After years, or even decades, of building up your pension and investments, you eventually reach the point where you want to start drawing from these savings. This marks the transition from the accumulation phase of your financial life to the decumulation phase.
Five Essential Rules for Drawing on Your Investments and Pension
By Portugal team
This article is published on: 4th October 2024
Navigating this phase effectively can make a significant difference to your financial well-being and your legacy. Below, we outline five key rules to help ensure that your withdrawals are both tax-efficient and investment-savvy.
1. Only withdraw your lump sum if necessary
Under UK pension rules, you can withdraw 25% of your pension fund tax-free. This is known as the “Pension Commencement Lump Sum.” Whilst this payment is tax free for UK residents, those living in Portugal must report and pay tax (unless 0% NHR) on this sum.
If you have a specific plan for this money, such as paying off a mortgage or clearing other debts, withdrawing the lump sum may be a wise choice. However, if you don’t have an immediate need for it, it might be better to leave the funds in your pension, where they can continue growing tax-free.
Another key consideration is inheritance tax (IHT). Currently, pension funds are exempt from UK IHT. By taking money out of your pension, you may unintentionally move it into your taxable estate. This is fine if you plan to spend the funds, but it could be inefficient if you are simply holding on to or reinvesting the cash.
2. Dynamic withdrawals
When withdrawing from your investments, striking the right balance between enjoying your lifestyle now and securing your financial future is crucial. Some people prefer to prioritize their current lifestyle, while others aim to leave a larger estate for their beneficiaries.
Market conditions should also influence your decisions. For instance, if stock markets have risen, it might be wise to take profits. Conversely, during market downturns, you might choose to reduce your withdrawals until conditions improve.
Cashflow planning can also help you plan for the future. Forecasting allows you to balance your spending today with the need to preserve funds for the future. It also allows you to adjust for variables like inflation, market performance, and unexpected expenses, helping to prevent the risk of outliving your savings while maintaining your desired lifestyle.
3. Plan for the long haul
Many people underestimate their life expectancy when planning for retirement. A couple in their mid-60s today has a good chance of living well into their 80s or even beyond 100. This means it is important to plan (and think in) decades rather than just a few years.
This increased longevity has important implications for how one should invest. In the past when life expectancy was much shorter, retirees often moved their portfolios into lower-risk assets like bonds or cash but with people living longer, this approach is no longer be suitable.
To ensure long-term growth, it’s essential to maintain a healthy allocation of growth-oriented assets such as shares, while balancing this with safer investments like fixed income and cash. The exact mix will depend on your risk tolerance and other income sources.
4. Review Your Plan Regularly
Global markets and tax laws are constantly changing, which is why it is crucial to review your portfolio regularly against this ever-changing backdrop.
This includes keeping up with changes in tax laws across multiple jurisdictions, for example UK pensions has seen huge changes recently and further changes are expected in the next UK Budget. Adapting to new rules in both the UK and Portugal, can help you avoid costly mistakes and optimise your financial strategy.
5. Control Fees and Taxes
While you can not control market movements, you can manage two major eroders of wealth: taxes and fees.
People often end up paying tax in the wrong country or, worse, in multiple countries at once. Additionally, many fail to take advantage of the tax reliefs and allowances available to them.
Regularly reviewing your financial arrangements can help ensure that your investments and pensions are tax-efficient and that you are not overpaying in fees.
Final word
By following these five rules, you can better navigate the transition to decumulation, ensuring that your hard-earned savings continue to work for you in a tax-efficient and financially secure way.
Moving to Portugal Show & Seminars
By Portugal team
This article is published on: 3rd October 2024
LONDON, THURSDAY 17TH OCTOBER
Pestana Chelsea Bridge Hotel
354 Queenstown Road London SW11 8AE
Escape the ordinary, embrace the extraordinary, and discover why Portugal is the perfect present for your future.
On Thursday 17th of October 2024, our Moving to Portugal Show & Seminars will return to central London. This one day event, which opens at 10.30am and closes at 7.30pm, mixes live seminar presentations and expert panel discussions with carefully selected exhibitors, who can give you all the information you need on how to make your business or lifestyle move to Portugal a success from day one.
