Financial Planning

After a bumpy ride through the post-Covid World, investors may well look back at 2024 with a sense of relief. This year has seen the return of positive market conditions, where investors have been rewarded for taking investment risk, and market sentiment has proved strong enough to shrug off any immediate geopolitical concerns.

A good year for investors

Barring any major jolt before the end of the year, investors can reflect on a positive year, with equities, bonds and alternatives all seeing gains. Relative performance across asset classes has, however, seen a handful of major markets underperform, and adopting a global investment view, with a heavy exposure to the US, has been the key to success over the last 12 months.

With inflation returning to more modest levels, the prospect of lower interest rates, coupled with investor appetite for stocks involved in Artificial Intelligence propelled markets during the first half of the year. The positive momentum has continued, with a further spurt of outperformance seen from US indices after the US election result. Away from the US, the Nikkei 225 index in Japan broke through the psychologically important 40,000 level for the first time in March, after regaining levels not seen since 1989. It has recently regained this level once again, despite a sharp fall and recovery in August amidst a spike in the value of the Yen.  Looking closer to home, UK equities made modest returns, lagging those seen in the North America and Asia Pacific regions.

Political upheaval

2024 was always going to see politics take centre stage, given the number of countries holding major elections. It has proven to be a year of political change, with elections in the UK and US seeing incumbent parties voted out of office. With many predicting a US election that was too close to call, markets breathed a sigh of relief that a clear winner emerged. President elect Trump’s emphatic victory will herald both opportunities for further growth under a pro-business leader, and greater uncertainty over foreign policy decisions that will affect global stability. The clean sweep victory for the Republican party should provide a strong platform for Trump to push through his chosen policies.

Following a landslide victory in the General Election, the new Labour Government has endured a tumultuous honeymoon period. Throughout August and September, the new administration effectively talked down the prospects for the UK economy and warned that a tax raising Budget would be forthcoming, which was duly delivered on the eve of Hallo’ween.

France has endured months of political turmoil, and recently led to the fall of Michel Barnier as Prime Minister, and events in South Korea briefly spooked markets earlier this month, as the sitting President tried to impose martial law.

Whilst 2025 may not be impacted by global elections, unresolved issues remain, and politics will continue to influence global markets.  We expect Eurozone defence spending to be a prominent talking point, in particular given the hawkish words from incoming President Trump about NATO spending. US-China relations could sour if Trump imposes tariffs and rhetoric over Taiwan intensifies.

Higher tax take and a weakening economy

Rachel Reeves’ first Budget brought about a series of significant changes to the way assets and wealth are taxed. The far-reaching set of measures, which may be the most impactful for many years, have received a very mixed response, leaving businesses and the farming community deeply unimpressed.

Apart from the increase in Capital Gains Tax rates, which applied immediately after the budget, many of the changes will come into force in the next and future tax years. Pensions will be brought into the scope of Inheritance Tax from April 2027, which may well mean those in retirement with unused pension funds need to reconsider their plans. The changes to Agricultural and Business relief, which have been met with anger and resentment from the farming community and business owners, will come into force a year earlier, in April 2026. From a planning perspective, those with substantial pension or business assets should look to reassess their financial plans, and holders of agricultural property should begin to gather valuations of assets to see what action can be taken to reduce any likely Inheritance Tax charge.

The planned increase to Employer National Insurance from April 2025 is already being felt in the jobs market, and domestic consumer and business confidence remains at a low ebb. It is, therefore, of little surprise that the initial reading for October saw the UK economy shrink for a second consecutive month.

UK consumers remain under pressure from modest wage inflation and spiralling prices. Many homeowners will see existing fixed rate mortgage deals end in 2025, which will add further affordability pressures, and the end of the Stamp Duty relief for first time buyers in March could limit any further growth in the UK housing market.

We have often commented about our concerns for the health of the UK economy. Early indications are that the impact of the Budget will exert further pressure on an economy that has limped along for some time. The Bank of England would ordinarily look to give the economy a boost by cutting interest rates more aggressively; however, the likelihood of higher inflation in the first half of next year could see the pace of cuts slow as we head through 2025.

Festive wishes

As we draw a close on 2024, we look forward to a year that still presents opportunities for nimble investors. Our first Wealth Matters of 2025 will set out our predictions for the year ahead; however, at this point we take this opportunity of wishing our readers a very Happy Christmas and a healthy and prosperous 2025.

Getting your affairs in order is a crucial aspect of financial planning that extends beyond managing investments and ensuring tax efficiency. Many are totally unprepared for unforeseen scenarios such as death or loss of mental capacity which could place their financial wellbeing and family members at risk. We look at the importance of preparing a will, or reviewing an existing will, making an Expression of Wish over existing personal pension death benefits, and preparing a Lasting Power of Attorney.

Make your wishes clear

Writing a will puts the control over your wishes in your hands. Leaving a will that states clearly who should get your possessions and property when you die can prevent unnecessary distress for your loved ones after you’ve gone. It also removes most of the complexity that comes with sorting out a person’s estate after their death, which is a particularly stressful period at the best of times.

Writing a will is particularly important for anyone who has children or other family members that depend on you financially, or if you would like to leave some of your possessions to people who are not considered part of your immediate family.

If you die without leaving a valid will, this is called ‘intestacy’. This means that if you live in England or Wales (the rules are different in Scotland), everything you own will be shared out under the legal framework. This could potentially lead to unwelcome outcomes. For example, if you’re married, your husband or wife could inherit all your estate even if you were separated at the time of your death, and your children might not get anything. Another potential pitfall awaits partners who are not married or in a civil partnership. Under the laws of intestacy your partner will not be legally entitled to anything when you die, no matter how long you were together.

