Time to reflect on 2007


[email protected]

WITHIN THE Financial Services profession, now is always a good time to reflect on what has happened over the last 12 months and, more importantly, what the prospects are for the coming year.

Economy and investments

2007 has been a difficult year to say the least. The most significant factor has been the US “sub-prime” mortgage disaster which has led to the credit squeeze and general lack of investor confidence.

Some economists are predicting a full-blown recession but economists cannot reliably forecast recessions. Nor can they detect for certain when a recession is in progress.

Only after the fact do the official cyclical timekeepers identify the beginning and ending dates of a slump.

It is difficult to discern whether a recession is inevitable because we are in the midst of a new type of financial crisis, one for which history has no map.

When banks sustain large losses, like the savings and loan association crisis in the 1980s or the collapse of the Japanese bubble in the 1990s, the result is a contraction in credit, a slowdown in consumption and investment, and a recession.

But in the current turmoil, the banking sector (which started out with very healthy capital balances) seems to be incurring losses that, while large, appear to be far lower than those in previous crises.

The losses are spread across a range of poorly understood entities and investors, such as hedge and pension funds, around the globe.

It is far from inevitable that this bad financial news, the equivalent to the loss in assets seen in a typical bearish day on Wall Street, will translate into a sustained reduction in economic activity.

As for the stock markets, in 2007 China led the way with India snapping at its heels. However, most other markets including the UK have had a very volatile and disappointing year, with the FTSE100 index showing less than two per cent growth overall since January 2, 2007.

This compared to the average Asian unit trust (excluding Japan) which returned over 30 per cent.

So for those investors who were prepared to accept the higher risks associated with investment in Asia, greater rewards were available. Many investment managers consider that this trend will also continue for the coming year.

Nevertheless, it is important to remember that the vast majority of investors should focus on obtaining a well balanced portfolio of assets that will perform well over the longer term and limit any downside risk.

This can be simply achieved by investing through one of many professionally managed funds available.


The credit squeeze has caused problems in the UK house market and November saw the biggest monthly fall in house prices for 12 years, according to figures from Nationwide building society.

There has also followed a general tightening of mortgage availability with lenders such as Northern Rock struggling to obtain funding.

Gross lending had fallen eight per cent in November down to 30.7 billion pounds sterling, according to the Council of Mortgage Lenders.

Although property sales in Portugal have been sluggish, we haven’t seen the problems suffered in Spain and the mortgage market has seen banks launching much improved products.

As a result it is even more important for people looking to purchase a second home in Portugal to consider all options. This includes raising any finance here rather than in the UK.

With the lower Euro interest rate, good deals are available for both new purchases and re-mortgages.

Equity release

2007 saw a number of true equity release schemes become available in Portugal for the first time. This has followed the dramatic rise in popularity of equity release in UK and other European countries.

Unlike UK schemes, there are generally no age limits imposed in Portugal. Also, they are asset backed schemes and therefore not only suitable as a means of raising additional income and cash in retirement, but can also be used as a means of business finance and investment diversification.

UK inheritance tax

The UK chancellor, Alistair Darling, made more than a few waves throughout 2007. This included his pre-Budget speech when he announced that he would double the inheritance tax (IHT) nil-rate allowance for couples.

Effectively, this means that the first 600,000 pounds sterling of a couple’s estate can pass to their heirs free of IHT.

This move was almost certainly in response to the Tory’s pledge to raise the threshold to one million pounds sterling, should they be elected.

The majority of UK expatriates living in Portugal still retain their UK domicile and so are therefore potentially liable to IHT. Despite the increase in nil-rate allowance, many will remain within the IHT net, based on the value of their worldwide assets.

Therefore, people will still need to seek expert advice on how to avoid paying inheritance tax. There are many types of scheme available that can legitimately reduce or mitigate liability to IHT while retaining access to income and capital.


The dramatic overhaul to UK pension legislation that took place in April 2006 continued throughout last year to shape the pension marketplace. Self Invested Personal Pensions (SIPPs) have become the fastest growing breed of pension.

In Portugal, SIPPs have also become one of the favourite vehicles for Income Withdrawal, which allows benefits to be taken from a UK pension without the need to purchase an annuity.

This allows far more flexibility with excellent tax planning opportunities.


While we cannot dismiss the likelihood of storms for the financial climate in 2008, there are still plenty of opportunities for sensible investment and tax planning to make it a very prosperous New Year.