Most people complete Lump Sum Investments as they understand that any money in low-interest accounts loses value each year. They wish to ensure this money is working for them over time. For example, prices in 2018 are 65.34% higher than they were in 2000 (Bank Of England).
That means £250,000 in 2000 would need to have grown to £413,367.07 in 2018 just to have kept pace with inflation. An annual growth rate of 2.8% to keep up to speed with the rising costs of living. A Lump Sum Investment tackles this issue by positioning the capital for a higher rate of growth above inflation.
Having instant access to capital is essential for unexpected costs like needing to fly home at short notice. It is also known as an emergency fund. The leading cause of expats accumulating more than 3-6 months worth of expenses is their monthly salaries building up over time. That is perhaps because they do not feel comfortable investing the money in their local country. Other typical reasons include inheriting capital or the sale of a house or business. In all of these scenarios, Lump Sum Investing is the correct financial advice.
There are few better investments than your children or grandchildren’s future. A well-planned Lump Sum can give your loved ones the best start in life. You also have the advantage of allowing the lump sum to grow and compound over time. We all recall compound interest from maths — the process of earning interest on interest as investment growth compounds each year.
With simple interest, £250k invested over 18 years with a growth rate of 5% would grow to £475,000. With compound interest, £250k over 18 years with a growth rate of 5% would grow to £601,655. A difference of £126,655.
Typically, this is age 18 to 25, to help fund tuition fees or house deposits. With a general understanding of your goals, you can begin to formulate a lump sum investment plan. Speak with a Financial Adviser today to start understanding your options. Alternatively, if you prefer for your children’s future through a regular monthly savings plan, read our Education Planning page.
Many of our expat clients reach financial freedom between age 50-65. They are comfortable financially, but this does not mean that they want to stop maximising their wealth. For example, John is 55 and lives in Dubai; he is semi-retired working on a consulting basis. He enjoys a few holidays per year and spending time in the UK with his grandchildren. John has £250k in his current account. Based on a net annual growth of 5%, by investing the capital, John could generate an additional £12.5k each year during retirement. Leaving the original £250k intact to pass onto his beneficiaries.
A key question we ask clients is whether they are investing their lump sum for income or capital growth. A high proportion of high clients in retirement are investing their lump sum for income. You can achieve this by using assets which have a track record of providing income, typically through dividends or bond repayments. These clients are looking to provide additional income during their retirement.
Investing over a period of 5 years or more allows a lump sum portfolio time to smooth out market fluctuations. No matter the track record of any investment fund, no-one is in control of the stock markets. Any Financial Adviser who promises guaranteed returns in the stock markets is likely best avoided.
Equity markets have always historically outperformed cash holdings through the long term upward trend of equities (Reuters, 2019). However, there will be periods of volatility. The value of your investments can go down as well as up. In summary, the longer you hold a lump sum portfolio, the higher the likelihood that it will outperform cash holdings.
Offshore investments offer several advantages for expat clients who do not feel comfortable investing in their local country. Uncertainties can include local banking regulations, language barriers, unsuitable currency options, political instability or a lack of trust due to corruption.
Offshore investments can also help minimise clients tax obligations. It is not illegal to mitigate or avoid taxes by using tax laws to your advantage to reduce your tax burden. It is illegal to evade taxes, which typically occurs when individuals do not disclose their assets and are untruthful.
In the Client Example, an Offshore Investment within a UK Crown Dependency such as the Isle of Man could be more suitable (Gov.Uk). That removes John’s uncertainties, and he feels comfortable all around.
Investment platforms can be particularly valuable for individuals trading stocks and shares. As they may need to trade instantly to benefit from short term market movements.Typically speaking, our clients tend not to invest directly in stocks and shares.
Firstly, because individual stocks are more volatile, and the number of stocks required to create a diversified portfolio is significant. Holding a sufficiently diversified portfolio of individual assets would create high costs that would erode a client’s portfolio. Secondly, day-trading is typically used by well-funded companies or individuals who use leverage to amplify their profits or losses.
A platform investment provides more online accessibility including the ability to place trades online. This speeds up the process of buying and selling assets.
