Why is it important to have regular financial reviews?

By Amanda Johnson
This article is published on: 15th March 2019

15.03.19

Finding time in our busy schedules for reviewing our financial position is not always easy; however, here are some reasons why it is worth the effort and considerations in choosing who you should see.

1/ Living in France, it is important to check that you are both tax compliant and tax efficient, through proper use of savings allowances and being up to date on current tax rules.

2/ Using a company that is regulated here in France means that your advice is specifically relevant to France.

3/ Choosing a financial adviser who is also an expatriate means there are no language barriers and you both understand the experience of what it is like to have moved countries.

4/ Personal circumstances can change and regular reviews will make sure your finances are in line with your current needs. For example, you may have recently retired, be experiencing a change in your income or have just become a French resident.

New Tax Laws in Italy

By Gareth Horsfall
This article is published on: 14th March 2019

If you have been reading my previous articles, you may have read about tax breaks that are in the pipeline for Italian residents.

They have been proposed by Matteo Salvini and his party La Lega. The proposals that are the most interesting from my point of view are the following:

FLAT TAX OF 7% FOR RETIREES MOVING TO ITALY

This was introduced into the ‘Legge di Bilancio 2019’. In short, anyone who moves to Italy and is in receipt of a pension income from abroad, can benefit from a flat tax of 7% on their income for a period of 5 years after becoming resident, based on the criteria that:

a) you must establish residency in one of the following regions, Sicilia, Calabria, Sardegna, Campania, Basilicata, Abruzzo, Molise e Puglia,

b) the town/village must have less than 20,000 registered inhabitants.

c) you must NOT have been resident in Italy in the last 5 full tax years prior to taking the offer.

d) you can opt out of the regime if you feel it does not fit your circumstances.

The idea is to re-populate the southern regions of Italy which have been decimated over the last 20 years due to lack of employment opportunities and mass migration to the large Italian cities and Northern Europe. The aim is to try and draw in foreign money and also Italians abroad who may wish to move to Italy in retirement.

CHANGES TO THE INCOME TAX BANDS

From calendar year 2020 there are proposals afoot to reduce and simplify the current income tax bands. Currently there are 5 tax bands in Italy:

On the first $15000	23%
€15001 – €28000	27%
€50,000 – €75,000	41%
+75,000%	43€

The initial proposal was to reduce the rate of taxation to 15% on the first €65000 of income and then 20% above. Whilst that has been introduced in 2019 for self employed people on a partitia IVA, the proposal on personal income has been scaled back somewhat since the initial proposals, mainly due to concerns over balancing the books. The latest proposal doing the rounds is to reduce the number of income tax bands, but the rates do not move much:

On the first €28,000	23%
€28,000 – €75,000	33%
€75,000	43%

An income of €28000 per annum gross would amount to an annual saving of €520pa.
An income of €50000 per annum gross would amount to €1620pa

These are not figures that are going to change many people’s lives in a big way, but something is better than nothing. However, all this is hypothetical at the moment as we wait to see the final proposals and implementation of the law. It is unlikely that we will know more at this point since Salvini is quite likely to force another general election this year in lieu of his gaining popularity and the demise of M5S. Since the flat tax was his proposal, if he becomes PM, then further changes could be in the pipeline. Watch this space!

So, all in all I don’t see any great game changers for you or me, but who knows. At least we have the sun, sea, mountains, food and ‘la dolce vita’.

Taxes affecting residents in Italy

By Gareth Horsfall
This article is published on: 13th March 2019

Well, before I start this article I thought I should let you know that I am now a citizen of Italy. My citizenship journey is almost over. I received confirmation that my application for cittadinanza has been approved and in their words, ‘ definitivo’.

All I can tell you is that it was all a bit of an anti-climax at the prefettura. I was hoping for a band, a hug from the chap who had administered my application and a bowl of pasta con sugo di pomodoro e basilico….nothing!

In fact, all I got was the door slammed in my face after being handed a brown envelope to take to the comune. To be fair to him I have to now book an appointment with the comune to go and do the ‘giuramento’, which means changing my carta d’identita into one for an Italian citizen, and to swear on the Italian constitution. I assume it will be a little more pomp and circumstance than the prefettura office, but I shall keep you informed. However, it is official!

I had never dreamed of getting ‘cittadinanza’ in Italy until the big ‘B’ word arrived in my life. Without wishing to get hung up on that particular subject, it has changed my life and I know many of your lives have changed as well. One of those is, of course, taxation. For many it has meant deciding between the UK and Italy for residency purposes. That has implications and I have been a long time advocate of planning your financial life before making the leap of residency into another country. Italy is a higher tax country but the burden can be reduced, or ways can be found to make sure you can enjoy ‘la dolce vita’ without getting hung up on tax matters.

What is most important is understanding, and so every year I like to run a summary of the tax laws which mainly affect us and any proposed changes. There will also be some changes for UK home owners, post Brexit, which I will touch on and the proposed changes to the existing tax rates and the potential tax incentives.

A summary of the taxes which affect most residents in Italy

The first thing you need to remember, as a fiscally** resident individual of Italy is that you are subject to taxation on your worldwide earned and non-earned income, capital gains and assets (including property). It is your job to make sure that you report these to your commercialista each year to complete your tax return. But before you do it for the first time, a financial planning exercise can come in useful.

** Fiscal residency generally means being registered as a resident at your local comune/municipio.

TAX ON INCOMES

EMPLOYMENT
If you are employed or self employed then there are multiple options available, from partita iva, partita iva regime forfettario, rientro di cervello, amongst others. I won’t go into detail here as these really need to be looked at on a case by case basis, but needless to say that there are financial planning opportunities if you are working, or intending to work in Italy. If you have any questions in this area you can contact me on gareth.horsfall@spectrum-ifa.com

PENSIONS
Most of my clients are in, or close to retirement and so understanding how your pension will be taxed as a resident in Italy is of paramount importance.

