Tsumitate NISA

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Following my previous post on NISA – The Japan Individual Savings Account, here’s an update on the launch of NISA for regular savings. This new product is being rolled out by all the major securities companies and brokerages in Japan ready for a January 1st 2018 start.

You may remember that NISA allows you to save ¥1.2 million per year over five years free of the 20% tax on income from capital gains and dividends. The new “Tsumitate NISA” is designed to help people save smaller regular amounts over a longer period. In fact, SBI is advertising that you can start from as little as ¥100.

It works out that you can save up to ¥400,000 per year over a period of 20 years. That makes a maximum possible investment of ¥8 million which will be free of tax on gains / dividends.

Investment choice is limited to Mutual Funds and ETFs, but that still leaves plenty of choice so you can build your ideal asset allocation over time.

You are also able to make withdrawals any time if you need to.

As to whether the standard NISA or the Tsumitate NISA is better, that really depends on your personal preference. If you are trying to max out your tax-free savings then it’s perhaps better to use the standard NISA. That way you can save a larger amount over a shorter time period. If you have less disposable income and are saving for long term goals anyway, then the Tsumitate NISA is probably a good fit.

The account opening process will be similar to a standard NISA, so be sure to read this post on NISA if you are considering this.

Feel free to let me know how you get on!

 

 

Brokerage Accounts – Investing in Japan and Overseas

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For people who are looking for a high level of control over their investments with low cost, an online brokerage account is a great solution. In a way it’s a little sad that people no longer call their broker and instruct him to place orders for them, but it is very convenient to be able to do this yourself online. It also lowers the cost for the brokerage firm, which in turn lowers costs for investors. Today we will take a look at how these accounts work.

Let’s start with a definition: “A brokerage account is an arrangement between an investor and a licensed brokerage firm that allows the investor to deposit funds with the firm and place investment orders through the brokerage. The investor owns the assets contained in the brokerage account and must usually claim as income any capital gains he/she incurs from the account.” (from Investopedia)

If you live in Japan and are looking for a local brokerage, there is plenty of choice. Some well known ones are Rakuten SecuritiesSBI Securities and Matsui Securities. However their interfaces are not available in English, so you will have to be able to work through the application and use of the platform in Japanese. I have an account with SBI, so will use them as a reference in this post.

If you are looking for an account in English, then Interactive Brokers is probably the best option. IB have a Japan office and offer both a local Japan account for investing in the Japanese market and also a US account, which can access not only US, but also European and other global markets. The US account is completely separate from the Japanese company and is administered in the US, although you can apply through the Japan office.

Other overseas brokerage firms may or may not accept investors based on the country they live in. Japan residents will find they are not eligible to open accounts with most of them. In fact I think Interactive Brokers may be the only option available at present. (please correct me if I’m wrong on this)

SBI allows trading on both the Japan market and also overseas markets, namely the US, China, Korea, Russia, Vietnam, Indonesia, Singapore, Thailand and Malaysia. Once you get used to the interface it is fairly easy to navigate and execute transactions. Google translate does a reasonably good job these days if you get stuck.

Security – nothing is 100% safe, but as long as you are using a recognised broker you can expect them to be heavily regulated. You retain ownership of the assets in the account at all times. Obviously, because we are talking about online accounts, you need to be careful with your personal online security. Your brokerage should be using high-end encryption, but you need to make sure your login details are kept safe and that you change your password regularly.

Investment options –  A brokerage account gives you access to direct stocks, bonds, ETFs and mutual funds. Many also offer FX trading, options, and margin trading.

Cost – costs vary from one broker to another. Some may charge a fixed fee per transaction, and some may have a sliding scale depending on volume and how often you trade. Here is a breakdown of costs for Interactive Brokers and SBI.

Tax – As noted in our definition, these are taxable accounts. If you reside in Japan and use a local brokerage, you will receive a summary document each year you can submit to your tax office. If you use an overseas account, you will be responsible for reporting on this account in the country or countries you are tax resident in.

Drawbacks – Interactive Brokers has an account minimum of $10,000 for the US account. I think it’s ¥1,000,000 for their Japan account. (SBI doesn’t have this minimum so it’s easy to get started with a small amount and build up over time) Obviously the lack of an English interface for the Japan accounts can be a problem. For some investors this kind of account could simply be too “hands on”. You have to make all the investment decisions and execute them yourself. Hopefully this blog will make that easier! (see the section on Asset Allocation)

Account opening – information on opening an Interactive Brokers account is available here. For SBI, the process is as follows:

  1. Fill in some personal information on the website and request the account opening documents.
  2. Account application documents are mailed to you.
  3. Complete account application documents and return along with a copy of your residence card and tax ID number. (My Number)
  4. The securities company then notifies you that the account is open, either by mail, or via login to their website.

