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Sep 04
0

The importance of regular reviews

By | Financial Planning

Taking control of your financial future can bring numerous benefits, and the key to any successful strategy is to take the time to plan ahead. Whilst the original planning stage is critical, it is equally important to review your financial plans at regular intervals, to ensure that the strategy remains on track to reach your financial goals and takes account of changing circumstances and evolving market conditions.

Think of financial planning as a garden

One way to visualise the importance of financial planning reviews is to consider the process in the same way as you would if you were planning a garden. At the outset, you will make careful plans as to the layout of flowerbeds and the positions of shrubs and other plants; however, as the seasons pass, without regular maintenance, the most attractive of gardens when first planted can begin to look unruly. Plants that show vigorous growth can overtake others and without regular pruning and maintenance, growth can be difficult to keep in check. There may be plants that begin to struggle, and these may need extra attention or indeed be replaced by plants more suited to the conditions. Long-term trends, such as changes in the weather, can impact on the type of plant that thrives in the prevailing conditions.

Changes in our lives could also mean our imaginary garden needs to adapt to our needs. For example, grandparents may need to make a garden more friendly for grandchildren to play in. Similarly, as we age, it may be appropriate to change the layout, so that the garden is lower maintenance.

Key elements of the process

The financial planning process is very much like designing and planting out a garden. Firstly, by identifying goals that you aim to achieve, you can ensure that actions taken are aligned with your priorities. This could be the purchase of a first home, building up retirement savings for the longer term, or producing an income in retirement.

Once you have identified your goals and objectives, setting out a structured plan will ensure that actions taken are designed to meet these objectives. Advice is, however, perishable and the original advice given may not remain appropriate for changes in life’s circumstances. Having children, facing divorce, ill-health, receiving an inheritance or change in employment are all common examples of situations where financial plans need to adapt to changing circumstances.

By arranging a regular financial planning review with a regulated financial planner, changes in our lives, variances in investment performance and updates to legislation can all be taken into account when considering whether any changes are needed to a financial plan.

Weed out poor performance

One of the key areas that needs to be considered in any financial review is to analyse fund performance. There have been numerous high-profile instances over recent years where so-called “star” fund managers have suffered a period of underperformance after years of producing strong returns. Similarly, it is important to recognise that the global economy is constantly evolving. As a result, the performance of stocks located in different geographic regions and across a range of sectors of the economy, can shift significantly over time. The recent strong performance of companies involved in Artificial Intelligence is a prime example of an investment trend that has only emerged in the last year or two.

The danger you face by not carrying out a regular review of the funds held in an investment portfolio, is that weak performance trends can set in, leading to a poor outcome. Without a regular and detailed review of fund performance, years of underperformance can result in financial goals not being met.

Even if strong investment fund performance has been achieved, investments held outside of a tax-efficient wrapper, such as an Individual Savings Account (ISA) or a pension, need to be regularly reviewed so that issues such as a large Capital Gains Tax liability does not arise in the future.

Keep abreast of changes in legislation

A comprehensive financial planning review should go beyond just looking at the investments you hold. Changes in tax legislation, and consideration of alternative investment solutions should be an automatic part of every regular financial review. The financial services industry continues to evolve, and with it, new products and solutions are launched that could potentially be appropriate for your objectives.

Another vital element of any financial review is to consider the level of investment risk within the existing strategy. Changes in circumstances, such as your age, overall financial health or particular events such as divorce, the receipt of an inheritance or the need to pay for long term care, may well mean that the level of risk being taken needs to be adjusted.

Peace of mind

Perhaps the hardest benefit of a regular financial review to quantify is the confidence gained that your financial wellbeing has received a thorough health check. This can give considerable peace of mind that investments remain appropriately invested and actions have been taken to minimise tax and keep the overall plan aligned to your circumstances and objectives.

If you have received financial planning advice in the past, but do not regularly engage with a financial planner to reassess the original plans and undertake a review, you run the risk that your financial plans fail to keep up with updated legislation and evolving investment trends or don’t adjust to changes in your situation. Similarly, if you have undertaken investment planning without the benefit of an advisor, you may not be aware of other solutions that may be more appropriate to your circumstances. A comprehensive review from an experienced and independent advisor could identify changes which could reduce costs, enhance performance and save tax.

Independent and Expert advice

At FAS, we take great pride in the comprehensive regular review process we undertake with our clients. We see the regular review as being as important as the initial recommendations, and as we take a holistic approach, we look at all aspects of our clients’ financial arrangements during a financial review, taking into account subjects such as inheritance tax planning, gifting, income production, and tax efficiency. Speak to one of our experienced, independent advisers who will be happy to take a look at your existing arrangements and provide you with an unbiased and comprehensive review.

Aug 29
0

The danger of holding too much cash

By | Financial Planning

Cash plays a vital role in every financial plan, as it helps us cover day-to-day expenditure, and meet short-term liabilities. Without cash, we would be unable to pay bills and everyday essentials, and instead we would need to realise other assets – which may well carry an opportunity cost – or use debt. Holding a cash reserve also provides peace of mind that any unexpected expenditure, such as repairing the car or fixing the boiler, can be met.

Whilst holding a cash reserve is the foundation of a sound financial plan, holding too much cash can have adverse consequences and lead to erosion of wealth over time. With interest rates starting to fall, we feel it is a good time to review existing cash savings to see if they could be better employed.

How much cash is too much?

The “correct” balance of cash held by an individual is undoubtedly a personal preference. Holding cash provides a feeling a security, and as we are all different in terms of our tolerance of investment risk, the most appropriate balance we hold in cash will differ. A general starting point would be to aim for a cash buffer of around six months’ worth of household outgoings; however, many prefer to hold a larger balance depending on the mix of other assets they hold, and in particular if assets are illiquid, such as residential property.

It may also be appropriate to hold a higher balance in cash if funds are required in the short-term, as investing funds with a brief time horizon increases the level of risk. For example, you may hold a higher cash balance temporarily for a specific purchase, such as a property, or to make a gift to a relative.

Hidden risks

Many believe cash savings to be risk free, and whilst the balance in a savings account does not fluctuate in value, hidden risks can damage your wealth over time. Inflation reduces the purchasing power of cash and is a factor that some do not consider. If the inflation rate is higher than the interest earned on cash (which is often the case) the real value of your cash diminishes.

