Investment options – Captial protected plans
By Craig Welsh
This article is published on: 3rd October 2011
This summer we have seen severe volatility in global financial markets, with concerns over the European debt crisis and the pace of the global economic recovery being the principle causes. At this article, we look at investment options for people not comfortable with taking on a lot of investment risk.
Whether it is savings you have built up, a redundancy package (a Stamrecht construction for example) or money from the sale of a property, one should investigate about how to sensibly invest for the longer-term.
Stock markets have enjoyed a relatively fruitful time since the lows of spring 2009, with the S&P 500 index, EuroStoxx 50, and FTSE 100 gaining around 75%, 55% and 66% respectively up until July this year.
However when markets see a drop like we have seen (the Eurostoxx 50 lost 20% through August and September) it usually provokes one of two reactions – either concern / anxiety / panic and a reluctance to invest ANY savings in equities, or indeed you see it as a great opportunity to invest at lower prices (buying low to sell high) and get prepared to pick up a bargain.
Many bank savings accounts are failing to pay an interest rate which is any higher than inflation. This means that the value of your long-term savings can be eroded simply by leaving them in the bank.
I have some savings which can be set aside. What are my options for investing?
First, it is always recommended to leave some savings as accessible cash in the bank (at least 6 months income, which you can easily access if required).
Second, you need to establish your attitude to investment risk and return, or your “Risk Profile” as it is known. This should be fully clarified before entering into any investment.
Third, your time horizon is a crucial factor (how long do I have before needing this money?).
“Capital protected” options
There are many of these products available (most often promoted by banks) however not all of them are considered good value.
Independent advisers are in a position to research out the more attractive and sound offers. Characteristics of these products vary however they normally involve “tying up” savings for between 3 to 5 years, offer 100% protection of your capital while your overall return is linked to stockmarket growth.
Recently, the Spectrum IFA Group managed to negotiate exclusive terms with one provider that guaranteed an 8.15% return after one year (a cash deposit) on half of the invested amount, with the other half remaining invested for a further four years.
The return on the second half of the investment is dependent upon market performance, subject to a minimum return of 5%; a very popular plan and it is expected that a similar offer will be available soon.
We were also involved in the creation of a Protected fund from CitiBank and BlackRock which offers 80% capital protection, with a profit lock-in feature. This gives the investor exposure to equity growth with some downside protection. This is a daily-traded fund and so does not have any lock-in period.
Other capital protected plans that offer good value include a product from Barclays Bank which offers a 5-year plan with 100% capital protection and a potential return of 55%, depending on the averaged performance of the FTSE 100 Index. Investors who would like to benefit from positive stockmarket performance, but who are not comfortable with the risk of loss, may be attracted to this sort of plan.
There are also so-called “Kick-Out” Plans which offer a guaranteed rate of return, without the need for a rise in markets. For example, one investment grows at 9.5% per annum, with the return paid out as long as markets are at or above the same level as the starting point at any given six-month point, from and including the end of month 12. The plan “kicks-out” if at one six-monthly point (after year one) the index is at or is higher than its starting point.
It must be noted here that capital is at risk if markets fall by more than 50% at maturity and because of this we would highly recommend that investors take professional advice from a qualified adviser before investing in capital protected plans. What is crucial is who is providing the guarantee; the strength and regulation of the bank or counterparty must be analysed.
Diversification
The golden rule about investing! It is rarely advisable to “put all of your eggs in one basket” by choosing juts one option. You should try to split your capital between your preferred options and sit them together in a well-diversified, tax-efficient portfolio.
Review regularly!
Once investments are in place it is important to keep track of them, reviewing at least twice a year.
How changes to UK pension law can benefit expats
By Craig Welsh
This article is published on: 17th February 2009
Recent changes to UK pension legislation means that many expats can benefit from much greater flexibility at retirement using Qualifying Recognised Overseas Pension Schemes or QROPS.
Many UK Expatriates are unaware that changes to pension rules were brought in by the British Government to allow greater flexibility in transferring pensions and to remove some restrictions and regulations. A particular advantage to such a pension transfer to an overseas pension scheme can remove the requirement to purchase an Annuity and may have further tax advantages.
Introducing Qualifying Recognised Overseas Pension Schemes or ‘QROPS’
Since April 2006, individuals intending to leave or those who have already left the UK, and who have left behind private or work pension benefits can benefit from a QROPS Transfer. HM Revenue & Customs introduced QROPS “Qualifying Recognised Overseas Pension Schemes” which allows a non-UK resident to transfer their frozen pension outside of the UK and the restrictive pension rules.
This has led to many UK Expats contacting their advisers for further information on how to improve their retirement options. Pension transfers under QROPS are a tax-efficient way to greatly enhance pension opportunities. Leaving frozen pension in the UK has very restrictive tax rules for UK expats to consider, and we at Spectrum IFA have been advising expats across Europe on QROPS solutions that fit their individual requirements. In some circumstances however it may not be appropriate to transfer your pension, each case is treated on its merits and a full review is undertaken.
Does QROPS apply to me?
- If you answer yes to the following questions then it is worthwhile seeking a full expert appraisal of your pension benefits:
- Do you intend leaving the UK?
- Have you left the UK and are working overseas?
- Are you now living overseas and have pensions still in the UK?
