Monthly Archives

April 2020

3 Reasons to Stay Globally Invested in 2020

By | Investments | No Comments

During March and April, we witnessed a considerable amount of global market volatility and instability, which is why we have been spending a lot of time proactively speaking to our clients in order to provide as much reassurance as possible. As the COVID-19 outbreak sweeps across the world and results in nationwide shutdowns, many UK investors are naturally worried about their portfolios as the markets have reacted.

On the 12th of March, for instance, the FTSE 100 recorded its worst performance since 1987, dropping over 10% following the U.S. announcement of restricted travel from mainland Europe. Indeed, by the end of the month, the index had recorded its largest quarterly fall since Black Monday in 1992.

However, Britain is not the only country to have been affected. We have noticed the effect of COVID-19 on virtually every major economy across the world. In the U.S., for example, the 1st of April logged the worst beginning to a business quarter in history for the S&P 500 and Dow Jones, with losses of at least 4.4%. European markets have also been hit, with the Stoxx Europe 600 finishing the first quarter at a 23% loss.

Given this widespread “bear market”, isn’t it safer to keep your investments confined to one country, just in case other countries are worse hit by COVID-19 than others?

In our professional experience, we would caution against dramatically changing a client’s investment strategy as a result of hitting harder times. Indeed, there are very good reasons to stay globally invested; three of which we share with you here.

 

#1 Unpredictability

The markets are never predictable, but this is especially true in light of the COVID-19 outbreak. Given the unknowns surrounding the virus, it’s still very difficult to anticipate how it might spread and affect different countries’ economies. This provides a strong reason for not placing all of your investment eggs in one basket, but instead, spread them out appropriately across different countries.

Consider the start of the outbreak. In early March, China seemed to be taking the brunt of the economic damage. Its city of Wuhan was the pandemic’s source, and the country faced strong widespread lockdown. Chinese production stalled, but markets in the Western world did not initially react. Fast forward to April 2020, however, China’s lockdown appears to be lifting and China has passed the U.S. as the world’s most popular venue for stock market listings in Q1, raising over $11bn in three months. The Western world, however, is now struggling.

Of course, everything could change again dramatically in the coming weeks and months. The lesson: don’t assume that one country is a “safe bet” for investments and write others off as unviable, leading to an under-diversified portfolio.

 

#2 Unavoidability

There is another important reason to include global investments in your portfolio; they cannot really be avoided! Consider that U.S. stocks comprise 54.4% of the world’s market capitalisation in April 2020, and many of these companies will have operations, supply chains and customers based overseas. Within the UK, moreover, many of the FTSE 100 companies also include foreign operations and revenue streams.

 

#3 Underexposure

Many nervous investors look at global investing and think they can avoid excessive damage to their portfolio during a down market, by keeping a “domestic focus”. There is another way of looking at this, however. By trying to confine your portfolio to one country, you could miss out on a range of investment opportunities which are only available elsewhere in the world.

Consider the effects of restricting your portfolio to the UK. As strong as the UK is for certain sectors (e.g. financial services, oil and gas), many industries/sectors are not represented well in our country. Most of the largest tech companies – such as Netflix and Facebook – are based overseas in the U.S., and many high-tech manufacturers are based in Japan (e.g. Hitachi).

By investing globally, you can help to further diversify your portfolio by exposing it to a wider range of sectors. This can enhance balance amongst your investments and shield your portfolio from excessive damage, should certain sectors struggle, compared to others. Consider the impact of COVID-19 on different sectors by the end of March, which has hit sectors such as retail, aviation and hospitality the hardest. Other areas, however, actually seem to be experiencing a boom in business due to the outbreak such as digital streaming, food delivery and hand sanitiser producers.

As we keep saying, if at any point you wish to discuss your investment strategy in more detail, please do get in touch.

This content is for information purposes only. It does not constitute investment advice or financial advice. To receive bespoke, regulated advice regarding your own financial affairs, please contact us.

 

How Much Do I Need to Retire Comfortably?

