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October 2020 Economic Update

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All views expressed in this article are those of the author Roger Martin-Fagg and do not necessarily represent the views of Ellis Bates Financial Advisers.

In this update I will continue to give evidence for my optimistic outlook. I do understand that many of you will consider my assessment as unrealistic. I see my purpose as giving you the facts insofar as we know them and then it is up to you to decide on the future progress of our economy and your role and response within it.

As far as I am able to discern currently the infection rate in the EU and the UK is rising. The much vaunted R is above 1 but not yet 2. The predicted second wave is upon us. There is increasing evidence that if an individual is reasonably fit, not overweight, exercises in the fresh air and sunlight they will not die from CoVid 19. They will feel ill, and like flu it is unpleasant but not life threatening. However if they are significantly overweight and have underlying health issues then the risk of becoming very ill and possibly dying rises with age. 90% of deaths have been those who are old and unhealthy.

The issue for the Government is how far to go with lockdown and isolation for the majority to protect the most vulnerable. It is a very difficult judgment to make. There is growing evidence that if there are sufficient hospital ICU beds available, care homes have the necessary support and there is an effective track and trace system then the balance should be in favour of letting the nation get on with normal life.

I believe public opinion is skewed by the mawkish media who seem to revel in portraying the suffering of the unfortunate few. And most people will have a story of a friend who has suffered. But equally they will know of friends who only suffered mild symptoms. If we look at the experience of our European neighbours, Italy stands out as the least affected by the second wave. And it would seem this is because of an effective test and trace system.

My guess is that we will not have a national lockdown but there are and there will continue to be local restrictions applied. The 10pm curfew is clearly an error and I suspect it will be dropped. A well-run pub or restaurant will be a much safer space than a large household with plenty of alcoholic refreshment. And why is anyone surprised that there are spikes in infection when schools and universities reopen?

All that follows assumes no national lockdowns in the UK and the EU.

Basically the economy is all about how much money is created by banks and how quickly that money changes hands as individuals buy stuff and pay debts. If we begin with how much money is being created the numbers are staggering in their magnitude.

The money supply in the USA is expanding at nearly 4x the normal rate.
In the EU it’s 2x normal.
In the UK it’s 3x normal.

Globally the monetary stimulus is 17% of Global GDP. This is a massive increase in potential purchasing power. If this had happened last year, the scribblers would be headlining “hyperinflation is on its way”. However, all this new money is not flowing through the system at normal rates. Anyone in the hospitality, travel, aerospace, public entertainment, sports and events industries will be suffering significant falls in customer spend and income. This is what lockdown, social distancing and the need to self-isolate causes. In addition the number of hours worked has reduced by around 15%. However thanks to furlough schemes incomes have fallen by less. So there is what is called an inflationary gap.

Graphic Illustration of an Inflationary gap

It is generally accepted that individual prices are determined by supply and demand at a point in time (think of eBay bids). The same can be said of aggregate demand and supply. If in the economy as a whole there is more spending power than immediately available goods and services, average prices rise, albeit with a time lag. The time lag exists because most prices of goods and services are not determined as they would be at an auction but are administered by companies who tend to mark up on unit cost after annual price reviews. The market which responds quickest (apart from commodities) is real estate. Over this next year thanks to Covid we will see central city commercial property prices falling and rural house prices rising. It is difficult to be accurate but I guess central city offices and shopping centres prices will fall 10-20%. And rural house prices rise 5-8%.

To reiterate: since March actual earnings have been higher than the volume of goods and services produced. The inflationary gap is because people have been paid whilst not producing.

In the UK an inflationary gap opens up whenever the money supply begins to grow consistently above 6% per annum. Its currently growing at 12% pa. The new job support measures are quite different; there is effectively no money without output. One would think the gap was closed, but it isn’t, the new money is in the system somewhere and it will get spent sooner or later. The Baltic Exchange freight rate for containers is a very good indicator of global trade volumes. The chart suggests strong demand from Northern European consumers for Asian goods. It is of course possible that container ship capacity has been reduced since March, but I imagine such vessels are probably the safest places to be assuming all the crew are tested a few days before embarkation. Global output is now only 5% below Jan 2020 levels.

Exports from China are rising at 10% year-on-year, the fastest rate for nearly two years. The reasons for all this are of course that since lockdowns were relaxed there has been a surge in consumer demand.
As I write this there is a high level of uncertainty for individuals and families and much discussion on the arrangements for Christmas!

If you are running a business you will have higher levels of cash than normal. You will be trying to guess demand, decide on how many employees you will need over the next years or so, and probably preparing for the worst but hoping for the best. The following data supports this view. The chart reflects the GDP performance of each country. Germany had the smallest contraction in Q2, the UK the largest at 20%. The question is what will happen to unemployment? Overall the average rate will rise to around 8% of the workforce. This means that 92% of the available labour supply will be gainfully employed. And it does not mean our economy and in particular the housing market will shrink. Although the media seem convinced otherwise.

From 1980-1989 the average unemployment rate was 8%, there were recessions at the beginning and the end of the decade, but the average GDP growth rate was 2.5%. It was a decade of blue collar unemployment as UK Manufacturing raised its productivity and either did well or ceased to exist. In the early Eighties the pound was overvalued by about 20% due to North Sea oil, so thin margin exporters failed. The deep-mined coal industry disappeared as low cost open cast Columbian and Australian coal was imported. Most of the unemployment was structural. This means the job was gone for good, and regardless of total spend in the economy would never return.

The unemployment we will experience over the next ten years will also be structural. This time it will be white collar jobs disappearing from the back offices of service companies. Smart systems are replacing legal clerks, HR personnel are being replaced by clever recruitment software; orders, dispatch and invoicing all automated. This has been around for at least 10 years but now it will be become generalised. The good news is many white collar workers have transferable skills, so an HR manager, with a bit of training, could design employment systems and processes. Covid is accelerating this change, along with how and where people work.

It is clear home working will be the norm for perhaps 40% of employees. And on the evidence to date is it is more productive. The central office will be reconfigured for more meeting/social interaction space and less rows of screens. New build housing will have to include studies, even if they are small. And for the professional couple, two study rooms or another in the garden will be seen as essential. In short we are entering a period of rapid change with reconfiguration of workplaces. This will create many new income streams for entrepreneurs who spot niches and act quickly to supply.

The example I particularly like is the massive increase in demand for domestic garden pizza ovens! I do not have one nor do I plan to but round here pizza parties for six are popular. The key point is these structural changes will increase GDP per capita so long as companies and employees embrace the opportunities.

The Housing Market

I read on a daily basis commentary which forecasts a collapse in house prices next year. Figures abound but the range is between minus 10% and 20% (the same forecasters predicted house prices would fall 7% this year, when so far they have risen by three percent!). The reason given is banks will be unwilling to lend and individuals unwilling and or unable to borrow because of actual or fear of job loss.

The banks know that their mortgage business is a Walmart operation: pile it high and sell it cheap. The margins are small so the volume has to be large and almost all the process can be automated. The losses on mortgage books currently are under one percent. Next year they may rise a bit but they will always be less than losses on lending to SMEs, which are likely to escalate. But with unemployment doubling the housing market will surely weaken, it’s obvious!

Well, no it isn’t.