- Would you like to understand more about QROPS?
What are the key benefits?
Annuities
Annuities are generally unpopular because it means that you give up your capital, the amount that you have built up in your pension, less any tax-free cash you are allowed, to an annuity provider who will guarantee you a lifetime income. The annuity rate however reflects interest rates. Current rates are extremely low and have meant that many people have received much smaller pensions than they might have hoped for. If you were being forced to buy an annuity in the current climate you would definitely see why they are unpopular!
By transferring to a QROPS, there is no requirement to purchase an annuity and income can be ‘drawn-down’ from the fund. The following example illustrates the point simply;
| UK pension |
Post QROPS | |
| Value Value of pension fund at retirement | 250,000€ | 250,000€ |
| Cost of annuity purchase | 250,000€ | Nil |
| Capital remaining on death | Nil | 250,000€ |
Tax-free cash
With a QROPS approved scheme, the amount of tax-free cash available at retirement can be greater than the 25 percent allowed with a UK pension. This depends however on the jurisdiction used.
Inheritance tax planning
Most people would like to think that, upon their death, as much of their assets as possible would be passed on to their heirs. It is a complex issue, however, by transferring to a QROPS the taxation of pension benefits on death can be much less punitive. With a UK pension scheme for example, there could be a tax liability of up to 55 percent of the fund value before being passed on. By bringing the pension out of the UK and using a QROPS approved scheme, this tax liability can be greatly reduced, or even wiped out completely.
Investment choice
By moving an arrangement out of the UK, there can be a much wider choice of investments available to the pension fund, with a more global focus. Some existing pension schemes can be very restrictive in the choice of funds (UK only), or permitted investments.
Currency risk
This should be considered for expats who do not intend to go back to the UK, but with pension assets in Sterling. By transferring to a QROPS, the underlying investments and income payments can be denominated in a choice of currencies to reduce the risk of currency fluctuations.
Can any pensions be transferred into a QROPS?
Not all pensions can be transferred into a QROPS – a pension arrangement from which you are already taking benefits cannot be transferred. State pensions are also non-transferable into a QROPS. For all other schemes, a full and comprehensive analysis should be undertaken before deciding on suitability.
Above all, getting professional advice is crucial, as well as choosing the right jurisdiction in which to hold the QROPS and a suitably approved scheme provider.
It’s not timing the market – It’s time ‘in’ the market
By Craig Welsh
This article is published on: 5th June 2008
Global stock-markets are currently extremely volatile. Craig Welsh tells you what you can do if you have savings or investments?
The volatility seen in recent months in global stock-markets has prompted many headlines. The credit problems emanating from the US housing market slump, and recessionary fears, have had an impact on the value of shares on all market indices. So if you have savings or investments, it is only natural to have some concerns – so what do you do?
Well, every market cycle can experience periods of volatility, with both up and down days. Often, a few very good days account for a large part of the total return. Staying the course ensures that investments will be ‘in’ the market on the good days. It can be tempting to try to time market movements by selling stocks / funds when you think the market is about to decline and by buying stocks / funds when it appears the market is about to rise.
Resist being a market timer! Very, very few people, including many professionals, are successful. By trying to time the market, you will potentially (and most probably will) miss out on market rallies that could substantially improve your overall return and long-term wealth. What is most important is not timing the market, but rather time IN the market. Staying the course can prove very rewarding in the long run. Consistently predicting which days will move in which direction, though, is virtually impossible and can ultimately be very costly.
Missing only a few of the best days over the last few years would have had an adverse effect on total return. For example; a hypothetical USD 10,000 initial investment in the S&P 500 Index held over the entire period of 1 January 1997 through 31 December 2006 would have grown to USD 22,446. Missing just the five best days would have reduced the ending value to USD 17,357.
To put it another way, from 1992-2007 the UK FTSE All-share returned an average annual return of 9.84 percent. Had you missed only the best 10 days of market rallies, your annual return would have been 6.89 percent, or only 2.78 percent had you not been invested in the best 30 days over the period. (Source: Fidelity International)
So resist trying to time the markets. Set clear objectives, be mindful of how long you want to invest for and ensure you have a well-diversified portfolio. Understand exactly the risk involved, and, very importantly – have regular reviews.
Is now a good time to start investing?
Many people do see opportunities when markets are more volatile, and like in any line of business, buying low and selling higher is fundamental to success. However it really depends on your own circumstances.
- Establish what your financial planning needs are and set some objectives. Where are you now and where would you like to be in the future? Are there other areas which require attention first? Investment is about making your money work harder for you, so think about what sort of returns you are expecting.
- Be clear about your time horizon. For example when do you plan to use the money? If you have a medium – long-term view (5 – 10 years) then it really does make sense to consider investing.
- Be clear about your attitude to risk. The relationship between risk and reward means that greater long-term returns are often delivered through investments that involve a higher degree of short-term risk. Hence the length of time you have is crucial.
For expats, or people in the international community, managing finances can be difficult and time-consuming. Add to that the various tax, pension and currency implications of moving countries and it can become a real headache.
Proper planning is vital and on-going assistance and advice from a properly licensed adviser, with particular focus on expatriates, can prove invaluable.
Please note that past performance is no guide to future performance and that you should take professional independent advice before investing.