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FAS

Aug 07
0

IHT planning through Business Relief

By | Inheritance Tax

Inheritance Tax (IHT) planning remains a central focus in many financial planning discussions, especially for individuals and families seeking to preserve wealth across generations. A common concern among clients is ensuring that as much of their estate as possible is passed on to loved ones, without being subject to IHT. At the same time, clients often express the wish to retain a degree of flexibility in their planning, enabling them to adapt their arrangements as their circumstances change.

One solution that can offer both tax efficiency and a flexible approach are investments that qualify for Business Relief. Whilst these strategies can be a valuable tool for IHT mitigation, significant changes announced in the October 2024 Budget will impact how Business Relief can be used from April 2026 onwards.

Business Relief basics

Business Relief was first introduced under the Finance Act of 1976. Its purpose was to alleviate the pressure placed on family-owned businesses where, historically, the imposition of IHT on death forced families to sell the business to meet tax liabilities. Over time, the scope of Business Relief was extended to include not only unquoted trading businesses, but also certain companies listed on the Alternative Investment Market (AIM), which is an alternative UK stock market for small and medium-sized innovative companies.

To benefit from Business Relief, shares held must meet specific criteria. The shares must be in an unquoted trading company or a company quoted on AIM and must have been held for at least two years before the investor’s death. In addition, the company in which the shares are held must be actively trading and not primarily involved in investment activities. This means that rental property companies are unlikely to qualify for relief. Finally, excessive cash reserves or non-trading assets held by the investee company may disqualify it from relief, as HMRC may interpret it as an investment rather than a trading business.

Accessing Business Relief through managed solutions

Most individuals are not directly involved in owning or running qualifying businesses—and may have no desire to do so. To bridge this gap, the financial services sector has developed a range of investment solutions that allow investors to access Business Relief investments through managed portfolios, providing the same tax advantages without the need to be operationally involved in a business.

Most managed solutions invest funds in a broad range of different qualifying trades, which focus on asset-backed investments, such as renewable energy facilities – for example wind, solar and hydro power generation – storage and warehousing, commercial property rental and forestry. They generally target modest returns, say between 3% and 5% per annum, which if achieved, would provide an element of inflation proofing.

While these asset-backed businesses can provide more stability than traded equity-based investments, they also carry certain risks. Notably, such investments are unquoted, meaning there is no public market to trade the shares. As a result, they are less liquid and may be more difficult to value or sell quickly. Investors must understand these risks as part of the broader decision-making process.

Flexibility and control

One of the standout benefits of Business Relief investments is the control retained by the investor. This sets Business Relief apart from other IHT strategies such as outright gifting, as the investments remain in the individual’s name and under their control. This means that if the investor’s circumstances change—such as the need for long-term care or unforeseen expenses arise—they can redeem the investment, subject to availability of liquidity. This makes Business Relief solutions particularly attractive for clients who want to plan tax-efficiently without fully relinquishing access to their funds.

Major reforms to Business Relief

The October 2024 Budget introduced significant reforms to Business Relief, due to take effect from April 2026. These changes will have meaningful implications for estate planning strategies and may lead investors to revisit existing plans.

Currently, assets that qualify for Business Relief are eligible for 100% relief from IHT. From April 2026, a new cap will apply, where the first £1 million of qualifying business and agricultural assets will continue to benefit from 100% relief, and any qualifying assets held above £1 million will receive only 50% relief, meaning the effective IHT rate will be 20% on the excess. This £1 million limit applies on a combined basis to Business and Agricultural Relief, and will remain fixed until 2030, after which it will increase in line with inflation.

Currently, qualifying shares listed on the AIM market receive full (100%) relief; however, from April 2026, the relief on AIM shares will reduce to 50%. According to HMRC data, the total IHT relief attributable to AIM shares in 2021/22 was approximately £185 million. The updated policy may, therefore, raise just £90 million of tax revenue per year, which leads us to question whether the disruption to investors is proportionate to the financial benefit for the Treasury.

Investors with significant AIM holdings must now consider whether the reduced tax efficiency justifies restructuring their investment portfolio. While recent AIM performance has been underwhelming, these shares may still offer long-term growth potential and merit inclusion depending on an individual’s risk profile and objectives.

The Importance of a holistic approach

Whilst this article has focused on Business Relief, and changes to the rules from next April, this solution is only one of a range of options that can be used to mitigate a potential IHT liability on death. By taking a holistic approach, tailored to your individual circumstances, our advisers can consider other options, such as gifting, the use of trusts and insurance products, as alternatives to Business Relief. Often when dealing with complex IHT planning needs, a combination of more than one of these options can provide the correct balance between tax efficiency, control, and risk.

Speak to one of our experienced advisers to discuss the implications of IHT on your potential estate and to discuss ways to reduce, or indeed avoid, a tax bill on your death.

Jul 31
1

State Pension Age review – a call to action

By | Retirement Planning

Retirement planning has once again taken centre stage following the Government’s surprise announcement of a fresh review into the State Pension age. This marks the third review of its kind, and while the Pensions Act 2014 stipulates that the State Pension age should be reviewed at least every six years, the timing of the announcement, just two years after the last review concluded, has taken many by surprise.

State Pension Age review

Currently, the State Pension age is 66, but it is set to rise gradually over coming years. For individuals born after April 1960, State Pension will not be payable until they reach 67, with a further jump to 68 for those born after 6th April 1978. However, this latest review could recommend an even later pension age, driven by ongoing concerns about public sector debt and the affordability of supporting an aging population.

In addition to the review of pension age, the Government has also reconvened a Pension Commission, who will be tasked with conducting a comprehensive review of the UK’s pension savings market. The commission’s findings will not be published until 2027; however initial analysis paints a concerning picture, where 45% of working-age adults are not saving into a pension at all, and those aiming to retire in 2050 may receive 8% less income from private pensions compared to those retiring today.

