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Financial planning – dangers of doing nothing


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Bill Blevins is Managing Director of Blevins Franks. He has specialised in expatriate investment and tax planning for over 35 years. He has written books and gives lectures on this subject in Southern Europe and the UK.

FEW PEOPLE actually enjoy financial planning. Whether we are talking about applying for bank accounts, setting up tax reduction arrangements or researching, buying and selling stocks and shares, most people consider it a chore and keep putting it off.

If you are quite new to Portugal you’ll be tired of paperwork after sorting out the move, purchasing and doing up your house, registering for tax etc, and probably want to avoid any further big decisions for a while.

Others do not understand the merits of approaching a qualified and authorised financial adviser and either stick with whatever arrangements they had before they came to Portugal or else try to sort out their finances alone.

Any hesitation and/or failure to seek professional advice can be very costly, both annually (e.g. if you are paying more tax than necessary) and in the future (if inflation has reduced your spending power), and possibly for your heirs too.

Depending on your personal wealth level, with the right advice and structures in place you could save thousands of euros over the years, even tens of thousands, in tax.

And in the future you could have even more spending power than you do today and not less, as is often the case with those spending a long retirement in Portugal.

Time spent with a professional adviser can make a considerable positive impact on your future wealth.

Tax mitigation for you

If you are in employment, there is little you can do to reduce income tax on your salary, unless the Beckham tax clauses apply, which have limited applicability, but those with savings and investments often pay significantly more tax than they need to.

Bank interest is always subject to income tax, regardless of where it is generated/received.

Investments held in your own name are also subject to income tax and possibly capital gains tax.

In many cases, it is possible to significantly reduce the tax paid on these savings and investments by moving the capital into tax efficient structures like an insurance bond.

Many people are amazed by the amount of tax they can save. It is often necessary to restructure your financial planning once you move to Portugal anyway, since the tax efficient arrangements you had back home (e.g. ISAs, PEPs, TOISAs) are not tax free in Portugal.

Tax mitigation for your heirs

British expatriates often remain liable for UK inheritance tax, since it is based on domicile and not where you are tax resident.

However, with appropriate planning you are often able to significantly reduce such tax liabilities for your heirs.

Maintaining the value of your money

Even if you are not looking to increase your wealth, you need to protect its value right through your retirement so that you have the same spending power in five, 10 or 20 years time as you do today.

The older you are, the harder it will be to cope with dwindling cash reserves, so you need to take steps today to prevent that happening.

Unfortunately, keeping money in a bank deposit account offers negligible protection against inflation and retired people are hit the hardest by inflation.

Inflation is causing significant concern at the moment, especially with high oil and food prices.

Eurozone inflation was 3.3 per cent in February, compared to 1.9 per cent 12 months ago.

Your personal rate of inflation is likely to be higher than this average, especially if you are retired. If your rate is four per cent over the coming years, it will reduce the spending power of 100,000 euros by 18 per cent in five years, by 34 per cent in 10 years and by 56 per cent in 20 years.

Investment choices

The current economic climate and stock market performance is unlikely to be encouraging people to move their money from cash into the stock market.

On the other hand, banks look a much less secure place than they used to. Those already with investments may be wondering whether to amend their portfolio.

To make matters worse, the Euro/Sterling exchange rate could be reducing your income.

All these issues mean that professional advice is more important than ever – sitting back and doing nothing may be detrimental.

Asset allocation and diversification are key to helping your finances get through these difficult times.

You don’t necessarily need to invest in equities.

Bonds and certain international property funds may be better for you and there may be lower risk investment opportunities you are not aware of.

Your UK pension

UK pensions are notoriously inflexible.

There are restrictions on how you take your pension benefits, you have to buy an annuity before age 75, you cannot leave the balance of your fund to your heirs and your income will be suffering with the Sterling/Euro exchange rate.

However, with the introduction of Qualifying Recognised Overseas Pensions Schemes (QROPS) in many cases it is now possible for expatriates who are no longer UK tax resident to transfer their pension out of the UK and avoid all these restrictions.

Also, after five years of non-UK residency, your fund will no longer fall under the UK tax net, not even UK inheritance tax.

Blevins Franks will be discussing these topics and the potential solutions at our April seminars.