By: Bill Blevins
Now you see it – now you don’t: Making sure your wealth does not expire before you!
ONCE YOU retire, looking after your savings becomes much more important than before. You need to know that your nest egg will support you for the rest of your life, provide income and allow you to maintain your standard of living.
You cannot predict to what extent your wealth may need to be utilised for additional costs in later life: residential care, nursing care and health care costs, especially if your health handicaps your ability to make appropriate decisions. If you own an older property, you may face costly home repairs or maintenance. And, as the price of goods and utility bills rise, you are also likely to find that your money doesn’t go nearly as far in the future.
If you won’t need to use all your capital for your retirement, you’ll still want to preserve its value for your family to inherit in the future, to help give them a more comfortable, easier life.
It is therefore sensible to use investment and financial structures to preserve your financial assets. When it comes to investments, the key concern for most retired people is that dreaded four letter word – risk. Most people fail to consider the risk to their purchasing power. You should evaluate all types of risk before deciding what to do with your savings.
Liquidity risk: The possibility you will not be able to sell or convert security into cash when you need the money or you may need to sell at a loss.
Interest rate risk: This income is reduced by inflation and there is every possibility interest rates will fall in the future.
Taxation risk: Tax rates are more likely to increase than fall. Income tax will reduce the amount of income you earn from a deposit account. Buying and selling direct investments, usually results in capital gains tax. However, by “wrapping” your capital up in an investment structure, like an insurance bond, you could significantly lower your tax bill.
It’s also important that your tax planning is fully legitimate. In the UK, the tax revenue has just won a court ruling forcing four high street banks to disclose full details of their clients with offshore accounts. Over 100,000 accounts will be examined and those caught evading tax will have to pay the back tax, interest and penalties.
Inheritance tax risk: If you would like to ensure that all your money is left to your chosen beneficiaries, as opposed to a large portion going to the taxman, you need to take steps to avoid UK inheritance tax. The use of trusts could help you do this.
Currency risk: It’s common for UK expatriates to keep a large proportion of their assets in sterling. However, currency markets can be more volatile than people realise.
Market risk: One common investing risk is the up and down movement in the value of an investment – its volatility. In short, a highly volatile investment has greater risk that its value may go down significantly in the short-term. A low volatility investment has less risk that its value may drop significantly. Your first instinct may be to choose the investment with minimal short-term ups and downs. Unfortunately, it is not that simple, because of inflation risk.
Inflation risk: The chance your money will decline in value as rising prices shrink the value of the currencies you are invested in. There is almost always, over the longer term, more risk to holding money in a bank account than to investing in other assets. Over the long-term, inflation can eat up much of the growth of so-called “low-risk” investments, particularly deposit accounts.
The longer you keep cash on deposit, the more it will be eroded by inflation. With a carefully diversified and well planned financial strategy for the longer term, you are in a position to accept investment risk in return for high returns.
Most investments involve some form of risk, but so does doing nothing. It is important to understand the different types of risks and ensure you invest at a degree of risk you can tolerate. You can strike a balance between risk and return through a well-diversified portfolio.
Diversification: Spreading your money among many different investments is a widely accepted method of minimising investment risks and the returns generated should, over the longer term, easily out pace inflation and bank or building society deposits.
You’ve worked hard for your money, you will want to protect it from inflation, taxation and poor investment planning, as well as aim to earn long-term capital growth. There are structures available to you in Portugal, which will help you achieve this.
To keep in touch with the latest developments in the offshore world, check out the latest news on our website www.blevinsfranksinternational.com