Monthly Archives

July 2021

Person calculating private school fees with calculator

Tax-efficient school fees planning

By | Tax Planning

A private school education is often considered as an investment in a child’s (or grandchild’s) future. With the right planning in place, and by taking advantage of available tax incentives, it is an investment that could well be within your reach.

Parents – and grandparents – always want the best for their children or grandchildren, and for many this means choosing to give them a private school education. The evidence suggests that students from private schools here in the UK outperform national and global academic averages, and that most children who attend private school go on to get a university education.

However, attending a private school is a privilege that doesn’t come cheap, which can often put parents under increased financial pressure. A Lloyds Banking study from a few years ago found that four out of ten private school parents had struggled to meet school fee payment deadlines and six out of ten parents were worried they might not be able to afford fees in the future.

How much does it cost to send a child to a private school?

According to the 2021 Annual Report published by the Independent Schools Council (ISC), the average fee for a child to attend a private day school is currently £15,191 per annum, which works out at £5,064 per school term. Naturally, day school fees vary depending on where the school is located, average term fees are more than £6,000 in London and £3,700 in the Northwest of England. As you would expect, it costs considerably more to pay for a child to attend boarding school, where the ISC estimates the average cost per term stands at £12,000.

Are private school fees going up?

Afraid so. According to the ISC, UK school fees have increased at an annualised rate of 3.9% since 2010, which is well above inflation. However, while COVID-19 has had a considerable impact on every school, and private schools are no exception, the latest ISC report suggests private schools have only increased their fees by an average of 1.1% in the past year – with average day school fees rising by just 0.9%.

But the school fees themselves are really just the beginning when it comes to counting the costs of a child’s education. You will also need to think about the costs of school uniforms, trips, sports activities (and equipment), and music lessons. When all those costs are factored in, parents might be looking at total costs of between £150,000 and £200,000 per child who attends a private day school, and maybe double that for a boarding school.

Investing to pay for school fees – the mathematical journey

Of course, when it comes to paying for school fees, the sooner you put a plan together – and start setting money aside – the better. If you plan ahead, you can give yourself five to ten years, or perhaps even longer, to build up a savings pot that could help to fund school fees when they become due.

One of the most important aspects of creating a plan to pay for school fees is to calculate the costs of private education, including some of those ‘miscellaneous’ costs that it’s easy to forget to include, and the education time horizon (the number of years the child will be attending the school). Once this is known it becomes considerably easier to create a strategy that will take advantage of the power of compounding, and generate enough investment growth from start to finish.

Tax-efficient school fee savings strategies

Given that interest rates on cash savings accounts remain so low, investing within a tax-efficient savings vehicle is likely to be the best starting point when it comes to saving for school fees – especially bearing in mind you will have to withdraw a large sum from the investment pot every year once the school terms start.

With a Stocks & Shares ISA, individuals can invest up to £20,000 each year, or £40,000 per couple. This would be a good way of constructing a diversified portfolio that contains a broad range of assets and is designed to achieve growth over the targeted investment horizon.

Tax-efficient strategies for grandparents

We are also seeing more grandparents talking to us about investing for school fees for their grandchildren, out of their excess after-tax retirement income. This is a good way to give children a great education while also making sure the parents don’t have the financial burden.

Setting up a discretionary trust can be a tax-efficient way for grandparents to pay the cost of private education. Once the trust has been set up, the grandparents can make a series of regular ‘gifts’ into the trust, and this money is invested according to the arrangements specified by the grandparents.

A valuable benefit of setting up a discretionary trust to pay for grandchildren’s school fees is that the gifts made into the trust should be declared outside of the estate for inheritance tax purposes, provided the donor lives for a further seven years after a gift. Also, annual gifts of up to £3,000 per grandparent are deemed instantly exempt from inheritance tax, as long as this annual exemption has not already been used.

Talk to us about school fees planning 

If you are a parent or grandparent who wants to send their children or grandchildren to a private school, the best way to pay for it is to start the financial planning process as early as you can. When you’re ready, we can help you by giving you a realistic assessment of the costs involved, and to put together a tailored plan to help you reach your savings goals.

If you are interested in discussing school fee arrangements with one of our experienced financial planners at FAS, please get in touch here.

This content is for information purposes only and does not constitute investment or financial advice. Tax rules are subject to change, and tax benefits depend on your personal tax position. 