These developments serve as a stark reminder of the need to take retirement planning seriously and start considering your retirement plans at a much earlier stage than you may think.

The most critical takeaway from these announcements is that relying solely on the State Pension in later life is unlikely to provide any more than a very modest standard of living, and those retiring in the future may be waiting longer before they start to receive a State Pension. Given this uncertainty, making personal pension provision, whether through a workplace scheme, a personal pension or other long-term savings, is more vital than ever.

Auto-Enrolment: A Starting Point, Not the Finish Line

Under current legislation, qualifying employees are automatically enrolled into a workplace pension. Contributions total a minimum of 8% of “band” earnings, with 3% from the employer, 4% from the employee (net of tax), and 1% from government tax relief.

While this framework helps build a pension pot, it is widely acknowledged that auto-enrolment minimums alone are unlikely to generate a sufficient retirement income. Proactive savers should consider increasing their monthly contributions to build a more substantial pot over time. Making additional contributions can have a profound impact on retirement income, as demonstrated by the following examples.

Example 1

Steve is a 21-year-old University leaver who earns £30,000 per year and makes contributions based on the auto-enrolment minimum contribution levels. Assuming a 2.5% annual salary increase, a 4.25% net investment return, and 2.5% inflation, Steve’s pension pot at age 67 would be approximately £129,500, producing a retirement income of around £6,200 annually in today’s money.

If Steve increased his gross annual contribution to 8% of his salary, which would cost him an extra £60 per month, the difference is dramatic. His pot value would increase by over £96,000 at age 67, providing a significantly larger annual income in retirement.

Example 2

Sally is also 21 and has just started a job earning £50,000 per annum. Again, using the same assumptions as in Steve’s example, Sally’s pension pot at age 67 would be approximately £273,000, which could produce a retirement income of around £10,280 per annum in today’s money.

Sally can afford a higher level of contribution than the minimum contribution levels under auto-enrolment and can increase her gross annual contribution to 10% of salary. This would boost her retirement pot by over £170,000 at age 67, which could provide an additional £6,300 of retirement income each year.

Source: Moneyhelper.org.uk

The worked examples show a net investment rate of return of 4.25% per annum; however, actual investment returns achieve depend on the performance of the pension investments selected and the chosen investment strategy. It is, therefore, important to review the performance of pension investments regularly, and make changes if returns lag expectations. The cost of not doing so can be significant, and using the power of compound interest, incremental performance gains can have a sizeable impact on the value of a pension pot at retirement, and the level of retirement income that the pot can support.

Looking Beyond Pensions

Whilst pensions form the bedrock of most retirement plans, they are not the only source of retirement income. Many people supplement their pensions with income from buy-to-let properties, particularly where outstanding mortgage debt has been repaid. Stocks and shares Individual Savings Accounts (ISAs) can provide a tax-free income stream from bond income and dividends, and withdrawals from investment bonds or unit trusts can provide regular payments in retirement.

By building multiple streams of retirement income, you can reduce your reliance on any one source. This can help manage risk more effectively and potentially increase the overall financial flexibility of a retirement plan.

A call to action

The Government’s review of State Pension age, and investigation into the long-term savings market, are further indicators that generations to come face a less comfortable retirement. It is, therefore, essential to take control of your retirement savings provision and begin planning at an early stage. As you start to consider your retirement plans, engaging with an independent financial planner can help lay the foundations for a comfortable retirement.

Our experienced advisers can review your existing pensions and recommend actions to ensure that your pension investments are appropriate for your objectives. We can also provide advice on the level of pension savings required to achieve your goals. Speak to one of our team for independent and impartial advice.

Jul 24
0

Time to review NS&I holdings?

By | Financial Planning

When undertaking a comprehensive review of a client’s financial assets, we often find that clients hold one or more products managed by NS&I, or National Savings & Investments in old money.

In today’s fast-moving savings market, NS&I has adapted to offer a more streamlined range of products. Although NS&I’s savings products have unique financial backing, the rates of interest offered can easily be bettered by other providers. In addition, apart from one remaining tax-free option, the tax-efficiency offered by historic NS&I Bonds is no longer available within the existing product range.

Backed by HM Treasury

Originally established in 1861 as the Post Office Savings Bank, NS&I is the UK government savings bank and aims to provide a secure place for individuals to save while helping the government finance public spending. As at September 2024, 24 million customers hold savings products with NS&I, and collectively NS&I manages more than £200 billion on behalf of savers across their range of savings products.

NS&I products are backed by HM Treasury, making them among the safest financial instruments available in the UK. This makes them more secure than typical bank accounts, which are only protected up to £85,000 under the Financial Services Compensation Scheme (FSCS).

NS&I provides funding to HM Treasury, and the Budget in November 2024 outlined the government’s intention to increase the amount of money sought from NS&I deposits, to £12bn for the 2025/26 tax year. This would provide a welcome boost to HM Treasury; however, NS&I needs to balance its role in raising government finance with the need to avoid distorting the wider savings market by offering rates that are significantly higher than competitors. Given the current range of products offered by NS&I, we feel there is little chance of that occurring.

Fixed Rate savings in a crowded marketplace

NS&I Savings Bonds are still the cornerstone of the product range. Interest earned on the current range of Bonds offered by NS&I is subject to Income Tax, which does little to set the products apart from fixed rate Bonds from other banks and building societies. The interest rates currently offered on the flagship British Savings Bonds lag market leading rates by some margin on each of the 1,2,3 and 5-year terms offered, and the only reason for considering NS&I over any other provider is if you want greater protection for deposits over £85,000.

The NS&I Green Savings Bonds offer even worse value. The Bonds currently pay 2.95% gross Annual Equivalent Rate for a 3-year term, which is over 1.25% lower than the market leading rate payable on a 3-year Bond. The ethical credentials of the Green Savings Bond also require closer scrutiny, given the woolly promise that HM Treasury will aim to match deposits into the Bond in chosen green projects.

