When our lives are full and there are not enough hours in the day, reviewing finances can often be the last thing on the agenda. We have so many things to focus our energy on, whether that’s our career, our home, our children, caring for parents, charitable work or simply living the lifestyle that keeps us happy. Of course, we are now doing all these things remotely and at a distance – a strange new normal which will continue to evolve as time moves on.
One thing that doesn’t change is the need to have a plan for your financial journey. If we take a step back and consider where we are in our lives now, and what plans we have for the next few years, there are likely to be several things that require wealth planning. Our goals are usually centered around four main areas: our family (which may include school fees/college education or legacy planning) our careers, our property (perhaps a planned house move, a holiday home or a global move) and our lifestyle both pre and post-retirement. It is prudent to look ahead considering the level of capital or income we will require to achieve our goals, and when those funds will be required.
The foundations
At the foundation of the plan there should be a sensible cash base, the traditional emergency fund, which also encompasses short-term needs. As we’ve seen recently, we should not be forced to sell investments at the wrong time. However, having too much of your wealth held in cash at a time when interest rates are at an all-time low is not an ideal scenario either. For goals that are several years away, investing is the most sensible approach, and even in these uncertain times (if you are investing for the long term) true investments are far more likely to provide real growth. Setting time horizons for your money is the single greatest thing you can do because you can then select appropriate investments.
The underlying investments should be carefully considered to marry with the level of risk you are comfortable taking. Minimising downside risk and focusing on capital preservation is a sound strategy. In the words of Warren Buffett, “the No. 1 investing rule is not to lose money”.
By having a coherent plan, a clear strategy for managing your wealth, you can achieve the lifestyle you want to lead both now and in the future. Financial peace of mind frees up your energy to do the things you love.
Unexpected hurdles
We must also be mindful that as sound as your wealth plan may be, there will almost always be unexpected hurdles to overcome – life events that were not accounted for. These are the times that having a trusted adviser working with you can be a lifeline, as they will help you to review and amend your plan to meet your changing circumstances and needs.
It is worth also considering the global nature of our lives today. Many wealthy families reside in a country other than the country of their domicile. It is crucial to take into account where to hold your assets, the investment vehicles used, and the underlying investments held.
US vs UK tax systems
While all of the above can seem challenging enough to piece together, there are further thoughts to consider if you are a US citizen living outside of the US. US expats have an additional layer of challenges to face when it comes to managing your wealth. Even if you have been in the UK for several years you will be beholden to two tax systems (and two different filing deadlines). There are tax treaties with the US to ensure that there is typically no double taxation. However, it is the treatment of the underlying investments that can often cause problems. This is the case whether they are held in domestic investments in the US or investment vehicles in the UK.
With the legislative changes we have seen over the past few years (FATCA, CRS and so on), the world has moved to a far more transparent place. It is important to make sure that your plan is joined up and you are considering your wealth as a whole. Your plan will only truly work if you are considering your wealth in totality.
One of the biggest pitfalls US citizens face is buying non-US funds. Rather unhelpfully, funds are the most common form of investment used in the UK. If these funds are not structured in a US friendly, manner they are extremely tax-disadvantageous for Americans as they are regarded as PFICs (Passive Foreign Investments Companies) by the IRS and as such are taxed in a much more punitive manner than they would be for a non-US tax reporter. Similarly, if you invest in a non-EU fund not on the UK reporting list, like a US mutual fund, these may be taxed heavily in the UK.
Taking action
On the brighter side, there are solutions, but you must be selective and take specialist financial advice. As we’ve seen, there are a different set of parameters for US-connected families but your desires, requirements and concerns for the future will still be centered around the four main life goals mentioned earlier. You need the right people managing and organising your global assets so your goals can be achieved without the stress of an unexpected tax bill.
The current pandemic has presented the opportunity to look at the bigger picture and consider what is important, a chance to review our priorities. Now may be a time to review your existing arrangements and ensure the plan for your wealth is fully aligned to your goals.
