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Is it better to pay off your mortgage early or save for retirement?

By Chris Burke
This article is published on: 10th August 2022

10.08.22

One of the more common and difficult questions to answer for clients, more because emotionally people like to pay off their debts and specifically their mortgage (its most likely the biggest debt you will have in your lifetime, if you exclude children!) is ‘Is it better to pay off my mortgage early or save for retirement?’ Well, I am very analytical, which is great being a financial adviser, so I need facts to make decisions and to look forward for clients planning.

Whether you’ve received a pay rise or you’re just planning for the future in general, it can be a challenge deciding how to employ use your hard-earned cash. From a psychological perspective, in a way it makes sense making clearing your debts a priority. However, will you be better off this way or by doing something else with that money/investing those funds? Which option will provide the better return on investment and generate long term wealth for you?

The first step is to evaluate your personal financial situation with a professional financial adviser if possible. There are many variables to take into consideration here such as:

What are your objectives/goals?
Do you have surplus cash each month?
Do you have an emergency fund in place?
What exactly are you looking to achieve?

Choosing to pay off your mortgage early
It can be very enticing to pay off your mortgage early and being debt free whilst owning your home outright. This may be able to save you thousands in the long-run and reduce your monthly outgoings, which could be a solid financial decision. Certainly, in the early years of your mortgage, if you are paying mainly interest on your monthly mortgage payments, then this may be the best option for you. However, have you considered the interest rate you have on your mortgage? Is this favourable when compared to other options? And furthermore, have you looked in to the potential early redemption penalties?

Pros of paying off your mortgage early	Cons of paying off your mortgage early
Save on paying off the interest borrowed	You may cut into your savings (and emergency fund)
Debt free earlier (psychological)	Have you diversified? Is your mortgage your only investment?
More money available to you after	Early redemption penalties
	Are you losing an opportunity to increase your wealth, by missing out on doing something more effective with the money?
	Money is historically cheap to borrow

Choosing to invest your money
Even though paying off a mortgage early can have many benefits and lifts the burden of repaying a large debt, in many cases it may be wiser to invest extra cash instead in the form of investments or retirement funds. With regards to investing for the future, the earlier that you do this the better. Interest builds up over time (the power of compound interest!) so the longer you have your funds invested ‘working for you’ the more they will be worth when it’s eventually the time to use them.

Pros of investing (vs paying off your mortgage early)	Cons of investing (vs paying off your mortgage early)
Potential to see a higher rate of return and increase your wealth	Riskier – returns are not guaranteed
The assets are more liquid – easier to sell if you are in need of cash	Still requires that you make payments
Depending on the type of investment, there may be opportunity for tax savings or for your employer to match the amount	Doesn’t make your debt ‘go away’

So, as I said earlier, I am analytical and its not for me to decide whether anyone should pay off their mortgage early or not, that’s their decision. However, mathematics doesn’t lie so let’s look at a real-life example. The Mortgage payments, rates of return and end results are real figures obtained from our mortgage department and professional investment calculator:

In the below examples I have used €1,930 as the monthly amount in total as this is what came back as the monthly payment for borrowing €300,000 over 15 years:

Case Study 1

Paying your mortgage off over 25 years and also saving for retirement along the way:

Property Value €600 000
Mortgage of €300 000 EUR (50% Mortgage)
25-year term fixed rate at 2%
€1,271 EUR monthly payment
Mortgage paid in full after 25 years

Meanwhile whilst also saving for retirement:

Investing €659 a month for 25 years (€659 + €1,271 adds up to €1,930, the 15-year monthly payment amount below)
5% compound interest
Value of investment/retirement plan after 25 years: €377,425

Case Study 2

Property Value €600 000
Mortgage of €300 000 EUR (50% Mortgage)
15-year term at 2% fixed rate
€1,930 EUR monthly payment
 Mortgage paid off in 15 years

Then (after the 15-year period and mortgage fully paid off)

Investing €1,930 a month for 10 years
5% compound interest
Value after 10 years: €291,000

Comparison Results
After 25 years in case study 1, you will have the value of the property you are living in plus €377,425 towards a retirement fund. After 25 years in case study 2, you will have the value of the property plus a retirement fund of €291,000.

Surmise
The difference is nearly €86,000, which I think most people would consider a decent amount of money. The main reason for this is that investing over a greater period of time will statistically bring you a greater return in your investments than shorter. Emotionally, people may like to pay their mortgage off first and then save for retirement, this will either mean you will have less for retirement in the above example or it will cost you a lot more. You would actually need to save €2,500 per month for the 10 years in case study 2 to achieve the same retirement pot, a whopping €68,400 more for the same outcome.

Should I pay off my mortgage or invest?
Before making a decision, it’s important to do a full-scale financial review (ideally with a financial adviser). For example, do you have an emergency fund in place to cover you in case of any unexpected surprises? Furthermore, take your life situation and goals into account. Do you have any plans to travel which you will need the money for? Or a wedding? Furthermore, how long do you think you will be in your home for? If you are considering moving to another place in the near future, it does not make sense to pay off your mortgage (and potentially paying a penalty).

Both options can be seen as very smart financial decisions, depending on your personal circumstances. But everyone’s financial situation is different. It’s important to take everything into consideration and consult a professional.

If you would like to speak with a Financial Adviser in Spain, I am experienced, qualified and legally able to discuss your financial matters. I am also able to review your current pensions, investments and other assets, with the potential to make them more effective and tax efficient moving forward. If necessary, we can perform in depth financial planning to get you set up/back on the right path/or ready for retirement once I fully understand what you are looking to achieve and your situation.

You can get in touch via the form below – or click the button below to make a direct virtual appointment here.

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Living in Spain after BREXIT

By Chris Burke
This article is published on: 26th July 2022

26.07.22

In this months regular article I’ll be discussing three main concerns I’ve heard from clients recently:

Changes to UK driving licenses in Spain
Living in Spain after Brexit, managing your personal finances
18 months on from Brexit in Spain – What has changed / what do you need to do to move here?

Changes to UK Driving Licenses (When Living in Spain)
Up until the end of 2020, British driving licenses were valid in Spain. Furthermore, Brits were able to exchange their British Driving License for a Spanish one up until 31/12/20. From this date onwards, Brits residing in Spain prior to this have not been able to exchange their British driving licenses for a Spanish one.

