Monthly Archives

March 2021

Piggy bank next to three blocks reading Plan For Retirement

Pension planning and the importance of death benefits

By | Pensions

Since 2015, changes to pension rules have made it increasingly important to understand the options surrounding pension death benefits and how they are likely to be taxed. It is also essential to nominate who you wish to inherit your pension pot in the event of your death.


One of the most frequently asked questions regarding pensions is what happens to the accumulated pension pot when the pension-holder dies. The answer is that most workplace and private pension schemes provide ‘death benefits’ which the pension-holder’s beneficiaries will be able to claim after they pass away. But there are some important factors to be aware of.


Death benefits from defined contribution schemes

Since 2015, new pension rules have added an additional layer of complexity in how the death benefits available from defined contribution pension schemes are taxed. For example, if you die before reaching your 75th birthday, and you hadn’t started to draw from your defined contribution pension, it can be passed to your beneficiaries free from tax. As far as HMRC is concerned, your pension hasn’t entered into your estate for inheritance tax purposes.

In these circumstances, your beneficiaries have up to two years to claim the pension funds (after which point tax may be charged). They can then choose to take the remaining pension payments as a lump sum or use the pension funds to purchase an annuity.

Should you die before reaching your 75th birthday, but you have already started to draw your pension, then how you have chosen to withdraw your pension will determine the options available to your beneficiaries. For example, if you’ve already withdrawn a tax-free lump sum from your pension, and the withdrawn cash is in your bank account, this money will be counted as part of your taxable estate. However, if you have opted to take an income from your pension (known as ‘pension drawdown’), your beneficiaries can still access the remainder of your pension completely tax-free. They can also decide whether they want to receive that pension as a lump sum, through pension drawdown, or buy an annuity.


What happens after your 75th birthday?

Should you die after reaching your 75th birthday, your beneficiaries will be required to pay income tax on any pensions you leave behind. Beneficiaries will be charged at their marginal rate of income tax, meaning that a large lump sum death benefit could possibly push them into a higher income tax bracket.


What about annuities?

The rules around annuities, and whether they fall into the category of a ‘death benefit’ are a little more complicated. In most instances, once the pension holder has purchased an annuity and started to receive an income from it, the annuity itself cannot be passed on to beneficiaries after the pension holder’s death.

However, there are some types of annuities that are eligible for a pension transfer after death. Examples where beneficiaries could receive future payments tax-free can include joint life annuities, value protected annuities, and guaranteed term annuities, although some conditions are likely to apply. Because annuities are so intricate, it’s well worth reviewing the small print and getting professional financial advice before making any decision to purchase an annuity.


Why are death benefits important?

The changes to the rules around pension death benefits mean that pensions now offer a substantial inheritance tax advantage. For some pension holders, the ability to pass on significant amounts of their accumulated wealth to their children or grandchildren – without triggering an inheritance tax liability – is extremely valuable. It could be valuable enough to use up other income sources first, while leaving the pension assets untouched for as long as possible. Doing so could mean that your pension can be passed down to your chosen beneficiaries without any tax implications at all.


Nominating beneficiaries

To ensure your pension gets passed on in accordance with your wishes after you die, you need to let your pension scheme provider know who should receive the death benefits, by completing and returning an ‘expression of wish’ form that names your beneficiaries.

When you’re planning to name beneficiaries, you may want to take some time to think through the consequences of your decision. Upon your death, after the pension funds have passed to your beneficiaries, those funds will then follow the beneficiaries’ choice of successor. We have heard of examples where a surviving spouse was named as the beneficiary (instead of the children of the pension holder), and then remarried and left all of their assets to their new spouse and children from the new relationship.

To avoid unpleasant, worst-case scenarios like this, you can choose to name your children or grandchildren as beneficiaries or nominate for death benefits to be paid into a trust.


How can we help?

The new pension rules might seem complicated at first glance. But here at FAS, we have considerable experience of helping people who have accumulated large pension pots over their lifetime to turn these rules to their advantage. We can help you take the necessary steps to ensure your beneficiaries get the best value from your pension assets, without incurring significant tax bills.


If you are interested in discussing your defined contribution pension arrangements with one of our experienced financial planners at FAS, please get in touch here.


This content is for information purposes only. It does not constitute investment advice or financial advice.

Two men having a conversation over a laptop

Why it pays to put the spare cash in your business to work

By | Business Planning

No business owner can afford to keep on an employee that doesn’t pull their weight, and the same is true for your working capital. If you’re a business owner with a significant chunk of cash sitting in a bank account, now might be the right time to start making that excess money work harder on your behalf, without taking too much risk.


