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Broaden your horizons

By | Financial Planning

The news that the UK economy fell back into recession at the end of last year is likely to be of little comfort to investors whose portfolios are heavily weighted towards UK Equities. It is fair to say that most UK investors will have some exposure to shares listed in the FTSE100, the index of the largest quoted UK companies. Indeed, we often come across portfolios that continue to hold a heavy concentration of UK Equities, and this is particularly true of traditional Discretionary Managed portfolios, which hold a blend of directly held shares and collective investments.

Investors who have focused on UK shares are likely to have seen an extended period of underperformance compared to investors who have adopted a global approach to investment. The FTSE100 index level has increased by just over 7% over the last 5 years, which is disappointing when compared to the performance of other global indices over the same period. Over the last 7 calendar years, the S&P500 index of leading US shares has outperformed the FTSE100 in each period, with the sole exception being 2022, which proved to be a very disappointing year for most asset classes. Moving away from the headline FTSE100 index, the performance of mid-sized UK companies in the FTSE250 index has been weaker still.

Structure of the index

One reason for the extended period of underperformance of the FTSE100 is the composition of the index itself. At the end of 2023, just under 20% of the FTSE100 is represented by financial companies, with Consumer Staples being the second largest sector. Industrials, Energy and Healthcare are the next three largest sector allocations. Over recent years, much of the outperformance of global markets has been led by stocks in the technology sector, which are significantly underrepresented in the FTSE100 index, with just over 1% of the index allocated to Tech stocks. By way of comparison, close to 30% of the S&P500 is invested in the Technology sector.

London losing its’ lustre

Another factor that is influencing the performance of UK indices is the diminishing influence of the UK in global financial markets. In 2022, the market capitalisation of French listed companies temporarily exceeded those listed in the UK for the first time. Further damage to London’s reputation has been caused by a number of leading domestic companies who have chosen to list on global exchanges rather than list on the London Stock Exchange. These include semiconductor stock ARM, who listed on the NASDAQ index last September. If this trend continues, the gap in performance between the UK and global markets could widen further.

Positive for income seekers

The above factors paint a rather gloomy picture for domestic shares. There are, however, a number of redeeming features which suggest that investors would be unwise to shun UK Equities altogether.

For investors who are seeking a high level of dividend income, the FTSE100 can be a happy hunting ground. The current yield on the index is around 3.7% per annum, which represents a significant uplift over the yield on the S&P500 index, which stands at just 1.3% and is also higher than the yield generated by the indices of our major European counterparts. The composition of the FTSE100 lends itself to an attractive dividend yield, due to the high concentration of mature companies that are cash generative. Furthermore, UK companies have a long-standing culture of returning excess profits to shareholders in the form of dividends.

Whilst UK stocks tend to offer the most attractive yields, many investors now choose to focus on total return from their investments, which combines capital appreciation or losses achieved in conjunction with dividend income received. Given the modest capital performance over the last five years, using this measure reduces the attractiveness of the FTSE100 dividend yield.

Investors seeking income can also broaden their horizons, as Global Equity Income funds increase in popularity. These funds, which are typically actively managed, invest in global stocks that offer attractive and sustainable dividend yields, and whilst it is fair to say that other geographies don’t share the dividend culture present in the UK, many mature companies listed in the US and Europe still offer attractive yields. Adding Global Equity Income to a portfolio can be a useful way of diversifying a highly concentrated exposure to UK companies.

Cheap for a reason?

The UK market is certainly attractively valued when compared to global markets. The forward price-earnings ratio – a well-known measure of whether a stock or index is cheap or expensive – stands at around 10 times earnings. This is less than half the price-earnings ratio of the S&P500 index, and indicates the UK is certainly cheap compared to US markets. The FTSE100 price-earnings ratio also stands at a discount to the same ratio for the major German and French indices.

Given the discount to other global markets, why have UK stocks continued to underperform? Perhaps the answer is that UK stocks are cheap for a reason, given the stagnation in the UK economy and lower appeal in the current market trend towards technology stocks.

The benefits of diversification

Over recent years, holding a high allocation to UK Equities may well have led to underperformance as UK shares have lagged their global counterparts consistently for an extended period.

