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Saving & Investments

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 Ugly Truth About Investment Loyalty | Independent Financial Adviser

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By Grant Ellis, Director Ellis Bates Group

I’ve been a Manchester City fan since 1970.  I chose to support them as all my friends were either Leeds United or Manchester United fans, and Manchester City were an attractive footballing alternative who were having a bit of success at the time, winning the league and the FA Cup in consecutive years.  However, just as I formed my allegiance to them their success dried up and apart from a couple of cup runs they remained relatively unsuccessful until 2011.  You know what it’s like though – once you’ve made your choice of team it’s incumbent upon you to stick with them through thick and thin.  After all that’s what supporting a football team is all about; you make your choice, and for better or worse you remain loyal to them whatever happens.

Just imagine though if I’d been prepared to switch my support between different teams over the years based on their performance, rather than simply sticking with Manchester City?  Had I for example, switched to a blend of Liverpool and Leeds Utd in the 70’s, Liverpool and Everton or Arsenal in the 80’s and Manchester Utd and Arsenal in the 90’s and noughties before reverting to Manchester City, I would have enjoyed way more success as a result.  Between them they were either first or second in the league every year throughout that period, winning numerous cups long the way too.

And it would have been quite possible to chose those clubs based on their results, coupled with a bit of football nouse.  Indeed, the pundits have only failed to predict all the top teams in a couple of the last 40 plus years, most recently when Leicester surprised everyone by winning the league in 2016.  In virtually all other seasons the top three or four teams have been easily identifiable by those with the experience and expertise to pick them out.

Now, being a football supporter is an entirely emotive decision, which is why we tend to stay loyal to one particular club.  So why do many of us behave like football fans when it comes to choosing Fund Managers to look after our investments?  That shouldn’t be an emotive decision at all, yet far too often we hold off moving our money when results are not going the way they should and there are better alternatives available.

Now, I do understand that everyone can go through a bit of a lean period, and sometimes it is better to give your incumbent the benefit of the doubt for a time.  Clearly that is not always the case, as the recent fall from grace of the one time darling of the investment world, Neil Woodford, is a timely reminder.

So when it comes to your money surely the key is to make evidence backed, emotion free informed decisions about switching, and on a regular basis?  Of course, not all of us have the time or the expertise to do this which is why many of us chose an Adviser to do it for us.

Choosing an Adviser wisely is clearly important, as they will of course charge for this service, but it is not all about the cost; it’s about value for money.  Look for an Adviser with a dedicated investment department, with full time, daily focus on the investment performance of their panel funds.  Get them to give you testimonials from satisfied customers along with the number and scoring of verified reviews they’ve had from clients, and ask them about their recent investment performance. They should also be prepared to back up their claims about investment success with hard facts which clearly demonstrate they are indeed followers of the latest winners and not blindly loyal, or just plain lazy.

And choosing winners works whether you’re a fan of active or passive funds, so this sort of support can work whatever your investment philosophy.  Check out the following link for more information https://www.ellisbates.com/individuals/investments/

Of course, being a Manchester City fan is now much more enjoyable than it was 30 years ago, but one thing I have learnt in the past 50 years is that I can’t and won’t take their recent success for granted and I know it won’t last for ever.  I am enjoying it whilst it does though!

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

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

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.

Setting Financial Goals

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How to create financial goals you can actually achieve.

Taking control of our financial life requires planning, and that starts with setting financial goals. Setting short-term, mid-term and long-term financial goals is an important step towards becoming financially secure and independent.

We all have different financial goals and aspirations in life. Yet often, these goals can seem out of reach. In today’s complex financial environment, achieving our financial goals may not be that straightforward. This is where financial planning is essential to help secure your financial future.

A financial plan seeks to identify your financial goals, prioritise them, and then outline the exact steps that you need to take to achieve your goals. Figuring out your objectives and matching them with timelines are the keys to setting financial goals. Your financial goals are specific and unique to a number of factors related to you, like your age, your interests, current financial situation and your aspirations. Based on these, you need to develop your goals and establish a plan to achieve them.

If your New Year’s resolutions include giving your financial plans an overhaul, here are our financial planning tips to help you create a robust financial plan for 2020 and beyond.

Be specific about your objectives

Any goal (let alone financial) without a clear objective is nothing more than a pipe dream, and this couldn’t be more true when setting financial goals.

