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FAS

Jul 18
0

Helping business owners reach their financial goals

By | Business Planning

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

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

Scenario 1  – Profit extraction via pensions

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

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

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

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

Scenario 2 – Protecting business interests

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

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

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

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

Scenario 3 – Keeping business cash productive

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

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

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

Saving business owners time and money

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

Jul 11
0

Funding long term care costs

By | Financial Planning

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

Funding options

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

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

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

Our approach to care fees planning

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

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

Immediate Needs Annuities

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

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

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

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

Investment options

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

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

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

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

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

The power of advice

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

Jul 04
0

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

By | Financial Planning

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

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

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

Take control of pensions

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

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

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

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

Plan ahead to retire earlier

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

Tax planning throughout your life

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

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

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

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

Don’t forget protection

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

Summary

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

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

Jun 27
0

The investment case for China

By | Investments

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

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

Continued growth

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

Consumer recovery overdue

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

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

The need to reflate

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

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

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

Property Market woes

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

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

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

Transition to tech

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

Good value for the patient investor

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

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

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

Sources

1 World Bank Group

2 National Bureau of Statistics of China

Jun 20
0

Is the hype over AI justified?

By | Uncategorised

One of the dominant trends that have contributed to the strong equity market performance over recent months has been growing enthusiasm for the potential that Artificial Intelligence (AI) can bring, and how companies can take advantage of the rapidly evolving technology.

What is AI?

AI is technology that enables computer systems to simulate human intelligence, with the aim of solving problems that would otherwise require human intervention. AI algorithms aim to model decisions that humans would take, by undertaking research and evaluation, and can learn from outcomes, so that the results improve over time.

Although the concept of AI can be traced back to the 1950s, significant advancement in AI capability has been seen very recently. Rapid acceleration in the efficiency of so-called Generative AI, which can produce anything from speech recognition to images and text, has seen applications such as ChatGPT being used by over 100 million users every week1. Unlike traditional AI systems, which are typically used for data classification and prediction, Generative AI models learn from large datasets, and have the ability to learn and then create new content, from realistic images to speech and writing.

The investment case for AI

Businesses that adopt AI are discovering ways to harness the new technology to streamline operations, introduce greater efficiency and in turn boost profitability. For example, in healthcare, AI can help speed up drug research and provide more accurate diagnosis. Another common example is the use of chatbots and automated customer services, which can learn from responses to become more efficient.

Investors often look for developments that can disrupt the status quo and lead to new opportunities, and it is increasingly apparent that AI will continue to be highly disruptive to existing ways of working. The breadth of application of the new technology is impressive and over coming years we suspect AI technology will find greater use in a diverse range of businesses, from finance to vehicle manufacture.

Enabling AI

Whilst many companies can see efficiencies from the use of AI, businesses that provide the infrastructure to enable AI usage have been amongst the biggest gainers over the last few months. The company that may have been able to monetise the boom in generative AI more than any other is Nvidia. As the need for processing power increases, the graphics processing units developed by Nvidia are in high demand, which has helped propel the market capitalisation of Nvidia to $3.3tn, overtaking Microsoft to become the largest quoted company in the World2. Microchip manufacturers, such as Taiwan Semiconductor, have also benefitted from the increased demand for AI solutions.

Other mega-cap tech companies have benefitted from the advancement of AI technology. Google and Microsoft have integrated AI technology into search assistants and the use of cloud computing in AI applications have boosted revenue received from cloud based servers. Recently, Apple have announced the integration of OpenAI into their Apple Intelligence system which will be available on Apple devices.

Universal adoption?

If you consider the very wide range of applications that could potentially benefit from AI technology, it is increasingly clear that most businesses will look to some form of AI integration within their systems over coming years. Customer facing functions, such as website chatbots and automated phone call handling, are becoming increasingly common, and as technology evolves, may lead to business efficiencies across most industries. For example, manufacturing businesses may harness AI technology to streamline inventory management, and help decision making. Similarly, Insurance and Finance businesses are increasingly turning to AI to help detect fraud. Those companies who have adopted AI at an early stage may gain a competitive advantage, which is likely to lessen over time as more and more businesses harness the evolving technology.

