Investments

There is now a growing importance placed on Environmental, Social and Governance (ESG) factors and the risks that these can pose to both businesses and investors. From adapting to climate change to avoid pollution, promoting employee rights and health and safety to considering executive remuneration, ESG considerations can have a range of impacts on an organisation’s financial performance and it’s ability to deliver shareholder value.

More often than not, the environmental impact is the focus on investors’ minds, driving businesses to be more sustainable, with a focus on efficiency, use of renewables, and avoidance of waste. Governance is also a key consideration, in particular when it comes to investments in emerging markets, where corruption and political interference is more likely to occur.

However, recent global events have seen social factors take on ever greater importance. One outcome of the very sad events happening in Ukraine has been to see ESG factors take centre stage, with firms racing to distance themselves from doing business with Russian firms, and close down operations in Russia. From automotive firms such as Ford, to airlines, energy firms such as BP and Shell and food and beverage companies such as Heineken, businesses have generally taken swift action to sever ties with Russia, whether being forced into action as a result of sanctions imposed by the West on the Russian economy, or more often than not, as a matter of choice and ethical stance.

For some, the costs of the withdrawal from the Russian market will be limited. Take Disney for example, who have pulled new releases of its’ films from Russian cinemas. This is likely to have a minimal effect on profitability. For others, such as BP –  who offloaded it’s 19.75% stake in Russian firm Rosneft in the wake of the invasion –  the impact on profits is likely to be more profound and long lasting. Likewise Apple, who announced on the 1^st March that they were withdrawing their products from sale in Russia. Whilst Russia is not Apple’s biggest market by any means, the company expects to lose $3m of sales of iPhones per day alone, equating to a cost of $1.14bn annually.

Many companies reached a swift conclusion that the social implications of continuing to provide goods and services to Russian consumers, or trade with Russian firms, would be damaging from a brand perspective, or lead to other companies whom they trade with to question whether the business relationship is right for them. Others have taken a stronger stance, and have been more outspoken, publicly shaming Russia for it’s actions, and aligning their values with a more activist stance.

Where firms have initially been reluctant to take decisions themselves, investor action and negative social media exposure (including #BoycottMcDonalds and #BoycottCocaCola trending on Twitter) have forced the Boards of McDonalds and Coca-Cola to announce their suspension of operations in Russia. Both companies have significant exposure to the Russian market – in the case of McDonalds, this accounts for 9% of it’s annual revenue – not an insignificant amount.

Rarely has investor and consumer activism been seen on such a scale and we wonder whether this marks new ground, where companies will be forced to be more focused on their ethical position and the need to take action quickly in the future to avoid reputational damage or indeed take a stronger moral stance in light of global events.

The outrage at the action taken by Russia, and steps taken to help Ukraine defend itself, have also prompted some to re-consider the definitions of what represents an ESG-friendly industry. Given the role companies have played in aiding Ukraine with weapons and counter-measures, could aerospace and defence companies conceivably be included under the ESG umbrella? Quite clearly, companies with activities in these areas have historically been off limits when ESG-focused portfolios are constructed. However, some ESG managers are now re-considering this broad-brush approach, and questioning whether those companies who help a country defend itself from aggression are, in fact, promoting a positive social impact.

It is clear that from an investment perspective, ESG factors have never been as prominent as they are today, with the response to the Russian invasion of Ukraine spreading the influence of ESG far beyond targeted investment strategies. The ESG metrics used to score investments and funds are however, arbitrary, and as can be seen from the debate over defence stocks, can be open to interpretation.

At FAS, we consider ESG factors when choosing funds we are happy to recommend to clients, and through our Socially Responsible Investment (SRI) portfolios, take this further by looking to recommend a portfolio where the majority of funds pass further qualitative filters. If you hold an existing portfolio of investments, and are unsure as to whether this meets your personal ethical preferences, then please contact one of our experienced Financial Planners who will be happy to review the portfolio for you.

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

The value of investments and the income they produce can fall as well as rise. You may get back less than you invested. Past performance is not a reliable indicator of future performance. Investing in stocks and shares should be regarded as a long term investment and should fit in with your overall attitude to risk and your financial circumstances.

The tension between Russia and the West over Ukraine has been building in recent weeks, and Russia’s incursion into Ukraine has clearly escalated the crisis. We explain why investors should stay calm and why we feel there are good reasons to take an optimistic view.

Likely fallout from the crisis

So far, 2022 has seen investment markets give back some of the gains made in 2021, firstly due to higher levels of inflation, and secondly as a result of the increased tensions between Russia and Ukraine. Whilst most global markets have seen modest falls over the year to date, as ever, it is important to take a rational look at events, and consider the bigger picture for investment markets over the remainder of this year and beyond.

As a direct consequence of the increased tensions, oil prices have climbed, breaching the $100 a barrel mark. Higher energy costs are likely to exacerbate the inflationary pressure in the short term; however, our view remains that inflation will moderate as we head towards the end of the year. Naturally, the higher oil price is likely to benefit oil producers and energy companies generally. Likewise, the imposition of sanctions on Russia and Russian interests by the West could lead to further falls in Russian equities, and the value of the Russian rouble. For this reason, we would recommend investors favour developed markets rather than emerging markets in these conditions.

