Quite recently I was watching the Disney movie Jungle Book with my son. I am sure that you remember the film. You may also remember the snake in the film, named Kaa, who tries on a couple of attempts to eat the ‘man cub – Mowgli’. If you happen to watch the film again you will see that he sings a song to hypnotise Mowgli, that song is called ‘ Trust in Me’.
Trust in me!
By Gareth Horsfall
This article is published on: 13th March 2018
13.03.18
Like alot of things in life, there are things that trigger the grey matter to start working at a rapid rate and the lyrics to ‘Trust in me’ seemed to resonate with my grey matter on that day. It was all the talk of ‘TRUST’.
You may have been aware of all the talk of offshore trusts in the Panama Papers. Well, you will be grateful that I am not going to go into that in any detail because for most of my clients it has very little to do with them. However, what might affect you is if you hold a trust in the form of a pension, specifically a UK private pension, an IRA, 401K or other US based retirement fund and/or a trust which has been set up in another country which might have the objective of protecting your estate from inheritance tax and or using a trust to pass assets on to family members in the event of your death.
What is a trust?
A trust is basically an agreement between three parties:
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- The initiator of the trust (the settlor)
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- The trustee: the person responsible for looking after the assets on behalf of the settlor
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- The beneficiary: the people named in the trust agreement who are entitled to receive the property/assets of the trust
The trustee holds the assets, legally, on behalf of the ‘settlor’, who ensures that they are distributed in accordance with the settlor’s instructions. This can save time, reduce paperwork and in some cases avoid inheritance taxes. When something sounds this good, why haven’t we all got one? Because in Italy things are never that simple.
Trusts in Italy
Before I start with the analysis of how trusts are treated for taxation purposes in Italy, I would like to caveat this by writing that if you have a trust and are unsure of its tax treatment then you may wish to seek the advice of a trust lawyer who specialises in this field. The information I have learnt here covers a range of trust tax law, in Italy, which is specific to about 99.9% of clients, but it may not be appropriate for everyone. It is a very complicated area and may need specialist advice.
The issue of trusts in Italy was best summed up by an Italian lawyer who I was asking about this topic some years ago and I asked what is the law surrounding trusts in Italy His reply has stuck in my mind….”there is no real law of trusts in Italy because no one trusts anyone”. If you think about it, he is right. You are effectively giving your assets to another party, on the basis of trust, to distribute them on your behalf. That works well in the UK and the US where trust law is written into the framework of society and universally accepted. However, in Italy, where corruption, fraud and a slow legal system exist there would be little recompense if the ‘trusted’ individual/company ran off with your money.
Different types of trusts
There are many different types of trusts which can be used for various planning purposes but they are almost all unwritten by 2 basic concepts. This is that they are either revocable or irrevocable.
An irrevocable trust is simply a trust with terms and provisions that cannot be changed by the person who set it up (the settlor). This is distinguishable from a revocable trust, which is commonly used in estate planning and allows the ‘settlor’ to change the terms of the trust and/or take the property/assets back at any time in the form of income payments or lump sum withdrawals.
This concept of irrevocable and revocable trusts are the defining factors in the tax treatment of trusts in Italy and why, if you inherit a trust or you set one up before moving to Italy, then it is worthwhile checking to determine which type it is.
In general, the irrevocable trust (the one which CANNOT be modified by the settlor), in Italy, is respected for income tax purposes. The trust is deemed to be the owner of the asset (not the person) and there is a legally defined separation between the person who set it up ( the settlor) and the beneficaries of the monies from it. i.e the person who set it up can’t take money and income out at will and change the terms of the trust as and when they please. This is important in the tax treatment which I will explain below.
Conversely, the revocable trust is ignored for tax purposes and the ‘settlor’ is treated as the owner of the assets and any income from the trust, as if they still held them in their own name. The person who holds the trust is also responsible for disclosing the assets in it to the Agenzia delle Entrate each year, as if they owned them directly. Clearly this is not very tax effective in Italy.
