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FAS

Apr 29
4
Multi- Generation Family Walking Along the Beach

Making tax-efficient gifts out of surplus income

By | Tax Planning

People often think that passing on large sums of wealth to loved ones is only possible after their death. But making regular financial gifts during your lifetime can be a highly tax-efficient way to reduce the value of your taxable estate, and give your loved ones a helping hand when they most need it.

 

Now that life is beginning to return to ‘normal’, at FAS we have started to see an increase in the number of clients who want to talk to us about planning for their future, making changes to their personal finances, and doing more to help their loved ones. One area that has been discussed with several clients is how to use their surplus income – in other words, money left over after all of their regular financial commitments have been met – in ways that benefit their family, friends, or even charities. Clients are keen to put that money to good use now, rather than waiting until it forms part of someone’s inheritance.

 

Gifting out of surplus income

Lots of people, particularly those in retirement with healthy pensions and other sources of income, such as rent on additional properties, may find themselves with income that’s surplus to requirements after all of their outgoings have been paid.

If you regularly have an income left over, it could be in your best interests to consider using this money to provide a regular financial gift. Not only does this allow you to make a financial contribution to an individual that could really benefit, but it is also a well-recognised and completely legal way of reducing the potential inheritance tax liability that will one day be calculated on the value of your estate. That is because whereas most gifts of large amounts can still be liable for inheritance tax, a gift made from surplus income is immediately outside of your estate for inheritance tax purposes.

 

A gift made from surplus income is not liable for inheritance tax

Here is why. In most instances, making gifts to friends or family of amounts of more than £3,000 runs the risk of incurring an inheritance tax bill. HMRC calls such gifts ‘potentially exempt transfers’ and applies the ‘seven-year rule’ when determining the amount of inheritance tax the gift can become liable for.

If the person making the gift lives for at least seven years after the gift is made, there is no inheritance tax to be paid by the person receiving the gift. However, if the person dies within the first three years of the gift being made, the gift could be liable to the full 40% inheritance tax charge, which is payable by the recipient of the gift. For gifts made between three and seven years before death, HMRC reduces the IHT charge for each full year the person who made the gift survives (known as ‘taper relief’).

However, one of the biggest advantages of making a gift out of surplus income is that there is no seven-year clock for the giver or the receiver of the gift to keep an eye on. But that is only as long as the Executors of the person’s estate can prove that the gift was indeed made from surplus income.

 

What are the rules around gifts?

To qualify as a gift made from surplus income in HMRC’s eyes, and therefore exempt from inheritance tax calculations, the following three conditions will need to be met:

  • There should be evidence that clearly shows the gift was intended to be made regularly and was part of the giver’s normal expenditure – a good example of this would be an annual amount of £3,600 gross paid into a grandchild’s pension.
  • The gift was made out of the post-tax income and was not the proceeds of a transfer of capital assets. Common sources of post-tax income used for gifts can include pension income, rent from property, interest and dividends, or even employment earnings.
  • The giver of the gift must still be left with enough of an income to maintain their present standard of living, without having to resort to using capital to meet their needs.

 

What kinds of gifts can be made?

As well as helping clients to set up regular cash gifts, we often talk to people who choose to use their surplus income to pay for school fees, to make regular payments into an Individual Savings Account (ISA) or Junior ISA, or even to fund pension contributions for children or grandchildren over several years. At FAS, we can help you to determine the level of surplus income available to you, as well as providing you with helpful advice on the best way to put that surplus income to work.

Make sure you keep records of any gifts you make

Whatever gifting option you choose, it is essential to keep financial records that can be used to prove your intentions after your death. Such records will be required by the Executors of your Estate to claim the ‘gift exemption’ from HMRC when it comes to valuing your estate. One of the easiest ways to do this is to write a letter to the person (or people) that you will be making gifts to, clearly stating your intentions and establishing a pattern of gifts for the future.

 

What happens after your death?

After your death, the Executors of your estate will be expected to demonstrate that the gift was intended to be both a regular occurrence and also a part of your normal expenditure. They will be required to complete Form IHT403, and provide details of sources of income (such as pension, rental, or investment income) and expenditure (such as household bills, holidays, and entertaining) for the years that any gifts from surplus income were made. If you intend to make regular gifts, it is a good idea to talk to us about dealing with the necessary paperwork on an annual basis that will make the estate handling process much easier when the time comes.

 

Summary

Rather than worrying about leaving an inheritance tax liability, making regular gifts out of surplus income can be an extremely effective way to reduce the taxable value of your estate. It is also a great way to do something meaningful for your loved ones, as you get to see them enjoy the benefits of their inheritance right now, rather than only after you have gone.

 

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.

Apr 22
3
Bird and worm next to a clock representing early bird catches the worm

Why early-bird ISA investors may catch the best returns

By | Investments

Now that the new tax year has started, people often ask us whether they should use their Individual Savings Account (ISA) tax allowance early, or wait until the end of the year? While many people leave it to the last minute, there are several reasons why it makes sense to invest early instead.

 

There is nothing like a hard deadline to focus the mind. It’s why tax year-end has traditionally been the busiest time of year for financial planners, as we work with clients to ensure they make the most of any available tax allowances. One area that is always busy for us is helping people with their ISA subscriptions.

 

ISAs remain popular with savers and investors

ISAs have become one of the most important building blocks for anyone looking to invest for their future. After all, ISAs allow you to shelter any investment gains or interest earned from the taxman, which means any money held within the ISA wrapper has the potential to grow more quickly.

