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FAS

May 29
0

Why you should review your discretionary fund manager

By | Financial Planning

New clients to FAS often agree to transfer existing investment portfolios they hold with discretionary fund managers, to our management. As a result, the advisers at FAS regularly have the opportunity to review the performance, management style and charging structure of what we would term “traditional” discretionary fund management services, from some of the biggest names in the industry.

As you might expect, our analysis produces some variances in results, depending on the fund manager employed. There is, however, sufficient commonality across a range of different discretionary fund managers to draw meaningful conclusions and reinforces the need to regularly review the investment performance and costs of any discretionary managed service.

Investment selection

When we review investment portfolios managed by other discretionary fund managers, we do so in an objective and unbiased manner. We have the mantra that if performance is consistent, and the portfolio volatility and risk match the objectives of the client, it may be best to take limited action. We do, however, notice a series of trends emerging from our ongoing analysis, which suggests that many of the largest UK discretionary managers adopt a very similar approach to each other, leading us to question whether the blend of investments held within portfolios really suits the client circumstances.

Firstly, many discretionary managers choose to directly purchase Gilts (UK Government Bonds), to form part of their fixed income exposure within a portfolio. Whilst Gilts do have an advantage in terms of their Capital Gains Tax treatment over collective investments holding a wider range of bond positions, we feel the focus on UK Government debt can miss out of the potential for superior returns from good quality corporate bond alternatives.

The second common theme we have identified is the use of investment funds domiciled outside of the UK. These funds often carry higher charges, which push up the overall cost of ownership, and potentially limit returns. There is a myriad of investment options available to UK investors that are UK domiciled, which remain significantly more popular to UK investors than those domiciled overseas. Indeed, the Investment Association produced data at the end of 2024 that showed that 83% of collective funds held by UK investors were held in funds domiciled in the UK. It could be that the common use of an overseas fund is a case of loyalty to a particular boutique fund house that the firm has used for many years; however, given the breadth of choice available within UK domiciled funds, we question the effectiveness of this apparently common trend.

Finally, we note the quantity of holdings that tend to be present within traditional discretionary managed portfolios. We often see portfolios with upwards of 25 or 30 different holdings, which we feel can cloud performance by spreading the portfolio allocation too thinly to good performing funds. Diversification is, of course, an important factor in risk mitigation; however, we would argue that this can be successfully achieved with a more compact and well organised portfolio.

Investment style and charges

We have often commented on our view of the blend of active and passive investment funds that we prefer to see within a well diversified portfolio. Passive funds dominate industry fund sales, and for good reason, as they provide wide exposure through a particular index with low costs. Our analysis shows that where passive investment styles are ideal for some markets, they are less than optimal for others.

Actively managed funds can provide additional returns over and above the target index, by adopting a more concentrated approach. Strong performance from an active manager can easily justify the additional costs associated with active management, which can be 10 or 15 times higher than an index tracking fund investing in the same sector or region. Conversely, weak active management can lead to underperformance of wider indices, with associated higher charges.

Through our analysis of traditional discretionary managed portfolio services, we note that the bias tends to be heavily weighted to active funds, with only limited exposure to passives. As a result, the blended portfolio cost may well be higher than average. Whilst cost and value should not be conflated, where performance is also modest, we have found clients with other discretionary managers are often paying more than they should, for less than stellar returns.

Absence of wider financial planning

Using a discretionary fund manager may ensure that your investments are reviewed and changed at regular intervals. The function of regular rebalancing and risk adjustment is a key component of any sensible investment approach – leaving investments in place without review for an extended period is unlikely to produce good results over the longer term.

The review carried out by a discretionary fund manager may, however, only extend to the funds themselves, and save for use of the annual Individual Savings Account (ISA) allowance, there may be little scope for wider financial planning.

This is not the fault of the discretionary manager. Their remit is to manage a portfolio of funds; however, this function only forms part of a bigger financial puzzle for most client circumstances. This is where an independent and holistic firm, such as FAS, can add significant value, by undertaking a full and comprehensive financial review, providing advice on multiple tax wrappers (such as Pensions and Investment Bonds), esoteric investments such as Venture Capital Trusts and Inheritance Tax solutions and other associated areas, for example protection policies.

The importance of critical review

Given the many examples we have noted, anyone using a discretionary fund manager should regularly undertake a critical review of the service they are receiving. Investors should question the investment performance, both on an absolute and relative basis compared to peers, and the costs and charges of the service. At FAS, we can undertake an impartial review of an existing investment strategy and undertake additional key analysis, looking at areas such as risk and volatility, which can be difficult to assess without expert advice. Speak to one of our experienced advisers to discuss your existing discretionary manager.

May 15
0

The evolving outlook for Japan

By | Investments

We previously cast the spotlight on Japanese Equities late in 2023, at a time when the region was seeing a sharp rally in values, which extended through to the start of this year. Recent performance has, however, been disappointing, as investors become wary of the impact of tariffs imposed by the US. Despite these challenges, Japan remains an interesting opportunity for investors.

New highs in 2024

Over the last two decades, Japanese equities have often been a source of disappointment for investors, promising much, but delivering sub-par returns. This is in stark contrast to the boom days of the 1980s, when Japanese equities were caught in a bubble of optimism that extended across other aspects of the Japanese economy, such as real estate. Partly due to lax regulation, asset prices continued to climb until the bubble burst in the early 1990s. It took 34 years for the Nikkei 225 index of leading shares to reclaim the level reached in 1989, when the index climbed to a record high in July 2024.