For those residents who failed to meet the Spanish deadline to exchange their licences for a Spanish one, they currently (as of 08/07/22) cannot drive on their UK licence – this does not apply to holidaymakers hiring a car. The Spanish Government has already issued four extensions to the ‘grace period’, allowing Brits to still drive using their UK license. The grace period ended on 30/04/22.

Hugh Elliot, the British Ambassador to Spain and Andorra, issued an update on Twitter stating that they were working on a resolution to this. The belief is that they are hoping to secure a deal, similar to the UK’s deal with France, Sweden and many other European countries, in which UK Driving Licenses can be swapped for the license of that country (providing that the individual is resident).

According to SpanishNewsToday, the proposed deal would allow Brits living in Spain to swap their UK driving licenses for a Spanish one for an additional period of six months. The deal would also see UK Driving Licenses valid for a further six months. If this proves to be the case and you have not yet exchanged your license, I would recommend that you seize this opportunity.

Spain and Italy are the only EU countries in which Driving License exchange conversations are ongoing.

Financial Matters for Brits living in Spain after Brexit
From a tax perspective, for Brits living in Spain before Brexit there should not be a change as it is highly likely that you were a tax resident prior. Being a tax resident in Spain means that ‘your centre of economic or vital interests is in Spain’. As a result, if this is the case you must declare your wealth and worldwide income accordingly.

However, what has changed is the Private Pension agreement in relation to the Wealth Tax. In 2019, a ruling by Spain’s Directorate-General for Tax declared that Private Pensions from non-EU states are now eligible for Wealth Tax. Please read this article on Wealth Tax to find out more about it.

Furthermore, it is now more important than ever that Brits ensure that their finances are managed correctly. From 2021 onwards, Financial Advisers based in the UK are no longer permitted to advise clients based within the EU. The same situation applies to UK based banks, investment and insurance companies and stockbrokers.

If you are still using a UK-based financial adviser or service whilst a resident of Spain, they may well be breaking the law whilst servicing you. This could still be the case even if you only engage with them when returning to the UK to visit, providing that you are a resident of Spain. Furthermore, their professional indemnity insurance may not cover you. This may leave you vulnerable if you were to receive poor advice.

Book a telephone call or zoom chat with Chris now

18 months on from Brexit in Spain – What has changed?
We are now over a year on from the end of the Brexit Transition Period (31/12/2020). Whilst British Expats in Spain continue to enjoy their life as it was before the Brexit, overall things are a little more complex than they once were. It’s important to understand these changes – some are more complex than others.

For Brits wanting to move to Spain in 2022, although it is far from impossible, the changes imposed have made this more complex. The door has not closed, however, it is important to seek clarification from experts who are aware of the legislation and will be best suited to providing you with available options.

Many Brits in Spain have experienced frequent ‘run of the mill’ changes to their lives in Spain compared to before Brexit. Whether this be extended queues when going through passport control, taxes on imports or companies no longer shipping to EU customers, most British people in Spain will have been effected at least in a minor way. However, there are bigger issues which people need to be aware of.

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90 Day Travel Rule
To summarise, unless you are a Spanish resident or have a visa you can no longer spend more than 90 days in Spain in a rolling 180-day period. This rule has particularly affected Brits who have holiday homes in Spain and used to come and go as they please. Now, it is important to plan your trips to Spain throughout the year to ensure that this 90 in 180-day rule is not broken. Furthermore, this rule does not only apply to Spain. It applies to everyone country in the Schengen Zone.

Brits who are non-residents must also now get their passports stamped as they enter and exit Spain. However, this is a temporary procedure. The EU are working on the European Travel Information and Authorization System (ETIAS), which is set to come in to force towards the end of 2022. This system will allow for the electronic tracking or arrivals and departures.

Spanish Residency Permits – Green Card and TIE
Those who were resident in Spain before the Brexit will keep their Spanish citizens’ rights. They should have the old green NIE card or a new TIE. The TIE, also known as the ‘Tarjeta de Identidad de Extranjero’ in Spanish, should state on it ‘Articulo 50’, meaning that it was issued as part of the Brexit Withdrawal agreement.

Although according to Spanish Law the green card remains valid, Brits have been encouraged to change it. Certain authorities have been said to no longer accept this card as suitable verification. Furthermore, the TIE is far more durable, can simplify administrative processes and acts as a valid form of ID as it contains a photo. In Spain, the law is that you must carry a form of ID when outside of your home. The TIE is allowable whereas the NIE ‘green card’ is not.

Spanish Residency Permits – Post-Brexit Arrivals
There are several ways in which you could apply for a residency permit post Brexit. However, although far from impossible, it must be said that this process is significantly more complicated than if you had arrived pre-Brexit. Working visas have proved challenging to obtain and, depending on your individual circumstance, sponsorship may be required.

If you are retired, you may be able to apply for a Non-Lucrative Visa and Residency Permit. To qualify, you must prove that you are financially stable (with sufficient resources to support yourself moving forward) and have suitable medical insurance along with a clean police record. It is also imperative that you go through the application process in the UK, before arriving in Spain.

Another option is the Golden Visa. You must invest a minimum of €500,000 into a qualifying investment scheme or property. If you were the obtain the Golden Visa, you would not need to abide by the 90 in 180-day rule and you could enter and exit Spain as you please. Please note that this does not give you freedom of movement around Europe, but only in Spain.

If you would like to speak with a Financial Adviser in Spain, Chris Burke is experienced, qualified and legally able to discuss your financial matters. Chris is also able to review your current pensions, investments and other assets, with the potential to make them more effective and tax efficient moving forward.

If you would like to find out more or to talk through your situation and receive expert, factual advice about living in Spain after Brexit, don’t hesitate to get in touch with Chris via the form below – or click the button below to make a direct virtual appointment here.

Book a telephone call or zoom chat with Chris now

Sustainable & Ethical Investment funds in Spain

By Chris Burke
This article is published on: 25th April 2022

25.04.22

More and more people are contacting me regarding sustainable investments in order to understand the choices available, whether they offer a good return on your investment and would you get any more return if you didn’t invest sustainably/ethically? We all know the planet needs our help but we also want to know that our hard-earned monies are working for us – it can be a difficult emotional trade off.