Hopefully this gives you an idea of how brokerage accounts work. If you are new to this it may seem a little daunting at first, but if you start with a small amount of money and study as you go, you may find it is not so hard to get the hang of. As always, let me know if you have any questions or comments.

Disclaimer: This should go without saying, but the information contained in this blog is not investment advice, or an incentive to invest, and should not be considered as such. This is for information only.

 

Lump Sum Investing – Offshore Platforms

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Today let’s take a look at a simple lump sum investment vehicle. These are often referred to as platforms or wrap accounts. There are a number of them available these days, each with different features, but we’re not going to try to compare one with another here, just to give an overview of how they work.

First of all, these products are for lump sum investment. If you are not sure what we mean by lump sum, please read this. Minimum investment levels will differ, but around USD 25,000 is typical.

Structure – The typical structure for these investments is a nominee account, whereby the assets are held by a nominee company set up by the platform provider. Investor assets are segregated from the provider company assets and the individual investor is the beneficial owner. Compared to investing directly in the underlying funds costs are reduced due to bulk trading and settlement is quicker.

Security – the nominee account structure ensures that if anything were to happen to the platform provider as a business, the investor assets are held separately. If one of the underlying funds falls in value or fails, then capital is of course at risk.

Jurisdiction – offshore platform accounts are typically set up in Isle of Man, Guernsey, Luxembourg or an equivalent tax efficient jurisdiction.

Tax – as the accounts are set up offshore, no tax will be deducted from the investment “at source”. Account holders are of course responsible for reporting the investment in the country they are tax resident in.

Investment options – Platform accounts can be either open architecture or menu-driven. Open architecture means you can own pretty much any publicly traded financial asset, which would include direct stocks, bonds, ETFs and mutual funds. Menu-driven platforms will have a fixed menu of mutual funds to choose from, and some of them will also have a menu of ETFs. Platform accounts are also likely to have access to a number of “managed portfolio” investments. These portfolios are managed by an investment manager and can invest in a diversified range of assets, many of which may not be on the platform menu itself. They are usually managed in a base currency, to a specified risk profile. So a USD Growth portfolio will have USD as it’s base currency and will invest in a range of cash, bonds, stocks, funds, ETFs and alternative strategies. The manager will have control over the underlying investments and will likely rebalance them on a regular basis.

Distribution – offshore platforms are typically distributed through financial advisers.

Fees – fees will vary from one platform to another. Typically the platform provider will take 0.5% upfront on money invested and 0.5% per year. The financial adviser handling the account may then add an upfront and annual fee on top of that, which may be negotiable depending on the investment amount. Mutual funds and ETFs on a platform will typically deal at NAV, which means there is no initial fee. Usually there are no redemption fees / exit penalties and all money can be withdrawn any time with reasonable notice.

Drawbacks – although you will be able to view your investment online, not all platform accounts allow online “trading”. They are not brokerage accounts and in some cases you will have to submit a signed instruction in order to buy or sell assets. The idea is that you should be discussing your investment strategy with your adviser and making long term asset allocation decisions, not trading assets day to day.

Platform accounts can be an efficient and cost effective lump sum vehicle. They also tend to offer significant diversification. This means it is possible to establish a solid core/satellite approach, whereby the majority of the investment is in a well diversified portfolio and a smaller percentage is invested in more alternative or riskier assets.

Disclaimer: This should go without saying, but the information contained in this blog is not investment advice, or an incentive to invest, and should not be considered as such. This is for information only.

 

 

NISA – The Japan Individual Savings Account

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Today let’s take a look at a Japan based investment vehicle that longer term expats may wish to utilise. The Nippon Individual Savings Account Program, or NISA, was launched in January 2014. It has since been expanded to include the Junior NISA. NISA is based on the UK Individual Savings Account. (ISA)

Eligibility – anyone over the age of 20 resident in Japan is eligible to open a NISA account.

