The most important thing for the new investor is preservation of capital and not, necessarily, increase in capital. The best way to do this is by diversification. The easiest way to understand this is if you have shares in ten companies and one of them loses a lot of money then you will feel the loss heavily. If you have the same amount in each company then you will, naturally, lose ten percent. If you had access to ten times the amount of companies the risk is massively reduced. However, you will have had to pay a small fortune in stockbroker fees thus making the point of diversification a bit meaningless.
Most of this article will relate to Unit Trusts. However, to that people can see the difference:
- Exchange Traded Funds are listed on a stock exchange and investors buy or sell them in the same way as they would shares. They are very good for people who like liquidity.
These days, it is vital that investors know what they are doing. Markets are volatile and it is possible to lose heavily in a very short space of time. Just look what happened to gold recently. No longer can you just buy a bunch of shares or stocks and hope they will grow and give a good, steady increase on capital.
As regular readers of this column know, I have been banging the drum about diversification of a portfolio for many years now and maintaining low volatility and liquidity in a fund are also very important. By having access to multi-asset, multi-managed funds you will protect yourself from placing all your eggs in one basket and thus, potentially, incurring losses due to one particular asset class retracing any previous growth.
Before I go on, please remember that I am only referring to offshore funds. Also, please ensure that before investing you are not liable to pay anything on your portfolio due to your own country’s tax laws. Finally, if you cannot afford to lose money then do not invest at all.
For those that have not invested in funds before there is a huge amount of information to digest. You need to know what they are, why they should be part of a portfolio, how to choose a fund that reflects your risk/reward ratio and the costs of having a fund.
The first thing to remember is that funds are for the long term. If you are only looking for short term growth then funds are not for you. As implied above, the price of funds and other investments will go up and down and so you might get back less than you originally put in. Time gives you longer for any downside to improve.
So, how do funds work? Basically, they pool together money from loads of different investors and they use that to buy whatever assets the fund manager is interested in. This could be stocks and shares, bonds, commodities, property, etc. Obviously, the aim of the fund is to make money for those people who have invested in it. It will try and do this either by capital growth or getting regular income via dividends and interest bearing payments.
There are different kinds of investing, when you go directly into stock and shares then you are only investing in one company or, at most, a group of companies. A fund is different. It will be managed by a manger who, hopefully, will know what he is doing. He will also have analysts and researchers looking for the best options to invest in.
Depending on the fund objective, the idea generally would be to invest in a wide spectrum of investments. Invariably, this would be more than most individuals could afford to invest in. As well as this, if someone living in Asia wanted to invest in Africa then it could be difficult for them to do the necessary research into a particular sector. By investing in a fund you circumnavigate this problem. As stated before though, some people may prefer only investing for the short term and so stocks and shares may well be the best form of investment for those particular individuals. However, funds may suit others. In an ideal world people should have both as well as other investments such as physical property and cash itself.
There are various kinds of funds to consider. There are Unit Trusts, Investment Trusts, Exchange Traded Funds (ETFs), Open Ended Investment Companies (OEICs), and Structured Products to name but a few. The most common offshore funds are unit trusts which are very similar to OEICs (the main differences are in the way they are structured legally) but the latter offers shares whereas the former issues units. In both cases, your money goes straight for the manager to invest as he sees fit. When you want to get out of whatever you are in then you just advise the fund that this is the case and the manager buys the units back from you at whatever the going rate is - there can be complications to this as some funds have exit charges or time penalties which may be prohibitive. You need to make sure you know what you are signing up for before giving the fund any money.
For most cases, there is not a limit to the amount of people who can invest in a fund unless it has reached a certain critical mass which may prevent certain strategies or hinders the fund’s actual objectives. If a fund gets to this stage then it will not accept any more money but will continue to manage what is already in the fund. If there are redemptions (people taking money out of the fund) then the manager may allow new investments but only to cover what has been taken out.
The amount of units available increases or decreases according to the how many people want to invest in the fund. The price of the units is based on the Net Asset Value (NAV) which is a valuation of all the assets in the fund minus any liabilities.