By | Pensions | No Comments

Many people are unaware of how much they need to save for retirement. We sometimes speak to clients who overestimate the amount needed, believing their retirement income should be the equivalent of their wage. Quite often this is unnecessary, as your outgoings are likely to be lower due to your mortgage being repaid, children leaving home and reduced outgoings (no more travel costs to work!).

On the other hand, there are also many people who vastly underestimate how much income they’ll need in retirement. Amounts vary depending on a client’s personal situation but currently, covering the basics is likely to cost £11,830 per year, per person. This average figure changes depending on where you are in the country; in Wales, the figure might be closer to £10,520. Here in Kent and the wider South East, the average could be significantly higher at around £14,270.

Of course, most people don’t just want to survive in retirement; they want to thrive too, enjoying a comfortable, well-earned “life after work”. However, how can you ensure you get there? We have devised this short 2020 guide to get you started.

 

What is a “comfortable retirement?”

According to Nationwide Building Society, 33% of British people expect their State Pension to meet their retirement needs. Yet in 2020-21, the full new State Pension is £175.20 per week, equivalent to about £9,110.40 per year. Looking at the aforementioned figures, this is lower than the regional average needed for covering the basics across the UK, let alone covering the extra expenditure you might need for meals out or the occasional holiday.

Indeed, people who rely on the State Pension (as important as it is for retirement planning) could be in for a nasty shock. Again, Nationwide’s research shows that, based on current pensioner spending habits, many of these people could face a £68,000 shortfall in their pension savings; equivalent to being about £400 out of pocket each month.

We can help you roughly calculate what you might need for a comfortable retirement but bear in mind that, as things stand currently, you could need at least two-thirds of your salary for a comfortable annual retirement income; e.g. possibly £27,000 – £42,000 per year. That said, this is a very broad estimation as your needs might produce a lower or higher figure.

 

How to make up a shortfall

There are many ways to address a potential shortfall in retirement income, and the sooner you act, the better. Here are some ideas to consider:

 

Maximise your State Pension

Whilst your State Pension is unlikely to cover all of your retirement expenditure, it is an important component of your retirement income. You need to make at least 35 years of qualifying National Insurance Contributions (NICs) to receive the full new State Pension. If you have gaps in your record, consider making voluntary contributions to “top them up”.

 

Workplace Pension

In 2020-21, if you are employed then you are required (under Auto-Enrolment rules) to contribute at least 5% of your salary into your workplace pension. Your employer must also put in at least 3%. Here, there can be significant opportunity to boost your pension pot by negotiating a higher contribution rate from your employer (amounting to “free pension money”), or by increasing your own contributions.

Suppose you earn £30,000 per year. If you contribute the minimum 5% to your pension and your employer 3% of your qualifying earnings, then your annual pension savings are likely to be £1,900.80. If you both continued to commit this total each year over 30 years, then with an average annual return of 5% on your investments, you are likely to accumulate about £132,601.31 (setting aside any tax relief, which would boost the pot further).

However, suppose you increased your contributions to 8% and your employer to 5%. This total annual contribution would, instead, be £3,088.80. Taking the same saving scenario, timeline and annual return outlined above, you could expect the total pot to reach £215,477.13. In such a case, increasing your monthly contributions by about £59.40 (i.e. from £99.00 to £158.40) and by persuading your employer to put in a bit more, you could grow your pension by £82,875.82.

 

Other assets

Of course, there are other ways you might address a future retirement income shortfall. If you have a second home, for instance, then this might release funds for your pension through its sale. The same might be said for a business or shares which you own. However, it’s important to consider these assets carefully, as a potential source of retirement income. Illiquid assets can be hard to sell, for instance, and you might not get as much for the sale as you currently hope.

If you are interested in discussing your financial plan or retirement strategy with a member of our experienced financial planning team, please do give us a call.

This content is for information purposes only. It does not constitute investment advice or financial advice. To receive bespoke, regulated advice regarding your own financial affairs, please contact us.

 

VCTs and EIS: How Can They Improve a Financial Plan?