Tax Exemption – individuals are eligible for an exemption of the 20% levy on income from capital gains and dividends from annual investments of up to ¥1.2 million made over a five year period, as long as they reside in Japan. In other words, you can contribute up to ¥1.2 million in year one and it is sheltered from tax on gains for 5 years. You can then invest up to ¥1.2 million in year two and that is also tax free for 5 years, and so on. Each annual “slice” qualifies for the 5 year tax exemption. So if you invest every year you can hold one NISA for a total of 10 years. After that you may start a new NISA.

Junior NISA – available since April 2016, Junior NISA allows parents / grandparents / guardians to make contributions on behalf of children under 20. The contribution limit for Junior NISA is ¥800,000 per year.

Investment options – NISA’s are offered by securities companies. This means you are able to invest in direct stocks, bonds, ETFs and mutual funds.

Security – as the account holder directly owns the investment assets in the account, NISA’s are very secure. Of course you are still taking investment risk and there is no protection against the value of investments falling.

Cost – it’s tricky to find information on the actual fees involved in investing in NISA, but they are relatively low. The securities company will charge a brokerage fee of up to 0.15%, usually with a minimum commission fee. ETF management fees are no more than 0.5% p.a.. Mutual funds run around 1.5% p.a. Obviously costs will increase if you employ an adviser to help you with asset allocation.

Drawbacks – one drawback is that capital losses made in a NISA cannot be used to offset against capital gains made in other accounts, but this seems fair enough on a non-taxable account. The main drawback with NISA is that if the value of your investment falls over the 5 year investment period, the price is effectively reset and any recovery then counts as a taxable capital gain.

Let me illustrate that so it’s clear: Say you invest ¥1.2 million in your NISA and leave it there for 5 years. Over the 5 years the value falls to ¥800,000. You don’t want to sell the asset and realise the loss, so you continue to hold it. However, it is now outside the 5 year tax exempt period. If the value then returns to ¥1.2 million you will be taxed on the ¥400,000 “increase” as a capital gain.

Account Opening – the account opening process is a little convoluted and you are going to need some skill / help in Japanese language to complete it. Typically the flow is something like this:

  1. On your chosen securities company website, request the account opening documents for NISA – this will require inputting some personal information.
  2. Account application documents will be mailed to you.
  3. Complete account application documents and return along with a copy of your residence card and tax ID number. (My Number)
  4. The securities company will then apply on your behalf to the tax office.
  5. The tax office approves the application and notifies the securities company.
  6. The securities company then notifies you that the account is open, either by mail, or via login to their website.

Some well known securities companies offering NISA are Rakuten Securities, SBI Securities and Matsui Securities. As far as I’m aware, the online interface for applying for accounts, depositing money, and buying / trading investments is all in Japanese.

This article suggests that, even for Japanese people, setting up Junior NISA is rather complicated.

Overall, NISA seems like a very cost-effective way to save and invest in Japan. However, I do feel that the major hurdle for expats is the lack of an English interface. Also for expats and Japanese alike, operating a securities account without professional advice, whether tax exempt or not, means managing your own investments. Some people will relish this level of control, while for others it can be rather daunting. Hopefully that’s where this blog will come in useful! You may want to go back and  work on your financial profile and read up on the investment basics in earlier posts.

Disclaimer: This should go without saying, but the information contained in this blog is not investment advice, or an incentive to invest, and should not be considered as such. This is for information only.

 

The Offshore Regular Savings Plan

So here is a first look at a well known investment product. I’m going to start here as these plans have been around for a long time, and have been known to generate lively discussion. They are in the toolbox of almost every expat financial adviser / salesperson worldwide and millions of dollars, pounds and euros flow into them every year. They are also somewhat controversial products as they have sometimes been abused by unscrupulous salespeople, selling them to (in some cases lazy) customers, who don’t read the terms and conditions.

Regular savings plans are offered by a number of life companies, with the most common being RL 360, (Royal London), Friends Provident International, Old Mutual International, Generali Worldwide and Zurich International Life.

Structure

The typical structure for this product is an offshore unit linked insurance policy. Offshore means it is domiciled in a tax free jurisdiction such as the Isle of Man or Guernsey. Unit linked means that contributions are used to buy units in investment funds. A unit linked plan acts like a savings vehicle, but it also has the benefits of an insurance contract. The insurance part comes from the 101% (of policy value) death benefit attached to the policy. Although many of these contracts are now issued on a capital redemption basis, whereby there are no lives assured and the contract can be passed on to future generations. Capital redemption products have a slightly confusing 99 year maximum term, which facilitates the passing on of the investment to future generations – you do not have to keep it in force for 99 years though!

