It is important for expats and international professionals to keep a firm view of what is most important to them, what their goals and objectives are, and to understand what they are trying to achieve. This shapes our investment advice and how assets are managed.
In a practical sense some key aspects of your life will change when you live outside your home country and here are two key elements you need to think about, which can impact your life today and in the future.
1. The long term one: Retirement gap – when you leave your home country to embark on the exciting life of an expat, you will typically put your home country pensions on pause. There will probably be no further contributions to your home pensions, and if your home country has a state pension, you will likely stop accruing towards that future payment. This means your future pension building pauses.
This is OK if you start building a pension in your new home country straight away. Oftentimes- and we see this with many clients– pensions are not commenced for some time, and in some cases not at all. In some countries in the EU where employer pensions are not compulsory, your employer may offer you cash in lieu. This can seem attractive when you have landed in your new home and are dealing with expenses. However, it is eroding your future income.
What to do? There are several options and considerations when working out the best strategies for you and ultimately it will depend on your specific circumstances.
You will need to think about pension options available to you, their advantages, and also the pitfalls. If you don’t intend to retire in your current country of residence, what impact will drawing income from there in retirement have on your future life? You will need to understand the tax and currency impact, as well as potential differences such as when and how you can access this pension. It needs to match up with your goals. Sometimes, looking outside the pension system is preferable.
You need to think about these questions in the broader context of your life plans and be mindful of what you are trying to achieve and how this component helps you to realise that.
2. Currency – an area where you can inadvertently end up spending more money than you expect, is when you have to move funds between currencies. This can be complicated and can come with a whole lot of extra costs, big and small, and sometimes hidden carefully from the view of the unsuspecting saver.
Let’s understand the real cost of changing money from one currency to another and what these costs might be.
Typically, there is one fee that everyone talks about, one charge that everyone just takes for granted, and one that people often don’t realise is a cost at all.
Of course, the most noise is made about the smallest cost, because why would any bank want to broadcast how much money they are sneaking out of a client’s transactions.
Charge 1 – the little and loud one
Commissions, transfer fees, transaction costs. Call it what you like, but most currency exchange services will tell you they don’t have these, nowadays. Otherwise, they might state in their promotional material “Only €10 per transaction” which, on the face of it, sounds like a great deal. Naturally, this is kind of misleading, as this is not where the institution is making their money.
Charge 2 – the most important one and the one we ignore
This fee has a few technical names, which shows it’s not designed for the client to understand. Known as the bid/offer spread, the bid/ask or the margin, this is the difference between the buying price and selling price of any currency, and it can cost you a lot. You might have seen the exchange desk in an airport arrivals hall or on the street in tourist areas of your city with a list of currencies on a board outside showing a buy and a sell price. This is the same principle. Those little kiosks can sometimes have a bid/ask of 10%, but even your high street bank will often have a bid/offer spread on 5% or more. This means that every time you move your money with online banking, 2.5% of it could be going straight from your cash to the Champagne fund for the shareholders meeting. Using a dedicated currency broker can substantially reduce these margins, but it’s important to understand this cost for any transfer you are making.
Charge 3 – the sneaky one
The final cost involved with money transfers often doesn’t even feel like a fee, so it is frequently ignored. When you instruct a cross-border or multi-currency transfer with your bank, you will probably find that it takes 3-5 working days to arrive.
This ‘clearing time’ used to be necessary to reconcile records between different banking systems and registers, but in today’s connected, online world, it really isn’t necessary. In fact, the European Union has very strict rules about how long banks can take for a transfer, in order to prevent these delays.
The fact is, during this period, your money is not in your ceding account and not in the destination account. So where is it?
Well, during that period, the amount you have instructed is still available for a bank to leverage. It’s all about keeping control of your assets for as long as possible to squeeze every last drop of potential growth from your hard-earned cash, while not having to share that with you for a little while.
Always understand how long your transfers will take and why. Don’t be afraid to look at this as a fee.
We can help you optimise all three of these items to save you cost, time and hassle when you have to move funds around the world.
Being an expat can have complexities and we have highlighted two ways that manifest when managing your money. Speaking with an expert like the Black Swan Capital team can help you to make the best decisions for you, and get you money working towards what is really important- your life goals. You can contact us directly at [email protected], or find more information on our website www.blaclswancapital.eu.