Global: Investments & Risks

Due to the often substantial investment period until pension age, it is highly relevant that the investment is done in the best possible way. The bases thereof is to use the correct personal risk profile.

It makes sure that your risk acceptance is defined in a highly accurate manner and that the deemed suitable investment categories are coupled with this profile for the correct period of time.

If you might have any doubt it your pension plan uses a correct profile, feel free to visit our site and use our elaborate risk profile form.

Type of Risk Profiles

• Very Defensive
  Totally risk averse. Not all investment categories are allowed.
• Defensive
  Risk averse. More investment categories are allowed.
• Neutral
  Risk is tolerated as long as there is a long enough investment horizon.
• Offensive
  To go for higher profit, substantial risk is allowed with a shorter investment horizon.
• Very Offensive
  To go for the highest profit, the highest risk is allowed with an even shorter investment horizon.

There are the following Investment Categories with the related risk indication:

1] Derivatives

• Extremely high risk which only focusses on change in value and not to buy a certain object itself.
• For example Options/Warrants/Futures.
• Thus only for those with a Very Offensive risk profile and a high level of knowledge.

2] Equity/Stock

• High risk even though the exact amount of risk can be different due to the kind of sector and global location.
• Equity requires an investment horizon of at least 7 years in general.
• For those with a (very) offensive risk profile, a slightly shorter period might be acceptable.

3] Real Estate

• Depending on the type of Real Estate, similar or slightly less risk than Equity.
• Thus requires an investment horizon of in general 5-7 year horizon.
• For those with a (very) offensive risk profile, a slightly shorter period might be acceptable.

4] High Yield Bonds

• As these kind of Bonds go for the higher return on investment and risk, they require an investment horizon of at least 5 years.
• For those with a (very) offensive risk profile, a shorter period might be acceptable.

5] Solid Bonds

• As these kind of Bonds aim for a regular return on investment and risk, they require an investment horizon of at least 3 years.
• For those with a (very) offensive risk profile, a shorter period might be acceptable.

6] Savings

• No real investment risk as long as not at a fixed term.

The standard situation is that the capital grows and is used at pension age to get the desired and legally and taxwise allowed pension:

• Lump Sum(s) and/or
• Temporary/Lifelong Annuities and/or 
• Flexi Draw Down

In some countries it is possibe to split the pension capital in several different sections and each with a separate focus: For example one for early retirement, one for standard retirement and one as an increase of the standard old age pension during the first few years of retirement.

In such a situation, you have to adjust your investment mix and risk to the different time tables and needs.

Often the Old Age Pension capital is also used as funding for the Next of Kin Pension in case the insured person passes away prematurely.

This is no problem but be aware that both types of pension can have a very different investment horizon. As the Next of Kin Pension horizon can be much shorter, please take this into account while creating the overall coverage. It might be a reason for acquiring an additional and in time declining risk coverage.

The essence of investing is to get the highest return on investment at the lowest risk.

One of the best ways to reduce risk is to spread the capital over many investments within each investment category. You will always have the risk of investing in a certain category. But if you spread the capital over many different kind of investments within that category, you will optimally reduce the risk of having a certain investment object.

Thus we advise clients to only invest in Investment Funds. As thus you spread your capital not only between Investment Categories but also in the best way possible within each Investment Category. In general it will also improve the liquidity of your investment.

As of now we will only focus on Funds

It speaks for itself that it is relevant to only use the best investment funds regarding expected return on investments and low costs. There are several kind of funds:

Active/Vision Funds

• These kind of funds try to generate a higher return on investment than by just following the index.
• As they often charge (high) additional costs for their services and as the positive outcome is not guaranteed, it is advisable to be critical about these funds.
• They often have a specific focus on certain sectors and locations.
• Our brochure on this topic provides much more details which additional insight might be welcome.

Passive/Index Tracker Funds (ETF)

• These funds do not believe that it’s possible to each year outperform the index.
• Thus their focus is to follow the index at the lowest amount of costs possible. That is their challenge and added value.
• Due to the huge effect of compounded annual return on investment, it’s a fact that a low cost level is highly relevant.

Life Cycle Funds

• These funds are mix funds that automatically reduce the risk as the owner ages.
• The positive aspect is that thus you have no risk problem if you forget to pay attention to your portfolio.
• These funds are often used in pension related investments and can be advisable if implemented correctly.
• Most providers offer several type of funds with each a different personal risk profile.
• They can be fine if they are implemented correctly. Please have this checked as it is not advisable to presume that they will all be fine.

Our brochure on this topic provides much more details which additional insight might be welcome.