Take a look at history:
House prices from 1980-1990 rose at an average annual rate of 13%. In the nineties unemployment steadily fell but house prices remained subdued on average growing at 3% per annum. The reasons are found in the behaviour of banks. In the eighties Barclays and NatWest were both determined to be the UK’s biggest banks, measured by total assets. Mortgages are nearly 60% of banks’ assets. So they slugged it out, and then Building Societies were allowed to become banks which meant they could start manufacturing money. Thus regardless of employment levels the wall of money was created.

In the early nineties Barclays and NatWest were close to insolvent due to reckless lending and the fall in interest rates reducing profit margins. Also Basle1 came into force which required them to be more prudent. I conclude that unemployment has little or no impact on prices but a recession does reduce the number of transactions. Assuming no national lockdown the UK economy will grow 10% next year despite job losses. Today’s money supply determines next year’s average house price. Money is virtually free and will remain so for the next two years. This means house prices next year will rise between 5 and 8%. For a change London will suffer but relatively depressed rural areas will boom. I accept that airport-dependent places such as Crawley and Luton will suffer.

Covid will do more to ‘level up’ between the regions than Government policy.

But you will say, this is all well and good, but it’s the deposit requirement which prevents youngsters from buying. Thanks to Covid many of the 25-34 year olds have been forced to save because of lockdowns. And many have had no commuting expense. And the bank of mum and dad has higher cash levels than normal. Why hold cash earning 0.1% when you can help a sibling get a house? If inflation doubles next year to 4%, the desire to buy property will increase. An inflating capital asset which is tax free. I rest my case.

Rising house prices increases consumer confidence via the wealth effect. Evidence suggests that households hold very little precautionary saving if their main asset is growing in value. Given the structural changes taking place, its likely half retail spend will be online by the end of 2021. The outlook for commercial property is a different ball game. Large sheds for online retail will still be in demand but city centre retail and office space will not. So we can expect both rent and capital values to fall on the latter. Some suggest by 20%.

Creative Destruction

An Austrian economist, E.F. Schumaker, was fascinated by innovation as a cause and effect in economic growth. He concluded that whereas inventions are random, innovations (which is an invention put to use) seem to cluster at particular points in time. We have known since 1922 that there are long waves in economic life which are around 50 years in duration. There are 30 years of above trend growth followed by 20 years of below trend. Its during below trend periods that clustering takes place and it is this which creates the next above trend wave of growth.

Since 2008 Western Economies have been below trend growth and Covid is accelerating technological change. There are many examples but the one I would like to mention is Quantum Computing. It is going to be the next big thing over the next 10 years. Google has already demonstrated a machine which within a few minutes made a calculation which would take thousands of years on current classical hardware. The ability to crunch masses of data at speed will transform everything in particular the application of AI and the Internet of Things.

BUT for success a large number of related and supporting activities have to be combined. This is why science parks next to Universities are so important and why silicon valleys exist. It is the combining of discrete activities which creates the wave. And destroys the old way of working. The resulting productivity gains simultaneously increase GDP per capita and structural unemployment.

The next 18 months:

Take a look at the chart. Normally the red line moves in line with the black line because when a bank lends it creates the money. When banks stop lending, as in 2011-2014, the central bank has to take over by creating new money which it uses to buy mostly Government debt. Covid has required more money than the commercial banks are willing to create so the Bank of England is creating it. We know so far Covid has cost £3k per person. None of this is funded from taxes, all of it has come from the Bank, in total just under £200Bn.

The crucial point is this is the equivalent of giving every citizen £3k to spend. Over the next 18 months I am convinced there will be another £1.5k per person spent by the Government and financed by the Bank. Remember debt = money. This is the largest economic stimulus we have seen since WW2.

Only when the new money is flowing freely through our economy will the Government claw some of it back through higher taxes. Next year Boris has to show the nation and the EU that the UK performs better outside the club than within it. Hence the stimulus will be maintained until higher growth is a reality.

There has been talk of negative interest rates, which is a system where you pay the bank to deposit money and they pay you to borrow. It is designed to stimulate bank lending and money creation. The chart above is clear: we do not need further monetary stimulus. So negative interest rates will not happen in the UK.

If inflation rises next year, will interest rates follow? No, because it is likely that the B of E will look at average inflation over a number of years before changing rates. The Fed has just adopted this approach in the USA. So money will be virtually free for the next 18 months.

The exchange rate illustrates how much political risk plays a role when the financial variables are similar. There will be a deal with the EU, so Sterling strengthens, then Boris says he will walk away and it weakens. Similarly with Trump’s utterances for the dollar.

I guess at a range of $1.30-1.38 and Euro 1.10-1.15 And as you can see I still expect strong growth next year. The IMF forecast is for global growth to be back at pre-Covid levels by the end of this year. Currently we are at 95% of pre-Covid output.

The performance of our economy over the next 18 months will depend on attitude. I am fortunate enough to be in touch with a range of SME owners in the UK. Their resilience, adaptability, and care for their employees is remarkable. And they are already trialling new business models with considerable success. As SMEs produce 60% of our national income their performance is critical. My optimism is the result of the attitude of these leaders: they do not whinge, moan, or give up.

They think, act, and create sustainable businesses. Some work in the hospitality sector and they are succeeding.  I do not believe in Boris’s bluster, but if the media would publish more good news stories I believe it would have a more positive effect on attitude in general. Finally, there will be a bare bones trade deal with the EU, neither side can afford not to, but the detail will take years to settle. And yes there will effectively be a border in the Irish Sea.

The Bottom Line: Why Shrewd Customers Use An Adviser | Independent Financial Adviser

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By Grant Ellis, Director Ellis Bates Group

Let’s face it – Financial Advisers have a bit of an image problem. In the public’s mind they probably rank alongside bankers, second-hand car dealers and estate agents in the trustworthiness stakes, and every investment fraud and mis-selling scandal that’s gleefully reported by the press does nothing to improve this. Then there’s the thorny issue of fees, and the anecdotal view that Adviser fees are unjustifiably high, and that they’re all simply out to line their own pockets at the customer’s expense.

So, is this image and reputation deserved? Should Financial Advisers be viewed with suspicion or is this all a myth? Let’s take a look at a few facts.

In 2017 the ILC-UK published its report The Value of Financial Advice, which quantified, for the first time, the real value of taking financial advice. The results strongly demonstrate the positive value of financial advice for consumers – both amongst those who are wealthy and those less well-off too.

The report concluded that those who were wealthy and took financial advice accumulated 17% more in liquid financial assets and 16% more in pension wealth than those who hadn’t consulted an Adviser. For those ‘just getting by’ the figures were even more dramatic – 39% more liquid assets and 21% more pension wealth for those who took advice; all more than enough to justify the fees charged by the Adviser.

Alongside demonstrating real value for their customers, evidence from this report also reveals that the experience of taking advice is highly satisfactory – 9 in 10 people were satisfied with the advice received with the vast majority deciding to go with their Adviser’s recommendation.

In December last year ILC-UK issued an updated analysis which not only reinforced their 2017 findings but in addition demonstrated that fostering an ongoing relationship with a Financial Adviser leads to even better financial outcomes. For example, those who reported receiving advice at both time points in ILC’s analysis had nearly 50% higher average pension wealth than those only advised at the start.

So, given this independent assessment, it begs the question why Advisers have such a poor image, and since advice has clear benefits for customers, why more people don’t seek it? The ILC-UK report sheds some light on this too.

The two most powerful driving forces of whether people sought advice were whether the individual trusts the Adviser providing the advice and that individual’s level of financial capability. Clearly therefore the more Advisers can demonstrate trustworthiness, the more likely they are to attract customers.