Tax Treatment
The irrevocable trust is certainly the most tax efficient of the 2 types of trust and the easiest one to declare in Italy. The tax treatment is very simple in reality because the trust itself is not taxed, although it must be declared on the Quadro RW each year under the ‘monitoraggio’ section. (and your % share in the trust) Any income distributed from the trust is treated as the income of the individual in the tax year in which it is distributed and taxed at your highest level of income tax. (Capital Gains and non earned income tax of 26% do not apply to this type of financial structure)
The revocable trust, by comparison, is another beast altogether. This type of trust is generally looked through and the assets in it are deemed to be in the ownership of the individual directly.(the settlor). In other words any assumed tax protection by placing assets in trusts is removed because the trust itself can be altered. The Italian authorities have a number of provisions, which if written into the trust deed, could destroy the existence of the trust. These include:
- The ‘settlors’ power to terminate the trust, causing a payment back to the settlor or the beneficiaries
- The power of the settlor to name themselves as a beneficiary
- Provisions which subject the trustee to consent or approval of the settlor i.e effective control of the trust by the person who set it up
- The settlors powers’ to terminate the trust early
- The provision granting a beneficary a right to a payment from the trust
- The provision requiring the trustee to take instructions from the settlor for the purpose of administering the trust assets
- The option to change beneficiaries
- The settlors powers to distribute or lend income or assets from the trust to persons designated by the settlor
- Any other provision, determined by the settlor or benficiary, which appears to limit the administration and distribution powers of the trustee
Assuming one of these provisions is written into the trust deed, then the protection of the trust invalidates the tax protection afforded by the trust and the assets will be subject to same rules as those assets which are held outside a trust.
Direct tax on assets in Italy is 26% capital gains tax and 26% on any income distributions/dividends or interest payments derived form assets, in the year in which they were realised. In addition a tax of 0.2% on the assets themselves as a wealth tax. The tax protection afforded effectively flies out of the window.
What are the alternatives?
For ultra wealthy individuals and companies there are always work rounds to these issues and with enough money you can pretty much construct anything these days to avoid taxes. However, this does not necessarily help the average person who would also like some tax protection for hard earned income and assets that you may wish to pass onto future generations.
The Investment Bond (Polizza Assicurativa Capitalizzazione) is a possible solution. It meets a number of similar criteria such as:
- No Italian income and capital gains tax on the fund itself
- Distributions are taxed at 26% on the proportional gain of the withdrawal (in some respects this is better than the irrevocable trust in which distributions are taxed at your highest rate of income tax)
- The option to name beneficiaries in the event of your death
- Continuation options in the event of death
- The possibility of regular withdrawals and/or lump sum withdrawals and
- A global range of investment options
- Lastly, the investment Bond itself is fully reported to the Italian authorities and any taxes paid at source so you don’t have the worry of having to submit the information each year yourself or making mistakes
Summary
The lesson to be learned from this is, that before you do anything, if you have a trust, are a beneficiary of a trust, have set up a trust yourself or had one set up for you, then the first thing you need to do is get a copy of the trust deed and look at your relationship / level of involvement in the trust to determine exactly how it fits into your tax affairs as a resident in Italy. If in doubt, consult a professional.
I am going to elaborate on this subject of trusts in my next Ezine, specifically in relation to UK private pensions and US IRA’s and retirement funds. These vehicles themselves are set up as trusts and therefore have a specific tax treatment in Italy.
French Tax Changes for 2018
By Sue Regan
This article is published on: 9th March 2018
09.03.18
In my last article from early November 2017 I set out the proposed French tax changes for 2018. After some fine-tuning of the proposals the actual changes came into effect from 1 January this year, the most noticeable of which were the introduction of the Flat tax on revenue from capital, and the replacement of the Wealth tax (Impôt de Solidarité sur la Fortune, or ISF) previously levied on total assets, with the new Impôt sur la Fortune Immobilier (IFI). You can read a summary of these and other changes by accessing the following link on our website: French Tax Changes
So, at the time of writing, with “the Beast from the East” sweeping its way across most of Europe last week, you would be forgiven for thinking we are still in the depths of winter rather than into the first month of spring. Spring is my favourite time of year. With any luck things will settle down to normality very soon and we will be enjoying the longer, warmer days with the spring flowers in abundance and the sense of anticipation that summer is just around the corner.
BUT… (of course, there has to be a BUT) along with spring come the, oh so loved, blue and pink Tax Return forms that will be arriving in our post boxes very soon. Over the last couple of years my Spectrum colleagues and I have been writing about the existence of the Common Reporting Standards (CRS) that are now well and truly in operation, whereby financial institutions of the EU and many non-EU countries around the world are exchanging financial information in order to combat tax evasion. If you have been receiving letters from your bank or investment providers asking for your country of residence and Tax Identification Number (TIN) – this is why.
