In his life Michael Jackson was probably the greatest musical performer for a generation and perhaps of the modern age.

But in death he may also have unwittingly given the world a dramatic lesson in basic financial management.

Financial planning

At its simplest, financial planning means living within your means and setting aside income for future expenditure including retirement funds.

It is estimated that Michael Jackson’s lifetime earnings were perhaps as much as $700m. His Thriller album had sold more than 109 million copies (before his death) and yet there are reports that he may actually have died bankrupt or very close to it.

While details of much of Jackson’s lifetime income, from musical Royalties, performance fees etc, are a well reported, less is known about his lifetime expenditure and his overall indebtedness.

Got to be there

Much of his money was spent in the creation and maintenance of his 2,600 acre Neverland ranch in Santa Barbara County, built on the scale of a European stately home.

It is not uncommon for people to financially overextend themselves when it comes to their home. The current housing crisis in the US in particular is due in part to people borrowing the paper profits on their home price, which at best were used to finance home improvements and at worst were used to supplement incomes.

At one stage Neverland employed over 150 staff. As his musical career wound down, Jackson borrowed hundreds of millions of dollars secured against his Neverland ranch and from stakes in Sony/ATV and another of his companies that owns all of the rights to his songs. He was at the brink of default on loans from Bank of American in the amount of $270m when they were sold to Fortress Investment at the eleventh hour.

Most people aren’t able to borrow this kind of money but they can cause a similar degree of damage with credit cards and bank overdrafts and with the same effect. Bankruptcy is bankruptcy.

Don’t stop ‘til you get enough

The Jackson Five Reunion World Tour that was due to begin this summer is perhaps an indication of how desperate things had become financially.

The tour would have been grueling for someone half Jackson’s age. It seems that his health was such that it was only possible to arrange life insurance cover for the first few of his planned appearances. The tour may have been in part an attempt to get Michael financially back in the game.

Ironically, Jackson’s net worth will likely to be greater in death than in life. Elvis Presley’s estate is said to have grown by perhaps 10 fold in the 10 years after his death.

The Reunion World Tour organizers, in a clever bid to avoid bankruptcy are offering to deliver the concert tickets, to the original purchasers, in lieu of a refund.

Estate planning

Estate planning ensures that when someone dies, their estate passes only to those chosen by the deceased and with minimum cost and delay. Estate planning can also mitigate or even eliminate death taxes that can arise due to nationality and/or place of residence at the time of death.

Trusts, foundations and offshore companies, the subject of articles earlier this year, are the most common estate planning tools. Assets held in these types of structures are not usually subject to death taxes on the death of the original owner of the assets.

There are reports that it may take years (and perhaps tens of millions of dollars) before the administration of Jackson’s estate is concluded.

His assets are likely held both personally and in special structures like companies etc. Just to produce a complete list of assets is likely to be a truly monumental task. If he didn’t leave a will or there are personal assets missing from the will……

One day in your life

Michael Jackson made one of the most astute investing decisions in entertainment history when in 1985 he purchased ATV (Associated Television Company) which owned the publishing rights to over 200 songs by John Lennon and Paul McCartney, for 47m.

In 1995 ATV and Sony merged their publishing businesses to become Sony/ATV.

Rock with you

In the summer of 1988 Jackson played an unprecedented 7 concerts at Wembley Football Stadium in North London on his BAD tour. This achievement was recognised in the Guinness World Records.

It was probably the peak of Jackson’s performing career and his ‘finest hour’.

The author of this article has fond memories of that tour because at the time I was employed in London by a specialist accounting and tax consultancy firm, whose clients were drawn exclusively from the entertainment industry. Jackson was one of their clients. On concert days we monitored the revenue protection controls inside Wembley Stadium and then got to watch the concert for free.

I watched the concert from the opposite end of the stadium, about 100m away. It didn’t matter. The atmosphere was electric and even without attending the concert anyone living within 10km of the stadium could have been forgiven for thinking that they had been in the presence of greatness.

In memory of Michael Jackson (1958 – 2009)

Gone too soon

Richard Colburn DipPFS is a UK qualified financial adviser and Managing Director of Sterling Assets the specialist wealth management consultancy serving the expatriate community in the Far East.

Questions to the author can be directed to:contact@sterling-assets.com

www.sterling-assets.com

Richard Colburn

Many expatriates who choose to manage their own savings and investments have traditionally allocated their money into cash and property.

