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Person calculating private school fees with calculator

Tax-efficient school fees planning

By | Tax Planning

A private school education is often considered as an investment in a child’s (or grandchild’s) future. With the right planning in place, and by taking advantage of available tax incentives, it is an investment that could well be within your reach.

Parents – and grandparents – always want the best for their children or grandchildren, and for many this means choosing to give them a private school education. The evidence suggests that students from private schools here in the UK outperform national and global academic averages, and that most children who attend private school go on to get a university education.

However, attending a private school is a privilege that doesn’t come cheap, which can often put parents under increased financial pressure. A Lloyds Banking study from a few years ago found that four out of ten private school parents had struggled to meet school fee payment deadlines and six out of ten parents were worried they might not be able to afford fees in the future.

How much does it cost to send a child to a private school?

According to the 2021 Annual Report published by the Independent Schools Council (ISC), the average fee for a child to attend a private day school is currently £15,191 per annum, which works out at £5,064 per school term. Naturally, day school fees vary depending on where the school is located, average term fees are more than £6,000 in London and £3,700 in the Northwest of England. As you would expect, it costs considerably more to pay for a child to attend boarding school, where the ISC estimates the average cost per term stands at £12,000.

Are private school fees going up?

Afraid so. According to the ISC, UK school fees have increased at an annualised rate of 3.9% since 2010, which is well above inflation. However, while COVID-19 has had a considerable impact on every school, and private schools are no exception, the latest ISC report suggests private schools have only increased their fees by an average of 1.1% in the past year – with average day school fees rising by just 0.9%.

But the school fees themselves are really just the beginning when it comes to counting the costs of a child’s education. You will also need to think about the costs of school uniforms, trips, sports activities (and equipment), and music lessons. When all those costs are factored in, parents might be looking at total costs of between £150,000 and £200,000 per child who attends a private day school, and maybe double that for a boarding school.

Investing to pay for school fees – the mathematical journey

Of course, when it comes to paying for school fees, the sooner you put a plan together – and start setting money aside – the better. If you plan ahead, you can give yourself five to ten years, or perhaps even longer, to build up a savings pot that could help to fund school fees when they become due.

One of the most important aspects of creating a plan to pay for school fees is to calculate the costs of private education, including some of those ‘miscellaneous’ costs that it’s easy to forget to include, and the education time horizon (the number of years the child will be attending the school). Once this is known it becomes considerably easier to create a strategy that will take advantage of the power of compounding, and generate enough investment growth from start to finish.

Tax-efficient school fee savings strategies

Given that interest rates on cash savings accounts remain so low, investing within a tax-efficient savings vehicle is likely to be the best starting point when it comes to saving for school fees – especially bearing in mind you will have to withdraw a large sum from the investment pot every year once the school terms start.

With a Stocks & Shares ISA, individuals can invest up to £20,000 each year, or £40,000 per couple. This would be a good way of constructing a diversified portfolio that contains a broad range of assets and is designed to achieve growth over the targeted investment horizon.

Tax-efficient strategies for grandparents

We are also seeing more grandparents talking to us about investing for school fees for their grandchildren, out of their excess after-tax retirement income. This is a good way to give children a great education while also making sure the parents don’t have the financial burden.

Setting up a discretionary trust can be a tax-efficient way for grandparents to pay the cost of private education. Once the trust has been set up, the grandparents can make a series of regular ‘gifts’ into the trust, and this money is invested according to the arrangements specified by the grandparents.

A valuable benefit of setting up a discretionary trust to pay for grandchildren’s school fees is that the gifts made into the trust should be declared outside of the estate for inheritance tax purposes, provided the donor lives for a further seven years after a gift. Also, annual gifts of up to £3,000 per grandparent are deemed instantly exempt from inheritance tax, as long as this annual exemption has not already been used.

Talk to us about school fees planning 

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. When you’re ready, we can help you by giving you a realistic assessment of the costs involved, and to put together a tailored plan to help you reach your savings goals.

If you are interested in discussing school fee arrangements with one of our experienced financial planners at FAS, please get in touch here.

This content is for information purposes only and does not constitute investment or financial advice. Tax rules are subject to change, and tax benefits depend on your personal tax position. 

High rise commercial properties

Is commercial property about to have a new lease of life?

By | Investments

It has been a difficult period for commercial property funds. According to data company Morningstar, the value of the property funds sector has almost halved in value since 2019. The troubles for the sector began immediately after the Brexit vote in 2016, when most property funds suspended dealing due to sustained withdrawal requests in the wake of the decision to leave the EU, and difficulties in accurately valuing property portfolios at the time. This suspension was relatively short lived, and most funds had reopened by the end of 2016.

Fast forward to December 2019, when a small number of funds again suspended trading just a few days before the last General Election. For example, M&G suspended its’ Property Portfolio – which invested in commercial retail parks and offices across the UK – after blaming “unusually high and sustained outflows” caused by Brexit uncertainty and the struggles of the beleaguered UK retail sector.

Next up came COVID of course, with the uncertainty created by the pandemic leading to a suspension of all property funds, as material uncertainty over the accuracy of the value of property portfolios, and lack of liquidity in some funds, forced a longer suspension. Whilst the largest players in the sector resumed dealing again in October 2020, several funds, including funds from AEGON and Aviva, have announced that they will be wound down and will return money to investors, although investors may have to wait more than a year to get their money back. So, what has caused so much damage to commercial property funds? The answer is in the fact that property behaves differently to other types of investment asset.