Whilst UK Equities remain attractively valued, the FTSE100 is poorly placed to take advantage of current market momentum, which is very much focused on new industry and technology in particular. A swing in market sentiment, however, towards more value orientated companies could help UK indices regain lost ground, and this is why retaining exposure to the UK remains appropriate in a diversified portfolio. There are, however, compelling reasons why investors, who hold significant allocations to UK shares, should broaden their horizons and seek to diversify into other geographies, such as the US and Far East.

Our experienced financial planners can review an existing investment portfolio and suggest areas where greater diversification could be beneficial. This can be particularly important for those who hold portfolios that have not been reviewed for some time. Speak to one of the team to arrange a formal review.

Are your pension savings on track?

By | Pensions

A recent study published by the Pension and Lifetime Savings Association (PLSA) caught the attention of mainstream media, and turned the spotlight on the need to plan ahead to enjoy a comfortable retirement.

The PLSA have devised three Retirement Living Standards, which help illustrate the level of income needed to provide a Minimum, Moderate and Comfortable retirement. The PLSA suggests that the Minimum level of income covers essential spending in retirement, with limited funds left over for discretionary expenditure. At the other end of the scale, a Comfortable retirement income provides a greater level of financial freedom, and leaves sufficient surplus income to pay for some luxury items.

The reason that the update to the Standards caught the attention of the media is the significant increase in the level of income required at each Standard level over the last twelve months. For a single person, the PLSA research suggests an income of £31,300 is needed to provide a Moderate standard of living in retirement, whereas this jumps to £43,100 for a couple. These figures represent an increase of over £8,000 for a single retiree, or just over £9,000 for a retired couple, in just one year. The increased costs of living, including higher energy and food prices, have naturally fed in to the higher figures, although the PLSA also highlighted the increased cost of holidays, and the cost of providing financial assistance to family members, as contributory factors.

Increased focus on saving

The PLSA survey acts as a useful reminder of the need to plan ahead for the longer term, and to review whether your pension savings are on target to meet your needs in retirement.

Of course, personal pension savings will form part of any retirement strategy; however, the State Pension will also provide a proportion of the target income amount. The triple lock has led to a significant increase in the State Pension, with the hike of 10.1% last year being followed by an increase of 8.5% from April 2024. An individual who qualifies for the full flat rate State Pension will be entitled to £221.20 per week from April, or £11,502 per annum. This falls some way short of the Moderate Living Standards suggested by the PLSA, and highlights the need for individuals to focus on pension saving to meet the shortfall between State Pension provision, and a more comfortable retirement.

Another point to consider is that many individuals do not wish to work until their State Pension age, which is now 67 for those born after March 1961. Early retirement introduces an additional period of shortfall, as years when the State Pension is not payable will need a greater level of funding from other sources, such as personal pensions.

Since the advent of auto-enrolment, most UK employees are enrolled into a workplace pension scheme. Whilst the level of contribution made by employees has increased over time, the statutory minimum level of contribution, at 8% of qualifying earnings, is unlikely to be sufficient to bridge the gap. One worrying statistic highlighted by the PLSA survey is that 51% of those questioned believed the minimum auto-enrolment contributions will be sufficient to provide their required level of target income in retirement. This reinforces the need for individuals to start planning ahead and think realistically about the level of savings needed at retirement.

It’s not just how much you save, performance matters

Whilst the amount that you pay into a defined contribution pension will have a major influence on the retirement income it could provide, it is important not to lose sight of the need to ensure that pension savings are invested in an appropriate manner. Pension savings could conceivably be in place for 40 years, and even longer if a drawdown approach is adopted, and this is a significant period of time over which good performing funds could make a significant difference to the overall pot value at retirement.

Take the example of an individual aged 57 with a pension pot of £100,000. They have 10 years left to retirement and contribute £200 per month gross into a pension. If consistent net investment returns of 4% per annum are achieved on the pension savings, the individual could expect to hold a final pension pot of around £178,000 at age 67; however, achieving consistent net returns of 6% per annum over the same time period could increase the pension pot to around £214,000, some £36,000 higher. Naturally, investment performance is never linear, and returns will fluctuate from year to year; however, this illustration highlights the difference performance can make to the overall pension pot value, and the importance of getting investment decisions right at the outset.