In some instances, Platforms are more straightforward and cheaper for expats. In other situations, another Offshore provider may be able to offer a lower charging schedule. It is the duty of our Financial Adviser’s to explore all options for you thoroughly. Consequently, presenting the solution that is most suitable and outlining why we discount other providers.
An Investment Bond provides clients with a flexible international portfolio to invest their assets. When used effectively, they are an excellent financial planning tool. When considering an Offshore Bonds, clients need to ensure they understand how their Financial Adviser earns money from this advice. At Cameron James, we only work on a transparent fee-basis for all lump sum investments. It means we are unbiased and independent in our research.
Some Financial Advisers work on a commission basis where they receive remunerations from the Investment Bond provider without your knowledge. In our opinion, this creates a conflict of interest. If you are unsure how your Adviser gets paid, contact us, and we will provide you with a free comparison. An 8-10 year lock-in period with the Investment Bond provider is a common sign to take into consideration. It suggests your Adviser is receiving a hidden commission.
Everyone with a UK pension is eligible for a 25% tax-free lump sum from their pension scheme at retirement. The technical term for this is a Pension Commencement Lump Sum (PCLS). People can use their pension lump sum as they wish. Some clients may spend this money while others may look to re-invest to provide an income in retirement.
The equity markets have consistently provided the greatest level of returns over the past century. Markets can fluctuate but over the long term, they have always performed. Between 1925 and 2007, the stock market returns were positive for 53 years and negative for 29 years (Investopedia). This is referred to as a long term upward trend of equities. Investing your lump sums ensures you have exposure to this long term growth.
Your lump sum is invested in the stock market straight away. Meaning your investment can start to earn dividends and take advantage of market returns. The historical track record of the stock market means you profit for investing for a more extended period.
You should invest lump sums with a minimum time horizon of 5-years. As such, they are not generally advisable if you require instant access to the capital. Additionally, there investment set-up fees so withdrawing money in the early years may not provide you with good value. Some investors make total lump sum investments for less than 5-years and can make good returns. Despite that, we advise our clients to take a more long term investment view.
Investing your capital in the stock market in one go. Should financial markets experience volatility, your portfolio value could be negatively affected and will take time to recover. That is why lump investments should categorise as a medium to long term investment. This risk can be reduced by holding a percentage of your portfolio in cash and gradually investing in the stock market. Usually referred to as dollar-cost averaging.
Topping up your lump sum portfolio is an effective strategy. It is a form of dollar-cost averaging as you are entering the market at different times. It can be useful for when you receive bonuses from work or your current accounts surpass your 3-6 month level of expenses again. That is also more cost-effective as your fixed fees spread across a more extensive portfolio. Reducing your charges through economies of scale.
Withdrawals typically pay into your bank account within 5-10 working days of submitting the withdrawal form. To fulfil this request, investment providers need to sell down the assets, so it is not an instant access scenario. An ongoing relationship with your Financial Adviser can ensure you plan any substantial withdrawals. The money can be sent to your bank account anywhere in the world. We advise using an account of the same currency to avoid FX charges from your bank.
Your beneficiaries can then decide what they wish to do with the capital. They could withdraw all the funds, keep the capital invested, or make partial withdrawals. They could also move the portfolio to another Financial Adviser.
Your beneficiaries can also be changed at any time. So if your relationship or family situation changes, you sign one A4 page, and your beneficiaries will be updated accordingly. If you have formed a long-standing relationship with one of our Advisers, they are well placed to continue advising your family in line with your wishes. Alternatively, your family can move the investment to any other Adviser of their choice or withdraw the capital.
It is the role of our Financial Advisers to carefully review your needs and advise which solution best matches your requirements. The basis for our advice depends on a variety of factors. Including the amount, you wish to invest, when you need access to the capital and what your investment objectives are. Where you currently reside and plan to retire are also important.
Talk to one of our Financial Advisers today for them to analyse which investment would be most suitable for you. Once we complete the analysis, you will get a detailed advice report outlining the best course of action for you. So you can review everything in black and white and make an informed decision. We look forward to understanding your needs.
Our FAQ section includes the questions asked by our existing Expat clients. If you don't see your question - Ask us and we'll answer it.