Monthly Archives

October 2021

Older lady in a wheelchair outside with a female carer

Are long-term care annuities value for money?

By | Financial Planning

The rising cost of care has been hitting the headlines lately, which has placed the spotlight on long-term care annuities designed to pay out for the rest of a person’s life. But these annuities may not be the best solution for everyone.

The costs of long-term care are increasing. According to LaingBuisson, an independent provider of healthcare statistics, the average cost of residential care home fees for someone in the UK increased to £672 a week (almost £35,000 a year) in the 2019-2020 tax year, an increase of 3.0% on the average fees in the previous tax year. Over the same period, the costs associated with nursing homes – where residents receive round-the-clock care – reached an average of £937 per week, almost £49,000 a year, an uptick of 5%.

Despite recent announcements from the government that National Insurance and Dividend Tax will be increasing to help to pay for the cost of social care, most people will have to pay for their own care as they get older. And with around one-fifth of the UK population – or 12.3 million people – aged 65 or older (figures published in 2019), it’s not surprising that more people are considering taking out some sort of insurance policy to help pay the future costs of care. These products are also known as ‘long-term care annuity’ or ‘immediate needs annuity’. With both, you use a lump sum to buy an insurance policy that pays out a regular lifetime income. This income is then yours to help fund your care fees for as long as you live. While a long-term care annuity might seem like an appealing option, giving you some much-needed peace of mind, they have several limitations that everyone should be aware of before they take one out.


What types of long-term care annuities are available?

Broadly speaking, there are two options when it comes to the types of long-term care annuities currently available, depending on whether you need care funding now, or expect to need to fund care in the future. The first is an ‘immediate needs’ annuity, and the second is a ‘deferred annuity’. We explore both of these in a bit more depth below.


An immediate needs annuity

This is an insurance policy designed to pay a regular income towards the cost of your care fees over the course of your lifetime. An immediate needs annuity is usually considered appropriate if the individual has health issues or is already receiving care at home or in a care home.

The annuity is bought upfront, with a single payment. The amount you must pay to buy the annuity will be calculated based on factors such as your age, your health, and the expected costs of current and future care. If you’re in poor health, you can expect to pay a lower price for the annuity, given the length of time you will need to pay for care will most likely be shorter than for someone in good health.


Disadvantages of an immediate needs annuity

There are several drawbacks that mean immediate needs annuities may not offer the best value to someone in need of long-term care. For starters, the initial cost of the annuity can be staggering, and can eat up much of an individual’s capital assets. Whilst the average stay in care is 26 months, sadly many survive for a much shorter period of time in care, and in these cases, the return on the annuity purchased can prove to be very poor value. Usually, if an individual dies shortly after taking out an immediate needs annuity, there is no return of capital to the estate, leaving beneficiaries in the will significantly worse off.

Second, taking out an immediate needs annuity can take longer than the name would have you believe. As annuities are insurance policies, they have to be underwritten, which means the annuity provider will first collect information about your health from your GP, family and current care provider. Third, if your annuity doesn’t allow for care fee increases, it may not even cover all of your future care costs. If this happens, you will have to make up the shortfall through other means.


A deferred annuity

A deferred annuity is similar to an immediate needs annuity, although having bought the annuity, you won’t begin to receive the income payments immediately. Instead, you choose when you want to be paid income, usually between one and five years in the future. The longer the deferred period, the lower the cost of the plan overall.


The disadvantages of a deferred annuity

As you would expect, while cheaper than an immediate needs annuity, a deferred annuity still requires an upfront payment. Should you need to pay for care fees sooner than anticipated, you’ll be expected to pay these fees until the deferred annuity income starts. The worst-case scenario would be that care costs increased to levels that saw you run out of money before the deferred annuity kicks in.

It’s also worth noting that the income from your annuity will be taxed at your marginal rate and may also affect your entitlement to means-tested benefits. This applies to immediate needs annuities too.


Are long-term care annuities value for money?

The answer to this question really depends on the particular circumstances of the person who is in need of care. We would suggest that the number of people who would benefit from a long-term care annuity is actually rather small, and that it’s a specialist product for those with urgent care needs, and where leaving behind an estate is not a key factor. For the vast majority of people looking to make long-term care plans, other options might offer better value and suit their longer term objectives.

