All Posts By

FAS

Oct 19
0
pension options

Navigating the options at retirement

By | Pensions

Individuals reaching the point at which they want to access a defined contribution pension are now faced with a wider range of options as to how to draw a pension income. The Pension Freedom rules announced by George Osborne in 2014 certainly re-wrote the pension rulebook. From April 2015, those holding a defined contribution pension and aged over 55 have the option of using their pension to purchase an annuity, accessing their pension flexibly to move into Flexi-Access Drawdown or take lump sums. At the time, the new rules were revolutionary, but with the increased range of options, pension holders faced a more complex decision when deciding how best to access their pension.

Eight years on from the introduction of pension freedoms, deciding the best way to access a defined contribution pension remains a difficult decision, which can have far-reaching consequences. For this reason, seeking independent financial advice at this point can assist in reaching the right decision for your circumstances.

Tax Free Cash

It is usually the case that 25% of the value of a defined contribution pension will be available as Tax Free Cash. Many choose to take their Tax Free Cash in one lump sum, which can be used to pay off existing debts or pay for discretionary expenditure. The Tax Free Cash could also be invested, and generate further income from the lump sum payment. An alternative that may not be immediately apparent is the ability to draw Tax Free Cash over a period of time, rather than in a single payment. Depending on the overall retirement strategy, this could be an effective way of generating a tax-efficient “income” through regular Tax Free Cash payments.

Income options

Any amounts drawn above the available Tax Free Cash amount will be liable to Income Tax, and this is where careful consideration is needed in respect of the options available, to find the most appropriate method for your circumstances. For many, using a Drawdown approach can provide a flexible way of providing a retirement income. You can draw an income that suits your requirements, and this can be adjusted as your circumstances change. In addition, any funds remaining in Drawdown at death can normally be paid to your nominated beneficiaries, and the enhanced treatment of drawdown plans on death is one of the major benefits of a Drawdown approach.

Funds in Drawdown need to stay invested and this is both an opportunity and a risk. If pension investments perform well, you could potentially grow the value of your pension at a faster rate than the amount taken via Drawdown; however, if investments do not perform as expected, the pension pot could be depleted, and income payments could stop. These risks can be mitigated by selecting an appropriate rate of withdrawal that doesn’t place excessive pressure on the investment fund and ensuring that pension investments perform well.

The second option is to use the pension fund to purchase an annuity. This is where the remaining pension fund is swapped for a guaranteed income, usually for life. This guarantee provides certainty that the payments will continue no matter how long you live, or how markets are performing. Annuities provide a range of options that allow pension payments to increase each year, thus giving some protection against inflation, and potentially providing an ongoing pension for a surviving spouse in the event of death of the annuity holder. It is, however, important to understand that any additional options selected will reduce the initial payment amount.

The key drawback of an annuity is that once the payments start, you cannot cash in the annuity or alter the terms. This is a critical decision, as you will not be able to adapt your pension income to any change in circumstances. Furthermore, if annuity rates rise in the future, annuities in payment will not benefit from the increase.

Most annuities are arranged on a whole life basis, but there are options to arrange an annuity for a fixed period of time. Depending on the options selected, this can provide a return of capital at the end of the fixed term.

The third and final option is to take a lump sum payment. This is where part or the whole of a pension is drawn as a lump sum, with the first 25% of the payment being taken as Tax Free Cash and the remainder being liable to Income Tax. The major drawback of this approach is that drawing funds in a lump sum will provide no ongoing income, and in addition, the lump sum payment is made in a single Tax Year, which can have adverse Tax implications.

A further element to consider is that you do not have to adopt the same approach with the whole of a defined contribution pension. You can adopt one or more of the pension income options to find the right balance for your personal circumstances.

Which approach is right?

The short answer is that all of these options could be appropriate, depending on your needs, objectives and wider financial planning considerations. This is why seeking personalised, independent advice can help you work through the options and begin to establish a plan that works best for you. A further complication is that not all pensions provide access to every option available under the Pension Freedom rules. It may, therefore, be a wise decision to consolidate or transfer pensions prior to retirement in order to benefit from the whole range of options available, and also access a wider range of investment fund options and competitive terms.

Speak to one of our experienced advisers, to start a conversation about your existing pension arrangements, and the options open to you when deciding how to draw an income in retirement.

Oct 12
0
Graphic of a notebook resting on a keyboard alongside a pen, with 'Make A Will' written inside

The risk of not writing a Will

By | Financial Planning

According to recent research carried out by Canada Life, half of the UK population has not made a Will. Whilst uptake in the older generations is understandably higher, one in three people aged over 55 do not have a Will in place. These statistics are alarming, as dying without a Will can place an additional burden on loved ones at a difficult time. Where a Will has been left, this usually provides clear instructions, including such matters as funeral arrangements, or how possessions are to be distributed, which can ease the burden on family members. Dying without a Will also leaves no named executor to deal with the estate, and family members or other individuals will need to decide amongst themselves who will be appointed as administrator.

 

Intestacy rules

Many are also not aware of potential issues that can arise by relying on the laws of intestacy, which are a standard set of legal rules that apply in England and Wales if an individual dies without having made a valid Will.

For those who are married, or in a civil partnership, the surviving spouse or civil partner will receive the full value of the estate, unless there are surviving children. In this instance, the surviving spouse or civil partner will receive the first £322,000 of the estate and an absolute interest in one-half of the remainder above this level. The other half is divided equally between surviving children.

