What is Financial Wellbeing?

A great deal of research has been done to reveal two universal truths.

Money does not make us happy. It’s how we use it that matters.

Further research has discovered that the value of accumulating wealth for its own sake is in direct contradiction with happiness.

In many ways financial wellbeing is about how money can be used to increase our happiness and fulfillment. Money can be a highly sensitive subject which evokes feelings and emotions. Furthermore, we may want to change (or need to change) some of our behaviours towards money in order to enhance our financial wellbeing. That is not always easy to do and from my own experience this usually evolves over time.

Many of us are facing our own challenges right now as we navigate through another lockdown. Interestingly, a study on happiness highlights that the largest contributor to our wellbeing is the quality of our relationships.

As a result of the current situation, we are spending more time with those who we live with – our spouse, partner, children and in some cases our parents. Under normal circumstances we wouldn’t necessarily spend as much time with them as we go about our daily, and often hectic, lives. However, we have the opportunity to spend more quality time perhaps helping with school work, going for more (or longer) walks or to cook together when perhaps we wouldn’t otherwise.

When we come out of lockdown the pace of life will no doubt increase again and the experiences we have had during this period may feel more meaningful and memorable.

A word of warning…

Many financial organisations have adopted the expression of ‘financial wellbeing’ and some seem more concerned about using this to promote financial products.

Of course there are times when financial products are appropriate, but I believe financial wellbeing is a much broader topic.

As to my opinion as to what financial wellbeing is; I believe it is interconnected across all aspects of our lives, and it is important that it is in sync with all these interconnecting factors in order to move the ‘happiness needle’ in the right direction.

It is about being happier, not just wealthier and to feel more confident about our money and to use it towards enhancing our overall wellbeing, as well as those who are closest to us.

Reasons To Be Optimistic

As the world faces up to a winter with Covid-19, I believe there is cause for optimism.

Although we have recently seen an increase in case numbers (which can feel scary), and a tightening of restrictions with continued confusion around what we can and can’t do, the world seems to be better prepared now.

Areas, such as East Asia, have recovered and it is likely that the UK economy will improve as the current restrictions ease.

With the launch of vaccines on the horizon, the prospects for a global economic recovery have significantly improved, although the path ahead is not going to be a smooth one. Also, the wave of monetary and fiscal stimulus continues unabated which is probably good news for investors.

While restaurant and bars closing make the headlines, it’s the continuing functioning of other sectors such as construction, manufacturing, financial services and healthcare which are driving the economy.

However, it is not always easy to separate the forest from the trees as we are continually buffeted by news flow which most of the time is overloaded with doom and gloom. Sadly, this attracts the headlines and is just noise dressed up as short term influences and scaremongering.

It is important not to listen to the doomsayers. Negative headlines sells papers and generates clicks. We’re more likely to read an article about the impending collapse of the global financial system than one saying that investors are likely to do all right in the next decade. But the latter outcome is far more probable.

In the last 20 years there have been many forecasters predicting global disasters. So far they have all been wrong. The impending disasters that are forecast rarely happen. Remember Y2K -  it was a non issue. We survived the Credit Crunch in 2008 and the world will get through and recover from Covid-19.

As this tumultuous year draws to a close, it is best to cut out the noise that comes our way and instead focus on the things that matter and the things that are important to us.

5 Reasons To Set Up a Family Trust

Trusts are often viewed upon as being overly complicated and complexed. However, they can be an effective tax planning tool in retaining wealth and keeping it ringfenced for the benefit of future generations.

In this blog I look at the benefits of using a trust and the scenarios in which creating one works particularly well.

Regardless of whether your wealth has been accumulated through hard work or whether it has been inherited, a key concern is often around it being frittered away by future generations or ending up in the wrong hands. Assets within a trust are safeguarded, whereas a family member’s own assets are subject to attack in the event of bankruptcy or divorce.

Control & Flexibility

Understandably, many people want to maintain control rather than make a direct gift. Setting up a discretionary trust can be an excellent way of doing this. If you make a gift into a discretionary trust you can act as a trustee and have an element of control and ensure the right people benefit at the right time. Lifetime trusts created “today” can last for up to 125 years so several future generations may benefit!

Providing you survive seven years from the date the gift is made your taxable estate for Inheritance Tax purposes will reduce by the value of the gift.

However, it is important to be mindful that a tax liability at the lifetime rate of 20% will arise if the value of all gifts made into a discretionary trust exceeds £325,000 over the previous seven years. For couples making joint gifts this would be £650,000.

Furthermore, there may be periodic (10 yearly) and exit charges if assets are transferred out of the trust, although there are strategies where this can be minimised or avoided altogether.

A simpler solution, but less flexible

An alternative to setting up a Discretionary Trust would be to use a Bare Trust (also known as an Absolute Trust). A key difference is the beneficiary has to be nominated at outset and the trustee has no say in how and when they benefit. Once the beneficiary turns 18 they have an absolute right to the assets within the trust. This may not be desirable.

They are therefore a lot less flexible although are commonly used by parents and grandparents to fund a future known liability for a family member such as funding education costs. Bare Trusts offer tax advantages as the tax liability falls on the beneficiary. Furthermore, there are no potential tax charges on the way in.

There are pros and cons for using one or the other. Care should be taken when considering the most appropriate and it is advised that professional advice is sought.

