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FAS

Mar 09
0
Graphic of a For Sale sign with writing alongside reading 'Can you afford it?' representing the affordability crisis

The Affordability Crisis

By | Financial Planning

We have commented on the prospects for house prices on a number of occasions over the last year, and highlighted the immediate headwinds that are likely to face the housing market. Recent data published by Nationwide has supported this view, as their House Price Index has now fallen by 3.2% from the peak in August 2022 to January 2023, and further weakness is likely over coming months. A recent report commissioned by Schroders on housing affordability has underlined how stretched current property valuations are and suggests that house prices could correct further in the near term.

 

High earnings multiples

The Schroders report analysed the average UK house price as a multiple of average UK earnings, and at nine times earnings, the last time UK house prices were this expensive relative to earnings was over 150 years ago. Apart from a blip during the 2008-9 Great Financial Crisis, the last 20 years has seen home ownership becoming steadily less affordable.

There are a number of reasons why affordability has been steadily falling. For many years, demand for housing has outstripped supply, and according to data from the Office for National Statistics (ONS) the UK population increased by 3.4m between 2011 and 2021, but only 1.9m new dwellings were built.

Wages have also lagged behind the pace of house price increases. Between 2012 and 2022, prices across the UK registered an average increase of 5.3% per annum (according to Rightmove), compared to average wages, which increased by an average of 2.7% per annum over the same period (Source ONS). More recently, however, wage inflation has picked up, with average earnings increasing by 6.4% over the three months to November 2022, compared to the same period in 2021.

 

Mortgage pressures starting to ease

Borrowers have become conditioned to low interest rates since 2008, and as a result, covering mortgage interest payments has not been a major concern for many holding a mortgage. Over the last 15 months, the UK Base Rate has increased sharply, increasing from 0.15% to 4%, which means that those borrowers on a variable or tracker rate will have experienced a series of hikes in their payments.

Fixed mortgage rates also increased during the first half of 2022, but the very sharp acceleration in fixed mortgage rates last October has added to the pressures on the housing market. As a result of the ill-fated mini budget, announced by former Chancellor Kwasi Kwarteng just six months ago, Gilt yields increased rapidly, which in turn pushed up the cost of securing long-term debt for mortgage lenders. As is often the case, however, the market reaction has turned out to be an over-reaction; at one point, the market rate was implying that the Bank of England Base Rate would hit 6% by the middle of this year. This is looking increasingly unlikely, and indeed, the Bank of England may actually be close to reaching the end of the rate hiking cycle, with Base Rates sitting at 4%.

Given the downward adjustment in base rate expectations, it is possible that the effect on the housing market will be lower. There are, however, a large number of mortgage holders, whose fixed rate mortgage deal is coming to an end during 2023. These individuals are highly likely to see a jump in their mortgage payments, although as fixed rates have fallen back from their peak, the effect is now likely to be less than was feared only 3 months ago.

 

Deposit concerns

For many first-time buyers, gathering a deposit still remains the biggest hurdle to home ownership. We have previously covered how the “Bank of Mum and Dad” is the UK’s 10th largest lender measured by total loans issued, and our previous article highlighted some of the potential issues that can arise by gifting funds for a deposit.

With house price affordability so stretched, parents and grandparents may well be tempted to provide larger gifts to help family onto the housing ladder. However, parents and grandparents need to consider their own financial position carefully before making a gifted deposit.  For example, giving away capital sums when retired, or close to retirement, can not only diminish the amount of savings or investments held, but also reduce the level of income that could be generated by any capital that is gifted. In addition, this could mean that funds are also no longer available to cover any unexpected expenditure that faces the parent or grandparent, and children will often not be in a financial position to return the favour if the parents require funds.

 

Solving the affordability conundrum

House price affordability can only improve by an increase in house construction (thereby easing the supply issues) an increase in earnings, or a fall in prices. In reality, it may well be a combination of all three factors that eventually improve house price affordability. However, we feel this may take many years to correct, and in the meantime, house price affordability is likely to remain stretched.

For anyone looking to gift a deposit to help ease the affordability conundrum, we can provide advice on the implications of gifting capital. We also highly recommend parents and grandparents seek independent legal advice before taking any action to help a family member with a deposit.

If you would like to discuss the above in more detail, please speak to one of our Financial Planners here.

 

The value of investments and the income they produce can fall as well as rise. You may get back less than you invested. Past performance is not a reliable indicator of future performance. Investing in stocks and shares should be regarded as a long term investment and should fit in with your overall attitude to risk and your financial circumstance.

Mar 02
0
Group of lightbulbs with shining fibres in the shape of words including 'service', 'advice', 'support', 'assistance', 'help' and 'guidance'

Choosing the right Adviser

By | Financial Planning

Taking financial advice can make a real difference in helping you achieve your aspirations, at all stages of life. As a Chartered, independent advice practice, we view our independence as being a vital component of the service we offer to clients, and we are proud of this status. Of equal importance is our ability to take a holistic approach to financial planning, whereby we consider your wider financial planning concerns and focus on your financial goals. In this article, we will explain why we value our independent status, and how taking a holistic view can help us tailor the advice that we give.

 

Restricted vs Independent Advice

Financial Advisers and Planners fall into one of two camps, ‘Restricted ‘and ‘Independent’. Being ‘Restricted’ means an Adviser can only recommend products from a limited selection or product range. For example, this could be an Adviser in a bank or other product provider, who can only consider and recommend products and services from that company. It could also mean an Adviser who can only advise on a limited number of areas of financial planning or is unable to review existing arrangements that you may have in place.

