Risk – Simply a Box of Chocolates?
By Jonathan Goodman
This article is published on: 7th January 2015
What is financial risk, and is it all down to chance?
Whether you are investing for your retirement or for more immediate financial needs, there are three factors that could keep you from achieving your goals: inflation, taxes, and risk. It is easy to plan for inflation and to reduce taxes, but risk is another matter as it is so unpredictable.
Types of financial risk to watch out for include:
Investment Specific Risk:
Risk that affects a very small number of assets.
Geopolitical Risk:
Risk of one country’s foreign policy unduly influencing or upsetting domestic political and social stability in another country or region.
Credit Risk:
Risk that a borrower will default on any type of debt by failing to make required payments.
Interest Rate Risk:
Risk that arises for bond owners from fluctuating interest rates. How much interest rate risk a bond has depends on how sensitive its price is to interest rate changes in the market.
Inflationary Risk:
The possibility that the value of assets or income will decrease as inflation shrinks the purchasing power of a currency.
Currency Risk:
Risk that stems from the changes in the valuation of currency exchanges. Fluctuations result from unpredictable gains and losses incurred when profits from foreign investments are converted from foreign currencies.
Volatility:
Risk of a change of price of a portfolio as a result of changes in the volatility of a risk factor. Usually applies to portfolios of derivatives instruments, where volatility is a major influencer of prices.
Liquidity Risk:
Risk that a given security or asset cannot be traded quickly enough in the market to prevent a loss (or make the required profit).
Diversification Risk:
Allocation of proportional risk to all parties to a contract, usually through a risk premium.
Leverage:
The use of various financial instruments or borrowed capital, such as margin, to increase the potential return of an investment.
Counterparty Risk:
The risk to each party of a contract that the counterparty will not live up to its contractual obligations.
Overcoming Risk: Prudential & Smoothing
Prudential Multi-Asset funds work by spreading your money across a number of different types of assets. Funds are designed to deliver smoothed growth through a number of investment options, such as company shares, fixed interest bonds, cash and property, balancing the risk being taken. So if one asset is falling in value, another may be increasing.
Risk: Simply a Box of Chocolates?
Understanding the importance of risk is a central pillar of financial planning. Risk can be measured and assessed; it can be managed. Learning how to do this is an invaluable aspect of becoming a successful investor.
Risk may be uncertain but it’s no box of chocolates. If you prepare for the uncertainty – do your research and seek relevant and informed advice – you can be fairly confident of what you’re going to get. It’s not all down to chance.
Looking forward to 2015
By Spectrum IFA
This article is published on: 9th December 2014
The end of the year is always a good time for reflection and this year we have had much to think about for our clients. However, as well as managing current financial risks for our clients, we are also forward looking. So I thought it would be a good time to do a quick review of some of the things that are on the horizon for 2015.
The UK Pensions Reform is big and we now have a reasonable amount of certainty of the changes taking place in April and it is unlikely that there will be any more changes of substance between now and then. The reform brings more flexibility, which is good, but the reality is that for many, the taxation outcome will be a deterrent against fully cashing in pension pots. This is likely to be even more so in France, where it is not just the personal tax and possible social contributions that are an issue, but also whatever you have left of the pot will then be taken into account in valuing your assets for wealth tax, as well as being potentially liable for French inheritance taxes.
The EU Succession Rules will come into effect in August. While the EU thinking behind this is good, i.e. to come up with a common EU-wide system to deal with cross-border succession, the practical effects will still have issues. The biggest issue for French residents is, of course, French inheritance taxes. Therefore, it may not necessarily be the case that the already tried and tested French ways of protecting the survivor and keeping the potential inheritance taxes low for your beneficiaries should be given up in favour of selecting the inheritance rules of your country of nationality. More information on the ‘French way’ can be found in my article at https://spectrum-ifa.com/inheritance-planning-in-france/ and on the EU Succession Regulations at https://spectrum-ifa.com/eu-succession-regulations-the-perfect-solution/
There is the UK General Election in May and who knows whether or not that will actually be followed at some point by a referendum on the UK’s membership of the EU. Nor do we know what the outcome of such a referendum would be and so there is really no point in speculating, at this stage.