Your fund(s) will usually charge an entry fee which will be a one off cost and can be up to five percent of the investment.
Safeguards are also important. Unit trusts have trustees in place to make sure that no improprieties occur. Also, if you invest via a life company in an offshore jurisdiction then there are even more safety nets put in place for you.
To be continued…
A recent report by consultants Rothstein Kass suggests that over the last five years, up to 31st December of last year, hedge and alternative funds run by female managers outperformed those run by men. In 2012 alone, women achieved returns almost 6% higher than men, with a return of just under 9%. Yet, the report states there are only around 100 female hedge or alternative fund managers globally. Also, women tend to run smaller mandates than men and are given less opportunity to take on more senior roles.
The problem with saying things is that you can’t “un-say” them afterwards. Words can hurt and saying sorry doesn’t make the pain go away as though it had never happened. Or as Warren Buffett put it (typically much better than I have) “It takes 20 years to build a reputation and 5 minutes to ruin it.”
One of the factors that has eased the pain of sending money back to Australia lately has been the strength of the Thai Baht. Thai residents earning in local currency have suffered nowhere nearly as badly as those paid in US Dollars (USD) or (God forbid) in Sterling. However, the sustained rebound in the Australian Dollar (AUD), which started in 2008, may well be coming to an end and that could bring with it a whole raft of both risks and opportunities.
Investors in Thai stocks have done extremely well over the past 18 months, with the local SET index almost doubling from the levels of late 2011.
No, I am not talking about their recent cricket, rugby or cycling prowess, but their current form in the “Currency Wars”. Newspapers and G20 summary statements refer to “currency wars” as policy maker’s capital controls, low interest rates, and the big bazooka of them all, quantitative easing polices. By way of example, the UK Pound has fallen precipitously in recent weeks and, as Bill Gross of PIMCO stated in a February FT article, “In a race to the currency bottom the ultimate winner will be the central bank that prints the fastest. The insinuation is undoubtedly true, although the assumption that any individual country or currency can win this war is rife with historical refutation.”
For many people, estate planning and the preparation of a Last Will and Testament (LW&T) is a dreaded thought and something that is avoided if at all possible. However, it is certainly advisable to make such provisions sooner rather than later and this holds true, in particular, if you have property in Thailand.
Since my last update there has been several new QROPS Trusts launched in the market place, as well as several generic developments within the world of pensions, courtesy of HMRC, that will have an impact on QROPS going forward.
Therefore, I will break this Update down into subsections to enable you to read what you believe is pertinent to you.
To start with, in the Autumn Statement, the UK Chancellor bowed to public pressure with the reinstatement of the 120% rate with regards to maximum GAD rates when calculating income drawdown, up from the 100% it had been reduced to previously.
However, the HMRC guidelines on income drawdown from QROPS has always been ambiguous, merely stating that the income should not exceed “published annuity rates”. Most of the industry has always taken this to mean the aforementioned GAD (Government Actuaries Department) rates, not wishing to ruffle HMRC’s feathers.
However, at least 1 scheme in New Zealand is offering far higher drawdown rates than this, as does the Isle of Man, albeit taxed at 20% under Manx law, making the IOM jurisdiction unattractive to most expatriates. Therefore at my request Brooklands Pensions, who have a very reasonable NZ QROPS offering, are taking this matter up with HMRC and we hope to have clarification on this shortly.
The Autumn Statement also revealed that the Lifetime Allowance would be reduced to £1.25 million from April 2014. Although the chancellor said in his statement that only 2% of pensioners currently have a retirement fund above £1.25m, many clients may now have to take serious note of this reduction from the current Lifetime Allowance level of £1.5m.
For example, a pension scheme member aged 40 today, with a fund valued at £600k, only requires net growth of 5% per annum in their fund to find them self with a pension fund of £1.25m by age 55.
Transfer into a QROPS is a benefit crystallisation event (BCE8) and so long as the value of the transfer is below the LTA at that time, there will be no LTA charge levied on the fund. If the transfer is above the LTA, the excess is taxed at 25%, however.