The global financial events of last year mean that assumptions like ‘money in the bank’ and ‘safe as houses’ have been rigorously tested and found somewhat wanting.

Safe as houses

Property has the advantage of being a real investment, while stocks/shares can and do ‘go to zero’. General Motors was recently given a price target of just that! In the UK, Woolworths has gone into liquidation.

Many who have invested directly in real estate are now faced with an illiquid market. This is due partly to the unavailability of credit as well as the fact that real estate prices may not yet have reached their clearing levels.

However none of this should come as any real surprise.

In December 2005, ‘The Economist’ published an extensive report on the global residential real estate market, which it said was already ‘the greatest financial bubble of all time’. Three years ago it was already bigger than the bubble that precipitated both the Wall Street Crash, as well as the dot.com crash that greeted the new millennium but despite this, prices kept on rising.

Markets and fundamentals don’t always move in tandem or even in the same direction and it wasn’t until the summer of 2007, with the collapse of the UK’s Northern Rock bank,  that there was any serious acknowledgement that house prices might NOT actually carry on going up forever.

Money in the bank

Many expats hold significant portions of their net worth in the form of cash, in bank accounts.  During 2008 the security of this strategy was called into question.

Banks have collapsed or have averted collapse only with Government bail-outs and guarantees and in some cases nationalization. In the United States, nationalization goes by the somewhat softer name of conservatorship which has been the fate of both Freddie Mac and Fannie Mae.

Printing money out of thin air to bail out failed banks erodes the purchasing power of those currencies.

Exchange rate movements during 2008 mean that the real cost of living for some expats in Thailand has risen sharply.

During 2008, British and Australian expats have seen the value of their home currencies fall by over 10% against the Thai Baht and this is before factoring in price increases inside Thailand.

If this wasn’t enough, interest rates have been slashed by Central Banks. The latest rate cut by the US Federal Reserve has taken the interbank rate almost to 0%.

Even those expats in Thailand who could have lived comfortably on interest from their savings accounts a year ago are now looking for alternatives.

A new paradigm

It is possible that we may now be at, or close to, the end of the credit and consumption driven, boom and bust era of the last 35 years or so.

In his Inauguration address, President Obama seemed to suggest that whilst greed and dishonesty were responsible in part for the current global financial crisis, the main cause was failed (Government) policies and the lack of oversight and supervision.

For the moment, battered economies are being kept on life support by printing money and with token interest rates. These two policies are not free market policies and until global financial markets are allowed to operate freely we will continue to see weekly if not daily spasmodic movements in global stock market indices and the crisis will continue.

Cause and effect

With property and cash no longer the sacred cows that they once were, people are now looking for answers to questions that few have asked since the 1930′s.

But although it may appear to some people that everything has changed, things may not be as different as they seem at first glance, particularly when market prices bear little or no relation to fundamental values.

That said, at current market prices there are probably already some sectors whose fundamentals present very good long term if not medium term value.

The guarantee limits that apply to bank accounts are also common knowledge.

Furthermore, a contraction in the global economy is as inevitable as the expansion which precedes it.

Financial planning

Whatever your personal financial circumstances, it would seem that for the moment at least, cash and property are no longer the default, go-it-alone and safe investments that they once were.

But financial planning is much more than just investment management. The asset protection, estate planning, succession planning and perhaps the tax planning needs of investors also need to be considered, regardless of the economic climate.

Richard Colburn Dip PFS is a UK qualified financial adviser and Managing Director of Sterling Assets the specialist wealth management consultancy serving the expatriate community in the Far East.

Questions to the author can be directed by:email

www.sterling-assets.com

Richard Colburn

UK pension regulations permit the transfer of UK pension rights to overseas schemes provided the overseas scheme is a QROPS (Qualifying Recognised Overseas Pension Scheme).

There can be considerable benefits in transferring your UK pension rights to a QROPS including:

• The ability to legitimately mitigate or avoid the withholding tax that is applied to pension income received from UK based pension schemes
• Legitimately avoiding Inheritance Tax on the pension fund
• More flexible investment management
• Freedom to choose your pension fund beneficiaries

The potentially tremendous benefits that QROPS can offer, depending on personal circumstances, have been widely and enthusiastically promoted, not least to the expat community.

However one size does not fit all and depending on your circumstances, it may be in your best interests for your pension rights to remain in the UK.

QROPS schemes

The majority of QROPS schemes are ‘Money Purchase Schemes’.

