Risk Tolerance
By Chris Webb
This article is published on: 18th July 2014
Each and every one of us has our own risk tolerance which should not be ignored when considering making any type of investment. Any good financial planner knows this and they should make the effort to help you determine what your risk tolerance is.
Then, based on this information, they should help you to build a portfolio that is aligned to your level of risk.
Determining one’s risk tolerance is based on several different criteria and there are different ways to look at how you should assess the risk you need to take. Firstly, you need to know how much money you have to invest, what your investment and financial goals are and what time horizon is involved. Then you need to consider the actual risk you are prepared to take.
Due to the emotional aspect of investing, there are various ways to look at it.
Let’s say you plan to retire in ten years and you’ve not saved a single penny/cent towards it. You could view this in two ways:
- You need a higher risk tolerance because you will need to do some aggressive investing in order to reach your financial goal.
- You may consider that as retirement is looming, you do not want to take unnecessary risks. If the markets were to crash it would affect your situation, therefore a more balanced portfolio (lower risk tolerance) would be better suited.
On the other side of the coin, if you are in your early twenties and want to start investing for your retirement now, you could share the same views.
- You should have a higher risk tolerance because you are young enough to ride out any market turmoil, maybe restructuring to a more cautious profile nearer the end goal.
- You should take a lower risk level and be happy with lower gains (potentially) but the end result will achieve what you require. You can afford to watch your money grow slowly over time.
There are more factors to consider in determining your tolerance.
For instance, if you invested in the stock market and you watched the movement of that stock daily and saw that it was dropping slightly, what would you do?
Would you sell out or would you let your money ride? If you have a low tolerance for risk, you would want to sell out… if you have a high tolerance, you would let your money ride and see what happens.
This is not based on what your financial goals are. This tolerance is based on how you feel about your money!
Again, a good Financial Planner should help you determine the level of risk that you are comfortable with and help you choose your investments accordingly.
Your risk tolerance should be based on what your financial goals are and how you feel about the possibility of losing your money. It’s all tied in together, it’s emotional.
Prior to working with any clients I insist on completing a detailed risk tolerance questionnaire. This will tell me exactly what your attitude to risk is and a suitable portfolio can be devised to suit you individually.
If you are interested in investing or saving for the future then get in touch to discuss the opportunities available and, just as importantly, the risks associated.
If you already have an investment portfolio and feel that it was never rated against your own risk tolerance then let me know. I am happy to discuss further and go through the questionnaire to ensure that what you have already done is suited to your circumstances.
This article is for information only and should not be considered as advice.
This article is written by Chris Webb The Spectrum IFA Group
More on risk and investing in different assets
How are you at managing your Finances ?
By Chris Webb
This article is published on: 17th July 2014
As the old saying “Practice Makes Perfect” seems to suggest, we are bound to improve at everything over time. However, there is something about “money” that just appears to get the better of us. Nowadays, we only need to look at the level of debt defaults to see that this is an area where most of us just don’t seem to be making much progress or improvement.
Here are just a few reasons why people, in general, do not successfully manage their finances:
- They have never been able to predict what the market will do next. However, this doesn’t deter them from trying to predict the markets!.
- They’re thrilled that the credit card they’re paying 22% interest on offers 1% cash back!
- They think dollar-cost averaging is boring without realizing that the purpose of investing isn’t to minimize boredom.
- They try to keep up with friends and family without realizing that friends and family are actually in debt.
- They think €1 million is a glamorously large amount of money when, actually, it’s what most people will need as a minimum in retirement!.
- They associate all of their financial successes with skill and all of their financial failures with bad luck.
- Their perception of financial history extends back about five years. This leads them to believe that bonds, for example, are safe and that the average recession is as bad as the recession of 2008.
- They don’t realise that the single most important skill in Finance is control over your emotions.
- They say they’ll take risks when others are fearful but then they seek the foetal position when the market falls by 2%.
- They think they’re too young to start saving for retirement when realistically every day that passes makes compound interest a little less effective.
- Even if their investment is over a period of 20 years, they get stressed when the market has a bad day.
- They size up the potential of investments based on past returns.
