Should you contribute to UK National Insurance as an Expat?
A significant number of expats who move overseas are more than happy living on rent, although there are others who prefer owning their own homes. While buying a home requires that you pay attention to different aspects, if you plan to buy one outside of your home country, matters may get even more complicated. Fortunately, a little groundwork will hold you in good stead.
Consider the Trade-offs:
When you move to a new country, buying a home largely limits your ability to explore new regions, which you get to do if you’re renting. The money you pay as down payment stays invested in the house, and you cannot use for other investments such as stocks and bonds. Besides, the cost of servicing your new home loan might end up being a burden, especially if you have an existing mortgage in your home country.
Pay Attention to Local Regulations:
Start by determining if you’re allowed to buy the property of your liking in your new country of residence. For instance, if you wish to purchase a property in Singapore, the Residential Property Act (Chapter 274) has a bearing on whether you may or may not qualify to buy it without government approval. While you may purchase properties categorized as “non-residential” or “non-restricted residential” without government approval, buying a “restricted residential property” as an expat requires that you get government approval.
If you plan to buy a property in India, regulations require that you qualify as a ‘person resident in India’. Buying a home in the United States or the United Kingdom, on the other hand, comes with very few restrictions.
Real Estate Agent Fees
Real estate agent fees tend to vary from one country to the next. In Singapore, sellers usually pay 2% for Housing & Development Board (HDB) properties as well as private properties. On the other hand, buyers pay 1% for HDB properties and nothing for private homes. In the UK, while sellers need to pay 0.75% to 3.5% as fees, buyers pay no fees at all. Buyers don’t have to pay fees in the U.S. Buyers’ fees in India may vary from 1% to 2%. In Germany, a buyer may end up paying 2% to 6%.
Getting a Loan
Eligibility criteria and restrictions for getting home loans tend to be region-specific. In Singapore, you may qualify to borrow up to 90% of the home’s value if you are in a strong financial position. If you’re unable to meet the criteria to qualify for the top bracket, you may still get a loan of up to 80% of the home’s value. If you have an existing mortgage, you can borrow up to 60% of the home’s selling price.
If you plan to purchase a house in the U.S. or the UK, expect to pay at least 40% of the home’s selling price on your own.
Making the Down Payment
Instances of expats making their down payments using foreign currencies are fairly common. Given that a down payment toward a house involves a large value transfer, it may be worth your while to compare different overseas money transfer companies. Like banks, the top players in this field such as InstaReM, TransferWise, WorldFirst, and OFX provide high levels of security. In addition, they also tend to offer better exchange rates and charge lower fees.
Buy a home in a foreign country may be simpler than you imagine, provided you meet the required eligibility criteria. With a steady source of income, you may even qualify for an expat mortgage. However, it is important that you start
As the markets tumbled, with the S&P 500 index showing its largest one-day fall since August 2011 and the subsequent drop across world markets that followed, many investors were shocked at the extent of the losses. At the same time, the VIC, the volatility index, recorded its largest one-day rise in history, showing just how deep the sell off was. There have been warning signs, in the bond market in particular, with yields rising from 2% in September 2017 to 2.8% today, reflecting the stresses within the markets as interest rates begin to rise.
Accelerating interest rates
This current sell-off seems to have been triggered by the Friday Non-Farm Payroll data, which came in firmly ahead of expectations. This strong showing indicates strength in the economy, which raised fears of faster interest rate rises than had been previously anticipated from the Federal Reserve, and with three rises in 2017, the possibility of more throughout 2018 concerned investors, particularly heavily leveraged ones.
Federal Reserve Chairman, Jerome Powell, faces a testing time in balancing this situation in the coming months, and the fear that caused this latest sell-off is only a small part of a broader issue he must contend with. Since the financial crisis in 2008, cheap credit has powered the markets, but we are now entering a new phase, with liquidity being pulled back from the financial system as uncertainty takes hold.
The big question
With signs of potential volatility being present for a while, the biggest question asked by this sell-off is a simple one, is it a one-time adjustment, similar to the one encountered in 2013 based upon the panic resulting from a reduction in quantitative easing, or is it something more significant, and the start of a bear market?
Our view on the road ahead
Looking at the broader picture, the sell-off and associated volatility is not something that would cause us to change our medium-term perspectives or asset allocations. Over the coming weeks, there will likely be more volatility, bringing instability and unpredictability as investors change their priorities depending on their thinking about future interest rates and inflation direction, and will likely create more attention-grabbing headlines and panic for the uninformed. However, with our long-term viewpoint we can approach these incidents for what they are, minor corrections during the upward trend, and simply sit tight with our positions.