For UK non-residents, we are expecting the introduction of UK capital gains tax on gains arising from UK property sales from April, subject to there not being any changes in the next budget. We had also expected that non-residents would lose their UK personal allowance entitlement for income arising in the UK, but we now know that this will not happen next year. The Autumn Statement confirmed that it is a complicated issue and if there are to be any changes in the future, these will not take place before 2017. Of course, there could be a change in government and so it might be back on the agenda sooner!
We will also have the usual round of French tax changes, although this year the expected changes are much less extensive than in previous years. The French budget is still winding its way through the parliamentary process and I will provide an update on this next month.
Turning to investment markets, my personal opinion is that the main factor that will have an impact in 2015 is central bank monetary policy. Whether this results in tighter or looser policy from one country to another, remains to be seen. What is clear is that the prospect of deflation in the Eurozone remains a real threat and not only needs to be stopped, but also needs to be turned around with the aim of eventually reaching the target of being at or just below 2%. Other central banks around the world have a similar target and in areas where recovery is clearly underway, the rate of price inflation and wage inflation also needs to increase before we are likely to see the start or interest rate movements in the right direction.
Last but not least, with effect from 1st January 2015, under the terms of the EU Directive on administrative cooperation in the field of direct taxation, there will be automatic exchange of information between the tax authorities of Member States for five categories of income and capital. These include income from employment, director’s fees, life insurance products, pensions and ownership of and income from immoveable property. The Directive also provides for a possible extension of this list to dividends, capital gains and royalties.
The above outline is provided for information purposes only and does not constitute advice or a recommendation from The Spectrum IFA Group to take any particular action on the subject of investment of financial assets or on the mitigation of taxes.
If you are affected by any of the above and would like to have a confidential discussion about your situation or any other aspect of financial planning, please contact me using the details or form below.
Certainty and Predictability for your Investments
By Jonathan Goodman
This article is published on: 1st December 2014
The PruFund range of funds are designed to spread investment risk by investing in a range of different assets, such as company shares, fixed interest bonds, cash and property – from both the UK and abroad.
Prufunds are managed by Prudential Portfolio Management Group Ltd (PMG), dedicated multi-asset fund managers with a team of over 30 economists, investment strategists, analysts and mathematicians, specialising in different areas of the investment world.
How PMG Manage Your Money
PMG believes that investment success should be built on clear philosophy, demonstrable processes and a team based approach. They believe that this will not only deliver superior returns, but also provide greater continuity and dependability.
They believe in the importance of asset allocation and the key role that multi-asset funds play as an investment solution for many investors. They also believe that asset allocation is a specialist skill which should, to avoid conflicts of interest, exist separately from the other investment activities in any fund.
PMG takes many factors into consideration when managing your money.
They focus on:
- Minimising reliance on economic forecasting
- Looking for irrational behaviour
- Taking a long-term approach
- Fund management
- Asset-liability management
PruFund Growth Providing Smoothed Returns
PruFunds offer a unique smoothing process designed to help protect an investment from some of the daily ups and downs associated with direct investments, providing less volatile and more stable returns over the medium to long-term, in line with each fund’s objective and allowable equity parameters.
The Prudential PruFund smoothing process has two elements:
- Expected Growth Rates (EGR) applicable to each of the funds, normally applied on a daily basis. The EGR is the annualised rate that is normally used to increase the value of your unit price each day, and they are set quarterly by the Prudential Directors having regard to the expected long-term investment return on the underlying assets of the funds.
- Upwards and downwards pre-defined unit price adjustments are applied in line with fully transparent process requirements.
For more information on PMG and the PruFund range of funds or to contact one of our Financial Advisors to arrange a full financial review of your current situation please use the contact form below.
Financial success from your yachting career
By Peter Brooke
This article is published on: 27th November 2014
RULE: Conceptually plan out different financial pots.
This is a really good way to plan your future in yachting. There is no need to have different accounts for these “pots”, although it may help.
