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FAS

May 26
0
Piles of coins and receipts alongside the word tax - HMRC annual statistics on taxpayer numbers - Why is tax efficiency so important?

Why is tax efficiency so important?

By | Tax Planning

As the old financial adage suggests, you should “never let the tax tail wag the dog”. The rather bizarre phrase is used to remind investors that conventional wisdom dictates that investment returns should be the primary objective of an investment strategy (i.e. “the dog”) with tax considerations being a secondary importance (i.e. “the tail”).

Whilst we wouldn’t argue with the general premise that investment performance is the main driver of investment returns, tax efficiency can often play a larger role in effective planning than many give it credit for. This can be particularly important during periods when investment returns are lower. Let us explain.

 

The effect of income tax on investment income

Equities dividends and bond and savings interest are all subject to income tax. Dividends are taxed at 8.75% for a basic rate taxpayer, increasing to 33.75% for a higher rate taxpayer and 39.35% for an additional rate taxpayer. Interest is taxed at the individual’s marginal rate of tax (i.e. the tax rate that applies to additional income earned over and above salary or pension income).

If you are investing for income, tax considerations become vitally important. Take the example of an individual who pays higher rate tax overall and holds £10,000 in an equities fund which pays a dividend of 4%, and £10,000 in a fixed interest fund, which pays 4% interest. The gross position is that £800 of income is generated (£400 of dividend and £400 of interest); however, the dividend income is subject to 33.75% tax and the interest is subject to 40% tax, leaving a net income payment (once tax due has been settled) of just £505.

Of course, tax breaks exist to shelter some or all of this income, in the form of individual savings accounts (ISAs), the dividend and personal savings allowances and the starting band for savings. As the above example demonstrates, using these allowances to their fullest extent is vital to maximising income earned.

 

Don’t waste annual allowances

Capital gains tax (CGT) is charged on the disposal of assets, at a rate of 10% or 20% on investment gains, depending on whether an individual is a basic or higher rate taxpayer. An annual CGT allowance of £12,300 per individual is available, but only within the tax year in question – if you don’t fully use the allowance, you lose it.

We often see clients with portfolios that have been held in the same investments for many years, without changes being made. Whilst we fully support the notion of long-term investment, by making regular changes to the portfolio to use the annual CGT allowances available, you can avoid the gains building up which creates a bigger problem when the investment is eventually sold. Married couples can also rearrange assets so that both allowances are used, which can yield a tax advantage when selling down positions that have been held for many years. Alternatively, ISAs provide exemption from capital gains tax in addition to income tax.

 

Effective retirement planning

When saving for retirement, tax relief on pension contributions can have a significant impact on the overall investment return achieved. For a basic rate taxpayer, relief on qualifying contributions attracts relief at 20%, whereas higher rate taxpayers can obtain an additional relief of 20% via a self-assessment tax return.

In other words, every £100 invested in a pension will only cost a basic rate taxpayer £80 and a higher rate taxpayer £60. This is a significant immediate return on the contribution, which is the equivalent of many years’ investment growth on the net amount contributed.

Of course, this simple example ignores the fact that only tax free cash is paid out from a pension without any tax deducted, and any income generated by the pension over and above the tax free cash is subject to income tax. However, even considering the net position of tax relief versus tax deducted on pension income payment, using a pension can yield a significant tax advantage.

 

Venture beyond

Pensions are not the only source of upfront tax relief available. Venture capital trusts (VCT) and enterprise investment schemes (EIS) are two types of investment where income tax relief of 30% is provided on qualifying investments. This is a generous relief, but is only granted on the premise that the underlying investments in smaller and unquoted companies are high risk, and the tax relief granted at least matches the potential for loss on the investment. These investments also need to be held for minimum qualifying periods. For example a VCT needs to be held for a minimum of 5 years to retain the tax relief provided on investment.

Whilst not suitable for all investors, individuals with significant assets, sufficient income, and the necessary tolerance to investment risk, may feel VCTs are worth considering, as a small part of a larger and more diversified investment portfolio.

 

Planning is key

At FAS, our experienced financial advisers will always consider tax efficiency as a key component in the financial planning process. Whilst investment strategy and selection will be the main drivers of returns achieved over the long term, considering the tax efficiency of investments plays an important role. Why not speak to one of our advisers to gauge how tax efficient your portfolio is, and where improvements can possibly be made.

 

If you would like to discuss the above with one of our experienced financial planners, please get in touch 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 circumstances.

May 19
0
Cryptocurrency coins in soil symbolising cryptocurrency mining - Cryptocurrencies risks

Cryptocurrencies – a stark reminder of the risks

By | Investments

Whenever clients talk about cryptocurrencies, our response has always been the same – the investments are unregulated and carry significant risk of total loss of the investment. Recent price action in cryptocurrencies, together with warnings issued by leading crypto exchange Coinbase, have only reinforced our view.

 

Making headline news

Cryptocurrencies have made headline news over recent days as a severe bout of turbulence has knocked the value of the largest coins available, including Bitcoin and Ethereum. The catalyst has been the collapse of the Terra Luna currency, which is supposedly pegged to the US Dollar as a so-called “stablecoin”. The Terra currency lost its peg to the Dollar last week, apparently due to issues in the algorithm that links the price of the digital currency to the US Dollar. The peg was not backed by currency or government bonds, but in other cryptocurrencies, and as the price began to fall, investors rushed to sell the coins, effectively creating a digital bank run. The price of Luna fell over 99% in the space of a week, effectively wiping out investors.

 

No safe haven

Following the collapse in Terra Luna, contagion has spread to other leading cryptocurrencies. Bitcoin fell below $30,000, to stand over 50% lower than the previous peak of $69,000 seen in November 2021. Ethereum, Ripple, and Cardano also suffered similar heavy falls.

