To achieve what 1% of the world’s population has (Financial Freedom), you must be willing to do what only 1% dare to do. Hard work and perseverance of highest orderBy. ~ Manoj Arora, From the Rat Race to Financial Freedom
The issue of financial planning for yacht crew is a hot topic. Your earning potential as a yachtie is high. Your spending whilst on rotation is low. But, few credible sources exist to help you plan for your life back onshore. Financial advice has been given a bad name in recent years with unregulated, unqualified advisers recommending unsuitable products to unsuspecting yacht crew.
The key to spotting the difference between good and substandard financial advice is having a basic understanding of how financial planning works. The aim of this article is to provide you with the baseline knowledge to put your finances in orderBy and avoid making key mistakes (and yes, not taking action is one of them!)
Setting Goals #
The first step to a sound financial plan applies to everyone, and it is understanding what you are working towards. Without a clear goal in mind, your finances are like a ship without a sail, an engine or a rudder – afloat, but directionless, and exposed to any changes in the tides. Having unprepared finances means returning to life onshore completely unprepared for the future.
Common goals that most yacht crew tend to focus on include retirement planning, saving for a house or building a nest egg for their family. Before you continue reading this article, I would urge you to take a second to ask yourself, “Why is money important to me?” to identify the main reason you would want to generate wealth.
With clear goals in mind, we can now put in place a strategy to achieve them.
Regular Savings #
Regular savings plans are a key financial tool for many yachties. With high salaries and high discretionary incomes, putting a sensible amount of money away for the future can be the difference between a successful life onshore or financial ruin when you leave your life at sea. Contrary to popular belief, there are a couple of different options available:
- Stock Market Investments
The classic regular savings plan, you may have seen these being advertised in recent years. These are policies that establish a regular savings premium and invest this amount into the bonds and equities markets each month in accordance with your strategy. These plans are a good way to get exposure to the markets, and let you accrue your wealth offshore – away from the prying eyes of the taxman.
However, these plans require a long investment timeline to be effective (typically 10 years), otherwise the fees can make them prohibitive. As a result, careful consideration should be taken before committing to such a plan. The convoluted terms and rigid payment schedule can also make them unsuitable for many.
- Property Investments
A more recent invention, regular savings plans centred around investment property are still fairly uncommon. However, these plans can offer a low-risk, low-cost savings option and are fantastic for those looking to build a stable, income-generating portfolio. After electing a suitable off-plan investment property, the required deposit (usually 30%) is divided by the number of months in the build term (usually around 2 years).
This is the regular savings premium that you will pay. Towards the end of the build term, the financing for the remaining 70% is arranged. This is either via a mortgage or via guaranteed rental agreements with the developer, whereby the rental income for the first few years pays off the balance directly. The commitment period is much shorter (e.g. 2 years instead of 10), the returns are predictable and there are no hidden fees (as can be the case with a stock market based plan if you are dealing with an unscrupulous adviser).
In my opinion, this will be the future of regular savings plans for the yachting industry.
Yachties, as with many others, will often find themselves with significant cash lump sums in their bank account. This may be as a result of diligent saving, an inheritance or simply because they never put a regular savings plan in place to ensure that money worked hard for them. This is a problem – particularly in the post-Covid context.
Inflation is now above 3% in many countries across the world, including the UK and Spain (at the time of writing). This is eroding the value of your forgotten excess capital in bank accounts. At this rate, €100,000 in a 0% bank account now would effectively only be worth €74,409 in 10 years’ time – a hidden cost of almost €26k. Would you be happy paying that?
This is why financial planning theory dictates that you should only hold an emergency fund of 3-6 months’ expenses in your current account to cover your reasonable short-term needs. Any amount over this should be invested in a suitable vehicle that can match, or preferably beat, the rate of inflation.
If you are holding excess capital in a low-interest bank account, I would urge you to speak with an adviser and develop an appropriate strategy.
Retirement Planning #
The first step to effective retirement planning is understanding your future needs and objectives. You’ll need to define (i) your current net worth, (ii) your target retirement age and (iii) how much you will need each year to live a comfortable life. Once you know this, we can define how much you will need to have saved in your investment portfolio.
For example, Alex is an engineer on a vessel based in Palma de Mallorca. He is 30 years old, has a net worth of €500,000 and he plans to retire at 50 years old on an annual income of €100,000.
If we plan for Alex to live until 85, then he will need 35 years x €100,000 in his retirement fund by the time he is 50 years old – a total of €3,500,000. We therefore have 20 years to accrue €3m in a retirement savings plan (net of inflation). The calculations are actually a little more complex than this in practice, but these numbers work as a general illustration of what we are looking to achieve.
This is Alex’s savings goal, and he will work with his financial adviser to ensure that his regular savings and investment portfolio are set up to deliver this. Fortunately for Alex, he has more than enough time remaining to put a sensible plan in place.
As a seafarer, your tax position may be somewhat more complicated than if you were based onshore. This is because you are unlikely to be physically resident in one country for more than 6 months in the year (the usual benchmark when determining where you should pay your tax). Fortunately, earning as a seafarer can therefore be far more attractive from an income tax perspective – with little or no income tax payable in almost all cases.
Your tax treatment will ultimately depend on your residency status. Whether or not your income is tax-free will then depend on local allowances. For example, in the UK, the Seafarer’s Earnings Deduction (SED) is a commonly used mechanism that can reduce your income tax bill to zero. This must be claimed via the UK tax authorities, HMRC.
This is simply as an example, as your tax allowances will vary according to where your onshore tax residency would be determined. Other jurisdictions, such as South Africa, have their own dedicated seafarer tax exemptions.
In all matters related to taxation, it is better to seek professional advice to ensure you are paying the correct amounts in the right places, registering your tax-exempt status and/or ensuring your salary is paid with no tax deductions applied.
Putting It All Together #
The world of financial planning can be daunting to the uninitiated. However, with the right tools and strategies, you can set yourself up for a far more comfortable life by taking action.
Jonathan Ralph is a Senior Associate at Holborn Assets and a fully qualified and regulated financial planner in the European Union. Based in Sineu, Mallorca, he provides trusted advice to expats from all walks of life. For a free, no-obligation consultation, visit www.jonathanralph.com
By Jonathan Ralph
22 October, 2021