of extracting fees from a client as money is locked in over a long period of time.
As many of you will be aware, the alternatives offered from within the UN agencies are limited in this regard, and there are external companies or co-operatives offering pensions or equivalents which appear expensive and likely work in their favour rather than yours.
We believe that there are far better options available which provide a secure, tax efficient and low cost way of saving and growing money for the future while allowing complete accessibility, so no restrictions by age and no penalties on taking withdrawals and no income tax on those withdrawals once you are no longer a UN employee.
We work under regulation from the Financial Conduct Authority in the UK which ensures a robust process for recommending the best solution to fit your circumstances and complete transparency on fees.
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