You can learn all about the different visa, residency and tax rules, and how daily life works in terms of jobs, schools, health and the cost of living. You can also learn about investing in Portugal, from the managers of some of the country’s top investment funds who will explain their investment strategies and why some funds are eligible for Portugal’s well known ‘residency by investment’ Golden Visa programme.
If it’s a quiet life you want, come and find out why retiring to Portugal makes good financial sense.
Come and meet our very own team of experts who live and work in Portugal – this means they understand exactly what its like to move to another country. Are team will be presenting and sharing valuable insights on maximising pensions, investments, and estate planning in Portugal.
We are also encouraging the in-person visitors on the day to book one to one meetings in advance with our advisers, or to book a Zoom call or video call with them if you prefer not to attend in person.
Contact our team direct to book your appointment: portugal@spectrum-ifa.com
Did you miss out on NHR? You could still be eligible
By Portugal team
This article is published on: 2nd October 2024
GOOD NEWS !
Many expats who were eligible for NHR status didn’t apply—either because they weren’t aware of the program or received incorrect advice—resulting in unnecessary tax payments.
Following a recent ruling from Portugal’s Supreme Administration Court, it may still be possible to apply for Non-Habitual Residence (NHR) status – even if you missed the initial deadline.
The detail
To qualify for NHR status, one of the key requirements is that you must not have been a tax resident in Portugal for the five years preceding your arrival and application.
Traditionally, the deadline for NHR applications is 31st March in the year following the start of your tax residency e.g. if you became resident on 1st June 2017, the application deadline was 31st March 2018.
As a result of this ruling, if you were eligible at the time of arrival in Portugal you may still apply for NHR, although the NHR period will start from your original residency date i.e. if you became tax resident on 1st June 2017, the end date of NHR will be 2026.
NHR – a taxation no brainer
To recap, the benefits of NHR lasts 10 years and offers:
- 0% tax on foreign dividends and interest
- 0% tax on capital gains from non-Portuguese property
- 10% income tax on foreign pensions
- 20% tax on income from “high-value” professional activities
These benefits make NHR one of the most attractive tax regimes in Europe. If you’re eligible under this new ruling, it is highly advisable to consult with your lawyer or accountant to review your status and potentially apply.
If you need any assistance in evaluating your investment and pension planning in light of NHR, we would be pleased to assist.
Are trusts right for you and your family
By Portugal team
This article is published on: 1st October 2024
In previous articles, we explored Qualifying Non-UK Pensions and Portuguese-compliant investment bonds as potential investment strategies. This week, we turn our attention to another important financial planning tool—trusts. In this article, we will discuss the advantages and drawbacks of using trust structures to manage investments.
Please note that the following analysis assumes UK domicile and it is important to understand that you can have a UK domicile as a Portuguese tax resident.
What is a trust?
A trust is a legal arrangement in which ownership of assets—such as cash, property, or investments—is transferred from one individual (the settlor) to trustees. These trustees then become the legal owners of the assets, managing them for the benefit of the settlor’s chosen beneficiaries.
A typical example might involve parents or grandparents aiming to reduce the size of their estate for inheritance tax (IHT) purposes. However, they may not feel comfortable gifting directly at this stage due to, for example, the beneficiaries being minors or not being mature enough to receive gifts direct. So the trust allows them to gift the assets now, but retain control over the timing and distribution of assets to the beneficiaries.
Trusts may also be used to safeguard assets for vulnerable beneficiaries or protect family wealth in the event of divorce.
Trusts can be created during a person’s lifetime or incorporated into a will.
Benefits
One of the key advantages of a trust is the control it offers. The settlor can dictate when and how assets are distributed to beneficiaries, which is particularly useful if the beneficiaries are not ready to manage large sums of money.
In addition to control, trusts offer substantial IHT benefits. Once assets are placed into trust, they are removed from the settlor’s estate, potentially resulting in a 40% tax saving—provided the settlor survives for seven years following the gift. This can significantly reduce the tax burden on beneficiaries when the settlor passes away.
Another practical benefit is that assets held in trust bypass probate, which can speed up the process of settling an estate and distributing assets to beneficiaries.
When is a trust most effective?