The chart below demonstrates the eroding effects of inflation, by comparing the compound returns achieved by cash (represented by the Bank of England Base Rate – blue) compared to the increase in prices generally (represented by the UK Consumer Price Index – red) over the last 10 years. As you can see, returns on cash have not kept up with prices, and even achieving cash returns in excess of the Bank of England Base Rate (illustrated by the Bank of England Base Rate +1% in green) would still lead to erosion.  

We have recently been through a period when the Bank of England Base Rate exceeds the rate of increase in the Consumer Price Index, and therefore the best cash accounts have provided savers with positive real returns. The current position is, however, something of an anomaly, and given that we expect base interest rates to fall further, we are likely to see a return to negative real returns on cash deposit.

Why keeping a cash balance is important

It is sensible planning to keep a proportion of your overall wealth as cash. One of the key roles that cash can play in a diversified investment strategy is that it can provide a buffer zone, which can allow longer-term investments to stay in place during periods when market conditions disappoint. For example, if you regularly withdraw funds from an investment portfolio, or a pension account in Flexi-Access Drawdown, holding a cash buffer can provide the ability to suspend withdrawals at a time when investment markets are weak, allowing time for the investments to recover before restarting regular withdrawals again.

Maintaining a cash balance can also provide the opportunity of adding to an existing investment portfolio, if markets dip. Finally, holding a small proportion of an investment account in cash can mean that platform and adviser fees are covered by the cash balance, and avoids the need to sell assets to cover ongoing portfolio costs.

Missed opportunities

Holding excessive cash means missing out on potential investment returns that can be achieved from other assets that are able to generate superior returns over time, which can  lead to substantial financial underperformance.

Historically, returns achieved from equities, bonds and commercial property have outperformed cash. The annual Barclays Equity-Gilt study has analysed the returns from various asset classes since 1899, and when considering returns from 1899-2022, their evidence shows that over an investment period of two years, the probability of equities outperforming cash is 70%. Looking at longer-term performance, over an investment period of 10 years, the probability of equities outperforming cash increases to 91%.

One reason for the outperformance is that returns from equities are derived from two sources – the prospect of capital growth over the longer term as the value of the investment increases, together with income in the form of dividends. Equities also act as a hedge against inflation, as a company’s revenue and earnings should, in theory, rise in line with inflation over time.

The Financial Conduct Authority (FCA) have issued a warning over excessive allocations to cash held in workplace and private pensions. Given the likelihood of underperformance over the longer term, the FCA are concerned that those holding significant cash balances over an extended period of time risk a poor outcome. New rules came into force late last year that require pension providers to send cash warning letters to customers holding more than 25% of their pension fund in cash for more than six months.

Reallocating surplus cash

Given the eroding effects of inflation, holding surplus cash deposits is likely to damage your financial wealth over the longer term. That said, if you have limited experience of investment in other asset classes, moving funds away from the perceived safety of cash can be a little daunting.

This is where the benefit of speaking to an independent adviser can prove invaluable. At FAS, our experienced advisers can provide guidance and reassurance and ensure that investments are well-diversified into a range of different asset classes, with the mix of assets tailored to your financial requirements, and attitude to risk. Speak to one of our holistic advisers to discuss the level of cash that you hold and consider alternative investment options.

Aug 22
0

Should VCTs be part of your portfolio?

By | Investments

It probably hasn’t escaped your notice that a range of taxes have increased over recent years, in part due to the economic effects of the pandemic. In March of this year, the Office for Budget Responsibility projected that 37.1p in every pound generated in the economy will be subject to tax by 2028. The date of the first Budget for the new Government has been set for 30th October, and media speculation is rife, suggesting potential changes to tax legislation that could increase the overall level of tax take further.

As a result, tax-efficiency is high up the wish list for many investors. The most popular options to increase the tax-efficiency of an investment strategy is the use the annual Individual Savings Account (ISA) allowance, or make pension contributions, which qualify for tax relief. These popular choices are, however, only two of a range of options that investors can consider to reduce the level of tax they pay. Investors who are comfortable accepting higher levels of investment risk may wish to consider Venture Capital Trusts (VCTs), which have grown in popularity over recent years. A qualifying VCT investment can provide a helping hand to small and growing UK businesses, but can also reduce your Income Tax bill, and provide you with a tax-free income stream.

Tax benefits

VCTs were introduced in the Finance Act of 1995, to encourage investment into Britain’s small and entrepreneurial businesses. VCTs are collective investments, with a fixed number of shares in issue at any one time. There are restrictions in place to limit the type of investment that the VCT can make, without risking their qualifying status. These include a £15m limit on the gross assets of the investee company, which must also not have more than 250 employees. In addition, 80% of the holdings within a VCT must be invested in these qualifying assets.

VCTs raise money regularly via the issue of new shares. Purchase of new shares via an offer provides the investor with up-front Income Tax relief of 30% on qualifying investments. This tax relief is retained as long as the investment remains qualifying and is held by the investor for at least 5 years.

In addition to the Income Tax relief, dividends paid by the VCT are tax-free. Most VCTs aim to pay regular dividends, and some actively look to arrange special dividends, in addition to the regular dividend schedule, subject to the performance of the underlying investments within the VCT. Finally, any gains made on disposal of a VCT are also free from Capital Gains Tax.

The need to accept higher levels of risk

It is important to recognise that the Income Tax relief provided on investment in new shares is given as compensation for the investment risk taken when investing in a VCT. As only fledgling unquoted companies qualify for investment, investors need to be aware that individual companies could fail; however, VCT investment has helped a number of household names, such as Zoopla, Secret Escapes, Gousto and Graze, take the next step in their growth story.

Investors in VCTs also need to bear in mind that their investment may be difficult to sell, as there is a very limited primary market. As a result, most VCT managers set aside cash funds within their portfolio to permit share buybacks, where the VCT company buys back shares from investors. Such buybacks are usually set at a small discount to the prevailing net asset value of the underlying VCT portfolio, and larger and more established VCTs offer buyback opportunities regularly. That said, the availability of VCT buybacks is dependent on the trading performance of the VCT, and there is no guarantee that a buyback opportunity will be provided.

