FAS

As 2021 draws to a close, investors can look back on a year that still presented challenges, despite conditions being much more benign than those experienced a year earlier. Following the very sharp recession seen at the start of the pandemic, we have witnessed a broad based economic recovery, fuelled by continued economic support from central banks and governments, which has continued to provide markets with the confidence to move forward.

At the time of writing, the S&P500 index of US shares stands 27% higher than at the start of the year, whereas the FTSE100 stands 12% higher. These increases have built on the strong returns seen during the latter part of 2020. Whilst most investment markets are higher than at the start of the year, there have been areas to avoid. Chinese markets, weighed down by concerns over the debt-laden property sector and government policy, have fallen throughout the year, despite a modest recovery seen over recent weeks. The safest government bonds have also seen disappointing returns, as inflationary pressures bite.

Compared to the wild swings in sentiment seen during 2020, this year has seen more stable conditions for investment markets. Apart from some volatility around the time that the Omicron variant was discovered, investment markets have sailed through much calmer waters than was the case a year ago.

As we progressed through the year, investor attention began to shift away from the pandemic, and the increasing rate of inflation being seen in Western economies became the primary concern. In the UK, the Consumer Price Index hit 5.1% in the 12 months to November 2021, the highest level for a decade. We are not alone in facing higher inflation, with the prevailing rate in the US standing just short of 7% per annum. A number of factors have contributed to the increase in inflation – demand for goods such as building materials and microchips has outstripped supplies, and the cost of shipping goods has also risen sharply. We have all felt the impact of higher gas and electricity prices, and food prices also continue to rise. Spare capacity in the labour market may also lead to modest levels of wage inflation, as certain sectors, such as hospitality and logistics, struggle to hire employees.

The heightened rate of inflation is unlikely to be welcome news for many. Whilst higher rates of inflation are helpful in eroding levels of debt, for households struggling with increasing energy costs, and for those individuals holding cash savings, these are painful times. Central banks would ordinarily be looking to increase interest rates at this point in the economic cycle, to combat the higher rates of inflation. However, they need to tread carefully to avoid damaging the fragile economic recovery. Taking away the support and raising rates too quickly could reverse the economic gains achieved since the height of the pandemic, whereas leaving rates on hold for too long could stoke inflationary pressure further.

The Bank of England was the first to jump, raising rates from 0.10% to 0.25% this month, and we expect most Western central banks to continue raising rates during the course of 2022. The pace of these rate increases is likely to be a key factor in determining how markets perform during the course of the year, and clear forward guidance – such as we are seeing now from the Federal Reserve – will be needed to avoid markets being spooked by unexpected changes in policy.

So where do markets go in 2022, and what is in store for the coming year? Firstly, the emergence of Omicron reminds us that sadly the pandemic is not over. Investors have faced continued uncertainty in the face of the virus since March 2020, and it is becoming clear that Covid-19, and the actions taken by governments to combat the spread, is once again going to dominate market sentiment as we head through into the New Year. As we have seen over recent weeks, governments around the world appear to be keen to avoid the kind of restrictions that could deal a substantial blow to the economic recovery, but they need to balance this with the need to protect public health.

The actions of central banks will also likely have an influence on market confidence. The rapid rise in inflation may well remain a headache for policymakers throughout next year, and tough decisions on removing key support that has been in place since the start of the pandemic could have negative consequences. Inflation may well start to moderate as we move through the next 12 months, although we suspect prevailing inflation rates will stay a little higher for longer, placing further pressure on central banks and savers.

We will be watching corporate earnings closely as we move through into 2022. By and large, profits have held up well and in some sectors have exceeded expectations this year. We do, however, need to be mindful that the valuations of some sectors of the economy are now looking a little expensive.

Finally, in contrast to the calm conditions we have seen through this year, we may well see a little more volatility return as a result of Omicron and the key interest rate policy decisions that will need to be taken. For this reason, 2022 could well be a year when paying careful attention to asset allocation, and maintaining good levels of diversification, are crucial to navigate the prevailing conditions successfully. Rest assured we are here to provide guidance and reassurance whenever needed.