This contrasts with an ‘independent’ Adviser, such as FAS. As independent Advisers, we can consider products from a wide range of companies across the market and will give unbiased and unrestricted advice.

In practice, being independent means that we can take a totally impartial view when it comes to selecting a solution or product and can take into account all relevant criteria – such as cost, features and ease of administration – so that we can recommend products that provide the most appropriate fit to a particular set of circumstances.

Using a Restricted Financial Adviser doesn’t necessarily mean you run the risk of receiving poor advice. All Financial Advisers must have a similar minimum level of qualifications and meet the same standards. Using a Restricted Adviser, however, does mean that the choices available to you may be limited, and the advice they give you may not be the best available, or meet your needs.

 

Taking a holistic approach

At FAS, we always take a holistic approach to financial planning with our clients. This means we really take the time to understand all aspects of the complex picture that makes up a client’s financial circumstances. Of course, as part of the initial assessment, we will need to understand the current arrangements a client holds, such as existing pension plans or investment accounts, life assurance and other protection arrangements. This analysis is crucial to understand how appropriate the current plans are and whether they can be improved. However, a holistic planning approach goes much deeper, to look at how these arrangements fit into the “bigger picture” that makes up an individual’s current financial position and their aims for the future.

Holistic planning also aims to help clients define their financial goals and objectives, so that the advice we then give is tailored to help achieve that goal. Often clients have several objectives and goals, and using a holistic approach can help clients place those targets in a priority order.

Of course, life doesn’t always go according to plan, and circumstances change from time to time. For example, a client could lose their job, receive an inheritance, face divorce, be diagnosed with an unexpected illness, or welcome a new addition to the family, any of which could force a shift in those priorities. By reviewing a holistic plan regularly, we can look to adapt existing arrangements to meet the challenges or opportunities presented by the change in circumstances.

One particular area that benefits from taking this approach is when we meet a client who is considering their retirement options. For example, we help clients to identify the level of retirement income with which they will feel comfortable, by considering all aspects of a client’s position. This can help focus a client on the affordability of the kind of retirement that they wish to achieve, and also potentially help them come to a conclusion on other planning decisions, such as whether early retirement is a sensible decision.

This approach often identifies areas that need close attention that the client hasn’t given any thought to. These can be as varied as looking at the implications for Inheritance Tax if the client were to die, to looking at financial planning to help children and grandchildren or considering alternative ways of generating an income in a tax efficient manner.

 

Getting the most out of financial planning

We feel that choosing a Financial Adviser that takes a holistic approach can help tailor the advice and solutions to an individual’s precise requirements, and take into account important aspects that are relevant that could be overlooked by traditional financial advice. We also are firm believers in the benefits that true independence can bring to the advice proposition.

 

If you would like to obtain holistic advice, speak to one of our experienced Advisers to discuss your requirements, here.

 

The value of investments and the income they produce can fall as well as rise. You may get back less than you invested. Past performance is not a reliable indicator of future performance. Investing in stocks and shares should be regarded as a long term investment and should fit in with your overall attitude to risk and your financial circumstance.

Feb 23
0
Crowd of black Umbrellas with one unique blue outstanding umbrella

Investing with Conviction

By | Investments

When selecting funds to add to an investment portfolio, many are attracted by actively managed investment funds, rather than passive funds, that aim to track an index. One of the most obvious reasons is that a passive investment, which replicates some or all of the components of an index, is unlikely to ever outperform the benchmark index.

Passive investments do, however, carry some advantages over actively managed funds. Passive funds provide broad exposure to an index, and generally carry low fees. That is why we hold an allocation to passive investments within our own discretionary managed portfolios, to provide an element of broad market exposure.

Our investment approach also looks to add actively managed funds, where a manager or management team select positions within their universe of stocks or bonds. The aim of active management is, of course, to select the best performing positions within the portfolio, and avoid the weaker performers, thus outperforming the representative benchmark. Active management does, however, come with a cost in terms of higher management fees, and it is therefore important that investors get good value for money.

Selecting active funds to hold in a portfolio can be a daunting process, due to the sheer number of funds available to UK investors, and this process isn’t made any easier as some active funds hold a very diversified range of positions. These “pseudo-trackers” potentially only produce returns that deviate from the index return by a small margin. This over-diversification may well lead to portfolio returns that closely follow the benchmark, which may prompt the investor to question what benefit the active manager can provide over a passive portfolio approach. This is particularly important when considering an Equities passive fund can carry an annual management charge of 0.10% per annum, compared to actively managed funds, where annual management charges of between 0.75% and 1% per annum are typical.

At the opposite end of the investment spectrum are what we describe as “high conviction” funds. These are funds with a very different investment approach and tend to hold a concentrated portfolio of investments within the fund. This can be as little as 20 stocks, but typically falls in the range of 30-60 stocks, which may well be highly concentrated when considering the universe in which the fund operates.

By constructing a concentrated portfolio, the manager will look to hold larger positions in stocks that aim to outperform, which in turn can improve the fund performance compared to the benchmark. High conviction funds tend to focus very heavily on stock selection, and as a result, portfolio turnover may well be lower than average. Furthermore, managers may well look to stick with positions through a market cycle, which can mean that funds can weather uncertain market conditions.

Selecting high conviction funds places greater emphasis on careful fund selection, as the decisions taken by the manager, or management team, have a much larger influence on returns. This is where expert fund analysis, focusing on the strategy adopted by the managers and careful review of the manager’s track record, can help identify high conviction funds with the best chance of outperforming benchmark returns.