Typically these contracts are set up with a fixed savings term, usually aligned with the investors savings goal, such as their retirement age. If the policy is surrendered before this savings term is reached, early surrender penalties apply.

Security

The Isle of Man and Guernsey regulators each operate a policyholder protection scheme. In Guernsey insurers are required to hold assets representing at least 90% of liabilities in trust with an independent trustee. The Isle of Man Policyholder Protection Scheme levies all insurance companies operating on the island to pay into a Policyholders Compensation Fund, which will pay out a sum equal to 90% of the liability if an insurer is unable to meet it’s liabilities.

Note: What we are talking about here is protection if the insurance company itself “goes under”. In practice this is highly unlikely. If one of these companies started to get into trouble, it would most likely be swiftly bought out by one of it’s competitors and policyholders would be unaffected. Also, policyholder protection does not protect from losses in the underlying funds. If the fund goes down in value, so does your policy. If the fund itself fails, then your capital is at risk.

Uses

Regular savings plans are typically used for saving for retirement or for children’s future education costs. Moreover they are popular with people who feel they need to get started saving and perhaps need some discipline to do so. Although it is getting much easier these days, it used to be quite difficult for expats to find an investment vehicle where you could invest a small amount of money each month and still be able to diversify into a range of asset classes. High investment minimums or high transfer costs would prevent the smaller saver from getting started. The ability to make automatic monthly collections from the customer’s credit card made all this easy, the money would simply be deducted every month and the investor didn’t have to go to the bank and send it. When you consider that in Japan, for example, making a $300 overseas bank transfer can cost up to $40, not to mention the time spent in the bank actually getting it done, credit card collection made these products easily accessible.

Fees and charges

The fees on these policies are relatively high. And with the advent of low cost brokerage accounts and ETFs it is getting harder to justify the cost of one of these vehicles. A typical fee structure looks something like this:

Initial unit charge: 1.5% per quarter, charged on contributions made in the first 18 months for the life of the policy.

Administration charge: 1.5% per year applied across both initial and accumulation units

Policy fee: A fixed fee, usually around $8 per month

These are the basic fees applied to the policy itself. The underlying investment funds also have their own management fee, which is typically 1.5% per year. There are generally no initial fees for accessing the funds.

These products are not sold directly by the life companies. They are distributed via financial advisers. The initial unit charges are largely used to pay commission to the adviser.

Usually these policies offer some kind of extra allocation as an incentive to get started, or a loyalty bonus to incentivise saving for the long term.

Investment Options

The investment choice for these products is menu-driven. This means there is a fixed range of funds to choose from. These are mostly managed funds (mutual funds) and cover the full range of asset classes. You cannot access ETFs in these plans at present, although there are an increasing number of index tracker funds available. Switching between funds is free of charge.

Currency

Typically these plans are available in GBP, Euro and USD. Some accept contributions in JPY. In most cases, once you have selected the contribution currency, it cannot be changed. This means you need to think carefully about your base currency before getting started. Funds are available in multiple currencies, which is one way you can mitigate currency risk if need be.

Tax

As these policies are domiciled in “tax havens”, they are not subject to income or capital gains tax in those jurisdictions. This means they will grow without any tax being deducted at source. It does not necessarily mean that they are tax free for policyholders, as that will depend on their nationality, where they reside, and their own personal tax situation. Offshore life products were originally designed for British expats, and carry several potential benefits for them, even if they return to the UK with the policy. These include a 5% withdrawal allowance, time apportionment relief, top slicing relief, and clustering and segmentation. (I’m not going to get into the details here as this post will already be long enough as it is)

One of the benefits of these international schemes is that they are “portable”. It’s easy to move from one country to another without affecting the investment itself, although it’s important to note that a policyholder’s tax situation may change when they move.

Do’s and Don’ts

Despite the high fees, these products can still be an effective long term savings vehicle if used properly. The most important thing here is to understand how the contract works and avoid the pitfalls.

There are two types of units associated with these policies: initial units and accumulation units.

Initial units are units purchased during the Initial Allocation Period (IAP), which is typically 18 months, but can vary. These units are charged at a higher rate and must stay invested until the end of the selected savings term. If these units are withdrawn early, an early surrender penalty will apply. That penalty starts off large and gets smaller the closer you get to the maturity date.

