Monthly Archives

September 2019

What Is Ethical Investing?

By | Investments

It’s probably fair to say that in 2019, environmentalism is moving increasingly into mainstream public consciousness. People are now more concerned about how their behaviour, habits and even investments are impacting on the planet. To note just a few developments:

    David Attenborough released his “Climate Change: The Facts” documentary earlier this year, which had a huge impact on bringing the topic to the fore in public discussions.
    Extinction Rebellion (an activist movement advocating rapid, far-reaching measures to combat climate change) has run protests and rallies across the country, throughout the year, to raise awareness and influence politicians on climate change.
    More and more celebrities (such as Prince Harry) are being scrutinised by the media over their use of private jets, due to the carbon footprint they produce.

Whilst opinions may vary on the above events, demonstrations and productions in question, undoubtedly more British people are coming to accept the broad scientific consensus about humanity’s impact on climate change, and want to do something about it. Indeed, many are even asking how their money and investments can be put to responsible use in this regard.

This is where our Financial Planners can often start to talk about ethical investing with certain clients. Other broad, related categories on this subject include “ESG investing” (Environmental, Social & Governance) and “social impact investing”.

Here, we’ll be outlining what “ESG investing” looks like and what it tends to involve. Please note that this content is for information and inspiration purposes only. It should not be taken as investment advice or financial advice.

What Is ESG Investing?

There is no doubt that different companies have a varying impact on the planet and human society. A financial planning business such as FAS, for instance, is a service-based business. It does not have a supply-chain in the same way as a car manufacturer. Whilst both companies will produce a carbon footprint, the latter is likely to have a much greater direct impact on the environment due to the size of the business and the nature of their core product.

ESG investing is an approach to investing which factors in the impact of different companies and other assets upon our physical environment, such as their approach to pollution and consumption of natural resources. It also factors in the governance of these companies (e.g. their approach to anti-corruption and gender diversity on the company board), as well as their impact on the society they inhabit (e.g. wage fairness and corporate social responsibility).

Is ESG Investing New?

It might surprise you to learn that ESG investing was quite a “fringe” approach to investing until recent years, as investor demands have brought it increasingly into the mainstream of investment management solutions.

There are many reasons for this, but among them include the fact that investor demographics are shifting. “Millennials” are growing as a target market of investment firms, and this group, in particular, tends to be very environmentally-conscious.

There is also the fact that many companies themselves have experienced considerable internal change with regards to beliefs about their ESG profile, as mounting evidence about climate change has accumulated over time.

There is also now increasing evidence to suggest that, with a viable strategy, ESG investments can offer investors attractive returns. This is gradually supplanting a common, previous belief widespread in the sector that ESG generally provides lower returns than non-ESG investments.

How Do I Start ESG Investing?

The important thing to recognise with ESG investing is that it is broadly intended to achieve two primary goals, simultaneously:

1/. Meaningful returns for the investor;
2/. Positive impact on the environment, governance and society.

To a degree, these two goals are in constant tension. Sometimes investors are tempted to sacrifice investment performance in the hopes of producing a positive sustainable impact. Whilst this is noble, it achieves little for your financial goals to lose money over the long term. Investing and charitable giving are called two different things for a reason.

On the other hand, there is also the temptation for investors (and fund managers) to chase after investment opportunities with a poor or dubious ESG profile, but which might offer more attractive potential returns. The more you go down this road, the more you dilute the definition of ESG and eradicate the second goal, above.

A good Independent Financial Planner will be able to help you navigate the world of ESG investing carefully with these two goals (as well as your own financial goals) in mind.

For some people, they might want to reconstruct an existing investment portfolio gradually, to include more ESG investments over time. This can help to reduce instability and risk in the portfolio, although some people might find such an approach in tension with their conscience.

Other people reading this article might be nearer the beginning of their investing journey and would like help setting up a portfolio which reflects their “ESG values” to a high degree, from the very outset. One of the challenges here will be establishing your financial goals and selecting an appropriate range of investments which can be justifiably labelled as “ESG”, and which also achieve an appropriate level of diversification, risk-minimisation and potential of return.