Thus, if you are French resident, it is very important that you declare the existence of all bank accounts, assurance vie policies and any other income generating investments held outside of France, even if you do not draw on the income. Failure to do so can result in severe penalties – €1,500 for each undisclosed bank account or policy (which increases to €10,000 if this is held in an uncooperative State that has not concluded an agreement with France to provide administrative assistance to exchange tax information). Furthermore, if the total value of the bank accounts and policies not declared is at least €50,000, then the fine for each is increased to 5% of the value of the account or policy if greater than €1,500 (€10,000 if in an uncooperative State).
You can make the declaration by listing the information on plain paper and attaching it to your Tax Return. Even bank accounts with a nil balance should be reported. In addition, if you have closed any foreign bank accounts during 2017, the accounts should be reported and the date of closure mentioned.
Unless you will be submitting a Tax Return for the first time (in which case you must complete a paper return) you are required to submit on-line in 2018 if your net taxable income (revenu fiscal de référence) in 2016 was greater than €15,000. However, you are granted an exemption from this requirement if you do not have an internet connection at your home. There are plans for paper based declarations to be completely obsolete by next year.
If you need to complete the pink form for anything other than pension, then perhaps you may be paying unnecessary taxes and therefore might benefit from a review of your financial situation. So don’t wait until May to gather all the information together, make a start now and get organised so that any action needed can be identified and taken care of before the “silly summer season” is upon us – it’ll be here before you know it!
Wills for Expats in France
By Katriona Murray-Platon
This article is published on: 1st March 2018
If you have been reading the news recently you will know that a legal battle is about to start between the wife of the much beloved deceased French Rock Star Johnny Hallyday and his two children from his previous relationships, Laura Smet and David Hallyday. Johnny Hallyday’s children will reportedly contest the decision in his will to leave all his property and artistic rights to his widow Laeticia and their two adopted daughters. Whilst many of us do not have the same level of wealth as Johnny Hallyday, this case does highlight the issues around proper legal wills and more especially in situations where one has assets in more than one country.
Why is it important to have a will?
No one is legally required to have a will; however, most people want to be able to leave instructions on how their assets should be handled in the event of their death. A will is a legal document allowing you to communicate what you would like to happen to your personal possessions after you die. When you purchase a high value, physical asset, such as a house, it becomes even more important to be able to decide who would receive such assets should something happen to you.
If you are resident in France and do not have a valid will in place, then your property would be shared out according to the French rules of intestacy, granting automatic inheritance rights to any children you may have had, your surviving spouse, or to other relatives in the absence of a surviving spouse or child. If you do not have children and are not married or in a civil partnership, your assets would go to your nearest relative.
Do I need to re-do my English will now that I have bought a property in France?
If you have bought a property in France and not updated your UK will it would be advisable to speak to a UK cross border specialist who would be able to advise on whether your existing English will is suitable, or whether it may need replacing or updating in any way.
An English will – if properly drafted and executed in accordance with the UK Wills act of 1837 – would be recognised in France. France has signed the 1961 Hague Convention concerning wills and therefore recognises wills that are valid under UK law. Your French assets could therefore be dealt with together with your English assets under a carefully drafted English will, however this is not recommended in every case and you should seek proper legal advice to ensure that this would be the best solution in your personal circumstances.
When drafting a new will, it is important to inform your lawyer or notaire of the existence of any previous wills in any other country, to avoid revoking a will you have already made in the other country. They would be able to assist you in drafting a new will which takes into consideration any other wills specifically dealing with property in another country.
Do I need to do a French will?
This will depend on your individual circumstances and you should always seek professional advice from a properly qualified lawyer experienced in dealing with cross-border matters. “The inheritance and tax laws of the two countries are very different and each case needs to be examined individually before making a decision” says Matthew Cameron, Partner at Ashtons Legal, specialist in French law and cross-border legal issues. For example, whilst trusts are used very frequently in UK wills, they can cause all kinds of additional administrative and filing obligations in French law. A UK testator usually appoints executors to administer his/her estate after death and distribute the assets to the beneficiaries. In French law the notary is responsible for distributing the estate and assets can be held “jointly” or in “indivision” until the estate is wound up.
You should also note that under French law you cannot leave your estate to whomever you wish. The children have priority over the estate and the surviving spouse is only entitled to a fraction of the whole amount. So whilst you can, in a French will, give certain assets to friends and relatives, you cannot override French inheritance laws in the terms of your will.
I have heard that I can have English law apply to my French will is this true?