High rise commercial properties

Is commercial property about to have a new lease of life?

By | Investments

It has been a difficult period for commercial property funds. According to data company Morningstar, the value of the property funds sector has almost halved in value since 2019. The troubles for the sector began immediately after the Brexit vote in 2016, when most property funds suspended dealing due to sustained withdrawal requests in the wake of the decision to leave the EU, and difficulties in accurately valuing property portfolios at the time. This suspension was relatively short lived, and most funds had reopened by the end of 2016.

Fast forward to December 2019, when a small number of funds again suspended trading just a few days before the last General Election. For example, M&G suspended its’ Property Portfolio – which invested in commercial retail parks and offices across the UK – after blaming “unusually high and sustained outflows” caused by Brexit uncertainty and the struggles of the beleaguered UK retail sector.

Next up came COVID of course, with the uncertainty created by the pandemic leading to a suspension of all property funds, as material uncertainty over the accuracy of the value of property portfolios, and lack of liquidity in some funds, forced a longer suspension. Whilst the largest players in the sector resumed dealing again in October 2020, several funds, including funds from AEGON and Aviva, have announced that they will be wound down and will return money to investors, although investors may have to wait more than a year to get their money back. So, what has caused so much damage to commercial property funds? The answer is in the fact that property behaves differently to other types of investment asset.

 

The reasons why commercial property funds are different

First, portfolios of ‘bricks and mortar’ properties are far less ‘liquid’ than other investments. If you own a large portion of a commercial property fund and you want to sell your investment, It is likely that the fund manager will have to sell some buildings to have enough money to pay back your investment. In periods of market volatility, this can cause huge problems. This is why a handful of commercial property fund managers were so quick to ‘shutter’ their funds back in December 2019, because they feared the sudden rush of investors looking for their money back would make them forced sellers of their best assets.

Another important reason behind the closure of several commercial property funds is that the assets held within them are valued significantly lower than they were before the pandemic. You don’t have to be an investment genius to work out that changes to the way people live and work – especially with more flexible options for people who can work from home – mean that demand for office buildings could be considerably lower in future.

Whether you are talking about offices, warehouses, shops or industrial locations, the value of the underlying assets (the buildings) is dependent on the demand for that type of property. This is determined by economic growth and the economic viability of the businesses who might want to use those buildings. Other factors, such as the quality and location of the building, also help to determine the yield (rental value) that the building can achieve.

At the same time, commercial property is a broad and varied sector. While shops and traditional office buildings were hit hardest by the lockdown restrictions, there was vastly increased demand for industrial buildings and warehouses linked to e-commerce and distribution. It is therefore highly likely that those remaining open-ended funds will gradually adapt to the new normal and take advantage of the different types of properties that are increasingly in demand.

 

Is the worst over for UK property?

Just because some commercial property funds have closed, it doesn’t mean that the sector itself is about to collapse. In fact, most funds in the sector are in positive territory for the year so far, and the current economic conditions could leave them well-positioned to benefit from the theme of inflation that is dominating investor sentiment. Real estate in all its forms tends to do well during periods of inflation. This is because as the economy expands and the demand for goods and services increases, rents tend to grow. In addition, many leases on commercial property are linked to inflation, which ensures the owners of the buildings receive a higher income should the cost of living rise.

 

Regulation, Regulation, Regulation

The suspensions within the property sector caught the attention of the regulator, the Financial Conduct Authority (FCA), who launched a consultation in August 2020 to consider proposals to try and avoid a repeat of the suspensions that were seen in the property sector after the start of the pandemic. The FCA have proposed that investors would need to give notice of withdrawal from funds – of between 90 and 180 days – so that property fund managers are aware of withdrawal requests and could manage their property portfolio more effectively, to ensure liquidity is sufficiently available to meet the expected withdrawal demands.

The consultation period has now ended, and an announcement is due later in the year. Amongst the current issues that need to be resolved include the ability to continue to hold property funds in an ISA (as the withdrawal notice would be incompatible with existing ISA rules) and the difficulties platforms and providers would have in managing withdrawal requests.

We await the outcome of the consultation to see the impact of any new rules introduced. Nevertheless, we feel it is clear that commercial property remains a varied and diverse asset class, that could benefit from the prevailing economic conditions and opportunities the new way of working could present.