Sustainable & Ethical investing has hit the world by storm over the last few years. By the end of 2019, professionally managed assets using sustainable strategies grew to $17.1 trillion, a 42% increase compared to two years prior, according to the U.S. SIF Foundation (2021). The organization also estimated that $1 out of every $3 under professional management is now invested under ´´sustainable practices´´.

Recent studies have also shown that Sustainable Investment funds, as well as providing ways to invest responsibly, provide both financial performance and lower levels of risk. For this reason, in part, many deem including sustainable investments in their portfolio is a ‘no brainer’.

Let’s say for example that you are in the market to buy a new dishwasher. You’ve analysed several products and have narrowed your choice down to the last two. Both products cost the same amount and wash dishes equally as effectively, yet one of them uses less electricity and is considered safer due to the addition of extra safety features. Which one would you pick?

When comparing the returns of sustainable funds and traditional funds, is there a financial trade off?
A common belief held by investors when comparing mutual funds that are performing to a similar standard is that the one with a sustainable investing model may not perform as well. However, a Morgan Stanley (2019) report has debunked this myth. The report analysed the performance of 10,723 mutual funds from 2004 to 2018 and found that the returns of sustainable funds were in line with comparable traditional funds, stating that ‘there was no consistent and statistically significant difference in total returns’.

When comparing the levels of risk of sustainable funds and traditional funds, is there a trade off?
The Morgan Stanley (2019) report found that sustainable funds experienced a 20% smaller downside deviation than traditional funds, a consistent and statistically significant finding. In years of higher market volatility (such as 2008, 2009, 2015 and 2018), sustainable funds downside deviation was significantly smaller than that of traditional funds. The study took an in-depth dive into in the last quarter of 2018 during which we saw extreme volatility in the US equity markets. Despite negative returns for almost every fund, the median US Equity sustainable fund outperformed the median US Equity traditional fund by 1.39%, and also had a narrower dispersion.

These findings may come as a surprise to many. There is a general consensus amongst investors that by investing in sustainable funds, you will also miss out on financial gains. The research based on concrete evidence of market performance over the past few years suggests that this is not the case, and that there is in fact no financial trade off when investing sustainably. Over the forthcoming years, I believe that the adoption of sustainable investments will continue and that we will continue to see the opportunity gap between investor interest and adoption narrow.

If you would like to speak with an expert on Sustainable and ESG Investments, Chris Burke is able to discuss with you the new investments in this area. Chris is also able to review your current pensions, investments and other assets, with the potential to make them more sustainable moving forward.

If you would like to find out more or to talk through your situation and receive expert, factual advice, don’t hesitate to get in touch with Chris via the form below, or click the button below make a direct virtual appointment.

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Sources:
“Sustainable Investing Basics, 2021,” US SIF Foundation: The Forum for Sustainable and Responsible Investment, https://www.ussif.org/sribasics. Accessed March 24, 2022
“Sustainable Reality – Analysing Risk and Return of Sustainable Funds, 2019,” Morgan Stanley, https://www.morganstanley.com/content/dam/msdotcom/ideas/sustainable-investing-offers-financial-performance-lowered-risk/Sustainable_Reality_Analyzing_Risk_and_Returns_of_Sustainable_Funds.pdf. Accessed March 24, 2022

Wealth Tax in Catalonia

By Chris Burke
This article is published on: 7th April 2022

07.04.22

How to reduce it and know how it works

Catalonia is a great place to live for so many reasons. However, like the majority of places in the world, there are taxes to pay too. Although nobody likes to pay taxes, there is a societal need for them. They help fund the public health system, providing care for our families and for ourselves in later life, schools, so our children can receive a formal education and roads, so we can safely and effectively travel. However, in spite of this there are ways in which we can organise our taxes in an efficient manner to ensure that we are paying no more than the amount that we need to pay.

The Wealth Tax (known as ‘El Impuesto de Patrimonio’ in Spanish) is an example of a tax which is an additional tax in Catalonia that many people deem to perhaps be unfair. I mean, why should you pay tax just because you have done well in life, or your parents have and passed this wealth onto you? In summary, it is a tax that you pay on your net wealth (assets owned minus liabilities). The tax is paid on the assets that you hold which fall over a certain threshold. The threshold in Catalonia is €500,000 whilst the threshold throughout the rest of Spain is €700,000. There is a €300,000 exemption for your main residence, meaning that you will not pay tax on your main residence if it is valued under this amount. If your main residence is worth more, you can deduct €300,000 from the valuation and you will only be liable to wealth tax on the excess amount.

Here is a list of the assets that are and aren’t liable to Wealth Tax in Catalonia:

Assets that Wealth Tax is applicable to	Assets that Wealth Tax is not applicable to
Real estate	Household contents (except for Art)
Savings	Shareholdings in family companies
Shares	Commercial Assets
Cars	Intellectual Property and Pension Rights
Boats
Jewellery
Art

Source: Balcell’s Group

The rate of wealth tax depends on the amount by which you are over the threshold. The general rule is that it ranges from 0.20% to 2.50% in Spain. However, in Catalonia the rate is slightly higher, ranging from 0.21% to 2.75%. You are required to declare your wealth as part of your annual declaration (in Spanish, ‘Declaración de la Renta’) on form 714 at the end of the calendar year, making any payment by 30th June the following year. The below tables display the Wealth Tax rates for Spain as a whole and the variation of the wealth tax to pay depending on the autonomous community (Communidad Autonomo) in which you reside. However, this is an overview to what is a complex calculation, so if you require personalised information, please get in contact with Chris.