Having a lot of cash at hand is considered a positive state of affairs for any business, and a sign of a company in good health. Not only does holding large sums of balance sheet cash demonstrate that the company itself is well capitalised, but it can also give the business owner and any major shareholders valuable reassurance that the business is positioned to face any challenging times in the future.


Is cash still king when it’s not earning its keep?

While it makes sense for the business to retain enough liquidity to see it through any potential issues, excess working capital does present many business owners with a dilemma. That hard-earned capital is most likely to be just sitting idle in the business bank account, not generating any meaningful kind of return.

During periods when interest rates are low and inflation is starting to creep up, such as now, having too much capital held on deposit starts to become worryingly expensive. Moreover, for smaller businesses, particularly family-run firms, having too much cash in the bank could potentially have a negative impact on your business and your longer-term wealth. It could mean paying higher taxes or alternatively, missing out on claiming valuable tax reliefs. Therefore, getting the balance right when it comes to managing your excess business cash could prove very significant in the years to come.


Tax planning considerations – Business Relief

In our experience, lots of smaller businesses, and especially family-owned businesses, benefit from being eligible for Business Relief. First introduced back in 1976, Business Relief (BR) makes it easier to pass on the ownership of a business from one generation to the next. As the shares of companies that qualify for Business Relief are exempt from inheritance tax, this means the shares can be passed on without triggering an inheritance tax bill that could potentially force the business to be sold.

However, in situations where the company is found to be holding cash in excess of its business needs, HM Revenue & Customs can restrict the amount of Business Relief available to shareholders upon the death of the business owner. This could result in shareholders facing an inheritance tax charge on the value of their company shares and reduce the amount of the estate the business owner intends to pass on to beneficiaries.


Tax planning considerations – Business Asset Disposal Relief

There are other issues that business owners should be aware of. For example, Business Asset Disposal Relief – which used to be known as Entrepreneurs’ Relief – is a government-approved incentive that makes it possible for business owners to pay a reduced rate of capital gains tax (as low as 10%) when they choose to sell all or part of their business.

Should the company be holding a large amount of surplus cash or other non-trading assets when the shares in the business are sold, or when the company ceases trading, this could result in HM Revenue & Customs restricting the availability of Business Asset Disposal Relief and trigger a larger capital gains tax bill.

So, there really are several good reasons why it makes sense to rethink the amount of spare capital your business is holding onto and think about ways to make that cash work a bit harder.


What we can do

At Financial Advice & Services, we work closely with business owners to provide a range of services based on the highly individual needs of their business. While recognising the importance of keeping an appropriate level of cash within the business, we can use our investment and tax planning experience to invest significant surplus funds more productively. As well as recommending investment strategies that aim to produce a healthy rate of return without taking on excessive risk, we can also take a closer look at your individual tax status, and work out which tax reliefs are valuable to you. We can then suggest investment products and services that will allow your business to invest its spare capital in ways that ensure these valuable reliefs are not lost.

At FAS, we know from our conversations with business owners that cash gives them a much-needed cushion during difficult times. So, we understand the need to not take any undue risks. But for many businesses, we think it makes sense to make sure every penny earned by the business is being put to good use, and earning a positive return, rather than sitting idle.

If you are interested in discussing tax planning strategies or business investment options with one of our experienced financial planners at FAS, please get in touch here.


This content is for information purposes only. It does not constitute investment advice or financial advice.

Bitcoin on motherboard

Beware the ‘irrational exuberance’ behind Bitcoin

By | Investments

The spectacular rise in the value of Bitcoin is prompting more investors to get involved. But as with any investment, would-be investors need to delve a bit deeper into why these assets are attracting attention, as well as understanding the significant risks involved.


After a strong performance over the second half of 2020, global investment markets have been treading water for the last couple of months. In investors’ minds, a tug of war is developing between the much-anticipated post-coronavirus economic recovery and the need for central banks worldwide to keep financial conditions loose. The fear among investors is that inflation is poised to make a big comeback, and this has resulted in the share price of many of 2020’s biggest winners, technology stocks in particular, seeing bouts of profit-taking.

At the same time, Bitcoin seems to be going from strength to strength, raising speculation that the “Bitcoin bubble” shows no sign of bursting just yet. The value of an individual Bitcoin hit an all-time high of $57,489 on 21 February (around £41,000 in sterling), but how much a Bitcoin is worth by the time you read this is anyone’s guess. Bitcoin is an incredibly volatile asset, underlined by the fact that it was valued at just $9,668 (£7,462) on the same day last year.


Why has the value of Bitcoin risen so dramatically?