Supporters of cryptocurrencies have often cited the decentralised nature of the currencies as offering protection against inflation and wider economic uncertainty. Given the underlying economic conditions we are experiencing, the recent price action is a clear indication that cryptocurrencies are, in fact, a poor hedge against rising prices.

Quite surprisingly, cryptocurrencies appear to be moving more in line with Equities markets, contrary to supporter’s claims that Bitcoin and others provide diversification away from more traditional investments. A study by the International Monetary Fund (IMF) in January of this year highlighted the much closer correlation between cryptocurrencies and the S&P500 index of US shares since 2020. What has become increasingly apparent is that the cryptocurrencies are just as susceptible to broader weakness in market sentiment as other assets, such as Equities, only accompanied with significantly higher levels of volatility.

 

Unregulated assets

In addition to the risks of falling prices and contagion from failing currencies, concerns over how safe investor’s crypto assets held on exchanges are, have added to the negative sentiment.

Coinbase, a leading US-based crypto exchange, announced a very poor set of financial results on Tuesday, which showed widening losses and a 19% drop in users over the last quarter. The most important part of the announcement, however, was the admission that should Coinbase declare bankruptcy, the assets held in custody on behalf of customers could become subject to bankruptcy proceedings. In other words, customer’s assets would not be segregated and the customers would become general unsecured creditors of the business.

Unlike UK regulated investments, where investors do have some protection offered under the Financial Services Compensation Scheme in the event that something goes wrong, cryptocurrencies are unregulated, potentially leaving investors without recourse if an investment fails.

 

Invest in what you understand

As famous US investor Warren Buffett quoted “never invest in a business you cannot understand”. We feel this sage advice is true of cryptocurrencies generally. The premise of Bitcoin and its peers was to create new valid currencies, free from intervention from central banks and governments, that would be accepted more frequently as a currency over time. A limited number of organisations do accept Bitcoin as payment for goods and services, although the use of the currency is hardly becoming mainstream. Furthermore, the high levels of volatility seen in Bitcoin and other cryptocurrencies would make their use for transactions almost impossible.

 

A move towards regulation

There has been growing calls for the cryptocurrency market to be regulated over recent years, and the recent volatility is likely to increase the volume of calls for more intervention in this market. Some may see this as a positive move, potentially increasing the mainstream appeal of the investment. However, others see increased regulation as a negative, and totally at odds to the premise of decentralised currencies, which could stifle innovation.

Cryptocurrencies have also long been associated with criminal activity, such as scams, malware and ransomware attacks and money laundering, and regulation would aim to reduce the amount of illegal activity that takes place. Another key consideration is the amount of energy expended in mining tokens, with any move towards regulation likely to focus on the industry’s environmental impact.

 

FCA warning

The Financial Conduct Authority (FCA) produced the clearest assessment of the risks associated in January 2021 when stating “the FCA is aware that some firms are offering investments in cryptoassets, or lending or investments linked to cryptoassets, that promise high returns. If consumers invest in these types of product, they should be prepared to lose all their money.”

Despite warnings such as this, the cryptocurrency market has continued to gain in popularity over recent years; however the gyrations seen over the last week may well serve as a timely reminder of the inherent risks of these unregulated investments.

 

If you would like to discuss the above with one of our experienced financial planners, please get in touch 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 circumstances.

May 12
0
Magnifying glass over document reading 'interest rates' - Why have interest rates increased

Where next for interest rates?

By | Investments

Central Banks on both sides of the Atlantic made headline news last week, as the US Federal Reserve and UK Monetary Policy Committee both raised interest rates. In a much anticipated move, US interest rates were increased by 0.50%, and in the UK, interest rates were increased by 0.25% to 1%, the first time UK interest rates have hit this level since 2009.

 

Why have rates increased?

Focusing on domestic interest rate policy, the Bank of England’s UK Monetary Policy Committee is tasked to support the Government’s economic aims for growth and employment, as well as hit an inflation target (measured by Consumer Price Inflation or CPI) of 2% per annum.

As widely reported over recent months, inflation has surged across the world, as a result of supply issues caused by lockdowns during the Covid-19 pandemic, increases in energy and commodity prices, and more recently by the Russian invasion of Ukraine. This has driven inflation far beyond market expectations, with UK CPI standing at 7% over the 12 months to March 2022, over three times the Bank’s 2% target. Furthermore, most economists believe UK inflation will increase further over coming months, with Bank of England Governor Andrew Bailey indicating the Bank’s belief that CPI will hit 9% in the third quarter and go beyond 10% by the end of the year. The anticipated increase in energy prices, as a result of the OFGEM price cap adjustment, in October, may well be the catalyst for UK inflation hitting double digits.

 

The impact of higher rates

Higher interest rates have a dampening effect on the economy generally, and affect households and businesses alike. The higher cost of borrowing impacts the ability of households to take out larger mortgages, and also increases the cost of loans and credit cards. A likely outcome of a sustained period of higher rates is that house price growth may well be limited, or indeed, could be the catalyst for house prices to fall.

Businesses need to access cheap finance to aid expansion, and if borrowing costs are higher, this could limit business plans to expand, including taking on new staff or premises.

 

Will the Bank keep on raising rates?

In light of the Bank’s forecast that inflation will rise further over the course of the year, it is likely that the Bank will raise interest rates further to try and bring inflation under control. Indeed, 3 of the 9 members of the Monetary Policy Committee voted for an increase of 0.50% rather than 0.25% last week, such was their concern that more aggressive action was needed immediately.