Choose the strategy wisely

Given the potential risks and range of outcomes from an individual investment made by a VCT, selecting a VCT with a portfolio approach is of key importance. Generalist VCTs usually invest in at least 20 companies, with many offering greater diversification across a wider range of positions.

There are other variables that can adjust the level of risk within the VCT portfolio. Investee companies that are already established can offer greater stability than those that are at an early stage in the growth cycle. By investing in companies across different sectors of the economy, VCT managers can try and avoid systemic risks affecting the portfolio. By their very nature, most VCT investments will be within companies involved in new technology or e-commerce; however, by adding industrial manufacturers, healthcare and leisure companies, greater diversification can be achieved.

Some VCT strategies add other investments into their portfolio, such as those quoted on the Alternative Investment Market (AIM). Whilst these investments are potentially more liquid, they remain smaller companies that still carry greater levels of investment risk.

Wide variance in performance

Analysing the performance of VCTs launched more than five years ago, shows a distinct variance in performance. Taking into account the initial Income Tax relief, dividends paid during the investment period, and the net asset value after five years, the best performing VCTs have produced an annualised rate of return of over 20% per annum, which is highly attractive; however, this strong performance is certainly not universal. There are a number of sizeable VCTs where the annualised rate of return achieved is between 6% and 8% per annum, which is barely above the level of Income Tax relief available on purchase. A handful of VCTs have fared even worse, losing money over the five year period, and eating into the Income Tax relief gained on investment.

Why advice is critical

Whilst the tax advantages are attractive, it is important to recognise that VCTs are a high risk investment, and should only be considered by investors who are willing to accept a significant risk of capital loss. Whilst many VCTs have produced strong returns over the long term, when factoring in the tax relief on investment and dividend income, others have performed poorly.

Given that this is a specialist market, we recommend seeking independent advice before considering any investment in VCTs, to assess whether a VCT investment is appropriate for your circumstances, needs and objectives.

Our independent advisers can provide you with unbiased and holistic advice to improve the tax efficiency of your investment portfolio, and the FAS Investment Committee has full access to independent expert research on available VCT offers. Speak to one of the team to start a conversation.

Aug 15
0

Where next for global markets?

By | Investments

Any long term investment strategy will enter stormy waters from time to time, with the Covid-19 pandemic, Russian invasion of Ukraine and inflationary spiral amongst the factors that have made for a bumpy journey over recent years. Since last November, market conditions have felt considerably calmer, with investors enjoying a period of solid returns. Over recent trading sessions, however, the swell has picked up again, with volatility increasing across global equities markets.

Why have markets outperformed?

The gradual decline in inflation and prospect of easier monetary policy, corporate earnings reports that have largely beaten expectations, and stronger-than-expected economic data have proved the catalyst for the positive market conditions over the first half of this year.

After the hangover from the Covid-19 pandemic, and the Russian invasion of Ukraine, central banks around the World were forced to raise interest rates to head off an inflationary spiral. With inflationary pressures now easing, investors have been eagerly anticipating a change in direction from central banks, as rate cuts are generally perceived as being positive for both companies and consumers alike.

Corporate earnings have also supported the rally seen through the first half of the year. According to Factset, 78% of US quoted companies reported better than expected second quarter earnings, with earnings reports from technology giants reinforcing the positive market sentiment.

The final factor behind the strong performance had been the continued strength of the US economy. Investors have been increasingly hopeful that the Federal Reserve manage to steer a course where inflation moderates, without tipping the US economy into recession.

Reaching the pivot

Recent economic data has, however, stoked fears that central banks could have left their restrictive policies in place for too long. The European Central Bank cut rates by 0.25% in June, and the Bank of England followed suit this month. The Federal Reserve has been keen to ensure that inflation remains in check, and are yet to cut rates, potentially increasing the risk of recession.

Recent US unemployment data has been much weaker than expected, and market consensus now expects that the Federal Reserve may need to take more drastic measures over coming months, to avoid a stall in economic growth.

Where strong earnings reports propelled markets higher over the first half of the year, forward guidance from a handful of tech giants over recent weeks has painted a more mixed picture. The valuations on major tech players are somewhat challenging, and earnings disappointments are likely to weigh heavy on market sentiment.

Away from the tech sector, the first signs of a rotation into more traditional industries have emerged, and renewed focus on value and mid-cap stocks could be a dominant feature over the remainder of 2024.

Seeking value globally

Whilst the performance of US markets sets the tone for global equities, there are always regional variances that provide opportunities. The outlook for the UK remains modestly positive, with an improving picture for growth over coming quarters, and UK equities continue to look inexpensive when compared to global peers. European markets also remain mixed. French stocks remain under pressure due to recent political instability, and general sentiment not helped by tepid Eurozone growth figures.

After a strong start to the year, the Nikkei 225 index of Japanese stocks has seen significant volatility of late, largely due to the strength of the Yen against the Dollar and the impact this may have on exporters. Despite the sharp technical moves in recent trading sessions, Japanese stocks remain attractively valued.

Chinese equities have struggled over the first half of the year; however, there are increasing calls for further stimulus, with additional Government intervention to help boost economic growth becoming more likely. The continued weakness in the beleaguered property sector may however, keep any outperformance in check, at least in the short term.

Geopolitical risks remain

Perhaps the biggest risk to global markets is the outcome of the US election in November. Investors have been weighing up the potential impact of the Trump-Harris showdown with the withdrawal of President Biden closing the gap in the polls. Markets had priced in a convincing Trump victory over recent months; however, the early surge in support for Harris could lead to an increase in market volatility, should momentum for the Harris ticket be sustained as election day draws closer.

The election result is likely to have implications for the conflict between Russia and Ukraine, which remains an ongoing risk to global stability and commodity prices. The US election result will also dictate the future path of US-China relations, where trade tensions continue, and the ongoing threats over Taiwan remain.

Conflict between Israel and Gaza, and wider unrest in the region, have yet to have any material impact on market sentiment. Any wider escalation could, however, push oil prices higher, damaging global economic prospects and fuelling inflation. Any surge in prices could, however, be tempered by weaker global economic growth.

Bond rally to continue?