Reasons to be optimistic

To counter the potential downsides of the increased tension, there are a number of good reasons to be positive despite the newsflow. With Covid-19 restrictions easing around the world, the headwinds from the Coronavirus pandemic are starting to subside, which should allow Western economies to continue to grow over the remainder of 2022. Apart from a small number of recent disappointments such as results announced by Meta (Facebook) and Peleton, corporate earnings have generally matched or beaten market expectations over recent months, and forecasted profits remain strong in many sectors of the economy.

Another reason for optimism is that markets have already fallen back over the last six weeks and may, to some extent, have already priced in some of the potential risk from further escalation of the Russian incursion.

Finally, the increased geopolitical risk could potentially lead central banks to take a more measured view over the pace of interest rates increases over the remainder of 2022. Markets would almost certainly view this in a positive light.

Volatility is part of the process

Global markets are digesting a regular stream of news from events in Russia and Ukraine, which is likely to lead to continued volatility in the short term. Volatility is a measure of how much an asset rises or falls in value over a given period of time, and all of our investment strategies focus on limiting investment volatility over the longer term.

It has been noticeable that volatility has not increased significantly over recent weeks and overall levels of volatility are significantly lower than levels seen at the beginning of the pandemic in March 2020. We see this as a positive sign that market participants are prepared to take a measured view of events.

Learning from the past

Many investors will clearly recall the market gyrations seen at the start of the pandemic just less than two years ago. We counselled clients at that time to stay calm and remain invested through the very high levels of volatility seen at the time. Of course, history tells us that this was a sensible course of action to take as global markets had recovered their losses by the end of 2020.

Similarly, we avoided recommending clients take action to try and trade the volatility seen at the time, and this remains our recommended course of action now. To quote an often used market adage “it is time in the markets, not timing the markets” that produces long-term returns.

Furthermore, investment should always be viewed as a medium to long term process, and investor focus should always remain on the longer term goals and outcome, rather than short term fluctuations in market conditions.

Review your portfolio

Diversification is a key part of our investment process, and for many investors should be a cornerstone of portfolio construction. Holding too much exposure to any one area or asset class can lead to greater than expected volatility, which can be reduced by spreading funds across a range of different assets, sectors and geographies. If your portfolio is not regularly reviewed, our experienced team at FAS would be happy to take an impartial review of your investments, to consider how they are invested and the level of diversification.

Stay the course

From a global security point of view, it is clearly unsettling to see the destabilising effects of the military action. However, when it comes to investment strategy we  recommend that investors remain calm and focused on the wider economic outlook. Naturally, the team at FAS will continue to monitor markets closely as the situation unfolds.

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

The value of investments and the income they produce can fall as well as rise. You may get back less than you invested. Past performance is not a reliable indicator of future performance. Investing in stocks and shares should be regarded as a long term investment and should fit in with your overall attitude to risk and your financial circumstances.

Investing for the future has taken on new meaning in this world of climate emergency, the continuing Covid-19 pandemic, and our growing awareness of how our actions might affect current and future generations. Environmental, social and governance (ESG) concerns now underpin many investment strategies, with the goal of minimising harm to the world and its people while also generating returns.

Investing in line with ESG practices is a rapidly growing area of the investment fund market. UK investors transferred almost £1bn a month on average into responsible investment funds in 2020. By the end of September 2021, the figure was £1.6 bn, up to two-thirds of total net retail fund investment in that month.

UK investors now have £85bn in responsible investment funds. Between September 2020 and September 2021, the sector saw 87% growth (versus 17% across funds overall), according to the Investment Association (IA).  So why now?

Three main factors are behind the move to ESG in the past few years:

• a bigger role by organisations such as the Principles for Responsible Investment;
• an improvement in ESG performance data and investor tools; and
• demand from ‘millennial’ investors, now aged 25 to 41, mid-career, and inheriting the reality of climate change and social unrest (87% of high net worth millennials invest based on a company’s ESG record).

In the last year, the Covid-19 pandemic and the COP26 summit in Glasgow have both led to greater interest in the responsible investment agenda.

Performance

Ethical investing was once positioned as a choice of principles over returns. A shift in global policy and advances in technology mean responsible funds now consistently outperform non-ethical equivalents. So, one of the traditional arguments against investing with conscience has all but disappeared.

Analysis of funds covering 23 comparable sectors found in the 12 months to 1 July 2021:

• Ethical funds had produced an average overall return of 19.87%.
• The average return of funds outside the ethical category was 17.89%.
• At a sector level, ethical funds outperformed on average in 13 of the 23 sectors.

Defining ESG investment

ESG investing is about choosing to consider the treatment of the planet, people and management structures in order to receive financial returns in a way that is aligned with personal ethics and concerns about the world. This may mean:

• avoiding certain sectors;
• excluding specific companies; or
• picking a theme with personal importance and investing in projects trying to achieve particular goals or change.

