Monthly Archives

September 2021

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NS&I Green Bonds – worth the wait?

By | Investments

This year’s Budget saw Chancellor Rishi Sunak announce the Government’s intention to start raising finance to fund projects designed to tackle climate change, and make the environment greener and more sustainable, by issuing Green Bonds. But are these Bonds worth the wait, or should environmentally conscious investors look to alternatives?


Ready to launch

Following the initial announcement of the Green Savings Bonds, further details have emerged over the Summer. The Bonds will be issued by NS&I (National Savings) later this year (although no firm date appears to have been set for the launch) and will have a fixed three-year term. It appears there will be no option to access funds during the fixed term, following an initial cooling off period of 30 days. The Bonds will be open to investors aged 16 or over and will require a minimum investment of £100 and allow a maximum investment of £100,000. The Bonds will not be available through an Individual Savings Account, and interest will be paid gross. This means for individuals who have already used their Personal Savings Allowance to cover other savings interest, interest could be liable to Income Tax.


An interesting proposition?

The key announcement that investors are waiting for is the interest rate that will be offered by the Green Savings Bonds. Despite the green credentials, we feel this factor alone will largely dictate the success or otherwise of this initiative.

Many savers and investors will recall the Guaranteed 65+ Bonds, which were the last major product launch by NS&I. Forming a major part of the 2014 Budget announcement, these Bonds were launched in January 2015 and were only open to investors over the age of 65. The Bonds were offered for terms of one and three years, and were a roaring success, selling out in a matter of weeks. The reason for their success was the attractive rates of interest offered, with the one year issue paying a gross rate of 2.8% and the three year issue paying 4% gross per annum. At the time, this placed the Bonds way ahead of the competition, providing over a third greater interest over the best paying accounts of similar terms.

The Treasury have a difficult decision as to where to pitch the interest rate offered on this three-year issue. At the moment, the highest paying three year Bonds are paying 1.75% per annum and this is significantly higher than the current interest paid by the Treasury on other forms of Government borrowing, such as Gilts. This is one key reason why we suspect that the rate offered by the Green Savings Bond will be less headline grabbing. Furthermore, there are other factors that need to be considered by all cash savers in the current climate.


Inflating away

Increasing inflation is becoming a growing concern for all savers. The Consumer Price Inflation figure for August caught our attention, recording an increase over prices seen in August 2020 at 3.2%. This was a large jump from the 2% announced in July, leading some economists to predict higher inflation still later in the year. There are particular reasons for the spike in the August reading, particularly when you consider that August 2020 saw the “eat out to help out” scheme provide subsidised dining to help the economy recover from the pandemic. Beyond food prices, however, increases in energy and petrol costs, plus supply shortages, may well add to inflationary concerns over coming months.

For savers, this simply heaps more misery for those who have suffered from record-low interest rates since March 2020. Indeed, the landscape for individuals who rely on savings income has been bleak for some time, and there are no signs of the pain easing any time soon.

It has traditionally been difficult for savings income to match the prevailing rate of inflation, leading to a small “real” loss in value for savers. However, the jump in the cost of living seen over recent months means that savers are now set on receiving a deeply negative “real” rate of interest, meaning their savings are rapidly losing their spending power.


Look to alternatives

We have been contacted by many prospective clients, who find themselves in a position where cash savings just aren’t providing adequate returns. For those investors willing to take on a modest level of investment risk, there are alternatives that can look to produce attractive levels of income, with some prospect of capital appreciation over time, which aims to offset some of the effects of inflation.

These strategies tend to hold a good proportion in Fixed Interest securities – Corporate and Government Bonds – which usually offer a fixed interest for the term of the Bond. Whilst these Bonds are not without risk, prospective returns are more appealing than cash savings, and those who wish to invest with a conscience can concentrate their investment in Socially Responsible Bond funds. These Bond funds use screening to only provide loans to companies that meet stated objectives, from avoiding investing in fossil fuels, intensive farming and oppressive regimes, to focusing on those companies that make a positive impact to the environment, community, or human rights.


Stick or twist?

So, should savers hold on for the NS&I Green Bonds, or look to alternatives? As we wait for the announcement of further details from NS&I, the situation for cash investors generally gets more difficult due to inflation. It is, of course, possible that the Treasury offer a very attractive rate on the NS&I Green Bonds, compared to the savings market generally. We think this is unlikely as it could question the prudence of such a move by the Treasury, given that the Green Bonds are essentially another form of Government borrowing.