Pot 1 – Emergency fund – we all know how volatile the yachting industry can be in terms of job security. It is important that if you suddenly find yourself without a job you can at least survive for a few months, get yourself to one of the main yachting centres and afford accommodation while looking for work. I recommend having at least 3 months’ salary in a bank account at any time.
Pot 2 – Education – in order to progress your career it is vital to consider the costs of education. Hopefully you will be on a yacht where Continual Professional Development (CPD) is part of the culture but there will still be courses that you need to fund yourself. Start to plan when you will need the money for the next course and how much it will be… then divide the amount by the number of months until the course, and save that amount EVERY month into an account. Remember there may be additional travel or accommodation costs too.
Pot 3 – Exit – you have now saved an emergency fund and are putting money aside for the next course…. now consider what you plan to do when you leave yachting? Are you going to start a business? Return home? Retire? You should now look to save at least 25% of your income for this purpose. It is very easy to go through a yachting career and end up with very little saved for when you want to leave. There is no provision made by your boss for your long term future, it is down to you to save.
Remember if you worked on land you’d lose at least 25% to social charges and tax anyway. As these are longer term savings you can now consider making investments to try and grow your money more. Make sure as your income grows, your savings and investment amounts grow too.
Pot 4 – Property – if one of the investments that you want to make for your long term future is into property, then you need to start planning what you need to put aside every month to be able to save enough for a deposit and legal fees/taxes. In France, for example, a yacht crew will now need at least 28% of the property purchase price to be able to borrow… saving this amount takes discipline and planning.
Pot 5 – Expenditure – all of the above requires a habit of saving and bit of effort to form the best plan… the single best way to successfully save for your future is to be strict with your own expenditure. Look at all of the above and then give yourself a set amount each month that you can spend on having fun and travelling. Do this well and the more difficult disciplines above will be easy. Saying no to another night out is the hardest part!!
This article is for information only and should not be considered as advice.
Should I stay or should I go?
By Spectrum IFA
This article is published on: 25th November 2014
Quite frankly I’ve been struggling to think of what to write about this week, but then it suddenly struck me that there has been a recurring theme in a number of my client meetings recently. That theme put simply is, ‘Where will I end my days; in France, or in England?’ This isn’t a popular topic of conversation amongst vibrant, exuberant, middle aged expatriates, but we’re not the only people here. We are in the company of many seasoned expats who’ve been here longer than we have; seen it all; done it before we did, and are feeling a bit tired. Many of them are ‘going home’.
We should pay a lot of attention to this group, because we are going to inherit their shoes. We need to learn from their experiences, and take the opportunity to plan for the time when we will experience what they are going through.
Five years ago, when writing on a similar theme, I think I proffered the theory of the three ‘D’s as the principal reason to return to the UK: death, divorce and debt. I still think that they are valid causes, but I now think that there are many subtle variations to be taken into account, and the biggest addition to the equation is age. Age changes your perceptions; often for the better, but age often also brings insecurity and loneliness. Add to that illness, and maybe bereavement, and you have a powerful reason to examine your reasons to continue to live hundreds of miles away from a family that (hopefully) continually worries about you. In short, no matter how much we pooh-pooh the idea now, the chances are that we may eventually end up being cared for in our final years in the UK rather than in France.
OK, that’s enough tugging at the heartstrings. Why is a financial adviser (yours truly) concerned about where you live, and where you may live in future? The answer is currency, specifically Sterling and Euro. In a previous existence, I was responsible for giving advice to corporate and personal clients of a major High St bank regarding exposure to foreign exchange risk. The basic advice was simple – identify and eliminate F/X risk wherever you can. F/X risk is for foreign exchange dealers; it is gambling. Don’t do it unless you know what you’re doing, and even if you do, prepare to lose money.
On a basic level, eliminating exchange rate risk is easy. Faced with a couple in their 50’s relocating to France with a healthy investment pot behind them and good pensions to support them in the future, I will always ask ‘Where do you intend to spend the rest of your days?’ The answer is usually an enthusiastic ‘France, of course. We have no intention of going back to the UK. In fact wild horses wouldn’t drag us back.’ I know this for a fact – I’ve said it myself.