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 is similarly up to date.

On the death of anyone holding a personal pension arrangement, it is a common misconception that the residual pension will pass in accordance with their will. This is not the case, and the pension trustees can choose who will benefit from the pension arrangement. They will, however, consider an Expression of Wish left by the deceased pension holder, which sets out how the pension holder would like the benefits to pass in the event of their death, when deciding who receives benefits from a pension.

Whilst a will and expression of wish can help ensure your affairs are dealt with in the event of your passing, it is also important to consider how you would manage your affairs if you were to lose capacity to take decisions. Sadly, an increasing number of people are affected by illnesses such as Alzheimer’s or dementia, which can mean that individuals are no longer able to make decisions for themselves.

Lasting Power of Attorney

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

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 different types of LPA, one covering Property & Affairs (e.g. property, investments and assets) and Health & Welfare (which covers healthcare 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. Preparing an LPA doesn’t mean that you instantly lose control of the decisions that affect you. For the Property & Affairs LPA, you can be specific about when the attorney can take control when preparing the LPA, and in respect of the Health & Welfare LPA, this can only be used once capacity to make decisions has been lost.

All LPAs must be registered at the Office of the Public Guardian, which is the government body responsible for the registration of LPAs before they can be used.

If you lose mental capacity and don’t have an LPA arranged, this can leave loved ones with significant worry and could potentially lead to difficulties in dealing with the individual’s personal finances. Should this situation occur, an application will need to be made to the Court of Protection, for an individual to become your appointed ‘deputy’, who can then make financial decisions on your behalf. The Court has the final say as to who is appointed, and this may not align with your wishes.

The process of making a Court application is long-winded, with applications taking many months to be heard and then approved. This could lead to significant issues for ongoing financial transactions, such as investment management, or the purchase or sale of a property. Anyone with investments, or complex financial affairs are at greatest risk if capacity is lost, with Directors and Business Owners at particular risk if they lose capacity without an LPA in place.

Take the time to review your affairs

Take a few moments to review your affairs and consider what would happen in the event of your passing, or loss of capacity. 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. Speak to one of our experienced financial planners who will be pleased to provide more details on why it is so important to get your affairs in order.

Valuation and data collation

The review process begins with gathering information from various sources to create the client valuation report, which serves as the foundation for our meetings. Our systems integrate with multiple platform providers to receive daily price feeds for automatic updates on valuations. For other investments, we proactively contact providers to gather necessary information, including income distributions and withdrawals. In the case of protection policies, we ensure that our records match those held by providers and update as appropriate. After thorough verification, the completed report is forwarded to the adviser for analysis.

Analysis and performance review

The meeting preparation stage begins with the adviser producing calculations of returns achieved over the reporting period, factoring in contributions, income, and withdrawals. We analyse portfolio performance against carefully selected industry benchmarks tailored to each client’s investment profile. Benchmarking is vital, as it allows us to evaluate performance relative to peers and helps clients assess their investment returns.

For portfolios managed on a discretionary basis, we review changes made during the reporting period. For advisory clients, we examine each fund’s performance and consult data produced by the FAS Investment Committee to identify potential fund switches. Additionally, we assess the asset allocation to ensure it continues to align with the client’s risk tolerance and objectives, making realignment recommendations if necessary.

Financial planning review

At this stage in the process, we revisit the client’s circumstances based on prior discussions, identifying any planning needs that may arise. For example, if a client approaches State Pension age, we may need to adjust their investment income for tax efficiency. Similarly, if a client has funds earmarked for specific purposes, such as education costs, we evaluate the risk level and consider whether to convert these to cash for withdrawals.

We also undertake tax calculations to determine the client’s potential liability to Income Tax or Inheritance Tax, or in the case where disposals are being made, the likely Capital Gains Tax liability that results from actions taken. By fully understanding a client’s tax position, we can tailor our recommendations to ensure their portfolio remains as tax-efficient as possible.

Our use of technology

We have invested heavily in technology, on which we rely at various points through the client review journey. We use an advanced client relationship software suite that retains detailed records about each client, from their personal information to the investment plans they hold. This software suite integrates seamlessly with our financial analysis software. This powerful tool allows us to analyse any of the thousands of investment funds available to UK investors, together with other financial instruments, such as offshore investments, global equities, fixed income securities and commodities. The package includes comprehensive charting and reporting functions, allowing detailed analysis of fund performance, and portfolio asset allocation.

Platform and Provider Review

Given the ever-evolving nature of financial services, we leverage our independent status to review investment platforms and products from across the marketplace, ensuring clients continue to receive optimal value for money. We undertake cost comparisons and evaluate service levels of existing providers and, where appropriate, recommend changes. Clients often hold legacy investment products and solutions, and an impartial review of these arrangements, compared to modern contracts now available, often results in a recommendation to switch to a more cost-effective solution.

Agreed actions for discussion

The outcome of our analysis will yield a series of recommendations for discussion with the client. Some may be routine, such as making use of the annual Individual Savings Account (ISA) allowance, while others may arise from significant life events, such as retirement planning or inheritance tax considerations. As part of this stage in the process, we may identify investment solutions that provide greater tax-efficiency, for example to reduce a client’s income tax liability via pension contributions or the use of Venture Capital Trusts.

Review meeting and report

Where appropriate, we arrange a review meeting with the client to discuss findings and potential strategy adjustments based on changes in client circumstances or market conditions.