Overseas investment into the London residential new-build property market is dominated by Asian investors who may be overlooking UK inheritance tax in their financial planning.
using data from the UK’s Office for National Statistics (ONS) and Centre for Housing Policy, shows that an estimated £1bn ($1.4bn, €1.1bn) was invested in the London new-build property market alone in 2017 from Asian investors, predominantly based in Hong Kong and Singapore.
Asia accounted for 61.4% of total overseas sales; with the Centre for Housing Policy’s research showing that 31.5% came from Hong Kong, 20.8% came from Singapore, 5.4% came from China and 3.7% came from Malaysia.
The research also shows that it’s not just those with surplus cash who are investing in the UK property market, but serious investors are prepared to take a leveraged position; in Singapore 67.5% of property sales are from a mortgage, well above the average of 53.5%, and in Hong Kong 54.6% of sales are mortgaged.
This shows investors in Singapore and Hong Kong are more likely to borrow in order to invest in UK property compared to investors from other regions.
Inheritance tax exposure
With so much money flowing into the UK new-build property market, investors need to be aware of their potential exposure to UK inheritance tax (IHT). IHT is payable on death on any property or assets owned in the UK by the deceased.
This is irrespective of domicile status or whether the deceased lived in the UK or overseas.
UK IHT is set at an eye-watering 40%, so needs to be properly planned for.a high number of investors in the region, both individuals and company investors, could be left exposed if they are unaware of the potential IHT liability.
Over 30% of those surveyed overseas either didn’t know or didn’t realise there would be a UK IHT liability on UK property, and just 7% claim to fully understand UK IHT.
If an investor’s estate is hit with a UK IHT bill that they haven’t planned for, this could potentially create a real headache for their beneficiaries, who may not have the cash to pay the IHT bill and may not be able to sell the assets quickly enough to access what they need.
To help ease this headache, if investors know there is a future liability on their estate, they can put plans in place to provide their executors with the required funds.
For example, by writing a life policy in trust, or using appropriate IHT. trust planning alongside their investments during their lifetime.
There are a number of ways to create an income when you become a tax resident in the UK that is free of tax, in effect to create your own tax haven.
Everyone receives a tax free allowance of £11,500 per year (2017/18), this is the amount before you are subject to income tax. There are other allowances such as savings starting rate (£5,000) and dividend allowance (£5,000) before you would pay tax on those assets. There is also capital gains allowance (£11,300) that can be utilised every year. In total, this could be £32,800 per year income before any tax is paid.
Furthermore there is option to use offshore bonds to generate a further tax free income into the UK. Whilst you're overseas as an expat you can build up a fund in this investment vehicle that will allow you to withdrawal the capital when you're in retirement. Regular withdrawals can be taken from an offshore bond soon after investing or that decision can be deferred until a future date.
This can be done through the 5% deferred tax withdrawal facility, which allows you to turn your existing capital into a tax-efficient income stream. A growth investment strategy can be followed initially, with a subsequent switch into income generating investments if and when that is desired. With the 5% deferred tax withdrawal facility you can take regular withdrawals from your offshore bonds, accessing the capital in a tax efficient way by withdrawing up to 5% of each investment amount every year without an immediate liability to tax. This is a very valuable benefit for higher rate taxpayers.
This 5% amount can be taken every year for 20 years, or accumulated over a number of years and withdrawn less frequently without triggering a chargeable event for tax purposes. There are a few other allowances that can be used with the account depending on how long you have been a non-UK resident. the ability to assigned the plan to other people or a trust is helpful when conducting financial planning.
It’s tough to find an asset allocator with an overweight position in US assets. Most agree that the stock market is expensive, the political situation is precarious and the economy may be on the cusp of overheating. Inflation is moving higher and further interest rate rises are imminent. So why does the stock market keep moving higher?
US equities have continued their strong run since the start of the year, fuelled by Donald Trump’s tax increases However, equity market valuations look increasingly precarious and appear to anticipate strength in the next quarter’s earnings In the past few days, there have been signs that US indices are starting to wobble. According to MSCI, North American equities are up 4.57% since the start of the year (data to 17 January). This is more than the Far East, on a par with Japan, and materially ahead of Europe, where – in many cases – economic growth is just as high and stock market valuations far cheaper.
There are a number of possible reasons for this. First is that the US continues to make up a significant proportion of global indices and passive investors continue to be an important influence on markets. While active investors are nervous about valuations, passive investors are less sensitive and continue to push the US indices higher.
It may also be that the Dollar is taking much of the strain. Sterling recently hit post-Brexit highs against the greenback, and US stock market returns look far more lacklustre in sterling terms (2.46% against 7.89% for Europe). There are those who believe that as America’s power and influence on the world stage slowly recedes in favour of China, the Dollar will continue to decline.