Yes, I would like to arrange a call to discuss my personal situation

Settlement basis up to (euros)	Fee (Euros)	Other net base up to (euros)	Applicable Rate %
0.00	0.00	167,129.45	0.20%
167,129.45	334.26	167,123.43	0.30%
334,252.88	835.63	334,246.87	0.50%
668,499.75	2,506.86	668,499.76	0.90%
1,336,999.51	8,523.36	1,336,999.50	1.30%
2,673,999.01	25,904.35	2,673,999.02	1.70%
5,347,998.03	71,362.33	5,347,998.03	2.10%
10,695,996.06	183,670.29	Thereafter	2.50%

Source: Balcell’s Group

Autonomous Community	Wealth Tax % Variation
Catalonia	Between 0.21% and 2.75%
Asturias	Between 0.22% and 3%
Region of Murcia	Between 0.24% and 3%
Adalusia	Between 0.24% and 3.03%
Community of Valencia	Between 0.25% and 3.12%
Balearics	Between 0.28% and 3.45%
Extremadura	Between 0.30% and 3.75%

Source: Balcell’s Group

There are ways in which you can mitigate the wealth tax you are required to pay, as noted in the above table, some assets are exempt. Therefore, if you transfer your wealth into these assets then they will not be included as part of your wealth tax calculation. For example, you may not be liable to wealth tax on assets that you transfer to shareholdings in family businesses or certain household or commercial assets.

However, this is not a straightforward process and certain criteria must be met. For example, if you transfer your capital to a ‘family business’, then there are strict regulations on what constitutes a family business, which assets qualify and how you do this. And if you were to utilise your capital to purchase household contents, certain items such as art are not exempt.

Another way to mitigate wealth tax is by relocating. There are a few countries in Europe in which you would not have to pay the wealth tax such as Sweden, Luxembourg, Denmark, Germany and Austria or France. In the UK, they are considering implementing a wealth tax. If you prefer to stay in Spain, then residents of Madrid are exempt from wealth tax so it may be beneficial relocating there.

Finally, you can effectively double your wealth tax exemption threshold by getting married! The wealth tax exemption threshold will then be increased as everyone person is entitled to it. This also counts for the main residence allowance; therefore you may not be liable on wealth tax on your main residence up to €600,000.

Being efficient with your monies/assets from a tax perspective is almost as important as making your money grow. If you would like to seek specialist advice, Chris Burke is able to review your pensions, investments and other assets and evaluate your current tax liabilities, with the potential to make them more tax effective moving forward. If you would like to find out more or to talk through your situation and receive expert, factual advice, don’t hesitate to get in touch with Chris via the form below, or make a direct virtual appointment here.

Disclaimer: Spectrum IFA do not provide tax, legal or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.

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Investing During War Times

By Chris Burke
This article is published on: 7th March 2022

07.03.22

Off the back of the current situation in Ukraine, many of my clients have been asking me what this means for their investment and pension portfolios. Irrespective of the size and scope of the conflict, any declaration of war has global repercussions. Instability in one area of the world will result in a ripple effect, effecting other areas of the world regardless of the countries involved. Yes, this is likely to affect your investments and your pensions but the key takeaway is that you should not worry. If you are panicking, please reach out to me and we can have a conversation about it. There are even areas of opportunity in war times and stocks in certain sectors have even bucked the trend and outperformed. In this article, I will discuss investing in war times, including the current conflict in Ukraine, and the impact that this has on the stock market performance and the wider economy.

The Current Conflict in Ukraine
In the case of the current conflict between Russia and Ukraine, the heavy sanctions inflicted on Russia already have and will continue to heavily effect the global economy. The sanctions are amongst the harshest sanctions ever imposed on a country, and include preventing the Russian Government from accessing up to 600 billion USD in foreign cash reserves which they hold in foreign banks around the world, banning Russia from SWIFT (thus preventing Russians from using various credit and debit cards to make payments) and the freezing of the assets of some Russian individuals around the world ranging from bank accounts, property and even private yachts.

Various multinational companies have also ceased or reduced their operations in Russia (at least temporarily). For example, Apple have closed their Russian stores, Shell and BP have sold their stakes or abandoned their Russian operations and a magnitude of aviation companies such as British Airways, Lufthansa and Boeing have either halted their flights to Russia (note that there have also been significant alterations to the accessibility of international airspace) or in Boeing’s case, suspended parts, maintenance and technical support for Russian airlines.

The conflict does not solely impact the Russian economy. A large number of countries throughout the world export products to Russia. If this is no longer possible, then they will see a reduction in profits, which will then go on to affect their balance sheet. Furthermore, many countries in the world import products from Russia. The key product in this case is oil, a vital energy source. Although the supply of oil has not yet been cut, we have already seen a rise in petrol prices in many countries such as the UK. Other popular Russian products such as vodka are likely to be hit. Due to the decrease in supply, we are likely to see both shortages and a rise in price of Russian products such as vodka.

However, it is very difficult to predict exactly what will happen. For this reason, when making personal finance related decisions it is recommended that you engage in a professional discussion with a professional financial adviser. In times of war in particular, it is recommended that people seek the advice of an expert to help them manage their portfolios.

Previous Wars and Their Impact on Stock Market Performance
It’s important that we consider previous wars and the impact that they had on the stock market. Some civil wars and internal conflicts, such as those in Sierra Leone (1991-2002) and the Central African Republic in 2013, caused severe disturbances in those countries’ economies. However, from a global perspective, these wars did not cause disturbances in the stock market of first-world nations such as the USA. On the other hand, large-scale wars such as World War 1 and 2 did effect the US market, even before the US entered the conflict.

Global markets in the past operated very differently from how they operate today. For example, prior to World War 1 every country operated independently and the countries that operated in global trade were seen as at ‘gold standard’ level. London was the world’s financial capital and used in this way when a financial centre was necessary, however the requirements and responsibilities were very different when compared to nowadays.

At the close of World War 2, significant changes were made to the global financial system which increased interdependence between countries. The World Bank and the IMF (International Monetary Fund) were created, and from then on stocks reacted very differently from World War 1 and World War 2 when conflicts arose.

It’s also important to consider the popularity of the war on the home front and the amount of time in which the war goes on for. For example, the Vietnam War and the Gulf War both saw very different stock market outcomes in the USA due to the difference in popularity of the wars amongst Americans. Furthermore, the Afghanistan War lasted almost 20 years. In this 20 years, the markets saw both highs and lows. Ultimately, the longer a war goes on the less reactive a market is to its influence. A war may start to be seen as a ‘Business as usual’ type of operation.

I created the below table, summarising previous wars and their impact on the economy and stock market performance (I used the Dow Jones stock market as a comparison).