As a reminder, you can save up to £20,000 annually into an ISA in each tax year. This limit applies to Stocks and Shares ISAs, Cash ISAs, and Innovative Finance (also known as peer-to-peer) ISAs, so there are plenty of options to choose from, and you can spread your ISA allowance between different ISA types. But ISA allowances operate on a ‘use it or lose it’ basis. In other words, if you do not make an ISA investment during a particular tax year, you cannot ‘roll-over’ the allowance to the next one. So, it makes sense to leave using up your ISA allowance at the very last minute, rather than to not use it at all.

 

Making the best use of your annual ISA allowance

Human nature being what it is, lots of people leave it until the last minute (11.59 on 5 April, to be precise) to get their ISA application completed. And then they tend to forget about their ISA for 12 months before repeating the process all over again.

Many people make the mistake of leaving their ISA investment until the end of March, perhaps because they are focused more on the tax benefits associated with an ISA, instead of thinking about it as an investment vehicle. While there is a strong temptation to wait, knowing that you have a full year to make the most of your ISA allowances, it is important to remember that investments need time to grow, so the more time you give them, the better the potential outcome.

 

Investing for income and growth

As an example, this year the FTSE 100 index is expected to generate an average dividend yield of 3.8%, which is an improvement on last year’s historic yield of 3.2%. If you hold off investing until close to the end of the tax year, your investment has missed out on a whole year of tax-free income. More importantly, your ISA will also be missing out on the potential of tax-free growth on the value of the shares in your ISA portfolio. Growth cannot be guaranteed, of course, but the theory is that the more time you leave your ISA invested, the longer it has to potentially grow, and the larger your investment pot will ultimately be.

 

‘Averaging in’ with regular investments

Starting your investment sooner means you could boost your overall ISA pot in the longer term, but not everyone is able to invest the full £20,000 ISA allowance at the beginning of every new tax year. So, instead of investing the whole amount into your ISA at the last possible minute, you might want to consider spreading regular amounts across the 12 month-period instead. Investors call this ‘pound-cost averaging’ because paying in regular amounts reduces the overall volatility of your investment.

How does pound-cost averaging work? Well, imagine if you pay £20,000 into your ISA in March, just before the tax year end. That money will be used to invest in different funds or stocks and shares at a set date in March when your investment will be subject to how overall stock markets are performing at that point in time. If valuations are high at that point, you will end up paying more for your investments than you would have had you invested at a different time.

It can be particularly painful to invest a large amount into your ISA, only to see stock markets take a tumble soon after, which means your investment is already in negative territory. ‘Timing the market’ is very difficult to get right. But by paying into your ISA regularly, using your regular amounts to purchase assets at different times and at different prices, you eliminate the possibility that the whole value of the ISA subscription will be bought when markets are at their peak. It is a simple way of taking the guesswork out of investing, avoiding uncomfortable market highs and lows, and spreading the risk out over a full year instead.

One final point to remember is that using your ISA allowance at the beginning of the tax year, instead of at the end, gives you the advantage of time, which is always the most precious commodity. Using your ISA allowance early can make a real difference to the returns on your investment, and give you the best possible chance to grow your wealth over the longer term.

 

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

 

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

Apr 16
1
Silhouette of man's head with brain highlighted in white with a pound symbol

The psychology of investing – knowing when to cut your losses

By | Investments

Sometimes, investors can be their own worst enemies. As Warren Buffett once said: “If you cannot control your emotions, you cannot control your money”. We explore the emotional side of investing, identify some of the negative behaviours that frequently trip people up, and we also give some advice on keeping emotion out of your investments.

 

Recognising and understanding investor behaviour

It is worth remembering that money is an incredibly emotional subject for people. People’s relationship with money usually begins at a very early age, and emotional responses can often overpower rational thinking when things are not going as well as a person had hoped.

Perhaps the biggest challenge investors must come to terms with is their own attitude towards investing. Studies have shown that it is more painful to lose money than it is pleasurable to win money – even when the amount is the same. Many investors find this aspect about themselves hard to come to terms with. Ingrained attitudes often make people too risk-averse when it comes to investing, which can often mean they miss out on significant returns over the longer term. To avoid this, you should think about some of your own personal psychological biases before deciding whether to buy or sell any investment.

 

Pride and prejudice

It is also common for investors to feel unable to admit when they’ve made a mistake. One of the most frequent examples of this we see is where investors continue to hold on to the shares in a failing company, in the hope that it will eventually recover. The old investment wisdom is to “run your profits and cut your losses”, but most people tend to do the opposite. They sell their profitable investments too soon and they let their loss-making investments keep going while they wait for a change in fortune.

People often let emotions sway their investment decisions because they have a personal attachment to the investments they own. Perhaps these investments were left to you by a relative, or they did particularly well in the early years after you first bought them. We often make the point that investments or companies don’t have feelings or attachments to you, so why have feelings or attachments to them? Taking a personally detached view from your investments is a good way to start making better investment decisions overall.

 

Forgetting that past performance is no guide to the future

Every investment comes with the warning that past performance is no guide to the future, but it remains a warning that most people struggle to heed. It’s far too easy to fall into the trap of ‘outcome bias’, which is the tendency to evaluate a decision based on the outcome of previous events, without giving enough consideration to how those past events developed.

To put it another way, you may decide to back the same horse in the Grand National that won last year’s race. But all of the factors that resulted in that horse winning (the condition of the horse on the day, the ground conditions, the weather, how competitor horses fared, and on and on) are not going to be replicated identically this year. Even if the same horse does in fact win again, it will have faced different conditions when achieving victory this time around.

Simply relying on the past to do the hard work for you, instead of carrying out helpful research and finding the right investment for right now, is unlikely to lead to positive investment results over the longer term.

