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John Smith and
his wife Amanda have recently relocated to Malaysia,
following John’s promotion to marketing director. Both UK
expatriates, they have previously spent 6 years living and working
in Europe and Australia.
John’s promotion has prompted him to review his long-term financial
position, so John and Amanda invited Stuart Williamson,
Managing Director of Expatriate Financial Services one of the
largest offshore financial services companies in the world, for a
bit of advice.
John is 32 years old, and Amanda who is 34, looks after their
2-year-old daughter Anna.
JS – Stuart, the promotion I’ve just received was a pretty
big one, and means that in total my salary and bonuses should total
around USD 150,000 for this year. I now have sufficient cash to plan
for our retirement, which is something that does concern me, as my
company doesn’t provide international staff with a pension scheme.
Ideally, I would like to have the option to retire at 60 with an
income of USD 50,000 per year. What do I need to do to achieve this?
SW – Well, firstly it’s good that you have recognised the
need to plan now. Sadly, many people leave retirement planning too
late and have to either carry on working, or be at the mercy of
family and welfare handouts. The first thing we need to consider is
that USD 50,000 today will have less purchasing power when you’re 60
than it will today, due to the effects of inflation. If we assume
inflation runs at an average of 3% per year for the 27 year period
that you have, then we are really looking at a target income of
around USD 114,000 a year.
Secondly, the retirement fund that we’re looking to build will
provide you with this income. If we assume your fund at retirement
yields 7% income, then our target fund at 60 should be in the region
of USD 1.63M
JS – That sound like a huge amount of money!
SW – It is, but don’t forget that people are living longer
and longer, and it is possible that your retirement could be almost
as long as your working life, which is why it’s important to make
sure that you have enough for the basics as well as the finer things
in life.
JS – So how much will I have to save?
SW – If we assume a target fund of USD 1.63M in 27 years
time, then if we achieve 8% per annum return, then the projected
monthly investment should be in the region of USD 1,534
JS – 8% in today’s markets sounds too good to be true. I’ve
lost a lot on tech stock that I bought 2 years ago, and I’m not
overly comfortable with risking more.
SW – It’s true that we are in the one of the longest bear
markets in history, but let’s not forget that we have a longer-term
time frame to work with. History has shown time and time again that
equity based investment always provides better returns than cash
over time. I would advise a mix of balanced funds to provide the
equity exposure, with a move towards fixed interest as you approach
retirement.
JS – How do you select which company to use?
SW – Well, the above projections were based on figures
provided by Royal Skandia for their Managed Pension Account. Other
market leaders in this area include Royal and Sun Alliance, Generali,
and Zurich. The projected amounts to achieve the target fund are
respectively: USD 1,729, USD 1,700, and USD 1494, the difference
being the differing charging structures.
Whilst charges are an important issue, the quality of the investment
should also be looked at closely. Our considerations are:
- Flexibility to
increase/decrease premiums as required
- Quality of the fund
managers that can be accessed (The companies mentioned above
utilise the expertise of external fund managers which is
important)
- Charges
- Access to capital if needed
JS – So what are the main differences between an onshore and
offshore pension?
SW – Both are long term savings plans with certain tax
advantages. Onshore plans are generally government approved, meaning
that investors can claim tax-relief on any investments as an
incentive to save for retirement. There are restrictions on how
benefits can be taken though, meaning limited access to cash lump
sums, and the necessity to purchase an annuity on retirement.
Offshore plans are tax efficient from a growth point of view, but
won’t receive tax relief on the contributions. The main benefit when
comparing to onshore schemes is the flexibility to be able to access
cash at any time, and at retirement having access to the whole fund.
This is important, as it means that you are not obliged to purchase
an annuity, and can protect the asset value for your beneficiaries.
AS – Stuart, I’m not working at the moment, so is there any
benefit in having plans in joint names or just in John’s name?
SW – Having 2 separate plans can be beneficial, especially if
one of them has a shorter maturity date, say 5 to 10 years. This
means that you will have cash available at earlier stages to either
role over or use for the more expensive things, e.g. house moves,
education costs, etc. I would also recommend reviewing your life
cover. If anything happens to John as the major earner, then you
will be faced with the costs of bringing up Anna on a reduced
income. Life and illness protection can easily be factored into most
savings plans offered by the offshore life assurance companies,
meaning that your family is fully covered.
JS – Stuart, any final thoughts?
SW – Well, you’ve probably realised by now that long-term
financial planning requires a few well-founded assumptions. The best
advice I can give is:
- Save whatever is
comfortably affordable. The above projections may be unrealistic,
so it’s better to start at a more realistic figure with a view to
increasing when feasible, rather than over committing from day 1.
- Don’t delay, as the cost of
not benefiting from compound returns can be considerable. In your
case, the cost of delaying by 1 year, could reduce your final fund
value by USD 138,000
- Take a longer-term view on
equity-based funds, i.e. 10 years plus, and try not to be
discouraged by times of market weakness.
- Fully review your
retirement planning at least once a year to ensure that you’re
still comfortable with your fund allocations, and that your
contributions are in line with your earnings.
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