Other products lag behind

Amongst other savings products offered by NS&I, rates are similarly disappointing compared to other savings options. The NS&I Direct Cash ISA currently pays interest of 3.50% per annum, almost 1% lower than the market leader, and the cash Junior ISA, which allows tax-free savings for those up to the age of 18, pays just 3.55% per annum, again some way behind other providers. Taken in the round, the range of savings products are uncompetitive, and better returns can be obtained by considering options across the marketplace.

Premium Bonds

The only bright spot in NS&I’s current lacklustre product line-up are Premium Bonds. These are NS&I’s most popular product, with over 22 million accounts holding savings up to the maximum £50,000. Premium Bonds don’t pay interest in the traditional sense. Instead, savers are entered into a monthly prize draw with tax-free prizes ranging from £25 to £1 million. This appeals to people who enjoy the “lottery” aspect while keeping their capital safe.

The annual prize fund rate will fall to 3.6% from August, leaving the headline rate below alternative savings options that offer almost instant access; however, given the fact that prizes are tax-free, Premium Bonds may appeal to Higher and Additional rate taxpayers.

Falling interest rates

We feel the current range of products offered by NS&I are disappointing, and apart from Premium Bonds, the rates offered by the government backed institution can be easily beaten elsewhere; however, whilst we would encourage savers to review their NS&I accounts, perhaps a more fundamental review of the level of savings you hold would be a sensible step to take.

UK base interest rates have fallen four times in the last 12 months, and further cuts to interest rates are likely during the autumn, and into 2026, as the Bank of England look to stimulate the stagnating UK economy. Savings rates are, therefore, likely to fall further over the next year, and savers should also be wary of the recent increase in the Consumer Prices Index (CPI), which rose to an annual rate of 3.6% in June, the highest level since January 2024. Savers often ignore the eroding impact of inflation, which coupled with falling interest rates, could mean that deposits lose value in real terms.

As an alternative to medium and longer-term cash savings, a cautiously invested managed portfolio may be an ideal solution to consider for surplus cash deposits. By allocating the largest proportion of the portfolio to fixed interest securities and cash-like instruments, volatility can be kept in check, and adding an allocation to equities can aim to boost returns and provide protection against inflation. A cautious portfolio strategy may also be a sensible option to consider for those who rely on income from their savings.

Selecting the right asset allocation and investment selection is a key component of any successful strategy, and our advisers can take a holistic approach to your savings and wealth and provide independent advice on alternative options where surplus cash deposits are held. Speak to one of our experienced team to start a conversation.

Jul 17
0

Financial Planning for Expected Tax Increases

By | Tax Planning

The Widening Fiscal Gap

The fragile state of the UK’s public finances has dominated headlines in recent weeks. A combination of increased spending on defence, reversals to public service cuts, and structural pressures on welfare and healthcare budgets has caused a growing mismatch between government income and expenditure. This “fiscal gap” will need to be addressed to avoid undermining the credibility of long-term economic policy. Failing to act could weaken the pound, raise borrowing costs, and signal a lack of fiscal discipline to markets.

Likely Tax Changes in the Autumn Budget

Given the government’s commitments not to raise the three headline taxes—Income Tax, VAT, and employee National Insurance—other areas of taxation are now firmly in the spotlight. We feel that the following three tax changes are likely, which will directly affect financial planning decisions.

1. Further Freezes on Tax Bands

The government previously announced a freeze on the personal allowance and the higher-rate tax threshold until 2028. Extending this freeze even further, potentially until the end of the parliamentary term, would allow the Treasury to increase revenues without technically raising taxes. As wages rise with inflation, more people are pulled into higher tax brackets, a phenomenon often referred to as “fiscal drag.”

2. Changes to Cash Individual Savings Account (ISA) Allowances

There has been speculation that the government could reduce the maximum amount that can be saved into a cash ISA each year. Currently, individuals can save up to £20,000 per year across cash and stocks & shares ISAs. Policymakers are considering reducing the cash component while keeping the overall ISA limit unchanged. This could nudge savers towards investments or mean that future cash savings are held outside of an ISA wrapper, where interest may be taxable.

3. Reform of Salary Sacrifice Schemes

Salary sacrifice arrangements allow employees to exchange part of their salary for employer pension contributions, reducing both Income Tax and National Insurance liabilities. These schemes have grown in popularity, particularly among higher earners. A government review is currently examining whether to limit the amount of salary that can be sacrificed or to reform the rules more broadly. Restrictions could reduce the effectiveness of this key tax-planning tool.

Speculative but Possible Changes

While the measures above are more likely, other potential changes have also been discussed, though with less certainty.

Pension Tax Relief Reforms

The current system provides tax relief on personal pension contributions at an individual’s marginal tax rate. Though expensive for the government—costing over £50 billion annually—this system is integral to encouraging long-term retirement saving. Reforming it could mean introducing a flat rate of relief or capping the amount that can be claimed; however, implementation could be complex and might run counter to the goal of incentivising saving.

Wealth Tax Proposals

Talk of a wealth tax has grown louder, especially as the government seeks ways to raise revenue without affecting working people. A wealth tax could target assets over a certain threshold, but it would be difficult to administer. Collecting a wealth tax on illiquid assets such as property would create significant challenges, and public support for such a tax remains divided. While still speculative, it is an option that cannot be ruled out entirely.

How to plan around tax changes

Dealing with changes in tax legislation is an unavoidable hazard when it comes to financial planning. In recent years, we have seen numerous changes to pension legislation, affecting the amount that can be contributed each year, and how untouched pensions are dealt with on death. Inheritance Tax laws have also been tweaked, with the introduction of the Residence Nil-Rate band, and forthcoming changes to Business and Agricultural Relief. Tax efficient savings vehicles have evolved several times since the introduction of the Personal Equity Plan (PEP) and Tax Efficient Special Savings Account (TESSA) in the early 1990s.