There are a number of ways you can assess an Adviser’s credentials – checking they are actually on the FCA register and how long they have been in business is a good starting point. The most effective check however is to ask their customers. Get the prospective Adviser to give you testimonials from satisfied customers along with the number and scoring of verified reviews they’ve had from clients.  At Ellis Bates Financial Advisers we encourage all our customers to leave a review of the service they have received with an independent review company. Check out the following link for more information https://www.ellisbates.com/about/reviews/

The International Longevity Centre UK (ILC) is the UK’s specialist think tank on the impact of longevity on society. The ILC was established in 1997, as one of the founder members of the International Longevity Centre Global Alliance, an international network on longevity.

Ellis Bates Financial Advisers are independent financial advisers with offices across the United Kingdom.  They specialise in active investment management of over £1 billion of assets on behalf of clients, who have given them a 4.9/5.00 score with Trustist. https://www.ellisbates.com/about/reviews/

For more information please visit their website www.ellisbates.com

Market Commentary – July 2020

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Navigating Change (Again)

“She stood in the storm, and when the wind did not blow her way, she adjusted her sails.” – Elizabeth Edwards

2020 has been interesting. To the end of June, year to date our Growth, SRI (Socially Responsible Investment) and Passive portfolios are effectively flat and ahead of benchmarks (and significantly also over 1 / 3 / 5 year timescales) although the journey has clearly been anything but steady. The Income portfolios have been more adversely affected as companies have reduced / cancelled dividends, while withdrawing forward guidance on earnings and income forecasts – effectively leaving a void where previously there was generally boring certainty and stability. Interest rates are verging on negative, oil futures in the US briefly went negative, the Federal Reserve is buying junk bonds, and in the UK, the government is offering £10 discounts on your meals out (Mon-Wed throughout August at all participating restaurants). I do not recall any of this being covered in my Economics A-Level back in the early 1990s. Some updated textbooks (digital of course) and theories will be needed for the current crop of home-schooled students.

Change is always fascinating and that is exactly what we have got. What the digital age ensures is that change is at a much-accelerated pace, and adoption of new technologies is often far quicker than anticipated, while necessity is still the mother of invention. This is demonstrated in the data from the Office of National Statistics (below) showing the sharp rise in “Non-Store retailing” (i.e. online) as the Covid-19 economic shutdown forced shoppers to opt for delivered goods and abandon reliance on traditional physical stores.

Figure 1: A sharp uplift to already increasing sales for non-store retailing during the coronovirus pandemic, while non-food stores and fuel show growth in May 2020 from the lowest levels on record in April

This change in purchasing behaviour is likely to be a continuing trend although the non-food and fuel sales will probably rise to a more normalised level while still falling ever further behind online activity. The adoption of all things digital and the move to a cashless society is likely to accelerate further which will present clear challenges and opportunities depending on the relevant business sector. This helps explain the drastic variation of fortunes in the outlook and share prices of various businesses over recent months, with exuberance and despair seemingly the two overriding moods of the markets.

The punishment for being in unfavoured sectors of the market has been brutal, and the UK stock indices have suffered more than most. In our own portfolios the bottom performing fund this year has been a UK focused income fund concentrating on smaller companies, while the top a global technology holding – with a 70% disparity of returns between the two over the first 6 months of 2020.  The economic data, as expected, has been appalling with the UK registering its biggest ever monthly drop in GDP in April (-20.4%) and the rise in unemployment levels globally seem set to escalate. The unprecedented steps taken by the Chancellor in the UK to support jobs highlights the concerns the government has about the inevitable impending increase in unemployment, particularly when the furlough support ceases and if further lockdown periods are deemed necessary.

However, there is some optimism that the recession may have already hit its worst, and while the return to previous levels of economic activity and employment may take considerable time, signs are that we are on an upward trajectory. Of the largest 12 global economies, 6 now have readings in excess of 50 on the Manufacturing Purchasing Managers Index – readings over 50 signal expansion. This supports some views that this will be a savage, but brief recession and while economic activity may recover quickly, the labour market globally may be more severely affected.

The continued role of central bankers and their “blank cheque” mentality is providing much needed liquidity in the markets and, potentially, supporting sentiment as the fastest correction in the S&P 500 in history was followed by its biggest ever 50 day rally. Jerome Powell, Chair of the US Federal Reserve, gave this unequivocal statement at his Congressional Testimony in June:

“The Federal Reserve is strongly committed to using our tools to do whatever we can for as long as it takes to provide some relief and stability to ensure that the recovery will be as strong as possible and to limit lasting damage to the economy. The Fed will continue to use these powers forcefully, proactively, and aggressively until we’re confident that the nation is solidly on the road to recovery.”

The mantra of “don’t fight the Fed” may be in play for now, but relying entirely on emergency measures from central banks and governments would be careless when perennial issues such as Brexit, the China vs US trade dispute and the small matter of a US election in November will add further uncertainty to the current situation. There is also the question of who is going to foot the bill for furlough benefits, SDLT holidays, and the endless monetary expansion that will create unprecedented levels of debt? Longer term there are implications, with the most material impact likely to revolve around whether prolonged low growth and deflation or inflation will be more prevalent. There are legitimate arguments for either outcome, but clearly the ramifications will be significant.

We are in a period of substantial change, and the mistake is to think that change is not normal – a simple glance through history shows it is ever present. While on an individual basis we grow accustomed to our own ways and preferences, humanity invariably collectively advances through forces of supply, demand and genetic desires that are impossible to rationalise into a simple formula. The combination of data-driven statistical theory aligned with the gloriously idiosyncratic behaviour of individuals is what makes the investment markets so fascinating and unpredictable.

One of the joys of investing is that occasionally when the wind blows a different way you can adjust your position if needed. The next 12 months will be intriguing as we adapt to different economic realities – but we will adapt and much of the change is merely accelerating the trends that were already in place. Given the increased uncertainties and extremes in valuations of various assets we believe adopting a well-diversified approach and incorporating the skills of some excellent fund managers will continue to protect and enhance our client’s financial wellbeing.

This is something we have done since we were established in 1980, and it is reasonable to assume our 40th year has given us, and our clients, a new challenge or two. We have addressed these in the same manner as all the others in the previous four decades by acting in the best interests of our clients, thinking of the long term, and dealing with reality. We are in a privileged position to have been trusted with safeguarding the futures of our clients and multiple generations of their families for 40 years – we look forward to many more in an ever-evolving world.

Please note any past performance mentioned is not a guide to future performance and may not be repeated. Any sectors, securities, regions and countries shown are for illustrative purposes only and are not to be considered advice, nor a recommendation to buy or sell.

Alan Cram – Investment Director
Ellis Bates Financial Advisers

The Big ‘Lies’ About Our Economic Prospects

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By Grant Ellis, Director Ellis Bates Group

In the spring of 2007 I hosted a conference for a group of insurance professionals. One of the most popular speakers was my old friend the economist Roger Martin-Fagg. He was his usual entertaining self, but took everyone by surprise by suggesting that the world economy was on the brink of a meltdown the like of which we had never seen before, and it was going to happen soon – probably within 12 months. Yes, he predicted the financial crash of 2008 a year before it actually happened.