When constructing our portfolios, the FAS Investment Committee meets regularly with leading fund houses and question the active managers directly to gain a better understanding of the investment approach adopted. Combined with advanced quantitative fund selection tools, our experienced team can filter the large number of funds available to UK investors, with the aim of selecting a number of high conviction funds to blend with broad passive market exposure. We feel that taking this disciplined approach to fund selection and portfolio construction can lead to strong and consistent returns over time.

If you would like to hear more about our investment strategy, please speak to one of our Financial Planners here.

 

The value of investments and the income they produce can fall as well as rise. You may get back less than you invested. Past performance is not a reliable indicator of future performance. Investing in stocks and shares should be regarded as a long term investment and should fit in with your overall attitude to risk and your financial circumstance.

Feb 16
0
Graphic of the word Tax with a pair of scissors representing tax changes in the new Tax Year

Tax Year end planning

By | Tax Planning

With the end of the Tax Year just around the corner, now is the time to consider any important planning decisions that are needed to ensure that your finances are as tax efficient as possible. This is particularly important as allowances are often lost if not used. The beginning of the next Tax Year heralds a number of changes to tax allowances affecting both Capital Gains Tax and Income Tax, so perhaps even more than ever, it is a good time to reassess the tax-efficiency of your investments and savings.

 

Make use of the ISA allowance

Individual Savings Accounts or ISAs have become a popular choice for savers and investors over recent years, as they enjoy a preferred tax treatment, whereby all income, interest or dividends generated from the assets held in the ISA are exempt from Income Tax, and any gains made on disposal are free from Capital Gains Tax. An ISA can hold Cash or Stocks and Shares and other investments, and irrespective of which ISA or ISAs are selected, the total contribution limit for adults across all ISAs in the 2022/23 Tax Year is £20,000. Taking full advantage of the allowance is important for anyone who pays Income Tax on their savings or dividend income or wants to avoid Capital Gains Tax on future gains.

The Junior ISA allowance is £9,000 in the current Tax Year. Junior ISAs let you save and invest on behalf of a child under 18 in a tax-efficient manner, and as with the main ISA allowance, this allowance is lost if not used.

 

Review Investment Portfolios

For those who hold investments outside of an ISA, it is more important than ever to consider whether it would be sensible to use the annual Capital Gains Tax allowance. This allowance covers the gain on disposal of assets (such as shares, investments and second properties) and in the current Tax Year, the allowance is £12,300 per person. In the 2023/24 Tax Year, this allowance will more than halve to £6,000 and then halve again to just £3,000 in the 2024/25 Tax Year. Any gains in excess of this allowance are taxed at 10% or 20% (in the case of investments) and 18% and 28% (for property), with the tax rate dependant on the overall tax position of the individual.

The Capital Gains Tax allowance can’t be carried forward, so it is important to consider whether it would be appropriate to sell assets to use the available Capital Gains Tax allowance, in particular as the allowances will be significantly reduced in future Tax Years.

The annual Dividend Allowance is also reducing from 6th April 2023. In the current Tax Year, the first £2,000 of dividend income is tax-free; however, this will fall to £1,000 for the 2023/24 Tax Year, and then to £500 from 6th April 2024. This will mean many individuals who currently avoid Tax on their dividends will begin paying 8.75% (for a basic rate taxpayer), 33.75% (for a higher rate taxpayer) and 39.35% (for an additional rate taxpayer) on dividend income that exceeds the reducing allowance.

Anyone with an investment portfolio that is not held in a ISA should be actively reviewing their investments to see if any action is warranted before the end of the Tax Year. This is where a comprehensive and independent review of existing portfolios could be a sensible step to take, not only from a tax-efficiency perspective, but also in terms of portfolio asset allocation and structure, and to review whether the portfolio continues to be appropriate for your needs and objectives.

 

Contribute to a Pension

As we approach the end of the Tax Year, now is the time to consider whether it is appropriate to make further pension contributions. Most individuals can make contributions of 100% of their earnings or £40,000 (whichever is the greater) in each Tax Year. Any unused Pension Annual Allowance can be carried forward for up to three tax years, and therefore anyone wishing to use any unused 2019/20 annual allowance has until 5th April 2023 to do so. For anyone who does not have a pension in place, and wishes to make large contributions in the future, making a contribution in the current Tax Year could mean that any unused Allowance in this Tax Year can be carried forward for use in the next three Tax Years.

 

Inheritance Tax planning

The annual Gift exemption is an annual amount that you can give away without having to pay any attention to the Inheritance Tax implications of making the gift. The annual exemption is £3,000 per individual, and couples could therefore give £6,000 away each Tax Year. This exemption can only be carried forward for a single Tax Year, so it is important for those who want to maximise this exemption to take action.

In addition to making gifts out of capital, surplus income can also be gifted away under certain circumstances. These rules are complex, but in short, if you have sufficient income and the amount you wish to gift does not reduce your standard of living, then making regular gifts of excess income could be sensible planning and reduce a potential liability to Inheritance Tax. We believe it is important to seek advice and guidance if you are planning to take advantage of these rules, and also to keep good records of actions taken.

 

The benefit of a holistic financial review

With the end of the Tax Year fast approaching, making use of available allowances is always important; however, we feel the changes to Capital Gains Tax and Dividend Allowance in the next Tax Year warrant extra attention before 5th April 2023. Speak to one of our experienced financial planners who will be able to undertake a holistic review of your finances to see whether any action is needed before the end of the Tax Year.

