October 2024

Oct 31

Budget Briefing

By FAS | Budget

Whilst not delivering some of the more outlandish predictions that had been suggested in the media over recent weeks, the measures announced in the Budget statement certainly provide opportunities for effective financial planning in a number of areas. We will delve more deeply into these planning opportunities in future issues of Wealth Matters; however, for now, we provide our summary of the key measures announced.

Employer’s National Insurance

The rate of National Insurance (NI) paid by employers will increase from 13.8% to 15% from 6^th April 2025. In addition, the salary threshold at which employers begin to pay NI has been reduced from £9,100 a year to £5,000 a year. Small businesses will see an extension to the employment allowance. There have been no other changes to NI, with the main rate payable by employees remaining at 8% on earnings between £12,570 and £50,270.

The increased rate of employer NI from April 2025 is likely to enhance the attractiveness of salary sacrifice arrangements, and the ability for company directors to make employer contributions into a personal pension.

Capital Gains Tax

The rates of Capital Gains Tax (CGT) applicable to the sale of non-residential property assets will increase from 10% (for basic rate taxpayers) to 18% and from 20% (for higher and additional rate taxpayers) to 24%, with the changes effective immediately. The new rates for gains on share disposals match the rates that currently apply to residential property gains, which remain unchanged. The hike in CGT rates is lower than many people had anticipated, which reinforces the need to carefully consider whether to dispose of assets that may give rise to a CGT liability.

Business Asset Disposal Relief

Business Asset Disposal Relief (BADR) will gradually become less attractive over the course of the parliament. Currently business owners who sell all or part of their business can benefit from a rate of 10% on all gains up to a lifetime limit of £1m. The rate will increase from 10% to 14% from 6^th April 2025, and again to 18% from 6^th April 2026, aligning this rate with the rate of Capital Gains Tax payable by basic rate taxpayers.

Inheritance Tax

The Government has announced the intention to bring pensions into the Inheritance Tax (IHT) regime from 2027. The Budget statement is light on detail, and clearly further clarification is needed, particularly in respect of the tax treatment that applies when beneficiaries draw from an inherited pension. The impact of the new rules will no doubt become apparent during the consultation process.

In addition to the proposed changes to pension death benefits, the Chancellor announced a new combined limit of £1m for assets that qualify for Agricultural Relief and Business Property Relief. Expected to come into force in April 2026, qualifying assets under £1m will continue to benefit from 100% relief from IHT; however qualifying assets above this level will only benefit from 50% relief, leaving such assets subject to an effective rate of IHT of 20%. This is a punitive move for those holding agricultural assets or family businesses.

The IHT rate payable on qualifying shares quoted on the Alternative Investment Market (AIM) will be set at an effective IHT rate of 20%. Previously, qualifying assets listed on AIM have been covered by the Business Relief exemption.

All other IHT bands remain unchanged, although the freeze on thresholds has been extended until 2030. The main nil-rate band will continue at £325,000 with the additional £175,000 being available in respect of a residence bequeathed to a direct lineal descendent. These allowances remain transferable between spouses, so that the surviving spouse can continue to pass up to £1m without an IHT liability. With increasing asset prices, the number of estates liable to IHT is set to increase over the course of the parliament.

Pensions

Apart from the proposals to bring pensions under the IHT regime from 2027, there were no other major changes to pension rules announced in the Budget. Existing rules on tax relief remain unaltered, as does the current maximum level of Tax-Free Cash available (£268,275). Additionally, there have been no changes to the pension annual allowance.

Personal Tax Thresholds

Whilst Personal Tax thresholds will remain frozen until 2028, the Chancellor confirmed that the Personal Allowance for Income Tax will increase in line with inflation from the 2028/29 Tax Year and beyond.

Stamp Duty Land Tax

The rate of Stamp Duty charged on second or additional properties will increase from 3% to 5% with effect from Thursday 31^st October. The Budget Statement also appears to rule out any extension to the temporary Stamp Duty discount for first-time buyers which is due to end in March 2025.

