THE START of a New Year is always a good opportunity to review one’s financial affairs and consider whether your capital is working as effectively, and as tax efficiently, as possible. If you have not had a ‘wealth check’ in the last couple of years, then it is certainly time to do so. If you already have a well thought out, long-term strategy in place, you may just need a quick review to ensure it is on track to meet your current goals and circumstances.
Get expert help
Your first step is to evaluate your objectives and circumstances, and then study your current financial strategy to see whether it is the most appropriate one for you. I recommend that you do this exercise with the help of an experienced independent financial adviser, as he/she may be able to point out aspects you had not thought of and recommend new strategies and investments.
New life in Portugal
You also need to ensure your financial planning is set up to work efficiently in Portugal. Many expatriates make the mistake of keeping their UK investments, like ISAs, PEPs and Premium Bonds. While these may have worked well while saving money in the UK, your situation is now different and your goals have changed. Note also that they are not tax free in Portugal. Don’t consider not declaring them, as they fall under the information exchange provisions of the EU Savings Tax Directive. A good financial adviser based in Portugal will be able to suggest more suitable investments for Portuguese residents and some of the options available (an offshore insurance bond, for example) that will enable you to save tax.
The best potential growth comes from equity investment, but if you are not comfortable with stockmarket volatility consider other investment options such as bonds, with-profits and guaranteed products. Bonds are considered lower risk than equities, yet a high-yield bond fund can provide attractive opportunities for growth. They can also provide a regular income.
The challenge is to achieve increasing returns without increasing risk. You need an investment approach that spreads risk over diverse assets, while seeking a consistent, above average, performance. These objectives can be met by using the multi-asset, multi-style, multi-manager approach. This strategy includes diversification across investment assets, geographical regions, sectors and management styles. With this approach, you can include equities in your portfolio, but without taking on as much risk as you may expect.
Many people prefer to keep their capital in what they perceive to be the safe haven of cash. However, just as you should not invest all your capital in one asset like equities, leaving all your money on deposit is not necessarily a wise option. Interest rates in the UK are at, or at least near, their peak for this cycle and experts believe they will fall again next year.
The interest earnings are also taxed. If you’re retired and won’t be adding to your savings, it’s important to keep ahead of inflation to maintain its spending power. Finally, keeping your money in sterling means it is affected by exchange rate movements. Over the two-year period from December 1 2002, sterling weakened against the euro by more than eight per cent. This would have made a serious dent in your interest earnings.
Other types of investment (such as the aforementioned bond fund) will provide higher income than cash and the prospect of additional growth to offset rising prices, without necessarily involving a high degree of risk. Another low risk option is a capital guaranteed investment bond, considered a ‘happy medium’ between deposit accounts and equities. As long as it offers a 100 per cent guarantee, you won’t lose any of your money, but can still participate in stockmarket rises.
You can’t avoid tax
You also need to consider tax issues. Are you legally compliant with the Portuguese and UK tax authorities? Have you avoided tax by ‘forgetting’ to declare interest earnings? Are you paying tax unnecessarily, or could you change your financial structures to legally lower your tax bill? The most significant change in 2005 will be the start of the Savings Tax Directive, starting on July 1. Banks will be under statutory obligations to automatically exchange information about interest payments to EU citizens. If you don’t declare all interest earned, your local tax authority will find out about it.
There are exceptions, such as Jersey, Guernsey, Isle of Man, Switzerland and Luxembourg, which will instead impose a withholding tax on your interest. This starts at 15 per cent and will rise to 35 per cent by 2011, though by then, the EU is hoping that these jurisdictions will also begin exchanging information.
You, therefore, need to ensure your affairs are fully legitimate now. This is the time to look into investing your money in legal tax efficient structures, like offshore insurance bonds and trusts. You should also consider inheritance tax (IHT) planning. Many British expatriates remain liable for IHT, because it is based on domicile, not residence, which is actually hard to change.
If you’d like to make life easier for your dependants, and save them significant amounts of money, look into inheritance planning this year. An offshore discretionary trust will remove your estate from the IHT net if you have lived in Portugal for three years and even if you return to the UK in the future.
Even if you do not believe in making New Year resolutions, I recommend that you make just one: invest a little time with an independent financial adviser to make sure your finances are on the right track for 2005 and beyond.