One of the biggest motivations for moving abroad to work is for the enhanced income and opportunity to save lots of money. But in a low interest rate environment, should an expat save or invest?
There’s no doubt that savers based overseas and in the UK have been on the receiving end of a raw deal for several years now, with interest rates barely helping an expat’s savings keep pace with inflation and certainly not after tax has been deducted.For most savers, particularly those looking for an income, savings accounts have performed poorly. Even those rates offered by offshore banks, which are still popular with expats, are not much more impressive.
Before leaving the UK, it may make sense for the expat-to-be to create an ISA which has a higher rate of interest and leave a chunk of money in there as a tax effective measure, but they should be aware that they cannot contribute to it while working abroad.
Many expats opt to use offshore bank accounts and many of these now offer higher interest rates than onshore banks.
It should also be noted that any expat who does decide to invest offshore will help to reduce their tax exposure, but they should still declare these accounts to the tax authorities in the country where they reside. It’s also worth noting that HM Revenue & Customs regularly announces crackdowns on offshore banking havens in a bid to find Brits with ‘secret’ accounts.
Reviewing your finances
Potentially the most important step for an expat is to review their finances and be honest when doing so. It’s also a good opportunity to take advice from a financial adviser, who will help determine which areas will need working on and which areas are fine.
Since many expats are working abroad to benefit financially, it makes sense to put in the right foundations for when they return home, if that’s part of the plan, so they are in a wealthier position than when they started working overseas.
A key consideration for an expat when it comes to deciding on a savings or investment plan is to appreciate that their savings need to keep pace with inflation so their spending power is not diminished. However, not all countries have poor rates of inflation; while France, Germany and Italy have low rates, the UK, the US and Switzerland have been in deflation territory.
So while low inflation effectively erodes returns in many countries, one way for an expat to generate returns that will beat inflation is to invest in the stock market. This is an investment policy stressed by one of the most successful investors in the world, Warren Buffett, who says that investing in equities over the long-term will generate better returns than leaving money in a savings account.
Indeed, Barclays analysed the figures for the past 114 years and found that in any given two-year period, an investor will have enjoyed a 68% higher chance of their equity investments beating cash returns. It should also be noted that the same survey revealed that investors could have lost 60% of their money invested in some two-year periods while in other phases they would have more than doubled their money – such is the occasional volatility of the stock markets.
The bank’s important analysis reveals that equities will outperform cash over the long term; over ten years, equities outperformed cash in nine out of ten of them.
Level of risk
The essential difference between deciding on whether to save or invest is the level of risk an expat is prepared to take to reach a particular investment goal. If they are looking at creating a pension pot, or paying a child’s school fees, for example, then they need to consider some high-risk investments as a part of their investment portfolio in a bid to generate higher than average returns.
For an expat looking for the best returns on investments or savings, they should look at how long they can hold onto their investment. If there are falls in stocks and shares, for instance, the extra time will allow them to recoup their losses.
Essentially, this will mean setting investment or savings goals and then striving to achieve them.
When a financial adviser discusses creating a plan of action, what they’re really asking for is what you want in financial terms. One reason why you will need to consult with an experienced adviser is that many expats will be switching countries and jobs while they are living abroad.
Even with this switching between jobs, the aim should be to boost the expat’s finances with an action plan that is achievable. The real secret to beating low interest rates is to start planning early with an action plan about your financial intentions.
Also added to the mix are the currency moves, which may mean volatility on the foreign exchanges which could see an expat’s investment in a particular currency being hit hard. This is true if they are paid in sterling and the pound fluctuates in value, which means they could be paid a lot less than they were planning for. Of course, currency fluctuations also work the other way around and being an expat means they may earn more for their money when the currency moves in their favour.
Expats will also be aware that when it comes to saving and making investments, the fees for moving money abroad or to the UK can eat into the amount being transferred. Some bank accounts are available as multicurrency which may mean the expat can save money on transferring cash between one account and another.
Consider your tax position
The other important consideration for an expat is to appreciate their tax position, particularly when it comes to where their investment will end up for tax purposes. This is another reason why it is important to consult with a financial adviser, particular one who has experience of dealing with expats, before making any decision about an investment.
For many expats, an offshore bank account is a crucial part of working abroad and, according to one survey, around half of these are for savings accounts.
The same survey, from financial services organisation AES International, also revealed that one in five expats have an offshore savings plan and around 10% of expats are looking to invest in offshore bonds.