- They use a doctor to manage their health, an accountant to manage their taxes, a plumber to fix their plumbing. Then, with no experience in the financial market, they go about their own investments all by themselves.
- They don’t realize that the financial “expert” giving advice on TV doesn’t know their personal circumstances, goals or risk tolerance.
- They think the stock market is too risky because it’s volatile, without realizing that the biggest risk they face isn’t volatility. The biggest risk is not growing their assets sufficiently over the next several decades.
- When planning for retirement, they don’t realize that their life expectancy might be 90 years or more.
- They work so hard trying to make money that they don’t have time to think about or plan their finances, especially for those days when work will no longer take up all their time.
You may read this, identify a few points that relate to your own position and now find yourself asking “What can I do about it though?”
Without doubt the answer to that question is to seek professional advice so speak to a qualified and regulated Financial Planner. They will be able to analyse your position from both an investment and an emotional perspective, ensuring that your plan of action is tailored to you as an individual.
You should expect a detailed consultation process and only after this process has been completed can the correct advice be presented, ensuring you avoid the pitfalls detailed above.
The steps to the consultation process are as follows:
- A full and thorough financial health check on your current and future situation including the completion of a Financial Review questionnaire.
- Identifying areas of strengths and weaknesses in your financial planning and understanding your specific goals.
- Designing a strategy to help ensure your financial aspirations are met. Also reviewing any existing portfolio’s to ensure they are working effectively and efficiently.
- Once your strategy has been finalised, a full financial report based on your Financial Review will be provided to you along with a concise recommendation.
- Ongoing consultations consisting of regular monitoring of your selected strategy and face to face meetings to ensure that your financial goals are achieved.
To explore all of your options and to discuss how this consultation process can benefit you please contact your local Spectrum IFA Group consultant.
An insight into the good things happening with Spanish Tax
By Barry Davys
This article is published on: 16th July 2014
We are pleased to report that there are a number of proposed schemes to reduce the amount of tax paid in Spain. The proposed reductions in tax apply to personal income, corporation and savings (capital gains) taxes. This will reduce the burden of taxes and some schemes, such as the “Beckham” scheme for retired people, if it passes from a proposal into law, will be particularly beneficial.
Yet it is curious that these proposed changes are getting so much press. In some cases, the proposal is simply to reduce tax back to where it was before the crisis. In addition, there are already other schemes which have already passed into law which are very useful for people living in Spain. For example, if you live in Spain but work outside Spain there is an exemption from income tax for the income from that work. The maximum allowance is 60,100€ per annum. Mark Twain’s famous quote “reports of my death was an exaggeration” could also be applied to the “Beckham” scheme. There is still a version of this scheme which can be extremely beneficial for people who wish to sell property outside of Spain.
Then there is the taxation of pensions and investments. In the best case, and I emphasis this is the best case, the taxation on pension income and investment income can be as low as 3.25%. A recent report in the press was highlighting a proposed detrimental change in taxation to dividend income without also mentioning this other rate of investment tax.
During the next 6 months there will be up to 17 changes in tax in Spain. Most of the changes will be beneficial. We work with a number of tax lawyers and specialists and we give clients access to these experts for a reason. Spanish Tax need not be painful, but you do need someone on your side who knows their way around the system.
We recommend a strategy for making the most of the changes by taking the following action:
- Have a review of your Spanish Tax situation to ensure you are compliant.
- See if there are any back taxes you can claim for the last four years
- Use the most appropriate of the new rules when they are passed into law (you can only do this if your affairs are in order).
QROPS Pension Transfer
By Chris Webb
This article is published on: 4th July 2014
If you ever worked in the UK, no matter what your nationality, the chances are you were enrolled in a private pension scheme. The UK government continues to tweak legislative changes affecting the expat’s ability to move this pension offshore. On the surface, these changes appear to limit transfer options, but in reality they have strengthened the legal framework offering expats continuing advantages.
Background
When you leave the UK, if you have a Final Salary pension, then your fund remains valid but is deferred and any increases will usually be limited to inflation until you reach retirement age. The pension income you then receive is taxable in the UK no matter where you are based in the world, you may be entitled to a tax credit if there is a Double Taxation Treaty in the country you reside. Once you die the pension will continue in the form of a spouse’s pension if you are married; otherwise it will cease. When your spouse dies, all benefit payments come to an end.
