Financial Planning

As we move into later life, our financial priorities often shift, and funding the cost of long-term care is a common concern. It is not surprising, given the rapid increase in the cost of nursing and residential care over recent years, and the financial impact on those who need to fund care costs.

According to recent figures from Age UK, the average weekly cost for residential care is around £949 per week, whilst full nursing care costs an average of £1,267 per week. There are, however, substantial regional differences, and we have come across situations where weekly costs for both types of care are significantly higher than the average.

Funding decisions

Local authorities have a duty to arrange appropriate levels of care, following an assessment of an individual’s needs. If there are significant health needs, NHS continuing healthcare may be available, which could cover some or all of the care costs; however, if the individual is not eligible for NHS continuing healthcare, and they hold assets greater than £23,250 (including property) they will be expected to make a contribution towards care costs, either in part or in full.

Self-funding care costs can be a daunting proposition, where financial decisions need to be made at a time of stress and worry when an individual is moving into care. Our experience shows that seeking independent financial planning advice can help alleviate these concerns, by helping families, or Attorneys appointed under a Lasting Power of Attorney, consider a range of options and agree an appropriate strategy to meet the ongoing care costs.

Financial assessment

When we first meet clients who potentially have care needs, or are moving into care, we undertake a full assessment of their capital assets, together with their income sources (e.g. pensions, attendance allowance, investment or property income) to work out the shortfall between the cost of care and other essential costs (such as personal care items and spending money) and their income.

It might be the case the individual can readily meet the shortfall between income and care, although this is typically only for those with significant investment, pension, or property rental income. In most instances, there will be a shortfall between the cost of care and income received, which will lead to erosion of capital assets over time. Individuals, or their Attorneys, will, therefore, need to make decisions about how best to deal with cash savings, investments, and property, to help stem the rate of erosion.

Immediate Needs Annuities

One option that can bridge the gap between income and care costs is to use savings, or property sale proceeds, to purchase an immediate needs annuity plan. In exchange for a capital lump sum, an insurance provider will pay a monthly amount direct to the care provider to meet the shortfall between income and care fees.

As insurers underwrite each plan, the single premium payable on purchase is dependent on the age, health, life expectancy, and care needs of the individual. In our experience, the levels of premium payable on such policies can be expensive; however, despite this cost, some may value the certainty that a care fees annuity can bring.

Once an Immediate Needs Annuity policy is in place, there is no return of capital to loved ones in the event of death of the individual in care, unless capital protection insurance is purchased, which comes at an additional cost. It is also important to consider the average life expectancy of an individual who moves into care. According to data from the Office for National Statistics, the average length of stay in care before death of a man aged 85 is around 2.5 years, with a woman of the same age expected to live for another 3.5 years. The purchase of a care fees annuity could, therefore, potentially only pay out for a limited period, leading to returns that offer poor value from the large capital outlay used to purchase the annuity.

Investment options

Building a bespoke investment plan from capital assets, which aims to limit the erosion of capital due to the shortfall between income and expenditure, is often the most appropriate route to take. Factors such as the value of any existing investments held, the tolerance to investment risk accepted and income needs all require consideration, before deciding on an investment strategy. Tax-efficiency and ease of access to funds will also be important considerations.

Cash savings will inevitably have a part to play in any sensible investment arrangement when funding care fees. It is, however, important that cash deposits remain productive and held in a tax-efficient manner.

For larger sums not immediately required to pay for care, other investment options, such as Company Shares, Corporate and Government Bonds and alternative assets, aim to generate superior returns to those available on cash, and help stem the rate of erosion of capital, so that funds held can continue to pay for care provision for an extended period or leave capital to loved ones on death. Keeping an investment strategy under review is also vital, as it is often the case that care needs change over time, and care home fees tend to rise each year in line with, or above, the rate of inflation.

Independent advice

Our experienced advisers can provide independent and unbiased advice on the best way to fund care costs, tailored to an individual’s personal circumstances. We can look across the market at annuity solutions and regularly provide advice on sensible investment strategies to keep funds productive whilst funding care costs. Speak to one of our advisers to discuss how best to pay for the cost of care.

As announced in the 2024 Budget, from 6^th April 2027, the value of most death benefits and unused pension funds held at date of death will form part of an individual’s estate for Inheritance Tax (IHT) purposes.

The draft rules are in stark contrast to the tax-advantaged position that currently applies. At present, unused pension funds, or remaining pension funds held in Flexi-Access Drawdown, can be passed to beneficiaries at the discretion of the pension trustees, outside of their estate for IHT purposes. This effectively allows the passing of unused pensions through generations and is an effective estate planning tool.

The first round of industry consultation following the 2024 Budget has now concluded. Further consultation is ongoing, although there is little chance of any substantive change to the draft legislation from this point. Those holding unused pension funds should, therefore, take the opportunity to review their position to determine whether any action is necessary in advance of April 2027.

Spousal exemption

The first round of consultation confirmed that pension benefits paid to a spouse or civil partner will remain exempt from IHT; however, just as is currently the case with assets other than pensions, a liability to IHT may arise on the second of a married couple to pass. This exemption does not apply to unmarried partners and could lead to an unexpected liability to IHT in the event of death of an unmarried individual, whose estate would not benefit from the usual spousal exemptions.

The draft legislation has further clarified the rules on Death in Service payments, which will also remain exempt from IHT from April 2027.

Potential 67% tax charge on inherited pensions

Not only will unused pension fund death benefits be subject to IHT, the existing tax rules for those also drawing death benefits from a beneficiary’s drawdown pot will remain in place. If the pension holder dies before the age of 75, whilst IHT could apply depending on the value of the estate, the beneficiary of pension benefits can draw down on the inherited pot without income tax applying to the payments.