It may also be that US equities are in the throws of a ‘last hurrah’. Bull markets tend to run on longer than most people expect and the US economic expansion may be mature, but it is still happening and may be prolonged by US tax cuts. Earnings for US companies are still improving, and – in many cases – justify the valuations.
However, there are signs that investors are finally pausing for thought. Volatility of US markets is increasing; there is increasing nervousness that markets have already anticipated any strong improvement in earnings this quarter.
Either way, there are vastly better opportunities elsewhere. Yes, the US bull market may limp on, but increasingly, the potential downside does not justify the potential upside. Fiscal stimulus may douse a little short-term fuel on the fire, but the petrol can is looking increasingly empty.
How does this happen? Tom Wolfe gives a steer in Bonfire of the Vanities. His banker protagonist, Sherman McCoy recalls where he spent last year’s paycheck, and it goes like this
“I’m already going broke on a million dollars a year! The appalling figures came popping up into his brain. Last year his income had been $980,000. But he had to pay out $21,000 a month for the $1.8 million loan he had taken out to buy the apartment. What was $21,000 a month to someone making a million a year? That was the way he had thought of it at the time-and in fact, it was merely a crushing, grinding burden-that was all! It came to $252,000 a year, none of it deductible, because it was a personal loan, not a mortgage. (The cooperative boards in Good Park Avenue Buildings like his didn’t allow you to take out a mortgage on your apartment.) So, considering the taxes, it required $420,000 in income to pay the $252,000. Of the $560,000 remaining of his income last year, $44,400 was required for the apartment’s monthly maintenance fees; $116,000 for the house on Old Drover’s Mooring Lane in Southampton ($84,000 for mortgage payment and interest, $18,000 for heat, utilities, insurance and repairs, $6,000 for lawn and hedge cutting, $8,000 for taxes.[…more expenses I don’t feel like typing out…] The tab for furniture and clothes had come to about $65,000; and there was little hope of reducing that, since Judy was, after all, a decorator and had to keep things up to par. The servants…came to $62,000 a year…the abysmal truth was that he had spent more than $980,000 last year. Well, obviously he could cut down here and there-but not nearly enough-if the worst happened!
Sherman was on the hedonic treadmill. It’s very easy to get on and very difficult to get off. When you’re on it, you find yourself not just wanting but needing certain things. Things you think you can’t do without. A better house, a better car, holidays on far-flung locations, nights out, new clothes, a second home etc etc
Don't get stuck on the treadmill
Non-residents selling property in the UK who fail to report their capital gains tax liability to HM Revenue & Customs within 30 days will be hard pressed to plead ignorance, despite precedence, following two recent tax tribunal judgments.
The 30-day requirement was announced in the 2013 Autumn Statement and implemented in April 2015. Sellers have to file a non-resident capital gains tax (NRCGT) return within 30 days of the disposal of a UK residential property. A return still has to be completed even if no CGT is payable.
Failure to notify HMRC within the specified time originally carried:
an initial penalty of £100 ($135, €113) in all cases; plus a 5% charge of the tax due or £300 for returns over six months late; plus a 5% charge of the tax due or £300 for returns over 12 months late; plus a £10 daily penalty for returns filed between three and six months late. According to the Society of Trust and Estate Practitioners (Step), this gave rise to a large number of complaints when HMRC tried to enforce the penalties.
As a result, the daily penalty was withdrawn, along with past penalties issued against late filers.
In mid-December, the First-Tier Tax Tribunal released decisions on two cases that centred on the late submission of NRCGT returns.
Both cited the case of Rachel McGreevy who resides in Australia and successfully overturned a £1,600 penalty for submitting an NRCGT a year after selling her UK property in 2015.
McGreevy said her understanding was that the CGT, which was nil, would be payable as part of her annual self-assessment. After discovering this was not the case, she completed the form and submitted it to HMRC, appealing the fine as “she had absolutely no idea” it was a requirement and had “received no previous advice to do this”.
The UK taxman rejected her appeal on the grounds that she had “no reasonable excuse”. It said it was McGreevy’s responsibility to ensure that an NRCGT return was submitted on time, as all the relevant information had been clearly publicised on the UK Government’s website.
McGreevy successfully appealed, with the tribunal judge determining in September 2017 that HMRC had not publicised the 30-day deadline widely enough, relying instead on the chancellor’s Autumn Statement and “an obscure document” on its website.
The judge stated: “I therefore consider that [Greevy] had a reasonable excuse for not filing a NRCGT return on time.”
Her success, however, has not meant that others have been as lucky, as two similar cases from December demonstrate.
Ignorance is not bliss
In one case, Mr Welland, who resides in Thailand, decided to sell three properties in the UK. He did not complete an NRCGT under the belief, like McGreevy, that he was to make the declaration in his annual self-assessment.
He claimed that it was only when he started to complete the self-assessment form that he became aware that the NRCGT had to be submitted within 30 days.