For example, instead of using capital to buy an annuity to pay for care, we often suggest an alternative where funds remain invested and capital is drawn down when required. This is a more flexible approach, and gives your money the chance to keep growing while it’s not needed. The added benefit of this is that upon death, the remaining capital is still available to form part of a person’s estate, and therefore left to beneficiaries.


If you are interested in discussing long-term care 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. 

Rubber stamp reading Dividends stamped onto a piece of paper

Reinvesting dividends: the power of compound interest

By | Investments

After a horrible 2020 for dividend paying companies, this year has been an encouraging return to form. Investors can’t afford to ignore the benefits of reinvesting dividends.

Good news: the COVID-induced dividend drought appears to be over. After a terrible 12 months, when most dividend-paying companies in the financial services, property, and oil and gas sectors were forced to suspend or drastically reduce dividend pay-outs to shareholders, 2021 has seen a sparkling recovery.

Dividends are usually considered to be a good sign that a company is doing well, and has plenty of spare cash in the bank. But the UK’s reputation for dividend payments took a battering during 2020 thanks to the COVID-19 pandemic, forcing companies to take widespread and often drastic measures to keep operating during a period of uncertainty. As a result, last year the FTSE 100 average dividend yield for 2020 overall ended up at a significantly lower 2.98%, and total dividends paid to investors fell to £61.4 billion. However, stockbroking firm AJ Bell expects FTSE 100 dividend payments to bounce-back to an impressive £85.1 billion this year, just short of the record-breaking peak of £85.2 billion in dividend pay-outs set in 2018.


Dividend tax is on the increase

Of course, the downside is that the government has now introduced a 1.25% increase in dividend tax to help pay the bill caused by COVID-19, and to increase spending on health and social care. As a reminder of the government’s tax plans, investors can still earn up to £2,000 in dividends before they are liable for any tax. But beyond that threshold, basic rate taxpayers can expect to pay dividend tax at a rate of 8.75% from the 2022-2023 tax year. Higher rate taxpayers will see their dividend tax rate increase to 33.75%, while additional rate taxpayers (earning more than £150,000) in England will pay dividend tax at 39.35%. It’s worth remembering that investors do not pay any dividend tax on money invested in an Individual Savings Account (ISA), which is why it’s essential to always use up your tax-free ISA allowances.


Why it pays to reinvest dividends

Dividend paying companies are very attractive within any investment portfolio, but you don’t have to collect the regular dividend payments. In fact, it’s well worth using the dividends instead to purchase additional shares – which in turn also pay out future dividends. This is known as the power of compound interest.

Here’s a quick example to show what we mean. You buy 100 shares in a company at a cost of £1,000. The company pays a dividend of £6 every year for ten years. Instead of pocketing the cash, you reinvest your dividends and you use the money instead to buy more shares in the company. As time passes, a dividend reinvestment strategy starts to become the largest contributor to total return. The more dividends you reinvest, the higher your future dividend payments.

Take the following example of the FTSE100 index over the last 20 years (see graph below). The red line shows the pure performance of the index, not taking any dividend income into account. As you can see, the index value has increased by more than 40% over the last 20 years.

However, this performance is a fraction of the total return achieved over the same period, when dividend income from the FTSE100 constituents is reinvested. You can see the total return including reinvested dividends, shown in blue, has returned 193% over the same 20 year period, almost five times the return of the raw index.

Graph showing FTSE 100 index over the past 20 years

The effect of compound interest on reinvested dividends is more powerful the longer you invest, as it multiplies the available returns on the original investment. Over time, the dividends reinvested in the early years have the largest impact on total returns, and you stand to benefit not just from the increased value of the company’s shares, which may fluctuate over time, but also from the larger shareholding as you’ve used the dividend proceeds to buy more shares, which means more dividend proceeds, and so on. It’s a great way to increase the value of your investment without lifting a finger.


Last thoughts

Of course, dividend payments received by investors are still liable for dividend tax, even if they are automatically reinvested. But for the time being, investors still have a dividend allowance of £2,000, which means for the first £2,000 of any dividends you receive you don’t need to tell HMRC or record the dividends on your self-assessment form.

If you’re unsure whether your investments will mean you pay dividend tax, please get in touch. We’d be happy to provide you with a report on your dividend situation, as well as recommending ways to get the most out of your tax-free allowances. You may not be able to avoid paying dividend tax, but we can help to make sure you get the best value from the dividends you earn on your investments.