 

Poor timing

Emotional investing is often an exercise in bad market timing. Greed and fear are powerful motivators, and one of the main reasons why investors lose money is they execute an investment decision out of greed or fear (or both), at a time when it is not in their best interest to do so. Examples of the greed/fear dynamic at work include:

  • Seeing others making large profits on an investment and jumping in without thinking about the risks involved. This is also the “fear of missing out” (Bitcoin is a good example of this).
  • During periods of market volatility, investors often sell their investments while values are falling, thereby crystalising their losses and potentially missing out on any recovery.
  • Following the herd, and simply doing whatever the rest of the market is doing.

 

So how can you stop being emotional with your investments?

Emotional investing usually takes place when events trigger our own individual responses to money and convince us that we should behave differently because the stakes are higher than we had expected. Sadly, there is not much that any of us can do about human behaviour, apart from being aware of it and learning to control it, rather have it control us.

But there are two ways to invest that help to lower the emotional stakes and reduce the risk of getting the timing of the investment wrong. The first of these is pound-cost averaging.

 

Pound-cost averaging

One of the most effective ways to remove emotion from investment decisions is to use pound-cost averaging. This is a strategy where you plan your investments in advance, and then invest regular amounts at set intervals. The benefit of this approach is that it removes the risk of regretting your investment. Instead, investing smaller amounts means that you get to buy fewer shares while the price is high, but more shares when the price is lower.

The key to the pound-cost averaging strategy is to stay the course and recognising that those periods when the value of your investment is lower can actually work in your favour over the longer term.

 

Diversification

The second most effective way to reduce the impact of emotion on your investments is through diversification. Holding a larger number of investments means that the impact of market volatility on your overall returns is more likely to diminish (as not all of your investments will behave in the same way). In normal market conditions, a well-diversified investment portfolio should offer some comfort that the losses suffered by some of your investments are offset by gains made in others.

However, it is important to understand what counts as true diversification. It’s not just about owning shares in a few different companies, or investment funds from different providers. At FAS, we can help you to create a diversified portfolio that invests across a wide range of different asset classes, geographical regions and industry sectors, as well as investments that invest for income or capital growth. An investment portfolio made up of all these various types of investments should offer increased protection that leaves your investments well-placed to cope with a range of different market conditions, and leaves you feeling much less stressed about what could go wrong.

 

Final thought

Investing without emotion is easier said than done. If it was easy, there would be far fewer headlines of stock market tumbles. But just because other investors struggle to keep their emotions in check, this doesn’t mean you have to follow them. An understanding of your own attitude towards money, and personal risk tolerance, is a good starting point.

It helps to be able to take a step back to see what is driving current market conditions and valuations. Once you can recognise that others are acting irrationally, you stand a better chance of leaving them to get on with it. Or, to use another Warren Buffet pearl of wisdom: “Outstanding long-term results are produced primarily by avoiding dumb decisions, rather than by making brilliant ones.”

 

If you are interested in discussing your investment portfolio 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.

Apr 08
2
Senior woman in a wheelchair being cared for by nurse

Counting the cost of care: don’t leave it too late

By | Investments

With care home costs continuing to increase, and pensions struggling to keep up, it is essential to come up with a long-term investment strategy that aims to match the cost of long-term care to reduce the risk of you – or someone you love – running out of money during retirement.

A worrying number of British pensioners are struggling to pay for care during retirement, according to recent statistics. Analysis from Age UK published in 2020 revealed that, in just one year, the number of pensioners whose assets have been effectively ‘wiped out’ due to the cost of paying care home fees has risen by more than one-third. Putting it another way, care bills are wiping out the finances of 100 people in the UK every week of the year.

 

Care costs are rising

Anyone who has looked into the costs of long-term care, perhaps on behalf of a parent, knows just how expensive those costs can be. According to health data provider Laing Buisson, in 2019-20, the average cost of a residential care home for an older person in the UK increased to £672 a week. Or, put another way, that’s an average annual expense of £34,944. In most instances, a person’s pension will be just a fraction of that amount.

 And, for those who are in urgent need of being placed into a nursing home – offering round-the-clock care – the costs of care are even greater. Between 2019 and 2020, the UK average nursing home cost increased by 5% to £937 a week, or £48,724 a year. The fees a person can expect to pay for nursing home care are significantly higher in London and the South East.

 

Will you have to pay for your own care?

While healthcare is provided free by the NHS, most of us will be required to pay some or all of the costs of our own social care in later life. Local authorities will provide financial support for people whose assets and income are below a set amount, but broadly speaking, anyone with savings or assets worth more than £23,250 can expect to pay for their own care costs. Most people hope to pay for care by using income from their pension, savings, and investments or income generated by other assets, such as the sale proceeds from their main residence, or rental properties. But it’s important to make plans that determine the most cost-effective way to pay for care, which is where we can definitely help.

 

Optimising capital and income to pay for care home fees

At FAS, we often talk to families looking for advice on what to do when a parent or loved one needs to go into care. The first thing we point out is that when large fixed costs are being paid every month (such as care home costs of £5,000 per month), cash in the bank usually doesn’t last very long. So, instead of thinking about relying on savings or a pension to pay for care, we usually tell families that it’s a much better idea for us to help devise an investment strategy that will help to ensure all known fixed monthly costs can be covered for as long as possible.

 

How can an investment strategy help with care costs?

From our perspective, we know that good financial planning can make it possible to plan for care without fully eroding a person’s capital, whilst also effectively ring-fencing the family’s future inheritance. It starts with calculating the costs of care over the longer term and identifying suitable investments that have the right risk and return objectives.

By matching liabilities with income, we are able to find and recommend investments capable of growing at a rate of return that will aim to ensure the rising costs of care continue to be met. This really emphasises the importance of investing your money with the aim of generating a meaningful return, rather than leaving it sitting idle in cash. This is particularly relevant given that care costs have a tendency to rise by more than inflation each year, which means you need the income you generate from your investments to be able to do the same.

