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FAS

Dec 15
0
Grandparents making festive cookies with grandchildren - A helping hand for grandchildren

A helping hand for grandchildren

By | Financial Planning

As we head into the festive season, the focus of many at this busy time of year will be on buying gifts for loved ones. It may also be a good time for grandparents to think about the benefits of making gifts to help set grandchildren up for adult life, and help with future expenses they may face, such as education and university costs, or funds towards a deposit on their first home.

Gifts made to grandchildren under the age of 18 will need to be held in Trust for them, and perhaps the simplest form of Trust arrangement, a Bare Trust, is ideal for this purpose. The Trust is a separate legal entity, and Trustees will need to be appointed to administer the money. The Trustees could be the donor of the gift, the child’s parents, or other responsible individuals.

The Bare Trust continues until the beneficiary reaches 18, although it is important to note that at this point the beneficiary has the right to request that the assets are transferred to them. Some parents and grandparents may see this as less than ideal, as 18 is quite a young age to receive a substantial capital sum. That being said, if the purpose of the gift is to help pay for further educational expenses, funds will be handed over at the time that they are needed.

In addition, Bare Trusts can allow Trustees to advance funds to a child earlier than age 18, however funds must be used for the child’s benefit, such as education costs.

 

Bare Trusts can be tax-efficient

Bare Trusts can often be a tax-efficient way of gifting funds to the next generation, as income or capital gains arising on assets held in the Trust are taxable on the beneficiary, i.e., the grandchild. As they are unlikely to have any other taxable income at that age, if the amount of Trust income generated is below the child’s personal allowance (which is £12,570 in the current Tax Year) then no income tax will be due. Similarly, capital gains on investments realised are also taxable on the minor beneficiary, and therefore if the gains fall within the Capital Gains Tax (CGT) allowance, there will be no CGT to pay.

It is important to note that these exemptions do not apply when a parent makes a gift for their minor child, as the parental settlement rules may mean income remains taxable upon the parent.

 

Gifting to reduce an Inheritance Tax liability

Gifts into a Bare Trust are treated in the same way as any other gift and are therefore subject to the same tax rules as any other transfer by way of gift. Each individual has an annual gift allowance of £3,000 and if the allowance from the previous Tax Year has not been used, then this can be carried forward. A couple could therefore potentially make a total gift of £12,000 without any immediate Inheritance Tax (IHT) considerations. Any amount above this would be a Potentially Exempt Transfer and the donor of the gift would need to survive seven years from the date of the gift for this to fully escape their Estate for IHT purposes.

Making use of the annual gift exemption, or making larger gifts, can be a useful method of reducing a potential IHT liability, although the decisions around IHT planning in general are often more complex and require careful consideration. Holistic financial planning can help those in later life consider their potential IHT liability and look at a range of options that can reduce the amount of tax that would be payable by their Estate.

 

Deciding on an investment strategy

Whilst it is possible for money to remain as cash within a Bare Trust, for example held in a deposit account, most Trustees will opt to look to some form of other investment, such as Equities (Company Shares), Bonds and other assets, such as Property or Infrastructure, to try and achieve better returns than those that can be generated from deposit accounts. Trustees need to make sensible decisions in respect of how funds are invested, and as the responsibility rests with the them, many Trustees opt to receive independent investment advice to devise an appropriate investment strategy.

In addition to the initial investment decisions, Trustees have a duty to review the investments to ensure that they remain suitable. Other than reviewing investment performance, Trustees need to consider whether an investment strategy should be altered as a child moves closer to age 18, in particular if funds will be used at this time.

 

Bare Trusts need to be registered

A further responsibility that Trustees need to undertake is to register the Trust with the Trust Registration Service. This service is managed by H M Revenue and Customs and is the government’s way of keeping a record of Trusts in the UK.

The Service records the beneficial ownership of assets held in trust, together with the Trustees’ details. When first established, only Trusts that suffer tax on a regular basis had to register, but now Bare Trusts fall within the category of Trust that need to comply with the registration process.

Trustees can register using the Government online portal, and Trustees do need to be aware that they must register a Trust within 90 days of the Trust being established. Failure to register can lead to financial penalties, and whilst HMRC are likely to take a more lenient approach initially, persistent offenders are likely to face fines.

FAS can provide holistic and independent advice to grandparents looking to set up a Trust, including the most appropriate Trust to consider, together with advice on a suitable investment strategy. Speak to one of our experienced advisers for further details here.

Dec 07
0
Figurine of bride and groom alongside a pile of coins -Tax breaks for married couples

Tax breaks for married couples

By | Financial Planning

Married couples can benefit from tax breaks that can reduce Income Tax, Capital Gains Tax and Inheritance Tax, together with other applications that can affect both personal and business finances. Although some of the rules can be complex, they are worth reviewing to see whether a married couple can benefit.

 

Transferring an Income Tax allowance

Before we look at the current rules, it is worth considering the historic context of the Married Couples Tax Allowance. Prior to 1990, the income of a married couple was added together for tax purposes and treated as if it was the income of the husband. The 1990 Budget introduced the concept of personal taxation, with each individual being taxed on their own income. However, married couples continued to receive a benefit in the form of the Married Couples Allowance, until it was abolished in the 2000 Budget for all married couples, except where one spouse was born before 6th April 1935. This allowance remains available to those couples who meet this criteria and in the current Tax Year can reduce the amount of tax paid by up to £941.50 a year. If the eligible couple were married before 5th December 2005, the tax reduction is received by the married man.

