Financial Planning

The last 25 years have changed the way we live. Now we can access information instantly, share experiences with people across the world, and reap the benefits of rapid technological change. These benefits include increased living standards and healthcare, and longer life spans. A longer life means your pensions and any other investment income in retirement have to last for longer; maintaining financial planning advice is more vital than ever to ensure you don’t outlive your income; and families may now stretch across more than three generations, making estate planning more of a challenge.

Financial planning for later life is, in many respects, the same as planning at earlier life stages. However, the emphasis will often change. For example, income will normally become a more important focus of investment than growth and planning for inheritance tax and potential care fees come to the fore.

Setting your goals

The first step in creating any plan is to decide what you want to achieve. There is no such thing as a standard, one-size-fits all solution – you need a personal plan designed around your goals. For example:

• What should the balance be between maintaining your lifestyle and preserving what you pass on to your family?
• Do you wish to stay living where you are today? Ultimately you may have no choice but to move to residential or nursing care, but in-home care can defer that transfer – albeit at a cost.
• If you are still working, perhaps part time, how long will you continue to do so before fully retiring?
• Are you prepared to rely solely on the NHS for your healthcare?

Careful income planning can be key to making the most of later life. Money concerns are never welcome, particularly if the opportunity to earn your way out of them is no longer open to you.

The transition from work to retirement is now often a gradual process. You might not want the instant change to 100% leisure time. Alternatively, you may need to earn extra income to cover a pension or other shortfall, perhaps because of the continuing increases in state pension age. Whatever your reason, national statistics show that men and women still work beyond their state retirement age. However, it is unwise to assume that you can rely on continued earnings for a long period of time. Factors such as your or your partner’s health, your enthusiasm, and the type of work you’re engaged in could mean you have to stop work at some point. If you think you will have to continue working indefinitely, then your non-retirement plans almost certainly need a serious review!

The role of pensions

Pensions, both state and private, are usually the main source of income in later life. For growing numbers of people, some pension income will be via income drawdown, rather than the traditional pension annuity. The drawdown approach offers flexibility suited to gradual retirement, but ongoing management is vital. The level of withdrawals needs regular review: taking too much from a fund can mean you outlive your pension, whereas the opposite could mean a lower than desired standard of living, thereby building up funds that your children, grandchildren or chosen benefactors will ultimately benefit from.

Investment management

What you require from your investments could alter over time and investment horizons naturally tend to shorten as you get older. For example, you may wish to increase the emphasis on security of income rather than income growth. To maintain a coherent approach, it is important to review your investments as a single portfolio, rather than as compartmentalised direct holdings, ISAs, life policies and pensions.

Tax

Income and tax sometimes seem inseparable, but this need not be the case. The flexible pension regime created ways to draw regular payments which are not fully taxed as income or are even tax free. Other investment structures can produce similar results if you think of your income requirement as a series of regular payments. For couples, tax savings can sometimes be achieved by simply rearranging who owns investments. The aim is to maximise use of an individual’s allowances and tax bands.

Long Term Care

Financial planning for social care is a highly complex area requiring specialist expertise. It had been made more complicated by the fact that, until September 2021, there had been no long-term plan for funding social care in England. Following new legislation, from October 2025 in England there will be an index-linked £86,000 cap on the total personal care costs (which excludes accommodation costs) that must be paid by an individual and capital limits will be raised for means-tested contributions, with the upper limit moving to £100,000.

Planning the future of your estate

You should ask yourself, what do you want to happen to your estate? That question affects more than inheritance tax (IHT) planning. Your estate and IHT are inextricably linked, but the most IHT efficient planning may not be ‘family efficient’ estate planning.

Protecting assets during your lifetime

The current and, to a lesser extent, future funding rules for long-term care can result in your estate being whittled down to pay care home fees. The average stay in a residential care home in England is around 30 months and average fees can exceed £1,200 a week in some parts of the UK. It may be possible to plan your affairs to limit the cost, but this is an area where in-depth knowledge is vital, and many dangerous myths exist – such as ‘just give it all away first’. To mitigate IHT, you should consider not only your will, but also any opportunities you have to make lifetime gifts. Today’s IHT regime has a favourable treatment for lifetime gifts. For example, outright gifts made more than seven years before death are completely free of IHT, as are regular gifts, regardless of size, when made out of income, provided that they do not reduce your standard of living.

Trusts

Trusts have long been used as a way of controlling lifetime gifts or legacies after they have been made. For example, a trust could be used to provide income from a portfolio for a surviving spouse, while also ensuring capital passes to children from a previous marriage when the surviving spouse dies. Trusts have often been associated with tax planning, but over the years legislation has been tightened. Now, most trusts are subject to the highest rates of income tax and capital gains tax, meaning that they can be disadvantageous from a tax viewpoint. Nevertheless, trusts continue to have a role to play, particularly when the would-be recipients of a gift or legacy are minor children or young adults.

Generation skipping

A five-generation family is a real possibility today, thanks to increased life expectancies. This can create some difficult estate planning decisions. Purely from an IHT viewpoint, the best option is to pass assets straight to the youngest generation, avoiding the tax that might otherwise be incurred on the trickle down through generations. However, the generations overlooked by such a strategy may be more in need of funds than their children or grandchildren. There might even be an expectation from the older generation of support with their care costs. As with so many other areas of later life planning, compromises may be necessary and sound advice essential.

How we can help

Later Life planning can be complicated with conflicting goals and uncertain timings. However, our experienced financial planners can provide advice on the following areas, so you are not alone. Please do get in touch if you wish to discuss any of these in more detail:

• IHT and estate planning
• Managing your pension arrangements
• Your options for funding long-term care
• Identifying opportunities to reduce your income tax bill
• Managing your investments, including pension assets
• The costs of downsizing and the alternatives available to you.