• Costs related to opening and having an account. (Often none.) :
  Paid directly by investor
• One time transaction costs: As of 0,15%:
  aid directly by investor
• Annual management costs: As of 0,2%:
  Paid directly by investor
• Fund costs: processed into the capital of the fund:
  Not paid directly by investor

Private annuity investments deserve additional attention due to the following often existing risks:

• High costs due to individual nature;
• Often limited investment opportunities;

Many expats have investments separate from official pension plans. It often strikes us that not all implications have been researched. For example the risk profile might be different from the pension plan related risk profile.

Please make sure that you are aware of all legal, tax and investment regimes and opportunities.

For an accurate oversight of the investment results in time plus a prediction of future results, feel free to look at our Brochure: ‘Investment Results in Time’.

As it is not possible to predict future equity fluctuations, we believe it is best to follow the index at very low costs. Which annual costs often amounts to 0,03% - 0,07% versus 0,5% - 1% of funds with a certain ‘vision`.

We will now show the average annual result in 2010-2020 of the most respected indices.

Global Equity

• MSCI World      : 10 Years: 10,29%

USA Equity

• Dow Jones IA   : 10 Years: 10,68%      15 Years:   6,67%
• Nasdaq CI         : 10 Years: 14,39%      15 Years: 10,19%
• S&P 500            : 10 Years: 13,60%

UK Equity

• FTSI 100            : 10 Years: 6,34%

EU Equity

• Euro Stoxx 50   : 10 Years: 12,07%

Japan

• Nikkei 225         : 10 years: 12%

• Which investment within Pillar 1-3 will provide the highest consecutive (after tax/costs) gain?
• Are there such possibilities in other countries with higher expected consecutive gain?
• Which of the Active/Passive/Index tracker/Life Cycle/Sustainable approach provides the highest consecutive (after tax/costs) gain and fits within the expat’s risk profile?
• Are the Life Cycle funds tailor-made to the personal risk approach?
• Too often funds focus on indeed low costs but not on the much more relevant expected consecutive height of the annual gain.
• If you like to have an oversight of the essence of investments, feel free to look at our Brochure: ‘The Essence of Investments’.

Due to the historically low interest rate an increasing number of pension plans is based on Defined Contribution (DC) and investments. We will now pay attention to the related risks.

Correct Risk Profile?

Due to the often substantial investment period until pension age, it is highly relevant that the investment is done in the best possible way. The bases thereof is to use the correct personal risk profile.

It makes sure that your risk acceptance is defined in a highly accurate manner and that the deemed suitable investment categories are coupled with this profile for the correct period of time.

If you might have any doubt it your pension plan uses a correct profile, feel free to visit our site and use our elaborate risk profile form.

Fund Selection?

It speaks for itself that it is relevant to only use the best investment funds regarding expected return on investments and low costs.

Life Cycle Funds can be fine if they are implemented correctly. Please have this checked as it is not advisable to presume that they will all be fine.

Split Pension Capitals?

The standard situation is that the capital grows and is used at pension age to get the desired and legally and taxwise allowed pension:

• Lump Sum(s) and/or
• Temporary/Lifelong Annuities and/or 
• Flexi Draw Down

In some countries it is possibe to split the pension capital in several different sections and each with a separate focus: For example one for early retirement, one for standard retirement and one as an increase of the standard old age pension during the first few years of retirement.

In such a situation, you have to adjust your investment mix and risk to the different time tables and needs.

Investment Mix regarding Old Age Pension and Next of Kin Pension?

Often the Old Age Pension capital is also used as funding for the Next of Kin Pension in case the insured person passes away prematurely.

This is no problem but be aware that both types of pension can have a very different investment horizon. As the Next of Kin Pension horizon can be much shorter, please take this into account while creating the overall coverage. It might be a reason for acquiring an additional and in time declining risk coverage.

Interest Rate at Retirement Age?

Just before retirement age a DC pension claim often requires that an annuity has to be bought. In that perspect the height of the interest rate is highly relevant. At the current historically low interest rate this means that buying an annuity is not that interesting and that if possible it seems advisable to look at other options.

These Defined Benefit kind of pension claims provide guaranteed pension pay-out. No investment risk until retirement age nor interest rate risk at retirement age. Does this mean there are no risks? No.

Transfer of Value?

In case there is a (often conditional) annual indexation of the existing pension claim and it is also possible to transfer the value to the new occupational pension claim, you have to choose whether or not to transfer.

Which means you have to make a projection: Will the existing annual indexation end up with more old age pension pay-out? Or will this be provided after a transfer of value?