The situation is different where a pension holder dies after the age of 75, as the beneficiary is taxed at their marginal rate of income tax on monies drawn from the pension. From April 2027, the value of the pension could potentially be subject to IHT at 40%, and funds drawn from the inherited pension could then also be subject to income tax up to 45% in the hands of the beneficiary.

Take the following example, which assumes you were to inherit a pension pot valued at £100,000 from someone who died after the age of 75, and all available nil-rate bands for IHT have already been used. The table shows the position where a beneficiary is either a Basic, Higher or Additional Rate Taxpayer, and in the case of Basic and Higher Rate taxpayers, the pension funds withdrawn are within the respective tax bands.

The above examples do not consider the potential impact of an additional tax liability if the Main Residence Band – which applies if you leave a property to your children or grandchildren – becomes tapered. This occurs for estates valued at between £2m and £2.35m for an individual or £2.7m for a married couple. In this instance, the effective rate of tax payable by an additional rate taxpayer, who receives pension death benefits, could reach 87%.

Clarification for Personal Representatives

The original proposals gave pension scheme administrators significant reporting and payment responsibilities, but following the first round of consultation, the responsibility to account and pay the correct amount of IHT falls on the Personal Representatives dealing with the estate.

Personal Representatives will need to contact the pension scheme to ascertain the value of the pension for reporting purposes, and pension scheme administrators will need to provide this within four weeks of a request. If IHT is due, Personal Representatives will need to calculate the IHT liability attributable to each pension and notify the pension scheme and beneficiaries.

Where the pension death benefits are free of IHT, either by virtue of spousal exemption or where the total value of the estate including pensions is below the Nil Rate Bands, pension trustees can pay benefits without delay.

If IHT is due, Personal Representatives can ask the pension scheme to pay tax directly to HMRC to settle the IHT liability, or they can pay the IHT due from other assets within the estate.

Despite this clarification, dealing with an estate containing unused pensions will become significantly more challenging after April 2027, and given the added complexity, it may well be worth considering who is appointed as Executor of your Will. Of course, Executors could seek professional legal and financial advice in dealing with aspects of an estate in relation to pensions.

Consider the impact of the new rules

For those with unused pension funds, now is the time to review pension values to determine whether the change in rules will alter the potential IHT liability on your estate from April 2027. If so, action can be taken to mitigate the additional IHT that could become payable. For example, you could consider taking benefits from a pension and gifting the Tax-free Cash element, drawing additional pension income and making gifts out of surplus income, or purchase an annuity.

As the pension value will simply be treated as another asset from April 2027, you could also consider planning with other assets held outside of a pension, which could be structured to reduce the impact of IHT. The most appropriate solution will depend on the precise composition of assets held, family circumstances and financial objectives. This is why seeking bespoke and tailored financial planning advice will be key to adopting an effective strategy.

The advisers at FAS always take a holistic approach to financial planning. We look at a wide range of aspects of an individual’s financial position, and as an independent firm, we can consider solutions from across the marketplace without restriction. If you have questions relating to the changes to pension death benefits, speak to one of our experienced advisers who will be happy to help.

When measuring the effectiveness of any financial plan, it would be tempting to simply focus on factors such as investment performance, tax efficiency, and ease of administration. Failing to consider the wider implications of unforeseen scenarios, such as death or loss of mental capacity can, however, place the best laid financial plans at risk. We look at the importance of writing a will, making an expression of wish over existing personal pension death benefits, and preparing a Lasting Power of Attorney.

Set out your wishes

Writing a will ensures your wishes are carried out the way you intend. Leaving a will that states clearly who should receive your possessions and property when you die can prevent unnecessary distress for your loved ones.

Everyone should consider making a will; however, anyone who has children or other family members that depend on them financially should view this as a vital action to take. Likewise, if you would like to leave possessions to people who are not part of your immediate family, preparing a will is the only way to ensure your executors follow your wishes.

If you die without leaving a valid will – known as dying “intestate” – the law determines who inherits your assets. This may mean that loved ones are unprotected, and other family members excluded from benefitting from your estate. As more couples now co-habit, it is important to understand the laws of intestacy can leave partners who are not married or in a civil partnership financially vulnerable, as they will not be legally entitled to anything under the intestacy laws, irrespective of how long the relationship has lasted. Likewise, those living in blended families are particularly at risk, as the law may not divide assets fairly.

After making a will, it is important to review the wording of a will periodically, to make sure that the will reflects changes in family makeup or circumstances.

Pension Expression of Wish

In conjunction with preparing a will, it is also important to ensure that an Expression of Wish for any existing pension arrangements has been prepared and is up to date. An Expression of Wish lets the individual set out who they would prefer the money to go to and in what proportions, in the event of their death.

It is a common misconception that a residual pension will pass in accordance with an individual’s will. This is not the case, as the pension trustees will decide who will receive the pension death benefits. The trustees are not obliged to follow the wish expressed by the pension holder; they will, however, take such wishes into account when reaching a decision.

Lasting Power of Attorney

According to Age UK, there are an estimated 982,000 people who are living with dementia in the UK, with this number expected to rise to 1.4 million by 2040. These sad statistics underline the importance of considering who would manage your affairs if you were no longer able to make decisions.

Preparing a Lasting Power of Attorney (LPA) can ensure your loved ones can make important decisions about your health and your financial assets on your behalf, should you become incapacitated through ill health or accident.

An LPA is a legal document that lets you appoint individuals you trust to make decisions on your behalf, should you become unable to make those decisions for yourself in the future. There are two LPAs that can be prepared, one covering Property & Affairs (e.g., your home and assets) and the other covering your Health & Welfare (such as care and medical treatment).