 

The reasons why commercial property funds are different

First, portfolios of ‘bricks and mortar’ properties are far less ‘liquid’ than other investments. If you own a large portion of a commercial property fund and you want to sell your investment, It is likely that the fund manager will have to sell some buildings to have enough money to pay back your investment. In periods of market volatility, this can cause huge problems. This is why a handful of commercial property fund managers were so quick to ‘shutter’ their funds back in December 2019, because they feared the sudden rush of investors looking for their money back would make them forced sellers of their best assets.

Another important reason behind the closure of several commercial property funds is that the assets held within them are valued significantly lower than they were before the pandemic. You don’t have to be an investment genius to work out that changes to the way people live and work – especially with more flexible options for people who can work from home – mean that demand for office buildings could be considerably lower in future.

Whether you are talking about offices, warehouses, shops or industrial locations, the value of the underlying assets (the buildings) is dependent on the demand for that type of property. This is determined by economic growth and the economic viability of the businesses who might want to use those buildings. Other factors, such as the quality and location of the building, also help to determine the yield (rental value) that the building can achieve.

At the same time, commercial property is a broad and varied sector. While shops and traditional office buildings were hit hardest by the lockdown restrictions, there was vastly increased demand for industrial buildings and warehouses linked to e-commerce and distribution. It is therefore highly likely that those remaining open-ended funds will gradually adapt to the new normal and take advantage of the different types of properties that are increasingly in demand.

 

Is the worst over for UK property?

Just because some commercial property funds have closed, it doesn’t mean that the sector itself is about to collapse. In fact, most funds in the sector are in positive territory for the year so far, and the current economic conditions could leave them well-positioned to benefit from the theme of inflation that is dominating investor sentiment. Real estate in all its forms tends to do well during periods of inflation. This is because as the economy expands and the demand for goods and services increases, rents tend to grow. In addition, many leases on commercial property are linked to inflation, which ensures the owners of the buildings receive a higher income should the cost of living rise.

 

Regulation, Regulation, Regulation

The suspensions within the property sector caught the attention of the regulator, the Financial Conduct Authority (FCA), who launched a consultation in August 2020 to consider proposals to try and avoid a repeat of the suspensions that were seen in the property sector after the start of the pandemic. The FCA have proposed that investors would need to give notice of withdrawal from funds – of between 90 and 180 days – so that property fund managers are aware of withdrawal requests and could manage their property portfolio more effectively, to ensure liquidity is sufficiently available to meet the expected withdrawal demands.

The consultation period has now ended, and an announcement is due later in the year. Amongst the current issues that need to be resolved include the ability to continue to hold property funds in an ISA (as the withdrawal notice would be incompatible with existing ISA rules) and the difficulties platforms and providers would have in managing withdrawal requests.

We await the outcome of the consultation to see the impact of any new rules introduced. Nevertheless, we feel it is clear that commercial property remains a varied and diverse asset class, that could benefit from the prevailing economic conditions and opportunities the new way of working could present.

 

If you are interested in discussing your investments with one of our experienced financial planners at FAS, please get in touch here.

 

This content is for information purposes only. It does not constitute investment advice or financial advice.

wooden block letters spelling out fixed income with a pile of coins either side

Why fixed income assets still deserve a place in portfolios

By | Investments

Bonds have a reputation for being boring. But sometimes boring is just what’s needed, especially in a well-diversified investment portfolio.

When most people consider an investment strategy, they are naturally attracted to those markets and sectors that are likely to produce the best performance. Generally, over time, growth in the value of company shares would outperform other asset classes, and it is, therefore, this asset class that tends to get the most attention. But higher returns often come at a cost, in terms of additional risk and volatility.

To dampen the overall risk of an investment portfolio, to provide a solution for those who are not necessarily looking for the highest returns, or to satisfy investors who want to limit the level of risk they are taking, introducing bonds to a portfolio is often the answer. Yes, they may have a boring reputation, but they are a key component that really cannot be overlooked.

 

So, what is fixed income investing?

Fixed income is an investment approach that prizes capital preservation and a steady stream of income above all other considerations. Within the world of fixed income, you can invest in government bonds (bonds issued by governments, such as UK Gilts or US Treasury Bonds) or corporate bonds (bonds issued by companies), along with other investments that pay a fixed income, such as certificates of deposit and money market funds.

 

How do bonds work?

The easiest way to think of bonds is to consider them as an IOU between a borrower (so, a government or company) and the lender (the investor). As an example, let’s say the borrower wants to borrow £10,000. They can issue a bond for that amount and agree to pay the lender interest at 3% per year for ten years. The investor knows that they will earn £300 a year in interest, and get their original £10,000 back in ten years’ time. If the borrower does not pay the loan back, or fails to make any of the interest payments, it is considered to be ‘in default’. Of course, some borrowers are a bigger credit risk than others, which is why bond issuers all have a credit rating to demonstrate their credit worthiness. Generally speaking, the lower the borrower’s credit rating the higher the rate of interest they will have to pay to investors.

 

Still with us? Good…

The most important point to remember is that fixed income assets such as bonds behave very differently to other types of assets, such as equities. This makes them a valuable asset to hold within an investment portfolio, for several reasons.

First, fixed income assets are generally considered to be lower risk when compared to equities. That’s because a bond is a promise from the borrower to repay the interest and the principal over time. Defaults within the fixed income world are relatively uncommon events, in particular for investment grade issues. In addition, a bond holder usually ranks ahead of ordinary shareholders in the event of a company falling into liquidation, meaning that they are further up the queue to receive a payment from the sale of assets held by the company.

Second, fixed income assets behave differently to other types of assets. For example, they are generally less sensitive to market risks, such as economic downturns and geopolitical events. This makes them useful to hold within an investment portfolio, because holding fixed income assets means you can potentially offset losses when stock markets are falling, and your equity investments are not doing so well. Instead, bond prices usually rise or fall in value in anticipation of changes in interest rates and inflation.