If you are interested in discussing your investment 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. 

Businessman at a crossroads

Sticking to the Path may not be the best option

By | Investments

Investment Pathways for Retirement Planning is a new initiative launched by the Financial Conduct Authority (FCA) in February 2021, designed for people who wish to draw their pension under a Drawdown arrangement, without first obtaining regulated financial advice. As we will explore, one size does not fit all, and forging your own bespoke path, whilst taking ongoing advice, may well lead to better outcomes.


Taking a flexible approach

Flexi-Access Drawdown is an alternative to the purchase of an annuity, which provides much greater flexibility in terms of how income is drawn in retirement. It is increasingly popular, as it can offer the potential for individuals to use their pension savings to best fit their needs and objectives, but unlike a pension annuity, does not provide a guaranteed income for life. As the pension fund continues to be invested throughout retirement under Drawdown, investment decisions and careful management of the fund are critical components of a successful Drawdown approach. Personal responsibility for the long-term viability of the pension drawdown plan rests with the pension holder, hence the importance of receiving initial advice on the level of income drawn and investment options, and reviewing the plan regularly to ensure that it continues to meet the initial objectives.


Choose a Path?

The idea behind Investment Pathways is to create four default investment routes for individuals who have already taken Tax Free Cash from their pension, leaving the remaining funds in Drawdown. The FCA hope the initiative will reduce the number of individuals, who decide to enter Drawdown without receiving advice, making poor investment decisions, such as leaving significant funds in Cash for the long term, or taking excessive investment risk.

Four Paths have been defined, with the first being aimed at those who have no intention of drawing an income in the next five years. This strategy is largely aimed at growth over the medium term. The second Path is designed for those who wish to purchase an annuity in the next five years and will aim to preserve capital. The third is for those who are considering drawing income in the medium term and will aim to provide a balanced approach. The final Path is for those who are looking to draw the full value of their pension in the next five years, and again aims to preserve the capital value.

For each defined Pathway, pension providers will produce a ready-made investment portfolio which aims to meet the objective of the Pathway, which is where we feel the proposals may begin to fall short of their objectives.

The majority of providers offering these Pathways are using a single passive investment fund, with no ability to vary the investment options within the Pathway selected. This limits the scope for an individual to select alternative funds within an individual Pathway, or to access funds that meet their own preferences, for example, to invest in a socially responsible manner.


Bespoke is best

But more importantly, the Pathways do not take into account an individual’s financial circumstances, objectives or attitude to investment risk. This is a vital element of the advice process that is missed by using this automated approach. Take an individual who prefers to take a cautious approach to investment as an example. They choose the third of the fourth automated pathways, as they are considering drawing income from the pension in the next five years. In this scenario, they could experience an increase in investment risk and volatility over their existing arrangements they held before entering the Pathway approach, which they may not be aware of, or may be contrary to their wishes.

Conversely, an individual who chooses the Pathway towards taking the full value of their pension in the next five years (option four) would be placed largely in a Cash fund with most providers, where negative real returns are more than likely to be achieved when charges, and the eroding effects of inflation, are taken into account. We don’t imagine someone who is planning to draw their fund out in five years’ time will be pleased to be missing out on the potential for investment returns over this period, even if they were taking a cautious investment approach.


Tailored to your needs

We understand the Regulator’s concerns. Without proper advice, individuals could leave their pensions in Cash over the longer term or take excessive risk with their pension arrangements, neither of which are likely to be appropriate. However, we feel that Investment Pathways are too rigid and inflexible for most individuals with at least modest sized pension plans, who are considering Flexi-Access Drawdown as an approach to retirement planning. For these individuals, we believe that Investment Pathways are no substitute to taking an alternative path, via independent advice, that is tailored to their own circumstances and objectives. Furthermore, regular reviews of any Drawdown are of high importance, to ensure the approach remains appropriate to any future change in circumstances.


If you are considering your retirement planning and would like to discuss your 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. 

Yellow note pad with 'Intestacy' on the front

Intestacy rules – why making a will is so important

By | Financial Planning

We often see situations where individuals haven’t made a will and are unaware of the potential consequences of leaving the laws of intestacy to determine the destination of their estate. As October is Free Wills Month, we thought this an ideal opportunity to remind our readers of the importance of making a will.