It is also important to review investment decisions regularly to ensure that the portfolio strategy adopted remains sensible, given the underlying economic and market conditions. It is also worth considering whether the investment approach needs to be adapted as you move closer to retirement.

The benefits of planning ahead

One key takeaway from the PLSA survey is that the level of pension income needed for a comfortable retirement is increasing.  Reviewing existing pension arrangements regularly can help ensure that your pension savings are on target to meet your goals, and that pension investments remain invested sensibly to maximise growth potential over the longer term. These are areas where holistic financial planning can add significant value, and help you achieve your objectives.

At FAS, our experienced financial planners can take an unbiased review of your existing pension savings, to advise whether the level of contributions you are making are sufficient, and review existing portfolio strategies to make sure that funds are invested appropriately. Our in-depth ongoing review service will review your pension savings at regular intervals so that you can make adjustments as necessary to help meet your retirement goals. Speak to one of our planners to discuss whether your retirement plans are on track.

Changes to Pension Lump Sum Allowances

By | Pensions

Announced in the Spring Budget 2023, the Lifetime Allowance for pension savings will be abolished from April 2024. The Lifetime Allowance is the amount of pension savings an individual can accrue before a tax charge could apply. Transitional arrangements are in place for the current tax year, which means that the existing Lifetime Allowance charge is now set at zero.

The legislation that brings about the permanent abolition of the Lifetime Allowance will introduce a raft of changes to the way that lump sum pension benefits are taxed. As is often the case, the new rules are not straightforward, and present a number of planning opportunities for pension holders in a range of circumstances. We must stress that HMRC are still working with the industry to bring about the final framework for the new rules, and therefore the content in this article is based on our understanding of the rules as they stand currently.

Lump Sum Allowance

From 6th April 2024, a new allowance, known as the Lump Sum Allowance, will place a limit on the amount of tax-free cash that can be taken from pension arrangements. The Allowance is set at £268,275, and is exactly 25% of the current Lifetime Allowance limit, which is  £1,073,100. Those with Lifetime Allowance protections will have a Lump Sum Allowance based on their protected Lifetime Allowance level.

From 6th April 2024, whenever tax-free cash is taken from a pension, this reduces the available Lump Sum Allowance. To take account of payments of tax-free cash made before 6th April 2024, 25% of the amount crystallised when taking benefits will be used. This produces a monetary amount that is deducted from the new Lump Sum Allowance. If the individual has used up 100% of their Lifetime Allowance, then they will be deemed to have no available Lump Sum Allowance remaining.

Further Tax Free Cash available?

The new rules may present an opportunity to draw further tax-free cash from a defined contribution pension scheme for individuals with specific circumstances. The starting point on the Lump Sum Allowance is to assume that everyone who took pension benefits prior to 6th April 2024 received 25% of the value of their pension as tax-free cash. Whilst this applies to most individuals, there are situations when this may not have been the case.

Those with Defined Benefit (Final Salary) pensions may have received less than 25% of the value of the pension as tax-free cash, either due to the way the scheme is structured, or if they decided to take full pension income and not draw available tax-free cash. Further tax-free cash could be available; however this may only be useful if an individual is close to the Lump Sum Allowance, and would otherwise not be able to receive 25% of a further crystallisation as tax-free cash.

Those who could benefit from the new rules can apply for a Transitional Tax-free Amount Certificate from their existing pension provider. Pension holders will need to obtain evidence from the scheme where the additional allowance was created, to support their claim.

Lump Sum and Death Benefit Allowance

The other key part of the new pension regime is the new Lump Sum and Death Benefit Allowance (LSDBA). From the start of the new tax year, an individual will have a LSDBA of £1,073,100, although those holding transitional protections may have a higher allowance. This allowance is designed to cover lump sum payments made during an individual’s lifetime, and in addition, also covers lump sum payments paid on death of the individual. These payments include Defined Benefit lump sums and Uncrystallised lump sum death benefits. Any lump sum payments made during an individual’s lifetime, or to beneficiaries, above the LSDBA, will be taxable at the individual, or beneficiary’s, marginal rate of tax.