ESG investing lets investors align the way they use their money with their principles, often as part of a lifestyle of ethical consumerism that considers the supply chain of everything we use, from plastic waste to modern slavery.

Future-proof investing

Global sustainability challenges are forcing us to rethink traditional ways of working and living. Companies that once looked like solid and stable investments now face new risks to their profits, including from:

• food shortages;
• drought;
• rising sea levels and floods;
• conflicts over resources and land;
• data privacy

ESG investing is considered a way of future-proofing returns by investing sustainably, choosing industries concerned for both people and the planet, in order to make long-term profits.

Example: Cleaner energy electric vehicle (EV) sales are expected to grow globally by 27% a year between now and 2030. Add in remote updates to EV functionality and entertainment, and investors get dual returns: consumer demand for less harmful products, and software subscription deals

Your values

Matching investments to your values means deciding what is most important to you. You may need to compromise to achieve all your goals.

The pandemic has made a larger number of investors look at ESG criteria more closely in the context of intergenerational planning and wealth transfer. In a recent survey from Prudential, 61% of participants said they now care more about the environment and the planet than they did before Covid-19. One in five are more worried about ESG issues now they have children or grandchildren.

The report found an increased appetite for ESG investing among:

• 60% of millennials;
• 44% of Gen X;
• 35% of baby boomers; and
• 45% of all investors now only want to invest in sustainable companies and funds.

However more than a third (36%) of UK adults admit they do not know where their current investments, including workplace and private pensions, are invested.

While interest in ESG investing has increased across the board, a generational divide exists over priorities when it comes to choosing investments. Climate change is a more pressing issue for older high net worth individuals, with 55% ranking it their top ESG issue. Social and governance issues ranked lower; only 9% put diversity among their top three ESG concerns.

Younger investors in the 18 – 34 range, however, prioritised social issues.

• 45% said diversity should be companies’ top priority;
• 64% judged companies by their responses to Covid-19; and
• 60% were concerned by unequal financial and social hardship caused by the pandemic.

This divergence of opinion in ESG investing has the potential to cause friction for intergenerational financial planning. A good financial planner can guide you on how best to find compromise for children or grandchildren.

Pitfalls

While ESG investment is currently experiencing a positive surge, as with every strategy, there are some key issues that investors should bear in mind.

To cash in on the ‘green pound’, and jump on the bandwagon of demand for ethical investments, some companies are rebranding as ESG-focused in a way that’s not entirely honest.

Some ESG funds take a liberal view of what they allow to make it easier to achieve returns. This ‘greenwashing’ can make it hard for ordinary investors to choose genuine ESG investments.

Greenwashing can be cynical marketing, or it can be an oversimplified view of a company or sector that fails to take into account hidden ESG risks. Examples include:

• Fishing, once seen as ‘green’ versus meat, is the largest contributor to ocean plastic.
• Soybeans are the second largest driver of deforestation after cattle, a fact largely hidden from investors in ETF indexes.
• The Australian government found modern slavery of Uyghurs in the supply chains of at least 82 well-known global brands.

Remember, just because a company, project or fund is marketed as ESG or ethical or sustainable doesn’t necessarily mean it will turn a profit or achieve anything worthwhile.

How we can help

When researching ethical investment funds for client portfolios, we believe in asking the same clear-headed questions of an ethically focused fund as any other potential investment:

• What is it doing better than its peer group?
• What growth has it achieved and what is it doing to achieve more?
• What problem is it solving and how is it measuring its success at that?
• Is it good value for money?

At FAS we can help you to understand how to translate the values that are most important to you into a suitable ethical investment portfolio that reflects your principles and financial goals.

So, if you wish to create a financial plan based on your wishes to build and pass on long-term, sustainable investment returns to your children and grandchildren, speak to one of our experienced financial planners who can help you to embrace the world of ethical investing.

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

The value of investments and the income they produce can fall as well as rise. You may get back less than you invested. Past performance is not a reliable indicator of future performance. Investing in stocks and shares should be regarded as a long term investment and should fit in with your overall attitude to risk and your financial circumstances.

Compared to the positive market returns enjoyed last year, 2022 has started in a turbulent fashion, with investment markets seeing selling pressure over the first three weeks of the year. Despite the increase in volatility, we feel this is, once again, a time for investors to stay the course.

Since the new year, the mood in investment markets has darkened, with risk assets seeing falls across the board. The catalyst for this weakness is a combination of a number of factors, rather than being the result of a single defined cause. Inflation is remaining stubbornly high and indeed increasing across developed economies. Higher energy costs, increased costs of shipping, scarcity of components, and labour shortages are all feeding into uncomfortable inflation readings. The actions taken by central banks to combat inflation will be watched more closely than ever, although we would hope that the Federal Reserve and Bank of England will continue to take a measured approach to higher prices, and continue to offer markets forward guidance of the path they expect to take.

On top of the concerns over inflation, the tense situation between Russia and Ukraine is also spooking investors. The threat of conflict is rarely taken as a positive by markets, as the risk and potential economic fallout is hard to quantify. In this case, a further concern is the potential disruption to European energy supplies.