With a personal pension, if you take any part of your fund and then die before you fully retire, a lump sum can be paid to your spouse. Although this is exempt from inheritance tax there is a special lump sum benefits charge, also known as “death tax”, payable on the remaining fund. This is at the rate of 55% of the benefit amount, although the recent budget changes have advised that this is likely to be reduced in the near future.
In April 2006 Her Majesty’s Revenue and Customs (HMRC) introduced pension ‘A’ day. This liberalised UK private pensions and allowed people leaving the UK to transfer them overseas, often to a new employer. In doing this the UK complied with European legislation which allows all citizens the freedom of movement of their capital. Thus ‘Qualified Recognized Overseas Pension Schemes’ (QROPS) were born.
Implementation
QROPS are not necessarily the right thing in every single case. In order to decide whether it would be advantageous to transfer your pension or leave it in the UK, with the intention of drawing the benefits in retirement, please contact me so that I can carry out a personalised evaluation. There may be compelling arguments, outside of the evaluation alone, which are often overlooked and may affect you in the future.
One of these is that a large number of UK schemes are currently in deficit to the point that they will be unable to pay future projected benefits. This would mean that even though it looks as though there are arguments to leave your UK pension in situ it may actually be wiser to transfer it.
In order for you to make the best decision you need professional advice on what would be the best solution for you. This will entail seeking details of the current UK schemes, including transfer values, the types of benefits payable to you and options going forward when you get to a retirement date and when you die.
I have detailed below some advantages & disadvantages of a QROPS pension transfer, using the jurisdiction of Malta as a reference point.
Advantages
1. Lump Sum Benefits
If you transfer your benefits under the QROPS provisions to a Malta provider, in accordance with the rules of this jurisdiction, you may be able to take a pension commencement lump sum of up to 30% (unless you have already taken this lump sum from the UK pension). Under the current HMR&C (Her Majesty’s Revenue and Customs) rules to qualify for the lump sum option you must be age 55 or over. Your remaining fund is then used to generate an income without having to purchase an annuity. The 30% pension commencement lump sum is only available once you have spent 5 full consecutive tax years outside of the UK (in terms of tax residence), if you are within the first 5 years, we strongly advise you to limit the pension commencement lump sum to 25%.
2. No Liability to UK Tax on Pension Income
A non UK resident drawing a UK pension remains subject to UK tax on the income, unless he or she resides in a country that has a Double Tax Treaty (DTT) with the UK, which contains an article on pensions that exempts the pension from UK income tax. Transferring under the QROPS provisions ensures that, if tax is due on pension income, it will only be taxable in the country of your residence.
3. No Requirement to Purchase an Annuity
There is no longer a requirement to ever purchase an annuity with either your UK pension or in the event you make a transfer under the QROPS provisions.
Whilst the UK Government changed its pension rules in April 2011 so that you can now delay taking your pension indefinitely, in the event of your death after age 75 you are treated as if you had already taken benefits (whether or not you have actually done so) and there would be a 55% tax charge on the funds paid out to heirs. With a Malta QROPS there is still no need to purchase an annuity, however you must start to draw an income from age 70. The Pension commencement Lump Sum must be taken by this age or the option to take it after this age is lost.
4. Secure Your UK Pension Pot
Some defined benefit schemes in the UK are in deficit. Since the deficit forms part of the balance sheet of the company, this can present a huge risk to your pension fund. Transferring your UK benefits under the QROPS provisions could enable you to have full control of these funds without worrying about the financial situation of your previous employer.
5. Ability to Leave Remaining Fund to Heirs
Standard UK pension legislation significantly restricts the member’s ability to leave the pension fund to their heirs on death, except if death occurs before age 75 and no benefits have been paid to the member. Otherwise if a member has started to draw benefits prior to age 75, the remaining fund can still be paid as a lump sum to heirs, but less a tax charge equal to 55% of the lump sum (increased in April 2011 from 35%). If the member dies after age 75, then the tax charge remains at 55% (reduced in April 2011 from 82%) whether or not the member has received any benefits.