The foreign exchange solution is simple. Eliminate your risk. Convert your investment funds to Euro (invest in a Euro assurance vie). Convert your pension funds to Euro (QROPS your pension and invest in Euro). Job done! Client happy, for now! But what happens 25 years later, when god knows what economic and political shenanigans have transpired, and the exchange rate is now three Euro to the pound and the surviving spouse wants to ‘go home’?
As it happens, I will no longer be his or her financial adviser. The chances are that I will have popped my clogs years ago, but If not, I will most likely be supping half a pint of mild in a warm corner of a pub somewhere in the cheapest part of the UK to live in. (In fact that is poetic licence, as I know full well that I’d probably be being spoiled rotten in my granddad flat in one of my sons’ houses). To draw this melancholy tale to a close, I’d just like to round up by saying that things are rarely as simple and straightforward as they seem. My job is not always to take what you tell me at face value. I know people who’ve been here longer than you. My advice may well be ‘hedge your bets, spread your risk’. I will give you the best possible investment tools for your money and pensions, but I might just surprise you with my recommendation as to what currency those funds should be invested in.
Do You Fear For Your Financial Future?
By Jonathan Goodman
This article is published on: 24th November 2014
How do you choose your investments when you are an expatriate?
International investors face many choices, and taking personalised advice can be vital, especially in the current economic climate. With high inflation and record low interest rates, volatility, complexity, uncertainty and a huge amount of change sum up the current state of the global economy.
Picking the right investment opportunity with maximum return objectives can be a risky and complicated process, and mapping a financial strategy that enables you to better navigate these turbulent financial times is a must.
The International Prudence Bond (Spain)
The International Prudence Bond (Spain) is a medium to long term bond designed with the needs of international investors in mind. Tailored to each market and sold via professional Independent Financial Advisers, it allows access to a range of unit-linked investment funds with the aim of increasing the value of the money invested over the medium to long term.
The PruFund Range of Funds includes guarantee options where the choice of guarantee can be linked to the anticipated year of retirement. The funds utilise the asset allocation expertise of the Portfolio Management Group and offer a truly global investment perspective.
Benefits
- Funds denominated in euros, sterling and US dollars
- A minimum investment of only £20,000, €25,000 or $35,000
- A minimum allocation rate of 100%
- No set investment terms
- Top-up facility from £15,000, €20,000 or $25,000
- Cumulative allocate rate on top-ups
- Flexible withdrawal options so clients can access funds when it suits them
- PruFund Protected Funds guarantee
How Spectrum Can Help
Spectrum’s role is to provide Insurance Intermediation advice and to assist clients in their choice of Investment Management Institution. Our Financial Advisors can help you decide which investment opportunity is right for you.
For more information or to contact one of our Financial Advisors to arrange a full financial review of your current situation please use the contact form below.
What New Year’s Resolution can I make for 2015?
By Amanda Johnson
This article is published on: 18th November 2014
As 2014 draws to an end and we look forward to spending the festive period with family and friends, there is one New Year’s resolution that you can make which will benefit both you and your family and that is to make sure that you review your finances in 2015.
2014 has seen the UK Government make changes to pensions, the French Government levy Social Charges on areas not previously charged and a joint agreement on Wills which is due to come into effect during 2015. On top of this, there is constant media concentration on whether the UK is better off in or out of the EU. Bearing all of this in mind, it is worth taking advantage of a free financial review to ensure your savings, investments & pensions are working for you in the most tax-efficient manner and that they match your goals and aspirations for the future.
A free financial review will include the following areas:
- Investments – to ensure they are as tax efficient as possible
- Inheritance tax – to minimise the amount of inheritance tax imposed and increase your say in where you money goes after you die.
- Pension planning – putting you in better control of planning for your future
Whether it has been a while since you last looked at your finances or you are unaware of how changes both in the UK & France could affect you, a decision to take a free financial review could be one of the best New Year’s resolutions you can make.
Whether you want to register for our newsletter, attend one of our road shows or speak to me directly, please call or email me on the contacts below and I will be glad to help you. We do not charge for reviews, reports or any recommendations we provide.
Have a Merry Christmas and a very Happy New Year.