At present, economists are predicting UK Base Rates will reach between 1.75% and 2.25% by the end of the year, a further increase of 0.75% to 1.25% over and above the current level.

The Bank forecasts are always forward looking and they will be considering the longer term inflation forecasts before taking action. Given that CPI measures price growth over the previous 12 months, unless prices continue to rise at the same rate, the current elevated rate of inflation should begin to ease during 2023.

The Bank of England will, however, be acutely aware of the impact of higher interest rates on economic growth. Raising interest rates generally causes an economy to slow down, and with the UK economy already decelerating from a more promising position last year, the Bank will undoubtedly be considering the impact of their actions on the UK economy, which could be heading back towards recession.

Recent numbers for UK PLC have not been encouraging. UK growth stalled from 0.8% in January to just 0.1% in February, and the April 2022 consumer confidence report (as measured by GfK) showed consumers felt less confident than at any time since 2008. Services and Manufacturing surveys carried out last month also showed a drop in optimism.

Whilst the ongoing conflict in Ukraine underpins the increase in the price of food, energy and other supplies, and the continued Covid-19 lockdowns in China threaten to slow supply chains of key goods for manufacturing, it is difficult to see the current economic situation improving over the next few months.

We therefore feel that the market and economists may be off-target with their projections for UK Base Rates to hit 2% by the end of the year. Should the economic slowdown worsen, and the UK economy contracts, this may well weigh on the central bank’s decisions, and could lessen the need for the Bank to raise rates aggressively over the second half of the year.

 

What does this mean for investors and savers?

Savers should expect some respite from the very low interest rates that have persisted now for more than a decade. Whilst some banks and building societies have been slow to pass on the base rate increases in their savings products, others have been more reactive, and as always is the case nowadays, savers should look across the market for competitive rates. The bad news for savers is that the increase in savings rates is not likely to keep up with the expected increase in inflation over the remainder of this year. The “real return” (i.e. the return after the effects of inflation are taken into account) from cash savings may well shrink, leaving savers worse off.

Investors can access a wider range of assets that could look to take advantage of the prevailing conditions. Within lower risk assets, inflation linked bonds and alternative investments such as infrastructure could continue to do well, and in terms of equities, taking a global approach, and focusing on companies with strong earnings and attractive dividend yields could produce outperformance.

If you would like to review your existing savings and investments with one of our experienced financial planners, please get in touch 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 circumstances.

May 05
0
Young woman leans over parents to reach calculator - The Bank of Mum and Dad

The Bank of Mum and Dad – what to consider

By | Financial Planning

Buying your first home has never been easy, and the increase in house prices over recent years has made the task even harder for first time buyers. As a result, prospective house buyers are turning to parents, grandparents and other relatives for help. Indeed, it is a scenario we come across regularly; and, by and large, parents are keen to give their children a helping hand to provide a deposit to enable them to buy their first home, or trade up to a larger property.

 

The UK’s 10th largest lender

If the Bank of Mum and Dad was a business in its own right, it would be the UK’s 10th largest lender measured by total loans issued, according to research carried out by Legal & General in 2019. This research, undertaken in conjunction with the Centre for Economics and Business Research (CEBR) also showed that 23% of all housing transactions undertaken in that year involved parental or family assistance, with 65% of buyers questioned saying that they would not be able to proceed with the purchase without the financial assistance. Legal & General’s research also showed the average gift made for this purpose was £25,800 for buyers in London.

By providing a gift by way of deposit, parents can enable their children to increase the amount they can borrow on a mortgage, helping them to buy a home which would be impossible without the financial assistance. Alternatively, the gift could mean that the child borrows less on their mortgage, leading to lower monthly repayments and potentially access to lower mortgage interest rates.

 

Beware the pitfalls

Despite the good intentions that parents often have to help their children, they would be well advised to consider the pitfalls before gifting funds to their children to enable them to buy a home.

Any gift – be it by way of a deposit for a house or for another purpose – could have inheritance tax consequences. Each individual can make gifts of £3,000 per tax year and therefore a married couple could gift £6,000 of capital (plus £3,000 each from the previous tax year if not used) without any inheritance tax concerns. As shown by the research above, this is less than 50% of the average financial assistance provided by parents. Any amount gifted above the gift exemption is treated as a potentially exempt transfer (PET). No inheritance tax is due immediately; however, the person making the gift needs to live seven years from the date the gift is made for the gift to fully escape inheritance tax.

If a parent makes a gift to a child who is buying with an unmarried partner, the consequences of relationship breakdown could mean that the funds are unprotected if the property is subsequently sold. It is an important scenario to consider, and this can be avoided if the solicitor dealing with the purchase prepares a suitable Declaration of Trust, which stipulates that the amount of the gift is paid back to their child from the proceeds of sale.

 

Be careful with co-ownership

Some parents decide that rather than making a gift of a deposit, they would prefer to buy the property with their children. Whilst this allows parents to enjoy an equity participation in the property, the tax consequences need to be considered further. Firstly, assuming the parents already own a home, the purchase would be seen as being a second home, and therefore be liable to the additional rate of stamp duty (3% of the purchase price).

Secondly, the share of the property owned by the parents would not benefit from Principal Private Residence Relief, and if a gain is made on sale of the property in the future, the proceeds on the share owned by the parents would potentially be liable to Capital Gains Tax, at a rate of 18% or 28% (depending on their overall tax position).

Lastly, if a mortgage is being arranged for the purchase, the parent would be jointly responsible to meet the mortgage payments if the child was unable to make the repayments.