For those who are not married or in a civil partnership, the situation is even more complicated.  If the deceased had children, they receive everything split equally between them. For those without children, assets first pass to any surviving parents, then to siblings (if parents are deceased), then to grandparents (if alive), and then to wider blood relatives, such as aunts and uncles. Where an individual dies without any surviving blood-related relatives, the estate is deemed to be Bona Vacantia, and assets are passed to the Crown.

 

Modern life

The laws of intestacy are particularly complicated, and not widely understood. Indeed, couples that have lived together for many years but are not married or in a civil partnership, can often wrongly assume that this affords each other protection under the law. It is crucial to remember there is no such thing as a “common-law partner” under UK law, and in this situation, an unmarried partner of an individual dying intestate would not be entitled to anything under the intestacy rules.

As financial planners, we see this as a key risk that many are exposing themselves to unnecessarily. The best-laid financial plans for the future could be changed in an instant by the death of a partner who hasn’t made a Will and can leave surviving partners in financial difficulty at a time of great distress. For example, this could mean the unmarried partner being forced to move out of the family home, or funds being left to an estranged spouse. It could also lead to investments and savings being left to surviving blood relatives of the deceased partner.

Making a Will can also deal with important aspects such as guardianship of children, and how funds that children inherit are dealt with. Whilst the legal age of majority is 18, many would consider this too young an age to inherit assets. It may be a good idea to consider whether this should be delayed to, say, 21 or 25 when the beneficiary is potentially more financially aware and in a position to use the funds wisely for further education costs, or a house deposit.

 

Business owners at risk

Irrespective of the business interest you hold, not holding a valid Will can have serious implications in the event of the death of a sole trader, partner, or director. This could mean that the business assets could be passed to someone who may have no interest in running the business or lack the necessary ability, leaving the business at significant risk. It could also lead to conflict and disputes amongst business partners.

 

The link to financial planning

Whilst we do not write Wills, we regularly remind our clients of the need to prepare a Will or ensure an existing Will is up to date as part of a wider review of their financial planning objectives. Not having a valid Will, or holding a Will that is out of date, could potentially undermine financial planning strategies, or potentially lead to higher levels of tax being paid.

We recommend speaking to a suitably qualified solicitor when making a Will. This should ensure that the Will is drawn up correctly to reflect your wishes, as mistakes and errors in a Will, which are usually only uncovered after the death of the individual, can lead to disputes and legal expenses in rectifying the position.

 

Getting over the inertia

Most people understand the importance of making a Will, though many do not see it as a priority, or feel uncomfortable thinking about their own mortality. Given the potential risks many are facing, potentially unwittingly, by not holding a valid Will, we recommend everyone takes the time to make a Will or review an existing Will to make sure that it still reflects your wishes.

Please speak to one of our experienced team here if you would like to discuss the implications in more detail.

Oct 05
0
Background illustrating bond market data

Time to revisit Bonds?

By | Investments

After the very difficult conditions for Bond investors seen last year, we are seeing growing evidence that a change in direction is now likely. This could herald an improved performance for an asset class that has struggled over the last 18 months and suggests that good opportunities exist in Fixed Interest markets at the present time. We take a closer look at Bonds as an asset class and why now may be a good time to consider Bonds as part of your portfolio.

 

What is a Bond?

Bonds are issued by governments and companies when they want to raise money. By buying a bond, you’re effectively loaning your capital to the government or company, and in return, they agree to pay you back the face value of the loan on a specific date, and pay you interest during the life of the Bond.

The characteristics of a known redemption date and a fixed rate of interest should mean that Bonds produce less volatility than Equities (shares) and are also more predictable. Other factors that influence the risk of a Bond include the financial strength of the government or company issuing the Bond. The more secure and financially stable the issuer, the more likely the Bond is to be repaid in full. The length of time before the Bond matures is also a key factor. Bonds that are due to be repaid in a relatively short period of time (say 5 years or less) are less volatile than those that redeem in 20 or 30 years’ time.

 

Why was 2022 so difficult?

Bond markets tend to do well in periods when interest rates are low, as the yield (the return offered by a Bond) looks attractive compared to the rate of interest you could obtain through a bank or building society. Last year was, of course, dominated by the sharp rise in inflation, which was caused by the aftermath of the Covid-19 pandemic and exacerbated by the Russian invasion of Ukraine. Central banks across the Western World began hiking rates from the end of 2021, in an attempt to slow the rate of inflation. Indeed, the speed at which rates increased caught many by surprise.

As interest rates rose sharply, the only way for Bonds to remain competitive with overnight money is for the price to fall, which in turn increases the yield. There was nowhere to hide within Fixed Interest markets, and whilst some protection could be found in shorter dated Bonds – in which we held good exposure throughout the last 18 months – the value of Government and Corporate Bonds fell. Whilst this led to disappointing returns last year, it does not mean that Bonds are attractively priced.

 

Why is the outlook brighter?

The Bank of England and US Federal Reserve have both now paused their rate hiking cycle, bringing to an end a run of successive rate increases. Whilst there remains a possibility that either or both could raise rates again, we feel this is unlikely. Firstly, we expect inflation to continue to fall over the remainder of this year and into 2024, and the speed at which inflation returns to more normal levels could be a surprise. UK inflation data in August was weaker than expected and in the US, inflation rests just above 3%.

Secondly, economic growth is likely to slow through the next 6-12 months in many Western economies. Ratings agency Fitch recently reduced the outlook for global growth next year, and the OECD projection is for the US economy to rise by only 1% during 2024. Consumer confidence is expected to weaken and the housing markets in both the US and UK are both under pressure given the impact of higher mortgage rates.