PRIVATE PENSIONS AND OCCUPATIONAL PENSIONS
If you are in receipt of a pension income and it is being paid from a private pension provider overseas / occupational pension provider or you are in receipt of a state pension / social security, then that income has to be declared on your Italian tax return. If you have paid tax already on that income then a tax credit will be given for the tax paid in the country of origin (assuming that the country has a double taxation agreement with Italy), but any difference between the tax rates in the country of origin and Italy will have to be paid.

I often hear stories of people who are told by their commercialista that their state pension / social security pension is not taxable in Italy. This is absolutely NOT the case. The UK state pension, as an example, is 100% taxable in Italy as is US social security. It is not excluded from the double taxation treaties and therefore must be declared in Italy. Failure to declare could mean fines and penalties.

GOVERNMENT DERIVED PENSIONS
It is a good idea to define what is meant by government paid pensions. The definition according to the Italy/UK double taxation convention1988 is, paid from:

” a political or an administrative subdivision or a local authority”

This generally means civil servants of any kind and foreign office employees but would also include teachers, NHS workers, military personnel, police men and women, fire service etc. In these cases, the pension awarded is taxable only in the state in which it originates, and tax is generally deducted at source in that country of origin.

But there are some tax idiosyncrasies to look out for here. On the positive side, this income is not taken into account when calculating the tax on your other income sources in Italy, e.g. rental income, and it is not declared on your tax declaration in Italy.

On the negative side, for those of you who are thinking of becoming citizens of Italy, these pensions are only taxed in the state of origin UNLESS you become a citizen of Italy and then they are taxable in Italy as well. So for anyone thinking about cittadinanza, plan before you leap!

INVESTMENT INCOME AND CAPITAL GAINS
As of 1st January 2017, interest from savings, income from investments in the form of dividends and other non-earned income payments stands unchanged at a flat tax rate of 26%. Realised capital gains are also taxed at the same rate of 26%.

(Interest from Italian Government Bonds and Government Bonds from ‘white list’ countries are still taxed at 12.5% rather than 26%, as detailed above. This is another quirk of Italian tax law as this means that you pay less tax as a holder of Government Bonds in Pakistan or Kazakhstan, than a holder of Corporate Bonds from Italian giants ENI or FIAT).

PROPERTY OVERSEAS
Property which is located overseas is taxed in 2 ways. Firstly, there is the tax on the income and, secondly, a tax on the value of the property itself.

1. The income from property overseas.

Overseas net property income (after allowable expenses in the country in which is located) is added to your other income for the year and taxed at your highest marginal rate of income tax.

Where many properties are generating all your income, this can prove to be a tax INEFFICIENT income-stream for residents in Italy. It is better to have a diversified income stream, pensions, investments and property, to maximise tax planning opportunities and allow you to redirect income from the most tax efficient source at any one time. Relying solely on one type of asset for income in retirement is generally not a good idea.

2. The other tax is on the value of the property itself, which is 0.76% of the value. (IVIE)

A) Value must be defined in this instance. For properties based in the EU, the value is the Italian cadastral equivalent. In the UK that would be the council tax value NOT the market value. You will find that the market value will, in most cases, be significantly more than the cadastral equivalent value.

B) In properties located outside the EU the value for tax purposes is defined as the purchase price or value at time of ownership, where this can be evidenced, otherwise the value of the property is defined as the current market value.

** BREXIT TAX CHANGE** Once the UK leaves the EU the definition of value of the property will change as per the explanations above. This will affect any UK national living in Italy, who owns property in the UK post Brexit, and depending on your circumstances you could find yourself paying more or less in taxation on the property.

DISPOSAL OF UK PROPERTY
If you are thinking about moving to Italy and are looking to dispose of second properties in the UK before the move, then you may be entitled to take advantage of a tax break. If you have owned the UK property for more than 5 full tax years then it is no longer deemed a speculative transaction and you will not be capital gains tax liable, as a resident in Italy, on the disposal.

However, you may also qualify for a tax break in the UK as well, because although non-UK residents are liable to taxation on the disposal of UK property, the purchase price of the property is taken at the point at which the legislation was introduced: 6th April 2015 or later, if applicable. So if you have owned the property for a long time and seen some large capital gains, you could dispose of the property and benefit from a largely reduced tax rate as a result of this cross border financial planning loophole.

TAXES ON ASSETS
1. Banks accounts and deposits
A very simple to understand and acceptable €34.20 per annum is applied to each current account you own. This includes fixed deposits, short term cash deposits, CD’s etc. The charge is the equivalent of the ‘imposta da bollo’ which is applied to all Italian deposit accounts each year.

2. Other financial assets
Lastly, we have the charge on other foreign-owned assets (IVAFE). This covers shares, bonds, funds, portfolio assets, gold holdings, art, classic cars etc or most other types of assets that you may hold. The tax on these is 0.2% per annum based on the valuation as of 31st December each year.

Also, remember that if you have a portfolio of managed assets that are NOT held in a suitably compliant Italian investment bond, then all the separate funds/shares/assets are considered “individual” and MUST be reported individually on your tax return each year. That also includes reconciling any income payments that have been made and also any capital gains that have been realised. A reference to the Banca D’Italia EUR/GBP or USD exchange must be made for each transaction on the correct date.

GUIDE TO GROWING YOUR INCOME

By Robin Beven
This article is published on: 10th March 2019

10.03.19

A NEW ERA FOR INCOME STRATEGIES

Income investing has moved into a new dimension. In the past, income-generating strategies were largely restricted to cash and fixed income so that, to a large extent, investors had to accept the need to sacrifice the opportunity for capital growth in order to obtain a higher yield.