A trust is most effective when the settlor does not need access to the assets or income from the trust.
If the settlor or spouse retains any benefit from the assets within the trust, this is treated as a “gift with reservation of benefit” (GWR or GROB) meaning that the value they thought they had given away actually remains in their estate for tax purposes.
We commonly see parents gifting their main home to their children, or to a trust though which their children can benefit, thinking that this gift removes the value of their home from their estate on the basis they are no longer the legal owners. However, by continuing to live in the property they have fallen foul of the GWR rules and have defeated the purpose of the planning.
Tax implications
While trusts can deliver IHT savings and offer control over asset distribution, they can be quite costly from a tax perspective.
Upon creating a trust, the settlor must pay a 20% IHT charge on any amount exceeding the available nil-rate band (£325,000 for the 2024/25 tax year). For example, a £1 million gift into trust would result in a tax bill of £135,000 on the excess £675,000.
If the gift involves non-cash assets, capital gains tax (CGT) may apply, as the transfer is treated as a disposal.
Lastly, trusts are effectively additional rate taxpayers in the UK. They therefore pay income and capital gains tax at the highest rates on any income received and gains made annually. The trust also pays an inheritance tax charge of 6% every 10 years on the trust value.
Trusts and Portuguese Law
As a civil law jurisdiction, Portugal does not recognise trusts legally but it does tax income deriving from trusts and this applies irrespective of whether the trust has increased in value or not i.e. any distributions would be taxed at 28%, or at 35% if coming from a blacklisted jurisdiction, on both capital and gains.
Alternatives to trusts
If trusts are expensive from a tax perspective, not to mention the costs of appointing and running trustees, what at the alternatives?
‘Bare’ trusts
These are simpler than discretionary trusts and do not carry the 20% entry or 6% periodic tax charges. However, bare trusts have a significant limitation: once the beneficiary turns 18, they automatically gain full access to the assets, which may not be suitable for every family.
Contract based solutions
There are financial products that offer similar benefits to trusts—such as “gifting with control”—without the hefty tax costs associated with trusts. These may be worth exploring as an alternative.
Conclusion
There is no “right” or “wrong” in relation to trust planning – the suitability of different trust options will really depend on each family’s position and objectives.
For example, if you need access to either the capital or income from the underlying assets, trusts may not be appropriate. Or if you are uncomfortable gifting directly to your beneficiaries now, then a trust may be a redundant step in the financial planning process, and it may be better to consider various ways and allowances for making direct gits to your beneficiaries.
We would also advise a word of caution against companies cold-calling offering trust solutions to “Labour proof” your finances, and to always ensure you use caution and do your due diligence.
Portuguese compliant investment bonds
By Portugal team
This article is published on: 15th September 2024
A path to lower taxes?
In an increasingly complex financial landscape, Portuguese tax residents are constantly on the lookout for investment strategies that offer both flexibility and tax efficiency. One of the most tax certain options for investors looking to reduce their tax burden is the Portuguese Compliant Investment Bonds (PCIB).
What is a PCIB?
PCIBs are a tax efficient form of investment that work particularly well for residents of Portugal. They also offer enhanced tax advantages for those who may return to the UK in the future.
Despite the somewhat misleading name, these “bonds” are not traditional loans to corporations or governments. Instead, a PCIB operates as a tax-efficient “wrapper,” akin to the UK’s Individual Savings Accounts (ISAs), offering investors a protective layer against immediate tax obligations.
How they function
The actual performance and growth of the PCIB is driven by what you put into the wrapper and in this respect, it is very flexible.
The PCIB allows you to invest in a wide choice of investments without the tax drag of ongoing capital gains or income tax – this is referred to as “gross roll up”. This means that within the PCIB, investments can accumulate wealth more rapidly than if they were subject to annual taxation outside of this structure.
A Strategic Move for Homeowners
One of the standout features of PCIBs is their potential to reduce or eliminate capital gains tax when selling property in Portugal.
Unlike in the UK, where selling a primary residence often incurs no tax, Portugal applies capital gains tax to all property sales. Historically, the only means to avoid this tax was to reinvest in another EU property—a strategy rendered moot for UK properties post-Brexit.