During these meetings, the adviser will go through the portfolio performance and provide a detailed update on market events and highlight our projections for market performance over the short and medium term. We also discuss any changes in legislation and introduce other planning opportunities that the adviser feels may be appropriate.

We ensure we update our records and note any changes to a client’s income, savings, or health, which may influence our recommendations. Our discussions often extend to related topics, such as cash savings, wills, or lasting power of attorney, providing a holistic view of the client’s financial landscape.

After each meeting, we provide a written report summarising our discussions and recommendations. For clients where a review meeting is not conducted, we send a detailed postal review and arrange a follow-up call to address any questions and update our records.

A key part of our service proposition

We take great pride in our review process, as we feel that this is fundamental to our service proposition. Our thorough reviews also help ensure we provide the most appropriate advice to our clients. We hope this article sheds light on the extensive work involved when carrying out a client portfolio review. As always, we welcome any feedback on how we can enhance our service.

US sets the tone

The US election result will have fundamental implications for the outlook for global investments. US stock markets are by far the most influential global indices, with US quoted companies accounting for 62% of the FTSE All-World index, with Europe lagging way behind on 15% and Asia Pacific accounting for just 10% by weight. The performance of the S&P500 and Nasdaq sets the tone for the performance of European, Asia Pacific and Emerging Markets. As such, UK investors need to pay careful attention to the outcome of the US election. If US markets react positively to the result, this may well boost investor confidence globally.

Democrats and Republicans take a very differing stance on a range of issues, some of which are domestically focused and will affect US consumers and businesses directly. There are, however, a range of issues that are relevant to global stability and may have far reaching implications.

Foreign policy

Harris and Trump are likely to follow a very different path when it comes to foreign policy, which may have wider implications for global security and could have economic consequences, too. Trump has repeatedly stated that other NATO countries need to increase their spending and has indeed threatened to pull the US out of NATO. This is in stark contrast to the position that Harris is likely to adopt, which will be a continuation of the existing policies currently in place. With the Russian invasion of Ukraine contributing to the rapid increase in the cost of commodity prices in 2022, any significant escalation of tension between the West and Russia, could drive up commodity prices once again, and threaten stability.

The conflict between Russia and Ukraine is one of three potential threats to global security that the next President will need to deal with. Tensions in the Middle East could morph into a wider conflict in the region, and the strained, but relatively stable, relationship between the US and China may well be managed differently should Trump become President once again.

Climate policy

The Biden administration has wholeheartedly supported the transition to clean energy as part of the Inflation Reduction Act, which provides tax credits for electric vehicles. Harris is likely to continue the same path and has indicated her firm support for increased spending to tackle climate change. On the other hand, Trump is likely to take a different stance, given his record on carbon emissions and fossil fuels. The outcome of the election may well impact the fortunes of oil and gas companies, who could be beneficiaries of a Trump victory.

Tariffs

Both Democrats and Republicans may seek further tariffs on imported goods, although Trump is likely to go further in imposing higher tariffs on goods from China. This may prove to be inflationary, as US consumers face higher costs for imported goods. The Federal Reserve’s actions since 2022 to combat inflation have been largely successful, and a resurgence of inflation could prove negative to both equities and bond markets. One potential positive from the imposition of tariffs may be an increased drive towards domestic production, which could benefit the US manufacturing sector.

Tax and spending

A Trump victory could provide a boost to US consumer spending, as he is likely to be in favour of additional tax cuts, which would leave US citizens with more money in their pockets each month. Cuts to business tax could also prove positive for US corporate profitability. The Democrats have called for the removal of tax breaks for higher earners, and an increase in corporate taxes from 21% to 28%. Trump is likely to promote the reduction of red-tape and regulation on business, whilst Harris is likely to favour big state and increased regulation.

Monetary policy

US national debt continues to climb exponentially, standing at US$35tn. When Trump became President in 2016, US national debt stood at US$19.95tn, although a good proportion of the increase in debt since 2020 can be attributed to the Covid pandemic. The cost of servicing the debt has increased significantly over the last two years and tackling the ballooning debt is not a job either Harris or Trump will relish. Reversing the annual deficit, so that debt does not rise further, is a significant challenge and would involve cutting public spending, raising tax significantly, or both.

Should Trump get the keys to the White House for a second term, there could even be a change to the way that monetary policy decisions are reached. Trump has indicated that he would prefer to see the President have a say when the independent Federal Reserve makes decisions on US interest rates. This would mark a fundamental change to the current process and remove the independence that the Federal Reserve enjoys.

No honeymoon

Whoever wins the election in November may not have everything their own way. It is a possibility that the eventual victor may see the opposing party controlling either the House of Representatives, or the Senate. This would mean policy decisions would not necessarily pass and could weaken the ability for the President to successfully implement their election promises.

Outlook for US equities

US equities have been the catalyst for the strong global equity market performance since last November, and this trend shows no signs of reversing. Continued economic growth, the expectation of supportive monetary policy and strong corporate earnings are factors that support our conviction to US equities. Apart from a short-lived spike last month, volatility has remained low through the year to date; however, the upcoming election could see volatility increase as the US heads towards the polls.

Our experienced financial planners are on hand to discuss the exposure to US equities within your portfolio. Speak to one of the team, who would be pleased to review your existing portfolio asset allocation.

With house prices staying close to all-time highs, finding a deposit for a house purchase remains a challenge for many buyers. As a result, an increasing number of prospective home buyers are turning to wider family for financial assistance, either to get their first leg up onto the property ladder or move to a larger property to better suit a growing family.