 

If you are interested in discussing the above further, please speak to one of our experienced advisers here.

 

The value of investments and the income they produce can fall as well as rise. You may get back less than you invested. Past performance is not a reliable indicator of future performance. Investing in stocks and shares should be regarded as a long term investment and should fit in with your overall attitude to risk and your financial circumstance.

Feb 09
0
Business man with laptop sitting on a log in a forest

The drive towards sustainability

By | Investments

The COP27 climate change conference held in Egypt concluded late last year with a number of key agreements that may impact investment decisions in the future. Perhaps the most eye-catching agreement was reached on the last day of the conference, as developed nations agreed to establish a dedicated fund to assist developing countries rebuild infrastructure caused by extreme weather events. The conference also reaffirmed the 2015 Paris Agreement, where nations committed to pursue efforts to limit global temperature increases, and also agreed to focus on low-emissions energy, through wind and solar, to carbon capture and storage.

So what does this mean for investors? Almost every company and investment fund has been influenced by the environmental agenda for some time, and the decisions reached at COP27 underline how businesses will need to consider the environmental impact of their operations in the future. Companies are already moving in a consistent direction of travel towards greater sustainability, better corporate governance and consideration of the social impact of their business.

This drive towards sustainability is being adopted by most global companies, although companies are moving in different ways and at different speeds. Common themes adopted by many companies is to reduce use of fossil fuels in the manufacturing process, moving away from single use plastic to recycled products, and switching to renewable energy sources. It is good practice as well as being good for the planet, as consumers are becoming increasingly conscious about the sustainability of the products they purchase, and companies want to be seen to be doing business with other companies that share similar views, ethos and outlook when it comes to sustainability.

Amidst the clamour to be more sustainable, it is important that investors can rely on the transparency of data, so that they can make informed investment decisions. Over 90% of the constituents of the S&P500 index now issue an annual Sustainability Report, and sets of standards have been introduced covering a diverse range of impacts, from use of natural resources, pollution and waste measures, to impact on local communities, human rights and anti-corruption.

Whilst undoubtedly a positive move, trying to provide investors with key data that allows comparison between different organisations is difficult, as one or more factors can be specific to a sector of industry. A further hindrance are the different measures used by the various global sustainability standards that companies use to prepare the reports, which can make interpretation of the results more difficult.

Given the importance that many investors, consumers and businesses now place on sustainability, regulators are becoming more concerned about “greenwashing”. This is where a company uses language and imagery that claims that its products are environmentally friendly or have a greater positive environmental impact than they actually do. Whether undertaken deliberately or innocently, a greenwashed product can tap into the growing desire that investors and consumers have to invest in a sustainable manner, and companies found guilty of greenwashing can be subject to reputational and financial damage. Take the case of Volkswagen, who admitted cheating emissions tests by adding software that recognised when engines were being tested and changed the engine performance accordingly. Not only did this cause significant reputational harm, but the company also suffered a financial penalty of $4.3bn*.

As awareness of sustainability increases, many investors appreciate that avoiding companies that harm the environment or promote what some may see as unhealthy products, such as tobacco or gambling, is difficult. This is why our Socially Responsible portfolios aim to take a common-sense approach, by focusing on those funds who aim to invest with sustainability in mind, but adopt a strategy that is not too restrictive so as to reduce the universe of available investments, which could potentially hurt investment returns over the longer term.

If you would like to move your portfolio towards a more sustainable footing, then speak to one of the advisers at FAS about our Socially Responsible portfolios, here.

 

*Source: – justice.gov/opa/pr/volkswagen-ag-agrees-plead-guilty-and-pay-43-billion-criminal-and-civil-penalties-six

 

The value of investments and the income they produce can fall as well as rise. You may get back less than you invested. Past performance is not a reliable indicator of future performance. Investing in stocks and shares should be regarded as a long term investment and should fit in with your overall attitude to risk and your financial circumstance.

Feb 02
0
Robot hand tapping on graphic of trading data

Robo-advice….system malfunction?

By | Investments

The financial services industry is often known for innovation, although not all ideas gain traction in a crowded marketplace. The first robo-advice services were born out of the financial crisis in 2008, when US firms Betterment and Wealthfront launched the first automated advice services, which were touted as major disruptors to the financial services industry. However, given the struggle that robo-advice firms face to turn a profit from their activities, and significant flaws in the efficacy of a robo-advice process, some are beginning to question whether robo-advice has a long-term future.

 

Automated advice

The journey to obtaining robo-advice is an online experience. Depending on the robo-advice provider selected, the website will ask a series of questions relating to an individual’s appetite for investment risk, time horizon for investment and other key factors. By using a computer algorithm, an investment portfolio is then selected from a small range provided. These portfolios are usually invested in passive investments, such as Exchange Traded Funds, and some services provide rebalancing of the portfolio at regular intervals.

Given that most robo-advice services only use passive investments, that track a particular index or set of indices, there is little ability for a fund to outperform markets generally. This is where investors can miss out on potential returns offered by actively managed funds, where costs are higher, but performance can exceed the index return over time. Of course, actively managed funds can also underperform their target return, and this is where the value of advice can help select good performing funds, which are reviewed regularly.

Robo-advice services are also restricted, which means that they can only provide advice on products and funds from a severely limited range. This is in stark contrast to an independent, whole of market advice service, who can select the most appropriate solution and select funds from across the market.