The important point to note here is that the rules apply to lump sums only. In the case of a Defined Benefit pension, or some Defined Contribution schemes, the only option open to beneficiaries is to receive a lump sum payment. This could potentially mean that beneficiaries become liable to tax if the LSDBA limit is breached.

Individuals holding modern Defined Contribution pensions should be able to avoid any adverse consequences of the LSDBA, if the pension arrangement offers Beneficiary Flexi-Access Drawdown. Payments made under beneficiary drawdown are not lump sums, and therefore benefits are not tested against the LSDBA.

Do you need to take action?

The final framework of the new pension rules is still in the process of being ironed out, and there could be further revision to the draft legislation before the end of the tax year. Our initial assessment of the draft framework is that the changes are likely to affect a relatively small number of individuals with specific circumstances.

Some pension holders could be entitled to additional tax-free cash, in particular if they have taken benefits from a Defined Benefit pension and did not draw the maximum available tax-free cash. Those with specific pension protection may also need to check to see whether the new rules carry any implications for existing defined contribution pension arrangements.

In addition, the new Lump Sum and Death Benefit Allowance could lead to more beneficiaries paying tax when receiving pension benefits following the death of the pension holder; however, this can normally be avoided by ensuring that Beneficiary Flexi-Access Drawdown is an option under the pension contract. It is important to note that not all pension arrangements offer Beneficiary Flexi-Access Drawdown and it is therefore worth checking that this is an option under an existing pension plan. If it is not an option, it may be worth considering whether the existing pension arrangement is appropriate, and if any action is needed to move the pension to an alternative plan.

It has always been important to complete an Expression of Wish declaration on a Defined Contribution pension, to guide the pension trustees on who you would like your pension benefits paid to. The new rules only strengthens the need to ensure a valid nomination is in place, so that the option to draw benefits under Beneficiary Flexi-Access Drawdown is available.

Speak to one of our experienced advisers to discuss the implications of the new rules on your pensions and whether you need to take any action.

Plan ahead in advance of tax changes from April

By | Tax Planning

Capital Gains Tax (CGT)

After being significantly cut in April 2023, the annual CGT allowance will be halved from 6th April 2024, and will see many more individuals subject to CGT in the next tax year.

The Finance Bill 2022 introduced the first reduction in the annual CGT exemption, reducing the allowance from £12,300 in 2022/23 to £6,000 in the current tax year. From 6th April, this exemption will halve to just £3,000 and the legislation confirms this allowance is fixed until any further legislative changes are made.

CGT is payable on the net balance of gains and losses made over the course of a tax year when assets – such as property and investments – are sold. A direct result of the lower annual allowance is that many more people will pay CGT, with those holding substantial investment portfolios that are not in a tax-efficient wrapper, such as an Individual Savings Account (ISA), facing mounting annual CGT bills. The rate of CGT on the disposal of investments is, thankfully, not punitive. Those who pay basic rate income tax will pay CGT at 10% and higher rate taxpayers pay 20%. Higher rates of CGT are, however, charged when disposing of residential property.

Impact on portfolio planning

The reduced allowance is likely to challenge investment strategies, and could potentially lead some to reach the conclusion that they should avoid disposing of investments for fear of triggering a tax charge. Another way to reframe the decision is that you still retain at least 80%, or possibly 90%, of the gain made above the allowance, and the sale could provide the opportunity to realign an existing portfolio. This could prove to be a sensible move, if the investment has grown substantially and the level of risk has increased by virtue of the larger holding. It could also be worthwhile if the investment is underperforming and the proceeds are used to reinvest into another asset with improved prospects.

There are steps you can take to maximise the available allowances. Investments held in joint names can use both CGT allowances as the gain is deemed to be shared, and if investments are held in an individual’s sole name, arranging a transfer between spouses could help make use of available allowance that would otherwise be wasted.