It is often said that saving and investing is nothing more than deferred consumption. Therefore, you need to be crystal clear about why you are doing what you’re doing. This could be planning for your children’s education, your retirement, that dream holiday, or a property purchase.

Once the objective is clear, it’s important to put a monetary value to that goal and the time frame you want to achieve it by. The important point is to list all of your goal objectives, however small they may be, that you foresee in the future and put a value to them.

Keep them realistic

It’s good to be an optimistic person, but being a Pollyanna is not desirable. Similarly, while it might be a good thing to keep your financial goals a bit aggressive, being overly unrealistic can definitely impact on your chances of achieving them.

It’s important to keep your goals realistic as it will help you stay the course and keep you motivated throughout your journey until you get to your destination.

Short, medium and long-term

Now you need to plan for where you want to get to, which will likely involve looking at how much you need to save and invest to achieve your goals. The approach towards achieving every financial goal will not be the same, which is why you need to divide your goals into short, medium and long-term time horizons.

As a rule of thumb, any financial goal which is due within a five-year period should be considered short-term. Medium-term goals are typically based on a five-year to ten-year time horizon, and over ten years, these goals are classed as long-term.

This division of goals into short, medium and long-term will help in choosing the right savings and investments approach to help you achieve them, and it will also make them crystal clear. This will involve looking at what large purchases you expect to make such as purchasing property or renovating your home, as well as considering the later stages of your life and when you’ll eventually retire.

Always account for inflation

It’s often said that inflation is taxation without legislation. Therefore, you need to account for inflation whenever you are putting a monetary value to a financial goal that is far away in the future. It’s important to know the inflation rate when you’re thinking about saving and investing, since it will make a big difference to whether or not you make a profit in real terms (after inflation).

In both 2008 and 2011, inflation climbed to over 5% – not good news for savers – so always account for inflation. You could use the ‘Rule of 72’ to determine, at a given inflation rate, how long it will take for your money to buy half of what it can by today. The rule of 72 is a method used in finance to quickly estimate the doubling or halving time through compound interest or inflation respectively. Simply divide 72 by the number of years to get the approximate interest rate you’d need to earn for your money to double during that time.

Risk protection plays a vital role

Its best to discuss your goals with those you’re closest to and make plans together so that you are well aligned. An evaluation of your assets, liabilities, incomings and outgoings will provide you with a starting point. You’ll be able to see clearly how you’re doing and may find areas you can improve on.

Risk protection plays a vital role in any financial plan as it helps protect you and your family from unexpected events. Make sure you have put in place a Will to protect your family, and think about how your family would manage without your income should you fall ill or die prematurely.

Check you’re using all of your tax allowances

With tax rules subject to constant change, it’s essential that you regularly review your own and your family’s tax affairs and plan accordingly. Tax planning affects all facets of your financial affairs. You may be worried about the impact that rises in property values are having on gifts or Inheritance Tax, how best to dispose of shares in a business, or the most efficient way to pass on your estate.

Utilising your tax allowances and reliefs is an effective way of reducing your tax liability and making considerable savings over a lifetime. When it comes to taxes, there’s one certainty – you’ll pay more tax than you need to unless you plan. The UK tax system is complex, and its legislation often changes. So it’s more important than ever to be tax-efficient, particularly if you are in the top tax bracket – making sure you don’t pay any more tax than necessary.

Creating your comprehensive financial plan

Creating and implementing a comprehensive financial plan will help you develop a clear picture of your current financial situation by reviewing your income, assets and liabilities. Other elements to consider will typically include putting in place a Will to protect your family, thinking about how your family will manage without your income should you fall ill or die prematurely, or creating a more efficient tax strategy.

Identifying your retirement freedom options

Retirement is a time that many look forward to, where your hard-earned money should support you as you transition to the next stage of life. The number of options available at retirement has increased with changes to legislation, which has brought about pension freedoms over the years. The decisions you make regarding how you take your benefits may include tax-free cash, buying an annuity, drawing an income from your savings rather than pension fund, or a combination.

Beginning your retirement planning early gives you the best chance of making sure you have adequate funds to support your lifestyle. You may have several pension pots with different employers, as well as your own savings to withdraw from.

Monitoring and reviewing your financial plan

There is little point in setting goals and never returning to them. You should expect to make iterations as life changes. Set a formal yearly review at the very least to check you are on track to meeting your goals.