Not to be confused with the Married Couples Allowance, the Marriage Allowance was introduced in the 2015 Budget. This allowance lets you transfer £1,260 of your Personal Allowance to your husband, wife or civil partner, and in the current Tax Year can provide a tax reduction of up to £252 a year.  To benefit, one spouse must have an income below the Personal Allowance, which is £12,570 in the current Tax Year, and can therefore transfer just over 10% of their unused Personal Allowance to their spouse. The higher earning spouse needs to be a basic rate taxpayer, that is to say, he or she receives income between £12,571 and £50,270 a year.

Going about claiming the allowance is straightforward, either via the Gov.UK website or by contacting HMRC, and you can backdate your claim to include any tax year since 5th April 2018 that you were eligible for Marriage Allowance.

 

Using combined allowances for Capital Gains

Capital Gains Tax (CGT) reform was one of the main features of the recent Budget Statement, delivered by Chancellor Jeremy Hunt. From next Tax Year, the annual CGT allowance will halve and then halve again in the following Tax Year, meaning that gains on asset disposals in future years are more likely to be liable to CGT.

As individuals each receive a CGT allowance, married couples can potentially reduce the amount of CGT payable on disposal, as transfers of assets between spouses are not deemed to generate an immediate tax liability. This allows part of an asset which is held in one spouse’s name to be transferred to the other spouse, so that both CGT allowances can be used.

Common applications of this rule are in the transfer of shares between spouses so that each spouse sells down part of the holding to use both CGT allowances, or the transfer of the percentage of a property prior to sale.

 

Transferable Nil Rate Band for IHT

Married couples also benefit from the ability to transfer any unused Nil Rate Band on death of a spouse. The Inheritance Tax (IHT) allowance for each individual is £325,000 and this allowance will remain frozen until at least 2028. However, transfer of assets between spouses on death are exempt, and any unused IHT allowance can also be transferred to the surviving spouse. If the first to die leaves all assets to their surviving spouse, their estate will benefit from a double allowance of £650,000 on the second to die.

This ability to transfer allowances also extends to the Residence Nil Rate Band, which is available on Estates where a residential property is bequeathed to a direct lineal descendent. The Residence Nil Rate Band is currently £175,000 and, as with the Nil Rate Band, if unused on the first death, the surviving spouse can receive the unused allowance, providing a further £350,000 allowance.

Contrast this to the position where a couple are not married. Any assets that exceed the Nil Rate Band (or Residence Nil Rate Band) are likely to be subject to IHT at 40%.

 

Keeping the ISA allowance

When a spouse or civil partner dies, the surviving spouse can inherit any Individual Savings Allowance (ISA) held at the date of death. This can be a valuable benefit if couples have made sensible financial planning decisions and used ISA allowances to hold Stocks and Shares or Cash during their lifetime. The rules provide a fresh allowance equal to the value of the ISA at date of death – or when the ISA is closed – and the new allowance is in addition to any allowance the surviving spouse has in the current Tax Year.

For couples who have built up substantial investment portfolios using the ISA allowances, the Inherited ISA rules are valuable, as the transfer of investments on death could otherwise leave the survivor in the position where future dividends or interest could be liable to tax.

 

The value of financial planning

Married couples can benefit from modest tax breaks under UK tax legislation, although the rules can be complex and through careful planning, there are other benefits that can be obtained by positioning assets in the most tax advantaged manner.  This is where holistic financial planning can add significant value, considering all aspects of a couple’s circumstances, personal and business assets, to position these to their best advantage. Speak to one of our experienced financial planners who will take a holistic view of your finances.

 

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.

Nov 30
0
Individual wooden blocks spelling out the word SCAM - Don’t fall victim to a scam

Don’t fall victim to a scam

By | Uncategorised

A recent National Audit Office report laid bare the ugly truth about fraud in the UK, which accounted for 41% of all crimes against individuals recorded in the year to June 2022. The number of frauds and scams recorded have risen sharply over the last year, with the scams becoming ever-more sophisticated. Indeed, Office for National Statistics data shows that people are more likely to fall victim to fraud or cyber offences than any other crime.

Just last week, the Metropolitan Police reported that their detectives were beginning the mammoth task of contacting over 70,000 people they believe have been the victim of a banking scam. Posing as employees of major UK banks, fraudsters have cold called individuals to alert them to a supposed security breach on their account and asked them to access their account whilst on the phone, in doing so disclosing personal information allowing the scammers to clear out their accounts. Police have suggested that one individual has been scammed out of £3m.

 

Scams come in many forms

These reports are a timely reminder of the need to remain vigilant against fraud and scams, which come in various guises. Whilst frauds involving banking and credit remain the largest proportion of reported crimes, the biggest increase has been seen in consumer retail fraud and advance fee fraud. The latter is where scammers target victims to make upfront payments for goods or services that then do not materialise.

 

What can you do to protect yourself?

There are some common-sense steps you can take to help defend yourself against financial scammers. Firstly, you shouldn’t automatically trust an unexpected communication from your bank, H M Revenue and Customs or a company you’ve done business with. Always treat any unsolicited calls with suspicion, and do not confirm or provide your personal details or agree to transfer any money.

If you’ve been called by someone claiming to be from your bank, end the call and then phone the official bank number from a different phone. This is important, as scammers can keep the line open if you call back from the same phone.

You should also treat text messages or emails received from a bank or other service provider with suspicion, in particular if the text message asks you to click on an email link provided. The link could direct you to the scammers website, where your personal details can be collected. If in doubt, always log on to a website directly rather than clicking a link in an email.

You should always be wary of cold callers trying to sell you a product or service. Don’t allow yourself to feel rushed into making a financial decision, and always take time to think about whether to take up an offer. This will give you time to seek independent advice if needed.

 

If it is too good to be true…

Scams involving investments and pensions are also on the increase, and the fraudsters are using more sophisticated ways to make offers look and sound more plausible to unsuspected consumers. A good rule of thumb is that you should always reject any unsolicited contact offering you the opportunity to make an investment. The contact could come via a telephone call, email, post or by word of mouth, and may offer an investment that can provide unrealistic returns that sound too good to be true, or a need to urgently make an investment, as not taking up an offer would lose the potential investor a bonus or discount.