Individual Savings Accounts

The annual subscription limits for Individual Savings Accounts (ISAs) will remain frozen at £20,000 until April 2030. The limits for Lifetime ISA and Junior ISA will also remain frozen at £4,000 and £9,000 per tax year, respectively. The British ISA, a policy idea announced by the previous Government, has been scrapped.

Summary

Taken in the round, the measures announced are not as painful as many had been predicting in the weeks leading up to the Budget statement. Our initial assessment of the Budget statement does present interesting planning opportunities, which we will cover in more detail in future editions of Wealth Matters. Contact our experienced advisers if you would like to discuss the impact of the Budget on your financial plans.

Oct 24

Getting your affairs in order

By FAS | Financial Planning

Getting your affairs in order is a crucial aspect of financial planning that extends beyond managing investments and ensuring tax efficiency. Many are totally unprepared for unforeseen scenarios such as death or loss of mental capacity which could place their financial wellbeing and family members at risk. We look at the importance of preparing a will, or reviewing an existing will, making an Expression of Wish over existing personal pension death benefits, and preparing a Lasting Power of Attorney.

Make your wishes clear

Writing a will puts the control over your wishes in your hands. Leaving a will that states clearly who should get your possessions and property when you die can prevent unnecessary distress for your loved ones after you’ve gone. It also removes most of the complexity that comes with sorting out a person’s estate after their death, which is a particularly stressful period at the best of times.

Writing a will is particularly important for anyone who has children or other family members that depend on you financially, or if you would like to leave some of your possessions to people who are not considered part of your immediate family.

If you die without leaving a valid will, this is called ‘intestacy’. This means that if you live in England or Wales (the rules are different in Scotland), everything you own will be shared out under the legal framework. This could potentially lead to unwelcome outcomes. For example, if you’re married, your husband or wife could inherit all your estate even if you were separated at the time of your death, and your children might not get anything. Another potential pitfall awaits partners who are not married or in a civil partnership. Under the laws of intestacy your partner will not be legally entitled to anything when you die, no matter how long you were together.

Pension Expression of Wish

In conjunction with preparing a will, it is also 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 will pass 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.

Whilst a will and expression of wish can help ensure your affairs are dealt with in the event of your passing, it is also important to consider how you would manage your affairs if you were to lose capacity to take decisions. Sadly, an increasing number of people are affected by illnesses such as Alzheimer’s or dementia, which can mean that individuals are no longer able to make decisions for themselves.

Lasting Power of Attorney

Setting up a Lasting Power of Attorney (LPA) is straightforward and can make sure your loved ones can make the important decisions about your health and your financial wealth on your behalf, should you become incapacitated through ill health or accident.

An LPA is a legal document that lets you appoint individuals you trust to make decisions on your behalf, should you become unable to make those decisions for yourself in the future. There are two different types of LPA, one covering Property & Affairs (e.g. property, investments and assets) and Health & Welfare (which covers healthcare and medical treatment).

You can choose to set up one or both types of LPA, and you can nominate the same person or elect to have different attorneys for each. Preparing an LPA doesn’t mean that you instantly lose control of the decisions that affect you. For the Property & Affairs LPA, you can be specific about when the attorney can take control when preparing the LPA, and in respect of the Health & Welfare LPA, this can only be used once capacity to make decisions has been lost.

All LPAs must be registered at the Office of the Public Guardian, which is the government body responsible for the registration of LPAs before they can be used.

If you lose mental capacity and don’t have an LPA arranged, this can leave loved ones with significant worry and could potentially lead to difficulties in dealing with the individual’s personal finances. Should this situation occur, an application will need to be made to the Court of Protection, for an individual to become your appointed ‘deputy’, who can then make financial decisions on your behalf. The Court has the final say as to who is appointed, and this may not align with your wishes.

The process of making a Court application is long-winded, with applications taking many months to be heard and then approved. This could lead to significant issues for ongoing financial transactions, such as investment management, or the purchase or sale of a property. Anyone with investments, or complex financial affairs are at greatest risk if capacity is lost, with Directors and Business Owners at particular risk if they lose capacity without an LPA in place.

