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Nov 07
0

How to plan around Budget CGT rate hikes

By | Tax Planning

One of the key measures announced in last week’s Budget was a hike in the rate of Capital Gains Tax (CGT) paid on disposal of investments. The move had been widely flagged by the media and commentators; however, predictions of a significant jump in the rate of CGT have proven to be wide of the mark.

With effect from 30th October, gains made on the disposal of investments will be subject to new rates of CGT, depending on the overall tax position of the individual making the gain. For those within the basic rate tax band, the rate of CGT has increased from 10% to 18% and for those in the higher and additional tax bands, the rate has increased from 20% to 24%. The new rates are aligned with the rates that already applied to the sale of residential property, which remain unchanged.

Not as bad as predicted

In the weeks leading up to the Budget statement, commentators were speculating that the rate of CGT could see a large increase, with predictions of rates between 30% and 40% being forecast. On the face of it, the new CGT rates are, therefore, not as painful for investors as could have been the case.

The annual exempt amount, i.e. the net gain an individual can make in a tax year without paying CGT, remains at £3,000, with 50% of the annual exempt amount being available to trustees. The exempt amount had already been reduced from £12,300 to £6,000 and again to £3,000 in previous Budget statements. Investors should look to make use of the annual CGT exemption each tax year, as unused exempt amounts cannot be carried forward to another tax year. When the net balance of gains and losses in a tax year creates an overall loss, the loss amount can be carried forward indefinitely and be used to offset gains above the annual exempt amount in the future, as long as the loss has been reported to HMRC.

It is also important to note that CGT is effectively wiped out on death, and thankfully the Budget did not contain any change to this rule, as this would, in effect, lead to the potential for estates to face double taxation. As investments held on death are uplifted to their value at probate, beneficiaries receive the assets with a new purchase cost equivalent to the probate value.

Time to review your portfolio

For those holding investments outside of a tax-efficient wrapper, such as an Individual Savings Account (ISA), the hike in CGT rate should be a clarion call for investors to review their existing investment portfolios and consider how they are structured. As gains made from disposals of assets within an ISA are exempt from CGT, the increased rate of CGT further enhances the benefit of holding assets within an ISA wrapper. Investments held within an ISA also benefit from exemption from Income Tax, too. The Budget statement confirmed that the ISA allowance will remain fixed at £20,000 per tax year for the remainder of the parliament, and this provides the opportunity for investors to use the annual ISA allowance going forward with a degree of confidence.

For those seeking to shelter funds from CGT, alternative investment wrappers, such as Investment Bonds, now look increasingly attractive. Gains on Investment Bonds are subject to Income Tax, and not Capital Gains Tax, and investors can freely change investments inside the

Bond wrapper without triggering a charge to CGT.

As a result of the increase to CGT rates on investment gains, it may be appropriate to review how your investments are structured, to see whether greater tax-efficiency can be achieved from a combination of ISA and Investment Bond wrappers, rather than standard General Investment Accounts.

Business owners see hike in rates from April

Business owners looking to dispose of business assets will also see higher rates of CGT applied from April 2025, although a relief that reduces the rate paid by a business owner on the sale of a business remains available.

Formerly known as Entrepreneur’s Relief, Business Asset Disposal Relief (BADR) allows business owners and sole traders to sell their business with lower rates of CGT applying on disposal. To qualify for BADR, the business owner needs to prove ownership throughout the two-year period prior to disposal or in the case of a shareholder, needs to be beneficially entitled to 5% of profits distributed on winding up of the company or 5% of the sale proceeds. BADR will continue to apply to the first £1m of qualifying gains during an individual’s lifetime, with gains above this level charged at the standard rate of CGT.

Until 5th April 2025, the current rate of CGT of just 10% will continue to apply to claims under BADR; however, this will increase to 14% from 6th April 2025 and 18% from 6th April 2026. Once the rate of CGT payable through BADR reaches this level, it will align with the CGT rate that applies to basic rate taxpayers. It does, however, still provide a small discount against the headline CGT rate of 24% that applies to higher rate taxpayers.

Planning Opportunities

The change to CGT rates should prompt investors to undertake a review of their existing investments to look for opportunities to reduce the potential tax liability in the future. Use of the annual ISA allowance, alternative structures such as Investment Bonds and other tax efficient investments, such as Venture Capital Trusts, can reduce an overall tax liability. For business owners looking to sell their business, higher rates of tax will apply from April; however, powerful tax planning tools remain available, such as the ability to make employer pension contributions, that could help achieve a more favourable outcome and reduce the overall tax burden.