 

Limited range of options

As the decision-making process is automated, the investor has very limited control over the assets chosen by the algorithm used by the robo-advice service. Whilst some offer options to take into account ethical or socially responsible investments, there is little the user can do beyond this to tailor what is selected for their investment portfolio.

The advice service provided by a robo-advisor is very much hands-off. There is usually limited human interaction and the services lack the personal touch that face to face financial advice can provide. This is, in our opinion, the key flaw of robo-advice. The essence of the service that a human financial adviser can provide is that the advice given is tailored to each client’s specific needs and objectives.

 

Questions about suitability

Ensuring that investment decisions are suitable is a key component of effective investment planning, and this is where algorithms led by rudimentary questionnaires can leave significant gaps. A human adviser can really get to know and understand a client, considering elements such as their past knowledge and experience of investment markets and emotional reaction when talking about the potential for investment volatility. A holistic advice service can also consider wider financial planning considerations, such as making tax-efficient decisions to reduce current or future tax liabilities, and areas that clients often don’t immediately consider, such as protection needs. An automated service also cannot consider decisions outside of the computer algorithm; for example, whether a client should repay their mortgage rather than consider an investment or make a pension contribution instead of using their ISA allowance.

 

Not as cheap as one might expect

One of the key drivers towards an automated investment process is cost, and given the lack of human interaction, one would expect the overall cost of a robo-advice service to be low. This is an attraction to some investors who place a low-cost service at the top of their wish list, although we would contend that value for money is a more sensible metric for most investors to consider. That being said, despite the lack of personal advice, robo-advice is not cheap, with platform charges levied by leading UK robo-advisers higher than those charged by direct and advisor platforms who offer access to a wide range of fund options.

 

Making the breakthrough

Despite the higher charges, robo-advisers are struggling to gain traction, and the high financial cost of establishing the service and infrastructure, together with marketing in a crowded space, means that many services are some distance from profitability. Not helping this struggle is the average investment size held on robo-advice platforms. One of the biggest advantages robo-advice can offer is the ability to handle small investments, and many services do not stipulate a minimum investment size. Whilst this may increase user numbers, firms will struggle to make significant progress handling smaller portfolios. Global data compiled by Statista shows that the average size of a robo-advice portfolio is under £5,000, and if this trend continues over the longer term, charges may have to increase or service levels could fall, as firms try and move towards profitability.

 

No substitute for traditional advice

It is clear that robo-advice has a place in the crowded financial services marketplace, although they may struggle to gain mainstream traction. They have, however, provided positive benefits to the industry and have almost certainly helped push a digital revolution in the market which has been adopted by most providers, who now provide easy-to-use online access to funds held on their platform. This has also helped drive down costs and improve service levels offered by mainstream providers.

Whilst some may be happy to use a robo-advice service, we feel this is no substitute for independent human financial advice. Leaving investment decisions to a computer algorithm has the potential to lead to an investment portfolio that doesn’t suit an individual’s requirements, and not being able to factor in wider financial planning needs or tax considerations places robo-advice at a distinct disadvantage. Speak to one of our advisers for impartial, tailored advice with human interaction.

For more information on the above, please speak to one of our experienced advisers here.

 

The value of investments and the income they produce can fall as well as rise. You may get back less than you invested. Past performance is not a reliable indicator of future performance. Investing in stocks and shares should be regarded as a long term investment and should fit in with your overall attitude to risk and your financial circumstance.

Jan 26
0
Hand holding magnifying glass on yellow background over the word Pension

Pension Wise – the need for proper advice, not just “guidance”

By | Pensions

The Pension Freedom rules, announced in the 2015 Budget, provided those with Defined Contribution pensions with much greater flexibility and choice as to how to draw their pension. Alongside the announcement of the new rules, the Government launched the Pension Wise service, which provides free and impartial guidance and information for those approaching retirement.

 

Pension Wise appointment

Anyone aged 50 or over, with a UK based Defined Contribution pension, can book an appointment through the Pension Wise service. The appointments last around 60 minutes and are carried out over the phone or face-to-face through Citizens Advice delivery centres. The purpose of the appointment is to go through the various ways you can access your pension savings and will also cover the tax implications of each option. It will also explain the ability for the pension holder to shop around, particularly in relation to the purchase of pension annuities, and help the user identify pension scams and avoid becoming a victim of what is sadly a growing trend.

Pension providers are now compelled to nudge consumers towards Pension Wise when they make direct contact with a provider to access their pension savings. Prior to June last year, pension providers were only compelled to signpost the Pension Wise service to those accessing their pension; however, the rules have been strengthened, so that the consumer who approaches a pension provider directly must be referred to the Pension Wise service prior to being able to access their pension.

 

What to do next

It is clear an appointment with Pension Wise may be a positive step and a way of arming yourself with information as to the options that are open to you. However, it is at this point that the crucial decisions need to be taken, where signposting and generic guidance won’t provide the answers.

The introduction of the Pension Freedom rules has undoubtedly been a success and put the control in the hands of individuals as to how they access their pension pot. However, the rules are now significantly more complex, and there are many variables to consider that a guidance service simply can’t take into account. Furthermore, depending on the action taken with the accumulated pensions, there may be no way of undoing a mistake which could prove costly over the long term. This is where independent and holistic advice can help you take the right decisions.