Weaker economic data over recent weeks has seen bond yields fall (which pushes bond prices higher), and with markets now expecting a series of rate cuts by Western central banks over the next 12 months, the outlook for bonds appears broadly positive. Bond investors will, however, need to consider credit quality, in the event that economic growth slows significantly. The additional yield offered by sub-investment grade bonds does not appear to offer sufficient additional return to compensate for the increased risk of an economic slowdown.

A broadly positive outlook

After enjoying a calm and positive first half of 2024, we have seen greater levels of volatility over recent weeks, and we expect this to continue through the remainder of this year. US equities continue to offer good value over the longer term, although the short-term performance may well be dominated by actions taken by the Federal Reserve. UK and European markets remain cheap when compared to the US, and any renewed focus on value equities could shrink the performance gap between the UK and US.

Diversification remains ever important, and whilst equities markets may see further volatility in the short term, holding an allocation to other asset classes can aid stability. After being adversely affected by the inflationary pressures of recent years, government and corporate bonds look attractively priced, given the monetary easing expected over the next few quarters. Lower interest rates may also prove positive for both commercial property and infrastructure investments, which have underperformed since 2022.

With more volatile conditions seemingly set to return, we feel this would be a sensible time to review the investment strategy within pension or investment accounts that you hold. Speak to one of our experienced advisers to discuss your existing portfolio strategy and consider whether any changes would be appropriate.

Aug 01
0

Signs of recovery in commercial property

By | Investments

Commercial property has traditionally played an important role in portfolio diversification. Direct Property funds that invest in UK physical property assets, such as warehouses, office and industrial space, has traditionally found a place in many portfolio strategies, as it tends to produce consistent returns, that show little in the way of correlation with other assets, such as Equities (shares).

Challenging markets

It is fair to say that the commercial property sector has faced a number of challenges over recent years. Many property holdings experienced void periods during the Covid-19 lockdowns, with the office and retail sectors particularly badly affected. In the aftermath of the lockdowns, commercial property has, again, struggled to spark interest from investors due to the spike in inflation which led to the rapid increase in interest rates during 2022 and 2023. The graph below shows the performance of the Investment Association UK Direct Property sector over the last eight years. Consistent returns were enjoyed until the Covid-19 outbreak, and following a rapid recovery as the economy reopened, the sector has faced serious headwinds as inflation and interest rates climbed.

Improving outlook

There is, however, increasing evidence that the prospects for the commercial property sector are improving. The Bank of England appear ready to press ahead with the first of a number of base interest rate cuts in the coming months. This could well prove positive for commercial property assets, as the returns achieved from property investments are particularly sensitive to monetary policy decisions. As base rates fall, and inflation settles around the Bank of England’s target, the rental income received from commercial property becomes relatively more attractive.

Further evidence of the improvement in sentiment can be found in the Royal Institute of Chartered Surveyors (RICS) UK Commercial Property Monitor, published earlier this year. The RICS research indicated that demand for retail and office space – two of the sectors of the property market that have been hardest hit – had seen the first tentative signs of increased demand. Furthermore, there is growing confidence amongst those surveyed that rents will increase over coming months.

Liquidity issues

Aside from the pressures of lockdown and adverse monetary policy, collective funds investing in direct property have also had to face liquidity issues that first surfaced immediately after the Brexit decision to leave the EU in 2016, which led to increase demand from investors wishing to sell their investments. As direct property funds hold large bricks and mortar property investments, that cannot easily be realised, increased demand from investors at the time exhausted liquid funds, and as a result, leading commercial property funds managed by the likes of M&G, Janus Henderson and Legal & General closed their doors to withdrawals temporarily.

Most funds reopened after 2016, and could be traded without restrictions, until the Covid-19 pandemic caused a further round of suspensions and liquidity concerns. Several funds have limped on, but a number of leading players in the industry have taken the decision to wind-up their property funds. M&G announced the wind-up of their Property Portfolio last October, with the process ongoing. Janus Henderson sold their entire property portfolio to a single buyer in 2022 and repaid investors, and St James Place’s property fund remains gated since the decision was taken to suspend withdrawals in October 2023.

Evolving strategies

Despite the loss of a number of funds within the sector, investors can still select from a range of direct property funds; however, those that remain open typically hold a higher allocation to cash, to mitigate against liquidity concerns. One of the largest funds in the sector, Legal & General UK Property, has taken the decision to make more fundamental changes to their portfolio, and have asked shareholders’ permission to alter the asset allocation, in an attempt to provide adequate liquidity and avoid holding excessive levels of cash, which can dilute returns. The Legal & General fund will continue to hold direct property assets; however it will also aim to hold an equal allocation to Real Estate Investment Trusts (REITs). These are quoted companies that hold a portfolio of direct property, from retail parks to student accommodation. As the shares are quoted and actively traded on the London Stock Exchange, their inclusion should alleviate future concerns over liquidity.

Additional considerations

There are, however, significant differences between a REIT and a direct property unit trust, which investors need to consider carefully, as the introduction of REITs changes the risk profile of a commercial property fund.

Firstly, a REIT can borrow money to purchase securities. This leverage is not present with a direct property fund and does introduce additional risk. Secondly, the buying and selling price of a REIT may not reflect the value of the underlying property portfolio, and the shares can trade at a discount or premium to the underlying value of the portfolio. Currently, many REITs stand at a discount to their net assets, reflecting the difficult conditions seen over recent years; however, an improvement in the fortunes for the sector could see these discounts narrow.

Is a hybrid approach the answer?

We wait to see the response to the changes made to the Legal & General Property fund, and whether other property funds may consider similar changes to their portfolios. It is clear that the ongoing liquidity concerns have cast a shadow over the sector and any measures taken that remove barriers to investment should be seen as a positive step. Investors will, however, need to carefully consider the impact of any changes within the asset mix within property funds.

Diversification remains the key

Commercial Property investments have traditionally helped diversify investment portfolios, and the improving market outlook, together with changes being made within the sector to alleviate investor concerns, may see fund inflows improve. We always recommend that investors adopt a diversified approach to investment, and hold a precise mix of assets that match your objectives and tolerance to investment risk. This is where our experienced advisers can add significant value, by considering your exact circumstances to determine the correct asset allocation for your investment or pension portfolio. Speak to one of our independent advisers to start a conversation.

