January 2024

Jan 25

Give your pension a check-up

By FAS | Pensions

It doesn’t matter the size of your pension pot, it’s important to review your personal pensions on a regular basis, to ensure everything is still on track to meet your objectives at retirement.

For most people, their personal pension is one of the biggest financial investments of their lifetime, second perhaps only to their investment in the family home. The contributions made to a pension over a lifetime can accumulate into a significant pension pot, which can help provide a pension income at retirement. Unlike a family home, however, where most people will undertake regular maintenance to ensure their home remains in good order, many people pay little attention to the progress of their pension plans as they go through their working life. The result is that underperforming pension funds could be left in place for an extended period of time, or excessive charges are allowed to eat away at the value of the pension.

Why is it important to regularly review existing pension plans?

We often come across clients who have held pension arrangements for 20 years or more, and it is important to recognise the significant changes that have occurred in the pension industry over this period. Pensions have become more sophisticated, more transparent, and far more competitively priced, and the most appropriate solution available on the market decades ago may well lack the features and efficiency of modern pension contracts.

The range of investment options available within a pension has increased dramatically in the last couple of decades. Most modern pension contracts offer a wide range of fund options, providing the scope to tailor an investment portfolio to your precise requirements. For example, this includes the ability to adapt a portfolio to meet ethical considerations, if preferred.

How you choose to take your pension benefits has also evolved, with the pension freedom rules introduced in 2015 now giving far more flexibility and greater choice. Many older pension contracts have a very limited menu of options open when taking benefits, whereas the new pension freedoms allow Tax Free Cash to be drawn as best suits the individual, and provide the ability to draw pension income flexibly to meet exact income requirements. This can also provide greater tax-efficiency and allow pension plans to adapt to a change in circumstances over time.

The price of inaction

Many older style pension contracts carry management fees that are expensive when compared to more modern pension plans that are available. These additional fees can mount up over the years a pension is in place and eat into potential returns.

The performance of pension funds in older style contracts may also not be up to scratch when compared to the performance of other funds with similar levels of risk, invested in a similar asset allocation. Insured funds, which formed the basis of many older pension contracts, often produce a poor performance when compared to actively managed modern investment funds, or look expensive when you consider the low-cost passive funds that are now available.

Whilst newer style pension plans are more competitively priced, pension providers have little incentive to lower the fees on older, uncompetitive pensions. They rely on the inertia from their customers, who don’t seek a better deal elsewhere. Holding an older pension contract over your working life could have a negative impact on the value of pension savings over time, and as a result, lead to a lower income when retired.

Is it best to switch pensions? Not necessarily…

When we consider existing pension contracts, we can often identify cost savings, better performing funds and greater flexibility in how pension benefits are drawn at retirement, as being potential reasons why it may be appropriate to consider moving the pension to another provider.

There are, however, reasons why it may be best to leave a pension arrangement in place and firmly underlines the importance of seeking impartial advice on existing pensions before taking action. Expert advice is particularly important when dealing with older pensions, which often come with lots of potential traps you could inadvertently fall into. We can do the work by analysing your pension carefully, to make sure you aren’t hit with costly exit penalties, or where transferring means you risk losing valuable benefits that would be lost on transfer, such as a guaranteed annuity rate. We can help to determine whether it is worth merging some or all of your older pension pots, and to find the right pension to suit your retirement plans and goals.

Arrange a review

Arranging a check-up on your existing pensions can be a sound investment. At FAS, we take the time to understand your existing pension arrangements, and can undertake comprehensive analysis of the performance of existing pension funds, together with a cost comparison against other pension contracts available. We also take the time to get “under the bonnet” to check carefully to see whether the existing pension has any special features, such as guaranteed annuity rates or exit penalties, which could affect our advice. As an independent Chartered firm, we can access competitive modern pension contracts from across the market place to find the most appropriate solution for your needs.

Contact one of our experienced financial planners at FAS to arrange a review of your existing pension arrangements.

Jan 18

Opportunities in Emerging Markets

By FAS | Financial Planning

We often highlight the importance of diversification in any investment strategy, and one element of a well-diversified approach is to ensure that the portfolio contains allocations to different geographies. Whilst most will allocate funds to developed market equities, such as those in the UK, developed Europe (e.g. Germany, France, Spain) North America (US and Canada) and developed Asia-Pacific countries (such as Japan and Australia), introducing an allocation to emerging markets can help spread risk further, as returns from these markets do not necessarily correlate with their developed counterparts.