Third, as they are less volatile than equities investments, they are an ideal anchor for a portfolio, to reduce the overall portfolio risk. Investors who are closer to retirement usually aim to switch more of their investment portfolios or pension into fixed income assets, because this is a better way to preserve capital than staying invested in more volatile equities.

And fourth, fixed income investments can be relied upon to deliver a steady – and known – stream of income. Again, this is particularly valuable for those who are entering retirement or are already retired, and want to prioritise getting a reliable, regular return from their investments over more risky growth strategies. However, investors should always be careful that inflation does not cause their fixed income investments to lose value over time.

 

Those are the benefits, but what about the risks?

Of course, all investments come with an element of risk, and fixed income is no exception. There are three key risks to be aware of. As we have already mentioned, interest rate risk is worth keeping an eye on. We have been living in a low interest rate environment for over a decade now – which has been very positive for bond investors. But when interest rates rise, bond prices tend to perform less well. Interest rate movements are the major cause of price volatility in bond markets.

The second key risk to bear in mind is inflation risk. In periods when inflation (the rate at which the price of things goes up or down) is on the rise, this makes the fixed amount of income paid by bonds and other fixed income assets worth less than it was. If the rate of inflation is higher than the rate of income paid out, bonds become much less attractive from an investment perspective.

The third most important risk for fixed income investors is default risk, also known as credit risk. This is the risk that the issuer will not repay the principal at the maturity date and therefore default on its debt obligation.

Should fixed income investors be worried about inflation?

Inflation has become a hot topic this year, as prices for goods and services have been pushed up following the coronavirus pandemic. This has caused some people to question the long-term value of fixed income assets, which is understandable. However, this doesn’t mean fixed income assets have become poor value overnight. They should still be considered as a key element within an investment portfolio, especially if you’re looking for income, lower volatility, or much-needed diversification that spreads the risk.

They may not be the raciest of investments, but they are a sensible way to take some of the uncertainty and volatility out of investing and should be considered as a key component in most diversified strategies.

If you are interested in discussing the above with one of our experienced financial planners at FAS, please get in touch here.

This content is for information purposes only. It does not constitute investment advice or financial advice.

Granddaughter on shoulders of grandfather walking along coastline with Grandma alongside

Using pensions to invest for your grandchildren

By | Pensions

A few weeks ago, one of our articles highlighted how much young people are finding it difficult to set aside money for retirement. While pensions have always been a ‘hard sell’ to those who struggle to imagine themselves getting older and retiring, we recognise that flat wages, job uncertainty, high rents and the increased cost of higher education are all contributing factors that understandably leave younger people with less savings to set aside. And we also realise that a lack of pension could potentially have a disastrous effect on their long-term wealth as they get older.

This struck a chord with our readers, particularly those who have sizeable retirement pots themselves having paid into their own pensions over their lifetime, and perhaps benefitted from generous final salary schemes, as well as owning their own properties. So, it was encouraging to hear that so many of our clients are interested in helping their grandchildren with their finances and are considering setting up a pension on their behalf.

 

Setting up a pension for a grandchild

Pensions are considered individual investments and as such come with certain rules around how much can be invested and when. Most people are unaware of how the pension rules apply to family members, but in essence, a pension can be opened on a child’s behalf by their parent or legal guardian, and grandparents can then make lump sum contributions into the pension, quickly and easily as a “third party” contribution.

At present, the maximum amount you can invest into a child’s pension is £3,600, per tax year. But as qualifying contributions made to pensions are eligible for 20% basic rate tax relief, this means that the net contribution only needs to be £2,880, and the UK Government will top-up the rest. If you have several grandchildren, you can invest £2,880 annually for each of them. From a grandparent’s perspective, gifts could fall within the annual gift exemption of £3,000 or possibly be classed as gifts out of surplus income. Otherwise, anything above this level could be a Potentially Exempt Transfer, and therefore some thought would need to be given to the potential Inheritance Tax consequences of making contributions to a number of grandchildren in any one tax year.

As a reminder, investments held in a pension grow free from UK income tax and capital gains tax, making them a tax-efficient choice for longer-term saving.

 

The benefits of starting early

Once the pension contributions have been made, that money can then be invested to help it grow. Investing over several decades means it makes sense to invest in higher-risk/higher reward investments that can grow over time as well as riding out those periods of stock market volatility.

Also, investing over long periods ensures the growth is continually reinvested, meaning that the pension will benefit from the “magic” of compound interest. For example, if you started paying into a grandchild’s pension from the year they were born and for every year until they turned 18, their pension pot could have reached the £1 million mark by the time they reach 65.

 

Different pension options

If you are considering using a pension to invest for your grandchildren, there are two different pension options to choose from: a stakeholder pension and a personal pension. Stakeholder pensions allow you to pay low minimum contributions (from £20) up to the maximum annual amount, and you can usually pay either via lump sums or regular payments. However, most stakeholder pensions offer limited choice when it comes to the funds you can invest in.

With a personal pension, you get to choose from a wider range of investments but could pay more in terms of fund charges and annual fees.

 

Worth remembering

As with any pension, one of the biggest drawbacks is that the money invested cannot be accessed until the grandchild reaches the age of 55 at the earliest, and this is likely to rise to 57 or 58 depending on the timing of increases in the State Pension age. There is also a good chance that the pension rules will have changed by the time your grandchildren reach retirement. However, to give you a real-life example, retired long-standing clients of ours who are now enjoying retirement, started investing in pensions for their six grandchildren some 20 years ago. Their eldest grandchild has just graduated from university with her own pension fund worth in the region of £150,000. She thanked her grandparents for their foresight and generosity and could well retire at age 60 with a million pounds pension pot, without ever paying a penny into it herself!