By gifting a deposit, parents can help their children increase the amount they can borrow on a mortgage, in turn enabling them to buy a home which would be impossible without the financial assistance. We have also seen instances where family gifts have been used to reduce an existing mortgage debt, leading to lower monthly mortgage repayments and easing the financial burden.

Growing trend

A recent study by Legal & General reported that a total value of £9.2bn will be gifted by parents, grandparents and other family members to help fund house purchases this year, an increase of 13% on the £8.1bn gifted for this purpose in 2023. The same study sees the pace of gifts accelerating, with the amount gifted likely to reach an aggregate of £11.3bn in 2026. Legal & General’s research also showed the average gift made has jumped to £27,400. Similar research from the Centre for Economics and Business Research (CEBR) found that 42% of all property purchased by those aged under 55 this year was in part funded by a gift from family.

Traps lie in wait for the unwary

Whilst gifting funds is generally well intentioned, parents and grandparents should consider the consequences of their actions before proceeding.

Firstly, any gift made could have potential 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 highlighted by the Legal & General research, this is some way short of the average amount of financial help provided. 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.

Parents and grandparents also need to be aware that a gift is absolute. If the child buys a property jointly with an unmarried partner, the consequences of relationship breakdown could mean that “family wealth” is unprotected, if the property is later sold. Unfortunately, this is a common occurrence, and all parties involved should seek specialist legal advice to determine how gifted deposits are dealt with.

Some parents might consider co-ownership with their children, as an alternative to gifting funds outright. This needs very careful thought, as this option is likely to incur an additional Stamp Duty levy, if the parent already owns a property. Further complications could also arise if the parents need to release funds from the property at some point in the future.

Protecting your financial security

Parents and grandparents making gifts need to carefully consider their own financial requirements before taking any action. The Legal & General research shows that 40% of those gifting deposits are using cash savings and investments to fund the gift, and 12% are accessing pension savings for this purpose. As a result, many older family members gifting money are financially less secure after making the gift.

Most calls to the “Bank of Mum and Dad” are when parents are typically in their 50s or 60s. This is a time when parents should be concentrating on their retirement plans, and gifting funds at this time can not only mean that cash or investments are unavailable to cover unexpected expenditure, but also affect their income in retirement.

Parents typically want to ensure that their children are treated equally, and this could lead to added financial pressure. Gifting funds to one child, for example, may increase the expectation that a similar gift is also made to other children in the future. This could be at a time when available funds are limited or being used to fund retirement.

Planning ahead

Given the findings of the Legal & General survey, and our own experience of advising clients in this situation, it would be wise to think ahead and begin putting aside funds to give children a helping hand onto the property ladder. One option is to fund the child’s Junior Individual Savings Account (ISA) with regular contributions over time. It is important to note that the returns achieved on the underlying cash or investments within the Junior ISA will dictate the amount available to the child, and therefore careful consideration needs to be given in respect of the choice of investment. The other risk with a Junior ISA is that the account can be accessed when the child turns 18, which may well be too early for the funds to be used for its intended purpose. An alternative is to place funds in a separate investment portfolio, where the parent or grandparent can keep control of the funds. This could be arranged in a tax-efficient manner, for example, by using an Investment Bond.

Getting the right advice

We strongly recommend that parents and other family members, faced with calls on the generosity of the “Bank of Family”, take advice, as there are a number of financial and legal considerations that need careful consideration. At FAS, we regularly are called on to provide such advice to parents and grandparents, including the most appropriate method of funding the gift, and the potential financial impact of any actions taken on their financial security. We can also provide advice on appropriate investment solutions where parents and grandparents can regularly save to build a capital sum for their children or grandchildren’s future.  Speak to one of our experienced financial planners for independent and expert advice.

Taking control of your financial future can bring numerous benefits, and the key to any successful strategy is to take the time to plan ahead. Whilst the original planning stage is critical, it is equally important to review your financial plans at regular intervals, to ensure that the strategy remains on track to reach your financial goals and takes account of changing circumstances and evolving market conditions.

Think of financial planning as a garden

One way to visualise the importance of financial planning reviews is to consider the process in the same way as you would if you were planning a garden. At the outset, you will make careful plans as to the layout of flowerbeds and the positions of shrubs and other plants; however, as the seasons pass, without regular maintenance, the most attractive of gardens when first planted can begin to look unruly. Plants that show vigorous growth can overtake others and without regular pruning and maintenance, growth can be difficult to keep in check. There may be plants that begin to struggle, and these may need extra attention or indeed be replaced by plants more suited to the conditions. Long-term trends, such as changes in the weather, can impact on the type of plant that thrives in the prevailing conditions.

Changes in our lives could also mean our imaginary garden needs to adapt to our needs. For example, grandparents may need to make a garden more friendly for grandchildren to play in. Similarly, as we age, it may be appropriate to change the layout, so that the garden is lower maintenance.

Key elements of the process

The financial planning process is very much like designing and planting out a garden. Firstly, by identifying goals that you aim to achieve, you can ensure that actions taken are aligned with your priorities. This could be the purchase of a first home, building up retirement savings for the longer term, or producing an income in retirement.

Once you have identified your goals and objectives, setting out a structured plan will ensure that actions taken are designed to meet these objectives. Advice is, however, perishable and the original advice given may not remain appropriate for changes in life’s circumstances. Having children, facing divorce, ill-health, receiving an inheritance or change in employment are all common examples of situations where financial plans need to adapt to changing circumstances.

By arranging a regular financial planning review with a regulated financial planner, changes in our lives, variances in investment performance and updates to legislation can all be taken into account when considering whether any changes are needed to a financial plan.