The European Succession Regulation 650/2012, also known as ‘Brussels IV’, which came into force on 17 August 2015, allows one law to apply to the whole of the deceased’s estate regardless of the location of the asset. International private law states that French law applies to immovable real estate assets situated in France and English law applies to real estate assets situated in England. Under this regulation the laws of the country in which a person is habitually resident at their death will apply to them unless they have made a declaration during their lifetime. This means that if you wish to elect for the law of your nationality to apply to the disposal of your estate, and for it to be recognised in France, it must be written into your will. However, the inverse cannot apply as the UK opted out of this EU regulation, so only English law can apply to an English estate. As Caroline Jeanson, notaire in Bordeaux who worked for over 12 years with English speaking clients in the Duras area, said “I have never yet, since the Regulation was enacted, advised a British national resident in France to opt for English law in their French will”. Whilst in theory you can choose which law will govern how you leave your assets, this will not avoid French inheritance tax. Under French tax law, if you leave your assets to someone who is not a direct blood relative, there can be substantial tax consequences. That beautiful chateau you own would probably have to be sold to settle the tax liability.
Do I need to do a will with a French notaire?
Strictly speaking you do not need to go to a French notary to write your will. You can do a hand written will called a “Testament Olographe” (holographic will) which is perfectly valid under French law. There is no legal requirement for it to be in the French language, it does not need to be witnessed nor does it have to be registered anywhere, however it is advisable to have it registered with the Central Wills Registry (Fichier Central des Dispositions de Dernières Volontés) which would enable any notary to access it. In any case it is best to seek the advice of a French notary before drafting a will. The first consultation is free and once the notary fully understands your specific situation they would be able to advise you on how best to draft the terms of your will.
Anyone who has ever lost someone will tell you that not only is it difficult to manage emotionally, but just at this very difficult time, there are a whole range of administrative matters that have to be dealt with. If the person did not make provisions in their will it is left to their friends or loved ones to deal with their assets, causing further upset and difficulty. To avoid this and to fully understand your personal situation it is best to seek professional advice from an independent financial adviser specialised in French tax matters, a UK solicitor specialised in French law or a French notary with several years’ experience advising English speaking clients.
For any questions or to make an appointment, please do not hesitate to contact us.
Emotional Challenge
By Chris Webb
This article is published on: 28th February 2018
28.02.18
THE RATIONAL, IRRATIONAL AND EMOTIONAL STRUGGLE
In such challenging times, emotions may play a significant role in investment decisions. Investors feel the variances in their portfolios’ performance much more than the average return over the life of their investments. Rationally, investors know that markets cannot keep going up indefinitely. Irrationally, we are surprised when markets decline.
IN VOLATILE MARKETS STAYING INVESTED MAY BE CHALLENGING
It is a challenge to look beyond the short-term variances and focus on the long-term averages. The greatest challenge may be in deciding to stay invested during a volatile market and a time of low consumer confidence. History has shown us that it is important to stay invested in good and bad market environments. During periods of high consumer confidence stock prices peak and during periods of low consumer confidence stock prices can come under pressure. Historically, returns trended in the opposite direction of past consumer confidence data. When confidence is low it has been the time to buy or hold.
Of course, no one can predict the bottom or guarantee future returns. But as history has shown, the best decision may be to stay invested even during volatile markets.
DECLINES MAY PRESENT OPPORTUNITIES
An emotional roller coaster ride is especially nerve-racking during a decline. However, the best opportunity to make money may be when stock prices are low. Buying low and selling high has always been one of the basic rules of investing and building wealth. Yet during these emotional and challenging times it is easy to be fearful and/or negative so let’s turn to the wise advice of one of the world’s best investors, the late Sir John Templeton:
“Don’t be fearful or negative too often. For 100 years optimists have carried the day in U.S. stocks. Even in the dark ’70s, many professional money managers—and many individual investors too—made money in stocks, especially those of smaller companies…There will, of course, be corrections, perhaps even crashes. But, over time, our studies indicate stocks do go up…and up…and up…Chances are that certain other
indexes will have grown even more. Despite all the current gloom about the economy, and about the future, more people will have more money than ever before in history. And much of it will be invested in stocks. And throughout this wonderful time, the basic rules of building wealth by investing in stocks will hold true. In this century or the next it’s still ‘Buy low, sell high’.”
Watching from the Sidelines May Cost You
When markets become volatile, a lot of people try to guess when stocks will bottom out. In the meantime, they often park their investments in cash. But just as many investors are slow to recognize a retreating stock market, many also fail to see an upward trend in the market until after they have missed opportunities for gains. Missing out on these opportunities can take a big bite out of your returns.