Now in Spring 2007 the world economy was doing very nicely thank you. Following three consecutive years of good growth, averaging 3.8% it was expected to fall only slightly in 2007 to 3.6%. Meanwhile the UK was doing pretty well too. House prices had risen from an average of £150,633 in January 2005 to £184,330 in May 2007 – a rise of 22.4%, whilst wages grew by an average of over 5% per annum between 2004 and 2007. Inflation on the other hand was under control and only rose by an average of 3.25% in the same period. Furthermore, between 2003 and 2007 the FTSE All Share Index grew by 49%, so overall everyone was feeling pretty optimistic about the prospects for the future. No one, other than Roger was saying anything about a recession, never mind a full blown crash!

So, when Roger issued his dire warning, the overwhelming response was to laugh it off – in the same way that we would laugh at a soothsayer predicting the end of the world. Eccentric yes, and likely to happen eventually, just not anytime soon.

You can imagine that those of us who were there in 2007 are far less likely to write off Roger’s opinions now than we would have done previously.

I was therefore pleasantly surprised, and heartened to receive his latest Economic update, penned on 16 June. Once again he is at odds with the mainstream view, and indeed is critical of others talking world economic prospects down. He opens his piece by saying that the press is being irresponsible in the way it is reporting our economic outlook. His opening paragraph reads:

“Last weekend the Daily Telegraph had a banner headline: ‘Britain’s biggest ever collapse in GDP wipes out 18 years of growth’. This statement is completely wrong. I am concerned that individuals who are trying to make the right judgement call are being fed this nonsense. To be clear: 18 years ago our GDP was £1 trillion. It is now £2.2 trillion. The reduction in spending in April was 20% on the previous April. The monthly flow of spending averages £200bn. 20% of that is £40bn. The media, as we know, impact emotion and decision taking. That Telegraph article is therefore both economically illiterate and irresponsible.”

Wow! Hard hitting stuff. And the perpetuation of such comments is still evident a week later. In the Sunday Times on 21 June Sajid Javid is quoted as saying:

“We’ve seen a 25% fall in GDP in two months. To put that in some perspective, that is 18 years of growth wiped out in two months.”

And that’s from our erstwhile Chancellor of the Exchequer, who should be anything but economically illiterate!

In his update Roger goes on to suggest that, despite what the world and his wife are saying, we are not going to have a recession. Indeed, whilst he acknowledges that quarter 2 of 2020 will be significantly negative, he expects quarter 3 to be significantly positive, and predicts that the UK economy could grow by 8.5% in 2021, with the World economy back to 2.5% growth next year too.

His argument is that the fundamentals for a recession don’t exist in the same way as they did for previous recessions; rising prices and interest rates squeezing individuals and companies alike in 1979 and 1989, and banks stopping lending in 2008.  The common factor is a shortage of money available, and that’s not the case this time around. Households have seen a reduction in income, but a larger fall in what they’ve spent, and the UK Government is spending an extra £40bn a month pumping new money into the system, so no shortage here. Roger predicts a mini boom to take off in the next few months as a result of this excess cash in the system, with the only thing that could dampen it being the media reporting company closures, an increase in the R well above 1, and stories of mass redundancies.

I don’t propose to reproduce all Roger’s arguments here – you can read the whole article at https://www.ellisbates.com/news/june-2020-economic-update/ to get the complete picture, but I would say his reasoning and logic are very persuasive. And I for one would not bet against him. I also fully endorse his condemnation of sensationalist reporting in the media. They have to take more responsibility for the message they send out as, rightly or wrongly, people do listen to them. A more evenhanded and less melodramatic approach to reporting would benefit us all. After all, we all know the power of ‘fake news’ by now, don’t we?

Ellis Bates Financial Advisers are Independent Financial Advisers with offices across the United Kingdom. They manage over £1 billion of assets on behalf of clients, who have given them a 4.9/5.00 score with Trustist. https://www.ellisbates.com/about/reviews/

For more information please visit their website www.ellisbates.com

World Economic Situation and Prospects 2007 (United Nations publication, Sales No. E.07.II.C.2), released in January 2007 accessed on 21 June 2020

Office of National Statistics UK House Price Index, accessed on 21 June 2020
Office of National Statistics Wages and Salaries average growth rate percentage, accessed on 21 June 2020
Office of National Statistics RPI All Items: Percentage change over 12 months, accessed on 21 June 2020
Swanlowpark.co.uk FTSE 100 and FTSE All-Share since 1985, accessed, on 21 June 2020

June 2020 Economic Update

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All views expressed in this article are those of the author Roger Martin-Fagg and do not necessarily represent the views of Ellis Bates Financial Advisers.

Last weekend the Daily Telegraph had a banner headline: ‘Britain’s biggest ever collapse in GDP wipes out 18 years of growth’. This statement is completely wrong. I am concerned that individuals
who are trying to make the right judgement call on the future of their business are being fed this nonsense. To be clear: 18 years ago our GDP was £1 trillion. It is now £2.2 trillion. The reduction
in spending in April was 20% on the previous April. The monthly flow of spending averages £200bn. 20% of that is £40bn. The media, as we know, impact emotion and decision taking. That
Telegraph article is therefore both economically illiterate and irresponsible.

Over the past few months the BBC has occupied its 10 o’clock news slot with images of people who have died, are seriously ill, or extremely upset because they have lost loved ones to Covid19. There is little or no coverage of how SMEs are adapting their business model and successfully serving customers.

That lack of coverage could persuade people that things are going badly wrong in the British economy and that recovery will be a long and difficult process. That is not my view. And it is not the case.

In this update I want to convince you that we will see a rapid recovery in the third quarter of this year and the global system itself will be back at 2.5% growth by this time next year.

If we consider previous recessions they exhibited similar characteristics. In 1979 the price of oil doubled, which caused inflation in the west to rise quickly – and interest rates soon followed. The
recession was caused by households and companies trying to balance their cash position. In 1989 the price of oil doubled and inflation rose to 10%; the response was an increase in interest
rates. Households cut their spending to balance their cash position and in the UK two banks, Barclays and NatWest, had overlent to the housing market which took them close to insolvency.
They called in loans and caused a short but dramatic shortage of credit. In 2008 the recession was caused by the western banking system which had over-leveraged its balance sheets. There
was a liquidity crisis as insolvent banks refused to lend to other insolvent banks and all of them stopped lending to businesses. In short, the last three recessions had similar causes and effects.

At the time of writing there is no recession. The definition of recession is two successive quarters of negative growth, which I do not think will happen.

So far it is clear that Q2 will be significantly negative. However, I expect Q3 to be significantly positive.

We all know that Q2 spending collapse was because people were unable to spend their income.

It is the 16th June as I write this. Shops opened yesterday. Footfall outside London was up 50%, in London up 30%. I would expect a steady increase over the next few weeks. Until cafes and or
public lavatories are opened we will not see many over 60 out shopping (except in garden centres because they have lavatories!).

My expectation is based on a simple piece of behavioural economics.

I believe that the majority of consumers and the majority of business owners like to see a particular number in their current account at the end of each month. this number could be positive or negative. Each of us likes to be in monetary equilibrium. There are two types of disequilibrium. The first type is insufficient money – we look at our current account balance and we see that it is
less than we are comfortable with. To restore the balance we immediately cut non-essential spending. It is this behaviour which caused the 1979 recession and the 1989 recession. In both
instances the increase in interest rates plus the increase in energy costs caused many to have insufficient money balances.