You can choose to set up one or both types of LPA, and you can nominate the same person or elect to have different attorneys for each. You do not instantly lose control of the decisions that affect you when preparing an LPA. For the Property & Affairs LPA, you can be specific about when the attorney can take control when preparing the LPA. In the case of the Health & Welfare LPA, this can only be used when an individual loses mental capacity. All LPAs must be registered at the Office of the Public Guardian, a government body, before they can be used.

If you lose mental capacity without an LPA in place, someone who wishes to act on your behalf may need to apply to the Court of Protection to be appointed as your ‘deputy’, who will have similar powers and responsibilities as someone appointed under an LPA.

The process of making a Court of Protection application is long-winded, with significant delays before an Order is made. Furthermore, the Court will decide on who is appointed as deputy, which may not be someone you would choose if you had capacity.

Failing to prepare an LPA can cause family members significant distress if you lose capacity to make decisions, and lead to financial vulnerability. Bank and investment accounts may be frozen, leading to difficulties in dealing with day-to-day financial matters, and those with complex financial affairs or business owners are at even greater financial risk should they lose mental capacity.

Take the time to review your affairs

Take a moment to review your affairs and consider what would happen in the event of your death, or loss of mental capacity. Neither situation is something we wish to contemplate; however, failing to prepare a will and LPA could cause loved ones emotional and financial difficulties, and undermine financial planning decisions.

As part of our holistic planning service, we remind our clients to make a will, or review an existing will, refresh their Expression of Wish, and make an LPA at our regular financial reviews. Speak to one of the team to discuss whether your affairs are in order.

More people than ever are considering the potential impact of Inheritance Tax (IHT) on their wealth and looking for ways to protect assets from tax on death. Amongst a range of different options, gifting assets away to family members is one of the simplest methods of reducing the value of your potential estate, mitigating an IHT liability, and transferring family wealth to the next generation.

Making outright gifts is, however, not always possible or the gift could result in unintended consequences. If the beneficiary of the gift is under the age of eighteen, they cannot receive gifts directly. Grandparents gifting larger sums to their children could inadvertently add to their children’s IHT concerns due to the value of their own assets. We regularly see situations where family members are gifted funds to help purchase a home, only for a relationship to break down, leading to dilution of family wealth through a divorce settlement.

Instead of gifting funds directly, settling money in Trust can be an effective planning tool that helps protect family wealth and avoids the pitfalls that can arise when making outright lifetime gifts.

There are a range of different Trusts that individuals can establish, with an Absolute (or Bare) Trust being the simplest. This is where funds in Trust benefit a single individual, usually a minor, who accedes to the Trust capital at the age of eighteen. A more flexible arrangement is, however, often preferred, where the donor can retain control over when assets held in Trust are paid to beneficiaries.

Increased flexibility

Discretionary Trusts provide this flexibility, as the Trust wording allows the funds held in Trust to be paid to anyone within a pool of potential beneficiaries. Trust wording will often allow children, grandchildren, and great-grandchildren of the settlor to benefit, although it could also include other named beneficiaries. The Trust is flexible in that it allows the Trustees to decide who receives funds from the Trust, and when. The following provides an example of how gifting into a Discretionary Trust would work in practice, to protect family wealth.

Mr & Mrs Smith own property and other assets valued at £2.5m and wish to gift funds across generations of their family. They have not undertaken any lifetime gifting previously. Mr & Mrs Smith each gift £325,000 into a Discretionary Trust, which avoids any immediate Inheritance Tax charge as this is within their Nil Rate Bands. Mr & Mrs Smith appoint themselves as Trustees, to retain control over the Trust assets, but also appoint their daughter as an additional Trustee, to ensure continuity in the event of death of one or more of them.

The potential beneficiaries of the Trust are any of Mr & Mrs Smith’s children and grandchildren. The Trustees invest the Trust funds in a diversified managed investment portfolio and future growth is therefore outside of the Smith’s own estates. Beneficiaries receive Trust capital at various intervals, to help grandchildren through further education, and to provide one older grandchild with a deposit for their first home. The remaining funds held in Trust continue to grow over the longer term, enabling future generations of the family to benefit. After seven years, the gift into Trust falls outside of Mr & Mrs Smith’s estate for Inheritance Tax purposes.

Wider planning options

When using a Discretionary Trust, the Settlor (i.e. the person setting up the Trust) cannot benefit from the Trust, if the gift is to be effective for IHT planning. There are, however, a range of different options that can provide the Settlor with access to the funds gifted into Trust, whilst ensuring that the funds held in Trust grow outside of their estate.

Discretionary Gift Trust arrangements allow the Settlor to receive a regular stream of capital payments from the Trust, and the value of the gift for IHT purposes may be subject to a discount, based on the age and health of the Settlor. Loan Trusts are a further alternative that can be effective in certain circumstances. The Settlor lends funds to the Trust, which can be repaid to the Settlor if required, whilst growth in the value of the Trust capital is outside of the Settlor’s estate.

Tax considerations

Discretionary Trusts can be powerful tools when it comes to protecting family wealth. They are, however, subject to a more punitive tax regime than individuals, with interest and savings income taxed at 45% and dividends at 39.35%. It is therefore important to consider the most appropriate method of establishing the Trust and arranging the Trust assets, to avoid unnecessary tax liabilities.