An overheated market?

Investors with long memories will recall the end of the last century as being a time when market interest in technology companies reached fever pitch. Known as the “Dot Com bubble”, the value of many technology stocks during 1999 and into early 2000 was driven to totally unrealistic levels based on the premise that they would be able to capitalise on the boom in web based applications. Whilst a select few companies justified their lofty valuations, many did not, and as investor risk appetite waned, sharp falls in value were seen across much of the sector.

Despite the strong returns achieved by a number of stocks involved in AI over recent months, it is possible to draw a distinction between some of the pure speculation that was apparent in 1999 and 2000 when the tech bubble burst, and the returns that have been fuelled by the growth in AI. Firstly, positive earnings reports from tech giants such as Nvidia and Microsoft continue to offer some support at current valuation levels. Simply put, if quarterly earnings continue to beat estimates convincingly, valuations become less demanding; however, expect stock valuations to be punished if future earnings fail to deliver.

The second clear distinction between the current tech rally and 1999 is the diversified nature of businesses that are benefitting from the growth in AI. Whilst it is quite easy to identify the companies at the forefront of AI technology, it is likely that a wide range of companies across different sectors will be able to achieve efficiencies and cost savings through AI use.

Finally, mega-tech giants such as Apple and Alphabet are highly cash generative and profitable. This is in contrast to many companies that were swept up in the dot com bubble, who were many years away from profitability and typically carried high levels of debt.

The conclusion we draw is that AI stocks are certainly not cheap on a historic valuation basis. Continued earnings growth may well support valuations; however, any signs that earnings disappoint when compared to market expectations will leave valuations exposed at current levels.

Why it is important to diversify

Market attention has been focused on the AI-fuelled rally in tech names that has driven global equities markets forward over recent months; however, formulating an investment strategy that focuses on a single trend introduces additional investment risk. Building an investment portfolio that encompasses new trends such as AI, together with other, more traditional, industries, can help reduce volatility. Speak to one of our experienced advisers if you would like to discuss your exposure to the AI trend, or to review an existing portfolio.

Sources:

1 OpenAI.

2 Companiesmarketcap.com.

Jun 13
0

The impact of rate cuts

By | Financial Planning

Decisions taken by central banks have been one of the main drivers of global market direction over recent years. Following the outbreak of the Covid-19 pandemic, interest rates around the World fell to ultra-low levels as policy makers attempted to stimulate demand amidst the global lockdowns. Just over a year later, interest rates began rising across Western economies to combat an inflationary spike, that saw UK Consumer Price Inflation (CPI) peak at 11.1% in October 2022.

As expected, inflation has fallen to more modest levels in most Western economies, and the UK is no exception. In the 12 months to April 2024, CPI has returned to 3.2% and is expected to continue to fall over the course of this year, potentially moving lower than the Bank of England’s own target of 2% by the autumn, although risks remain that inflation could modestly rebound in 2025.

Given the expected course of inflation, pressure is mounting on the Bank of England Monetary Policy Committee (MPC) to reduce the cost of borrowing and ease the burden on households and business alike. Of course, inflation isn’t the only indicator that the Bank are closely monitoring. The UK returned to growth in the first quarter of 2024, and GDP growth expectations have increased for the remainder of this year. Recent unemployment data was worse than expected and retail sales for April were very disappointing, suggesting consumer confidence remains weak. Understandably, the Bank do not wish to cut rates substantially, only to stoke the inflationary fire once again.

On balance, taking recent data and central bank comments into account, there is a large consensus that base rates will be cut in the next quarter.  Indeed, at the last meeting of the MPC on 9th May, two members of the Committee, including the deputy governor Sir David Ramsden, voted to cut rates by 0.25%, with the other seven voting to keep rates on hold.

Source of Data: Bank of England

Bond markets are already beginning to price in a series of rate cuts over the next 12 months, with yield curves implying one or two cuts to the base rate in 2024. The outlook for rates has impacted the mortgage market, where lenders have been making modest cuts to five year deals, and in fixed-rate savings bonds, where rates being offered on one and two year fixed-rate bonds have also fallen from their peak.