Our expert advisers can provide independent advice on the options open to you. Speak to one of the team to start a conversation.

Oct 31
1

Budget Briefing

By | Budget

Whilst not delivering some of the more outlandish predictions that had been suggested in the media over recent weeks, the measures announced in the Budget statement certainly provide opportunities for effective financial planning in a number of areas. We will delve more deeply into these planning opportunities in future issues of Wealth Matters; however, for now, we provide our summary of the key measures announced.

Employer’s National Insurance

The rate of National Insurance (NI) paid by employers will increase from 13.8% to 15% from 6th April 2025. In addition, the salary threshold at which employers begin to pay NI has been reduced from £9,100 a year to £5,000 a year. Small businesses will see an extension to the employment allowance. There have been no other changes to NI, with the main rate payable by employees remaining at 8% on earnings between £12,570 and £50,270.

The increased rate of employer NI from April 2025 is likely to enhance the attractiveness of salary sacrifice arrangements, and the ability for company directors to make employer contributions into a personal pension.

Capital Gains Tax

The rates of Capital Gains Tax (CGT) applicable to the sale of non-residential property assets will increase from 10% (for basic rate taxpayers) to 18% and from 20% (for higher and additional rate taxpayers) to 24%, with the changes effective immediately. The new rates for gains on share disposals match the rates that currently apply to residential property gains, which remain unchanged. The hike in CGT rates is lower than many people had anticipated, which reinforces the need to carefully consider whether to dispose of assets that may give rise to a CGT liability.

Business Asset Disposal Relief

Business Asset Disposal Relief (BADR) will gradually become less attractive over the course of the parliament. Currently business owners who sell all or part of their business can benefit from a rate of 10% on all gains up to a lifetime limit of £1m. The rate will increase from 10% to 14% from 6th April 2025, and again to 18% from 6th April 2026, aligning this rate with the rate of Capital Gains Tax payable by basic rate taxpayers.

Inheritance Tax

The Government has announced the intention to bring pensions into the Inheritance Tax (IHT) regime from 2027. The Budget statement is light on detail, and clearly further clarification is needed, particularly in respect of the tax treatment that applies when beneficiaries draw from an inherited pension. The impact of the new rules will no doubt become apparent during the consultation process.

In addition to the proposed changes to pension death benefits, the Chancellor announced a new combined limit of £1m for assets that qualify for Agricultural Relief and Business Property Relief. Expected to come into force in April 2026, qualifying assets under £1m will continue to benefit from 100% relief from IHT; however qualifying assets above this level will only benefit from 50% relief, leaving such assets subject to an effective rate of IHT of 20%. This is a punitive move for those holding agricultural assets or family businesses.

The IHT rate payable on qualifying shares quoted on the Alternative Investment Market (AIM) will be set at an effective IHT rate of 20%. Previously, qualifying assets listed on AIM have been covered by the Business Relief exemption.

All other IHT bands remain unchanged, although the freeze on thresholds has been extended until 2030. The main nil-rate band will continue at £325,000 with the additional £175,000 being available in respect of a residence bequeathed to a direct lineal descendent. These allowances remain transferable between spouses, so that the surviving spouse can continue to pass up to £1m without an IHT liability. With increasing asset prices, the number of estates liable to IHT is set to increase over the course of the parliament.

Pensions

Apart from the proposals to bring pensions under the IHT regime from 2027, there were no other major changes to pension rules announced in the Budget. Existing rules on tax relief remain unaltered, as does the current maximum level of Tax-Free Cash available (£268,275). Additionally, there have been no changes to the pension annual allowance.

Personal Tax Thresholds

Whilst Personal Tax thresholds will remain frozen until 2028, the Chancellor confirmed that the Personal Allowance for Income Tax will increase in line with inflation from the 2028/29 Tax Year and beyond.

Stamp Duty Land Tax

The rate of Stamp Duty charged on second or additional properties will increase from 3% to 5% with effect from Thursday 31st October. The Budget Statement also appears to rule out any extension to the temporary Stamp Duty discount for first-time buyers which is due to end in March 2025.

Individual Savings Accounts

The annual subscription limits for Individual Savings Accounts (ISAs) will remain frozen at £20,000 until April 2030. The limits for Lifetime ISA and Junior ISA will also remain frozen at £4,000 and £9,000 per tax year, respectively. The British ISA, a policy idea announced by the previous Government, has been scrapped.