Free Wills Month is an initiative where a number of leading charities offer members of the public over the age of 55 the opportunity to prepare or change a simple will free of charge, by using a participating Solicitor.

Just under half of the UK population have not made a will, which is a frightening statistic given the potential issues that can arise by relying on the laws of intestacy, which are a standard set of legal rules that apply if an individual dies without having made a valid will. Who benefits from an intestacy depends on a strict order based on family connection, rather than which family member is most in need. It is important to note that these rules differ for estates covered by Scottish Law.


Intestacy rules

For those who are married, or in a civil partnership, the surviving spouse or civil partner will receive the full value of the estate, unless there are surviving children. In this instance, the surviving spouse or civil partner will receive the first £270,000 of assets, with the remainder of the estate being divided in half. The surviving spouse or civil partner receives an absolute interest in one half of the remainder, with the other half divided equally between surviving children.

The situation is even more complicated for those who are unmarried. For anyone dying intestate with children (either biological or adopted), the children will inherit the estate at the age of 18, with the estate divided between children equally. For anyone dying without being married or in a civil partnership, and without children, assets first pass to any surviving parents, and then to siblings (if parents are deceased) and then to grandparents (if alive) and then to wider blood relatives, such as aunts and uncles. An individual who dies without any surviving family will see their estate being left to the Crown.


Potential complications

As you can see, the intestacy rules are complicated enough, without considering how they haven’t kept up with the way modern families are living. A particular issue we come across regularly is couples that have lived together for many years but have not married, and wrongly assume that this affords each other protection under the law. It is crucial to remember there is no such thing as a common-law partner under UK law, and in this situation an unmarried partner of an individual dying intestate would not be left anything under the intestacy rules. This can leave surviving partners in financial difficulty at a time of great distress, and lead to outcomes that differ wildly from expectations. For example, this could mean the unmarried partner being forced to move out of the family home, or funds being left to an estranged spouse.

A will can also deal with important aspects such as guardianship of children, or how funds are left for minor beneficiaries so that they benefit from any inheritance at the right time. The legal age of majority is 18, however, many would consider 21 or 25 as being more appropriate dates for beneficiaries to receive funds when they are potentially more financially aware and in a position to use the funds wisely for further education costs or a house deposit.

Intestacy also leads to further complications in dealing with the estate. Where a will has been left, this usually clearly sets out the wishes of the deceased, including such matters as funeral arrangements, or how possessions are to be distributed. This is a great help to executors and family members in dealing with arrangements at what is a difficult time. Dying without a will leaves no named executor, and family members or other individuals will need to decide amongst themselves who will be appointed as administrator of the estate.


Ensure your will is up to date

At FAS, holistic financial planning is at the heart of what we do. Whilst we do not write wills, we regularly remind our clients of the need to both prepare a will, or ensure an existing will is up to date and reflects an individual’s wishes as part of a wider review of their financial planning objectives. Not having a valid will, or holding a will that is out of date, could potentially undermine financial planning strategies, or potentially lead to higher levels of tax being paid.

In conjunction with reviewing existing wills, or preparing a new will, it is also very important to ensure that an ‘expression of wish’ for any existing pension arrangements is similarly up to date.

On the death of anyone holding a personal pension arrangement, it is a common misconception that the residual pension also passes in accordance with their will. This is not the case, and the pension trustees can choose who will benefit from the pension arrangement. They will, however, consider an ‘expression of wish’ left by the deceased pension holder, which sets out how the pension holder would like the benefits to pass in the event of their death, when deciding who receives benefits from a pension.


Make a will this month

Make this month the time to make a will. As part of our holistic planning service, we constantly remind our clients of this important step, ensuring assets accumulated during a lifetime are left in accordance with your wishes. Leaving matters to the laws of intestacy may not achieve the desired outcome and could cause financial distress at an already difficult time.


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. 

Woman looking at investment figures on her mobile phone

Why time in the market is better than timing the market

By | Investments

Since the advent of electronic day trading, it has become increasingly popular among do-it-yourself investors to trade stocks on a short-term basis, hoping it will lead to spectacular returns. But trying to time the market is a risky gamble where the odds are seldom in your favour.

We’ve probably all thought about what life could have been like if we had invested a few thousand pounds the day after the ‘Black Monday’ stock market crash in 1987, or after the global financial crisis in 2008, or even during the lowest point during the COVID-19 pandemic in March of 2020 when stock markets fell heavily due to concerns about the global economy shutting down. These are the kind of hypotheticals that get people excited about the rewards associated with investing, and they are all examples where ‘timing the market’ would have paid off handsomely.