No CGT was due from the sale, as the profit was within his annual allowance.
However, after HMRC stripped out the daily penalties, Welland was left with a penalty of £1,800.
In a similar case, David and Jennifer Hesketh live in Singapore having been non-resident in the UK for many years. They sold a jointly-owned London property in December 2015 but did not file an NRCGT until January 2017.
Again, no CGT was payable on the sale of the property.
In January 2017, HMRC imposed a late filing penalty of £100 on both Heskeths, plus a £300 late filing charge each and £900 of daily penalties. After withdrawing the daily fines, the total penalty the couple faced was £800.
The same judge made both decisions and determined, having consulted the McGreevy ruling, that ignorance of the law was not a reasonable excuse for not complying with it.
The penalties were upheld, although Welland’s was reduced to £700 to reflect the quick succession in which he sold his properties. Had they been spaced apart, the judge said it was likely that he would have learned of his non-compliance and not made the same error with the subsequent sales.
Source: International Adviser
As we approach the end of another year, the equity bull market shows no sign of abating. Nine years after the financial crisis, equities have been on a stellar run with a seemingly constant move higher with little volatility, in what is becoming known as the most hated bull market in history.
When Quantitative Easing was announced by central banks, many suggested it should be called ‘the Great Financial Experiment’. While the overall aim was to underpin the economy and ensure that credit continued to flow to businesses to promote growth, one of the implications has been the rapid advancement of technology, fuelled by access to very low financing costs and the exceptional performance of growth stocks, particularly in the technology space.
As a result, when looking at investment styles during 2017, growth investing has significantly outperformed value investing, and since the financial crisis growth has outperformed value in seven out of the last nine years*. Unsurprisingly, this has meant that value investing as a style has fallen hugely out of favour, with only the value teams at Schroders, Jupiter and JO Hambro really falling into the true value camp.
Those of you who, like me, remember the technology bubble in 1999/2000, will recall that equity valuations in growth sectors got incredibly stretched and many value managers of the day were being told they had lost the plot and needed to change their investment style to reflect a new world. Well, you may also recall that value went on to outperform growth in each of the following seven years!In those heady days of the technology bubble the mere hint of an internet connection saw a company’s valuation sky rocket. Things are different to today, but growth stocks are once again priced on very high multiples. Interestingly, November saw the elevation of online takeaway company Just Eat into the FTSE 100 Index and it now trades on a PE multiple of 73**. While I have no doubt that Just Eat is a great company that is capitalising on the changing way we are leading our lives, paying 73 times its current earnings to own a slice of it is a very rich price indeed.
The challenge for these highly valued growth stocks is that they must keep on growing at the same phenomenal rate to justify their valuations. With genuine growth seemingly hard to find, it is no surprise that some are prepared to pay these high prices to access such growth. However, it’s important to remember that there is no margin of safety and any disappointment in trading is likely to see their share prices hit hard.
It’s these valuation anomalies that are exciting value managers and giving them hope that the dispersion between value and growth has gone too far. With businesses such as Just Eat – which, remarkably, is now worth more than Marks & Spencer, J Sainsbury and WM Morrisons – priced for perfection, it is the old fashioned industries of mining, oil and gas extraction, insurance and telecoms that are currently the laggards and trading at significant discounts to their history.
While these businesses may not be exceptionally glamourous, and certainly not as exciting as ordering a takeaway on your phone while settling down in front of the Strictly Come Dancing Christmas Special, there comes a point when the valuation anomaly becomes just too great and these businesses get too cheap. When looking at the current dispersion between value and growth, it feels like this has been stretched to extreme levels.
As we enter 2018, the economic environment is changing, with inflation running high, the prospect of higher interest rates and a potential slowdown in the UK as the headwinds of Brexit begin to bite. If this spills over into the investment world, it will be interesting to see if it is those businesses priced on high PEs that provide the protection or whether it is cheap stocks that weather the storm the best. A look back at both 2000 and 2008 gives a clear pointer that if we do hit a period of turbulence in the economy and stock market, then value investing could well be the place to shelter.
Ryan Hughes Head of Fund Selection, AJ Bell InvestCentre
After 11 months of decent returns from UK stocks*, you may think the market will wind down for the festive month of December. But this is unlikely—historically, investors have joined in the Christmas cheer.
The so-called “Santa Rally” has been observed throughout December in many previous years, but is typically most generous in the last week of trading. Analysis from J.P. Morgan Securities suggests that the Santa Rally has a 76% hit rate in the UK equity market (based on the FTSE 100) and has provided an average return of 2.8% over the month of December1.
There are a number of suggested reasons for the Santa Rally, many of which may well be spurious. For example, some may believe it is caused by investors buying stocks in anticipation of gains at the beginning of the New Year caused by another seasonal anomaly called the “January Effect”.