If you are planning on leaving your grandchildren with enough money to use as a deposit to buy their first home, then you might want to consider alternative investment arrangements, such as a Junior ISA, where the money can be accessed when the grandchild turns 18. For grandchildren over the age of 18, a Lifetime ISA, where the money can be used for retirement savings, or as a deposit for their first home, could be an appropriate option to consider.

 

If you are interested in discussing pension arrangements with one of our experienced financial planners at FAS, please get in touch here.

 

This content is for information purposes only. It does not constitute investment advice or financial advice.

Digital globe

Why it’s essential to have a globally diversified portfolio

By | Investments

When it comes to investing, British isn’t always best. To get the most consistent portfolio returns, it’s important to have a spread of investments across multiple regions and locations.

As independent financial planners, one of the tasks we are often asked to perform for new clients is to review their existing investment portfolios and to recommend any necessary changes. In almost all cases, a common theme is for portfolios to have a significant bias towards UK investments, rather than holding a more well-diversified spread of global investments. In recent years, this would often lead to underperformance.

 

Why is diversification so important?

As most investors are aware, diversification is one of the most important principles of modern investing. And it’s another name for making sure you don’t have all your eggs in one basket. And from a consumer’s point of view, diversification makes sense. After all, most of us don’t only buy UK products at the expense of products from other countries, so why would we limit our investment portfolios to just UK companies?

Even so, most investors still tend to gravitate towards investments in UK companies, or in funds that are weighted towards the UK. While it’s understandable to prefer to invest in the location you know best, no one can know which markets will do well from year to year. By choosing to hold a globally diversified portfolio, investors are giving themselves the best possible chance to capture investment returns wherever they occur, and gain exposure to some of the world’s largest companies.

 

The need for geographical diversification

A diversified investment strategy is one that aims to ensure your portfolio has the right balance between risk and return. And right now, global diversification is of particular importance for investors.

You don’t need us to tell you that the COVID-19 pandemic has been responsible for the largest and most abrupt shock to global growth in modern times – and the deepest global recession on record. But the timing and the sweeping nature of the pandemic means it has had an uneven – and at times unpredictable – impact on various countries and regions of the world.

While some areas were affected earlier, particularly China and the Far East, and have since by and large recovered, other areas, most notably the US, Europe, and the UK, are still dealing with the crisis. Some countries have emerged relatively unscathed, while others thought they had seen the worst of the pandemic pass, only to experience second (and third) waves. While countries continue to roll out their own vaccination programmes, there continues to be plenty of uncertainty, particularly around the potential for virus variants to continue to spread throughout the world. This uncertainty means volatility will likely remain high as the global economy and markets throughout the world continue to recover from the impact of the pandemic at their own pace.

So, from an investment perspective, the best way to deal with this uncertainty is to spread investments across different regions and within different asset classes. This approach could help to reduce the impact of volatility in specific regions or markets and to help to diversify returns across all areas.

Looking at historic returns over the last decade, it is clear that no single investment region has consistently outperformed others, although research reveals that a diversified portfolio, with allocations to all geographic locations, demonstrates less portfolio volatility than just investing in one or a handful of asset classes or markets.

 

Size is everything?

Within the UK, investors can hold stakes in household names such as Unilever, AstraZeneca and Royal Dutch Shell, which are familiar to UK investors. However, it is important to remember these companies are tiny compared to the market capitalisation of the largest stocks listed in the US, China and Europe. By way of example, in March 2021, the capitalisation of Apple, the world’s largest company was $2,051bn, closely followed by Microsoft ($1,778bn) and Amazon ($1,558bn). China’s largest companies, Tencent and Alibaba, also rank in the top 10 companies by capitalisation. In stark contrast, the UK’s largest holding by capitalisation was Unilever at just $147bn, leaving it ranking 85th in the world in terms of size.

What is crucial is that those largest global mega-cap stocks, such as Apple and Amazon, have performed well over the course of the pandemic, and their stock price performance has made a significant contribution to the overall recovery seen in global markets since last March. By not holding a suitably diversified global portfolio, and focusing on UK companies, you are limiting your exposure to these potentially strong performing global giants.

 

Global diversification is key to long-term success

As the past 18 months have shown, life is unpredictable – and so are investment markets. Uncertainties are bound to continue, and it is very difficult to predict how events will play out. This makes it even more important to have a globally diversified investment portfolio that balances out those risks. And, while it’s good to back British businesses and invest in ways that help to support the UK economy, it’s also equally important to make sure your investment portfolio is positioned as well as it can be to deal with the ups and downs or markets, without putting all your eggs in one basket.

 

If you are interested in discussing your investments with one of our experienced financial planners at FAS, please get in touch here.

 

This content is for information purposes only. It does not constitute investment advice or financial advice.

Woman speaking with her financial adviser

The four questions to ask your financial adviser

By | Financial Planning

Since the COVID-19 pandemic, we have noticed an increase in the number of people coming to us for financial advice. We see this as evidence of the real need for people to seek out professional advice to help with their financial concerns and aspirations. So, we wanted to share some of the questions that should be asked when anyone chooses to meet with a financial adviser.

 

1. What are your professional qualifications?

It always makes good sense to find out what professional qualifications a financial adviser has attained. When it comes to finding the right person, it is important to start with a feeling of trust. You want to feel reassured that they are professionally competent and that they have the necessary specialist knowledge, experience, and technical expertise to be able to advise you properly. Of course, a professionally qualified adviser will be pleased you asked the question and will be more than happy to disclose their credentials as they will have worked very hard to pass their exams!