The impact of rate cuts

When interest rates move lower, media focus will be targeted on the impact of the cuts on households. The outcome of falling interest rates on household budgets is generally well understood. For those with variable rate mortgages and loans, cuts in the base rate could lead directly to a fall in interest payments on a monthly basis. In turn, this could have a positive impact on discretionary expenditure, and lower rates could also encourage consumers to take on credit, from mortgages to car and personal loans. Consumers also feel more comfortable carrying a higher debt burden when interest rates are lower.

Those with savings begin to see a fall in the interest they receive on their variable rate accounts, and this may encourage those with accumulated savings to spend, potentially providing a boost to economic growth.

What is less understood is the significant impact underlying and future interest rates have on business, and in turn the health of the economy. Whenever the base rate changes, this affects the rates charged by banks on commercial loans, which tend to be arranged using a variable interest rate. The rapid succession of rate increases from the end of 2021 to August 2023 not only raised interest costs on existing business borrowing, but also has the effect of deterring businesses from taking on additional debt, further suppressing economic expansion.

How markets may react

Monetary policy decisions taken by central banks are one of a number of variables that dictate the progress and direction of financial markets. Cuts to base interest rates are generally perceived as being positive for both equities and fixed income securities. Equities benefit as companies can reduce their borrowing costs and more easily fund expansion. Depending on the sector, company profits may also benefit from more buoyant consumer confidence. Those companies who carry the highest level of borrowing tend to benefit the most from falling interest rates, which helps explain the recent strong performance of high growth companies, such as those involved in new technology, who tend to be highly geared.

The performance of bonds is directly linked to the future path of interest rates. As base interest rates increase, existing bond prices tend to fall, as investors can choose other options that offer a higher rate, such as newly issued bonds, or cash. The rapid increase in base rates during 2022 and 2023 proved to be very painful for bond investors, and saw bond prices retreat. The inverse is true when rates fall, as existing bonds offering higher rates look increasingly attractive compared to cash or bonds issued at a lower rate.

It is important to note that markets are forward looking, and have long been anticipating interest rate cuts in the US, UK and Eurozone. Indeed, markets have been frustrated by the slow march toward the expected rate cuts, although some of the concern has been offset by consistently stronger US economic data over recent months. Some of the positive impact of easing monetary policy has, therefore, already have been taken into account.

What action should investors take

As interest rates fall, investors would be wise to consider reviewing their existing financial arrangements in light of the changing landscape. Whilst cash has provided savers with attractive interest rates over the last 12 months, it is likely that savings interest rates will fall over the next two years, and those holding excess deposits on cash may do well to consider alternative options.

We feel a falling interest rate environment should prove positive for both equities and bond markets, and despite the strong performance seen since last autumn in anticipation of central bank action, the prospects over the medium term remain positive. Given the expected impact of a shift in monetary policy, this may be an ideal time to take another look at how your investments are positioned. Speak to one of our experienced financial planners to discuss the impact of falling interest rates on your investment portfolio.

Jun 06
0

Get the right advice when approaching retirement

By | Pensions

Each major financial decision that we take throughout our lives will have some form of impact on our financial wellbeing. From the decision to purchase a property and take out a mortgage, to changing careers and other life events, such as divorce or receipt of an inheritance, the choices we make will have some impact on our financial future. Perhaps the most crucial decisions, however, need to be taken when we approach retirement, as actions taken at this time can have lifelong implications. This is where tailored and personal advice on the options open can prove highly beneficial in navigating the right course to take.

Pension Options

As we head towards the end of our working lives, thoughts inevitably turn to the level of income that we can look forward to in retirement, and pensions are likely to form a substantial part of your income when retired.

The full rate new State Pension is now £221.20 a week, although you will need to have accrued 35 years of qualifying National insurance Contributions to receive this amount. It is worth checking your State Pension record with the Department for Work and Pensions, as this can identify any gaps in your record that could be filled before reaching State Pension age. This is currently 66 but will rise to 67 for those born after April 1960, with a further increase to age 68 between 2044 and 2046.

Many individuals would prefer not to work until State Pension Age, and this is where careful planning at an early stage can help you assess your options and make best use of private and workplace pensions accrued during your lifetime, which could, in turn, make earlier retirement feasible.