WAR	EFFECT ON ECONOMY
World War 1	Nations that imported more than they exported lost gold reserves, negatively impacting their economies, because the slow economic conditions saw greater demand for exports When Archduke Franz Ferdinand was assassinated, what is considered as the start catalyst of the war, the stock market was barely effected When Austria-Hungary declared war on Serbia in 1914, the Dow Jones dropped by 30% and the market had to close to maintain order and stability. When it opened a few months later, it sawed up by 88% and continued to rise until late 1916 When the US declared War in Germany in 1917, the stock market took a hit and continued trending downwards into 1918. It didn’t recover fully until mid 1919, on the news that the war was over
World War 2	The US was just emerging from the Great Depression in 1939 when the war started. In the early days of the war the Dow Jones increased over 10%, offering hope that the geopolitical environment would put an end to the challenging economic times. However, the conflict started to disrupt international trade and after this initial boost, the market started to fall significantly Rapid action from various impacted Governments around the world prevented the stock market from falling further than it did From 1939 to the end of the war in 1945, the Dow Jones was up 50%. Considering the economic conditions, this was a rather unexpected gain. The gain was put down to the various international cooperation agreements which succeeded in stabilising and growing the US economy
Korean War	The Dow Jones dropped around 5% on the first day – the war was a shock to most investors The recovery was fast, and by the time the war ended in 1953 the Dow Jones was up almost 60%. This is thought to be due to a number of Government policies such as increasing taxes and not borrowing money to fund the war.
Vietnam War	The Dow Jones grew by 43% from the start to the end of the war (1965 to 1973), despite its low popularity However, it was not all plain sailing. The Government’s decisions on funding the war caused inflation, setting off a mild recession in 1970
Gulf War	The Gulf War only lasted for 7 months. Due to its shortness, it is more difficult to separate the changes caused by the conflicts from those related to other world events. For example oil prices increased, causing a brief recession, which is an unusual event for war times When comparing the Gulf War with the previous wars, the US economy has changed a lot. The economy changed from processing natural resources and manufacturing capital goods to primarily knowledge based work (producing information and services). This may have meant that the stock market reacted differently during this war compared to previous wars.
Afghanistan War	The Afghanistan War lasted for almost 20 years, making it difficult to measure the impact of the war There were two crashes (2008 Global Financial Crisis and 2020 Covid Pandemic) which were both followed by quick recoveries, however these were largely unrelated to the war Industries such as Real Estate, Data Processing and Information Services and Computer Systems design and related services saw huge growth, suggesting that the war did not influence them. Shares in industry-leading defense contractors also profited significantly during the war.

Do any Patterns Emerge from Historical Stock Market Performance During War Times?
In the early days, there is certainly volatility. For example, both the FTSE and the Dow Jones took a dip last week (25/02/22) when Russia invaded Ukraine, however both have recovered since then. Logic dictates that this volatility continues throughout war times, however history has shown that this is not always the case. Yes, during pre-war times and at the beginning of a war (especially if there is no escalation period and the war breaks out suddenly without warning) stocks prices tend to decline due to shock and uncertainty. However, once war begins, history has shown that the stock market goes up, as has been the case with the Dow Jones and the FTSE this week (as of 03/03/22).

Generally speaking, there is no need to panic. Panic selling stocks and investments at the start of a war could prove to be a very bad move, considering that early sharp drops tend to be followed by steady gains. However, it is also important to note that the world is changing and that historical patterns may not play out again in future conflicts. Economics and the way in which the stock market behaves is very complex and depends on a variety of internal and external factors such as earnings, valuation, inflation, interest rates, and overall economic growth. Regardless of world events, investors should maintain proven strategies to protect and grow portfolios. The best way in which you could do this is to speak with an expert, and have your investment portfolio professionally managed.

Make a direct virtual appointment here

If you would like to speak with an expert, Chris Burke is able to review your pensions, investments and other assets, with the potential to make them more effective moving forward. If you would like to find out more or to talk through your situation and receive expert, factual advice, don’t hesitate to get in touch with Chris via the form below:

ESG – How to invest ethically

By Chris Burke
This article is published on: 29th January 2022

29.01.22

Positive Ethical Screening

Over the last few months, I’ve noticed a large increase in enquiries relating to ethical investments. It’s brilliant to see so many people looking and willing to make a positive difference to the world, whilst also in many cases seeing an equally positive return on their investments.  However, I often get questioned ‘What exactly makes an ethical fund ethical?’ and ‘What exactly do the companies that are defined as ethical funds do to make themselves ethical?’

Traditionally, ethical investing has focussed on omitting companies which operate in a non-ethical manner (for example, companies that produce arms or alcohol). However, it is just as important that when investing ethically we also consider the positives as opposed to solely filtering out on the negatives. There are many funds and companies out there who actively make amends to be more ethical, sustainable and make the world a better place, which doesn’t always get taken into account when negatively screening. In this article, I will go over positive screening criteria that I look for in an Ethical or Sustainable Fund. What exactly makes an ethical fund (or company), ethical?

Communication, Lobbying and Engagement
Funds that regularly communicate, lobby and engage with the companies in which their funds invest in. Although there is no guarantee that doing this will make a difference, communication is never a bad thing and there is potential for it to result in positive changes. For example, a fund could issue an ultimatum to a company if they do not act to reduce their carbon footprint. If the firm does not act, then the fund may well disinvest.

For example, Blackrock are pushing for more disclosure from companies. Specifically, they are asking companies to disclose how their business model will be compatible with a net-zero economy. By actively communicating and lobbying the companies which they include in their ethical funds, this will make companies take note and, hopefully, change for the better. If all investment management corporations followed suit, the chances of companies in general becoming more ethical and sustainable would increase.

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Climate Change
Funds that contain companies which actively establish policies relating to reducing the impact of climate change. This could mean reducing their carbon footprint by reducing their mileage or switching their vehicle fleet to electric cars, or by utilising sources of renewable energy such as solar panels and wind turbines.

Various investment management companies such as JP Morgan, Schroders and Templeton all have specific climate change funds. The criteria by which each fund selects does vary, however the goal of all of them is to appreciate by investing in companies which adapt to risks posed by climate change and resource depletion. For example, Schroder do not filter based on sector but they select companies which are based on five themes: clean energy, energy efficiency, sustainable transport, environmental resources and low carbon leaders. JP Morgan operates a specialist thematic approach, utilising artificial intelligence and data science to create a portfolio of sustainable companies. Templeton select companies which exhibit superior climate-change practices and favour companies that provide low carbon solutions, companies transitioning to a low carbon economy and companies that are resilient to climate change.