 

Looking after your interests

Whilst there are plenty of valid reasons for the Bank of Mum and Dad to remain open for business, parents need to carefully consider their own financial needs in later life before gifting funds to help offspring onto the housing ladder. The same research undertaken by Legal & General showed that 17% of parents passing money to their children via the Bank of Mum and Dad are materially worse off financially as a result.

Giving away capital when retirement is looming can diminish the amount of savings or investments, but also reduce the level of income that could be generated by the gifted capital. The gifted funds are also no longer available to cover any unexpected expenditure, and children will often not be in a financial position to return the favour if the parents require funds.

Parents would also be well advised to consider the effect of unequal gifts made to children. If one child receives a helping hand onto the property ladder, friction within the family could be caused, in particular if the parent is not in a financial position to equalise the gift to children at the same time. It may well be sensible to consider recording the gift in your Will, and making provision so that all are treated in an equitable fashion over time.

 

Engage with financial and legal advice

Many parents are happy to open the doors of the Bank of Mum and Dad, and do the best they can for their children. There are, however, a number of financial and legal considerations that need careful thought. A good solicitor should be able to provide the necessary advice to protect the gift in the event of relationship breakdown, and any changes that may be appropriate to your Will.

At FAS, we can provide assistance to parents who wish to use their funds to help their children. We can advise on which assets are gifted, and the potential financial impact of any actions taken on their financial security. Speak to one of our experienced advisers for assistance.

 

If you would like to discuss the above with one of our experienced financial planners, please get in touch 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 circumstances.

Apr 28
0
Ratings on bonds - Analysing credit ratings

Analysing credit ratings

By | Investments

Corporate and government bonds will form a part of most diversified investment strategies. However, given the high rates of inflation we are experiencing at the moment, it is even more important to select bonds that will perform well in the prevailing conditions. We use a number of tools to select appropriate bonds, and one of the factors we analyse is the bond’s credit rating.

 

Bond basics

Looking at the broad definition, a corporate bond is a type of debt security that is issued by a firm and sold to investors (although there are a number of different types of bond and other debt instruments in circulation). The company obtains the capital it needs from investors and in return the investor is paid a number of interest payments at either a fixed or variable interest rate. When the bond reaches redemption, i.e. when all of the pre-determined interest payments have been paid, the original investment is returned. In a similar manner, governments issue bonds to finance public spending, which are known as gilts in the UK.

 

Credit where it’s due

Just as individuals have a personal credit rating based on their financial security, bond issuers are usually evaluated by credit rating agencies to assess the creditworthiness of the bond. There are three main ratings agencies that undertake the evaluations of bond strength – Moody’s, Standard & Poor’s (S&P) and Fitch. Each bond rating agency considers the underlying company and its ability to meet its future obligations, by considering a number of factors, including the strength of the balance sheet, the future economic and business outlook, profit margins, and earnings growth. As a result, the credit rating provides an indication of how likely the company will pay its obligations.

Using the S&P ratings, for example, the highest-graded bonds are graded AAA with all bonds rated above BBB- being classed as investment grade. Any bonds graded BB+ and below are classed as high yield bonds, with the lowest classification being grade D, which means the bond is in default – in other words, the issuer cannot repay its obligations.

Currently, the UK Government is rated AA for its sovereign debt. There are very few governments whose debt is rated AAA, and this select list includes Germany, Norway and Canada. Unsurprisingly, Russia has seen the rating given by S&P to its debt fall to a rating of CC, which suggests a default is imminent.

 

Risk and reward

Generally speaking the highest graded bonds are those with the lowest chance of default. This would, therefore, make these bonds the most obvious choice for bond investors? Well, not necessarily and indeed in recent times, this isn’t often the case. Given the lowest perceived risk of default, the bonds with the highest credit ratings offer the lowest returns in terms of regular income payments, expressed as “yield” when compared to the underlying bond price. These returns have been very unattractive for a number of years, and with inflation heading northwards, the “real” return offered looks even worse.

Just as the highest-graded bonds offer the highest-perceived security, but lowest yields, those bonds with the lowest grade will need to compensate investors for the increased default risk. Thus low-graded bonds tend to offer attractive yields, although the risk of default is much greater, due to the weaker financial strength of the issuing company.

This is the reason why a portfolio approach is most appropriate when considering bond investment. Mixing a range of bonds with different credit ratings can find the correct blend of income yield and investment risk to suit the particular strategy being adopted.

 

Are ratings to be trusted?

Credit ratings can usually be a good guide as to the creditworthiness of a bond issuer; however, they are not infallible as the ratings are based on historic financial data. Credit ratings agencies cannot look into the future and material changes in the fortunes of a company can lead to credit ratings being downgraded. This would normally lead to an increase an yield, as investors seek higher returns as compensation for the greater risk. On the other hand, a high yield bond, where the issuing company sees a substantial improvement in its financial prospects, could potentially be re-rated to investment grade, which could generate capital returns to investors in addition to the interest payments.

 

One tool in the box

Whilst credit ratings are undoubtedly helpful, they cannot be used in isolation to determine whether a bond is worthy of consideration. As we have mentioned above, they look at historic data, and careful analysis of the bond issuer is needed together with regular review of how changes in profits, or economic outlook in the case of a government bond, could affect the credit rating going forward.

At FAS, we use collective investments within our strategies. These are pooled investments where a manager will buy a portfolio of bond investments to offer a spread across a range of different bonds, which will all have different criteria, including credit ratings. By analysing the constituent components of a bond fund, we can determine the average credit rating across the bond portfolio to get a feel for the level of risk the manager is willing to take.

As we have stressed above, bond investment is a complex area, where a number of different qualitative and technical analyses all contribute to the selection process. The economic conditions we are experiencing at present has, in our view, only increased the need for comprehensive due diligence. If you hold corporate or government bond funds or corporate bond investments as part of an existing portfolio, we would be happy to offer an impartial review of your existing arrangements.

