You have moved to Spain … and you are now tax resident here.
You do not want the volatility or risk of investments, but want more earnings than you get out of a savings account.
Is there a middle ground solution?
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Tax Efficient Savings
By Antony Poole - Topics: Costa del Sol, spain, Spanish Compliant, Tax Efficient Savings
This article is published on: 10th October 2019
10.10.19
The majority of expats in Spain move over here for the weather, the more relaxed way of life and let’s face it, because they can afford to do it!
The savings, investments and pensions they built up are used to fund their lifestyle in Spain. The problem many are facing now is the changing financial environment; we have seen the pound devalue against the Euro and interest rates drop due to quantative easing, amongst other factors. This is great if you are looking at taking out a loan to start a business or to buy a house, but most expats are past this stage, so not good news.
That sum of money held in savings is absolutely vital, as it is readily accessible and, in the majority of cases, protected from what the markets are doing, i.e. when the markets go down, it doesn’t affect the cash held on deposit! However, the low interest rates mean that, due to inflation (which affects retirees the most), the purchasing power of that cash is going down.
The investment route does give you the possibility of earning more from your cash, but it also takes away all that protection. The markets have been pretty steady for the last few years, however, with quantative easing at the time of writing looking at coming to an end, so will the volatility of investments increase. The problem most expats face is that they do not have the luxury of time on their side to ride out the dips in the markets. Sorry to be so blunt, but it is what it is. When the markets climb it is all good, however, two weeks later when they are down then it can be very stressful, especially if this is when you need to access some of the money held in the investment!
So what do we do? Is there any middle ground?
Yes, there is, but it is not very sexy! It is for people who are willing to sacrifice the spikes in market prices (this is the unsexy part) while limiting exposure to drops in market prices. It is a very prudent scheme that works like this: The investment you make is combined with a pot of around
£500 billion and when this investment makes money they hold some of the gain back, so you do not get it. The flip side is that when there is a dip in the performance, they put the profit back in so you are not overly affected. This is called smoothing and this chart reflects how it works. The expected return is published every three months and is currently running at around 5% (August 2019).
This is a popular product in the UK for those who are either looking at putting a portion of their savings somewhere to earn more than just interest, or for those who are looking at a stable investment fund for their pensions. It can also be set up as last life policy, so can be used to limit IHT. Many expats also use this type of policy, which is now available Spanish tax compliant (your English policy is not, so speak to me about making it Spanish compliant). This is a low risk option for those preparing for market volatility and who want a stress free life!