Estate planning is an important consideration for many of us, but so is protecting our savings for our own retirement years. And the more we protect our wealth, the more we will have left for our family.
One of our recent articles, “Estate Planning Considerations For France”, focused on passing our wealth to the next generations, protecting it from French succession law and tax. This is an important consideration for many of us, but so is protecting our savings for our own retirement years. And the more we protect our wealth, the more we will have left for our family.
Many people do not want to take risks with their savings once they have retired and prefer to leave their money in the bank. But it has been a difficult seven years for savers with interest rates stuck at historic lows, and in February analysts at the Economist Intelligence Unit predicted that the Bank of England would freeze rates at 0.5% until at least 2020.
It is a similar situation for Euro savings. By mid-February traders were expecting that the European Central Bank could reduce its rates a further three times – its deposit rate for banks is already below zero.
Another key concern when leaving savings in the bank long term is inflation. Inflation may be low at the moment but you need to look ahead. It is the compounded effect, year after year, that reduces the spending power of your capital. Even low inflation can have a significant impact over time.
We looked at the average annual rates of inflation in France over the years 1985 to 2014. They would have reduced the value of €100,000 to €72,860 10 years later; €61,719 in 2004 and down to €52,219 after 30 years. Of course France did not have the Euro in 1985, but this illustration shows the impact inflation can have – and it was low over many of these years.
On the other hand, it can be hard to make the decision to invest our savings for the growth we need to keep pace with inflation when we have seen markets go through a period of volatility. But it is important to try and put emotions aside when investing.
There is an established investor behaviour chart that shows the cycle of emotions. It runs from optimism, to euphoria, fear, panic, despondency, hope and back to optimism. It is at the points of “thrill” and “euphoria” that most people are buying, but that is actually the “point of most financial risk”. It may feel safer to buy when markets have been rising for a while, but shares are likely to be overpriced and start to come down soon. Fear makes investors stay away when markets have been falling, but the point of “despondency” is also the “point of maximum financial opportunity”. This is where you can find shares at attractive prices, and once invested you will benefit from the rebound which always happens at some point.
We cannot know when it will happen, so you would need to be prepared for further falls and to hold your investments for the longer term.
Successful investing is a marathon, not a sprint. Staying invested in the markets over the longer-term usually gives the best results. So while volatility can be uncomfortable, those who are already invested should be careful about reacting and selling and locking in their losses. It can also present opportunities for those with capital to invest.
Missing the best few days of a market cycle can significantly affect returns. A hypothetical £10,000 investment in the FTSE All Share Total Return, from January 2005 to December 2014 would have generated a profit of £10,754 if invested throughout. Missing the five best days would have reduced the profit to £4,278. Missing the 30 best days would have resulted in a loss of £4,270.
If you are uncertain of how the markets are going to perform, you can adopt the ‘Euro cost averaging (or ‘pound cost averaging’, depending on your currency) approach where you stagger your investment over three or four stages. You will have some money invested if prices rise, while you will not have invested everything if prices fall, so it can provide comfort. You could make a start now by setting up a structure like an investment bond (assurance-vie) and using it to move money around slowly until you are fully invested. These arrangements can provide attractive tax mitigation opportunities.
While the tax tail should not wag the investment dog, you do need to think about the tax implications of how you hold your investments. Just as you need to protect your savings and income from inflation, you also need to protect them from undue tax.
One of President Hollande’s early tax reforms was to start taxing investment income at the progressive rates of income tax. This means higher earners pay more tax. The current rates rise up to 45%, with additional exceptional tax rates of 3% and 4% for income over €250,000 and €500,000 respectively (the thresholds are higher for families). Social charges of 15.5% are added on top – the government amended its social security law so that social charges are again due on unearned and investment income, even for those with Form S1. You may also have to pay wealth tax on your savings, depending on the value of your household’s worldwide assets.
So before you set up investments, you should consider which is the most tax efficient way of holding them. You also want to think about how your investments can be passed onto your chosen beneficiaries, both in terms of making it straightforward and saving them tax.
The wisest investors are the ones who create a good long-term, tax efficient strategy. This needs to be designed around your circumstances, objectives, time horizon and risk profile. Your tax planning should also be based on your specific aims. Take personalised advice.
Any questions? Ask our financial advisers for help.
Tax rates, scope and reliefs may change. Any statements concerning taxation are based upon our understanding of current taxation laws and practices which are subject to change. Tax information has been summarised; an individual is advised to seek personalised advice. The value of investments can fall as well as rise as can the income arising from them. Past performance should not be seen as an indication of future performance.