Capital gains deferral

A trust may also work well where there is an asset holding a capital gain, such as a property or shares. In making the transfer the settlor (the person who creates and puts assets into trust) can elect to hold over the gain to the trustees. What this means is the trustees acquire the shares at the original purchase price and the gain is transferred to the trust.

Any sale of shares within the trust would be subject to a capital gains trust rate of 20% (the trust capital gains allowance is 50% of the individual allowance which is currently £12,300). With further planning the gain can potentially be passed on to a beneficiary whereby they can use their capital gains exemption to offset any taxable gain.

Retaining the Residence Nil Rate Band

A trust can also be used to potentially reduce the value of an estate to below £2 million in order to benefit from the full Residence Nil Rate Band (RNRB). In addition to the Standard Nil Rate Band (SNRB), the RNRB is an allowance which can be offset against the value of a main residence on first or second death (providing specific criteria are met). Much like the SNRB any unused RNRB can be transferred to a surviving spouse.

The value of the RNRB is currently £175,000 per individual or £350,000 per couple if unused on first death. Higher value estates above £2m will see the RNRB reduced by £1 for every £2 over this threshold. This means that the current RNRB would be completely lost if the estate is greater than £2.35m. Alternatively, where someone receives an unused RNRB from a former spouse they will lose both allowances once the surviving spouse’s estate is more than £2.7m.

However, although gifts made (either directly or into trust) in the 7 years prior to death will form part of the estate for IHT they are not caught by the tapering of the RNRB. This means some later life planning may be possible which could save as much as £140,000 in IHT if both RNRB’s can be retained.

Conversely, assets which may be IHT free due to the availability of business relief are included in the tapering test. However, this can be avoided if some or all of these assets are transferred into a discretionary trust during lifetime. Furthermore, if the assets have been held for at least 2 years there will be no lifetime tax charge on the way in.

Post death planning

A trust can be set up to receive a lump sum death benefit from a life policy. The benefit of doing this is that the trustees will receive the money very quickly and can pass it on to the beneficiary without waiting for probate. The lump sum won’t be counted as part of the estate and will not be assessable to IHT. Furthermore, if the policy has been set up to fund an IHT liability the funds will be available immediately to pay any tax due.

There are pros and cons of putting assets into trust. One of the main drawbacks for setting up a lifetime trust is loss of access. Once assets go into trust they can’t be used for the benefit of the person(s) who put them in there. This can’t be changed at a later date so an understanding of the implications of this is really important. However, there are some structures whereby the individual can retain a right to a regular stream of income or capital.

If it can be shown via financial forecasting that it is affordable for one generation to transfer wealth to another, using a trust can work particularly well to ensure there is peace of mind that the right people will benefit and at the right time. Along with the potential tax saving benefits, trust planning as part of a comprehensive family plan can work really well in protecting family wealth down the bloodline.

Any reference to legislation and tax is based on Ontrak’s understanding of current UK legislation which may be subject to change in the future.

How Inter-generational Planning Can Help You and Your Family

Helping our family members financially will be important for many of us, but it is not necessarily easy to know how best to navigate this.

This blog outlines some of the common issues and the benefits of taking a more structured and cohesive inter-generation approach.

Inter-generational planning often involves families spanning three or four generations, with a wide age gap! Although grandparents or great-grandparents often want to help their grandchildren financially they are unsure as to how much they can afford to give away, especially when taking into account the potential threat of care costs.

Adult children or those approaching adulthood are confronted by their own issues and worries about the cost of higher education and finding their way onto both the career and property ladders.

Meanwhile, the couple in the middle, the so-called sandwich generation are maybe having to help their parents and at the same time support their children while thinking about their own retirement!

A lot of these pressures maybe carried on in silence!

Creating a family plan can help.

This would typically involve family members from different generations engaging with each other, with a willingness and openness to talk about potentially difficult and emotional issues. Quite often these are resolved once they are brought out into the open and discussed. The result could be better and faster help for those who need it because the picture of the family finances is clearer.

It may be best to engage the help of a professional here as they may have the software to illustrate whether it is affordable for one generation to transfer wealth to another.

Moving money between generations comes with tax considerations. Inheritance Tax (IHT) is the main one and is fraught with frustrations and complexities. However, both capital gains tax and income tax can also be impactful. Careful use of tax allowance and exemptions is vital, as is recording details of all gifts which are made. Seeking expertise in this field can make a massive difference.

Over the coming years trillions of pounds is likely to pass between family generations. However, in the absence of any meaningful planning, a significant proportion of this wealth transfer will not have been received when it was needed most and a big chunk of it will be paid to the taxman. It is best to have a plan in place and to start as early as possible.

Finally, a key concern around passing wealth down the generations is the risk of it falling into the wrong hands or being frittered away. The benefits of using a trust can remove these concerns which will be the topic of my next blog.

Why Percentage Charging Is Unfair

Why do we save and invest money today instead of spending all of it? For most people, it’s to provide for their future, their family’s security and to maintain a desired standard of living during their retirement years. It seems the right thing to do.

However, there is a problem! Most financial advisers/wealth managers charge a percentage of the money invested, which is typically around the 1%* level. This looks like a small number but the long term wealth damaging effect on this can be significant.

An investment of £1 million over a 30 year period could mean the investor ends up with £1 million less**, due to the effect of a percentage fee structure, when compared with an alternative flat fee model.

Over a lifetime of investing the percentage fee eats away at the investment portfolio but the real consequence is rarely seen or known by the investor. Many couples are now experiencing retirements of 30 years or more so percentage fees can create a very costly drag on returns.