Whilst it is a topic we have covered previously, we make no apology using this week’s Wealth Matters to reinforce the benefits of independent financial advice, and potential pitfalls when using a restricted adviser.

Understanding the difference

Financial advice can be provided on either an independent or restricted basis; however, many people may not immediately understand the difference between the two. Firms need to clearly inform clients whether they offer independent or restricted advice when engaging with a client; however, many restricted firms do not do this, and thus mislead clients.

Independent financial advisers (IFAs) are not tied to any specific financial products, providers or investment institution, so they can offer impartial advice tailored to their client’s needs. In contrast, restricted advisers can only recommend certain products and solutions from a very limited range of options, and in some cases, will only be able to recommend products from a single provider.

Using a restricted financial adviser doesn’t necessarily mean you’ll be getting ‘bad’ advice, as all financial advisers must have a similar minimum level of qualifications and meet the same standards. It does, however, mean that the choices available as a client of a restricted firm may well be limited, which may lead to missed opportunities, or a sub-optimal solution.

At FAS, we choose to be completely independent so that we can research and recommend financial products spanning the whole of the market. In doing so, our advice is unbiased and unrestricted. We are very proud of our independence, and our ability to recommend the most appropriate product or service from across the marketplace helps us to achieve our aim of providing the best advice to clients.

Value for money

Some may make the mistake of assuming a restricted adviser will offer better value for money, as they perceive the amount of work undertaken in recommending a product from a limited range will prove more cost effective; however, this is not the case, and in our experience, the opposite is found to be true. We often meet new clients who have received advice from a restricted firm, and when undertaking unbiased cost comparisons, the restricted firm prove to be expensive compared to the cost of independent advice. One factor is our ability to look across the whole of the investment market and potentially access more cost-effective options that may not be offered through a restricted adviser.

What independence means to FAS

To help demonstrate the importance we place on our independent status, we look at three key areas where our day-to-day advice is enhanced by our independence.

1. Independence in fund selection

The UK fund management industry continues to grow in size with around 3000 funds being available to UK retail investors, covering both active and passively managed fund solutions across the widest range of asset classes, sectors and geographies.

Being an independent firm affords us complete freedom in the investments and funds we recommend are held within client portfolios. The FAS Investment Committee always take a wholly unbiased view when it comes to fund selection, selecting the most appropriate funds from across the whole of the market, without restriction. Comprehensive research and analysis is undertaken on all investment funds available to UK retail investors every quarter, and where funds pass our filters, we engage with fund managers to carry out more detailed analysis.

Funds that we currently recommend to clients need to fight for their place on our recommended list at each quarterly review. In the event that a fund underperforms, we discuss performance with fund managers, and have no hesitation in removing a fund from our recommended list if we feel better prospects lie elsewhere. Our focus on strong fund performance, together with our desire to access competitively priced solutions, can help our clients meet their financial goals, such as saving for retirement, more quickly.

2. Independence in product selection

As an independent firm, we always look to recommend the most appropriate product provider from across the whole of the marketplace. We undertake a regular whole of market review of platforms and product providers, considering factors such as platform cost, service levels received and changes in product features. This whole of market approach means that we can feel confident that the recommendations made to our clients are based on a comprehensive review of the full range of options available.

In a similar manner, we monitor and regularly review platforms that have been recommended to clients, and should a more appropriate solution become available, we have the ability to recommend that the client moves to a platform that provides lower costs, or improved levels of service.

3. Independence in financial solutions

A key benefit of our independent status is the ability to take a totally unrestricted view as to the solutions that would best fit an individual client’s circumstances. This is a particularly important element that supports our holistic approach to financial planning. For example, for those in later life, we are able to recommend esoteric investments, such as business relief solutions for inheritance tax planning, and for individuals who are seeking a high degree of tax efficiency, we can look across the range of Venture Capital Trust, and Enterprise Investment Schemes, if appropriate, given a client’s attitude to risk and objectives.

Why independence matters

We are very proud of our independent status, which we feel allows us to provide the best advice by being able to recommend products and solutions from across the whole of the market. If you currently receive advice from a restricted adviser, you may not be receiving poor advice; however, it may well be sensible to consider the limitations under which the adviser is working.

For example, the limited range of fund options offered by a restricted adviser could lead to underperformance, when compared to recognised benchmarks and peers. Given our experience, it may also be wise to review costs and charges, to see whether the restricted adviser is offering good value for money. Speak to one of our independent advisers, who are happy to take an unbiased and impartial review of your existing financial arrangements.

In our weekly Wealth Matters newsletter, we try to keep our readers up to date with developments in financial markets and information on financial planning opportunities. Reviewing the feedback we receive (which is always welcome!) we have been asked to provide readers with an insight into how FAS operates on a day-to-day basis. In the first of a recurring series of articles, we go behind the scenes to look at the role of the administration team at FAS and the vital role they play in providing excellence and high levels of service to our clients.

Our Administration Team

Our clients will no doubt build a strong relationship with their adviser, who they see face-to-face at review meetings or through other regular contact. FAS is, however, very much a team effort, with dedicated staff focused on ensuring that the administration of client assets runs smoothly. Our  strong administration team is office based and is split across the two offices, in Folkestone and Maidstone. Our team needs to be multi-skilled, as they handle all aspects of client administration, communication with product providers and providing business support.

Gathering Information

When we begin acting for a new client, it is imperative that we fully understand any existing financial arrangements they may have. To enable us to gather information, it is usual that we lodge a letter of authority, signed by the client, with the pension or investment provider. This authority allows the provider to forward information to us relating to a client’s existing investments, pensions, and other financial plans.