 

Buying care insurance

As a last resort, another area where we might be able to help is with arranging care insurance. This insurance (also known as an ‘immediate needs annuity’ or ‘immediate care plan’) will automatically cover the cost of care fees for the rest of a person’s life, in exchange for a one-off lump sum payment. Just as with pension annuities, care insurance payments can be set to provide a flat payment monthly, or arranged to rise in line with inflation. However, these types of policies are only available to those with a restricted life expectancy.

 

Summary

No one should be left to worry about how to pay for a loved one’s long-term care. And, with careful planning, it should be possible to structure someone’s finances to ensure care fees can be paid for as long as required, without the money running out. If you’re in this position, talk to us. Our knowledge of this complex market means we have considerable experience of coming up with tailored care funding strategies designed to suit individual needs. The sooner you get in touch, the more peace of mind you will have.

 

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.

Apr 01
2
Gavel laying across book entitled Powers of Attorney

The importance of arranging a Lasting Power of Attorney

By | Financial Planning

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

We live in an era when people are likely to live for many more years than previous generations would have expected. But with more people living longer, it has become increasingly commonplace that many will reach a point in their life when they are no longer able to make decisions for themselves.

Sadly, this is only likely to become more commonplace. According to Alzheimer’s Research UK, one million people in the UK will be diagnosed as living with dementia by 2025, and this will increase to two million by 2050. A person’s risk of developing dementia rises from one in 14 over the age of 65, to one in six over the age of 80.

When the person who has been in charge of the family finances all their life is no longer capable, it can become increasingly difficult for their family to ensure that the right decisions are being taken. So, as we all get older, it becomes even more important to make sure we get our affairs in order, and one of the best ways to do this is to arrange a Lasting Power of Attorney (LPA).

 

What is a Lasting Power of Attorney?

An LPA is a legal document that lets you appoint someone you trust to make decisions on your behalf, should you become unable to make those decisions for yourself in the future. There are two different types of LPA:

  1. Property & Affairs LPA – which lets the person/s you appoint make decisions about your property and finances.
  2. Health & Welfare LPA – which lets the person/s you appoint make decisions about your health care and medical treatment.

You can choose to set up one or both types of LPA, and you can nominate the same person or elect to have different attorneys for each. However, just because you’ve set up an LPA, it doesn’t mean that you instantly lose control of the decisions that affect you. You can be very specific on the LPA about when the attorney acting on your behalf is able to take control. All LPAs must be registered at the Office of the Public Guardian, which is the government body responsible for the registration of LPAs before they can be used.

 

Who can be your attorney?

You can nominate anyone to be your attorney, provided they are 18 years old or older. However, for a Property & Affairs LPA, your attorney cannot be bankrupt or the subject of a debt relief order. Whoever you choose, you should bear in mind that they will need to be someone that you trust to make decisions for you, and will be able to act responsibly and in your best interests. It’s always worth having a conversation with the person you’re considering to nominate as your attorney, so you can explain your wishes and your preferences, along with what you expect of them.

 

What are the benefits of setting up an LPA?

Having an LPA in place will make things easier for you and your family should you start to become incapacitated. For example:

 

  • Once the LPA has been set up, it will become easier to have discussions with your family, both in terms of your wishes now, and what you want to happen in the future. An LPA is a great way to make sure everyone is on the same page. It can also help your attorney to become familiar with all your financial and legal arrangements.
  • With a Property & Affairs LPA, you don’t have to step away entirely from the decision-making process. You can ask your attorney for help with your decisions but still have the final say yourself.
  • Arranging an LPA will make things considerably less complicated, time-consuming, and expensive for your loved ones should they need legal permission to act on your behalf in the future.


What happens if someone doesn’t have a Lasting Power of Attorney?

If you lose mental capacity and don’t have an LPA arranged, your family will have to apply to the Court of Protection to become your appointed ‘deputy’. The Court of Protection will make an assessment and appoint someone that it believes is a suitable appointee. This deputy will then make financial decisions on your behalf. It’s worth recognising that the person the Court appoints may not be the person you would have intended. It’s also worth noting that the process of appointing a deputy can take considerable time to resolve.

 

LPAs and Discretionary Fund Management

For obvious reasons, when it comes to managing someone’s investments, the subject of exactly what an attorney is legally allowed to do becomes more complicated. Many people who have been placed into the role of attorney may not feel qualified to make strategic investment decisions, and feel this type of responsibility is best left to professionals with the experience and qualifications to make the right decisions.

Therefore, subject to the donor’s consent, it is important that any LPA document contains specific wording that provides express permission to delegate investment management decisions to an existing or new discretionary investment manager. If the document does not provide this permission, Attorneys will need to take decisions themselves following advice from an investment professional or they will need to apply to the Court of Protection to obtain retrospective consent before they instruct any investment decisions.

 

How we can help

Quite often, it is the parent in need of care who holds all the family assets in their name. At FAS, we have been made aware of several cases where family members have found it difficult to make long-term care provisions for a parent who was no longer capable of making their own decisions.

In these instances where no LPA has been put in place, family members have spent considerable time and money trying to take control of the parent’s assets to pay for their care, while experiencing lengthy delays trying to get a determination from the Office of the Public Guardian. These cases have convinced us that families should really start talking about the importance of LPAs long before they think an LPA will ever be needed. We can help to ensure that any LPA drawn up contains the necessary wording to delegate investment decision-making to those best placed to manage the investments.

