Case study: World Citizens – a practical example

Phil Billingham CFPTM Chartered MCSI, director at Perceptive Planning, unravels a couple’s fiendishly complex financial situation arising from working in three countries, three currencies and different tax regimes

case study
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Mike and Sally – not their real names – both aged late-50s, had spent their working lives (Mike as a scientist and Sally as a senior civil servant) in Canada, the US and the UK. They had both been born in Canada, but their movement around the globe resulted in them falling in love with a pretty bit of northern England.

But this was the second place they had fallen in love with. Vancouver had caught their eye several years before and they had committed to it to the extent that they had bought a home there, and were working with a local financial planner to plan their retirement. 

Their financial planner, who we had met at a conference I was speaking at, introduced us to the couple, explaining that she knew she could not help because their financial ‘centre of gravity’ had moved to the UK, and she was neither competent nor regulated to give advice on the UK position, but that we may be able to.

The change of plan required some working through. The house in Canada needed to be sold, and a new financial plan calculated. This entailed working with assets in three countries, in three currencies, with very different tax regimes.

While any financial planner looking after the couple would have had the same cross-border issues to deal with, UK-based financial planners encounter these frequently, so are experienced in dealing with them. And the couple planned to make a home, and receive/draw down their pensions, in the UK.

They had accumulated pension rights in two of the countries  – the UK and Canada – with different tax rules, different attitudes to interjurisdictional transfers and early encashment.

The financial plan

Phil Billingham CFP™ Chartered MCSI

Phil joined the profession in 1982. He is a past director of both the Institute of Financial Planning and the Society of Financial Advisers, and a past member of the Financial Planning Standards Board (FPSB) Regulatory Advisory Panel.

He has spoken at conferences and worked with financial planners in the UK, Ireland, Monaco, Portugal, Hungary, the Czech Republic, Bulgaria, France, the US, Canada, South Africa, India and Australia.

Phil is a CFP professional and a Chartered Wealth Manager. He is named as one of the Top 100 Global Influencers 2018 in International Adviser magazine.

He specialises in working with clients with assets and lifestyles across different jurisdictions – ‘world citizens’.

At our initial meeting, Mike and Sally were well organised and pretty clear in their objectives, which were to buy a house, retire and have enough money to continue their current lifestyle, minus the costs of working.

The main variables were:

  • The price of the house
  • Their income, and the difference between discretionary and ‘fixed’ income
  • Longevity
  • Morbidity
  • Expectations of and experience of inflation – here and in Canada
  • Exchange rates
Clarity of objectives makes it easier to work with clients in many ways, but can throw up obstacles as well. Mike and Sally were both focused on a very clear outcome, so exploring a range of options (not buying the house, retiring elsewhere, for example) was a process which met with limited success!

The initial stages involved laborious cross checking of spreadsheets, and then trying to get to the facts behind the numbers. In short – where was the money coming from? What assumptions had already been made? Did the provider’s figures agree with this? How much of this expenditure was ‘discretionary’ and how much was fixed? How was that going to change?

Having set clear budgets for the house purchase, and a firm figure for the income required, we spent some time calling to and fro across the Atlantic, and in liaison with UK and other tax advisers and financial services providers in different jurisdictions.

We discovered that Canadian pension schemes have no mechanism at all for transferring assets/funds out of Canada to the UK. The people we chatted to were amazed such a thing was even being contemplated. The only mechanism available was to cash them in. Simple to do, but expensive – you have to pay the tax as if all the income has been received in the year they are cashed.

A note on currency exchange volatility

We are all familiar with setting out our assumptions when creating a financial plan: inflation; asset growth and charges, for example. But it’s also important to set out currency exchange assumptions. This not only includes the actual exchange rate used, but what risks the clients are taking based on potential volatility in exchange rates.

But in this case, as in others, we find that what in the UK makes sense – defer drawing a pension, and see the resulting payable income rise by a few percentage points, for example – can be stood on its head as a strategy when currency is considered.

It does not take many 10% overnight type swings to wipe out a few years of slow and steady gains.
The biggest surprise was a UK-based pension scheme Mike had acquired (especially designed for ‘overseas staff’). He had deferred drawing the pension, as he was still working and paying higher rate tax. But we discovered that this simply meant that the undrawn pension was ‘lost’. There was no credit at all for the ‘missed’ pension. This was extremely unusual, and we had to keep checking that the pension provider was serious. It was, so we explained the position to Mike and Sally, who then arranged for the payments to be paid with immediate effect. 

We established that they couldn't achieve all their goals immediately; it had to be one step at a time. They could afford to buy the house they wanted, but not to retire straight away. We suggested that they spend some time in the new house, familiarising themselves with the costs involved. We also suggested that they reorganise their affairs to use their available pensions, ISAs and annual capital gains tax allowances and reduce their tax and investment costs. And then save as much as possible, with a view to re-evaluating their situation in three to five years. We would of course keep checking in the meantime.

They were happy to carry on working, but wanted to know the point where they could emotionally and practically walk away without too much pain.

What happened next
They bought the house for a figure over their initial budget. But they had unexpectedly inherited some money, so we did the projections again, based on the increased assets, and the fact that some resources had been simplified and moved to the UK in the meantime. 

This resulted in the previous guidance to wait another three to five years before retirement changing to a more positive “Yes, you can retire if you are comfortable with the shape of your income in retirement." This was greeted with delight and relief. But not immediate action.

It appears that the emotional knowledge that retirement is possible is the most important thing to clients. I suspect that they will soon tire of early morning starts to catch flights all over the world, reality will set in, and their dream of retirement will eventually come about.

This article was originally published in the Q4 2018 print edition of The Review. The print edition is available to all members who opt in to receive it, except student members. All eligible members who would like to receive future editions in the post should log in to MyCISI, click on My Account/Communications and set their preference to 'Yes'.
Published: 08 Feb 2019
  • Financial Planning
  • currency exchange volatility
  • retirement
  • pension transfer
  • Case study

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