One of the challenges with the UK financial services sector is that there are a number of different bodies that assist in the attainment of industry professional qualifications entitling someone to be called a ‘Financial Adviser’. These include the Chartered Insurance Institute, the Personal Finance Society, the Institute of Financial Planning, the CFA Society of the UK, and the Chartered Institute for Securities and Investment. All Independent Financial Advisers in the UK are regulated by the Financial Conduct Authority (FCA) and can be found on the FCA register.

At FAS, we are part of a relatively small group of independent financial advice firms in the UK to have been awarded the ‘Chartered Status’ from the Chartered Insurance Institute. This is considered the ‘gold standard’, in terms of commitment to professional excellence and integrity. The Chartered Insurance Institute only awards Chartered Status to firms with the highest level of advanced qualification, an overall commitment to continued professional development, and adherence to an industry-standard Code of Ethics.

 

2. What services do you provide?

People decide to talk to a professional financial adviser for any number of different reasons. Perhaps they have experienced a sudden change in their personal circumstances or decided that the time is right to start planning for their future.

At FAS, we call ourselves financial planners because we believe in offering our clients a comprehensive service that takes everything into account. While some financial advisers can be relied upon to recommend a particular product or service, we believe financial planning should be holistic and more about the actual advice than simply selling financial products.

Our team will talk to you and take whatever time is needed to help determine both your shorter and longer-term financial aims and objectives. This means that as well as covering more immediate issues, such as tax-efficient investments and savings, mortgages and protection and family arrangements, we will also cover a wider variety of topics such as your retirement goals, inheritance tax and estate planning, and any potential later life care needs. For example, tax planning is one of our specialist areas, and because this is such a potentially complex area, it is important that a client receives comprehensive professional advice tailored to their personal situation, rather than receiving generic advice.

Our aim is to work with you to build a well-considered, robust financial plan that can give you peace of mind and allow you to work towards the future you want for yourself and your family. We would always say that a financial plan is better than just selling a product, but this is an important discussion to have with any financial adviser you are considering using.

 

3. How do you get paid for providing financial advice?

This is an important question to ask anyone who provides financial advice, and it is an answer that most advisers will already have prepared in advance. We believe that the best financial advice pays for itself in the long run and that the best available advice is independent in nature.

As the name suggests, an independent financial adviser will offer you impartial, objective advice on financial products and services. This means they will carry out research across the whole of a particular market to find the right solution to suit you personally. The alternative is a ‘restricted’ financial adviser, who can only recommend products from a limited selection or product range, not from the entire marketplace. Restricted advisers are usually incentivised to recommend products or services from within the available product range.

We have noticed an increasing number of clients who have come to us because they have been disappointed by the performance of managed portfolio products recommended to them by restricted advisers. This is because in most instances the adviser can only recommend the managed portfolio service from the investment company they work for. However, if you receive an investment recommendation from an independent financial adviser or planner, they are able to research and choose the associated product from the whole of the market, not just one provider.

 

4. What experience do you have advising people in my situation?

One of the most common questions we hear from new potential clients is whether we have experience advising clients in a similar situation to their own. More often than not, the response is a resounding ‘yes’. We have been providing independent financial advice since 1991 so for 30 years we have been able to provide our clients an exceptional level of personal service, tantamount to what you should expect to receive from any professional practice.

We often receive enquiries from potential clients who have had a less than welcoming experience from larger financial advice firms, which has left them feeling neglected while ‘bigger’ clients are prioritised. No one wants to be made to feel like a ‘little fish in a huge pond’, which is why we have continued to expand the business to make sure that both new and existing clients remain well looked after and receive the attention they deserve.

 

Summary

People often make the decision to talk to a financial adviser because they have a specific issue in mind, usually one that demands immediate attention. But looking beyond that, you should look to forge a relationship with a financial professional who understands you, your personal needs, and your lifestyle goals – someone who will be able to use their knowledge and experience to turn this into a well-defined financial plan.

Above all, it is worth thinking about the relationship you have with your financial adviser. It should be capable of lasting for many years, you should feel comfortable with that person and expect to continue to benefit from their advice well into the future.

 

If you are interested in discussing your financial plan or investment strategy with one of our experienced financial planners at FAS, please get in touch here.

 

This content is for information purposes only. It does not constitute investment advice or financial advice.

 

Senior couple receiving independent financial advice

The advantages of independent financial advice

By | Financial Planning

With the coronavirus forcing many of us to re-evaluate our lives, and to prioritise what’s most important, thousands of people have realised the advantages of getting professional financial advice to help them reach their goals and protect their family.

The pandemic has certainly helped to focus people’s minds on things that they may have been putting off for a long time. For many, reviewing their financial situation has been a necessity, as many individuals have been put on furlough, lost their job, or chosen to retire early.

So, it is no surprise that since COVID-19 interrupted everyone’s lives more than a year ago, there’s been a sharp increase in the number of people seeking financial advice. Here at FAS, we have noticed a significant number of new clients talking to us about protection products such as income protection and critical illness cover. We have also seen a rise in demand for retirement and estate planning advice, as more people have decided that they need to make decisions now about their future.

However, the rise in the number of people seeking financial advice has been met by an expanding range of options available to individuals. In recent years, a number of large investment companies have widened the services they offer clients to include financial advice. However, it is important to recognise that there is a huge difference between financial advice designed to sell you products, and a more comprehensive financial planning service designed to look after your needs.

The meaning of ‘restricted advice’

If your high street bank or big-name investment provider tells you they now offer financial advice, you can be certain that the advice they give is of the ‘restricted’ variety. Being ‘restricted’ means an adviser can only recommend products from a limited selection or product range (usually the bank or investment provider’s own services), not from the whole of the market.

