Foreign currency: A new job, a new country, a new language, and new taxes. Investing while living abroad requires a localized approach. Swiss News's short-list of expat investment dos and don'ts.
Should expats invest differently?
In a word, yes. While most expatriates enjoy a higher salary than at home, they often have higher costs as well. And since the stay in a new country often feels like a permanent holiday at first, money tends to evaporate. Expatriates also have different needs: moving around can have an impact on state and company pensions, and sending the children home for college might be a lot more expensive. In short, careful financial planning is crucial. But not all investments or savings plans are suitable for expatriates. Swiss taxes--and your home country's taxation system--could have unexpected effects on your investments. Here are a few rules to avoid the most common pitfalls.
Don't keep all your eggs in one basket
As a first step, it's important to he very honest with yourself about what your goals are. Do you want capital growth, or a growing income? How much can you invest for your long-term retirement planning, or for your children's education fund, how much fur medium-term goals like a holiday home? Investment risk reduces with time, and long-term investments of 10 years or more are not as vulnerable to the dangers of volatility as short-term ones. But sometimes investors forget one of the other main tricks of the trade: diversify, diversify, diversify.
Use the Law to your Advantage
In Switzerland, there is no capital gains tax for private investors, a pleasant, yet sometimes misunderstood reality. A wealth tax is levied on your worldwide assets at a rate of about 0.5-1 per cent per year. Any income from interest on cash deposits or dividends on shares and investment funds (even if reinvested), plus any other income from anywhere else is subject to Swiss income tax, and should be declared on the tax return. Here the strategy should be clear: capital growth is more tax efficient than income generation.
Other avenues of investment
Life insurance. On an investment in a lump sum life insurance policy, the Swiss taxman levies a 25 per cent stamp duty. Swiss insurance companies are legally obliged to deduct this automatically, whereas with international insurance companies, such as those found in the Channel Islands, the Isle of Man, etc., you must see personally to payment.
Day Traders Beware
As the saying goes, a fool and his money are soon parted. Day trading shares will almost certainly place you in this cadre. The only people who consistently make money, whether you buy or sell, are stockbrokers. A good example was recently published by the UK Sunday Times: a Mr. Jon Urbanek, who gave up a [pounds sterling]55,000 annual salary in London, swapped his executive house for a starter home and some start capital with which he commenced trading full time. His fortune? He lost [pounds sterling]34,000 in year one, made a [pounds sterling]29,000 profit in year two, not counting [pounds sterling]110,000 of lost salary. Collapses of "Blue Chip" companies like Swissair, Enron and Marconi show that the effects of bad management are cruelly exposed by the world market's current volatility, at investors' expense. NBC reported one Enron employee lost all of her $500,000 401k pension fund, which had been invested solely in Enron shares. In Switzerland, day traders would probably be classified as "professional i nvestors," thus eliminating the benefits of thc Swiss system as any capital gains accrued by a professional investor are taxed as income. If you're residing in Switzerland, there are better ways to make money.
Reduce the Risk with Investment Funds
As in other parts of the world, investment funds have become very popular in Switzerland. The appeal is of course the reduced risk coupled with the rather impressive long-term returns. You can further reduce risk by investing in more than one fund, from more than one fund manager. Some Swiss registered investment funds allow you to invest as little as Sfr2,500 in as many as 500 different companies. Not a bad set of numbers. And monthly installment plans of as little as Sfr50 can give investors a great deal of fund flexibility and diversity.
Funds come in many flavors and cover most asset classes. People of all salary levels can invest in bonds, equities, or mixtures of both. Some funds are specialized in sectors (Healthcare, Property, Technology), economic regions, or countries. In addition to the added advantage of much broader investment diversity, you also get a professional fund management team making the daily decisions for you. There's even a safety brake that limits the amount invested in any one company.
Swiss expertise, modesty, and prudence also apply to the financial sector. In Switzerland, only qualified financial advisers are allowed to advise on and sell investment funds. Swiss banks traditionally hold your funds in a custodian account. However, fund companies that are not owned by a Swiss bank usually allow you to be registered with them directly (as it is common in the US and the UK), therefore saving you any separate custodian fees.