As a result, the next substantive move in interest rates may well be down. Economists and market participants are currently weighing up whether rates will be eased gradually or potentially more aggressively, depending on the pace of economic growth. Central banks are adopting a policy whereby their decisions are being led by inflation, unemployment and growth data. Should data remain strong, then there is a case to suggest that rates will only fall gradually, but in the event that data is weaker than expected, then calls will grow for central banks to take more rapid action. There is also discourse as to the timing of rate cuts, with some suggesting the first cuts could come in the first half of next year, whilst others seeing the easing cycle starting in the third or fourth quarters of 2024.

Just as increases in interest rates are generally negative for Bonds, cuts in base rates may well prove positive. At the time of writing, a 10 year US Treasury Bond is currently yielding 4.6%, which doesn’t appear overly attractive when compared to overnight interest rates available on cash deposit; however, a yield of 4.6% could look very attractive should base rates fall over the medium term, say to between 3% and 4%.

 

Time to revisit Bonds?

After a very difficult 18-month period, Bond prices are attractive, and we feel there is good reason to see value in Bonds at current levels. Investment Grade Corporate Bonds (i.e. those Bonds issued by companies who credit rating agencies deem to be financially stable) and Government Bonds may well see a slow re-rating, as the economic landscape changes over the coming year. Despite the fact that the default rate (that is to say the number of Bonds who fail to repay capital or interest to investors) remains low, a slowing economy could lead to an increase in defaults from more speculative Bonds.

Diversification is a key component of a successful investment strategy, and any allocation to Bonds should be balanced with other assets, according to your attitude to risk, objectives and time horizon. This is why taking advice on the correct asset allocation for your circumstances is an important step for most investors to take.

Speak to one of our experienced advisers here about the outlook for Bonds and Fixed Interest investments, and how they could fit into your investment portfolio.

Sep 28
0
Graphic of a pad of paper with the words 'Tax Planning' written on it, alongside a pen, calculator, laptop, and pile of coins.

Tax Planning for Higher Earners

By | Tax Planning

Amidst a landscape of rising costs, the amount of Income Tax collected by the Exchequer is increasing. Much of this is due to the Personal Allowance – which is the amount you can earn before paying any tax – and Income Tax bands being frozen. This freeze was introduced in 2021 and was expected to remain in place until 2026;  however, Chancellor Jeremy Hunt extended the freeze for a further two years in last year’s Autumn Statement. Static tax bands create a so-called “fiscal drag” as increasing wages and earnings push individuals higher up the tax bands. Furthermore, the Additional Rate Tax threshold, which is the level where 45% Income Tax becomes payable, has been lowered from £150,000 to £125,140 from April. As a result, higher earners would be well advised to consider financial planning options that could potentially reduce the amount of tax they pay.

 

Make use of the ISA allowance

Those with higher earnings should look to make use of their annual Individual Savings Accounts (ISA) allowance, as ISAs enjoy a preferred tax treatment, whereby all income, interest or dividends generated from the assets held in the ISA are exempt from Income Tax, and any gains made on disposal are free from Capital Gains Tax. This is of particular benefit to higher earners, who may not benefit from any Personal Savings Allowance.

An ISA can hold Cash or Stocks and Shares and other investments, and irrespective of which ISA or ISAs are selected, the total contribution limit across all ISAs in the 2023/24 Tax Year is £20,000. Taking full advantage of the allowance is important for anyone who pays Income Tax on their savings or dividend income, or wants to avoid Capital Gains Tax on future gains.

 

The advantages of pension planning

The starting point for many higher earners is the ability to save into a pension. Qualifying contributions into a pension receive tax relief, which is paid at the highest rate of income tax that you pay. If you’re a basic rate taxpayer, you’ll get 20% tax relief, but higher rate taxpayers receive tax relief of 40% and additional rate taxpayers receive 45% relief.

For those that earn between £100,000 and £125,140, effective tax relief of 60% is available. When an individual’s taxable income reaches £100,000, their Personal Allowance is tapered, losing £1 of allowance for every £2 of additional income. Once taxable income reaches £125,140, the tax-free Personal Allowance is lost completely. As a result those with earnings between £100,000 and £125,140 pay an effective tax rate of 60% on this portion of their earnings.

Pension contributions have the effect of extending the tax bands, which can mean that those earning between £100,000 and £125,140 not only receive tax relief at 40%, but also reclaim part of their Personal Allowance, too.

When making pension contributions, careful consideration is needed as there are a number of tax traps to catch the unwary. Individuals can contribute up to 100% of their relevant earnings, although this is subject to an Annual Allowance of £60,000 in the current Tax Year. It is important to ensure that earnings qualify for pension contributions – property rental income from a buy to let property, for example, is not normally considered to be relevant earnings.

In addition, those receiving taxable income above £260,000 need to consider the taper that applies to the Annual Allowance, which reduces the amount you can contribute by £1 for every £2 of income above this level.

Given the complexity of the rules, we recommend higher earners seek advice before taking any action. Pension contributions need to be affordable to your circumstances, and the key to effective pension planning is to make sure the contributions work hard in terms of investment performance. This is where regularly reviewing your pension investments can make sure that the portfolio remains appropriately invested for the prevailing and expected conditions.