 

Looking to the long term

One of the first areas to consider is how your pensions are currently invested, and this is beyond the scope of a Pension Wise appointment. Flexi-Access Drawdown remains a very popular way of drawing benefits and this will mean that the pension remains invested for the long term. It is, therefore, crucial that the funds in which the pension pot is invested perform well and offer good levels of diversification. This is where a clear, defined investment strategy provides a significant advantage, although any investment strategy put in place should be reviewed regularly to ensure that the plan remains appropriate for your evolving needs and objectives.

Many people acquire a series of workplace pensions throughout their lifetime and holding multiple plans can make successful investment planning all the more difficult. One option is to combine plans into a single arrangement, and whilst this often provides advantages, it isn’t right for everyone. This is where taking tailored advice, rather than relying on guidance, can look at the specific options and advise on the right path to take.

 

Watch out for pitfalls

Different pension schemes and arrangements have varying rules, depending on the scheme. Some older style pensions, in particular, carry valuable benefits, such as enhanced Tax-Free Cash, guaranteed annuity rates or growth rates. This may not be immediately apparent from communications received from the pension provider and discovering the finer details of a pension arrangement is an important step to take before looking to draw benefits from a pension. Taking individual advice can discover all aspects of an arrangement and potentially avoid losing a valuable benefit by taking the wrong course of action.

 

The tax trap

The tax treatment of pension arrangements carries several traps, which the unadvised pension holder could easily fall down. For example, drawing a flexible income could mean that limits are imposed on making further contributions. Pension holders may also wish to access tax-free cash but taking an income may have an adverse impact on their tax position if they are still working. This is where a guidance service can only go so far and is no substitute for personalised advice.

 

Guidance is limited

Whilst a useful starting point for those approaching retirement, it is important to recognise that a Pension Wise appointment can only offer guidance on the options available. Pension Wise cannot provide advice, which is bespoke and takes into account your personal circumstances. This is where someone who has used the Pension Wise service may question their next steps and moving on to seek independent advice can help structure pension arrangements to suit the retirement you are aiming for.

 

Please speak to one of our experienced advisers who can provide the right advice tailored to your specific aims and objectives, here.

 

The value of investments and the income they produce can fall as well as rise. You may get back less than you invested. Past performance is not a reliable indicator of future performance. Investing in stocks and shares should be regarded as a long term investment and should fit in with your overall attitude to risk and your financial circumstance.

Jan 12
0
Mature couple in their kitchen reviewing finances on their laptop - Understanding the Lifetime Allowance - the rising cost of retirement

Understanding the Lifetime Allowance

By | Pensions

Using a pension is a highly tax-efficient way of saving for retirement. Whilst there is no limit to the amount of pension savings that can be built up by an individual, any pension benefits drawn above a stated level are liable to an additional charge to tax. This is known as the Lifetime Allowance, and the allowance currently stands at £1,073,100.

 

History of the Lifetime Allowance

The Lifetime Allowance was introduced in 2006, and prior to this date, there was no limit placed on the value of pension savings. When introduced, the allowance was initially set at £1.5m and as one might expect, with prices rising over time, the allowance increased to £1.8m in 2012. This was, however, the highest allowance provided, and the allowance was subject to a number of gradual reductions to stand at just £1m by 2016. The allowance slowly increased in line with inflation after this date but was frozen at the current level in 2020. The Budget in March 2022 confirmed this freeze would remain in place until the 2025/26 Tax Year, which will lead to a further real terms reduction in the allowance, when adjusted for inflation.

 

How to value a pension against the allowance

For those with Defined Contribution pensions, considering the current value of pension savings against the allowance is relatively easy. However, calculating the value of final salary (defined benefit) pensions for lifetime allowance purposes is not so straightforward. For this type of pension, the annual pension accrued is multiplied by 20, although if a separate lump sum is provided by the scheme at retirement, this also needs to be taken into account.

 

Testing against the allowance

The value of pension savings is tested against the Lifetime Allowance when you start drawing a pension. In the case of a Defined Benefit pension, this will be when the pension comes into payment. For Defined Contribution pensions, this is on each occasion that income, or a lump sum, is taken from the pension. The allowance is also tested if you reach the age of 75 and have pension savings that have not been drawn, or if an individual dies before the age of 75 and hasn’t drawn their pension savings before death.

 

What is the charge

If your pensions are collectively worth more than the Lifetime Allowance when drawn, you are likely to face an extra tax charge. What this charge will be, depends on how much you exceed the limit by, and also the method by which you draw your pension. If the amount above the allowance is taken as a lump sum, the tax charge on the excess is 55%, or if the excess is taken by way of pension income (for example via drawdown or an annuity) the tax charge is 25%, which is added to any income tax due on the pension income drawn.

 

Planning ahead

As pension values increase, it is important that individuals consider whether they are likely to face a Lifetime Allowance charge. This is where future planning can be helpful, as an estimate of the likely position at retirement can be calculated by considering an estimate of the likely contributions that will be made in the future, and what growth could be achieved (in the case of a Defined Contribution pension) on the value of the existing pension pot.

Protections exist that enable an individual to benefit from a higher Lifetime Allowance, although there are strict criteria that need to be adhered to in order that the individual benefits from the protection.

 

Criticisms of the Lifetime Allowance

As tax relief is provided on contributions into a pension, it is reasonable that legislation places certain restrictions to avoid the pension system becoming too generous and costly to the Exchequer. The Lifetime Allowance, however, has long been the subject of criticism, as being punitive and a disincentive to long term saving.

One reason is that the allowance can be considered as a tax on growth, as the value of the pension pot is measured against the allowance when benefits are drawn, with no reference to the amount contributed into the pension.