Linking fees to a percentage of the money invested means the financial adviser will only be paid when money is invested and the more money invested the more they will be paid.

Furthermore, they may receive an immediate pay cut in their fee income if money is withdrawn from the investment portfolio. So typical lifestyle events such as making gifts to children, buying a property or other significant expenditure items may be met with resistance if funded from an investment portfolio. Also, alternatives such as paying off debt or creating a healthy cash buffer may be overlooked.

For these reasons, I believe the percentage model is unfair. It creates a conflict of interest and can prove to be very expensive over time. It is linked to the value of investments rather than the value that is received. The percentage fee surges when markets rise and plunges when markets fall. The need for an advice service does not rise and fall in line with the markets.

Fees charged for advice should be aligned to the required expertise of the adviser, the level of complexity and time taken to provide the advice, and importantly the value received. None of these are necessarily linked to the amount of money being managed.

My contention is that this outdated and broken model is not aligned to the long term interests of clients and the services delivered to them.

The flat fee model is a much fairer alternative. It is easy to understand, fully transparent and linked much more closely to the service being delivered.

*According to a survey by the consumer group Which on average the annual fee is 1% of the money invested, although rates will vary across firms.

**Using an annual growth rate of 7.6%. The annual percentage fee of 1% starts at £10,000 and moves in line with the portfolio value. The flat fee also starts at £10,000 and increases at the long term inflation target for the UK (2%), adjusted every three years.

What is Sustainable Investing?

There are a multitude of investment solutions that are available in the market and there is no such thing as a perfect solution. However, I believe the key criteria to experience a successful investment journey are to keep costs as low as possible and to be globally diversified across high quality liquid funds.

Within some investment portfolios, it is difficult to know the exact identity of the underlying companies and sectors that make up a portfolio, as there are likely to be thousands of them. Because of this, there will be an allocation to companies that are likely to have a negative impact on the environment and society in general. For example, this may include exposure to companies involved in the extraction and production of fossil fuels or the manufacture of armaments.

Interest in investing in a more sustainable way has increased over the last few years and is becoming more mainstream and accessible. Importantly, it does not mean sacrificing investment returns. In fact, there is increasing evidence that companies which operate in a more sustainable way outperform companies which don’t, both in rising and falling markets.

The concept of ‘investing sustainably’ can mean many different things and can be somewhat confusing and complexed. In short, it is about investing in companies with business practices that are capable of being continued indefinitely without causing harm to current or future generations, or exhausting natural resources.

I think it is helpful to look at sustainable investing as an “umbrella” under which there are three separate categories – Ethical Screening, ESG Investing and Positive Impact Investing – each with increasing levels of ‘sustainability.’ At one end of the spectrum is a conventional investment where no consideration is taken to the sustainability of the underlying companies within a portfolio, and at the other end sits philanthropy.

A word of explanation on each may be helpful.

A conventional investment can include any company, industry, or sector. It can be managed on an active basis (where a manager is trying to beat the market) or passive basis (following the movement of an index) and include an evidence based approach.

Ethical screening excludes companies that operate in controversial activities and are likely to cause a harmful effect on the planet and society. Such companies are likely to fail to reach a minimum ‘sustainable’ criteria and are deemed to be the least responsible companies within their sector.

ESG investing builds on the exclusion of controversial business areas and gives greater weighting to companies with more sustainable business practices. ESG stands for the following:

Environmental; how companies interact with the environment.
Social; how companies interact with their employees, communities and customers.
Governance; how companies are run.

All three pillars combine to define what most people would regard as good business practice. Companies operating in controversial sectors (for example oil companies) may be included within the ESG category if they have better scores when compared to other companies in the same sector i.e. they may be the least bad!

The aim of ESG investing is to create an investment portfolio which is made up of ‘best in class’ companies which score well against a range of factors taking into account their environmental, social, and governance credentials. In short, the aim is to target companies which are the most responsible and well run.

Impact Investing moves a step further beyond ESG investing and invests in companies which aim to deliver a positive or beneficial impact to the planet and society, while still seeking a financial return. This takes a more holistic view and requires more active management with fewer companies in a portfolio. Importantly, positive social or environmental impacts are actively measured and reported.

Philanthropy lies at the extreme beyond impact investing where the sole aim is to ‘do good’ in the world aligned to chosen interests and areas, without the expectation of any financial or monetary return from the investment (donation).

As to whether there is a desire to invest in a more sustainable way depends on your specific preferences and views. That could  range from having no desire at all, to dipping your toe in the water and being at least ‘somewhat green’, or moving further along the spectrum and having a significant proportion (or all) of your investments in a sustainable solution. There are many factors to be considered.

Sustainable investing is an evolving area and one which is growing in awareness and popularity. I believe that companies with more sustainable business practices are likely to perform better, which in turn should help to reduce risk and deliver both financial and non-financial benefits.

Financial Implications of Covid-19

Since March, Government spending has gone through the roof in an attempt to counter the economic impact of the coronavirus pandemic.

Many people are wondering where the money is coming from and what future impact this could have for them. This blog attempts to shed some light on this, with various considerations being thrown into the mix.

In this year’s budget the Government projected that they would need to borrow around £55bn in order to balance their books i.e. make up the shortfall between what they spend and what they receive in tax receipts.