Take the time to review your affairs

Take a few moments to review your affairs and consider what would happen in the event of your passing, or loss of capacity. As part of our holistic planning service, we remind our clients to make a will, or review an existing will, refresh their expression of wish and make an LPA. Speak to one of our experienced financial planners who will be pleased to provide more details on why it is so important to get your affairs in order.

Oct 17

Making best use of compound returns

By FAS | Investments

The success of any investment strategy is determined by the performance of the investments selected, and the length of time that the investments are held. Maths also plays an important part in contributing towards the returns achieved, as growth, which is accumulated or reinvested, benefits from a compounding effect, which helps accelerate investment returns over time.

In simple terms, compound returns are earned on both the capital investment and investment growth already achieved. This additional “growth on growth” has a cumulative effect and helps investments grow exponentially. Whilst incredibly powerful, the impact of compound investment returns reinforces the need to ensure that your investment funds perform well. If funds underperform over a sustained period, this can lead to substantially lower returns, when considering investment strategies that are in place for many years, such as a pension.

To demonstrate the impact of compound returns, take the example of Alice, whose pension plan is valued at £100,000. She plans to retire in 20 years’ time and does not expect to contribute further to this plan. If the investment achieves a rate of return of 3% per annum compound, the value at the end of the 20-year investment period would be £175,000. Increasing the investment return to 5% per annum compound would see the value at the end of the 20-year investment period increase to £252,000. Achieving an even higher return of 7% per annum compound would see the value at the end of the 20-year investment period rise significantly higher to £361,000.

As demonstrated on the graph, the rate of growth accelerates due to the impact of compound returns. By achieving compound returns of 7% per annum, rather than 3% per annum, at the end of the 20-year investment period, the value of Alice’s plan would stand at more than double the value that would have been achieved if returns were only 3% per annum.

This simple example demonstrates the power of compound returns; however, other real-world factors need to be considered. It is important to reflect on the eroding impact of inflation on investment returns, particularly over a longer timeframe, such as a working lifetime. The spending power of money falls over time, and this factor needs to be considered when undertaking calculations on future investment returns. The annual return achieved from risk assets, such as equities, bonds, and property, will also fluctuate from year to year, and examples using a fixed linear rate of return are unlikely to prove accurate. Finally, the impact of tax and charges on investment returns also need to be factored in.

Why performance needs to be reviewed

Given the cumulative effect of underperformance, it is important to keep any portfolio strategy and investment fund selection under close review. We often meet with new clients who have held the same investments within a pension, investment bond or Individual Savings Account (ISA) for an extended period, and in many cases, the performance of the portfolio held has lagged the performance of other funds investing in a similar portfolio of assets, with broadly the same level of investment risk.

This is particularly true when we undertake analysis of legacy investment products, which were purchased some time ago. The financial services industry is constantly evolving, and many historic investment products offer a limited range of investment options, which can hinder growth over the longer term. We often see other drawbacks with legacy products, such as high charges and exit penalties.

Taking an independent view of the universe of investment funds is, in our opinion, a vital component that helps drive investment returns. Products offered by restricted advisers tend to offer investors a limited menu of fund options from which to select, with many of the choices often limited to in-house investment funds. Whilst some of these funds may perform well compared to sector peers, it is often the case that we see sustained underperformance, the effect of which becomes more apparent over time due to the compounding effect. Even small marginal gains in performance can compound into a significant difference in outcome. For example, on an investment of £100,000 held over 40 years, a slight increase in return achieved, from 4% per annum to 4.5% per annum, would result in additional growth of over £94,000 being achieved (before the effect of charges and tax).

Compound returns are a powerful factor that is hard to ignore; however, investors need to give sufficient time for the compounding effect to impact investment returns, as the effect becomes more powerful, the longer an investment is in place. This is particularly true when long term regular savings, such as pension contributions made over many years, benefit from the power of compounding.

How to take advantage of compound returns

Compounding is a powerful driver of investment returns, and investors should be aware of the need to review their investment portfolio regularly, so that changes to underperforming assets can be made. As the examples have shown, even a small difference in performance over time can have a major impact. It would also be wise to consider investment product selection, as legacy investments can hinder growth over time due to limited fund choice and higher charges.