Taking the time to review existing pension arrangements at an early stage can help identify poor performing investment funds, or recognise opportunities to increase pension saving, which could boost the end value of the pension plan as you reach retirement. It could also provide an opportunity to consolidate and rearrange plans, if appropriate, to benefit from cost savings or access the widest range of options when retired.

When taking a defined contribution pension, it is usually the case that 25% of the value will be available as Tax Free Cash. This is the first of many decisions that need to be reached. Some may decide to use the Tax Free Cash payment to cover existing debts or pay for discretionary expenditure. Some plans allow you to draw Tax Free Cash over a period of time, rather than in a single payment. Depending on the retirement strategy adopted, this could be an effective way of generating a tax-efficient “income” through regular Tax-Free Cash payments.

Deciding on how to draw an income in retirement is a key decision that many find daunting. Many choose a Drawdown approach, where the pension fund remains invested, and income is drawn flexibly to suit your needs and objectives. If funds remain invested after you die, these can normally be paid to a nominated beneficiary. The risk with drawdown is that the invested pension fund is fully depleted during your lifetime, and this is where regular reviews of the investment performance and amount of income drawn are important.

Purchasing an annuity, where the remaining pension is exchanged for a guaranteed income for life, is an option that some prefer, given that this provides a degree of certainty. The downside is that the purchase of a lifetime annuity cannot be reversed, and therefore careful consideration of the benefits and drawbacks need to be taken into account.

The final option is to take out the pension value as a single or series of lump sum payments. Taking this option is rarely sensible, as it will leave no ongoing pension income, and could potentially lead to adverse tax consequences.

Other Income sources

For many individuals, pension income is built from several sources, and whilst pensions form the majority of retirement income, other income streams can help support ongoing living expenses. Some may hold property that is rented out, which provides rental income, which may well be reliable, although such income is normally not tax efficient.

Many individuals hold existing investment accounts outside of a pension. Undertaking a review of such investment plans could prove beneficial in determining whether an income stream can be generated. Use of the annual Individual Savings Account (ISA) allowance can help ensure income is received free of tax.

Finally, some continue to work past their normal retirement age, or look to adopt a phased retirement approach of gradually reducing hours, whilst building up pension income slowly. This can be an effective way of managing income and leaving pensions in place to potentially benefit from further growth.

Watch out for tax

We are all taxed during our working lives, and many will continue to pay Income Tax on pension income throughout retirement. There are, however, steps you can take to look to reduce the tax burden in later life. For example, where income is generated in a flexible manner, the level of income can be tailored to meet your precise requirements without surplus income being generated, on which tax becomes payable.

Seek out personal advice

Planning for retirement is a point where important decisions need to be taken, and  seeking independent and tailored financial planning advice at an early stage is therefore advisable. Every individual’s circumstance, needs and objectives are different, and other variables, such as your attitude to investment risk and personal preferences, are key factors in reaching the right decision for you.

Speak to one of our experienced financial planners, who can help guide you through the retirement planning process.

May 30
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What history tells us about UK markets after an election

By | Financial Planning

In a little over a month, the UK will head to the polls in a much-anticipated General Election. The announcement by Rishi Sunak to call a General Election for 4th July caught many observers off guard. Whilst not unprecedented, summer elections are rare, and many were expecting the Tory leader to call an election in the autumn or winter.

Thus far, market reaction has been muted, which is not surprising, given the relatively limited impact domestic politics can exert over global markets. It is important to recognise that global factors carry greater significance, with the Middle East, Ukraine and US economic policy decisions likely to provide greater direction than political decisions at home.

As both major parties begin to firm up their manifestos ahead of the election, one major theme adopted by both sides will be the importance of financial prudence. Whilst the economic outlook is improving, with UK GDP returning to growth in the first quarter of 2024 and inflation falling, the adverse market reaction to the mini-Budget in 2022, which caused Sterling to fall heavily and gilt yields to rise sharply, will be fresh in the minds of both parties when making spending pledges. Whether Jeremy Hunt remains as Chancellor of the Exchequer, or Rachel Reeves takes up the role, both are likely to tread carefully when announcing policy decisions over coming months.

