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Viewing posts categorised under: Investment Bonds

Bonds – still a low-risk investment?

By Jozef Spiteri - Topics: Investment Bonds, Investment Risk, Investments, Malta
This article is published on: 5th May 2022

05.05.22

Are bonds going out of fashion?

Bonds, which are fixed income instruments, are probably one of the most popular asset classes along with equities, and have been used by organisations to raise funds for many years. Because these instruments pay regular interest (coupons), they are attractive to investors, but are bond investments really as good as people think they are?

Let’s begin by defining what bonds actually are. A bond is a debt instrument, meaning that the organisation that issues them, be it a government or a private corporation, is obtaining a loan from the general public. The reason for opting to get a loan from the public rather than a traditional bank is simple; they will pay less interest making it a much cheaper method to finance a project. An example of a bond would be one maturing in 10 years’ time, paying an annual interest rate (coupon) of 2.5%. This simply means that if an investor had to purchase €1,000 worth of this bond issue, they will receive €25 per year for 10 years and they will get the initial amount (principal) of €1,000 back at maturity. The fact that money is being received every year tends to deceive investors. The truth is, for a coupon as low as 2.5% they will just be moving in line with inflation, which has been around 2-3% in recent years and has started to creep up in recent months. This means that with such an investment they are not adding value to their wealth and actually risk losing value.

Investment Bonds

After reading this you might be wondering what investments could help you beat inflation.

Over the past 10 years the asset classes that have performed the best have been US equities and REITs (Real Estate Investment Trusts) (www.blackrock.com/corporate/insights/blackrock-investment-institute/interactive-charts/return-map).

Debt, or bonds, has been one of the weakest performers across the board, and this has contributed to the fall in popularity of this asset class. The best approach would be to invest in a diversified basket of assets with well-established fund managers, with a track record of good returns. This will not only reduce the risk of bad performance and value destruction thanks to inflation, but will also give you exposure to higher returns.

If you are interested in discussing this matter further, or any other topic, feel free to reach out to one of our advisers. We will be more than happy to sit down with you and go over all the questions you might have.

We do not charge any fees for our initial consultations and there is no obligation to proceed further.

Investing as a resident of Portugal

By Mark Quinn - Topics: Investment Bonds, Investment objectives, Investment Risk, investments in Portugal, Portugal
This article is published on: 23rd February 2022

23.02.22

If you are relocating to Portugal (or if you are already resident here) it is important to carry out a review of your investments to make sure they will be tax-efficient in your new county of residence.

Just because your investments are tax-efficient in one country does not mean that the tax advantages will transfer to another county. There are various ways of investing as a Portuguese tax resident, including directly held stocks and shares, collective investments, trust and pension structures. One structure that is beneficial to use in Portugal, and which is used widely across Europe as a whole, is the investment bond.

The benefits of investment bonds

There are several benefits to using investment bonds:

  1. Tax deferral during accumulation phase – gains within an investment bond grow free of tax, known as ‘gross roll up’. This means you can benefit from compounding and tax is only payable when withdrawals are made i.e. the gains are realised
  2. Low effective tax rates when withdrawing funds from the policy – Only the growth element of any withdrawal is taxable, and further tax savings are available after 5 and 8 years. It is important to note that this preferential tax treatment is enjoyed if you are a Non-Habitual Resident or a standard Portuguese taxpayer
  3. Control of the timing of tax events – the bondholder can control the timing of any withdrawal which creates the taxable event. This can be done to coincide with low-income periods, for example
  4. Investment flexibility and diversification – as income and gains roll up free of tax within the structure, you are free to pursue any investment strategy without being constrained by the potential tax consequences of re-balancing or switching between strategies. Additionally, these structures can accommodate a wide range of currencies, asset classes and fund management styles, such as discretionary fund management, index trackers and self-management
  5. Simplification of tax reporting – You are only required to report and declare any income and gains when withdrawals are made. This makes local tax reporting very simple
  6. Portability – the investment bond structure is widely recognised in other jurisdictions so you do not necessarily have to surrender your investment if you relocate from Portugal
  7. Succession planning – investment bonds allow flexible and certain transfer of wealth to beneficiaries. This may not be possible with other investment types and the default “forced heirship” provisions under Portuguese law
  8. Inheritance tax savings – with the correct planning, holding wealth in an insurance bond could mitigate or even completely avoid UK inheritance for British domiciles
  9. Estate administration – in the event of death, the proceeds of the structure can be distributed seamlessly to your beneficiaries without the need for any formal probate process
Investing as a resident of Portugal

At Spectrum, we can help analyse your options and if appropriate for you, advise on how to set up the optimum bond structure for you and your family, including:

  • How to set up the structure for maximum control and flexibility
  • Selection of a suitable provider and jurisdiction to hold your investment in, being cognizant of the relevant double tax treaty with Portugal
  • Which currency to hold the investment in and advise on the underlying fund choice
  • Consideration of trust options
  • Regular reviews of the structure and investment strategy on an ongoing basis in light of ongoing changes in taxation and investment markets

You can contact me using the form below to find out more on the services we offer and to arrange a free financial consultation.

*Mark Quinn is a Chartered Financial Planner with the Chartered Insurance Institute and Tax Adviser qualifying with the Association of Tax Technicians.

