Worry

I renewed my daughter’s residence visa in Hong Kong this morning. Last year they only gave her one year instead of two because her visa could not be granted past the passport expiry date. This time we got three years. Good news for her.

So, while we were waiting she asked me what is my greatest fear, to which I replied, “running out of money”. Fairly standard, I would think for someone of my age group given that average life expectancy once you reach 55 suddenly shoots up. I can only assume this is because all those that brought the average age down are already dead.

How do you ensure your money will last you to potentially 30 more years?

I like to think I know the answer to that question, of course. I certainly believe that in my case, I have it sorted.

My more honest answer to her question might have been that she is the source of my biggest fears, and to a lesser extent, all my other children.

 

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Relief for the beleaguered American Expat. An offshore, uncapped retirement plan.

Eritrea and the US are the only two countries in the world to tax its citizens irrespective of their physical location. Whilst Eritrea offers its non-resident citizens a reduced rate of tax at 2%, the US seeks to impose the same level of taxation to its residents and non residents. This means that regardless of physical location, US citizens remain subject to income tax of up to 39.6% on their earnings and the same again on unearned income arising from investment portfolios – with a possible 3.8% surcharge for those generating more than $250,000 of unearned income. Alongside this there is an additional complication when considering where US taxpayers can invest. Long-standing legislation in the US looks to aggressively tax US taxpayers where investments are made into Passive Foreign Investment Companies (PFICs). A PFIC is, in broad terms, any non-US company or fund that does not distribute income to the US on an annual basis. This means 99% of non-US funds are deemed to be PFICs and US taxpayers cannot structure a globally diverse investment portfolio without suffering penal tax charges and reporting responsibilities. In addition to this it is extremely difficult for US taxpayers to invest in US tax compliant structures for their retirement. Below you will find the basic information on two plans offered to US taxpayers with their funding restrictions: 401(K) For any non US resident taxpayer who is employed by a US company or self employed, it may be possible to fund a 401(k). This does come down to employer discretion and many overseas employees are not allowed to contribute. Employees are entitled to contribute $17,500 per annum which can be topped up by an employer to $51,000 depending on the individual’s earnings. For those over the age of 50, it is possible to increase these amounts by $5,500 as ‘top up’ contributions. INDIVIDUAL RETIREMENT ACCOUNTS (IRA) Any US taxpayer can invest into an IRA – however the annual cap on the contributions is $5,500. This means if an individual contributes the maximum allowance to an IRA for 30 years receiving 5% investment return – the plan will be worth about $500,000 at retirement. If the balance was used to purchase an insurance annuity, one could expect to receive about $30,000 per annum for life. To put this in context, the average cost of a nursing home in New York is $106,500 which is expected to be more than $190,000 by 2030. This all being said, the average size of a 401(k) in 2013 was a mere $90,000 whilst the average IRA was worth $81,000. If a retiree had both a 401(k) and an IRA, this provides an annual annuity income of just $8,500. There have been countless comments made by the President and Congress over the state of retirement plans for US taxpayers however there has been little other option as even establishing a personal investment account outside of the US is now proving challenging due to the complexities being introduced under FATCA. One option that can be considered is to fund a non US pension plan located in a jurisdiction that holds a formal taxation agreement with the US. One such solution is the Trireme Explorer Pension Plan. TRIREME EXPLORER PENSION PLAN The Explorer Pension Plan is a pension arrangement established in Malta under the articles of the Malta : US taxation agreement. Any non-US resident who would like to save in a US compliant and tax efficient manner for their later retirement aged over 18 can apply to become a member of the Plan. Members are able to contribute as much as they would like from after-tax dollars. Going forward Members are able to save with tax deferral meaning they can benefit from compound interest within the plan. Investments may be made in PFICs with no underlying charges or reporting issues due to the terms settled in the Double Taxation Agreement. Whilst these two points are highly beneficial – they are set up to follow the exact treatment as is offered under 401(k) plans and IRAs. Members can draw benefits from age 50 commencing with an initial lump sum of, up to, 30% of the total value of the plan which remains outside the scope of Maltese or US tax irrespective of where the member resides. From then on the Member can draw income directly from the plan with no requirement purchase an annuity. This income will only be partially taxable to US tax as a proportion of the received income is deemed to be a return of capital, which has already been taxed. COMPOUND INTEREST Within the plan members can benefit from compound interest – or “gross roll up”. Compound interest is one of the most advantageous effects of saving in a US compliant pension plan as it means no tax is deducted from the invested capital on an arising basis. Using a simple equation, over a 10 year period if the investment portfolio achieves roughly 7% the original investment will have doubled in value. For individuals looking at retirement planning compound interest is the strongest savings tool available. KEY POINTS: The key points within this solution are:

  • This is a pension scheme and therefore nothing can be taken before age 50.
  • Members can contribute as many after tax dollars as they would like.
  • The plan can invest in global funds with no PFIC charges.
  • Benefits taken at 50 are highly tax efficient – starting with a lump sum of up to 30%.
  • On death, the value of the plan is fully included for US estate tax calculations.

For more information please contact: Mark Plummer T │ (852) 9666 0501 E │ mark.plummer@acumahk.com DISCLAIMER This document has been written in general terms and should be seen as broad guidance only. The document cannot be relied upon to cover specific situations and the reader should not act, or refrain from acting, upon the information contained herein without obtaining specific professional advice. Acuma Hong Kong Limited, Trireme Pension Services (Malta) Limited and its officers, employees and agents do not accept or assume any liability or duty of care for any loss arising from any action taken or not taken by anyone in reliance on the information in this publication or for any decision based on it. Within the borders of the United States, this document is intended to be solely read by professional advisors for general awareness and to assist them in their provision of advice to their non-resident US taxpayer clients.

Doctor, Dentist, Teacher, Spy?

If you ever worked in the UK in the NHS or as a Teacher or even in the Armed Forces, Police or other government service, come April 2015 you can breathe a sigh of relief and perhaps your phone will not ring as often.

Why is that? I hear you cry.

The UK Government has announced that all transfers out of unfunded UK defined benefits pension schemes will be banned effective April 2015.

An unfunded pension scheme is one in which here is no actual money. The benefits paid to retirees are made either from the governments other resources or from current contributions of those paying in.

The government cannot afford to have people taking cash lump sums in lieu of pension benefit especially in the current low interest rate environment and this is one reason why they want to stop you from doing it. They simply don’t want to stump up the cash in advance

One other reason is that those who know they will not live very long and whose pension income either dies with them or is a drastically reduced widows/widowers pension would rather have the cash in hand as it could be better to take cash now rather than die within a year of retirement.

The reality is that most people probably would not want to exchange what is a gilt-edged guaranteed income from a AAA-rated government but there will be people, perhaps expatriate people who have no intention of ever returning to the UK for whom it just might be something worth looking at.

After April 2015, you will no longer have the option. If you want to be certain that leaving it there is the best thing for you, let me know and we can check. We independent actuaries and a UK FCA authorised branch of our group to ensure you get the very best advice

On the plus side, most of those QROPS salesmen will not be calling any more.

ARE THE TREND FOLLOWERS BACK?

In 2008 when traditional equity funds showed their worst returns in recent memory trend followers reigned supreme. The leveraged version of one high profile ‘black-box’ trend following Commodity Trading Advisor managed over 50% in 2008 while a more volatile member of this asset class managed a mere 21% gain for the year.

Since then there has been some faltering although if you had held on through the last 6 years you could be looking at rather handsome profits.

CTA funds, on a standalone basis, can disappoint but there is strong evidence of non-correlation to equities and many advocate them as a portfolio diversification tool, particularly if your outlook is to reduce overall volatility and improve predictability.

They typically display positive skew – that is, the upside capture when a CTA program captures a trend significantly outweighs the small losses while waiting for a trend to follow. The last few years have been a waiting game but I am fairly confident we are turning that corner.

It’s really a contradiction in terms to say there are Managed Futures/CTA/Trend Followers that have low volatility but some are certainly more volatile than others. If you can handle large drawdowns and hold on then evidence would appear to show that investing in the higher vol funds is worth it in the long run.