 

Beware of clones

The use of “cloning” is also becoming more prevalent. This is where the fraudster sets up a fake firm, using the name, address and other details of a legitimate financial firm. The scammer pretends to be calling from a legitimate firm and may try and use convincing language and provide links to the official firm’s website and literature, to make the potential victim feel more comfortable that they are dealing with a genuine firm.

 

Protect your pension

Scams involving pensions are particularly common. These generally involve cold-calls offering investment opportunities in high-risk investments, such as overseas property, forestry or other unregulated investments. Many of these offers will suggest that the individual needs to transfer their pension to the scammer to access the unregulated investments, and this is often accompanied by high pressure selling tactics employed by the fraudsters. Another potential scam is a call offering the ability for an individual to access or unlock their pension before the age of 55. Again, such a call is highly likely to be fraudulent.

 

Know who you are dealing with

Consumers can protect themselves from investment fraud by checking who they are dealing with. The Financial Conduct Authority (FCA) Financial Services Register lists details of firms and individuals who are authorised to provide investment and pension services. The FCA also provide a list of “cloned” firms on their website, where you can check whether a fake firm has been previously reported.

 

Don’t be a victim

Given the worrying upward trend in financial fraud, everyone needs to be vigilant to the risk of falling victim to a scam or fraud. Consumers should always treat unsolicited contact with a degree of caution, and you should always check who you are dealing with if you are contacted out of the blue. Trust your instinct, and if something feels suspicious, then report it to Action Fraud, the UK’s national reporting centre for fraud and cybercrime.

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.

Nov 21
0
Pound coins resting on pile of autumnal leaves

The impact of the Autumn Statement on investors

By | Investments

Just eight weeks after the Emergency Budget announced by former Chancellor Kwasi Kwarteng, Jeremy Hunt delivered an Autumn Statement which was very different in tone to the previous statement. After analysing the measures announced, the Office for Budget Responsibility have forecast the impact of the changes will lead to a drop in living standards of almost 7% over the next two years.  The Budget statement contained a number of changes to allowances and tax rates that will impact investors from the start of the next tax year. However, with careful planning, the impact of the Autumn Statement on investors can be minimised.

 

Additional Rate Income Band adjustment

Perhaps the most striking measure in the Autumn Statement was the reduction in the Higher Rate Band for Income Tax. Currently income earned between £50,270 and £150,000 is taxed at 40%; however, from April 2023, the upper end of this threshold will be reduced to £125,140, and income above this level will be taxed at the Additional Rate of 45%.

 

Thresholds frozen for a further two years

In addition to the changes to the threshold for the top rate of Income Tax, the Chancellor has frozen the Personal Allowance, Basic and Higher rate thresholds for a further two years than had previously been announced. These thresholds will now be frozen until April 2028, and the so-called “fiscal drag” caused by the freeze will generate additional tax for the Exchequer as income increases over time.

As more individuals are subject to the Higher and Additional rates of Income Tax, this increases the opportunity for individuals to reduce their tax burden through financial planning. By making personal pension contributions, an individual can obtain tax relief at their marginal rate, and Venture Capital Trusts, which provide Income Tax relief of 30% on qualifying investments in new shares, can also reduce an individual’s tax liability.

The rules surrounding pension contributions can be complex, and Venture Capital Trusts are higher risk investments and only suitable for investors with an appropriate appetite for investment risk. For this reason, we strongly recommend investors take independent advice on the best way to proceed.  

 

State Pension increase confirmed

As covered in last week’s Wealth Matters, there had been speculation that the State Pension “triple lock” could have been under threat, given the elevated levels of inflation, and the impact this may have on public finances. The Chancellor announced the “triple lock” remains in place, and that State Pensions will increase by 10.1% from April 2023.

It is important to remember that the State Pension takes up the first part of an pensioner’s Personal Allowance, and the increase from April, whilst welcome, may mean that a greater proportion of personal pension, rental or investment income will be subject to basic rate Income Tax. It would be sensible for pensioners with additional income sources to review the tax efficiency of investments and ensure that allowances, such as the Marriage Allowance, are used where appropriate.

 

Dividend Allowance cut

The Dividend Allowance, which shelters dividends from shares and business profits from tax, will be reduced from £2,000 to £1,000 from 6th April 2023. When the Dividend Allowance was first introduced in April 2016, it was worth £5,000 and fully covered the dividends generated by shareholdings for many investors. The reduction from April will likely mean more shareholders will be liable to tax on dividends, and an even greater number will be liable to tax from April 2024, when the Dividend Allowance will be halved again to £500.

 

Capital Gains Tax allowances reduced

Changes to the Capital Gains Tax (CGT) thresholds and rates have been mooted for some time. Whilst the Autumn Statement left the current CGT rates unchanged, the CGT allowance – which is the amount of gain an individual can make on the disposal of assets before CGT becomes payable – will fall from the current £12,300 to £6,000 from April 2023. As with the Dividend Allowance, the Chancellor has gone further and will halve the CGT allowance again, to just £3,000, from April 2024.

This is likely to have a significant impact on investors who are selling assets such as shares and investments, and rental or second properties. As a result, investors may wish to revisit existing portfolios and make sure that the current CGT allowance is used to its’ fullest extent. Furthermore, if an investor makes a net capital loss over a tax year, this loss can be carried forward to offset against gains made in future tax years. This is called an “allowable loss” and can be claimed up to 4 years after the end of the tax year in which the asset was disposed. Given the reduced annual allowances, it will become even more important to report allowable losses to HMRC.