Money Purchase Schemes do NOT provide a guaranteed income and neither do they guarantee the capital value of your pension fund so they are classified in the UK as ‘Unsecured Pensions’.

Secured pensions

There are two types of secured pension arrangements for those whose pension rights remain in the UK.

Scheme pensions

Also known as final salary (or defined benefit) scheme pensions, these provide the greatest level of financial security.

Pension income is guaranteed for life, at relatively high (often double digit) effective rates of return and may also include statutory annual increases of up to 5%. They also provide the highest level of financial security for surviving spouses and civil partners.

These considerable benefits mean that there are relatively few cases in which a QROPS transfer would be considered to be best advice for someone with a UK defined benefit or final salary scheme pension arrangement.

Annuities

Annuities are the other form of secured UK pension arrangement. Annuities also guarantee a pension income for life as well as providing pension income to surviving spouses or civil partners.

The guarantee provided by an annuity is achieved by investing in fixed interest Government securities and so the returns are significantly lower than those provided by scheme pensions. Annuities currently provide between one third and one half of the pension income that would be provided by a scheme pension of equivalent value.

One of the best kept secrets is that there is actually NO requirement to purchase an annuity at the age of 75.
However the effective returns provided by an annuity for someone aged 75 are quite attractive and involve no management charges. It is also the conservative and cautious option for those who are more risk averse, which many if not most 75 year olds are.

Cost benefit

Arranging a QROPS transfer comes at a price.

While the charges and fees of most QROPS schemes are calculated as a percentage of money transferred, most QROPS schemes incorporate monetary maximum charges. This means that the greater the amount transferred to the QROPS scheme, the lower the effective cost of the QROPS arrangement. Conversely, those with relatively small transfer values would suffer disproportionately high charges.

Furthermore, QROPS schemes don’t provide financial planning advice to those wishing to transfer their UK pension rights overseas, so it is necessary to retain and pay for the services of a professional financial planner when selecting your QROPS scheme.

Financial advice

QROPS transfers are based entirely on UK laws and regulations.

Given the wide range of factors that need to be carefully considered and examined on a case by case basis when considering a QROPS transfer, it would seem sensible to choose a UK qualified financial adviser when reviewing your options and perhaps selecting your QROPS scheme.

In many countries in the Far East, not everyone in the financial services industry who is working with expats holds the professional qualifications necessary to give advice in the UK.

The UK Personal Finance Society (www.thepfs.org) recently confirmed that they have barely a handful of members in Thailand who hold these qualifications.

All that glitters…

Final salary or defined benefit scheme pensions really do take some beating. Personal circumstances may be such that a QROPS transfer might be beneficial but these are likely to be unusual exceptions and if things don’t go as hoped for, it will not be possible to transfer back from your QROPS scheme into your UK final salary scheme.

For those who are not fortunate enough to be members of final salary schemes (and most people are not), the only secure option is to purchase an annuity. For those with modest pension transfer values, the costs applied by the QROPS scheme and any other ongoing investment management charges can be more than the potential savings in UK withholding taxes.

There certainly are circumstances in which a QROPS transfer is appropriate but when considering your options it is important to consider both the sizzle AND the steak.

It’s your money and your peace of mind.

Richard Colburn: Cert PFS, is a UK qualified financial planner and Managing Director of Sterling Assets, a specialist wealth management consultancy, based in Thailand.

Questions to the author can be directed to 05 216 839 or email.

Further information is also available at the QROPS Bureau: www.qrops.org

www.sterling-assets.com

Richard Colburn

QROPS regulations were introduced with the ‘A-Day’ changes to UK pension rights that took effect from April 6, 2006. These included provisions that allow expats to enjoy considerably more freedom of choice and relief from tax when transferring their UK pension rights overseas.

QROPS

Qualifying Recognised Overseas Pension Schemes, or QROPS, are the only overseas pension schemes that are eligible to receive transfers of UK pension rights. QROPS are approved by Her Majesty’s Revenue and Customs, and their approved list of overseas pension schemes is available at the HMRC website.

Whilst there are no age restrictions for transferring UK pension rights overseas, the rules under which these overseas pension schemes operate prevent the drawing of pension income from a QROPS before the UK ‘Normal Minimum Pension Age’. This is currently 50 but will rise to 55 from April 6, 2010.

Pension income

Income from UK based pension arrangements is paid in British pounds and is subject to the automatic deduction of tax prior to payment. This withholding tax applies regardless of the country of residence or nationality of the recipient.