Naturally, we look to obtain this information as quickly as possible; however, the speed at which product providers respond varies from reasonable to incredibly slowly, and one of the administration team’s key tasks is to chase up outstanding information and responses from product providers. Our team are highly experienced and diligent in obtaining missing information, so that our advisers can provide the very best advice they can, based on the fullest set of information available.

Processing instructions

When a client follows our recommendations and proceeds with a financial transaction, our administrators deal with all aspects of the purchase, transfer, or sale, to ensure that the recommendations are followed precisely to those specified in the report. Our team always aim to process instructions swiftly and accurately on the relevant platform via an online interface, which ensures instructions are processed quickly.

Whilst most instructions are now dealt online via secure websites, some client instructions still require paper forms and applications to be submitted. This involves close liaison with product providers, and in the case of transfers from existing pension arrangements or ISAs, this will normally involve an element of follow-up and chasing to expedite the transfer. Given the poor level of service we receive from certain product providers from whom we arrange transfers, persistence and patience are key virtues that all of our administration team possess!

From time to time, platforms and product providers request further information or additional documentation at the time an instruction is lodged. Our administration team will contact clients directly as required to obtain further information, or if a signature is needed. As a result, some clients will get to know the administration team directly through this contact.

Preparing client reviews

When an adviser attends a client review meeting, it is vital that he or she is armed with accurate and complete information on a client’s investments, pensions and protection policies. Our client review service is fundamental to our business and ensures that clients receive a comprehensive review and regular contact at predetermined intervals. Given the importance we place on the value of regular reviews, a great deal of care and attention is afforded to the preparation of client valuation statements. The review preparation process involves dealing with product providers to obtain up to date valuations, and checking that the records we hold in respect of the number of units and holdings, prices and dividends match those records held by the product provider or platform.

Dealing with compliance

Compliance with all relevant regulations and following internal procedures are crucial to the smooth operation of the business. Our administration team have a key role to play here, confirming client identification and source of funds with product providers. By liaising with product providers directly, this frees up time for advisers to focus on their key role of providing advice.

Continuing Professional Development

All staff at FAS follow a strict regime of continuing professional development, so that staff can keep abreast of changes in legislation and reinforce their knowledge in all areas of the business. Our administration team fully participate in this professional development programme, to ensure that their knowledge is up to date. They also undertake regular training with product providers to make sure that the team are fully conversant with changes to platform services and procedures.

A team effort

The administration team at FAS play a key role in the business, supporting other staff in their day-to-day activities, and ensuring that client instructions are carried out efficiently and accurately. We hope this article helps to reinforce the collegiate nature of our business and the fact that FAS is far greater than the sum of the parts. We hope you have enjoyed this look behind the scenes, and in the next part of the series, we will look at the work of our paraplanning team.

With the end of the tax year rapidly approaching, it’s an ideal time to consider your finances and take decisions to maximise tax-efficiency. With the right planning, you can make the most of available allowances, exemptions, and reliefs, before the 5th April.

Use your ISA allowance

Individual Savings Accounts (ISAs) remain one of the most tax-efficient ways to save and invest. As the tax year draws to a close, it’s time to assess whether you have fully used your available ISA allowances. For the 2023/24 tax year, the ISA allowance stands at £20,000 per individual. This allowance can be split between a Cash ISA, Stocks and Shares ISA, Innovative Finance ISA, and Lifetime ISA (up to a certain limit). In addition, up to £9,000 can be invested in a Junior ISA, which can be held by a child up to the age of 18. This could provide a planning opportunity to make gifts to children or grandchildren which makes use of the Junior ISA allowance.

It is important to note that ISA allowances must be used in the tax year in question, otherwise they are lost. There is no facility to carry forward or make use of allowances from previous years. It is very much a case of “use it or lose it”.

Making Pension Contributions

Contributing to your pension is not only a prudent retirement planning strategy but can also be a tax-efficient way to reduce your tax bill. Personal pension contributions benefit from tax relief at the individual’s highest marginal rate. Higher-rate and additional-rate taxpayers can claim additional tax relief through their self-assessment tax return. The maximum contribution that can be made (known as the Annual Allowance) for this tax year is £60,000 or 100% of an individual’s net relevant earnings (whichever is the greater).

Pensions are complex and the annual allowances carry some quirks for higher earners, as the amount they can contribute into a pension could be limited. In addition, an individual who has flexibly accessed a pension will be subject to the Money Purchase Annual Allowance, which limits the level of contributions to £10,000 in the current Tax Year. We recommend you seek advice before making pension contributions, to ensure that allowances are not breached, as there could be tax penalties for making excess contributions above your available allowance.

Consider Capital Gains

With the annual Capital Gains Tax (CGT) allowance dropping from £6,000 in the current Tax Year to £3,000 in the next Tax Year, it is an ideal time to review an existing investment portfolio and make use of the annual CGT allowance. Whilst the rate of CGT payable on the disposal of investments is not particularly punitive (10% for basic rate taxpayers and 20% for higher and additional rate taxpayers) it may make sense to sell part or all of an investment to use the available allowance if you hold investments that stand at a significant gain over the purchase price. That being said, the decision to sell an investment certainly takes greater consideration than simply looking at the tax implications, and this is where independent advice can help you assess an existing investment portfolio to take the right decision.

Gifting for Inheritance Tax planning

The end of the Tax Year is a good time for those with significant assets to consider whether any simple planning for Inheritance Tax mitigation is appropriate. The easiest method of reducing the value of an individual’s assets is to make a gift, and gifts made within the annual gift exemption do not carry any Inheritance Tax (IHT) implications.