Others suggest that the Santa Rally may be driven by tax considerations, or even a feel good factor from investors due to the festive atmosphere.
These sort of anomalies are by no means guaranteed, but let’s cross our fingers that Santa brings a little extra return this Christmas to the UK stock market.
Moving a United Kingdom pension to Australian superannuation is complicated enough after big changes over the past few years. But a further worry for those wanting to transfer their UK entitlements is how much it can cost to do this.
A reader has less than £100,000 ($177,000) in a UK pension plan managed by the Friends Life group since 2012 that he wants to add to his Australian super savings.
Originally a top-up plan for the UK basic state pension, he is concerned about the likely transfer costs. He’s also worried about what might happen to its value in the lead-up to the UK leaving the European Community – Brexit – in 2019.
His concerns are quite valid, says Brian Bendzulla, managing director of financial consultant Net Actuary. On top of potentially further changes to UK pension transfer rules, he will have to deal with the interaction between UK rules and Australia’s super reforms, including changes to Australian contribution entitlements.
Governments in both the UK and Australia have made major changes to retirement savings arrangements – especially at the retirement income end. They are changes that anyone planning to transfer UK pension savings to Australia must become familiar with.
When a UK pension amount is transferred, it is treated as a non-concessional (or after-tax) contribution to super.
As far as the UK is concerned, the most important of these changes is a restriction imposed from April 2015 on allowing transfers before a member has reached the UK minimum pension age (currently 55).
This is the most immediate condition the reader must satisfy.
If he can’t, says Sydney super adviser Liam Shorte of Verante Financial Planning, he will have to wait until he is 55.
Shorte says he has a list of about 10 people in their early 50s with UK pension savings they want to bring to Australia. They have an arrangement to come back to him when they turn 55.
Until then, he has advised them to ensure their UK super is managed properly. They should concentrate in particular, he says, on ensuring they don’t pay too much in fees and charges which can be a trap for many.
His additional advice is to build up their Australian super.
If the reader satisfies the age condition and wishes to transfer the UK pension, he will not be able to transfer this to his Australian super fund if it’s a retail or industry fund.
Another key change to UK pension transfer rules in 2015 was a host of big Australian super funds losing their right to accept UK pension amounts because they couldn’t unconditionally satisfy the age 55 restriction. That’s because their rules can allow early access to super on hardship and compassionate grounds.
To be able to accept a UK pension transfer, an Australian super fund must be registered with the UK pension regulator, Her Majesty’s Revenue and Customs (HMRC), as a Qualifying Recognised Overseas Pension Scheme (QROPS).
Self-managed super funds (SMSFs) can accept a UK pension transfer.
If the reader satisfies the age 55 condition and has an established SMSF, says Brisbane barrister Jeremy Gordon, the fund’s trust deed can be amended so that it complies with the QROPS rules.
Gordon offers a legal documents service DirectDocs.com.au that includes an online QROPS conversion kit for a cost of $145.
Using an SMSF is not a simple process, cautions Olivia Long, chief executive of Adelaide-based SMSF administrator SuperGuardian.
Get the deed right
To start with, she says, you must ensure the SMSF trust deed is worded appropriately to comply with UK pension regulations. In particular, there must be no access prior to the age of 55.
The next step is to lodge a request to HMRC to be registered as a QROPS. This application can be done online and includes providing SMSF details, information on SMSF legislation and the SMSF’s trust deed.
Applying for QROPS status requires patience, says Long, as this can take four to eight weeks to be acknowledged.
A key consideration for anyone contemplating the SMSF route is the likely cost, especially if specialist advisory services become involved. This makes researching the costs of any exercise a very important part of the UK transfer process. Some specialist services charge a per cent of the transfer amount plus the cost of establishing an SMSF.
While an SMSF is one option, there is an alternative in the form of a boutique public offer retail superannuation fund, the Australian Expatriate Super Fund (AESF).
Established just over 12 months ago with South Australian based Tidswell Financial Services Ltd as the trustee, managing director Dannie Fox says the AESF is the only public offer retail superannuation fund in Australia able to receive UK pension transfers.
Keep costs down
Judging by the reader’s balance, says Fox, it will likely be more cost-effective to transfer directly into a retail fund than to establish an SMSF for this purpose. The AESF has more than 100 members. For a pension transfer it initially charges $880 (including GST) to contact the UK pension scheme, obtain, assist and lodge the discharge paperwork and then receive the money.
Once it is in the fund, says Fox, the UK pension amount is treated like normal Australian superannuation for access purposes, although there is an annual $264 charged for QROPS reporting.
While some of those who transfer their UK pension to an SMSF run it as an additional super account, says SuperGuardian’s Long, others use this as a “means to an end”.
