As John Cleese conceded in Monty Python’s “Life of Brian”, they did provide sanitation, medicine, education, public order, irrigation, roads, a fresh water and a public health system – oh and wine! However, they also came up with – pensions.
Viewing posts from: November 2000
What did the Romans ever do for us?
By Tim Yates
This article is published on: 17th February 2025
17.02.25
In 13BC Emperor Augustus had Roman soldiers stationed across the empire, including some poor souls stuck in Britain disillusioned with the weather and living conditions. To keep morale up, Augustus introduced the first Defined Benefit “Final Salary”, pension scheme. After 20 years’ service soldiers could retire with a lump sum equal to 13 years’ salary. It was initially funded by regular taxes but later by a 5% inheritance tax. Perhaps the UK Chancellor has been studying the Romans recently!
Not much then happened on the pension front until the 17th century when the Germans started the first pension fund in 1645. It was set up to provide benefits for widows of the clergy followed in 1662 by a similar fund for widows of teachers. It took another 200 years for civilian pensions to become widespread, with Germany leading the charge again under Chancellor Otto von Bismarck.
Fast forward to today and global pension funds hold over $55 trillion in assets. The largest 300 account for $22 trillion, with the top 10 holding $7 trillion. Japan and Norway’s government pension funds top the list at around $1.5 trillion each. The problem is that many of these funds (Norway being the exception) are struggling and are unsustainable in their current form.
Back in the 17th century, pensions weren’t costly. People worked until they dropped – literally. The pension age was 60, but the average life expectancy was only 45. Today, life expectancy in the Western world is over 80, and many retire in their mid 60’s, meaning pension funds have to support retirees for 15 years or more. That’s problem number one.
Problem number two is “lifestyle investing”. This affects Defined Contribution (DC) “Money Purchase” schemes. As retirement nears, fund managers gradually move investments from the stock market into government bonds, historically seen as the safest asset.
Bonds are basically IOUs and if issued by the UK government are called gilts (because the original certificates had gold leaf embossed edges). These bonds promise to return the initial investment after 10, 20 or 30 years, paying annual interest in the meantime. Investors typically don’t hold them until maturity but trade them in the open market instead.
Imagine in 2020, I borrowed £10,000 from you on a 10 year, interest only basis at 1% a year. At the time, it seemed a good deal – your bank was paying next to nothing. Now, in 2025, you realise you could lend that money elsewhere and get nearly 5%. But I’m not keen to repay early. Your only option, if you want the higher rate of interest, is to negotiate a lower payout, meaning you get back less than £10,000. That’s how bond markets work.
Before the UK’s 2015 pension freedom reforms, most people took 25% of their pension pot as a tax-free lump sum (tax free in the UK not France) and used the rest to buy an annuity which gave them a guaranteed lifetime income. Since 2015 when everyone was given the flexibility to do basically whatever they liked with their pension, most people have taken their tax-free lump sum and then left the remaining funds in “drawdown” – staying invested and taking an income every year – rather than buying an annuity. This seemed safe after decades of low interest rates. But rising rates in 2022-23, driven by inflation, caused bond yields to soar and bond prices to plummet, hammering lifestyle funds.
Charles Stanley, a leading UK wealth management firm, recently analysed the impact of over- reliance on bonds. If you had invested £150,000 five years ago in a portfolio with 80% shares and 20% bonds, it would now be worth £210,000. But if you had gone all in on bonds, your portfolio would have shrunk by 20% to £120,000. This illustrates the divergence between shares and bonds in recent years.
So, what’s the takeaway? First don’t panic. If you have a final salary (DB) scheme, you are protected – provided your scheme is well funded. If you have a DC pension but don’t monitor it , or don’t have someone reviewing it regularly on your behalf, then you should.
We get regular health checks. Our cars get checked once they reach a certain age. Pensions and other investments are no different. Regular reviews ensure you maximise returns, minimise tax exposure, provide financial security for yourself and your family, and avoid unwelcome surprises. After all, the Romans may have invented pensions, but it is up to you to make sure yours actually works for you.
Swedish and living in France
By Tim Yates
This article is published on: 19th February 2014
19.02.14
“I wish I had known about this five years ago when I moved here!”
The subject of this quote from one of your compatriates was “Assurance Vie” (AV) but more of this later. If you attended our seminar at Villa Ingeborg at the beginning of November you will know all about it. If you are tax resident in Sweden and just have a holiday home here in France then it is largely irrelevant to you and you can stop reading now – unless of course you plan to move here permanently at some time in the future.