 

Making use of the ISA allowance

As a result of the reduction of the Dividend Allowance and Capital Gains Tax annual allowance, we feel it is now more important than ever to make use of the annual Individual Savings Allowance (ISA). All income earned within an ISA is exempt from Income Tax, and sheltering Equity investments within an ISA will ensure tax efficiency is maintained, despite the reduction in the Dividend Allowance. Furthermore, all gains made within an ISA are exempt from Capital Gains Tax, and again this renders the ISA even more valuable given the reduction in the Capital Gains Tax allowance over the next two tax years.

The ISA allowance remains unchanged at £20,000 for the 2023/24 Tax Year, and using the available allowance consistently each tax year remains an important way of ensuring investments remain tax efficient.

 

Planning opportunities

The Autumn Statement introduced a number of measures designed to raise additional tax and as a result, investors could end up paying more tax on dividend income and capital gains from 6th April 2023. However, with careful financial planning, individuals can reduce the impact of the changes to thresholds and allowances on their personal finances. Speak to one of our experienced advisers to discuss how careful financial planning can maximise tax efficiency of your investments in the current and future tax years.

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.

Nov 16
0
Mature woman reviewing pension options on a laptop at home

Get to know your State Pension entitlement

By | Pensions

With the appointment of Rishi Sunak as Prime Minister, attention has turned to the potential tax increases and cost savings that may be needed to balance the books. The anticipated fiscal statement, which was first scheduled for 31st October, has now been upgraded to a full Autumn Statement, to be delivered on Thursday. One of the possible contentious decisions to be reached by the Chancellor will be the level of increase in the State Pension from April 2023.

 

History of the Triple Lock

Since 2010, the annual increase to the State Pension has been subject to a “Triple Lock”. This is a guarantee that the annual increase would be calculated by the greater of the Consumer Price Index (CPI), average earnings, or 2.5%. This has ensured that the State Pension has kept up to date with rising prices since 2010, and the additional guarantees provided by the Triple Lock has given further protection in periods when inflation has been low. For example, in 2014-16, when annual CPI fell below the 2.5% level, the minimum lock at 2.5% provided an increase in the State Pension above the prevailing rate of inflation.

The rate of CPI inflation used to calculate the increase to the State Pension is the CPI annual rate as at the September preceding the date of the increase. For the increase due in April 2023, the September 2022 CPI figure of 10.1% will be used.

 

How State Pension is calculated

The amount of State Pension to which an individual is entitled depends on their National Insurance contribution record. This includes contributions made through work, and contributions added when an individual is unable to work. You need 35 qualifying years of National Insurance contributions to get the full amount, and a minimum of 10 qualifying years are needed to be entitled to any level of State Pension.

Credits earned before 6th April 2016 are treated differently to those earned after this date. At the point at which an individual reaches State Pension age, a “starting amount” is calculated, which is the larger of the pension you would receive under the former State Pension system, or the new State Pension, which currently amounts to £185.15 per week. It is, therefore, possible that the entitlement under the former system provides a greater entitlement than the new State Pension, and this amount is protected, and paid on top of the new full State Pension.

 

How to check your State Pension entitlement

It is a good idea to obtain a State Pension forecast, which provides an indication of the likely State Pension to which you will be entitled. You can either obtain a forecast from the Government Gateway, or submit form BR19 to the Department for Work and Pensions. The forecast will also provides details of the qualifying years on your National Insurance record, from which you can identify any gaps in the record.

If there are any gaps, an individual can make voluntary National Insurance contributions, which can make up for years where a full contribution was not made. Individuals can make contributions to catch up any gaps in their record during the last six years, and the Government’s Future Pension Centre will be able to provide details of the cost of the voluntary contributions.

It is often the case that making voluntary contributions, where necessary, offers good value for money. However, each individual needs to consider their own position to determine whether it is worth making voluntary contributions.

 

Increasing retirement age

The age at which individuals are entitled to their State Pension remains under review, after a number of changes over recent years. Under the current legislation, State Pension age is currently 66 and this will gradually rise to 67 for those born on or after April 1960. A second increase is also scheduled, to age 68, between 2044 and 2046 for those born on or after April 1977; however, there have already been consultations, which have looked at bringing this date forward to between 2037 and 2039. A further announcement is due on the proposed changes by May 2023.

 

Build your own provision

Whilst the State Pension is available to all individuals with sufficient National Insurance contributions, relying on the State Pension alone is likely to lead to a very modest retirement. This is why we strongly recommend individuals look to make their own pension provision, to supplement the State pension payments. Most employees are now eligible to join auto-enrolment pension schemes, although it is important to ensure an adequate level of contribution is made, and your pension is invested in good performing funds.

Another reason to build personal pension provision is the increase in the State Pension age over coming years. Whilst average life expectancy has risen steadily over recent years, working right up to State Pension age may not be desirable or indeed practical. For example, depending on the nature of the job, ill health could force an early retirement, and by using the flexibility offered by personal pensions, it may be possible to look to draw a pension in the years leading up to State Pension age, allowing a reduction in hours or potentially an early retirement. Whether this is feasible depends on many factors, and this is where personalised financial advice can help you plan ahead for the future with confidence.

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.

Nov 10
0
Pile of Sterling notes and coins - Generating an income through dividends

Generating an income through dividends

By | Investments

After more than a decade of negligible returns, deposit interest rates have slowly increased over the course of the year. The actions of the Bank of England, in an attempt to slow inflation, have given savers some respite after many years of ultra-low interest rates.

For those seeking to generate an income from their capital, to supplement income from other sources such as pension or property rental, cash has given very little in the way of income since 2008, and investors have turned to other forms of investment, such as equities, to generate better returns. With cash deposits now offering higher rates than at any time over the last decade, some may consider whether cash is a viable option for income generation. However, as we will explain, there are good reasons for investors to stick with assets, such as equities, to provide a consistent income.