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

May we take this opportunity to wish you a peaceful, happy Christmas with good health and prosperity in 2022!

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

Over the years, governments have introduced, and then replaced, a variety of schemes to stimulate investment in new and small businesses. A key feature of all these schemes has been some type of tax incentive. The Treasury views these tax sweeteners as a necessary cost to attract ‘patient capital’ from private investors. The net result is that today the rules governing the three current schemes – venture capital trusts (VCT), enterprise investment schemes (EIS) and seed investment schemes (SEIS) – are highly complex. Before embarking on investment in any of this trio, it is crucial to understand the constraints that surround them, the inherent risks, as well as the potential rewards.

Relief on investment

All three schemes – VCT, EIS and SEIS – offer income tax relief on the initial investment into new shares, with VCT and EIS providing 30% relief, and SEIS offering 50% relief. These reliefs are subject to a number of conditions, primarily being the minimum holding periods. VCTs need to be held for at least five years and EIS and SEIS for at least three years, to avoid the relief given on investment being clawed back on disposal. In addition, it is important to note that income tax relief can only be obtained on income tax actually paid.

Over recent years, this income tax relief offered has become a key attraction for many high-income investors who find their scope for pension contributions has been constrained or eliminated completely by the reductions in the pension lifetime and annual allowances.

HM Treasury does not give tax relief without good reason. In the case of VCT, EIS and SEIS, that reason is the risk that the investor is expected to accept. This was underlined by a change to the legislation for all three schemes introduced by the Finance Act 2018. Broadly speaking, any underlying company in which investment is made must now satisfy a “risk to capital” requirement. For investments in companies that qualify for relief, the investment needs to demonstrate that the company has objectives to grow and develop over the long-term, and there needs to be a risk that there could be a loss of capital to the investor of an amount greater than the tax relief provided.

The aim of this test is to prevent low risk, growth-averse companies from being established solely for the purpose of accessing the tax reliefs available. It has had the desired effect, with VCT and EIS providers regularly reminding investors that the returns are likely to be more volatile than before the 2018 change.

Other tax incentives

In addition to the income tax relief on a qualifying investment, VCT dividends are tax-free and many VCTs focus on returning capital to shareholders through the payment of regular and special dividends. EIS and SEIS investments qualify for business relief after being held for 2 years’ ownership. This grants the shares in EIS and SEIS exemption from inheritance tax, as long as the shares are held until death. EIS also offers investors the ability to defer capital gains tax charges for gains made between 3 years before to 1 year after investment.

Risk to capital

It is important to acknowledge that investment in any of these schemes involves holding shares in very small and fledgling companies. These companies are seeking capital to help them grow, and whilst there are substantial success stories where exceptional returns have been achieved, the risk that these companies fail to deliver is also considerable. By way of example, companies that qualify for VCT funding need to hold assets of less than £15m at the time of investment and have fewer than 250 full-time employees (or 500 for so-called “knowledge-intensive” companies). SEIS qualifying companies are much smaller still, with the company needing to hold gross assets of less than £200,000 and have fewer than 25 full-time employees.

An additional risk is the fact that these investments can be hard to sell once the minimum holding period has elapsed. VCTs are listed on the London Stock Exchange (LSE), but trading in smaller issues can be thin, partly because of the tax relief clawback rules. That being said, VCTs normally offer a buyback route, where the shares are re-purchased by the company at regular intervals, at a discount to the underlying asset value. EIS and SEIS investments are not quoted on the LSE, and disposing of these unquoted investments relies on finding a buyer for the shares, which can take some time.

The importance of advice

It’s necessary to point out that VCT, EIS, and in particular SEIS investments involve a higher level of investment risk when compared to the likes of other equities, bonds and cash. The potential returns, of course, can be higher than those provided by more traditional asset classes, and the various tax incentives are attractive.