However, in 2019, the Portuguese government introduced a concession allowing individuals to bypass this tax by investing the proceeds from a property sale into an approved investment or pension structure, such as a PCIB. There are however certain qualifying conditions, the main ones being age 65+ or retired, the property being sold must be your main residence, and it has to be held by you personally (not through a company).
Other benefits
PCIBs offer a range of benefits beyond property-related tax relief:
- Lower Effective Tax Rates: When funds are withdrawn, only the growth portion is subject to tax. Additional tax reductions apply after five and eight years.
- Post-NHR Flexibility: The favourable tax treatment of PCIBs is available to both Non-Habitual Residents (NHR) and regular Portuguese taxpayers, making them a versatile tool for long-term financial planning.
- Control Over Tax Timing: PCIB holders can choose when to withdraw funds, enabling them to synchronize taxable events with periods of lower income.
- Avoid the 53%+ capital gains tax trap – investments held for less than 12 months typically attract income tax rates of up to 53%. However, within a PCIB, buying and selling can occur without triggering immediate tax liabilities.
- Investment flexibility and diversification – PCIBs accommodate a variety of currencies, asset classes, and investment strategies, offering a broad scope for portfolio diversification.
- Simplified Tax Reporting: Tax and reporting obligations are only triggered when a withdrawal is made therefore simplifying the reporting process for bond holders.
- International Portability: Recognised in many jurisdictions, PCIBs offer flexibility for those who may relocate, potentially eliminating the need to liquidate investments to start planning again. They are particularly tax efficient for UK residents allowing investors to potentially washout gains made whilst overseas.
- Succession planning – investment bonds allow flexible and certain transfer of wealth to beneficiaries. This may not be possible with other investment types and the default “forced heirship” provisions under Portuguese law.
- Inheritance tax savings – with the correct planning, holding wealth in an investment bond could mitigate UK inheritance for British domiciles and strengthen a non-UK domicile claim.
- Estate administration – In the event of the bondholder’s death, the distribution of assets to beneficiaries can occur without the need for a lengthy probate process.
The Importance of Professional Guidance
Given the intricacies involved in setting up a PCIB, it is essential to seek expert advice. Properly structuring the investment to align with individual and family needs is crucial to maximising its benefits and ensuring compliance with applicable laws.
How to Labour proof your finances
By Portugal team
This article is published on: 14th September 2024
No matter where you stand on the political spectrum, it seems there may be difficult times ahead regarding the UK’s finances.
With the upcoming budget on 30th October, tax increases seem all but certain.
The dilemma for the government is that, with Labour’s pledge not to raise income tax, national insurance, VAT or corporation tax, how will they look to ‘plug the hole’?The dilemma for the government is that, with Labour’s pledge not to raise income tax, national insurance, VAT or corporation tax, how will they look to ‘plug the hole’?
Here are some key areas to consider, the implications of which will be determined by your tax residency status, UK or Portugal.
Capital Gains Tax (CGT)
Currently, non-property gains are taxed at 10% for basic-rate taxpayers and 20% for higher/additional rate taxpayers, and property gains are taxed at 18% or 28%. One potential change could see CGT rates aligned with UK income tax rates i.e. 20%, 40% or 45%.
Whilst this will not have an impact to gains made by expatriates on non-property related investments, as the gain is only taxable in the country of resident (28% in Portugal), it would impact gains made on property held by non-UK residents.
UK property is always primarily taxable in the UK, irrespective of where the owner is resident. For Portuguese tax resident selling UK property, tax is also due in Portugal on the gain with a credit for any tax paid in the UK (unless a Non-Habitual Resident, where the gain is taxed at 0% in Portugal).
Pension Schemes
Changes to pensions would impact both UK and Portuguese tax residents. Currently, pension schemes are exempt from inheritance tax (IHT), but this benefit could be reduced or eliminated. Additionally, there may be changes to tax relief on pension contributions, so now could be a good time to maximise contributions and unused allowances while full relief is still available.
Keir Starmer has confirmed that there are no plans to reintroduce the lifetime allowance (LTA), but he has pledged a pension review.
