By: STEVE RODGERS
Blacktower Group
financial@portugalresident.com
DESPITE THE recent series of increases to interest rates in both UK and Europe, the net rate of interest available to most savers is barely keeping pace with inflation.
The UK Consumer Price Index (CPI) is running at about two per cent per annum, but with petrol prices nudging one pound sterling per litre, which is similar to Portugal, and some food prices rising, the real inflation indicator is the Retail Price Index (RPI) which stands at 4.5 per cent per annum. I do not think many readers would argue that the reality of inflation is a very similar story here in Portugal.
Offshore bank accounts are currently paying about six per cent per annum for sterling accounts and just four per cent per annum if you save in euros. For those of you with income in excess of the tax threshold, it means the net return could be as low as 3.5 per cent per annum for sterling accounts and 2.4 per cent per annum for euro accounts.
With these figures below the true rate of inflation, it is easy to see that money held on deposit could be losing value in real terms.
The most popular way to invest as a hedge against inflation is to expose some of your capital to “real asset” investments such as equities, commodities and property. However, these types of investment are only suitable for investors who have a medium to long-term strategy. For money which may be required in the shorter term, typically under three years, less volatile investments are required.
TEPs
An option worthy of serious consideration is to invest in Traded Endowment Policies (TEPs), also known as second-hand endowments.
While endowments have suffered from bad press, second-hand endowments have gained in popularity. TEPs can offer investors a low-risk, tax-efficient opportunity with known minimum values and the potential for capital growth. The TEP market experienced a record year in 2006, driven by high demand from overseas.
The market exists because the majority of people who take out endowment policies do not hold them to maturity. Most are surrendered or sold by the original policy owners because of changing circumstances. Alterations to mortgage arrangements or divorce are two of the main reasons. As more of these policyholders become aware that they may achieve a higher price selling their policy on the second-hand market, rather than surrendering it back to the insurance company, the number of policies available for purchase has increased dramatically over the last few years.
There would not be a second-hand market in traditional with profit policies if there were not as many people wishing to buy policies as there are people wishing to sell policies.
The market for TEPs works on the assumption that endowment policies will grow steadily in value until they mature as the life office declares its annual bonuses. As each policy has a maturity date, an investor can buy one knowing exactly when it will pay out.
However buying just one or a few TEPs can be somewhat inflexible and does not allow easy access to your money. Therefore a simpler and more efficient way of entering this market may be through a specialised, managed fund that invests purely in TEPs.
Low Risk
The minimum investment in this type of fund is typically 10,000 or 15,000 pounds sterling and most fund managers offer investments in sterling, euros or dollars.
One such fund was launched in March 2001 and has consistently produced a return of approximately eight per cent per annum and also boasts that their unit price has never fallen. While these TEP funds do not have explicit capital guarantees like bank deposits, they do offer a plausible alternative to investors looking for a low risk investment.
Furthermore, unlike offshore bank accounts, these funds are not subject to the European Savings Tax directive. Therefore, there is no automatic withholding tax or reporting requirements. It is the investor’s responsibility to declare any growth achieved to their appropriate tax authority.
So, for people looking for an alternative to bank deposits, a TEP fund has some very strong advantages:
• Current and consistent historic returns of about eight per cent per annum;
• No tax deducted at source;
• Current return net of tax is above rate of inflation – meaning real growth;
• Low risk;
• Low initial investment;
• Choice of currencies;
• Easy access to capital.
In addition, if invested through a suitable offshore portfolio bond or ‘wrapper’ tax can be deferred for a significant number of years, reduced dramatically and in some cases mitigated completely.
Generally, an investment that may be required within the next 12 months, such as an emergency fund or income and capital requirements, is best left in a deposit account. However, there are all sorts of additional applications for a TEP investment:
• In retirement planning – either within an existing pension fund or as an addition to existing pension arrangements. TEPs are permitted investments for Small Self Administered Schemes (SSAS) and Self Invested Personal Pensions (SIPP);
• As a low risk investment as part of a balanced portfolio;
• As a regular savings vehicle for specific future capital needs, such as, weddings, school or university funding, or a special anniversary holiday;
• As an investment within an existing trust – an attractive alternative to long term deposits;
• To repay loans or mortgages.
As with all financial matters you should always first consult an independent financial adviser.
Please contact Steve Rodgers of Blacktower Group for further information on 289 355 685 or email steve.rodgers@blacktowerfm.com