However, with tax receipts falling off a cliff and spending skyrocketing it has been forecast that the Government’s borrowing requirement could balloon to around £300bn in 2020/21. This is not, however, the end of the story when it comes to Government borrowing. Each year, borrowing from previous years has to be refinanced as repayments fall due and the amount coming up for refinancing this year is around £100bn.

The way in which borrowing is being financed (both this year’s and previous years debt) is by the sale of gilts. These are IOUs issued by the Government which pay a fixed amount of interest over a fixed term. At the end of the term the capital lent to the Government is repaid.

Taking into account the sums of money the Government needs to borrow, unsurprisingly, the main buyers of gilts are not the general public but large life companies, pension funds and banks, in particular the Bank of England. In the Bank of England’s case this is quite often under the guise of quantitative easing.

The Bank of England plays a crucial part in all of this. As well as one of the largest investors of gilts it is effectively providing capital to the Government on tap by way of an overdraft. Until recently this facility had been little used but has been extended ‘temporarily’! This is more of a back up in the event gilt sales falter.

National Savings plays a minor financing role. Its financing target for 2020/21 was £6bn so is just a drop in the ocean when looking at the bigger picture.

So the huge cost of the pandemic is initially being met by borrowing, but looking longer term how is this massive widening of the deficit going to be brought down?

Taxation alone is unlikely to be an immediate solution. The Government starts from a tricky position with its manifesto pledge that there would be no increases to income tax, national insurance contributions or VAT (the three largest revenue raisers). However, election promises haven’t always been kept! If that promise is broken adding 1% to any of those rates would raise around £6bn to £7bn a year.

Taxing just the wealthy is not going to bring in enough either: adding 1p on the basic rate would raise the same revenue as about 4.2% on the higher rate and 28p on the additional rate. The middle income group therefore is likely to be a target too.

Given the much publicised cost of pension tax relief, the removal of higher rate tax relief and the introduction of a lower flat rate may be ripe for the picking. This has been threatened many times before, although it would be harder than it looks to implement with a number of consequences to be taken into account.

Reform of Inheritance Tax (IHT) is another area, although in revenue terms it would make no serious dent. Doubling the IHT take would raise less than a ‘NHS 1p’ on income tax and probably would create a lot more angst.

Other possibilities include a ‘Covid-19’ tax surcharge, along the lines of the solidarity tax Germany levied after reunification. This was introduced in 1991 and will be finally abolished for 90% of taxpayers this year – a reminder of the danger of ‘temporary’ levies! Or the introduction of a wealth tax as a one-off levy or annual payment. Although such a measure could be a significant revenue raiser the politics and practicalities of this may make this a non-starter.

When things are more back to normal it is likely that Government expenditure will be trimmed in places, so we are likely to see a combination of spending cuts and tax increases. The triple look guarantee for state pensions looks like a candidate for a cull. With inflation and earnings growth both set to fall, the 2.5% triple lock floor could be reduced or removed. However, tax increases are easier to introduce than spending cuts and are likely to produce faster results so the balance may be skewed more towards tax increases.

One way a Government can pay its debts is to print money. Although it can have a wealth destroying inflationary impact (as in Zimbabwe) it does have its supporters. Quantitative easing is often described as electronic money printing and has been used extensively by the Bank of England as part of its gilt purchase programme both in this crisis and the financial crisis back in 2008. Despite all the money that the Government has pumped into the economy inflation is currently at a low level and below target. However, this may only be in the short term and we may see higher inflation return.

In practice any solution to tackle the debt mountain is likely to be a combination of factors, and it is unlikely very much will emerge in the short term. In times like these when these issues seem so vast and uncertain it is much better to focus on the things that matter and the things we can control in our lives; and through the process of planning for a better financial future to check in regularly and make course corrections if need be.

The Importance of Discipline

Following the recent falls in the equity markets many investors would have been tempted to abandon their investments and go to cash. Some will have done this and some will have held on.

It is those who have held on who will have been rewarded. Against the backdrop of what is still a very uncertain landscape there has been a fragile recovery in the markets.

In the last few weeks we have seen a stark contrast between upward movements in global stock markets and the bleak economic outlook for the global economy.

So what is the reason for this apparent dis-connect?

I believe the reason for this is that governments and central banks around the world are doing everything they can to support and re-start the economy. They are jumping in to keep their economies afloat.

Markets are forward looking meaning current prices reflect expectations for future economic and health developments and the potential impact these may have for the thousands of companies which make up the global market.

Against this backdrop nobody knows whether stock markets will sustain the fragile recovery or fall back again. It is reasonable to assume that market volatility will remain over the coming months as information coming through continues to evolve and the picture as to how our lives will be affected changes. Market prices are likely to reflect this constant change.

So we are definitely not through the turbulence yet!

Markets are uncertain and unpredictable, in fact the only certainty is their uncertainty! However, history shows that those who avoid making wealth damaging decisions by trying to time the markets and instead stay invested for the long term, and accept there will be good times and bad, will experience a much more successful and less stressful investment journey.

Very few investors succeed in timing the markets i.e. buying at the bottom and selling at the top. Nobody can predict what is going to happen and it is best to accept there will be turbulence along the way and take advantage of the diversification benefits of investing in a global portfolio covering multiple assets classes with no bias to a specific industry or segment.

Getting the risk/reward dilemma in sync with an investment strategy that is appropriately diversified and aligned to a workable plan is as important as ever.

How to motivate yourself when you don't feel like exercising!