Taking the previous two examples over the period from 2009 to date as an example, the lower vol fund would have you just about break even whereas the more volatile version is double-digit to the positive.

Some would say that these funds are an essential diversification tool in an overall portfolio and do actually reduce volatility and my research would support this and even might go so far as to say that you could allocated less to a high vol fund than you might to a lower vol fund and achieve the same overall result.

So let’s take a look at one in particular, the IQS Futures Fund. The manager of this fund was for a while mixed in with similar managers in a ‘fund of funds” but broke away a few years ago and is now the sole manager.

The IQS Futures Fund was launched in November 2011 to offer investors the opportunity to achieve a high rate of return while keeping the level at risk within acceptable limits.

The assets of the Fund are traded by IQS Capital Management Limited utilizing the IQS Diversified Program. The Program trades a diversified portfolio of outright futures contracts, including interest rates, currencies, energy and both hard and soft commodities, using an objective approach, which employs a series of computer programs.

From its inception in October 1995 to date, the IQS Diversified Program has achieved returns comparable with those of the best performing traders in the managed futures sector.

I switched my own holding from the previous fund of funds to the IQS Futures Fund in November 2011 along with all my personal clients, bar one. If you had done the same, you would now (to end September 2014) be up some 130% than if you had remained in the former fund, which has fallen some 70% over the same period.

It’s not for the faint-hearted nor Widows & Orphans but as a long-term, forget about it play, you could do a lot worse.

Death Taxes – Do You Really Care?

I remember many years ago, there was a general consensus that Inheritance Tax in the UK might well be abolished. At the time, few people actually paid it but these days it is a huge earner for the British taxman. My little old granny died having made no provision and it made a huge dent in her legacy and certainly had my Father and Uncle tied up in correspondence with HMRC for a very long time.

Estate Tax or Inheritance Tax is a fact of life in many countries but at least in the UK and the US and you probably get to pass everything to your spouse or legal partner free of any taxes.

Don’t assume that just because you have lived overseas for decades, you are exempt. Many people think this tax doesn’t apply to them, but they are usually wrong. Can you afford to ignore it?

In the UK, Inheritance Tax is levied on worldwide assets of anyone the government deems domiciled in the UK and you can be non-resident for many, many years but still be considered UK domiciled.

If you are UK domiciled but you are married to a person who is not then you only get to pass on the current Nil Rate Band free of tax, the rest is taxed at 40%

I recently helped one client who has a potential tax bill on death of almost GBP1 million to reduce that by GBP130,000 immediately simply by re-arranging a small portion of his liquid assets into a structure that gives him full access to that money on a set of pre-arranged dates in the future. Over the next few years we can gradually work on reducing more and more of that bill and at very low cost.

If you have assets in the US such as a property, then you pay Federal Estate Tax at 40% on everything above USD60,000. State taxes often apply in addition to that.

If you buy an apartment New York, for example and you are not American then you might get a nasty surprise, or rather your wife will if you happen to die unexpectedly.

Take a development we are jointly offering in New York at the moment. These range from US$637,000 to US$2.4 million. Non resident alien holding such a property would be looking at Federal Estate Tax on death of USD230,800 on the lowest rice unit and almost US$1 million on the most expensive. In addition, New York State death duties are levied on graduated scale from 3.06% right up to 16%.

Lies, Damned Lies & Statistics

Life and Critical Illness Insurance, especially amongst the expatriate community are very much overlooked in favour of products that are designed to grow your wealth.

In this blog, I am ONLY going to point out some statistics recently pointed out to me by Friends Provident International. If you do not have something that will pay a CASH LUMP SUM in the event of your death or earlier disability, these numbers might worry you. They should.

One of my old clients said to me last week, “I’m OK, I’ve got savings plans for myself and for the boys”

Great but; what happens if you don’t make it to pay the premiums?

