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Reviewing your financial planning on arrival in Spain Thursday, August 30, 2007
Have you recently moved to Spain? If so, have you reviewed your financial planning to take your new circumstances into account? Your saving and investment structures should be specifically chosen to suit with your current circumstances and aims for your future. Now that your situation has changed, it’s very likely that your financial planning also needs to change.
This is especially true if you have moved to Spain on retirement. Retirement is enough of a change to warrant a financial review, when you add in a new country this becomes even more imperative.
Retiring to Spain is a move to a foreign country where tax and investment rules are different to the UK. You worked all your lives to provide for a relaxed and enjoyable retirement. Unfortunately, without the right financial planning, some people could find themselves financially deprived in future years. A review of your financial situation, preferably with the advice of a professional financial adviser, will help ensure your money is invested wisely for your new status as a retired expatriate. Savings and investments set in place while living and working in the UK may have been good choices at the time but relocation to Spain means changes usually need to be made to ensure your investments remain as tax efficient as they were in the UK and designed for regular income, capital growth and wealth preservation as needed.
I thought it would be helpful to run through a typical scenario of a couple recently arrived in Spain; the issues they had to consider and the constructive approach taken by their financial adviser.
Mr and Mrs Black are aged 66 and 61 respectively. A year ago they sold their UK home to purchase a property in Spain which left them with €250,000 in the bank. Mr Black has a full state pension and Mrs Black a smaller pension from part time employment. They have two ISAs and a PEP, some shares and a with profits bond. The ISAs, PEP and bond are tax free in the UK but not tax free for Spanish residents. The shares pay a dividend which is taxed in the UK and liable for Spanish tax, but under the Spain/UK double tax treaty the tax is not levied again in Spain.
They left their €250,000 in a Spanish bank account which is attracting an interest rate of 3%. Inflation in the Eurozone at the time of writing is 1.9% which means that in real terms their capital is only earning 1.1% interest. The Blacks wanted to see if they could earn more from this money and made an appointment with an independent financial adviser recommended by other British expatriates. The adviser is located in Spain and up to date with both Spanish and UK investment and tax legislation.
The financial adviser asked to meet Mr and Mrs Black as a couple, aware that each partner’s views are important in deciding how to go forward. Regardless of who takes responsibility for financial investment, both spouses should understand their investment structure, the reasons for it and be comfortable with it.
The adviser spent time fully discussing their aspirations and aims and filling in a financial planning questionnaire to get a complete picture of their financial assets and how they could be best utilised to achieve their goals. They considered whether their combined pensions were enough for day to day living in Spain and if they would need income to top up their pension. In this case, the adviser would include income producing investment structures in his recommendations. He asked about their pensions. Were they guaranteed and inflation proof? Inflation is an issue of particular concern for retired people – inflation could diminish the capital in the bank by as much as 50% in 20 years – and in order to combat it some of their investments should be designed for capital growth.
The adviser probed Mr and Mrs Black as to how they would spend their money. Did they anticipate any major expenses or were they planning to take regular holidays abroad or make some improvements to their property? Did they want to provide financial help for their children or grandchildren? Establishing such future expenses helps calculate what income and capital growth is needed. The time frame of such capital outlays is also important. If money will be needed in, for example, a year’s time, then a medium to long-term investment would not be appropriate. Some money could be deposited in a high interest bank account as necessary and the rest invested to meet their income and capital growth aspirations.
Of course he also ascertained their views as to how much investment risk they wished to take so that he could make appropriate recommendations. In the meeting he explained why they should consider liquidating their PEPs, ISAs, with profit bond and shares and moving the capital into a tax efficient offshore assurance bond. This would greatly lower their Spanish tax liability and help their money go further. The proceeds would be invested in appropriate structures to meet their financial objectives and placed within the offshore bond.
It’s wise to take the eventuality that one of you may return to the UK after your spouse dies into account when setting up your new financial planning. One key issue is UK inheritance tax; even if you manage to establish a UK non-domicile status after living in Spain for a number of years, thus escaping the UK inheritance tax net, if either of you return to the UK in your later years you will be liable for this tax again.
The possibility of this happening caused the adviser to suggest setting up an offshore discretionary trust to protect Mr and Mrs Black’s assets from UK inheritance tax. This can also protect against Spanish succession tax, the rules of which are quite different from the UK.
Another important issue discussed was what currency their investments should be denominated in. A Euro denominated investment would match their spending currency and avoid the risk of exchange rates having a detrimental effect on their wealth. If they are likely to return to the UK, or spend money in the UK over the coming years, then keeping some money in Sterling would probably be appropriate.
When the financial adviser felt that he had a comprehensive idea about Mr and Mrs Black’s financial needs he wrote a detailed report, confirming the information he had gathered and making recommendations based on this information. Everyone has different aims and objectives and his investment plan was tailor made to fit the Black’s situation and requirements. The report contained various choices as to the investment path they could take and stated the costs involved, the investment terms, the risks and benefits.
If they decide to proceed, their adviser will monitor their investment portfolio and review it regularly with them. He will keep the couple informed of new investments and tax changes and guide them financially throughout their retirement in Spain.
Story from Bill Blevins of Blevins Franks