Times have changed and now, an income strategy does not necessarily mean you have to accept a hit to your portfolio’s value – especially if you are in a position to take on a bit more risk with your capital.

There are plenty of choices of all persuasions available to income-seeking investors and this guide sets out a number of the available options.

FLEXIBILITY AND VERSATILITY
For many investors, an income-generating strategy forms the core of their approach. Some want a portfolio that will provide a regular income stream for them to spend. For others, an income-based approach is a consequence of their attitude to risk, rather than an instigator of their strategy, and these investors might choose to reinvest their income to boost their portfolio’s total return over the long term.

Still others might have a core investment strategy that focuses on capital growth, complemented and diversified by an income-generating segment.

Every investor will have their own unique needs – for instance, they might choose to draw the income or to reinvest it for the long term. However, an income strategy can easily be adapted to meet each investor’s changing circumstances as time moves on.

A WORLD OF CHOICE
Whatever your investment risk profile, there are a wide range of asset classes from which to formulate a diversified income strategy – from government and corporate bonds, through UK and global equities to property.

Please click on the headings below to read more:

FIXED INCOME (BONDS)

Fixed income investments provide a stable and predictable level of income many investors find reassuring. They pay a set rate of interest that does not change, regardless of the prevailing economic environment, and also have a fixed repayment date. Bond prices are influenced by fluctuations in interest rates and the rate of inflation. In addition, corporate bond prices are also affected by individual company or industry newsflow.

Changes to UK base rates, which are set by the Bank of England’s Monetary Policy Committee, will affect the level of interest paid on cash in a UK bank deposit account, but base rates will not affect the level of income paid on a bond. In an environment of rising interest rates, bonds become less attractive, because investors can more easily achieve a competitive rate of interest from their cash deposits.

Similarly, low interest rates increase the appeal of bonds, as it becomes harder for savers to generate an attractive level of income from their cash deposits. Funds investing in such bonds are freely available, of course, care should be taken in choosing the best-suited one that fits-the-bill. See, “Collective Bond Funds, below.

CASH: NOT NECESSARILY KING

A cash deposit account might be the first port of call for many investors who want to generate an income. In an environment of low interest rates, however, it is difficult for savers to generate a meaningful return from their cash deposits. How times have changed! Furthermore, the impact of inflation will erode the purchasing power of their capital over the longer term.

GOVERNMENT BONDS

As the name suggests, government bonds are issued and underwritten by a government. UK government bonds – also known as ‘gilts’ – may be regarded as lower risk investments as, to date, the UK has never defaulted on its debts.

However, because they are a low-risk investment, the level of return available on gilts tends to be relatively low and they offer little protection against inflation. Index-linked bonds are the only exception – they pay a rate of income that is partly influenced by the rate of inflation. If the rate of inflation rises, the level of income they offer is adjusted upwards while, in an environment of falling inflation, the level of income paid will fall.

CORPORATE BONDS

Corporate bonds are issued by individual companies as a way of raising capital for their businesses. As with gilts, a corporate bond is redeemed at a predetermined date for a fixed sum and, during the life of the bond, the investor receives a fixed amount of interest.

Corporate bonds carry a higher level of risk than UK government bonds but that level will vary from one company to the next. High-quality companies are regarded as relatively low-risk, whereas lower-quality companies are believed to have a higher risk of defaulting on their obligations to bondholders.

The level of income paid to bondholders tends to reflect the level of risk involved. Investors who take on a riskier investment are compensated for that risk with a higher level of income. If a company should go bust, bondholders rank higher than shareholders as the company has to meet all its obligation to its creditors – including bondholders – before it considers its shareholders.

It is important to understand the risks of investing in corporate bonds. There can be a substantial difference in quality between one corporate bond and the next. Many of the large fund management houses undertake research to evaluate the potential risk of each bond, but they also often rely on research produced by credit-rating agencies such as Standard & Poor’s, Moody’s and Fitch. These companies assign a rating to companies that offer bonds. A high credit rating indicates the company is believed to have a low risk of default while a lower credit rating suggests the company presents a higher risk of default.

Bonds may be divided into two classes – ‘investment-grade’ for the highest credit ratings and ‘sub-investment-grade’ (also known as ‘high yield’ or sometimes ‘junk’) for the lower grades. A lower credit rating means a higher level of income paid, in order to compensate for the extra risk involved. Generally, investment-grade bonds are seen as a relatively lower-risk asset class, while higher-yielding sub-investment-grade bonds are regarded as higher risk.

COLLECTIVE BOND FUNDS

Collective funds that focus on government and/or corporate bonds will invest in a managed portfolio that can help you to reduce your risk by diversifying across a range of investments, rather than owning just one or two. Some funds will focus on a specific area of the market while ‘strategic’ bond funds are ‘go-anywhere’ portfolios, whose managers take a view on the bond market and focus on the areas they believe offer most value. If you are interested in adding an element of additional risk to your overall portfolio, therefore, strategic bond funds can offer an introduction to the sub-investment-grade arena or to overseas opportunities.

EQUITY INCOME

Over the long term, equities offer the potential for superior returns compared with many other major asset classes. An equity income strategy focuses on shares in companies that pay consistently high and rising dividends and typically aims to generate a consistent, above-average income stream, accompanied by the potential for capital growth over the long term.

Dividends are paid – usually in cash – by companies to investors and are taxable. By law, dividend payments must be paid out of the company’s profits or from profits generated in previous years. Companies are not obliged to pay a dividend, but a high dividend payout can provide an incentive for investors to take a stake in the company.