In Britain
Stroke
• 1 in 6 people around the world will have a stroke in their lifetime
• Every five minutes someone in the UK has a stroke
• One in five strokes are fatal
• 25% of strokes occur in people under age 65
• In 2010 stroke was the fourth largest cause of death in the UK after cancer, heart disease and respiratory disease
• Of those who survived a stroke:
o 42% will be independent
o 22% will have mild disability
o 14% will have moderate disability
o 10% will have severe disability
o 12% will have very severe disability
Heart Disease
• 1 in 6 males and 1 in 9 females died from coronary artery disease in 2011
• Every 5 minutes someone in the UK has a heart attack
Cancer
• More than 1 in 3 people in the UK will be diagnosed with some form of cancer in their lifetime
• 1 in 35 men and 1 in 20 women will be diagnosed with cancer before age 50
• 6 months is the average time people take off work to recover from chemotherapy and radiotherapy, after a diagnosis of cancer
In Hong Kong
• Over 13,000 people died of cancer in 2013 – equivalent to 1.5 deaths per hour
• Nearly 6,000 people died of heart disease in 2013 – equivalent to 1 death per hour
• Over 1,500 deaths were due to external causes of mortality and morbidity – they weren’t ill – equivalent to over 4 deaths per day
Cancer
• Over 24,000 people are newly diagnosed with cancer in Hong Kong every year
• 1 in 4 males have a risk of developing cancer before age 75
• 1 in 5 females have a risk of developing cancer before age 75
Cost of recovery
• The mean first year cost for newly diagnosed coronary artery disease in Hong Kong is USD11,477
• The average monthly cost for cervical, ovarian, breast and small cell lung cancer can exceed HKD20,000
• To qualify for the low cost medical services in Hong Kong you must be a permanent resident

In America
Cancer
• 1 in 2 men have a lifetime risk of developing cancer
• 1 in 3 women have a lifetime risk of developing cancer
• 1 in 29 men have a risk of developing cancer before age 50
• 1 in 19 men have a risk of developing cancer before age 50
• 68% of people diagnosed with cancer are still alive 5 years following diagnosis
Cardiovascular
• >2,150 Americans die of cardiovascular disease each day, an average of 1 death every 40 seconds
• 150,000 Americans who died of cardiovascular disease in 2010 were under age 65
• An estimated 620,000 Americans have a new heart attack each year
• Approximately every 34 seconds 1 American has a coronary event and approximately every 1 minute 23 seconds, an American will die of one
• On average, every 40 seconds, someone in the US has a stroke and someone dies of one approximately every 4 minutes

In Australia
Cancer
• 1 in 2 men and 1 in 3 women will be diagnosed with cancer by the age of 85
• 66% of people diagnosed with cancer are still alive 5 years after diagnosis
• Cancer accounts for about 3 in 10 deaths in Australia
Cardiovascular
• Cardiovascular disease is the leading cause of death in Australia, one Australian dies every 12 minutes
• Each year, 55,000 Australians suffer a heart attack – equivalent to one heart attack every 10 minutes
• 1 in 6 Australians are affected by cardiovascular disease

Other
Cancer
• There were an estimated 3.45 million new cases of cancer and 1.75 million deaths from cancer in Europe in 2012
• In 2012 an estimated 14.1 million new cases of cancer occurred worldwide
• In 2012 an estimated 8.2 million died from cancer worldwide
Cardiovascular
• Each year cardiovascular disease causes over 4 million deaths in Europe
• Overall cardiovascular disease is estimated to cost the EU economy almost EUR196 billion a year
• An estimated 17.3 million people died of cardiovascular disease in 2008

Sources;
http://www.stroke.org.uk/sites/default/fils/Stroke%20statistics.pdf
http://www.bhf.org.uk/research/heart-statistics/morbidity/incidence.aspx
http://www.cancerresearchuk.org/cancer-info/cancerstats/keyfacts/
Department of Health, Government of Hong Kong SAR
www3.ha.org.hk/cancereg/all_2011.pdf
heartasia.bmj.com/content/5/1/1.abstract
http://www.cancer-fund.org/en/press_centre_press_releases_40.html
Cancer Council Australia
Heart Foundation Australia
http://www.ehnheart.org/cvd-statistics.html
http://www.who.int/mediacentre/factsheets/fs317/en/

Your Money or Your Life.

This morning I walked my daughter to primary school for the last time. Starting next term, she will be at secondary school and getting the bus.