Many roll out the funds to a retail or industry fund at the first opportunity, or cash it out if they have met a condition that allows them to withdraw their super.
They use the SMSF, she says, as a vehicle to bring the pension funds across but don’t want to deal with the ongoing administration requirements of being SMSF trustees.
AFR Contributor, John Wasiliev, Fairfax Media
Many Expats often make the mistake of believing that death in service benefits they have with their company and life insurance are the same thing, This however, is not the case. Death in service is an insurance offered through your employer, while life insurance is available through an insurer. Often the two types of cover differ significantly in terms of the benefits they can offer.
The major problem with the death in service benefits is that in essence its just a personal accident insurance. If we look at the scenarios that a life company will pay in the event of a claim, the majority of the cases likely to be after a period of illness. But if you look at the cover that death in service offers then you are unlikely to be employed as the firm has no obligation to keep you on after the a period of illness.
The expat employee contract will generally have a clause that entitles the employer to stop employing you after 3 months if you're too ill to work. If after this period you die then the death in service benefits cease to exist.
With death in service, if you were to move or lose your job, through redundancy or dismissal for example, any death in service benefits will be lost. Replacing this level of cover may not be easy, particularly if you were in poorer health, which could then leave your family at risk should anything happen to you. For this very reason, you should be aware that death in service insurance may not be sufficient to cover all of your needs, so it may be worthwhile to consider additional cover in the form of life insurance.
What is death in service?
Death in service insurance pays out a lump sum to your family, usually around three or four times your annual salary if you die while working for the company offering the insurance policy. Many employees are provided with death in service benefits through an insurance scheme set up by their employer. The cover is normally offered free of charge as part of a benefits package and goes some way towards protecting your loved ones financially should you die whilst employed. However, if you leave your job, get made redundant or are dismissed, the cover ends, which could then leave your family at risk financially if you were to die.
What is life insurance?
Life insurance pays out either a lump sum or an income if you die. You might want it to provide your family with an income to live on or to cover a specific regular expense. Or you might want them to receive a lump sum which they can then invest/use for income or to pay for something specific such as an outstanding mortgage or inheritance tax bill
For a quote for life and critical illness insurance
We define a structured product as, ‘An investment backed by a significant counterparty (or counterparties) where the returns are defined by reference to a defined underlying measurement (such as the FTSE 100) and delivered at a defined date (or dates)’
A ‘capital-at-risk’ structured product might for example offer a return of 65% on the investment if the FTSE 100 is at the same level or higher on the day the product matures in 5 years’ time. If the FTSE 100 is below that level, it will return the invested capital, unless it is more than a specified amount below, say 50%, whereupon capital would be reduced by the equivalent fall in the FTSE 100.
Most structured products may be sold during the term but they are designed to be held until their maturity. If sold early, the investor may get back less than they invested, even if the underlying asset has performed well. These investments should therefore only be considered if the intention is to hold them for the full investment term
Structured products offer many attractive features which can be used to satisfy a variety of investor needs. However, we do not believe they should be seen as a replacement but as a complement to traditional investments such as funds.
Most holders of life insurance policies don't put their policies in trust. For most UK expats (and other nationalities) putting the policy in trust is a common sense tax saving opportunity.
By putting it in trust it has two benefits:
- Firstly it ensures that the insurance payout is not included in your estate for UK inheritance tax purposes
- Secondly, it ensures that your beneficiaries can access the cash quickly as it will be paid directly to them rather than having to be classed as part of the estate and subject to probate, etc
The reason why people usually choose to have their life insurance policy written in trust is that the money can go directly to where it's needed, for example to the mortgage provider to pay off the remortgage, or to family members so they can use the tax-free money immediately.
The procedure for putting the policy in trust is usually very straightforward, and most insurance companies will offer this for free. The documentation from the insurance policy usually includes a box to tick if you want to put it into trust. You'd then need to provide the name(s)of the beneficiary under the policy (i.e., who you want to benefit). Joint life insurance policies
Certainly, for individual insurance policies, it's pretty straightforward. What's the position with a joint insurance policy though?
In this case, the policy pays out on the death of (usually) the first to die. Using a joint life insurance policy makes the position potentially complex, and the tax treatment would depend on the specific wording of the policy. Ignoring the trust issue if you and your partner are joint policyholders there are three possibilities:
Firstly you are both beneficial tenants in common and the interest of the first to die passes under his/her will. In this case the share of the first to die forms part of their estate and, subject to exemptions, UK Inheritance Tax is payable on the value of that share.
Secondly, you are both beneficial joint tenants and the interest of the first to die passes to the survivor. In this case, the same consequences will follow, and the receipt would be potentially subject to inheritance tax.
Note that in either of these cases if you were married the spouse exemption would be available to avoid IHT on the death of the first spouse.