Speak to one of our experienced advisers to review your existing investment or pension plans. We can analyse investment performance and where appropriate recommend changes that aim to take full advantage of the power of compound returns.

Oct 10

Using protection for estate planning

By FAS | Inheritance Tax

Inheritance Tax (IHT) planning was once only considered necessary for the very wealthy; however, largely because of increases in property and asset prices, many more estates are now liable to IHT. The most recent data from HMRC showed that IHT receipts were £3.5bn for the three months to August 2024, an increase of 10% over the same period last year. Whilst this upward trend is likely to continue, careful financial planning can help reduce or eliminate an IHT liability and leave a greater proportion of an estate to beneficiaries.

IHT legislation

Existing tax legislation provides each individual with a ‘nil rate band’ of £325,000 which is exempt from IHT. Married couples can use two nil rate bands on second death meaning that estates valued at less than £650,000 will pay no tax. This can be further extended by the ‘main residence nil rate band’ which can be claimed in respect of the main family home, of £175,000 per individual, as long as the home is left to a direct descendant. The main residence band can also be transferred between married couples, and as a result, a total of £350,000 can be covered by the main residence band on second death.

Any amount exceeding the total ‘nil rate band’ is taxed at 40%, which can have a major impact on the legacy you leave to your beneficiaries. There are, however, a range of financial tools available to help mitigate a potential IHT liability.

IHT mitigation via life assurance

Amongst the IHT mitigation strategies available for consideration, life assurance could be a sensible option that is worth considering. A specific type of life assurance policy, known as a Whole of Life policy, is used for this purpose. Unlike traditional term assurance policies that provide cover for a set period, Whole of Life protection is designed to cover the life insured for the rest of their life, as long as the insurance premiums continue to be paid.

Whole of Life cover can either be taken out on a single life assured, or jointly. For married couples, where their estates are left to each other on the first to die, the IHT liability will generally arise on the second death, and therefore joint policies are often established on a “joint life, second death” basis.

The key planning element when using a Whole of Life policy is to ensure that the policy is written into trust, so that the payment on death does not aggregate with the individual’s other assets when their estate is assessed for IHT purposes. On death, the trustees use the policy proceeds to pay towards the IHT liability on the estate, which could potentially be covered in full.

Depending on the policy options chosen, the life assurance premiums can be guaranteed, in other words they remain unchanged for the life of the policy, or reviewable. Choosing the latter option will lead to cheaper premiums in the early years of the policy, but premiums will increase over time. The level of premium payable will be determined by an underwriting process, where the premium takes into account the age, health and lifestyle of the applicant. In most cases the policy will not pay out in the event of death within the first 12 months of the policy.

It is important to ensure that premiums remain affordable throughout the life of the policy. As a result, we often provide advice to help clients generate an income stream from existing investments, which can be used to pay the monthly or annual premiums.

Selecting cover options

When we sit down with clients to look at IHT planning options, we stress the importance that determining the value of an estate is just a “snapshot” of the current position of their existing assets. Of course, the value of an estate can shift significantly over time, either due to increases in the value of investments or property or further inheritance received. It could also be reduced, due to the eroding costs of long-term care, or other planning measures undertaken, such as direct gifting to family members.

It is also important to appreciate that IHT legislation can alter over time, and although the nil rate band hasn’t increased since 2009, the introduction of the main residence band in 2016 is a good example of how changes in legislation can impact on existing planning measures put in place.

Some Whole of Life policies allow the sum assured to be increased over and above increases in prices generally, which is an option that is available in most cases. That being said, given the relative inflexibility of Whole of Life policies, it may be appropriate to consider using protection policies as part of a broader strategy to mitigate a potential IHT liability.

The power of independent advice

Although IHT receipts are increasing, by planning ahead, the impact of this tax can be avoided or even eliminated. Our experienced holistic planners can fully assess the potential IHT liability on your estate and consider the options, including protection policies written in trust, as part of a broader financial planning strategy. Speak to one of the adviser team to discuss what action may be appropriate to meet your circumstances.