Jul 25
0

A Guide to Gifting

By | Inheritance Tax

Our advisers provide holistic and independent advice to clients with a wide range of different financial circumstances and objectives; however, one common discussion point for many clients centres around the rules for gifting money, and how to avoid tripping off a tax charge when making a gift.

There are many reasons that individuals may wish to make a gift. A popular reason is to provide a younger relative with funds towards a house deposit, or cover university costs. Others may look to gifting as a method of reducing the value of their estate that is chargeable to Inheritance Tax.

It is, however, important to seek expert advice before undertaking any estate planning, as the rules can be difficult to understand, and actions taken can have unexpected and expensive consequences.

What constitutes a gift?

It may seem a simple question, but it is important to note that a gift needs to be outright to be effective for tax purposes. In other words, the donor of the gift is not able to derive any benefit from the asset that is gifted. If they do, they are likely to fall foul of the reservation of benefit anti-avoidance rules, which could render the gift as being null and void. The most common example of such a gift is when parents gift their main residence to their children, and then continue to live in the property. This is a clear example of a reservation of benefit, unless a market rent is paid by the parents.

Annual gift exemptions

Each individual has an annual gift exemption, where gifts below this figure can be made each year without incurring a potential charge to Inheritance Tax in the future. The annual gift exemption is only £3,000, and sadly this figure hasn’t been increased in more than four decades. Despite the size of the allowance, the annual gift exemption can still be of value, in particular as a couple could each use their annual gift exemption. In addition, if you haven’t made gifts in the previous tax year, this can be carried forward to allow a potential total gift of £12,000 per couple in a single tax year.

One source of confusion is the fact that the £3,000 allowance needs to cover the total of gifts made in a tax year. You can also make small gifts of up to £250 per person each tax year, so long as you have not gifted to that individual under another allowance during the same tax year.

Finally, gifts can be made to a relative who is getting married or entering a civil partnership. Parents can give £5,000 each, grandparents can give £2,500 each and you can give £1,000 to any other person.

 Tax treatment of larger gifts

There is no limit to the amount you can gift each tax year; however, any gifts made in excess of the annual gift exemptions outlined above could carry a potential Inheritance Tax charge. For a gift in excess of the annual gift exemption to fully escape your estate for Inheritance Tax purposes, you need to survive more than seven years from the point the gift is made. If the donor of the gift fails to survive seven years, the value of the gift will use up part of their nil rate band, which is the first £325,000 that you can give away on death before Inheritance Tax becomes payable. Where any amount of the gift exceeds the nil rate band, Inheritance Tax is charged on the surplus and is payable by the donee (i.e. the person receiving the gift). There is, however, taper relief that reduces the amount of Inheritance Tax charged, so long as the individual has lived more than 3 years after making the gift.

Making regular gifts

Another way of making a gift without tax considerations is to make regular gifts out of surplus income. This is a confusing rule, and great care is needed if relying on this rule when making gifts. Firstly, the gift can only be made out of income that is truly surplus to your requirements, after all regular spending is taken into account. Secondly, the gifts need to be regular in nature, that is to say that they follow a pattern. For example, if you have truly surplus income over expenditure of £10,000 per annum, and pay this amount each year to your child or grandchild to help pay for school fees, this is likely to be accepted as a regular gift out of surplus income.

The gifts out of surplus income rule cannot be used if the person making the gift reduces their standard of living to make the gift, or uses capital for this purpose. A useful tip for those relying on this rule is to make a careful note of income received and outgoings in a tax year, to help demonstrate that the gifts have been made from income that is truly surplus to requirements.

Avoiding common pitfalls – the importance of advice

Before planning any gifting, it is important to take stock of your own personal financial position. It is understandable that many would not hesitate to offer a gift to help family members, or look to take action to reduce a potential Inheritance Tax charge on their estate; however, many people underestimate potential costs that can arise, particularly in later life, when care fees or private medical expenses may need to be met. By taking holistic financial planning advice, the impact of gifting can properly be assessed to see whether any material damage to your own financial position will result after making the gift.

Deciding which assets to gift can also lead to adverse tax consequences. Where some will have available cash to make a straightforward payment, others may need to sell down assets, be they property or investments. These actions can create an unintended tax consequence for the one making the gift.

It is also important to seek holistic advice, as assets such as the value of personal pensions may not aggregate with other estate assets when assessed for Inheritance Tax. This may cast a different perspective on any planning required.

Finally, there are a number of tools available at our disposal that can assist in estate planning. One such example is the ability to arrange a limited life assurance policy that can be used to pay the Inheritance Tax if the individual making a larger gift doesn’t survive the requisite seven years after making the gift.

Speak to one of our experienced advisers who will be pleased to provide advice on the options and assess the impact of any actions taken.

Jul 18
0

Helping business owners reach their financial goals

By | Business Planning

Whether making strategic decisions, managing staff or building relationships with customers, running a business takes time, focus and energy. In our experience, business owners often don’t have the time to pay enough attention to their own financial planning goals. In addition, business efficiency can also be improved by sensible financial planning. Indeed, as the prospects for your business and personal financial goals are closely aligned, seeking tailored financial planning advice can assist business owners to plan ahead for the future with confidence.

At FAS, our experienced advisers can help business owners meet their financial objectives. In this article, we take a look at three common scenarios where the independent advice we have provided has proved beneficial.

Scenario 1  – Profit extraction via pensions

Business owners need to decide the most appropriate method of extracting profits from their business to fund their ongoing costs and lifestyle. Most business owners that we advise pay themselves a modest salary, and receive funds to cover their personal expenditure via dividends. But what about profits made by the business in excess of their living costs?

Profits made by a business are subject to Corporation Tax, which is charged at 25% for companies with profits over £250,000; however the rate reduces to 19% for small businesses with profits under £50,000. This tax charge can effectively be saved if the company arranges a pension contribution on behalf of the business owner, as such contributions are usually treated as a legitimate business expense and deductible from profits liable to Corporation Tax. Furthermore, there is no National Insurance liability either, which would be the case if the additional profits were drawn as salary.

Pension planning using Employer Contributions can be a very sensible and tax efficient method for the business owner to reduce their company’s Corporation Tax bill, and build up retirement savings for their future use. This is particularly powerful when business owners move closer to retirement, as funds drawn through Employer Pension Contributions could be accessed if required.