This could see the tax-free Lump Sum Allowance (LSA) reduced or removed, so those needing this cash could benefit from withdrawing it sooner rather than later.
There may also be a reduction in the tax relief on pension contributions for high earners, reducing the relief from 45% to 20%/25%.
Whilst currently, pensions are outside the scope of UK inheritance tax, there has also been talk of removing this benefit. So those with large pension pots should keep an eye on these changes.
Inheritance Tax (IHT)
IHT changes are likely to impact UK nationals, regardless of residency, since IHT liability is determined by domicile status, not residency. Therefore, even if you have lived in Portugal for many years, you may still face UK IHT if you have not taken the necessary steps to shed a UK domicile of origin.
It is likely that any foreign assets held in offshore trusts will be liable to IHT.
Possible further changes include reducing the generosity of agricultural and business property reliefs, as well as extending IHT to pension schemes.
Early planning is crucial with IHT, such as starting the seven-year gifting period and taking advantage of the annual available reliefs.
For those looking to adopt a domicile of choice in Portugal, it would be beneficial to reduce your UK-based assets, as they remain subject to UK IHT, even if you are domiciled abroad.
Other changes
Possible further changes include reducing the generosity of agricultural and business property reliefs, and “wealth tax” targeting high-net-worth individuals e.g. through increased taxes on property holding, shares, dividends and luxury goods.
Final word
It is expected that any announced changes will come into effect from 6th April 2025, so whilst this may seem like a long planning window, planning early will be very important to ensure you take advantage of any remining opportunities and restructure in time.
With over 35 years’ experience, Debrah Broadfield and Mark Quinn are Tax Advisers & Chartered Financial Planners specialising in cross-border advice for expatriates. Contact us at: +351 289 355 316 or portugal@spectrum-ifa.com
QNUPS is this right for you?
By Portugal team
This article is published on: 4th September 2024
For those relocating to or living in Portugal, exploring tax efficient investment options is crucial as taxes can run relatively high. One option that has gained attention in Portugal is the Qualifying Non-UK Pension Schemes (QNUPS). In this article, we will delve into what QNUPS are and assess their potential role in a financial strategy.
What is a QNUPS?
A QNUPS is a type of international pension plan designed for individuals based outside of the UK. Unlike the Qualifying Recognised Overseas Pension Scheme (QROPS), which is funded by transferring assets from an existing pension, QNUPS are established with personal funds, assets, or cash.
Interestingly, a QNUPS is not a specific scheme or structure per se; it a tax status deriving from UK inheritance tax legislation (IHT) introduced in 2010. The fact that QNUPS derives from IHT legislation hints at one of the key benefits of using this scheme.
Making contributions to the QNUPS
While registered pension schemes offer tax relief on contributions, QNUPS do not. However, QNUPS are not bound by the annual allowance restrictions that apply to tax-relieved pension schemes, such as the current £60,000 cap for the UK 2024/25 tax year.
Contributions can be made in cash or by transferring assets, although it’s essential to consider potential tax implications, such as capital gains tax when transferring property.
When contributions to a QNUPS are made with genuine pension planning in mind, they generally do not attract inheritance tax. However, if contributions cannot be justified as legitimate pension provision, the inheritance tax position can become uncertain.
Taking money out of a QNUPS
A QNUPS must broadly follow the same rules as UK-registered pension schemes, meaning that at some point, you will need to draw benefits from the scheme.
Most withdrawals must be taken as income, which is likely taxable in your country of residence. For Portuguese tax residents, this income is typically subject to local taxation unless you qualify for pre-April 2020 Non-Habitual Residence (NHR) status, under which pension income could be taxed at 0%.
It is crucial to note that QNUPS may not be tax efficient or appropriate in all cases, as from a tax perspective it breaks the cardinal rule – do not turn capital into income.
To fund a QNUPS you contribute capital (which has already been taxed), and any withdrawals are treated as income and taxed fully – even if you have made a loss within the pension.
Benefits of QNUPS
Inheritance tax (IHT) advantages
One of the significant benefits of QNUPS is the potential inheritance tax relief. If structured correctly, assets within a QNUPS may be excluded from your estate and therefore not subject to the 40% UK IHT charge upon death.