Perhaps the bigger question is whether cash savers should consider alternative options to try and generate better returns in this period of low interest rates. For those who have a wish to support green issues, alternatives certainly exist to allow investors to try and achieve returns in line with inflation, whilst investing with a conscience.


If you are interested in arranging a review of your existing cash savings or would like to discuss investing with a conscience 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.

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The importance of keeping your portfolio under review

By | Investments

Investing for the long term is a mantra that most investors understand, and therefore selecting good performing investments, and deciding on an appropriate asset allocation at the outset of any investment strategy, are fundamental to how the portfolio will perform in the early stages.

However, whilst the initial portfolio may well be appropriate for the conditions of the day, the world keeps turning. As the saying goes “nothing ever stays the same” and that is certainly true for investment markets. It is also the case for our lives, where our priorities, goals, and objectives change over time. For these reasons, reviewing an investment portfolio and strategy on a regular basis is key to ensuring the strategy remains current and appropriate in achieving those objectives.


Investment cycles

One of the main reasons we recommend regular reviews is that market economies revolve around an investment cycle, which means that underlying investment conditions are always evolving. In very simple terms, economies start to grow and move out of recession and then expand to a peak. At this point, the economy becomes overheated leading to a downturn, and eventually falls back into recession and then the cycle starts again. Of course, the mechanics of market economics are far more involved than this, and many factors can affect the length of each economic cycle, the severity of a recession, or the pace of growth during the boom years.

Think back over the last 25 years, and the different market conditions we have seen over that period, from the over-exuberance of the Dot Com boom at the turn of the Millennium to the depths of the Financial Crisis of 2007-2008. Over this time, we have seen very different conditions, from periods that are friendly to risk assets, to times where taking a more risk-averse approach is appropriate to protect portfolio values. And these can change at varying speeds, with the rapid plunge into recession at the start of the COVID-19 pandemic being a recent example.

Clearly, any given investment portfolio is unlikely to perform well in all of these different conditions, and therefore it is important to make sure your portfolio structure is well suited to the conditions of the day and those that are expected to follow, by reviewing the investment mix, structure, and assets held. Simply holding the same basket of investments during all these conditions is unlikely to be optimal and could lead to underperformance over time, together with exposure to higher levels of risk.


Keeping peak performance

Just like economic trends, choosing the right investments is a decision that needs to be revisited regularly, particularly when funds are actively managed. Over the years, fund managers’ reputations are built on their performance, and some achieve star status, having outperformed a particular sector consistently or achieving a stellar performance over a short period of time. But reputations can be damaged just as quickly, and the fund management industry is littered with names of former star managers who have fallen out of favour with investors. Similarly, individual fund managers often move between fund houses and fund objectives can alter significantly over time from their initial brief. In short, following an individual fund irrespective of performance is not likely to achieve a good outcome, and by regularly reviewing your choice of investment funds, underperformance can be weeded out with better performing funds taking their place.


What is your goal?

Every investor has a goal at the outset of an investment strategy. They could be looking to build a long-term investment fund towards retirement, start saving for children’s university costs, or generating an income in retirement. Each of these life stages has different priorities and a single investment approach is unlikely to be suitable for each stage. By keeping the investment strategy, fund choice and approach under regular review, you can help ensure that the appropriate funds are held in your portfolio to help achieve the goal at that particular stage in life.


Tax rules

Over the years, successive governments have made significant changes to the way investments are taxed, and introduced several different tax wrappers, from the TESSA to the ISA, Junior ISA, and Lifetime ISA. By regularly reviewing the structure of your portfolio, as well as the investments, you can take advantage of the most tax advantageous investment approach or undertake a re-structure to make a portfolio more tax-efficient in light of changes to rules and legislation.


Achieve your (re)balance

In a well-tended garden, plants that thrive begin to dominate their space and encroach on others. This is why regularly pruning and re-shaping is needed to keep the space tidy. The same is true for investment portfolios, where funds that perform well get bigger and take on a greater proportion of the portfolio. This can often lead to an increase in risk, and portfolios can quickly move out of line with the original goals and objectives.

By ‘rebalancing’ a portfolio, any positions that have grown too big can be pruned back into shape; however, a good rebalancing exercise needs to adopt a methodical approach, taking into account relevant factors before deciding to proceed.


Time for a review?

Many factors, such as underlying economic conditions, individual fund performance, and changes in circumstances, can knock a particular strategy off course; however, reviewing investment portfolios and strategies regularly can be beneficial in helping you to achieve those ultimate goals and objectives.


If you are interested in arranging a review of your existing investment portfolio or strategy 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.