The second type of disequilibrium is excess money – we look at our current account balance and there is more there then we are comfortable with, so we spend it. However it doesn’t disappear
from the economy as a whole. It becomes an increase in sales and hence incomes for other players who in turn find they have excess money and they spend it. In this way excess money drives
an economic boom which may or may not result in rising inflation.

The big question is, where are consumers and businesses placed today? It is my judgement that the majority of consumers have excess money which they will get rid of as soon as they are able.
Consumers have excess money because even though their income has fallen in recent weeks their expenditure has fallen by more. Turning to businesses, the picture is less clear. Businesses
which have been able to borrow under the terms of the government sponsored schemes are likely to be cash neutral. Other larger businesses are probably enjoying excess money balances. Finance
directors are trained to ensure the business is both liquid and solvent. The data I will share with you suggests many businesses have excess liquidity which will be spent as soon as confidence
returns to the boardroom. Sales well ahead of forecast is a significant driver of confidence. Taken together I expect consumer spending to be stronger than forecast and, with a time lag, I
would expect business to splash the cash. In short I, unlike the majority, expect an inflationary boom to take off in the next few months. The only things which will dampen this could be the media
reporting company closures, an increase in the R well above 1 (even if it a small pocket), and stories of mass redundancies.

The latest employment data shows how well the employment support packages are working. Headline rate is unchanged at 3.9%. I would remind you that in a modern economy which is undergoing significant technological change and thus requires people to change jobs and careers – the definition of full employment is 5%. The data for March-May shows that hours worked for full time workers fell from 36.5 to 33.9 per week. The media have emphasised the increase in benefit claimants at 600,000. However it is possible to be employed and claim benefits simultaneously. For example there are 500,000 self-employed musicians in the UK. I would expect the majority to be getting only intermittent work if at all. Many will be claiming benefits.

The employment support packages reduce and then end by October. Many commentators are suggesting that unemployment will surge beyond that date. It will if spending fails to recover from
now. I am assuming the Government will bring the 2m rule down to 1m and drop the two week quarantine rule for visitors by July 4. This will be just in time to save the hospitality sector. If Government delays beyond this date then I would expect a significant increase in redundancies beginning in August. There are 3.2 million employed in the hospitality sector and of course more dependent on it for custom such as food service, the drinks industry and musicians. The industry employs people under 30 many of whom receive the minimum wage. I now want to give you the reasons for my optimism (I realise this is uncharacteristic).

The rate of growth in money supply has more than doubled.

The Government is spending an extra £40Bn a month. All this is new money created by the Bank of England. In addition the banks are growing their loan books.

This chart needs some explaining. Assume business A buys and pays for something from business B. The amount in the grey block doesn’t change. Assume a household buys two new bikes –
the amount in the blue box goes down, the amount in the grey block goes up. So new money in the system changes hands and accounts when it is spent but it remains in the system unless it is
spent abroad.

This data shows that overall the system is flush with ‘cash’. It is not equally spread. One of the consequences of lockdown is the increase in inequality it causes. For example a well-run small
business may make some employees redundant to conserve cash. All we need is lockdown to end and the cash will begin to change hands, when it does GDP indicators will soar.

The data is replicated throughout the World. By the end of 2020 global personal and business accounts will have circa £14 trillion more than at the start of the year. There will be not be an L
shaped recovery. It will be a short V. When £14 trillion begins to be spent, that is seriously strong demand for goods and services. Just to be clear. The £14 trillion has been spent once by governments, we now need business and consumers to spend it. This is what economists call the multiplier or velocity of money.

Euro Area Money Supply

They do it bigger in the USA: look at the graph: money is growing 3x faster than normal.

The steady state growth in money supply for the USA is circa 5% per annum. It is now growing at nearly 18%. No wonder the stock market is defying gravity! Why is this happening you may ask?

New Monetary Theory

In essence NMT challenges mainstream economic thinking. This mainstream view is as follows: at any point in time there is a finite supply of money for investment by Government and business. If Government borrows more then it leaves less for business to borrow. So if Governments increase their borrowing it crowds out the private sector. And it has political consequences: mainstream
thinking supports Conservative/Republican mindsets. NMT is seen as the excuse for lefties to increase the size of the state which will crush the private sector.

Mainstream economics has never fully understood money, very few economists actually understand how money works in a modern society.

In 2008 when the Western banking system failed because it had created too much money lending to dodgy property companies and households who were unable to afford the interest bill. Governments bailed them out using new money created by the central bank. Then Governments introduced austerity measures to pay for it.

BUT austerity killed productivity growth due to underinvestment in training, infrastructure, health services, and R&D. And lower productivity meant slower growth in wages and taxable incomes.

NMT shows that if the government borrows newly created money from its own bank and spends it on productivity raising activities then the tax base expands (with a time lag), and the interest
payable on the new debt is easily financed. The outstanding debt remains as an increase in the national debt. Anyone with a mortgage knows that providing one can pay the interest and the value
of the asset rises then it works. NMT applies exactly the same thinking to the country as a whole.

It must be emphasised that Government should not use the new money to finance transfers such as pensions, welfare payments and social support. And given historical experience it is best that
the new money is allocated to private sector companies to deliver the products and services.

NMT has been quietly adopted in the UK, Germany, Japan and the USA. France has always applied it with its state sponsored Indicative Planning. Brits should note that the French produce the same output as we do but with 17% fewer hours of work. Italy would adopt it if the EU would let it.

I find the politics of NMT theory fascinating. Because of anchoring and confirmation bias people see NMT as socialism by the back door. And yet Rishi Sunak is clearly a convert, and Boris (who
doesn’t understand money) buys it if it keeps northern voters on side. It will allow a levelling up. Trump buys it if it means he remains President. The surprise is Germany. I have no doubt that when inflation takes off next year there will be siren voices claiming it is a mistake, unless of course the value of their property portfolio and SIPP grows faster than inflation, which it will!

Dear reader, I hope you are still awake!

We are in the final stages of the analysis, hang in there.

There are four composite sectors in an economy.

Households, Businesses, Government and the Overseas sector (measured by the balance of

There are massive flows between each sector. One sector’s surplus is another’s deficit. All four sectors summed must equal zero.

I have adapted the chart below from the Office of Budget Responsibility. The OBR forecast the budget deficit will rise to 15% of GDP (£330bn in today’s money) by the end of 2021. This deficit
will mostly be financed by new money from the Bank of England, so no crowding out of the private sector and no increase in interest rates. The rest of the World has a 4% surplus with us because we have a deficit on our current account balance of payments of 4%. We can assume this will not change much.

Households were forecast to be in balance but thanks to the March budget plus Covid support, increases in public sector pay, the 3.9% increase in the state pension, and the upcoming infrastructure spend households will enjoy a surplus of 6%. NB this is £132bn in today’s money.

Corporates will enjoy a surplus of 4%, or £88bn in today’s money. If the labour market tightens considerably then households will get more and corporates less.

The implication of this is straightforward. The economy will grow strongly as soon as lockdown is over and households return to their old consumption habits: enjoying meals out with friends, going to concerts, buying new cars and televisions, shopping online and down the high street, painting their house and buying new furniture, new lawnmowers, a patio, a garden office, an expensive holiday, skiing. Upgrading their PC, going to the pub, splashing out on significant birthday celebrations, etc. And for some a bigger house, or a second home, or a boat, or paying for the
grandchildren’s education.

It is up to you whether you agree with this analysis. If you do you will be getting your business fit for the imminent expansion and ignoring the doom laden scribblers. If you don’t you will be hanging on to cash, cutting capex, making people redundant, and agreeing with those who say the new normal will be much less consumption, an L shape economic profile, and a country going
nowhere fast.