For the current tax year, the annual gift exemption is set at £3,000 per person, which means that you can gift this amount to one person, or make a number of gifts up to this total. Couples can benefit from making joint gifts, effectively doubling the annual gift exemption to £6,000. In addition, if you haven’t used the gift exemption in the previous tax year, you can carry forward any unused allowance; however, this can only be done for a single tax year.

Gifts with a greater value than the annual gift exemption are also potentially exempt from IHT, as long as the individual making the gift survives for seven years after the gift has been made.

The end of the tax year is, therefore, an ideal time to assess whether you wish to make gifts, so that available allowances are maximised.

Other Tax breaks

There are many other smaller tax breaks that can add up and minimise the amount of tax that you pay. As with many tax allowances, the end of the tax year presents a call to action to avoid missing out on potential tax savings.

Those who are married or in a civil partnership could benefit from the marriage allowance. This is only effective if one partner earns below £12,570 per annum, and the other pays tax at basic rate. The non-taxpaying partner could transfer £1,260 of their personal allowance to the taxpaying partner, which would mean an income tax saving of £252. You can also potentially claim the allowance for the last four tax years, if you were eligible and did not claim.

It is also worth reviewing your income position in relation to the Child Benefit High Income Charge. Making pension contributions could be an effective way of reducing net income so that a lower charge is applied, or removed completely.

Get the right advice

As we have identified, there are many opportunities to take decisions to maximise tax efficiency, many of which could be lost if not used before the end of the tax year. Successful financial planning is, however, far more involved than simply ensuring your investments and savings are tax-efficient, and this is where engaging with a financial planner can help assess your financial priorities and make sensible plans for the future. Speak to one of our experienced financial planners to carry out a review of your financial position and consider any actions that need to be taken.

It is fair to say that monetary policy decisions taken by central banks have been a leading driver of market sentiment since the start of the Covid-19 pandemic. Investors have been keenly watching for signs that UK interest rates would begin to fall, after the rapid series of hikes during 2022 and 2023 pushed base rates from 0.15% to 5.25%.

The first sign that a rate cut may be on the cards followed the Bank of England’s Monetary Policy Committee (MPC) meeting in February, which saw the vote split three ways, with six members voting to keep rates on hold at 5.25% and two members voting to hike rates further, to 5.5%. One Committee member voted to cut rates to 5%, the first such decision  since the MPC started to raise rates in December 2021.

Central banks fuel market rally

Both the MPC and the US Federal Reserve changed their language in the final quarter  of 2023, which suggested the battle with inflation was nearing an end. This led to a sharp rally in both equities and bond markets, as investors welcomed the prospect of easier monetary policy. US bond markets began to price in multiple rate cuts, with the first coming as early as March, and UK Gilt yields also fell on the prospect of imminent central bank action.

Since the start of the year, however, investors have had to temper the expectations of rate cuts. US economic data continues to prove highly resilient, with GDP growth remaining strong. As a result, bond markets have reacted to the stronger-than-expected data by paring expectations of multiple rate cuts, and pushing back the start of the rate cutting cycle to June.

It is a similar story in the UK, where Gilt yields have risen back towards level seen in November 2023. This is despite the news that the UK economy fell into recession at the end of last year, and it is clear that the higher borrowing costs are affecting consumer confidence.

Inflation – one of the primary reasons for the rate hikes seen over the last two years – has fallen back from a peak of over 10% in October 2022 to stand at 4% in January, and economists expect inflation to fall further towards the target of 2% over coming months. Recent comments from Bank of England Governor Andrew Bailey have indicated that the Bank do not need to see inflation reach their 2% target before action is taken to cut rates.

Over the medium term, the MPC’s projections show lower base rates are likely. Forward market interest rates imply a rate of 3.9% in 12 months’ time, and 3.3% by the start of 2026. These projections are, of course, subject to revision, although it is interesting to note that the rates projected for early 2025 and 2026 have been lowered somewhat from the Bank’s own projections just three months earlier.

The MPC are, however, making no comment on the pace of rate cuts, or indeed when the first cut will arrive. One reason behind this may be the potential for global events to cause inflation to spike again. In the wake of the Red Sea attacks on global freight, the cost of shipping has increased significantly since the start of the year, although costs have moderated a little over the last couple of weeks. The increased cost of shipping, and delay caused by ships using sub-optimal routes, could be inflationary. The wider conflict in the Middle East could also cause oil prices to jump, which would feed into higher prices generally.

How investors can take advantage

Prevailing and expected interest rates and inflation data have an important role in determining the performance of corporate and government bonds. Higher inflation, and interest rate increases, make bonds look less attractive, as higher rates on cash deposit mean investors will demand a higher return from bonds to compensate for the additional risk over cash.

In order for bonds to remain attractive, they need to pay a higher yield to compete with cash interest rates, and as bonds pay a fixed rate of interest, prices fall as yields rise. Both UK and Global bond prices fell sharply during 2022, as markets expected higher interest rates. Conversely, as markets now expect interest rates to fall, this may well prove to be positive for bonds, where yields become increasingly attractive compared to falling cash interest rates.

We feel that bond investors do, however, need to take a sensible approach to how their portfolios are allocated. A weakening global economic outlook could increase the rate of default on lower quality bonds, where the most attractive yields can be found. Whilst longer duration bonds may be the most sensitive to changes in interest rates, they are likely to be more volatile and susceptible to any disappointment in the pace or timing of rate cuts.

Lower interest rates also impact equities markets, but to a lesser extent. A drop in the cost of borrowing may well be welcome news for heavily indebted companies, and equities generally feed off the boost in sentiment that less restrictive monetary policy could bring. Expectations of lower rates have been the main catalyst in the sharp rally in equities this year, particularly in the US.