The rationale behind the strong performance in Japan during 2023 and 2024 has little to do with speculation. After grappling with deflation for many years, Japan’s inflation rate has been positive since the end of 2022, which has helped the Japanese economy to normalise. With stable levels of inflation, wages have increased, improving the outlook for domestic demand. Interest rates are now also positive, albeit at just 0.5%, after many years where the base lending rate was negative.

Japanese companies have also evolved over recent years, improving their corporate governance and engagement with shareholders. As a result, Japanese companies have become more “westernised” when delivering shareholder value, by increasing dividends and using excess capital to arrange share buybacks. Each of these measures has the potential to improve return on capital and enhance the attractiveness of Japanese equities to investors.

Volatility remains

Using valuation metrics, Japanese equities look inexpensive compared to global counterparts. For example, they stand at a sizeable discount to the valuation of US equities. It is, however, worth noting that Japanese equities are not as cheap as they were two years ago, prior to the upswing in values.

Japanese equity markets can also be volatile. Investors in Japan suffered a temporary setback in August last year when a sharp rally in the value of the Japanese Yen against the Dollar triggered the unwinding of the so-called “carry trade”. This is where investors take advantage of the low interest rates in Japan to borrow Yen and use these funds to invest in assets with higher potential returns. When the Yen rose unexpectedly, this led investors to unwind their positions, which led to a short but painful fall in the Nikkei 225 index. Whilst the index had recovered the lost ground within four weeks, it served as a timely reminder of the importance of considering the outlook for the Japanese currency in conjunction with the prospects for equity markets.

Tariff threat

Japan is seen to be one of the nations most at threat from the imposition of tariffs by the US administration. Japan is a major exporter, and the 24% tariff announced on 2nd April by President Trump was certainly not welcome. Despite the pause on tariffs announced a week later, investors remain concerned that tariffs could derail the positive outlook, and result in weaker economic growth.

The US accounts for around 20% of Japan’s exports, and any lasting trade barrier could prove troublesome, particularly for industries such as automotive, given the scale of exports of Japanese cars to the US market.

It is also important to consider the “knock-on” effects of tariffs imposed on other nations which trade with Japan. Lasting tariffs on major trading partners, such as China, could lead to a hike in the cost of parts and components used by Japanese industry.

Whilst tariffs continue to pose a threat to the outlook for Japanese exporters, and the wider economy, Japan enjoys good relations with the US and of the nations looking to strike a deal with President Trump, a good argument can be made that Japan are in a better position than many others to achieve a reasonable outcome.

Largely due to the tariff announcements, the Nikkei 225 fell by 8.2% over the first four months of 2025, compared to the index level at the start of the year, although valuations have subsequently rebounded strongly from their low point. Market valuations have, therefore, already discounted some of the concern over tariffs, and a positive outcome from trade negotiations for Japan, could aid further recovery. On the other hand, a reimposition of the punitive rate announced by President Trump on Liberation Day could potentially lead to further underperformance.

The investment outlook

Using valuation metrics, and considering the pace of change within Japanese companies, Japanese equities appear attractive; however, risks do remain, and whilst the regulatory reforms may prove helpful in the long term, the most immediate threat is posed by tariffs on global trade. For this reason, we recommend allocations to Japan are held as part of a diversified investment portfolio, which enables investment risk to be controlled. By allocating funds to different regions, where investment performance does not necessarily correlate, and to different asset classes, such as Government and Corporate Bonds and Alternative Investments, volatility and risk can be reduced.

Speak to one of our experienced financial planners to discuss the asset allocation of your portfolio.

May 08
0

Testing times for ethical investment strategies

By | Investments

Ethical investment strategies have seen significant growth over recent years, as more investors aim to align investments with their own values. According to data from Morningstar, total assets in global sustainable funds have climbed to US$3.2 trillion at the end of 2024, almost double the total assets held in similar funds at the end of 2020.

Whilst returns from socially responsible investment strategies have been strong over the longer term, recent performance has lagged unfiltered investment approaches. This underperformance is one reason for the slowing demand for socially responsible strategies.

Playing catch-up

Those who wish to invest with an ethical stance have enjoyed returns over the medium and long term which have closely matched the returns from wider markets. Over recent months, however, this has not been the case. After seeing strong growth in 2024, largely due to the allocation to technology within ethical funds, socially responsible investment strategies have lagged more inclusive investment approaches since the start of the year. The chart below shows the widening gap between the MSCI World Index (shown in blue), and the MSCI World SRI Index, which excludes companies whose products have negative social or environmental impacts (shown in red), over the last 12 months.

The disparity in performance is the first significant divergence seen between the two MSCI indices over the last five years and clearly demonstrates the additional “cost” that ethical investors are currently paying to invest in line with their values.

MSCI World vs MSCI World SRI indices, Total Return in GBP over 12 months. Source FE Analytics April 2025

The underperformance can be attributed to the sector rotation we have seen over the last three months, due to global events. The decisions taken by European nations to increase defence spending has seen the Aerospace and Defence sectors grow strongly, as investors anticipate the potential profits that could be generated from growing order books. Socially responsible strategies are likely to hold a very limited exposure to these sectors.

Energy stocks have also performed well in the first quarter of 2025, producing the strongest performance of any sector within the S&P500 index, spurred on by a shift in policy from the US administration towards oil and gas production. This contrasts with the performance of renewables related stocks over the same period.

The underperformance of Technology has also been a major detractor that has hindered ethical investment strategies. After an extended period of growth, investor confidence in the major US Tech players has cooled due to concerns over the impact of tariffs and Chinese advances in Artificial Intelligence (AI).

Finally, the new Trump administration has clearly set out plans that fail to align with the green agenda and climate goals. This has led investors to question whether the change of direction could lead to continued underperformance.