Financial legislation is subject to frequent change, and reacting to speculation rather than confirmed policy can be risky. History has shown the dangers of pre-emptive action. For example, during a wave of speculation last year that pension tax free cash would be capped, many individuals rushed to crystallise their pensions. When the Budget was released and no such changes were made, they were left with irreversible decisions that could have carried unforeseen tax implications.

Rather than acting on rumour, it is advisable to ensure that your financial plans remain flexible so that they can adapt to change without incurring heavy costs or unwelcome tax penalties.

Focus on Tax Efficiency

In an environment where direct tax rises are politically constrained, stealth taxation through frozen allowances and capped reliefs are likely to play a greater role. This makes tax efficiency more important than ever.

A well-constructed financial plan considers not just returns, but also how much of those returns you keep after tax. Whether through ISAs, pensions, business ownership, or estate planning, there are still many legitimate ways to improve your position. Ensuring you are taking advantage of all available tax wrappers, allowances, and reliefs is essential.

Our advisers can help you navigate complex and changing tax environments. We can take a comprehensive look at your financial position—including pensions, investments, income, and inheritance planning—and identify opportunities to improve your overall tax-efficiency.

The upcoming Budget is likely to include tough choices, even if they are not considered as “tax increases” in the traditional sense. Although it may be tempting to act now in anticipation of changes, the most prudent course is to prepare your finances to be flexible, rather than reactive. Tax-efficiency should be viewed as a permanent part of any sound financial plan, and actions taken should be reviewed regularly so that they remain appropriate in light of changes to the tax rules.

Speak to one of our team to review your current strategy and ensure that it is ready for what lies ahead.

Jul 10
0

Can I afford to take early retirement?

By | Retirement Planning

When we speak to clients about their hopes for the future, taking early retirement, to enjoy travel or pursue hobbies, is often high on their list of goals. Whether this is possible or not depends on a range of factors; however, starting to formulate plans for retirement well in advance can help improve the prospects of retiring early and enjoying a comfortable retirement.

When can I retire?

Unless you hold assets that can provide an income or regular capital sum – such as property or investments – that can enable early retirement, most people will need to wait until pension provision is accessible before considering retirement. The earliest point at which you can access personal, or workplace pensions is currently age 55, although this will rise to age 57 from April 2028; however, affordability constraints mean that this age is often too early for most to consider. According to Office for National Statistics (ONS) data published in 2021, just over 3.5% of the population opt to retire at the earliest current pension age of 55.

For those that hold a Final Salary or Defined Benefit pension, each pension scheme will have rules as to when the pension benefits can be taken. Often this is set at age 65, although others may offer access at 60. Taking benefits earlier than the normal retirement date for the scheme will usually lead to a reduction in benefits for each year the pension is taken early – typically this will be a reduction of around 5% per annum, which may be sufficient penalty to dissuade pension holders from accessing pensions early.

What standard of living do I want?

Early retirement is entirely possible for many individuals, although this depends on your expectations in later life, as personal pension funds and other savings will normally be needed to bridge the gap between the point of retirement and when state pension provision begins, and then continue to support lifestyles in later life.

A good starting point is to consider the amount of income you will need during retirement, in today’s money, to begin to assess the feasibility of early retirement. All regular outgoings and costs need to be considered, such as household bills, groceries, transport costs and any outstanding loan or mortgage that needs to be repaid. On top of essential spending, holidays and travel expenditure, hobbies, leisure, and home improvements need to be accounted for, together with the cost of replacing vehicles and household items over time.

It is also important to think about the impact of increases in the cost of living. The last few years has seen the cost of gas, electricity, food, and other essentials rise faster than the headline rate of inflation. Not considering the eroding impact of rising prices could lead to a shortfall of income in later life if pension funds are accessed too early.

Increasing life expectancy

Life expectancy in the UK continues to increase. According to the ONS, a woman aged 50 now is expected to live until an average of 87 years and has a one in four chance of living to 95, while a man aged 50 has a mean life expectancy of 34 years. Along with increasing life expectancy, medical advances may enable people to stay healthier and active for longer, and as a result pensions and other sources of retirement income will need to potentially fund lifestyle choices for an increasing number of years. These factors underline the need for forward planning to ensure retirement is comfortable.

Is the state pension enough?

State pension provision will form a useful part of most people’s retirement plans; however, state pension alone is unlikely to provide a comfortable retirement. The current state pension payable to anyone with 35 or more qualifying years of National Insurance contributions is £230.25 per week, or £11,973 per annum.

Legislative changes over recent years has pushed back the age at which the state pension becomes payable. In 2018, the state pension age for men and women was set at 65; however, the state pension age has increased to 66 for anyone born between 6th December 1953 and 5th April 1960, 67 for anyone born between 6th March 1961 and 5th April 1977, and 68 for anyone born after 6th April 1978. As a result, those looking to retire early may need to rely solely on pension savings for longer.

The Retirement Living Standards report concluded that a couple looking to enjoy a moderate standard of living in retirement will need to aim to receive income of around £43,900 per annum, which far exceeds the £23,946 per annum that a couple who both receive the full state pension would enjoy. It is, therefore, crucial to begin to make your own provision for retirement to make life more comfortable.

Start planning ahead

As you start to consider your future, and how retirement may look for you, engaging with an independent financial planner at an early stage can help lay the foundations for a comfortable retirement, and consider whether retiring early really is possible.

At FAS, we understand that every individual’s circumstances are unique, and we take the time to fully understand your expectations, needs, and goals in retirement. Our experienced advisers can review existing personal pension arrangements, to ensure that they are appropriate, and analyse pension investments with the aim of improving investment performance. We can also undertake cash flow analysis, to consider the level of pension savings that need to be made to achieve your goals.