We will help you to monitor your plan, making adjustments as your goals, time frames or circumstances change. Discussing your goals with us will be highly beneficial as we can provide an objective third-party view, as well as the expertise to help advise you with financial planning issues.

Finally, make sure your financial goals are SMART

This is a great way to set a variety of goals. SMART stands for Specific, Measurable, Achievable, Relevant and Time-Related.

Advice every step of the way

Setting financial goals marks the beginning of the financial planning process to help you achieve the objectives at various life stages. Goal-setting gives meaning and direction to the various financial decisions you will take during your lifetime. The start of a new year is the perfect time to review your financial strength, assess your budget and make plans for the future. To arrange a meeting, or for further information, 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.

Tax-wise

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Make the most of your valuable allowances, reliefs and exemptions

Once we enter January, the end of the 2019/20 tax year will be just over three months away on 5 April. As this date approaches, the window of opportunity reduces if you want to make the most of valuable allowances, reliefs and exemptions that could help reduce your tax bill and make sure your finances stay tax-efficient.

Some of these allowances will be lost forever if they are not used before the tax year end – and the sooner you claim them the better. Every year, some people leave end-of-year tax planning until the last minute. But leaving planning until the eleventh hour increases the risk that you will discover you have left it too late and missed out on the chance to improve your financial position.

Acting well before the tax year end means you can also be sure that you are maximising your opportunities and minimising your stress. The list we’ve provided below isn’t exhaustive, but it highlights some of the main areas to consider if appropriate to your particular situation. If you would like to discuss your own financial position, please contact us.

Income Tax

Consider making use of lower-rate tax bands. It’s important to review the tax implications of transferring income-producing assets and taking note of anti-avoidance and settlements legislation.

The way you receive an income, and the rates and allowances that apply, should be at the front of your mind. How much you pay depends on where you live in the UK, with Scotland and Wales in receipt of devolved powers to set their own Income Tax bands on top of the personal allowance.

The annual dividend allowance remains at £2,000 for 2019/20 after reducing from £5,000 this time last year. With the new personal allowance of £12,500 added to the frozen dividend allowance, the maximum tax-free income you can receive through dividends is £14,500 in 2019/20.

Some smaller amounts of income are tax-free up to annual limits. Under the Government’s renta-room scheme, you can continue to earn taxfree income of up to £7,500 a year from letting out a furnished room in your home.

Individual Savings Account (ISA) Allowance

With a Cash ISA or a Stocks & Shares ISA (or a combination of the two), you can save or invest up to £20,000 a year tax-efficiently.

If you are in a position to, it makes sense for you and your spouse to take advantage of each other’s ISA allowance, particularly if one of you has more financial resources than the other. That way, combined, you can save (in the case of Cash ISAs) or invest (in the case of Stocks & Shares ISAs) up to £40,000 tax-efficiently in 2019/20.

Currently, 16 and 17-year-olds actually get two ISA allowances, as they’re able to open a Junior ISA (which for 2019/20 has a limit of £4,368) and an adult Cash ISA. This means that you can put away up to £24,368 in your child’s name tax efficiently this tax year.

People aged 18–39 can open a Lifetime ISA, which entitles them to save up to £4,000 a year until they’re 50. The Government will top up the savings by 25%, up to a maximum of
£1,000 a year.

Pension Contributions

The annual pensions allowance enables you to contribute up to £40,000 in 2019/20. If your adjusted income exceeds £150,000 in 2019/20, your annual allowance will be reduced by £1 for every £2 that exceeds this threshold down to a limit of £10,000.

Any unused pensions annual allowance can be carried forward for three tax years, providing you were a member of a registered pension schemeduring that period. This unused allowance can be added to your 2019/20 annual allowance, giving a maximum pension contribution of £160,000, all of which will attract personal tax relief if you have the required level of relevant earnings.

You can also increase your basic State Pension by paying voluntary Class 3 National Insurance Contributions (NICs).

Consider contributing up to £2,880 towards a pension for your non-earning spouse or children. Tax relief is added to your contribution, so if you contribute £2,880, a total of £3,600 a year will be paid into the pension scheme, even if you earn less than this or have no income at all.

You begin to lose your personal allowance once your adjusted net income exceeds £100,000, such that the allowance reduces to £0 when adjusted net income reaches £125,000.

Inheritance Tax

You can act at any time to help reduce a potential Inheritance Tax (IHT) bill when you’re no longer around.

