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Top savings don't always add up

Assurance vie contracts can be very tax efficient, but that cannot be the only criteria for selecting an investment

Q: I AM interested by an assurance vie contract in sterling as I have savings in the UK which are shrinking and transferring funds into a French euro account would involve a poor exchange rate.
Such an assurance vie facility would allow me to invest in sterling from a UK account without the exchange rate penalty; secondly, I would benefit from a reasonable (4% plus) rate of return; thirdly, I would pay tax/social charges only on the 'interest' element of my funds and, finally, I could convert the investment to euros later at a better exchange rate.
Perhaps I was expecting too much, as I have not found any facilities which meet my precise requirements.
They are either not widely available or not widely publicised and such contracts that do exist seem to impose high minimum investment amounts, punitive charges, and discourage regular monthly saving.
I appreciate some may have been designed for the very wealthy - whose primary concern is reducing tax liabilities - however, some of us with more modest means see a reasonable rate of return and protection from poor exchange rates as being just as important.

A: Assurance vie contracts can be very tax efficient, but that cannot be the only criteria for selecting an investment. Your hopes for income or capital growth would not best be achieved with such a contract. An investor’s tax position might also be better served with another product.

With regard to contracts in sterling, this is a nice example of how the EU is not that flexible. All French assurance vie contracts contain at least one "so-called" guaranteed fund, the fond en euros.

No French-based contract offers sterling investment into these fond en euros as French contracts invest in euros and the fonds are only in euros.

However, one assurance vie contract provider established outside of France is providing sterling access to a fond en euros held by its French-based assurance vie company.

Good news? Well, not quite, as the sterling rate of return is not as high as that obtainable in France because of costs in accessing the euro fund, including currency exchange costs. It is generally about 0.4% less than the actual rate declared in France.

The French assurance vie company in 2008 returned 4% in France but only 3.6% was paid on the fund denominated in sterling and held by the non-French assurer.
This year, most assurance vie companies are predicting an annual rate of about 3.7%.

Using sterling to invest in a French fund held in euros will produce a rate of return that will always be lower than that seen in France because the French rate of return will always have administration and currency costs subtracted.

However, I must question some of your other points:

Firstly, from an income aspect, the assurance vie contract does not avoid tax and social charges - it merely stalls them to a time which may be more convenient.

If the contract is sold, then these charges, as a whole, would be little different to paying them on the income or profit each year.

The tax system may be more beneficial than on other investments, but it does nonetheless still exist.

Assurance vie contracts can also benefit from a more benign succession system, but, again, to ignore the tax liabilities would be wrong.

Secondly, the rate of return you quote was the average for 2008 in France.

Past performance does not guarantee or indicate future performance and this golden rule must always be heeded.

The fond en euros is invested at about 60-70% in government and corporate bonds and the returns on these have fallen and continue to fall. So the return on the fond en euros must also fall.

Just because the rate was 4% does not mean it will continue to be so in future.

Thirdly, the currency exchange rate issue is not valid. Some people exchanged at e1.18 to the pound in summer and, as most currency experts do not expect the exchange rate to settle much above this, the game is far from being over.

The Connexion reported recently on possible pound-euro parity so, in this situation, is getting €1.10 or so today all that bad after all?

Fourthly, converting your fund into euros at a later date may not be better, partly because in the meantime your investments are generating a lesser return.
So, is it better to earn less until you transfer in, say, two years, then suffer tax on profits and costs on reinvestment, or suffer the costs now and have your funds invested, today, at reasonable rates of return, and in the most appropriate way?

Fifthly, it is not possible to "convert" an investment from one investment house to another - it has to be sold, with the added costs involved.

There are also alternatives to assurance vie contracts that can, in pre-tax terms, be just as beneficial. You should consult appropriately qualified investment advisors.

If you are seeking income from your investment then an assurance vie contract in sterling may not be the right solution. It is sometimes the way it is set up that counts - also bearing in mind there are other investments available.

As to the charges you mentioned, these are variable if using an adviser and the adviser must justify their recommendations on investments and should also explain the costs, although a regulated adviser should charge more than a simple broker.

To finish, the sterling fund you mention is designed for those wanting guarantees on income and secure capital, something the very wealthy would be less interested in.

In this case it is the assurance vie contract which minimises fiscal liabilities, not the fund itself within the assurance vie contract.

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