Any CGT liability needs to be declared to HMRC, and even when the net balance of gains and losses falls below the new £3,000 annual allowance, disposing of assets valued at more than £50,000 will also trigger the CGT reporting requirements. This is likely to mean that many more individuals will need to complete a Self-Assessment Tax Return in the future.

Dividend Allowance

Alongside the reduction in the CGT allowance from 6th April 2024, the Dividend Allowance is also being further reduced to just £500.  The Dividend Allowance is a tax-free allowance that covers dividend income received, and captured the first £5,000 of dividend income received in 2016. This allowance was cut to £2,000 in 2018, and was further reduced to £1,000 in the current tax year.

According to Treasury data, the latest cut to the Dividend Allowance is likely to impact over 3 million individuals, from those who hold investment portfolios to company directors who are largely remunerated through dividends.

The changes are likely to be felt the most by investors with smaller portfolios of individual shares or collective investments, who may be faced with paying dividend tax for the first time. Dividend tax is charged at 8.75% for basic rate taxpayers, and therefore the impact may appear relatively light; however, the rate is hiked to 33.75% for higher rate taxpayers and 39.35% for additional rate taxpayers.

Take action before April

According to Treasury figures, the combined impact of the CGT allowance changes and reduction in the Dividend Allowance will generate over £4.6bn of revenue over the next four years. This represents a significant additional tax take for the Exchequer, although investors can take steps to minimise the impact of the changes.

Firstly, the changes present an ideal opportunity to review an existing investment portfolio, to consider whether funds or stocks need to be sold in the current tax year to crystallise a gain within the CGT allowance. We often meet clients who have not reviewed existing portfolios for some time, and carry investments with large capital gains that would be crystallised on disposal. With the reduction in the CGT allowance, the tax implications of disposal will need to be carefully managed, although investors would be well served to consider the performance and future prospects of an investment, when reaching a decision that creates a CGT liability.

Using tax allowances, such as the ISA allowance, can be effective ways of minimising the impact of the tax changes. ISAs have been a staple of financial planning for many years, and the benefits of regular use of the ISA allowance, in conjunction with other tax efficient investment wrappers, could reduce tax bills in the future.

Seek advice

The reduction in the annual CGT and Dividend Allowances is likely to impact many investors from April, and for individuals with sizeable investment portfolios that are rebalanced and reviewed regularly, CGT liabilities may well be increasingly unavoidable. That being said, future liabilities to both CGT and Dividend Tax can be reduced by planning ahead and using annual exemptions where possible.

As a Chartered independent firm, we can advise on solutions from across the marketplace, and are very used to providing advice on existing investment portfolios and how these can be made more tax-efficient. Speak to one of our experienced advisers to discuss the impact of the changes from April and how it will affect your portfolio.

Give your pension a check-up

By | Pensions

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

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

Why is it important to regularly review existing pension plans?

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

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

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

The price of inaction

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

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

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

Is it best to switch pensions? Not necessarily…

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

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

Arrange a review

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

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

Opportunities in Emerging Markets

By | Financial Planning

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

Economies in transition

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

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

Attractions of emerging markets

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

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

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

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

Wide-ranging risks to consider

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

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

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

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

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

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

Our view on emerging markets

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

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

The role of financial advice in the divorce process

By | Divorce

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

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

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

Gathering information on assets

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

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

Preparing a budget

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

Tax Considerations

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

Understanding retirement planning options

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

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

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

Assessing protection needs

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

Create a new financial plan post divorce    

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

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

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

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

2024 Market Outlook

By | Financial Planning

Falling interest rates

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

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

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

Slower Growth

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

Geopolitical and political risks remain

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

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

Asset class outlook

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

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

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

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

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

Time to review your portfolio strategy

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

Reflections on 2023

By | Financial Planning

As 2023 draws to a close, we can reflect on a year when relative calm returned to investment markets after an extended period of market turbulence due to the pandemic, war in Ukraine and global inflationary spike. The level of volatility – that is to say the amount markets move up and down over time – has fallen as the year progressed and has recently touched record low levels not seen since 2020.