 

Venture beyond

Beyond ISAs and Pension contributions, there are other tax efficient investments that can reduce an individual’s tax liability, but also provide a helping hand to small businesses. Venture Capital Trusts (VCTs) were introduced in 1995 as a way of encouraging investment into Britain’s small and entrepreneurial businesses. As these investments tend to be of higher risk, and some smaller companies can fail, VCTs offer up-front tax relief of 30% on qualifying investments. This tax relief is retained as long as the investment remains qualifying and is held for at least 5 years. In addition to the tax relief, dividends paid by the investments within a VCT are tax-free and any gains on disposal are also free from Capital Gains Tax.

Whilst the tax advantages are attractive, it is important to recognise that VCTs are a high risk investment, and should only be considered by investors who are willing to accept a significant risk of capital loss. VCTs range from investing in companies that are already profitable, to those quoted on the Alternative Investment Market (AIM) and some that specialise in early stage investments, and as a result, the risks and potential returns can vary significantly. Many VCTs have produced strong returns over the long term, when factoring in the tax relief on investment and dividend income, but others have performed poorly. This is why we recommend seeking advice before considering these investments.

 

The benefits of advice

Those who pay higher rate or additional rate tax – or indeed business owners or shareholders who receive a high level of dividend income – should take the time to consider the amount of tax they pay. By considering financial planning options, many will find that they can reduce their tax liability.

Speak to one of our experienced financial planners here for expert advice on the options open to you.

Sep 21
0
Graphic of a small handheld blackboard with 'Retirement Plan' written on it alongside points '1', '2', and '3'.

How to plan for retirement

By | Financial Planning

Whatever your plans are for retirement, it pays to begin planning well in advance, to give you the best chance of meeting your goals in later life. We often meet clients who are beginning to consider the end of their working career, but find choosing the right path difficult, for fear of making the wrong choice. Financial decisions taken at retirement are one of the most important many people make. This is largely due to the fact that the path chosen can have lifelong implications.

When beginning to consider retirement plans, there are a number of fundamental questions that need to be answered.

 

When to retire?

Deciding on the right time to retire may be down to personal choice, or it may be as a result of changes in the workplace that push you to reach a decision. For some, decisions will need to be reached some time in advance of the retirement date, due to contractual obligations, or the need to train a new member of staff to fill the role. In other instances, the decision may sadly be reached due to ill-health or inability to continue in the role.

An increasingly common choice is to reduce working hours gradually over time and ease into retirement, and this is where financial planning can help in determining alternative income sources that could be accessed to fund the reduction in salary or self-employed income, and maintain your lifestyle. Tax planning is often vital at this stage, as individuals are juggling employment and retirement income at the same time.

 

What kind of lifestyle do I want?

The most important factor that often determines the point at which an individual retires is affordability. The ongoing costs of maintaining the home, paying utility and other bills, and covering necessary spending such as food and transportation need to be considered. In addition, some may need to clear any outstanding debt prior to retirement, such as a mortgage, whilst others may wish to undertake home improvements.

Retirement introduces significant change, and one important point to remember is that many will have more time on their hands, which may be filled with hobbies, pastimes or travel. These will all have costs attaching to them, which need to be taken into account.

Calculating a monthly budget is a useful first step to see what regular and discretionary expenditure is likely to arise. It is also a good idea to build in a contingency for unexpected outgoings.

 

What income can be generated?

It is important to start looking at existing pension arrangements well in advance of a planned retirement date, to begin to determine what income could be generated in retirement. As a result, any gaps can be identified and this will allow time to make further pension contributions, or other savings arrangements to help plug the gap.

State Pension provision is usually the starting point from which to build a retirement income, and obtaining a State Pension statement is a good idea. This will provide an estimate of how much State Pension you are likely to get, which will be based on your National Insurance contributions. It will also let you know the date at which State Pension becomes payable.

For those who wish to retire earlier than their State Pension age, thoughts turn to producing an income from elsewhere to fund ongoing living costs. It is important to note that State Pension alone is unlikely to provide a comfortable retirement, and making the most of existing pension arrangements built up through employment, or personal pensions, will be a key building block of your retirement income.

An important step to take is to understand what pension arrangements are held. Obtaining up-to-date valuations can assist; however it may well be necessary to undertake further research and analysis to get the full picture in respect of the options for drawing a pension income, and to discover if there are any special features within the pension contract that could affect the decision making process.

It may also be worth considering whether you have any additional pension plans that you have lost touch with during your working life. We often meet clients who provide documentation relating to an old pension, which turns out to provide additional retirement benefits that they were not expecting.

As part of the retirement planning service we offer, we write to a client’s existing pension providers, and obtain full details of their arrangements. We take the time to fully analyse the plan, which can often reveal features which may not necessarily be apparent. These can include guaranteed annuity rates, guaranteed plan values or protected levels of Tax Free Cash.

Retirement income can, of course, come from other sources, too, and at this point, we can review other savings and investments held to consider how best to generate an income. By making changes to an existing portfolio, we can look to generate a sustainable income, in a tax-efficient manner.

 

Financial advice can help define your plans

Once existing pension arrangements have been analysed, the question of when to retire has been answered and a target income identified, it is time to start to consider how these goals can be reached.

Taking financial planning advice can make a real difference to the decision-making process, as we can take a holistic and impartial view of existing pensions and other assets and begin to set out a plan to reach your goals and objectives. We can assess what income can be generated from existing pensions, in conjunction with other savings income or property income. Other important aspects, such as tax-efficiency can be considered, together with wider planning issues, such as Inheritance Tax concerns.

Speak to one of our experienced advisers here to discuss the options and start to formulate your retirement plans.

