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FAS

Feb 01
0

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.

Jan 25
0

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.

Jan 18
0

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.

Jan 11
0

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.

Jan 04
0

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.

Dec 21
0

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.

Dec 14
0

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.

Dec 07
0

Reviewing trust investments

By | Trusts

We come across many instances where trustees of an existing trust have carefully considered an appropriate investment strategy when the trust commences, giving due consideration to the terms of the trust, and the requirements of the Trustee Act. So far, so good; however, we equally come across trusts where funds have remained in the same investment strategy for many years, without any detailed scrutiny of the investment process or investment performance.

Investment management is an evolving process. Looking back over decades, the composition of a modern investment portfolio is very different to a portfolio that would have been seen as being appropriate years ago. In recent years, investment trends have increased the focus on passive investment funds, which offer a low-cost way of accessing a particular market index. Active fund managers now pay greater attention to environmental, social and corporate governance factors when constructing portfolios. These, and other factors, can influence portfolio performance, and with an increased focus on value for money, the costs of investment funds and fund management.

Reviewing investments

Keeping the provisions of the Trustee Act in mind, trustees should seek professional advice when carrying out a review of trust investments, unless they feel competent to carry out the review themselves. Our view is that reviews should be carried out at least once a year, and possibly more frequently, depending on the trust situation. The review should, of course, consider the portfolio performance, and adopting an appropriate benchmark can help trustees measure the performance of the portfolio against wider markets.

When investments are managed on an advisory basis, trustees should seek advice as to whether the current portfolio remains suitable given the prevailing and expected market conditions, and if any of the investments should be switched. If the portfolio is managed under discretion, it would be good practice to carefully analyse the decisions reached by the discretionary manager over the review period, and to ensure that the portfolio investments remain consistent with the original investment brief agreed at the outset.

The importance of diversification

Over recent years, our experienced advisers at FAS have reviewed the trust investment strategies of a large number of trusts, which are managed by some of the biggest providers of discretionary managed services to professional and lay trustees. We have noted that many of these solutions tend to employ strategies that are focused on UK equities, and carry an underweight exposure to global equities, which may introduce additional risk, given the dominance of overseas Equities. To demonstrate, 70% of the MSCI World Index (which covers the largest 1511 global quoted companies) is weighted towards US equities, with just over 4% allocated to the UK. Whilst carrying such a small allocation to the UK is, in our opinion, a little extreme, it does underline the importance of global diversification in modern portfolio construction.

We have also noted that some discretionary managed strategies tend to offer unattractive income yields, which may not be appropriate where trustees are not only seeking capital growth, but need to produce a strong level of natural income which is paid to a life tenant. As the circumstances of a trust can differ widely depending on the position of beneficiaries, the time horizon and objectives, trust investment strategies need to be able to adapt to meet the precise requirements of the trust.

Review the trust and tax position

Other than considering the investment strategy, trustees need to regularly consider whether there is any change to a beneficiary’s requirements. For example, are minor beneficiaries close to reaching the age when they receive capital from the trust, and if so, should the trustees consider reducing investment risk. Or perhaps a life tenant’s circumstances have changed, which may mean a switch of portfolio strategy is needed.

Tax rules are also subject to frequent change, and trustees need to keep abreast of how any changes could affect their decisions. A good example of this is the reduction in the Capital Gains Tax allowance, which has more than halved in this Tax Year and will halve again from 6th April 2024. This will undoubtedly lead to more trusts being liable to Capital Gains Tax on a regular basis. Relevant Property Trusts are subject to a punitive tax regime, and by careful review of the various investment wrappers that are available, it may be possible to reduce the burden of tax on the trust. One such example is the use of an investment bond as a way of avoiding Capital Gains Tax considerations.

FAS Trustee Service

As you would expect, we regularly undertake detailed analysis of our portfolio performance and as part of this review, we consider the performance of some of the more common managed portfolio services offered by the largest providers of trust investment management services, and compare these to the performance of our CDI Discretionary Managed portfolios. We carefully monitor not only the raw performance data, but also other factors such as volatility and risk, which are important factors that trustees need to consider, together with fund charges and the management fee structure.

This regular review allows us to make comparisons of our performance against our peer group, and our analysis shows the performance of our CDI portfolios has been favourable when compared to some of the more popular discretionary managers who provide services to trustees. We have a well-defined investment process, which makes best use of our independent status. This allows us to select funds and solutions from the widest range of UK fund managers, allowing us to select the most appropriate investments without restriction.

