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Cash management in uncertain times

cash management

Never has it been more important to be aware of cash management in our financial planning. Markets are going through a period of high volatility where even traditionally low-risk sectors don’t offer a safe haven. An effective cash management strategy can plug the gap in unpredictable times.

Fixed Interest funds are suffering due to gilt yields rising, property funds are under pressure as a result of higher interest rates, and money market funds aren’t even close to keeping up with inflation.

Despite this, Money Market and Cash funds can perform a valuable role in portfolio planning. Whilst they might never match inflation, capital values generally won’t reduce, and they can help with other day-to-day financial requirements.

Cash management strategies for retirement

Volatile markets create uncertainty globally and locally. This applies equally to individual financial planning just as much as at the macro level. If you are still in the wealth accumulation stage of your retirement planning, the old maxim of staying in the markets is as true today as it ever was. There is no point selling at a loss if you don’t need to use the money immediately or within a short timeframe.

The situation is very different for those in the decumulation stage that have based their strategy on Defined Contribution pensions and/or investment income. Many people use their investment portfolios to provide income. If you are fully invested and taking an income from a portfolio or pension, and the markets correct or even crash, you will be forced to sell losses until markets recover. When markets are rising, it makes sense to draw from gains. The converse is true, however, when markets are falling. This is where an effective cash management strategy comes into play. Ensuring we have a sufficient balance of cash either in our portfolios or bank accounts means income withdrawals can be switched from investment funds to cash funds.

This way, losses don’t have to be sold, and income can be provided from cash accounts. When markets recover, and funds produce gains, the strategy can be reversed, and cash balances can be replenished from investment growth.

financial planning

Most Defined Contribution pensions allow ‘Flexible Access Drawdown’ (FAD). This means it is easy to stop income payments at any time and withdraw funds from other sources. Annuity-based and Defined Benefit pensions aren’t subject to market fluctuations, so nothing to be concerned about there. However, anyone who holds a pension plan which can only be withdrawn under ‘Capped Drawdown’ rules should check their options and see if it’s possible to change this to FAD.

Capped Drawdown works on the 70/30 principle whereby up to 30% can be taken as a lump sum, and the other 70% is used to provide an actuarially calculated ‘income for life’. In most cases, this assumes steady growth in stock market returns and an income level of a maximum of 150% of Government Actuarial Department annuity rates. This strategy works, provided the markets don’t crash! Should this happen, income would have to be revised lower at the next actuarial review. Again, making sure you have a cash holding which can be drawn on when markets are uncertain is vitally important.

Cash management and investment structures

Another important point to note for those who rely on investment income is that of ‘structure’. By this, I mean where assets are held and what is the tax position of the underlying investment structure.

In Spain, for example, residents are taxed on a worldwide basis, and all investments, assets and cash accounts are potentially subject to Savings Income Tax and Capital Gains Tax (CGT). This means any increase in value is taxable whether investment gains are realised or not. Similarly, Capital Gains are taxable even if proceeds are reinvested elsewhere.

If you hold investment funds anywhere in the world, they are subject to these taxes. Clearly, if no gains are made, no tax will be payable; however, this isn’t why we invest. We are all looking for positive growth in our net wealth.

The Spanish Compliant Investment Bond overcomes this problem as Capital Gains and investment growth aren’t liable for Spanish tax. Effective income and cash management will often require an element of buying and selling, which may result in gains being realised. This could, in turn, create unnecessary tax liabilities being forced upon investors when topping up cash accounts.

In any case, retaining investments outside of the Spanish Bond structure will always mean they are subject to tax. On the face of it, this is like being caught between a rock and a hard place, as selling non-compliant funds could create a CGT liability and retaining them a Savings Income Tax issue. But, is there a solution?

The answer is yes. Existing investment funds can be transferred into a Spanish Bond without the need to sell them immediately. Those that qualify under UCITS regulations can then be retained, and no annual tax will be levied.

Savings Income Tax can be seen as unfair, particularly when investment gains aren’t realised. The concept is also foreign to many expat residents. Care must be taken when transferring assets to a Spanish Bond; it’s important to involve your tax and financial advisers. It does work, however, and solves the ‘rock and hard place’ conundrum.

The Spanish Bond can therefore be an ideal solution for tax planning and cash management. It is also possible to create a flexible, multi-currency and multi-market portfolio of investment funds.

In turbulent times, it might turn out that cash management becomes an essential element of your plan. Your planning can benefit from increased flexibility regarding income generation and help reduce overall investment risk without exposing your portfolios to enforced consolidation of losses.

If you would like more information on cash management strategies, please complete the form below:





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About Phil Loughton

Phil Loughton is a pensions expert with over 30 years experience in the financial services industry. His main specialty is the transfer of UK pensions overseas for expats.

Categories

  • EU Taxation Matters (20)
  • Expats Life (24)
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  • QROPS (66)
  • Retirement in France (25)
  • Retirement in Spain (19)
  • Retiring in Ireland (3)
  • Retiring in the Netherlands (2)
  • UK Pension Lifetime Allowance (4)

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AXIS Financial Consultants are a team of Overseas Pensions experts helping expats make the best financial decisions about their retirement.

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The contents of this website are for educational and information purposes only. No part of this website is to be considered as an offer, inducement or recommendation to invest.

AXIS Financial Consultants are a fully authorised “Courtier d’Assurance” in France, ORIAS reg. no. 17 003 701

They are also authorised to act as a “Financial Investment Advisor “, referenced under the number E009199 by the association ANACOFI-CIF and approved by the Financial Markets Authority in France.

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