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Using trusts for Inheritance Tax planning

By | Tax Planning

If you are thinking about estate planning and passing assets to different generations, establishing a trust is one way of ensuring your wishes are carried out in a tax-efficient manner.

According to the latest figures published by HMRC, Inheritance Tax was one of the few revenue-generating taxes that increased in the 2020-2021 tax year. Inheritance Tax receipts increased to more than £5.3 billion in 2020/2021 compared to the previous year (although below their 2018/2019 peak of £5.4 billion). According to HMRC, this increase is likely in part due to the higher number of wealth transfers that took place during this tax year, and the higher than the usual number of deaths, in part due to COVID-19.

Given the higher tax take and increasing asset values, Inheritance Tax planning is becoming relevant to more and more families. When it comes to Inheritance Tax planning, there are a number of options, which are all worthy of consideration in most circumstances. Each has positives and drawbacks, which is the primary reason why taking independent advice tailored to an individual’s precise situations, needs and objectives, is particularly important in this area. Establishing a trust during an individual’s lifetime is one option that is often a suitable solution.


The history of trusts

Trusts are one of the older forms of English financial and property law, having started life in medieval England, around the 12th century. Historians will tell you that when knights went off to war, a trust was required to implement the stated will of the knight, while at the same time granting power to the person chosen to manage the knight’s estate in his absence.


Common uses for trusts today

Today, trusts are used either to pass assets during an individual’s lifetime or to help determine what happens to someone’s property or assets in the event of their death. Trust arrangements can be particularly useful where large sums of money are involved, or where the family relationships are complicated, for example after divorce or remarriage, or where children and stepchildren are involved. And above all, trusts place controls over who can receive the assets or property, and when they become eligible to receive them.

Lifetime Trusts are useful when individuals wish to ringfence funds for future generations or to make a gift to family members who maybe cannot receive funds due to their age (i.e. if they are under the age of 18). A common use of a trust is to set aside funds to cover university costs or provide a house deposit for younger relatives.

An important concept to consider is that placing assets into a trust, with the intention of being effective for Inheritance Tax purposes, will mean that those funds will be out of reach to the person making the gift, who is known in law as the “settlor”. This means that trusts tend to be inflexible and careful planning is needed to ensure that funds gifted into a trust will not be needed by the settlor in the future. In addition, the monies placed into a trust will not fully leave the settlor’s potential estate for seven years after the date the gift has been made.

When gifts into a trust are made during an individual’s lifetime, there are different types of trust arrangements that can be used. A Bare Trust is a simple form of trust that is often used for beneficiaries (i.e. the person or people nominated to receive funds from the trust) who are under the age of 18. There is no need for decisions to be reached as to who receives funds from the trust, as the beneficiary is established at the outset and once the beneficiary reaches 18, they are automatically entitled to the funds under law.

Discretionary Trusts are more flexible, in that the trust wording establishes a “pool” of potential beneficiaries. This is often all members of the settlor’s immediate family, including grandchildren and great-grandchildren, but excluding the settlor and spouse. This type of arrangement doesn’t specify who receives the trust fund and allows the ultimate destination of the funds to be decided at a later date. This flexibility comes at a price, however, as this type of arrangement is potentially subject to Inheritance Tax charges every 10 years.


Trustees’ duties

In both cases, trustees are appointed to administer the trust. This is often the settlor but other family members, trusted friends or professionals, such as solicitors, can also be appointed. Ideally, there will be at least two trustees, with a maximum of four being appointed. Trustees must ensure the trust is administered correctly, decide how the trust fund is invested, ensure the correct amount of tax is paid and submissions to HMRC are completed, and in the case of a Discretionary Trust, make decisions as to when sums of money are paid to beneficiaries and how much is paid.

The Trustee Act 2000 sets out comprehensive guidance as to how trustees need to act, when they need to take advice from professionals, and how they reach their decisions. Being a trustee is an important role that carries significant responsibility, and therefore careful thought is needed as to who is appointed as trustee when a trust is set up.


Trusts have their limitations

While setting up a trust gives you much greater control in determining where your assets will eventually go, they do have some limitations. For instance, they can often carry a higher burden of tax and greater levels of administration.

In the right circumstances, however, Lifetime Trusts can be an efficient way to plan ahead, by ensuring funds are set aside for future generations and potentially reducing the Inheritance Tax burden on an individual’s estate.

But setting up a trust can be complicated, so it’s always worth talking to an experienced professional who can talk you through the process in determining which type of trust is right for you and your family.


If you are interested in discussing estate planning 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.