Using a restricted financial adviser doesn’t necessarily mean you’ll be getting ‘bad’ advice. All financial advisers must have a similar minimum level of qualifications and meet the same standards. It just means that the choices available to you may limited, and the advice they give you might not be in your best interests. They might only be able to suggest a pension from one pension provider, for example. Your options could be drastically reduced, because they won’t have access to the widest choice of products available. More importantly, after they’ve sold you the product, their job is done so you run the risk of experiencing a very shallow, transactional approach, when you might well be in need of more comprehensive financial planning.

The meaning of ‘independent advice’

Independent financial advisers, on the other hand, are so much more than salespeople. We believe financial planning is more important than just recommending where you should put your money. It’s our job to help you plan your goals in life, consider your personal circumstances and help you decide on the best course of action.

In the case of pension planning, an independent adviser will research every relevant pension available within the UK market to find the one that they believe is best suited to your needs. They will then make a recommendation and provide you with the reasons that justify their decision.

In fact, recommending products is just a small part of what we do. We tailor our advice to suit your needs, and we will never recommend a product that is not suitable for you. We will always provide you with clear, comprehensive reasons behind every recommendation we make.

Creating your bespoke financial plan and carrying out regular reviews

There are other advantages to be gained from talking to an independent financial adviser over a restricted financial adviser tied to a larger organisation. For example, we can help you to set clear goals and create a financial plan that covers all eventualities. And, whether you like to keep on top of your investments and finances regularly or just every now and then, we can make sure that your finances stay on track, and alert you to important changes of rules and regulations that may come with tax implications or that you may be able to take advantage of. With us, you will not end up feeling forgotten after you have signed on the dotted line.

Tax planning and tax efficiency

One area in which independent financial advisers excel over the new breed of restricted financial advisers comes with navigating the complexities of the UK tax system. Whereas financial advisers who work for investment companies or banks may be well-versed in the benefits of their own company’s products and services, they may not be so well-equipped with helping you with tax and estate planning. We can provide a comprehensive service that takes tax planning into account, and potentially reduces your tax obligations in the process.

Summary

Good independent financial advice can make a real difference to your quality of life, at any age. At a time when many people are thinking more deeply about their personal finances, as well as their goals and future plans, talking to an independent financial adviser who is capable of giving impartial, expert advice is still the most cost-effective way to help you get there. If you receive advice from an independent financial adviser at FAS, you can certainly feel confident they are working solely for the benefit of you, and no one else.

If you are interested in having a discussion with one of our experienced financial planners, please get in touch here.

 

This content is for information purposes only. It does not constitute investment advice or financial advice.

Multi-generational family walking through woods

Using life assurance to eliminate inheritance tax on gifts

By | Tax Planning

If you are thinking about gifting a large sum of money to loved ones during your lifetime, it is important to realise that the gifts you make could still carry an inheritance tax liability after your death. So, you might want to consider arranging a life assurance policy that will eliminate the risk of leaving behind an unexpected inheritance tax bill.

When Chancellor of the Exchequer Rishi Sunak announced in his March Budget that inheritance tax thresholds would be frozen until 2026, one of the consequences was that inheritance tax and estate planning returned to the top of the agenda for lots of people. We have seen an increase in the number of clients talking to us about the potential inheritance tax liability that could be due on the value of their estate, and we have been pleased to be able to discuss the different estate planning strategies with them – as there are lots of different options available during a person’s lifetime.

 

What are the current inheritance tax thresholds?

As a reminder, everyone in the UK aged 18 or over has a personal inheritance tax allowance known as the nil-rate band. This nil-rate band currently stands at £325,000. If the value of a person’s estate (money, property and possessions) when they die is below this amount, then there is no inheritance tax to pay. However, if their estate is valued above £325,000, the beneficiaries of the estate will be required to pay inheritance tax at a rate of 40% on the amount over the threshold.

It is also worth noting that if you give your home away to your children or grandchildren in your Will, your estate can also claim the residence nil-rate band, which is another inheritance tax allowance that can increase the value of your estate excluded from inheritance tax to £500,000. However, this allowance is only available provided you leave the home to your direct descendants, and the allowance is reduced if the total value of the estate is more than £2 million.

 

What are the current rules on gifting?

Gifting money to your family during your lifetime is one of the most popular ways of attempting to reduce an inheritance tax liability. However, in order for a gift to become completely free of an inheritance tax liability, the person who gave the gift must survive for at least seven years from the date when the gift was made. Lifetime gifts of this type are known as potentially exempt transfers. Also known as the ‘seven-year rule’, the inheritance tax bill due on a potentially exempt transfer reduces on a sliding scale for each full year the person who made the gift survives (also commonly referred to as ‘taper relief’); however, no taper relief is available in the first three years after making a gift.

How does this work in practice? Let’s use an example. Frederick gives £200,000 to his daughter. It is a potential exempt transfer, so should Frederick die within the three years of having made the gift, Frederick’s daughter would be required to pay inheritance tax at 40% on the value of the gift (£80,000). In year four, the inheritance tax rate drops to 32% (a bill of £64,000), it falls to 24% in year five (a bill of £48,000), 16% (£32,000) in year six, and 8% (£16,000) in the seventh year. After the full seven years have passed, Frederick’s daughter will have no inheritance tax bill to pay, but as those amounts demonstrate, the inheritance tax due on the gift can prove very costly depending on Frederick’s health during those seven years.

Fortunately, there is a way to remove the risk involved with making large gifts, and to make sure that the recipient of the gift, like Frederick’s daughter, is not left facing a significant tax bill.