Where did that last year go? Sigh.

I’m sure like me, you all remember how, as a kid, things like birthdays and Christmas and school holidays seemed to take forever to come around and now, as we all get older, they fly past at an alarmingly faster and faster rate.

Time and tide wait for no man, as they say and yes, you guessed it, I am about to go on about funding your retirement years. If you don’t do it, they ain’t going to happen, you’ll just keep working. You certainly can’t trust the governments of the world to take care of you properly any longer, that’s for sure.

I read a report a few months back which questioned what level of income one would need in retirement and whilst the details escape me, the conclusion the writer came to was that the relative amount required decreased, let’s say each decade, as you become less able-bodied. So assume you retire at 65, the first ten years you might want an income close to what you had prior to retirement but from 75 to 85, you might need quite a lot less and from 95 onwards, who knows? but bear in mind, medical advances have us all living longer and longer.

Quality of life means different things to different people, some want to travel the world, others, like me, just want to spend time at home, family time and selfish pursuits combining to create utopia. But what does this cost? How long is a piece of string?

What I do know is this. The earlier you start, the better off you will be.

Einstein famously said “Compound interest is the eighth wonder of the world. He who understands it, earns it … he who doesn’t … pays it.”

It’s not so much about interest is it, these days? The Zero Interest Rate Policy (ZIRP) of governments around the world and even negative interest rate policy in Europe (NIRP) means that we can’t rely on yield from 100% safe government bonds anymore, this is not Jane Austen’s time. Life was simple then and maybe if time travel where invented we could live and earn 21st century money and retire to simpler times.

So, how do you know if you are on track? Financial modelling can tell you a lot; we are all different, we all have different assets and liabilities, aims and objectives, income and expenses.

I recently put all my own details into a financial modelling tool that I recently acquired and was pleasantly surprised, I’ve since done it on clients confident that they were well advanced in their planning who were shocked to see serious shortfalls. It’s not about how much money you have, many of my clients are far richer than I am, (I’ve got seven kids and two grandkids, enough said) it’s more about managing expectations and though my wife doesn’t know it, I plan to take it easy when I retire and sit by the proverbial fire with pipe and slippers at the ready.

How about you? 

Why You Need A Financial Planner

I’m not much of a mechanic but when I was less than half the age I am now, back in the ’70’s, first with my little 50cc motorbike and then with various cars, two Vauxhall Viva’s, one Ford Cortina, a couple of Ford Escorts, I did pretty much all my own maintenance work. I learned through experience, the workings and operation of the basic internal combustion engine. With the Cortina, I actually stripped down the engine and rebuilt it with stage 2 head, twin Weber carbs, added a Corsair close ratio gearbox and repainted it, for some strange reason that I cannot today fathom, what I can only describe as a kind of shitty brown. In my mind it was always going to be electric blue but for whatever reason, it ended up brown.

I was pretty proud of myself until I put it on the road and blew the diff. Too much power to the weakest link. Of course, my basic knowledge gleaned from books and a few ‘experienced’ mates down the pub, did not make me the boy racer I yearned to be. Of course, now I know you need to upgrade the brakes, they were drums not discs in those days, a hydraulic clutch might have been nice, it was cable back then.

Nowadays, I lift the bonnet (hood, if you’re not British) of my Mini Cooper and I don’t recognise anything at all. What did they do to the Mini? What happened to that cute little 850cc shell of a car I used to race on grass tracks in Sussex every Sunday? Lucky for me the washer fluid reservoir and oil caps are clearly marked, not that I ever dare put oil in it. It’s a 20 minute job, for an expert, trained ‘technician’, to get the battery out!

In 2014, my car tells me when it wants an oil change, it tells me when it’s brake pads are wearing thin but on the downside, a sensor malfunctioned a few months back and the engine refused to fire up because it was “too cold” outside. It was 34 celsius outside a shopping centre (mall) but my car thought it was somewhere in Siberia.

The Fatboy is not that much different. I can just about get oil and brake fluid in this bike, but anything more than that and I’m screwed. I tried to fit a new seat a few months ago and ended up calling my mechanic to do it properly. Yes, the seat.