Can history provide any clues?

To help understand how markets have reacted historically in the period immediately after UK General Elections, we have undertaken research looking back at the performance of the FTSE All-Share Index, which is the broadest measure of performance of UK quoted companies and captures 98% of the UK market capitalisation.

Our analysis shows that UK markets have historically produced a similar performance over the longer term under both major UK political parties. Looking at the tenure of each major party since 1997 (and not including the coalition government from 2010 to 2015) the average total return per annum (including dividends reinvested) from the FTSE All-Share index has been broadly similar under both a Conservative and Labour majority government.

The FTSE All-Share index has returned an average total return of 7.54% per annum under the Conservatives and 6.94% under Labour. Naturally, each period of control has encountered factors that have influenced global markets, such as the Global Financial Crisis of 2007-8, or the Covid-19 pandemic; however, it is interesting to note the broadly similar trend over time, irrespective of whoever is in power, which indicates – at least historically – that politics has little influence over the longer-term market performance.

A short-term boost for UK equities?

We have also looked at historic data to understand the potential for the General Election to be a catalyst for stronger domestic market performance in the short to medium term. In theory, an incoming government may be able to introduce greater fiscal stimulus, or boost public spending, as a result of their policy decisions. The same could, however, also be said for an incumbent government, who are emboldened to carry out manifesto pledges.

Our analysis of the UK stock market performance immediately after an election shows a similar trend, with the performance under both major parties being broadly similar; however, what is notable is the historic strong performance seen in the 12 months immediately after a change of government.

In 1997, when Tony Blair won a large majority for Labour, the FTSE All-Share index produced a total return of 35.6% over the 12 months immediately after that landslide victory. Similarly, under the coalition formed by the Conservatives and Liberal Democrats following the hung parliament in 2010, the FTSE All-Share produced a total return of 17.8% in the following year.

Comparing the returns in election years where power changes hands, to those where the incumbent party remains in power, indicates a marked difference in performance, with an average total return of just 2.5% being achieved by the FTSE All-Share index in the 12 months following a General Election when the ruling party retains power. This does, therefore, suggest that a change of government could prove beneficial for UK equities, at least in the short term.

Should investors be concerned?

Naturally, a General Election can cause uncertainty, particularly when considering any potential changes that will be implemented over the course of a parliament that could affect financial planning decisions. When it comes to market performance, however, we feel the upcoming General Election will have a limited impact, as the direction of UK equities markets continue to be dominated by geopolitics and global events, together with decisions taken by the Federal Reserve in respect of US interest rates. Indeed, we feel the US election in November has far greater potential to influence the direction of UK Equities than our own General Election on 4th July.

That being said, we feel investors should take the opportunity to assess how their portfolio is positioned, both in terms of asset and sector allocation. Our experienced advisers can take an unbiased look at an existing investment portfolio, to make sure that the portfolio provides adequate diversification and meets your needs and objectives. Speak to one of the team if you have any concerns about the impact of the General Election on your portfolio.

May 23
0

Behind the Scenes at FAS – Part 3 – Our Advisers

By | Financial Planning

In the first two parts of our “Behind the Scenes at FAS”, we gave an insight into the work of our adept administration and paraplanning teams, who fully support our team of financial planners. This collegiate approach ensures that advisers are afforded the time to spend with clients and pools the many areas of expertise across the firm to provide the best advice and service to clients.

Our team of advisers

The FAS adviser team is office based, although they tend to split their time between the office and attending client meetings, which can either be held at the client’s home or business address, or one of our two offices in Folkestone and Maidstone.

Led by the Directors, our FAS adviser team is made up of highly qualified and experienced individuals, the majority of which have at least twenty years or more experience in advice roles across the industry. We will continue to expand our dedicated team of financial advisers in line with our continued business growth.

Importantly, all of our advisers are employed by FAS on a salaried basis and none of our advisers are set targets for achieving certain levels of fee income. We feel this is of fundamental importance, as it allows our advisers to focus on providing the most appropriate advice and removes any notion of “sales” bias.