Human Rights
Funds that favour companies who tackle human rights issues. This could mean by actively reviewing and ensuring that they do not break any human rights issues such as child labour, poor labour or generally poor working conditions. For example, if a firm was to use the services of a subcontractor, then they could actively and regularly audit them to ensure that no human rights issues are present.

Abrdn have a strong human rights stance, as demonstrated in a recent report. As they have an ESG friendly approach for their company as a whole, this naturally flows through into the companies that they select for their fund range (although they don’t have a specific human rights fund). The company performs regular human rights assessments to monitor that they are on track. As stated in the report, their human rights status is underpinned by four core beliefs and they are supporters of the ‘Protect, Respect, Remedy’ framework agreed by the UN Human Rights Council in 2008.

Positive Contributions to Society
Funds that generally screen for companies that make a positive contribution to society. For example, funds that look for companies that create products such as medical products that could save lives or industrial machinery that could help make people’s jobs safer. Furthermore, companies that offer good working conditions including pay, hours and the environment could also be screened positively. A positive working environment could see positive human resources policies within an organisation relating to disabilities, assistance with parental care and flexible working. If a company donates a sizable percentage of their profits to charity, then they could also be included here.

There are many examples of investment companies and funds which positively contribute to society. M&G have one of the most extensive ranges of ethical and sustainable funds ranging from funds that invest in long-life, immovable infrastructure assets to funds that invest in companies which companies that contribute towards the Paris Agreement goals. Furthermore, Prudential have been named as one of the World’s Most Ethical Companies by the Ethisphere Institute for the 7th year running. The award is based on five key categories: ethics and compliance program, culture of ethics, corporate citizenship and responsibility, governance, and leadership and reputation. Prudential were one of six financial services companies out of 132 honourees.

Welfare of Animals
Funds that look at companies that show a general interest in the welfare of animals. For example, this could be ensuring that farm animals have quality facilities, enough space to roam and a lasting, regular supply of food and water. It could also focus on funds that include firms who do not facilitate tests on animals. However, it is important to be aware that a lot of firms test on animals in accordance with ‘best practice’. But is this ethical? The more ethical choice would be to not test on animals at all.

Various funds show a clear interest in animal welfare. This is stated in the various fund factsheets and prospectuses. Morningstar conducted an analysis of funds that are against animal testing. The fund which came out on top, The Vegan Climate ETF Index, describes itself as having zero animal exploitation.

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If you would like to find out more about ethical investing, or invest your pension or investments in a more ethical manner, don’t hesitate to get in touch with Chris via the form below.

How to reduce your taxes in Spain (legitimately!)

By Chris Burke
This article is published on: 28th January 2022

28.01.22

Taxes are present all over the world. Just because tax rates may seem high here in Spain or because the system may seem complex, it doesn’t mean that you don’t have to pay them! It’s important that you gain an understanding as early as possible on how the system works. By doing so, you may be able to take vital action early which could potentially save you large sums of money by the time your tax bill comes around. In this article, I’m going to provide an overview of the tax situation in Spain whilst offering tips on how to reduce your tax bill legitimately.

First and foremost, it must be said that you do not have the option to choose whether or not to be a tax resident in Spain. Just because the taxes may be cheaper in the UK or the US or wherever you are from, or because you understand the tax system in your home country and not here, it doesn’t mean that you can elect to pay your taxes there. Ultimately, it boils down to if you live in Spain and if so, how many days of the year you spend here. Once you have spent 183 days in Spain in a tax year, which runs from 1st January to 31st December, you are then obliged to declare all of your income and assets and pay tax. These 183 days do not have to be consecutive. For example, in the tax year you could spend 170 days here before then leaving, coming back for a week and then leaving and coming back for another week, taking your total amount of days spent in Spain to 184.

Just because you have a residency card does not mean that you automatically become a tax resident immediately. For example, if your NIE or TIE application gets accepted and you decide to move to Spain in August 2022, and spend 5 months or less living in the country in 2022, in that tax year you will not be liable to tax. Therefore, you would have a few months to assess and take action to protect your assets from Spanish tax before becoming tax resident in the following year.

As a result, it can be highly beneficial if you are planning to move to Spain that you take action early. For example, if you decide to move to Spain in August 2022 and therefore do not become tax resident in Spain in that year, then you can dispose of your assets in that year free of tax in Spain. Therefore, you could sell your property or shares avoiding capital gains tax here and instead pay capital gains tax in your home country. Furthermore, there is no capital gains allowance in Spain. In the UK in 21/22, and 22/23, there is £12,300 capital gains allowance meaning that you will not pay tax on any capital gain up to this amount (which rises to £24,600 if you are married, joint own the asset and combine your allowance with your partner’s).

Example 1

August 2022 – Bill moves to Spain
August 2023 – Having been living in Spain for over 183 days in 2023, Bill sells his house in the UK. As he is now a Spanish tax resident, and this is not his primary residence, he is now required to pay capital gains tax in Spain (supposing he has made a gain on his property)

Example 2

August 2022 – Bill moves to Spain
September 2022 – Having been living in Spain for one month in 2022, Bill sells his house in the UK. As he is not yet a Spanish tax resident, he is not required to pay capital gains tax in Spain and he may benefit from the £12,300 tax free UK Capital Gains Allowance. The first £12,300 of profit made from selling his property may be tax free, depending on other factors such as if he has already used up his capital gains allowance for the year

Contact Chris to discuss your current tax liabilities

Alongside the normal income and capital gains taxes, Spain also imposes an annual wealth tax. This wealth tax, although only paid by individuals who own over €700,000 (€500,000 in Catalonia) in worldwide assets, can result in a discouraging annual tax bill. The wealth tax, into which I will go into in more detail in a future article, is only payable at between 0.2% and 2.5% on assets over the annual allowance (€700,000 or €500,000 in Catalonia).  There is a way to avoid, or at least mitigate this wealth tax. Following the previous example, if you decide to move to Spain in August 2022, and therefore not spend the required 183 days in Spain which you need to spend to become a tax resident, then you may be able to avoid the wealth tax in Spain by gifting your assets. However, this can prove to be a complicated process so it is recommended that you speak to us directly prior to doing this.