Summary

Taken in the round, the measures announced are not as painful as many had been predicting in the weeks leading up to the Budget statement. Our initial assessment of the Budget statement does present interesting planning opportunities, which we will cover in more detail in future editions of Wealth Matters. Contact our experienced advisers if you would like to discuss the impact of the Budget on your financial plans.

Oct 24
0

Getting your affairs in order

By | Financial Planning

Getting your affairs in order is a crucial aspect of financial planning that extends beyond managing investments and ensuring tax efficiency. Many are totally unprepared for unforeseen scenarios such as death or loss of mental capacity which could place their financial wellbeing and family members at risk. We look at the importance of preparing a will, or reviewing an existing will, making an Expression of Wish over existing personal pension death benefits, and preparing a Lasting Power of Attorney.

Make your wishes clear

Writing a will puts the control over your wishes in your hands. Leaving a will that states clearly who should get your possessions and property when you die can prevent unnecessary distress for your loved ones after you’ve gone. It also removes most of the complexity that comes with sorting out a person’s estate after their death, which is a particularly stressful period at the best of times.

Writing a will is particularly important for anyone who has children or other family members that depend on you financially, or if you would like to leave some of your possessions to people who are not considered part of your immediate family.

If you die without leaving a valid will, this is called ‘intestacy’. This means that if you live in England or Wales (the rules are different in Scotland), everything you own will be shared out under the legal framework. This could potentially lead to unwelcome outcomes. For example, if you’re married, your husband or wife could inherit all your estate even if you were separated at the time of your death, and your children might not get anything. Another potential pitfall awaits partners who are not married or in a civil partnership. Under the laws of intestacy your partner will not be legally entitled to anything when you die, no matter how long you were together.

Pension Expression of Wish

In conjunction with preparing a will, it is also important to ensure that an Expression of Wish for any existing pension arrangements is similarly up to date.

On the death of anyone holding a personal pension arrangement, it is a common misconception that the residual pension will pass in accordance with their will. This is not the case, and the pension trustees can choose who will benefit from the pension arrangement. They will, however, consider an Expression of Wish left by the deceased pension holder, which sets out how the pension holder would like the benefits to pass in the event of their death, when deciding who receives benefits from a pension.

Whilst a will and expression of wish can help ensure your affairs are dealt with in the event of your passing, it is also important to consider how you would manage your affairs if you were to lose capacity to take decisions. Sadly, an increasing number of people are affected by illnesses such as Alzheimer’s or dementia, which can mean that individuals are no longer able to make decisions for themselves.

Lasting Power of Attorney

Setting up a Lasting Power of Attorney (LPA) is straightforward and can make sure your loved ones can make the important decisions about your health and your financial wealth on your behalf, should you become incapacitated through ill health or accident.

An LPA is a legal document that lets you appoint individuals you trust to make decisions on your behalf, should you become unable to make those decisions for yourself in the future. There are two different types of LPA, one covering Property & Affairs (e.g. property, investments and assets) and Health & Welfare (which covers healthcare and medical treatment).

You can choose to set up one or both types of LPA, and you can nominate the same person or elect to have different attorneys for each. Preparing an LPA doesn’t mean that you instantly lose control of the decisions that affect you. For the Property & Affairs LPA, you can be specific about when the attorney can take control when preparing the LPA, and in respect of the Health & Welfare LPA, this can only be used once capacity to make decisions has been lost.

All LPAs must be registered at the Office of the Public Guardian, which is the government body responsible for the registration of LPAs before they can be used.

If you lose mental capacity and don’t have an LPA arranged, this can leave loved ones with significant worry and could potentially lead to difficulties in dealing with the individual’s personal finances. Should this situation occur, an application will need to be made to the Court of Protection, for an individual to become your appointed ‘deputy’, who can then make financial decisions on your behalf. The Court has the final say as to who is appointed, and this may not align with your wishes.

The process of making a Court application is long-winded, with applications taking many months to be heard and then approved. This could lead to significant issues for ongoing financial transactions, such as investment management, or the purchase or sale of a property. Anyone with investments, or complex financial affairs are at greatest risk if capacity is lost, with Directors and Business Owners at particular risk if they lose capacity without an LPA in place.

Take the time to review your affairs

Take a few moments to review your affairs and consider what would happen in the event of your passing, or loss of capacity. As part of our holistic planning service, we remind our clients to make a will, or review an existing will, refresh their expression of wish and make an LPA. Speak to one of our experienced financial planners who will be pleased to provide more details on why it is so important to get your affairs in order.