 

Summary

As with writing a will, the most important aspect of an LPA is that it gives you the power to make a decision when you choose to, rather than leaving it too late to have your say. Creating an LPA at the same time as you write your will could potentially save you and your family a great deal of money and distress further down the line.

 

If you are interested in discussing arranging an LPA 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.

Mar 25
1
Piggy bank next to three blocks reading Plan For Retirement

Pension planning and the importance of death benefits

By | Pensions

Since 2015, changes to pension rules have made it increasingly important to understand the options surrounding pension death benefits and how they are likely to be taxed. It is also essential to nominate who you wish to inherit your pension pot in the event of your death.

 

One of the most frequently asked questions regarding pensions is what happens to the accumulated pension pot when the pension-holder dies. The answer is that most workplace and private pension schemes provide ‘death benefits’ which the pension-holder’s beneficiaries will be able to claim after they pass away. But there are some important factors to be aware of.

 

Death benefits from defined contribution schemes

Since 2015, new pension rules have added an additional layer of complexity in how the death benefits available from defined contribution pension schemes are taxed. For example, if you die before reaching your 75th birthday, and you hadn’t started to draw from your defined contribution pension, it can be passed to your beneficiaries free from tax. As far as HMRC is concerned, your pension hasn’t entered into your estate for inheritance tax purposes.

In these circumstances, your beneficiaries have up to two years to claim the pension funds (after which point tax may be charged). They can then choose to take the remaining pension payments as a lump sum or use the pension funds to purchase an annuity.

Should you die before reaching your 75th birthday, but you have already started to draw your pension, then how you have chosen to withdraw your pension will determine the options available to your beneficiaries. For example, if you’ve already withdrawn a tax-free lump sum from your pension, and the withdrawn cash is in your bank account, this money will be counted as part of your taxable estate. However, if you have opted to take an income from your pension (known as ‘pension drawdown’), your beneficiaries can still access the remainder of your pension completely tax-free. They can also decide whether they want to receive that pension as a lump sum, through pension drawdown, or buy an annuity.

 

What happens after your 75th birthday?

Should you die after reaching your 75th birthday, your beneficiaries will be required to pay income tax on any pensions you leave behind. Beneficiaries will be charged at their marginal rate of income tax, meaning that a large lump sum death benefit could possibly push them into a higher income tax bracket.

 

What about annuities?

The rules around annuities, and whether they fall into the category of a ‘death benefit’ are a little more complicated. In most instances, once the pension holder has purchased an annuity and started to receive an income from it, the annuity itself cannot be passed on to beneficiaries after the pension holder’s death.

However, there are some types of annuities that are eligible for a pension transfer after death. Examples where beneficiaries could receive future payments tax-free can include joint life annuities, value protected annuities, and guaranteed term annuities, although some conditions are likely to apply. Because annuities are so intricate, it’s well worth reviewing the small print and getting professional financial advice before making any decision to purchase an annuity.

 

Why are death benefits important?

The changes to the rules around pension death benefits mean that pensions now offer a substantial inheritance tax advantage. For some pension holders, the ability to pass on significant amounts of their accumulated wealth to their children or grandchildren – without triggering an inheritance tax liability – is extremely valuable. It could be valuable enough to use up other income sources first, while leaving the pension assets untouched for as long as possible. Doing so could mean that your pension can be passed down to your chosen beneficiaries without any tax implications at all.

 

Nominating beneficiaries

To ensure your pension gets passed on in accordance with your wishes after you die, you need to let your pension scheme provider know who should receive the death benefits, by completing and returning an ‘expression of wish’ form that names your beneficiaries.

When you’re planning to name beneficiaries, you may want to take some time to think through the consequences of your decision. Upon your death, after the pension funds have passed to your beneficiaries, those funds will then follow the beneficiaries’ choice of successor. We have heard of examples where a surviving spouse was named as the beneficiary (instead of the children of the pension holder), and then remarried and left all of their assets to their new spouse and children from the new relationship.

To avoid unpleasant, worst-case scenarios like this, you can choose to name your children or grandchildren as beneficiaries or nominate for death benefits to be paid into a trust.

 

How can we help?

The new pension rules might seem complicated at first glance. But here at FAS, we have considerable experience of helping people who have accumulated large pension pots over their lifetime to turn these rules to their advantage. We can help you take the necessary steps to ensure your beneficiaries get the best value from your pension assets, without incurring significant tax bills.

 

If you are interested in discussing your defined contribution 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.

Mar 17
1
Two men having a conversation over a laptop

Why it pays to put the spare cash in your business to work

By | Business Planning

No business owner can afford to keep on an employee that doesn’t pull their weight, and the same is true for your working capital. If you’re a business owner with a significant chunk of cash sitting in a bank account, now might be the right time to start making that excess money work harder on your behalf, without taking too much risk.

 

Having a lot of cash at hand is considered a positive state of affairs for any business, and a sign of a company in good health. Not only does holding large sums of balance sheet cash demonstrate that the company itself is well capitalised, but it can also give the business owner and any major shareholders valuable reassurance that the business is positioned to face any challenging times in the future.

 

Is cash still king when it’s not earning its keep?

While it makes sense for the business to retain enough liquidity to see it through any potential issues, excess working capital does present many business owners with a dilemma. That hard-earned capital is most likely to be just sitting idle in the business bank account, not generating any meaningful kind of return.

During periods when interest rates are low and inflation is starting to creep up, such as now, having too much capital held on deposit starts to become worryingly expensive. Moreover, for smaller businesses, particularly family-run firms, having too much cash in the bank could potentially have a negative impact on your business and your longer-term wealth. It could mean paying higher taxes or alternatively, missing out on claiming valuable tax reliefs. Therefore, getting the balance right when it comes to managing your excess business cash could prove very significant in the years to come.