Final Thoughts

We have only managed to scratch the surface of ESG investing here in this article. However, we hope it has given you enough information to inspire you and help gather your thoughts on this increasingly important topic.

We understand some people will want to act quickly out of intentions to “make a difference”. Whilst this is completely understandable and noble, it is also important to look after yourself – and your loved ones – by not putting your capital at unnecessary risk.

If you are interested in discussing an ESG investment strategy with us, please do get in touch.

Income Protection vs. Key Person Insurance: Which Do I Need?

By | Pensions

At a glance, Income Protection and Key Person Insurance might look like the same thing. After all, they both intend to help protect a business if someone falls seriously ill or is injured; although the latter safeguards against death, as well.

In broad terms, Key Person Insurance is designed to protect a company’s financial interests. Income Protection, however, is intended to look after an individual and their family (i.e. following a serious injury or diagnosis of illness, which prohibits the person from working).

In this short guide, we have provided a summary of the key similarities and differences between Income Protection and Key Person Insurance. We’ll also be suggesting some scenarios where either might be appropriate to consider.

Key Person Insurance

If you are a Director or an important stakeholder in a particular business, then you will likely want to consider the benefits of Key Person Insurance. Essentially, it is a type of insurance which helps to ensure the business has access to much-needed funds if a key person, shareholder or decision-maker dies.

Some insurance policies will offer Critical Illness Cover (CIC), which could provide an emergency lump sum to the business if a key person can suddenly no longer work due to certain illnesses or injuries. If you are considering adding CIC to a Key Person Insurance policy, then it is important to check the details carefully with one of our Financial Planners. Certain illnesses and injuries might not be covered under different policies. You might need to balance the premiums of the policy with its conditions, as comprehensive policies are likely to be more costly.

Please speak to us about the tax implications of a Key Person Insurance policy. For instance, if you take out a policy for “business continuity purposes” then you should be able to treat the insurance premiums as a tax-deductible business expense. If, however, you are thinking about using Key Person Insurance to protect a loan, then the policy will likely not qualify as “tax-deductible”.

Key Person Insurance can be used to achieve a range of goals, including:

    Repay loans which might need settling.
    Providing funds to help close the business in a methodical, non-chaotic way.
    Open up a financial “safety net” to mitigate against a possible loss of profits.
    Supply funds for staff training and recruitment purposes.
    Provide much-needed funds for projects and developments.

Income Protection

As mentioned above, Income Protection exists primarily to protect an individual and their family, should they find themselves no longer able to work due to injury or illness. Should this, unfortunately, happen to you, and you have taken out such a policy, then if you meet its conditions you should be entitled to up to 80% of your pre-incapacity salary.

Sometimes a business will pay for an employee’s policy (e.g. a Company Director). In which case, this is usually called “Executive Income Protection” or EIP. Similar to Key Person Insurance, EIP can be treated as a tax-deductible business expense.

It’s worth noting, however, that if the policy’s conditions are met then the benefits are paid directly to the business, not to the individual. This means that when the company then distributes this post-incapacity, replacement remuneration to the employee, it will be subject to tax. So, it’s worth running this by us to ascertain the best way to distribute this in a tax-efficient manner.

In many cases, an individual will simply take out a policy themselves rather than a business taking it out on their behalf. Income Protection can be an attractive option for self-employed people, who typically do not otherwise have a means of attaining “sick pay” (since they have no employer to pay it).

Bear in mind that these self-funded policies are not tax-deductible, since you will likely be paying for the premiums using post-tax income. The good news, however, is that the benefits you receive from the Income Protection policy are usually exempt from tax.

Final Thoughts

Many businesses recognise the value of certain types of insurance to protect their assets and future growth prospects. Public Liability Insurance, for instance, is crucial for protecting your business against compensation claims levelled against you by customers. Employers’ Liability Insurance will help to cover you if such claims emanate from your staff.

However, as many as 3/5 small businesses in the UK admit to having no succession plan. Nearly 90% of the UK’s registered companies comprise businesses which employ fewer than 5 people, which are especially vulnerable if a key person was suddenly removed from the picture. This vulnerability, in turn, can hold businesses back due to investor reluctance or maintaining lines of credit.