Oct 17
0

Making best use of compound returns

By | Investments

The success of any investment strategy is determined by the performance of the investments selected, and the length of time that the investments are held. Maths also plays an important part in contributing towards the returns achieved, as growth, which is accumulated or reinvested, benefits from a compounding effect, which helps accelerate investment returns over time.

In simple terms, compound returns are earned on both the capital investment and investment growth already achieved. This additional “growth on growth” has a cumulative effect and helps investments grow exponentially. Whilst incredibly powerful, the impact of compound investment returns reinforces the need to ensure that your investment funds perform well. If funds underperform over a sustained period, this can lead to substantially lower returns, when considering investment strategies that are in place for many years, such as a pension.

To demonstrate the impact of compound returns, take the example of Alice, whose pension plan is valued at £100,000. She plans to retire in 20 years’ time and does not expect to contribute further to this plan. If the investment achieves a rate of return of 3% per annum compound, the value at the end of the 20-year investment period would be £175,000. Increasing the investment return to 5% per annum compound would see the value at the end of the 20-year investment period increase to £252,000. Achieving an even higher return of 7% per annum compound would see the value at the end of the 20-year investment period rise significantly higher to £361,000.

As demonstrated on the graph, the rate of growth accelerates due to the impact of compound returns. By achieving compound returns of 7% per annum, rather than 3% per annum, at the end of the 20-year investment period, the value of Alice’s plan would stand at more than double the value that would have been achieved if returns were only 3% per annum.

This simple example demonstrates the power of compound returns; however, other real-world factors need to be considered. It is important to reflect on the eroding impact of inflation on investment returns, particularly over a longer timeframe, such as a working lifetime. The spending power of money falls over time, and this factor needs to be considered when undertaking calculations on future investment returns. The annual return achieved from risk assets, such as equities, bonds, and property, will also fluctuate from year to year, and examples using a fixed linear rate of return are unlikely to prove accurate. Finally, the impact of tax and charges on investment returns also need to be factored in.

Why performance needs to be reviewed

Given the cumulative effect of underperformance, it is important to keep any portfolio strategy and investment fund selection under close review. We often meet with new clients who have held the same investments within a pension, investment bond or Individual Savings Account (ISA) for an extended period, and in many cases, the performance of the portfolio held has lagged the performance of other funds investing in a similar portfolio of assets, with broadly the same level of investment risk.

This is particularly true when we undertake analysis of legacy investment products, which were purchased some time ago. The financial services industry is constantly evolving, and many historic investment products offer a limited range of investment options, which can hinder growth over the longer term. We often see other drawbacks with legacy products, such as high charges and exit penalties.

Taking an independent view of the universe of investment funds is, in our opinion, a vital component that helps drive investment returns. Products offered by restricted advisers tend to offer investors a limited menu of fund options from which to select, with many of the choices often limited to in-house investment funds. Whilst some of these funds may perform well compared to sector peers, it is often the case that we see sustained underperformance, the effect of which becomes more apparent over time due to the compounding effect. Even small marginal gains in performance can compound into a significant difference in outcome. For example, on an investment of £100,000 held over 40 years, a slight increase in return achieved, from 4% per annum to 4.5% per annum, would result in additional growth of over £94,000 being achieved (before the effect of charges and tax).

Compound returns are a powerful factor that is hard to ignore; however, investors need to give sufficient time for the compounding effect to impact investment returns, as the effect becomes more powerful, the longer an investment is in place. This is particularly true when long term regular savings, such as pension contributions made over many years, benefit from the power of compounding.

How to take advantage of compound returns

Compounding is a powerful driver of investment returns, and investors should be aware of the need to review their investment portfolio regularly, so that changes to underperforming assets can be made. As the examples have shown, even a small difference in performance over time can have a major impact. It would also be wise to consider investment product selection, as legacy investments can hinder growth over time due to limited fund choice and higher charges.

Speak to one of our experienced advisers to review your existing investment or pension plans. We can analyse investment performance and where appropriate recommend changes that aim to take full advantage of the power of compound returns.

Oct 10
0

Using protection for estate planning

By | Inheritance Tax

Inheritance Tax (IHT) planning was once only considered necessary for the very wealthy; however, largely because of increases in property and asset prices, many more estates are now liable to IHT. The most recent data from HMRC showed that IHT receipts were £3.5bn for the three months to August 2024, an increase of 10% over the same period last year. Whilst this upward trend is likely to continue, careful financial planning can help reduce or eliminate an IHT liability and leave a greater proportion of an estate to beneficiaries.