If you would like to discuss the above with one of our experienced financial planners, please get in touch 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 circumstances.

 

Apr 21
0
Long term and short term road signs - Define your investment goals

Define your investment goals

By | Investments

An important part of the financial planning process is defining the reasons why you are investing in the first place. By taking the time to consider the bigger picture at the outset, you can enhance the probability of achieving your desired outcomes, by matching appropriate strategies to your targets.

 

What stage in life are you at?

Broadly speaking, many investors fall into one of two categories. The first are those who are accumulating and building wealth and assets over time. These clients are often younger or middle aged and are able to save regularly (either via a pension, an investment vehicle, or both).

The second category are those who have already accumulated wealth, and are looking for that wealth to perform a function in later life. This cohort are often approaching retirement, or have already retired, and instead of looking to regularly save towards their goal, they are looking for the accumulated funds to either provide an income (through a personal or defined contribution pension, or investment plan) or achieve further growth (to provide a larger inheritance to family).

 

Aiming at the goal

Irrespective of which category an individual falls into, it is important to break down your thinking and define short term and long term goals. Both the short and long term goals may well aim to achieve a similar outcome, although sometimes the goals can be very different.

Take the example of a married couple aged 30, with two children. They both earn good incomes and manage to save regularly each month. After speaking to an adviser, they have considered their goals in the short term. Firstly, they want to make sure they have an emergency fund held in readily accessible funds, to provide for life’s unexpected costs. Secondly, they hope to be able to afford private education for their children. They have therefore decided to invest for the medium term by regularly saving into an investment strategy designed for growth to meet the target date at when funds could be needed to fund private education costs, by funding regular withdrawal to meet the expected annual costs.

In the longer term, they want to make sure that they can afford a comfortable retirement and therefore are also committing funds into a pension arrangement, to try and achieve a good level of pension savings from which to provide retirement income.

The three goals (two short term, and one long term) have completely different time horizons, and therefore it would be appropriate to consider investing in a separate strategy for each goal. In this way, the most tax efficient method can be selected, and the choice of investments be tailored to suit the target of each goal. This is certainly a more sensible approach than simply holding a single savings pot, that doesn’t match any of the stated objectives.

For clients reaching retirement, the goal of many is to provide a sustainable retirement income. This can be achieved via a number of methods, using existing pensions, and investments accumulated through life and also possibly through inheritance. For these clients, defining the level of income needed to meet expected outgoings is very helpful in tailoring the strategy to generate the correct level of income. These clients often have other objectives in mind, for example, the ability to pass on wealth earlier to younger family members by way of gift. Again, careful thought and planning can maximise the tax efficiency of these transactions.

Lastly, the longer term objectives may be to leave significant wealth to the next generation in a tax efficient manner. The three objectives identified are likely to impact on each other, and clearly defining goals and targets at the outset can help prioritise your goals and aspirations.

 

Review and revisit

Whilst giving careful consideration and clearly defining investment goals is an important part of the planning process, reviewing and revisiting those goals is equally important for two reasons.

Firstly, goals change over time. Life is often unpredictable and life events and changes of plan can lead to a clearly defined goal at the outset becoming less important. Let’s look again at the married couple in our example above. They receive an unexpected inheritance that covers the private education costs for their children and therefore they do not need to plan for this expense when the children reach school age. They can, therefore, alter their priorities and focus on their other short and long term goals.

Secondly, it is important to review and consider whether investment goals remain achievable by considering performance of the investments regularly to see whether they are on track to reach their target. If investment markets are underperforming, committing greater savings to the stated goal could help get the plan back on target. Conversely, if investments perform above target, this may allow regular savings investments to be reduced, releasing funds for other uses.

 

Engage with a holistic financial planner

Planning for investment goals is an important area where holistic financial planners can add significant value. By engaging with a trusted adviser, they can assist in defining investment goals at the outset and work with you over time by regularly reviewing your goals and expectations and whether the strategies put in place are on target to achieve that goal.

At FAS, we always take a holistic view, and really take the time to understand your investment and financial goals. Our comprehensive regular reviews not only cover the performance of recommended investment strategies, but also whether these are on target to meet your goals, and whether any changes to the strategy are needed.

If you would like to review your investment plans to see whether they meet your goals, then please get in touch with our experienced 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 circumstances.

Apr 14
0
Giant anthropomorphic British Pound Currency (fictional money character) symbolising income getting stronger - make cash work harder for you

Make cash work harder

By | Financial Planning

The so-called “cost of living crisis” is never out of the news at the moment, with the hike in energy prices, petrol, and food costs causing concern for many. Headline UK Consumer Price inflation rates have now exceeded 6% per annum, and with expectations that annual inflation could reach double digits by the autumn, many are considering how to give their income a welcome boost.

 

Feeling the squeeze

One group in particular who are likely to feel the effect of the price hikes more than others are retired individuals, where income levels are not keeping up with the general rising prices. The reference point that sets the annual increase in State Pension is the rate of inflation at the September preceding the end of the tax year, and as a result, the State Pension has only increased by 3.1% this year, lagging behind the current rate of inflation by some margin.

Retired individuals who hold savings on cash deposit have had to live with low interest rates for more than a decade, so in some respects conditions at the moment represent the status quo. However, the big difference this year to previous years is the fact that the gap between savings rates and inflation has widened, and this trend is only likely to strengthen during the remainder of the year.