 

The inflation trap

After the measures taken by Governments and Central Banks around the World to help their economies through the Covid-19 pandemic, and the significant inflationary pressure exerted by the war in Ukraine, inflation stands at over 10% in the UK and Eurozone, and 8% in the US. This headline rate somewhat understates the true impact of the cost of living on individuals and households, where essential items such as food and energy have seen much greater price increases than the official rate.

Looking at deposit rates currently available on fixed rate savings bonds, a rate of over 4% can now be obtained for locking cash away for one year. This may, at face value, seem attractive, particularly when compared to savings rates seen over the last decade. However, when the effect of headline inflation is taken into account, this represents a negative real rate of return of -6%. In other words, the spending power of a saver’s capital is still eroding, despite the higher savings rates on offer.

Indeed, the current conditions provide a deeper negative real rate of return for cash deposit than at any time since 2012. Between 2012 and 2021, the headline Consumer Prices Index did not exceed 3%, and therefore even a deposit rate of 0.1% would have only produced a negative real return of -2.9% per annum during this period.

Despite the disappointing real return, cash remains an important element of any sensible diversified investment strategy. However, for investors seeking consistent income levels, with the potential for capital growth in an attempt to offset the eroding effects of inflation, equity income investments remain a viable and attractive option.

 

Growing an income

Investors in equities derive returns from two sources. Firstly, an investor will hope that the value of the investment will rise over time, as growth in the profits of the company is reflected in the price of the share owned by the investor. Secondly, successful companies make distributions of a company’s earnings to its shareholders in the form of a dividend. The level of dividend paid, divided by the share price, provides the dividend yield figure, which is a useful way of comparing the income generated by equities to the income earned on cash, or any other income generating investment, such as a rental property.

It is important to note that dividends are not guaranteed, and are reliant on the fortunes of the company in which the investor owns shares. Large, stable companies tend to offer a consistent dividend, and would only seek to cut their dividend if the company saw a significant downturn in performance. For this reason, equity income strategies tend to focus on mature large cap stocks, with a track record of consistent dividend payment.

Dividend growth is a key added attraction. Many companies look to grow dividends paid out to investors year on year and there are a small number of global giants, such as Johnson and Johnson and Coca-Cola, who have consistently increased their dividend at each declaration point for many years.

 

Diversification is key

Within any equity income strategy, it is important to maintain a well diversified portfolio. This is where collective equity income funds can provide investors with an allocation to a large number of individual positions, to spread the risk and also achieve a regular income stream. Equity income funds are generally actively managed, although an increasing number of passive options are now available. Most equity income funds adopt the approach of balancing income generation with capital appreciation over time, and whilst investors can achieve additional growth through reinvested dividends, those seeking an income can arrange for this to be paid out.

Further diversification can be achieved by investing in global equity income funds, in conjunction with UK equity income, as this further spreads the investment across different geographies.

 

Focus on the longer term

2022 has been a difficult period for investors in almost every asset class, which is in stark contrast to 2021, where most asset classes posted strong returns. Over the longer term, the total return – i.e. income and capital appreciation – generated by equity income funds has a significant lead over the return achieved on cash deposit. For example, since 2016, cash returns have only beaten returns from equities once (2018) and in the other years, equities have outperformed by a wide margin.

Despite the increase in cash savings rates, we feel that equity income remains a viable option for investors seeking an income from their investments. Naturally, risk needs to be considered, and an element of cash savings is an important part of any diversified strategy. This is where expert financial planning can add value, both in respect of helping investors determine the appropriate strategy for their objectives and attitude to risk, and also devising an appropriate portfolio of funds to generate an attractive level of income.

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.

Nov 03
0
Gold bars representing gold investment - Has Gold lost its shine?

Has Gold lost its shine?

By | Investments

In a year dominated by the War in Ukraine, higher inflation and political upheaval, most asset classes have struggled to make headway over the year to date. According to traditional investment theory, these conditions would usually prove positive for the price of Gold.

 

A store of value?

Gold has been viewed as a highly valued precious metal for centuries, with the first records of Gold being considered a desirable symbol of wealth dating back as early as 4000 B.C.. Gold coins were first struck around 550 B.C. and records show that these coins were used as currency by merchants at that time.

Gold is a scarce resource, and apart from being valued both as an investment and in the form of jewellery, it is used in electronics, with small amounts of Gold being used in the production process of everyday items such as smartphones, televisions and cars.

Investors often perceive Gold as being a store of value, and it has a long-standing reputation for being a safe haven in troubled times. This has been the case during recent periods of global turmoil. Investors in Gold were rewarded in 2020, when the World was in the grip of the Covid-19 pandemic. Given the high degree of uncertainty lockdowns and restrictions caused, it is perhaps not surprising that Gold prices climbed rapidly, surpassing $2,000 an ounce for the first time.

The increased geopolitical risk caused by the Russian invasion of Ukraine also provided a temporary spike in Gold prices. The price of an ounce of Gold was $1,800 at the start of 2022, and following the Russian invasion, Gold climbed above $2,000 an ounce by early March, as investors in Equities and Bonds took flight amidst the turbulence.

 

An inflation hedge?

As Gold is a finite resource, the supply of Gold cannot be manipulated in the same way as currencies, where Governments and Central Banks can print paper currency to control supply and demand. In theory, this means that the value of Gold cannot be devalued in real terms, and is why many investors continue to believe Gold to be a hedge against inflation.