Oct 03

Our Approach to Client Reviews

By FAS | Financial Planning

Valuation and data collation

The review process begins with gathering information from various sources to create the client valuation report, which serves as the foundation for our meetings. Our systems integrate with multiple platform providers to receive daily price feeds for automatic updates on valuations. For other investments, we proactively contact providers to gather necessary information, including income distributions and withdrawals. In the case of protection policies, we ensure that our records match those held by providers and update as appropriate. After thorough verification, the completed report is forwarded to the adviser for analysis.

Analysis and performance review

The meeting preparation stage begins with the adviser producing calculations of returns achieved over the reporting period, factoring in contributions, income, and withdrawals. We analyse portfolio performance against carefully selected industry benchmarks tailored to each client’s investment profile. Benchmarking is vital, as it allows us to evaluate performance relative to peers and helps clients assess their investment returns.

For portfolios managed on a discretionary basis, we review changes made during the reporting period. For advisory clients, we examine each fund’s performance and consult data produced by the FAS Investment Committee to identify potential fund switches. Additionally, we assess the asset allocation to ensure it continues to align with the client’s risk tolerance and objectives, making realignment recommendations if necessary.

Financial planning review

At this stage in the process, we revisit the client’s circumstances based on prior discussions, identifying any planning needs that may arise. For example, if a client approaches State Pension age, we may need to adjust their investment income for tax efficiency. Similarly, if a client has funds earmarked for specific purposes, such as education costs, we evaluate the risk level and consider whether to convert these to cash for withdrawals.

We also undertake tax calculations to determine the client’s potential liability to Income Tax or Inheritance Tax, or in the case where disposals are being made, the likely Capital Gains Tax liability that results from actions taken. By fully understanding a client’s tax position, we can tailor our recommendations to ensure their portfolio remains as tax-efficient as possible.

Our use of technology

We have invested heavily in technology, on which we rely at various points through the client review journey. We use an advanced client relationship software suite that retains detailed records about each client, from their personal information to the investment plans they hold. This software suite integrates seamlessly with our financial analysis software. This powerful tool allows us to analyse any of the thousands of investment funds available to UK investors, together with other financial instruments, such as offshore investments, global equities, fixed income securities and commodities. The package includes comprehensive charting and reporting functions, allowing detailed analysis of fund performance, and portfolio asset allocation.

Platform and Provider Review

Given the ever-evolving nature of financial services, we leverage our independent status to review investment platforms and products from across the marketplace, ensuring clients continue to receive optimal value for money. We undertake cost comparisons and evaluate service levels of existing providers and, where appropriate, recommend changes. Clients often hold legacy investment products and solutions, and an impartial review of these arrangements, compared to modern contracts now available, often results in a recommendation to switch to a more cost-effective solution.

Agreed actions for discussion

The outcome of our analysis will yield a series of recommendations for discussion with the client. Some may be routine, such as making use of the annual Individual Savings Account (ISA) allowance, while others may arise from significant life events, such as retirement planning or inheritance tax considerations. As part of this stage in the process, we may identify investment solutions that provide greater tax-efficiency, for example to reduce a client’s income tax liability via pension contributions or the use of Venture Capital Trusts.

Review meeting and report

Where appropriate, we arrange a review meeting with the client to discuss findings and potential strategy adjustments based on changes in client circumstances or market conditions.

During these meetings, the adviser will go through the portfolio performance and provide a detailed update on market events and highlight our projections for market performance over the short and medium term. We also discuss any changes in legislation and introduce other planning opportunities that the adviser feels may be appropriate.

We ensure we update our records and note any changes to a client’s income, savings, or health, which may influence our recommendations. Our discussions often extend to related topics, such as cash savings, wills, or lasting power of attorney, providing a holistic view of the client’s financial landscape.

After each meeting, we provide a written report summarising our discussions and recommendations. For clients where a review meeting is not conducted, we send a detailed postal review and arrange a follow-up call to address any questions and update our records.

A key part of our service proposition

We take great pride in our review process, as we feel that this is fundamental to our service proposition. Our thorough reviews also help ensure we provide the most appropriate advice to our clients. We hope this article sheds light on the extensive work involved when carrying out a client portfolio review. As always, we welcome any feedback on how we can enhance our service.