Has a bubble really built up in bonds - and how can expats protect themselves?

The Bond market has never looked more bubbly - the iShares Barclays Aggregate Bond ETF (AGG) generated a cumulative total return of more than 23% since the end of 2008. Commodities guru Jim Rogers has tried, at least twice that I know of,  to short bonds (and lost each time). In the men time, sovereign bond yields continue to go lower, the 10-year US Treasury bond yielding around 1.7%, Germany's 10-year yielding around 1.3% and Japan's about 0.6%. In Europe inflation for April fell to 1.4% (per Eurostat) further keeping bond yields low and inflating the bond bubble further. Bill Gross of PIMCO, in his latest newsletter has advised his investors "to continue to participate in an obviously central-bank-generated bubble but to gradually reduce risk positions in 2013 and perhaps beyond" - which is quite possibly the best advice you can use today. My only additional comment would be to reduce risk positions - not gradually as Bill suggests but to do it as quickly as possible. A well structured offshore bond will be the best vehicle to do this.

Thanks to proposed ECB negative deposit rates Euro may go through a massive drop - what should expats do?

Austerity obsessed ECB lowered its main interest rate this week from 0.75% to 0.5% but along with this cut caused a stir about whether the bank might also cut the deposit rate, taking it into negative territory (which would mean banks having to pay for leaving money in the facility and would ostensibly push banks to lend more rather than hoard cash). ECB dropped hints on the negative deposit rates to express their frustration with banks that are hoarding cash and not lending. Clearly at the ECB, the money printing carrot does not seem to be enough to revive the moribund European economy so now this stick has been added to the equation. The unintended consequence of these negative deposit rates would be to put enormous downward pressure on the Euro jeopardizing the value of Euro denominated assets. Expats should look at reducing this risk by diversifying their portfolio through exposure to US dollar denominated assets. The most suitable vehicle for this type of optimal diversification would be an offshore bond.

British Baby boomers need to plan for loss of entitlements as they age

YC45W73DVK8Z Fareed Zakaria, who has his own syndicated show on Sundays on CNN had an interesting take on changing population demographics in the US and their political effects a couple of weeks ago (see video). Last year, Mr. Zakaria wrote a similar article in Time magazine, on the works of Mr. Pete Peterson, a banker and private equity billionaire. In that article Mr. Zakaria presented Mr. Petersons' overriding concern that the long-term outlook for the US economy in the form of massive structural deficits as the baby boomers start retiring in large numbers should be tackled by massive austerity and debt reduction programs. Mr. Peterson apparently confided to Mr. Zakaria, "I want to strengthen the safety net for the poor. But to do so, we have to reform entitlements, because they are simply not sustainable in their current form," Peterson says. "The elderly population is doubling, and health care costs are rising rapidly." His foundation is making the control of health care costs its No. 1 priority. "But we need to start making changes soon, because the longer we wait, the more painful will be the eventual changes".

The exact same arguments apply in equal measure to aging Britons looking for safety nets in their advancing years. Given the current debt load of the UK, it is inevitable that pensions and entitlements will take a hit in the coming years. All the more reason to have QROPS, QNUPS or offshore bonds to plan for a more secure retirement in the face of  eroding state benefits.

State of the European Union - enough to make you cry!

Spain's unemployment hit a new record of 27.2% (over 6 million unemployed) with the unemployment rate for the under 25 a staggering 57%. France followed suit with a new record unemployment rate of 10.2% (over 3.2 million unemployed). Even though the UK managed to avoid a triple dip recession with a modest growth in GDP in 1Q2013 of 0.3%, as Ed Balls descries it, the UK economy is essentially flat lining with no new job growth. Inflation figures are massaged by all the EU nations. The citizens of the Eurozone have to sponsor the banks without knowing whether there will ever be return on investment, not to mention return of investment. It’s become increasingly hard to conclude whether the mainstream media is bringing us ‘independent news’.Child hunger in Greece is exploding. Some families are trying to survive on pasta and ketchup. People in Cyprus are being robbed of their savings. Even the Cypriot children who became orphans after their parents died in the 2005 plane crash and who have been paid damages, ensuring them a security for their future and education, have been confiscated a very large portion of their money with the closure of Laiki. Former customers of Irish IBRC (former Anglo Irish) have been informed that their retirement savings had no cover.

Pensions schemes and retirement funds are excluded from the deposit guarantee scheme. Goodbye retirement savings ! And you want us to have confidence in you ? No one is sure whether contributions towards pensions are secure. Those of us who have a job, will need to work until they have the two feet in the grave. - Poverty rates are soaring and the middle-class is disappearing. - The financial sector is moving away from Europe to Dubai, Hong Kong, SingaporeTo add to this gloom, German Chancellor Angela Merkel said on Monday that euro zone members must be prepared to cede control over certain policy domains to European institutions if the bloc is truly to overcome its debt crisis and win back foreign investors. Where have we seen this scenario before? Way back in the 1930s during the great depression ofcourse. History is repeating itself  and we are perhaps a few meals away from a social revolution (see video).