We appreciate that the adviser-client relationship often strengthens over time, and each client’s dedicated adviser is their usual main point of contact. It is, however, important to recognise that FAS is a team effort, and if an individual’s usual adviser is not available for any reason, another member of our advisory team will happily step in assist in their absence, wherever possible.

A team of all rounders

Working for an independent advice firm, our advisers need to be able to provide holistic financial advice, drawing on extensive knowledge in many different areas of financial planning. None of our advisers are “specialists” as each needs to be able to provide a high level of technical advice in a range of diverse areas, depending on the needs of a client. Typical planning requirements are pensions, investments, tax planning, divorce planning, trusts, and business planning. Other areas of expertise are also required, when client circumstances call for planning advice on personal and business protection, funding care fees or school or university fee planning.

An adviser’s role

As the name suggests, the primary element of an adviser’s role is to provide financial advice! This is either given during an initial, or review meeting, which is conducted face-to-face or through Zoom or Teams. During a client meeting, advisers make contemporaneous notes of the conversation and complete a detailed fact find, gathering the necessary information to be able to provide the most suitable advice. These notes and information are then logged as an ultimate record of the meeting.

Advisers also spend time each day dealing with client email correspondence and telephone calls. They regularly speak to Solicitors, Accountants, and other professionals in relation to queries which are relevant to mutual clients. We are strong advocates of this collaborative way of working, as it ensures that clients receive cohesive advice across common areas.

Working closely with our paraplanners and administration team, our team of advisers assist in the preparation of client reports following meetings, and ensure that comprehensive meeting preparation is undertaken before a client meeting takes place.

Highly qualified advice

To provide advice of the highest quality, the Directors place significant emphasis on study, learning and the achievement of relevant industry examinations.

The majority of our advisers have achieved Chartered status, which means that they have attained the highest standard of qualification in the industry, with others on a study path to achieving Chartered status. Being Chartered is not only an indication of technical competence, it also signifies an individual commitment to professional standards. Only a small proportion of the regulated financial advisers in the UK have achieved this status.

FAS follow a strict regime of continuing professional development, so that staff can keep themselves fully abreast of changes in legislation and reinforce their knowledge. Advisers are subject to an enhanced continuing professional development requirement and need to undertake a prescribed number of hours of learning each year, which includes structured learning.

FAS has also been awarded Corporate Chartered status in recognition of our commitment to professional excellence and integrity. Industry gold standards are not awarded lightly; the Chartered Insurance Institute sets this benchmark at the highest level based on advanced qualifications, an overall commitment to continuous professional development and adherence to an industry standard Code of Ethics. Our corporate title is not simply recognition for passing examinations or paying an annual fee; it is a public declaration of our commitment to excellence and quality in everything we do.

Product knowledge

A key element of an adviser’s role is to ensure that the most appropriate solution is recommended for a particular individual set of client circumstances. As an independent firm, we can recommend solutions without constraint, and therefore our advisers need to have an extensive knowledge of the features of products from across the marketplace and keep up to date with product and industry developments.

FAS – a team effort

Our diverse team consists of experienced, high qualified Advisers, Paraplanners and Administrators who, over the years, have been handpicked for their dedication, team spirit and client-centric focus. We all work closely together for the good of our clients. We prioritise client relationships, ensuring our focus is to always provide quality advice and exceptional service. All staff are integral to the running of the business and there is a mutual respect amongst colleagues for the role everyone plays.

Our experienced adviser team are committed to providing sound holistic financial planning advice. We are proud of our independent status, which enables our advisers to recommend the most appropriate solution to suit the needs of our clients. Whilst the advisers will be the main point of contact for our clients, the advice process is a team effort, requiring the skills and input of our paraplanning and administration teams.

We hope this article helps to reinforce the collegiate nature of our business and welcome any comments or queries you may have.

May 16
0

The drawbacks of a passive only investment approach

By | Investments

First available to investors in 1975, a passive fund aims to offer a low-cost method of replicating the performance of a specific market index, rather than actively selecting individual assets within a particular market. Over the last decade, passives have grown substantially in popularity, with Morningstar research confirming that passive funds saw higher inflows than active funds during 2023.