Most transfers into discretionary Trusts are Chargeable Lifetime Transfers (CLTs). Unlike gifts to individuals, which are Potentially Exempt Transfers, CLTs may give rise to an immediate IHT liability if the value of gifts exceeds the Nil Rate Band. Discretionary Trusts are subject to a liability to IHT on the 10^th anniversary of the creation of the Trust and each 10-year anniversary thereafter, and a potential IHT charge is also payable when assets leave the Trust. These charges are, however, modest when compared to the rate of IHT charged on death.

Administrative matters

In addition to tax considerations, Trustees will also need to ensure that they properly administer the Trust, including registering the Trust with HMRC, via the Online Registration Service, and filing annual tax returns as required. It is, therefore, essential that Trustees keep good records and seek advice from an Accountant or Solicitor. Where FAS provide Trustees with investment advice, we can provide detailed reports of income and capital events for each tax year, to simplify the reporting process.

The need for tailored advice

It is important to consider Trust planning as one of a range of options available which can help mitigate a potential IHT liability. Each option has benefits and drawbacks and therefore selecting the right path, or paths to take, will depend on your individual circumstances. Our experienced advisers can show you examples of various Trust planning advice we have given to clients, to help you select the right option. Speak to one of the team to start a conversation.

In our weekly Wealth Matters newsletter, we try to keep our readers up to date with developments in financial markets, changes in legislation and financial planning opportunities. In a break from our usual content, we ran a series of articles last year giving an insight into how FAS operates on a day-to-day basis, which proved popular, judging by the feedback we received. Twelve months have passed since the publication of our initial “behind the scenes” articles, and as FAS continues to grow, we would like to bring you up to date with recent developments within the business.

2025 – a busy year!

2025 thus far has proved to be an incredibly busy year for FAS, with the team expanding, and internal systems evolving to continue to meet the highest standards of service. Whilst the business was already growing rapidly, the pace of growth has accelerated even faster this year. It is clear there is an ever-greater need for individuals and businesses to seek independent, professional financial advice. A key driver of this has been the various changes in legislation affecting a range of UK taxes, and an increased awareness of the need to ensure that pensions and investment plans are appropriately managed and reviewed. We have also seen a greater call from clients for individual and tailored advice to ensure that family wealth can pass between generations, reducing or eliminating an Inheritance Tax liability.

To deal with the increased demand, we have expanded our team by 30% over the last twelve months. The adviser, paraplanner, compliance and administration teams have all been strengthened, with experienced and dedicated team members helping to enhance the levels of service we provide to clients. We strongly believe in a collegiate and collaborative approach to our work. All staff are integral to the running of the business and there is a mutual respect amongst colleagues for the role everyone plays.

The team are based within our Folkestone and Maidstone offices, and we believe working closely together in an office environment promotes more efficient administration, and amongst the adviser and paraplanner teams, encourages discussion around planning opportunities, and the outlook for investment markets. Being office based ensures the combined years of experience across the adviser team can work together on complex financial planning scenarios, together with input from our highly qualified and experienced paraplanners.

Growth in the business continues to be fuelled by the client referrals we receive. Many existing clients have been kind enough to pass on our details to friends, family, and colleagues, which is the best compliment we can receive. We also regularly receive referrals from professional firms across Kent, London and the South East, who trust FAS to provide their clients with bespoke financial planning advice.

Procedural upgrades

FAS has not only invested in additional personnel over the past year. We have also continued to invest in technology over the last twelve months, to improve the service we provide. One key enhancement has been the increased use of digital signature systems, which allow clients to electronically sign application forms and declarations. Electronic signatures not only avoid postal delays and ensure rapid processing, but many clients have also commented that they find digital signatures far more convenient. We have also introduced new software solutions that provide detailed cash flow analysis, which help support our retirement planning recommendations.

The FAS Investment Committee work continues to evolve, with enhancements to our research, methodology and investment process. Committee members now schedule more frequent meetings with leading fund managers and have access to a wider range of research and analysis, which continues to expand. The FAS Investment Committee also now provides more regular updates on investment performance and strategy and undertake enhanced analysis to compare investment performance against market peers. The analysis also reviews the open market to ensure that our investment functions provide value for money. In addition, FAS have negotiated fund discounts with leading fund houses, passing on lower fund costs to our clients.

Chartered Status and the Community

FAS is proud of our Chartered status, which is a mark of distinction which signifies a public commitment to professional standards and technical competence. Continuing professional development, whether through further examinations, or regular targeted learning and study, is undertaken by all staff throughout the year. We are fully cognisant of the rapidly changing financial planning landscape and continue to evolve the professional development programme undertaken by the team to meet these challenges.

Links with the local community have also been strengthened over the last twelve months. FAS are a sponsor and key supporter of the Kent Charity Awards, which recognise the amazing work undertaken by local charities. In addition, FAS sponsor the Kent Life Food & Drink awards, and this year, we are also a lead sponsor of the Kent Law Society. We remain proud to be able to support these local events and organisations.

Into the future!

Whilst 2025 has been a year of rapid growth for FAS, we will not lose sight of our core ethos, which prioritises client relationships and focuses on providing quality advice and exceptional service. We are also acutely aware of the need to avoid complacency and will continue to invest in our team and systems to meet growing demand over the months and years to come.

We hope this update has been of interest. We always welcome feedback, so please do get in touch if you have any questions or comments.

As a new academic year begins, families turn their attention to the rising costs of education. Whether saving for university costs or funding private schooling, early planning can make a significant difference. We are increasingly seeing grandparents and other older relatives who wish to help fund education costs of younger generations, easing the financial burden on their children, and undertaking Inheritance Tax planning at the same time. With the right planning, this can be an effective and tax-efficient strategy.