Whilst Covid-19 measures are easing in the UK, it is important to note that this is not the case around the World. Omicron variant numbers remain high across the US and Europe and it would be unwise to write off the potential for Covid-19 to wreak more economic damage.

Taking these factors into consideration, it is perhaps not surprising to see markets take a step back in the short-term. It is, however, important to remember the speed at which economies and investment markets have recovered from the worst effects of the Covid-19 pandemic, almost two years ago. 2021 saw gains from most asset classes and sectors, with only a few exceptions, and irrespective of the factors dominating market attention at the present time, a pause for breath and consolidation was always likely to happen.

Despite the gloomy picture painted above, there are reasons that investors should remain positive. Corporate earnings have, by and large, held up very well, and given the waning impact of Covid-19, supply chain issues – which have been ongoing since the start of the pandemic – should begin to ease. Not only will this help industries from many sectors of the economy, but may also help ease some of the inflationary pressures later on in the year. Companies remain cash rich and further merger and acquisition activity remains likely. This is often seen as a further sign of confidence.

Unlike the very high levels of uncertainty seen at the start of the pandemic, we do not believe the price action seen during the first trading days of 2022 is a matter for great concern. Whilst our view could change as events unfold, the global economy is in a better place than it was two years ago, and in any prevailing market conditions, there are always investment opportunities to explore that could lead to outperformance.

Bouts of higher volatility, as we are seeing currently, are not comfortable, but are an essential part of the investment process. In conditions such as those being experienced currently, our recommendation to clients is to remain invested in a diversified portfolio of assets, which offers allocation to a range of asset classes and good geographic spread. It is also worth noting that returns on cash are deeply negative due to elevated inflation and unless central banks take dramatic action to increase base rates, which we feel is highly unlikely, cash returns may well remain deeply disappointing for the foreseeable future.

As always, the team at FAS remain vigilant to the prevailing conditions, and remain on hand to discuss market conditions with our clients. If you are interested in discussing the above with one of our experienced financial planners, please get in touch here.

The value of your investment and any income from it can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.  The value of tax reliefs depends on your individual circumstances. Tax laws can change. The Financial Conduct Authority does not regulate tax advice.

Cryptocurrencies are regularly in the headlines and growing in popularity, but are they really investments?

Cryptocurrencies, of which Bitcoin is the most famous (or notorious, depending on your viewpoint), are not currencies in any practical sense of the word.

Think of the pound in your pocket:

• It has the backing of a state-owned central bank;
• its value is stable, give or take the longer-term impact of inflation; and
• it can be easily used in any financial transaction as a method of payment.

Source: Investing.com

According to the Financial Conduct Authority (FCA), in the UK, 2.3 million people own some form of cryptocurrency, with an average holding of about £300 – meaning that cryptocurrencies account for about 0.1% of UK household wealth. Other research shows ownership to be concentrated largely among Generation Z – 45% of 18–29-year-olds have placed some money in cryptocurrencies and half of those have gone into debt doing so. However, 10% of cryptocurrency holders in the UK are over 55, with potential inheritance tax and legacy issues for their estates.

Many of these new investors may believe these virtual currencies are socially as well as personally beneficial. But with the huge amounts of energy required in cryptocurrency mining just one area of controversy, they may not be simply a benign option for those seeking to sidestep traditional investing.

HMRC has recently entered the fray, seeking to contact holders of crypto assets to remind them that they would owe tax on any profit from disposal of cryptocurrencies, whether from sale, exchange, or where used for goods or services in the limited areas available.

Some cryptocurrencies called stablecoins, such as Tether, aim to have a fixed value (often linked, ironically, to a traditional currency). However, most cryptocurrencies have anything but a stable value, as none have central bank backing and it can be difficult or near impossible to buy anything with them.

Despite these factors the cryptocurrency market has grown at a breakneck pace: over the last five years to November 2021 its value has increased from USD $16 billion to USD $2,600 billion. The FCA does not directly regulate cryptocurrencies. However, UK cryptocurrency businesses are required to register with the FCA and comply with money laundering rules. The regulator makes clear in its consumer guidance (see fca.org.uk/consumers/cryptoassets) that:

• Cryptocurrencies are regarded as “very high risk, speculative investments”;
• purchasers are unlikely to be covered by the main investor protection schemes; and
• if you choose cryptocurrencies, “you should be prepared to lose all your money”.

Scams, particularly using social media and involving offshore companies, are another high risk of the cryptocurrency market. One international scheme, the subject of an in-depth podcast investigation, operated in over 175 countries to the tune of $4 billion but turned out to be a complex scam with the founder still apparently unaccounted for.

As the Bitcoin graph shows, it is possible to make – and lose – large amounts in cryptocurrencies. With the development and growing popularity of app platforms making ‘trading’ and tracking more accessible and convenient, you may be tempted to join in. But be warned – other, less exotic, and better regulated investments could well be a wiser choice. As always, if you wish to discuss in more detail, please give us a call.