Euro / Dollar Cost Averaging Makes It Easier to Cope with Volatility
Most people are quick to agree that volatile markets present buying opportunities for investors with a long-term horizon. But mustering the discipline to make purchases during a volatile market can be difficult. You can’t help wondering, “Is this really the right time to buy?” Euro / Dollar cost averaging can help reduce anxiety about the investment process. Simply put, Euro / dollar cost averaging is committing a fixed amount of money at regular intervals to an investment. You buy more shares when prices are low and fewer shares when prices are high, and over time, your average cost per share may be less than the average price per share.
Euro / Dollar cost averaging involves a continuous, disciplined investment in fund shares, regardless of fluctuating price levels. Investors should consider their financial ability to continue purchases through periods of low price levels or changing economic conditions. Such a plan does not assure a profit and does not protect against loss in a declining market.
Now May Be a Great Time for a Portfolio Checkup
Is your portfolio as diversified as you think it is? Meet with me to find out. Your portfolio’s weightings in different asset classes may shift over time as one investment performs better or worse than another. Together we can re-examine your portfolio to see if you are properly diversified. You can also determine whether your current portfolio mix is still a suitable match with your goals and risk tolerance.
Tune Out the Noise and Gain a Longer-Term Perspective
Numerous television stations and websites are dedicated to reporting investment news 24 hours a day, seven days a week. What’s more, there are almost too many financial publications and websites to count. While the media provide a valuable service, they typically offer a very short-term outlook. To put your own investment plan in a longer-term perspective and bolster your confidence, you may want to look at how different types of portfolios have performed over time. Interestingly, while stocks may be more volatile, they’ve still outperformed income-oriented investments (such as bonds) over longer time periods.
Believe Your Beliefs and Doubt Your Doubts
There are no real secrets to managing volatility. Most investors already know that the best way to navigate a choppy market is to have a good long-term plan and a well-diversified portfolio. But sticking to these fundamental beliefs is sometimes easier said than done. When put to the test, you sometimes begin doubting your beliefs and believing your doubts, which can lead to short-term moves that divert you from your long-term goals. To keep from falling into this trap, call me before making any changes to your portfolio
What can I do to minimise any potential impacts of a tough Brexit process?
By Chris Webb
This article is published on: 26th February 2018
26.02.18
This is a question many expatriates are mulling over, now positioning for the upcoming negotiations has started. First and foremost, I remind my customers that the process to leave the EU is widely anticipated to take the full two years set out in article 50, so the only immediate areas people should focus on are changes in the U.K. and Spanish budgets.
As the negotiations progress however, there are steps you can take which will ensure that any effects to you are minimised:
1. Does your adviser work for a Spanish registered company, regulated by the Spanish authorities?
Working with an adviser who operates and is regulated already under Spanish finance laws means that any change in the UK’s ability for financial passporting will not affect you.
2. Are your investments held in an EU country, not part of the U.K?
Again, any issues the U.K. may have to solve regarding passporting are negated by ensuring your investments are already domiciled in another EU country.
3. Have you reviewed any U.K. Company pension schemes you hold, which are due to mature in the future?
The recent U.K. Budget saw the government levy a new tax on people moving their pensions to countries outside the EU. There is no certainly that this tax will not be extended to EU countries once the U.K. has left the union. The process of leaving the EU is very much unchartered waters and whilst I certainly do not recommend anyone acts hastily, a review of your financial position in the next few months may avoid future headaches.
If you want to review your personal financial position please call or email me on the contacts below.
Cash Is Not King….
By Chris Webb
This article is published on: 23rd February 2018
23.02.18
I think that it is fair to say that the global economy has been ill for some time! Central banks throughout the developed world have tried to cure the illness in the form of ultra-low interest rates and other extraordinary measures, aimed at stimulating economic growth.
The outcome is that it has ‘dethroned cash from its former place as king’
For all of us today, wealth preservation is key to the decisions that we make regarding the investment of our financial assets. This is even more important if you are approaching retirement and no longer have the possibility of increasing your wealth by saving from disposable income.
For risk-averse investors, the traditional way of saving has usually been bank deposits, feeling this is the safest and most secure way. Understandably, when you could get a decent rate of interest – especially if index-linked – then this was often sufficient for their needs. However, today, this is no longer a viable solution, particularly if the investor needs to supplement their pension income from their investment income. Even for those who do not need to take the income from their capital, the real value of their capital is not being protected in the low-interest rate environment that we are experiencing.