However, it is critical to emphasise that QNUPS must be established with genuine retirement intentions. If the primary motive appears to be inheritance tax avoidance, HMRC may challenge the arrangement.
Ongoing tax efficiency
Generally, funds within a QNUPS are not subject to capital gains tax or income tax. However, exceptions may arise, such as when income is generated from UK-based assets held within the QNUPS.
Income tax treatment in Portugal
In Portugal, pension income is typically taxed according to the scale rates of income tax.
Some individuals report income from QNUPS on an “85/15” basis which, strictly, is applicable to annuities. Under this method, 85% of the income is treated as a return of capital, with only the remaining 15% taxed as income.
However, this approach may not always be appropriate, and professional advice is recommended.
Flexible investment choice
A QNUPS offers a broader range of investment choices compared to traditional pensions, including assets like real estate, non-listed shares, and chattels. This flexibility can be appealing to those with diverse investment portfolios.
Ensuring compliance
The jurisdiction and structure of the QNUPS must meet specific requirements, aligning closely with the rules governing UK pension schemes, particularly in terms of benefit form and timing.
To safeguard against accusations of IHT avoidance or “deathbed planning”, careful consideration must be made not only in terms of the value of an estate placed into a QNUPS, but the underlying investments too. For example, while some may promote the ability to hold non-income-producing assets like fine wine collections, it is essential to consider how such investments will generate income for the mandated future withdrawals.
Summary
QNUPS can be a valuable component of a well-structured financial plan but they are not a one-size-fits-all solution. Unlike registered pension schemes, QNUPS do not offer tax relief on contributions or withdrawals, and their benefits are contingent on proper planning and compliance.
For those interested in QNUPS, consulting with a financial advisor familiar with both UK and Portuguese tax regulations is essential to ensure that this investment strategy aligns with your overall financial goals.
“Sales shopping” in investments……
By Portugal team
This article is published on: 19th August 2024
With some stock markets falling over the past couple of weeks, it is an opportunity to review markets and risk.
We all love the feeling we get when we grab a bargain and have no hesitation in purchasing our favourite goods or services when they have a price reduction or promotion.
However, the world of investments is probably the only one in which the same price reductions are met with fear and anxiety instead of joy, however if you are a long term investor, the falls can be an opportunity.
The numbers matter
Statistics show that, over the longer term, stock markets go up approx. 70-75% of the time. In this context therefore any fall in values can be seen to be temporary setback and opportunity to buy shares at “sale” prices.
“Breaking news! Shares up over 20% in 2023!”
You will rarely, if ever, see such a headline. In the same way, you would not have seen a headline stating there “wasn’t a single casualty in the millions of commercial aviation flights in 2023”, but you probably have seen many “flight from hell” articles published in the same year.
When it comes to the world of investments, the media is not your friend in helping you make informed decisions as the focus tends to be on short-term news developments without taking into accountant the much broader and longer-term picture.
The media also tends to catastrophise events with news headlines being designed to grab attention. We see discussions of “crashes”, “crises”, “recessions” etc. and this is getting worse in the digital age with “click bait” designed to grab people’s attention. Moreover, through sophisticated algorithms, the same messages are reinforced through links to similarly anxiety inducing articles.
As a result of this, many still equate the stock market to rolling dice at the casino. An alternative and more considered and rational description of the stock market could be:
“a highly diversified selection of some of the world’s largest and financially secure companies, including such names as Apple, BP, Nestle etc. many of which have been in existence for decades if not hundreds of years, and whose return has averaged over 10% per annum over the past 50 years”.
This hardly trips of the tongue, but the emotional reaction is much different.
What is risk anyway?
It is not as clear cut as you think. When people think of investing and risk, they think about the possibility of losing all of their investment.
Whilst it is indeed possible for individual companies to fail, if you hold a diversified portfolio of, say, the top 500 shares in the US (the S&P 500 index), the only way you could lose your money would be if every one of those 500 companies were to fail.
Over a 50-year period, the S&P 500 index has increased by an average of more than 10% per annum and this is a period that has been marred with the inflation shocks of 1970s, wars, emerging market crises, 9/11, “Grexit”, “Brexit”, the great financial crisis of 2007/08 etc. Nevertheless, the market continues to increase consistently.