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

The value of your investment and any income from it can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.  The value of tax reliefs depends on your individual circumstances. Tax laws can change. The Financial Conduct Authority does not regulate tax advice.

As 2021 draws to a close, investors can look back on a year that still presented challenges, despite conditions being much more benign than those experienced a year earlier. Following the very sharp recession seen at the start of the pandemic, we have witnessed a broad based economic recovery, fuelled by continued economic support from central banks and governments, which has continued to provide markets with the confidence to move forward.

At the time of writing, the S&P500 index of US shares stands 27% higher than at the start of the year, whereas the FTSE100 stands 12% higher. These increases have built on the strong returns seen during the latter part of 2020. Whilst most investment markets are higher than at the start of the year, there have been areas to avoid. Chinese markets, weighed down by concerns over the debt-laden property sector and government policy, have fallen throughout the year, despite a modest recovery seen over recent weeks. The safest government bonds have also seen disappointing returns, as inflationary pressures bite.

Compared to the wild swings in sentiment seen during 2020, this year has seen more stable conditions for investment markets. Apart from some volatility around the time that the Omicron variant was discovered, investment markets have sailed through much calmer waters than was the case a year ago.

As we progressed through the year, investor attention began to shift away from the pandemic, and the increasing rate of inflation being seen in Western economies became the primary concern. In the UK, the Consumer Price Index hit 5.1% in the 12 months to November 2021, the highest level for a decade. We are not alone in facing higher inflation, with the prevailing rate in the US standing just short of 7% per annum. A number of factors have contributed to the increase in inflation – demand for goods such as building materials and microchips has outstripped supplies, and the cost of shipping goods has also risen sharply. We have all felt the impact of higher gas and electricity prices, and food prices also continue to rise. Spare capacity in the labour market may also lead to modest levels of wage inflation, as certain sectors, such as hospitality and logistics, struggle to hire employees.

The heightened rate of inflation is unlikely to be welcome news for many. Whilst higher rates of inflation are helpful in eroding levels of debt, for households struggling with increasing energy costs, and for those individuals holding cash savings, these are painful times. Central banks would ordinarily be looking to increase interest rates at this point in the economic cycle, to combat the higher rates of inflation. However, they need to tread carefully to avoid damaging the fragile economic recovery. Taking away the support and raising rates too quickly could reverse the economic gains achieved since the height of the pandemic, whereas leaving rates on hold for too long could stoke inflationary pressure further.

The Bank of England was the first to jump, raising rates from 0.10% to 0.25% this month, and we expect most Western central banks to continue raising rates during the course of 2022. The pace of these rate increases is likely to be a key factor in determining how markets perform during the course of the year, and clear forward guidance – such as we are seeing now from the Federal Reserve – will be needed to avoid markets being spooked by unexpected changes in policy.

So where do markets go in 2022, and what is in store for the coming year? Firstly, the emergence of Omicron reminds us that sadly the pandemic is not over. Investors have faced continued uncertainty in the face of the virus since March 2020, and it is becoming clear that Covid-19, and the actions taken by governments to combat the spread, is once again going to dominate market sentiment as we head through into the New Year. As we have seen over recent weeks, governments around the world appear to be keen to avoid the kind of restrictions that could deal a substantial blow to the economic recovery, but they need to balance this with the need to protect public health.

The actions of central banks will also likely have an influence on market confidence. The rapid rise in inflation may well remain a headache for policymakers throughout next year, and tough decisions on removing key support that has been in place since the start of the pandemic could have negative consequences. Inflation may well start to moderate as we move through the next 12 months, although we suspect prevailing inflation rates will stay a little higher for longer, placing further pressure on central banks and savers.

We will be watching corporate earnings closely as we move through into 2022. By and large, profits have held up well and in some sectors have exceeded expectations this year. We do, however, need to be mindful that the valuations of some sectors of the economy are now looking a little expensive.

Finally, in contrast to the calm conditions we have seen through this year, we may well see a little more volatility return as a result of Omicron and the key interest rate policy decisions that will need to be taken. For this reason, 2022 could well be a year when paying careful attention to asset allocation, and maintaining good levels of diversification, are crucial to navigate the prevailing conditions successfully. Rest assured we are here to provide guidance and reassurance whenever needed.

If you are interested in discussing the above with one of the experienced financial planners at FAS, please get in touch here.

May we take this opportunity to wish you a peaceful, happy Christmas with good health and prosperity in 2022!

This content is for information purposes only. It does not constitute tax planning or financial advice.

Over the years, governments have introduced, and then replaced, a variety of schemes to stimulate investment in new and small businesses. A key feature of all these schemes has been some type of tax incentive. The Treasury views these tax sweeteners as a necessary cost to attract ‘patient capital’ from private investors. The net result is that today the rules governing the three current schemes – venture capital trusts (VCT), enterprise investment schemes (EIS) and seed investment schemes (SEIS) – are highly complex. Before embarking on investment in any of this trio, it is crucial to understand the constraints that surround them, the inherent risks, as well as the potential rewards.