Strong headwinds

The weaker returns achieved from ethical investments over recent months is likely to be a key reason behind the significant outflows seen from ethical investment funds over the last quarter. According to Morningstar research, more money was withdrawn from ethical strategies globally than invested, and new fund launches also fell to their lowest point in three years, reflecting the weaker investor demand.

Recent performance is not, however, the only reason ethical investments are facing strong headwinds in the current market conditions. Tighter regulation of sustainable investments has seen Europe, and the UK introduce new regulatory frameworks, designed to reduce the potential for “greenwashing”, i.e. misleading marketing that makes an exaggerated or false claim about the environmental impact of an investment.

In the UK, the Sustainability Disclosure Requirements (SDR) came into force last year, which encouraged funds to apply for a sustainable label, and for funds that choose not to apply for a label, to tighten up naming conventions. Take-up of the new labels has been slow, with just 94 funds adopting one of the SDR sustainability labels by April 2025. This is due to the rigorous scrutiny of the investment approach by regulators. As a result, a much greater number of funds have chosen to change name, more closely reflecting the strategy of the fund, or have decided to drop a sustainable investment approach altogether.

Whilst the slowdown in fund launches is a concern to asset managers, there remains a wide choice of both active and passive investment funds available for those who wish to invest ethically. Sustained weaker performance and diminishing investor appetite could, however, lead some fund managers to ditch their ethical stance, or in the case of smaller funds, merge or close investment strategies.

Where next for Ethical investments?

Socially responsible investment has taken significant leaps forward over recent years in terms of popularity and the availability of both actively managed and index tracking funds. Whilst ethical investors have seen returns closely match mainstream investment strategies over the longer term, the recent underperformance will no doubt be of concern to some who prefer to invest ethically. This could potentially have wider implications for continued growth in the ethical investment space.

At FAS, we have two distinct approaches to cater for those who wish to incorporate ethical considerations into their investment approach. Through CDI, our discretionary managed portfolio service, we offer two strategies that take a common-sense approach to socially responsible investment, that are designed to meet suitable screening criteria (which limits exposure to areas such as fossil fuels, gambling, animal testing and weaponry) whilst being as inclusive as possible.

We also appreciate some investors would prefer a more focused ethical investment approach. Here, we can build bespoke advisory investment portfolios, using rigorous quantitative screening processes and active engagement with leading fund managers, to meet a client’s ethical preferences.

Speak to one of our experienced financial planners to discuss existing investments you hold, or if you wish to invest in a socially responsible manner.

May 01
1

Choosing the right investment vehicle

By | Financial Planning

One of the most important choices facing investors is where to place long-term investments. The choice of investment vehicle can influence the tax-efficiency of the strategy, the overall cost of the arrangement, and the potential for growth. For many investors, an Individual Savings Account (ISA) offers a tax advantaged route which is ideal for long-term investment, whereas Pension contributions receive tax relief, and Pension savings benefit from tax-free growth whilst invested. Beyond Pensions and ISAs, the tax implications of any investment plan need to be considered. There is, however, a further option that investors could consider, that can defer a tax liability or in some circumstances, remove it completely.

Investment Bonds in focus

Investment Bonds are products offered by life insurance companies, which combine features of both insurance and investment. For the uninitiated, Investment Bonds can appear complex structures, given the decisions that need to be taken when establishing the Bond, and the tax treatment of gains. This is where independent advice can prove invaluable in navigating the options available.

In simple terms, the first option when choosing an Investment Bond is whether to purchase a Bond from a UK based provider (so-called “Onshore” Bonds) or an International Bond provider, who may be based in Jersey or the Isle of Man. These are known as “Offshore” Bonds. As this choice will also dictate the tax treatment of the Bond, this decision requires careful consideration.

Unlike an ISA or Pension, Investment Bonds do not provide tax-free growth. They do, however, allow the investor to defer an income tax liability, whilst providing regular access to a proportion of the original investment. Investors can withdraw up to a maximum of 5% of the original investment each policy year, without triggering an immediate tax liability, although adviser charges are deemed to be withdrawals, and form part of the annual 5% allowance. As a result, the investor can potentially withdraw 100% of the original investment over a 20-year period, without any immediate tax considerations. The example below demonstrates the ability to draw regular sums from an initial investment of £200,000 into an Onshore Investment Bond.

Initial Investment £200,000
5% allowable limit per annum before incurring a tax charge £10,000 per annum
Monthly Withdrawal payment £833.33 per month

Any withdrawals made above the accumulated 5% allowance, either as a larger lump sum or full policy surrender, is deemed to be a Chargeable Event and the gain is assessed for Income Tax on the investor.  The precise level of tax payable will depend on whether the bond is held Onshore or Offshore, and the tax position of the investor. Further tax mitigation can be achieved through a mechanism where the gain is effectively “spread” over the number of years the Bond has been held.

Wider investment options

Historically, Investment Bond solutions were exclusively provided by the largest UK insurers, such as Aviva, Scottish Widows and Standard Life. This has presented challenges in terms of investment selection, as most contracts of this type offer a restrictive range of fund options from which to select. More recently, leading investment platforms have introduced modern Investment Bond contracts, which allow complete freedom of investment choice, including Discretionary Managed options. This wider range of options greatly enhances the attractiveness of an Investment Bond structure. In addition, such platform-based solutions are also competitively priced when compared to older insurance products.

Tax efficiency

The availability of more modern Investment Bond solutions is testament to their growing popularity as an investment option, much of which is due to changes in tax legislation.