I am not saying that cash is entirely bad, only that the role of cash has changed and it can no longer be depended on to provide income or protect the real value of capital
I am finding more and more that negative investor sentiment, during the last year or so, has led to a situation whereby many investors are holding too much cash, i.e. in excess of what can be considered as prudent, given the very low level of interest rates. Keeping too much cash – beyond what someone may need to meet short-term capital and emergency needs – can be disastrous for savers. The decline in income generated by deposit accounts and some other ‘perceived safe-haven’ fixed interest investments have all but completely dried up. The decline is not imaginary or hypothetical and the lost income means less money to meet the household needs. Combined with a stronger Euro, which we are also currently experiencing, this can make it more difficult for the expatriate to meet their income needs.
So how do we avoid the ‘cash trap’?
The simple answer is to invest part of your financial assets in investments that are delivering a real rate of return (i.e. after allowing for inflation).Naturally, this means taking some risk, but there are different types of risk. What is clear is that investing in cash for the long-term is not a risk-free strategy.
Cash no longer delivers a ‘risk free rate’ but instead creates a ‘rate free risk’
Hence, finding the appropriate risk strategy will depend entirely upon the investor’s individual circumstances. If you need to take income from your capital, since bank deposit returns no longer meet your requirements, you need to cast a wider net than was historically needed. This will result in a move up, not down, the risk spectrum.
For the year to the end of December 2012, Headline CPI (Consumer Price Index) in the Eurozone was 2.2%, despite the fact that the European Central Bank target is to be below 2%.With cash only earning say 0.5%, this is a negative real rate of return of -1.70%. By comparison, the FTSE 100 dividend yield was 3.7% in 2012; emerging market debt and high yield debt yielded 4.5% and 6.7%, respectively, compared to UK gilts yielding 1.8%.
Looking over a longer period, the annualised change in the dividend yield of companies included in the ‘MSCI Europe ex UK Index’, over the period from December 1999 to 2012, was 4.1%. Dividends have generated constant income over decades for investors, as well as long-term capital growth.
This can be seen in the table below, which shows the proportion of the average annualised return made on the S&P 500 Index since the 1920’s that has come from dividends and capital appreciation.
| Period | Dividends % | Capital Appreciation % | Total % |
| 1926-29 | 4.7 | 13.9 | 18.6 |
| 1930’s | 5.4 | -5.3 | 0.1 |
| 1940’s | 6.0 | 3.0 | 9.0 |
| 1950’s | 5.1 | 13.6 | 18.7 |
| 1960’s | 3.3 | 4.4 | 7.7 |
| 1970’s | 4.2 | 1.6 | 5.8 |
| 1980’s | 4.4 | 12.6 | 17.0 |
| 1990’s | 2.5 | 15.3 | 17.8 |
| 2000’s | 1.8 | -2.7 | -1.9 |
| 2010 – 2012 | 2.1 | 8.5 | 10.6 |
| 1926 – 2012 | 4.1 | 5.6 | 9.7 |
So despite any short-term volatility in stock markets, which may result in a short-term reduction in the value of the capital, income can still be delivered in the form of dividends.If income is not needed and instead the dividends are re-invested, the compounding effect will increase the amount of capital growth.
For example, the FTSE 100 actually resulted in a negative return of -15% during the period from December 1999 to 2012, based on the index prices. However, where the dividends were re-invested, this resulted in a positive return of 32% over the same period. Clearly, it is not a good idea to ‘put all eggs in one basket’. Therefore, it is very important to have a diversified portfolio of investments that is structured to meet the objectives of the individual investor. Avoiding the ‘cash trap’ is an essential part of that process.
If you would like more information about investing or saving on a tax-efficient basis for Spain (whether for investing an amount of capital and/or saving on a regular basis), or any other aspect of retirement and inheritance planning, please contact me by telephone on + 34 639 118185 or by e-mail at chris.webb@spectrum-ifa.com to discuss your situation, in confidence.
The above outline is provided for information purposes only and does not constitute advice or a recommendation from The Spectrum IFA Group to take any particular action on the subject of investment of financial assets or to mitigate the effects of Spanish taxes.The Spectrum IFA Group advisers do not charge any fees for their time or for advice given, as can be seen from our Client Charter
Will your pension sustain you through retirement?
By Spectrum IFA
This article is published on: 16th February 2018
It is widely known that Europe’s ageing population is a problem for EU Member States. Quite simply, people are living longer and this impacts on the sustainability of State pension systems, referred to as the first pillar. Member States may attempt to address this issue by raising State pension ages and increasing the number of years that people need to qualify for a full State pension. However, this then impacts on the standard of living that retirees can expect to attain, unless additional provision is made.