Expats cannot escape Income Tax on UK pension rights that remain in the UK.

But depending on your circumstances, the Income Tax that is automatically deducted from UK pension income can be completely avoided by transferring your pension arrangements away from the UK and into a QROPS.

At the time of writing, at the end of March 2008, the British Pound is worth around 10% less in Thai Baht than it was in January 2007, which would have wiped out the gains of most British Pound denominated ‘cautious’ pension portfolios during the same period.

By making a QROPS transfer of UK pension rights, it is possible to mitigate the impact of these types of currency fluctuations.

Inheritance Tax

UK Inheritance Tax is not just a death tax levied on British citizens.

The United Kingdom levies Inheritance Tax on ALL UK based assets of deceased persons. This applies regardless of the nationality, normal country of residence or place of death of the decedent.

Some types of UK pension arrangements are subject to additional charges on top of Inheritance Tax on the death of the pension holder, which can result in an overall death tax rate of 82%!

UK pension rights that are transferred to a QROPS are no longer subject to UK Inheritance Tax.

This is of particular benefit to the many expats with UK pension rights who have foreign born spouses or civil partners and who enjoy only a GBP 55,000 exemption from UK Inheritance Tax, which is currently 40%.

Lifetime allowance charge

When the value of a person’s UK pension rights exceeds the ‘lifetime allowance’ a charge is applied to the excess. The charge is 55% when taken as a lump sum and 25% when used to provide pension income.

This charge is separate from any Inheritance Tax that may fall due and in some cases can be levied in addition to Inheritance Tax.

Expats with UK based pension rights cannot avoid the lifetime allowance charge.

However, transferring UK pension rights to a QROPS means that future lifetime allowance charges can be legitimately avoided.

Beneficiaries

Under UK law, when someone with UK pension rights dies (regardless of their nationality or country of residence), in many cases death benefits in respect of those pension rights are only available to ‘dependants’ who will generally only include the children under 23 years of age and the spouse or civil partner of the deceased pension member.

After transferring UK pension rights to a QROPS, there are no restrictions placed on the choice of beneficiaries.

More information about QROPS can be found at The QROPS Bureau.

Financial advice

Anyone wishing to transfer their UK pension rights to a QROPS is required to take professional financial advice.

The overseas transfer of UK pension rights is governed entirely by UK laws and regulations, so a professionally UK qualified financial adviser is likely to be the most appropriate provider for this type of financial planning.

QROPS schemes themselves do not give financial advice.

To ensure that you enjoy the maximum benefit from the overseas transfer of your UK pension rights, the selection of your QROPS scheme must be based on your personal circumstances including, amongst other important factors, your nationality and normal place of residence.

UK qualified financial advisers are eligible to join the UK Personal Finance Society, membership of which and therefore professional credentials can be verified directly at their website.

Richard Colburn (Cert PFS) is a UK qualified financial adviser and pensions specialist with Sterling Assets.

Questions to the author can be directed to 053 216 528 or email.

www.sterling-assets.com

It is getting less easy to set up a Thai company for the sole purpose of buying land in Thailand. Thai commercial law does not recognise the concept of the ‘dormant company’ that is common place in many Western countries.

But Thai companies that are set up as genuine vehicles for commercial activity are free to purchase land in Thailand.

Thai companies

Most Thai companies are still required to be majority Thai owned but Thailand’s Board of Investment is able to authorize certain Thai companies to be 100% foreign owned.

However the purchase of land and the construction of any buildings must still be for the specified business purposes of the Thai registered company. This limits the opportunity for land and property purchase for purely personal or real estate investment/speculation purposes.

These provisions would not prevent a 100% foreign owned Thai company from constructing a residential home for its directors.

Such a building would usually need to be located on the same land as the business or commercial operations of the Thai company and so may not be suitable for those Thai companies located within Industrial Parks. Furthermore, the residential property so built would need to be appropriate to the business and so an 8 bedroom Phuket style mansion is less likely to be permitted than a more modest dwelling.

Foundations

Foundations can be set up in Thailand and under Thai law are legal entities that are established as non-profit organizations.

Thai Foundations can own land in Thailand but as with Thai companies, any purchase of land in Thailand must be for the express purposes of the Foundation.

Estate planning

Offshore companies, foundations and trusts are estate planning tools which can be used as part of an overall financial plan that might include succession planning, tax planning and other asset protection.