 

If you are interested in discussing your investments 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.

wooden block letters spelling out fixed income with a pile of coins either side

Why fixed income assets still deserve a place in portfolios

By | Investments

Bonds have a reputation for being boring. But sometimes boring is just what’s needed, especially in a well-diversified investment portfolio.

When most people consider an investment strategy, they are naturally attracted to those markets and sectors that are likely to produce the best performance. Generally, over time, growth in the value of company shares would outperform other asset classes, and it is, therefore, this asset class that tends to get the most attention. But higher returns often come at a cost, in terms of additional risk and volatility.

To dampen the overall risk of an investment portfolio, to provide a solution for those who are not necessarily looking for the highest returns, or to satisfy investors who want to limit the level of risk they are taking, introducing bonds to a portfolio is often the answer. Yes, they may have a boring reputation, but they are a key component that really cannot be overlooked.

 

So, what is fixed income investing?

Fixed income is an investment approach that prizes capital preservation and a steady stream of income above all other considerations. Within the world of fixed income, you can invest in government bonds (bonds issued by governments, such as UK Gilts or US Treasury Bonds) or corporate bonds (bonds issued by companies), along with other investments that pay a fixed income, such as certificates of deposit and money market funds.

 

How do bonds work?

The easiest way to think of bonds is to consider them as an IOU between a borrower (so, a government or company) and the lender (the investor). As an example, let’s say the borrower wants to borrow £10,000. They can issue a bond for that amount and agree to pay the lender interest at 3% per year for ten years. The investor knows that they will earn £300 a year in interest, and get their original £10,000 back in ten years’ time. If the borrower does not pay the loan back, or fails to make any of the interest payments, it is considered to be ‘in default’. Of course, some borrowers are a bigger credit risk than others, which is why bond issuers all have a credit rating to demonstrate their credit worthiness. Generally speaking, the lower the borrower’s credit rating the higher the rate of interest they will have to pay to investors.

 

Still with us? Good…

The most important point to remember is that fixed income assets such as bonds behave very differently to other types of assets, such as equities. This makes them a valuable asset to hold within an investment portfolio, for several reasons.

First, fixed income assets are generally considered to be lower risk when compared to equities. That’s because a bond is a promise from the borrower to repay the interest and the principal over time. Defaults within the fixed income world are relatively uncommon events, in particular for investment grade issues. In addition, a bond holder usually ranks ahead of ordinary shareholders in the event of a company falling into liquidation, meaning that they are further up the queue to receive a payment from the sale of assets held by the company.

Second, fixed income assets behave differently to other types of assets. For example, they are generally less sensitive to market risks, such as economic downturns and geopolitical events. This makes them useful to hold within an investment portfolio, because holding fixed income assets means you can potentially offset losses when stock markets are falling, and your equity investments are not doing so well. Instead, bond prices usually rise or fall in value in anticipation of changes in interest rates and inflation.

Third, as they are less volatile than equities investments, they are an ideal anchor for a portfolio, to reduce the overall portfolio risk. Investors who are closer to retirement usually aim to switch more of their investment portfolios or pension into fixed income assets, because this is a better way to preserve capital than staying invested in more volatile equities.

And fourth, fixed income investments can be relied upon to deliver a steady – and known – stream of income. Again, this is particularly valuable for those who are entering retirement or are already retired, and want to prioritise getting a reliable, regular return from their investments over more risky growth strategies. However, investors should always be careful that inflation does not cause their fixed income investments to lose value over time.

 

Those are the benefits, but what about the risks?

Of course, all investments come with an element of risk, and fixed income is no exception. There are three key risks to be aware of. As we have already mentioned, interest rate risk is worth keeping an eye on. We have been living in a low interest rate environment for over a decade now – which has been very positive for bond investors. But when interest rates rise, bond prices tend to perform less well. Interest rate movements are the major cause of price volatility in bond markets.

The second key risk to bear in mind is inflation risk. In periods when inflation (the rate at which the price of things goes up or down) is on the rise, this makes the fixed amount of income paid by bonds and other fixed income assets worth less than it was. If the rate of inflation is higher than the rate of income paid out, bonds become much less attractive from an investment perspective.

The third most important risk for fixed income investors is default risk, also known as credit risk. This is the risk that the issuer will not repay the principal at the maturity date and therefore default on its debt obligation.

Should fixed income investors be worried about inflation?