 

Tax planning considerations – Business Relief

In our experience, lots of smaller businesses, and especially family-owned businesses, benefit from being eligible for Business Relief. First introduced back in 1976, Business Relief (BR) makes it easier to pass on the ownership of a business from one generation to the next. As the shares of companies that qualify for Business Relief are exempt from inheritance tax, this means the shares can be passed on without triggering an inheritance tax bill that could potentially force the business to be sold.

However, in situations where the company is found to be holding cash in excess of its business needs, HM Revenue & Customs can restrict the amount of Business Relief available to shareholders upon the death of the business owner. This could result in shareholders facing an inheritance tax charge on the value of their company shares and reduce the amount of the estate the business owner intends to pass on to beneficiaries.

 

Tax planning considerations – Business Asset Disposal Relief

There are other issues that business owners should be aware of. For example, Business Asset Disposal Relief – which used to be known as Entrepreneurs’ Relief – is a government-approved incentive that makes it possible for business owners to pay a reduced rate of capital gains tax (as low as 10%) when they choose to sell all or part of their business.

Should the company be holding a large amount of surplus cash or other non-trading assets when the shares in the business are sold, or when the company ceases trading, this could result in HM Revenue & Customs restricting the availability of Business Asset Disposal Relief and trigger a larger capital gains tax bill.

So, there really are several good reasons why it makes sense to rethink the amount of spare capital your business is holding onto and think about ways to make that cash work a bit harder.

 

What we can do

At Financial Advice & Services, we work closely with business owners to provide a range of services based on the highly individual needs of their business. While recognising the importance of keeping an appropriate level of cash within the business, we can use our investment and tax planning experience to invest significant surplus funds more productively. As well as recommending investment strategies that aim to produce a healthy rate of return without taking on excessive risk, we can also take a closer look at your individual tax status, and work out which tax reliefs are valuable to you. We can then suggest investment products and services that will allow your business to invest its spare capital in ways that ensure these valuable reliefs are not lost.

At FAS, we know from our conversations with business owners that cash gives them a much-needed cushion during difficult times. So, we understand the need to not take any undue risks. But for many businesses, we think it makes sense to make sure every penny earned by the business is being put to good use, and earning a positive return, rather than sitting idle.


If you are interested in discussing tax planning strategies or business investment 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.

Mar 11
2
Bitcoin on motherboard

Beware the ‘irrational exuberance’ behind Bitcoin

By | Investments

The spectacular rise in the value of Bitcoin is prompting more investors to get involved. But as with any investment, would-be investors need to delve a bit deeper into why these assets are attracting attention, as well as understanding the significant risks involved.

 

After a strong performance over the second half of 2020, global investment markets have been treading water for the last couple of months. In investors’ minds, a tug of war is developing between the much-anticipated post-coronavirus economic recovery and the need for central banks worldwide to keep financial conditions loose. The fear among investors is that inflation is poised to make a big comeback, and this has resulted in the share price of many of 2020’s biggest winners, technology stocks in particular, seeing bouts of profit-taking.

At the same time, Bitcoin seems to be going from strength to strength, raising speculation that the “Bitcoin bubble” shows no sign of bursting just yet. The value of an individual Bitcoin hit an all-time high of $57,489 on 21 February (around £41,000 in sterling), but how much a Bitcoin is worth by the time you read this is anyone’s guess. Bitcoin is an incredibly volatile asset, underlined by the fact that it was valued at just $9,668 (£7,462) on the same day last year.

 

Why has the value of Bitcoin risen so dramatically?

After many years of being treated with distrust and disdain by the financial world, Bitcoin is becoming an accepted part of the modern world. This year, major financial institutions such as BNY Mellon and Mastercard announced they would begin integrating Bitcoin into their payment systems. The reputation of the most well-known cryptocurrency was given another almighty boost after electric car manufacturer Tesla announced it had bought $1.5 billion of Bitcoin for its corporate treasury and would accept Bitcoin as payment for its cars. These announcements helped drive up the price of a single Bitcoin to record levels, and the value of Bitcoin has remained fairly strong even while equity market values have taken a hit.

The complication of Bitcoin is that it is not just a method of payment; it is also an asset class. So, somewhat unsurprisingly, the runaway rise of Bitcoin is leading to more talk of an asset ‘bubble’, drawing comparisons to the famous tulip mania of the 17th century. As with all asset bubbles, the value of the asset reaches unrealistic, even extraordinary, levels because people think it is going to be worth more tomorrow than they were prepared to pay for it today. Once that ‘FOMO’ (fear of missing out) dries up, the value comes crashing back down.

One of the biggest challenges around Bitcoin is that it is supposed to be considered as a valid currency, one that will soon become more mainstream, rather than as purely a speculative asset class or investment. But the volatility associated with Bitcoin makes it almost impossible to use as a currency. Nobody wants to be that unfortunate person who, in 2010, spent $30 worth of Bitcoin to buy a pizza, who would have been sitting on a $350 million fortune today if he had used cash instead.

 

Bitcoin is a huge energy drain

One of the biggest issues is that the process of mining Bitcoins consumes vast amounts of energy. This is because blockchain technology requires a vast network of computers and, as Bitcoin gets more valuable, the sheer effort expended on creating and maintaining it – as well as the amount of energy consumed – also increases. According to research from the University of Cambridge, Bitcoin uses more electricity annually than the whole of Argentina. Bitcoin’s annual total energy consumption is somewhere between 40 and 445 annualised terawatt-hours (TWh).

By comparison, here in the UK, our total electricity consumption is a little over 300 TWh a year. This also brings into question Tesla’s decision to back Bitcoin so heavily, and so publicly, as doing so appears to fly in the face of its environmentally green credentials.