Tax Efficient Savings in Luxembourg
By Michael Doyle
This article is published on: 6th November 2014
Two of the main concerns many of my clients have whilst living in Luxembourg are:
- The low interest rates they receive from saving in the bank.
- How can they save in a tax efficient way?
At the moment, as most of you will already know, whilst leaving your funds to accrue in a bank account in Luxembourg you can receive interest of around 1%. However, due to the European Savings Directive, you lose 10% of this as a tax, thus you will receive around 0.9% interest net.
Putting this in perspective, most of us have to save for the future, either for our pension provision or for our children’s further education. Based on the Liverpool Victoria Study in November 2007, it said that University costs increase at approximately 7.5% per annum (the current level of inflation for educational costs). This was further supported by an article in The Sunday Telegraph, (26th August 2007), which stated:
“School fees have risen 41% in the past 5 years”
Fees at many universities in the UK now stand at £9,000 per annum.
So the question we have to ask ourselves is whether or not by leaving our money in the bank, will we be able to meet all of our future goals?
One solution is to look at saving through a Life Assurance wrapper.
A wrapper is effectively an “investment platform” through which an enormous range of underlying investments can be purchased. Whilst the wrapper will be provided by a life assurance company, it is important to note that you are not paying a premium to purchase additional life assurance. It is, to all intents and purposes, an investment contract.
So what are the benefits of saving within a wrapper here in Luxembourg?
- All investments grow within the wrapper free of income tax and capital gains tax.
- As the wrapper is considered a life assurance contract it is not affected by the European Savings Directive.
- The premiums you pay could be tax deductible (subject to personal circumstances).
- You have access to investments perhaps only available to institutional investors.
- Lower minimum entry levels in underlying investments.
- Access to some of the top fund managers in the world.
- The flexibility to change your investment strategy at any time.
- The ability to access your funds if required.
- Higher bank rate. For example, there are currently bank rates offered within the wrappers of 4.25% per annum.
- Security.
Every person’s circumstances are different and you should always seek Independent Advice before making any investment decision. Here at The Spectrum IFA Group we offer a no obligation Financial Review before offering any advice.
Savings solutions in Spain
By John Hayward
This article is published on: 29th October 2014
Stockmarket falls and low interest rates
Have you seen your investments fall by over 4% in the last month? This could be the case if you have been invested in the stockmarket. Most people know that investments can go down as well as up. Over time, stocks and shares can make significant gains. However, it still hurts when one sees a loss of this amount in such a short period. Some people prefer to keep their money in cash but then we have another risk. Interest rates are low and, even with the suggested increases in 2015, they could remain low relative to inflation. What many people want, and probably need, is a steady increase in the value of their savings with as little risk as possible. So what is the solution?
The low risk solution
We at The Spectrum IFA Group have access to an insurance bond offered by arguably the largest insurance company in the UK and one of the largest in Europe. Their investment model has allowed consistent returns of over 4.5% a year (after deducting charges) whilst exposing the investor to a fraction of the risk of a stockmarket such as the FTSE100. Whilst the FTSE100 has fallen by more than 4% over the last month, this low risk approach has produced a gain of almost 1%.
Tax friendly in Spain and the UK
No tax is payable on the pure growth of the insurance bond. Even if withdrawals are made, the tax treatment is vastly more favourable when compared to bank accounts or other non-compliant arrangements (see an example of how tax is calculated here). If you are currently Spanish resident, but you subsequently move back to the UK, the bond can follow you and benefit from the advantageous tax treatment awarded to these policies in the UK.
Outside Spanish inheritance tax (IHT)
With Wills correctly drafted and you are deemed domicile the UK, this insurance bond is outside Spanish IHT because it is not based In Spain. With IHT in Spain extremely punitive for non-residents (law possibly to change in 2015), this is a huge benefit to the non-resident beneficiary. It can be written in joint names so as to avoid Spanish IHT on the resident owner.
No Modelo 720 declaration
As this bond is Spanish compliant, there is no obligation to declare it as an overseas asset on the Form 720. This is because the insurance company declares it to Spain each year.
To find out more about how we can help you arrange your savings in a more beneficial way, contact your local adviser or fill in the contact form below.