Diversification matters

Markets are at an interesting point in the investment cycle, where the prospects for improved performance from bond markets are competing with positive momentum in global equities. We feel these are conditions where a well diversified portfolio could perform well.  Cash will always remain an important element of any sensible investment plan; however, this brief period of strong returns from cash deposit may be close to ending. Whilst we do not expect interest rates to fall back to pre-pandemic levels in the medium term, cash is likely to be less attractive when compared to the opportunities for superior returns from asset markets.

We believe this would be a sensible time for those holding significant allocations on cash deposit to consider alternative options. Our experienced financial planners are on hand to provide tailored and independent advice on how to best construct an investment portfolio to meet your needs and objectives.

The news that the UK economy fell back into recession at the end of last year is likely to be of little comfort to investors whose portfolios are heavily weighted towards UK Equities. It is fair to say that most UK investors will have some exposure to shares listed in the FTSE100, the index of the largest quoted UK companies. Indeed, we often come across portfolios that continue to hold a heavy concentration of UK Equities, and this is particularly true of traditional Discretionary Managed portfolios, which hold a blend of directly held shares and collective investments.

Investors who have focused on UK shares are likely to have seen an extended period of underperformance compared to investors who have adopted a global approach to investment. The FTSE100 index level has increased by just over 7% over the last 5 years, which is disappointing when compared to the performance of other global indices over the same period. Over the last 7 calendar years, the S&P500 index of leading US shares has outperformed the FTSE100 in each period, with the sole exception being 2022, which proved to be a very disappointing year for most asset classes. Moving away from the headline FTSE100 index, the performance of mid-sized UK companies in the FTSE250 index has been weaker still.

Structure of the index

One reason for the extended period of underperformance of the FTSE100 is the composition of the index itself. At the end of 2023, just under 20% of the FTSE100 is represented by financial companies, with Consumer Staples being the second largest sector. Industrials, Energy and Healthcare are the next three largest sector allocations. Over recent years, much of the outperformance of global markets has been led by stocks in the technology sector, which are significantly underrepresented in the FTSE100 index, with just over 1% of the index allocated to Tech stocks. By way of comparison, close to 30% of the S&P500 is invested in the Technology sector.

London losing its’ lustre

Another factor that is influencing the performance of UK indices is the diminishing influence of the UK in global financial markets. In 2022, the market capitalisation of French listed companies temporarily exceeded those listed in the UK for the first time. Further damage to London’s reputation has been caused by a number of leading domestic companies who have chosen to list on global exchanges rather than list on the London Stock Exchange. These include semiconductor stock ARM, who listed on the NASDAQ index last September. If this trend continues, the gap in performance between the UK and global markets could widen further.

Positive for income seekers

The above factors paint a rather gloomy picture for domestic shares. There are, however, a number of redeeming features which suggest that investors would be unwise to shun UK Equities altogether.

For investors who are seeking a high level of dividend income, the FTSE100 can be a happy hunting ground. The current yield on the index is around 3.7% per annum, which represents a significant uplift over the yield on the S&P500 index, which stands at just 1.3% and is also higher than the yield generated by the indices of our major European counterparts. The composition of the FTSE100 lends itself to an attractive dividend yield, due to the high concentration of mature companies that are cash generative. Furthermore, UK companies have a long-standing culture of returning excess profits to shareholders in the form of dividends.

Whilst UK stocks tend to offer the most attractive yields, many investors now choose to focus on total return from their investments, which combines capital appreciation or losses achieved in conjunction with dividend income received. Given the modest capital performance over the last five years, using this measure reduces the attractiveness of the FTSE100 dividend yield.

Investors seeking income can also broaden their horizons, as Global Equity Income funds increase in popularity. These funds, which are typically actively managed, invest in global stocks that offer attractive and sustainable dividend yields, and whilst it is fair to say that other geographies don’t share the dividend culture present in the UK, many mature companies listed in the US and Europe still offer attractive yields. Adding Global Equity Income to a portfolio can be a useful way of diversifying a highly concentrated exposure to UK companies.

Cheap for a reason?

The UK market is certainly attractively valued when compared to global markets. The forward price-earnings ratio – a well-known measure of whether a stock or index is cheap or expensive – stands at around 10 times earnings. This is less than half the price-earnings ratio of the S&P500 index, and indicates the UK is certainly cheap compared to US markets. The FTSE100 price-earnings ratio also stands at a discount to the same ratio for the major German and French indices.

Given the discount to other global markets, why have UK stocks continued to underperform? Perhaps the answer is that UK stocks are cheap for a reason, given the stagnation in the UK economy and lower appeal in the current market trend towards technology stocks.

The benefits of diversification

Over recent years, holding a high allocation to UK Equities may well have led to underperformance as UK shares have lagged their global counterparts consistently for an extended period.

Whilst UK Equities remain attractively valued, the FTSE100 is poorly placed to take advantage of current market momentum, which is very much focused on new industry and technology in particular. A swing in market sentiment, however, towards more value orientated companies could help UK indices regain lost ground, and this is why retaining exposure to the UK remains appropriate in a diversified portfolio. There are, however, compelling reasons why investors, who hold significant allocations to UK shares, should broaden their horizons and seek to diversify into other geographies, such as the US and Far East.

Our experienced financial planners can review an existing investment portfolio and suggest areas where greater diversification could be beneficial. This can be particularly important for those who hold portfolios that have not been reviewed for some time. Speak to one of the team to arrange a formal review.

