Whatever happened to worries about Eurozone collapse?

Today, as we wake up to the European election results it is opportune to reflect on the state of the Eurozone.

Cast your mind back just over a year to March 2013. The Eurozone was going through its fifth bailout, with Cyprus on the brink of meltdown. There was a fear that a major country, like Italy or Spain, might follow, exhausting the Eurozone bailout capacity. A test looked imminent for that famous 2012 pledge made by the European Central Bank’s (ECB) chairman, Mario Draghi, that the Bank would do “whatever it takes” to save the euro.

Fifteen months on and the word Eurozone is no longer automatically twinned with the word ‘crisis’:

• Ireland officially left its bailout programme at the end of 2013, after three years of treatment.

• Greece, which had two bailouts, was able to able to raise €3bn of five year government debt in April at a cost of only 4.95%. The bond issue was eight times oversubscribed, despite Greece having a B- ‘junk’ credit rating.

• Portugal followed Greece by raising €750m of 10 year bonds at a rate of just under 3.6% later in April. It was the government’s first bond auction in three years and comes ahead of a likely exit from its bailout programme.

• Spain, which did not have a formal bailout, but did receive EU funds to support its banks, is also finding favour in the markets. Its 10 year government bonds are now yielding about 3%, against over 7.5% in 2012.

Does all this mean that the Eurozone is on the road to recovery? The answer is, perhaps inevitably, yes and no. The ‘periphery’ countries are no longer the concern that they were, but serious economic issues remain. Greece still has a mountain of debt that experts expect will require another write down at some point. Spain continues to have an unemployment rate of over 25%, with a youth unemployment of double that level.

Ironically, worries are now moving from the periphery to the core, and in particular France. The Eurozone’s second largest economy is struggling to meet its 3% EU government borrowing target – already twice deferred – has 10%+ unemployment, almost no economic growth and a deeply unpopular President.

In the Eurozone background is the spectre of deflation (falling prices). Inflation in the zone is now 0.5%, a long way below the ECB’s target of slightly under 2%. Mr Draghi could yet end up doing “whatever it takes”…

With the success of eurosceptic parties throughout Europe, we live in interesting times.

Read between the (head) lines

Too often, money gets a bad press. Just in the past few weeks headlines have reported that “Yes, the stock market is rigged”[1] and “City watchdog to probe 30m financial products”[2]. At the same time, investigators are still looking into the alleged manipulation of foreign exchange rates and the rate that underpins most savings and mortgages.

It is hardly surprising that people are put off saving and investing when there are so many scandals. But it’s not all bad news: in fact, there are some very good news stories about money that will never make the headlines.
One of them is that many investors have doubled their investments in the past five years. They didn’t go to great lengths to pick the right funds, or devise a complex investment strategy. They could have spent more time digging a new flower border than poring over stock prices. All they did to achieve this great return was to hold a diverse and low-cost portfolio of global shares and stick with it.

These people have benefited from one of the most powerful wealth-generating machines in the world; the stock market. They ignored the Eurozone crisis and they ignored the lumpiness of the global economic recovery. Instead, they just sat back and watched the steady climb of their investments, while taking care not to give up any returns to bad timing or paying too much in fees and costs.

It might not sound exciting, and there are very few reporters in the world that would be interested in writing about it, but right now, all around us, are people easing their way to their financial goals.

1 http://www.msnbc.com/msnbc/yes-the-stock-market-rigged
2 http://www.bbc.co.uk/news/business-26780863


Following the recent UK Budget, major changes have been announced for pensions. From next April, it will no longer be necessary to draw an income. Instead the whole fund can be cashed-in. The first 25% will be tax free to UK residents (but not necessarily to residents of other countries) and the balance will be subject to tax at the pensioner’s marginal rate. So far so good. At the same time, the Chancellor has announced, since this might encourage a lot more people to take their pension funds as a lump sum and, since government pensions are unfunded (that is to say they are paid out of annual tax revenue as they arise), he would be enabling such pension schemes to no longer offer transfer values.

This leads me to the reason for the title to this article, as clients of ours have already been approached by ‘advisers’ recommending that they get on and transfer their pension to a QROPS before the opportunity to do so runs out. The question is, just because you might not be able to do something in future, does that mean you should do it now?

On our travels, we see all sorts of extremely poor advice regarding pensions, amongst other things. All manner of completely spurious reasons are given for transferring. These include, that the UK pension is ‘frozen’, it will be subject to UK tax, it might all be lost if the employer goes bust, to name but a few.

Lets start with what you are giving up by transferring out of a UK defined benefit scheme, such as the Teachers Pension Scheme or any major employer’s scheme. Under long standing UK legislation, such benefits are effectively inflation proofed both before and after payment. They are guaranteed by the government in the case of public sector schemes. For private sector schemes, in the first instance, they are backed by the financial strength of a major corporation but even if they go bust, there is the mandatory Pension Protection Fund (to which all UK pension schemes must subscribe) , which provides protection for 90% of the benefits for most people. It is therefore completely untrue that UK pensions are ‘frozen’ once you leave or that they are at risk of being completely lost if your ex-employer goes bust. There is there no justification to transfer out on the grounds that the benefits will be static or somehow at risk.