In many Western countries foundations, trusts and companies are still used as succession planning tools and for asset protection, despite being subject to taxation.

Thailand does not have an established practice of using these forms of investment vehicles for estate planning purposes partly because Thailand does not levy Inheritance Tax.

It is for this reason that expats often hold most of their liquid assets outside of Thailand and why, apart from condominiums, expats who wish to enjoy the long term use of land in Thailand are doing so through the use of land leases registered at a Thai Government Land Office.

Questions to the author can be directed to 053 216 528 or email.

www.sterling-assets.com

You might be surprised to learn that the home countries of some expats have property laws that impose restrictions on real estate ownership that are not unlike those applied to foreigners here in Thailand.

The difference is that in some expat home countries these restrictions are imposed on everyone, not just foreigners!

Direct property ownership

When it comes to real estate in Thailand, foreigners are only permitted full and direct ownership of condominiums. Enjoyment of any other category of real estate by foreigners cannot be secured via individual direct ownership.

Foreigners wishing to secure the use and enjoyment of real estate in Thailand other than condominiums will often do so through a land lease, putting them in a somewhat similar position to tens if not hundreds of thousands of people who have ‘bought’ apartments in the UK, particularly in London.

A very British affair

When someone purchases an apartment (or flat) in London, they are not buying title to property in the strict sense of the word. This is because they do not normally own the land on which their apartment is built and so the owner of the apartment is required to pay rent to the owner of the land on which their property sits. In order for such apartment owners to be able to continue enjoying their ownership rights, it is necessary to maintain and eventually extend this leasehold agreement.

Whilst the annual rental costs payable to a UK landlord under a leasehold agreement usually amounts to only a nominal cost in relation to the value of the apartment, the cost of extending that lease can be quite expensive. In fact the cost of extending such UK leases with an unexpired term of less than say 20 years can border on prohibitive and these rules apply to British citizens and foreigners alike!

Property planning in Thailand

One of the most common ways for foreigners to secure rights to the use and enjoyment of real estate other than condominiums in Thailand is by taking out a lease over a piece of land and then erecting a building on that land. Foreigners can’t own land in Thailand but they can own the buildings that they construct on land that they lease.

Although land lease terms under Thai law cannot exceed 30 years, it is possible to negotiate with the Thai landlord for options to extend land leases beyond the end of the current term. Landlords in Thailand are under no legal obligation to include such options in land lease agreements but there is no limit to the number of extension options that can be incorporated into a land lease if they are willing to grant renewal options.

To enjoy maximum legal protection and to ensure that their rights under their land lease are enforceable, foreigners should register their lease agreement with the local Government Land Office.

The Thai company option

Foreigners can also secure enjoyment and the use of real estate in Thailand by purchasing via a Thai company. Under Thai law, a normal category Thai company cannot be majority owned by foreigners and so a common practice has been to use nominee Thai shareholders and or to attach different voting rights to shareholdings of the Thai and foreign shareholders. This practice is at best a grey area and over the past year or so, Thai Government Land Offices have been taking a much closer look at the funding sources of Thai companies that have foreign shareholders with large shareholdings.

We would like to stress that this is a result of more rigorous enforcement of existing Thai laws and regulations regarding foreign shareholders in Thai companies.

It is also worth bearing in mind that Thai companies are expected to be used as vehicles for conducting commercial business. Thai companies set up solely as a vehicle for holding land and real estate, (even if they are 100% Thai ‘owned’), could easily become targets for the kind of scrutiny now being applied to Thai companies with foreign shareholders.

It is also worth remembering that legally, purchasing land via a Thai company is only an indirect form of asset enjoyment.

An officially registered land lease agreement in Thailand provides expats with a direct and very personal form of enjoyment of land and property.

The ship that sailed!

Up until recently, foreigners ‘buying’ land via a Thai company could take advantage of the financial protection afforded by a legal mortgage, or first charge, over the land. This gave legal recognition to money that had been ‘loaned’ by a foreigner to the Thai company in whose name the land was actually purchased.

In order to create a legal mortgage agreement it is now necessary to draw up a formal repayment schedule, similar to the kind of repayment schedule used when someone purchases a car on credit.

The repayment schedule is subject to regular official review and if the cash repayment schedule is not maintained, fines can be imposed! Interest must be charged on the money ‘borrowed’ by the Thai company and the foreign ‘lender’ is subject to tax on the interest received.