 

The quest for better rates

A simple option for those who are receiving a disappointing rate of interest on their savings is to look to move funds to an account paying a better rate. The Bank of England have increased base interest rates on three occasions since December last year, and in an attempt to tackle the persistent higher rates of inflation, are likely to increase rates further during the remainder of this year. Our current expectations is that the Bank of England will hike rates a further three times before the end of the year, although the continued uncertainty over the price hikes and growth could see the Bank take a more aggressive stance if necessary.

That being said, the pursuit of improved cash interest rates remains an exercise in frustration, despite the likelihood of cash interest rates offered by banks and building societies improving during the course of year. As much as cash savings rates improve, the prevailing rate of inflation is likely to have risen further, maintaining and even increasing the difference between the cost of living and savings rates.

 

Look to alternative options

So what can investors do to generate much needed income and also aim to add some growth into the mix to offset the rising prices?

By considering alternative assets to cash, such as fixed interest securities and equities, more attractive levels of income can be generated. Naturally, moving away from cash deposits introduces investment risk, which is not present when holding cash (although as we have shown above, cash is not risk-free, as inflation risk can be significant). Investment risk can be mitigated in a number of different ways. By holding a diversified portfolio, with allocations to different assets that look to balance out assets that have potential for greater returns, with those that offer more predictable returns. In addition, stock specific risk can be avoided by investing in pooled funds (such as Unit Trusts or Open Ended Investment Companies) that spread the investment across a wide range of different individual positions.

Let’s take a look at those alternative asset classes in more detail. Corporate bonds, government bonds, and other fixed interest securities are loans, where the investor lends capital to the issuing company or government. In exchange, the bond provides a regular income for a fixed period of time, with a set return of capital offered when the bond redeems. These investments tend to be more predictable than equities (company shares) but they do still carry risks. These risks include default risk, where the issuer of the bond is financially unable to repay the capital or interest. This risk can be minimised by careful selection of who to lend your money to.

Dividend income generated from equities (company shares) are regular distributions of capital to shareholders. The ability of a company to pay dividends relies on the company having sufficient capital to make the distribution, and are not fixed. Dividend yields came under significant pressure during the early stages of the pandemic, but more recently, dividend yields have improved. Unlike fixed interest securities, equities tend to be more volatile in terms of their capital value, which shows greater fluctuations over time. That being said, equities have greater potential to provide capital returns, and once again, with careful management, the risks can be managed through diversification into assets held in different sectors of the economy and geographic locations.

 

It’s all in the blend

By blending these assets classes, together with other assets that complement the overall strategy (such as infrastructure or property) cash savings could be better employed to generate more attractive levels of income and over the longer term, aim to provide some capital appreciation. Holding these assets in an individual savings account (ISA) can enable a tax-free income to be generated and this is often a sensible way of generating additional income, particularly for those who rely on fixed incomes, such as in retirement.

Moving away from cash and into investments such as fixed interest securities and equities can be a big step and this is where expert financial planning advice can add significant value. The advisers at FAS can provide impartial advice on the options open to you and construct a discretionary managed or advisory portfolio designed to meet your income needs.

If you are looking to make cash worker hard for you, then please get in touch with our experienced 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 circumstances.

Apr 07
0
Feather duster, a pair of marigold gloves, and a calculator representing a financial spring clean

New tax year – time to spring clean your finances

By | Tax Planning

With warmer weather approaching (well in theory anyway!) and another tax year upon us, now is an ideal time to review your financial arrangements, to take advantage of a new set of tax allowances and consider how hard your money is working for you.

 

Make best use of your ISA allowance

The Individual Savings Account (ISA) is a mainstay of annual tax planning and for most people, making use of the available ISA allowance is a sensible way forward. The ISA allowance remains at £20,000 for the 2022/2023 tax year (the sixth tax year in succession where a £20,000 limit applies). All income generated within the ISA is exempt from income tax and gains made on assets held in the ISA are also exempt from capital gains tax. These tax advantages make the ISA wrapper valuable to most individuals.

It is important to remember that the ISA is simply a wrapper that protects whatever is held inside the ISA from tax – what assets you hold inside the wrapper will determine the returns achieved. You can either hold cash (within a Cash ISA) or investment funds, individual equities, or bonds (within a Stocks & Shares ISA). Anyone aged 18-39 can hold a Lifetime ISA. This ISA can only be used to fund the purchase of a home for a first-time buyer or be used for retirement savings, and this ISA has an annual limit of £4,000.

 

Cash certainly isn’t king

Possibly out of habit, many will choose to fund an ISA with cash, either through an instant access account, or a fixed term notice account. Cash has been a poor investment choice for some time, due to low interest rates generally, which have existed for over 12 years; however, with inflation rising, the real return (that is to say the interest earned less the prevailing rate of inflation) is becoming more deeply negative than at any time for a generation.

We all need to hold part of our wealth as cash, as it is only sensible to hold funds that are available to pay for living expenses and any unexpected expenditure. However, holding high balances on cash will almost certainly lead to the value of the savings eroding in real terms, and it would be worthwhile to consider alternative assets for balances held in Cash ISAs.

 

Dividend tax increase

From 6th April 2022, the rate of tax paid on dividends paid by shares and equities based funds is increasing by 1.25% across all bands, with the increased tax take being used to support the NHS, health and social care. For basic rate taxpayers, the dividend tax rate will increase from 7.5% to 8.75%, with corresponding increases for higher rate taxpayers (from 32.5% to 33.75%) and additional rate taxpayers (from 38.1% to 39.35%).

The dividend allowance remains in place, whereby the first £2,000 of dividends received by an individual in a tax year are received tax-free. However, with dividend tax rates increasing, those with larger investment portfolios may wish to look at holding investments within an ISA to receive dividend income without tax being deducted.