Many people are hesitant about spending too much time here, and therefore becoming tax resident (even if you would like to make this your home), because the perception is that the tax regime in France is punishing. This is a valid perception if you work here and your income is “earned” income because the social charges are high. However if you are retired and your income is derived from pensions and investments then you could be pleasantly surprised to find out that actually your tax and social charge liability is not as high as you thought it would be – particularly if you take advantage of the various tax efficient opportunities that exist here in terms of structuring your wealth.
If you live here and are tax resident here then AV is definitely something you should be aware of and be familiar with because it could save you a substantial amount of money.
If you have decided to live and work, or have decided to retire, here in France it probably means you are financially comfortable. That being the case you have probably commissioned your bank and/or a financial adviser in Sweden to manage your money in an investment portfolio. They are undoubtedly doing a good job for you (otherwise you wouldn’t still be using them) and they are investing your money wisely. You are holding a well diversified portfolio with exposure to equities, bonds and all the other asset classes. The problem you now have is that your adviser is now suggesting you sell something that has given you substantial capital growth. Whilst you have no need to take the money out of your portfolio to spend never the less if you follow their advice you will have a significant capital gains tax liability on the sale. You could have “wrapped” your investment portfolio in such a way that would have meant that you wouldn’t have had any tax liability until you decided to take the money out of the portfolio to spend it – and even then it would have benefitted from a lower rate of tax depending on how long it had been wrapped.
That seems too good to be true? – I hear you say – and what happens if the rules change. It is true that the French government could change the rules and it is rumoured that they will reduce the tax benefits of assurance vie (AV). However it is highly unlikely it will be retrospective and to understand why we need to look at when and why this all started. Back in the 1970’s most western European governments wanted to encourage families to take out life assurance to ensure that, on the death of the income earner, the family was not going to be a financial drain on the state. To do this they introduced a preferential tax regime for life assurance policies.
However they didn’t define life assurance quite as precisely as perhaps they intended. You have life assurance that is pure protection – i.e. you pay your premium each month but it has no value during your lifetime but will pay out a lump sum when you die to make sure your family are financially looked after on your death. You also have life assurance investment plans where the money you have put into them is always available to you during your lifetime but on death will pay out 101% of the value of your investment portfolio. This extra 1% means it qualifies as a life assurance policy and a preferential rate of tax is applied to the proceeds on death. This was clearly not the intention so why haven’t successive governments not closed this “loophole” where you have an investment portfolio masquerading as a life assurance policy? The simple reason is that politicians generally will not do anything to disadvantage themselves and their families even if this means compromising their ideological principles. There are 22 million AV policies in France and it is highly likely that all the members of our present government will have some of their capital wrapped in one.
There is another advantage of having your assets wrapped in an AV policy – unlike unwrapped assets they do not have to follow the French forced heirship rules. If you want to leave your estate to your spouse then you can if it is AV wrapped. Otherwise if you have one child they have to inherit half of your estate. With two children it is 2/3 and with three or more children it is 3/4 divided equally between them. This may not be a problem for you but whilst everything you leave to your spouse is tax free only the first €100,000 you leave to each of your children is free of tax. If you have re-married and have children from a previous marriage then it gets really complicated because anything your children from your previous marriage receive from a “step parent” is liable for 60% tax as there is no blood relationship between the two. With AV wrapped assets you are free to leave them to whoever you choose and the tax they pay (if it is not a spouse) is not determined by how closely related they are.
The bottom line is that investment management is only part of wealth management and that what you have done in Sweden, in terms of structuring your investments, to mitigate tax may not be as tax efficient in France. Clearly assurance vie is more complex than I have space to cover comprehensively in an article like this. However if it is a subject that is of interest to you please contact me and I am more than happy to detail how it could be relevant to your financial planning and remember that existing portfolios can be wrapped without you having to sell everything and then buy it back.
Buying a second home as a summer retreat
By Tim Yates
This article is published on: 27th January 2014
27.01.14
You don’t have to be a millionaire to get in on the game. In Southern Europe, particularly in Italy, Spain and France, it is very common for people with ordinary incomes to buy second properties. “They [the French] use them as holiday homes and rent them out when they are not using them,” said Tim Yates, a financial adviser with the Spectrum IFA Group in Valbonne, southern France.