We often highlight the importance of diversification in any investment strategy, and one element of a well-diversified approach is to ensure that the portfolio contains allocations to different geographies. Whilst most will allocate funds to developed market equities, such as those in the UK, developed Europe (e.g. Germany, France, Spain) North America (US and Canada) and developed Asia-Pacific countries (such as Japan and Australia), introducing an allocation to emerging markets can help spread risk further, as returns from these markets do not necessarily correlate with their developed counterparts.

Economies in transition

Emerging market economies are those that typically display rapid growth and industrialisation, but do not yet meet the criteria to be fully developed. Emerging markets also generally have weaker infrastructure, and their population normally earn lower incomes than those in developed nations.

An emerging market is, however, not necessarily a small market.  Two of the largest emerging market economies, China and India, are amongst the World’s most populous countries. Other notable emerging market economies, such as Brazil, Mexico, Indonesia, Saudi Arabia and Poland, are also of considerable size and are rapidly moving towards becoming developed economic nations.  This transition holds the key to the attractiveness of emerging markets. Many countries considered to be emerging markets are in the early stages of their development and the opportunities afforded through emerging markets can lead to better long-term growth prospects, relative to more mature developed markets.

Attractions of emerging markets

One area of emerging market growth is infrastructure. As a nation develops and experiences economic growth, the need to provide critical transport, utilities and connected networks can provide the springboard for further expansion. One particular growth area is sustainability and the increased focus on renewable and clean energy.

Another positive for emerging markets is the increasing wealth amongst the population. As a greater number of citizens become middle-class, they are more able to consume goods and services. This new-found wealth can help propel growth and business opportunity.

Natural resources will be another potential driver of growth in the coming years. Demand for industrial metals, such as Copper, Aluminium and Nickel – which are all heavily used in clean energy solutions – is likely to remain high and a number of emerging market countries dominate global production of these raw materials.

Many emerging market economies have a younger population than their developed counterparts, and this can assist in the adoption of newer technology at a faster pace. Whilst technological innovation may be well-established in developed markets, emerging market economies provide exciting growth opportunities, as advances in areas such as e-commerce are increasingly adopted.

Wide-ranging risks to consider

So far, so good; however, investment in emerging markets presents a wide range of risks that need to be considered.

Emerging markets often have unstable – even volatile – governments. Their political systems can often be less advanced than those in developed nations, and one potential outcome is political unrest, which can have serious consequences to both the economy and investors.

Governance issues are an ongoing risk of investment in emerging markets. Weak regulatory systems can lead to corruption, and political intervention in free markets can also impact on potential returns. A further associated risk is the availability of accurate data on the financial position of a company in an emerging market. Where investors in developed nations can take a degree of comfort that the financial data on which decisions are reached are accurate, the same cannot always be said for companies located in emerging markets.

Emerging markets face greater economic challenges than developed markets. The risks of poor monetary policy decisions is increased, which can lead to unwanted levels of inflation or deflation. For example, Argentina’s inflation rate was 211% in December 2023, and Turkey’s rate in the same month was over 60%. These levels of hyperinflation can lead to issues in a nation’s banking systems and affect tax revenues.

Currency risk is much more acute when investing in emerging markets, as the value of emerging market currencies compared to the dollar can be volatile. This can mean that investment gains can be adversely affected if a currency is devalued, or drops significantly.

Governments in emerging economies may face greater difficulty raising capital than developed markets, and as a result, yields on emerging market Government Bonds tend to be substantially higher, as the risk of default is greater. The same can be said for companies that wish to raise finance to fuel expansion. They often face paying substantially higher interest rates as investors demand greater returns in exchange for the increased risk.

Our view on emerging markets

Emerging markets present a number of interesting opportunities. The growth potential is certainly attractive, although the current geopolitical instability around the World needs to be taken into account.

Most long-term investors are likely to want to hold an exposure to emerging markets in a well-diversified investment portfolio; however, the increased risks of emerging market investment need to be carefully evaluated and understood, as investors are likely to be exposed to higher levels of volatility than will be experienced holding developed market equities. This is where consulting an experienced financial planner can help discuss the potential risks and rewards and analyse your portfolio to ensure the overall level of risk is appropriate. Speak to one of our advisers, who can provide truly independent and impartial advice.

Falling interest rates

Much of the rally over the last two months of 2023 was predicated on market expectations that interest rate cuts will begin earlier than expected in 2024. Some economists have suggested the first cut by the Federal Reserve could come as early as March; however, this could prove to be a little optimistic, and we are mindful that markets could be prone to disappointment if the anticipated cuts are delayed. The last Federal Reserve meeting of 2023 indicated that there may be three 0.25% base rate cuts in the US during 2024, and further cuts to follow in 2025 as the global economy slows.

We expect a similar story of rate cuts in the UK. The Bank of England, who were slow to begin raising interest rates as inflationary pressure began to build towards the end of 2021, may well have hiked base rates above what is necessary to cool inflation, and given our expectations for growth and outlook for the UK economy, we anticipate the Bank of England will be cutting rates, potentially aggressively, in the second half of 2024.

The end of the hiking cycle will provide some respite for mortgage borrowers, although the housing market is likely to remain under pressure. Falling interest rates will also change the outlook for cash savings, which have been attractive compared to other assets over the last year. We have already seen longer term fixed savings rates begin to taper, and this trend should continue during 2024.

Slower Growth

We expect global growth to slow during 2024. Growth was stronger than anticipated in 2023, despite concerns over the financial strength of US banks in the Spring and ongoing monetary tightening by central banks. As inflation continues to fall away over the first half of the year, the restrictive policies are likely to lead to more muted growth in the US and global economy. Whilst the US may manage to avoid a recession in 2024, the same fate is less likely for the UK, where growth has been negligible for much of the last 12 months and indeed, October 2023 saw the UK economy contract by 0.3%.