Cryptocurrency versus Regulated Funds

By Jozef Spiteri - Topics: Cryptocurrency, Investment Bonds, investment diversification, Malta
This article is published on: 10th January 2022

10.01.22

Patience is a virtue, but in today’s world this is sometimes forgotten as people try to do as much as possible as quickly as possible. This approach is often also applied to investing – trying to get rich quick – but this can result in flawed investments which may result in losing money. An asset class which has been used this way over the past year is cryptocurrency, with its rollercoaster ride making and breaking fortunes.

Still a relatively young asset class, cryptocurrency first gained traction with the Bitcoin boom in 2017 and were again very much in the news in 2021. The value of Bitcoin shot up making those who had held the coin for years very rich. As often happens, the opportunity attracted much attention, leading to the increase in popularity of alternative coins such as Ethereum and Litecoin, and the creation of numerous others.

But what is cryptocurrency? Cryptocurrencies are digital currencies which permit automated transaction recording and record maintenance by a decentralised system, using cryptography, as opposed to using a centralised, regulated authority to keep the accounts. They are based on blockchain technology, which is an important innovation in itself with potential uses in a multitude of applications across all industries. But a key point to remember before you buy cryptocurrencies is that they are currently unregulated by any authority, which means that their value can be manipulated and safety cannot be guaranteed. This is the main reason why most financial advisers rarely recommend this asset class to their clients.

cryptocurrency

So, what do financial advisers prefer to recommend to clients? International financial advisory firms, such as Spectrum, have access to a wide variety of providers offering regulated funds to create a fully diversified portfolio across a range of asset classes. One such example is Prudential International’s PruFund range of funds, one of the largest and most secure investment portfolios available to expatriates globally – (watch the video explanation here)

An advantage of this well diversified investment is what is termed as its ‘smoothing’ effect. Simply, this means that by being invested in such funds you will not experience the full extent of stock-market highs and lows. The smoothing feature protects investors from the extremes of market volatility, providing investment growth that is smoother and steadier.

The most important requirement for investment success is patience. An investment portfolio should therefore be created with a long-term outlook, prioritising assets that are regulated and in line with your risk profile.
Please contact us to learn more about investing patiently and successfully.

Investment bonds in Italy

By The Spectrum IFA Group Italy - Topics: Investment Bonds, Investment Risk, Investments, Italy
This article is published on: 22nd October 2021

22.10.21

If you are resident in Italy, or planning to move here, it is important to complete a review of your investments to avoid unnecessary and expensive tax liabilities locally. It is well known that how to handle your finances is one of the major challenges of moving to a new country – the tax and legal systems are different, and on top of this, everything is in a language you might not fully understand. An experienced adviser based in Italy will help to ensure your finances are arranged both tax-efficiently and appropriately for your individual circumstances.

The best time to carry out a review of your investments and to develop a long-term financial plan is before you make the move. This is something many people don’t consider, but acting early allows you to make the most of valuable planning opportunities and to avoid costly mistakes, for example with the timing of a property sale or taking a pension lump sum. But even if you are already here, it is never too late to make sure you are making the most of your money.

There are many ways of saving and investing as an Italian tax resident, including with banks, in directly held portfolios, in collective investments, and in trust and pension structures. Taxation in Italy is complex, and you will need an accountant to help you with tax returns. One structure that is highly tax efficient, which simplifies annual tax declarations and is also widely used across Europe, is the investment bond.

The 10 benefits of investment bonds in Italy

There are several advantages to using life insurance investment bonds for Italian residents:

  1. Tax deferral during the accumulation phase – unlike a directly held portfolio which attracts ongoing capital gains tax and income tax, investment growth within a bond is not taxable (income and gains are able to accumulate on a ‘gross roll up’ basis)
  2. Low effective tax rates when withdrawing funds from the policy – when withdrawing funds from an investment bond, the withdrawal is split into two components: the initial capital, and the growth element. Tax of 26% is due only on the growth element of the withdrawal, so effective tax rates are low.
  3. Gains are calculated net of all costs – directly held investments in Italy are always less efficient than a life insurance bond.
  4. Availability of asset management services otherwise inaccessible to Italian residents – there is a wide range of investment options, including EU authorised funds, discretionary portfolios and index trackers, all available in the currency of your choice.
  5. Your money is outside the Italian financial system – investments are held securely in Ireland or Luxembourg.
  6. Simplification of reporting and ongoing tax administration – there is only a single asset to declare in your tax return whatever the number of investments within the bond, as opposed to the complicated declarations necessary for directly-held foreign assets.
  7. Reduction in VAT – asset management services in Italy generally attract VAT at 22%, but using a life insurance bond results either in a substantial reduction to, or an exemption from, VAT.
  8. Inheritance tax savings – beneficiaries named in a life insurance bond receive the proceeds free from Italian inheritance tax.
  9. Portability – the investment bond structure is widely recognised in other jurisdictions, so you do not necessarily have to encash your investment if you relocate. However, care is necessary to take into account the differences between tax laws, so take advice prior to moving jurisdictions.
  10. Time apportionment relief on return to the UK – if you decide to return to the UK, investment bonds are particularly attractive as time apportionment relief under UK tax rules state that only investment growth generated whilst resident in the UK is taxable.

Whilst the ideal time to review your finances is before you move, we can also help if you are already resident in Italy. Contact one of our advisers (free of charge and without obligation) for an introductory discussion and an outline of how we can help.