IHT legislation

Existing tax legislation provides each individual with a ‘nil rate band’ of £325,000 which is exempt from IHT. Married couples can use two nil rate bands on second death meaning that estates valued at less than £650,000 will pay no tax. This can be further extended by the ‘main residence nil rate band’ which can be claimed in respect of the main family home, of £175,000 per individual, as long as the home is left to a direct descendant.  The main residence band can also be transferred between married couples, and as a result, a total of £350,000 can be covered by the main residence band on second death.

Any amount exceeding the total ‘nil rate band’ is taxed at 40%, which can have a major impact on the legacy you leave to your beneficiaries. There are, however, a range of financial tools available to help mitigate a potential IHT liability.

IHT mitigation via life assurance

Amongst the IHT mitigation strategies available for consideration, life assurance could be a sensible option that is worth considering. A specific type of life assurance policy, known as a Whole of Life policy, is used for this purpose. Unlike traditional term assurance policies that provide cover for a set period, Whole of Life protection is designed to cover the life insured for the rest of their life, as long as the insurance premiums continue to be paid.

Whole of Life cover can either be taken out on a single life assured, or jointly. For married couples, where their estates are left to each other on the first to die, the IHT liability will generally arise on the second death, and therefore joint policies are often established on a “joint life, second death” basis.

The key planning element when using a Whole of Life policy is to ensure that the policy is written into trust, so that the payment on death does not aggregate with the individual’s other assets when their estate is assessed for IHT purposes. On death, the trustees use the policy proceeds to pay towards the IHT liability on the estate, which could potentially be covered in full.

Depending on the policy options chosen, the life assurance premiums can be guaranteed, in other words they remain unchanged for the life of the policy, or reviewable. Choosing the latter option will lead to cheaper premiums in the early years of the policy, but premiums will increase over time. The level of premium payable will be determined by an underwriting process, where the premium takes into account the age, health and lifestyle of the applicant. In most cases the policy will not pay out in the event of death within the first 12 months of the policy.

It is important to ensure that premiums remain affordable throughout the life of the policy. As a result, we often provide advice to help clients generate an income stream from existing investments, which can be used to pay the monthly or annual premiums.

Selecting cover options

When we sit down with clients to look at IHT planning options, we stress the importance that determining the value of an estate is just a “snapshot” of the current position of their existing assets. Of course, the value of an estate can shift significantly over time, either due to increases in the value of investments or property or further inheritance received. It could also be reduced, due to the eroding costs of long-term care, or other planning measures undertaken, such as direct gifting to family members.

It is also important to appreciate that IHT legislation can alter over time, and although the nil rate band hasn’t increased since 2009, the introduction of the main residence band in 2016 is a good example of how changes in legislation can impact on existing planning measures put in place.

Some Whole of Life policies allow the sum assured to be increased over and above increases in prices generally, which is an option that is available in most cases. That being said, given the relative inflexibility of Whole of Life policies, it may be appropriate to consider using protection policies as part of a broader strategy to mitigate a potential IHT liability.

The power of independent advice

Although IHT receipts are increasing, by planning ahead, the impact of this tax can be avoided or even eliminated. Our experienced holistic planners can fully assess the potential IHT liability on your estate and consider the options, including protection policies written in trust, as part of a broader financial planning strategy. Speak to one of the adviser team to discuss what action may be appropriate to meet your circumstances.

Oct 03
0

Our Approach to Client Reviews

By | Financial Planning

Valuation and data collation

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

Analysis and performance review

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

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

Financial planning review

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

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

Our use of technology

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

Platform and Provider Review

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

Agreed actions for discussion

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

Review meeting and report

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

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

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

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

A key part of our service proposition

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

Sep 26
0

Protecting your financial future

By | Protection

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

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

Review existing life cover

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

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

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

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

Death in Service

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

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

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

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

Family Income Benefit

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

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

Carry out a protection audit

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

Sep 19
0

Why the US election matters

By | Financial Planning

US sets the tone

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

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

Foreign policy

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

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

Climate policy

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

Tariffs

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

Tax and spending

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

Monetary policy

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

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

No honeymoon

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

Outlook for US equities

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

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

Sep 12
0

Pressure on the “Bank of Family” grows

By | Financial Planning

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

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

Growing trend

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

Traps lie in wait for the unwary

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

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

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

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

Protecting your financial security

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

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

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

Planning ahead

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

Getting the right advice

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

Sep 04
0

The importance of regular reviews

By | Financial Planning

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

Think of financial planning as a garden

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

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

Key elements of the process

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

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

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

Weed out poor performance

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

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

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

Keep abreast of changes in legislation

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

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

Peace of mind

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

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

Independent and Expert advice

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