The reduction of the Capital Gains Tax (CGT) annual exemption from £12,300 to £3,000 over recent years means that investors holding direct equities, or investment funds outside of an ISA or Pension, are more likely to face a CGT liability when disposing of investments. This is not a concern for investments held within an Investment Bond, as funds can be freely switched without creating a chargeable event.

The availability of the annual withdrawal allowance is another benefit, as this allows investors to establish a stream of regular payments, by way of an “income” without considering the tax implications.

Specialised uses

Investment Bonds can also be a sensible option when trustees consider how to invest trust funds, although this very much depends on the type of trust and objectives. As an Investment Bond doesn’t produce any income (unless a Chargeable Event occurs) or capital gains, this can ease the burden of administration on trustees.

Discretionary trusts are a particular example where an Investment Bond could be an option to consider. As such trusts pay Income Tax at a rate of 45%, the Bond structure defers this tax liability until a beneficiary requires funds from the trust. At this point, segments of the Bond can be “assigned” to the beneficiary, to encash at their personal rate of tax, which may well be lower than the rate that would apply if surrendered by the trustees. Whilst this could be a sensible way to structure an investment for this particular type of trust, it would not be appropriate for others, and we therefore recommend that trustees seek bespoke advice tailored to the precise terms of the trust.

The value of independent advice

The decisions behind the selection of an appropriate investment strategy can be complex and multi-layered. Aside from selecting the correct asset allocation and investment provider, the choice of product will influence the tax-efficiency of the arrangements, the costs and flexibility offered. Investment Bonds could be an ideal solution in certain circumstances; however, it is important that the right investment vehicle is chosen to meet the needs of each individual. As an independent firm, we can recommend products and solutions from across the marketplace without restriction. Speak to one of our experienced advisers to discuss the options in more detail.

Apr 24
0

Pension Freedoms – ten years on

By | Pensions

It is now a decade since George Osborne introduced legislation under the title of Pension “Freedom and Choice”. The rules, which were introduced in April 2015, gave people aged 55 and over more flexibility about when and how they draw their Defined Contribution pension savings.

Increased popularity

Flexi-Access Drawdown, which was introduced under the legislative changes ten years ago, has rapidly become the most popular method of drawing a pension income. Under a Flexi-Access Drawdown approach, the pension holder has complete freedom to draw as much or as little from their pension pot beyond the normal pension age (currently 55) without restriction.

According to data compiled by the Financial Conduct Authority (FCA) in the 2023/24 tax year, 68% of those with pension funds valued between £100,000 and £250,000, who accessed their pension, did so via Flexi-Access Drawdown. Only 19% chose to purchase an annuity, where a guaranteed income for life is bought with the pension fund value. For those with pension values above £250,000, the popularity of Flexi-Access Drawdown is even higher, with 82% of individuals accessing their pensions using this approach.

It is easy to understand why Flexi-Access Drawdown has become such a popular option for those with more substantial pension savings. Adopting a drawdown approach provides the ability to adjust the amount of income drawn to a level that precisely suits the individual and can easily be adjusted to adapt to changes in financial circumstances. For example, the level of drawdown can be increased if additional income is required or reduced if income is not needed.

Furthermore, the income stream can be established as monthly payments, or ad hoc lump sums of income can be paid in addition to, or instead, of regular payments. This means that Flexi-Access Drawdown can also be a powerful way of reducing an income tax liability, by adjusting the level of income withdrawn. This is proving particularly useful as Income Tax bands and the Personal Allowance have been frozen since 2021, and the State Pension is increased each year via the “triple lock”.

By adopting a Flexi-Access Drawdown approach, the fund remains invested, providing the opportunity to participate in growth in values over time. As a pension fund remains tax exempt when invested, it allows the accumulated savings to grow in a tax-efficient environment.

A key benefit of Flexi-Access Drawdown is that any remaining pension value held can be passed on to a nominated beneficiary when an individual dies. This contrasts with other options, such as pension annuities, where payments cease on the death of the individual, or their dependent.  It is, however, worth remembering that pension death benefit rules are set to change from 2027, when the remaining value of a defined contribution pension will be added to an individual’s estate when Inheritance Tax is calculated.

Not without risks

Whilst it is easy to identify the reasons for the increased popularity of drawdown pensions, it is important to recognise that this approach carries ongoing risks. The most obvious is the potential for the withdrawals to erode or even exhaust the value of the pension, at which point the pension would cease to provide you with an income. The success of a drawdown approach will be measured by whether the rate of withdrawals taken is sustainable, and the long-term investment performance achieved.

Selecting an unsustainable rate of withdrawal is likely to reduce the value of the pension over time, if investment returns fail to match the level of withdrawal taken. As the pension value falls, the rate of erosion often accelerates, as the rate of return required to offset withdrawals becomes increasingly unrealistic. This effect can be exacerbated by significant movements in global markets, such as those seen during the early stages of the Covid-19 pandemic or at the start of the Russian invasion of Ukraine. If such a market shock occurs in the early stages of a drawdown strategy, this could further reduce the likelihood that the portfolio can meet the required rate of return to match the rate of withdrawal.

Adopting a drawdown approach will mean that a suitable investment portfolio will need to be constructed, and managed, which will incur ongoing costs. Such costs are not present when buying an annuity, due to the absence of an investment fund. It is also crucial that any drawdown retirement strategy is reviewed regularly, to ensure that it continues to meet any changes in circumstances, and the investments remain appropriate given variances in market conditions.

The power of tailored advice

We have often commented in the past that financial decisions taken just before retirement are perhaps the most crucial, as they can have implications for the remainder of an individual’s life. The increased choice offered under the Pension Freedom rules also increased the complexity of the decision-making process, and this remains as true today as it was ten years ago. This is why it is important to seek advice which is tailored to your specific needs, objectives and financial circumstances.