As the tax system in Spain may be different to your home country, financial products and ‘tax wrappers’ that are tax free there may not be tax free in Spain. Taking the UK as an example: ISAs are tax-free wrappers in which any gains or dividends on assets held in this wrapper are not subject to UK tax. However, you need to declare your UK ISA if you are a tax resident in Spain and any gains within this ISA, although it would not be subject to UK tax, would be subject to tax in Spain. Furthermore, in the UK you can draw the initial 25% from your pension tax free. In Spain, the same withdrawal would be taxable, although there is another tax exemption for this who contributed to their pension prior to 2007. For this reason, it’s very important to strategically plan ahead and our advice is straightforward: make the most of your tax-free allowances whilst they are available.

Yes, I need to discuss my tax planning opportunities

There are various ways in which you can restructure your assets in order to take advantage of tax planning opportunities here in Spain. For example, you can utilise Spanish tax-effective investment arrangements such as the Spanish Compliant Investment Bond (similar to a UK ISA) which will significantly reduce your tax bill compared to holding the same investment outside of this wrapper. You could also transfer your pension to Spain and adjust how you take income from it.

Everyone’s circumstances are different, but the above points go to show that the way you hold, dispose and take income from your assets can make a large difference to how much tax you pay in Spain. However, it many cases it is not as straightforward as it seems and it could be highly beneficial to seek specialist advice as early as possible to reduce future tax liabilities.

If you would like to seek specialist advice, Chris Burke is able to review your pensions, investments and other assets and evaluate your current tax liabilities, with the potential to make them more tax effective moving forward. If you would like to find out more or to talk through your situation and receive expert, factual advice, don’t hesitate to get in touch with Chris via the form below, or make a direct virtual appointment here.

Inheritance tax living in Catalonia, Spain

By Chris Burke
This article is published on: 26th January 2022

26.01.22

With all that has been happening the last couple of years with Brexit and the Covid 19 pandemic, it could well have slipped by many people that significant changes have been made to the inheritance tax laws in Catalonia. This will particularly affect those who are resident here and receiving an inheritance from someone who is a non-resident of Catalonia.

Prior to 2020, spouses and descendants received large allowances in respect of tax due to be paid, starting from 99%. However, for those receiving inheritance as a descendant this has been reduced, at the worst to only a 60% reduction. This raises two main questions. Firstly, how much tax will you have to pay if you receive an inheritance, and secondly, is there an alternative way to receive this inheritance, for example as a gift rather than an inheritance, which has a different rate of tax?

It is important to understand how an inheritance is taxed in Catalonia. Major factors are the relationship between the deceased and the inheritor, what asset is being received and where the money comes from, i.e. which country. In the UK it is fairly straightforward: if someone dies as a resident in the UK and leaves you assets up to £325,000 there is usually no inheritance tax (paid by the estate) to pay due to the nil-rate band. However, anything over this amount is usually is taxed at 40%. However, in Catalonia it is not that simple (surprise surprise, I hear you say!) and alongside what is declared and what you may have to pay tax on in the UK, you must also declare and pay the relevant tax in Catalonia. Any assets you already own can also be taken into the equation of what tax is payable.

Inheritance tax in Catalonia is paid by the receiver, not the estate, and very importantly, you have 6 months to declare this inheritance. Even if you haven’t yet received the inheritance (this is from the date of decease), you must declare it within 6 months or else you will be fined the following way on the amount of tax you are liable to pay:

5% in the following 3 months (i.e. months 6-9 since death)
10% from 3 months to 6 months
15% from 6 months to 12 months
20% plus interests after 12 months

However, if you know that you need more time you can ask for an extension of an additional 6 months. This must be requested in the first 5 months following the death. In this case, the surcharges described in the above table will not be applicable and you will have an extra period of 6 months.

If you have questions, please contact Chris Burke

There are some discounts on inheritance tax in Catalonia. To start with, there is usually no tax to pay on the first €100,000 received if you are a spouse or child of the deceased. For other descendants, the allowance is €50,000. If you are an ascendant the allowance is €30,000 and for any other relation the reduction is €8,000.

From this point on, there are further reductions between 97-99% and other factors are to be taken into account, such as if the children are under 21, disabled, or if you receive the main home (“vivienda habitual”), family business or shares in certain types of companies.

As you can see, the calculation is not straightforward. I feel the quickest and simplest way to give you an idea of what tax you would pay is if I give examples using the most typical scenario of people we help. This scenario is of a parent resident in the UK leaving their child, who lives in Catalonia, an amount of money/assets not including property (as we said there would potentially be extra tax deductions for receiving this). The guidelines are shown below for someone tax resident in Catalonia, over 21 years old, owning assets themselves of less than €500,000. Note that the ‘domestic trousseau’ has also been included (the domestic trousseau is a tax on inherited household items, for example furniture, by default calculated as 3% the estate value):

Amount to be inherited	Tax due in Catalonia
€100,000	€84
€250,000	€6,969
€500,000	€29,888
€750,000	€64, 908
€1,000,000	€109,297

One possibility we investigate for our clients is whether it would it be better to plan the future inheritance and anticipate it, receiving the monies through a donation that is taxed between 5% and 9% between parents and their children (with some specific requirements). Additionally, please note that if a previous donation has been made, this must also be considered in order to calculate the effective inheritance tax rate. We always suggest getting in touch to confirm exactly what the amount would be, and for help declaring it. For the assets themselves, it is worth noting that whilst living in Catalonia it is not always efficient to have many overseas assets.

For example, investments or ISAs in the UK are declarable and tax is payable in Spain on any gain annually EVEN if you do not withdraw any of the money, unlike in the UK. It is possible to hold these monies in a Spanish tax-efficient structure, such as a Spanish Compliant Investment Bond, remaining in sterling as opposed to Euros if you prefer. In this way, you can benefit from the money growing through compounding with potential to greatly mitigate tax. This is where we can add value to help our clients effectively organise their assets, and we can manage the assets if need be.

If you have any questions relating to this article or would like help planning for this eventuality, or anything similar, don’t hesitate to get in touch.