A transfer under the QROPS provisions will allow the member to leave lump sums without deduction of tax to heirs as can be seen more easily from the table below.
UK Pension
| Age | Benefits from Pension | Tax On Death |
| 55+ | PCLS | 55% |
| 55+ | Income* | 55% |
| 55+ | PCLS & Income** | 55% |
| 55+ | No PCLS, No Income*** | 0% |
| 75+ | PCLS, Income or nothing | 55% |
QROPS – Malta
| Age | Benefits from Pension | Tax On Death |
| 55+ | PCLS | 0% |
| 55+ | Income* | 0% |
| 55+ | PCLS & Income** | 0% |
| 55+ | No PCLS, No Income*** | 0% |
| 75+ | PCLS, Income or nothing | 0% |
PCLS – (Pension Commencement Lump Sum)
This table is based on the aim of paying out the remainder of the pension fund as a lump sum death benefit. There may however be other options than providing a lump sum death benefit.
*This is based on the remaining lump sum being paid out as a death benefit. A spouse could transfer the pension into their name and continue the income drawdown.
**There is an option of phased drawdown where you could take part of your PCLS allowance and part income. The remaining portion of the fund that you have not taken the PCLS or income from could continue to be paid out with no tax up to the age of 75.
***There will be no tax up to the age of 75 if you have not taken any benefits from your plan.
6. Currency
A standard UK pension will usually only be invested and pay benefits in Sterling, which means the member runs an exchange rate risk in respect of pension income, in addition to incurring charges in converting the pension payments to the currency of their country of residence.
A transfer under the QROPS provisions means that the pension payments can be made in the local currency, thus potentially eliminating exchange rate risk
7. Lifetime Allowance Charge (LTA)
This is a restriction on the total permitted value of an individual’s total accrued fund value in UK registered pensions, currently £1.5m. Those who exceed this value face a potential tax liability of 55% on the excess funds on retirement at any time when there is a “benefit crystallisation event” that exceeds the LTA. A benefit crystallisation event is any event which results in benefits being paid to, or on behalf of, the member and so includes transfer values paid to another pension scheme, as well as retirement benefits.
The UK Government have advised that the LTA will be reduced to £1.25m from 6 April 2014. (This was reduced in 2012 from £1.8m to £1.5m).
There is no LTA within a QROPS so transferring larger plans to a QROPS may not be caught in this reduction in the future. Careful planning will be needed with your adviser if you are close to the limit in the UK.
Disadvantages
1. Charges
If you have a pension(s) with a combined transfer value of less than £50,000 then the charges may be prohibitive.
2. Loss of Protected Rights
A transfer under the QROPS provisions may result in the loss of certain protected rights, including Guaranteed Annuity Rates, Guaranteed Minimum Pension, a protected enhanced lump sum, or rights accrued under a defined benefit scheme. (These are shown in the section “Analysis of Your Existing Pensions”).
3. Returning to the UK
If you return to the UK, then the QROPS administrator will have to report this ‘event to HMRC and the pension scheme will become subject to UK pension regulations again.
If it is your intention to return to the UK in the near future then a transfer under the QROPS provisions is usually inappropriate.
Pilot Loss of License and Loss of Training Expenses Insurance
By Chris Burke
This article is published on: 26th June 2014
Aircrew undergo many years of hard work at substantial expense to attain their aviation license. However, a commercial pilot’s career and income are always at risk should they suffer serious injury or deterioration in health.
Pilots Loss of License Insurance provides financial support should your aviation career end abruptly; it provides stability while you retrain for a new career. Policies are available on an individual basis should your employer not provide it; similarly members can ‘top up’ their coverage in addition to their company’s existing group policy.
Loss of license insurance is specifically designed for pilots. As such, it negates many of the associated limitations of traditional group insurance products. For instance permanent health and critical illness insurance policies may provide limited cover and significantly reduced benefits in the instance of losing your license.
Who can we insure?
We can cover any individual commercial, fixed rotary or wing pilots including flight instructors, who hold a current license and who are gainfully employed, and actively at work.