After many years of being treated with distrust and disdain by the financial world, Bitcoin is becoming an accepted part of the modern world. This year, major financial institutions such as BNY Mellon and Mastercard announced they would begin integrating Bitcoin into their payment systems. The reputation of the most well-known cryptocurrency was given another almighty boost after electric car manufacturer Tesla announced it had bought $1.5 billion of Bitcoin for its corporate treasury and would accept Bitcoin as payment for its cars. These announcements helped drive up the price of a single Bitcoin to record levels, and the value of Bitcoin has remained fairly strong even while equity market values have taken a hit.

The complication of Bitcoin is that it is not just a method of payment; it is also an asset class. So, somewhat unsurprisingly, the runaway rise of Bitcoin is leading to more talk of an asset ‘bubble’, drawing comparisons to the famous tulip mania of the 17th century. As with all asset bubbles, the value of the asset reaches unrealistic, even extraordinary, levels because people think it is going to be worth more tomorrow than they were prepared to pay for it today. Once that ‘FOMO’ (fear of missing out) dries up, the value comes crashing back down.

One of the biggest challenges around Bitcoin is that it is supposed to be considered as a valid currency, one that will soon become more mainstream, rather than as purely a speculative asset class or investment. But the volatility associated with Bitcoin makes it almost impossible to use as a currency. Nobody wants to be that unfortunate person who, in 2010, spent $30 worth of Bitcoin to buy a pizza, who would have been sitting on a $350 million fortune today if he had used cash instead.


Bitcoin is a huge energy drain

One of the biggest issues is that the process of mining Bitcoins consumes vast amounts of energy. This is because blockchain technology requires a vast network of computers and, as Bitcoin gets more valuable, the sheer effort expended on creating and maintaining it – as well as the amount of energy consumed – also increases. According to research from the University of Cambridge, Bitcoin uses more electricity annually than the whole of Argentina. Bitcoin’s annual total energy consumption is somewhere between 40 and 445 annualised terawatt-hours (TWh).

By comparison, here in the UK, our total electricity consumption is a little over 300 TWh a year. This also brings into question Tesla’s decision to back Bitcoin so heavily, and so publicly, as doing so appears to fly in the face of its environmentally green credentials.

So, taken in total, Bitcoin is a mass of contradictions. It is an investment that is highly volatile, a currency that you would be very fearful of spending, it is burning up fossil fuels at a very troubling rate, and its value is only whatever the market says it is on any given day. In other words, the value of Bitcoin appears to be maintained almost purely on speculation, meaning the bubble could burst any time.


An unregulated minefield

It is crucial to bear in mind that cryptocurrency is an unregulated investment. As with all high-risk, speculative investments, it is vital that investors fully understand what they are investing in, the risks associated with investing, and any regulatory protections that apply.

For crypto-asset-related investments, consumers are unlikely to have access to the Financial Ombudsman Service (FOS) or the Financial Services Compensation Scheme (FSCS) if something goes wrong, potentially leaving investors without recourse if an investment were to fail.

Furthermore, increased dangers of criminal activity have been associated with cryptocurrency, such as ransomware and other attacks, which appear to have increased during the Covid-19 pandemic.


Importance of diversification

When clients talk to us about Bitcoin, we always start by reminding them of the risks that we have outlined above. But it is also important to recognise that cryptocurrencies are a very new (and very volatile) asset class, and it is impossible to know where it could go from here.

Our suggestion is that if you are aware of the risks and the contradictions surrounding Bitcoin, and you still believe they are an asset that is worth holding, then only put in what you can absolutely afford to lose, bearing in mind that trends wear out and most bubbles do eventually burst.

If you are interested in discussing your investment portfolio with one of our experienced financial planners at FAS, please get in touch here.

This content is for information purposes only. It does not constitute investment advice or financial advice.

Pug dog wearing glasses pointing to graphs on whiteboard

How investment reviews can help to spot the ‘dog’ funds

By | Investments

What is a ‘dog fund’ and what should you do if you hold one in your portfolio? We look at some of the facts behind the ‘dog fund’ label, highlight the big names in the doghouse, and explain how fund reviews can keep your investments on track.


What is a dog fund?

Every year, Bestinvest publishes its ‘Spot the Dog’ research. In the September 2020 update, the investment firm identified 150 funds officially in the doghouse, the highest number for 25 years.

To earn the notorious ‘dog’ tag, a fund must deliver a worse return than the market it invests in over three consecutive 12-month periods, and must also have underperformed that market by 5% or more over a full three-year period. The research focuses on unit trusts and open-ended investment companies (OEICs) listed in the equity sectors covered by the Investment Association.

