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FAS

Oct 03
0

Our Approach to Client Reviews

By | Financial Planning

Valuation and data collation

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

Analysis and performance review

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

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

Financial planning review

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

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

Our use of technology

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

Platform and Provider Review

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

Agreed actions for discussion

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

Review meeting and report

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

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

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

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

A key part of our service proposition

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

Sep 26
0

Protecting your financial future

By | Protection

The focus of many sensible financial plans is to help build security, be it to pay off an outstanding mortgage or accumulate wealth to help provide a comfortable lifestyle in later life. An equally important element – and one that is often overlooked – is to consider the impact of death on a family’s finances. This is where protection policies can provide security and peace of mind.

Not everyone needs life insurance; however, if you are responsible for someone else’s financial security, either by virtue of salary or other income that would be lost in the event of death, or have caring responsibilities for a child (or indeed an older adult), it may well be sensible to review your existing protection arrangements, to see whether you have sufficient cover in place.

Review existing life cover

The most obvious reason for taking out life insurance is to cover an outstanding mortgage debt. Most policies taken out for this purpose are established on a Decreasing Term basis, whereby the amount of life cover provided falls by a set percentage each year to reflect the lower mortgage balance outstanding. If the mortgage has been established on an interest only basis, for example on a rental property, then Level cover – where the sum assured remains the same throughout the policy period – would be more appropriate.

Whilst holding life cover to settle an outstanding mortgage balance is obviously sound financial planning, a lump sum payment would do little to provide additional funds on an ongoing basis to cover day-to-day living costs and other expenditure for family members left behind. Although the burden of mortgage payments would be eased, the loss of earnings caused by the death of the main income provider could mean that surviving family members struggle to cover ongoing costs, in addition to other financial commitments, such as hobbies and leisure or further education expenses.

It is, therefore, sensible to review any existing policies in place to see what cover is already provided and look for gaps where additional protection could provide peace of mind. Conversely, we sometimes meet new clients who are paying premiums on policies that are surplus to their financial planning requirements, although we always recommend seeking independent advice when weighing up whether to cancel existing life cover.

There are a range of different products that offer life cover to help families protect their loved ones in the event of death. We will focus on two options, namely Death in Service and Family Income Benefit, which provide very different, but equally valuable, benefits.

Death in Service

We regularly meet with clients who are unsure whether their employer offers a Death in Service policy as part of their remuneration package. Whilst not mandatory, many employers provide Death in Service policies, as they are a cost-effective benefit and a way to attract and retain staff.

Death in Service is a valuable benefit, which is paid out to those who die whilst employed. Whilst having some similarities to a standard life insurance policy, instead of paying out a specific lump sum on death, the amount paid is usually a multiple of salary. For example, a scheme paying three times salary to an employee earning £50,000 per annum would provide cover of £150,000 in the event of death whilst employed.

Death in Service arrangements can vary depending on how the policies have been established. Schemes that register with HMRC fall under pensions legislation, whereas so-called “excepted” schemes fall under trust rules. Depending on your personal circumstances, a payment on death could impact other financial plans you have in place, such as existing pension savings, and it is therefore important to check how your Death in Service scheme has been established.

If the benefits under a Death in Service policy are paid to a trust, the trustees will determine who the benefits are paid to. It is therefore important to complete an Expression of Wish form, to let the trustees know who you would like to benefit from the policy. It is, however, important to note that the trustees have the final say on how benefits are distributed, although they will take any valid nomination into account when reaching their decision.

Family Income Benefit

Whilst most life policies are established to provide a lump sum on death, some are arranged to provide a regular income for a set period of time. So-called Family Income Benefit policies are designed to replace earnings or income that would have been generated, in the event that the policyholder dies, which provides surviving family members with an income to maintain their standard of living. The policy is established over a specific term, and in the event of a claim being made on the policy, the regular payments will be made for the remainder of the term. For example, if a policy was established for a 25-year term, and the policyholder died in the 15th year, the monthly benefit payments would continue to be paid for the 10 years remaining on the policy.

Benefits paid by a family income benefit policy can either be paid on a level basis (i.e. the monthly premium and benefit payments are fixed at the same amount for the life of the policy) or indexed, where the level of benefits, and monthly premium, are inflation linked. This can protect the real value of the cover provided, and the cost of living increases we have seen over recent years are a timely reminder of the importance of protecting future payments against inflation.