While the world of personal finance and investing has come on in leaps and bounds since the 70’s, sadly it has not progressed to the same level as the car (automobile). The technology may not have kept but, like my car, most people reading this have lives far more financially complex than almost all of the people back home. Add to that the fact that governments all around the world are looking at ways of increasing the tax-take while not impacting too negatively on votes and you could be in for trouble.

Being an expat, either on a temporary basis or for life (no comments from the purists please; I know by definition you cannot expatriate temporarily), complicates one’s finances enough to make them dangerous to your financial health. If you’re unfortunate enough to be an American citizen and/or taxpayer, there’s an above average chance you will be ‘touching your toes’ for the IRS in the not too distant future.

The resistance among the ‘expat’ community to seek expert advice on their personal finance is surprising to me but again I believe that much of the resistance is a bit like men not wanting to ask directions while driving, or there’s the age old fear of being sold something they don’t want or need. The former is of course, ridiculous, I always consult my SatNav, and the latter, well, the latter is easily overcome by taking the time to check that the person you are talking to is educated either formally or by experience and preferably both. These days it’s real easy to do that background check.

So, do you need financial advice? I would say, with very few exceptions, yes, you almost certainly would benefit from seeking the opinion of someone versed in the area. It’s generally free for the initial meeting and I am still, after 36 years in the industry surprising people every day with simple facts they did not know, but need to know. Just this month I have highlighted potential Inheritance Tax liabilities in the millions of pounds that people assumed they were not liable for.

I saw yesterday the example of an American expat who was quoted US$250,000 by a US tax accountant just to file his PFIC returns going back only 5 years. That’s not the tax bill, that’s the bill for sorting out the mess through not taking the correct financial planning advice.

We have the facility now, to give just one example, to be able to punch in all your relevant data and tell you, based on certain scenarios that you choose, how long your money will last which makes it easier for us to plan together how to fix the problem of living too long.

Once you know stuff like that, the rest of the puzzle is relatively easy.

So I ask you? Do you feel lucky? Will you be living with your kids in your retirement years?

 

Land of the Free?

When I was a kid at boarding school in England I remember one day a group of kids (not me) took the handbrake off a Land Rover belonging to the Chemistry teacher, Mr. Curtis and free-wheeled it down onto the cricket pitch, abandoning it on the pristine bowling surface.

The next morning at Assembly, the headmaster asked for information leading to the apprehension of the culprits and one was duly forthcoming.

The next day said ‘snitch’ appeared in class having clearly had a serious beating, but when asked what happened he replied, “ fell down the stairs Sir” Lesson learned. School was horrible back then but at least we didn’t actually go around shooting each other.

These days, whistle-blowing is all the rage with one rather high profile individual passing almost 5,000 UBS accounts over to the IRS and after a short stint in jail collected $104 million in rewards.

As of July 1st, 2014, pretty much all financial institutions including banks and insurance companies will report either directly to the US government or indirectly via their own government, all accounts in the name of US Persons over US$50,000.

There are estimated to be about 7 million US citizens residing abroad and it is a criminal offence not to file an annual tax return even if you owe nothing. One estimate is that only 7% of these are filing. That’s 6.5 million non compliant!

There’s an annual income exemption limit so earnings up to $99,000 are not taxable but you still have to file. Short and long-term capital gains are still taxable and death duties still apply.

If you invest in any non US Investment Fund or offshore insurance bond or regular savings plan, then that will qualify as a Passive Foreign Investment Company (PFIC) and these are taxed hideously with mountains of paperwork for reporting and whilst in the past, you might have hidden it, not anymore will that be possible unless it’s below $50,000 and even then, some financial institutions will just play safe and report every dollar.

The new rules Foreign Account Tax Compliance Act (FATCA) will generate gazillions of TB of data for the IRS to sift through and given the glacial speed of that department you might consider yourself rather unfortunate to get a knock on the door for an audit anytime soon.

Since currently the IRS only goes back 6 years on audit, you could take this a warning sign and get your act together now.

What can you do? First, take advantage of the 401k and IRA facilities that exist; if they apply to you. If you have a US employer you probably can but otherwise choices are very limited.

