Financial planning in the best and worst of times
This column is by Bill Blevins of Blevins Franks financial advice group. He has decades of experience advising expatriates in France and co-authored the Blevins Franks Guide to Living in France
It is fair to say these are unusual times. If we went back a year, I don’t think anyone would have predicted the state of disorder that people, governments, businesses and markets find themselves in today.
Brexit was expected. Coronavirus wasn’t.
But that’s how life goes. You need to be able to plan for what you know, while trying to protect yourself as best you can from life’s surprises.
If, as they say, the only certainties in life are death and taxes, it seems fortunate that you can prepare for both.
Conversely, when it comes to your finances, one thing we can never be sure of is how investments will perform.
So, if you are living in France, what can you do to try to “future-proof” your finances?
Investing in volatile times
With coronavirus concerns and global trade tensions heightening market volatility, these are challenging times for investors. Does this make it a bad time to invest? There is no simple answer, and I’d even say the question is flawed.
Whatever the market is doing at any point, the most sensible approach is to invest for the long term, rather than trying to “time” the market.
Financial markets move radically and swiftly in times of uncertainty. But reacting to current conditions is usually too late – even experienced investors cannot get this right all the time. Wise investors are aware of how emotions affect our actions. As markets peak, we may feel excited and be tempted to flood into the market.
But this is often the worst time to do so, as markets are likely to be over-priced.
Conversely, when markets dip, investors often feel panic and the fight-or-flight impulse urges us to exit the market. This would lock in your losses.
For new investors, this would actually be an opportune time to buy shares.
Certainly, from previous events such as the dramatic 1987 and 2008 market falls, we can see that short-term negative reactions are often later reversed by a strong longer-term recovery.
Trying to time the market has plenty of risks, but the biggest may be the risk of missing out.
It is surprising the difference certain days in a market cycle can make to returns.
If, say, you had invested £10,000 in the FTSE All-Share index for the full 10-year period up to December 31, 2018, you would have earned a profit of £4,754 (excluding fees or charges).
But if you missed the 10 best days, returns would fall to £2,081. Being out of the market on the best 20 and 30 days would have brought respective losses of £132 and £1,896.
So while it may feel uncomfortable to stay invested when markets fluctuate, this discipline usually produces better returns over the longer term than chasing short-term gains.
Investing in a low interest rate climate
Of course, this is also a time of prolonged ultra-low interest rates worldwide. In the UK, you have to go back more than 11 years, to January 2009, to find rates over 1%.
As a result, funds in savings, ISA, or deposit accounts are failing to keep up with inflation, let alone beat it. At times like this, achieving better returns than bank deposits means widening your investment horizons to consider “riskier” assets. However, it is crucial to factor in diversification and your personal appetite for risk.
As we have already seen, you can reduce risk by being invested for the medium to long term in a well-diversified portfolio.
The key is to spread investments across different regions, asset types and sectors to limit exposure in any one area, using a strategy matched to your particular situation, goals, timeline and risk appetite.
You could also consider spreading the timing of your investments by investing capital in tranches. This “pound (or euro/dollar) cost averaging” approach can help smooth out volatility and potentially improve overall returns over longer time periods.
Tax planning for France
France generally has a reputation for having high taxes, but it can actually be a highly tax- efficient home. Of course, much depends on how you structure your wealth and assets.
There are not many places, for example, where you could potentially pay just 7.5% tax on your entire UK pension fund. To benefit, you would need to take everything out as one lump sum and meet other conditions, such as holding the S1 form (available at UK state pension age).
French residents can also take advantage of a highly tax-efficient assurance-vie, which can offer additional benefits for your capital, such as estate planning control and currency flexibility.
Yet many UK expatriates overlook such opportunities in favour of retaining UK assets.
This approach may become less tax-efficient when the Brexit transition period ends in December and UK assets become non-EU assets. With much still unknown about Brexit, now is the time to explore France-compliant alternatives, before your tax position potentially changes for the worse.
Estate planning for France
While we cannot avoid death, we can control who receives our legacy, and when, with good estate planning. Even after Brexit, you can override France’s “forced heirship rules” by applying the law of your nationality to your estate instead through the EU regulation Brussels IV.
While this would ensure your legacy is distributed according to your written wishes, it can have unwelcome tax implications.
Beware, French succession tax can be punishing. You need to be particularly careful where stepchildren and non-blood-related heirs are involved, as they face 60% rates with a very low allowance. Meanwhile, inheritances between spouses/PACS partners are tax-free. Biological children face lower rates and higher allowances than other relations.
You can restructure your wealth to reduce succession tax for chosen heirs – and even ensure they receive your legacy when you want them to – so explore your options.
With a careful strategic financialplanning review – that considers your investments, tax and estate planning together – you will be best placed to prepare for what’s ahead.
Cross-border financial planning is complex and needs to be designed around your specific circumstances and wishes, so take specialist advice.
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