Gifts of up to £3,000 per year can be made on an IHT-free basis. The limit increases to £6,000 if the previous year’s annual exemption was not used.

A married couple can therefore make IHT exempt gifts totalling £12,000 – if unused, the annual allowance can be carried forward to the next tax year only. This simple technique could save a possible IHT bill of £4,800 in the event of your untimely death.

You should also consider using other annual gifts such as gifts in consideration of marriage or £250 small gifts.

Business Relief (BR) is a valuable IHT relief, with business property potentially receiving up to 100% relief if certain criteria are met. BR is an important part of succession planning, but due to the complexity of the BR rules, the relief may not be due even though you expect to meet the conditions.

It is important to regularly review your BR position to ensure that it continues to apply and that your business activities do not jeopardise your BR position.

Capital Gain Tax Allowance

Capital Gains Tax (CGT) is a tax on the gains and profits you make when you sell something, such as an investment portfolio or second home.

Everyone has an annual allowance of £12,000 (in 2019/20) before CGT applies. Like the ISA allowance, it doesn’t roll over – so if you don’t use it, you’ll lose out. And you may have to pay more CGT in the future.

Also, it’s worth remembering the allowance is for individuals, so couples have a joint allowance for 2019/20 of £24,000. In some situations, it may be appropriate to transfer assets into your joint names so you both stay within your individual allowances. However, this is only effective if the gift is a genuine gift of beneficial ownership, and the transferor does not continue to benefit from the asset following the transfer.

Not every investment portfolio is subject to CGT. If you’re looking for a tax-efficient way to invest, a Stocks & Shares ISA could be for you. Just like any investment, it carries risk – meaning you could lose some or all of your money – but if you do make a profit due to share price increases, you won’t be required to pay CGT on it.

A Bed & ISA will allow you to utilise the current year’s ISA allowance by moving investments from an unwrapped environment to the ISA tax-efficient wrapper. This is achieved by disposing of the unwrapped investment and repurchasing it via an ISA. The disposal of the unwrapped investments may be liable to CGT, but once inside the ISA, the investments are sheltered from CGT in the future.

Don’t lose it, use it

As we make our way towards the end of the tax year, now is the ideal time to review your tax affairs to ensure that you have taken advantage of all the valuable allowances, reliefs and exemptions available to you. To discuss the planning opportunities available to help you, your family and business to reduce your tax bill, please contact us.

If you want to find out more on certain areas such as inheritance tax, book onto our February 2020 Estate Planning seminars here.

Inheritance Tax

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How do you leave a legacy which serves your family’s best interests?

Will you be one of the thousands of households in Britain that will have to pay Inheritance Tax? What’s the best way to avoid it? If you’re administering an estate because someone has died, how do you obtain probate? Is it ever possible to retrospectively minimise an estate’s tax liabilities?

Inheritance Tax receipts reached a record high of £5.2 billion in the 2017/18 tax year according to figures published by HM Revenue & Customs[1], despite the introduction of a new residence nil-rate band (RNRB).

Families are becoming increasingly complex entities, often shaped by divorces, remarriages and children from previous relationships. This can make estate and trust planning a challenge to navigate if an individual has strong feelings about those they would like to inherit their assets and those they wouldn’t.

If applicable to your situation, effective estate and trust planning could save your family a potential Inheritance Tax bill amounting to hundreds of thousands of pounds. Inheritance Tax planning has become more important
than ever following the Government’s decision to freeze the £325,000 lifetime exemption, with inflation eroding its value every year and subjecting more families to Inheritance Tax.

Reducing the amount of money beneficiaries have to pay

Inheritance Tax is usually payable on death. When a person dies, their assets form their estate. Any part of an estate that is left to a spouse or registered civil partner will be exempt from Inheritance Tax. The exception is if a spouse or registered civil partner is domiciled outside the UK. The maximum a person can give them before Inheritance Tax may need to be paid is £325,000. Unmarried partners, no matter how long-standing, have no automatic rights under the Inheritance Tax rules.

However, there are steps people can take to reduce the amount of money their beneficiaries have to pay if Inheritance Tax affects them. Where a person’s estate is left to someone other than a spouse or registered civil partner (i.e. to a non-exempt beneficiary), Inheritance Tax will be payable on the amount that exceeds the £325,000 nil-rate threshold. The threshold is currently frozen at £325,000 until the tax year 2020/21.