So, taken in total, Bitcoin is a mass of contradictions. It is an investment that is highly volatile, a currency that you would be very fearful of spending, it is burning up fossil fuels at a very troubling rate, and its value is only whatever the market says it is on any given day. In other words, the value of Bitcoin appears to be maintained almost purely on speculation, meaning the bubble could burst any time.

 

An unregulated minefield

It is crucial to bear in mind that cryptocurrency is an unregulated investment. As with all high-risk, speculative investments, it is vital that investors fully understand what they are investing in, the risks associated with investing, and any regulatory protections that apply.

For crypto-asset-related investments, consumers are unlikely to have access to the Financial Ombudsman Service (FOS) or the Financial Services Compensation Scheme (FSCS) if something goes wrong, potentially leaving investors without recourse if an investment were to fail.

Furthermore, increased dangers of criminal activity have been associated with cryptocurrency, such as ransomware and other attacks, which appear to have increased during the Covid-19 pandemic.

 

Importance of diversification

When clients talk to us about Bitcoin, we always start by reminding them of the risks that we have outlined above. But it is also important to recognise that cryptocurrencies are a very new (and very volatile) asset class, and it is impossible to know where it could go from here.

Our suggestion is that if you are aware of the risks and the contradictions surrounding Bitcoin, and you still believe they are an asset that is worth holding, then only put in what you can absolutely afford to lose, bearing in mind that trends wear out and most bubbles do eventually burst.


If you are interested in discussing your investment portfolio 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.

Mar 04
1
Pug dog wearing glasses pointing to graphs on whiteboard

How investment reviews can help to spot the ‘dog’ funds

By | Investments

What is a ‘dog fund’ and what should you do if you hold one in your portfolio? We look at some of the facts behind the ‘dog fund’ label, highlight the big names in the doghouse, and explain how fund reviews can keep your investments on track.

 

What is a dog fund?

Every year, Bestinvest publishes its ‘Spot the Dog’ research. In the September 2020 update, the investment firm identified 150 funds officially in the doghouse, the highest number for 25 years.

To earn the notorious ‘dog’ tag, a fund must deliver a worse return than the market it invests in over three consecutive 12-month periods, and must also have underperformed that market by 5% or more over a full three-year period. The research focuses on unit trusts and open-ended investment companies (OEICs) listed in the equity sectors covered by the Investment Association.

This performance criteria is used to help identify those funds that are consistently poor performers, rather than those that have simply suffered a difficult year. It also filters out tracker funds that aim to replicate the return of a market index (minus running costs). What this means is that behind every dog fund, there’s a fund manager looking very sheepish.

 

What characteristics do dog funds share?

Just as with most other facets of life, there are often lots of reasons behind the disappointing performance of a dog fund. The most recent list of 150 offenders features a number of former high-flying equity funds that did really well for a few years, before crashing back down to earth. Other funds have just continued to plod along, falling further behind their peers and the returns of the market, while still charging high fees for the privilege. Sometimes, things can go horribly wrong for so-called ‘star’ fund managers and for fund management companies.

Perhaps the greatest example of spectacular dog fund fails is the story of the rise and fall of Neil Woodford. When he was at Invesco Perpetual, Woodford ran the Invesco Perpetual Income and High Income funds and was the UK’s most famous and respected fund manager. After Woodford left Invesco in 2014 to start his own fund management company, Invesco never really recovered. Its funds have earned it the unenviable reputation of having the most dog funds in the research for five years in a row.

But after striking out on his own, Neil Woodford hasn’t fared any better either – instead he has ended up ruining his reputation and his legacy. His LF Woodford Equity Income fund became a regular in dog fund tables until it was forced to suspend dealing and ultimately close down in 2019, with investors bearing the brunt of heavy losses.

 

Repeat offenders in the doghouse

One of the most troubling aspects of the most recent Spot the Dog report is the sheer size of the investments within these dog funds. According to Bestinvest, the 150 worst performers hold a staggering £54.4 billion in assets from long-suffering investors. And 18 of these funds manage more than £1 billion each in assets.

 

Which sectors feature the most dogs?

The UK Equity and Global Equity Income sectors have the highest proportion of dog funds (26% in UK Equity Income, and 25% in Global Equity Income, respectively). However, it’s only fair to point out that this poor performance has been added to by the sudden suspension of dividend payments from traditional high-dividend paying companies during the pandemic months of 2020.

 

Why are dog funds dangerous?

As Bestinvest noted in their most recent report, the average fund in the Investment Association UK All Companies sector posted a loss of 5.1% over its three-year period. But the worst dog fund in the same sector fell by 51%, whereas the best performer achieved a positive return of 34%. That kind of underperformance is just not acceptable, and really demonstrates why it is so important sometimes to cut your losses.

 

Which fund providers have the most dogs?

Keeping a watchful eye over the performance of the funds you hold is important. Not only does it ensure that you hold a healthy balance of good performers, but it can help to identify any red flags that you might want to take notice of, such as when an investment company has an unhealthy number of consistently poor performers.

As already highlighted, Invesco has become highly synonymous with the dog fund reputation – proving that old saying about “giving a dog a bad name”. Across all sectors, Invesco currently has 13 funds classed as ‘dogs’ (although two of these funds have since merged). Together, these funds have a total value of £11.4 billion – which means Invesco is responsible for managing just over one-fifth of all assets held within dog funds.

Snapping at Invesco’s heels is St James’ Place, which features eight dog funds across all sectors, with £6.9 billion invested. Fidelity has four dog funds, holding a combined total of £3.9 billion. And Schroders also deserves a dishonourable mention, with a total of ten dog funds featured for a combined value of £2.7 billion. When you think about it, this is an awful lot of money that’s failing to deliver a respectable return for investors.