In some Member States, employees may benefit from occupational pension schemes that are sponsored by their employer. These are known as second pillar schemes and if a promise of a defined benefit pension related to salary and service is on the horizon, then this is highly advantageous. However, employers too are feeling the strain of funding such promises and so are increasingly closing defined benefit schemes and putting in place alternative defined contribution plans. There is no benefit promise and the employee will get whatever the eventual ‘pension pot’ purchases. In short, the risk of meeting the target benefit is passed on to the employee.
Third pillar pensions are also ‘money purchase’ and these sit on top of the first and second pillars. Voluntary by nature, these plans can make the difference between a comfortable or a poor retirement. Such additional pensions may also provide a ‘bridge’ to State retirement pension commencement, if the benefits can be accessed before the State retirement age. However, without appropriate and regulated advice, the saver may find out all too late that their aspirations for a financially secure retirement are not met. Saving sufficient amounts and investing the monies wisely are both essential requirements, but so too is taking advice.
Pension entitlement is a complicated subject. Regular reviews with the adviser should be carried out to check that the ‘pension pot’ is on target to achieve objectives. Generic on-line advice is unlikely to be enough, particularly if the person has accumulated several ‘pension pots’. Moreover, if a person has had a cross-border career, how does the ‘pension pot’ acquired in one State dovetail with one in another State? How are the State pensions earned in each Member State impacted by the EU State pension co-ordination rules? How do the diverse tax rules across Member States affect the outcome for the saver? These are just a few of many questions that should be addressed by the adviser – a robot cannot do this!
In June last year, the European Commission launched its proposal for a Regulation on a pan-European Personal Pension Product (PEPP), as a third pillar pension. In States where the first and second pillar systems are not well-developed, the PEPP may offer a solution for citizens who may be facing a poorer retirement. In other States, the PEPP should provide more choices to its citizens.
Whilst the PEPP initiative is welcomed, the Regulation as drafted, already presents some barriers to becoming a successful cross-border pension arrangement. The PEPP has the potential to contribute to the Capital Markets Union, but only if the barriers are overcome. Regulatory and fiscal rules diverge between the 28 Member States and so pragmatism and co-operation are needed to reach a solution. If the tax incentives are insufficient, and subject to change after an arrangement has commenced or even harmonised, the PEPP is unlikely to succeed.
The PEPP Regulation proposes a limited number of investment strategies be made available by PEPP providers. This includes a “safe investment option”, as a default option, which should provide a capital guarantee. The merit in capital guarantees for pension products is questionable, as these are expensive to provide. The result being that to support the capital guarantee (if in fact a real guarantee can be provided – and by what institution?), this would require low-yielding investments and consequently at retirement, the capital may be insufficient to provide an adequate level of income to supplement other pensions. Thus, the reference to a “safe investment strategy” could be misleading to the saver.
However, rather alarming is the proposal that the PEPP saver can waive the right to receive advice, if he/she selects the default investment option. It is arguable that PEPPs should not be sold on a non-advised basis, even in these circumstances. The Regulation as currently drafted could lead to the saver losing purchasing power, since an obligation to provide inflation-proofing has not been included.
Furthermore, the impact of national pension entitlements, varying decumulation options and retirement ages, particularly if the PEPP saver has cross-border accumulated benefits, strengthens the need for the PEPP saver to receive appropriate professional advice. Hopefully, the European Commission will also come to this conclusion.
This article was published on The European Federation of Financial Advisers and Financial Intermediaries website
Daphne Foulkes is a Board Member of the FECIF
How do you choose a financial adviser?
By Amanda Johnson
This article is published on: 12th February 2018
12.02.18
Question: Can you offer me any tips in choosing a financial adviser?
When you move to France, you are moving to Country with many different laws and rules to the one you are leaving and this is unlikely to change in the future, so choosing a financial partner which is right for you is very important for your financial peace of mind.
Here are several things I would suggest expatriates consider when looking for a Financial Adviser:
Is the Company regulated in France?
With nothing yet becoming clear on how the UK will be trading with France after Brexit, using a company which is based and regulated in France reduces any need for a sudden change, should regulations change, post Brexit.
Is my adviser able to sit down with me and review my finances on regular basis?
Your Financial Adviser is not just someone to see once and then forget about. As your needs and circumstances change and with different investments growing at varying rates, being able to sit down and review your situation regularly is very important.
What are the costs involved for any appointments, reports or ongoing support?