Alternatively, if you’re interested in a group policy, please email us directly at chris.burke@spectrum-ifa.com
Key benefits
- Lump sum payment
- Monthly temporary benefit option
- Continuous coverage
- Full psychological illness cover option available
- Market leading cover for alcohol and drug related illnesses
- No extra charge for rotor-wing pilots
- Worldwide cover
I have worked extensively with aviation companies and individuals alike, please do not hesitate to contact me with any questions.
Click here for a quote on Pilots Loss of License Insurance
Spanish Mortgage News
By Chris Burke
This article is published on: 17th May 2014
In the last two months, we have seen some incredibly positive things happening in respect of mortgage lending for non-residents. This affects not only product conditions (see below), but also service standards.
In March, two of the main lenders contacted one of our mortgage brokers us to ask us if they could meet decision makers in their banks to understand how they can compete for and win more non-resident mortgage business. They met with two members of the Board of Directors of one of the largest banks in Spain and last week we met two senior officials from another of the largest banks.
At these meetings we advised that to compete effectively banks need to offer at least 70% of purchase price, with no compulsory life assurance, without a minimum rate (“suelo”), for all nationalities, and to improve the efficiency and turnaround times for approvals.
We have also advised that debt-to-income ratios could be increased to gain more business from rivals, but this seems to be something that is harder to get banks to change. Many banks are currently using a 30% debt-to-income ratio, so monthly debts (including the new Spanish mortgage) must not exceed 30% of overall net monthly income. Some banks are using 40%, but these banks are not offering the best conditions. It is worth noting that the 30% rule is often relaxed slightly for high-earners.
We anticipate that changes will be made one step at a time, but have been very encouraged by the results of these meetings. Here are some new conditions we have been involved in negotiating:
- 70% now available for most other nationalities (case-by-case basis for non-Europeans)
- Low interest rates from annual Euribor + 2%
- Products without compulsory life assurance
- 30-year terms available
- Fast-track approval with decisions in 1-2 weeks from submitting all requested documents
For Scandinavian clients, as most agents are already aware, Nykredit has often been the preferred bank to use because they offer attractive conditions and 70% for Scandinavian nationals (up until recently they offered up to 80%, but this is now very difficult to achieve with them). We are getting more and more Scandinavian clients coming to us telling us that Nykredit has declined their mortgage, is taking an eternity to approve it or requires them to invest large sums to get approval for 80%. What is clear is that Nykredit is purposefully slowing down its lending for Spanish property purchases. This now appears to be in contrast to the leading Spanish banks. Nykredit has also made clear that it is not keen on self-employed applicants, cheaper properties, non-touristic areas and even some very popular holiday destinations such as Ibiza.
| MAXIMUM LTV |
Fiscal Residents – 80% Non-residents – 70% |
| EURIBOR* | 12 month (annual) – 0.549% |
| EXCHANGE RATES |
1 GBP = 1,1952 EUR 1 EURO = 0.8367 GBP |
Data correct at the time of writing
* Based on purchase price or bank valuation (lowest of the two)
** All non-resident mortgages are now based on the annual Euribor with a loading of 2 – 4%. The margins now vary considerably depending on the bank in question and the customer profile and some banks have minimum rates
Le Tour de Finance in Spain
By Spectrum IFA
This article is published on: 9th May 2014
Le Tour de Finance arrived in Spain on the 5th May in Girona, Catalona. After further events in Mallorca and the Costa Blanca Le Tour is now ready to move eastwards to France.
Commenting on the 3 events in Spain, Jonathan Goodman from The Spectrum IFA Group said “We’ve seen an increase in attendance in Spain with some really great input from the attendees. The range of expert speakers has been wonderful and from general feedback, the events have been a massive success”.
Le Tour de Finance is now preparing for the French leg with a total of 9 locations being visited from the end of May and then into June. If you’re interested in joining us for any of these events, please contact us to find a location near to where you live.