 

Pension allowances frozen

Whilst pension annual allowances remain frozen for the 2022/2023 tax year, they remain highly tax-efficient vehicles for retirement savings. The maximum an individual can contribute is £40,000 in a tax year, or 100% of their earnings, whichever is the greater. However, the rules are complex if you are a higher earner, and it is always best to discuss contribution levels with an independent financial adviser.

We argue making sure that pension investments work hard for you is as important as funding the pension with regular contributions. With the new set of allowances available, it may be wise to review existing pension arrangements to ensure that the underlying pension funds are performing well, and undertaking a review of the overall strategy to make sure this continues to meet your needs and objectives.

 

Gifting

The new tax year heralds a fresh annual gift exemption, which remains stubbornly fixed at £3,000. Sadly, this allowance has not been reviewed for many years, and the available allowance does little to help individuals make significant headway in reducing the value of their potential estates which may be subject to inheritance tax.

Under the gift exemption you can give away assets or cash up to a total of £3,000 in a tax year without it being added to the value of your estate for inheritance tax purposes. If you haven’t used the allowance for the last tax year, this can be carried forward to be used in this tax year. In addition, small gifts of up to £250 can also be made, and separate limits apply to wedding gifts.

There are many options open to those who are concerned their estates will breach the inheritance tax limits, and we recommend seeking independent advice in this area. Here at FAS, we can consider options and solutions from across the market to help clients mitigate their potential inheritance tax liabilities.

 

Venturing out

Venture capital trusts (VCTs) are another planning tool that may be appropriate for those that expect high income tax liabilities in the new tax year. VCTs invest in smaller and unquoted companies and as a result, these tend to be higher risk investments; however, they do offer valuable tax advantages, with 30% income tax relief provided on qualifying investments that are held for a minimum of five years, and tax free dividends. This is, again, a specialised area, and one where our experienced advisers can provide expert advice.

 

Summary

The new tax year provides the ideal opportunity to spring clean finances, make use of newly available allowances, and review existing arrangements. If you feel that your finances could benefit from a thorough review, then please speak to our financial planning team.

 

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

Mar 31
0
Houses in bubbles representing UK housing market bubble

The UK housing market

By | Financial Planning

It was just over two years ago since Prime Minister Johnson announced the first national lockdown to combat the spread of Covid-19. Global growth slumped and a deep recession ensued, as businesses and individuals relied on Government and Central Bank support for survival. Following a sharp slowdown in property transactions during the Spring of 2020, Chancellor Sunak announced a Stamp Duty holiday, removing Stamp Duty on properties up to £500,000. This helped reflate the flagging housing market, together with a trend amongst homeowners to look for properties with gardens and home offices.

Last year saw house prices continue to post significant growth following the rebound later in 2020. According to Nationwide, the average UK house price increased by 10.4% in 2021, the highest rate of growth recorded for 15 years. Considering the further lockdown seen in the first quarter of 2021 and continued uncertainty over new Coronavirus variants, these gains appear somewhat irrational. That being said, the extension of the Stamp Duty holiday, low borrowing costs and an imbalance between supply and demand appear to have combined to drive prices higher still.

 

How sustainable is house price growth?

Fast forward to 2022, and in the first two months of the year at least, the trend appears to be continuing, with Nationwide reporting house price growth of 0.8% in January and 1.7% in February. But is this really sustainable, or are we on the verge of a rapid slowdown in the housing market?  According to the Building Societies Association (BSA) Property Tracker March survey, it would appear buyers are becoming increasingly concerned.

The BSA Property Tracker survey, which is carried out quarterly by YouGov PLC, showed just 18% of those surveyed in March thought it is a good time to buy property in the UK. This is the lowest figure reported since the survey was introduced in June 2008. Perhaps unsurprisingly, fears over the increasing cost of living generally, the conflict in Ukraine, and the impact of sanctions on Russia on global energy and fuel prices were highlighted as key concerns.

 

Higher costs squeeze affordability

We have warned clients that inflation was likely to increase since early in 2021, although our early estimate that inflation could peak in the Spring or Summer of this year now looks highly unlikely, largely due to the effect of the Russian invasion of Ukraine on global commodity prices. UK Consumer Price Inflation reached 6.2% in the 12 months to February 2022 and this is likely to go higher still as the year progresses.

Given the higher inflation numbers, the Bank of England has now raised Base interest rates at three successive meetings, from 0.10% to 0.25% on December 16th 2021, and agreeing two 0.25% increases in February and March, with the Base Rate now standing at the same level as it was before the pandemic. There are six further Monetary Policy Committee (MPC) meetings scheduled for 2022, and given the heightened inflationary expectations for the remainder of this year, we would not be surprised to see at least three more hikes in Base Rate before the end of the year.

The increase in Base Rates will, of course, feed into higher mortgage rates, both for those on variable rates and those with fixed rate deals that come to an end. Just over seven months ago, five year fixed rates could be obtained at just 0.99%, whereas the best deals in the market are almost double the rate at 1.82%.

 

Confidence on the wane

With higher costs of living impacting on household finances, it is little surprise that UK consumer confidence is starting to falter. The GFK Consumer Confidence barometer fell to -31 in March 2022, to stand just above the levels seen at the start of the pandemic, and when asked about their forecast for personal finances over the coming 12 months, respondents indicated that they were more negative now than at the height of the pandemic and also more pessimistic than they were during the Financial crisis in 2008.

 

Supply imbalance about to correct?

Much of the house price growth seen over the last decade has been a result of cheap borrowing costs, but also an imbalance between demand and supply, as housebuilding generally failed to keep up with demand for housing.