The maximum amount of contributions a person can make to his or her 401(k) plan is set each year by the IRS. For 2014, you can contribute up to $17,500, slightly more if you are age 50 or older.

Matching contributions from the employer are limited to 25% of your salary (or 20% of your net self-employment income if you are self-employed).

The total of your elective salary deferral plus employer matching contributions is limited to $52,000 for the year 2014.

The bad news: A recent survey from American Investment Planners reported that the number of employer 401(k) matching programs has decreased by 7 percent. And another recent survey by consultant Towers Watson reported that 18percent of 334 companies surveyed have suspended or reduced contributions to conserve cash. And 23percent of companies that reinstated matches offered less generous contributions than before the recession

What’s more alarming to workers is the growing number of companies cutting 401(k) plans altogether.

Since 2009 approximately 6 percent of 401(k) plans have been terminated. To make matters worse, the number of traditional defined-benefit pension plans decreased by 15 percent in 2011.

How much can you contribute to an IRA or ROTH IRA for the 2014 tax year?

  • $5,500 for those age 49 and under.
  • $6,500 for those age 50 and older.

According to a recent report I read somewhere on the internet, US based retirement assets total 4.2 trillion bucks. Sounds like a lot, right?

There are around 320 million people in the good ‘ole US of A. In 2012, 66.73% of the population was aged between 15 and 64 

  • For 320 million people, retirement assets of 4.2 trillion gives, on average, $13,125 each, IN TOTAL
  • For 213 million people, (the 66.73% between 15 and 64), retirement assets of 4.2 trillion gives, on average, $19,718 each.

Hmmmm, not looking so good now, huh?

If you are mid 30’s now, retiring at 65 and contributing the absolute maximum to US tax-advantaged retirement plans, (let’s round it up to $60,000), then at a net rate of growth of 8% per annum you might be looking at a pension starting at around $25,000 per year, (assuming current interest/annuity rates and a 5% annual increase in that pension)

The problem is that almost every other option to add to your wealth so that you are more comfortable in retirement is taxed either as short-term of long-term capital gains at 20% and 39.6% respectively.

The good news: We have access to a retirement plan that is uncapped, can invest in assets outside the US and at retirement age you can take 30% tax free with income tax only on the portion that represents growth within the plan, which by the way, does not pay any taxes while it is invested within the plan.

So, no tax on growth of assets while invested in the plan, ability to invest in PFIC’s with minimal reporting and no penalties, 30% available at retirement without tax and an income for life on tax advantageous terms AND no cap on contributions.

The catch? It’s a retirement plan so no access until age 55.

Size IS Important

So, I just returned with my wife and daughter to live in Hong Kong after a decade in Philippines. This is where I started my offshore advisory career way back in 1994, it’s where I met my current, hopefully last, wife.

But what’s changed in ten years? On the face of it, not that much. Clearly there are many more, ever taller buildings than in 2003 but the biggest change for me is the sheer numbers of bodies on the streets. Central district at lunchtime, Causeway Bay and Mong Kok shopping areas early evening and weekends have always been like trying to swim against a shoal of fish coming at you but now, in 2014, it’s utter madness here. People appear to be deliberately aiming at you as they walk down the street.

I look out of my office window and I marvel at the sheer overwhelming feeling of affluence, while even in 2014, only a few miles down the road, many local people live close to the poverty line. In Hong Kong the divide between rich and poor is greater than almost any other place.

Almost all my Hong Kong based clients have moved on, a testament to the transitory nature of the place but many of them are still expat in some other place and easy to keep in touch with.

My new employer obviously expects me to bring in new clients otherwise I’m an expensive “bum on the seat” and so I find myself in much the same situation as I did in 1994 but with 20 years experience under my slightly greatly enlarged belt and this time, I’m not completely skint.

Anyway to quote the late great Peter Cooke, it’s a long introduction but it’s rather a short song. Regulation has come to Hong Kong.

From an industry perspective, two things have changed for me since I was here last. First, the quality of advisors in the industry in Hong Kong has markedly improved. It’s all very much more professional and all the old carpet-baggers have long gone and many fallen on their proverbial swords.