Remember that a UK pension is UK source income and therefore you have the Nil Rate Band allowance before you start to pay tax. Most expatriates with a UK pension fund will also qualify for a UK State Pension; this will use up a fair chunk of the Nil Rate Band and also the State Pension cannot be transferred to a QROPS.
However, for expatriates who do not have a UK state pension and their UK Company/Personal pension fund is relatively small, there may be few advantages and a few disadvantages in transferring to a QROPS, especially if they have no dependents to leave the residual value to on death.
In such instances it may be better to leave it where it is or transfer to a Small Self Invested Pension Scheme (SSIP). As always, each case should be looked at separately.
As stated, however, most holders of UK pensions will also have a State Pension due at retirement age. You will require 30 qualifying years (30 years where National Insurance contributions have been paid) to achieve a full basic State Pension. You can make up for a shortfall in your contributions, however, by paying voluntary Class 3 National Insurance Contributions. For example, I only have 21 qualifying years, a shortfall of 9 years, that I intend to start addressing 9 years before my State retirement age of 66.
When I enquired about my State Pension 18 months ago you could also go back 6 years to make up unpaid contributions, clearly, every expatriates situation will be different. Therefore to obtain a State Pension Forecast you should contact https://www.gov.uk/future-pension-centre, telephone +44 (0)191 218 3600 from overseas, with your national Insurance number to hand and you will find them very helpful.
This year the Overview of Legislation in Draft, as the Draft Finance Bill is formally known, appears to do little more than add a few new reporting requirements to QROPS, including an obligation for all QROP scheme administrators to notify HMRC that their scheme continues to meet the conditions to be a QROPS.
With different jurisdictions now having different methods of taxing pensions and therefore QROPS payments from these jurisdictions, clearly care must be taken in where a UK pension is transferred to; the chosen retirement destination of the individual having a big influence on this. This has come about as a result of last April’s legislation, in particular what became known as “Condition 4”, which stated that members of QROP schemes would not be permitted to enjoy a different tax treatment on their pension payments than that available to pensioners resident in the country in which the scheme was domiciled.
Therefore, here is a brief summary of each of the currently available preferred jurisdictions for people retiring in South East Asia.
After 3 years of negotiations with HMRC, Gibraltar has emerged as a front runner with a nominal 2.5% local income tax rate on QROPS income, placating the UK taxman and also removing the requirement for Double Taxation Treaties (DTT) with other countries. Being a fully EU compliant jurisdiction it is regulated by the Gibraltar Association of Pension Fund Administrators (GAPFA), who released their own QROPS Code of Conduct in October 2012, a sensible level of compliance making this a very attractive jurisdiction.
There are also now 2 low cost options for the transfer of pension funds under £100,000 GBP in value, with the castle Trust Groups offering of incredibly low fees of just £299 per annum being the front runner on price. The Sovereign QROPS “Lite” Trust charges £500 per annum but also offers free transfers to their Malta QROPS. However, at time of writing the Malta DTT with Thailand is still being negotiated.
The Malta Financial Services Authority (MFSA) is a heavily regulated and therefore slow moving regulatory body with a lot of DTT’s in place. At time of writing the first test cases are going through the MFSA to establish what they require under their “proof of residency” requirements for paying out pension income gross. Malta reserves the right to withhold up to 35% income tax on pension payments to other jurisdictions if their proof of residency requirements are not met.
A long established QROPS provider, New Zealand has the potential to offer a higher level of income (see pension income above) but investment fund choice is limited in this jurisdiction. There is a very attractive zero percent income tax stopped at source; however, regardless of DTT’s, that are contained in the second attachment along with their Tax Information Exchange Agreements.
Not suitable for anyone wishing to draw an income from their QROPS due to a 20% tax rate.
Closed to new expatriate business from April 2012.
After new pension legislation was introduced by the Mauritius Financial Services Commission last month, I am liaising with Pension Administrators here who believe they will have a QROPS offering similar to Gibraltar in the first quarter of 2013. A dark horse but do not hold your breath waiting for the QROPS approval…