UK: Protecting Against Events

It's always reassuring to know that someone reads these articles – but there can be a downside. Last month I discussed events and how even the best-laid plans can be derailed by political change, weather or financial shocks. A few days after that article appeared, someone stopped me to say that what I had said seemed to make sense, but then went on to ask me how on earth she could protect herself financially from such episodes. We had a good chat that left me with some food for thought.

On reflection, it strikes me that there are indeed ways in which we can ensure that we will not always be at the mercy of those – often unpleasant – occurrences called "events", of which I like to speak so often. After all certainty is a very rare commodity. It was Benjamin Franklin who said: "In this world nothing can be said to be certain, except death and taxes". And that is just as true now as when he was speaking two centuries ago.

We should first consider what type of "event" we are talking about. It could be a planned event – either on a fixed date in the future or likely to occur within a certain time scale – or it could be the unexpected, "out-of–the-blue" type of happening – a so-called "derailing" event.

Planned events are often "big ticket" items such as a family wedding. One only needs to look back at the marriage of the newly created Duke and Duchess of Cambridge at the end of April in London. For me, one of the most telling moments was Prince William's comment as the bride and her father arrived at the altar – "it's supposed to be a small family affair." Fortunately, most of us won't ever face paying for a church service for 2,000 guests and a reception for 600!

For most people, planning expenditure for such predictable events is likely to involve a combination of releasing savings, cutting spending elsewhere and, most sensibly, being realistic about what can be done with resources available. In other words, setting a budget, funding that budget and sticking to that budget.

So much for those one-off happenings where the level of expenditure is likely to be more or less known in advance and can be planned for. But what of the other categories? Events that cannot be guaranteed but are highly likely to occur, or those that emerge out of nowhere. Financial planning for both is just as vital.

After a marriage has been paid for, children are often the next "big ticket" items that must be considered – not only by parents but also the long-suffering grandparents. In these days of historically low interest rates, it's difficult to open a small investment or savings account for a child in the hope that years of compound interest will do the rest. It simply isn't going to happen at present (or I suspect for some years to come) but there are alternatives. In my case, I buy Premium Bonds for my godson who lives in the UK. They are backed by the UK government and offer at least the chance of a tidy tax-free prize – although dreams of him winning the monthly £1 million prize are most probably just that.

Similarly, one can set up longer term investments for future education, particularly at tertiary level. Given the current debate raging in the UK over university tuition fees, funding is likely to become ever more important for students and their families in the years ahead. Suitable planning, assisted by qualified investment specialists, is highly recommended – and as early as possible to allow any agreed strategy time to achieve its full potential.

The most difficult category of all is the unknown or at least generally unquantifiable type of happening such as accident, illness, untimely death, redundancy or even fraud – as I call it, an "off-piste" type of event. Financially speaking, what can one do to protect oneself, and one's family, from sudden changes in circumstances? Other than savings and investments, of course, there is insurance. A good friend of mine was recently involved with his family in a spectacular road accident. Thankfully, no one was badly hurt and insurance covered the cost of replacing the car, so all is well.

All of us who drive must purchase insurance cover by law so the financial impact of such accidents should always be mitigated. But what about happenings where there is no insurance cover in place? It surprises me how many people venture off on an annual holiday without taking out travel insurance. If, like me, you travel throughout the year on business as well as holidays, an annual travel policy can be surprisingly affordable – and if it's for a two-week trip away it seems very odd that this most simple coverage should not be considered as important as the old "tickets, money and passport" mantra.

Health cover is not inexpensive but might also be considered. Although we are served very well here in Gibraltar by our own "national" health service, the additional comfort given by private cover, if it is affordable, can be well worth thinking about in the long run, especially if one is not covered by some form of social security.

And for the ultimate protection, some form of life insurance should be discussed with an appropriately qualified professional adviser. Not just to cover funeral expenses but perhaps to clear the mortgage (banks often insist on this type of cover anyway). For those caught in the inheritance tax net – not just UK people but Gibraltarians with property in Spain perhaps – it may be that the only way to protect one's family in the event of one's passing is to take out a life policy that covers the cost of any inheritance tax that may become due. In certain parts of Spain inheritance tax is no longer charged but non-residents in popular second home regions, such as Andalucía, must still pay this tax.

UK expatriates should also look carefully at any domestic private pension schemes when moving away from the UK. For example, moving an existing UK pension to a Qualifying Recognised Overseas Pension Scheme (QROPS) will ensure that, in the event of early death, all remaining assets in the scheme are distributed to your named beneficiaries.

At present, the preservation of cash assets' capital value is the best one can hope for when holding standard bank deposit accounts. It is to be assumed that the lessons learnt in recent years after some banks failed – and so many others came perilously close to doing so – will lead to a safer, more stable banking environment for all. But don't expect interest rates on savings to rise dramatically any time soon.

Now is a good time to think about the diversification of your investments – no matter how modest. My colleagues at Sovereign Asset Management tell me that the choices available to private investors are more wide ranging and exciting than ever before. Many of us here in Gibraltar need to use both sterling and euro and the exchange rate varies from day-to-day. Currency hedging is something we can all do. Most of the banks offer a specific euro account simply to "hedge" your bets. In this way, if your euro are worth less one day against sterling, your pounds in the other account will be worth more – and vice versa.

As always some ready cash or at least space on the credit card should always be left available for those unexpected but often unavoidable events. Experience in recent years shows us that there is generally something lurking around the corner to trip us up. Considering new ways to cushion ourselves against such shocks should be the number one priority so that when they do happen – and they will – it is an irritation rather than a calamity.

Finally, remember too that good things happen in equal measure. A sudden windfall may result and that too needs thinking about. But that's a subject for another day.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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