If you are considering Key Person Insurance or Income Protection as a possible solution to your needs, then act swiftly. According to the ONS, a 35-year-old man has a 1/62 chance of dying within the next ten years. By the age 45, the chances change to 1/29 and by age 55, the chances are 1/12.

At FAS, we offer financial planning and advice on a wide range of business and income protection solutions. If you are interested in exploring your options, please do give us a call.

A Short Pension Guide for Your Grandchildren

By | Pensions

Did you know that in 2019-20 you can put up to £2,880 per year into a pension for your grandchild (i.e. £240 per month), regardless of their age?

Conveniently, this £2,880 also falls into the £3,000 annual limit on gifts, which are exempt from Inheritance Tax. Moreover, any money which is placed into your grandchild’s pension receives tax relief, effectively acting as a Government “top-up” to your contributions. This tax relief amounts to 20% on the contributions. So, if you put the full £2,880 per year into your grandchild’s pension, they would also receive £720 in the form of tax relief. To be clear, a grandchild can only receive one annual net payment of £2,880 into a pension so two grandparents cannot contribute £2,880 each.

All of these benefits can lead many grandparents to seriously consider making contributions to a grandchild’s pension as they feel it allows them to leave a more meaningful Inheritance to their beneficiaries via Inheritance Tax reduction.

Pensions for Grandchildren: Pros & Cons

As you know, today’s UK State Pension is unlikely to cover most people’s outgoings in retirement. With both the UK’s overall population and life spans projected to increase over the coming decades, the pressure on future Government’s pension budgets is likely to be stretched even further.

In light of this, the main advantage of setting up a pension for your grandchild is so you can potentially make a significant difference to their financial future by:

    Reducing their future reliance on the State Pension.
    Reducing the pressure of them having to make their own pension contributions.

The other attractive benefit to starting a pension for your grandchild (particularly if they are very young) is that the funds you invest in have more time to grow.

For instance, let’s give some thought to how much a single lump-sum contribution of £2,880 into your grandchild’s pension could potentially grow over 30 years, 40 years and 50 years (assuming a 5% annual rate of return). Whilst there are many variables to consider, broadly speaking values could be in the region of:

After 30 years: £12,447.19
After 40 years: £20,275.17
After 50 years: £33,026.11

However, the main disadvantage to consider before setting up a pension for your grandchild relates to accessibility. Under the existing pension rules in 2019-20, you cannot access money in your pension pot(s) until you are at least 55 years old.

So, if your loved one wants to use the money for a house deposit, to cover wedding costs or to help fund their way through University, then they will most likely be unable to do so. Bear in mind that the age you can access your non-State Pension(s) is also set to rise to 57 by 2028 and is it possible that this could rise even further in the distant future.

Some clients prefer to gift money to their grandchild’s Junior ISA or other investment, whilst committing other funds towards their pension. This way, the grandchild can benefit from having investments building for their future retirement, whilst allowing easy access to other funds they may need for a house deposit, wedding or another important life event.

Choosing a Pension for Your Grandchild

Certain types of pension are prohibited when setting up a pension for a grandchild. For instance, you cannot set up a workplace pension on their behalf. However, you should be able to arrange a Personal Pension Plan.

As there are different types of Personal Pension to choose from, it’s a good idea to speak to us first. You could choose to open a SIPP for your grandchild (Self-Invested Personal Pension), which can offer a fairly wide range of investment choices, but bear in mind that these pensions can often carry higher charges when it comes to investment management fees so its best if we are involved to help you find the most competitively charged contract. We can help you choose the right SIPP from the wide range available including “Child SIPPs” or “Junior SIPPs” targeted specifically at grandparents who are interested in setting up a pension for their grandchild.

5 Key Ways A Financial Planner Adds Value

By | Financial Planning

As Financial Planners here at FAS, we understand the value of financial planning which we offer to our clients. However, that value isn’t always easy to explain to those unfamiliar with it.

