A new year – and a fresh start in France! Is this what 2007 holds for you? Is this the year your dream to move to France comes true?
Or perhaps this last New Year’s Eve – with retirement in an attractive French ville in sight in the not too distance future – you resolved to get your investment portfolio in order and to thoroughly investigate the financial implementations of your ‘third age’ relaxing in France.
So much will change when you are free of the bonds of working for a living and are able to look forward to lots of French socialising, culture… and French cuisine, complemented with a French size glass of perfect wine.
Unfortunately, unless you are lucky, dreams have to be worked at to become a reality. At least when you are working there is the safety of a regular income to pay the bills and buy the luxuries but in retirement, income will have to be provided from elsewhere. The start of a new year with a motivated and fresh frame of mind is no better time to re-examine your investment portfolio so that when your dream of owning a home in France materialises, effective and tax efficient financial arrangements will help to ensure that the bubble doesn’t burst.
Just as relocation to France has various stages of planning – from the first idea to gathering information, making constructive aims and deciding on a time span before the big move should take place – so financial planning has different stages too.
The first stage is to work out a rough budget. It is unlikely to be the same as your UK budget. Living expenses will change and you will need cash for leisure pursuits, emergencies and some medical insurance. Your home and all moving and settling in expenditure will probably have been bought from the sale proceeds of your British abode along with a new French car. When you have completed your French budget for after your move and you compare it with your expected income, you will know how much extra you may need to live on and how much you can afford to invest – the aim of which will be protecting your money, long term capital growth and provision of a regular income to supplement your pension if necessary.
The next stage is to seek specialist guidance. An adviser in the UK is unlikely to be the best choice unless he is an authority in French investment and tax affairs. You need to consult a professional who is thoroughly knowledgeable of the UK and French investment opportunities and an expert in tax planning. Taxation in France is quite different to taxation in the UK and savings, pensions and estate planning should be discussed to achieve the maximum tax efficiency. The more tax you can legitimately save, the more you will have for investing and spending.
A proficient adviser will take into account your goals, your budget, your investment preferences and the level of risk with which you feel comfortable, and recommend the right strategy for your circumstances.
Important points to bear in mind are the negative effects of tax, inflation and exchange rates. Many retirees simply want a safe and secure worry-free way of accruing extra income and are content to put the lot into a bank account and watch the interest payments build up. But this is actually not so worry- free as it seems. Firstly, the interest earned will be taxed and interest rates have an unfortunate habit of falling from time to time while inflation will diminish the spending power of your capital over the years.
Inflation in the UK and EU has been close to the 2.5 per cent mark over the target of 2 per cent in both economies. The real rate of inflation in the UK is estimated to be about 10 per cent for middle earners and so it’s easy to see how much your capital can erode over twenty years. Exchange rates are also an enemy for British expatriates who maintain a UK bank account while living in France. Transferring money from sterling into euros on a frequent basis can lose you a sizeable amount if the exchange rate is not in your favour.
The next stage in your financial planning is to make your investment choices with the help of your adviser.
Asset allocation
The basis of your portfolio should include the right blend of assets ranging across equities, bonds and cash. This proven mix allows for capital growth and a steady income at a lower risk. You can alter the level of risk by weighting the portfolio in favour of equities that by nature carry a higher risk but also the potential for higher returns over the longer term. If you are happier with lower risk then include more bonds in your portfolio. Equities and bonds don’t normally go through high and low periods at the same time and the cash element will buffer any downturns.
Your asset allocation should contain a wide diversification across global zones, industries, sectors and styles. In the past people would normally invest only in UK and US markets but Asia, eastern Europe and the Pacific basin are now growing economies and could be considered. Including a blend of assets from across the world balances the market cycles – when one area is not performing so well the other will be experiencing growth.
With this is mind it is also worth considering including in your portfolio one of the newer asset opportunities – a REIT (Real Estate Investment Trust). REITs are particularly appropriate for retirees in France as they also provide regular income, have the potential for long-term capital appreciation, are structured to reduce risk and are tax efficient.
REITs have low correlation to equities and bonds and contain a broad diversification of international property spanning commercial, industrial and residential sectors. The advantage of owning a REIT over property directly is that a REIT does not involve high capital outlay, management costs and liquidity risk. There is also limited diversification available.
Time Horizon
To complete you financial planning it is important to keep in mind your time horizon and not to jump ship if one particular sector slumps. Time is the key to successful investing and between five to ten years is a good guide. Considering you will expect to have at least twenty years in retirement you will probably need to extend this. Having said this, your portfolio should be reviewed regularly at least once a year and adjustments made that seem fitting according to market trends and any shift in your personal circumstances.
When you near the end of your time horizon you could consider creaming off the benefits and put them into a 100 per cent guaranteed investment bond which will protect the profits while at the same time attract a higher rate of income than a bank or building society.
Assurance Vie
Finally, French residents could wrap their investment portfolio in an insurance bond for even greater tax savings. Assurance Vie is the French term for an insurance bond, such as a Personal Portfolio Bond. Holding your assets in an Assurance Vie can reduce your tax rate on investment income and gains. If you allow the monies to roll up and do not make any withdrawals, you will not need to pay any French income tax or capital gains tax.
Where a withdrawal is made, French tax is highly favourable as only the growth element of the withdrawal is liable to tax. An Assurance Vie may also help reduce your wealth tax liability. Most favourable of all is that if you set up an Assurance Vie before becoming a French tax resident it is exempt from French succession tax providing the holder is under the age of 70 when the policy is taken out.
Whether or not 2007 is the year you intend to relocate to France, make this January the month to start your financial planning for when you do move. The earlier you do this the better. Happy New Year and prosperous investing!
Bill Blevins is Managing Director of Blevins Franks International, one of the largest independent financial advisers, which specialises in advising retired expatriates in southern Europe