In my next update I will forecast the usual numbers but as I write this our PM has some critical choices to make: 1m distancing, ending travel quarantine, building more permanent ICU capacity,
opening up all hospitality, ensuring there is trade deal by the 1st Jan t and most important of all telling the nation that Covid in its various forms is likely to be a regular occurrence. As a nation we
must learn to live with it instead of locking down society.

Roger Martin-Fagg
June 16 2020

About the author

Roger Martin-Fagg is an economist who combines insight into the financial and policy worlds with management strategy. He specialises in making economic activity, trends and indicators understandable and delivers both an economic outlook, and what organisations should do to prepare.

Boost Your COVID-19 Retirement Planning with these Tips | Independent Financial Adviser

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By Grant Ellis, Director Ellis Bates Group

Bear in mind that retirement savings are for the long run. The Coronavirus (COVID-19) is having a widespread impact across all elements of financial life, including retirement plans. The current global stock exchange turbulence, as a result of COVID-19, will undoubtedly be concerning for people whose retirement savings are spent partly or entirely during these volatile marketplace conditions. However, making decisions based on what is happening in the short term may be a risky thing to do. It may be tempting, for instance, to consider transferring all your investments into cash or other lower-risk investments – but in doing so, you not only lock in the loss as a result of recent falls, but you may also miss out as the value goes back up, so you’d lose out in the long term also.

Here are our tips on how to navigate these difficult times.

Allow time for markets to recover

It is really important to remember that retirement savings are for the long term. If you are young and paying towards a workplace pension, then there’s time for your pension pot to achieve growth over the long run and regain the losses caused by the volatility now being experienced in the stock markets. You shouldn’t be overly concerned, as you have many working years to come, and this will provide time for markets to recover before you’re ready to take your retirement income.

If you are older and closer to retirement, you may have seen your funds ‘lifestyled’. This means that your pension will have been transferred into generally less risky funds and invested in ‘safer’ areas like cash, gilts or bonds, which are lower risk and in the main provide a fixed rate of return. The older you get, the more pension schemes tend to invest in these assets to limit investment risk. But, not all pension schemes provide automatic lifestyling.

The reality of purchasing an annuity now

An annuity is a retirement income product that you purchase with some or all your pension pot. It pays a regular retirement income for life or for a set interval.  If you are intending to retire soon, and were preparing to buy an annuity, in March, the Bank of England cut the base rate twice in just over a week as a further emergency response to the Coronavirus pandemic, reducing it from 0.25% to 0.1%. This has meant annuity rates have also fallen.

If you’re still thinking of securing an income by buying an annuity, the current volatility indicates the importance of gradually reducing the risk in your portfolio as you approach your anticipated annuity purchase date. Doing so provides greater certainty over the lump sum you will have available to buy your annuity, which in turn will give you clarity over exactly how much secured income you can expect to make from the fund.


Drawdown is a way of taking money from your pension to live on during retirement. You need to be aged 55 or over and have a defined contribution pension to get your money this way. You keep your retirement savings invested when you retire and take money from (or ‘drawdown’) out of your pension pot. If the last few months have taught us anything, it is the stock markets can be quite volatile, so because your money remains invested — and it is usually in the stock market – should you select drawdown you will need to be comfortable that the markets and the value of your pension could fall as well as rise. The upside is that investment growth can provide higher returns and see your pension pot continue to increase in value even though you are taking an income from it.

If we continue to see a protracted period of negative investment returns, and you are already using drawdown or intend to move into drawdown shortly, you may also wish to avoid taking out more than you will need to while stock market values remain depressed. The more you are able to leave in, the more you’ll profit over time once there’s a recovery.

Keep making contributions

If you’re still in the process of saving for your retirement now might be a great time to think about increasing your pension contributions. Despite the fact that there is short term volatility in markets, increases in contributions over the long term can make a major difference to your eventual retirement fund’s value, especially if it coincides with a recovery in the market.

Stagger your retirement

A new study [1] has shown how many pensioners are choosing to stagger their retirement, moving part-time prior to giving up work entirely to make sure their pensions will last for as long as possible after they fully retire. With people living longer, and with the extra prospect of long term care costs in later life, retirees increasingly know the advantages of having a bigger pension pot.

Of those who have not touched their pension pot, half (51 percent ) say it’s because they’re still in work, while over a quarter (25 percent ) of those in their 60s say it’s because they need their pensions to hold out as long as possible.

Naturally, retirees who have not yet touched their pension pot must have alternative sources of revenue. When asked about their income, almost half (47 percent) said they take an income from savings, others rely on their partner or spouse’s income (35 percent) or the State Pension (22 percent), while 12% rely on income from property.

Professional financial advice counts

If you are about to retire, the amount of exposure you have will reflect both your attitude to investment risk and the time you have until retirement. Most of all, before making any significant decisions concerning your pension, take professional financial advice.

And there’s no need to fear – at this stage, we don’t know what the long-term consequences of Coronavirus will be. An adviser can help you focus on what’s important, weigh all your options, and take a balanced assessment of your risks.

Ellis Bates Financial Advisers are independent financial advisers with offices across the United Kingdom.  They manage over £1 billion of assets on behalf of clients, who have given them a 4.9/5.00 score with Trustist.  https://www.ellisbates.com/about/reviews/

For more information please visit their website www.ellisbates.com


Source information: [1] LV= poll of over 1,000 adults aged over 50 with defined contributions — 25 February 2020

A pension is a long-term investment. The fund value may fluctuate and can go down, which would have an impact on the amount of pensions benefits available. Pensions aren’t normally available until age 55. Your retirement income could also be affected by interest rates at the time you take your gains. The tax consequences of pension withdrawals will be dependent on your personal circumstances, tax legislation and regulations, which are subject to change. The value of Investments and income from them can go down. You might not get back the amount invested. Past performance is not a reliable indicator of future performance. Taking withdrawals may erode the capital value of the fund, especially if investment returns are poor and a high level of income is being taken. This could result in a lower income if and when an annuity is purchased.

Lifestyle Protection

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One in five self-employed and contract workers unable to survive a week without work. The world of work has changed enormously over the past 20 years. Being self-employed, freelance or working on a contract basis has become the norm for all sorts of professions. Although it has many benefits, working for yourself means that the responsibility for providing a financial safety net shifts from the employer to the individual. New research has highlighted the precarious nature of self-employed people’s finances.

Financial Support

A survey[1] of the financial health of self-employed, part-time and contract workers reveals that if an accident or illness prevented them from working, more than one in ten (11%) wouldn’t be able to last any time without using long-term savings, while 30% would run out of money in less than a month. And 48% said they couldn’t turn to friends or family for financial support, while one in ten said they would be forced to turn to credit cards or payday loans.

Figures from the Office for National Statistics (ONS) show that the number of self-employed workers in the UK increased from 3.3 million in 2001 to nearly 5 million in 2019[2]. While a quarter (25%) of those surveyed said they would seek help from the state, benefits provide little or no support for this group.

Income Protection

Some self-employed people wrongly believe they would not be eligible for income protection if they fell ill and couldn’t work. However, Statutory Sick Pay isn’t available to self-employed workers, and for those workers that are eligible, the maximum that can be claimed is just £94.25 a week versus the average outgoing of £262.83[3] a week for self-employed or contract workers.