Independent advisers have no funds of their own to promote, but review the 3,000-plus funds registered for sale on the Swiss market plus others beyond. Make sure your adviser is authorized to distribute investment funds by visiting the website of the Swiss Federal Banking Commission (www.ebk.admin.ch).
Where is Offshore?
More than half of the funds registered in Switzerland are based offshore. This means that the funds are domiciled in places where there are no or very modest local taxes deducted from your money as it grows. Luxembourg is the main offshore domicile for money in Europe, while Switzerland is itself an offshore" location for investors who live elsewhere.
Regular Bonuses by Investing with Profits
"With Profits" investing remains a uniquely British way to invest. Every year these investments receive a bonus which once added cannot be taken away. After a number of years (anywhere from 1 to 5 depending on the company) extra bonuses are allocated to the fund from the reserves which accumulate in good years.
With Profits funds (available in Sterling, Euros and US dollars) are used mainly by cautious investors, both in the UK and internationally, for income or capital growth, children's education planning and retirement planning. Contributions can be made as single one-off contributions, or through monthly savings plans. Over the last five years returns for lump sum investments have averaged between 10 and 11 per cent per year, with every statement having shown increases over the previous year. Considering the returns, and the relatively low level of risk, With Profit investments would be an attractive option in Switzerland, too.
Traded Endowment Policies (TEP)
Endowment policies are life insurance-based monthly savings plans designed to repay mortgages in the UK. Early surrender values offered by the insurance companies can be quite low, so a second-hand market has developed for trading endowments that invest in With Profits funds. TEPs can be very rewarding, but UK taxes of an annual 20 per cent apply, and they are non-reclaimable. To make matters worse, Swiss tax may also be payable depending on how the policy was set up. Thorough investigation of all aspects of TEPs is indispensable.
Investing in Property
Property is also a popular expat investment, either via property funds or by way of purchasing a house or apartment, which can be rented Out. In Switzerland buying property can hardly be called an investment, at least not short-term, whereas in the UK, for example, the average house price has grown by 67.72 per cent over the last five years, or 10.8 per cent per year, excluding rental income. It's not all bad, though. Swiss properties are known for their unequalled quality, so a long-term property investment is certainly worth looking into. To maximize your profits you can use a mortgage to leverage your investment. Before you buy, make sure you get advice from somebody who knows the system where the property is located as well as the Swiss system-particularly the tax implications.
As an expat you should ensure any regular savings scheme you begin is flexible and with no ties. Investing monthly into an investment fund gives you the benefit of "Unit Cost Averaging." This means that over a year your monthly payments buy more fund units when the price is low, and fewer when it is higher. At the end of the year not only will you have more of the lower priced units, but those same units will have grown at a faster rate than those that were bought more expensively. In light of the minimum return, placing long-term money in a deposit account to make occasional capital investments reduces the growth potential of your money.
Another issue is the so-called Third Pillar, or private retirement savings option in Switzerland. Third pillar savings schemes can be tax efficient for saving, but you have to be careful about which sorts you choose. They are not all the same, and for expats bank-sponsored funds are generally better.
When is the best time to invest?
The question of questions. Newspapers concentrate on a short-term horizon full of bad news, but your retirement is many years away. There will always be a reason not to invest, not to save, but how many paydays will you have before your time has run out? Here's a simple equation: subtract your age next birthday from your desired retirement age and multiply by twelve. That's how many, or how few, paydays you'll have left once you get to your next birthday.
If you wait "until the market improves" you will lose out. An example of how unpredictable the market can be: if you had invested in September 2001, by January 2, 2002 you would have made 22 per cent by investing in US blue chips, 17.7 per cent in the UK, 24.4 per cent in Europe, 19.8 per cent in Switzerland, or a staggering 39 per cent by investing in the technology sector. Investing is all about the long term, and you should not let short term fluctuations put you off your strategy.
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|Date:||Mar 1, 2002|
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