Spending more time at home in the current environment we find ourselves in, may have affected our routine and sapped our energy and enthusiasm to exercise. For some of us, it may have had the reverse effect.

Exercise is one of the few things in life that is really good for us. It can help in many ways – from boosting our feel good factor and our general wellbeing, to reducing stress, weight control plus many other benefits. The problem is we don’t always feel like exercising.

So, what can we do when our “get up and go” has “got up and left?”

Well, apparently science may have the answer as a result of the work of Michelle Segar at the University of Michigan. Her research has found that a key aspect is to reframe exercise and to stop thinking of it as a chore and start thinking of it as a gift.

In particular, one technique is to instead of saying “I have to exercise” is to say “I want to exercise.”

Researchers claim that the best way to sustain behaviour is if we have autonomy and can draw on a desire within, rather than being controlled by and having to rely on outside motivators. They go onto claim that saying “I have to” imposes an element of external control, whereas saying “I want to” means it’s our choice and we can draw on our own values, desires and wishes.

So, the next time you are not feeling motivated to go out for a run, bike ride, a walk, or to hit the online workout session you may wish to use this simple linguistic technique.

Making exercise enjoyable and doing some regular physical activity, however long or short, is likely to help us say “I want to”, although I’m convinced my wife say’s this so she can have an extra glass of wine!!

PS If you are interested to find out more about Michelle Segar’s work she has written a book No Sweat: How the Simple Science of Motivation Can Bring You a Lifetime of Fitness which is available on Amazon.

Coronavirus scams - how to spot & avoid them

At a time when we are all trying to stay safe, sadly, there’s been a worrying increase in the number of scams since the coronavirus pandemic, with victims being tricked out of over £1.6 million since the start of the outbreak.

Scammers appear to be coming up with new ways of tricking people, and fears over coronavirus have given them an opportunity.

I have noted below some of the main scams and tips on how to avoid them:

Emails
Fraudsters are targeting people with a number of scam emails, for example, asking for donations or to claim a refund.

To avoid being scammed, don’t download attachments or click on links in emails purporting to be from well known organisations especially if the email is not expected. It is likely to be a scam. Also, it is worth checking the email domain as it may have come from a scammer overseas, which bears no reference to the organisation the sender is claiming to be from.

Examples of scam emails have come from HMRC claiming entitlement to a tax refund which then tempts you to click on a link and input your bank details. I have also heard about a very convincing email from the government which asks for money for the NHS as well as other organisations which claim donations will go towards the NHS. You can reduce the risk of being scammed by only donating to legitimate charities, and these can be searched via the Gov.uk website charity register.

Text Messages
Scammers are also sending text messages, again, that look like they are from a genuine organisation, such as the government, NHS or even your bank. They can appear to be very realistic and I myself have received several. The best advice is not to click on any link that appears to come from a legitimate source. HMRC does not issue tax rebates by text and banks don’t ask for personal information in this way.

Financial & Pension Scams
There are also scammers who pretend to be from an authorised financial advisory firm that typically cold call people to promote worthless or non-existent investments or property scams.

Also, there are fraudsters who claim they can help people access their pensions before 55. If you do, you’ll incur massive charges of 55% of your pension pot in addition to the scammers fees. In some cases you could lose all your money. There are only very limited circumstances when a pension can be accessed before 55, such as in the event of serious ill health.

Also watch out for offers of free pension reviews which come out of the blue and offers to help you move your money to a safe haven. Your money will probably be invested in high risk and unregulated investments or will disappear altogether.

Pension cold calls are illegal so if you get one just hang up, and ignore any offers via email, text or online adverts too.

All authorised firms are registered with the FCA so it is worth checking on the FCA’s Register in the event you are considering making any changes to your pension.

Doorstep scams
Not all scams are over the phone or online. There have been reports that scammers have been going door-to-door offering ‘coronavirus’ tests. To avoid being scammed in this way, ask to see the identity badge of anyone who comes to your door and claims to be from a company or organisation. If you’re not 100% comfortable don’t let them in, and don’t give away any financial information.

So, as well as staying healthy, please stay ‘financially’ safe.

Holding firm in these uncertain times

We are living in uncertain times, which is being felt all around the world.

Global stock markets are continuing to take a bashing, as the coronavirus spreads. The expansion of the outbreak is causing worry among governments, companies and individuals about the impact this will have on the global economy.

For a sustained period up to recently, markets have been rising except for a few “blips” here and there. We are currently experiencing one of those significant “blips.”

Although a severe decline can feel uncomfortable the falls we have seen is part of the journey when investing. Investing is about the long term. Markets fall, but markets will recover and it is best to remain invested to benefit from this when they do.

It is important to accept a few simple truths.

Markets are uncertain and there are always going to be ups and downs and no one can predict when they are going to happen. It is best therefore to avoid behaving irrationally and avoid making moves based on fear or speculation.

Additionally, it is best to focus on the long term and look at returns in terms of five/ten/twenty year plus periods, rather than isolated years, months or days. Past crises, such as the financial crisis of 2008/09, then don’t look as scary and are seen as small downward squiggles in a long term upward trend.

Please also remember that all the noise that comes from the media is just scaremongering and is best to be ignored.

Most importantly of all, it is fundamental to have the right portfolio structure in place which is built around values and goals and which is aligned to an ongoing plan. This helps to manage emotions and prevent panic which is really important during times such as this.

Life goes on and these current events will pass.