This performance criteria is used to help identify those funds that are consistently poor performers, rather than those that have simply suffered a difficult year. It also filters out tracker funds that aim to replicate the return of a market index (minus running costs). What this means is that behind every dog fund, there’s a fund manager looking very sheepish.


What characteristics do dog funds share?

Just as with most other facets of life, there are often lots of reasons behind the disappointing performance of a dog fund. The most recent list of 150 offenders features a number of former high-flying equity funds that did really well for a few years, before crashing back down to earth. Other funds have just continued to plod along, falling further behind their peers and the returns of the market, while still charging high fees for the privilege. Sometimes, things can go horribly wrong for so-called ‘star’ fund managers and for fund management companies.

Perhaps the greatest example of spectacular dog fund fails is the story of the rise and fall of Neil Woodford. When he was at Invesco Perpetual, Woodford ran the Invesco Perpetual Income and High Income funds and was the UK’s most famous and respected fund manager. After Woodford left Invesco in 2014 to start his own fund management company, Invesco never really recovered. Its funds have earned it the unenviable reputation of having the most dog funds in the research for five years in a row.

But after striking out on his own, Neil Woodford hasn’t fared any better either – instead he has ended up ruining his reputation and his legacy. His LF Woodford Equity Income fund became a regular in dog fund tables until it was forced to suspend dealing and ultimately close down in 2019, with investors bearing the brunt of heavy losses.


Repeat offenders in the doghouse

One of the most troubling aspects of the most recent Spot the Dog report is the sheer size of the investments within these dog funds. According to Bestinvest, the 150 worst performers hold a staggering £54.4 billion in assets from long-suffering investors. And 18 of these funds manage more than £1 billion each in assets.


Which sectors feature the most dogs?

The UK Equity and Global Equity Income sectors have the highest proportion of dog funds (26% in UK Equity Income, and 25% in Global Equity Income, respectively). However, it’s only fair to point out that this poor performance has been added to by the sudden suspension of dividend payments from traditional high-dividend paying companies during the pandemic months of 2020.


Why are dog funds dangerous?

As Bestinvest noted in their most recent report, the average fund in the Investment Association UK All Companies sector posted a loss of 5.1% over its three-year period. But the worst dog fund in the same sector fell by 51%, whereas the best performer achieved a positive return of 34%. That kind of underperformance is just not acceptable, and really demonstrates why it is so important sometimes to cut your losses.


Which fund providers have the most dogs?

Keeping a watchful eye over the performance of the funds you hold is important. Not only does it ensure that you hold a healthy balance of good performers, but it can help to identify any red flags that you might want to take notice of, such as when an investment company has an unhealthy number of consistently poor performers.

As already highlighted, Invesco has become highly synonymous with the dog fund reputation – proving that old saying about “giving a dog a bad name”. Across all sectors, Invesco currently has 13 funds classed as ‘dogs’ (although two of these funds have since merged). Together, these funds have a total value of £11.4 billion – which means Invesco is responsible for managing just over one-fifth of all assets held within dog funds.

Snapping at Invesco’s heels is St James’ Place, which features eight dog funds across all sectors, with £6.9 billion invested. Fidelity has four dog funds, holding a combined total of £3.9 billion. And Schroders also deserves a dishonourable mention, with a total of ten dog funds featured for a combined value of £2.7 billion. When you think about it, this is an awful lot of money that’s failing to deliver a respectable return for investors.


Putting things into perspective

But just because a fund has made an appearance in the dog fund tables doesn’t necessarily mean it should be immediately sold. After all – as we are often quick to point out – past performance really is no guide to the future. Fund management companies could already be taking action behind the scenes to improve the performance of some of their repeat offenders, either by changing fund managers, merging underperforming funds, or redesigning the fund’s investment strategy and approach. Sometimes it’s well worth sticking with a fund while they go through this process.

But knowledge is power, and knowing whether a fund is suffering from just a short-term blip, or whether the fund management company has a lot of poorly performing funds can really help when it comes to asking the right questions and making informed investment decisions.


Talk to us for a comprehensive fund review

If you haven’t reviewed your investments for a few months, now might be a good time to come to us for a review of your holdings. We can help you to identify any poor performers, and help you to decide whether it’s worth sticking with those funds for the time being, or whether it’s time to look for better opportunities elsewhere. But it’s always worth having a discussion with us before making any investment decisions.

Dogs have many attractive qualities, loyalty being one of them. But holding onto poorly performing dog funds for too long can have a damaging impact on your long-term wealth.


If you are interested in discussing your investment portfolio with one of our experienced financial planners at FAS, please get in touch here.


This content is for information purposes only. It does not constitute investment advice or financial advice.