Whilst Flexi-Access Drawdown is clearly the most popular option amongst many approaching retirement, it isn’t right for everyone. Annuities provide a guaranteed income and avoid the need for the ongoing risk and costs of managing pension investments. They do, however, fail to offer the flexibility that a drawdown approach provides, which many find invaluable.

Our experienced advisers can take an independent review of your retirement savings, and thoroughly explore the options with you, so that you can be confident you have made the right decision. Speak to one of the team to start a conversation.

Apr 17
0

Pensions on Divorce – the importance of financial advice

By | Divorce

Dealing with marital finances can be one of the most challenging elements of the divorce process.  At a time when emotions are often running high, the need to gather financial information to provide a full and frank disclosure of each party’s circumstances, can be a daunting task. Perhaps the most complex area that needs to be considered is each party’s accrued pension rights.

Many people going through divorce are surprised to learn the impact the value of pensions can have on a divorce settlement. Yet, it is an area that those going through marital breakdown often ignore. Research carried out by Opinium for Legal & General found that only 13% of divorcing couples considered pension values when dividing assets. It also found that many are prepared to waive rights to their partner’s pension, potentially missing out on assets that could provide them with a more comfortable retirement.

Why are pensions so important?

For many divorcing couples, the value of pension rights may only rank second to the family home in order of value. Pension assets accrued through an individual’s lifetime should be considered when assessing the total value of marital assets that need to be disclosed, and the division of pension assets often forms part of the financial settlement.

Where pension rights are based on the length of service an individual has accrued, usually called Defined Benefit or Final Salary pensions, a Cash Equivalent Transfer Value (CETV) is usually obtained to provide a current cash equivalent of the rights accrued within the scheme. There have been reports that such calculations are taking many months to produce by schemes such as the NHS, Teachers and Police pensions. There is, sadly, no way of short cutting this process; however, patience may well be rewarded, as anyone with long standing service in a public sector scheme may well have accrued significant pension benefits, even if salaries during their working life were modest.

For those with personal pension savings, high earners or self-employed individuals may well have made substantial pension contributions over time into a personal pension, which can build into a sizeable pension pot. Assessing the value of such pension arrangements is more straightforward, although many people accrue pensions through several arrangements throughout their working life, and it may take time to uncover all pension accounts held.

Whilst most pension assets can be included in the financial assessment, State Pension provision is usually ignored.

Options for division

There are three major routes to dividing pension assets on divorce. The first is “Offsetting”, whereby the value of pension rights are retained by the individual and offset against the value of another marital asset, such as a property, savings or investments. For example, one party may forego any rights to the other party’s pension, if they retain a marital property.

Pension “Earmarking” is a less common approach, whereby rights in the pension scheme are carved out for the other marital party, but stay within the scheme. These pension benefits are then paid to the other party when they reach the normal pension age for the scheme.

Pension “Sharing” is more popular. This is where pension rights are physically divided and paid across to a new or existing pension in the other party’s name. The major benefit of this approach is to enable both parties to enjoy a “clean break” and choose how and when to take their pension benefits.

Deciding on which option to consider can be further complicated by the rules of each pension arrangement. For example, some pension schemes may not offer the ability to earmark pension rights for a spouse.

How advice can help

Financial planning advice can make a real difference to divorcing couples holding pension assets. Working in conjunction with legal professionals, our experienced advisers can consider the options for marital assets, including pensions, and provide advice, by taking a holistic approach.

Where pension assets are complex, it may well be necessary to commission an Actuary Report, which is often prepared to assess the pensions held by both spouses. Such reports not only review the value of pensions but provide calculations on the likely income each party would receive in retirement, using a range of assumptions. These reports can be long and difficult to understand. Our experienced team 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.

For divorcing parties, the temptation is to focus on short-term financial needs, rather than long-term goals. This is where independent advice can add value by assessing your overall financial circumstances, including pensions. We can undertake cash-flow analysis to demonstrate the potential outcome in retirement, based on which action is taken with pension credits and how these interact with other savings and investments, to build a comprehensive financial plan.

If the chosen route is to use a Pension Sharing order, we can help provide advice on how the pension credit is invested. It is crucial that a Pension Sharing Order is implemented promptly and accurately, and our administration team can work closely with pension providers to expedite the process.

At FAS, we provide truly independent financial 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.

Apr 10
0

What history tells us about market turbulence

By | Investments

Investment market sentiment has been fragile since the “Liberation Day” announcements by President Trump on 2nd April. The imposition of tariffs by the US, and retaliatory measures taken by trading partners, threatens to change the dynamics of global trade and the outlook for the global economy. Market volatility has increased significantly, as investors try to understand the implications for equities markets. In short, it has been an uncomfortable time to be invested in global equities.

In times when market volatility spikes, it is important to remain focused on the long-term trend, and to try and avoid taking short-term decisions that could prove detrimental to your financial well-being. History tells us that the initial knee-jerk reaction to global events, such as those invoked by the US administration currently, are often short lived. This may be even more pertinent to the current tariff-induced volatility, where policy decisions taken by the Trump administration reverse quickly and lead to a rapid rebound in stock values.

Bumps in the road are more common than you might think

It is important to recognise that periods of high market volatility are commonplace when we look back over recent history. The chart below shows the maximum drawdown – i.e. the largest move from peak to trough – in the S&P500 index of leading US shares, in each of the last 20 calendar years, from 2005 to 2024. As you can see from the chart, maximum drawdowns of more than 10% have occurred in seven of the last 20 years.