 

Sep 15
0
Graphic of a hoodie covered with dark stormy skies being unzipped to reveal sunny blue skies, representing a brighter future.

The end of the cycle

By | Investments

As traders head back to their desks after the summer break, thoughts turn to the prospects for markets over the remainder of the year. What is apparent is that the conditions this Autumn appear to be calmer than one year ago. It is perhaps easy to forget that almost 12 months ago, then Chancellor Kwasi Kwarteng had just delivered a controversial budget that spooked markets. At the same time, inflation was climbing month on month and Equities and Bond investors took flight to safety, amidst high levels of volatility.

Looking back, it is no understatement that 2022 will be remembered as a tough year for investors. It was also highly unusual, as the impact was felt across all asset classes. Indeed, according to a study carried out by Blackrock, last year was one of only three years in history where both Equities and Bond markets returned a negative performance in the same calendar year.  It is important to remember that markets always look forward, and whilst we can ruminate on the difficult conditions of last year, the future prospects for corporate earnings and government and monetary policy will shape the performance of markets in the months ahead – and the prospects are certainly looking brighter.

 

The end of the cycle?

Much of the market’s attention since early last year has been focused on the actions of central banks in their attempts to curb inflation. As expected, inflation is now falling quite quickly in some parts of the World (i.e. the US) and a little more slowly in others (i.e. the UK). As inflationary pressure eases, so does the rationale for central banks to continue to raise rates. In addition to the fall in inflation, other important economic measures are adding weight to the suggestion that we are close to the peak of the cycle. Unemployment data, which has been resilient over the course of the last year, has softened over recent weeks in both the US and UK, and the outlook for the UK housing market is gloomy. These trends are likely to continue and as a result, economic growth may well slow in the next few months.

We have long argued that central banks may have been too aggressive in raising interest rates, given the lag between policy decisions being made, and the time taken for these decisions to impact on the economy. As a result, as inflationary pressure eases further, we feel markets will focus on the timing and speed of rate cuts as we head through 2024.

Both Bonds and Equities should benefit from easier monetary conditions. High inflation and rising interest rates work against Bonds and Fixed Income investments as they make the yield offered by the Bond less attractive when compared to cash rates. As expectations rise that monetary policy will pivot, Bonds should gain more attention, and many are currently priced attractively. Lower borrowing costs over time should also help ease the pressure on corporate borrowing, and help companies finance their operations.

As ever, risks remain. It is possible that inflation doesn’t fall as quickly as expected, which could lead to central banks delaying their expected pivot to lower rates. The recent jump in Crude Oil prices, for example, is one of a number of external shocks that could sway the course of interest rates. China’s debt-laden property market and slow recovery post-Covid could also have an impact. We do, however, feel markets have, to some extent, already priced in the “higher for longer” narrative.

 

Corporate Earnings remain positive

One of the key drivers of the improving outlook has been the strength of corporate earnings. The recent US reporting season saw over three quarters of companies announce profits ahead of expectations, confounding some predictions that earnings reports could be lower. Whilst there have been a handful of notable companies where earnings disappointed, many others have seen estimates for their future earnings increase.

Equities performance in the first half of 2023 was dominated by what we would identify as “growth” investments, which are often involved in technology and new industries. As the landscape changes, we would expect to see the focus shift in favour of companies with good levels of dividend yield and more value-based characteristics. Corporate balance sheets largely remain healthy and dividends are generally well covered. The contribution to overall investment returns achieved by dividends over time should not be underestimated.

 

Political risks and opportunities

As we move forward to next year, investors will need to consider the impact politics can have on market sentiment. There are, of course, key Elections in both the UK and US next year and the sitting administrations will be keen to see their economies in reasonable shape, as the electorate’s personal financial position is usually one of the key drivers of voter intention. History would suggest that election years tend to be broadly positive for markets; however, we need to be alert to the potential risks that a scenario such as that seen in the US in 2020/21, where no clear winner was apparent for some time, is not repeated, as this has the potential to cause a spike in volatility.

 

Brighter skies ahead?

Investors have had to negotiate rough seas over the last 18 months, but the end of the rate hiking cycle could well be in sight. A shift in monetary policy may well see calmer waters return over coming months, and evidence is building that 2024 will see us move to less volatile market conditions.

If your portfolio is not regularly reviewed, now is an opportune moment to consider your existing assets to see whether they are well positioned for the expected market conditions. Speak to one of our experienced advisers here to start a conversation.

Sep 07
0
piggy bank next to blackboard detailing financial planning for education

Planning for the costs of education

By | Financial Planning

The start of a new school year brings the cost of education into focus. As financial planners, we are regularly asked to assist clients when planning to fund University or further education costs. Some parents take the decision to privately educate children, and budgeting and saving for these expenses also need careful planning. It is often the case that older generations want to lend a helping hand, too, and there are a number of factors that need to be considered when providing gifts to help with the costs.

We take a detailed look at some of the factors parents – and possibly grandparents – need to consider when planning to fund the costs of further education, or private education.

 

Meeting University costs

When a child goes to University, financial assistance is available in the form of Tuition and Maintenance Loans. The Tuition Fee loan covers the cost of the course, and as University Tuition fees are capped at £9,250 per annum, a three year course will mean a debt of almost £28,000 will accrue (assuming the cap remains in place).