This should be good news for Gold investors, given the elevated levels of inflation seen around the World. Inflation in many Western economies has reached levels that have not been seen for many years, as a result of the monetary policies adopted during the Covid-19 pandemic, and the hikes in energy and food prices seen following the invasion of Ukraine. The reality for Gold prices over recent months has, however, been somewhat different. Gold has been a disappointing investment, falling by almost 20% in Dollar terms from the peak seen in March. So why has Gold underperformed this year, and should investors still consider Gold as part of a diversified portfolio?

 

Gold has fallen heavily since March

As we progress towards the end of 2022, inflationary pressures continue to dog wider financial markets, and the situation in the Ukraine is far from stable. The recent falls in Gold prices may, therefore, seem a little surprising. However, there are a number of key factors that have led to the underperformance of the yellow metal.

Gold as an investment can only rise and fall in value, and it doesn’t offer the investor any interest or income. This places Gold at a clear disadvantage to other investments, such as Equities or Bonds. Over recent years, when cash and Government Bonds offered little in the way of interest, the opportunity cost of holding Gold has been minimal; however, with interest rates climbing around the World, investors in Gold need to consider the lost income or dividend stream more carefully, as this forms an important part of total investment returns achieved by other asset classes.

The strength of the Dollar against other currencies has also harmed Gold’s progress. As Gold is priced in Dollars, the dominance of the US currency has led to Gold becoming more expensive for overseas investors to buy. The weak performance of Equities and Bonds during 2022 may also be a contributory factor, as investors look to the perceived value in global investment markets, which stand at a discount to levels seen at the start of the year.

Finally, with Global growth likely to slow over coming months, the likely economic slowdown could reduce demand for Gold in technological manufacturing and jewellery, which may be particularly affected by weakness in consumer confidence. The jewellery industry accounts for over 55% of global Gold demand, and a deep recession could depress prices further.

 

Is Gold a true diversifier?

Some investment strategies look to include an allocation to Gold within an investment portfolio, as historically Gold prices have a weak correlation with the performance of other asset classes. This has not been the case over recent months, as Gold prices have struggled in line with Equities and Bonds during the summer and autumn. It remains to be seen whether this suggests that Gold has lost it’s attraction as a portfolio diversifier, or the poor performance is just a product of a very difficult year for investors in all asset classes.

 

Should investors hold Gold?

When we review asset allocation, we regularly consider whether it would be appropriate to hold direct allocations to Gold. However, we usually reach the conclusion that it is difficult to justify holding Gold when investors are not rewarded with income or interest, which is a key component of total investment returns. The short and medium term prospects do not hold much appeal for us to consider an allocation to Gold, although it could have some limited use in the event of further significant geopolitical turmoil.

Holding the right asset allocation is a crucial component of an effective investment strategy. If you hold an existing portfolio of investments, let us review your asset allocation to see whether it meets your needs and objectives, and market conditions.

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.

Oct 27
0
Green globe against market trend graphic representing ethical investments - Why ethical investors should be patient

Why ethical investors should be patient

By | Investments

Sustainable investing has been a increasingly popular choice for investors, who are aiming to achieve financial returns whilst also promoting positive environmental or social benefits. According to the Global Sustainable Investment Alliance (GSIA) global investment assets under management, with a sustainable mandate, increased from $30.7 trillion in 2018 to $35.3 trillion in 2020.

 

A more difficult year to be responsible

Over recent years, investors in ethical strategies have benefitted from good performance, with sustainable strategies at least matching more mainstream investment approaches. This year has, however, been less favourable for ethical investors, with performance lagging behind broad market returns generally.

On closer inspection, the reason that ethical strategies have struggled this year is quite clear. Whilst few areas of the market are doing well this year, investments in fossil fuels have seen a standout performance compared to other sectors. Russia’s invasion of Ukraine saw prices for Oil and Natural Gas surge, and coupled with ongoing supply chain issues and increased demand, market valuations of stocks in the Energy production and exploration sectors rose strongly.

To the end of September, the S&P Energy sector is the only US sector showing a positive return over 2022 to date. The outperformance has been consistent throughout the course of the year, and returns from Energy have been the single bright spot in an otherwise difficult year so far. Of course, the activities of mega-cap companies such as Exxon Mobil and Chevron mean that they are unlikely to feature in a portfolio adopting an ethical approach.

Whilst Energy has been the best performing sector overall, individual stocks in other traditionally non-ethical sectors have also performed well. Global Defence stocks, such as the UK listed BAE Systems, and US giants Lockheed Martin and Northrop Grumman, have also seen their stock well supported, as investors look to invest in companies which may benefit from increased global Government spending on defence. As with Energy, defence stocks are largely incompatible with an ethical investment approach.

 

Value in focus

Another factor impacting the performance of Ethical investment strategies so far this year has been the underperformance of Technology stocks. Sustainable investment portfolios tend to hold high allocations in Technology, Healthcare and Consumer Discretionary stocks, which are all sectors that have struggled this year. The proportions held in Technology are particularly important to consider, as this sector represents 22% of the MSCI World ESG (Environmental, Social and Governance) Index. Whilst the weight towards Tech had a positive influence on performance during 2021, the inverse has been true this year to date.

Delving a little deeper into market conditions we have seen over this year, it is evident that 2022 has been a year where value companies have been in vogue. We define value stocks as being those companies that are more defensive and mature, offering an attractive dividend yield. With the war in Ukraine and Inflation dominating Global markets, conditions are very different to those seen last year, where growth companies outperformed value stocks. Growth companies are usually defined as those with higher growth potential, but this may come with less financial strength or track record. Technology stocks tend to sit in the growth space and the general nature of markets this year has been another contributing factor to the underperformance of ethical investment strategies.

It also should be borne in mind that a number of value stocks are also unlikely to feature in an ethical portfolio. Take Tobacco stocks for example. Both British American Tobacco and Imperial Brands, who are the two largest quoted UK stocks in the sector, have shown a positive performance this year, compared to the weaker conditions seen overall.