The cost of private and further education

For some families, investing in a private school education is a priority, with evidence showing that students from private schools often outperform national academic averages. However, private education comes at a significant cost – not only in terms of school fees, but also when factoring in uniforms, extracurricular activities, trips, and other associated expenses.

Private education fees were a hot topic of debate last year, after the Government’s decision to impose VAT on school fees from January 2025. The average cost of an annual independent day school place is around £18,500 per annum, and the imposition of VAT on fees only increases the financial burden on parents. In addition, recent reports suggest HMRC are reviewing cases where parents made advanced payments to schools, to determine whether these payments are also liable to VAT.

University education comes with a substantial price tag. Tuition fees are subject to a cap of £9,535 per year in the UK, which means a typical three-year degree could result in over £28,000 of student debt being accumulated for tuition alone. Additional costs, including accommodation, food, travel, course materials, and entertainment, significantly increase the financial requirement. While Tuition Fee Loans cover course fees, Maintenance Loans, which are means-tested based on household income, rarely cover the full cost of living. For the 2025/26 academic year, Maintenance Loans have risen by just 3.1%, leaving a widening gap that families often need to fill themselves.

For those starting courses since August 2023, student loan repayments only begin once earnings exceed £25,000 per year; however, interest applies to the outstanding balance, with the rate of interest linked to increases in the retail price index. This means that the debt does not erode over time due to inflation, which is the case with other debt, such as mortgage loans.

The burden on parents

Parents looking to help their children through further education may well find that this comes at a time when they may also be focusing on other financial priorities, such as retirement planning and maximising pension contributions. Balancing these competing goals can present a challenge; however, starting to save well in advance of a child entering higher education allows families to spread the cost over a longer period and potentially reduce the financial pressure later.

For longer term investments, leaving savings on cash deposit is likely to see the value of those savings erode in real terms. Choosing an investment strategy that reflects the investment time horizon and holds a diversified portfolio including global equities and bonds could generate higher returns over time, albeit investment risk also needs to be considered.

Tax efficiency should form an important part of the planning process. Sheltering investments within an Individual Savings Account (ISA) wrapper could provide tax-free growth and income. The exemption from Capital Gains Tax offered by an ISA can be particularly helpful when withdrawals are taken to cover fees that become due.

Help from older generations

Grandparents and other older relatives often wish to contribute towards school and university costs, both to invest in their grandchild’s future, while also reducing the financial pressure on the parents. At the same time, we are seeing many people actively consider the potential Inheritance Tax liability that could be due on their estate, particularly given the upcoming change to legislation that will mean that unused pension funds become liable to Inheritance Tax from April 2027. For older relatives, gifting money for the purposes of funding education costs can, therefore, not only help younger family members, but also reduce the potential liability to Inheritance Tax.

In these cases, it is important to carefully consider how best to help fund expenses in the most tax-efficient way possible. Annual gifts of up to £3,000 are typically exempt, but larger capital gifts may be subject to Inheritance Tax unless the donor survives seven years from the date of the gift.

The benefits of arranging gifts out of surplus income are often overlooked. These rules are not straightforward; however, if income earned by the donor is truly surplus to expenditure, regular gifts of surplus income could be a method of contributing towards the cost of education without concerns that the value of the gift could be clawed back if the donor fails to live seven years.

For more advanced planning, a Discretionary Trust, with the grandchildren as potential beneficiaries, could be an alternative way to build a fund to cover education expenses. Grandparents could settle funds into Trust when grandchildren are young and invest with the aim of growing the fund over time. Once grandchildren need funds for education fees, the Trustees can release funds tax-efficiently, to cover ongoing educational expenses as they arise. Discretionary Trusts have wider applications than funding education costs and can be a powerful tool for wider estate planning and protecting family wealth.

Start planning early

Whether covering the costs of university or private school fees, the best way to meet education costs is to start planning as early as possible. By putting a structured and tax-efficient strategy in place, you can help ensure that your children – or grandchildren – have access to the educational opportunities you want for them. For older generations, such planning can also have the dual benefit of reducing a potential Inheritance Tax liability.

Our experienced advisers can provide independent and holistic advice on how best to fund your family’s education expenses, and how to reduce a potential liability to Inheritance Tax. Speak to one of the team to start a conversation.

When undertaking a comprehensive review of a client’s financial assets, we often find that clients hold one or more products managed by NS&I, or National Savings & Investments in old money.

In today’s fast-moving savings market, NS&I has adapted to offer a more streamlined range of products. Although NS&I’s savings products have unique financial backing, the rates of interest offered can easily be bettered by other providers. In addition, apart from one remaining tax-free option, the tax-efficiency offered by historic NS&I Bonds is no longer available within the existing product range.

Backed by HM Treasury

Originally established in 1861 as the Post Office Savings Bank, NS&I is the UK government savings bank and aims to provide a secure place for individuals to save while helping the government finance public spending. As at September 2024, 24 million customers hold savings products with NS&I, and collectively NS&I manages more than £200 billion on behalf of savers across their range of savings products.

NS&I products are backed by HM Treasury, making them among the safest financial instruments available in the UK. This makes them more secure than typical bank accounts, which are only protected up to £85,000 under the Financial Services Compensation Scheme (FSCS).

NS&I provides funding to HM Treasury, and the Budget in November 2024 outlined the government’s intention to increase the amount of money sought from NS&I deposits, to £12bn for the 2025/26 tax year. This would provide a welcome boost to HM Treasury; however, NS&I needs to balance its role in raising government finance with the need to avoid distorting the wider savings market by offering rates that are significantly higher than competitors. Given the current range of products offered by NS&I, we feel there is little chance of that occurring.