Economies in transition

Emerging market economies are those that typically display rapid growth and industrialisation, but do not yet meet the criteria to be fully developed. Emerging markets also generally have weaker infrastructure, and their population normally earn lower incomes than those in developed nations.

An emerging market is, however, not necessarily a small market. Two of the largest emerging market economies, China and India, are amongst the World’s most populous countries. Other notable emerging market economies, such as Brazil, Mexico, Indonesia, Saudi Arabia and Poland, are also of considerable size and are rapidly moving towards becoming developed economic nations. This transition holds the key to the attractiveness of emerging markets. Many countries considered to be emerging markets are in the early stages of their development and the opportunities afforded through emerging markets can lead to better long-term growth prospects, relative to more mature developed markets.

Attractions of emerging markets

One area of emerging market growth is infrastructure. As a nation develops and experiences economic growth, the need to provide critical transport, utilities and connected networks can provide the springboard for further expansion. One particular growth area is sustainability and the increased focus on renewable and clean energy.

Another positive for emerging markets is the increasing wealth amongst the population. As a greater number of citizens become middle-class, they are more able to consume goods and services. This new-found wealth can help propel growth and business opportunity.

Natural resources will be another potential driver of growth in the coming years. Demand for industrial metals, such as Copper, Aluminium and Nickel – which are all heavily used in clean energy solutions – is likely to remain high and a number of emerging market countries dominate global production of these raw materials.

Many emerging market economies have a younger population than their developed counterparts, and this can assist in the adoption of newer technology at a faster pace. Whilst technological innovation may be well-established in developed markets, emerging market economies provide exciting growth opportunities, as advances in areas such as e-commerce are increasingly adopted.

Wide-ranging risks to consider

So far, so good; however, investment in emerging markets presents a wide range of risks that need to be considered.

Emerging markets often have unstable – even volatile – governments. Their political systems can often be less advanced than those in developed nations, and one potential outcome is political unrest, which can have serious consequences to both the economy and investors.

Governance issues are an ongoing risk of investment in emerging markets. Weak regulatory systems can lead to corruption, and political intervention in free markets can also impact on potential returns. A further associated risk is the availability of accurate data on the financial position of a company in an emerging market. Where investors in developed nations can take a degree of comfort that the financial data on which decisions are reached are accurate, the same cannot always be said for companies located in emerging markets.

Emerging markets face greater economic challenges than developed markets. The risks of poor monetary policy decisions is increased, which can lead to unwanted levels of inflation or deflation. For example, Argentina’s inflation rate was 211% in December 2023, and Turkey’s rate in the same month was over 60%. These levels of hyperinflation can lead to issues in a nation’s banking systems and affect tax revenues.

Currency risk is much more acute when investing in emerging markets, as the value of emerging market currencies compared to the dollar can be volatile. This can mean that investment gains can be adversely affected if a currency is devalued, or drops significantly.

Governments in emerging economies may face greater difficulty raising capital than developed markets, and as a result, yields on emerging market Government Bonds tend to be substantially higher, as the risk of default is greater. The same can be said for companies that wish to raise finance to fuel expansion. They often face paying substantially higher interest rates as investors demand greater returns in exchange for the increased risk.

Our view on emerging markets

Emerging markets present a number of interesting opportunities. The growth potential is certainly attractive, although the current geopolitical instability around the World needs to be taken into account.

Most long-term investors are likely to want to hold an exposure to emerging markets in a well-diversified investment portfolio; however, the increased risks of emerging market investment need to be carefully evaluated and understood, as investors are likely to be exposed to higher levels of volatility than will be experienced holding developed market equities. This is where consulting an experienced financial planner can help discuss the potential risks and rewards and analyse your portfolio to ensure the overall level of risk is appropriate. Speak to one of our advisers, who can provide truly independent and impartial advice.

Jan 11

The role of financial advice in the divorce process

By FAS | Divorce

Dealing with financial decisions can be one of the most challenging elements of the divorce process. Amidst the emotional turmoil, thoughts inevitably turn to finances and how to protect your financial security at what is a difficult time.