The actual cost of the course is only one aspect of the overall cost of further education. Accommodation, food, travel, study material, and entertainment all need to be covered whilst a student is at University. Whilst the Tuition Fee loan covers a fixed amount, the Maintenance loan is means tested and based on household income. The amount a student can borrow via the Maintenance Loan is highly unlikely to be sufficient to cover all of these living costs, and parents or grandparents will need to make up the shortfall. The maintenance support loan has only increased by 2.8% for the 2023/24 academic year, and given that increases in the cost of living far exceed the increase in the allowance, this may well mean parents need to help cover a larger proportion of living costs.

Around the time that a child goes to University, there are likely to be competing demands on parents’ finances. It may be the time when a parent is starting to plan ahead towards the end of their career, and this is the time when maximising pension contributions typically takes a higher priority.

By establishing a regular savings plan years in advance of a child’s education starting, you will have more time to build the value of the accumulated savings, and ease the financial pressure at the time a child is ready to attend University. Selecting the most appropriate method of saving depends on a number of factors, such as the time horizon for investment and tolerance of investment risk. Cash savings accounts may be an appropriate method for some, but investing in a broad range of assets, such as Global Equities and Bonds, could mean that greater returns are achieved over time.

Tax efficiency is another important consideration. An Individual Savings Account or ISA is often a good choice, as the investment held within the ISA can provide returns that are free from both Income Tax and Capital Gains Tax (CGT). Exemption from CGT may be particularly valuable, given the need to draw down lump sums from investments at regular intervals to fund ongoing costs.

Whilst students do not need to start paying back loans until their earnings exceed £25,725 per annum, the rate of interest charged by the Student Loan company now stands at a minimum of 6.25% per annum. This means that students may well be saddled with debt for an even longer period of time due to the interest charges.

Building a university fund from when a child is very young is an ideal way of looking to meet tuition costs and the costs of living during further education. By planning ahead early, parents could also potentially reduce the debt burden on their children, by reducing the amount of Student debt carried forward into their working life.

 

Funding private education

Parents – and grandparents – always want the best for their children or grandchildren, and for some this means choosing to give them a private school education. Evidence suggests that students from private schools outperform national and global academic averages, and the cost of private education can be seen as an investment in the child’s future.

Meeting the costs of private education can, however, look daunting, when you factor in not only the fees, but also the additional costs of school uniforms, and other activities such as trips, sports, and music lessons. For this reason, parents who wish to send their children to a private school need to start planning ahead, and build a strategy to save sufficient funds over time to cover the expected costs. In the same manner as saving for further education costs, ensuring that funds are appropriately invested, and in a tax-efficient manner, are key considerations.

Grandparents are often keen to help fund school fees as a way to invest in their grandchild’s future, while also making sure the parents don’t shoulder all the financial burden. It is, however, important to consider the Inheritance Tax implications of any gifts made. Annual gifts of up to £3,000 in total should be exempt, but additional gifts could be liable to Inheritance Tax unless the donor lives at least seven years from the point the gift is made. An alternative approach is to gift funds into a Discretionary Trust, with the grandchildren named as potential beneficiaries. The Trustees can then draw from the Trust to fund ongoing educational expenses.

If you are a parent or grandparent who wants to send their children or grandchildren to a private school, the best way to pay for it is to start the financial planning process as early as you can. Speak to one of our experienced financial planners here if you would like to discuss how best to plan for future education costs.

Aug 31
0
Image of a black and white dog wearing glasses on an orange background

“Dog fund” report highlights benefits of independent advice

By | Investments

The latest Bestinvest “Spot the Dog” report has recently been published, and in addition to turning the spotlight on funds that have lagged behind fund performance within their sector, the most recent report also highlighted a trend of underperformance within funds offered by restricted wealth managers.

 

The list no-one wants to be on

The biannual “Spot the Dog” report lists funds investing in Equities, that have underperformed their relevant market index over three consecutive 12 month periods and also underperformed by a total of 5% or more over the last three years. By using these criteria, the report aims to exclude periods of short-term underperformance, which can happen from time to time to even the best long-term performing actively managed funds. Instead, the report attempts to highlight those funds that have consistently underperformed.

The latest study listed 56 funds that have met the criteria, with nine of the funds holding assets under management in excess of £1bn. The most interesting feature of the latest report is that it highlighted the inclusion of a high number of funds offered by restricted wealth managers. One particular restricted manager, St James’ Place, had a total of six entries in the Bestinvest Dog List, with three of St James Place’ Global Equities funds that appear on the list, holding combined assets under management of over £26bn. Another restricted provider, Scottish Widows (where funds are managed by Schroder), saw two of its funds make the list.

 

The limitations of restricted advice

We have regularly commented on the differences between independent and restricted financial advice, and why we believe the former to be superior. FAS is an independent practice, whereby we can recommend products, solutions, and investment funds from across the marketplace. This contrasts with a restricted advice proposition, which can only recommend products from certain providers and could mean that the advice provided is limited to a single range of products or funds.

We are passionate believers that independent, whole of market advice has distinct advantages over restricted advice propositions, and the Bestinvest report only serves to strengthen our belief that independent advice offers a significant advantage.

This is particularly the case if your investment portfolio is managed by a restricted adviser. By using a restricted wealth manager, it is likely that the adviser can only construct your portfolio by investing in their own brand funds. As a result, if one or more of the funds offered underperform consistently, your options will be few as the adviser will be limited in what they can offer as an alternative. In the case of St James’ Place, three of the six entries in the Bestinvest list are invested in Global Equities. For investors who take a medium to high level of investment risk, allocations to Global Equities are likely to feature heavily in any diversified investment portfolio, and holding consistently underperforming funds in this sector sets the foundation for poor overall portfolio performance, on a relative basis against other propositions.