IHT is payable at 40% on the amount exceeding the threshold

Every individual is entitled to a nil-rate band (NRB) – that is, every individual is entitled to leave an amount of their estate up to the value of the nil-rate threshold to a non-exempt beneficiary without incurring Inheritance Tax. If a widow or widower of the deceased spouse has not used their entire NRB, the NRB applicable at the time of death can be increased by the percentage of the NRB unused on the death of the deceased spouse, provided the executors make the necessary elections within two years of your death.

To calculate the total amount of Inheritance Tax payable on a person’s death, gifts made during their lifetime that are not exempt transfers must also be taken into account. Where the total amount of non-exempt gifts made
within seven years of death – plus the value of the element of the estate left to non-exempt beneficiaries – exceeds the nil-rate threshold, Inheritance Tax is payable at 40% on the amount exceeding the threshold.

Certain gifts made could qualify for taper relief

This percentage reduces to 36% if the estate qualifies for a reduced rate as a result of a charity bequest. In some circumstances, Inheritance Tax can also become payable on the lifetime gifts themselves – although gifts made between three and seven years before death could qualify for taper relief, which reduces the amount of Inheritance Tax payable.

From 6 April 2017, an Inheritance Tax RNRB was introduced in addition to the standard NRB. It’s worth up to £150,000 for the 2019/20 tax year and increases to £175,000 for 2020/21. In order to qualify, you must own a property or a share in a property, which you have lived in at some stage and which you leave to your direct descendants (including children, grandchildren or stepchildren). For estates over £2 million, the RNRB is reduced at the rate of £1 for every £2 over £2 million. In addition, it only applies on death and not on gifts or any other lifetime transfers.

Property, land or certain types of shares where IHT is due

It might also apply if the person sold their home or downsized from 8 July 2015 onwards. If spouses or registered civil partners don’t use the RNRB on first death – even if this was before 6 April 2017 – there are transferability
options on the second death. Executors or legal personal representatives typically have six months from the end of the month of death to pay any Inheritance Tax due. The estate can’t pay out to the beneficiaries until this is done. The exception is any property, land or certain types of shares where the Inheritance Tax can be paid in instalments. Beneficiaries then have up to ten years to pay the tax owing, plus interest.

Source data: [1] https://assets.publishing.service.gov. uk/government/uploads/system/uploads/ attachment_data/file/730110/Table_12_1.pdf

Retirement Resilience

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Taking the reins and having more control over your pension pot.

Saving for retirement is one of our greatest financial priorities, especially as life expectancy is growing and retirements are likely to last longer. It may be the case that you’d prefer to take the reins and have more control over your pension pot. For appropriate investors, one option to consider is a Self-Invested Personal Pension (SIPP).

Please note that a SIPP is a type of Personal Pension, and the rules as to how much you can contribute to a SIPP are the same as a Personal Pension. Also, when it comes to taking the pension, the same rules apply to both a SIPP and a Personal Pension.

Saving Discipline

A SIPP is a tax-efficient wrapper for your pension investments and gives you control of your pension, whereas most members of a company pension scheme have very little control and almost no idea where their pension money is invested. SIPPs enforce saving discipline until retirement since you cannot withdraw your money early.

Also, with many of the UK’s largest companies closing their final salary schemes to all members, many members now have to look at taking their pensions into their own hands. You can make both regular and one-off payments into your SIPP, and even putting a small amount away early will make a difference to how much you will eventually have to fund your retirement.

Extra Flexibility

Once you reach 55, you can access your whole pension pot. You decide how and when to use the fund built up in your SIPP to provide you with an income. You can take up to 25% of your fund as a tax-free lump sum and use the balance to provide you with a pension through income withdrawal from your SIPP, or through the purchase of an annuity. You can also take a series of lump sums from your SIPP – it’s flexible.

SIPPs can be opened by almost anyone under the age of 75 living in the UK. You can open a SIPP for yourself or for someone else, such as a child or grandchild. Even if you’ve already retired, you can still open a SIPP and take advantage of the extra flexibility that it gives you over your pension savings in retirement – but you may be limited by how much you can pay into it.

Investment Control

SIPPs offer a wider investment choice than most traditional pensions based on investments approved by HM Revenue & Customs (HMRC). They give you the chance to pick exactly where you want your money to go and enable you to choose and change your investments when you want, giving you control of your pension and how it is organised.