More than half (55%) have no life insurance, private medical insurance, critical illness cover or income protection should they find themselves unable to work due to illness or injury.

More Time off Work

Nearly half of those surveyed (45%) worry that sickness will prevent them working. They also worry about consistency of earnings (37%), and over a third (35%) of those workers who took time off for illness or injury last year returned to work before they felt they had fully recovered. Half (50%) of these said they did so because they couldn’t afford to take any more time off work.

People in full-time employment commonly receive sick pay and life insurance through their employer, but self-employed people need to provide it for themselves. Although many self-employed people and contractors worry about the consequences of an accident or illness preventing them from working, too few are taking steps to protect themselves from any loss of earnings if they are unable to work.

Source data:

[1] Research among 1,033 UK self-employed, part-time, contract and gig economy workers between 1 October and 7 October 2019, conducted by Opinium on behalf of LV=.
[2] EMP14: Employees and self-employed by industry.
[3] Average monthly outgoings of £1,182.76 recorded from 1,033 UK self-employed, part-time, contract and gig economy workers between 1 October and 7 October 2019, conducted by Opinium on behalf of LV=.

Do you have a financial safety net in place?

Many self-employed people consider income protection insurance and critical illness cover in case they get too sick or injured to work, or suffer from a serious illness. Life insurance is also common for people who have dependents, such as a partner or children. If you have any concerns or want to review your protection requirements, please contact us.

Wealth transfer and the next generation

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How to secure your family’s financial future.

We spend a lifetime generating wealth and assets but not many of us ensure that it will be passed to the next generation – our children, grandchildren, nieces, nephews, and so on. Intergenerational wealth transfer is the passage of wealth from one family generation to the next.

It’s becoming increasingly important for more people to consider succession planning and intergenerational wealth transfer as part of their financial planning strategy. As the baby boomer generation reaches retirement age, we’re on the brink of a vast shift in assets, unlike any that we have seen before.

Wealth transfers

By 2027, it is expected that wealth transfers will nearly double from the current level of £69 billion, to £115 billion[1], coined as ‘the Great Wealth Transfer’ of the 21st century.

Intergenerational wealth transfer can be a huge issue for all family members concerned. If done well and executed properly, it can make a real difference to the financial position of the recipients. If misjudged or poorly handled, it can cause enormous issues, conflicts and resentments that are never forgotten nor forgiven.

Financial implications

One aspect that hasn’t been widely considered is the impact on other family members, and in particular children, as their parents think about selling their business or retiring from their career, perhaps selling their family home, and starting life in retirement.

It is important that children are prepared to deal with this process, not least so they are aware of the financial implications and how they may be affected. For instance, children may be expecting to receive a certain amount of money from their parents – particularly those who are selling a business – and end up disappointed. Conversely, they may not be expecting to receive anything, and are therefore not equipped to deal with a windfall.

Contributory factors

According to the King’s Court Trust, £5.5 trillion will move hands in the United Kingdom between now and 2055, with this move set to peak in 2035[2]. Why? Well, there are a number of contributory factors that account for this. The two main reasons are increased net worth and rising mortality rates.

For those approaching, or in, retirement, it’s important to have frank and open conversations with children about expectations and also whether children have the knowledge and understanding to manage financial matters.

Approaching retirement

This is not an easy exercise, as you may not want to discuss your financial affairs with your children. You may find your children’s eyes are opened when they see what their parents have been able to achieve financially. They may even want to know how they can do that themselves and change their own habits.

Everyone works hard to provide for their family, and perhaps even leave them a legacy. However, parents approaching retirement shouldn’t feel that their family is solely reliant on them, or that they need to be responsible for their children’s financial situation.

Expressing wishes

A good approach is to help your children establish their own strong financial footing and be ready for intergenerational wealth transfer. For instance, introducing them to your professional advisers can provide comfort that there is someone they can go to for advice.

Having open conversations with your children and expressing wishes and goals will also ensure that your family are all on the same page, which can help reduce potential conflict later when managing intergenerational wealth transfer. These are some questions you should answer as part of your intergenerational wealth transfer plans:

  • When did wealth enter my life and how do I think this timing influences my values and family relationships?
  • What impact does affluence have on my life and the lives of my next generation?
  • What was the key to my success in creating wealth and how might telling this story to my future generation be helpful?
  • What is my biggest concern in raising my children or grandchildren with affluence?
  • What conversations (if any) did I have with my own parents about money and wealth growing up?
  • How did my parents prepare me to receive wealth?
  • What lessons did I learn from my parents about money and finance that I would like to pass on to my heirs?
  • What family values would I like to pass down to the next generation and how do I plan on communicating this family legacy?
  • What concerns do I have about my adult children when it comes to inheriting and managing the family wealth?
  • How can I help prepare my beneficiaries to receive wealth and carry on our family legacy?

Between generations

Despite the vast amount of wealth likely to be passed down between generations, those in line for inheritance could end up being over-reliant on their expected windfall. The key will be to ensure younger generations are able to get involved and understand how to handle the wealth they will be inheriting, as well as being able to make good decisions about the wealth that they generate themselves.

You need to consider who will receive what and whether you want to pass your wealth during your lifetime or on death. These decisions then need to be balanced by the tax implications of any proposed planning. This is especially important at what can be a highly stressful time. By making advanced preparations, the burden of filing complicated Inheritance Tax returns can be reduced. It’s worth noting that UK Inheritance Tax receipts exceed £3bn from 17,900 estates[3].

Source data:
[1] Kings Court trust, ‘Passing on the Pounds – The rise of the UK’s inheritance economy’.
[2] Resolution Foundation, Intergenerational Commission. ‘The Million dollar be-question’.
[3] Prudential 2019.

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Estate Protection

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Preserving your wealth and transferring it effectively.

Estate planning is an important part of wealth management, no matter how much wealth you have built up. It’s the process of making a plan for how your assets will be distributed upon your death or incapacitation.

As a nation, we are reluctant to talk about inheritance. Through estate planning, however, you can ensure your assets are given to the people and organisations you care about, and you can also take steps to minimise the impact of taxes and other costs on your estate.

In order to establish the value of your estate, it is first necessary to calculate the total worth of all your assets. No matter how large or how modest, your estate is comprised of everything you own, including your home, cars, other properties, savings and investments, life insurance (if not written in an appropriate trust), furniture, jewellery, works of art, and any other personal possessions.

Having an effective estate plan in place will not only help to ensure that those you care about the most will be taken care of when you’re no longer around, but it can also help minimise Inheritance Tax (IHT) liabilities and ensure that assets are transferred in an orderly manner.

Write a Will

The reason to make a Will is to control how your estate is divided – but it isn’t just about money. Your Will is also the document in which you appoint guardians to look after your children or your dependents. Almost half (44%) of over-55s have not made a Will[1], and as such, they will not have any say in what happens to their assets when they die.

Should you die without a valid Will, you will have died intestate. In these cases, your assets are distributed according to the Intestacy Rules in a set order laid down by law. This order may not reflect your wishes.

Even for those who are married or in a registered civil partnership, dying without leaving a Will may mean that your spouse or registered civil partner does not inherit the whole of your estate. Remember: life and circumstances change over time, and your Will should reflect those changes – so keep it updated.

Make a Lasting Power of Attorney

Increasingly, more people in the UK are using legal instruments that ensure their affairs are looked after when they become incapable of looking after their finances or making decisions about their health and welfare.