Furthermore, UK pensions can be paid anywhere in the world and due to the large number of double taxation treaties between the UK and other countries, in many instances, the income can be paid free of UK tax. Even if it is subject to UK tax, British citizens still have their personal allowance of over £10,000 per year, which covers most people’s pensions. So, there is no justification for transferring in order to improve the tax treatment.

Of course, there are circumstances when a transfer may be worth considering. These include: funds in excess of the lifetime allowance, the need to secure benefits on a different basis to the original scheme or sometimes improve death benefits, or to use the fund for specific purposes perhaps by a business owner wanting to use it to acquire trading premises.

Occupational Pension Transfer advice is a very specialist area. It requires a balancing of the benefits to be secured with those which will be lost and a determination as to whether the proposed transfer is worth it, or not. This involves the carrying out of a transfer value analysis calculation which determines the rate of return (the critical yield) needed by a private scheme to match the benefits being given up. It also analyses and compares things like tax free cash entitlement and death benefits in the existing and proposed schemes. You would usually expect to receive a pretty comprehensive suitability letter either recommending that you transfer or, actually more likely, that you do not. Prior to receiving the advice, you should expect to be asked lots of questions about your requirements and preferences and most likely be required to complete a range of questionnaires on your investment risk and on your specific attitudes to your pension arrangements. UK advisers are required to presume that the default, most appropriate course of action is for pension benefits NOT to be transferred and therefore when giving advice, the case for transferring must be made, not the other way round.

In the UK, advice on occupational pension transfers may only be provided by financial advisers with specialist qualifications. It is actually a regulatory offence, liable to result in a fine, striking off and possibly even a criminal conviction for a non-regulated adviser in the UK to provide advice in this area. Such restrictions do not apply to people operating in this market from outside the UK. Here is a summary of the FCA’s requirements.

Which leads me to my conclusion. If you have been been approached by an adviser based out of an office in Eastern Europe, Spain, Malaysia, Thailand or, anywhere other than the UK, suggesting that you should transfer your UK pension to a QROPS – think twice. You might want to ask them what specific pensions qualifications they hold. Ensure that you obtain a proper report from them covering all of the points above. If they don’t burden you with lots of questions and send you a lengthy and probably tedious report with lots of numbers crunched, ask yourself why. How can they possibly know that the transfer is good for you and having perhaps determined that it is, how without a proper report, can they be sure that you are making a properly informed decision? Better still, seek advice in the UK from a properly qualified and regulated adviser. As an expatriate, you may not benefit fully from UK regulation but the adviser is obliged to conduct himself in a fit and proper way and to provide advice to the required standard, no matter where they are based.

This is only a brief summary of the issues. The UK regulator is so concerned about the shenanigans that have been going on and the predatory activity, particular from offshore, I hesitate to call them ‘advisers,’ that it has issued a fact-sheet, which you can access here.

Our associated UK regulated independent advisory firm provides qualified specialist pension transfer analysis service to UK clients and expatriates. It also assists other advisory firms who don’t hold the required qualifications or regulatory permission to provide such advice to their clients. If you have a UK pension are concerned about whether it is suitable for your needs, or have been approached by someone suggesting that you transfer it, they would be happy to help. For further details please contact Phill or myself.

Christopher Wicks ACII FPFS CFP
Chartered Financial Planner

Retirement Planning for Expatriates

Retirement Planning, in common with all financial planning is just a funding exercise. It deals with a fundamental fact of life that confronts all of us, namely that at some stage, whether you like it or not, you are going to have to stop working. When that happens your earnings will cease and you therefore need to build up a replacement income sufficient to maintain the standard of living to which you have (or would like to) become accustomed. It does not matter where the replacement income comes from but it needs to come from somewhere. One thing is for sure, it is not going to magically appear, so a plan is necessary.

The starting point is to work out how much you need to live off in retirement. This can be difficult because your circumstances can have changed quite a bit. That said begin by looking at your current expenditure. Apart from totting up all of your payments you should take note of what you are spending your money on. Some items should have stopped by the time you retire, at least in theory, such as mortgage and children’s education costs. However if you are on an expat contract and your rent is paid, you are going to need to start to pay full housing costs. So you add things on that you will need to spend and deduct items that will have stopped. Incidentally, when you carry out this analysis, look at what you are spending on utilities, insurance, and bank interest. If you shop around now, can you save some money?