By adopting a holistic approach, we can look at wider financial circumstances, such as investments, savings, and property income, to build a comprehensive retirement plan. We can also provide a projection of the likely income you could enjoy in retirement and whether you could afford to retire early. Speak to one of our experienced advisers to discuss your existing pension arrangements and begin planning for later life.

Jul 03
0

The Importance of Market Momentum

By | Investments

Anyone who has held investments through the last five years will have encountered uncomfortable periods when market volatility has increased. The outbreak of Covid-19 at the start of the decade, the Russian invasion of Ukraine, the ill-fated Mini-Budget of 2022 that led to the downfall of Liz Truss, and more recently the global tariff shock and increased instability in the Middle East, are all recent examples of global events that have led markets to retreat in the short-term.

Given how markets have traditionally reacted to global events over recent years, some investors have been a little puzzled by the calm market conditions seen over recent weeks. The CBOE VIX index, which measures the volatility of the S&P500 index of US stocks, has barely suggested any sign of increased risk, despite the US involvement in the Israel-Iran conflict, which has the potential to lead to a regional war, and have wider implications for the global economic outlook.

Reasons behind the muted reaction

A major reason for the sanguine response to the escalation in the Middle East has been the suggestion that US involvement will be limited. We suspect market reaction would be different should the US be drawn into a wider conflict in the region. In previous periods of unrest in the Gulf, Oil prices have been driven rapidly higher, as fears grow over supply constraints, and indeed, this was also the case following the Russian invasion of Ukraine. Whilst the bombing of Iranian nuclear facilities did cause a minor spike in the price of Brent Crude, the reaction has been muted given that many feel that tensions could ultimately ease. Should oil prices remain around current levels, the potential for damage to the global economy is limited; however, actions, such as blocking the Straits of Hormuz, would undoubtedly see the price of oil soar.

Tariffs remain a threat

The instability in the Middle East is not the only current global factor that markets are seemingly taking in their stride. Away from global conflict, the tariff issue remains unresolved. Markets fell sharply immediately after the Liberation Day announcement on 2nd April and began to rebound once the US administration announced a 90-day pause a week later.

The trade deal struck with the UK recently is the first of what the US hope will be many that will be completed; however, time is running out before July 9th, when the current 90-day pause will end, and this poses the question, what happens next? Could the 90-day pause be extended, to allow additional time for deals to be struck? Will challenges questioning the legal basis of tariffs be successful? Or will Trump simply roll the dice again and reimpose the original tariff levels on trading partners? Markets will undoubtedly gain clarity in the coming weeks; however, given Trump’s unpredictability, the current market optimism runs the risk of discounting the potential for further turbulence when the 90 days expire.

Focus on fundamentals

Whilst markets grapple with geopolitical factors, other risks remain which could derail the current positive mood. We will shortly be entering the next quarterly reporting season for US equities, and markets will once again focus on the quality of US earnings, which may have been impacted by uncertainty over tariffs and weaker consumer confidence. Given the current market valuations, disappointing earnings reports could leave the valuations of some leading companies exposed.

The actions of the Federal Reserve could also pose a risk to the current positivity in global equities. Despite Trump’s regular demands that Fed chairman Jerome Powell starts to cut US base rates, the Federal Reserve have so far stayed resolute, highlighting the potential that tariffs could push inflation higher over coming months. Economists are also split as to whether any inflationary pressure would be short-lived, as companies readjust to tariff levels, or more persistent. Markets currently expect the Fed to cut rates twice this year, and any deviation from this path could lead to market disappointment.

Don’t discount market momentum

One theory that tries to explain the perceived complacency is that investment markets are simply growing increasingly numb to the seemingly endless stream of geopolitical noise and choosing to look for positive signs to support the current rally.

It is easy to build a case that suggests that current market valuations may become challenging as geopolitical factors weigh; however, market momentum remains strong, and further upside is possible in the short-term, if corporate earnings beat estimates and the Federal Reserve begin to ease the cost of borrowing. In short, markets could continue to ignore the risks and focus on positive factors that support valuations for some time to come.

As suggested in the famous quote attributed to John Maynard Keynes, “markets can remain irrational longer than you can remain solvent”. This may be an important mantra as we head through the coming weeks, if investment markets continue their upward momentum.

What action should investors take

Diversification is a key component of sound investment strategy in all market conditions. Holding a diversified portfolio can ensure that you participate in periods when markets are on an upward trajectory, but also hold other asset classes, which may be more predictable, to protect the portfolio when volatility increases and markets retreat. For example, holding a position in fixed interest securities, such as corporate and government bonds, may act as a foil to global equities exposure, and help reduce overall portfolio risk.

Given the current conditions, and potential challenges that await, investors should look to review their current portfolio, to ensure that the asset allocation not only matches their needs and objectives, but changes in market conditions. Our experienced advisers can undertake a comprehensive analysis of your existing investments and provide an unbiased opinion on whether changes should be made. Speak to one of the team to discuss your existing portfolio.

Jun 26
0

Why investors need to be aware of currency risk

By | Investments

Changing travel money for holidays abroad may be the only direct interaction many will have with currency exchange rates on a day-to-day basis; however, exchange rates between currencies have far reaching implications for investment markets, the prospects for the global economy and our financial prosperity.

How currency movements affect performance

When investing in overseas assets, currency fluctuations can significantly affect your investment returns. In addition, domestic investors are also impacted by exchange rate movements due to the global nature of supply chains and revenue streams.