The rise in the popularity of passive strategies is also evident from our own market analysis. Our Investment Committee regularly undertakes a comprehensive review of managed portfolio solutions offered by discretionary fund managers, to ensure that we can demonstrate that FAS clients receive good value for money. Our analysis clearly demonstrates an increasing bias towards passive investments, on which many of our competitors’ products and services are founded.

The rationale behind the increased use of passive investment funds is that the ongoing cost of a passive investment is usually cheaper than an actively managed fund. This helps passive only strategies maintain a competitive total cost of ownership. A key drawback of such an approach is that investors may be missing out on additional returns generated by strong active management. In our opinion, many portfolio managers are confusing “value for money” with “cheap”, with the focus on costs being the dominant factor.

Drawbacks of passives

Many investors fail to take account of two key disadvantages of a pure passive investment approach. The first is that, by definition, a passive investment will not outperform the representative index or market it is trying to replicate. Indeed, due to costs and potential tracking errors, most passives return just below the index return. As an investor, we contend that you should be seeking outperformance where possible, as long as the level of risk being taken remains commensurate with the prospects for superior returns.

A second key risk of a pure passive approach is that replicating an index will mean producing returns in line with that index. When market indices fall, the value of a passive investment tracking that index will fall by a similar amount. Unlike a fund with an active manager, who could potentially take avoiding action by reducing allocations, increasing the percentage of cash or possibly using derivatives, the passive fund will simply track the index on the way down.

Our approach

Within our investment strategies, we try to seek out good value for our clients, and our independent status allows us to take an unbiased approach as to the precise blend of funds we select. This allows us to select passive funds, where this is appropriate. We will, however, also look to use active funds if we feel this is likely to result in outperformance.

Our Investment Committee undertake considerable research on a sector and region basis when conducting the regular review of funds that we recommend to clients. This research, which has been carried out for many years, allows us to better understand areas where passive investment is likely to be sensible, and where selecting an active investment approach may produce superior returns.

The most commonly cited example of a sector where passive investments perform well is US Equities. Our own analysis has shown that index funds that track the S&P500 index of leading US companies tend to produce consistently strong returns when compared to actively managed US Equity funds. There will, of course, be active funds that do beat the market; however, the key is whether this can be achieved on a consistent basis.

One of the main reasons for the attractiveness of passive funds in US markets is the dominance of a small number of mega-cap stocks, where performance has been positive compared to the wider index for some time. Our analysis concurs with research carried out by S&P Dow Jones, who suggest in their recent SPIVA report that 60% of active large-cap US Equity funds failed to beat the representative S&P500 index during 2023.

A good example of an area where passive investment has shown historic weakness is in Fixed Income investment. Whilst many investors would associate passive funds with Equity investment, a wide range of passive bond funds are now available, which track a particular UK or Global bond index, and typically replicate hundreds or potentially thousands of individual bond positions. Bond investment is an area where adopting the correct strategy can yield significant outperformance, and an active bond fund manager can alter the duration of bonds held, the credit quality and sector or geographic allocation, to try and generate superior returns over the benchmark index. These additional levers available, which can adjust the allocation within the fund, can help a skilled fund manager generate superior performance to a passive fund, which simply holds the constituents of an index.

At FAS, we view ourselves as conviction investors, and therefore when selecting an active fund, we prefer to select an investment manager or team with a clear vision as to how their fund is to be positioned. This can often mean a concentrated portfolio, when compared to the representative region or universe of stocks available. All too often, we come across funds that employ an active manager or management team, who take an approach that allocates their portfolio closely to the benchmark index. In most instances, such funds fall between two stools, carrying high charges without the prospects for outperformance.

Summary

With the increased focus on costs across the industry, many portfolio management services are leaning towards a passive only investment approach, with the ultimate aim of highlighting a competitive pricing structure. We feel such an approach is highly inflexible and potentially means that opportunities for outperformance from active managers is being missed. We prefer adopting a hybrid strategy, using passive funds in areas where index tracking funds should perform well, combined with actively managed funds where we feel the prospects for outperformance justify the higher costs of active management.

If your investment manager is using a passive only approach, speak to one of our experienced advisers to discuss whether adopting a different strategy would be appropriate.