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Looking ahead in 2020-21, how do you see your pension contributions and Individual Savings Accounts (ISAs) panning out? Some clients regret not considering these earlier in the 2019-20 financial year, to get a better deal out of their tax position. Provided your circumstances allow, you may wish to act sooner this tax year, to take advantage of the full range of tax planning tools available to you, including VCTs (Venture Capital Trusts) and EIS’ (Enterprise Investment Schemes).

These two options can be attractive to investors who want the opportunity of possibly generating stronger returns. However, they can also be great for some people who are likely to maximise their pension and ISA contributions during a tax year.

In this short 2020 guide, we outline some ideas how you can do this.

 

Overview of EIS & VCTs

In the 10 years preceding 2019, both EIS & VCTs markets have doubled in size. Since its inception in 1994, for instance, the EIS market has attracted more than £18bn of investment to over 27,905 companies. VCTs, moreover, have raised about £7bn since first launched in 1995.

Both EIS & VCTs are Government-run schemes intended to incentivise investment into innovative companies, which can spur economic growth and create jobs (thus creating more tax revenue). One reason they have proven popular with some investors is down to the tax reliefs on offer. In particular, both EIS & VCT investments allow you to claim back 30% of your investment against your Income Tax bill.

However, both EIS & VCTs have also come to the attention of pension savers, who have faced an increasing “squeeze” in recent years. Over ten years ago, for instance, you could put up to £255,000 per year into your pension. Today in 2020-21, you can only commit £40,000 per year (or up to 100% of your salary; whichever is lower). As a result, some clients now consider EIS & VCT investments as another way of supplementing existing retirement savings but of course they are more complex and need to be fully understood.

 

Case Scenario: EIS & VCTs “in play”

Suppose you earn £100,000 per year and want to continue saving and investing into your pension, despite nearly having used up your £1,073,100 Lifetime Allowance. What options do you have?

One idea to consider (which we recommend discussing with us first!) is to reduce your pension contributions (to keep within your Lifetime Allowance before you retire), and redirect some of this into VCT investments. This involves “buying” shares in one or more VCT companies on the London Stock Exchange (LSE), and you can commit up to £200,000 per year into these investments. From there, you could then claim back 30% of your VCT investment against your Income Tax, the following April. If you put £40,000 into VCT investments, for instance, then you could claim back £12,000.

Another option, however, would be to consider investing in some EIS-qualifying companies or EIS funds. With an EIS, you can invest up to £1m per tax year (i.e. 5 times more than VCTs), which can make it an attractive option if you have just sold a business or received a large bonus, and are wondering what to do with it. Again, you can claim back 30% of your EIS investment against your Income Tax bill.

 

Which is better?

The suitability of VCTs over EIS’ (and vice versa) depends on your individual financial objectives, needs and circumstances. One notable benefit of VCTs, for instance, is that they provide dividends which are paid completely free from tax. This can lead us to recommend VCTs as a useful tool for retirement planning, since they provide a regular tax-free yield. On the other hand, EIS investors can defer a Capital Gains Tax (CGT) liability, which can give you much more tax planning flexibility if you have suddenly received a large unexpected sum of money, such as an Inheritance.

It’s important to note, both EIS and VCT investments involve a higher level of investment risk when compared to the likes of other Equities, Bonds and Cash. The potential returns, of course, can be higher and thus worth the trade-off. Yet you should always discuss this with one of our experienced Financial Planners first, to ensure that any EIS or VCT investments sit appropriately within your investment risk profile.

Two notable benefits of EIS, nonetheless, are worth mentioning. First of all, you can claim loss relief on any EIS investment which fails, equivalent to your highest rate of Income Tax. In the case scenario above, for instance, a £100,000 earner would be in the 40% Higher Rate bracket in 2020-21. So, if he/she invested £10,000 into an EIS opportunity which failed, they’d “only” make a £4,200 loss. This is because 30% of the original investment would be claimed back against the Income Tax bill, meaning that the “at-risk” capital was £7,000. 40% “loss relief” on this amount is £2,800, resulting in a £4,200 loss. Secondly, any EIS shares held for at least two years are exempt from Inheritance Tax.