One of the most direct ways exchange rates influence investments is through their effect on returns when converting foreign investments back into the investor’s home currency. Take the following example of a direct purchase of Microsoft Inc Common Stock. At the time of writing each Microsoft share would set you back $477 USD, which at the exchange rate of 1.35 US Dollars to the British Pound, would be £354. Let us assume the share price remains unchanged a year later, at $477 USD; however, over the course of the year, the US Dollar strengthens against the Pound, moving the exchange rate from 1.35 to 1.25 US Dollars to the Pound. In Sterling terms, the value of the investment has increased to £381, despite the share price remaining unchanged. Whilst the example demonstrates a positive currency movement, should the US Dollar have weakened over the course of the year, the investment would have lost money when converted back to Sterling.

Exchange rates affect investments in multinational companies listed in an investor’s home country; however, we live in a global marketplace, and multi-national firms generate revenue from multiple currencies. Continuing to use Microsoft as an example, the company earns a substantial proportion of its revenue from abroad. If the US dollar shows strength against other currencies, this can reduce the value of the overseas earnings generated by Microsoft when they are converted back into dollars, which can affect profitability. Conversely, if the US dollar weakened against other currencies, this can help boost Microsoft’s earnings, which would potentially lead to an upward rating in the value of the company.

The factors behind currency movements

Exchange rates are influenced by a range of factors, although two of the most important considerations are prevailing and expected interest rates and levels of inflation. A country with a higher interest rate than its’ peers may attract more foreign capital, increasing demand for their currency. This can make investments in those countries more attractive. Higher levels of inflation have the opposite effect, as it can erode the real value of currency and deter investment.

Government policy decisions can also have an impact on currency stability. Elevated levels of Government debt can cause currency values to fall as investors become wary of a nation’s financial stability. For example, the ill-fated Mini Budget of 2022, saw a run on the Pound, and caused a sharp drop in the value of Sterling against the Dollar, so much so that the two currencies briefly came close to parity. Likewise, the Brexit vote in 2016 had a severe impact on the strength of the Pound at the time, and in turn damaged investor confidence.

“Safe haven” currencies?

The strength or otherwise of the US Dollar plays a pivotal role in the outlook for the global economy and the price we pay for goods in the UK. Commodities such as oil, gold, and copper are priced in U.S. dollars, and therefore movement in the US currency has a direct impact on the cost of these commodities locally and further influences the cost of goods that rely on these raw materials.

The US Dollar has long been considered a pillar of strength and a “safe haven” currency, which investors tend to flock to in times of crisis. This year has seen a change of direction, partly driven by the trade tariffs announced by President Trump in April. This caused the Dollar to slide against a basket of major currencies, as investors digested the impact of trade barriers imposed by the US. Recent events in the Middle East, including the deepening conflict between Israel and Iran, would ordinarily have led to the Dollar seeing inflows. In recent trading sessions, however, the Dollar Index has barely moved, adding further weight behind the suggestion that the Dollar is beginning to lose its “safe haven” status.

To hedge or not?

Diversifying a portfolio globally is a powerful way of spreading risk across multiple geographic regions. However, this introduces the challenge of managing currency exposure. Truly global investment funds, which invest in several regions and underlying currencies, can minimise the impact of currency movements on fund performance, as different currency positions held function as a hedge against each other. In addition, some investment funds actively undertake hedging strategies to reduce the impact of currency risk. This is particularly the case for fixed income investments, where fund managers are seeking income and stability without the added volatility of currency movements. Whilst hedging can provide downside protection from adverse currency movements, it may also limit potential gains, and therefore the decision to hedge currency risk will be determined by the composition and objectives of the investment fund in question.

Another layer of complexity

When choosing an investment strategy, currency risk adds another layer to the decision-making process and is a risk that some investors choose to ignore. This can, however, lead to underperformance, and increased volatility, particularly in today’s global markets. Our experienced advisers can review existing investment portfolios and assess the level of currency risk to which you are exposed. Speak to one of the team to start a conversation.

Jun 19
0

Stay away from the edge! Tax traps for the unwary

By | Financial Planning

Amidst the confusing and complex UK tax system, quirks in the tax rules often lay traps for the unwary, which can seriously damage your wealth. Amongst these are so-called “cliff edges”, where a small increase in income leads to a disproportionately large loss in benefits or a sharp rise in tax. You can, however, avoid these traps by sensible financial planning.

60% Marginal rate of Income Tax

One of the most striking cliff edges occurs when an individual’s income exceeds £100,000 in a tax year. Most people are familiar with the progressive tax bands of basic rate, higher rate and additional rate income tax; however, less well known is that the Personal Allowance (i.e. the amount that an individual can earn before tax is payable) is tapered once income exceeds £100,000 and is completely lost once income exceeds £125,140.

With £1 of the Personal Allowance being lost for every £2 of income above £100,000, this creates a marginal tax rate of 60% on earnings between £100,000 and £125,140, as the individual not only pays 40% income tax, but an effective 20% tax on top in respect of the lost Personal Allowance.  Once National Insurance is considered, an employed individual takes home just 38p out of every pound of salary earned between £100,000 and £125,140.

The £100,000 threshold also impacts the ability for working parents to obtain Tax-Free Childcare. This Government scheme provides up to £2,000 per annum towards childcare costs, based on the level of contributions made. For example, paying £8 into the childcare account will result in a £2 top-up from the Government. To qualify you (and your partner, if you have one) both need to be in work and receive at least the national minimum wage; however, if either parent earns more than £100,000, you are ineligible for the scheme. Likewise, any parent with income above £100,000 would also lose 15 hours’ worth of free childcare that is available for 3- and 4-year-old children.

Take action to save tax

The cliff edge when income exceeds £100,000 can certainly have a disproportionate impact on the amount of tax paid and eligibility to certain benefits. The good news is that those affected can take steps to bring their net adjusted income below this threshold and save significant amounts of tax.