A company does not have to pay a dividend, and many, particularly small- and medium -sized ones, prefer to reinvest surplus cash into the business. The profits of a relatively young company, for example, can be unpredictable as it seeks to establish itself – and any profit it does make will probably be used either to repay start-up costs or as a reinvestment to help growth. Even as a company grows older, its management might decide to retain profits to finance debt, expansion or product development.

Longer-established companies tend to pay higher dividends – hence an equity income strategy tends to focus on large, high-quality companies, rather than smaller, younger firms. Nevertheless, a small but rising proportion of dividend payouts are coming from medium-sized and smaller companies.

Even large, well-established companies can fall on hard times, however, and the management might decide to shore up their firm’s finances by reducing its dividend payout or cancelling it completely. Furthermore, a diminished or cancelled dividend will undermine confidence in the company and its share price is likely to be negatively affected, cutting the value of your capital investment.

OVERSEAS OPPORTUNITES

While there is a longstanding culture of dividend payments among UK companies, a growing number of companies in overseas markets are returning value to their shareholders in the form of dividend payouts. The US has, for example, traditionally been home to a core of large companies that pay high dividends. More recently, Asian companies have sought to attract and meet the needs of international investors by focusing on dividend payouts, with countries such as Hong Kong and Taiwan establishing solid dividend regimes in this exiting region of the world.

A global equity income approach has become increasingly achievable, and many investment houses have launched funds to tap into this trend. Equity income investors now have much greater scope to diversify across a broadening range of countries by investing in collective funds.

EQUITY INCOME FUNDS

An equity income fund invests in the shares of companies that pay consistent and attractive dividends and then combines the dividend payouts in order to pay a regular income to investors. Diversification across a broad range of companies reduces the danger a single company’s decision to cut or cancel its dividend might drag down the overall yield of the portfolio.

PROPERTY

As an asset class, property can polarise opinion. It is often viewed as a relatively illiquid asset in that it can be time-consuming and expensive to trade. Some experts also believe investors are already overexposed to the property sector if they own their own home or a buy-to-let property, or if they are invested in commercial property through their business. However, property can play a part in an income portfolio for those investors who are not overexposed or who are attracted to its potential benefits.

RESIDENTIAL PROPERTY

‘Buy-to-let’ is a popular means by which investors gain exposure to residential property. Traditionally, buy-to-let has enabled investors to generate income through rents negotiated on short-term tenancy agreements. More recently, many buy-to-let investors have chosen to use their rental income to finance their own mortgage payments and to wait for the bigger profit in the form of a capital gain when the property is sold. Of course, as some investors have found to their cost, there is no guarantee a property’s market value will rise over the long term as we’ve seen along the Costas.

COMMERCIAL PROPERTY

In contrast, commercial property investment focuses principally on the generation of a high and consistent income that is generated through rents. Whereas residential leases typically operate on a series of short-term agreements, however, commercial leases tend to be much longer – perhaps 10 or 20 years.

Income from commercial property can derive from a variety of different sectors – ranging from City real estate, through shopping centres, to industrial parks and warehouses. Each sector commands a different level of rental yield and will react differently to the prevailing economic climate.

COLLECTIVE PROPERTY FUNDS

Direct investment in commercial property is very expensive but smaller private investors can access the asset class through diversified collective funds. Diversification helps to reduce the extent to which the loss of a tenant from one particular property might negatively affect the overall performance of the fund.

REAL ESTATE INVESTMENT TRUSTS

A real estate investment trust or ‘REIT’ is a company that manages a property portfolio on behalf of its shareholders. A REIT can contain residential and commercial property. Its profits are exempt from corporation tax, but it must pay out at least 90% of its taxable income to shareholders.

KEY FACTORS TO CONSIDER BEFORE YOU INVEST

Before deciding on the right blend of assets to generate an income stream, you should consider the following factors, which might affect the decisions you make:

INFLATION
The rate of inflation measures how the price of a basket of goods has changed over time. So, for example, if the cost of running your home increases by 5% in a year, you will need to earn 5% a year more to pay for the same level of comfort.

If you are aiming to maximise the income from your investments in order to pay for everyday expenses, you should consider the impact of inflation and – particularly over the longer term – whether you require a specific form of protection against inflation.

However, if you decide to invest in a fixed-rate investment – for example, a gilt or a corporate bond – be aware inflation will definitely have an impact. As an example, a fixed rate of 4% is attractive when the rate of inflation is 2%. However, if inflation rises to 5%, that return of 4% becomes less appealing.

RISK
Investment risk is a very personal thing as it can mean different things to different people. Some investors are not prepared to tolerate financial loss in any form while, at the other end of the spectrum, some investors most fear missing out on an opportunity. For still other investors, risk means not being able to meet future financial commitments.

Before formulating an investment strategy, every investor needs to be clear about their investment goals and their tolerance for risk. No investment is risk-free – the lowest-risk investments might guarantee the preservation of capital and/or regular income payments, but they cannot necessarily protect your money against the erosive effects of inflation.

Ultimately, in order to enjoy an absence or reduction of risk, a cautious investor has to accept the prospect of lower returns. Equally, an investor who is willing to pursue higher returns will also have to accept the possibility of increased potential for risk to their capital.

DIVERSIFICATION
Since every source of income carries some form of risk, it pays to diversify your portfolio across a range of different asset classes. Diversification helps to reduce the possibility that especially weak (or even strong) returns from a particular investment or asset class might have a disproportionate effect on the overall performance of the portfolio.

There is a world of choice out there for income investors. Whether you are a more cautious person or someone willing to take on higher levels of risk in the hope of achieving, ultimately, higher returns, please do get in touch so we can help you find a solution that meets your individual needs.