Tax legislation does, of course, change from time to time, and the new Government could bring about changes in pension legislation. We therefore recommend seeking advice before taking any action.

Scenario 2 – Protecting business interests

We often come across business owners and shareholders who don’t consider the potential impact of the death or serious illness of a business owner or key staff member. This could mean years of hard work are placed in jeopardy, and could compromise a business owners retirement plans.

Losing key personnel to death or serious ill health could have devastating consequences for the future success of the business and its’ employees. Some businesses may even face wind up or closure due to the loss of an individual who is vital to the success of the business. Key Person protection is an insurance that provides a cash benefit to the company in the event of the death, diagnosis of a terminal illness, or a specified critical illness, of a key individual in the business. The funds paid through the policy could be used to help cover any potential reduction in profits as a result of the missing individual, meet ongoing business expenses, or pay for recruitment and training costs for a replacement.

We have also seen instances where the structure of the business could potentially lead to difficulties in the event of the death of a shareholder. It is quite common for a shareholder in a small business to prepare a Will that leaves their shares in the business to their spouse or children on death. This is understandable, as the value of the shares are then left to the benefit of family members. That being said, the spouse or children may not have any interest in being a shareholder in the business and may prefer to sell the inherited shares to other shareholders. This may also be the desired outcome from the other shareholders’ perspective.

The shares will, of course, have a value and other shareholders may have difficulty raising the necessary finance to purchase the shares. This is where a Shareholder protection policy, arranged in an appropriate manner under a Trust arrangement, can provide the necessary funds to the other shareholders so that the deceased shareholder’s shares can be purchased from the estate.

Scenario 3 – Keeping business cash productive

We have come across many successful firms, who have built up substantial balances in cash. Naturally, some of these funds will be needed for day-to-day cashflow; however, funds that are truly surplus to these requirements should really be working hard for the business, and more often than not, they simply languish on a business bank account earning little, if any, interest.

The obvious first step is to look for business deposit accounts that pay more attractive rates of interest. Many banks offer such accounts, but rates of interest differ greatly. At FAS, we have assisted business owners in finding suitable deposit facilities to keep surplus funds productive.

Many business owners are unaware that businesses can make capital investments using business funds, which are held in the name of the company. Where excess funds held by a business are unlikely to be needed in the short or medium term, investing in a diversified portfolio of investments could generate superior returns over time and potentially lead to growth in the value of the business. Corporate investments are an area where specialist advice can add significant value, not only in terms of selecting an appropriate investment strategy aligned to the investment time horizon, objectives and tolerance of investment risk, but also to make sure the investment will not have any impact on the status of the company, which could lead to adverse tax consequences in the event of the sale of the business in the future.

Saving business owners time and money

As demonstrated above, there are many ways that independent advice can help business owners achieve their personal financial planning goals and help grow their business. In addition to the services described in the three scenarios above, our experienced advisers can also provide independent advice on a range of employee benefits, such as death in service and private medical group policies and help establish group pension plans. Speak to one of the team to start a conversation about the ways we can assist.

Jul 11
0

Funding long term care costs

By | Financial Planning

As we move into later life, our financial priorities often shift, and funding the potential cost of long term care is a common concern that is shared by many clients. This is not surprising, given the rapid increase in the cost of care over recent years. According to recent figures from Age UK, the average weekly cost for a place in a nursing home is £1,078, although there are substantial regional differences, and we have come across situations where clients are paying significantly higher fees than the average figure quoted.

Funding options

Local authorities have a duty to arrange and pay for appropriate levels of care, following an assessment of the individual’s needs; however, this financial assistance is only available to those with less than £23,250 in capital, and this figure includes the value of all assets, including property.

Depending on the needs of the individual requiring care, an assessment could decide that NHS continuing healthcare is available, which could cover some or all of the cost; however, if the individual is not eligible for continuing healthcare, and they hold assets greater than £23,250, they will be expected to make a contribution towards care costs.

Self-funding care costs can be a daunting proposition, where decisions need to be reached at a time of stress and concern when an individual is being moved into care. At this point, family members, or their attorneys if acting under a Lasting Power of Attorney, may find independent financial planning advice to be of significant value, to help consider the options and agree an appropriate strategy to meet the ongoing care costs.

Our approach to care fees planning

When we first meet clients who potentially have care needs, we undertake a full assessment of their capital assets. Quite often, we meet those who have investments and other assets that have not been professionally managed, and our analysis uncovers investments or pensions that could have been otherwise overlooked. Once we have assessed the capital position, we look at income sources (e.g. state pension, private pension, attendance allowance, investment or property income) to begin to work out the shortfall between the cost of care and other essential costs (such as personal care items and spending money) and their sources of income.

Once this assessment has been carried out, we can provide advice on the options for consideration. Depending on the level of shortfall, it might be the case that the care costs could be met through income alone, although this is not common and is typically reserved for those with significant personal pension or rental income. In most instances, the cost of care is likely to erode capital, with the rate of erosion dictated by the shortfall between income and expenditure. There is, therefore, a need to consider how best to meet the shortfall and preserve as much capital as possible.

Immediate Needs Annuities

One option that can bridge the gap between income and care costs is to purchase an immediate needs annuity plan. This is where capital is paid to a provider, who in turn will pay a monthly level of income that can be used to meet the shortfall between income and care fees. This income is usually tax-free and paid direct to the care provider.

Each plan is individually underwritten, with the single premium payable dependent on the age, health, life expectancy and care needs of the individual. In our experience, the premiums payable on such policies can be very expensive; however, despite this, some may value the certainty that a care fees annuity can bring.

A further factor to consider is that there is no return of capital to loved ones in the event of death of the individual in care, unless a capital protection element is purchased, at an additional cost.

Finally, the reality of how long an individual stays in care needs to be taken into account. Office for National Statistics analysis shows that for those aged 85 to 89 years in care, the average life expectancy is 3.6 years for women and 2.6 years for men. The purchase of a care fees annuity could, therefore, potentially only pay out for a limited period of time, leading to returns that offer poor value from a large capital outlay used to purchase the annuity.