What about putting a joint policy in trust?
You could put a joint policy into trust. As we've seen, the benefit of a trust is that it could avoid IHT on the death of the first partner.
However, writing a joint policy in trust is likely to be more complex than a single policy. There are standard forms available from the insurance company that can allow the trust to be set up.
It is usually a very straightforward process. In many cases, single life policies are preferred to a joint life policy. The costs involved are not significantly more, but it is simpler to write into a trust and offers added protection & flexibility.
Publicly funded educational institutions normally charge two levels of fee: a lower 'home' fee and a higher 'overseas' fee. Private sector institutions often have only one level of tuition fee, which all students must pay. Whether you pay a 'home' or 'overseas' fee depends on whether you meet certain criteria.
The fee status criteria is provided in regulations, and guidance, published by the governments of the four countries of the UK. Different criteria will be applied depending on which country you are studying in, and whether you are studying a course at higher education (HE) or further education (FE) level.
As an expat you are likely to be subject to much uncertainty, you may need to move country at a moments notice. Many overseas employers will not offer the conventional pension schemes that you would receive in your home country. You may not be eligible for the local retirement fund as well. You also need to look at how you’re going to build your retirement income if you can’t continue to pay into your pension back home.
The earlier you start, the less onerous saving for your retirement is likely to be. You may also be able to afford to take greater risk with investments the further away you are from retirement, as temporary shortfalls caused by fluctuations in the market can be smoothed out over time.
There is a great saying. ‘The best time to plant a tree is 20 years ago. The second best time is today’
When thinking about saving and investing for retirement, it's important to consider where you plan to retire to, along with how income from your retirement savings will be taxed in retirement.
Look into the cost of living in your new country and tax implications in both your home country and adoptive country. You might be in the situation where you have moved to various countries throughout your working life, holding retirement savings in each.
When you're planning for retirement, there are some key issues you need to consider:
Where do you want to live when you retire? - If you're thinking of retiring abroad, it's worth checking how the cost of living compares with other countries. When do you want to retire? – The day you want to move into retirement whether it is early or later. Costs that you may not considered? – Your children may have moved out but they may also live in different parts of the world. Travelling to see them will be a big expense. The cost of health care is likely to be higher in retirement While some expats choose to return home in retirement, their experiences of life abroad may convince them to remain overseas. This could be either in the country in which they've been residing, or a different country that might offer an improved quality of life, a better climate or allow them to be closer to family.
Many are now looking for flexibility in retirement, which could include more extensive travelling and homes in different countries. It could involve more adventurous activities that they were unable to pursue when working, due to time constraints or having young children in tow. So how does an expat create a retirement fund? Create Multiple streams of income.
Once you have calculated how much you need, where you are likely to be and what expenses there are going to be. The creation of the retirement fund will come from different sources of income accumulated such as:
• Conventional occupational pension scheme • Buy to let property portfolio • Cash in the bank • Share portfolio • Social security or government pension • Consultancy work or part-time work in retirement • Small business
Mr. and Mrs. Brown live in Singapore and wish to retire to Malaysia. They have calculated that they need 50,000 GBP per year. Their daughter is in Australia after remaining there after university and their son is in Italy working. They expect to travel to both countries to see them. They still need to maintain their health insurance and the cost of flights each year.
They receive 8,000 GBP each from the UK basic state pensions and Mr Brown receives 12,000 GBP from an occupational pension scheme. They have a buy to let property in the UK that provides them with 12,000 GBP per year. They have a portfolio of 500,000 GBP they need to generate 10,000 from this, even though it could produce a lot more.
Investors are strange creatures: they wait until the market has risen before they put money in and then sell out when the market has plunged - or worse, hold on to a floundering stock, waiting for it to get back to the value they paid for it.
Why do we behave irrationally? We would not wait for the price of our morning coffee to go up 20% before buying it, so why do we do this with investments? Why do we panic when markets drop, even though we knew it would happen? And why do we become attached to lame ducks whensellingthemandmovingonwouldgetourmoneybackquicker? Manytheoriesabound:gobackasfarasthe18thcenturyandeconomists such as Adam Smith were seeking an explanation of why markets behave as they do. One that has gathered force of late is behavioural finance.
Behavioural finance suggests people often make decisions based on so-called rules of thumb, rather than after rational analysis. Technically referred to as heuristics, it involves understanding that the way a problem is presented can affect the outcome (a process called framing). Therefore, market inefficiencies are not the only way to explain outcomes that go against rational expectation.
Two of the most influential psychologists in the field are Daniel Kahneman and Amos Tversky who, in 1979, published a paper comparing models of rational economic behaviour with decision-making during times of risk and uncertainty. Their theories sought to explain anomalies in the way investors and financial markets react.