The Beckham Law 2019

By Chris Burke
This article is published on: 8th March 2019

08.03.19

*UPDATED 1st January 2020

Also originally known as ‘The Special Displaced Workers Regime’, The Beckham Law has been in place since it was passed by Spanish Tax decree in 2005. The Law has undergone two reforms/changes since its inception (2010 and 2015) and was originally open to all foreign workers living in Spain adhering to certain conditions.

Why was it brought in?
In essence, it was designed to attract brains, talent and wealth from all over the world, encouraging high earners to become Tax Resident in Spain (spending more than 183 days a year living there) and thus pay 24% income tax (IRPF), as opposed to rising up to 43% (or higher in certain circumstances). It was given its name by one of the first high profile sports people to use it, David Beckham, when he signed for Real Madrid.

Who can take advantage of it?
The main criteria to be eligible for the Beckham Rule are:

You must not have been a Spanish resident in the last 10 years when applying
You must be employed by a Spanish company, or a non Spanish company but with a permanent office here in Spain (You can be a director of a company but hold no more than 25% of the shares)
The rule can be used for the remaining Tax year you start in, and the following five
The application MUST be made within 6 months of starting your employment in Spain
You have to be resident in Spain and also have at least 85% of your work interests there

Reforms/Changes
The Law became infamous and a perfect fit for Spanish football clubs to buy some of the best well known footballers in the world, since the player’s tax would be much lower than in other countries. However, in 2010 the law was changed to address this popularity with high earning footballers, and a rule was brought in to limit the annual earnings applicable to €600,000, three years after David Beckham had left Spain.

Then, in 2015 they went one step further and completely excluded professional athletes from applying for this. However, those already on a contract were not affected. They also removed the limit of €600,000, but any income over that level is now taxed at 45%. Note that any capital gains would adhere to the current rules of 19%, 21% and 23% respectively (not applicable for the first €6,000).

Other Major Benefits
Critically, one of the major benefits of this rule is that under it, you do not pay taxes on any gains outside of Spain. So if you sell an asset with a taxable gain, such as a business or property in another country, you could make a considerable saving.

Moving on from this and to a more regular scenario, you would not pay tax on any property rental income, bank account interest, investments or savings in another country.

You would also not be required to submit certain other annual reports such as the ‘Modelo 720 Overseas Assets declaration’ during this period of time.

Why you might not want to apply for the Beckham Rule
There is no minimum annual earnings to apply, however you do not receive any personal income allowances, thus a general rule of thumb is that earning over €60,000 might make it worthwhile for you to apply.

The other reason you might not want to apply is that if the country you are from has a less favourable tax rate, then paying capital gains tax in Spain could be better.

If you have any questions regarding this, or would like to discuss applying for it or your personal situation, please contact us through the form below:
Source GM Tax Consultancy, Barcelona

BEWARE: FADS AND FASHIONS

By Robin Beven
This article is published on: 5th March 2019

The best way to start diversifying your portfolio and to blend together the myriad options in a way that best suits your personal circumstances is to speak to a professional adviser. Not only are they able to offer vast experience of the investment market, but they can also advise on the most suitable structures and products for your investments to match your individual needs.

Nowadays there are many more esoteric investment choices than ever before to capture the attention of potential investors – but they can create unpalatable risks if bought alone.

A GUIDE TO DIVERSIFICATION
This guide is designed to help start you on the road to building an investment portfolio. With a little groundwork, a balanced, well-diversified portfolio ought to be able to weather short-term storms and fluctuations. It should smooth out the various peaks and troughs and help you meet your financial objectives over the longer term, without causing too many shocks along the way.

Diversification is a much-used term in the financial world and one that can be employed at many levels. Most fund managers claim their aim is to diversify risk by buying a range of different investments, even when the area they specialise in is quite small. A smaller-companies fund manager, for example, with perhaps only 500 potential investments from which to choose, would suggest their hand-picked selection of 70 holdings offers diversification.

At the same time, it is my job as a financial adviser to help you diversify your portfolio by guiding you through the range of different assets, allocating your portfolio across the different options and, ultimately, helping you meet your objectives while staying within a level of risk that is acceptable to you.

When looking to invest, it is important to acknowledge that, no matter what the type of asset, there will be risks involved. These risks are made up of two principal aspects: market risk (the impact of economic factors, say, or government changes) and investment risk (the uncertainty and volatility of returns). Diversification can help to reduce both of these.

Market risk cannot be eliminated but it can be reduced by spreading a portfolio over a range of different asset ‘classes’ that should behave differently in different market environments. By broadening a portfolio’s exposure across a range of asset classes, you raise your chances that, at any one time, some assets will be rising while others may be falling – and the two movements should, to an extent, offset each other.

The same holds true for investment risk. While, for example, all shares are similarly exposed to investor sentiment towards the stockmarket on which they are listed, the investment-specific risk will vary from company to company. This means the share prices of each company will not move in the same direction, by the same amount and at the same time. Each share plots its own path, resulting in a smoothing of returns.

Investing across different asset classes sounds like a good move but you should also be aware of the other side of the coin. By diversifying your portfolio, you will also lower the level of return you would have received if you were fortunate enough to be invested only in the best-performing asset class. The skill comes in balancing your asset allocation so the relative payoff matches your own attitude to risk and reward.

This might lead you to ask how diversified your portfolio should be and the answer will depend greatly on your attitude to risk. Given the lessons of history, we can with some confidence assume nobody can accurately predict the performance of markets to the degree they will know exactly where to be invested at any point in time.

If this were possible, we would of course all be millionaires. Therefore, in effect, we use diversification to hedge our bets. The extent to which we need to diversify depends on how much volatility we feel able deal with – put simply, how much we tend to worry or panic when the value of our portfolio starts to fall.