Second, the regulatory environment has tightened up considerably although mostly so far the real burden has been on the product providers with more disclosure and client compliance calls to check on the advice given.

Personally I agree with this as if you want to create a safer and sounder marketplace, it has to be at the product level. It’s a bit like the guns debate in the US, if you don’t produce them, they can’t kill people because guns don’t kill people, people kill people.

There was an old saying back in the day before email and internet which goes along the lines of, “a memo is generally written less to inform the reader than to protect the writer”.

This is what I feel has brought about much of the hideous increase in paperwork that a client must endure just to invest his (or her) hard-earned cash.

The financial services regulators have a policy to cover their own backs protect the investor and they do that by insisting that the investor sign something like eight different declarations on two sides of A4 paper acknowledging such things as “I understand commission is payable”, “I have the right to change my mind”, “I may lose money if I stop paying”. It’s overkill of course, and surely this is mainly common sense and therefore one has to assume that all this additional paper and signature is protection of the authorities that govern, not those that invest.

Personal financial planning and investments, call it wealth management if you like is not, in my opinion, supposed to be financial advisor telling you what to do with your money, it should be a partnership between client and advisor. Accountancy is like physics, there are rules and laws that cannot be broken but financial planning is like art, there are many routes to get to your destination, it’s not an exact science how you do it.

We are here to guide you taking into account your personal circumstances, wishes and desires. It’s just not a ‘one size fits all’ situation.

Of course, we need to be properly trained and carry with us the experience that life and hundreds of clients brings us but it’s a two-way street as much of what we do is personal to you. How do you want to live your life, what is important about money to you?

Things go wrong sometimes but this is when we have to work together harder to straighten out problems.

What a strict regulatory environment ultimately leads to is a dilution of the service providers in the market. Ultimately one hopes that it’s a case of quality over quantity and eventually I believe that is what happens.

First, the crooks and the cowboys go elsewhere for easier pickings and then the small one and two-man band firms find that the cost both financial and in time spent is too much for them and so they disappear or get amalgamated and finally even the mid-size firms get taken out as costs go through the roof, Indemnity insurance becomes harder to get and/or prohibitively expensive.

So, what’s my point? In a nutshell, I suppose it’s this;

  • Working with an advisor located in a regulated jurisdiction probably means less choice but the quality of the choice will be higher and the opportunity for redress in cases where bad advice is proven, is markedly higher.

 Big is beautiful now and will be going forward. I saw the writing on the wall a while ago and while it’s a small culture shock going from one man band to a small cog in a mighty machine, the benefits of being part of that machine are immediately apparent to me with bespoke and exclusive products, financial clout and the most important commodity of all which is TIME. Now I have real time to devote to what I do best. No more negotiating with cleaners or going to the post office or courier, chasing up insurance companies and fund managers.

And let’s not forget, the bigger the institution you are invested through and upon whose advice you rely, the more likely they will be able to stump up the cash in the event you can prove wrongdoing. In the handful of cases where an investor has sued his IFA over the last twenty years, notably Towry Law and the Barber case in Hong Kong, investors did not get fully recompensed. Imagine even contemplating suing Joe Bloggs ‘one man band’. There is no capital there and Professional Indemnity insurers make a career out of finding ways to refuse claims.

None of this of course solves the problems of collective investments going belly up due to fraud or liquidity problems, the latter often caused by scared investors running for the exit as rumours get started.

The zero interest rate policy (ZIRP) of governments around the world is arguably driving yield seekers, mostly elderly, into riskier and riskier investments just to maintain some semblance of income.

Here’s my simple advice to anyone buying, in particular, an investment-linked life assurance policy. When you receive the documents; READ THEM. This will save you a lot of bother because this is the final contract and may or may not bear any relation to what you may or may not have been told.

This is the important bit. If you acknowledge receipt of these documents and you don’t read them then it will be really hard later to go back in five years time and say this is not what you thought you agreed to.

You know, we can give you all the information possible but even with full disclosure of product information there is an obligation on the part of the participants to take responsibility for using the full information to make their own independent investment decisions. That’s why it’s called financial ADVICE, right?