Weed out poor performance

One of the key areas that needs to be considered in any financial review is to analyse fund performance. There have been numerous high-profile instances over recent years where so-called “star” fund managers have suffered a period of underperformance after years of producing strong returns. Similarly, it is important to recognise that the global economy is constantly evolving. As a result, the performance of stocks located in different geographic regions and across a range of sectors of the economy, can shift significantly over time. The recent strong performance of companies involved in Artificial Intelligence is a prime example of an investment trend that has only emerged in the last year or two.

The danger you face by not carrying out a regular review of the funds held in an investment portfolio, is that weak performance trends can set in, leading to a poor outcome. Without a regular and detailed review of fund performance, years of underperformance can result in financial goals not being met.

Even if strong investment fund performance has been achieved, investments held outside of a tax-efficient wrapper, such as an Individual Savings Account (ISA) or a pension, need to be regularly reviewed so that issues such as a large Capital Gains Tax liability does not arise in the future.

Keep abreast of changes in legislation

A comprehensive financial planning review should go beyond just looking at the investments you hold. Changes in tax legislation, and consideration of alternative investment solutions should be an automatic part of every regular financial review. The financial services industry continues to evolve, and with it, new products and solutions are launched that could potentially be appropriate for your objectives.

Another vital element of any financial review is to consider the level of investment risk within the existing strategy. Changes in circumstances, such as your age, overall financial health or particular events such as divorce, the receipt of an inheritance or the need to pay for long term care, may well mean that the level of risk being taken needs to be adjusted.

Peace of mind

Perhaps the hardest benefit of a regular financial review to quantify is the confidence gained that your financial wellbeing has received a thorough health check. This can give considerable peace of mind that investments remain appropriately invested and actions have been taken to minimise tax and keep the overall plan aligned to your circumstances and objectives.

If you have received financial planning advice in the past, but do not regularly engage with a financial planner to reassess the original plans and undertake a review, you run the risk that your financial plans fail to keep up with updated legislation and evolving investment trends or don’t adjust to changes in your situation. Similarly, if you have undertaken investment planning without the benefit of an advisor, you may not be aware of other solutions that may be more appropriate to your circumstances. A comprehensive review from an experienced and independent advisor could identify changes which could reduce costs, enhance performance and save tax.

Independent and Expert advice

At FAS, we take great pride in the comprehensive regular review process we undertake with our clients. We see the regular review as being as important as the initial recommendations, and as we take a holistic approach, we look at all aspects of our clients’ financial arrangements during a financial review, taking into account subjects such as inheritance tax planning, gifting, income production, and tax efficiency. Speak to one of our experienced, independent advisers who will be happy to take a look at your existing arrangements and provide you with an unbiased and comprehensive review.

Cash plays a vital role in every financial plan, as it helps us cover day-to-day expenditure, and meet short-term liabilities. Without cash, we would be unable to pay bills and everyday essentials, and instead we would need to realise other assets – which may well carry an opportunity cost – or use debt. Holding a cash reserve also provides peace of mind that any unexpected expenditure, such as repairing the car or fixing the boiler, can be met.

Whilst holding a cash reserve is the foundation of a sound financial plan, holding too much cash can have adverse consequences and lead to erosion of wealth over time. With interest rates starting to fall, we feel it is a good time to review existing cash savings to see if they could be better employed.

How much cash is too much?

The “correct” balance of cash held by an individual is undoubtedly a personal preference. Holding cash provides a feeling a security, and as we are all different in terms of our tolerance of investment risk, the most appropriate balance we hold in cash will differ. A general starting point would be to aim for a cash buffer of around six months’ worth of household outgoings; however, many prefer to hold a larger balance depending on the mix of other assets they hold, and in particular if assets are illiquid, such as residential property.

It may also be appropriate to hold a higher balance in cash if funds are required in the short-term, as investing funds with a brief time horizon increases the level of risk. For example, you may hold a higher cash balance temporarily for a specific purchase, such as a property, or to make a gift to a relative.

Hidden risks

Many believe cash savings to be risk free, and whilst the balance in a savings account does not fluctuate in value, hidden risks can damage your wealth over time. Inflation reduces the purchasing power of cash and is a factor that some do not consider. If the inflation rate is higher than the interest earned on cash (which is often the case) the real value of your cash diminishes.

The chart below demonstrates the eroding effects of inflation, by comparing the compound returns achieved by cash (represented by the Bank of England Base Rate – blue) compared to the increase in prices generally (represented by the UK Consumer Price Index – red) over the last 10 years. As you can see, returns on cash have not kept up with prices, and even achieving cash returns in excess of the Bank of England Base Rate (illustrated by the Bank of England Base Rate +1% in green) would still lead to erosion.  

We have recently been through a period when the Bank of England Base Rate exceeds the rate of increase in the Consumer Price Index, and therefore the best cash accounts have provided savers with positive real returns. The current position is, however, something of an anomaly, and given that we expect base interest rates to fall further, we are likely to see a return to negative real returns on cash deposit.

Why keeping a cash balance is important

It is sensible planning to keep a proportion of your overall wealth as cash. One of the key roles that cash can play in a diversified investment strategy is that it can provide a buffer zone, which can allow longer-term investments to stay in place during periods when market conditions disappoint. For example, if you regularly withdraw funds from an investment portfolio, or a pension account in Flexi-Access Drawdown, holding a cash buffer can provide the ability to suspend withdrawals at a time when investment markets are weak, allowing time for the investments to recover before restarting regular withdrawals again.

Maintaining a cash balance can also provide the opportunity of adding to an existing investment portfolio, if markets dip. Finally, holding a small proportion of an investment account in cash can mean that platform and adviser fees are covered by the cash balance, and avoids the need to sell assets to cover ongoing portfolio costs.