SPREAD YOUR EGGS ACROSS MANY BASKETS
Any portfolio can be diversified. Do remember, however, when you diversify your portfolio, risk is not the only thing you will reduce. You will also lower the level of return you would have received if you had been fully invested in just the best asset class. The skill comes in balancing your asset allocation so the relative payoff matches your individual attitude to risk and reward.

So that is the theory. In practice, once you know what risk you can deal with, the effectiveness of your diversification strategy will depend on the degree of ‘correlation’ between various elements in a portfolio – that is to say, the extent to which different investments move in relation to each other – and combining them appropriately so the overall movement is in line with your expectations.

Government bonds, for example, are perceived as being a safer haven when markets are rough and equities are volatile. Property, on the other hand, has tended to protect against inflation over the long term, while also not moving in line with equities. Then there is cash, which depends entirely on interest rates for the level of income generated. To a greater or lesser extent, each asset class responds differently to external influences such as interest rates and inflation.

DIVERSIFY WITHIN ASSET CLASSES
Within each asset class, there are further opportunities for diversification. Within equities, for example, the returns of some companies versus others are not related in any way. Generally speaking, there is little correlation between the performance of, say, biotechnology stocks and utilities – such as water and electricity companies – as the market forces driving these two sectors can be completely different. However, as both types of company are listed on the stockmarket, they are both exposed to factors that affect the overall equity market, such as the impact of a government’s monetary policy, or general investor sentiment.

DIVERSIFY BY GEOGRAPHY
Geography also allows some of the impact of stockmarket movements to be dissipated, as your portfolio is not only exposed to the economics and government decisions of one country. Different markets are affected by different economic and financial factors and are therefore not perfectly correlated with one another. If the Far East performs badly, for example, it does not necessarily mean European stockmarkets will have fallen. And within Europe, there is the possibility of further geographical diversification, as the performance of each underlying European stockmarket will not necessarily be aligned with that of its peers.

Even so, all equities are capable of being affected by global influences and particularly when investor sentiment is involved – just consider the boom in telecom, media and technology stocks in the late 1990s and their subsequent collapse in 2000. The effects were global – although markets such as the US, which had greater exposure to these sectors, were more heavily affected, almost all countries suffered from the somewhat depressed equity environment during the bear market that prevailed through to early 2003.

DIVERSIFICATION WITHIN BONDS AND PROPERTY
The same sort of thinking can go for fixed interest investments and property. Government bonds, for example – and particularly those of more highly-rated countries such as the US or the UK – do not tend to behave in the same fashion as the so-called ‘sub-investment-grade’ corporate bonds that are issued by less financially secure companies. Within property, meanwhile, even commercial and residential property are not always correlated in the returns they offer but both can be illiquid.

MAKING YOUR DECISIONS
Most investors should in general start by making a detailed assessment of their attitude to risk. If you could not live with the fluctuations of the stockmarket and would be very worried by the sight of prices going down, then you are a lower-risk investor and your portfolio should be biased towards correspondingly lower-risk assets, such as cash and perhaps some fixed interest.

If on the other hand you are comfortable with some volatility and are investing for the longer term – at least five years, say – you might decide to include a small element of equity exposure. Then again, if you are at the opposite end of the scale – a high-risk investor, who is perfectly happy with the ups and downs of markets – then you would most likely have the majority of your portfolio in equities.

USING COLLECTIVE INVESTMENT FUNDS
Collective investment funds are inherently diversified to some degree as they hold a number of different investments, generally in a particular market, industry sector or asset class. You could, to pick just a handful of examples, choose an emerging market equity, global technology, government fixed-interest, UK corporate bond or North American smaller companies fund.

As collective funds tend to hold 50 or more stocks, they automatically offer more diversity than just one or two stocks from these markets. By selecting funds, you hand over the job of stock diversification to expert fund managers, leaving you and your adviser to concentrate on the other main decision elements – asset class and geography.

If you are making your first steps into investment, or have only a small amount to invest, you can hand over even more of the decision process by targeting the broader portfolios of global equity or managed funds. Within these, the fund manager will diversify not only by type of company and level of exposure, but also by geography – and these portfolios usually involve some element of asset allocation as well.

Please note: The value of any equity, bond or property investment can go down as well as up and you may not get back the amount originally invested. Property is a specialist asset class and expert advice should be sought before making a decision to invest.

“the effectiveness of your strategy will depend on the extent to which different investments move in relation to each other.”

BRINGING IT ALL TOGETHER
When considering a portfolio’s proportions, many investors pursue simple strategies such as, for example, a ‘core & satellite’ approach. Typically, the ‘core’ portion would make up the larger part of your portfolio since it should be relatively less volatile and provide a solid base on which to build. The satellite investments would then add ‘spice’ to your portfolio by taking smaller positions in higher-risk regions, asset classes or industry sectors.

A lower or medium-risk investor might concentrate their core portfolio in cash, bond and property funds, or perhaps in an equity fund linked to larger, more highly regulated stockmarkets such as the US or the UK.

However, “multi-asset” funds are becoming the first choice for investors, be they lower, medium or higher risk investors, because the fund manager runs the fund for you without the distraction market noise.

Savings Bank Account Comparison in Spain

By Chris Burke
This article is published on: 5th March 2019

05.03.19

The most efficient way of losing money is to keep it in a current account. Many years ago offset mortgages were introduced, which were a great way of saving interest being paid on your mortgage. Effectively, any interest on savings you had in an account that was linked to your mortgage account, reduced the mortgage payments by that amount, more or less (most simplified explanation). So, if you had a mortgage of €250,000 and savings on a linked account of €50,000, each month it’s almost as if the mortgage was only €200,000 and you would only pay interest on that amount.