Any pension contribution made by an individual into a personal or workplace pension will reduce their net adjusted income, as the pension contribution effectively extends the basic rate band by the amount contributed. For example, an individual with income of £110,000 would lose £5,000 of their Personal Allowance. By making a net pension contribution of £8,000 (£10,000 gross), their adjusted net income falls to £100,000, thus restoring the Personal Allowance in full and making an effective 60% tax saving.

Those considering pension contributions should be aware that there are limits to the amount you can contribute to a pension each tax year, and higher earners may be subject to a lower annual pension allowance.

Pension contributions are not the only way to reduce your adjusted net income. Donations to charity which are eligible for Gift Aid would also have the same effect of reclaiming the lost Personal Allowance.

Inheritance Tax Taper

Tax cliff-edges do not only apply to Income Tax. Inheritance Tax rules also use tapering, which add further complexity to an already unpopular tax.

The standard nil-rate band, which is the amount an individual can leave to loved ones on death is £325,000, and assuming a married couple leave everything to each other on the first death, the nil-rate band is transferable, so that the second of the couple to die can leave £650,000 free of Inheritance Tax.

Since 2017, an extra residence nil-rate band has been available when passing on a residence to direct descendants. This is currently worth £175,000, bringing the potential total Inheritance Tax-free threshold for a married couple to £1 million; however, the residence nil-rate band is reduced by £1 for every £2, where the net estate is worth more than £2 million. By way of example, an estate valued at £2.7m would fully lose any residence nil-rate band, leading to an additional £140,000 Inheritance Tax liability.

It is important to regularly consider your Inheritance Tax position, so that action can be taken to reduce the amount of tax paid by your estate. You should, however, bear in mind that the value of the estate on date of death – and not now – will form the basis of any Inheritance Tax paid, and growth in the value of assets over time should also be considered. Furthermore, the value of defined contribution pensions that are unused will form part of your estate from April 2027 onwards.

There are a range of strategies that can be used to reduce the value of an individual’s estate for Inheritance Tax purposes. Gifting is the most obvious way of reducing the value of the estate; however, you should also carefully consider your own financial needs in later life, which may involve care costs, together with any unintended tax consequences on the recipient of the gift. This is where independent financial planning advice can help in looking at your personal circumstances, to consider the most appropriate plan of action.

The benefit of personalised advice

We have highlighted cliff edge tax thresholds that effect both Income Tax and Inheritance Tax, which can lead to disproportionately higher levels of tax, and for working parents, could also impact on assistance with childcare. Our experienced advisers at FAS can consider your personal financial situation and provide advice on effective ways both to reduce your tax burden and ensure your investments, pensions and other arrangements are professionally managed and reviewed. Speak to one of the team to start a conversation.

Jun 12
0

The pros and cons of guaranteed income in retirement

By | Retirement Planning

With the introduction of pension freedoms from 2015, those approaching retirement have a much wider range of options available to generate pension income. Although flexible pension options such as Flexi-Access Drawdown remain popular, pension annuities are an alternative that should be considered.

A lifetime pension annuity is a financial product that provides a guaranteed income for life in exchange for a lump sum from your pension pot. As the purchase of an annuity forms a contract with the insurance provider, a lifetime pension annuity will continue to pay the contractual level of income, irrespective of how long you live. The contract is, however, binding on both the insurer and the pension holder, as once a lifetime annuity has been purchased, the decision is usually irreversible.

Weighing up the factors

It is important to carefully consider the positives and drawbacks of an annuity, compared to other options to generate an income from accumulated pension funds, before deciding on any course of action.

Perhaps the biggest advantage of a pension annuity is that the guaranteed income provides certainty. Once in place, the income payments will continue for as long as you live and avoids the potential that you outlive your pension savings if drawing an income via another method, such as drawdown.

An annuity can be arranged on a single life basis, guaranteeing payments for the rest of the pension holder’s life, or set up so that benefits continue to be paid to a spouse or partner in case of death of the annuity purchaser. A further choice is to select a guarantee period, whereby payments will continue for a pre-determined length of time, irrespective of whether the annuity purchaser survives the length of the guarantee period. Each of these options will, however, reduce the amount of income paid.

A pension annuity also avoids the need to consider stock market risk, as the pension savings will have been converted into a guaranteed income. Irrespective of market or economic conditions, the contractual payments will continue. Additionally, as the pension fund has been exchanged for an annuity, no further fund or management charges will be levied.

Whilst pension annuity rates are largely determined by age and life expectancy, enhanced annuity rates may be offered to those with adverse lifestyle factors, such as smokers, or individuals with certain underlying health conditions. Based on underwriting decisions through each insurer, those qualifying for an enhanced annuity may see modest uplifts to the annuity rate offered, as their actuarial life expectancy is shorter.

Drawbacks of lifetime annuities

Whilst the above may make annuities sound appealing, there are drawbacks to consider when guaranteeing an income in retirement through a pension annuity. One of the most serious drawbacks is that once you purchase a pension annuity, the decision is usually final. If your circumstances change in the future, you can’t adjust the pension in payment or resurrect the pension pot. This lack of flexibility can be a major disadvantage as income needs often change through retirement. For example, you may look to spend more in the early years after retirement on lifestyle choices, such as travel, or home improvements. A fixed lifetime annuity does not provide that flexibility, while through drawdown, you can adjust your income to match your spending needs or take a single income payment should an unexpected need arise.

Other than any guarantees that are purchased with a lifetime annuity, the annuity payments will cease on death. In contrast, under flexible retirement income options, such as Flexi-Access Drawdown, any remaining funds can be passed to beneficiaries on the death of the pension holder. This allows the beneficiary to draw a flexible income and effectively allow the value of the pension to cascade down generations. Currently, remaining pension values on death are outside the scope of Inheritance Tax (IHT), further enhancing the attractiveness of the flexible pension options. Despite the change of rules from April 2027, when pension values will form part of an individual’s estate for IHT purposes, the ability to leave residual pension funds to loved ones on death via flexible income methods continues to be attractive and cannot be matched via a lifetime annuity.