Accumulation units are those purchased after the IAP. They are charged at a lower rate and can be withdrawn without penalty if necessary.

Once you have completed the initial unit allocation period, you have the option to reduce contributions, or take a break from contributions for a while.

DON’T mistake one of these products for an 18 month savings plan – if someone explains it to you as such, run a mile.

DON’T start with a higher premium level than you plan to contribute for the whole of your chosen term. One of the worst ways to use a plan like this is to start off contributing say $4,000 per month, and then reduce it to $300 per month after the IAP. You just end up paying high initial fees on the original amount in order to get a $300 per month savings plan.

DO start with an initial contribution amount that you are comfortable making for the whole investment term. This is the most efficient way to use these plans. The flexibility to take a break from paying premiums is there but it’s far better not to use it. Increasing contributions generates a new IAP on the increased amount and new initial charges, but you are not penalised for it. Reducing / stopping premiums effectively comes at a price.

DO read the product literature, especially the parts about fees and charges, the IAP, and maturity dates. Take responsibility for understanding the investment before you get started.

That said, if you are considering investing in one of these schemes, you are likely talking to a financial adviser. This is a long term investment and the adviser is well paid for it, so make sure you are talking to someone you think you can work with for the long term. How long have they been around already? Are they likely to stick around? Are they qualified? Do they have a plan for how to manage one of these policies through the three stages of capital accumulation, diversification, and pre-retirement? (See here)

NOTE: If you have one of these plans already, and you didn’t really understand it when you started, your “adviser” is no longer around, and you are not happy, consider your options carefully. I have seen blanket online advice that you should quit immediately and take the hit, or withdraw as much as you can to reinvest in something cheaper. These things should be considered on a case by case basis, depending on what your maturity date is, how much you have contributed so far, and how much you are able to contribute going forward. You should also be considering what funds you hold, how they’ve performed, and whether now is a good time to be selling them or not. Find an adviser you can trust before making any hasty decisions.

Summary

It’s very easy to write these plans off and say “you should just invest in a portfolio of ETFs and only pay 0.5% per year in fees”. While I certainly don’t disagree with that strategy, some people simply do not find it that easy to implement by themselves. If used for reasonable investment amounts as a long term savings vehicle these products can be simple and effective. I have seen them make decent returns over the long run when used properly. However, they are certainly not for everybody and should only be implemented after careful consideration.

Disclaimer: This should go without saying, but the information contained in this blog is not investment advice, or an incentive to invest, and should not be considered as such. This is for information only.

Investment vehicles / products and cleaning toilets for wifi

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Over the coming weeks we are going to take a look at the pros and cons of various investment vehicles. Before doing so, let’s just clarify what we mean by this. When talking about an investment vehicle or an investment product, what we’re really talking about is a box – a box for holding assets. These assets could be cash, bonds, stocks, funds, ETF’s etc. The box may be structured as a directly owned account, a nominee account, or even an insurance product. The main point here is to separate the box from the actual investment strategy – i.e. what assets you hold inside the box and how you manage them over time.

I often hear people say “I’ve got a …….. product / account and it’s not performing well.” This requires some clarification as it’s unclear if it’s the account itself that is not performing well, or the investments inside it. You can have a really great vehicle that is secure, tax efficient, and reasonably costed, but if your asset allocation is poor and the investments are not performing you will not be happy with the result. Equally, you could have picked great investments that have performed very well and suffer because the vehicle you are using is inefficient, not secure, or the fees are excessive. For some of you this will be obvious, but many people fail to distinguish between the investment vehicle and the investments themselves.

Another thing people often fail to do is read the instructions on the box! It’s amazing how many people own investment products without having any idea of how they work, what restrictions there are, what fees they are paying or how they will be taxed. In many cases they have bought the product through an adviser or salesperson, based on their presentation, and not actually read the terms and conditions themselves. While we are on the subject of reading the small print, I recently came across this rather amusing article about a public wifi company’s campaign / publicity stunt, whereby thousands of people agreed to clean toilets for wifi because they didn’t read the terms.

Now I’m as guilty as anyone of not reading the terms I agree to in order to get access to public wifi, or download songs from iTunes for that matter, but when it comes to investing money we should all take responsibility for understanding what we are getting into. While I truly feel for people who get duped, or simply get unlucky, investors need to do their own due diligence before investing their money.