A Simple Financial Plan

Guess where you want to go
The first step in creating a financial plan is to get clear about where you are, and where you want to be. It’s about making the connection between tangible things like the money you have and aligning this towards the things that are really important to you. However, understanding where you want to go is not necessarily easy to map out.

When it comes to the future, we don’t know what is going to happen. We don’t have a crystal ball. So rather obsessing over goals and trying to get really precise around them I think it is best to make a best “guess.” Things change and the decisions we make around money and life will never be “perfect” and should not be set in stone. It’s an ongoing process of making adjustments in line with the uncertainties that life throws at us.

Be clear about your current position
Once you have made a “guess” as to where you want to go you need to get clear about where you are. The best way of doing this is to create a personal balance sheet which involves detailing everything you own and everything you owe.

Budgeting
If you have got some clarity around your current position this now might be the time to start saving or investing your money. However, it is important to firstly track where the money is going to come from.

Being aware of how we’re spending our money is really important. Budgeting requires discipline and can be hard. Financial goals get funded with pounds – lot’s of them added up over time – and pounds tend to slip through our hands unless we are doing something to plug the holes. Budgeting is about understanding that the holes exist and taking action to plug them.

Save as much as you reasonably can
I disagree with the notion that we should work as much as we can now, so that we can live comfortably when we retire. Life isn’t just about retirement and a financial plan should not have such a rigid framework that denies us from being happy and living today.

There are lots of rules of thumb about how much to save which are usually based on age and a percentage of salary. I think the best view is to save as much as you reasonably can, although falling victim to the pull of instant gratification can affect our ability to do this.

Saving towards something that is likely to be far bigger and better in the distant future may seem off radar compared to buying something today. But the constant pull of instant gratification repeated over a long period of time is likely to derail a plan.

Insurance and debt
Before any money is invested it is important to assess whether any life and ill health insurance is needed and if so, how much. This can be uncomfortable because it centres on what would happen when we are no longer here. Although it can’t replace an emotional loss its sole purpose is to replace an economic one.

Paying down debt may be preferable to investing and should be viewed as an investment giving a guaranteed return. There is no such guarantee with an investment. Comparing the interest rate on the debt to the expected return on the investment should help to decide which course to take, but other factors may need to be considered as well.

A word about Investing
If there is a need to invest, typically, we are talking about money you will not require in the next five years or so. This gives a greater chance to recover from any market falls.

Investing is personal and should be closely aligned to your specific circumstances.

Key takeaways are to diversify your portfolio to lessen the risk of one holding hurting it. Keep costs low so you keep more of the returns. Determine the split between risk assets (equities) and defensive assets (fixed interest) that you can emotionally tolerate.

Be mindful that a higher allocation to risk assets is likely to result in a higher return in the future (although not guaranteed); but will fall more in a downward market.

Stay invested and don’t look at it too often.

Finally, avoid all the “noise” coming from the media as to what you should or shouldn’t be doing.

Stay the Course
Sticking to a plan is not always easy and because we are human the temptation to stray away from it can be strong! Emotions can cloud our judgement so working with an objective third party, whoever that may be, can help. Most importantly keeping focus on what is really important is likely to help to stay the course.

Helping your Children to Manage their Finances more Effectively

As parents, we want to help our children to stand on their own two feet and manage their finances successfully. However, this is not easy for them. The economic climate is tough for many young adults causing them to rely heavily on their parents.

They are growing up in an entirely different world to the one we grew up in. They can buy things  with just one click without thinking. The modern consumer world is full of traps luring them into buying things they don’t really need. It seems to be all about instant gratification with a pay later attitude. Also, offering words of wisdom may fall on deaf ears!

Navigating this financial landscape is complex so here are a few ideas to help children manage their finances more effectively.

• Have a Budget
  Having an awareness of the unnecessary purchases that are made and being aware of how they are spending their money is important. Writing down all the things they spend for a period of time (for example one month) could help with this. This may free up more cash for the things that are really important to them.
  

• Pay off Debts/Overdrafts
  Prioritise paying off debts/overdrafts over saving or investing. This is because the ongoing cost of debt will be at a higher rate than can be achieved through most savings and investments. If they have multiple debts, they should prioritise those incurring the highest interest first.
  
  Many banks offer students interest free overdrafts. However, following their graduation there is usually a “grace” period before they have to pay back interest and a monthly charge on top. If they don’t pay off these overdrafts before the end of this period the charges can be hefty.
  

• Saving for a first home
  Getting a foot on the property ladder can be a challenge, with a reliance on the bank of Mum & Dad to help fund the hefty deposits that are required. With house prices having risen significantly being accepted for a mortgage can be difficult.
  
  There are some incentives for the younger generation to save for a house and one of them is the Lifetime ISA (LISA).
  
  This is an effective way for 18 to 40 year olds to save for a deposit. Each year £4,000 can be deposited or invested into a LISA, and HMRC will add a 25% bonus, giving an extra £1,000.
  If the account holder does not use the money to purchase a property then it can be used towards their retirement. Any withdrawals from the account will result in a 25% penalty unless it is used to buy a first home or withdrawn from age 60.
  
  It is worth remembering that anyone purchasing their first home for less than £300,000 is exempt from paying Stamp Duty.
  

• Investing
  When your grown up children have greater financial security they may be in a position to invest. Investing is for the longer term (typically 5 years plus). It is important they understand the core principles around risk and return, investment fees and the power of compounding.
  