By arranging a Lasting Power of Attorney, you are officially naming someone to have the power to take care of your property, your financial affairs, and your health and welfare if you suffer an incapacitating illness or injury.

Plan for Inheritance Tax

IHT is calculated based on the value of the property, money and possessions of someone who has died if the total value of their assets exceeds £325,000, or £650,000 if they’re married or widowed. If you plan ahead, it is usually possible to pass on more of your wealth to your chosen beneficiaries and to pay less IHT.

Since April 2017, an additional main residence nil-rate band allowance was phased in. It is currently worth £150,000, but it will rise to £175,000 per person by April this year. However, not everyone will be able to benefit from the new allowance, as you can only use it if you are passing your home to your children, grandchildren or any other lineal descendant. If you don’t have any direct descendants, you won’t qualify for the allowance.

The headline rate of IHT is 40%, though there are various exemptions, allowances and reliefs that mean that the effective rate paid on estates is usually lower. Those leaving some of their estate to registered charities can qualify for a reduced headline rate of 36% on the part of the estate they leave to family and friends.

Gift Assets while you’re Alive

One thing that’s important to remember when developing an estate plan is that the process isn’t just about passing on your assets when you die. It’s also about analysing your finances now and potentially making the most of your assets while you are still alive. By gifting assets to younger generations while you’re still around, you could enjoy seeing the assets put to good use, while simultaneously reducing your IHT bill.

Make use of Gift Allowances

One way to pass on wealth tax-efficiently is to take advantage of gift allowances that are in place. Every person is allowed to make an IHT-free gift of up to £3,000 in any tax year, and this allowance can be carried forward one year if you don’t use up all your allowance.

This means you and your partner could gift your children or grandchildren £6,000 this year (or £12,000 if your previous year’s allowances weren’t used up) and that gift won’t incur IHT. You can continue to make this gift annually.

You are able to make small gifts of up to £250 per year to anyone you like. There is no limit to the number of recipients in one tax year, and these small gifts will also be IHT-free provided you have made no other gifts to that person during the tax year.

A Potentially Exempt Transfer (PET) enables you to make gifts of unlimited value which will become exempt from Inheritance Tax if you survive for a period of seven years.

Gifts that are made out of surplus income can also be free of IHT, as long as detailed records are maintained.

IHT-Exempt Assets

There are a number of specialist asset classes that are exempt to IHT. Several of these exemptions stem from government efforts over the years to protect farms and businesses from large Inheritance Tax bills that could result in assets having to be sold off when they were passed down to the next generation. Business relief (BR) acts to protect business owners from IHT on their business assets. It extends to include the ownership of shares in any unlisted company. It also offers partial relief for those who own majority rights in listed companies, land, buildings or business machinery, or have such assets held in a trust.

Life Insurance within a Trust

A life insurance policy in trust is a legal arrangement that keeps a life insurance pay-out separate from the valuation of your estate after you die. By ring-fencing the proceeds from a life insurance policy by putting it in an appropriate trust, you could protect it from IHT. The proceeds of a trust are typically overseen by a trustee(s) whom you appoint. These proceeds go to the people you’ve chosen, known as your ‘beneficiaries’. It’s the responsibility of the trustee(s) to make sure the money you’ve set aside goes to whom you want it to after you pass away.

Keep Wealth within a Pension

When you die, your pension funds may be inherited by your loved ones. But who inherits, and how much, is governed by complex rules. Money left in your pensions can be passed on to anyone you choose more tax-efficiently than ever, depending on the type of pension you have, by you nominating to whom you would like to leave your pension savings (your Will won’t do this for you) and your age when you die, before or after the age of 75.

Your pension is normally free of IHT, unlike many other investments. It is not part of your taxable estate. Keeping your pension wealth within your pension fund and passing it down to future generations can be very tax-efficient estate planning.

It combines IHT-free investment returns and potentially, for some beneficiaries, tax-free withdrawals. Remember that any money you take out of your pension becomes part of your estate and could be subject to IHT. This includes any of your tax-free cash allowance which you might not have spent. Also, older style pensions may be inside your estate for IHT.

Make Sure Wealth Stays in the Right Hands

Estate planning is a complex area that is subject to regular regulatory change. Whatever you wish for your wealth, we can tailor a plan that reflects your priorities and particular circumstances. To find out more, or if you have any questions relating to estate planning, don’t hesitate to contact us.

Source data: [1] Brewin Dolphin research: Opinium surveyed 5,000 UK adults online between 30 August and 5 September 2018.

Information is based on our current understanding of taxation legislation and regulations. Any levels and bases of, and reliefs from. Taxation are subject to change. The rules around trusts are complicated, so you should always obtain professional advice. The value of investments and the income they produce can fall as well as rise. You may get back less than you invested.

Why Silence Isn’t Necessarily Bliss

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Over six million adults refuse to discuss their will with loved ones. Making a Will is very important if you care what happens to your money and your belongings after you die, and most of us do. But have you tried to talk with your children about your Will? If that conversation isn’t happening, you’re not alone.

And it’s not only parents who are uncomfortable. Adult children may also be nervous about raising the topic of their parents’ finances for fear they appear greedy or nosy. Understandably, talking about dying can be seen as ‘taboo’ and it is not always easy to bring it up. However, discussing your Will with beneficiaries means they are better prepared when the time comes. However, worryingly, almost six and half million adults refuse to discuss their Will with loved ones according to new research[1]. A quarter (26%) of people with a Will say they will not discuss it as they do not want to think about dying, and one in four (27%) do not want to upset beneficiaries by discussing the contents of their Will[2]. It is also hugely important for family members to be aware of vital decisions in your Will, such as who will look after your children. By overcoming ‘death anxiety,’ the natural fear of talking about death and the emotions associated with it, these important conversations can ensure your beneficiaries are aware of your wishes and understand them. Nearly half (45%) of UK parents, the research identified, with adult children believe their Will is ‘no one’s business’ but their own or a partner’s. But sharing the contents of a Will makes the financial and practical consequences of death easier for those left behind. Losing someone can have a huge impact on finances for months or even years to come, so it is crucial for families to be prepared.

‘When I’m gone’ conversation with your partner or family

Avoid talking to someone when they’re busy. Look for opportunities to broach the subject, such as when you’re discussing the future or perhaps following the death of someone close to you

  • Consider beginning the conversation with a question such as, ‘Have you ever wondered what would happen…?’; ‘Do you think we should talk about…?’
  • Think about how you would manage financially should the worst happen. What impact would losing a partner or family member have on your household income and your expenses? Be aware that your financial situation may change in the future
  • Make sure you know where all important documents such as Wills, bank details, insurance policies, etc. are kept, so that you have all the information you might need
  • Prepare in advance – would you know how to manage the day-to-day finances? If not, consider how you could start to learn about them now so this doesn’t come as a shock

In the event of an illness, loss of capacity or death – are your plans in place?

Many of us will eventually reach a point in our lives when we require specialist assistance to ensure that our family will be able to cope better and manage their affairs in the event of an illness, loss of capacity or death. If you would like to review your particular situation, contact us to arrange an appointment.

Source data: [1] Royal London – six million figure is based on ONS adult population stats of 52.8million. Our research shows 47% of UK adults have a Will – 26% of this figure equates to 6,458,535.05 [2] Opinium on behalf of Royal London surveyed 2,006 adults between 26 and 29 October 2018. The survey was carried out online. The figures have been weighted and are representative of all GB adults (aged 18+).