PART ONE of my article last week covered choosing your retirement lifestyle and the dangers of inflation. This week, I look at your investment strategy and opportunities, tax planning, estate planning and pensions.
Investing wisely is one way to ensure that your money won’t expire before you. Of course, you would leave some money in the bank, but the rest can be invested to provide capital growth or income to beat inflation.
There is a selection of investments available, which are suitable for retirees in Portugal and your portfolio can easily be structured to keep the risk level to a comfortable one. The first step is to set out your circumstances and objectives with a financial adviser, so that he or she can recommend a bespoke strategy for you. Investment assets to consider include:
Equities
These provide the best capital growth over the longer term. Risk can be substantially reduced by holding a well diversified section of equity funds plus other investment assets in your portfolio. Multi manager funds are an appropriate way for retirees to invest in equities, because they aim to lower risk and provide steady growth.
Bond funds
These are considered ‘safer’ investments than equities and work well in a portfolio alongside equities. They provide an income, which is often very useful for retired people, for example a yield of around 6.5 per cent per annum. Bond funds also provide capital growth.
Property funds
Property has a low correlation with equities and bonds, making it an ideal third component in your portfolio. Today, a new and very attractive form of property fund is available on the market – Real Estate Investment Trusts or REITs. They include quality commercial and residential real estate from across the world, provide a useful income (and one that provides protection against inflation), capital growth over the longer term and are tax efficient too. There is such a fund available to expatriates in Portugal.
Capital guaranteed investments
With a 100 per cent capital guaranteed investment, you cannot lose any of your money, even if markets fall and yet, you will participate in stock market rises. A bit like having your cake and eating it! They can be used to safely lock away cash lump sums (you should earn more than you would from a bank and without having to pay tax), to protect profits or as a diversification tool to lower your portfolio’s overall risk level.
The downside is that you have to lock your money away for a fixed term (usually between five and six years) – you can take out money should you need it, but you would lose the capital guarantee. You therefore need to be fairly confident that you won’t need this money for the next five years or so.
Your financial adviser will advise you as to how much of each investment asset to include in your portfolio, depending on your objectives and risk tolerance. What you want to do is establish the mix that will work well for you and provide good returns without increasing the risk level.
Tax planning
If you want to protect your money, you’ll need to pay as little tax on it as possible. Please remember that, in Portugal, you must declare and pay tax on your worldwide income and gains (and you must declare bank interest earned in the Channel Islands and Isle of Man, even if you are paying the withholding tax there). Failing to do so, for whatever reason, is a very risky strategy these days. It is more than likely that the Portuguese authorities will find out about it at some point.
However, there are various ways you can structure your money to legitimately keep your tax obligations as low as possible. For example, a life assurance bond is taxed favourably in Portugal and would lower your tax bill. It also allows you to combine your tax and investment planning in one structure, keeping life simpler and more cost effective. A trust may also be an appropriate structure for you, to help you lower tax, as well as provide various other benefits.
Estate planning
What will happen to your estate once you pass on? Will your beneficiaries be liable for UK inheritance tax? Setting up an offshore trust would avoid this. It would also speed up the probate process and ensure your money is distributed as per your instructions. Your money will go to who you want, when you want and in the amounts you want. A trust may also be able to protect your wealth from being lost, for example if your children go through a divorce or are likely to engage in risky business ventures.
Pensions
Depending on the type of pension you have and whether you have started drawing income from it, there may be ways to improve your pension fund and earn more from it. It’s worth discussing your options with a financial adviser to see what you may be able to do. You will need to take the rules in Portugal and your home country into consideration.
Retirement should be the time when you take it easy and reward yourself for all the years of hard work. You shouldn’t have to worry about money all the way through. The earlier you get your financial planning in order, the better. Then you can sit back and enjoy your life in Portugal.
To keep in touch with the latest developments in the offshore world, check out the latest news on our website www.blevinsfranksinternational.com
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