There have been specific factors behind each of the major drawdowns of the last two decades. The “Great Financial Crisis” of 2008-9 was the longest and most painful downturn of recent times. Caused by the failure of US lenders and the bursting of a US housing bubble, the fallout caused a global recession in 2009. Investors who bought the S&P500 index just before the crisis had to wait almost three years for the index level to rise above their purchase price.

The outbreak of the Covid-19 pandemic created the largest global economic crisis for a generation, as lockdowns caused significant damage to public finances and global commerce.

Investors had nowhere to hide during the early stages of the pandemic, with stock markets around the World moving rapidly lower during March and April 2020. The S&P500 index fell by 29% to the low point on 23rd March 2020, but had recovered the lost ground just four months later.

The Russian invasion of Ukraine in February 2022 led global markets lower, as inflationary pressure rapidly increased and caused investors to re-think economic projections. Despite reacting calmly to the initial outbreak of hostilities, the S&P500 index of leading US stocks moved decisively lower a few weeks later and took just over one year to recover to a higher level than at the start of the Russian invasion.

More historic evidence

Each of the market events listed above caused a short-term re-pricing of risk assets; however, looking back through recent history provides clear evidence that investor pain following a global event is relatively short-lived. Despite the numerous temporary setbacks of the last two decades, the S&P500 index has risen by over 400% since 2005, significantly outstripping returns from other asset classes.

The need to stay invested is supported by historic data over an even longer period. The Barclays Equity Gilt Study has compiled data over more than 130 years and shows the probability of equities providing better returns than those available on cash, over a two-year investment period, is 70%. When a longer time horizon of 10 years is considered, the probability increases to over 90%. Such evidence, gleaned over an extended period, further supports the need to stay invested through periods of uncertainty.

Is this time different?

In some respects, the current bout of market turmoil is different to recent precedents, as much of the volatility has been caused by the policy decisions of the US administration. As we suspected, Trump’s actions may well be short-lived. Countries are highly likely to negotiate deals with the US administration, dampening the direct impact of tariffs. A baseline 10% tariff will cause little in the way of lasting damage to the global economy. Nations may take the imposition of tariffs as an opportunity to change trading habits to form new trading alliances to circumvent the tariff charges. Finally, Trump’s actions are not without consequences, as demonstrated by the weakness in US Treasury Bond market, and concern amongst Republican party members.

Trying to tactically move to cash, to avoid the downturn, or selling out temporarily in the hope of buying investments back at a cheaper price may sound an attractive proposition; however, such decisions are rarely successful and rely more on luck than judgement, as you may find that markets have already moved higher when you look to re-enter markets, leading to a worse outcome than would be the case by staying invested. This is particularly the case when considering the current volatility, as demonstrated by the initial market reaction to the climb down by the Trump administration.

Keep the long-term view in mind

It is important to keep your longer-term objectives in mind when dealing with turbulent markets. Equity markets are inherently volatile, and from time to time, global events push risk levels higher. Of course, we cannot predict the future, but we can learn lessons from the market’s reaction to past events.

Engaging with an independent financial adviser during periods of volatility can prove invaluable. Our advisers are experienced and can help provide reassurance during periods of market turbulence and review your personal arrangements to provide peace of mind in challenging markets. Speak to one of our friendly team to start a conversation.

Apr 03
0

Spring Statement – key takeaways for investors

By | Budget

Chancellor Rachel Reeves delivered the Government’s Spring Statement on 26th March. Whilst not a full-blown Budget, pressures on the UK economy from various angles meant that the Statement contained rather more than just an update to Budget forecasts. As expected, no changes to tax legislation were announced; however, there are several key takeaways which investors should consider.

Individual Savings Account (ISA) consultation

Buried in the depths of the Statement, the Government confirmed that they will undertake a review of the current ISA rules. The aim of the review will be to look to “boost the culture of retail investment” and will consider whether the balance between cash and investments is appropriate. This appears to be a clear indication that the Cash ISA is the main target of the consultation, rather than the Stocks and Shares ISA, and therefore the impact on investors could be limited. Savers, however, could see changes to the amount that can be saved within a Cash ISA, although there is no indication as yet as to how the Government could implement any changes to the existing ISA framework. We would expect further clarity as we head towards the Budget in the Autumn.

Increased tax receipts

Amongst the slew of data presented with the Statement, projected tax receipts highlighted the impact of recent changes to tax rules when assets are sold, and on inheritance. The Office for Budget Responsibility (OBR) expect Inheritance Tax (IHT) receipts to have climbed to £8.4bn for the 2024/25 tax year, an increase of 11.6% on the receipts from the previous year. Even more stark is the projection that IHT receipts will reach £14.3bn by 2029/30, a 70% increase over the next five years. The expected increase is due to the inclusion of pensions within the scope of IHT from April 2027, the changes to Agricultural and Business Reliefs, and the ongoing impact of the frozen Nil Rate Band.

Capital Gains Tax (CGT) is also forecast to bring increased funds into the Treasury over the rest of this parliament. The CGT exempt amount (i.e. the net amount of gain that can be made before CGT becomes payable) has been slashed from £12,300 per year to just £3,000 per year in successive Budgets, and the rates of CGT payable by investors increased immediately after the Budget last October. The OBR have forecast that CGT receipts will rise sharply to £19.7bn for the 2025/26 tax year, an increase of 48% on the amount received in the current Tax Year and reach £25.5bn by the end of this parliament in 2029/30.

With more estates being liable to IHT, and investors increasingly unable to avoid CGT, the forecasted figures are a timely reminder of the need to ensure that your financial plans are as tax efficient as possible.