Once you have worked out how much you need, the next thing is to calculate the level of income that you already expect. If you are entitled to the UK state pension you can obtain a forecast. The same should go for state pensions from other countries. You can also obtain projections for private pensions from the UK and other territories. You should also take into account the value of existing savings and investments as well as any rental income if you have investment properties. Do not include rent from the home you intend to return to, since this will stop when you move back into it. You may need to run some projections based on your current rate of saving and the present value of your investments and pension funds. Bear in mind that these need to take the effect of inflation into account.

Having determined what you need and how much is coming in, the final step is to work out the difference. This is what you need to fund. If you are going to build this up using regular savings, you need to convert it to a capital sum. In order to ensure that your target income is realistic, you should assume a similar rate to an index linked annuity in the UK and back calculate from there. You then need to calculate the regular monthly amounts that you need to save in order to arrive at the amount of capital needed to provide your target income. Simple!

Of course, all of the above is complicated by the fact that you are expatriates. You may not return to your country of origin. You need to consider the likely rate of inflation where you plan to retire and also the effect currency fluctuation on your savings. You also need to decide in which currency you wish to make the savings. Taxation is also an important consideration and you will need to plan for this well before you implement any transactions.

If this sounds daunting, it need not be. It is all in a day’s work for any competent financial planner with experience of dealing with expatriate personal finances. In addition to helping you with the basic funding calculations they will also be able to advise you on the best way to build up the necessary retirement income and hopefully help you to adopt a sound evidence based investment strategy, which gives you the best chance of achieving your goal for the level of risk that you wish to take. 

Bridgewater’s new website is here!

Bridgewater’s new website is here!

We are pleased to re-launch our website which contains information about the services offered by Bridgewater Financial Services Limited, Independent Financial Advisers based in Sale Cheshire, serving clients in the UK and worldwide.

EU Gender Directive – important update

The Court of Justice of the European Union decided today that insurance companies are no longer allowed to use gender as a factor for assessing risk. This change is effective as of 21st December 2012.

This means that from that date the rates for all types of insurance eg life, motor, incapacity will be the same for men and women. It will also affect annuity rates. Mostly, women will be disadvantaged by this since they benefit from better current rates due to their greater longevity and the fact that contrary to popular rumour about women drivers they constitute a lower moral hazard to motor insurers.

The bizare aspect about this Euro nonsense is that age discrimination still appears to still be allowed when it is now banned in many countries such as the UK.

Hidden Fund Costs could damage your investment performance

Most investors are aware that their funds levy annual charges against their funds. These comprise the Annual Management Charge which ranges from 0.1% to around 1.8% or more for UK mutual funds. In addition the funds are required to publish certain additional fund charges such as custody and legal costs. These two items make up the Total Expense Ratio (TER).

Many investors are unaware of the fact that, in addition to the TER, funds incur costs in two other ways. One of these, the Portfolio Turnover Rate (PTR), is caused by the costs which fund managers incur when the buy and sell stocks. The more they do this, the greater the PTR. In the UK the estimated cost of a sale and purchase is around 1.8%, when Stamp Duty is taken into account. The average UK fund turns over its portfolio by around 100% a year, thus adding around 1.8% onto investors’ costs. Many funds have PTRs of twice or more this level.

A further area in which investors can incur costs is the price at which funds are able to deal in their shares. Generally shares are offered for sale or purchase by market makers in batches of say, £250,000 or £1Million. On dealers’ screens the best priced batches are generally shown at the top of the list with prices getting worse further down the list. A fund needing to offload £10Million of a particular stock could therefore find its self selling via a number of market makers and not all at the best price available on the market. This can be a substantial hidden drag on fund performance, especially for very large funds or those which trade actively.

So what can be done about this? Bearing in mind that the method of access to the market (fund selction) is very much a secondary decision, well behind Asset Allocation, the optimum way to keep fund costs down is to invest in passive or tracker funds. These can be expected to provide returns in line with the performance of the market at low cost. In addition certain passive funds engage in dealing strategies designed to optimise the price at which deals are carried out.

Changes to Early Retirement Rules

On 6th April 2010 the minimum age at which you can access your pension benefits will increase from 50 to 55.

Both your employer’s pension schemes (past or present) and any individual pension plan’s you hold will be subject to the new rules. From 6th April 2010 therefore, you will not be able to access pension benefits unless you are at least age 55.

There are some very limited circumstances where retirement prior to age 55 will still be allowed after this date which are detailed below:

1. Some sportspeople/those in hazardous occupations or those who had a ‘contractual right’ to an early retirement age as at December 2003.

2. Those individuals who are in ill health can still apply to take benefits early and the scheme trustees will determine, following a medical report, whether it will be granted.

In the majority of cases, it is more worthwhile to leave your pension benefits to grow for as long as possible. However, if you need to access some or all of your pension benefits early, between the ages of 50 and 55 you should contact your financial adviser as soon as possible for further guidance.

For the avoidance of doubt, this could affect you if your date of birth is between 7th April 1955 and 5th April 1960.