Inflation has become a hot topic this year, as prices for goods and services have been pushed up following the coronavirus pandemic. This has caused some people to question the long-term value of fixed income assets, which is understandable. However, this doesn’t mean fixed income assets have become poor value overnight. They should still be considered as a key element within an investment portfolio, especially if you’re looking for income, lower volatility, or much-needed diversification that spreads the risk.

They may not be the raciest of investments, but they are a sensible way to take some of the uncertainty and volatility out of investing and should be considered as a key component in most diversified strategies.

If you are interested in discussing the above 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.

Granddaughter on shoulders of grandfather walking along coastline with Grandma alongside

Using pensions to invest for your grandchildren

By | Pensions

A few weeks ago, one of our articles highlighted how much young people are finding it difficult to set aside money for retirement. While pensions have always been a ‘hard sell’ to those who struggle to imagine themselves getting older and retiring, we recognise that flat wages, job uncertainty, high rents and the increased cost of higher education are all contributing factors that understandably leave younger people with less savings to set aside. And we also realise that a lack of pension could potentially have a disastrous effect on their long-term wealth as they get older.

This struck a chord with our readers, particularly those who have sizeable retirement pots themselves having paid into their own pensions over their lifetime, and perhaps benefitted from generous final salary schemes, as well as owning their own properties. So, it was encouraging to hear that so many of our clients are interested in helping their grandchildren with their finances and are considering setting up a pension on their behalf.

 

Setting up a pension for a grandchild

Pensions are considered individual investments and as such come with certain rules around how much can be invested and when. Most people are unaware of how the pension rules apply to family members, but in essence, a pension can be opened on a child’s behalf by their parent or legal guardian, and grandparents can then make lump sum contributions into the pension, quickly and easily as a “third party” contribution.

At present, the maximum amount you can invest into a child’s pension is £3,600, per tax year. But as qualifying contributions made to pensions are eligible for 20% basic rate tax relief, this means that the net contribution only needs to be £2,880, and the UK Government will top-up the rest. If you have several grandchildren, you can invest £2,880 annually for each of them. From a grandparent’s perspective, gifts could fall within the annual gift exemption of £3,000 or possibly be classed as gifts out of surplus income. Otherwise, anything above this level could be a Potentially Exempt Transfer, and therefore some thought would need to be given to the potential Inheritance Tax consequences of making contributions to a number of grandchildren in any one tax year.

As a reminder, investments held in a pension grow free from UK income tax and capital gains tax, making them a tax-efficient choice for longer-term saving.

 

The benefits of starting early

Once the pension contributions have been made, that money can then be invested to help it grow. Investing over several decades means it makes sense to invest in higher-risk/higher reward investments that can grow over time as well as riding out those periods of stock market volatility.

Also, investing over long periods ensures the growth is continually reinvested, meaning that the pension will benefit from the “magic” of compound interest. For example, if you started paying into a grandchild’s pension from the year they were born and for every year until they turned 18, their pension pot could have reached the £1 million mark by the time they reach 65.

 

Different pension options

If you are considering using a pension to invest for your grandchildren, there are two different pension options to choose from: a stakeholder pension and a personal pension. Stakeholder pensions allow you to pay low minimum contributions (from £20) up to the maximum annual amount, and you can usually pay either via lump sums or regular payments. However, most stakeholder pensions offer limited choice when it comes to the funds you can invest in.

With a personal pension, you get to choose from a wider range of investments but could pay more in terms of fund charges and annual fees.

 

Worth remembering

As with any pension, one of the biggest drawbacks is that the money invested cannot be accessed until the grandchild reaches the age of 55 at the earliest, and this is likely to rise to 57 or 58 depending on the timing of increases in the State Pension age. There is also a good chance that the pension rules will have changed by the time your grandchildren reach retirement. However, to give you a real-life example, retired long-standing clients of ours who are now enjoying retirement, started investing in pensions for their six grandchildren some 20 years ago. Their eldest grandchild has just graduated from university with her own pension fund worth in the region of £150,000. She thanked her grandparents for their foresight and generosity and could well retire at age 60 with a million pounds pension pot, without ever paying a penny into it herself!

If you are planning on leaving your grandchildren with enough money to use as a deposit to buy their first home, then you might want to consider alternative investment arrangements, such as a Junior ISA, where the money can be accessed when the grandchild turns 18. For grandchildren over the age of 18, a Lifetime ISA, where the money can be used for retirement savings, or as a deposit for their first home, could be an appropriate option to consider.