These theories help explain how we all got pulled into phenomena such as the technology boom (mostly too late to make any real money), despite the irrational theories that tend to support them. They also help explain why we sell out of a falling market, just when our loss is at its greatest, and why we hold on to ‘loved’ investments long after they have started to go wrong. And it is why we shy away from markets that have underperformed, despite indications of great potential.
Increasingly, asset managers are using pricing models to take behavioural biases into account, as they believe it gives them an advantage. If you understand these theories, you could have that advantage too.
What you need to know
If you are looking to invest in shares or bonds, you may think about putting your money into one or more managed funds. Managed funds are pooled investments that contain different securities, so you reduce the risk of holding just a few individual shares or bonds.
You can invest in funds which provide access to a variety of different markets and sectors. But wherever you invest, you will be faced with one of the most basic questions: do you want to put our money in ‘actively’ or ‘passively’ managed funds?
CHOICE OF FUNDS
Deciding if you would prefer your investment ‘actively’ or ‘passively’ managed is an important consideration and a useful step towards narrowing your choice of funds to invest in. Your first consideration is deciding how you want your investments managed. Are you looking for a fund that will be impacted by an individual fund manager’s choice of investments? Or are you more interested in keeping charges lower and prefer one that simply reflects the performance of a major index, such as the FTSE 100?
ACTIVE MANAGEMENT STYLE
Active funds typically have higher annual management charges than passive funds. This reflects the investment managers’ potential to outperform the market, and they are managed with the aim of generating returns greater than the relevant markets, as measured by an index – known as its ‘benchmark’. The index contains the companies whose shares are being bought and sold daily by the fund. All equities belong to at least one index depending on the location of the company and the type of business.
GOOD STOCK SELECTION
Professional fund managers or investment research teams run active funds, and they make all the investment decisions – like which companies to invest in or when to buy and sell different assets – on your behalf. The manager will pick stocks to buy and then compare the returns that they make against the benchmark. Good stock selection is designed to pick the companies that the fund manager thinks will outperform others within the index.
BEST DIVIDEND PAYMENTS
The manager does not have to buy all the index stocks, only the ones they believe will increase the most in value or, in some cases, pay the best dividends to give the best overall returns. They have extensive access to research in different markets and sectors and often meet with companies to analyse and assess their prospects before making a decision to invest. Typically, active fund managers base their stock buying and selling decisions on several factors including market conditions and the political climate, the state of the economy, and company-specific factors (for example, profitability and market share).
MOST PROMISING OPPORTUNITIES
Depending on the fund’s objective, an active fund manager may have little or no constraint on their investment choice. Where this is the case, they can select what they consider the most promising opportunities, regardless of industry sector or company size, and aim to maximise gains in rising markets and limit the effects when markets are falling.
PASSIVE MANAGEMENT STYLE
The passive management style of investing is called ‘passive investing’, also known as ‘tracking’. A passive, or index-tracking, fund is managed with the aim of replicating the performance of a specific index. Passive investment funds track a market and charge less in comparison to an active fund. To track the FTSE 100, for example, an investment manager will aim to invest in the same shares, in the same proportions, as this index.
“Professional fund managers or investment research teams run active funds, and they make all the investment decisions – like which companies to invest in or when to buy and sell different assets – on your behalf.”
Passive fund managers won’t make any ’active’ decisions, as they’re only trying to match the index. The fund will generally rise and fall with the index. Typically, the fund will buy all the stocks in, for example, the FTSE 100 in the same proportion they represent in the index. So if Vodafone accounts for 6% of the FTSE 100 Index by value and a smaller company such as Tate & Lyle accounts for 1%, some 6% of fund by value will be in Vodafone shares and 1% by value in Tate & Lyle, and rebalancing will occur to ensure the fund is consistent with the index.
LOWER TRANSACTIONAL COSTS
Passively managed funds perform well when markets rise and poorly when they fall, and they can be less diversified than active funds, as the relevant index may be dominated by just a few large companies. A change in the investment manager should have no impact on its performance, and they generally offer lower annual management charges, with a lower turnover of shares leading to lower transactional costs.
DEGREE OF RISK
It’s important to remember that a degree of risk is inherent with any investment, and the potential for greater returns comes with a higher degree of investment risk. While
a passive fund is considered to have less investment risk associated with it than an actively managed fund, there are still risks (such as stock market risk) involved.
DOES YOUR INVESTMENT PORTFOLIO TRULY REFLECT YOUR INDIVIDUAL INVESTMENT OBJECTIVES?
It’s important to understand the difference between ‘actively’ or ‘passively’ managed funds before you embark on choosing a fund or combination of funds, and we always recommend you obtain professional financial advice. That way, you can build an investment portfolio which truly reflects your individual investment objectives.