Missed opportunities

Holding excessive cash means missing out on potential investment returns that can be achieved from other assets that are able to generate superior returns over time, which can  lead to substantial financial underperformance.

Historically, returns achieved from equities, bonds and commercial property have outperformed cash. The annual Barclays Equity-Gilt study has analysed the returns from various asset classes since 1899, and when considering returns from 1899-2022, their evidence shows that over an investment period of two years, the probability of equities outperforming cash is 70%. Looking at longer-term performance, over an investment period of 10 years, the probability of equities outperforming cash increases to 91%.

One reason for the outperformance is that returns from equities are derived from two sources – the prospect of capital growth over the longer term as the value of the investment increases, together with income in the form of dividends. Equities also act as a hedge against inflation, as a company’s revenue and earnings should, in theory, rise in line with inflation over time.

The Financial Conduct Authority (FCA) have issued a warning over excessive allocations to cash held in workplace and private pensions. Given the likelihood of underperformance over the longer term, the FCA are concerned that those holding significant cash balances over an extended period of time risk a poor outcome. New rules came into force late last year that require pension providers to send cash warning letters to customers holding more than 25% of their pension fund in cash for more than six months.

Reallocating surplus cash

Given the eroding effects of inflation, holding surplus cash deposits is likely to damage your financial wealth over the longer term. That said, if you have limited experience of investment in other asset classes, moving funds away from the perceived safety of cash can be a little daunting.

This is where the benefit of speaking to an independent adviser can prove invaluable. At FAS, our experienced advisers can provide guidance and reassurance and ensure that investments are well-diversified into a range of different asset classes, with the mix of assets tailored to your financial requirements, and attitude to risk. Speak to one of our holistic advisers to discuss the level of cash that you hold and consider alternative investment options.

As we move into later life, our financial priorities often shift, and funding the potential cost of long term care is a common concern that is shared by many clients. This is not surprising, given the rapid increase in the cost of care over recent years. According to recent figures from Age UK, the average weekly cost for a place in a nursing home is £1,078, although there are substantial regional differences, and we have come across situations where clients are paying significantly higher fees than the average figure quoted.

Funding options

Local authorities have a duty to arrange and pay for appropriate levels of care, following an assessment of the individual’s needs; however, this financial assistance is only available to those with less than £23,250 in capital, and this figure includes the value of all assets, including property.

Depending on the needs of the individual requiring care, an assessment could decide that NHS continuing healthcare is available, which could cover some or all of the cost; however, if the individual is not eligible for continuing healthcare, and they hold assets greater than £23,250, they will be expected to make a contribution towards care costs.

Self-funding care costs can be a daunting proposition, where decisions need to be reached at a time of stress and concern when an individual is being moved into care. At this point, family members, or their attorneys if acting under a Lasting Power of Attorney, may find independent financial planning advice to be of significant value, to help consider the options and agree an appropriate strategy to meet the ongoing care costs.

Our approach to care fees planning

When we first meet clients who potentially have care needs, we undertake a full assessment of their capital assets. Quite often, we meet those who have investments and other assets that have not been professionally managed, and our analysis uncovers investments or pensions that could have been otherwise overlooked. Once we have assessed the capital position, we look at income sources (e.g. state pension, private pension, attendance allowance, investment or property income) to begin to work out the shortfall between the cost of care and other essential costs (such as personal care items and spending money) and their sources of income.

Once this assessment has been carried out, we can provide advice on the options for consideration. Depending on the level of shortfall, it might be the case that the care costs could be met through income alone, although this is not common and is typically reserved for those with significant personal pension or rental income. In most instances, the cost of care is likely to erode capital, with the rate of erosion dictated by the shortfall between income and expenditure. There is, therefore, a need to consider how best to meet the shortfall and preserve as much capital as possible.

Immediate Needs Annuities

One option that can bridge the gap between income and care costs is to purchase an immediate needs annuity plan. This is where capital is paid to a provider, who in turn will pay a monthly level of income that can be used to meet the shortfall between income and care fees. This income is usually tax-free and paid direct to the care provider.

Each plan is individually underwritten, with the single premium payable dependent on the age, health, life expectancy and care needs of the individual. In our experience, the premiums payable on such policies can be very expensive; however, despite this, some may value the certainty that a care fees annuity can bring.

A further factor to consider is that there is no return of capital to loved ones in the event of death of the individual in care, unless a capital protection element is purchased, at an additional cost.

Finally, the reality of how long an individual stays in care needs to be taken into account. Office for National Statistics analysis shows that for those aged 85 to 89 years in care, the average life expectancy is 3.6 years for women and 2.6 years for men. The purchase of a care fees annuity could, therefore, potentially only pay out for a limited period of time, leading to returns that offer poor value from a large capital outlay used to purchase the annuity.

Investment options

In many cases, adopting a sensible approach to investment from capital raised either from the sale of the main residence or other assets, is the preferred option. We provide advice to clients (or their attorneys or deputies) to construct a bespoke investment plan, after considering the level of shortfall and precise composition of existing assets held.

Cash will naturally have a part to play in any sensible investment arrangement where care fees are payable. It is, however, important that cash funds remain productive, and held in a tax-efficient manner. We can assist clients in establishing an appropriate strategy and provide advice as to the right level of immediate cash to hold.