Furthermore, to prevent speculating on the exchange rate of the Thai Baht, the exchange rate applied to such repayment agreements is determined by the Bank of Thailand.

These new rules have effectively made the once popular mortgage safeguard a redundant option for expats.

Perspectives

Renting has always been a natural alternative to buying and permits the enjoyment of assets by those who lack the necessary resources to purchase them outright. It also permits those who do possess the resources with which to purchase outright, the freedom to allocate those resources in other ways.

The restrictions on foreign ownership of real estate in Thailand mean that expats who choose to lease land and build their dream home are perhaps more financially liquid than they would be if they had also bought the land on which they built.

It is also worth remembering that those building a house in Thailand enjoy far more freedom of design than would probably be the case in the home countries of most Western expats and that property taxes here in the Kingdom of Thailand are a fraction of what they would be ‘back home’.

Foreigners in Thailand are guests in one of the most desirable countries in the world in which to live as an expat. While there are restrictions placed on the ownership of real estate by foreigners, Thailand still affords expats options for their accommodation needs that go well beyond simply renting an empty building.

This review of foreign ownership of real estate in Thailand is provided for information purposes only. No advice is intended and none should be inferred.

Regulations and their official interpretation are subject to change without notice and so we would always encourage readers to consult with a professionally qualified Thai lawyer, before entering into any form of land or other real estate transaction in Thailand.

It’s your money and your peace of mind.

Richard Colburn is Managing Director of Sterling Assets, a specialist wealth management consultancy serving expatriates in Thailand and the Far East.

Questions to the author can be directed to 053 216 528 or email

www.sterling-assets.com

The Year end is a time when many people choose to review their financial planning arrangements.

One aspect of financial planning that is often overlooked is charitable giving.

It may come as a surprise to some readers to learn that almost every highly renowned writer on the subject of financial and personal success extols the virtues of giving.

Warren Buffett, the most successful investor of all time and one of the richest men in the world, has donated over 35 Billion US Dollars to charitable causes. Bill Gates has donated billions of US Dollars to causes such as the global fight against AIDS.

Most expats have a rather more modest net worth than those of Warren Buffett and Bill Gates, but it is still possible to make a difference with even the most modest financial support.

One good cause in Northern Thailand that provides financial assistance to school children, has launched its ‘dollar a day’ initiative. For less than the price of a cup of coffee, it is possible to contribute to a fund that provides school meals, school uniforms, books and writing materials to needy children in Thailand.

You can learn more about ‘Give and Live’ and their ‘dollar a day’ initiative by visiting their website at: www.giveandlive.org

For those expats who are still liable to taxes in their home countries you may be able to deduct your charitable donations from your taxable income and cut your tax bill. Many charities that operate in Thailand are also registered in other countries and if one of those countries is your home country you can be financially rewarded for giving!

Trusts and foundations, which have been the subject of previous articles, can be very tax efficient forms of financial planning. The reason why they enjoy this special treatment is that they are legally created from an act of giving. In the case of a trust, the Settlor places assets into trust which then cease to be their property. Similarly with a foundation, the Founder makes a gift of assets to the foundation, which then becomes the new legal owner of the assets.

Many expats are discovering that one of the best financial planning decisions that they could ever make is to ‘sell up’ back home and move to a relatively low cost country, like Thailand. With most items of expenditure at least four times higher in their home countries compared to prices in Thailand, expats are able to quadruple the value of their savings and net worth simply by purchasing a one way plane ticket.

As we look forward to a New Year that for expats is often far more financially secure than would be the case in their home country, maybe we could spare a thought (and perhaps some spare change) for the poor and needy of the country in which we are such financially privileged and warmly welcomed guests.

For more information on good causes in Thailand you can visit the website of The Giving Trust at www.thegivingtrust.org .

The Giving Trust was established as an information portal to good causes with the sole purpose of bringing an awareness of the needy to those with a willingness and the ability to help.

Richard Colburn is Managing Director of Sterling Assets, a specialist wealth management company serving the expatriate community in Thailand and South East Asia.

Questions to the author can be directed to contact@sterling-assets.com or 053 216 528

www.sterling-assets.com

Published in the Bangkok Post, 30 October 2007

Imagine trying to build a house in a world where units of measurement were variable. If you managed to build it at all, it would almost certainly come crashing down within a short time. The same problem arises with paper currencies whose supply can be literally increased at the push of a button.