Most SIPPs allow you to select from a range of assets, including:

  • Unit trusts
  • Investment trusts
  • Government securities
  • Insurance company funds
  • Traded endowment policies
  • Some National Savings & Investment products
  • Deposit accounts with banks and building societies
  • Commercial property (such as offices, shops or factory premises)
  • Individual stocks and shares quoted on a recognised UK or overseas stock exchange

Time to Take Control of your Retirement Plans for the Future?

A SIPP is not right for everyone, but the freedom it offers you compared to a traditional pension could far outweigh the extra time taken to run your own pension. To find out more about setting up a SIPP, please contact us and we’ll arrange a meeting to discuss your requirements – we look forward to hearing from you.

Please note: you must pay sufficient tax at the higher and additional rates to claim the full higher-rate tax relief via your tax return.

The value of investments and income from them may go down. You may not get back the original amount invested. Accessing pension benefits early may impact on levels of retirement income and your entitlement to certain means tested benefits and is not suitable for everyone. You should seek advice to understand your options at retirement.

Wealth Preservation

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The 6 things you need to consider to help preserve your wealth.

Whether you have earned your wealth, inherited it or made shrewd investments, you will want to ensure that as little of it as possible ends up in the hands of HM Revenue & Customs. With careful planning and professional financial advice, it is possible to take preventative action to either reduce or mitigate a person’s beneficiaries’ Inheritance Tax bill – or mitigate it altogether. These are some of the main areas to consider.

1. Make a Will

A vital element of effective estate preservation is to make a Will. According to a YouGov survey, almost 60% of all UK adults do not have a Will. This is mainly due to apathy but also a result of the fact that many people feel uncomfortable talking about issues surrounding death. Making a Will ensures an individual’s assets are distributed in accordance with their wishes.
This is particularly important if the person has a spouse or registered civil partner. Even though there is no Inheritance Tax payable between both parties, there could be tax payable if one person dies intestate without a Will.
Without a Will in place, an estate falls under the laws of intestacy – and this means the estate may not be divided up in the way the deceased person wanted it to be.

2. Make allowable gifts

A person can give cash or gifts worth up to £3,000 in total each tax year, and these will be exempt from Inheritance Tax when they die. They can carry forward any unused part of the £3,000 exemption to the following year, but they must use it or it will be lost.
Parents can give cash or gifts worth up to £5,000 when a child gets married, grandparents up to £2,500, and anyone else up to £1,000. Small gifts of up to £250 a year can also be made to as many people as an individual likes.

3. Give away assets

Parents are increasingly providing children with funds to help them buy their own home. This can be done through a gift, and provided the parents survive for seven years after making it, the money automatically moves outside of their estate for Inheritance Tax calculations, irrespective of size.

4. Make use of trusts

Assets can be put in an appropriate trust, thereby no longer forming part of the estate. There are many types of trust available that, if appropriate, usually involve parents (settlors) investing a sum of money into a trust. The trust has to be set up with trustees – a suggested minimum of two – whose role is to ensure that on the death of the settlers, the investment is paid out according to the settlors’ wishes. In most cases, this will be to children or grandchildren.
The most widely used trust is a discretionary trust and can be set up in a way that the settlors (parents) still have access to income or parts of the capital. It can seem daunting to put money away in a trust, but they can be unwound in the event of a family crisis and monies returned to the settlors via the beneficiaries.

5. The income over expenditure rule

As well as putting lump sums into an appropriate trust, people can also make monthly contributions into certain savings or insurance policies and put them into an appropriate trust. The monthly contributions are potentially subject to Inheritance Tax, but if the person can prove that these payments are not compromising their standard of living, they are exempt.

6. Provide for the tax

If a person is not in a position to take avoiding action, an alternative approach is to make provision for paying Inheritance Tax when it is due. The tax has to be paid within six months of death (interest is added after this time). Because probate must be granted before any money can be released from an estate, the executor may have to borrow money or use their own funds to pay the Inheritance Tax bill.
This is where life assurance policies written in an appropriate trust come into their own. A life assurance policy is taken out on both a husband’s and wife’s life, with the proceeds payable only on second death. The amount of cover should be equal to the expected Inheritance Tax liability. By putting the policy in an appropriate trust, it means it does not form part of the estate. The proceeds can then be used to pay any Inheritance Tax bill straightaway without the need for the executors to borrow.