Financial advice in Spain should always consider the rules and regulations of the Spanish system. Expats must be aware of local opportunities and potential pitfalls when constructing their financial plans. Everyone’s situation is different; it is important to create a plan based on your financial position as it stands today with a view to the future, in combination with your personal and family circumstances. Most people’s planning requirements tend to fall into the following categories:
- Cash flow management
- Investment planning
- Pension/retirement planning
- Tax planning
- Banking and currency management
1. Cash flow management
Most of us are used to receiving a steady monthly income as a salary or pension. This makes the income side of cash flow planning relatively easy to predict; outgoings are managed accordingly. However, things don’t always work out as planned. There are a couple of important points to consider:
- Are you prepared for a ‘rainy day’?
- What happens to your cash flow if the roof suddenly springs a leak, the car breaks down, or your children need to access the ‘bank of Mum and Dad’?
The first step in creating your financial plan is ensuring sufficient funds are available at short notice to cope with unforeseen circumstances. For those whose cash flow is less predictable, the same principle applies. For example, earnings may be high when employed on temporary contracts or when business is good, but how does one cope financially between contracts or when business is slow? A ‘safety net’ of up to 6 months’ earnings in an instant access bank account is recommended to protect against any ‘down period’.
2. Investment planning
Having planned and prepared for your short-term cash requirements, the next step is to look a little further into the future. Medium and long-term cash requirements such as buying a holiday home, supplementing retirement income, or funding the holiday of a lifetime open up different investment options, which can be more beneficial than simply saving in a bank deposit account. Interest rates have been low for many years; it is unlikely that this will change soon as most governments seek to keep inflation manageable. Low inflation means low-interest rates. Sometimes the net return on investment is lower than inflation as tax takes a bite out of gross returns. Despite various market corrections, equities (stocks and shares) have always outperformed cash holdings over any 5-year rolling period. Similarly, bonds and property investments tend to perform better over the medium/long term than cash.
There is no ‘one size fits all’ solution to investment planning, as everyone’s attitude to risk differs. Factors influencing someone’s appetite for risk include age, timeframe, dependents, and the amount available for investment as a percentage of total wealth. The objective is to make your hard-earned cash work for you by investing wisely over time. Generally, this involves being more risk-averse the closer one comes to when the money is required for spending.
3. Pension/retirement planning
Retirement planning is a key aspect of financial advice in Spain. The type of retirement plan you choose is only one part of the equation. Sound investment decisions that match your risk profile also need to be made. You should consider your pension requirements in conjunction with your overall financial goals.
The pension/retirement planning element of your overall strategy should take into account the following factors:
- What do you have now?
- What is the future value of these benefits?
- When are they payable, and in what form (lump sum, income, or a combination)?
- What potential factors could affect the future value?
- Do you have a shortfall?
- Dependents benefits (life assurance, surviving spouse’s pension, etc.)?
- Currency considerations?
- Is your pension n the most cost-effective and flexible manner possible?
- Do you have a Spanish will?
Expats looking to transfer their UK pensions to Spain should consider the benefits of Qualifying Recognised Overseas Pension Schemes, otherwise known as QROPS.
The result of a well-thought-out pension strategy should be that you know what income and/or capital is available and when.
4. Tax planning
The essence of effective tax planning is arranging your affairs in such a way as to minimise liabilities and take full advantage of allowances and any special deals available under the current tax system. In Spain, the taxation of pensions depends on their underlying structure. Annuities are treated differently to defined benefit plans; therefore, ensuring that you can take full advantage wherever possible is important. Spain is relatively unique in Europe because each region imposes its own tax code and national tax regulations. This should be considered when deciding whether to live in one region rather than another. The same applies to all other forms of taxation; income, capital, wealth, property, and inheritance tax. It would be best to wrap your financial plan in the most tax-efficient blanket within the confines of the tax laws.
Spanish tax legislation allows wealth and capital gains tax to be mitigated, enabling portfolios to grow with minimal adverse tax consequences. In addition, considerable tax advantages are available to insurance bondholders; many EU companies offer flexible and sophisticated products in this area.
We all know the benefits of insuring our valuables. A properly constructed and integrated financial plan should always consider the need for life assurance and income protection insurance. Wrapping your financial plan up in an appropriate insurance policy means preparing yourself for all eventualities, including your eventual demise.
6. Banking and currency management
Those who become expatriated or internationally mobile often find themselves in a multi-currency world. You may live in the Eurozone but have financial commitments in your home country in a different currency. Although most of us show commendable loyalty to our home bank, sometimes it’s necessary to look at other options, particularly if your account doesn’t offer multi-currency facilities and/or charges expensive transfer fees. Specialist currency conversion companies have been in existence for many years; thus, an increasing number of expats are now aware of the advantages of using their services. High street banks can charge up to 5% per transaction, whereas a specialist company will usually conduct the same transaction for 1-2%; this is indeed a considerable saving. Offshore banks offer multi-currency account services; using a specialist forex company combined with an offshore bank may solve an expat’s banking requirements.
Financial Advice in Spain: Summary
The days of the State or a large corporation taking care of our financial concerns for life are well and truly over. Only by creating and managing our financial plan can we be sure we are maximising the value of our financial resources and taking advantage of the various tax allowances and benefits available. A well-constructed plan must be flexible and adaptable enough to change as our circumstances alter and robust enough to weather the inevitable financial storms we will encounter. Spanish residents must be aware of all the issues unique to the Spanish tax and fiscal system and adapt their planning accordingly. For financial advice in Spain, please complete our free consultation request.