For sums not immediately required, there are other asset classes, such as Equities, Corporate and Government Bonds and alternative assets, that could be considered to try and achieve superior returns to those available on cash. Our experienced advisers can recommend an appropriate investment strategy, which often focuses on lower risk assets, and aims to stem the rate of erosion, so that the capital can fund care provision for an extended period, or leave additional capital to loved ones on death. The strategy is then regularly reviewed, so that it adapts to any change in circumstances.

Naturally, there are many factors that need to be considered in any investment strategy, including the time horizon for investment, the tolerance to investment risk accepted and income requirements. Tax-efficiency and ease of access to funds will also be important considerations. We can also arrange regular withdrawals from investments at an agreed level to ease the administrative burden by moving cash to cover ongoing care costs.

Investing funds for someone else under a Lasting Power of Attorney introduces an added layer of responsibility. An attorney is duty bound to act in the best interests of the donor, and unless the funds available for investment are limited or the attorney has sufficient skill and knowledge, attorneys should consider whether they need to obtain independent financial advice. This advice can provide valuable reassurance to attorneys who are tasked with the responsibility of handling the financial affairs of the donor, and also provide evidence that appropriate advice has been obtained.

The power of advice

When an individual goes into care, decisions taken to fund ongoing care costs require careful consideration, to make the most of funds available. Our experienced advisers can provide independent advice on the options from across the market place and build a bespoke plan of action. Speak to one of our team if you, or a loved one, needs specialist advice in this area.

Irrespective of our age, financial obligations shape the decisions we reach on a day-to-day basis. For those with young families, the cost pressures of mortgage or rent payments, childcare costs and household bills undoubtedly take priority, and it is easy to consider longer term financial objectives, such as retirement planning, as being something that can be put off until later in life.

This is reinforced by the results of a survey carried out by the Department for Work and Pensions, published in 2022, where 2,655 people aged 40-75 were asked a series of questions relating to retirement and providing income in later life. Of those surveyed, 24% did not hold a private pension at all, and 16% had not started saving for retirement.

The reality is that failing to take control of your financial future at an early stage can lead to missed opportunities, which could compound over many years, and potentially lead to a less comfortable retirement. There are, however, a number of steps you can take to improve your financial future, and working out a financial plan with a regulated financial adviser can help you achieve your longer-term goals.

Take control of pensions

With the introduction of auto-enrolment, most employed individuals now hold and contribute to a workplace pension scheme. Indeed, as individuals move jobs, most accumulate a number of pension arrangements during their working life. Holding multiple pension plans can make understanding the overall value of pension savings, and the potential income in retirement they could provide, more complicated. Furthermore, keeping abreast of the performance of defined contribution pension funds is more difficult across multiple plans.

This is a crucial point, as the difference between strong performing investment funds, and those offering an average performance, can compound over years and lead to a significant difference in the accumulated value of your pensions, and the level of income that can be generated, at the point of retirement.

Default pension funds tend to produce broadly similar returns irrespective of the pension provider; however, taking an active role in selecting good performing investment funds can produce a significant improvement over the performance of the default pension option. Many pension arrangements now offer “lifestyle” options, which automatically reduce the level of risk as you near retirement. This automated approach may not be appropriate for the options you wish to consider at retirement and doesn’t take into account prevailing investment market conditions or economic prospects.  By engaging with a financial planner, an impartial assessment of your arrangements can be undertaken, which can help identify weak performing funds and allow changes to be made to improve performance or align the portfolio with your tolerance to risk and other preferences.

Performance is only one aspect where financial planning can assist in producing a better outcome. The charges levied by some pension contracts, particularly older style arrangements, can be expensive compared to modern platform-based plans, and these additional costs can be a further drag on investment growth within the pension fund.

Plan ahead to retire earlier

The State Pension age continues to increase and in our experience, many do not wish to continue working until their State Pension becomes payable. Engaging in the financial planning process at an early stage can make the possibility of retiring early a reality. Increasing the amount contributed earlier in life means that the contributions have longer to grow, and working with a financial planner can help adjust the contributions over time to ensure that they are affordable and invested appropriately.

Tax planning throughout your life

Tax relief received on pension contributions is one of the key benefits that sets pensions apart from other methods of retirement planning. Most individuals can get tax relief at their marginal rate of tax on pension contributions up to the annual allowance, which is currently £60,000 or 100% of relevant earnings if lower, although lower allowances apply to higher earners or those who have drawn a flexible income from their pensions.

Not only does the tax relief received on contributions provide a boost to growth in pension value, it can also help you avoid falling into a tax trap. One such example is the income tax charge that applies to people in receipt of Child Benefit, where either their income (or their partner’s income) is more than £60,000 per annum. Pension contributions made by an individual will have the effect of reducing the adjusted net income amount and potentially help avoid the income tax charge. Similarly, the 60% tax trap on income between £100,000 and £125,140 per annum can be avoided by making pension contributions to reduce adjusted income.

It isn’t just pensions where careful planning can yield tax advantages. Many people are finding they are paying more income tax on savings and investments due to static tax bands, and the reduction of the Capital Gains Tax (CGT) annual exemption is leading to more individuals paying CGT on the disposal of investments. By using tax advantaged vehicles, such as an Individual Savings Account (ISA), savings and investments can be sheltered from Income Tax and CGT.

Engaging with a financial planner can help identify opportunities to save tax throughout your working life, with each step towards greater tax-efficiency ensuring that your assets work as hard as possible to achieve your financial goals.

Don’t forget protection

One area of financial planning that is often overlooked is the need to protect your family’s finances, should an unforeseen event, such as death or serious illness, occur. Focusing on planning for retirement is all well and good; however, the best laid plans could be seriously compromised should the worst happen. It is important to ensure that adequate life cover is in place, and other forms of protection, such as Critical Illness cover, should be considered, too. It is also important to make a Will, to ensure your wishes are laid out, and ease the burden on loved ones. What is often not considered is that your Will can be a powerful tool that can be used to aid tax and estate planning.