Lifetime annuities tend to be arranged on a level basis, which means that the payment stays the same over the life of the annuity holder. Over time, inflation will erode the real value of the annuity income and reduce the purchasing power of the income received. To mitigate inflation risk, you have the option of buying an inflation linked annuity, or an annuity that increases at a set percentage rate each year. This may appear a sensible option; however, the index linked annuity payments start at a much lower income than a level annuity, and it may take many years for the increasing income to match the starting value of a level annuity.

Seek tailored advice

Deciding the best method of generating an income in retirement from pension savings, depends on a range of factors, and the individual’s overall financial position. Annuities can provide certainty and peace of mind; however, the lack of flexibility and inability to pass down residual pension funds to loved ones can help drawdown options look more appealing.

Given that decisions taken at retirement can have lifelong consequences, it is vital that independent and unbiased advice is obtained before reaching a conclusion. Our experienced advisers will take a holistic overview of your financial circumstances and give tailored advice on both flexible and guaranteed pension income options. Speak to one of the team to discuss your retirement income needs.

Jun 05
0

Alternatives to cash when savings rates fall

By | Financial Planning

Many turn to accumulated savings as a way of generating an income. Those in retirement may use savings interest to supplement state and workplace pension income. Others may use deposit interest earned to fund discretionary spending. Whatever the reason, savers may well have been pleased with the interest received on deposits over the last two years, which are a far cry from the meagre returns paid to savers during much of the last decade.

A mistake that is commonly made is the assumption that cash savings are risk-free. It is true that the balance on a savings account does not fluctuate in value, unless funds are added or withdrawn; however, the hidden risk in holding cash is the eroding impact of inflation. Last year provided something of an historic anomaly, as the Bank of England base rate regularly exceeded the prevailing rate of Consumer Price Index (CPI) inflation, meaning that savers enjoyed a brief period when deposits provided a positive real return.

This brief period of positive real returns may, however, be ending. The Bank of England cut the base interest rate to 4.25% in May, the fourth cut in less than a year, and further cuts are expected over the coming twelve months. This is despite the sharp uptick in CPI in April, which saw a jump to 3.5%, although we expect inflation numbers to ease later this year as economic growth slows once again.

The pace and timing of future action by the Bank of England Monetary Policy Committee will depend on how the UK economy fares in the face of a higher overall tax burden, the ongoing threat of tariffs and consumer confidence. The trend for base rates is, however, now firmly downward.

Diversify away from cash

Naturally, everyone should aim to keep a sensible balance on cash deposit, to meet everyday costs and unexpected contingencies; however, given the likely trajectory for UK base rates over the coming year, those with larger deposits should take the opportunity to consider alternatives that could provide a sustainable level of income, without taking excessive levels of risk.

The first alternative to consider are fixed income investments. When a government or company wishes to finance their ongoing debt obligations, they often do so by issuing a loan note. In the case of government debt, these are known as Gilts in the UK, or Treasury Bonds in the US. Company debt is often labelled as a Corporate Bond. Most loans have a similar structure, whereby the issuer pays regular interest, at set intervals, and at the maturity of the loan, repays the principal of the loan to the lender. This predictable income stream makes government and Corporate Bonds an ideal method of generating a sustainable income.

Investors should, however, be aware that bond prices fluctuate on a day-to-day basis according to underlying market conditions and can also be influenced by the perceived financial strength of the issuer. In the event of a bond issuer failing to repay the interest or principal at maturity, the bond is said to be in default, whereby losses can occur.

Bond prices are also influenced by expected levels of inflation, and interest rate expectations. This is particularly true for longer dated bonds, which tend to be more volatile than short-dated issues, where the proximity of the maturity date increases the predictability of returns. By focusing a fixed income strategy on bonds with shorter maturities, attractive levels of income can be achieved with low levels of volatility.

The second alternative to cash deposit are equities (company shares). Part of the return from holding equities are regular distributions of excess profits which are paid to shareholders in the form of dividends. Many companies have a strong track record of dividend payment and a company that enjoys a robust performance may well look to increase its’ dividend payment over time, which could potentially offset the effects of inflation.

Dividends are, however, not guaranteed, and changes in the fortunes of the company in which shares are held can not only impact the share price, but also the potential for dividend growth. Indeed, a company that begins to struggle may look to cut its’ dividend or cancel it altogether.

The importance of advice

Those who rely on a sustainable level of income should review their cash deposits and potentially seek to diversify surplus funds into alternatives, such as fixed interest securities or equities. It is, however, important to seek impartial advice before considering employing cash savings elsewhere in the pursuit of an income stream.

Firstly, the time horizon for investment needs to be evaluated. Both bonds and equities are designed to be held for the longer term (i.e. at least a period of five years) as holding risk assets over a shorter period only increases the investment risk. The second important consideration is to ensure that you are comfortable with the volatility that will be encountered when moving away from cash deposits. For those used to seeing a static balance on a savings account, adverse movements in bond or stock prices may be unsettling in the initial stages of an investment strategy.

The benefits of taking a holistic approach

The risks of diversifying away from cash deposit can be reduced by building an appropriate and well diversified portfolio, which is tailor-made to suit your requirements. At FAS, we recommend the use of collective investments, which invest in a wide range of different individual positions (thus avoiding stock specific risk) and blend a number of these collectives to achieve further diversification.

As we adopt a holistic approach to financial planning, we will also take into consideration the appropriate level of funds that should remain on deposit and ensure that these deposits remain productive. We will also look to maximise the tax-efficiency of any portfolio strategy.

If you are holding surplus cash deposits and wish to generate an attractive level of sustainable income, then speak to one of our experienced advisers.