Our reader is 36 and has been investing for 10 years. He is an expatriate Indian citizen who has worked on European assignments and has now been in the UK for three years. He plans to return to India in a year's time and intends to retire. He has a home in India on which the mortgage has been paid off.
"Indians usually have a lower life expectancy so longevity isn't an issue, from a portfolio perspective," he says. "Apart from my individual savings account (Isa) I invest via my wife's account as she is not a taxpayer.
"Unless there is something terribly wrong with an investment, I am happy to hold it for five or more years. I have burnt my fingers with bond funds so I am reluctant to invest in them, but try to compensate for this by lending money via peer-to-peer platform Ratesetter.
"I aim to reduce my working hours once I am able to get £1,000 a month as income, in inflation-adjusted real terms, until the age of 72.
"I am a high risk taker provided there is an opportunity to earn a higher return, and differ from the average investor in that I am an expat planning to retire in an emerging economy.
"I can live comfortably in India for £1,000 a month, as per current purchasing power. However, considering the high inflation and much higher erosion of purchasing power due to rising education and healthcare costs, what should be my estimate for retirement planning? Until what age do I need to contribute £1,000 a month in order to get £1,000 a month in current value real terms from my savings? This is assuming currency changes can take care of differences in inflation."
Isas, pensions and Indian mutual funds
Retire in India next year on £1,000 a month
36-YEAR-OLD INVESTOR'S PORTFOLIO
Holding | Value | % |
Stocks and shares including Isa | ||
Aberdeen Global Emerging Markets Smaller Companies D2 GBP (LU0278932362) | £20,980 | 8 |
First State Global Emerging Market Leaders (GB0033873919) | £3,512 | 1.5 |
First State Global Property Securities A (GB00B1F76M62) | £7,262 | 3 |
Templeton Global Total Return (LU1048430422) | £7,507 | 3 |
Aberdeen Smaller Companies High Income Trust (ASCH) | £7,020 | 3 |
Aberdeen Asian Smaller Companies IT (AAS) | £18,472 | 7 |
Standard Life Investments Global Smaller Companies (GB00B7KVX245) | £3,000 | 1 |
F&C Global Smaller Companies (FCS) | £7,643 | 3 |
Scottish Mortgage Trust (SMT) | £14,000 | 5.5 |
JOHCM European Select Values B (IE0032904009) | £2,000 | 1 |
Powershares FTSE RAFI US 1000 (ARCA:PRF) | £8,411 | 3 |
CBRE Clarion Global Real Estate Income (IGR) | £6,576 | 2.5 |
iShares Gold Trust ETF (IAU) | £1,933 | 1 |
Lyxor UCITS ETF SG Global Quality Income NTR (SGQD) | £7,204 | 3 |
TR Property (TRY) | £5,400 | 2 |
Scottish Oriental Smaller Companies (SST) | £4,000 | 1.5 |
SAP | £7,385 | 3 |
Berkshire Hathaway (BRK.B) | £17,224 | 7 |
Barratt Developments (BDEV) | £3,426 | 1 |
India based mutual funds | ||
HDFC Equity Fund - Growth | £5,040 | 2 |
HDFC MID CAP OPPORTUNITY | £11,637 | 4.5 |
IDFC Premier equity fund | £9,345 | 4 |
QUANTUM long term equity fund | £7,750 | 3 |
DSP BP MICRO REG -GROWTH | £1,500 | 0.5 |
HDFC | £1,983 | 1 |
ICICI Bank (IBN) | £2,108 | 1 |
Bonds | ||
RateSetter 3 year (4.8%) | £6,600 | 3 |
Cash | £7,810 | 3 |
Pension | ||
Scottish Widows Pension Portfolio One (Pension) | £45,000 | 18 |
TOTAL | £251,728 | 100 |
Source: Investors Chronicle
LAST THREE TRADES Lyxor UCITS ETF SG Global Quality Income (SGQD), TR Property Investment Trust (TRY) and Powershares FTSE RAFI US 1000 (ARCA: PRF). WATCHLIST As I have substantial emerging markets exposure which has a correlation coefficient of 0.92 with commodities, should I invest in BlackRock World Mining Trust (BRWM) given the state of commodities? Or should I abstain from further exposure? |
GENERATING £1,000 A MONTH
Chris Dillow, the Investors Chronicle's economist, says:
You are not far off your target income of £1,000 a month. Such an income is 4.8 per cent of your portfolio. On the assumption that equities return 5.2 per cent per year after inflation, which is what Credit Suisse estimates global equity returns to have been since 1900, then you could just about take £1,000 a month in real terms out of this portfolio now, while retaining your capital in real terms.
One problem with doing this, though, is normal equity volatility. A big drop in share prices soon would eat into your capital. It's probably better, therefore, to keep saving for a few more years to build up a cushion against such falls.
Patrick Connolly, a certified financial planner with Chase de Vere, says:
In terms of a target, if we assume your investments grow at 6 per cent per year after charges, and that inflation in India is 5 per cent, your portfolio of around £250,000 would last 23 years from the point at which you start taking income. A portfolio worth £400,000 would last for 40 years.
YOUR LIFE EXPECTANCY
Mr Connolly says:
You're not concerned about longevity due to the lower life expectancy in India. This is a topical issue in the UK, with new pension freedoms meaning that people can access their (defined contribution) pensions from age 55. There are fears that many people could underestimate their longevity and run out of money.
