The world is plodding steadily on, apart from Italian politics. It seems stuck in an eternal rut. Who knows when the various
factions will start to work together for the greater good of the country.
My feeling is that there are far too many self interested parties in
politics in Italy and until these are blown apart then nothing fundamentally
will change (I am starting to sound like a Grillo supporter).
Unfortunately, the likelihood is that change will only be brought about
by external forces, namely the Bond market.
Until the worlds' purchasers
of Italian government debt deem it to be too risky to invest in and force up
the spread then my hunch is that things will continue to plod on as normal.
It is interesting to remember that the last time something significant
happened in this regard (Berlusconi resigning) was when the Bond market pushed
the Italian government Bond yield above 7%. Of course, this all makes
very good dinner talk but I doubt much will change in the near future despite
the rhetoric from the Grand Coalition. Saying that, I do hope that I am
wrong as Italy and its people have so much potential and it is held back by
some very self interested parties and individuals..
Moving
swiftly on.
One
of the biggest complaints that I hear from people around Italy, especially
those on income from pensions and savings, is that the interest rate on their
savings has dropped considerably in the last few years coupled with the fall in
the exchange rate from GBP to EUR. The majority of people seem to have at
some point in time fixed their savings into 1, 2 or even 5 year high interest
savings account. But once those years pass the interest rate falls to low
levels that are below the rate of inflation.
The
big problem is that since you may no longer be resident in your home country
(UK, Germany, Netherlands etc) that the banks will no longer allow you to
switch accounts for a better rate. As a non-resident you are stuck.
So
what are the options?
1.
Either you bite the bullet and bring your savings to Italy. For UK
expats this could mean converting from UK Pounds into Euro which may neither be
desired or convenient. Add to that the events in Cyprus and it begs the
question whether Italy would rob depositors of savings should they be next in
line.
2.
You could move your savings offshore. However, it is unlikely to
solve any problems and could end up creating more. The interest rates in
offshore banks are rarely above those in onshore banks. In addition, to
avoid any exchange of information requirements (income from interest) they
often to do not pay any interest at all. There is also the problem that
offshore jurisdictions are black listed for Italian tax purposes and so are not
treated preferentially for tax purposes and could be subject to punitive fines
and penalties merely for holding money in these territories, especially if they
are not declared but later discovered.
3.
The other option might be to look at other assets to provide you with a
similar and /or increasing income stream over time. Take UK
companies as an example. They distributed 14.1bn GBP in the first 3 months of
2013, as dividends from shares. Taking into account one off factors that
is an increase of 6.1% from the previous year.
I
will just repeat that again, a 6.1% increase on one year ago. From 2011
to 2012 during the same period dividends increased approx 12%.
Let
me put that into context. If you earned 3% last year on your savings then
it would have risen to 3.18% this year. That may not sound much but take
into account last year as well and it would have increased to 3.54%, all the
while bank savings rates have been dropping. Once again, it may not
sound much, but when you consider that dividends, historically, have shown
consistent increases in line with inflation and above, then an income stream
derived in this way becomes a lot more attractive and a lot more stable than
bank account interest.
Now
I am not suggesting that you run out and buy shares in UK companies, but for
those of you who have seen an income decline in recent years because of the
falling exchange rate and /or falling interest rates then it might be time to
start looking at other ways to protect the lifestyle you have become accustomed
to.
I
know the word 'shares' drives the fear into the hearts of even the cleverest
savers but rarely do I meet someone where a little exposure to an asset which
has historically shown rising income and capital appreciation, would do any
harm in a well balanced portfolio of savings and investments. It would
do quite the opposite and help to put aside those fears and worries about
declining incomes and living standards in the future.
If
you are an existing investor and living from your investments, then it is also
worthwhile looking at how your portfolio is currently invested. If you
are taking an income or regular withdrawal from your savings then you might
need to reconsider your investment strategy. All too often I see people
investing in clearly the wrong ways for their needs and mainly investing for
growth, as they have done all their lives. Now that they need an income
from their monies a totally different investment strategy needs to be devised
to ensure that the capital does not run out too quickly, but all too often the
old ideas are held onto when in fact a more up to date portfolio would provide
greater benefits.
At
the Spectrum IFA group we have devised specific portfolios for various life
stages. We understand that our clients are not the run of the mill
bank clientèle and we have devised these portfolios especially for
the types of clients with whom we work most frequently. One of these is
an income portfolio, designed exclusively for people who are looking to live from
the capital they have spent their lives building.
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