There have, however, been moments when market volatility has spiked. The failure of Credit Suisse and Silicon Valley Bank in March briefly threatened another banking crisis, although regulators stepped in and took appropriate action to avoid contagion spreading. The start of hostilities between Gaza and Israel also temporarily put markets on the back foot. Market direction has, however, largely been dictated by expectations that central banks would look to change tack, and begin to cut rates after a rapid series of hikes. Economic data – particularly in the US – has been stronger than expected throughout the year, which has led to the Federal Reserve and others raising rates further than many market participants had expected.

Recent comments by central bankers, particularly in the US, have suggested that the long awaited “pivot” is finally here. Investors have been eagerly anticipating the point at which central banks call time on the hiking cycle which has dominated sentiment since early 2022. This has led to a strong return over recent weeks as markets end the year in an optimistic mood, with the expectation that rates will be cut next year.

Technology dominates returns

The so-called “Magnificent Seven” technology stocks have been responsible for a good proportion of the gains achieved by markets during 2023. The performance of Apple, Microsoft, Meta, Amazon, Alphabet, Nvidia and Tesla have not only driven US market returns, but also global markets, due to their combined market capitalisation. Our portfolio strategies have continued to hold good exposure to these tech giants, despite challenging valuations in one or two cases.

Inflation back under control

Inflation, which was the major cause of the market gyrations last year, appears to be back under control. As we entered 2023, inflation stood at 10.5% in the UK and 6.5% in the US. Partly due to actions taken by central banks, inflation has more than halved in both the US and UK. Whilst the current rates of inflation continue to run at elevated levels when compared to the target rate of 2%, the trend is firmly lower, and we feel that central bankers run the risk of inflation undershooting medium term targets if they maintain restrictive monetary policies for too long.

Bonds fight back

2022 will be recorded as being one of the worst performing years for fixed interest investors since records began. The rapid series of rate hikes and inflationary spike led to yields rising substantially over the course of the year. Whilst the early stages of this year saw Bonds move sideways, recent performance has been more encouraging, as markets look to a change in direction from the Federal Reserve, Bank of England and European Central Bank in 2024.

London loses its’ lustre

The London stock exchange appears to be losing its’ appeal for companies who wish to list on public exchanges. Chip designer ARM holdings made the decision to list on the New York Stock Exchange earlier this year and other significant moves overseas have included Irish building materials company CRH. In our opinion, this only reinforces the importance of taking a global approach to investment and to avoid investment strategies that are too concentrated in domestic Equity funds.

Geopolitical tensions

Geopolitical events have continued to have an influence on markets over the course of the year. The conflict in Israel and Gaza, which commenced in October has, to date, had a limited impact on market sentiment. Naturally, any escalation in the conflict could have a significant impact on oil prices, which in turn would increase volatility in global markets.

The Russia-Ukraine conflict continues, although it is becoming more evident that the economic damage was caused last year, and investment markets have paid less attention to events in central Europe over the course of the year. Another possible area of concern is the potential for China to invade Taiwan. This threat should not be ignored, and again, this would have a significant impact on market sentiment in the event of increased tensions between China and the US.

Whilst external events have had less of an impact this year than say in 2020 or 2022, investors always need to be mindful that events beyond the control of markets can influence sentiment and momentum. For this reason, we recommend that investment strategies are reviewed regularly so that they remain appropriately invested in response to global events.

What is in store for 2024?

Unless we see a significant turnaround over the remaining trading days this year, global markets will end the year higher and investors will be able to reflect on a more representative market performance, after a difficult period of volatility in recent years. Compared to the tentative mood twelve months ago, markets are showing a degree of confidence that the worst may be behind us.

We will take a look at our thoughts for the year ahead in the first edition of Wealth Matters in 2024. We take this opportunity of wishing all of our readers a pleasant Christmas break and good health and happiness in 2024.

12 quick ways to review your financial plans this Christmas

By | Financial Planning

The run up to the festive period is traditionally a busy time for many; however you may find time over the Christmas holiday period to sit down and review your financial position.

Data from H M Revenue and Customs suggests that this is precisely how some individuals use their down time over the Christmas period. Last Christmas saw 22,060 individuals file their Self Assessment Tax Returns between Christmas Eve and Boxing Day last year, with 3,275 filed on Christmas Day itself.