After all, financial planning isn’t particularly tangible; you can’t “see” or “feel” it like you can with retail products, such as a new car. However, financial planning, when done properly, solves many key problems which many of us experience:

    How will I ensure my family is financially secure if I suddenly passed away?
    Am I paying more tax than I need to, and are there ways to free up more of my income?
    How can I be sure that I am fully complying with the various rules about my taxes?
    Can I ensure a meaningful inheritance for my loved ones at the end of my life?
    Is it possible to secure a comfortable, secure retirement income? If so, how?

These are all very important questions which can keep us awake at night. Moreover, the answers are not always clear to people. Take the world of pensions, for instance. There are numerous rules about the State Pension, Workplace Pensions and Personal Pensions which often change over time (e.g. due to Government policy).

Once you start peering into this world, it can sometimes feel intimidating, but speaking to someone who understands the landscape can really help. At FAS, we believe there are at least five ways a good Financial Planner can add real value:

Helping to Clarify your Goals

Have you ever set out to achieve a goal, only to later realise it was unrealistic? Perhaps you thought you could teach yourself Mandarin Chinese fluently within a year, for instance, and quickly realised that it would realistically take more time and investment to get there?

Without the help of a professional Financial Planner, it is easy to make a similar mistake with your finances and wealth. However, the danger is that the costs can be much higher. This is because it is often many years later when people realise that their original retirement goals were unrealistic. With a Financial Planner, however, you can plot your intended course much more clearly and with far better information at your disposal.

At FAS, we will be completely honest with you and explain why we feel you are aiming too high or low with your retirement goals whilst outlining the reasons why. Then we will propose strategies that are achievable, allowing for different possible future scenarios.

Pointing out Blind Spots

It can be easy to think that you have “covered all of your bases” in your financial plan and yet miss out something important which could later cost you dearly.

Take British people who live overseas (Expats) as an example. Many people living abroad believe that they will not have to pay Inheritance Tax when they die due to their residential status, yet the reality is that most people will have to pay Inheritance Tax on their UK assets.

Mistakes like these can come as a nasty surprise later. So it does pay to consult a professional about your financial plan, helping to ensure that you have not missed out anything important.

Getting Better Deals

There are many areas of financial planning where it is possible to pay more than you need to. Take investment management fees as an example.

You might have an investment portfolio which you feel is performing well. Yet if you are paying excessively high fees which eat into your investment returns, then over many decades these could, effectively, represent a “loss” of tens of thousands of pounds.

We will help you to review your portfolio, scan the wider market and help you find the best deal for your needs and goals. Even a slight reduction on your investment management fees, for instance, could make a huge difference to your standard of living later on in retirement.

Minimise Threats

Did you know that in 2018 many people were scammed out of their pensions by fraudsters, costing each victim an average of £91,000? Whilst having a decent Financial Planner on standby is not iron-clad protection against receiving a malicious cold call, a trusted financial planner can help you discuss any unsolicited offers and avoid making costly mistakes with your money.

Simplify Everything

As mentioned above, many areas of financial planning are deeply complicated (such as pensions). A good Financial Planner will help to bring clarity to the world of Inheritance Tax, Income Tax, National Insurance, ISAs, Annual Allowances and more to help ensure you understand it. Moreover, this person can also help you bring different parts of your wealth together. This can not only make things more tax-efficient but can also simplify everything.

For instance, perhaps you are nearing retirement and have over a dozen pension pots scattered around due to a long, successful career in different lines of work. For many people, it can help immensely to consult a Financial Planner who can help consolidate all of these separate pots into a central pot, making everything much easier for you to manage.

Final Thoughts

There are many other benefits to a Financial Planner in addition to the above. For example, this person can help you to manage the emotional rollercoaster of investing. After all, your investments are likely to experience a lot of volatility and it can be tempting to act impulsively.

A Financial Planner can also help you to delineate the areas of your finances and wealth where you can exert control, and where you cannot. They can then help you to focus your energies on the former, allowing you to better relax and enjoy more peace of mind.

If you are interested in speaking to us here at FAS about your financial plan, then we’d be delighted to hear from you!