The Lifetime Allowance has also been cited as a major reason that highly experienced medical professionals are opting to take early retirement. Given that many will breach the Lifetime Allowance by the time they reach 55, highly paid professionals may look to reduce their hours, or leave the profession altogether.  This doesn’t only affect the NHS, it also has an impact on individuals working in other skilled professions, for example the judiciary.

 

Holistic planning can help

For those who are already affected or may become liable to a Lifetime Allowance charge in the future, there are a range of options that can be considered, including ceasing or restricting contributions or reducing hours (or potentially taking early retirement). For others, it is best to approach the situation by considering methods of mitigating the tax charge that will apply on taking benefits. The crucial point is that one size certainly does not fit all, and this is where independent, holistic advice – taking into account all aspects of an individual’s circumstances – can be beneficial.

It is also important not to leave planning too late, as this affords time to make appropriate decisions.

If you expect to be affected by the Lifetime Allowance or would like to review your existing pension arrangements, please speak to one of our experienced advisers here.

 

The value of investments and the income they produce can fall as well as rise. You may get back less than you invested. Past performance is not a reliable indicator of future performance. Investing in stocks and shares should be regarded as a long term investment and should fit in with your overall attitude to risk and your financial circumstance.

Jan 05
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Graphic of 2023 with person sitting on it holding telescope representing looking ahead to the new year

A brighter New Year ahead?

By | Investments

Investors will be pleased to see the back of 2022, a year that brought war to Europe, a cost-of-living crisis and a looming recession. The start of a new year is naturally a time to be optimistic and look forward to better times ahead. Whilst risks certainly remain, there are good reasons to suggest that asset markets will enjoy a more positive year in 2023.

 

Fears of recession – Central Banks hold the key

2022 was dominated by inflation, which was driven markedly higher than expectations due to the economic effects of the war in Ukraine. The US Federal Reserve, Bank of England and European Central Bank raised interest rates over the course of the year in a bid to bring inflation back under control, ignoring the potential risks of pushing economies into recession. US inflation has now fallen consistently from the peak in June, which is a trend we expect will continue throughout 2023, and inflation in the UK may well now be past the peak.

The Fed have indicated that they are content to slow the pace of future rate increases, and indeed, we feel that rates across the Western world are not far from a pivot point. In the first quarter, we expect markets will continue to hang on every word uttered by central bankers, looking for a clear signal that they have taken the action they feel necessary to bring inflation under control.

Whilst the global economy may not fall into recession this year, a mild, shallow recession in the US, UK and Eurozone is a probable outcome. As economies contract, attention will then turn to central banks, who could look to ease monetary conditions by the end of the year. This could herald a significant change in market sentiment, and be a positive sign for asset prices generally.

 

Mind the gap

Following a difficult year for Equities, global market valuations now look more appealing than they did at the start of 2022. Weak price action over the course of the year has led to attractive valuations, particularly in sectors such as Technology. What isn’t clear, however, is whether earnings can match market expectations, or if recessionary conditions are sufficient to dent corporate earnings as 2023 progresses. Much will depend on how resilient consumers remain in the face of rising costs, and whether unemployment rises appreciably. Across the Western World, structural changes following the pandemic continue to lead to staff shortages in many industries, and we suspect unemployment may not be the issue that would ordinarily be the case as an economy enters recession.

 

Bond reset

The rapid rise in inflation and pace of interest rate increases during 2022 battered Government and Corporate Bonds. As a result, valuations have become attractive, and investment grade and Government debt now offer yields that look appealing, as interest rates are close to their peak and could potentially fall by the end of the year. Whilst it is tempting to look at the yields offered by higher yielding debt, default risk could rise and it may well be preferable to focus on credit quality during 2023.

 

Time to look East?

With growth likely to remain subdued in the US, UK and Eurozone, investors may well be tempted to look towards Asia and Emerging Markets for growth. There are clearly opportunities here, in particular in China, where their zero-Covid policies, which are now being eased, have hampered growth. Chinese Equities underperformed significantly over the last year and whilst valuations could be attractive, investors may need to be patient as Covid cases climb following the easing of restrictions, and concerns over the ailing property market continue. Japan also looks interesting, as inflationary pressures are lower here and domestic demand looks solid.

 

A more stable political year ahead?

Since the turn of the decade, investment markets have been buffeted by a series of external shocks, from the Covid-19 pandemic, to the war in Ukraine, a global inflationary spike and the potential for recession. Clearly, geopolitical risk has not gone away, as the war in Ukraine seems unlikely to reach a swift conclusion, and tensions between the US and China continue. The political landscape has also been unhelpful to investors, as continued uncertainty in Westminster and on Capitol Hill have weighed on sentiment. 2023 could, however, be a year where politics has less of an impact. The US mid-term elections are out of the way, and with the revolving door of number 10 appearing to have stopped spinning  – for now at least – we expect markets can focus on economic, rather than political factors, over the coming year.

 

Headwinds for housing

We fully expect the UK housing market to come under pressure during 2023. After strong growth over the last two years, a combination of higher mortgage rates, the cost of living crisis and economic uncertainty could lead to substantial falls in house prices. Of particular note are the number of borrowers whose fixed rate deals come to an end during the year ahead. This could stretch affordability for those looking to move, and with first time buyers facing headwinds, market activity could be subdued throughout the year.

