The virtues of regular banking reviews
From time to time there is a definite need for you to review your banking arrangements to ensure that they are adequate for your needs and are operating optimally.
Some basic principles need addressing to ensure that you are well versed in the arrangements you have made. The legal aspects include anti-money laundering requirements. Banks have a duty to comply with international anti-money laundering regulations. These will include fairly stringent checks on you as a person when you first open an account. But banks will also often follow up on customers for whom they feel information is lacking.
Do not be surprised if your bank contacts you to advise that its records are outdated and it requires information updates. It may even threaten that if you do not comply, it will freeze your account. If you have an unusually large deposit, your bank will also ask for documentary evidence of the source.
The European Savings Tax Directive is another area of concern to those of you with accounts in the popular Channel Islands and Isle of Man, especially if you are a European country national. The directive took effect in 2005 when European Union members agreed to exchange information about investors and potential tax subjects. The tax-haven countries objected because it threatened their status as world renowned financial centres. So those countries were exempted from the exchange of information on the condition that a withholding tax is deducted from interest paid to account holders in lieu of this.
The law is a little complex and there are exceptions but this applies to all bank accounts. You are probably temporarily exempt if you are resident outside the EU. You will also be exempt if you make investments through a variety of other vehicles available in the market.
So although your banking arrangements are an essential part of living today, what is the main purpose of your account from your perspective? There will be requirements to fulfil minimum balances and a certain level of cash to which you require fast access. But do you keep a substantial proportion of your wealth in bank accounts because you feel it is safe? If your feeling is that safety is of the utmost importance, it is likely you are not really considering the correct issues.
Is your money safe in other investments versus the traditional bank account? Over any given period of 10 years in history, world equity and financial markets have outperformed bank deposits by a substantial margin. While world markets are in turmoil right now, the fact remains that bank deposits perform at an inferior rate. Markets will pick up again after the bear run. It is unclear when but there are now some good investment opportunities available. These will certainly beat the bank.
If you are set on leaving part of your cash in fixed deposits, are you actually getting the best deals available at present? Maybe your professional financial adviser could assist you in securing fixed-term deposits at rates like 8.55% in Sterling and 5.85% in US dollars.
Having considered the safety of the actual cash asset in investment terms, have you also considered the safety of your investments in terms of confidentiality and protection from third parties? If your funds are sitting in a bank and you pass away, your heirs will be obliged to obtain probate from the courts of all jurisdictions where you have assets. This could be costly in terms of time but more importantly in terms of inheritance tax (IHT). With money in a bank, there is no way around this.
However, there are innovative investment products available that can avert the requirement for specifically obtaining probate prior to distribution of funds. Not only that, but distributions may be made without the deduction of IHT. If you had a personal portfolio bond, for instance, a declaration to the custodian institute of the bond will trigger an immediate distribution to your named beneficiaries, without deduction of taxes, in the event of your demise.
Consider also the distinct possibilities of your cash deposits in a bank being exposed to possible creditors. Many of you have businesses. If creditors had difficulties and could not meet their obligations there may well be an attack from them on your personal assets. Bank accounts are the easiest target in these circumstances. But if you make proper provision through a bona fide investment bond, such parties would not even be aware that such a vehicle existed.
Better still, if you combined such bonds with trusts, you could ensure the IHT bill is dramatically reduced or negated. Then you would have much safer provisions for your assets, your financial future and that of your beneficiaries.
Talk to an independent financial adviser and ask him to review your total situation. He will conduct a thorough review and advise you not only how to improve your banking arrangements but also how you can optimise your overall financial and investment strategy.
Questions to the author can be directed to Barclay Spencer International on 0-2653-1971 or e-mail to email@example.com