 

Using a life assurance policy to plan ahead for an inheritance tax bill

One of the most cost-effective ways of avoiding an inheritance tax bill is to set up a life assurance policy that pays out if you were to die, with a sum insured that covers the potential tax liability. In cases where a large gift has been made, or could be made in the future, a ‘gift inter vivos’ policy can be created. Roughly translated, inter vivos means ‘between the living’, and it can be used to pay a lump sum paid in the event of a person’s death during a specific timeframe.

Most users of a gift inter vivos policy arrange for the policy to have a fixed seven-year term, with the amount of cover it provides reducing to match the reduced inheritance tax liability as taper relief starts to take effect. Although the cover reduces, the premium you can expect to pay for this type of assurance policy typically remains fixed for the whole seven years.

 

Considering the nil-rate band

However, before choosing to set up a gift inter vivos policy, it is important to determine whether the available taper relief will apply in your own particular circumstances. This is because any lifetime gifts made will first be allocated against your nil-rate band when the gift is made. This means that the initial impact of any gift you make, as well as any subsequent gifts, is that your nil-rate band will itself be reduced during those seven years, potentially increasing the inheritance tax liability due on the value of the estate during this time. It is also worth noting that taper relief is applied to the rate of inheritance tax, not to the value of the gift. So, if a gift falls within the nil-rate band, the rate of tax is zero and therefore taper relief has no effect.


Writing the assurance policy into trust

When we discuss setting up a gift inter vivos policy, we usually recommend that the policy itself is placed into trust. This ensures that the proceeds of a claim made on the policy are not included in the policyholder’s estate, which would otherwise increase the inheritance tax liability. Arranging the policy into trust also means the policy does not get caught up in the probate process, meaning beneficiaries should be able to get the policy proceeds quickly to settle the inheritance tax bill.

 

Summary

One of the most attractive things about gifting money to loved ones – perhaps to help with a house deposit or university fees – is that you’re able to play a part in their future now, rather than waiting till you die. But the rules around gifting, especially calculating the liability on lifetime gifts, can be a headache. Using a life assurance policy designed to cover the costs of that liability can really make a difference, and is a very effective way of removing the uncertainty that comes with making large gifts.

With more families likely to be caught in the inheritance tax trap – thanks to the frozen inheritance tax allowances – we expect such policies will prove increasingly popular with our clients.

 

If you are interested in discussing estate planning arrangements or your tax situation with one of our experienced financial planners at FAS, please get in touch here.

 

This content is for information purposes only. It does not constitute investment advice or financial advice.

Senior man sitting at table with laptop planning finances

The advantages and disadvantages of lifestyle pension funds

By | Pensions

Within many pension schemes, default investment strategies now employ a process known as lifestyling, which claims to do the hard work of managing your pension assets for you as you get closer to retirement. However, adopting such lifestyle approach may well not be suitable for everyone.

 

What is a lifestyle pension strategy?

Lifestyle strategies are designed to effectively ‘lock in’ the investment growth built up in your retirement pot as you get closer to your designated retirement date. A lifestyle pension will start by investing a larger proportion of your retirement pot in equities, which offer the best potential for growth, with higher levels of risk. As you get older, and closer to your retirement date (typically 5-10 years before retirement), your pension will automatically start switching into lower-risk holdings, such as cash and bonds. The aim is that when you retire, and want to begin drawing your retirement benefits, you have a pot that is invested largely in a mix of cash and bonds and is less exposed to stock market volatility.

Pension providers like to talk about lifestyle strategies as offering a ‘glide path’, and there is a very good reason for doing it this way. After all, the last thing anyone just days from retirement would want to happen is to learn that stock markets have crashed, and a huge amount of their pension has suddenly been wiped out. A lifestyle pension takes away this risk because the pension has already been moving away from higher-risk assets into more low-risk investments over a number of years.

 

What are some of the advantages/disadvantages?

In theory, lifestyle pension strategies are a good idea, and certainly provide more certainty to individuals who do not wish to make investment decisions within their pension funds. That being said, lifestyle pension strategies still have a few drawbacks that anyone with a company pension would do well to be aware of.

 

Times have changed

Perhaps the biggest irony with lifestyle pensions is that they do not quite fit with the lives of today’s retirees. Retirement needs have changed considerably in the last few years. Some people are now choosing to retire later, either because they need to keep working or they don’t want to retire just yet. Others may want to reduce hours prior to retirement and begin taking pension income a little earlier.

Also, lifestyle pensions were introduced back when it was compulsory for UK retirees to purchase an annuity in exchange for a guaranteed pension income for the rest of their life. But since compulsory annuities were scrapped back in 2015, it’s no longer a requirement to have a large pot of cash ready to buy an annuity when you hit retirement age. In recent years, using income drawdown has become a more effective way of receiving an income during retirement, as this avoids locking into the low annuity rates that we have currently.

 

Lifestyle strategies may not deliver the retirement flexibility you need

Another important factor associated with lifestyle pensions is their relative rigidity. When you start your lifestyle pension, you are expected to name your retirement date. Lifestyle pensions will focus on ‘growth assets’ in your early and middle years and, based on your ‘glide path’, will phase-in less volatile investments as your retirement date approaches. However, the timing of this shift from risky to less risky assets can make a huge difference to the overall size of the pension pot.

If your pension starts switching someone out of equities on your 45th birthday, because you told your company you planned to retire at 55, you could be missing out on a decade or more of investment growth, seriously limiting the final value of your retirement pot.

 

Switching from equities to bonds may not be the best investment strategy

Although owners of lifestyle pensions have done very well in investment terms over the last decade, this has been partly due to the strong performance of bond markets. This may not necessarily be the case over the next decade. The problem with a lifestyle pension is that it will make the switch based on the retirement date, rather than the conditions within investment markets at the time. At a time when everyone in retirement wants their money to go further, giving up ten years of investment growth may not be the right decision.