 

Putting things into perspective

But just because a fund has made an appearance in the dog fund tables doesn’t necessarily mean it should be immediately sold. After all – as we are often quick to point out – past performance really is no guide to the future. Fund management companies could already be taking action behind the scenes to improve the performance of some of their repeat offenders, either by changing fund managers, merging underperforming funds, or redesigning the fund’s investment strategy and approach. Sometimes it’s well worth sticking with a fund while they go through this process.

But knowledge is power, and knowing whether a fund is suffering from just a short-term blip, or whether the fund management company has a lot of poorly performing funds can really help when it comes to asking the right questions and making informed investment decisions.

 

Talk to us for a comprehensive fund review

If you haven’t reviewed your investments for a few months, now might be a good time to come to us for a review of your holdings. We can help you to identify any poor performers, and help you to decide whether it’s worth sticking with those funds for the time being, or whether it’s time to look for better opportunities elsewhere. But it’s always worth having a discussion with us before making any investment decisions.

Dogs have many attractive qualities, loyalty being one of them. But holding onto poorly performing dog funds for too long can have a damaging impact on your long-term wealth.

 

If you are interested in discussing your investment portfolio 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.

Feb 24
0
Red mug with post its on reading Retirement Plan and Pension

Why every personal pension needs an annual check-up

By | Pensions

It doesn’t matter the size of your pension pot, it’s important to review your personal pension on a regular basis, to ensure everything is still on track to give you a retirement to look forward to.

 

There’s no hiding from the fact that pensions are uninteresting. Not only are they a guaranteed conversation killer at parties (remember those?), just thinking about pensions makes you feel older than your years. It doesn’t help that the pensions industry as a whole has made dealing with pensions unnecessarily complicated. People are put off by the technical jargon, and find dealing with the whole world of pensions a bit overwhelming.

 

So, it’s very easy to understand why even the most financially-aware people still view looking after their pensions as an unwelcome chore. It’s far easier to pay them minimal attention, and to simply let them chunter on in the background of our lives, isn’t it?

 

The problem is that for most people, their personal pension is the biggest financial investment of their lifetime, second perhaps only to their home in terms of the amount put in and the value it should accumulate. At FAS, we’ve been advising people on their pension arrangements for 30 years. Throughout this time, we’ve been reminding people that it’s not enough just to start a pension and then ignore it – just as you wouldn’t buy a house and then refuse to maintain it. You need to give your pension attention, and make careful adjustments every now and then. In other words, if you look after your pension, your pension will look after you.

 

Why is it important to regularly review any existing pension plans?

When clients ask us to review their existing pension arrangements for the first time, it can sometimes be quite an eye-opener, for them and us. That’s because of three reasons. First, the sheer number of different investment options available within a pension has increased dramatically in the last couple of decades. Second, how you choose to take your pension benefits has changed, and third, the pensions industry itself has become more sophisticated, more transparent, and far more competitive, meaning that pension management charges are fairer and conspicuously lower.

 

Are you paying the price for staying put?

Often these older pensions are invested in ‘balanced’ or ‘mixed asset’ portfolios that simply haven’t kept up with more modern investment strategies or techniques and therefore aren’t optimised to suit your individual needs and attitudes towards investing. Alternatively, you could be saving into a pension that is performing reasonably well, but where the fees being charged are taking a large bite out of your gains.

As with many products in modern day life, it sometimes feels as if you get penalised for being a loyal and long-standing customer. People in their 20s or 30s are most likely to be benefitting from paying into a pension that has low annual management fees (around the 0.5% mark), whereas people in their 40s, 50s, and 60s stand a greater chance of paying higher pension charges on older, less competitive products. Some of these pensions are charging closer to 2.0% annually. That might not sound like much, but those percentage points can add up to several thousands of pounds. And every pound paid in fees reduces the value of your overall retirement fund.

Poor returns and high fees can really act as a double whammy on a pension, eating into returns and leaving customers with a much smaller pension pot than they could have built up elsewhere. Of course, pensions companies have no incentive to lower the fees on these older, uncompetitive pensions, choosing instead to rely on the inertia from their customers.

 

Are new pensions always better? Not necessarily

Yet while some old-school pension providers are hoping to cling on to their customers through inertia alone, there’s more competition within the pension industry than ever before. In some respects, it has become almost too easy to transfer your pension from one provider to another. That’s why we think it’s so important to treat the new crop of online pension companies with a healthy dose of scepticism.

These online pension providers might promise a no-nonsense service that comes with low charges as standard, but this also means there’s little or no advice available on whether transferring your pension is the best thing to do. When it comes to pensions, it’s vital to remember that cheap isn’t always the best option. It’s far more important to get value for money, and to talk to a financial adviser who knows the right products to suit you.

Expert advice is particularly important when dealing with older pensions, which often come with lots of potential traps you could inadvertently step into. We can do the work to make sure you aren’t hit with costly exit penalties, or where transferring means you risk losing valuable benefits that are no longer available from today’s pension products, such as a guaranteed annuity rate. We can help to determine whether it is worth merging some or all of your older pension pots with your current one, and to find the right pension to suit your retirement plans and need for income or capital.


Final thought

Spending time to think about your pension might feel like something you want to put off indefinitely, but it really doesn’t have to take long and it could end up saving you thousands of pounds in fees and lower returns. If you think your pension would benefit from a review, the first step is to get in touch and book an initial telephone pension consultation with one of our pension experts. Let us do the hard work, because helping sort out pensions is something we love to help our clients with (even if we usually don’t talk about it at parties).

 

If you are interested in discussing your current 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.