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Lifetime Allowance changes and ‘Fixed Protection 2014
By Chris Burke
This article is published on: 18th March 2014
This year the Her Majesty’s Revenue and Customs (HMRC) are lowering the UK Pensions Lifetime Allowance amount. This is the maximum allowance the HMRC grant to each individual to hold as a UK pension without incurring any extra tax charges. Previously, UK residents receive tax relief on the contributions made into a pension up to £1.8 million in 2010/2011 before it was reduced to £1.5 million in 2012. The HMRC has changed this twice over the last 8 years bringing the allowance down each time, from £1.8 million in 2010/2011 to £1.5 million 2012. The government agency is enforcing a further reduction to £1.25 million this coming year.
Any amount above the lifetime allowance is liable to 55% taxation when withdrawn as a lump sum, or 25% taxation when withdrawn as a pension.
It is important that those affected by this change apply for ‘Fixed Protection’ before 6th April 2014. A successful application allows the pensioner to maintain their lifetime allowance of £1.5 million as opposed to a reduced £1.25 million commencing from 6th April 2014.
A successful application for Fixed Protection in essence allows a pensioner to withdraw savings worth up to £1.5 million without paying the lifetime allowance charge which will soon affect all pensioners with more than £1.25 million across their schemes.
Firstly note – you cannot apply for ‘fixed protection’ 2014 if you already have ‘primary’, ‘enhanced’ or ‘fixed’ protection.
Secondly, you will lose fixed protection 2014 if:
a) You join a new pension scheme – unless you’re transferring pension savings from one of your existing schemes into the new scheme.
b) You build up new benefits in a defined benefits or cash balance pension pot above a set amount – enquire for further details.
c) You start saving in a new pension pot either under an existing pension scheme or a new pension scheme.
d) You have a contribution paid to any of your money purchase pension pots.
Links:
Apply for Fixed Protection 2014 at: http://www.hmrc.gov.uk/pensionschemes/fp14online.htm
Calculate if Lifetime Allowance affects you at: http://www.hmrc.gov.uk/tools/lifetimeallowance/index.htm
Are you a Spanish tax-resident for tax purposes
By Chris Burke
This article is published on: 5th March 2014
If you are currently living in Spain, you would assume that you would also be a Spanish tax resident. That is not always the case. The underlining rule is that if you live more that 183 days of the calendar year in Spain then you are deemed to be tax resident also. Although this is usually the deciding factor there are exemptions to the rule. If the ‘centre of your interests’ is arguably in the United Kingdom, Her Majesty’s Revenue and Customs (HMRC) could reason that you are responsible for tax there, not Spain.
Where is your ‘centre of interests’? Well, you could quite conceivably spend most of your time in Spain whilst still having a house in the UK, a business or job based in the UK, children in school in the UK and/or a spouse in the UK. If all these were the case then you would almost certainly be UK resident for tax purposes. You would also be liable to tax in Spain (in theory) if you spend more than 183 days here. In practice there is however a ‘double tax treaty’ in existence between the UK and Spain which ensures you do not have to pay tax twice as a result.
If you currently reside in Spain and the majority of your ‘centre’s of interest’ are (in Spain) then you will be deemed as a tax resident by the Hacienda (the Spanish tax authorities) and liable to pay taxes on your assets world-wide.
The Spectrum IFA Group Expands in Madrid, Spain
By Spectrum IFA
This article is published on: 3rd March 2014
The Spectrum IFA Group are delighted to announce that Conor MacSherry has joined Chris Webb in the Madrid office.
Conor has worked in Financial Services for 27 years covering all aspects of protection, mortgages, investment and retirement planning. Through many years of management roles covering sales, development, compliance and consultancy, Conor has always maintained his authorisation to deal with and look after his clients directly.
As well as being a fully qualified Financial Adviser, Conor holds a B.A. Degree in Business Studies, a Diploma in Management Studies and a Masters of Business Administration.
Commenting on this recent appointment, The Spectrum IFA Group’s Chairman Michael Lodhi explains that “The group has been expanding within Europe over the past few years and it is clear that our services are badly needed by the expatriate community. This recent appointment under pins The Spectrum Group’s commitment to extend our range of services and add further advisers in Europe to provide expatriates with professional financial advice”.
You can contact Conor directly here