Average life expectancy at birth in India has risen considerably, from 42 years in the 1960s to about age 68 in 2011-15 (source: The Times of India). This is an average and many people will live considerably longer.
The inflation rate in India is typically much higher than in the UK and at age 36 your personal circumstances and requirements could yet change considerably.
INFLATION AND CURRENCY RISKS
Mr Dillow says:
When you return to India, there'll be a huge currency mismatch. Your liabilities - your day-to-day spending - will mostly be in rupees, while your assets are mostly sterling. This would not be a problem if, as you say, currency changes take care of differences in inflation. But we should not assume this.
In the past 20 years inflation in India has averaged 7.2 per cent a year while in the UK it has averaged 2.1 per cent - a gap of 5.1 per cent a year. However, sterling has risen only 3.3 per cent against the rupee in this time. History therefore tells us that there is a danger that your sterling assets won't rise enough to protect you against Indian inflation.
Of course, history might not repeat itself. For example, between 1991 and 2007 the sterling-rupee rate was stable in real terms, implying that sterling did protect you against Indian inflation. And before then, sterling's real rate rose against the rupee, implying that sterling assets did better than just offset Indian inflation. But I wouldn't want to base long-term investment decisions upon a view about exchange rates.
HOW TO IMPROVE THE PORTFOLIO
Mr Dillow says:
You should probably rejig your assets. The obvious thing to do would be to buy Indian funds (in rupees). Doing so has the advantage of removing unnecessary exchange rate exposure. But it also has the disadvantage of increasing your exposure to local economic conditions. You might instead hold a more global portfolio of equities, which would diversify away domestic equity risk.
Either, I suspect, would be better than a UK-dominated portfolio. From an Indian perspective, there's nothing special about the UK market other than the fact that it accounts for around 8 per cent of the world's stock market. In this context, I'm not sure about the merits of BlackRock World Mining Trust (BRWM). Given its correlation with emerging markets, it adds to risk you are already exposed to.
What you might want to consider, though, is gold, as you face the risk of Indian inflation. While Indians can buy index-linked savings, these are subject to tax. It might be, therefore, that gold offers slightly better protection against the risk of inflation and a falling rupee.
Mr Connolly says:
At 36, you can afford to take significant investment risks. Your asset allocation reflects this, with a large weighting to smaller companies, and while this portfolio wouldn't be suitable for most UK investors, a sizeable exposure to Asia and the emerging markets makes sense for you.
Your largest holding is the Scottish Widows Pension Portfolio One, which gives passive exposure to UK and global markets. It is a lifestyle fund which reduces risk from 15 years before your selected retirement date. This is a core buy-and-hold pension fund.
Another buy-and-hold holding is the Scottish Mortgage Investment Trust (SMT). This is an excellent diversified global equity fund and I've used it myself for long-term investing for my 12-year-old son.
Other larger holdings include Aberdeen Global Emerging Markets Smaller Companies (LU0278932362) and Aberdeen Asian Smaller Companies IT (AAS). Both are very high-risk but benefit from a well-regarded and resourced investment team.
This theme is repeated across the portfolio, which has some very good but high-risk holdings. My concern would be the requirement to diversify and reduce risks as the need to draw income approaches. An aggressive investor like you shouldn't be nervous about bond funds. I would consider strategic bond funds such as Kames Strategic Bond (GB0033988436) and Legg Mason Income Optimiser (GB00B3XX1N61).
I would also be wary of having too many separate holdings, which can make the portfolio unwieldy and more difficult to manage. Some of the current holdings could be consolidated.
DEALING WITH TAX ISSUES WHEN MOVING ABROAD
The investor asks: "Should I continue investing in my self-invested personal pension (Sipp) and hold it in the UK until I turn 55. Or should I pay the tax and keep the money accessible as a change in law can prevent access to pensions for foreign citizens?"
Mr Dillow says:
If you're living permanently outside the UK, you'll not be able to contribute to an individual savings account (Isa) and might not be able to add much to your Sipp. Speak to a financial adviser about this: they do have their uses.
Jonathan Spring-Rice, a partner at Towry, says:
An individual living in a foreign country should consider:
■ Tax treatment
■ The relevant tax jurisdiction
■ Currency in the relevant jurisdiction
■ Their own circumstances, ie income and expenditure and how this may change
You should then look to create a financial plan looking at your own circumstances, income, access to capital, expenditure, family circumstances, when these might change, when you might need access to income or capital and, from there, make decisions on an educated basis.
Issues such as tax and currency will be highly relevant. Although Isas in the UK give the investor tax freedom, it is unlikely that such freedom would be replicated to an individual who is resident outside of the UK. The investor would have to confirm this by seeking tax advice upon arrival in the country. In addition, the same would apply to a Sipp based in the UK.
This investor would need to ascertain how Indian tax authorities would treat withdrawals from a Sipp. For example, would the 25 per cent pension commencement lump sum (PCLS) be taxable in India or not; and what tax rates would apply, as it is likely that these would be relevant and would not be the tax liabilities in the UK. The terms of the tax treaty between the UK and India would set this out. This would then give the reader an indication as to the best way forward from a tax point of view.
It would be sensible to ascertain the points above before making investment decisions with regard to investment funds and sectors. I would therefore recommend that you seek local financial planning advice in India before any specific investment decisions are made.
• Want to see your portfolio analysed by our experts? Email moira.oneill@ft.com
• None of the above should be regarded as advice. It is general information based on a snapshot of the reader's circumstances.