 

Independent advisers have the advantage

Contrast the position of the restricted advice client with a client of an independent firm. As the whole of the market is available to an independent adviser, a skilled adviser can select the most appropriate fund from the very widest range of funds offered to retail investors, and if one of the funds underperforms, there are options to switch into an alternative fund which is managed by another fund house.

At FAS, we have a highly disciplined process when it comes to fund selection. Our in-house Investment Committee undertakes a comprehensive review of all funds available to investors each quarter, using quantitative research initially, and then engaging in rigorous analysis of those funds shortlisted, considering the style, approach and track record of the fund manager in question. As part of this process, we regularly meet with leading UK fund managers, so that we can fully understand their fund selection process and investment strategy.

The vast majority of the funds we recommend perform well when compared to sector peers. Where a fund underperforms on a consistent basis, we carefully analyse the reasons for the underperformance and if the Committee feels it appropriate, we remove that fund from our list of recommended funds. Given that most investment platforms can provide access to more than 3,000 investment funds, an alternative will always be available.

 

Conflict with FCA Consumer Duty

The recently introduced Financial Conduct Authority (FCA) Consumer Duty rules introduced a higher level of protection for clients of advice firms, as the rules now oblige firms to act to deliver good outcomes for retail customers. The FCA now requires all firms to apply the new principles to the areas of products and services, price and value, consumer understanding and consumer support.

Given the depth of the review we undertook in respect of our response to the introduction of Consumer Duty, we do wonder how restricted firms have been able to demonstrate value for money and good outcomes for clients. When reports such as “Spot the Dog” point the spotlight on underperforming fund performance, the restricted advice proposition is unlikely to be able to adapt, and therefore we feel it is difficult to see how such a service is compatible with the principles of the Consumer Duty rules.

 

Time to question restricted advice?

If your investments are managed by a firm that offers a restricted advice service, the “Spot the Dog” report makes for compelling reading. Any investor holding funds through a restricted adviser should consider the investment proposition carefully and consider the impact that a limited fund range could have in the event of underperformance.

Speak to one of our experienced independent advisers here, who would be pleased to analyse an existing restricted portfolio and review your current financial arrangements.

Aug 24
0
Graphic of symbols of four different currencies alongside eachother.

Do you need to consider currency risk?

By | Investments

Most investors understand the importance of diversification within an investment portfolio as a way of mitigating risk, and also appreciate the need to seek out funds that aim to produce strong returns. Some investors, however, fail to take currency risk into account, which has the potential to influence the investment returns achieved.

For UK investors, the exchange rate versus the Dollar carries high importance. The US Dollar has been the dominant reserve currency since the end of World War II, and according to the International Monetary Fund, 58% of global foreign exchange reserves are held in US Dollars.

 

Why currencies fluctuate against each other

The relative strength of a currency against another global currency can be influenced by a number of different factors, many of which we have seen play out over the last 18 months. Perhaps the most important factor is economic and political stability, as a nation with good economic prospects and a positive environment for business is likely to attract inflows of foreign investment. This can help drive demand for that currency.

Conversely a period of political instability, as we saw last Autumn during Liz Truss’ brief tenure as Prime Minister, can lead to sustained weakness in a currency. Almost a year ago, the Pound slid sharply against many other leading currencies, and indeed the Pound very nearly fell to parity against the US Dollar at one point. Political and economic instability can drive longer term trends, too. A good example of this is the weak performance of the Pound against most major global currencies in the period following the vote to leave the EU in 2016.

Other factors that can influence the direction of a currency are generally linked to the economic landscape, with factors such as the direction of domestic interest rate policy, and prevailing and expected rates of inflation, influencing the relative strength, or weakness, of a currency. During 2023, markets have continued to price in further hikes in UK base interest rates, whereas other developed nations, such as the US, now appear to be close to the peak of their rate hiking cycle. This has led to a rally in the Pound over the course of this year; however, with UK interest rate expectations moderating of late, the US Dollar has regained some of the ground lost earlier in the year.

 

Currency considerations for UK investors

Some investors who invest exclusively in UK listed assets, may incorrectly assume they are immune from currency risk. The reality is that over 80% of the earnings generated by companies listed on the FTSE100 are derived from overseas, in particular through US Dollars. Whether currency weakness has a positive impact depends on how a company derives its’ earnings and profits. A UK listed company that earns much of its’ income from overseas (such as HSBC or BP) will welcome a weak Pound, as those overseas earnings, when translated back to Sterling, will look more attractive. Weak Sterling, on the other hand, will hamper the prospects of companies that import components or products, as the weak exchange rate will mean the costs of importing goods increases.

One of the ways currency risk can be reduced is by hedging, and some funds actively choose to hedge their currency exposure back to Sterling. This can be seen as an insurance, as this removes the potential for currency movements to impact investment returns, and is achieved by holding complex financial instruments such as swaps or futures. Other globally diversified funds choose not to hedge, therefore aiming to generate additional returns through currency appreciation. Whilst such currency calls can amplify investment returns achieved from the portfolio, a wrong decision can lead to returns looking less attractive.

 

Diversification helps

Some argue that hedging is not important, and good levels of natural hedging can be achieved by building a portfolio of global Equities funds, as the investor will be exposed to a number of different currencies which will help offset some of the currency risk. Furthermore, as returns from Equities tend to be stronger over time, the impact of currency fluctuations will have less bearing on returns achieved. For a Bond investor, the impact of currency movements can be much more severe as returns are more predictable over time. For this reason, the majority of Sterling Bond funds that invest overseas in global Bonds, will hedge returns back to Sterling, thus reducing or eliminating the additional currency risk.