 

If you are interested in discussing 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.

Digital globe

Why it’s essential to have a globally diversified portfolio

By | Investments

When it comes to investing, British isn’t always best. To get the most consistent portfolio returns, it’s important to have a spread of investments across multiple regions and locations.

As independent financial planners, one of the tasks we are often asked to perform for new clients is to review their existing investment portfolios and to recommend any necessary changes. In almost all cases, a common theme is for portfolios to have a significant bias towards UK investments, rather than holding a more well-diversified spread of global investments. In recent years, this would often lead to underperformance.

 

Why is diversification so important?

As most investors are aware, diversification is one of the most important principles of modern investing. And it’s another name for making sure you don’t have all your eggs in one basket. And from a consumer’s point of view, diversification makes sense. After all, most of us don’t only buy UK products at the expense of products from other countries, so why would we limit our investment portfolios to just UK companies?

Even so, most investors still tend to gravitate towards investments in UK companies, or in funds that are weighted towards the UK. While it’s understandable to prefer to invest in the location you know best, no one can know which markets will do well from year to year. By choosing to hold a globally diversified portfolio, investors are giving themselves the best possible chance to capture investment returns wherever they occur, and gain exposure to some of the world’s largest companies.

 

The need for geographical diversification

A diversified investment strategy is one that aims to ensure your portfolio has the right balance between risk and return. And right now, global diversification is of particular importance for investors.

You don’t need us to tell you that the COVID-19 pandemic has been responsible for the largest and most abrupt shock to global growth in modern times – and the deepest global recession on record. But the timing and the sweeping nature of the pandemic means it has had an uneven – and at times unpredictable – impact on various countries and regions of the world.

While some areas were affected earlier, particularly China and the Far East, and have since by and large recovered, other areas, most notably the US, Europe, and the UK, are still dealing with the crisis. Some countries have emerged relatively unscathed, while others thought they had seen the worst of the pandemic pass, only to experience second (and third) waves. While countries continue to roll out their own vaccination programmes, there continues to be plenty of uncertainty, particularly around the potential for virus variants to continue to spread throughout the world. This uncertainty means volatility will likely remain high as the global economy and markets throughout the world continue to recover from the impact of the pandemic at their own pace.

So, from an investment perspective, the best way to deal with this uncertainty is to spread investments across different regions and within different asset classes. This approach could help to reduce the impact of volatility in specific regions or markets and to help to diversify returns across all areas.

Looking at historic returns over the last decade, it is clear that no single investment region has consistently outperformed others, although research reveals that a diversified portfolio, with allocations to all geographic locations, demonstrates less portfolio volatility than just investing in one or a handful of asset classes or markets.

 

Size is everything?

Within the UK, investors can hold stakes in household names such as Unilever, AstraZeneca and Royal Dutch Shell, which are familiar to UK investors. However, it is important to remember these companies are tiny compared to the market capitalisation of the largest stocks listed in the US, China and Europe. By way of example, in March 2021, the capitalisation of Apple, the world’s largest company was $2,051bn, closely followed by Microsoft ($1,778bn) and Amazon ($1,558bn). China’s largest companies, Tencent and Alibaba, also rank in the top 10 companies by capitalisation. In stark contrast, the UK’s largest holding by capitalisation was Unilever at just $147bn, leaving it ranking 85th in the world in terms of size.

What is crucial is that those largest global mega-cap stocks, such as Apple and Amazon, have performed well over the course of the pandemic, and their stock price performance has made a significant contribution to the overall recovery seen in global markets since last March. By not holding a suitably diversified global portfolio, and focusing on UK companies, you are limiting your exposure to these potentially strong performing global giants.

 

Global diversification is key to long-term success

As the past 18 months have shown, life is unpredictable – and so are investment markets. Uncertainties are bound to continue, and it is very difficult to predict how events will play out. This makes it even more important to have a globally diversified investment portfolio that balances out those risks. And, while it’s good to back British businesses and invest in ways that help to support the UK economy, it’s also equally important to make sure your investment portfolio is positioned as well as it can be to deal with the ups and downs or markets, without putting all your eggs in one basket.

 

If you are interested in discussing your investments 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.