An offshore bond helps an expat hold an investment within a ‘wrapper’ and is usually created by life insurers in popular offshore centres, including the Isle of Man. The offshore bond enables a range of investments to be held and are not liable to tax until the expat comes to withdraw funds.
However, AES points out that many of the regular savings plans aimed at expats, as well as bonds, can offer poor value for money because of the fees that are charged. The investment firm says that expats should opt to buy investment funds directly to help their long-term savings strategy.
It’s also worth highlighting that the same survey revealed that while many expats head abroad in a bid to become wealthier, around half of them save no more than they would have done if they remained working in the UK.
The disadvantages of the 'holiday atmosphere'
One reason for this, the firm explained, is that the original aspiration to save money becomes diverted by the temptations of living in what they termed as a ‘holiday atmosphere’, where expats are encouraged to spend more on socialising, for instance.
It also makes sense to reduce financial outgoings, whether the plan is to save or invest. Just as there are in Britain, there are popular money-saving websites in many parts of the world to obtain discounts in restaurants as well as for activities. These should be utilised so there is some enjoyment and benefit for working abroad, but it can still be done as cheaply as possible.
Let’s not forget too that many British expats are looking to buy UK property in a bid to enjoy capital gains from rising property prices and, possibly, earning income from renting the property to tenants.
According to deVere Mortgage, who deal with expats on a regular basis, London is the most popular location for investment, though investment property analysts will also explain that some of the best yields and returns for property investment are found outside of the capital.
The mortgage firm says that most of its enquiries are from expats working in the United States, Asia, Russia and the Middle East. One reason for their keenness for property investment, the firm says, is to enjoy the weakness of the US dollar which helps to make Britain a less expensive location for property investment, particularly for elite cities such as London, than it has been to date.
For expats who do not like the sound of investing, banks in the UK are offering better deals to attract savers’ money. Skipton International and Permanent Bank International are two of several banks offering 18-month fixed rate bonds.
These offers have a minimum deposit requirement but their offer beats the interest currently on offer for domestic bond accounts. Some of these bonds also allow the saver to take their interest monthly which will be a boon for expat pensioners, for example.
Which is best, saving or investing?
While there is no direct answer to the question of saving or investing, a lot depends on the expat’s own investment policy and, as stated earlier, it’s always wise to consult with a specialist financial adviser before making any investment decisions.
It is also important for an expat to undertake thorough research in a bid to find the desired best returns and interest rates and decide just how much risk they are prepared to take in a bid to reach an investment goal.
Essentially, there are pros and cons for an expat saving or investing and it makes sense to do both, as savings will offer financial security and access to money when needed, while investment offers the prospect of more profitable returns. It’s always wise bearing in mind the old adage of not putting all of one’s eggs into one basket, since diversification will also bring security.
The other important issue to remember is that while the low interest rate environment has damaged the prospects for savings, this will not continue for years to come and the Bank of England is already under strain to raise rates and follow the footsteps of the US Federal Reserve. They raised rates in December 2015 and look set to do so again. This means that a carefully crafted financial action plan by expats will need to be revisited, because the emphasis may switch to savings becoming a more attractive proposition while living and working abroad.
Our top tips for expats looking for financial advice:
1. Find a suitably qualified financial adviser. Many firms will offer employees access to some financial advice before they leave the UK. Expats without access to relocation experts or their HR team will need to find an independent financial adviser. If you are retiring abroad then seek financial advice in the UK, where advisers have to be qualified and regulated. Do not take a chance when living abroad as it is unlikely that there will be the same level of protection – even if you are dealing with a UK-registered financial adviser who is working overseas.
2. Before leaving the UK, get your financial affairs in order. This means organising accounts, pension and tax. Cancel all unnecessary standing orders and decide whether you are going to rent out your home, if you own it. Be aware that if you do so, there will be a tax liability. Organise an international bank account which allows transactions in foreign currencies.
3. Expat financial advice is not just a one-off meeting. Review your financial plan regularly and, if possible, meet with your independent adviser. Be aware of how interest rates are behaving and what savings rate offers are being made by UK banks. Ensure that your financial plans are flexible should you need to change direction from a savings-focused financial plan to one that is investment-led.
Further reading:
Barclays Equity-Gilts Study: Investing lessons from 114 years of data
AES International: British expats failing to save, despite money worries
deVere Mortgages: Three quarters of mortgage enquiries are from overseas buyers