Investment options

In many cases, adopting a sensible approach to investment from capital raised either from the sale of the main residence or other assets, is the preferred option. We provide advice to clients (or their attorneys or deputies) to construct a bespoke investment plan, after considering the level of shortfall and precise composition of existing assets held.

Cash will naturally have a part to play in any sensible investment arrangement where care fees are payable. It is, however, important that cash funds remain productive, and held in a tax-efficient manner. We can assist clients in establishing an appropriate strategy and provide advice as to the right level of immediate cash to hold.

For sums not immediately required, there are other asset classes, such as Equities, Corporate and Government Bonds and alternative assets, that could be considered to try and achieve superior returns to those available on cash. Our experienced advisers can recommend an appropriate investment strategy, which often focuses on lower risk assets, and aims to stem the rate of erosion, so that the capital can fund care provision for an extended period, or leave additional capital to loved ones on death. The strategy is then regularly reviewed, so that it adapts to any change in circumstances.

Naturally, there are many factors that need to be considered in any investment strategy, including the time horizon for investment, the tolerance to investment risk accepted and income requirements. Tax-efficiency and ease of access to funds will also be important considerations. We can also arrange regular withdrawals from investments at an agreed level to ease the administrative burden by moving cash to cover ongoing care costs.

Investing funds for someone else under a Lasting Power of Attorney introduces an added layer of responsibility. An attorney is duty bound to act in the best interests of the donor, and unless the funds available for investment are limited or the attorney has sufficient skill and knowledge, attorneys should consider whether they need to obtain independent financial advice. This advice can provide valuable reassurance to attorneys who are tasked with the responsibility of handling the financial affairs of the donor, and also provide evidence that appropriate advice has been obtained.

The power of advice

When an individual goes into care, decisions taken to fund ongoing care costs require careful consideration, to make the most of funds available. Our experienced advisers can provide independent advice on the options from across the market place and build a bespoke plan of action. Speak to one of our team if you, or a loved one, needs specialist advice in this area.

Jul 04
0

Don’t leave it too late to create a financial plan

By | Financial Planning

Irrespective of our age, financial obligations shape the decisions we reach on a day-to-day basis. For those with young families, the cost pressures of mortgage or rent payments, childcare costs and household bills undoubtedly take priority, and it is easy to consider longer term financial objectives, such as retirement planning, as being something that can be put off until later in life.

This is reinforced by the results of a survey carried out by the Department for Work and Pensions, published in 2022, where 2,655 people aged 40-75 were asked a series of questions relating to retirement and providing income in later life. Of those surveyed, 24% did not hold a private pension at all, and 16% had not started saving for retirement.

The reality is that failing to take control of your financial future at an early stage can lead to missed opportunities, which could compound over many years, and potentially lead to a less comfortable retirement. There are, however, a number of steps you can take to improve your financial future, and working out a financial plan with a regulated financial adviser can help you achieve your longer-term goals.

Take control of pensions

With the introduction of auto-enrolment, most employed individuals now hold and contribute to a workplace pension scheme. Indeed, as individuals move jobs, most accumulate a number of pension arrangements during their working life. Holding multiple pension plans can make understanding the overall value of pension savings, and the potential income in retirement they could provide, more complicated. Furthermore, keeping abreast of the performance of defined contribution pension funds is more difficult across multiple plans.

This is a crucial point, as the difference between strong performing investment funds, and those offering an average performance, can compound over years and lead to a significant difference in the accumulated value of your pensions, and the level of income that can be generated, at the point of retirement.

Default pension funds tend to produce broadly similar returns irrespective of the pension provider; however, taking an active role in selecting good performing investment funds can produce a significant improvement over the performance of the default pension option. Many pension arrangements now offer “lifestyle” options, which automatically reduce the level of risk as you near retirement. This automated approach may not be appropriate for the options you wish to consider at retirement and doesn’t take into account prevailing investment market conditions or economic prospects.  By engaging with a financial planner, an impartial assessment of your arrangements can be undertaken, which can help identify weak performing funds and allow changes to be made to improve performance or align the portfolio with your tolerance to risk and other preferences.

Performance is only one aspect where financial planning can assist in producing a better outcome. The charges levied by some pension contracts, particularly older style arrangements, can be expensive compared to modern platform-based plans, and these additional costs can be a further drag on investment growth within the pension fund.

Plan ahead to retire earlier

The State Pension age continues to increase and in our experience, many do not wish to continue working until their State Pension becomes payable. Engaging in the financial planning process at an early stage can make the possibility of retiring early a reality. Increasing the amount contributed earlier in life means that the contributions have longer to grow, and working with a financial planner can help adjust the contributions over time to ensure that they are affordable and invested appropriately.

Tax planning throughout your life

Tax relief received on pension contributions is one of the key benefits that sets pensions apart from other methods of retirement planning. Most individuals can get tax relief at their marginal rate of tax on pension contributions up to the annual allowance, which is currently £60,000 or 100% of relevant earnings if lower, although lower allowances apply to higher earners or those who have drawn a flexible income from their pensions.

Not only does the tax relief received on contributions provide a boost to growth in pension value, it can also help you avoid falling into a tax trap. One such example is the income tax charge that applies to people in receipt of Child Benefit, where either their income (or their partner’s income) is more than £60,000 per annum. Pension contributions made by an individual will have the effect of reducing the adjusted net income amount and potentially help avoid the income tax charge. Similarly, the 60% tax trap on income between £100,000 and £125,140 per annum can be avoided by making pension contributions to reduce adjusted income.

It isn’t just pensions where careful planning can yield tax advantages. Many people are finding they are paying more income tax on savings and investments due to static tax bands, and the reduction of the Capital Gains Tax (CGT) annual exemption is leading to more individuals paying CGT on the disposal of investments. By using tax advantaged vehicles, such as an Individual Savings Account (ISA), savings and investments can be sheltered from Income Tax and CGT.

Engaging with a financial planner can help identify opportunities to save tax throughout your working life, with each step towards greater tax-efficiency ensuring that your assets work as hard as possible to achieve your financial goals.