With prices potentially coming under pressure due to increased costs of living, could we see a increase of properties on the market as sellers hope to cash in before confidence weakens? It is too early to tell, although some investors with Buy to Let properties may decide to take advantage of current prices, particularly given that rental yields are likely to have fallen over time.

As a reminder to those who are considering selling second homes or investment properties, Capital Gains Tax on disposal needs to be paid to H M Revenue & Customs within 60 days of the property sale completing. This is less onerous than the 30 day payment window in place between 6th April 2020 and 26th October 2021, however sellers should be aware that tax due needs to be settled within the 60 day window to avoid penalties adding to the tax due.

 

Time to reassess property portfolios?

The UK housing market has defied gravity since the start of the pandemic, although it is becoming apparent that confidence could weaken significantly as 2022 progresses. Higher inflation and hikes in borrowing costs could see the imbalance between demand and supply ease and slow down the pace of growth. For anyone holding property investments, it may be time to reassess existing portfolios in light of the extraordinary gains seen over recent years.

 

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

Mar 24
0
Sign reading Work one way and Retirement the other way

Can I afford to retire early?

By | Pensions

At FAS, we meet clients at various stages of life, from those who are working age and looking to plan for the future, through to clients who have already retired and need later life planning. Perhaps the biggest cohort of clients that approach us for advice are those where retirement is beginning to move into focus, and many ask a similar question – when can I afford to retire? Whilst the answer for each individual is different, we look at some of the common themes that anyone in this situation needs to consider.

 

The cost of early retirement

Under current legislation, the earliest you can access personal or workplace pensions is age 55 (which rises to age 57 from April 2028). For some individuals, it can be tempting to look to take pension income at the earliest opportunity. However, this is rarely a good option, irrespective of the type of pensions an individual holds.

For those that hold a Final Salary pension, the scheme will have rules as to when the pension can be accessed. Often this is set at age 65, although some schemes offer access at 60. Taking benefits early will usually lead to a reduction in benefits for each year the pension is taken early – typically this will be a reduction of around 5% per annum.

For individuals who hold Money Purchase or Defined Contribution Workplace pensions, an option may be given to either purchase an annuity or receive a scheme pension (both of which are progressively less attractive the earlier the pension is drawn, as they will, on average, need to be paid for a longer period of time) or generate a retirement income via Flexi-Access Drawdown. The same applies to personal pensions, and in the case of individuals selecting a Drawdown approach, drawing benefits early will mean that the retirement pot will need to fund retirement for a longer period of time, increasing the potential that the pot becomes exhausted.

 

Increasing life expectancy

Despite the coronavirus pandemic slowing the pace of increase in UK life expectancy over the last two years, the Office for National Statistics still expects longevity to increase over time. A female who is 40 now is expected to live until an average of 87.3 years, whereas a male at the same age now expected to live until an average of 84.2 years, though many will live for years beyond the expected average age. Along with increasing life expectancy, medical advances may enable people to stay healthier and active for longer, therefore pensions will need to potentially fund lifestyle choices for a greater number of years.

 

Relying on State Pension provision

The gradual increase in the age at which State Pension becomes payable leads many to consider whether they can afford to retire before they are entitled to their State Pension.

In 2018, the State Pension age for men and women was set at 65; however this has now jumped to 66 for anyone born between 6th December 1953 and 5th April 1960, 67 for anyone born between 6th March 1961 and 5th April 1977, and 68 for anyone born after 6th April 1978. However, according to research undertaken by Moneyfarm, the average retirement age in the UK is lower than the current statutory age of 66, at 64 for women and 65.1 for men, which suggests that despite the increasing State Pension age, many will continue to take the opportunity of retiring earlier. Of course, this assumes that individuals are able to fund their lifestyle in the intervening period before they receive their State Pension.

Currently, the basic State Pension is £179.60 per week, for an individual with 35 or more qualifying years of National Insurance contributions, which rises to £185.15 per week from 6th April 2022. State provision on its own is only going to provide a very basic standard of living in retirement, and may well prove insufficient,  particularly in the early stages of retirement, when many are active and want to enjoy the additional time at their disposal to enjoy hobbies, travel and leisure activities. That is why it is crucial to begin to make your own provision for retirement to make life more comfortable.

 

How to begin planning ahead

A good way to approach retirement is to start planning as early as you can. Firstly, look to establish a pension and fund this consistently through your working life. When you begin to consider your future plans, and how retirement may look, engage with an independent planner who can assist in looking at the options, seeing where improvements can be made to existing pension arrangements and reviewing investment performance to maximise returns on pension savings.

Individuals can also start considering the amount of income they will need during retirement, in today’s money, to begin to assess the feasibility of early retirement. All regular outgoings and costs need to be taken into account, such as household bills, groceries, transport costs and any outstanding loan or mortgage. In addition, a margin needs to be factored in for additional expenditure, which often arises after retirement. Holidays and travel expenditure, hobbies and leisure and home improvements need to be considered, together with the costs of replacing vehicles and household items over time.

Inflation is also an important consideration and one that is rarely out of the news at the moment. We have been living through a decade or more when inflation has been close to or below expectations; however, with the cost of energy, food and petrol rising substantially, individuals would be wise to place greater emphasis on the impact of increased costs when considering their ability to successfully fund retirement.

 

Take the first step

Every individual’s circumstances are unique and when it comes to planning for retirement, one size doesn’t fit all. At FAS, we take the time to fully understand your expectations, needs and objectives in retirement, with the aim of providing a plan of action designed to determine your likely income in retirement and whether you can afford to retire early. Speak to one of our experienced advisers to discuss your existing pension arrangements and plans for the future.

 

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