Relief on investment

All three schemes – VCT, EIS and SEIS – offer income tax relief on the initial investment into new shares, with VCT and EIS providing 30% relief, and SEIS offering 50% relief. These reliefs are subject to a number of conditions, primarily being the minimum holding periods. VCTs need to be held for at least five years and EIS and SEIS for at least three years, to avoid the relief given on investment being clawed back on disposal. In addition, it is important to note that income tax relief can only be obtained on income tax actually paid.

Over recent years, this income tax relief offered has become a key attraction for many high-income investors who find their scope for pension contributions has been constrained or eliminated completely by the reductions in the pension lifetime and annual allowances.

HM Treasury does not give tax relief without good reason. In the case of VCT, EIS and SEIS, that reason is the risk that the investor is expected to accept. This was underlined by a change to the legislation for all three schemes introduced by the Finance Act 2018. Broadly speaking, any underlying company in which investment is made must now satisfy a “risk to capital” requirement. For investments in companies that qualify for relief, the investment needs to demonstrate that the company has objectives to grow and develop over the long-term, and there needs to be a risk that there could be a loss of capital to the investor of an amount greater than the tax relief provided.

The aim of this test is to prevent low risk, growth-averse companies from being established solely for the purpose of accessing the tax reliefs available. It has had the desired effect, with VCT and EIS providers regularly reminding investors that the returns are likely to be more volatile than before the 2018 change.

Other tax incentives

In addition to the income tax relief on a qualifying investment, VCT dividends are tax-free and many VCTs focus on returning capital to shareholders through the payment of regular and special dividends. EIS and SEIS investments qualify for business relief after being held for 2 years’ ownership. This grants the shares in EIS and SEIS exemption from inheritance tax, as long as the shares are held until death. EIS also offers investors the ability to defer capital gains tax charges for gains made between 3 years before to 1 year after investment.

Risk to capital

It is important to acknowledge that investment in any of these schemes involves holding shares in very small and fledgling companies. These companies are seeking capital to help them grow, and whilst there are substantial success stories where exceptional returns have been achieved, the risk that these companies fail to deliver is also considerable. By way of example, companies that qualify for VCT funding need to hold assets of less than £15m at the time of investment and have fewer than 250 full-time employees (or 500 for so-called “knowledge-intensive” companies). SEIS qualifying companies are much smaller still, with the company needing to hold gross assets of less than £200,000 and have fewer than 25 full-time employees.

An additional risk is the fact that these investments can be hard to sell once the minimum holding period has elapsed. VCTs are listed on the London Stock Exchange (LSE), but trading in smaller issues can be thin, partly because of the tax relief clawback rules. That being said, VCTs normally offer a buyback route, where the shares are re-purchased by the company at regular intervals, at a discount to the underlying asset value. EIS and SEIS investments are not quoted on the LSE, and disposing of these unquoted investments relies on finding a buyer for the shares, which can take some time.

The importance of advice

It’s necessary to point out that VCT, EIS, and in particular SEIS investments involve a higher level of investment risk when compared to the likes of other equities, bonds and cash. The potential returns, of course, can be higher than those provided by more traditional asset classes, and the various tax incentives are attractive.

Selection of the appropriate investment is vitally important, as there can be vast differences in performance between individual VCT and EIS funds. Different investment approaches are also taken, with some focused on a specific area or field, and others being more generalist in nature. For this reason, you should always discuss this with one of our experienced financial planners first to ensure that any VCT or EIS investment sit appropriately within your investment risk profile, time horizon, and your other assets and investments.

If you are interested in discussing your VCT, EIS or SEIS investments with one of our experienced financial planners at FAS, please do get in touch here.

This content is for information purposes only. It does not constitute investment advice or financial advice. 

The use of trusts to protect the wealth of a person (or a family), and to pass it down to their beneficiaries has been commonplace in Britain since the Middle Ages. In olden times, before knights set off to battle in The Crusades, they would create a trust to protect their financial interests and ensure their wives and children would be looked after.

While the use of trusts has long been associated with only the very wealthy, trusts have a wide number of uses and are still used today to solve a variety of financial issues, such as mitigating inheritance tax, providing income or a home for a spouse, preserving family wealth, investing for children or grandchildren, or making care provisions for vulnerable relatives. As a result, thousands of people each year are appointed as ‘lay’ trustees, and there’s also a thriving industry of professionally appointed trustees.

What are the responsibilities of a trustee?

Whether a lay trustee or a professional, whoever is appointed as a trustee owes duties of honesty, integrity, loyalty, and good faith to the beneficiaries of the trust. They must act exclusively in the best interests of the trust and be actively involved in any decisions. The general duties of trustees include:

• To observe the terms of the trust, and follow any duties and directions set out in the trust deed
• To act impartially when dealing with one or more beneficiaries, and balance competing interests
• To keep records and accounts for the trust and provide information when required
• To act unanimously, carefully, and to distribute assets correctly

What duties do trustees have when investing trust funds?

Trustees also have clear and specific responsibilities when it comes to managing investments, which centre on following the duty of care towards beneficiaries and acting in their best interests. For example, while in most instances trustees are able to invest in any type of asset (unless the trust deed specifically restricts some investments), the trustees must consider the purpose of the trust, and – most importantly – the needs of the beneficiaries when establishing the investment policy.