Growth downgraded

The UK economy has effectively stalled over recent months, with GDP data showing very marginal gains. It was, therefore, no surprise that the OBR have downgraded their growth forecast for the UK economy in 2025 from 2% to 1%. Other leading forecasts show a weaker projection, with the Bank of England reducing their growth forecast from 1.5% to 0.75% in February.

Both forecasts may, however, be too optimistic. Households have just been hit with a succession of price hikes, from Council Tax increases to a jump in utility bills. This is likely to continue to supress consumer confidence as households grapple with higher essential expenditure. Businesses have just been impacted by the increase in minimum wage, and hike in employer’s National Insurance. This could lead to rising unemployment, and higher prices, as businesses look to offset the higher costs.

Inflationary pressure

The Chancellor received a welcome piece of news before the Statement was delivered, when the annual rate of inflation, measured by the Consumer Prices Index, fell from 3% to 2.8% in February. This does, however, remain above the Bank of England target rate of 2%.

Most economic forecasters expect inflation to rise again over the rest of this year, as a combination of tax hikes on business and higher energy costs force prices higher. In their latest inflation report, the Bank of England predict that inflation will hit 3.7% by the middle of the year, before falling back gradually.

Amidst an increasingly uncertain outlook for the global economy, we question whether these projections have properly considered the potentially disruptive impact of tariffs imposed by the US administration. On the same day as the Spring Statement, the US announced new tariffs on the import of cars and car parts from overseas, which could directly affect UK exports of luxury vehicles to the US, which is a major buyer of British marques.

Considering the range of factors, the balance of risks may point to inflation moving higher than is currently projected. This could, potentially, limit the scope for further interest rate cuts as 2025 progresses.

What should investors do?

Whilst the Spring Statement did not introduce any changes to tax legislation, it reinforced the weak outlook for the UK economy and underlined the need for investors to consider the tax-efficiency of their financial arrangements.

The ISA allowance remains a valuable tax break and a cornerstone of many financial plans. Naturally, we wait with interest to learn further details on the government review of ISA regulations; however, the indication is that Cash ISAs are more likely to be impacted than Stocks and Shares ISAs.

The projected increased tax receipts from IHT and CGT are a timely reminder of the need to plan ahead to minimise your exposure to either of these taxes. Undertaking estate planning can help reduce the potential IHT liability on your death and leave more of your estate to your loved ones. Similarly, structuring investments with tax-efficiency in mind can help reduce the likelihood of a CGT liability when assets are sold.

Our experienced advisers can carry out an impartial and holistic review of your financial arrangements and suggest changes that promote tax-efficiency and are tailored to your financial goals. Speak to one of the team to start a conversation.

Mar 27
0

The benefits of regular investment

By | Investments

One of the simplest ways of investing for the longer term without committing a lump sum is to regularly invest over a period of time. In fact, many of us do this without thinking, as employer and employee contributions are paid into personal pension plans on a monthly basis via payroll.

Each monthly contribution buys units in an investment fund or strategy, with the quantity of units received from each contribution based on the prevailing price of the selected fund at the time of investment. Since fund prices fluctuate over time, the number of units acquired each month varies accordingly. When markets are performing well, fund prices are generally higher, resulting in fewer units being purchased with each contribution. Conversely, during market downturns, lower fund prices allow investors to buy more units with the same amount of money.

A regular investment approach benefits from a theory known as “Pound Cost Averaging”, which helps smooth out market fluctuations over time. By undertaking regular investment, the purchase price paid will vary from month to month leading to an average entry point over the longer term. This helps smooth out the volatility which is inherent in global equity markets.

Investing regularly can help remove the emotional aspect of the decision on when to invest, which can be particularly helpful during periods when market volatility and risk are elevated. For a long-term investor, the timing of market entry can be less relevant, as investment returns over an extended period are largely dictated by the amount of time an investment is held; however, making the decision to invest in a market downturn can be challenging, particularly for investors who have not experienced such conditions previously.

Regular investment can be a very sensible way of building wealth over the long term. Saving a set amount each month promotes financial discipline and if funds are collected automatically, as is the case with pension contributions, the commitment is made before the funds reach your bank account. The same approach can, however, be used to regularly invest for other financial targets, such as building a sum of money to help children and grandchildren through higher education, or towards a deposit for their first home.

For those without the funds to make a lump sum investment, regular investment into a plan can improve accessibility to investment markets. Most investment plans offer the ability to accept regular savings, which can usually be set up via a direct bank payment each month. Whilst this automates the investment process, it is important to remember that the savings plan can be adapted to reflect changes in circumstances. For example, the amount saved each month could increase as funds allow, or contributions could be temporarily suspended if funds are needed for other financial commitments.

Regular investment with a lump sum

While regular investing is an effective way to build wealth gradually, the same approach can be adopted for those with a lump sum available for investment. Conventional investment wisdom suggests that the longer an investment remains in the market, the greater the potential for growth. A rational investor might, therefore, opt to invest a lump sum immediately to maximize market exposure and potential returns. Historical data supports this strategy, particularly during stable or rising markets.

While investing a lump sum immediately may be beneficial in a rising market, in periods when market volatility is elevated, adopting a regular investment approach may be beneficial. This process is known as “phasing” and divides the lump sum investment into smaller portions which are invested at regular intervals over a set period, such as three, six, or twelve months.

As demonstrated in the example below, an investor with a lump sum of £150,000 to invest could choose to allocate £25,000 per month over six months instead of investing the entire amount upfront. The first payment of £25,000 is made in month one, with the balance of £125,000 being held on cash deposit. Each consecutive month, a further £25,000 is invested until the full investment has been made.