Carry out a protection audit

As part of our holistic approach to financial planning, our experienced advisers will look at your existing protection arrangements you hold to ensure that sufficient cover is in place. After all, no matter how much energy is devoted to making the right plans for long term saving, without adequate protection against death, the best laid plans can be derailed. Speak to one of our advisers who would be happy to review your existing arrangements, and provide recommendations to alter existing cover or establish new policies to ensure your family are protected in the event of death. As an independent firm, we can access providers from across the marketplace, to provide advice on the most appropriate solution.

Sep 19
0

Why the US election matters

By | Financial Planning

US sets the tone

The US election result will have fundamental implications for the outlook for global investments. US stock markets are by far the most influential global indices, with US quoted companies accounting for 62% of the FTSE All-World index, with Europe lagging way behind on 15% and Asia Pacific accounting for just 10% by weight. The performance of the S&P500 and Nasdaq sets the tone for the performance of European, Asia Pacific and Emerging Markets. As such, UK investors need to pay careful attention to the outcome of the US election. If US markets react positively to the result, this may well boost investor confidence globally.

Democrats and Republicans take a very differing stance on a range of issues, some of which are domestically focused and will affect US consumers and businesses directly. There are, however, a range of issues that are relevant to global stability and may have far reaching implications.

Foreign policy

Harris and Trump are likely to follow a very different path when it comes to foreign policy, which may have wider implications for global security and could have economic consequences, too. Trump has repeatedly stated that other NATO countries need to increase their spending and has indeed threatened to pull the US out of NATO. This is in stark contrast to the position that Harris is likely to adopt, which will be a continuation of the existing policies currently in place. With the Russian invasion of Ukraine contributing to the rapid increase in the cost of commodity prices in 2022, any significant escalation of tension between the West and Russia, could drive up commodity prices once again, and threaten stability.

The conflict between Russia and Ukraine is one of three potential threats to global security that the next President will need to deal with. Tensions in the Middle East could morph into a wider conflict in the region, and the strained, but relatively stable, relationship between the US and China may well be managed differently should Trump become President once again.

Climate policy

The Biden administration has wholeheartedly supported the transition to clean energy as part of the Inflation Reduction Act, which provides tax credits for electric vehicles. Harris is likely to continue the same path and has indicated her firm support for increased spending to tackle climate change. On the other hand, Trump is likely to take a different stance, given his record on carbon emissions and fossil fuels. The outcome of the election may well impact the fortunes of oil and gas companies, who could be beneficiaries of a Trump victory.

Tariffs

Both Democrats and Republicans may seek further tariffs on imported goods, although Trump is likely to go further in imposing higher tariffs on goods from China. This may prove to be inflationary, as US consumers face higher costs for imported goods. The Federal Reserve’s actions since 2022 to combat inflation have been largely successful, and a resurgence of inflation could prove negative to both equities and bond markets. One potential positive from the imposition of tariffs may be an increased drive towards domestic production, which could benefit the US manufacturing sector.

Tax and spending

A Trump victory could provide a boost to US consumer spending, as he is likely to be in favour of additional tax cuts, which would leave US citizens with more money in their pockets each month. Cuts to business tax could also prove positive for US corporate profitability. The Democrats have called for the removal of tax breaks for higher earners, and an increase in corporate taxes from 21% to 28%. Trump is likely to promote the reduction of red-tape and regulation on business, whilst Harris is likely to favour big state and increased regulation.

Monetary policy

US national debt continues to climb exponentially, standing at US$35tn. When Trump became President in 2016, US national debt stood at US$19.95tn, although a good proportion of the increase in debt since 2020 can be attributed to the Covid pandemic. The cost of servicing the debt has increased significantly over the last two years and tackling the ballooning debt is not a job either Harris or Trump will relish. Reversing the annual deficit, so that debt does not rise further, is a significant challenge and would involve cutting public spending, raising tax significantly, or both.

Should Trump get the keys to the White House for a second term, there could even be a change to the way that monetary policy decisions are reached. Trump has indicated that he would prefer to see the President have a say when the independent Federal Reserve makes decisions on US interest rates. This would mark a fundamental change to the current process and remove the independence that the Federal Reserve enjoys.

No honeymoon

Whoever wins the election in November may not have everything their own way. It is a possibility that the eventual victor may see the opposing party controlling either the House of Representatives, or the Senate. This would mean policy decisions would not necessarily pass and could weaken the ability for the President to successfully implement their election promises.

Outlook for US equities

US equities have been the catalyst for the strong global equity market performance since last November, and this trend shows no signs of reversing. Continued economic growth, the expectation of supportive monetary policy and strong corporate earnings are factors that support our conviction to US equities. Apart from a short-lived spike last month, volatility has remained low through the year to date; however, the upcoming election could see volatility increase as the US heads towards the polls.