As this regards the comparison of many technical aspects, it seems wise to seek advice. One misunderstanding we already like to address: Some consultancy companies prefer clients to transfer in order to ‘earn’ money on commissions and future investments. They often state that ‘pensions is about having the freedom to decide yourself about your own pension capital’.

Which statement is wrong. Pensions is about getting the highest pension at the lowest cost and risk.

So please let yourself not get side tracked.

Double Tax Treaties?

Expats who live in one country and receive pension pay-out from other countries are advised not to forget the impact of Double Tax Treaties.

They are often created between two countries in order to prevent or limit the negative effect of double taxation and are highly relevant for pension optimization.

Expats who plan ahead are advised to compare several countries in this respect.

Future Legal/Tax Regime?

No one knows what the rules will be in the future. Some countries, like for example The UK, have a tendency to change the pension related legislation and not always in favor of the person entitled to pensions. Please take this uncertainty into account when planning ahead.

Conflicting International Regimes?

Expats often have pension claims in several countries. One of the most relevant aspects of pension optimization is to make sure you use all tax benefits. In that regard each country has its own rules. As we have seen many times that national regimes can conflict in a serious manner, please take this into account when planning ahead.

For example: In Swiss certain pension pay-outs are Lump Sum based. Holland does not allow pension Lump Sum pay-out. Without additional attention this will result in the situation that a possibly substantial Swiss pension capital is not treated as such by Holland and could be taxed completely and up front at pay-out at a very high progressive tax rate.

Risk versus Ruling?

We sometimes hear from new clients that they know what a certain international tax situation constitutes as they have done their homework.

We always stick to our own approach which means that we do our own research and prevent not needed risks. Regarding international tax issues this means that we in general ask the National Tax Authority to in writing agree with our view on a certain matter.

Regarding how to fund the Next of Kin Pension coverage, there are three options:

Capital Based

This means that there is a capital with which the Next of Kin Pension coverage will be funded. As Next of Kin Pension often is about lifelong pension annuities, this will often require a substantial capital for funding.

Risk Based

This means often that an insurance company provides coverage if the insured person passes away during the contract. As this is only about risk coverage and does not require capital, the costs are substantially lower. If the insured person has not passed away at the end of the contract, you have paid premium that will not anymore provide any result.

Combination

Often the capital used to build a fine Old Age Pension is also used to fund the Next of Kin Pension, which capital based funding is suplemented by an additional (often temporary) risk coverage.

In order to see if the coverage meets your demands, please look at all existing State/ Occupational/ Private coverages. The funding can be capital and or risk based. Due to the current historically low interest rate, additional risk coverage is not that expensive if you get it in time and at the right place and at the right age.

Additional risk coverage is often either not possible or very expensive. So in order to have your demands met, to be frank you should have provided for enough capital back in the day.

This coverage often does not get the attention it deserves.

When you are looking at the existing coverage please take into account that you have to look at all existing State/Occupational/Private coverages. To the extent that the existing coverages do not meet your whishes, you can opt for additional risk coverage. The collective rate is often substantially lower than the individual rate.

Expats who participate in a pension plan are often asked if they would like to choose certain additional clauses. While this might sound great, please first check in depth the exact meaning of such clauses.

What does it provide at what (annual) cost? In the past we have seen that many expats opted for additional disability clauses without checking the cost, exact meaning and if they really needed the addition in the first place.

In many countries it is possible to buy additional State Pension Claims.

This might sound attractive as expats often lack a certain pension build up capacity regarding a certain period. Please be aware that you often have the risk of paying a too high premium for such an addition.

Furthermore it is also not sure if the additional infusion of premium will indeed result in more State Pension pay-out in the future as regimes and State Pension Systems can and do change.

Private annuities deserve additional attention due to the following often existing risks:

• High costs due to individual nature;
• Often limited investment opportunities;
• Inflexibility due to standardization;
• Limited or no tax advantages.

If the right product is chosen it might sometimes prove to be a fine addition to the total planning. It all depends on your circumstances and the type and amount of product.

In general Expat Pensions have the familiar 3 Pillar Division:

1. State Pensions;
2. Occupational Pensions;
3. Private Pensions.

Expats working for Supernational Institutions like for example ESA will see that there is no such division and that you have to look carefully at the exact kind and amount of coverage with often also a special and unique tax regime. This all provides an increased risk for mistakes.

Regarding the issue whether or not to transfer the value of existing pension claims to such a new plan, please be very cautious and seek advice.

Many expats have investments separate from official pension plans.

It often strikes us that not all implications have been researched. Please make sure that you are aware of all legal, tax and investment regimes and opportunities.