What is ‘timing the market’?

Timing the market is an investing strategy where investors hope to make profits by identifying the best times to buy investments, and the right times to sell them. The most popular advice associated with timing the market is the well-worn catchphrase: “buy low, sell high”. While that advice isn’t wrong exactly, the difficulty with trying to follow it is this: how can you be sure of when prices are low enough to buy, and high enough to sell? The simple answer is you don’t. You can only make a judgement based on your limited knowledge at the time. Just because you think something is priced at its absolute lowest, that doesn’t mean it won’t get any lower. Similarly, plenty of people have sold stocks at a point where they felt their value couldn’t get any higher, only for it to do precisely that.

The other great piece of advice about market timing comes from Warren Buffett: “Be fearful when others are greedy, and greedy when others are fearful”. The challenge with this wisdom, of course, is that it’s incredibly hard to do the exact opposite of what everyone else is doing.


Is timing the market achievable?

Cheerleaders for timing the market will tell you that it is possible to forecast the highs and lows of investment markets and that doing so will result in greater investment returns than available through more conservative strategies. However, in our view, timing the market is a risky strategy that leaves investors potentially exposed to volatility and unpredictable events that a more sensible investment approach will navigate relatively easily. At FAS, we work closely with our clients to help them grow their wealth by staying invested in the market, and we discourage our clients from thinking they can simply buy and sell their way towards long-term wealth.


Why is timing the market risky?

One of the biggest downsides to timing the market is that the timing is fiendishly difficult to get right. Getting it wrong means potentially missing out on the days when being invested in the market works firmly in your favour.

One of the most common market timing ‘missteps’ DIY investors often make is to pay attention to negative headlines and sell their equity investments ahead of an expected market ‘correction’ (a correction usually occurs when investments appear overvalued and subsequently fall by more than 10% but less than 20%). But the timing of a correction is never easy to predict. While the investor is sitting on the sidelines waiting for markets to fall, they could be missing out on a period when investments continue to rise.

This market timing error is often compounded by the investor – who has grown increasingly frustrated at missing out on returns – deciding to jump back in and start rebuying equities at the higher prices, only to then suffer even greater losses when the correction occurs. In such instances, staying invested and riding out the correction would have been a wiser, more profitable – and less stressful – course of action!


So what’s the alternative?

In our view, buying and holding a well-diversified collection of investments is a much more effective strategy over the longer term, and the research confirms it. A recent study by investment firm Schroders calculated the benefits of staying invested in the market over long periods, compared with attempting to time the market by dipping in and out. Their research included looking at the performance of the FTSE All-Share and FTSE 250 indices since the beginning of 1986.

If an investor had invested £1,000 evenly across the companies listed on the FTSE 250 back then and held their investment to January 2021 (a 35-year holding period) according to Schroders that grand could have been worth £43,595. Over the same period, if the investor had timed the market, and missed out on the FTSE 250’s best 30 days, Schroders estimated the same initial investment would be worth just £10,627, a shortfall of £32,968 (not adjusted for the effect of investment charges or inflation).

Schroders also revealed that buying £1,000 of FTSE All-Share stocks over the same timeframe would have resulted in the investment increasing in value to £19,452 provided it was held throughout the period. Alternatively, dipping in and out of the market, and missing out on the best 30 days means that £1,000 would only be worth £4,264 some 35 years later.

Of course, no one has a crystal ball that can tell them whether tomorrow will be one of the best days or worst days. And the irony with stock markets is that many of the ‘best’ days in return terms have followed shortly after some of the worst. That’s why the most sensible approach, and to prevent you from missing out on valuable potential returns, is to stay ‘in’ over the longer term, along with reviewing your investments regularly to check on their progress.


Staying the course

So, when it comes to managing your wealth, and investing with the aim of achieving long-term objectives, we think it’s important to take luck out of the equation, and that ‘staying the course’ will give you every chance of success. Choosing to ‘buy and hold’, doesn’t mean ignoring your investments, instead it’s about having a plan and sticking to it, even when things look rocky. The best way to do that is to agree on a long-term financial plan with us, that gets reviewed on a regular basis to ensure it remains on track.


If you are interested in discussing your investment 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.