Selection of the appropriate investment is vitally important, as there can be vast differences in performance between individual VCT and EIS funds. Different investment approaches are also taken, with some focused on a specific area or field, and others being more generalist in nature. For this reason, you should always discuss this with one of our experienced financial planners first to ensure that any VCT or EIS investment sit appropriately within your investment risk profile, time horizon, and your other assets and investments.

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

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

The use of trusts to protect the wealth of a person (or a family), and to pass it down to their beneficiaries has been commonplace in Britain since the Middle Ages. In olden times, before knights set off to battle in The Crusades, they would create a trust to protect their financial interests and ensure their wives and children would be looked after.

While the use of trusts has long been associated with only the very wealthy, trusts have a wide number of uses and are still used today to solve a variety of financial issues, such as mitigating inheritance tax, providing income or a home for a spouse, preserving family wealth, investing for children or grandchildren, or making care provisions for vulnerable relatives. As a result, thousands of people each year are appointed as ‘lay’ trustees, and there’s also a thriving industry of professionally appointed trustees.

What are the responsibilities of a trustee?

Whether a lay trustee or a professional, whoever is appointed as a trustee owes duties of honesty, integrity, loyalty, and good faith to the beneficiaries of the trust. They must act exclusively in the best interests of the trust and be actively involved in any decisions. The general duties of trustees include:

• To observe the terms of the trust, and follow any duties and directions set out in the trust deed
• To act impartially when dealing with one or more beneficiaries, and balance competing interests
• To keep records and accounts for the trust and provide information when required
• To act unanimously, carefully, and to distribute assets correctly

What duties do trustees have when investing trust funds?

Trustees also have clear and specific responsibilities when it comes to managing investments, which centre on following the duty of care towards beneficiaries and acting in their best interests. For example, while in most instances trustees are able to invest in any type of asset (unless the trust deed specifically restricts some investments), the trustees must consider the purpose of the trust, and – most importantly – the needs of the beneficiaries when establishing the investment policy.

Choosing the right investments

A trustee also must, from time to time, review the investments in the trust and make sure they are still appropriate. This is often the area of responsibility that lay trustees and indeed professional trustees overlook. In our experience, it’s all too common that after a trust is set up and investments are made, the continued monitoring and oversight of the investments is forgotten about. Not only is this ignoring the responsibilities of the trust, but if investments are left alone and underperform over several years, the loss of capital could have disastrous consequences for the beneficiaries.

What are the risks of not doing anything?

If you have been appointed as a trustee, you could be liable if beneficiaries feel that the trust has been mismanaged and this includes the investment decisions made. Ultimately, this could lead to a trustee being taken to court by the beneficiaries to recover any amount of money lost due to trustee negligence or mismanagement. It’s important to note that a lay trustee who is not acting in a professional capacity is just as liable as a professionally appointed trustee.

Therefore, anyone appointed as a trustee – professional or otherwise – has a personal responsibility to take advice that ensures funds placed in a trust have been appropriately invested, and that the funds are monitored and regularly reviewed.

Can people get help with their duties as a trustee?

Managing a trust can be complicated at the best of times. It’s important to keep up with the rules relating to trusts, as well as any new legislation that crops up. The good news is that trustees can get professional help from financial planners, accountants, and solicitors. When it comes to managing investments, we think it’s in the best interests of the beneficiaries and the trustees that advice is sought – and taken – from professional financial planners like us. We can help to make sure the investments held in the trust are on course to meet their objectives, and we can carry out other key tasks, such as ensuring the trust is properly structured, and that investments are tax-efficient and well diversified where necessary.

Acting as a trustee is a privilege, but it doesn’t also have to be a burden, provided trustee responsibilities are carried out as fully as possible. Where necessary, it’s a good idea to take professional financial advice before making decisions – particularly investment decisions – on the trust, and to ensure regular reviews are carried out.

