In the UAE, which is home to more than 200 nationalities, there are an increasing number of expats looking for support with financial planning.
Sarah Lord, Managing Director of Killik Chartered Financial Planners, has put together a new guide aimed at helping globe-trotting expats wherever they are in the world.
It includes a step-by-step advice on managing financial ambitions, simple budgeting tips, understanding personal net worth, managing expensive debt, designing an investment strategy and how to make the most of trust funds.
In part one, we looked at how expats should work out their net worth, start budgeting, create an emergency fund and clear expensive debt. In the second series, we shared how to set up financial goals and design your investment strategy.
Financial fitness for UAE expats
Here are the final three steps of the nine-step financial fitness programme:
7. Become a savvy saver
Once you have identified your saving goals, how do you go about investing in the most efficient way? Here are a few of the key considerations:
Q1. Should I send money home and invest it there?
Many expats feel more comfortable investing in their home countries. However, if you are sending money home to invest, make sure you are aware of the tax treatment of your investment, as you could be opening the door for the taxman to take a chunk of your income and gains.
Q2. Should I use an offshore savings plan?
There are many offshore regular savings plans promoted to expats as the best way to fund your future financial goals. It is important to understand the terms of these plans as they can have complex structures, hidden potential charges or contractual terms which can severely affect your returns and catch out the savviest saver.
Common investment pitfalls
Access: Can you get your money out of your investment at short notice without incurring a penalty? If not, you could lose a lot of your initial investment and any growth if you surrender a regular savings plan before the end of its contractual term.
Charges: The charges attached to your investment vehicle can have a significant impact on your overall return. If you are buying investment funds, watch out for “mirror funds” which may have additional charges and cause a further drag on your potential returns. It can be difficult to discern what ongoing charges will be with many investment products so, if in doubt, seek independent advice.
Flexibility: Many savings plans levy charges based on assumed contributions for a specific term. Stopping your contributions earlier may mean your investment pot has to grow even further and faster to overcome the impact of higher charges. This could severely hinder your returns.
Tax-efficient investing is an important component of expat financial fitness. However, do research alternative solutions and talk to a qualified and regulated adviser before you agree to something you may later regret.
8. Sort out your paperwork
No matter how long you spend as an expat, record-keeping is vital. For example, our finances get more complicated as we gradually build up assets, alongside commitments such as mortgages. And many of us take on more dependants, whether non-working spouses, ageing parents or children.
Here is a short checklist of some key documents that you should keep up to date and in a secure place. Let someone you trust know how to access these records on your behalf, including any that you receive online, in the event of an emergency.
• Birth certificate
• Marriage certificate
• Insurance documents
• Driving licence, vehicle registration document
• Bank statements
• Recent utility bills
• Property title deeds
• Investment portfolio statements
• A will
• A power of attorney
Why do I need a will?
The administrative and emotional stress you will leave behind for your dependents, not to mention the potential tax bill if you have not made a will, could be sizeable. Without one the law dictates how your assets are distributed, regardless of your intentions. A valid will sets out who will act as your executor and manage your affairs on death, who will become the guardian/s of your children and how your assets are to be distributed. As such it’s a no-brainer for most people.
Do I need a foreign will too?
Often the inheritance laws in a country of residence will operate differently from your home country. For example, in some countries the local law dictates how a property is distributed, while in other countries, the law of the owner’s country of nationality applies.
Sometimes there are inheritance laws which override the intentions of an individual, requiring that part of a deceased person’s estate is left to specific relatives. If you have assets in different countries you may need additional planning and should seek advice from a qualified professional rather than assuming that your will in your home country will automatically apply to your worldwide assets.
9. Involve the family
“I never saved – I didn’t see the need with a final salary pension” says a friend of my father who is part of the baby-boomer generation. He benefited from a guaranteed final salary pension, an expanding welfare state and several house price booms. Those days are gone.
All is not lost, however. We should see the baby boomer years for what they were – a unique one-off period of unusually benign conditions – and adapt by returning to a model whereby those with the means help those who are less well off. Grandparents, for example, can support their own children by helping them meet the cost of private education for their grandchildren.
Or they can help their grandchildren directly by boosting their savings to cover their first car, house deposit, university tuition fees, or round-the-world trip (if they are really lucky). There are many ways to do this tax-efficiently – either via regular savings or via a lump sum.
• Regular savings for children
A grandparent or relative can set up a savings or investment account (or both) for their grandchildren and contribute regularly to it. With an investment account, regular contributions can smooth out the ups and downs of the markets and can help get your children interested in becoming savvy savers themselves. The longer money is invested for, the greater the effect of compound interest, ie the snowball effect when your savings and investments earn interest of their own. Don’t forget the potential pitfalls though.
• Investing a lump sum
Saving or investing a lump sum can also benefit from the effect of compound interest. For example, were you to invest $4,000 when a child is two and achieve a 5 per cent real rate of return for the next 16 years, the account could be worth around $8,700 (more than twice its original purchasing power) when they turn 18, or around $15,500 (4x) by the time they turn 30, or an impressive $53,000 (13x) by the time they turn 55. If a relative is happy to save or invest a lump sum for your children, then it is worth discussing the most tax-efficient method of doing this with a qualified adviser.
• The family trust
This is a big topic, however in summary these allow grandparents (and parents) to tax-efficiently pass assets on to other members of the family, without handing over immediate direct control in the meantime.