Most people facing divorce understand that decisions taken can have lifelong implications, and will therefore look to use a solicitor to help negotiate the legal aspects of the divorce process. Alongside specialist legal advice, seeking independent financial advice during the divorce process can provide valuable assistance in negotiating the numerous decisions that need to be made. To make best use of a financial planner, those going through divorce would be well advised to seek advice throughout the process, rather than just at the final stages, when decisions have largely been reached.

There are a number of key areas where seeking financial planning advice can help throughout all stages of the divorce process, from considering the financial implications at the point of separation, to making the right decisions with a divorce settlement.

Gathering information on assets

Parties to a divorce need to provide full disclosure of assets and a financial adviser can assist in obtaining valuations of marital assets, from savings and investments to pensions. Investment products can often be complex and understanding the true value of an asset can sometimes prove challenging. Obtaining an accurate valuation of all assets is crucial in establishing the starting point for financial negotiations.

Pensions are a particular area where financial planning advice can make a real difference. Many people going through divorce are surprised to learn the impact the value of pensions can have on a divorce settlement. Anyone with long standing service in the public sector may well have accrued significant pension benefits. Similarly, high earners or self-employed individuals may well have made substantial pension contributions over time, which can build into a sizeable pension value.

Preparing a budget

One of the first considerations at the early stages of divorce is how to meet any immediate financial obligations and this is an area where independent financial advice can assist, in assessing income, expenditure and affordability. Likewise, a financial planner can help determine the level of capital required from a divorce settlement to maintain a desired lifestyle, which can help navigate decisions that need to be reached in respect of existing marital assets and each spouse’s income streams. This can prove very helpful when negotiations between spouses, or the mediation process, is taking place.

Tax Considerations

Decisions reached to sell or transfer assets during or after the divorce process has completed, can carry tax consequences. The transfer of assets between spouses is normally exempt from Capital Gains Tax; however, this may not be the case after the relationship has legally ended. Likewise, the disposal of investments could potentially have tax consequences if they are sold as part of a financial settlement.

Understanding retirement planning options

Pension assets accrued through an individual’s lifetime are taken into account when assessing the value of pension assets. As each divorce settlement is different, the treatment of existing pension arrangements will differ from case to case.

Where significant pension assets are held, it may well be necessary to obtain an actuary report, which is often prepared to assess the pensions held by both spouses. These reports can be long and difficult to understand. We can review the report and use the findings to help individuals make appropriate plans for existing pension arrangements they may receive as part of a pension sharing order, or assist those whose pensions are to be split to make the right decision on which pensions are divided or transferred.

Once an order has been implemented, we can help provide advice on how an individual can make best use of their remaining pension savings, and the likely income that could be generated in retirement.

Assessing protection needs

One area that is often overlooked are ongoing insurance and protection needs. Many couples will have joint life insurance policies which provide cover over existing debts, or to provide funds for family in the event of death. It is important to review such policies to make sure that they provide adequate cover for your future needs. Many people rely on Death in Service provision offered by their employer, and again it is important to review the beneficiary on these policies once a marriage has come to an end. Finally, spouses often benefit from cover on family health insurance that could be provided through their employer. Again, it Is important to review options to provide ongoing cover.

Create a new financial plan post divorce

By working with a financial planner through the divorce process, you can begin to establish a relationship whereby the planner can really get to understand your circumstances, needs and objectives post divorce.

One key area where advice is often crucial is in respect of retirement planning. For many individuals going through divorce, established plans for retirement savings may need a major overhaul. We can ensure that pensions are invested appropriately and plans drawn up to establish an affordable pattern of contributions to rebuild pension pots.

We often see clients who receive a lump sum capital payment as part of the divorce process. We can provide advice on the most appropriate investment strategy, either to provide a tax efficient income stream or aim for capital growth over the longer term.

At FAS, we provide truly independent and holistic advice, taking into account all aspects of our clients’ financial circumstances. Our advisers are experienced in assisting those going through divorce, and are very used to working collaboratively with other professionals, such as Solicitors. Speak to one of our advisers to start a conversation.