 

The prospects for Sterling

The FAS Investment Committee actively monitors currency movements and the impact these will have on our investment decisions. For example, returns achieved from our unhedged allocations to US Equities were boosted by the weak Pound during 2022. Whilst the Pound has regained some of the lost ground during the first half of this year, we have seen the US Dollar strengthen once again over the last month, and we feel this trend could continue. Should the US Dollar find further strength, this is likely to boost returns from global Equities and reinforces our view that holding a portfolio of global Equities could achieve strong returns as we move towards the end of this year and into 2024.

Currency risk is an area that many investors overlook, although good levels of global diversification can help reduce the need to actively hedge currency exposure in a portfolio.

Speak to one of our experienced planners here if you would like to review your current investment portfolio.

Aug 17
0
A graphic showing a piece of paper with 'Capital Gains' handwritten on the page and wooden squares with letters on scattered across it. The wooden squares spell out 'tax' beneath 'Capital Gains'.

Plan ahead to avoid Capital Gains Tax

By | Tax Planning

None of us want to pay more tax than is absolutely necessary, but when it comes to Capital Gains Tax (CGT), the impact of the tax liability is cushioned to an extent by the fact that CGT only applies when you have made a profit from selling an asset. Furthermore, generous annual CGT allowances that have applied in the past have meant that liabilities to CGT could be at worst minimised or potentially avoided altogether.

 

Reduction in annual exemption

The status quo changed in the November 2022 Budget, when Chancellor Jeremy Hunt announced that the annual CGT exemption – which is the total amount of gain an individual can make on assets in a tax year – would fall from £12,300 per annum to £6,000 from April 2023, and then fall again to just £3,000 from April 2024. These significant reductions to the annual CGT exemption will make it more difficult to manage gains effectively to avoid a potential CGT liability and will undoubtedly increase the revenue generated from CGT receipts. The Office for Budget Responsibility estimate that £17.8bn will be raised from CGT in the 2023/24 tax year. This is the equivalent to £620 per household or 0.7% of national income.

The rate of CGT that an individual pays depends on the asset being sold, and their overall tax position. Higher Rate taxpayers automatically pay CGT at a rate of 28% on gains from residential property, and 20% on the sale of other assets, such as investments. It is possible to pay a lower rate of CGT, at 18% for residential property sales and 10% for the sale of other assets, but only if the gain – when added to an individual’s taxable income in the tax year – remains within the basic rate band.

 

How financial planning can help

We often meet new clients who have held investments for a long period of time, without reviewing or changing their portfolio of investments. Buying investments and retaining them for the long term has been a popular mantra for investors over the years; however, by not reviewing investments regularly and making decisions to use the available allowances, gains can build up over time. As a result, a hefty CGT bill is created on disposal.

With careful planning, individuals can minimise their potential CGT liability. At FAS, as part of our regular financial planning review process, we consider the performance, asset allocation and strategy adopted within an investment portfolio. We also consider the portfolio structure to look to ensure that individual assets do not grow out of shape compared to the rest of the portfolio. This avoids introducing additional investment risk and volatility, as well as helping to avoid a potential CGT problem in the future.

Regular use of the Individual Savings Account (ISA) allowance is an important component of many financial plans. ISAs provide exemption from CGT and Income Tax and by investing in an ISA, investments can grow over time without any CGT considerations. A popular way of using the ISA allowance is through a “Bed and ISA” transaction, when investments held outside of an ISA are sold and the proceeds used to repurchase the investment within the ISA wrapper. The sale could potentially be liable to CGT, though any future disposal from within the ISA would be exempt.

Married couples also enjoy greater flexibility in managing potential gains. Transfers of assets between spouses are not deemed to be a disposal, and therefore it may be possible to transfer investments between spouses to make the best use of the available allowances, and potentially reduce or eliminate a potential CGT liability.

 

Advice to landlords who are selling

Another area where we are called on to provide advice is to individuals who are looking to sell buy to let or holiday properties. Regulatory pressure on landlords has been steadily growing, and with house prices expected to fall modestly over the next 12 to 18 months, some landlords are considering selling up with the aim of diversifying into other assets.

Whilst property investors can deduct their expenses incurred in the sale of the property, and can also claim other allowances to cover capital spent on improvements, many investors will still find themselves with a large CGT liability when selling a property, in particular if it has been held for many years. We can look at options to mitigate this liability, which include tax efficient investments such as Venture Capital Trusts (VCTs), which provide Income Tax relief on the investment made, which can be used to “offset” CGT payable elsewhere. This is a high risk and complex area, and therefore seeking expert advice is critical.

By taking a holistic approach, we can review an individual’s overall financial position, and look to recommend solutions designed to replace lost rental income and achieve greater diversification. In addition, investors often find that liquidity improves when holding investments, as assets are available to access quickly and efficiently when compared to holding bricks and mortar. Finally, tax efficiency can often be improved significantly, given the ability to use ISAs and other tax efficient savings vehicles.

 

Take steps to review your position

The revenue generated by CGT receipts is likely to increase further as the annual CGT exemption halves again next year, and more individuals are subject to CGT on disposal of assets. CGT is only payable when making a gain, but nonetheless, the amount of tax due can be minimised by careful financial planning.

Speak to one of our experienced team here to review your existing portfolio or discuss tax-efficient planning opportunities.