To understand why current accounts are the main way to lose money, let’s suppose,for example, you have €50,000 sitting in a current account for a rainy day. Inflation has been running at around 3% lately (that’s the increase in the regular items we buy). Therefore, just for your money to KEEP UP with that, it needs to grow by €1,500 per year. Over a period of 4 years that’s €6,000.

Therefore, it is very important that you have this money working for you, especially after the hard work it took you to earn it, both to keep up with inflation so it keeps its purchasing power and to grow to build your wealth.

The very least you should do is have the money in a savings account, or similar. So what are the current bank savings rates in Spain? Well, they will guarantee to lose you money every year, but they are better than having money sitting in your current account:

1.5% ING – interest rate per annum, deposit term 1 month
0.5% WeZink (Banco Popular) – interest rate per annum, paid given monthly
0.3% BNP Paribas – interest paid quarterly

Another way of keeping your money safe and perhaps earning a larger return if you are lucky, in sterling, is having UK Government backed Premium Bonds (annual prize fund interest rate of 1.4%). Did you know that you don’t need to be British OR live in the UK to have these?

If you would like to explore other options, then feel free to get in touch and we can discuss what will work for you AND your money, giving you flexibility along the way. Knowledge and advice will help you plan your finances.

Does Qrops or transferring your UK Pension overseas work?

By Chris Burke
This article is published on: 4th March 2019

Those people who have a UK private or company pension and are resident outside of the UK, more often than not have the choice to transfer their pension to a QROPS (Qualifying Recognised Overseas Pension Scheme), that is the process of moving your pension outside of the UK. However, what are the important points to note with this, how does it differ from having your pension in the UK and most importantly, does it actually work effectively?

For just over 10 years you have been able to move your pension outside of the UK. Over that time, I have seen mixed success at doing this, with the companies providing this service changing, fees in essence reducing and the options of managing this growing. What has also changed is the benefit of doing this, alongside the advice you receive. Unfortunately, I have come across many cases where this has not worked well, and the reasons are nearly all the same: bad advice was given by the financial adviser who put their clients is funds/pensions that were overpriced and expensive.

To summarise, the current key potential benefits of Qrops would be the first step to seeing if this could be the right choice for you:

Pension potentially outside of future UK law changes
Brexit and the impact it would have on being a British person living in Spain
Potentially side stepping an expected 25% tax charge for moving pensions after Brexit
Currency fluctuation (ability to change your pension to euros when convenient)
Portability – the ability to move your pension in the future if needed
Potentially reduced tax liability
Inheritance – potential reduction of tax to beneficiaries or potentially lower tax on death (depending on your country of residence)
Peace of mind
Closer personal management of your pension
Tax efficient (working alongside a local tax adviser) potentially

And what are the key points that might mean Qrops is not right for you:

Returning to live permanently in the UK in the next five years (or maybe longer)
Pensions total value under £60,000 (the charges would be, in my opinion, punitive)
A company scheme where the benefits outweigh transferring
In the near future, wanting to take most of the money from your pension
Not having your pension in a Qrops managed well and expensively

From the perspective of access to your money, there is currently not much difference to having a personal pension in the UK or a Qrops. With the rule changes a few years back, you can, in essence, get access to your UK pension from age 55 in the UK and as much as you like, just as in Qrops.

Where Qrops really can help is moving an asset away from the UK and any potential rule changes, which have been regular over the recent years (mainly worse for the person owning a private pension). Couple that with Brexit and a potential 25% tax charge, then having your pension outside the UK will give you peace of mind in knowing exactly what the pensions rules would be for you moving forward. Also, given the fact that if you did ever move back to the UK (statistics show that for a British couple, there is a 75% chance one of you will go back at some point), you can transfer it back with you (there could also be tax benefits of doing this) and with some pension companies no charge.

However, perhaps the most important question is, does it work? The simple answer is yes it can, BUT it has to be set up the right way, with the right company and if you are given the right advice for what your pension is invested in. Basically, it needs to be done for your benefit, not so that the adviser can earn as much commission as possible from your pension.

Whenever I take a new client on, I always ask them if they would like to speak to an existing client to see what their experiences were, which is what I would do when performing my own due diligence.

If you would like to talk through any pensions you have and what your options are, feel free to get in touch and know that you will be given good advice, whether you become a client or not.

G transferred her pension 4 years ago; it has grown significantly over that time. “Chris has always been consultative and there when we need him.”

J transferred his pension 6 years ago. “It has grown well over that time. Whenever I have needed money from my pension Chris has arranged this for me. I would recommend him for sure.”

C transferred her pension 5 years ago. “It has grown steadily in that time (I am a cautious investor) and since then my husband and I have asked Chris to help us with our other investments.”

Creating THE Folder – your financial snapshot

By Robin Beven
This article is published on: 27th February 2019

27.02.19

It was ten years ago that my wife, son and I (and our golden retriever) had to evacuate our house along with 15,000 other residents of La Nucia, Alicante, due to fire risk.

With forty mile-an-hour winds, the fire was fast approaching; we grabbed two suitcases of necessities, computer and personal documents case – that was about all we could fit into the car.

Fortunately, we returned 12 hours later and our house was still intact!

This reminded me to update my personal records because had they been lost, or worse still had I demised in the fire, my inheritors, loved ones, would have had undue strain at the most stressful time trying to deal with things. So, within a week I had updated everything in my fire-proof case and also recorded things digitally and let my executors know where all could be found.

Are you confident that all of the papers and documents you hold are not only all in order, but in equal measure, somewhere where they can be found and easily understood in the event of your demise? I know some individuals and couples who don’t know where all of the important documents relevant to their lives are.