Funny money

When a country increases the amount of its currency in circulation by more than the rate of growth in the economy, the result is a fall in the purchasing power of that currency. This is the reason why counterfeiting is such a serious crime but the result is the same, whoever is printing the money.

All hail the Dow

For the 12 months to October 24, 2007 the Dow Jones Industrial Average has risen by around 9.8% and during the same time, the US dollar index, which values the greenback against a basket of major currencies, has fallen by almost exactly the same amount.

This might imply that the average foreign investor in US stocks has just about managed to stay afloat but the devil is in the detail. The following dollar devaluations against individual currencies, puts many foreign investors underwater for the 12 months to date:

• Canadian Dollar: 16.8%
• Australian Dollar: 15%
• Thai Baht: 13.5%
• Euro: 12.7%

Investors of British Pounds can celebrate a modest net gain on their American investments because Sterling has only appreciating by 9% against the US dollar in the last 12 months!

American real estate returns will have fared little better in the hands of foreigners and depending on the property location, could be much worse.

Inside America

The performance of the ‘Dow’ may not be seen entirely in its proper context by those living inside the US, particularly when US Government bodies are reporting ‘inflation’ rates of little more than 2% for ‘core’ inflation, that excludes rises in food and energy prices. For anyone who still needs to eat, drives a vehicle and who needs to heat and light their home, this is perhaps a puzzling way to monitor cost of living increases with the price of oil in US dollars climbing almost 30% in the year to October 2007.

Foreigners buying oil are somewhat cushioned from this sharp increase, with their appreciating currencies acting as a discounting mechanism to the US dollar price of oil. Here in Thailand the price of petrol has certainly not risen by 30% in the past year.

Real estate

In December 2005 the Economist magazine reported that residential real estate was in a global bubble, bigger even than the ones that preceded the Wall Street Crash of 1929 and the dot.com crash in March 2000. The report focused on rental returns relative to property prices with returns at around half of their long term historic yields. Two years on these yields are even more skewed.

Although most major currencies have strengthened against the US dollar, those currencies are also printed in excess of the real economic growth of their issuing country, resulting in an internal fall in purchasing power. When looked at in this context and the very real prospect of house price stagnation or worse, caution might be the order of the day for those considering investment in property.

Commodities

Like property, commodities are ‘hard assets’ but whilst property is probably the asset class with which people are most familiar, knowledge of commodities is generally much more limited. With regular news reports that many commodities are trading at or near all time highs, it is important to look at this in its proper context.

Paper currencies that can be printed out of thin air are a rubber yardstick when it comes to acting as an objective measure of ‘value’ and so real commodity prices are much lower than they appear.

Oil and gold

According to the UK Chartered Insurance Institute, the British Pound has less than 10% of the purchasing power that it did in 1971.

This means that in 1971 prices, gold would currently cost around USD 76 per ounce with oil at USD 8.80 per barrel.

This represents a real gold price increase, from its long term fixed price of USD 35 in 1971, of just 117%, or less than 3% a year compounded; hardly bubble territory. In real terms gold today is actually trading at around a 30 year LOW. Some value investing experts might describe this as a buying opportunity.

Equally oil was trading at 3 dollars a barrel at the end of 1971, (prior to the quadrupling of prices by OPEC by the end of 1974), giving a much more respectable 193% return in 36 years. This represents a compound annual return of around 5% which today would probably be considered a target return for a cautious investment.

Flight to quality

It would be difficult to deny that property is an important asset class and it is a fact that over the long term, equities do outperform cash and bonds, but with equity multiples and entire indices in many emerging countries, over 50 and residential rental yields globally that are currently so clearly over extended, the fundamentals of commodities seem to be much stronger.

At the time or writing, at the end of October 2007, global equity markets seem to be making almost daily gains of between 1% and 3%. These are punctuated with pull backs like the 4.8% drop in Shanghai on October 25 and an almost 10% plunge earlier in the month in India before trading was halted.

It would be a brave man indeed who would try to second guess the top of the current global equity and real estate bull markets and the subsequent bursting of these bubbles, but in the words of ‘Hot Commodities’ author Jim Rogers, ‘The last leg of a bull market always ends in hysteria’.

Richard Colburn (Cert PFS) is a UK qualified financial adviser with Sterling Assets.

Questions to the author can be directed to 053 216 528 or contact@sterling-assets.com

www.sterling-assets.com

Richard Colburn

Published in the Bangkok Post, October 20 2007

While the home countries of most expats require financial planners to be professionally exam certified this is not always the case when living abroad.