Jan 04

2024 Market Outlook

By FAS | Financial Planning

Falling interest rates

Much of the rally over the last two months of 2023 was predicated on market expectations that interest rate cuts will begin earlier than expected in 2024. Some economists have suggested the first cut by the Federal Reserve could come as early as March; however, this could prove to be a little optimistic, and we are mindful that markets could be prone to disappointment if the anticipated cuts are delayed. The last Federal Reserve meeting of 2023 indicated that there may be three 0.25% base rate cuts in the US during 2024, and further cuts to follow in 2025 as the global economy slows.

We expect a similar story of rate cuts in the UK. The Bank of England, who were slow to begin raising interest rates as inflationary pressure began to build towards the end of 2021, may well have hiked base rates above what is necessary to cool inflation, and given our expectations for growth and outlook for the UK economy, we anticipate the Bank of England will be cutting rates, potentially aggressively, in the second half of 2024.

The end of the hiking cycle will provide some respite for mortgage borrowers, although the housing market is likely to remain under pressure. Falling interest rates will also change the outlook for cash savings, which have been attractive compared to other assets over the last year. We have already seen longer term fixed savings rates begin to taper, and this trend should continue during 2024.

Slower Growth

We expect global growth to slow during 2024. Growth was stronger than anticipated in 2023, despite concerns over the financial strength of US banks in the Spring and ongoing monetary tightening by central banks. As inflation continues to fall away over the first half of the year, the restrictive policies are likely to lead to more muted growth in the US and global economy. Whilst the US may manage to avoid a recession in 2024, the same fate is less likely for the UK, where growth has been negligible for much of the last 12 months and indeed, October 2023 saw the UK economy contract by 0.3%.

Geopolitical and political risks remain

Investors need to be alert to a number of potential geopolitical risks in 2024. The conflict between Israel and Gaza could spill over into a broader Middle Eastern conflict, which would have an unwelcome effect on Oil prices. Investors would be wise not to ignore the ongoing war in Ukraine, although much of the economic impact of the conflict was felt last year. Any increase in tension between China and the US over Taiwan would be viewed negatively by risk assets, and lead to a flight to safety.

2024 will be a big year for elections, with a UK General Election forecast to be any time between May and December, and the US Presidential election in November. The outcome of the UK elections are likely to have a lower impact on market sentiment, and a clean outcome from the US election in November would also be well received by markets. A constitutional crisis, similar to that seen four years ago after the disputed Biden-Trump election of 2020, would not be good news and may see volatility spike sharply higher.

Asset class outlook

After a very strong final few weeks of 2023, we would not be surprised to see markets take a pause for breath in the first quarter of this year. A broad based rally in both Equities and Bonds since November has undoubtedly priced in some of the potential that monetary loosening could bring in 2024. It also means that some vulnerability now exists should central banks not deliver the expected rate cuts, and markets will remain keenly focused on key economic data as the year progresses.

In the battle of growth versus value, stocks that display strong growth potential – particularly large cap US technology stocks – clearly dominated 2023. This trend may continue in the short term, but this leaves interesting opportunities in more value orientated stocks, who have been largely ignored for much of the last 12 months.

Careful geographic allocation may well prove pivotal in the coming year, as economic performance diverges. We remain positive on the prospects for US Equities, and also favour Japan and the wider Asia-Pacific region. UK and European markets appear to offer relatively good value, but given that we anticipate weaker growth from this region over the coming year, we would prefer to keep allocations relatively light.

After a dismal year in 2022, Bond markets produced a better performance last year and we expect this to continue through 2024. Markets may, however, have moved a little ahead of themselves given the strong rally seen over the last few weeks and there may well be some consolidation during the early stages of the year. Yields look attractive, although we prefer investment grade to high yield debt, given that growth will slow and the higher cost of debt servicing and tight lending conditions could see default rates rise.

Commercial Property produced very disappointing returns in 2023, and although the landscape should improve over time, continued low occupancy of office space and a tough retail environment are factors that keep us away from the property sector for the time being. Other alternative investments, such as infrastructure, may see improved conditions during this year as the high interest rate headwinds subside.

Time to review your portfolio strategy

As we enter a new year, we feel this is an ideal time to review existing portfolios to ensure that they remain appropriately invested for the year ahead. Uncertainty continues, and therefore holding a diversified portfolio will remain as important as ever as we navigate 2024. Speak to one of our experienced advisers to discuss your existing portfolio strategy.