If you are interested in exploring this area of financial planning in more detail, please do give us a call or broach the subject with your Adviser when next reviewing your circumstances.

This content is for information purposes only. It does not constitute investment advice or financial advice. To receive bespoke, regulated advice regarding your own financial affairs, please contact us.

How to Enhance Your Business Protection in 2020

By | Business Planning | No Comments

Business protection is all about preparing for the worst, so your business has the best chance of reaching its full potential. It can help you to keep trading and financially afloat should things go wrong, which, in light of the COVID-19 national lockdown, things broadly have. In April 2020, most businesses remain closed under Government guidelines, with airlines grounded and sectors such as hospitality and retail suffering heavy financial losses.

Of course, no business owner could have predicted the effect COVID-19 would have on the economy. Yet for some businesses that are continuing to keep going during the crisis and for those that will resume post lockdown, there are still things that can be done to enhance your business financial protection.

Here is our short guide for business owners.

 

Protection & business type

Financial protection can come in many forms depending on your business goals, strategy, size and stage in its life cycle. In February 2020, there were nearly 5.9m private businesses across the UK; the vast majority (99%) comprising small or medium-sized businesses (SMEs) with under 250 employees. When added together, these businesses form a huge part of the UK economy, employing 16.6 million people.

There are many factors which keep businesses afloat, such as product development and strong distribution networks. However, a crucial (and often neglected) factor is business protection infrastructure. In other words, what would happen to your business if either you, or another key person, could no longer work because they became seriously ill, or even died?

This has always been an important question for a business, but in light of COVID-19, it has become even more poignant. None of us knows what’s around the corner, even if we do not believe the worst could happen to us or someone we know. Unfortunately, we are able to recount cases from our own experience, where a company took out protective cover, and only a few years later a Key Person within the organisation (e.g. the Director) sadly passed away.

Unfortunately, financial protection cannot prevent tragedy but it can help soften the blow. We can help you identify the weak points in your protection plan and find the best solution for your situation.

 

Succession planning

Whilst all businesses are different, one common issue centres around succession planning; i.e. who will take over should the Director/owner die, or suddenly become incapacitated (e.g. through a serious accident). At FAS, we can work with your Accountant and Solicitor to help you craft both a short term and long term succession plan. The first plan is most important, as it assists in addressing the more pressing issues that could occur if the business leadership is severely disrupted. The second, however, involves developing a tax-efficient plan to eventually transfer leadership to new management, usually after the current Director/owner reaches their intended retirement date. This might take the form of handing the reins to a trained family member, appointing an external successor or even business disposal. Regardless of the situation, careful planning is needed to ensure livelihoods are protected and liabilities are addressed.

 

Key Person protection

In the case of a sole trader, one of the key protective measures you might want to consider is Life Insurance. After all, since your business largely rests on your own shoulders, if you die suddenly then it will be considered as part of your Estate for Inheritance Tax (IHT) purposes. A lump sum from a good Life Insurance policy can help ensure your beneficiaries have the liquidity they need to wind up your business or take up the reins whilst dealing with any debts in your name.

For joint partnerships and Limited Liability companies, however, things work differently due to the share structures involved. Suppose one business partner in a joint partnership dies; what happens to their shares? Typically, these will pass to their beneficiaries, usually a surviving spouse. Unless you (the surviving business partner) have the funds and written agreement in place to ensure you can buy these shares, your business will run the risk of being held back by a stakeholder who has no interest or experience in stepping in to take the deceased’s place.

Once again, this is where our experience in dealing with such matters can really help. We can help you come to a binding agreement with your business partner which addresses the above scenario, and releases the funds you need to buy the deceased’s share(s) or we can assist with the arranging of a Key Person protection policy to guard against the loss of a key person. The right type of cover can help release the funds you need to help meet commitments, without rocking the entire ship.

If you are interested in discussing any of these aspects in more detail, please do give us a call.