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? 

Advertisements

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?    

QROPS

When I started in this business in England way back in 1977, before many of you were probably born, life and pensions were fairly straightforward affairs. We were admittedly at the beginning of the end of the time when people tended to work for pretty much the same employer for decades, and so building up your pension entitlement tended to happen in spite of any effort (or lack of effort) on the part of the employee. I was tasked with administering the radical end of the workforce which in those days, were the self-employed, having done a short stint on Executive Pension Plan administration.

Now, in 2014, we are looking at a situation where the UK government of the here and now is potentially giving us what appears to be complete access to our tax advantaged retirement funds, originally sacrosanct and intended only to keep us in the manner to which we intend to be accustomed for the remainder of our time on Earth. Hold on a minute, it seems like only yesterday that this same administration was rapping the knuckles of QROPS providers in New Zealand for offering much the same choice. Is this the same lot who closed down various previously recognized plans in Singapore and Hong Kong?

Who said election looming?

Whatever your preferred reason for the turnaround in policy, all is not what it may seem when you go behind the tabloid headlines because, yes, you may be able, under certain circumstances, to access your entire pension fund in one lump sum, BUT you will pay tax at your highest marginal rate on 75% of that money. Think again if you think as a non-resident you don’t have a “marginal rate of income tax”

Take someone with a pension fund of say three hundred thousand quid. In the right circumstances, 75,000 or so comes to you free of UK tax, but watch it, if you live in some other country, that government might want a piece of that action. Then, under the old system you would be forced to convert the rest into an income for life, which in a low interest rate environment like we have today might be rather a paltry sum compared to what your Daddy might have got.  Now, they are telling us we can take that in cash also but wait, 100,000 in tax please, leaving you with a grand total of less than 2/3rds of your original pot.

To add insult to injury, unless you spend that money and you die while it’s still in your name you could be looking at Inheritance Tax at 40%!!!!

What’s the alternative? If you have a UK pension fund gathering dust in the UK, it might be worth looking at a Qualifying Recognised Overseas Pension Scheme (QROPS).

Existing since 2006, these have been an unmitigated success, much to the dismay of HMRC. Literally hordes of people have taken advantage of these schemes since they were introduced and some generally well-informed and better educated than me are saying there are potential negative changes coming to a QROPS near you in the not too distant future.

Should your pension remain in the UK, payments from it would generally be taxed as earned income. From 6 April 2006 a single set of rules came into effect. Under this system, the tax treatment for all types of approved schemes, including occupational schemes, small self administered schemes, personal pensions, self-invested personal pension plans and retirement annuity contracts has been amalgamated into the rules for registered pension schemes.

Generally, non UK residents are subject to UK income tax on UK source income. Therefore on payment of a UK pension, income tax is charged at the individual’s marginal UK tax rate (current top rate 45%), but this could be different if you are tax resident in a country that has a Double Tax Agreement (DTA) with the UK.

In a nutshell, as it stands right now you can transfer your UK pension fund out of the UK tax net, (provided you meet certain conditions), and take full control over the investment of those monies, and choose the underlying currency, and access more cash at retirement than you would in a UK scheme, and continue to grow your pension fund outside the UK tax net, and mitigate or even avoid ‘death tax’, avoid potential liquidity problems should your former employer get into difficulties and others.

Here’s my question; why would the UK government allow you to transfer your entire pension fund out of the UK into a secure environment where you as an individual have greater control and access to your own money when they could take either income tax, inheritance tax or both on your lump sum or income by forcing you to leave it in the UK scheme? Do you think the UK does not need the money?

I see a window of opportunity here. It’s not possible, most likely, for them to stop you from moving it, but it’s possible they might impose a transfer tax on those movements.

Right now, transfer of UK pension funds to a QROPS is not taxable. After the likely implementation of the new measures announced last budget day, is there a chance that situation will change?

I ask you; Do you feel lucky?