We all spend time every year making sure the ITV for the car is sorted, house insurance and car insurance policies are up to date, tax returns are filed etc. How about putting some time aside to create a folder (let’s call it “THE Folder”) or fire-proof case where documents can be found?

So what is THE Folder?
It is a single file (physical or digital) where all important personal and financial information is kept? This allows access to these documents in the event that you are no longer around. If it is only one family member that takes the lead on the finances, it is imperative that other family members or executors know where to locate things.

So what should be in THE Folder?
Financial documents such as:
• Birth, marriage and divorce certificates, as applicable!
• Bank account details, including online login details
• E-mail and social media account details and logins
• Life assurance policies
• Funeral plan policy
• Pension documentation and statements
• Investment documentation and statements
• Wills (Spanish, UK, etc)
• House ownership deeds

THE Folder can be very simple, and I always suggest contact details for each of the relevant assets should be marked up as well. Also, make sure that when THE Folder is complete, you sit down together and explain all of the information it contains.

Is it worth the effort?
At a time of loss it can be stressful enough, without having to try to piece together the deceased’s financial affairs. This can be a really difficult time for family members, even more so if your support network, typically children, is back home in the UK.

However, preparing THE Folder is much more than just avoiding stress; if you leave behind an administrative nightmare, you could delay access to inheritors’ funds and potentially cost a small fortune in legal fees.

Which is best physical or digital?
This comes down to personal preference but I’d suggest both if possible. A digital file listing all your assets can be accessed by inheritors but, of course, there are original documents like wills, birth & marriage certificates to consider, hence, a fire-proof case.

An electronic file can be stored on your main computer, in the cloud or on an external hard drive. Make sure everyone knows how to access the computer, cloud or hard drive though!

A physical folder keeps all of the important information together, but make sure it is large enough to keep everything together. I’ve known one client 20 years, now elderly, and throughout have been unable to persuade her to use anything other than plastic bags! I even bought her two shiny new folders and volunteered to help her organise things. At least, when she declared her Modelo 720 (Overseas Assets Declaration) in 2013 this was half the job done!

How often should THE Folder be reviewed?
Firstly, note when it was created and last reviewed so that anyone using it knows. Then reviewing the THE Folder on an annual basis should be sufficient or, of course, whenever a significant change occurs which you consider materially important. Again, be sure to tell someone about it! There is little point going to the effort of creating such a folder if no one knows of its existence or where to find it.

Incidentally, along with my sister, I’m power of attorney (POA) holder to our mother that includes financial and health & welfare. It actually took months to record everything because of the added burden of having to write to all – as in the financial documents list above – with certified copy POA’s.

Please let me know if you would like a digital version of THE Folder that is printable as well.

Putting financial concerns in perspective

By John Hayward
This article is published on: 25th February 2019

25.02.19

Perspective ( /pəˈspɛktɪv/)
– To compare something to other things so that it can be accurately and fairly judged

We know that there is much going on with Brexit negotiations; we know that Trump is having issues with the Chinese and the Mexicans; and there are plenty of other things which we don´t yet know about, that could have an effect on our lives. When investing in stockmarkets, either directly or indirectly, there tends to be a focus on performance, whilst ignoring all other financial factors such as interest rates and inflation. It is regularly reported that markets are up, down or flat. It is rarely pointed out that interest rates have been low for a long time and that inflation has been consistently eating into the value of savings. There is also the fact that shares can receive dividends, which is pretty much ignored in reporting.

Another point to consider for those receiving pensions (or other income) from the UK in pounds, but spending in euros, is the GBP/EUR exchange rate. In this case, fluctuations in the exchange rate can seriously affect your disposable income.

In order to clarify my point, the charts below illustrate the behaviour of these factors over the last 15 years. This period includes arguably the worst period for all aspects over the last 15 years: 2008 and 2009.

I have accessed the information that makes up the basis of these charts from a variety of sources(*).

Interest Rates and Inflation

GBP/EUR Exchange Rate

FTSE100 Index Level

Comparison: inflation rate, interest rate and annual percentage changes in the GBP/EUR exchange rate and the FTSE 100

So what do we learn from this exercise? Putting them all together, apart from it being a pretty busy chart, we can see that, in the financial world, things go up and down. Nothing amazingly newsworthy there, but it is appreciating the size and frequency of these movements, in either direction, which is key. Then it is a case of seeing how these movements compare with the other factors. For a British immigrant in Europe who is paid in sterling, there has been a 20% fall in the spending power of his pounds since 2004. Interest rates have been below 1% for 10 years. Inflation, on the other hand, has averaged almost 3% since 2004. Put all of these together and for the cautious investor, finding the right home for savings has been more than tricky.

As much as people may be fearful of investing in stocks and shares, the fact is that over time, especially in the last 15 years, people have seen good returns when a considered and careful managed approach is taken. For those who are nervous about putting their money directly into stocks and shares, but want to, or even need to, have their money grow at least at the rate of inflation, we feel that we have the solution. As you will see from the chart below featuring a fund available to both UK and Spanish residents, keeping on top of inflation has been possible in almost every year in the last 14 and people have seen their funds grow consistently but with only a fraction of the risk of stockmarkets.

A Solution

The Spectrum IFA Group has been operating in Europe for many years; I have been with them since 2004 helping my clients through the volatility described above. With so much uncertainty, why not see if what we have available to us will be of interest to you?

Let us help you to put everything in perspective.

* Sources
Interest rates – Mortgage Strategy
Exchange rates – XE Money Transfer
FTSE100 – Yahoo Finance
Inflation – Iamkate
PruFund – Prudential

No warranty is made as to the accuracy of any information on third party websites and no liability is accepted for any errors and omissions or for any damage or injury to persons or property arising out of the use or operation of any materials, instructions, methods or ideas contained on such websites.