Our experienced financial planners are on hand to discuss the exposure to US equities within your portfolio. Speak to one of the team, who would be pleased to review your existing portfolio asset allocation.

Sep 12
0

Pressure on the “Bank of Family” grows

By | Financial Planning

With house prices staying close to all-time highs, finding a deposit for a house purchase remains a challenge for many buyers. As a result, an increasing number of prospective home buyers are turning to wider family for financial assistance, either to get their first leg up onto the property ladder or move to a larger property to better suit a growing family.

By gifting a deposit, parents can help their children increase the amount they can borrow on a mortgage, in turn enabling them to buy a home which would be impossible without the financial assistance. We have also seen instances where family gifts have been used to reduce an existing mortgage debt, leading to lower monthly mortgage repayments and easing the financial burden.

Growing trend

A recent study by Legal & General reported that a total value of £9.2bn will be gifted by parents, grandparents and other family members to help fund house purchases this year, an increase of 13% on the £8.1bn gifted for this purpose in 2023. The same study sees the pace of gifts accelerating, with the amount gifted likely to reach an aggregate of £11.3bn in 2026. Legal & General’s research also showed the average gift made has jumped to £27,400. Similar research from the Centre for Economics and Business Research (CEBR) found that 42% of all property purchased by those aged under 55 this year was in part funded by a gift from family.

Traps lie in wait for the unwary

Whilst gifting funds is generally well intentioned, parents and grandparents should consider the consequences of their actions before proceeding.

Firstly, any gift made could have potential Inheritance Tax consequences. Each individual can make gifts of £3,000 per Tax Year and therefore a married couple could gift £6,000 of capital (plus £3,000 each from the previous Tax Year if not used) without any Inheritance Tax concerns. As highlighted by the Legal & General research, this is some way short of the average amount of financial help provided. Any amount gifted above the gift exemption is treated as a Potentially Exempt Transfer (PET). No Inheritance Tax is due immediately; however, the person making the gift needs to live seven years from the date the gift is made, for the gift to fully escape Inheritance Tax.

Parents and grandparents also need to be aware that a gift is absolute. If the child buys a property jointly with an unmarried partner, the consequences of relationship breakdown could mean that “family wealth” is unprotected, if the property is later sold. Unfortunately, this is a common occurrence, and all parties involved should seek specialist legal advice to determine how gifted deposits are dealt with.

Some parents might consider co-ownership with their children, as an alternative to gifting funds outright. This needs very careful thought, as this option is likely to incur an additional Stamp Duty levy, if the parent already owns a property. Further complications could also arise if the parents need to release funds from the property at some point in the future.

Protecting your financial security

Parents and grandparents making gifts need to carefully consider their own financial requirements before taking any action. The Legal & General research shows that 40% of those gifting deposits are using cash savings and investments to fund the gift, and 12% are accessing pension savings for this purpose. As a result, many older family members gifting money are financially less secure after making the gift.

Most calls to the “Bank of Mum and Dad” are when parents are typically in their 50s or 60s. This is a time when parents should be concentrating on their retirement plans, and gifting funds at this time can not only mean that cash or investments are unavailable to cover unexpected expenditure, but also affect their income in retirement.

Parents typically want to ensure that their children are treated equally, and this could lead to added financial pressure. Gifting funds to one child, for example, may increase the expectation that a similar gift is also made to other children in the future. This could be at a time when available funds are limited or being used to fund retirement.

Planning ahead

Given the findings of the Legal & General survey, and our own experience of advising clients in this situation, it would be wise to think ahead and begin putting aside funds to give children a helping hand onto the property ladder. One option is to fund the child’s Junior Individual Savings Account (ISA) with regular contributions over time. It is important to note that the returns achieved on the underlying cash or investments within the Junior ISA will dictate the amount available to the child, and therefore careful consideration needs to be given in respect of the choice of investment. The other risk with a Junior ISA is that the account can be accessed when the child turns 18, which may well be too early for the funds to be used for its intended purpose. An alternative is to place funds in a separate investment portfolio, where the parent or grandparent can keep control of the funds. This could be arranged in a tax-efficient manner, for example, by using an Investment Bond.

Getting the right advice

We strongly recommend that parents and other family members, faced with calls on the generosity of the “Bank of Family”, take advice, as there are a number of financial and legal considerations that need careful consideration. At FAS, we regularly are called on to provide such advice to parents and grandparents, including the most appropriate method of funding the gift, and the potential financial impact of any actions taken on their financial security. We can also provide advice on appropriate investment solutions where parents and grandparents can regularly save to build a capital sum for their children or grandchildren’s future.  Speak to one of our experienced financial planners for independent and expert advice.

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.