Retreat of Austerity from Europe may bring more opportunities for British expats working in Europe

For the last three years or more, Austerity has been the mantra in Europe blindly adopted by the governments of almost all the EU 27 nations. This policy has prolonged recession in Europe and especially in the UK which is showing signs of going through a triple dip recession. As the video shows, the calculations behind the Austerity programs are now more suspect and may be the result of something as mundane as an excel coding error. Gavin Hewitt, European editor of the BBC writes today that the austerity believers are in retreat since Europe's leaders and officials fear more now is unemployment, recession, and growing disillusionment with the eurozone that seems unable to deliver. Reducing debt is no longer the priority. This turning point is probably the beginning of the creation of a great jobs boom by next year as Governments ease on austerity and target unemployment. British expats, already well placed in Europe will now see their horizons open up as more job opportunities start to appear. Time to revisit plans for setting up a QROPS or QNUPS or an offshore bond.

Geopolitical stress points to upcoming war events - what should expats do?

From the nuclear missile laden saber rattling from North Korea to the French Embassy bombing in Libya today to an Iran linked terror plot in Canada to potential conflict between China and Japan (see video) or between China and Vietnam or between China and India, not to mention everyday bad news from Syria, Pakistan and Afghanistan, geopolitical stress seems to be climbing to new heights globally. A great article in Salon.com today summarizes the basis of all this geopolitical stress as being resource shortage driven. According to the article, "although the global supply of most basic commodities has grown enormously since the end of World War II, analysts see the persistence of resource-related conflict in areas where materials remain scarce or there is anxiety about the future reliability of supplies".

The question for expats and other investors is how should they hedge themselves against such an event. It is highly recommended that expats should have exposure in their portfolio to resource based funds such as water resources funds, food commodities, oil and gas, forestry as well as precious metals. These are exactly the resources that shoot up when geopolitical conflicts escalate.

Detailed comparison between QNUPS and an offshore bond

Yesterday's post on QROPS vs. QNUPS vs. offshore bond generated huge amount of interest especially asking about the differences between QNUPS and an offshore bond. I have created a table below detailing the differences from information gathered from international adviser magazine.

	Offshore Bond	QNUPS
Legal structure	Insurance policy - but normally used in conjunction with a Discretionary Trust for IHT planning	Discretionary Pension Trust
Contribution limits	Gifts into a Discretionary Trust for IHT purposes are limited to the nil rate band every 7 years i.e. £325k	HMRC do not define any limits. HMRC may challenge any contribution made to a QNUPS where it considers that they are made for the purpose of avoiding IHT, rather than funding for pension provision. Where the individual's standard of living is unaffected by the contributions, this provides evidence that IHT avoidance is not the purpose.
IHT planning	The settler must survive 7 years for the "gift" to be fully IHT efficient	Any permitted contributions or transfers are outside of the member’s estate immediately
Tax relief	No tax relief on premiums made in respect of UK residents	Any permitted contributions or transfers are outside of the member’s estate immediately
Permitted investments	Subject to the fund list of the chosen bond provider	Subject to the investment list of the QNUPS provider but can include access to Platforms, DFM portfolios, directly quoted equities, commercial/residential property
Fund taxation	Gross roll up	Gross roll up
Withdrawals	5% per annum - tax deferred	Subject to local pension rules - normally 30% TFC and similar income limits to UK drawdown
Change of provider	Unable to transfer bonds from one provider to another without incurring a chargeable event	Free to change from one provider to another subject to any asset transfer charges if applicable
Adviser fees	Post RDR come out of the 5% annual withdrawal allowance	Can be taken from the fund in addition to any other pension income payments
Fund payable on death	100% of the fund value at the date of death (Provided a Discretionary Trust was used and the settler survives the 7 years)	100% of the fund value at the date of death paid to beneficiaries - no "insurable interest" issues
Member HMRC reporting	Chargeable events reportable on self assessment return	Any pension income taken is reportable under the foreign pension income section and as such 90% will be subject to tax at the member's marginal rate
Regulation	By the Financial Conduct Authority	Depends on the local regulator e.g. In Gibraltar the Trustee is regulated by the Gibraltar Financial Services Commission
Compensation scheme	Covered by the FSCS	Subject to any local compensation scheme - normally none. However, as QNUPS are normally Trust based the investments are protected within the Trust themselves

QNUPS vs. QROPS vs. Offshore bonds - how do they differ?

Pensions are a prime concern not only for British Expatriates working overseas but also for UK Resident/Domiciled individuals who may have already utilised their maximum income tax exempt pension contributions. The pensions industry is full of jargon and abbreviations and as a Professor, I naturally want to explain them as simply as possible. Qualifying Non-UK Pension Scheme (QNUPS) are an offshore pension scheme for new funds or assets that are separate from your current pension scheme. A QNUPS does not require approval or reporting to Her Majesty's Revenue & Customs, unless assets are transferred to it from an existing UK authorised pension scheme. The main advantage of a QNUPS is that any funds invested immediately sit outside of Inheritance Tax (IHT), without needing to wait seven years and will grow tax free. There is no age restriction on when you have to stop investing, Income can be taken from age 55 or it can be deferred until age 75. Upon death, the funds and assets you have left within a QNUPS are free of IHT, allowing your beneficiaries to receive the proceeds tax free.

Qualifying Recognised Overseas Pension Schemes (QROPS) on the other hand has to be approved by Her Majesty’s Revenue & Customs to accept pension transfers from an authorised UK pension scheme. A QROPS offers enormous financial benefits for people of any nationality, who have accumulated a UK pension fund and are now living or planning to live out their retirement outside the UK.

An offshore bond on the other hand is essentially a life insurance policy specifically structured as an accumulation vehicle that upon death, passes on the proceeds of the policy plus an additional percentage amount to beneficiaries. An offshore bond is normally used in conjunction with a Discretionary Trust for IHT planning.