When it comes to protecting your wealth one key element, whether you are looking at tax planning, estate planning, savings and investments or pensions, is that the arrangements and strategies you use should be designed around your personal circumstances and aims.
We often write about the importance of protecting your wealth, from France’s high taxes, inflation, institutional failure etc. It is worth highlighting that one key element, whether you are looking at tax planning, estate planning, savings and investments or pensions, is that the arrangements and strategies you use should be designed around your personal circumstances and aims.
Otherwise there may be unexpected consequences in future which do not suit what you had in mind for your family, or your investments may not be meeting your needs or could be too risky.
Your circumstances change over time, as can your objectives, at which point you need to review your wealth management. So, for example, it is important to re-evaluate your financial planning when you retire. It also critical to carry out a thorough review when you move to France, and take your income needs here, the local lifestyle, the completely different tax and succession regime etc. into account.
A tailor-made strategic approach is key for the success of your investment portfolio. Every investor has different objectives, time horizon and attitude to risk. So it is vitally important that your portfolio is created and managed to meet your particular requirements.
The starting point is to understand your risk profile. To avoid unnecessary risk you should obtain a clear and objective assessment of your personal appetite for risk, for example through psychometric analysis.
You can then move on to establish asset allocation and diversification across asset classes, geographical regions, sectors etc. to match your risk profile.
Diversification helps to manage and mitigate the risk of any one asset type underperforming over time, ensuring you are not over exposed to any given asset type, country, sector or stock. At the same time the aim is to provide the highest potential return for your risk profile.
Too many people have portfolios which are not suitable for them. They often carry a higher level of risk than they are comfortable with, even though they may not realise this. They may not have adequate diversification, or own ‘unregulated collective investment schemes’ or illiquid assets. Or the investment choices or combination of them may not actually be appropriate to meet their specific needs.
The opposite can also be true – people can be too cautious, and this can have consequences in your later years.
The simple fact is that some risk is unavoidable to achieve a return that will outpace inflation. Traditionally, many retirees have preferred to leave much of their savings in bank deposits. However, when you take the effects of inflation and withdrawals into account, the capital in your deposit account is likely to erode.
We prepared an illustration on this, comparing two £500,000 investments made in 1980. Both investors planned to withdraw £30,000 each year, and this withdrawal amount increased each year in line with an estimated annual inflation rate of 2%.
One of them invested in a fixed interest deposit paying a fixed rate of 6% per annum. The other invested in a diversified balanced mixed asset portfolio made up of bonds, equities and cash*.
The investor who kept his money on deposit ran out of money in 2009. In contrast, the other investor’s mixed asset portfolio had grown to £4,878,247 by that year. It has continued to grow overall since, reaching £7,497,285 last year. This is in spite of the fact that by this stage his annual withdrawals had increased to £57,667 with inflation.
Besides the investment strategy itself, you also want to protect the returns your investment makes from being slashed by taxation. When setting up your portfolio you need to consider the best way to hold your investments to shelter capital from tax, provide a tax efficient income, and facilitate the transfer of capital to your beneficiaries with the minimum of bureaucracy and succession tax.
This is particularly important in France where investment income is now taxed at the scale rates of tax of up to 45%, plus 15.5% social charges (though this may change in some circumstances following the European Court of Justice’s (ECJ) ruling on social charges on unearned income – at the time of writing the French tax administration has not updated its guidance).
Assurance-Vie is a popular and effective savings vehicle in France, used by both French nationals and expatriates to save considerable tax.
While many people are aware they provide tax advantages, what many often do not realise is that there are many different types of Assurance-Vie. The type of product and the jurisdiction the policy is based in can make a considerable difference to the benefits they can offer.
For example, EU policies can benefit from significant tax reductions the longer you hold your policy, with a 7.5% fixed rate of tax option (plus social charges if still applicable after the ECJ ruling) available after eight years. This, however, does not apply to Isle of Man and Channel Island policies.
There can also be considerable succession tax savings, but only if your policy allows you to nominate beneficiaries. Many policies do not provide a defined beneficiary clause so you could miss out on these tax breaks.
We often come across British expatriates who have been sold policies by their UK based adviser which are not actually suitable for French residents. For peace of mind take advice from an adviser who lives in France, who will understand the nuances of what works here and what does not, and keeps up to date on the numerous French tax reforms.
Whether it is your tax planning, estate planning, investment strategy or pensions, seek tailor made professional advice based on your current life in France, what your future plans are and where your heirs live.
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4 September 2015
*Illustrative portfolio comprising 50% MSCI World TR GPB; 40% IA UK Gilt TR and 10% LIBOR GPB 7 Day.
All advice received from any Blevins Franks firm is personalised and provided in writing; this article, however, should not be construed as providing any personalised investment advice. These views are put forward for consideration purposes only as the suitability of any investment is dependent on the investment objectives, time horizon and attitude to risk of the investor. 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.
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.