 

One size does not fit all

Lifestyle pensions became the default choice for company pensions because they offered a very straightforward method of pension planning – build up a pension pot and then purchase an annuity once you retire. But once you take annuities out of the equation, and make the retirement date a moving target, the simplicity of the lifestyle approach becomes less of a solution and much more of a problem. Based on the current economic climate and modern retirement patterns, there is an even stronger case to be made for keeping pension pots invested in growth assets well into retirement, choosing instead to take income via drawdown.

 

Have a conversation about your pension

If you have a company pension invested in a lifestyle pension strategy, it might be a good idea to discuss the details with us. We can ‘look under the bonnet’ of your current pension, and can help to determine whether it is set up to support your retirement plans. You only get to retire once, and an overly cautious investment strategy can be just as dangerous as an overly risky one. So, let us help make sure your lifestyle pension is really capable of delivering the lifestyle you want.

 

If you are interested in discussing pension arrangements with one of our experienced financial planners at FAS, please get in touch here.

 

This content is for information purposes only. It does not constitute investment advice or financial advice. 

Young woman at table with laptop and documents reviewing her finances

The two big benefits of starting a pension early

By | Pensions

If you have people in your life who don’t feel it’s worth putting money into a pension, you might show this article to them to help change their minds. It could prove an invaluable piece of advice in years to come.

 

Back in February, research by Royal London revealed that within the millennial age range (18-34-year-olds) two in five respondents had stopped or reduced their pension contributions following the coronavirus pandemic. A similar survey published by unbiased.co.uk also reported 24 per cent of under-35s said they had no pension savings at all. That’s a worrying trend, as it means that many young people are avoiding paying into pensions precisely at the time when making contributions can make all the difference to their eventual retirement pot.

 

Why are young people out of the pensions loop?

It had been expected that the UK government’s workplace auto-enrolment scheme would make sure that the majority of young people would start paying into a pension of sorts. But after a year when many young people’s jobs and lives have faced upheaval because of the coronavirus pandemic, it seems that a large proportion are outside of this safety net. Perhaps the rise in ‘gig economy’ jobs, as well as self-employment, is behind the lack of workplace pension take-up among the millennial age range.

Of course, pensions are always a tough sell with 18-34 year-olds anyway. Encouraging people to start up their own self-invested personal pension may seem a low priority when money is tight and they are still paying off student debts, have bills to pay, and want to spend any surplus money enjoying themselves.

But there’s no getting around the fact that the very best time to start a pension is when you are young. And there are two main reasons why: compound interest and tax reliefs.

 

Compound interest

There’s a quote that’s often attributed to Albert Einstein that “Compound interest is the eighth wonder of the world”. Now, Einstein may not have actually said this, but whoever did say it might have been onto something.

Compound interest simply means that once you start paying into your pension, you don’t just earn interest on your savings, but the interest starts earning interest too. Think about compound interest like a snowball. The longer the snowball rolls downhill, the bigger it gets. This means that even small pension contributions could have a meaningful impact over time.

 

The effect of compound interest on your pension pot

Consider two pension savers, Susan and Phil. Susan started putting money into her pension when she was just 20, investing £50 a month. Phil waited until he was 40, but began investing £100 a month.

Assuming an average annual interest rate of 4% (and assuming both keep paying in the same amount every year), by the time Phil reaches 60, his pension pot will have grown to just over £36,500. But by the time Susan reaches the same age, her pension will be worth almost £60,000. Even though both Susan and Phil will have invested the same amount over time, Susan will end up with almost twice as much, thanks to the power of compound interest. Eighth wonder indeed!

 

Taking advantage of tax relief

While compound growth is one of the biggest benefits of starting a pension as early as possible, another valuable incentive is tax relief on pension contributions. When you make a payment into a pension, the government makes an additional contribution that effectively repays your tax at the rate you usually pay. In other words, the government will actually pay money into your pension – that’s how important it is to have an income during retirement!

 

The effect of pension tax relief over time

Returning to our previous example – with Susan benefiting from a much larger pension pot than Phil – the advantages are even greater when you factor in tax relief on pension payments.

Each time Susan pays £50 into her pension, her pension pot increases by £62.50. As a basic rate taxpayer, Susan pays tax at 20%, and her pension contributions are paid into her pension as if they have never been taxed. So, after taking into account the available tax relief on Susan’s pension contributions, she is looked at a retirement pot available at age 60 of closer to £72,800.

And what about Phil? Well, for the sake of this example, let’s assume Phil pays income tax at the higher rate of 40%. This means that each of his £100 pension payments are adjusted to become £166. However, despite this, Phil’s pension pot will still end up behind Susan’s, at around £60,600.

What this example demonstrates is that a person with a relatively modest income, who only pays a small amount into their pension, and receiving half as much tax relief, can still end up with a significant retirement pot, just by starting their pension sooner. So, if you have family members who don’t think they earn enough to pay into a pension at their age, this might persuade them otherwise. You might also want to remind them that even if they can only afford small pension payments now, they can always increase the size of their contributions later, as their income increases.

The twin drivers of pension growth – compound interest and tax relief – are really too good for anyone to ignore, and they certainly make a convincing case for putting any doubts about pensions aside. According to the old Chinese proverb: “The best time to plant a tree was 20 years’ ago. The second-best time is now”. The same applies to pensions.

 

If you are interested in discussing pension arrangements with one of our experienced financial planners at FAS, please get in touch here.

 

This content is for information purposes only. It does not constitute investment advice or financial advice.