 

Time to review your portfolio

After a bruising 2022, we feel there are many reasons to take a positive view on how investment markets will perform over the coming year. Equities valuations are attractive in many areas, and barring a significant slump in global earnings, offer investors good value at current levels. Staying at the defensive end of the Equities spectrum may be sensible during the first few months, although we feel high growth stocks may come back into favour later in the year.

Bond markets should also stabilise after the disappointing year in 2022, with attractive yields on offer. Investors may well be advised to focus on credit quality, given that recessionary conditions are expected.

Property investments could come under pressure during 2023. Commercial property valuations have already fallen back during the last quarter of the year, and could continue to struggle as the economy contracts. Investors in residential property will need to batten down the hatches as prospects for the UK housing market look testing for the year ahead.

The new year is a good time to review existing investment portfolios and determine whether they are invested appropriately in light of the expected conditions. Our experienced advisers are on hand to review existing strategies and provide independent advice on how best to invest for the year ahead…

If you are interested in discussing the above further, please speak to one of our experienced advisers here.

 

The value of investments and the income they produce can fall as well as rise. You may get back less than you invested. Past performance is not a reliable indicator of future performance. Investing in stocks and shares should be regarded as a long term investment and should fit in with your overall attitude to risk and your financial circumstance.

Dec 22
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Clapperboard reading 2022 review - brighter prospects ahead

Out with the old…

By | Investments

Investment market participants will be keen to see the back of what has been a difficult year for investors. Whilst it may seem a long time ago, 2022 began with markets in a buoyant mood. The restrictions imposed due to Covid-19 were finally ending, and with central banks and Governments continuing the support put in place at the start of the pandemic, global Equities markets peaked around the turn of the new year.

Inflationary pressures were already starting to build at the end of last year, although it would have taken a very brave economist to predict inflation reaching double-digit levels in most Western economies by the third quarter of the year. Whilst some of the blame for the heightened inflation can be placed firmly at the door of Vladimir Putin, the shake-off of the Covid excess and a tight labour market also contributed to the rapid rise in inflation. Central banks have predictably moved to raise interest rates to try and dampen the inflationary fire, but the combination of restrictive central bank policy and concerns over the conflict in Ukraine pushed most asset classes lower over the first half of the year.

The summer saw markets rebound, amidst very tentative indications that inflation was being tamed, although the renewed optimism was dashed by hawkish words by the Federal Reserve and the ill-fated Mini-Budget announced by Kwasi Kwarteng. This forced the Bank of England into the very uncomfortable position of firing up the printing presses once again, to provide liquidity to the Gilt market and caused Sterling to plummet against major currencies.

By early November, the mood finally began to lift, as market participants cheered lower than expected inflation data in the US, and closer to home, a second Budget statement was received more positively. Whilst central banks may not be at the end of the rate hiking cycle just yet, markets are hopeful that the first quarter of 2023 will see the end of this painful period where interest rates have realigned to reflect the prevailing and expected conditions.

 

Nowhere to hide

One of the key takeaways from 2022 has been the negative impact of higher inflation on most asset classes, and how this has reduced the benefits of diversification. An important component of a well-diversified portfolio is to include exposure to different asset classes that tend to produce a variance in performance, with the aim of balancing weak performance from one particular class or sector, with an improved performance elsewhere.

This year has seen very different conditions emerge, and as the year progressed, the performance of different asset classes began to correlate more closely than they have done for many years. The rapid spike in inflation heralded conditions that are not friendly to fixed interest securities, such as Government and Corporate Bonds, and this has undermined the traditional role Bonds play in reducing volatility, at least for the time being. Equities, which should see less of an impact from the inflationary conditions, also retreated, as sentiment towards risk asset faded in light of the ongoing conflict and worsening economic outlook.

The result has been that 2022 has been a disappointing period for investors in most asset classes, with a high degree of correlation across the board. We do, however, see a return to more normal market behaviour over coming months as our expectation is for inflation to fall back towards mid-single figures by this time next year. We therefore believe that the benefits of diversification, which were rather hidden during this year, will make a return next year.

 

Taking the medicine

Stock markets are often referred to as “discounting mechanisms”, which work on the notion that the current price of a market or asset takes into consideration all available information at the time, including present and potential future events. Whilst this theory is nowhere near perfect, and short-term sentiment is often dictated by market fear and greed, it is clear that markets do take into account expected economic data within prices we see today.

As a result, the difficult market conditions experienced over the last 12 months can be viewed as being a period of readjustment in asset prices, from the positive outlook many held at the start of the year, to the reality of slower growth, and possible recessionary conditions, as a result of the conflict and the spike in energy, food and fuel prices. We feel that investors should not, therefore, be alarmed by the expected gloomy reports in the media about the state of the economy over coming months, as markets have, at least to some extent, factored this into the current market value.

 

Brighter prospects ahead?

As 2022 draws to a close, investors will reflect on a bruising year and will be hoping for a return to less volatile conditions over the course of the next year. We certainly feel that current valuations are attractive for many asset classes, and we will explain the reasons behind our optimism for the coming 12 months in our market outlook to be released in January.

 

As this is the last Wealth Matters for 2022, we would like to take this opportunity of wishing all of our readers a peaceful Christmas, and good health and happiness for 2023.

 

If you are interested in discussing the above further, please speak to one of our experienced advisers here.

 

The value of investments and the income they produce can fall as well as rise. You may get back less than you invested. Past performance is not a reliable indicator of future performance. Investing in stocks and shares should be regarded as a long term investment and should fit in with your overall attitude to risk and your financial circumstance.