Choosing the right investments

A trustee also must, from time to time, review the investments in the trust and make sure they are still appropriate. This is often the area of responsibility that lay trustees and indeed professional trustees overlook. In our experience, it’s all too common that after a trust is set up and investments are made, the continued monitoring and oversight of the investments is forgotten about. Not only is this ignoring the responsibilities of the trust, but if investments are left alone and underperform over several years, the loss of capital could have disastrous consequences for the beneficiaries.

What are the risks of not doing anything?

If you have been appointed as a trustee, you could be liable if beneficiaries feel that the trust has been mismanaged and this includes the investment decisions made. Ultimately, this could lead to a trustee being taken to court by the beneficiaries to recover any amount of money lost due to trustee negligence or mismanagement. It’s important to note that a lay trustee who is not acting in a professional capacity is just as liable as a professionally appointed trustee.

Therefore, anyone appointed as a trustee – professional or otherwise – has a personal responsibility to take advice that ensures funds placed in a trust have been appropriately invested, and that the funds are monitored and regularly reviewed.

Can people get help with their duties as a trustee?

Managing a trust can be complicated at the best of times. It’s important to keep up with the rules relating to trusts, as well as any new legislation that crops up. The good news is that trustees can get professional help from financial planners, accountants, and solicitors. When it comes to managing investments, we think it’s in the best interests of the beneficiaries and the trustees that advice is sought – and taken – from professional financial planners like us. We can help to make sure the investments held in the trust are on course to meet their objectives, and we can carry out other key tasks, such as ensuring the trust is properly structured, and that investments are tax-efficient and well diversified where necessary.

Acting as a trustee is a privilege, but it doesn’t also have to be a burden, provided trustee responsibilities are carried out as fully as possible. Where necessary, it’s a good idea to take professional financial advice before making decisions – particularly investment decisions – on the trust, and to ensure regular reviews are carried out.

If you are interested in discussing trust arrangements with one of our experienced financial planners at FAS, please get in touch here.

This content is for information purposes only. It does not constitute investment advice or financial advice.

After a horrible 2020 for dividend paying companies, this year has been an encouraging return to form. Investors can’t afford to ignore the benefits of reinvesting dividends.

Good news: the COVID-induced dividend drought appears to be over. After a terrible 12 months, when most dividend-paying companies in the financial services, property, and oil and gas sectors were forced to suspend or drastically reduce dividend pay-outs to shareholders, 2021 has seen a sparkling recovery.

Dividends are usually considered to be a good sign that a company is doing well, and has plenty of spare cash in the bank. But the UK’s reputation for dividend payments took a battering during 2020 thanks to the COVID-19 pandemic, forcing companies to take widespread and often drastic measures to keep operating during a period of uncertainty. As a result, last year the FTSE 100 average dividend yield for 2020 overall ended up at a significantly lower 2.98%, and total dividends paid to investors fell to £61.4 billion. However, stockbroking firm AJ Bell expects FTSE 100 dividend payments to bounce-back to an impressive £85.1 billion this year, just short of the record-breaking peak of £85.2 billion in dividend pay-outs set in 2018.

Dividend tax is on the increase

Of course, the downside is that the government has now introduced a 1.25% increase in dividend tax to help pay the bill caused by COVID-19, and to increase spending on health and social care. As a reminder of the government’s tax plans, investors can still earn up to £2,000 in dividends before they are liable for any tax. But beyond that threshold, basic rate taxpayers can expect to pay dividend tax at a rate of 8.75% from the 2022-2023 tax year. Higher rate taxpayers will see their dividend tax rate increase to 33.75%, while additional rate taxpayers (earning more than £150,000) in England will pay dividend tax at 39.35%. It’s worth remembering that investors do not pay any dividend tax on money invested in an Individual Savings Account (ISA), which is why it’s essential to always use up your tax-free ISA allowances.

Why it pays to reinvest dividends

Dividend paying companies are very attractive within any investment portfolio, but you don’t have to collect the regular dividend payments. In fact, it’s well worth using the dividends instead to purchase additional shares – which in turn also pay out future dividends. This is known as the power of compound interest.

Here’s a quick example to show what we mean. You buy 100 shares in a company at a cost of £1,000. The company pays a dividend of £6 every year for ten years. Instead of pocketing the cash, you reinvest your dividends and you use the money instead to buy more shares in the company. As time passes, a dividend reinvestment strategy starts to become the largest contributor to total return. The more dividends you reinvest, the higher your future dividend payments.

Take the following example of the FTSE100 index over the last 20 years (see graph below). The red line shows the pure performance of the index, not taking any dividend income into account. As you can see, the index value has increased by more than 40% over the last 20 years.

However, this performance is a fraction of the total return achieved over the same period, when dividend income from the FTSE100 constituents is reinvested. You can see the total return including reinvested dividends, shown in blue, has returned 193% over the same 20 year period, almost five times the return of the raw index.