Your Financial Health Check 2022

By Chris Burke
This article is published on: 5th January 2022

05.01.22

New Year Financial Planning Resolutions

First of all, a very Merry Christmas, Happy New Year & Kings Day to all of my clients and readers! Here we are about to start another year; how fast the time passes! Although we have various challenges and uncertainties on our plate currently, the latest COVID-19 variation Omicron and the ongoing Brexit transition to name a couple, I am feeling optimistic about the year ahead.

This time of year is commonly thought of as the natural time to plan ahead. Writing our New Year’s Resolutions allows us to put down in writing what we would like to accomplish over the forthcoming 12 months, and hold ourselves accountable to this. There is a four-benefit cycle of writing New Year’s Resolutions:

Motivation Increases – we will feel motivated and determined from the moment that we set our goals so that we…
Take Control – we internalise that there is nothing stopping us from achieving our goals and that we have the power to ‘make it happen’. Resulting in a…
Sense of Achievement – as we take control and achieve our goals, we will start to feel a sense of achievement, motivating us further…
Self-Esteem/Confidence – as we crush our goals, we will see our self-esteem and confidence skyrocket!

New Year Financial Planning Resolutions - Health Check

But Chris, I hear you say, I don’t know what to include in my New Year’s Resolutions! There are lots of options, whether this is improving your fitness, learning a new skill or improving your financial situation. I specialise in financial advice, so I believe that I can add the most value assisting you with the latter!

A recent Royal London study (Royal London customer research: Feeling the benefit of financial advice, 2020) found that those who take financial advice are on average £47,000 better off over 10 years than those who do not. Furthermore, the study also highlighted that having a financial adviser not only has financial benefits. It suggested that the average person that receives regular financial advice feels more confident and in control, along with experiencing a heightened sense of ‘peace of mind’.

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I am an advocate of the Five Key Financial Planning Principles, also known as the PIPSI. These principles are listed in order of importance, starting with ‘Protection’. If you do not have adequate cover in place, then should something happen, the rest of your plans will not happen, so it is generally agreed that protection is the most important.

P – Protection
I – Income Protection
P – Pension
S – Savings
I – Investment

Protection – do you have adequate life and critical illness cover? Are you paying a fair price for it? Do you have a will to protect your family? Is it up to date?
Income Protection – if something happened resulting in you being unable to work due to accident or illness, are you covered? Would your dependents be financially secure?
Pensions – will your pension plans allow you to retire comfortably? Do you have pensions from previous jobs that could be due for a review? If you have numerous pensions, could it be best to consolidate them to reduce the overall charges and to maximise their effectiveness?
Savings – are you saving money regularly? Are you getting the best interest rate on your savings? Are your savings protected against inflation?
Investments – do your investments match your attitude to risk? Are your current investment charges too high? Do your principles align with your investment choices? For example, are you investing in an ethical manner? Are they on track with your financial life goals?

Have you included improving your finances as a part of your New Year’s Resolutions? Don’t hesitate to get in touch with Chris to talk through your situation and receive expert, factual advice. The initial consultation is free and without any obligation.

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Pension scams – what you need to know

By Chris Burke
This article is published on: 2nd December 2021

02.12.21

The pension scams in Spain – What they are, how they work and how to avoid them

Pension scams have cost UK expats residing in Spain millions of pounds over the last few years. The reality is that anyone can fall foul to a pension scam, irrespective of how financially savvy they think they are. The fraudsters often seem very professional and trustworthy and promise guaranteed lucrative returns, but in reality, the victims are usually left with nothing.

How do pension scams work?
Fraudsters normally contact the individual by phone, text or email. They may claim to be a fictitious company or they may even falsify their identity, for example claiming to be from HMRC (HM Revenue and Customs) or the FCA (Financial Conduct Authority). After establishing a rapport with the individual, the scammer will then try to persuade the victim to part with their pension. There are multiple different strategies for this, but each strategy effectively entails persuading the victim to transfer all or a large part of their pension to the fraudster.

The pension may be stolen outright, or it may be invested into rare, high-risk investments such as overseas bonds, infrastructure or obscure technologies. The scammer may also promise early access to the pension through various ‘loopholes’ or by offering loans to be paid back upon receipt of the pension. In this scenario, alongside potentially losing their entire pension, if they transfer it out early the victim may also face a large tax bill from HMRC. If HMRC class the early pension withdrawal as ‘unauthorised’, the tax bill can mount up to a maximum of 55%!

Only in very specific circumstances are you able to withdraw your pension early. If you are contacted by someone trying to persuade you to do this, it is likely to be a scam.

How to avoid pension scams? Top 5 Tips

1.Research the individual/company – are they genuine?
Research the individual and the company that they work for on the internet. Depending on how they contacted you, perform a search on their phone number, email address or even their LinkedIn profile. Next, look for news articles and/or reviews on the company, ideally from an independent source (companies in the past have falsified reviews or even paid news outlets to publish positive publicity).

2. Contact a government regulated body for guidance
After conducting your own research online, why not contact an official government regulated body for additional verification? Companies such as Pension Wise, the Pensions Advisory Service or the Money Advice Service may be able to assist and ensure that the proposition is legitimate.

3. ‘If it sounds too good to be true, it probably is’
Have you been promised guaranteed returns at an exceptionally high rate? If the proposal sounds too good to be true, it probably is. Furthermore, high rates of returns often also result in high levels of risk.

4. Offers of early pension access – thoroughly research
As mentioned above, this is a very common pension scam. In only very rare case scenarios are you able to access your pension under the age of 55, so if this has been offered to you please conduct thorough due diligence. It may furthermore result in a tax bill of up to 55%.

5. Investing in an unusual asset class – be vigilant of scams
Be mindful of proposals to invest in strange and obscure assets. The assets which you invest in should all have easily accessible information available on them. For example, the funds that you invest in should all have factsheets available online (on Trustnet for example) and the shares you invest in should all be listed on a reputable exchange.

Pension advice, either managing or planning, is very important and that advice can greatly improve the amount you receive in retirement, or for your loved ones after death. What it will also give you is peace of mind that your pension money is safe and not falling foul of any risks/scams, and that you are being given ongoing, good advice.

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If you would like to find out more about pensions and investments here in Spain or to talk through your situation and receive expert, factual advice, don’t hesitate to get in touch with Chris on the form below.