Geopolitical and political risks remain

Investors need to be alert to a number of potential geopolitical risks in 2024. The conflict between Israel and Gaza could spill over into a broader Middle Eastern conflict, which would have an unwelcome effect on Oil prices. Investors would be wise not to ignore the ongoing war in Ukraine, although much of the economic impact of the conflict was felt last year.  Any increase in tension between China and the US over Taiwan would be viewed negatively by risk assets, and lead to a flight to safety.

2024 will be a big year for elections, with a UK General Election forecast to be any time between May and December, and the US Presidential election in November. The outcome of the UK elections are likely to have a lower impact on market sentiment, and a clean outcome from the US election in November would also be well received by markets. A constitutional crisis, similar to that seen four years ago after the disputed Biden-Trump election of 2020, would not be good news and may see volatility spike sharply higher.

Asset class outlook

After a very strong final few weeks of 2023, we would not be surprised to see markets take a pause for breath in the first quarter of this year. A broad based rally in both Equities and Bonds since November has undoubtedly priced in some of the potential that monetary loosening could bring in 2024. It also means that some vulnerability now exists should central banks not deliver the expected rate cuts, and markets will remain keenly focused on key economic data as the year progresses.

In the battle of growth versus value, stocks that display strong growth potential – particularly large cap US technology stocks – clearly dominated 2023. This trend may continue in the short term, but this leaves interesting opportunities in more value orientated stocks, who have been largely ignored for much of the last 12 months.

Careful geographic allocation may well prove pivotal in the coming year, as economic performance diverges. We remain positive on the prospects for US Equities, and also favour Japan and the wider Asia-Pacific region. UK and European markets appear to offer relatively good value, but given that we anticipate weaker growth from this region over the coming year, we would prefer to keep allocations relatively light.

After a dismal year in 2022, Bond markets produced a better performance last year and we expect this to continue through 2024. Markets may, however, have moved a little ahead of themselves given the strong rally seen over the last few weeks and there may well be some consolidation during the early stages of the year. Yields look attractive, although we prefer investment grade to high yield debt, given that growth will slow and the higher cost of debt servicing and tight lending conditions could see default rates rise.

Commercial Property produced very disappointing returns in 2023, and although the landscape should improve over time, continued low occupancy of office space and a tough retail environment are factors that keep us away from the property sector for the time being. Other alternative investments, such as infrastructure, may see improved conditions during this year as the high interest rate headwinds subside.

Time to review your portfolio strategy

As we enter a new year, we feel this is an ideal time to review existing portfolios to ensure that they remain appropriately invested for the year ahead. Uncertainty continues, and therefore holding a diversified portfolio will remain as important as ever as we navigate 2024. Speak to one of our experienced advisers to discuss your existing portfolio strategy.

As 2023 draws to a close, we can reflect on a year when relative calm returned to investment markets after an extended period of market turbulence due to the pandemic, war in Ukraine and global inflationary spike. The level of volatility – that is to say the amount markets move up and down over time – has fallen as the year progressed and has recently touched record low levels not seen since 2020.

There have, however, been moments when market volatility has spiked. The failure of Credit Suisse and Silicon Valley Bank in March briefly threatened another banking crisis, although regulators stepped in and took appropriate action to avoid contagion spreading. The start of hostilities between Gaza and Israel also temporarily put markets on the back foot. Market direction has, however, largely been dictated by expectations that central banks would look to change tack, and begin to cut rates after a rapid series of hikes. Economic data – particularly in the US – has been stronger than expected throughout the year, which has led to the Federal Reserve and others raising rates further than many market participants had expected.

Recent comments by central bankers, particularly in the US, have suggested that the long awaited “pivot” is finally here. Investors have been eagerly anticipating the point at which central banks call time on the hiking cycle which has dominated sentiment since early 2022. This has led to a strong return over recent weeks as markets end the year in an optimistic mood, with the expectation that rates will be cut next year.

Technology dominates returns

The so-called “Magnificent Seven” technology stocks have been responsible for a good proportion of the gains achieved by markets during 2023. The performance of Apple, Microsoft, Meta, Amazon, Alphabet, Nvidia and Tesla have not only driven US market returns, but also global markets, due to their combined market capitalisation. Our portfolio strategies have continued to hold good exposure to these tech giants, despite challenging valuations in one or two cases.

Inflation back under control

Inflation, which was the major cause of the market gyrations last year, appears to be back under control. As we entered 2023, inflation stood at 10.5% in the UK and 6.5% in the US. Partly due to actions taken by central banks, inflation has more than halved in both the US and UK. Whilst the current rates of inflation continue to run at elevated levels when compared to the target rate of 2%, the trend is firmly lower, and we feel that central bankers run the risk of inflation undershooting medium term targets if they maintain restrictive monetary policies for too long.

Bonds fight back

2022 will be recorded as being one of the worst performing years for fixed interest investors since records began. The rapid series of rate hikes and inflationary spike led to yields rising substantially over the course of the year. Whilst the early stages of this year saw Bonds move sideways, recent performance has been more encouraging, as markets look to a change in direction from the Federal Reserve, Bank of England and European Central Bank in 2024.

London loses its’ lustre

The London stock exchange appears to be losing its’ appeal for companies who wish to list on public exchanges. Chip designer ARM holdings made the decision to list on the New York Stock Exchange earlier this year and other significant moves overseas have included Irish building materials company CRH. In our opinion, this only reinforces the importance of taking a global approach to investment and to avoid investment strategies that are too concentrated in domestic Equity funds.

Geopolitical tensions

Geopolitical events have continued to have an influence on markets over the course of the year. The conflict in Israel and Gaza, which commenced in October has, to date, had a limited impact on market sentiment. Naturally, any escalation in the conflict could have a significant impact on oil prices, which in turn would increase volatility in global markets.