 

Keep the faith

In the face of more difficult conditions for ethical investors over the year to date, you can understand why investors might look to reconsider their ethical stance. We do not believe this is the correct approach to take. Investment is a long-term process, and whilst a great deal has happened geopolitically and economically since the start of the decade, ethical investment approaches have seen investors rewarded for their stance during both 2020 and 2021.

Over the longer term, ethical investors have every reason to feel optimistic about the future. Following the COP26 Climate Change Conference, pressure is mounting on the World’s largest corporations to play their part in combating global warming. Indeed, many are already working towards net zero carbon emissions, and with the direction of travel being clear, this in turn will force others to follow their lead. Companies that are unlikely to feature in an ethical investment approach at the current time are making strides that could see their inclusion in the future. Take Shell, for example, who announced last year their intention to halve absolute emissions by 50% by 2030, through investments in low-carbon and renewable energy.

With the focus on delivering a cleaner and greener future, it is likely that technological advance will have a significant part to play. This would tend to suggest that the longer term prospects for sustainable and ethical investment are good. Looking to the short and medium term, 2022 has been a year where Tech has struggled, though investors would be well served to look to the performance over the previous two years, where they were rewarded for taking an ethical stance.

If you are interested in ethical investment strategies, or are looking to review an existing pension or investment portfolio to see whether this fits with your personal ethical stance, 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.

Oct 20
0
Graphic illustrating UK Gilt Yield

Why Gilt Yields matter

By | Financial Planning

Over the last three weeks, the terms “Gilt” and “Yield” have seemingly been ever-present in news bulletins. Following the announcement of the Government Growth Plan on 23rd September, Gilts have come under pressure, which in turn forced the Bank of England into a temporary position whereby they purchased Gilts, in a move designed to stabilise the market. Let’s go back to basics and look at the importance of Gilts to the wider economy.

 

What is a Gilt

A Gilt is a loan note issued by the UK Government, who use the money raised by the sale of Gilts to fund public spending. Gilts are issued by HM Treasury and listed on the London Stock Exchange. The term “Gilt” or “Gilt-edged security” is derived from the fact that the British Government has never failed to make interest or capital repayments on Gilts as they fall due. The first Gilt was issued in 1694, to help finance the war against France, and raised a total of £1.2m. By way of contrast, the size of the Gilt market in 2021 topped £2 trillion.

The UK Government is not unique in raising funds in this manner. Most Governments issue loan notes in one form or another. The US issues Treasury Bonds, Germany issues Bunds, and other major nations, such as France, Italy, Canada and Australia also finance public spending in this manner.

 

Conventional and Index Linked

There are two different types of Gilts listed on the London Stock Exchange. Conventional Gilts comprise around 75% of the Gilt market, and all have two common elements. Firstly, they pay a “coupon” or fixed interest payment, each six months. Secondly, the Gilt has a redemption date, upon which the principal of the Gilt is repaid. This is typically a fixed price of £100.

The remaining 25% of the Gilt market is made up of Index Linked Gilts. These have a redemption date, in the same manner as Conventional Gilts; however, the coupon payments, and the principal value at redemption, are adjusted in line with the Retail Price Index (RPI). This means that the redemption value, and the interest payments, keep in line with inflation.

 

Common Factors

Whilst Gilts have a redemption date, the fact that Gilts are traded securities will mean that the price will fluctuate over time. Gilt market sentiment is often dictated by prevailing interest rates, and as we have seen over recent weeks, how the market views Government economic policy.

As interest rates rise, this increases the attractiveness of overnight money on deposit, and therefore makes a Gilt look less attractive. The opposite is true, as Gilts generally look more attractive when interest rates are falling. Furthermore, in the situation when interest rates are rising, any new Gilts that are issued will need to offer a higher coupon to attract buyers. This tends to lower demand for existing Gilts which may well offer lower coupons.

The time remaining until a Gilt reaches the stated redemption date will also influence Gilt prices. When a Gilt heads closer to its maturity date, the value of the Gilt will move towards the Gilt’s initial face value.

Finally, inflation can impact on whether Gilts are in demand. Higher inflation, as we have seen over recent months, will reduce the purchasing power of a Gilt’s face value and coupon payments.

 

How yields are calculated

Gilt yields are often quoted by market participants, rather than Gilt prices, as the yield offers  a reflection of the cost of borrowing. The running Gilt yield is calculated by dividing the annual coupon by the current price. For example, if a 5% Gilt is currently priced at £90, the yield is 5.55%. Adding the redemption price into the equation can give an indication of the total return a Gilt holder will achieve if the Gilt is held to redemption. Take the same example of the 5% Gilt, currently priced at £90. Assuming this redeems at £100, then the buyer would also benefit from a £10 capital uplift per Gilt held, to redemption.

 

Implications for other Bond markets

It is important to note that movements in Gilt markets affect the attractiveness of Corporate Bonds. This is due to the fact that Corporate Bonds tend to trade using a “spread” over the corresponding Gilt, which indicates a risk premium that the holder of the Bond is willing to accept for holding a Bond issued by a company, rather than a Gilt issued by the Government.

 

Why Gilt Yields matter – mortgage rates and public finances

As market confidence in Government economic policy has ebbed since the Growth Plan was announced, Gilt yields have generally been rising. The Bank of England programme to purchase Gilts stabilised the market a little, although concerns remain over the prospects for Gilts in the short term.

Yields are of importance to the mortgage market, as they affect so-called “swap” rates, which financial institutions pay to other institutions, to acquire funding for future lending. In simple terms, swap rates are a best guess as to where interest rates will be in the future, and tend to move in tandem with Gilt yields.