If you are interested in discussing trust 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.

After a horrible 2020 for dividend paying companies, this year has been an encouraging return to form. Investors can’t afford to ignore the benefits of reinvesting dividends.

Good news: the COVID-induced dividend drought appears to be over. After a terrible 12 months, when most dividend-paying companies in the financial services, property, and oil and gas sectors were forced to suspend or drastically reduce dividend pay-outs to shareholders, 2021 has seen a sparkling recovery.

Dividends are usually considered to be a good sign that a company is doing well, and has plenty of spare cash in the bank. But the UK’s reputation for dividend payments took a battering during 2020 thanks to the COVID-19 pandemic, forcing companies to take widespread and often drastic measures to keep operating during a period of uncertainty. As a result, last year the FTSE 100 average dividend yield for 2020 overall ended up at a significantly lower 2.98%, and total dividends paid to investors fell to £61.4 billion. However, stockbroking firm AJ Bell expects FTSE 100 dividend payments to bounce-back to an impressive £85.1 billion this year, just short of the record-breaking peak of £85.2 billion in dividend pay-outs set in 2018.

Dividend tax is on the increase

Of course, the downside is that the government has now introduced a 1.25% increase in dividend tax to help pay the bill caused by COVID-19, and to increase spending on health and social care. As a reminder of the government’s tax plans, investors can still earn up to £2,000 in dividends before they are liable for any tax. But beyond that threshold, basic rate taxpayers can expect to pay dividend tax at a rate of 8.75% from the 2022-2023 tax year. Higher rate taxpayers will see their dividend tax rate increase to 33.75%, while additional rate taxpayers (earning more than £150,000) in England will pay dividend tax at 39.35%. It’s worth remembering that investors do not pay any dividend tax on money invested in an Individual Savings Account (ISA), which is why it’s essential to always use up your tax-free ISA allowances.

Why it pays to reinvest dividends

Dividend paying companies are very attractive within any investment portfolio, but you don’t have to collect the regular dividend payments. In fact, it’s well worth using the dividends instead to purchase additional shares – which in turn also pay out future dividends. This is known as the power of compound interest.

Here’s a quick example to show what we mean. You buy 100 shares in a company at a cost of £1,000. The company pays a dividend of £6 every year for ten years. Instead of pocketing the cash, you reinvest your dividends and you use the money instead to buy more shares in the company. As time passes, a dividend reinvestment strategy starts to become the largest contributor to total return. The more dividends you reinvest, the higher your future dividend payments.

Take the following example of the FTSE100 index over the last 20 years (see graph below). The red line shows the pure performance of the index, not taking any dividend income into account. As you can see, the index value has increased by more than 40% over the last 20 years.

However, this performance is a fraction of the total return achieved over the same period, when dividend income from the FTSE100 constituents is reinvested. You can see the total return including reinvested dividends, shown in blue, has returned 193% over the same 20 year period, almost five times the return of the raw index.

The effect of compound interest on reinvested dividends is more powerful the longer you invest, as it multiplies the available returns on the original investment. Over time, the dividends reinvested in the early years have the largest impact on total returns, and you stand to benefit not just from the increased value of the company’s shares, which may fluctuate over time, but also from the larger shareholding as you’ve used the dividend proceeds to buy more shares, which means more dividend proceeds, and so on. It’s a great way to increase the value of your investment without lifting a finger.

Last thoughts

Of course, dividend payments received by investors are still liable for dividend tax, even if they are automatically reinvested. But for the time being, investors still have a dividend allowance of £2,000, which means for the first £2,000 of any dividends you receive you don’t need to tell HMRC or record the dividends on your self-assessment form.

If you’re unsure whether your investments will mean you pay dividend tax, please get in touch. We’d be happy to provide you with a report on your dividend situation, as well as recommending ways to get the most out of your tax-free allowances. You may not be able to avoid paying dividend tax, but we can help to make sure you get the best value from the dividends you earn on your investments.