Summary

With life’s pressures, younger people may be tempted to put off planning for retirement until later; however, in our experience starting a sensible financial plan at an early age could provide a more comfortable retirement. Engaging with a financial planner can also bring peace of mind that your financial circumstances are being reviewed regularly and promote tax-efficiency across your financial arrangements.

Our expert financial planners are independent, and can provide unbiased advice using a holistic approach, which takes into account retirement savings, investments, protection and other financial planning objectives. Speak to one of the team to arrange a review of your retirement savings or investments.

Decisions taken by central banks have been one of the main drivers of global market direction over recent years. Following the outbreak of the Covid-19 pandemic, interest rates around the World fell to ultra-low levels as policy makers attempted to stimulate demand amidst the global lockdowns. Just over a year later, interest rates began rising across Western economies to combat an inflationary spike, that saw UK Consumer Price Inflation (CPI) peak at 11.1% in October 2022.

As expected, inflation has fallen to more modest levels in most Western economies, and the UK is no exception. In the 12 months to April 2024, CPI has returned to 3.2% and is expected to continue to fall over the course of this year, potentially moving lower than the Bank of England’s own target of 2% by the autumn, although risks remain that inflation could modestly rebound in 2025.

Given the expected course of inflation, pressure is mounting on the Bank of England Monetary Policy Committee (MPC) to reduce the cost of borrowing and ease the burden on households and business alike. Of course, inflation isn’t the only indicator that the Bank are closely monitoring. The UK returned to growth in the first quarter of 2024, and GDP growth expectations have increased for the remainder of this year. Recent unemployment data was worse than expected and retail sales for April were very disappointing, suggesting consumer confidence remains weak. Understandably, the Bank do not wish to cut rates substantially, only to stoke the inflationary fire once again.

On balance, taking recent data and central bank comments into account, there is a large consensus that base rates will be cut in the next quarter.  Indeed, at the last meeting of the MPC on 9^th May, two members of the Committee, including the deputy governor Sir David Ramsden, voted to cut rates by 0.25%, with the other seven voting to keep rates on hold.

Source of Data: Bank of England

Bond markets are already beginning to price in a series of rate cuts over the next 12 months, with yield curves implying one or two cuts to the base rate in 2024. The outlook for rates has impacted the mortgage market, where lenders have been making modest cuts to five year deals, and in fixed-rate savings bonds, where rates being offered on one and two year fixed-rate bonds have also fallen from their peak.

The impact of rate cuts

When interest rates move lower, media focus will be targeted on the impact of the cuts on households. The outcome of falling interest rates on household budgets is generally well understood. For those with variable rate mortgages and loans, cuts in the base rate could lead directly to a fall in interest payments on a monthly basis. In turn, this could have a positive impact on discretionary expenditure, and lower rates could also encourage consumers to take on credit, from mortgages to car and personal loans. Consumers also feel more comfortable carrying a higher debt burden when interest rates are lower.

Those with savings begin to see a fall in the interest they receive on their variable rate accounts, and this may encourage those with accumulated savings to spend, potentially providing a boost to economic growth.

What is less understood is the significant impact underlying and future interest rates have on business, and in turn the health of the economy. Whenever the base rate changes, this affects the rates charged by banks on commercial loans, which tend to be arranged using a variable interest rate. The rapid succession of rate increases from the end of 2021 to August 2023 not only raised interest costs on existing business borrowing, but also has the effect of deterring businesses from taking on additional debt, further suppressing economic expansion.

How markets may react

Monetary policy decisions taken by central banks are one of a number of variables that dictate the progress and direction of financial markets. Cuts to base interest rates are generally perceived as being positive for both equities and fixed income securities. Equities benefit as companies can reduce their borrowing costs and more easily fund expansion. Depending on the sector, company profits may also benefit from more buoyant consumer confidence. Those companies who carry the highest level of borrowing tend to benefit the most from falling interest rates, which helps explain the recent strong performance of high growth companies, such as those involved in new technology, who tend to be highly geared.

The performance of bonds is directly linked to the future path of interest rates. As base interest rates increase, existing bond prices tend to fall, as investors can choose other options that offer a higher rate, such as newly issued bonds, or cash. The rapid increase in base rates during 2022 and 2023 proved to be very painful for bond investors, and saw bond prices retreat. The inverse is true when rates fall, as existing bonds offering higher rates look increasingly attractive compared to cash or bonds issued at a lower rate.

It is important to note that markets are forward looking, and have long been anticipating interest rate cuts in the US, UK and Eurozone. Indeed, markets have been frustrated by the slow march toward the expected rate cuts, although some of the concern has been offset by consistently stronger US economic data over recent months. Some of the positive impact of easing monetary policy has, therefore, already have been taken into account.

What action should investors take

As interest rates fall, investors would be wise to consider reviewing their existing financial arrangements in light of the changing landscape. Whilst cash has provided savers with attractive interest rates over the last 12 months, it is likely that savings interest rates will fall over the next two years, and those holding excess deposits on cash may do well to consider alternative options.

We feel a falling interest rate environment should prove positive for both equities and bond markets, and despite the strong performance seen since last autumn in anticipation of central bank action, the prospects over the medium term remain positive. Given the expected impact of a shift in monetary policy, this may be an ideal time to take another look at how your investments are positioned. Speak to one of our experienced financial planners to discuss the impact of falling interest rates on your investment portfolio.