As Gilt yields rise, any additional Government borrowing will need to offer higher coupons, to ensure there are sufficient buyers for the Gilt issued. Furthermore, as Gilts reach maturity, the Government needs to roll over the borrowing into new Gilts, which again are likely to be at higher interest rates. This increases the interest bill paid by the Government and places further pressure on public finances. For this reason, the Government will want to ensure Gilt yields are brought back under control as quickly as possible.

Likewise, those with a fixed rate mortgage that is due to mature will be well advised to keep a close eye on Gilt yields as an indication of the direction of travel for mortgage rates in the near term.

 

Where next for Gilts?

Whilst some details of the change in Government policy have already been announced, market participants will still look to the 31st October for full details of the Budget review. The market is likely to be quick to jump on any perceived weakness in Government messaging, following the replacement of Kwasi Kwarteng with Jeremy Hunt as Chancellor. Shortly after the 31st October statement, both the US Federal Reserve and Bank of England will announce interest rate decisions on 2nd and 3rd November respectively. This will, therefore, be a period when further volatility in the Gilt market is likely. At FAS, we will, of course, continue to monitor events closely.

If you would like to discuss the above further, then contact 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.

Oct 14
0
Graphic of two business people holding trampoline to catch a falling building - UK Housing Market

No longer defying gravity

By | Financial Planning

The UK Housing Market has seemingly defied gravity over recent years, shrugging off the economic effects of Brexit and the Covid-19 pandemic. For those who have suggested previously that prices may have peaked, there have been a number of false dawns. However, recent market data, together with the higher costs of living and the impact of mortgage rate hikes, may well combine to finally curb house price inflation.

The latest Halifax House Price data, released on 7th October, showed that house prices decreased marginally in September, with a -0.1% month on month fall. Whilst not newsworthy on its’ own, perhaps of more interest was the news that the annualised rate of growth has now fallen in three successive months. Nationwide, who also publish monthly house price data, reported flat prices on the month and a further fall in the annualised rate.

 

Cost pressures

We are not surprised to see price growth slow, as the higher costs facing households begin to bite. Despite Government support which has capped the unit rates for Gas and Electricity domestic supplies for the next two years, household bills have still risen substantially from where they were earlier in the year. Food price inflation has also impacted on household budgets, and whilst petrol prices at the pump have fallen over recent weeks, they remain elevated from a year ago.

Whilst household outgoings have increased due to the cost of living, and caused some pain to household finances, the recent turmoil in the mortgage market is likely to have a bigger impact over coming months. Fixed mortgage rates have been climbing sharply since the UK mini-budget announcement on 23rd September, the result of which has seen the yields on Government Bonds (Gilts) rise sharply, as markets reacted negatively to the announcements. This led to Bank of England intervention to stabilise the Gilt market by temporarily buying Bonds. Given the uncertainty, mortgage lenders raced to pull fixed rate mortgage deals at record pace, with new deals being released at sharply higher rates, as the cost of securing funding has now increased.

 

Mortgage hikes

To put this in context, prior to the Chancellor’s speech, the average two-year fixed rate mortgage was priced at 4.74%, but has now risen to more than 6% at the time of writing, the highest level since 2008. In stark contrast, the average two-year fixed rate mortgage was just 2.34% at the end of 2021. In monetary terms, taking out a £200,000 repayment mortgage over 25 years in December 2021, at the average two-year fixed rate of 2.34%, would have resulted in monthly mortgage payments of £881 per month fixed for the first two years. The same repayment mortgage taken out with two-year fixed rates at 6%, would result in an increase in monthly payment to £1,289 per month for the first two years.

For those borrowers on fixed rate deals that are shortly coming to an end, the new rates on offer are likely to come as a shock. The higher rates will also affect first time buyers, who will find affordability stretched further. The effect on the mortgage market is highly likely to negate the Stamp Duty changes announced in the Mini-Budget, which increased the residential nil-rate band from £125,000 to £250,000 for all purchasers, and from £300,000 to £425,000 for first-time buyers. Without the turmoil in the mortgage market, the permanent reductions in Stamp Duty may well have continued to support prices.

 

The wider impact

With homeowners being hit from all sides, a sharp slowdown in the housing market is now highly likely. This may well have wider economic consequences, as perceived strength in the housing market is closely linked to consumer confidence. As homeowners see house prices rise, they generally feel better off and more confident to spend. The reverse is also true, and for some who are over-leveraged, some homeowners risk holding a larger mortgage than the value of their home.

Housing transactions may also slow, which will affect many sectors of the economy. Each Property transaction completed will provide business for Removals and Storage firms, Solicitors, Surveyors, Estate Agents, together with spending and renovations undertaken by new householders. This may also have a knock-on effect on unemployment. The Home Builders Federation suggest that over 11,500 jobs are supported by housing transactions alone.

 

Reasons to be positive?

For those remaining positive about house prices in the longer term, supply side constraints remain. The Office for National Statistics (ONS) forecast the number of households in the UK will increase by 1.6m over the next 10 years, whilst the current rate of house construction in the UK is running at levels that falls short of the amount of new homes that will be needed.

It has also been suggested that landlords who are not keen on selling up may well be looking to increase rents, which in turn could lead to renters looking to purchase, in particular if prices fall by an appreciable amount.

 

Where does this leave Property investors?

Buy-to-let landlords have enjoyed the benefits of rampant growth in house prices, together with rental income, over recent years. However, those who are leveraged with Buy-to-Let mortgages may begin to see a squeeze on rental margins, which landlords may not be able to pass on to tenants.

From a financial planning perspective, residential property assets remain a valid part of any sensible diversified investment approach. With house prices likely to come under pressure, the risk of holding residential property as an investment has increased. This is further justification for landlords to look closely at the returns they are achieving on their property investments, and consider whether they need to adjust their overall strategy.

 

If you would like to discuss the above further, then contact 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.