  Although retirement may seem like a long way off, for the younger generation to have enough in later life it is best to start early and let the power of compound interest do the heavy lifting work. This may be via a Workplace Scheme or Personal Pension but with the addition of tax relief (and “free” money from an employer) it should be considered as part of a more holistic plan.
  
  As parents, you can help to guide your children through this complex landscape and to help them decide what is the most effective solution for their situation. We are here if you feel you need a little help.

Things You Have to Invest!

There are more important aspects in life than money and one of them is enhancing our lives and those of our family. Money is really just the fuel which can be used to help meet our personal aspirations, but is not necessarily the essential part.

As we are now a few weeks into the new year and decade many lists of things to stop doing  - which may revolve around drinking, eating or maybe being less disorganised – will have been made and in many cases probably broken! New Year Resolutions don’t often provide a great outcome!

I think it is best to focus on a list of things to “start doing”, rather than “stop doing”. Ideally things that are really important to us, such as for example, spending more time with family, helping others, taking more time off, learning a new skill, doing some community work etc.

We all have ambitions and dreams of what we want to accomplish in our lives and the only thing really stopping us from making these a reality is “us!”

Money is a tool that can be used to close the gap between where we are now and where we want to be. But money is not the only “thing” we have at our disposal to invest. There are other factors that are probably more important and are likely to have a bigger impact on our future wellbeing.

Champagne on Ice!

I have a bottle of Salon Champagne (regarded as one of the greatest champagnes on the market which is only released during exceptional years) from the much acclaimed 1982 vintage in my “cellar” at home. Well, I can’t really call it a “cellar” because it is stored at the back of a cupboard out of arms reach!

I purchased this bottle back in 1999 for around £70 which would be about £140 in today’s money. Although this bottle is worth considerably more than that now, I did not buy it as an investment and I do intend to drink it. With Christmas fast approaching there is always the thought – will this be the year!

When I bought this bottle my intention was to hold it for the longer term. I have stored it in a safe and secure place, hidden, so as to avoid the temptation to meddle with it and drink it too early or at the wrong time! This wine will (I hope) have improved and evolved with age which will give greater drinking pleasure!

There is, I think, a similarity here with investing and experiencing a successful longer term investment journey. It’s important to select the right “bottle” at the outset i.e. high quality, low cost (there may be a deviation here!), super diversified funds designed to efficiently capture the returns that markets offer.

And to then leave the “maturation” process alone, avoiding the temptation to look at “it” too often and exiting (“drinking”) at the wrong time!

This approach may during certain periods be hard to adhere to, with conflicting messages and external noise from the media, friends or other forces. But patience and discipline when it is “opened” will likely result in being rewarded with something that is far better giving greater pleasure and satisfaction.

Whatever is going to be in your glass this Christmas – enjoy!

Saving Tax!

Throughout our lives we will pay a chunk of tax….Income Tax, National Insurance, VAT, Stamp Duty, Fuel Tax….the list is endless!

So it’s best to keep as much of your wealth away from the clutches of the taxman!

With some smart planning many people can significantly reduce the amount of tax they pay or avoid paying it altogether. A good tax planning strategy as part of an ongoing plan can make a real difference.

The approach to saving tax changes when the transition is made from working, to working less, to not working at all. This is the time when accumulated wealth may start to be withdrawn and spent.

So here are a few simple ways to plan to save tax when taking withdrawals from investments to replace or top up income from work.

• If you hold investments outside of an ISA, pension or investment bond which have made capital gains you can “wash out” gains each year by cashing them in and pay no tax on gains up to £12,000 (this tax year).
  

•  Spending ISAs during your lifetime makes sense because they are subject to Inheritance Tax on death. Also, there is no tax to pay when money is withdrawn from them.
  

•  Plan pension withdrawals carefully!
  

• Investment linked pensions are made up of two parts – one part can be withdrawn without paying tax which is usually 25% of the pension value; and the other part is subject to tax.
  

•  You don’t have to take out all of the tax free part in one go. The payments can be staggered to fund the current years spending requirement, for example.
  

• For the taxable part of the pension the income tax personal allowance (£12,500 this tax year) can be used if not used elsewhere resulting in potentially no tax being paid on that slice of pension income.
  

• On death any remaining pension fund is exempt from inheritance tax.
  

•  So it makes sense to use the tax free lump sum to fund annual expenditure and to keep the withdrawals from the taxable part as low as possible.
  

•  A combination of tax free lump sum and taxable part up to the personal allowance if unused (or not fully used) would deliver the best tax outcome.
  

• However, if you are still making contributions into a pension and if the taxable part is withdrawn you would need to be mindful that the annual pension allowance would reduce to £4,000.

But this is all providing current rules continue to apply as politicians love to tinker with the tax rules!

So it is really important this is all closely monitored so course corrections can be taken if need be, so as to ensure the taxman gets less and you get to keep more and the opportunity to spend more on the good things in life!

Making Progress

I believe we all want to make progress in our lives, and of course, progress will mean different things to all of us.

Getting from where we are now to where we want to be at some point in the future can seem daunting and riddled with perceived obstacles.

However, the power of making a start and taking small positive actions and repeating this over time can make a huge difference. In the early stages it can seem a waste of time with the feeling that nothing is really changing.

But by taking continuous steps the change over time can be significant!

This is also akin to compound interest and investing. Nothing very much happens for a while and can seem boring and even a waste of time to some. But by taking small positive steps over time things can get exciting as the power of compounding takes effect creating a steep upward curve (and using the investing analogy translates into greater wealth).