The Russia-Ukraine conflict continues, although it is becoming more evident that the economic damage was caused last year, and investment markets have paid less attention to events in central Europe over the course of the year. Another possible area of concern is the potential for China to invade Taiwan. This threat should not be ignored, and again, this would have a significant impact on market sentiment in the event of increased tensions between China and the US.

Whilst external events have had less of an impact this year than say in 2020 or 2022, investors always need to be mindful that events beyond the control of markets can influence sentiment and momentum. For this reason, we recommend that investment strategies are reviewed regularly so that they remain appropriately invested in response to global events.

What is in store for 2024?

Unless we see a significant turnaround over the remaining trading days this year, global markets will end the year higher and investors will be able to reflect on a more representative market performance, after a difficult period of volatility in recent years. Compared to the tentative mood twelve months ago, markets are showing a degree of confidence that the worst may be behind us.

We will take a look at our thoughts for the year ahead in the first edition of Wealth Matters in 2024. We take this opportunity of wishing all of our readers a pleasant Christmas break and good health and happiness in 2024.

The run up to the festive period is traditionally a busy time for many; however you may find time over the Christmas holiday period to sit down and review your financial position.

Data from H M Revenue and Customs suggests that this is precisely how some individuals use their down time over the Christmas period. Last Christmas saw 22,060 individuals file their Self Assessment Tax Returns between Christmas Eve and Boxing Day last year, with 3,275 filed on Christmas Day itself.

With the festive season looming, we thought it would be a good opportunity to take a brief look at 12 ways you can bolster your financial plans over the Christmas period and into the New Year.

Think about this year’s Individual Savings Account (ISA) allowance

In the current Tax Year, each UK resident is entitled to save £20,000 into an ISA, where those savings or investments are exempt from tax on interest and capital growth. The increase in cash interest rates over the last year could lead to many more individuals paying tax on interest from savings held outside of an ISA. Using the ISA allowance will shelter cash from both Income Tax and Capital Gains Tax.

Consider your protection policies

It is a sad fact that many people have insufficient financial protection in place to safeguard their loved ones. Research undertaken by Direct Line Insurance in 2022 found that only 35% of those questioned hold life assurance. Separate research from Charles Stanley suggested only 7% of individuals have either a Critical Illness or Income Protection policy in place.

The end of the year can be a good time to take stock and ask yourself some honest questions about the robustness of your financial plan. Would your spouse and children cope financially if you suddenly died or became seriously ill and could no longer earn? Are your current protection policies still up-to-date and appropriate for your needs?

Review your CGT allowance

The Capital Gains Tax (CGT) allowance has already more than halved this Tax Year and is expected to halve again from 6^th April 2024. Making best use of the allowance is now more important than ever, and it would be sensible to undertake a review of an existing investment portfolio to consider whether any action is needed.

Make use of annual gift exemptions

You are allowed to gift up to £3,000 in each Tax Year, without considering the Inheritance Tax (IHT) implications. There are additional exemptions that may be available, depending on your circumstances. If you are looking to reduce the potential impact of IHT on your Estate, making regular gifts can be a useful way of mitigating an IHT liability, in conjunction with other tax planning strategies.

Review your pensions

Assuming you are not affected by rules such as the Money Purchase Annual Allowance (MPAA) or Tapered Annual Allowance, you can contribute up to £60,000 into your pension (or up to 100% of your salary – whichever is lower) in the current Tax Year. It may also be possible to carry forward unused allowances from previous tax years.

Pension contributions can be a great way to save towards your retirement in a tax-efficient manner, and as pensions are usually exempt from IHT,  a pension can also shelter funds for loved ones on death outside of your Estate.

Take stock of your mortgage

For many people, their mortgage is their biggest liability and monthly outgoing. The hike in interest rates over the last year has led to increased payments for those on a Standard Variable Rate mortgage. For those currently on a fixed rate deal, it would be sensible to start to consider your position when the current deal expires.

Consider joint tax allowances

If you are married or in a civil partnership, then it is possible to transfer assets to your partner to make use of their allowances if available, as well as your own, or to be taxed at lower rates, if applicable. For instance, CGT can be avoided or reduced by using both allowances to share a capital gain.

Check emergency funds

Whilst everyone has a different view about the balance that would ideally be kept in a current account, we feel it is sensible to keep at least three to six months of outgoings accessible to cover any emergencies that could arise. Take time over Christmas to consider the level of cash you are holding to see if you feel comfortable. If the balances you hold are higher than you need, could you move some of the surplus cash to another home where it could be more productive?

Review your credit rating

Checking your credit score at various points throughout the year can be a good idea, as it can affect important areas of your life such as mortgage applications. There are a number of useful online resources that allow you to check your credit score.

Make sure you have completed an Expression of Wish

If you have a workplace or private pension, completing an Expression of Wish form with your provider will let them know who you’d like your pensions savings to go to if you die. It is worthwhile reviewing the nomination regularly to make sure that it continues to reflect your wishes.

Check your State Pension forecast

By using the Government Gateway service you can receive a State Pension forecast, which will indicate your likely State Pension and the date at which it is payable. It will enable you to identify any gaps in your National Insurance record, and check whether any action is needed.

Speak to one of our advisers

Make it a New Year resolution to undertake a comprehensive review of your financial circumstances. Speaking to an independent financial planner can help identify areas that you may have missed, and undertake a comprehensive and holistic review of your current position and whether you are on target to meet your needs and objectives. As a Chartered Firm, our advisers are highly experienced and can take an impartial review of your finances. Speak to one of our advisers to arrange a review.