Monday, April 6, 2020

Do You Have a Reliable International Pension?

When it comes to expats making investments the wind of change is blowing through Asia and its ‘out with the old’ and ‘in with the new’ breed of product. Andrew Wood offers advice on securing savings as an expat in Asia.

Accumulating wealth is an essential past time and often turns into a part time occupation when growing your asset base. If you have wealth then you will be able to enjoy the more comfortable facets of life; you will feel more secure and able to control your own life. Wealth can take the form of confirmed income or accumulated assets which you personally own.

Continuous income makes people feel secure but they are often insecure and doubtful about its reality and longevity, no more so than when working as an expat in Asia. Actual wealth in the form of assets, investments and bank balances makes individuals feel far more confident.

To accumulate wealth people need to invest. We then face the dilemmas of safety and the old adage of risk against reward. Attitudes vary when it comes to balancing these two factors and that is where the paths of many individuals diverge.

Physical or ‘real’ property is considered by most a very good investment. Being able to see, touch and feel it gives many people a sense of security, leaving investors with a feeling of safety. With a fixed supply of land in our world most believe that values can only go north.

Some prefer to keep their hard earned money in the bank where they consider it safe and secure. Others will invest in the shares of corporations where the opportunity for higher returns can be tantalisingly irresistible. The vast majority of investors will sit in the middle being prepared to take what they consider a “measured” or ‘balanced’ risk for a higher return than the safest bank deposit.

Whilst banks are considered safe they are not. Who would have believed that Lehman Brothers would have collapsed? What about the Icelandic Banks? So, if you think banks are safe think again. When you consider blue chip, or safe corporations, there are also shocks which can come from nowhere. The Enron collapse was unbelievable to many. Whatever you invest in, there will be risks.

Mattresses can also be dangerous. There was the family who took mum away for the weekend whilst they renovated her house. When they brought her back she acted, as expected, challenging the change. In the bedroom she went white. The bed had been replaced. She then announced that she had hidden a million dollars in the mattress, which had been burned. Nothing is safe.

As expats we all have the opportunity to invest in various ways. This is essential because here in Myanmar we cannot enjoy the comfort of welfare states, healthcare or home country pensions. In these areas, as expats, we are alone.

It is a natural progression for expats to invest and for businesses to spring up to help these expats make the most of investment opportunities. One such business model became popular during the 90’s remains prevalent across Asia today. The Independent Financial Adviser (IFA). Way back when such businesses were unlicenced and were open to abuse, things went wrong and there was no real redress to the investor.

The remuneration model for such business were traditionally commission based. As the industry developed, some advisers became unethical, sometimes opting to advise on products which paid them the most commission. The vast majority of commission rates were thus standardised but the damage had been done.

Because commissions became the norm, those investors who never faced paying fees rebutted the possibility. If you ask most expats today whether they would pay a fee for financial advice they would say most definitely not. However, they would pay fees for other advisers such as lawyers or tax advisers.

The ‘offshore financial services industry’ continued to develop and around fifteen years ago and exploded in terms of the number of firms and individual advisers offering their services. Governments started to take an interest in the industry and so regulations, codes of conduct and best advice regimes sprang up in some countries. These rules were implemented with the intention of protecting investors from being treated unfairly. Advisers had to comply with such regulations or face disciplinary sanctions. As with all legal requirements the regulations became more complex and have ended up severely restricting the type of product that can be recommended. Nevertheless ethical IFA’s continued in business and the competition narrowed because many greedy advisers were unable to achieve the easy buck as previously. .

One of the answers to this predicament is to remove the investment advice from unregulated countries and make the entire situation more advantageous to the expat. Imagine being able to place savings into a very well regulated jurisdiction where a trustee made the actual investment decisions based on the parameters given to them by you, the investor.

Such an arrangement would be governed by a highly regulated Asian government and placed in trust, under the laws of that country. Investment decisions would not be made by an adviser. The trustee would take responsibility for that. However, there would be a caveat that, as an investor, you would be able to self-manage the investment yourself, if you so desired. If you felt unable or unwilling to do that you could leave the decisions to the trustee who would appoint an investment manager for your portfolio on your behalf, subject to your agreement.

In order to address the commission system there would be far greater transparency and a fee schedule approximately 50% cheaper than the well-used but aging solution promoted by many.

Under the current regime investment institutions lock investors into fixed periods of charges to cover their set up costs and commissions they need to pay. However, the new trust would charge ongoing fees without any lock in periods. This means that investors can have access to some or all of their investment proceeds immediately from the very beginning. Of course there will be a setup fee to pay but once paid capital and growth is available to draw at any time without further penalties.

Do you also understand the advantages of using a trust for your investments and savings?

Affording protection of the assets in trust you need never fear prying eyes or possible attacks from predators. Your succession plan can be made on a comprehensive basis and account for your wishes for your current beneficiaries as well as future generations. There would never be a need to undergo probate for assets in the trust. Your wishes would simply be followed from day one. All assets would be exempt from inheritance tax.

In addition assets held within the trust may be drawn at any time in part or in full as pension income from this specific trust. Because there are double taxation agreements between this jurisdiction and 27 other countries tax is levied in the source country of the trust scheme. As the tax rate on pension income in this jurisdiction is zero this would make the withdrawal of benefits tax free in all these other nations. For example, income from this scheme would be exempt from tax in the UK, Belgium, Thailand, Canada and 23 more jurisdictions.

Questions to the author can be directed to PFS International Consultants at: [email protected]

Andrew Wood
“Andrew Wood is an expat affairs writer and independent financial adviser. He lives in Bangkok and has been spending a week every month in Yangon since 2012. Andrew loves Asia and has been living in various Asian countries for 33 years. He understands and advises on all aspects of “the business of living life”. Andrew can be reached at [email protected]

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