If you are interested in discussing your 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. 

Investment Pathways for Retirement Planning is a new initiative launched by the Financial Conduct Authority (FCA) in February 2021, designed for people who wish to draw their pension under a Drawdown arrangement, without first obtaining regulated financial advice. As we will explore, one size does not fit all, and forging your own bespoke path, whilst taking ongoing advice, may well lead to better outcomes.

Taking a flexible approach

Flexi-Access Drawdown is an alternative to the purchase of an annuity, which provides much greater flexibility in terms of how income is drawn in retirement. It is increasingly popular, as it can offer the potential for individuals to use their pension savings to best fit their needs and objectives, but unlike a pension annuity, does not provide a guaranteed income for life. As the pension fund continues to be invested throughout retirement under Drawdown, investment decisions and careful management of the fund are critical components of a successful Drawdown approach. Personal responsibility for the long-term viability of the pension drawdown plan rests with the pension holder, hence the importance of receiving initial advice on the level of income drawn and investment options, and reviewing the plan regularly to ensure that it continues to meet the initial objectives.

Choose a Path?

The idea behind Investment Pathways is to create four default investment routes for individuals who have already taken Tax Free Cash from their pension, leaving the remaining funds in Drawdown. The FCA hope the initiative will reduce the number of individuals, who decide to enter Drawdown without receiving advice, making poor investment decisions, such as leaving significant funds in Cash for the long term, or taking excessive investment risk.

Four Paths have been defined, with the first being aimed at those who have no intention of drawing an income in the next five years. This strategy is largely aimed at growth over the medium term. The second Path is designed for those who wish to purchase an annuity in the next five years and will aim to preserve capital. The third is for those who are considering drawing income in the medium term and will aim to provide a balanced approach. The final Path is for those who are looking to draw the full value of their pension in the next five years, and again aims to preserve the capital value.

For each defined Pathway, pension providers will produce a ready-made investment portfolio which aims to meet the objective of the Pathway, which is where we feel the proposals may begin to fall short of their objectives.

The majority of providers offering these Pathways are using a single passive investment fund, with no ability to vary the investment options within the Pathway selected. This limits the scope for an individual to select alternative funds within an individual Pathway, or to access funds that meet their own preferences, for example, to invest in a socially responsible manner.

Bespoke is best

But more importantly, the Pathways do not take into account an individual’s financial circumstances, objectives or attitude to investment risk. This is a vital element of the advice process that is missed by using this automated approach. Take an individual who prefers to take a cautious approach to investment as an example. They choose the third of the fourth automated pathways, as they are considering drawing income from the pension in the next five years. In this scenario, they could experience an increase in investment risk and volatility over their existing arrangements they held before entering the Pathway approach, which they may not be aware of, or may be contrary to their wishes.

Conversely, an individual who chooses the Pathway towards taking the full value of their pension in the next five years (option four) would be placed largely in a Cash fund with most providers, where negative real returns are more than likely to be achieved when charges, and the eroding effects of inflation, are taken into account. We don’t imagine someone who is planning to draw their fund out in five years’ time will be pleased to be missing out on the potential for investment returns over this period, even if they were taking a cautious investment approach.

Tailored to your needs

We understand the Regulator’s concerns. Without proper advice, individuals could leave their pensions in Cash over the longer term or take excessive risk with their pension arrangements, neither of which are likely to be appropriate. However, we feel that Investment Pathways are too rigid and inflexible for most individuals with at least modest sized pension plans, who are considering Flexi-Access Drawdown as an approach to retirement planning. For these individuals, we believe that Investment Pathways are no substitute to taking an alternative path, via independent advice, that is tailored to their own circumstances and objectives. Furthermore, regular reviews of any Drawdown are of high importance, to ensure the approach remains appropriate to any future change in circumstances.

If you are considering your retirement planning and would like to discuss your options 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.