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Many people ask us for investment advice and access to investment solutions. In these discussions the pivot is someone’s life plan. For some that plan is blurred beyond a limited number of years, for others the planning horizon is further away. One’s situation, risk appetite and risk tolerance (what can you tolerate emotionally and what can you afford) and life plan are the main ingredients regarding wealth decisions, and then other factors are taken on board.
In the past months we had a number of interesting client discussions with the following take-aways.
Does after-tax return matter?
That seems a rhetorical question. The Dutch tax system treats investing in pension products favorably; contributions (up to a maximum) are tax deductible now, the pension capital including returns on that capital is not taxed until you use the capital, and taxation beyond the State Pension age is lower than before that moment. So you can contribute in Box 1 and ultimately your periodic pension payments are taxed per year.
You can also ignore tax deductibility of contributions. Depending on what you invest in and how high the return is you can structure your wealth in Box 2 (using a company subject to Corporate Income Tax) or Box 3. This will result in a different way and thus different level of taxation of having the wealth, while using the wealth (taking it from the pot) is not taxed.
Doing the math then answers your question. There is however an important assumption behind that math which is that the investment horizon is equally long and the investment profile is equal. The latter condition is nowadays largely possible due to larger availability of suitable products at competitive pricing. But what if you want to emigrate? Or retire early? Then the math is not so straightforward. It is highly likely you need to consider flexibility in capital use in relation to taxation if you are keen to compare returns on after-tax basis.
Several clients had an “and/and” solution; part in Box 1 for the longer agenda, part in Box 2 or Box 3 for the flexibility aspect.
In the past months a political storm emerged when the Supreme Court (“Hoge Raad”) ruled the Box 3 taxation unjust and ordered restoration of rights of affected taxpayers. We published this article a few weeks ago. It will not take forever before the politicians determine how Box 3 taxation is impacted and then we can revisit calculations to assess the net return using Box 2 or Box 3.
Can you take your investment with you?
One of our first larger investment clients had, in a previous phase of their expat lives, decided to invest in an life insurance policy for which premiums were paid and these premiums were invested in stocks and bonds. This was a renowned insurance party, active worldwide. The company structure made it possible that wherever the client’s residence, investments were allowed to continue and to grow. Unfortunately, the investment returns were far below professional investor’s achievements and the charged fees were adding insult to injury. Premature termination was punished severely in the insurance terms and conditions; we refer to “Hotel California clauses” (you can check out any time you want but you can never leave).
So on the one hand it was easy to continue participating despite changed of life location, on the other there was poor liquidity of the couple financial possession.
Despite the take taken in setting a financial plan with the best suitable products at the time, sometimes life throws something at you causing a need to adjust to that situation/expectation. We think making sure you remain flexible is important. This is particularly true for financial capital. This is why we are keen to avoid illiquid investments. Very rarely clients choose for limited liquidity (that may be a subject for another publication); it is comforting to know that if you want/have to take your capital with you if in Box 2 or Box 3, you can liquidate immediately and with limited or no exit fees.
When you invest through Dutch banks with their “beleggingsrekening” and you move outside the EU, please be aware you will lose the right to have a Dutch bank account and products connected to that bank account.
Many investment managers include lock-up clauses in their contracts. These can take the form of long notice periods or of a minimum fee spending amount during a number of years. It takes a trained eye (or in our case, a rigid partner selection process) to avoid surprises there.
Although we like listening to the Eagles, our clients checked out and left Hotel California!