However, to get to this stage we may have to endure the dull and boring bit at the front end as well as perhaps a dose of stimulation to get started!

So making progress (whatever that may be) is about taking small actions and repeating these over time as the outcome at the end is likely to be worth it.

Forest & Trees!

Put simply, there are four things we can do with our money. Spend it, save it, invest it or gift it. That’s it! I think a lot of us are being constantly pulled from pillar to post with these options and it is not always easy to separate the trees from the forest!

With the strong pull of instant gratification and the sense of “I want it here and now”, spending is perhaps the most widely used option! Of course that can be ok but it can often have a big impact on deferred gratification, on things that are perhaps more important and more aligned to our values but are perceived not to be in the present moment.

Getting the balance right between enjoying the here and now (which does not necessarily always translate into spending) and saving towards something or investing for the future is no easy task.

There is a good chance we could be around for a long time so removing ourselves, even momentarily, from the everyday bubble of life and creating a vision towards a desired future state can help us to focus on what is really important. Once we have a picture as to where we are today and where we want to go it should make it easier to take action on how to get there.

Making small incremental changes over time can make a big difference and can give greater focus on how best to use our money.

Cutting out the noise!

With all the turbulence in the political world at the moment and the uncertainty as to how it will all play out there is a tendency for us to focus on how we will be affected by this.

We also have to contend with the usual doom mongering within the media and press around what could happen to the investment markets with the lure of how to avoid the next potential downturn.

It is easy to get blown off course!

I believe when it comes to investing it is best not to pay a lot of attention to what is going on in the markets. Investing is a life-long journey and the capital markets reward long term investors. Naturally, there will be periods when there is some turbulence and returns will be disappointing (it being important however that there are no surprises when these periods do arise).

By using the long-term power of the markets to do a lot of the “heavy lifting” work to help us achieve and maintain a desired future lifestyle (and avoid the temptation to make speculative calls) can remove ourselves from the noise.

Many things are out of our control, so it is much better to focus on the things that matter and the things we can control.

Are your family going to benefit from a £140,000 Inheritance Tax reduction?

Back in the summer budget of 2015 a new residence nil rate band (RNRB) was introduced which has been designed to exempt from Inheritance Tax (IHT) family homes up to the value of £1 million. The Bill has passed through Parliament and the new rules are due to come into effect from April.

The eye catching headline of a new £1 million IHT free allowance is not as simple as it sounds. The rules are complex. However, they do provide opportunities to reduce the IHT burden in the right circumstances.

The RNRB, which can apply on a person’s death, will start at £100,000 for 2017/18. It will then increase during the next three tax years by £25,000 per annum, until it reaches £175,000 in tax year 2020/21.

Like the standard nil rate band of £325,000, the RNRB will be transferable between spouses if unused on first death. This means that where none of the standard rate band or RNRB is used on the first death, and if the second death occurs after 6 April 2020, married couples with a main residence worth at least £350,000 will be able to potentially leave a total estate of £1 million before any IHT is payable.

This is good news but there are several pitfalls for the unwary, and the main ones are covered below.

• The RNRB will only be available if the main residence passes to children (including stepchildren) or grandchildren; and or surviving spouses of those children/grandchildren. Property left to a discretionary trust will not qualify for the RNRB even if all the beneficiaries of the trust are children/grandchildren.

• There are some trusts that do qualify – often referred to as immediate post death interest and absolute trusts – providing the beneficiary is a spouse, child or grandchild.

• Care needs to be taken when deciding the age at which children inherit the main residence as any entitlement beyond the age of 25 is likely to render the estate ineligible for the RNRB.

• The RNRB is reduced by £1 for every £2 if the deceased’s net estate exceeds £2m. Net estate means everything the deceased is beneficially entitled to after deducting all liabilities such as loans. It is important to note that property that qualifies for business property relief and agricultural relief is included in the estate for this purpose. Pensions are excluded as they do not form part of someone’s estate.Tapering will apply to reduce any transferable RNRB where the estate of the first to die exceeds £2m. For married couples, if the estate on the second death is sufficiently large, both the RNRB of the survivor and any transferable amount could be lost altogether.

• For married couples who are leaving everything to the spouse on first death, the practical effect of this is that in the 2017/18 tax year the RNRB will be lost altogether on second death where the estate exceeds £2.4m, rising to £2.7m from April 2020.

Considerations to preserve entitlement to the RNRB could include:

• For married couples there is the option, where appropriate, to transfer assets between each other to reduce each individual’s estate to below £2m.

• Leaving a share of the main residence to children or a discretionary trust on first death; or other assets up to the value of the standard nil rate band (£325,000). The RNRB will not be used and will be available for transfer to the surviving spouse.

• Making lifetime gifts of assets. There is no requirement to survive seven years so there is scope to make gifts even a short time before death and reduce the net estate to a level where the RNRB will not be lost.

Those who have downsized or disposed of their property before death will not lose out on the RNRB, providing there are other assets in the estate that are broadly equal to the lost RNRB and are inherited by children or grandchildren.

While the RNRB will help people to reduce their IHT liability who are planning to leave a main residence to direct descendants, it is important they are informed of the ways they can maximise its use and not take action (or inaction) unwittingly that may result in it being lost. The starting point should be to review wills made before the changes were announced to check whether they are tax efficient.

For wealthy individuals it is unlikely their IHT liability will disappear, so other planning will still be necessary.