Fixed Rate savings in a crowded marketplace

NS&I Savings Bonds are still the cornerstone of the product range. Interest earned on the current range of Bonds offered by NS&I is subject to Income Tax, which does little to set the products apart from fixed rate Bonds from other banks and building societies. The interest rates currently offered on the flagship British Savings Bonds lag market leading rates by some margin on each of the 1,2,3 and 5-year terms offered, and the only reason for considering NS&I over any other provider is if you want greater protection for deposits over £85,000.

The NS&I Green Savings Bonds offer even worse value. The Bonds currently pay 2.95% gross Annual Equivalent Rate for a 3-year term, which is over 1.25% lower than the market leading rate payable on a 3-year Bond. The ethical credentials of the Green Savings Bond also require closer scrutiny, given the woolly promise that HM Treasury will aim to match deposits into the Bond in chosen green projects.

Other products lag behind

Amongst other savings products offered by NS&I, rates are similarly disappointing compared to other savings options. The NS&I Direct Cash ISA currently pays interest of 3.50% per annum, almost 1% lower than the market leader, and the cash Junior ISA, which allows tax-free savings for those up to the age of 18, pays just 3.55% per annum, again some way behind other providers. Taken in the round, the range of savings products are uncompetitive, and better returns can be obtained by considering options across the marketplace.

Premium Bonds

The only bright spot in NS&I’s current lacklustre product line-up are Premium Bonds. These are NS&I’s most popular product, with over 22 million accounts holding savings up to the maximum £50,000. Premium Bonds don’t pay interest in the traditional sense. Instead, savers are entered into a monthly prize draw with tax-free prizes ranging from £25 to £1 million. This appeals to people who enjoy the “lottery” aspect while keeping their capital safe.

The annual prize fund rate will fall to 3.6% from August, leaving the headline rate below alternative savings options that offer almost instant access; however, given the fact that prizes are tax-free, Premium Bonds may appeal to Higher and Additional rate taxpayers.

Falling interest rates

We feel the current range of products offered by NS&I are disappointing, and apart from Premium Bonds, the rates offered by the government backed institution can be easily beaten elsewhere; however, whilst we would encourage savers to review their NS&I accounts, perhaps a more fundamental review of the level of savings you hold would be a sensible step to take.

UK base interest rates have fallen four times in the last 12 months, and further cuts to interest rates are likely during the autumn, and into 2026, as the Bank of England look to stimulate the stagnating UK economy. Savings rates are, therefore, likely to fall further over the next year, and savers should also be wary of the recent increase in the Consumer Prices Index (CPI), which rose to an annual rate of 3.6% in June, the highest level since January 2024. Savers often ignore the eroding impact of inflation, which coupled with falling interest rates, could mean that deposits lose value in real terms.

As an alternative to medium and longer-term cash savings, a cautiously invested managed portfolio may be an ideal solution to consider for surplus cash deposits. By allocating the largest proportion of the portfolio to fixed interest securities and cash-like instruments, volatility can be kept in check, and adding an allocation to equities can aim to boost returns and provide protection against inflation. A cautious portfolio strategy may also be a sensible option to consider for those who rely on income from their savings.

Selecting the right asset allocation and investment selection is a key component of any successful strategy, and our advisers can take a holistic approach to your savings and wealth and provide independent advice on alternative options where surplus cash deposits are held. Speak to one of our experienced team to start a conversation.

Amidst the confusing and complex UK tax system, quirks in the tax rules often lay traps for the unwary, which can seriously damage your wealth. Amongst these are so-called “cliff edges”, where a small increase in income leads to a disproportionately large loss in benefits or a sharp rise in tax. You can, however, avoid these traps by sensible financial planning.

60% Marginal rate of Income Tax

One of the most striking cliff edges occurs when an individual’s income exceeds £100,000 in a tax year. Most people are familiar with the progressive tax bands of basic rate, higher rate and additional rate income tax; however, less well known is that the Personal Allowance (i.e. the amount that an individual can earn before tax is payable) is tapered once income exceeds £100,000 and is completely lost once income exceeds £125,140.

With £1 of the Personal Allowance being lost for every £2 of income above £100,000, this creates a marginal tax rate of 60% on earnings between £100,000 and £125,140, as the individual not only pays 40% income tax, but an effective 20% tax on top in respect of the lost Personal Allowance.  Once National Insurance is considered, an employed individual takes home just 38p out of every pound of salary earned between £100,000 and £125,140.

The £100,000 threshold also impacts the ability for working parents to obtain Tax-Free Childcare. This Government scheme provides up to £2,000 per annum towards childcare costs, based on the level of contributions made. For example, paying £8 into the childcare account will result in a £2 top-up from the Government. To qualify you (and your partner, if you have one) both need to be in work and receive at least the national minimum wage; however, if either parent earns more than £100,000, you are ineligible for the scheme. Likewise, any parent with income above £100,000 would also lose 15 hours’ worth of free childcare that is available for 3- and 4-year-old children.

Take action to save tax

The cliff edge when income exceeds £100,000 can certainly have a disproportionate impact on the amount of tax paid and eligibility to certain benefits. The good news is that those affected can take steps to bring their net adjusted income below this threshold and save significant amounts of tax.

Any pension contribution made by an individual into a personal or workplace pension will reduce their net adjusted income, as the pension contribution effectively extends the basic rate band by the amount contributed. For example, an individual with income of £110,000 would lose £5,000 of their Personal Allowance. By making a net pension contribution of £8,000 (£10,000 gross), their adjusted net income falls to £100,000, thus restoring the Personal Allowance in full and making an effective 60% tax saving.

Those considering pension contributions should be aware that there are limits to the amount you can contribute to a pension each tax year, and higher earners may be subject to a lower annual pension allowance.