Does risk lie in ‘safe’ assets?
We live in a world in which costs are constantly increasing in value. If we reminisce and think about the cost of our first car or house, we can really appreciate the extent to which prices rise over time. Therefore, in order to maintain our standard of living over time, our money must at least maintain its purchasing power and ideally increase our purchasing power over time.
With that in mind, holding fixed return investments such as cash in a world in which costs are increasing is not low risk; it is high risk in the sense that you are jeopardising the value of you real wealth over the longer term.
Safety in risk?
Conversely, shares have historically demonstrated the ability to grow well in excess of the rate of inflation and therefore, as they are protecting your wealth, they can be regarded as safe investments.
Indeed statistics show that the risk of investing in high quality shares reduces to zero over a 20 year time horizon. This sounds like a long time but if we consider life expectancy statistics, a couple in their mid-60s can expect to live well into their 80s and one of the couple has a good chance of reaching 100! Furthermore, we find that many clients’ portfolios outlive them and will be handed down to children and/or grandchildren, in which case the investment period is likely to be multiple decades long.
Exchange Traded Funds
By Portugal team
This article is published on: 16th August 2024
(ETFs) – the investment “silver bullet”….?
Difficult times
With high levels of inflation and relatively low rates of returns on cash deposits, it is important to make sure your money is working hard for you.
In order to do this, investors will look to “real” investments i.e. assets that are expected to grow above the rate of inflation over the longer term – the main contenders are shares, bonds and property.
Make your money work harder
Whilst you can purchase individual investments direct, most investors choose to invest through a collective investment where you pool your money with other investors into a larger pot and appoint a fund manager to run this pot for you – in doing so, your combined value is larger and you can spread your investments much more widely which reduces risk. For example, the Vanguard LifeStrategy fund has approximately 22,000 underlying holdings.
‘Active’ versus ‘passive’ management
Active investors appoint a fund manager such as Fidelity or BlackRock to run the fund on their behalf and pay the manager a fee, typically between 1-2% per annum.
The alternative is to simply buy a basket of investments through a ‘tracker’ or passive fund – in this way, your fund will simply grow in line with the performance of the investments within the basket and do not have the personal involvement (and cost) of a fund manager overseeing the fund.
Examples of common trackers are those that mirror the S&P500 or FTSE100 indices, which are the largest companies trading on the US and UK stock markets respectively.
More money in your pocket with ETFs
ETFs are tracker funds that trade on a stock market and the major advantage is the extremely low fees, with annual charges on some ETFs as low as 0.01%. The savings in fees compared with active fund managers can make a substantial difference to the value of your investments over time.
As ETFs are traded in real-time on a stock exchange, they can be accessed quickly, with low costs and they offer access to a wide range of investments, from shares, gold and commodities to AI and environmental funds.
The devil is in the detail
Whilst Exchange Traded Funds certainly have a place in a well-diversified portfolio, there are important considerations when selecting them.
Tracking error – as the sole job of the ETF is to follow the index it is tracking; you must ensure it is following the market accurately. If it fails to track the market it could result in underperformance, and this can be more costly than the fee saving on the management fee.
Skewed risk – be careful that your portfolio is sufficiently diversified e.g. you may think that the S&P 500 is a highly diversified basket because you have 500 different underlying investments but the top 10 holdings make up around 35% of the value of the 500. The risk is very skewed to the big tech firms such as Google, Apple and Meta.
Another example of skewed risk is the MSCI World Index tracker. Although ‘world’ would suggest a globally diversified portfolio around 2/3rd is invested in the US alone.
Counterparty risk – there are different ways of tracking the market. The most secure is “physical replication” whereby the tracker simply holds the underlying investments of the index it tracks i.e. if you buy a FTSE 100 tracker, you will simply hold the 100 shares that make up that index.
The other main way is “synthetic replication” which means the index is tracked by using a complicated financial product supplied by another financial institution. In this situation, you have to think about the additional risk of that counter-party’s financial strength.