Many expats have a Will in another country than the country in which they currently reside. This is not advisable as the exact same clause can have a different meaning in another country. As it is advisable not to have risks that can be prevented, please always have a Will in the residing country.

During expat pension optimization projects, we always see how expats have been advised in the past and if that advice was correct.

Rest assurred, there are fine advisors in many countries. However, that does not mean that every advisor provides the best possible advice.

We urge you to be critical. The right type of advisor will understand and respect you for it.

Expats often face the situation that they would like to transfer capital from their bank/investment account in one country to another.

As a service, we will now mention the most relevant aspects thereof.

An international money transfer involves sending money to either another person and/or bank account and/or company overseas.

This transaction can be completed either through a Bank (the traditional method) or a Money Transfer Service. For the latter you first need to open an internet account.

The capital can be received electronically or in cash.

There are two kind of costs:

• The fee of the Bank or Money Transfer Service.
• The currency daily exchange rate differences which are between 2,5% - 5%.
• The costs can differ vastly depending on of it regards a transfer within the EU or not.

A transfer within the EU has often no currency aspects and should not cost much.

We recommend that you use an organization whose safety, reputation and governmental license is without any doubt in order.

Speed comes only second as the difference between a fast and regular transfer is in general just one or two days.

An alternative for transferring capital and also changing currency can be to get a foreign currency account at your current bank. This indeed prevents that you have to pay costs related to currency exchange.

Please be aware that such an alternative does include that you keep a currency risk which in the end might be much more expensive than the transfer costs.

If you might have any doubts about how to proceed, feel free to contact us as it will be our pleasure to assist you in preventing unnecessary risks.

Stock options are contracts which give an employee the right to buy or exercise a set number of shares of the company stock at an often pre set price. Which is called the ‘Grant Price’.

The employee has a limited amount of time to exercise his options before they expire and lose their value. The employer might require that the employee exercises his options within a period of time after leaving the company.

The number of options that a company will grant its employees varies. It depends on the company and on the seniority of the employees. Investors have to sign off before any employee can receive stock options.

 The contract will specify the ‘Grant Date’. This is the day the options begin to vest. Which means that it is available for the employee to exercise and buy stock.

Most employees will not receive all of their options right away when they join the company. The options often vest gradually over a period of time known as the ‘Vesting Period’. Often this period amounts to four years.

As the options vest gradually over the course of the vesting period, the employee will be able to access a part of his stock options before those four years are up.

Often there is a one year waiting period before any of the options vest. The employee will need to stay with the company for at least one year to receive any of his options. Often he can vest each year 25%.

Once options vest, the employee has the ability to exercise them and buy shares of the company. Until then, they do not have a real value.

The price that the employee has to pay for those options is set in the contract. It is often called the ‘Grant/Strike/Exercise Price’. Regardless of the performance of the company, this price will not change.

An alternative approach besides buying the stock is to make an ‘exercise and sell’ transaction. Thus the employee buys the options and immediately sells them again. Rather than having to use his own money to exercise, the brokerage firm handling the sale will effectively front the money.

A different approach is an ‘exercise and sell to cover’ transaction. Thus the employee sells just enough shares to cover his purchase of the shares and hold the rest.

Please never forget that after the expiration date, the options have no value. So don’t be late.

 It is obvious that when the stock is listed, that the employee should only want to exercise his options if the market price of the stock rises above the agreed upon exercise price.

Please be aware that in general the options are not transferable and there is no obligation for the employee to exercise the options, in which case the options will lapse.

To have the lowest possible tax exposure, you first need to know:

• The amount of the entitlement and its periodicy;
• The legally allowed/required moment of vesting;
• The price of vesting.

The next step is to look at the current tax regime to see if there are certain specific tax rules that might effect your tax exposure.

A well known example is that if you have the Dutch 30% Tax Ruling (which decreases your tax exposure), then it is best to vest as much as possible within this decreased tax rate.

Once you have the company stock, the next question is to see if or how it fits into your overall Portfolio.

There are several aspects to take into account:

• What is your Personal Risk Profile?
• Does equity fit into your profile and if so to what extent?
• What is your Investment Horizon?
• How long is it responsible to keep the stock in your Portfolio?
• What is the risk exposure of that specific stock? Higher/lower than average?
• You are aware that to have one type of stock increases risk substantially compared to investing in an Equity Fund with much better spread?
• Is a possible future market disruption and stock price drop to be expected and acceptable?

Please have your own plan about:

• How long you wish to go for the expected increase of value;
• Which risk you expect;
• Which risk you deem acceptable;
• As of which age you need to reduce your portfolio risk.