Pension contributions are not the only way to reduce your adjusted net income. Donations to charity which are eligible for Gift Aid would also have the same effect of reclaiming the lost Personal Allowance.

Inheritance Tax Taper

Tax cliff-edges do not only apply to Income Tax. Inheritance Tax rules also use tapering, which add further complexity to an already unpopular tax.

The standard nil-rate band, which is the amount an individual can leave to loved ones on death is £325,000, and assuming a married couple leave everything to each other on the first death, the nil-rate band is transferable, so that the second of the couple to die can leave £650,000 free of Inheritance Tax.

Since 2017, an extra residence nil-rate band has been available when passing on a residence to direct descendants. This is currently worth £175,000, bringing the potential total Inheritance Tax-free threshold for a married couple to £1 million; however, the residence nil-rate band is reduced by £1 for every £2, where the net estate is worth more than £2 million. By way of example, an estate valued at £2.7m would fully lose any residence nil-rate band, leading to an additional £140,000 Inheritance Tax liability.

It is important to regularly consider your Inheritance Tax position, so that action can be taken to reduce the amount of tax paid by your estate. You should, however, bear in mind that the value of the estate on date of death – and not now – will form the basis of any Inheritance Tax paid, and growth in the value of assets over time should also be considered. Furthermore, the value of defined contribution pensions that are unused will form part of your estate from April 2027 onwards.

There are a range of strategies that can be used to reduce the value of an individual’s estate for Inheritance Tax purposes. Gifting is the most obvious way of reducing the value of the estate; however, you should also carefully consider your own financial needs in later life, which may involve care costs, together with any unintended tax consequences on the recipient of the gift. This is where independent financial planning advice can help in looking at your personal circumstances, to consider the most appropriate plan of action.

The benefit of personalised advice

We have highlighted cliff edge tax thresholds that effect both Income Tax and Inheritance Tax, which can lead to disproportionately higher levels of tax, and for working parents, could also impact on assistance with childcare. Our experienced advisers at FAS can consider your personal financial situation and provide advice on effective ways both to reduce your tax burden and ensure your investments, pensions and other arrangements are professionally managed and reviewed. Speak to one of the team to start a conversation.

Many turn to accumulated savings as a way of generating an income. Those in retirement may use savings interest to supplement state and workplace pension income. Others may use deposit interest earned to fund discretionary spending. Whatever the reason, savers may well have been pleased with the interest received on deposits over the last two years, which are a far cry from the meagre returns paid to savers during much of the last decade.

A mistake that is commonly made is the assumption that cash savings are risk-free. It is true that the balance on a savings account does not fluctuate in value, unless funds are added or withdrawn; however, the hidden risk in holding cash is the eroding impact of inflation. Last year provided something of an historic anomaly, as the Bank of England base rate regularly exceeded the prevailing rate of Consumer Price Index (CPI) inflation, meaning that savers enjoyed a brief period when deposits provided a positive real return.

This brief period of positive real returns may, however, be ending. The Bank of England cut the base interest rate to 4.25% in May, the fourth cut in less than a year, and further cuts are expected over the coming twelve months. This is despite the sharp uptick in CPI in April, which saw a jump to 3.5%, although we expect inflation numbers to ease later this year as economic growth slows once again.

The pace and timing of future action by the Bank of England Monetary Policy Committee will depend on how the UK economy fares in the face of a higher overall tax burden, the ongoing threat of tariffs and consumer confidence. The trend for base rates is, however, now firmly downward.

Diversify away from cash

Naturally, everyone should aim to keep a sensible balance on cash deposit, to meet everyday costs and unexpected contingencies; however, given the likely trajectory for UK base rates over the coming year, those with larger deposits should take the opportunity to consider alternatives that could provide a sustainable level of income, without taking excessive levels of risk.

The first alternative to consider are fixed income investments. When a government or company wishes to finance their ongoing debt obligations, they often do so by issuing a loan note. In the case of government debt, these are known as Gilts in the UK, or Treasury Bonds in the US. Company debt is often labelled as a Corporate Bond. Most loans have a similar structure, whereby the issuer pays regular interest, at set intervals, and at the maturity of the loan, repays the principal of the loan to the lender. This predictable income stream makes government and Corporate Bonds an ideal method of generating a sustainable income.

Investors should, however, be aware that bond prices fluctuate on a day-to-day basis according to underlying market conditions and can also be influenced by the perceived financial strength of the issuer. In the event of a bond issuer failing to repay the interest or principal at maturity, the bond is said to be in default, whereby losses can occur.

Bond prices are also influenced by expected levels of inflation, and interest rate expectations. This is particularly true for longer dated bonds, which tend to be more volatile than short-dated issues, where the proximity of the maturity date increases the predictability of returns. By focusing a fixed income strategy on bonds with shorter maturities, attractive levels of income can be achieved with low levels of volatility.

The second alternative to cash deposit are equities (company shares). Part of the return from holding equities are regular distributions of excess profits which are paid to shareholders in the form of dividends. Many companies have a strong track record of dividend payment and a company that enjoys a robust performance may well look to increase its’ dividend payment over time, which could potentially offset the effects of inflation.

Dividends are, however, not guaranteed, and changes in the fortunes of the company in which shares are held can not only impact the share price, but also the potential for dividend growth. Indeed, a company that begins to struggle may look to cut its’ dividend or cancel it altogether.

The importance of advice

Those who rely on a sustainable level of income should review their cash deposits and potentially seek to diversify surplus funds into alternatives, such as fixed interest securities or equities. It is, however, important to seek impartial advice before considering employing cash savings elsewhere in the pursuit of an income stream.