With the festive season looming, we thought it would be a good opportunity to take a brief look at 12 ways you can bolster your financial plans over the Christmas period and into the New Year.

Think about this year’s Individual Savings Account (ISA) allowance

In the current Tax Year, each UK resident is entitled to save £20,000 into an ISA, where those savings or investments are exempt from tax on interest and capital growth. The increase in cash interest rates over the last year could lead to many more individuals paying tax on interest from savings held outside of an ISA. Using the ISA allowance will shelter cash from both Income Tax and Capital Gains Tax.

Consider your protection policies

It is a sad fact that many people have insufficient financial protection in place to safeguard their loved ones. Research undertaken by Direct Line Insurance in 2022 found that only 35% of those questioned hold life assurance. Separate research from Charles Stanley suggested only 7% of individuals have either a Critical Illness or Income Protection policy in place.

The end of the year can be a good time to take stock and ask yourself some honest questions about the robustness of your financial plan. Would your spouse and children cope financially if you suddenly died or became seriously ill and could no longer earn? Are your current protection policies still up-to-date and appropriate for your needs?

Review your CGT allowance

The Capital Gains Tax (CGT) allowance has already more than halved this Tax Year and is expected to halve again from 6th April 2024. Making best use of the allowance is now more important than ever, and it would be sensible to undertake a review of an existing investment portfolio to consider whether any action is needed.

Make use of annual gift exemptions

You are allowed to gift up to £3,000 in each Tax Year, without considering the Inheritance Tax (IHT) implications. There are additional exemptions that may be available, depending on your circumstances. If you are looking to reduce the potential impact of IHT on your Estate, making regular gifts can be a useful way of mitigating an IHT liability, in conjunction with other tax planning strategies.

Review your pensions

Assuming you are not affected by rules such as the Money Purchase Annual Allowance (MPAA) or Tapered Annual Allowance, you can contribute up to £60,000 into your pension (or up to 100% of your salary – whichever is lower) in the current Tax Year. It may also be possible to carry forward unused allowances from previous tax years.

Pension contributions can be a great way to save towards your retirement in a tax-efficient manner, and as pensions are usually exempt from IHT,  a pension can also shelter funds for loved ones on death outside of your Estate.

Take stock of your mortgage

For many people, their mortgage is their biggest liability and monthly outgoing. The hike in interest rates over the last year has led to increased payments for those on a Standard Variable Rate mortgage. For those currently on a fixed rate deal, it would be sensible to start to consider your position when the current deal expires.

Consider joint tax allowances

If you are married or in a civil partnership, then it is possible to transfer assets to your partner to make use of their allowances if available, as well as your own, or to be taxed at lower rates, if applicable. For instance, CGT can be avoided or reduced by using both allowances to share a capital gain.

Check emergency funds

Whilst everyone has a different view about the balance that would ideally be kept in a current account, we feel it is sensible to keep at least three to six months of outgoings accessible to cover any emergencies that could arise. Take time over Christmas to consider the level of cash you are holding to see if you feel comfortable. If the balances you hold are higher than you need, could you move some of the surplus cash to another home where it could be more productive?

Review your credit rating

Checking your credit score at various points throughout the year can be a good idea, as it can affect important areas of your life such as mortgage applications. There are a number of useful online resources that allow you to check your credit score.

Make sure you have completed an Expression of Wish

If you have a workplace or private pension, completing an Expression of Wish form with your provider will let them know who you’d like your pensions savings to go to if you die. It is worthwhile reviewing the nomination regularly to make sure that it continues to reflect your wishes.

Check your State Pension forecast

By using the Government Gateway service you can receive a State Pension forecast, which will indicate your likely State Pension and the date at which it is payable. It will enable you to identify any gaps in your National Insurance record, and check whether any action is needed.

Speak to one of our advisers

Make it a New Year resolution to undertake a comprehensive review of your financial circumstances. Speaking to an independent financial planner can help identify areas that you may have missed, and undertake a comprehensive and holistic review of your current position and whether you are on target to meet your needs and objectives. As a Chartered Firm, our advisers are highly experienced and can take an impartial review of your finances. Speak to one of our advisers to arrange a review.