Other important points to have clear knowledge of are:
- The size of the fund
- The ETF’s domicile status
- The ETF’s tax residence
- Income treatment
- Currency of the ETF
In short, although Exchange Traded Funds and tracker investments are simple in principle, there are important nuances of which to be aware, especially when considering cross-border investment.
As always, when investing your hard-earned money, take guidance from a professional.
Preparing for the end of your NHR
By Portugal team
This article is published on: 24th July 2024
Many people have been attracted to Portugal by the very advantageous Non-Habitual Residence Regime, but many are concerned about what will happen to their spending power once the normal tax rates are applied. Mark Quinn and Debrah Broadfield look at the planning you should put in place to prepare your finances for the end of NHR.
What is NHR?
NHR is a preferential tax status granted by the Portuguese government to new residents and lasts 10 years. It offers greatly reduced tax rates on foreign-sourced pensions, employment income generated from ‘highly valued’ professions, tax exemption on foreign-sourced rental income, dividends and on real estate capital gains.
What it does not do is protect from capital gains generated from stocks and shares, company sales or dividends received from funds.
What happens after NHR?
You will become subject to standard rates of tax but your tax position will be determined by the planning (if any) you have implemented during the NHR period.
How to take advantage of NHR
The benefits of NHR are not automatic and you must plan to make the scheme work for you. This might involve rearranging your assets and income sources so you can fully take advantage of the tax breaks. For example:
If you are receiving a salary from an overseas company, dividend payments are preferable as these are tax-free, but a salary is taxable at either 20% (if a qualifying profession) or standard scale rates. Additionally, social security contributions will be due on salary payments, but not on dividends.
If you have foreign property you will want to sell this during the NHR period. Whilst rental income is tax-exempt during NHR, post-NHR it is taxable at scale rates. Similarly, capital gains on sale during NHR are exempt, but post-NHR 50% of the gain is taxable at scale rates.
If you are selling a UK company, you would want to structure the sale as a dividend pay-out, rather than a share sale. The former would be tax-free and the latter would be taxed at 28%.
If you have non-Portuguese sourced savings and investments, interest and dividends from direct equities are tax-exempt (strictly, dividends derived from funds are taxable under NHR) but after NHR, they are taxable at 28%. Capital gains however are not protected under NHR. Gains realised e.g. by selling or switching your investments, are taxable – even if you do not have the gain physically paid out to you and they remain within the investment portfolio/ISA/platform. If the investment holding sold was held for more than 365 days the tax rate is 28% but if held for less, then it is taxable at scale rates of tax. The capital gains tax can be mitigated by restructuring these types of holdings within approved tax wrappers.
Pension income is taxable at 10% under NHR (or 0% if you have pre-31st March 2020 NHR). Post-NHR, generally pensions are taxable at scale rates so some individuals aim to deplete their pension over the NHR period. Just bear in mind however that this might not be suitable for everyone, as moving pension savings out will expose them to UK IHT. Do note, that QNUPS are often sold as a ‘silver bullet’ to protecting assets from UK IHT but this is not the case. There is no guarantee of tax-exempt status and HMRC are vigilant when assessing potential tax avoidance on death.
What can you do to plan?
Portugal does offer very advantageous tax breaks for those that use approved long-term savings vehicles, and it is not dependent on your NHR status. These shelter ongoing income and gains from tax and tax is only applied to gains when you make a withdrawal at 28%. Additional tax reductions apply after years 5 and 8 reducing the tax rate to 22.4% and 11.2%. Having said this the right jurisdiction must be chosen otherwise you could be subject to a punitive rate of 35%.
A particular advantage is that the tax reduction time limit is applied to the start date of the structure, not each time monies are added. This means you can start the structure with a small sum and add to it over time say, as you sell foreign property, drawdown your pension or sell a UK company.
The ideal position is to establish the structure when you are at the beginning of NHR so that by the end of the NHR period the structure is at its maximum tax efficiency.
Many individuals draw on their pensions and dividends during NHR tax efficiently and accelerate the drawdown towards the end of the 10 years to fund the tax-efficient investment. They may also sell property or companies during the NHR period and reinvest the proceeds in preparation for the end of NHR. Then after NHR, they switch the income source to the new investment and generally enjoy single-digit or very low double-digit effective rates of tax.