It is important to know what costs will be involved throughout the life of any arrangement with your Financial Adviser.
How does my adviser get remunerated?
A clear understanding of how your adviser gets paid and a client charter outlining how the relationship is set up helps clarity and ensures you have no surprises down the line.
Can your Adviser offer any references from existing clients?
Being able to speak to existing customers is a great way to measure a Financial Adviser. You can hear first hand, how the process and relationship has worked for someone in the same boat as you?
Does the company own, or do its Directors/Partners have financial interests in the investments being offered, or are they truly independent?
You should be comfortable that your Adviser is not promoting any “own brand products”, without making this clear to you in advance of any commitment. If the company does have its own products be sure that you can view performance, move to another product or change Adviser without additional penalties.
Can I work with this person?
Your Financial Adviser is someone you need to be able to work with. You will likely see them on a regular basis and be comfortable speaking about your future with. In life we sometimes meet people we just cannot seem to warm to, so do not be afraid to seek alternative advice if you find yourself in this scenario.
Whether you want to register for our newsletter, attend one of our road shows or speak to me directly, please call or email me on the contacts below and I will be glad to help you. We do not charge for our financial planning reviews, reports or recommendations.
How safe is your UK pension?
By Chris Webb
This article is published on: 9th February 2018
09.02.18
In days gone by the UK’s private pension schemes were the envy of the world, considered superior to other nations’ schemes. Alas, those days of world class company pension schemes are gone…………..
It is surprising just how many people are still members of their final salary or defined benefit schemes. Considered a “golden pension”, these schemes offer the best retirement promise, a promise to pay you the benefits that are defined in their pension schedule. Not a personal pension wholly dependant on the investments made, but a “fixed in stone” promise.
But how many of these people should be worried about how safe the promises are?
We recently witnessed the collapse of Carillion, a construction and outsourcing company with over 40,000 employees. They were just the latest in a high profile list of companies that have brought the subject of “pension safety” to the fore.
What happens to their workforce who are members of their pension scheme? The chairman of trustees of Carillion’s pension scheme, Robin Ellison, has suggested in a letter to a committee of MPs that there was a funding shortfall of around £990m with Carillion’s defined benefit pension scheme*. YES, £990 MILLION !!!
Many of the UK’s largest companies are running pension deficits that would bring a tear to the eye. The exact amount of pension deficit is hard to ascertain, but sources claim these numbers to be around £103 BILLION* with over 3,700 schemes in deficit compared to 1,800 in surplus.
Many household names find themselves in the same situation with their pension schemes. Names like BAE, Royal Dutch Shell, The Royal Mail and British Telecom to name a few. It is only a matter of time before one of these names, or another “big player” joins the list of collapsing pensions.
So, if you’re in a pension that is in deficit is that a problem? Well, there are close to 11 MILLION people holding defined benefit pensions. Out of that number they estimate that 3 MILLION (3) will encounter problems and potentially have only a 50% chance of receiving their promised pension.
The UK Government runs a special fund aptly called The Pension Protection Fund, the aim being to bail out companies with a pension crisis. The Pension Protection Fund (PPF) was set up on 6 April 2005 to protect members who had defined benefits (i.e. final salary type benefits) in a workplace pension scheme, where the employer became insolvent on or after this date and the pension scheme could not afford to pay those benefits promised to members on wind up.
Many smaller UK defined benefit pension schemes have already fallen into their basket, as well as some larger organisations. BHS and British Steel are two of the largest organisations to be in the pot. You can view all of the companies listed at the PPF website; it makes for horrid reading when you see the true amount of company pensions that have already owned up to and admitted they can’t afford to pay their promises………
The Pension protection fund isn’t exactly a guaranteed scheme anyway, whilst it runs within its parameters it can provide its own level of promises (below what the original pension company was offering), however if too many large company pension schemes start running to it for protection, it will put the protection fund under its own strain……
So what can you do about it?
Well, here at The Spectrum IFA Group we work closely with some of the worlds leading pension providers and can not only offer you completely independent advice but we can also provide you with a technical analysis on your pension. We can advise whether your pension is in deficit or surplus, we can advise on the pro’s and con’s of your existing pension provision and furnish you with sufficient information to actually understand what you may receive. We can also compare that information to the alternative options available to you, whether that be a transfer out of your scheme to a QROPS or an International SIPP option. This service is available for defined benefit and defined contribution (personal) pension plans.
It’s better to be aware of all the options available to you, it’s your retirement and it’s your choice to decide what the best option for your circumstances is.
*Sources: BBC News January 2018.