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What does an expat do at retirement?

As an expatriate, it’s never too early or too late to start working on your nest egg

Ideally, planning for retirement should start well before retirement.

Retirement is a common topic among investment managers. After buying a house, funding retirement will be the biggest personal finance issue for most people, especially nowadays as the more generous private sector schemes are coming to an end.

We tend to find that the financial situation of our clients is reasonably similar. While most in this region will have an end-of-service gratuity with their current employer, this lump sum is unlikely to be sufficient to fund retirement. Other pension savings are also common, such as membership of defined benefit schemes, from past employment. For our younger clients, however, defined contribution pensions are more common, where the size of your “pot” at retirement depends on market performance.

Most expats tend to retire around the age of 60 and return home, although it’s common for people to also split their time between two countries. That changes your financial planning for retirement because you have to fund a lifestyle in two currencies.

So how do you actually bring these different elements together in a retirement plan? Expats often have two people advising them on this — a financial adviser and an investment manager. The financial adviser is responsible for managing the personal finances, including the level of income needed in retirement, how much of that income — if any — should be linked to inflation, and a future retiree’s discretionary spending, in case their income falls. Another big area for advisers nowadays is assessing the benefits of transferring defined benefit pensions to a pension arrangement that may give them greater flexibility, such as a SIPP or QROPS.

Ideally, planning for retirement should start well before retirement.
Ideally, planning for retirement should start well before retirement.

The investment manager is responsible for deciding your investment strategy — what asset classes you will invest in and the best means of gaining exposure. That often requires a close working relationship with the adviser, who will understand a client’s financial situation in detail. Inflation protection, length of retirement and the place of retirement (thus what currency you will be spending in) will all influence your investment strategy.

Ideally, planning for retirement should start well before retirement. Our clients tend to come to us in their late 40s and early 50s, although a plan is important at whatever age. Throughout your working life you are said to be in the accumulation phase — growing your assets as much as possible. When you enter retirement, you are said to be in the decumulation or drawdown phase, selling down assets to fund your spending.

Investing in the accumulation phase is fairly straightforward. You tend to have a heavy equity allocation, as this asset class offers the highest long-term returns. While equities can also fall significantly in value, the long length of time you are investing for typically means you have time to recover any falls in value.

The drawdown phase is slightly more complicated. People are living longer now, meaning their retirement pots need to last for longer. A longer time horizon also allows you to take more risk. Having a proportion of your retirement fund still aimed at generating growth requires more active management around what assets you choose to draw down from, and how you invest.

From my own experience, the investment manager also has to manage expectations around what a retirement portfolio will achieve. People in accumulation, who have grown used to seeing their retirement investments grow at a rate of something like 7 per cent a year, could suddenly see a much lower rate of growth, especially if they move a significant proportion of their money from higher returning equities to lower returning bonds. In these circumstances, a lower rate of growth is not a sign of failure, but a sign of a more defensive portfolio, and one you can safely rely on to deliver your retirement income.

For people thinking about retirement planning, my key message would be that it is never too early or too late to start. It might not involve talking to a financial adviser and investment manager at this stage, but putting away some money, rather than relying solely on the end-of-service gratuity, is always a good idea.

The writer is head of Quilter Cheviot’s Dubai representative office

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