Making a case for saving cash against staking money in stocks and shares is a no-brainer for expats.
With Bank of England and US Federal Reserve interest rates pegged between 0.25% and 0.75% for almost a decade, savers have hardly seen any return on their money.
While interest rates have bombed since the downturn, share prices have soared with the Dow Jones and FTSE 100 surging to record peaks in the first three months of 2017.
Saving rates at record low and share prices at record highs are nothing unusual, according to the Barclays Equity-Gilt Study.
Analysts have studiously kept detailed records of how both have performed over nearly 120 years.
The clincher is the data shows that equities have generated a better return than cash in any two-year period since records began, giving investors a convincing 68% better chance of making a profit than savers.
Investors have not had everything their way, some would have been wiped out as the markets tumbled in downturns, but this evens out in other years where they would have seen their stakes double.
Over the long term of between 15 and 20 years for investors, equities would come out ahead of cash 99 times out of every 100, says the Barclays data.
How saving has changed for expats
The number of offshore banks offering saving accounts to expats has dropped dramatically in recent years.
Providers have struggled to offer competitive interest rates, while stricter tax cross-border tax rules have discouraged many from sending their cash overseas.
The two tax changes that affect expats are the US Foreign Account Tax Compliance Act (FATCA) and the global Common Reporting Standard (CRS).
Both require offshore banks to reveal personal and financial information about their customers to their home tax authorities.
FATCA specifically impacts Americans, but CRS involves the 50 leading developed countries and their dependants, such as the Cayman Islands, British Virgin Islands and Channel Islands for the UK.
Avoiding expat saving pitfalls
Although the offshore saving market has contracted rapidly over recent years, some banks and building societies still offer saving accounts for expats.
Several offer accounts in several financial centres, but the rule of thumb for an expat saver is to open an account in the place where you live.
Interest rates remain poor, but European banks, including Britain, the Crown Dependencies and Overseas Territories offer the bonus of regulator-backed financial compensation to protect money on deposit.
This does come with some conditions – so here’s a checklist of points to watch:
- Ask about the provider’s financial compensation service – every financial centre has a different scheme and the terms will vary from one to the other
- Watch inflation – money deposited on a fixed term is vulnerable to erosion from the rising cost of living
- If your home country is politically or economically unstable, consider banking offshore to protect your cash
- Don’t lock money into deals with fixed rates and terms. Inflation of 2% when a provider offers 1.75% interest means you are paying money to keep your cash on deposit, and this situation could worsen over a three or five-year fix
- Remember to disclose any interest earned on your tax return
Currency exchange rate concerns
Foreign currency exchange rate turbulence is an extra factor for expat savers and investors to consider.
Many must juggle their finances to move their money from the currency they earn their income in to the local currency that they spend with. Transferring currency also involves paying fees and commission.
For British expats, the weak Pound is bolstering the FTSE as most large British companies earn most of their money from abroad in foreign currency. The exchange rates increase the value of their sales and put a gloss on balance sheets.
The crisis point is investing in a currency that is not the one you spend where you live. Not only do expat investors must keep a weather eye on the markets, but they also should watch currency exchange rates, making this a risky strategy.
Investing for expats
Any financial adviser worth their salt will make testing an expat’s tax residency as a priority.
Tax status is a matter of fact, not choice and just because someone lives overseas does not make them an expat.
Expats pay taxes in the country where they are resident, although some countries may decide not to levy tax on gains and income.
In Britain, the measure of tax status is the statutory residence test.
Expats passing the test are tax resident outside the UK, while those that fail are UK resident.
Passing the test opens a new world of investment for expats with a much wider range of equities, funds, commodities and currencies.
Failing means mainly limiting investment to products and services offered by UK financial providers.
After establishing tax status, the next step is benchmarking where you are and setting lifetime targets, such as saving for retirement or to finance school fees and university for children.
A professional adviser will consider a client’s attitude to investment risk and financial goals, suggesting products and services that will help achieve those targets.
These financial tools might include joining the Qualifying Recognised Overseas Pension Scheme (QROPS) or investing in offshore bonds.
Wealth management for investors
Financial experts argue cost drags investors away from professional fund and portfolio managers to DIY investing with an online platform.
But how much a professional manager charges is just one of the factors to consider.
Wealth managers come with added benefits. The manager is the spearhead of a financial team with expertise in different aspects of investing. The team will have tax experts, market analysts and researchers who can give personal advice on risks and opportunities as they arise.
Modern investing is a round-the-clock activity with markets open 24/7.
Reviewing and reacting to market changes is a full-time job that a DIY investor would find hard to maintain alongside their personal and business lives.
Wealth managers also come with other benefits from economies of scale – these include special deals and offers from world class banks and finance houses.
The litmus test is simple – in the unlikely event of a DIY investor can beat the return offered by a wealth manager, then go solo and save the fees.
Further Information and Guidance
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