If you are a trustee, it may be a good time to consider how your investment reviews are carried out. Speak to one of our experienced advisers, who would be pleased to carry out an independent and impartial review of the existing trust investments.

Nov 30
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Our view on the Autumn Statement

By | Budget

National Insurance

The headline announcement in the Autumn Statement was the reduction in the main rate of Class 1 National Insurance Contributions (NICs) paid by an employee. Whilst speculation had mounted prior to the Statement that the cut to NICs would be 1%, Jeremy Hunt extended the cut to 2%, reducing the main rate (i.e. the rate payable on earnings between £12,570 to £50,270) from 12% to 10%. This will take effect from 6th January 2024 and provide a maximum saving of £754 per annum.

From the perspective of pension contributions, many employers now offer Salary Sacrifice arrangements, which provide NICs savings for both employers and employees. The reduction in the main rate of Class 1 NICs does slightly reduce the benefit achieved from a Salary Sacrifice arrangement; however, such an arrangement remains a tax-efficient way to structure regular pension contributions.

For the self-employed, Class 2 contributions have been abolished for those with profits above £6,725 a year. The main rate of Class 4 contributions has been reduced from 9% to 8% on profits between £12,570 and £50,270. Employer rates of NICs remain unchanged at 13.8%.

Extended support for VCT and EIS

The Statement confirmed continued support for Venture Capital Trust (VCT) and Enterprise Investment Schemes (EIS) until 2035, which is welcome news. VCT and EIS were previously subject to a “sunset clause” which would have ended tax relief on investment in new VCT and EIS shares in 2025. The announcement provides clarity to the sector and continues to underline the Government’s intention to support small and growing businesses with funding through tax efficient investments.

Pension rules clarified

Following the announcement in the Spring Budget 2023 that the Lifetime Allowance for pension savings is to be abolished, the Treasury and HMRC have provided further guidance on how the new regime will operate from 2024/25. The most important clarification was in respect of the tax treatment of funds in a Defined Contribution pension, where the member dies before the age of 75. Subject to confirmation in the Finance Act, it appears that annuity and drawdown income payable to nominated beneficiaries will remain tax-free beyond 6th April 2024.

IHT – no change…yet

Despite significant press speculation in the run up to the Autumn Statement, no announcements were made to alter the current Inheritance Tax (IHT) rules. Treasury receipts from IHT continue to grow year on year, and reducing or abolishing IHT would leave a gap in the public finances that would need to be filled elsewhere. It therefore remains the case that careful planning is needed to consider whether any mitigation to reduce or eliminate exposure to IHT is required.

Given that there is at least one more Budget before the next general election, we would not entirely rule out changes to IHT next year; however, it is likely that families will still need to consider and plan ahead to ensure that intergenerational wealth is cascaded in a tax-efficient manner.

ISA changes

Whilst some of the more radical changes that the Government could have made to Individual Savings Accounts (ISAs) have been left out of the Autumn Statement, some useful adjustments have been made to the ISA rules from April 2024. From the next tax year, investors and savers will be able to open more than one ISA of each type in the same tax year. Under current legislation you can only open one ISA of each type (i.e. one Stocks and Shares ISA and one Cash ISA) in a tax year, and the new rules introduce interesting opportunities to split Stocks and Shares ISAs across different providers, or save into both a fixed rate and a variable rate Cash ISA with different deposit takers. It will also be possible to arrange partial ISA transfers from contributions made in the current tax year.

The total ISA allowance remains at £20,000 and this is the hard cap on contributions across all different ISA types in a single tax year. This is slightly disappointing, given the fact that the ISA allowance has remained at £20,000 since the 2017/18 tax year, and inflation has eroded the real value of the ISA allowance over time. Junior ISAs will continue to have a £9,000 limit per tax year.

State Pension

The “triple lock” on State Pensions remains in place and therefore State Pensions will increase by 8.5% from next April, as this was the published rate of average earnings growth in September 2023. As a result, the full New State Pension will increase to £221.20 a week from April, or £11,541.90 per annum.

Those in receipt of State Pension will need to consider the effect of fiscal drag on other income they receive such as personal pension income, or savings or dividend income above the Personal Savings and Dividend Allowances. As the bands for Income Tax are frozen until 2028, the increase in State Pension may well push more income into the basic rate, and potentially higher rate, tax bands. It would, therefore, be sensible to consider using tax allowances where possible to shelter investment and savings income.