If markets decline during this period (as is the case in the first three months of the example) each investment purchases a greater number of units at lower prices, ultimately enhancing the overall investment position; however, if markets rise steadily, phased investing could lead to fewer units being purchased over time, resulting in a lower return than if the funds are invested immediately. Whilst this would place the investor in a worst position than if the investment was made in one tranche, it would, however, reduce the risk of making the full investment in a single transaction.

Getting the right advice

The decision to phase an investment needs careful consideration of the outlook for investment markets, time horizon for investment, and needs and objectives of the investor. For example, an investor seeking income from an investment may well have to contend with lower natural income in the early stages if an investment is phased, as only a proportion of the investment is committed to the chosen strategy.

Independent financial advice can add significant value in reaching this decision. At FAS, we tailor investment strategies to each client’s unique situation, considering both lump sum and phased approaches where appropriate. If you are looking to establish a regular savings plan, or arranging a lump sum investment, speak to our experienced advisers to discuss the options in more detail.

Mar 20
0

Alternatives to investment property

By | Financial Planning

Buy to Let has remained a popular investment option for many years, as landlords have enjoyed the benefits of a buoyant rental market, and rising property values. Investor appetite may, however, be waning, judging by recent data collated by estate agent Hamptons. Their data suggests the proportion of homes purchased by landlords has fallen to the lowest level since 2009, accounting for just 9.6% of purchasers in January.

It is not only new landlords who appear to be reconsidering property purchases. Those with existing Buy to Let properties are also considering selling, with National Residential Landlords Association research from last Autumn suggesting that 40% of landlords questioned were considering selling one or more properties in the next 12 months.

It is not difficult to see why landlords may be reaching this conclusion. Increased tenant’s rights, and an end to so-called “no fault” evictions, higher mortgage rates and an increased tax burden may all be contributing factors. Further legislative changes, including the recent announcement that all rental properties must meet tighter energy performance ratings, also adds to the uncertainty.

We frequently speak to clients holding rental properties, who are considering reducing their exposure to residential property. This decision needs careful consideration, as undertaking a property disposal is an expensive process, both in terms of fees and timing. The most appropriate way forward will be determined by the overall financial circumstances of the individual in question, with many variables to consider.

Increased liquidity

One of the most compelling reasons to consider an alternative to property investment is the increased liquidity that investments in assets such as equities and bonds can provide. Most regulated investment options provide access within a few working days, whereas raising funds from a property may be a long and expensive process. Other forms of investment, potentially using collective investments holding a blend of equities and fixed interest securities, can easily be realised should funds be needed for any reason.

Tax inefficiency

Profits from property rental income are liable to income tax in the hands of an individual, at their marginal rate of tax. Some allowable expenses can be deducted from rental income, such as insurance, professional costs, property repairs and maintenance. Buy-to-let mortgage interest payments can also be deducted; however, this tax relief has been restricted to 20% since 2020, meaning that higher and additional rate taxpayers have seen the tax they pay increase since the previous relief system was withdrawn.

By way of contrast, investors considering alternatives such as equities and fixed income securities have tax wrappers such as the Individual Savings Account (ISA) available where tax-free income can be generated. Whilst the ISA subscription is restricted to £20,000 per tax year, other options such as Investment Bonds can also provide tax-efficiency, and on equity investments held outside of a tax advantaged wrapper, the rates of tax on dividends are lower than on property income.

Capital Gains Tax (CGT) is another consideration for those selling a property. Successive Budgets have reduced the CGT annual exemption to just £3,000, although joint owners can use both allowances to offset the tax liability. Periods when the property was occupied by the owner can provide Private Residence Relief, and costs in selling the property can also be deducted. Finally, significant improvements made to the property may also be an allowable deduction. CGT is charged at 24% for higher rate taxpayers, whereas basic rate taxpayers pay CGT at 18%. CGT is due within 60 days of completion and therefore those selling property need to calculate the gain quickly to avoid a late payment penalty and/or interest.

Changing legislation

One of the most challenging aspects of property investment is navigating changes in legislation, which threaten to reduce the attractiveness of property investment. Firstly, landlords will need to comply with updated energy efficiency rules, where all rental properties will need to hold an Energy Performance Certificate (EPC) of at least C by 2030. This could force landlords into expensive upgrades to their rental properties, and damage investment returns from affected properties.

The Renters Rights Bill, which is expected to become law during the Summer, may well provide tenants with greater stability, but may lead to higher costs and greater difficulty removing problem tenants. Amongst the measures included in the Bill, so-called “section 21” evictions will be outlawed, meaning landlords will no longer be able to end a tenancy without a valid legal reason. Whilst the new legislation may not have any impact for landlords with good tenants, dealing with issues may become more problematic and costly.

Tailored advice is key

As you can see from the various factors listed above, the decision to sell an investment property is rarely straightforward; however, in our experience, landlords are more readily questioning whether they should consider alternative investment options, a decision which may be underpinned by static or falling house prices in the coming years.

In most instances, an investment strategy designed to produce an attractive level of natural income can compete with net income yields from property investment, particularly when the tax-efficiency that investment wrappers can provide is considered. Taking a diversified approach, and blending investments across different asset classes and sectors, can help reduce risk, and using equities can also produce capital appreciation over time, in addition to the income yield. Not only can a diversified portfolio be more tax-efficient than property investment, such an approach can also prove to be lower maintenance and less hassle.

Our experienced advisers can take a holistic view of your financial circumstances and provide independent and unbiased advice on the options available. We can also look at ways to offset a CGT liability through investments that provide tax relief on investment. Speak to one of the team if you hold investment property and are considering alternative options.