For most expats, the opportunity for tax free investing is a right that can be enjoyed and with the same quality of financial advice and financial adviser that would be available to you in your home country.

Among the best qualified and most rigorously exam tested financial advisers are those whose professional credentials have been awarded by Government licensed bodies in the UK, Canada, Australia and the US. This is because residents of these countries have fewer restrictions placed on what they can invest in and how they can invest, requiring a broader and higher level of financial planning guidance.

The best of the best

In the UK those legally qualified to provide financial planning services are known as Financial Advisers and the use of this term is strictly prohibited by anyone else. In Canada, Australia and the US, financial advisers are known as Financial Planners.

To qualify in these countries requires a considerable time commitment in professional studies as well as hands on experience in areas such as tax planning, estate planning, retirement planning, investment management and insurance planning.

Financial planning for expats

Whether working or retired, expats are typically investing far more than those back home and so the need for professionally exam qualified advisers is probably even greater. Ironically there are far fewer qualified independent financial advisers in expat locations than you would find back home. In some countries they are quite a rarity.

Do your own research

Financial planners who are exam qualified to the legally required standard for giving financial advice are eligible to join the professional bodies of their respective countries. These representative bodies can confirm the professional qualifications of their members and can be contacted through their respective portals which are:

UK

Personal Finance Society:

Australia

Financial Planning Association of Australia: www.fpa.asn.au

Canada

Financial Planners Standards Association: www.cfp-ca.org

US

Certified Financial Planner Board of Standards: www.cfp.net

Have your cake and eat it

By working with exam qualified financial advisers you can enjoy the benefits of onshore professional standards, with all of the flexibility that comes with being offshore.

Professional credentials allow you to ensure that whoever you choose to work with, in planning for your financial future, has been weighed, has been measured and has most definitely not been found wanting.

It’s your money and your peace of mind.

Richard Colburn is a UK qualified financial adviser with Sterling Assets.

Questions to the author can be directed to 053 216 528 or email us.

www.sterling-assets.com

Despite considerable growth in the British private pensions industry, according the the UK Chartered Insurance Institute around 60% of all pension payments made in Britain are still provided by the State.  With so many people depending on the Government for their income in retirement, we look at how UK State Pension provision can affect expats.

The main component is the basic State Pension.  Entitlement to this is broadly based on the length of your working life in the UK.  The other component is based on earnings although the earnings cap is such that no additional benefit currently accrues to anyone earning more than around GBP 35,000 a year. 

The frozen pension

The earnings related part of the UK State Pension can only be funded from UK earned income. The maximum earnings related State Pension income is around GBP 6,000 a year, is taxable and available only from the age of 65 for a man. 

Women were entitled to state pension income from the age of 60 but their entitlement age is being increased from April 2010 so that by April 2020 it will be 65 rising to 66 for both men and women by April 2024.

Offshore planning

The UK basic State Pension does have an impact on the financial planning of British expats because unlike the earnings related State Pension, it is possible to make payments towards the basic State Pension without actually living or working in the UK.  The cost of these ‘Voluntary Class 3 contributions’ is currently around GBP 400 a year.  With the full 45 year required work record (either worked in the UK or paid in kind) this would currently provide a taxable income of around GBP 4,500 a year. 

There are several factors to consider in deciding whether to keep your State Pension entitlement fully paid up 

• There is no annual increase in basic State Pension for British expats unless you live in the EU or America
• Age is a factor in determining whether to fund from overseas
• Like the State earnings related Pension, the basic State Pension cannot be paid before State Pension age which is already scheduled to be raised to 68 for both men and women within the lifetime of the current younger British expats
• UK State Pensions are taxable

Nobody should (need to) rely on their UK State Pensions to provide security in retirement, particularly expats, but deciding whether or not to commence/continue/discontinue voluntary contributions is one (proabably small for many expats) aspect of your overall financial planning that deserves attention.

Offshore pensions plans put you firmly in control of your long term savings.  You can pay in when and how much you choose and take an income at any age and free of tax.

A UK qualified financial planner will be able to review these and the other options available to you as an expat and help tailor a plan that is right for you.

It’s your money and your peace of mind.

Richard Colburn is a UK exam qualified financial adviser with Sterling Assets.

Questions to the author can be directed to 053 216 528 or email us

www.sterling-assets.com