Don’t forget protection

One area of financial planning that is often overlooked is the need to protect your family’s finances, should an unforeseen event, such as death or serious illness, occur. Focusing on planning for retirement is all well and good; however, the best laid plans could be seriously compromised should the worst happen. It is important to ensure that adequate life cover is in place, and other forms of protection, such as Critical Illness cover, should be considered, too. It is also important to make a Will, to ensure your wishes are laid out, and ease the burden on loved ones. What is often not considered is that your Will can be a powerful tool that can be used to aid tax and estate planning.

Summary

With life’s pressures, younger people may be tempted to put off planning for retirement until later; however, in our experience starting a sensible financial plan at an early age could provide a more comfortable retirement. Engaging with a financial planner can also bring peace of mind that your financial circumstances are being reviewed regularly and promote tax-efficiency across your financial arrangements.

Our expert financial planners are independent, and can provide unbiased advice using a holistic approach, which takes into account retirement savings, investments, protection and other financial planning objectives. Speak to one of the team to arrange a review of your retirement savings or investments.

Jun 27
0

The investment case for China

By | Investments

After a decade of rapid growth, China has offered scant reward for investors since 2021. Where developed western markets have enjoyed strong returns since November, Chinese Equities continue to forge a contrarian path lower, despite a growing number of reasons why China appears to offer good value to investors. The graph below demonstrates the very different performance of the CSI China 300 index (shown in blue) compared to the S&P500 index of leading US companies (shown in red), priced in Sterling, over the last 3 years.

We take a look at some of the factors that have led to the underperformance, and outline reasons why we feel an allocation to China deserves a place in a diversified portfolio.

Continued growth

The Chinese economy has traditionally expanded at a rapid pace, with annualised growth of between 6% and 10% per annum achieved between 2010 and 20191; however, the rate of growth on an annualised basis has slowed over recent years. Covid-19 caused Gross Domestic Product (GDP) growth to dip, as was the case across the World, although the Chinese economy rebounded last year, growing by 5.24%. This rate of growth compares favourably to the US, which itself expanded by an impressive 3.1%, and very appealing when you consider the meagre growth achieved by the UK and Eurozone last year. Although the rate of growth predicted for the Chinese economy over the next five years is lower than pre-Covid levels, economists predict an annualised growth rate of around 4% per annum, which may well look attractive when compared to other leading economies.

Consumer recovery overdue

The Covid-19 pandemic was particularly damaging to the Chinese economy. Harsh lockdown rules capped economic activity to a large extent, and when the restrictions were eased in November 2022, economists expected a rapid acceleration and recovery, as domestic consumption rebounded and consumers spent money saved during the pandemic.

The reality has been very different to expectations, as consumer confidence remained stubbornly weak post-pandemic.  Very recent data has, however, indicated a slight improvement, with retail sales for May growing by 3.7% year on year2, reversing the downward trend seen over recent months.

The need to reflate

Most western economies struggled to contain spiralling inflation during 2022 and 2023, caused by increased demand for goods and services post pandemic, and the impact of war between Russia and Ukraine, which pushed commodity prices higher. Given the sluggish recovery in consumer confidence seen in China, inflation was barely positive for 2023, and the International Monetary Fund (IMF) predict Chinese inflation will only reach 1% this year.

Beijing has already taken measures in an attempt to stimulate demand, such as offering trade-in subsidies against the purchase of new cars and white goods, and cutting base interest rates late in 2023. It is likely, however, that further monetary stimulus will be needed, which could prove a fillip for investors.

Unemployment levels amongst young people also remains a concern, with 14.2% of those aged 16 to 24, who are not in full time education, looking for work2. That being said, this has steadily fallen from the 20% level seen last year, and we expect to see further measures to boost productivity and employment prospects, in particular in areas such as technology.

Property Market woes

One key reason behind the underperformance of Chinese Equities since 2021 has been the continued struggles seen in the real estate sector. Land and Property development, which according to analysts accounted for almost one third of China’s GDP at one point, boomed during the last decade, with much of the growth fuelled by debt. Overdevelopment saw a glut of unsold properties, spawning ghost cities amidst a buyers strike. Lack of consumer confidence in the wake of the pandemic, and demographic shifts are often cited as the key reasons for the extended slump in real estate prices.

As demand eased, and debts mounted, pressure began to bear on the largest property enterprises. Evergrande, a key player in the Chinese property market and at one point the most valuable property company in the World, defaulted on its debt in 2021, and eventually filed for bankruptcy in August 2023. Country Garden, another leading property firm, saw its shares suspended earlier this year. The company has also defaulted on loans and is facing a liquidation petition.

Concerns over the impact that defaults could have on the strength of local and national banks remain,  although the immediate prospects of a property-led banking crisis now appear less likely. China’s Government have announced a raft of measures in an attempt to arrest the decline, including the purchase of unsold homes by local authorities, although further action will almost certainly be needed to help boost confidence in the sector. Any such moves would be welcome; however, we expect the property sector to be a drag on growth for some time to come.

Transition to tech

The increased focus on new industry, such as electric vehicles, is a good example where Chinese companies have the potential to dominate global supply. A slow but steady move towards net zero will require change on a colossal scale, and a gradual move away from traditional manufacturing to added value could halt the decline in industrial production seen over recent years.

Good value for the patient investor

The poor performance of Chinese Equities since 2021 has led to valuations becoming increasingly cheap when compared to other developed markets. Estimates of the forward price to earnings ratio suggest that the MSCI China Index stands at between 11 and 13 times earnings, which is roughly the same level of market valuation as the UK, despite the fact that China is likely to grow their economy at more than double the pace of the UK over the next five years.

Despite the apparent inherent value, investment in China is not without risks. Continued pressure from the ailing property sector, ongoing tensions with the West and the potential for regulatory interference temper our enthusiasm, and given the outflows seen from Chinese Equities over the past two years, investment at this point would be considered a contrarian move.

Taking all factors into consideration, we see the potential for a rebound in the fortunes of Chinese Equities over the medium term. Investors will, however, need to show patience, and volatility may well be uncomfortable at times. We therefore feel that an allocation to China could be appropriate; however it is important to hold a diversified portfolio of assets, and our experienced team can provide advice to tailor your portfolio to suit your tolerance to investment risk, whilst ensuring diversification is maintained. Speak to us to start a conversation about the asset allocation within your investment or pension portfolio.

Sources

1 World Bank Group

2 National Bureau of Statistics of China