Planning Opportunities

The Autumn Statement provided clarification on the pension rules that will apply from 6th April 2024, and also ended some of the uncertainty around the long term future of VCT and EIS investments. The measures announced may also present some useful opportunities in the way ISAs are structured from the next tax year; however, with tax bands still frozen, it would be sensible to review the tax-efficiency of existing investment portfolios. Speak to one of our advisers to discuss your financial planning requirements in light of the Autumn Statement.

Nov 23
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Trust investment decisions

By | Trusts

Whether a trust is created through a will, or established through a lifetime gift, the trustees will need to take a number of important decisions when a trust commences. One of the key decisions is how the trust funds are to be invested. By way of reminder, the Trustee Act obliges trustees to seek advice at this stage, unless the trustees feel advice is not necessary (due to the value of the trust fund) or if the trustees feel they have the necessary expertise to reach the decisions themselves.

Deciding on a trust investment strategy

The trustees need to have the interests of the beneficiaries at the heart of each and every decision reached. This extends to the initial assessment of the terms of the trust, where trustees need to understand the purpose of the trust, which will help define the investment objectives. For example, trustees will need to consider whether the trust needs to provide an income to a beneficiary, or if the target is to achieve capital growth, and how long the trust is likely to be in place for.

In addition, any specific terms included within the trust deed need to be considered together with any investment limitations. A good example of such a limitation would be where a will trust leaves funds for a beneficiary upon trust, until they attain the age of 18. If the beneficiary was aged 17 at the time the trust was created, the trustees are likely to reach a different conclusion as to the most appropriate investment approach than if the beneficiary was aged just 2 at the creation of the trust, as the time horizon for investment is very different.

One of the key principles of the Trustee Act is to ensure that the investment strategy is suitable for the purposes of the trust in question. This places the onus on trustees to ensure that the level of risk adopted is sensible, and that the investments provide adequate diversification across a range of different assets.

Another important aspect that is sometimes overlooked is the need to consider the tax treatment of the investments held within the trust. Trusts generally suffer a punitive rate of Income Tax and Capital Gains Tax, and setting up an investment portfolio in a tax-efficient manner can make a substantial difference to the overall net returns received by the beneficiaries.

Reviewing trust investments

Once an investment strategy has been established, there is a statutory requirement for trustees to review the trust investments. Trustees cannot simply establish an investment portfolio for the trust and then neglect to carry out regular reviews, as this could well be seen as dereliction of duty. There are many reasons why investments need to be reviewed regularly; investment performance can vary over time, and the trustees need to make sure that the investments held by the trust perform well compared to other investments of similar risk.

Furthermore, investment market conditions change regularly, and as the last three years has demonstrated, market sentiment can swing from positive to negative quickly in response to global events. As market and economic conditions change, the trust investment strategy will need to adapt to the prevailing conditions, and arranging a regular review can help trustees make decisions to change the investment strategy if necessary.

In addition to the requirement to review investments regularly, trustees also need to make sure that they keep good records of the decisions reached for audit purposes.

Powers of delegation

Trustees cannot ask another to step into their shoes when it comes to important decisions about the distribution of trust assets, or their fiduciary duties; however, trustees can delegate the management of trust investments to a professional, who acts as an agent of the trustees. It is important that this appointment is made under a formal agreement and the boundaries of the investment management agreement need to be clearly defined.

It is often the case that trustees will appoint investment managers who act under a discretionary agreement. This is where the investments are reviewed and changed regularly by the investment manager, without approaching the trustees for their prior approval. This type of arrangement can reduce the onus on trustees to respond to recommendations made by the investment manager, and ensure that the recommended changes are made in a timely manner.

FAS Trustee Service

The FAS Trustee Service aims to provide trustees with a comprehensive advice and review service, which enables trustees to meet their obligations under the Trustee Act.

When we first meet with trustees, we discuss the trust deed in detail and look at the important considerations that the trustees need to take into account. When devising an appropriate investment strategy, we can look at a range of options open to the trustees, and provide independent advice on the asset allocation together with other considerations, such as the amount of funds trustees should retain as cash. We also can provide advice on the most tax-efficient solution, based on the precise circumstances of the trust.

Our comprehensive review service provides trustees with peace of mind, as a thorough review of the trust investments is carried out at pre-determined intervals. We meet with trustees to discuss the investment performance, and other factors relevant to the trust, which can assist trustees in their decision making. We follow-up each meeting with a detailed written report, helping trustees in their compliance with the Trustee Act.

If you are a trustee of a new trust, speak to one of our experienced advisers about the FAS Trustee Service. Likewise, if you are a trustee of an existing trust, and haven’t reviewed the trust investments for some time, then contact us to carry out an independent review of the existing arrangements.