You purchase a stock say for $10, and later you sell it for $15. Do you pay taxes on $15? Absolutely not? You pay taxes on $5, the gain or profit you made on the transaction. Therefore, $10 is the basis (or cost) of the stock, $15 is the sale price and $5 is the gain. The same logic applies if you buy and sell a car or a house or run a business; you are taxed only on the proceeds that exceed the cost (or basis). I guess that so far you are with me on the meaning of basis.
Now let us consider your UN pension. You contribute a certain amount and the UN organization contributes double that amount. Thus, you contribute 1/3rd and the UN agency contributes 2/3rds. Now the UN agency takes all these contributions and remits it to the United Nations Joint Staff Pension Fund (UNJSPF). The UNJSPF invests all your money and earns a return or makes gains (or profits) that funnel back in to the pension fund so that you will have a larger accumulation for retirement. Therefore, once you retire, your monthly pension is going to exceed the contributions made to the pension fund (your contribution and the organization’s contribution). Therefore, when you start taking your pension you should pay for taxes on the profits that the pension fund has made for you. Now what is the basis or cost of your pension?
To get a good idea of the cost of your pension you can ask UNJSFP to give you the sum-total of your contribution plus those contributions of the organization. Realistically speaking, the “basis” or cost of your pension is the total of contributions made by you and the UN agency. However, the tax determination of what is basis will depend on the laws in the country you will reside and your status of citizenship before that.
Let us start with a developing country setting as a locally recruited staff member. In many a developing country, the UN is highly recognized and it is a status symbol to be working for the UN. In addition, in that recognition, the UN is important to that country and respected as a world government and the host country likes to give certain benefits to the UN and its staff. In as much as government salary may be exempt from taxes the host country may exempt local staff salaries from taxes and may extend that exemption to the UN pension as well. However, if the UN pension is taxable in your country and you did not pay taxes on your UN salary when working for the UN, it only deems fit that the basis of your pension is your contributions plus those of the organization. If you have been an expatriate and now decide to retire in your home country, then the same logic should apply, namely your total basis should be your contributions plus those of the UN agency. Remember, however logical these arguments may be, you must always follow the tax laws in your country. Of course, you can lobby to change tax laws if that is possible.
Now you work as an expatriate in a country such as the USA and decide to take US residency and live in the US as a UN retiree. When you were working for the UN in some other country and later in the USA, you did not pay taxes on UN salary because you were neither a citizen nor resident during employ with the United Nations. Your pension fund contribution was your own money and was exempt from taxes as much as your UN salary was. Now the logic flows that if the UN agency paid their share direct to you instead of paying it to the UNJSPF then that portion would also be exempt from US taxes. Having now established that the organization’s 2/3rd contribution is exempt from US taxes, that means that your total contribution (your contribution plus the agency contribution) is exempt from US taxes and forms the basis of your pension. Now, on what criteria is the pension taxed?
Remember our first paragraph on the basis of a stock or house. The same logic applies to your pension as well. The UN pension taxes the same way that you tax an annuity. In case some of you do not know what an annuity is, let me take a moment to explain that for you. Some people are very bad in managing their money. If they get a lump sum, they may squander it or their spouse may blow it up. Therefore, what most insurance companies and banks would do is sell you an annuity. You give the financial institution a large sum of money upfront and they promise to give you a certain amount at monthly or quarterly periods for your lifetime or for a specific term of years. The financial institution would normally invest your money to earn a higher return, share some of the profits with you, and keep some for them. Let’s say you decide to give 300,000 units of currency (UC’s) for a term of 20 years and the financial institution promises to pay you 2,000 UC’s every month for the next 20 years or 240 months. That means in one year the institution pays you 24,000 UC’s. Now you reach the end of the year and you must pay taxes on this annuity. Your taxable liability calculates as follows:
Calculation of taxable annuity:
- Basis of annuity is 300,000 for 20 years.
- Basis of annuity for one year is 300,000/20 = 15,000.
- Total annuity payments in a year = 24,000.
- Taxable portion of annuity is 24,000 minus 15,000 = 9,000
I gave you this annuity example to show how your pension is taxable. If you had a lifetime annuity then the denominator to determine the annual basis is determined by the taxing authority. In fact, the tax authorities normally use the annuity methodology to tax pensions. So now, let us see how your pension would tax. Let us assume that your contribution to the pension fund was 40,000 UC’s and the UN agency contributed 80,000 UC’s. Say for one year your total pension fund payments are 16,000 and from tax instructions, your joint life expectancy (husband and wife) is 360 months or 30 years from the period, your pension starts. In that case, the taxable portion of your pension would be as follows:
- Total Pension paid for the tax year = 16,000.
- Pension exemption 120,000/30 = 4,000
- Pension subject to taxation = 12,000
If however, your UN salary was taxable in the country (like it is for US citizens) and you were a citizen of that country and working in the UN in the same country and then decide to retire in the same country, then the basis of your pension would be only your own contributions and the pension exemption would be:
- Total Pension paid for the tax year = 16,000
- Pension exemption 40,000/30 = 1,333.33
- Pension subject to taxation = 14,666.67
Many UN staff who retires in other countries sadly lacks advice on what they should do. Just recently, I heard of a good UN friend who retired in Canada and for almost 25 years paid taxes on his full UN pension. I advised and counseled him to argue his case for a tax refund and he was pushing for the Canadian tax authorities to consider a part of his pension as tax-free. The Canadian tax authorities agreed readily that his contributions to the UN pension fund were certainly tax free following the same logic as purchasing an annuity. However, the Canadian tax authorities were unwilling to consider the UN agency contribution as the basis of the pension although this UN retiree was neither a citizen nor living in Canada during the employ of the UN. He is fighting his case to get the Canadian tax authorities to consider the UN agency contribution as part of the basis as has the USA. Nevertheless, my friend is due for a big tax refund. I am only flabbergasted that his tax accountants did not spot this earlier. Poor chap.
I hope this essay helps you to understand the taxing of your pension. It is written for educational purposes only. Please follow the advice of your tax counsel and observe the local tax laws of your country of residence. However, some times tax counsel may not know how pension’s tax and you must also take the time to ensure that you get this relief. At least you know now why your pension is partially tax exempt.
Any member of the public reading this should not get the impression that UN salaries are tax free, far from it. There are two salary scales in the UN, the gross salary scale and the net salary scale. The net salary scale is derived by taking into accounnt the taxing of gross remuneration. UN staffs are paid only net salaries, the equivalent of an after-tax salary.