The effect of compound interest on reinvested dividends is more powerful the longer you invest, as it multiplies the available returns on the original investment. Over time, the dividends reinvested in the early years have the largest impact on total returns, and you stand to benefit not just from the increased value of the company’s shares, which may fluctuate over time, but also from the larger shareholding as you’ve used the dividend proceeds to buy more shares, which means more dividend proceeds, and so on. It’s a great way to increase the value of your investment without lifting a finger.

Last thoughts

Of course, dividend payments received by investors are still liable for dividend tax, even if they are automatically reinvested. But for the time being, investors still have a dividend allowance of £2,000, which means for the first £2,000 of any dividends you receive you don’t need to tell HMRC or record the dividends on your self-assessment form.

If you’re unsure whether your investments will mean you pay dividend tax, please get in touch. We’d be happy to provide you with a report on your dividend situation, as well as recommending ways to get the most out of your tax-free allowances. You may not be able to avoid paying dividend tax, but we can help to make sure you get the best value from the dividends you earn on your investments.

If you are interested in discussing your investment strategy with one of our experienced financial planners at FAS, please get in touch here.

This content is for information purposes only. It does not constitute investment advice or financial advice. 

Investment Pathways for Retirement Planning is a new initiative launched by the Financial Conduct Authority (FCA) in February 2021, designed for people who wish to draw their pension under a Drawdown arrangement, without first obtaining regulated financial advice. As we will explore, one size does not fit all, and forging your own bespoke path, whilst taking ongoing advice, may well lead to better outcomes.

Taking a flexible approach

Flexi-Access Drawdown is an alternative to the purchase of an annuity, which provides much greater flexibility in terms of how income is drawn in retirement. It is increasingly popular, as it can offer the potential for individuals to use their pension savings to best fit their needs and objectives, but unlike a pension annuity, does not provide a guaranteed income for life. As the pension fund continues to be invested throughout retirement under Drawdown, investment decisions and careful management of the fund are critical components of a successful Drawdown approach. Personal responsibility for the long-term viability of the pension drawdown plan rests with the pension holder, hence the importance of receiving initial advice on the level of income drawn and investment options, and reviewing the plan regularly to ensure that it continues to meet the initial objectives.

Choose a Path?

The idea behind Investment Pathways is to create four default investment routes for individuals who have already taken Tax Free Cash from their pension, leaving the remaining funds in Drawdown. The FCA hope the initiative will reduce the number of individuals, who decide to enter Drawdown without receiving advice, making poor investment decisions, such as leaving significant funds in Cash for the long term, or taking excessive investment risk.

Four Paths have been defined, with the first being aimed at those who have no intention of drawing an income in the next five years. This strategy is largely aimed at growth over the medium term. The second Path is designed for those who wish to purchase an annuity in the next five years and will aim to preserve capital. The third is for those who are considering drawing income in the medium term and will aim to provide a balanced approach. The final Path is for those who are looking to draw the full value of their pension in the next five years, and again aims to preserve the capital value.

For each defined Pathway, pension providers will produce a ready-made investment portfolio which aims to meet the objective of the Pathway, which is where we feel the proposals may begin to fall short of their objectives.

The majority of providers offering these Pathways are using a single passive investment fund, with no ability to vary the investment options within the Pathway selected. This limits the scope for an individual to select alternative funds within an individual Pathway, or to access funds that meet their own preferences, for example, to invest in a socially responsible manner.

Bespoke is best

But more importantly, the Pathways do not take into account an individual’s financial circumstances, objectives or attitude to investment risk. This is a vital element of the advice process that is missed by using this automated approach. Take an individual who prefers to take a cautious approach to investment as an example. They choose the third of the fourth automated pathways, as they are considering drawing income from the pension in the next five years. In this scenario, they could experience an increase in investment risk and volatility over their existing arrangements they held before entering the Pathway approach, which they may not be aware of, or may be contrary to their wishes.

Conversely, an individual who chooses the Pathway towards taking the full value of their pension in the next five years (option four) would be placed largely in a Cash fund with most providers, where negative real returns are more than likely to be achieved when charges, and the eroding effects of inflation, are taken into account. We don’t imagine someone who is planning to draw their fund out in five years’ time will be pleased to be missing out on the potential for investment returns over this period, even if they were taking a cautious investment approach.

Tailored to your needs

We understand the Regulator’s concerns. Without proper advice, individuals could leave their pensions in Cash over the longer term or take excessive risk with their pension arrangements, neither of which are likely to be appropriate. However, we feel that Investment Pathways are too rigid and inflexible for most individuals with at least modest sized pension plans, who are considering Flexi-Access Drawdown as an approach to retirement planning. For these individuals, we believe that Investment Pathways are no substitute to taking an alternative path, via independent advice, that is tailored to their own circumstances and objectives. Furthermore, regular reviews of any Drawdown are of high importance, to ensure the approach remains appropriate to any future change in circumstances.

If you are considering your retirement planning and would like to discuss your options with one of our experienced financial planners at FAS, please get in touch here.

This content is for information purposes only. It does not constitute investment advice or financial advice.