Firstly, the time horizon for investment needs to be evaluated. Both bonds and equities are designed to be held for the longer term (i.e. at least a period of five years) as holding risk assets over a shorter period only increases the investment risk. The second important consideration is to ensure that you are comfortable with the volatility that will be encountered when moving away from cash deposits. For those used to seeing a static balance on a savings account, adverse movements in bond or stock prices may be unsettling in the initial stages of an investment strategy.

The benefits of taking a holistic approach

The risks of diversifying away from cash deposit can be reduced by building an appropriate and well diversified portfolio, which is tailor-made to suit your requirements. At FAS, we recommend the use of collective investments, which invest in a wide range of different individual positions (thus avoiding stock specific risk) and blend a number of these collectives to achieve further diversification.

As we adopt a holistic approach to financial planning, we will also take into consideration the appropriate level of funds that should remain on deposit and ensure that these deposits remain productive. We will also look to maximise the tax-efficiency of any portfolio strategy.

If you are holding surplus cash deposits and wish to generate an attractive level of sustainable income, then speak to one of our experienced advisers.

New clients to FAS often agree to transfer existing investment portfolios they hold with discretionary fund managers, to our management. As a result, the advisers at FAS regularly have the opportunity to review the performance, management style and charging structure of what we would term “traditional” discretionary fund management services, from some of the biggest names in the industry.

As you might expect, our analysis produces some variances in results, depending on the fund manager employed. There is, however, sufficient commonality across a range of different discretionary fund managers to draw meaningful conclusions and reinforces the need to regularly review the investment performance and costs of any discretionary managed service.

Investment selection

When we review investment portfolios managed by other discretionary fund managers, we do so in an objective and unbiased manner. We have the mantra that if performance is consistent, and the portfolio volatility and risk match the objectives of the client, it may be best to take limited action. We do, however, notice a series of trends emerging from our ongoing analysis, which suggests that many of the largest UK discretionary managers adopt a very similar approach to each other, leading us to question whether the blend of investments held within portfolios really suits the client circumstances.

Firstly, many discretionary managers choose to directly purchase Gilts (UK Government Bonds), to form part of their fixed income exposure within a portfolio. Whilst Gilts do have an advantage in terms of their Capital Gains Tax treatment over collective investments holding a wider range of bond positions, we feel the focus on UK Government debt can miss out of the potential for superior returns from good quality corporate bond alternatives.

The second common theme we have identified is the use of investment funds domiciled outside of the UK. These funds often carry higher charges, which push up the overall cost of ownership, and potentially limit returns. There is a myriad of investment options available to UK investors that are UK domiciled, which remain significantly more popular to UK investors than those domiciled overseas. Indeed, the Investment Association produced data at the end of 2024 that showed that 83% of collective funds held by UK investors were held in funds domiciled in the UK. It could be that the common use of an overseas fund is a case of loyalty to a particular boutique fund house that the firm has used for many years; however, given the breadth of choice available within UK domiciled funds, we question the effectiveness of this apparently common trend.

Finally, we note the quantity of holdings that tend to be present within traditional discretionary managed portfolios. We often see portfolios with upwards of 25 or 30 different holdings, which we feel can cloud performance by spreading the portfolio allocation too thinly to good performing funds. Diversification is, of course, an important factor in risk mitigation; however, we would argue that this can be successfully achieved with a more compact and well organised portfolio.

Investment style and charges

We have often commented on our view of the blend of active and passive investment funds that we prefer to see within a well diversified portfolio. Passive funds dominate industry fund sales, and for good reason, as they provide wide exposure through a particular index with low costs. Our analysis shows that where passive investment styles are ideal for some markets, they are less than optimal for others.

Actively managed funds can provide additional returns over and above the target index, by adopting a more concentrated approach. Strong performance from an active manager can easily justify the additional costs associated with active management, which can be 10 or 15 times higher than an index tracking fund investing in the same sector or region. Conversely, weak active management can lead to underperformance of wider indices, with associated higher charges.

Through our analysis of traditional discretionary managed portfolio services, we note that the bias tends to be heavily weighted to active funds, with only limited exposure to passives. As a result, the blended portfolio cost may well be higher than average. Whilst cost and value should not be conflated, where performance is also modest, we have found clients with other discretionary managers are often paying more than they should, for less than stellar returns.

Absence of wider financial planning

Using a discretionary fund manager may ensure that your investments are reviewed and changed at regular intervals. The function of regular rebalancing and risk adjustment is a key component of any sensible investment approach – leaving investments in place without review for an extended period is unlikely to produce good results over the longer term.

The review carried out by a discretionary fund manager may, however, only extend to the funds themselves, and save for use of the annual Individual Savings Account (ISA) allowance, there may be little scope for wider financial planning.

This is not the fault of the discretionary manager. Their remit is to manage a portfolio of funds; however, this function only forms part of a bigger financial puzzle for most client circumstances. This is where an independent and holistic firm, such as FAS, can add significant value, by undertaking a full and comprehensive financial review, providing advice on multiple tax wrappers (such as Pensions and Investment Bonds), esoteric investments such as Venture Capital Trusts and Inheritance Tax solutions and other associated areas, for example protection policies.

The importance of critical review

Given the many examples we have noted, anyone using a discretionary fund manager should regularly undertake a critical review of the service they are receiving. Investors should question the investment performance, both on an absolute and relative basis compared to peers, and the costs and charges of the service. At FAS, we can undertake an impartial review of an existing investment strategy and undertake additional key analysis, looking at areas such as risk and volatility, which can be difficult to assess without expert advice. Speak to one of our experienced advisers to discuss your existing discretionary manager.