ISA rules and Inheritance Tax

Families set to pay millions in unnecessary tax

There’s a fundamental lack of awareness and understanding around Inheritance Tax, especially when it comes to how Individual Savings Accounts (ISAs) are treated after death. Given that some people have been able to amass over a million pounds in their ISAs, it’s an area where lack of knowledge could prove costly.

Over half (51%) of over-45s do not know that ISAs are liable for Inheritance Tax, leaving families across the UK set to pay millions in unnecessary taxes according to findings from an annual Inheritance Tax monitor survey[1].

Gifted to a partner 

As ISAs can only be gifted to a partner and not children without incurring tax, the Government will ultimately be a major beneficiary of money currently residing in Cash ISAs and Stocks & Shares ISAs. In the last Budget, HM Treasury predicted it would raise £5.3 billion in the 2017/18 tax year in Inheritance Tax, which will eventually increase to £6.5 billion by 2022 to 2023.

The research also revealed over three quarters (77%) think the UK’s Inheritance Tax rules are too complicated. Yet despite this, only a third (33%) have sought professional financial advice on Inheritance Tax planning. Of those who did seek advice, over two fifths (42%) spoke to a professional financial advise

Rules regarding inheritance

Some people could inherit less than they expected because they aren’t aware or make assumptions about the rules regarding inheritance. In particular, the rules governing the gifting of ISAs and valuable estates mean that many may be faced with a higher than expected Inheritance Tax bill.

ISAs remain the ‘go to’ financial product for many people as they look to build up a nest egg in a tax-efficient way during their lifetime. But with such a large number of older people investing into them, there is a worrying lack of awareness that ISAs are subject to a 40% Inheritance Tax charge. ISAs are a great tax-efficient investment in your lifetime, but more people need to be thinking about how to pass on their hard earned money to their loved ones when they die.  

Securing and protecting your wealth

Early preparation is the key to success here. Taking advantage of methods to secure and protect your wealth will ensure that more wealth can be passed onto the next generation – to find out more, please contact us.

Source data:

[1] Survey of 1,001 UK consumers aged 45 or over with total assets exceeding the individual Inheritance Tax threshold (nil-rate band) of £325,000. Carried out in October 2017. 

Article published by Goldmine Media Ltd.  For further information, please see our latest edition of Smart Money
 

 

Back to the future

Uncovering what really matters to you is the key to the planning process

Have you ever thought about writing a letter to yourself to describe your ideal future life, long-term life goals and the process of how to plan for them?

Imagining what you want your life to be like in the long term when you retire will help you think much further ahead than you might have done before. Research conducted for a new campaign[i] shows that over half of people (54%) plan their lives only days (31%) or weeks (23%) ahead.

The participants were asked to look deep into their future lives in a bid to uncover what really matters to them. When asked to write a letter to describe their ideal future lives, people were very good at imagining it. But many didn’t know how they were going to achieve it or how to take the next step to build a bridge from now to that future self by putting a plan in place to get there. 

Key well-being aspirations

The writing exercise uncovered how people really envisage their life in the future. The letters illustrate that well-being in old age pivots on simple hopes (family, health and happiness) rather than extravagant financial ambitions. A well-balanced life was a key aspiration for many respondents. The letters confirm a clear hierarchy of needs and aspirations in life that many of us would have expected: family/partner, followed by career and financial security, followed by hobbies and interests, including friends.

While a handful of the respondents hoped for lottery wins or gold medal glory, the overwhelming majority expressed their desire to remain healthy and active in old age and to live ‘comfortably’ with some degree of financial security. The letters revealed a nation aspiring to much more grounded ambitions: the centrality of family, a desire to travel, to learn throughout life, and to have fulfilling but balanced careers with a good work/life balance.

Family, health and happiness

It’s not surprising that family, health and happiness are central pillars for people’s well-being. What is surprising is how unprepared most people are to achieve the dreams they have described. The letters are wonderfully optimistic, but there is a reality check. The findings showed that people underestimate their required size of pensions pots by up to £550,000, while many people who have the capacity to save aren’t doing so.

By using the letter as a catalyst, once you know what your goals are, the next step is to plan for them.    To support the letter writing campaign, a study was also commissioned to gauge people’s current well-being and life goals[ii]. The survey indicates a fundamental disconnect between the life people aspire to and their life now.

Prevention barriers

As noted above, the study found that 54% of people plan their lives only days or week ahead.  Only 14% of respondents said they plan for years ahead, with only a handful (4%) suggesting that they plan for future decades. This may explain why only 11% of UK adults with life goals know how they will achieve them.

When it comes to life goals for the future, travel is a primary ambition for over two in five people (44%), followed by eating well (40%), getting fit (39%), spending more time with friends and family (36%) and better work/life balance (20%).   On the flip side, the main objects listed as preventing people from achieving their goals are money (33%) motivation (28%) followed by energy and time as barriers in equal measure (26%).

Path to financial freedom

When it comes to financial goals, one in five people (20%) have none whatsoever. Among those with goals in mind, the same percentage of people (20%) have not worked out a strategy and don’t know how they will achieve their specific goals. The top financial goals are: save for a rainy day (43%); earn more money (32%); save for a special occasion (21%); reduce or clear debts (19%); and buy property and pay off mortgage (both 17%).

Finances touch just about every aspect of your life. Your personal life and your financial life are not separate – they intertwine with each other. Your path to financial freedom means identifying and harnessing your dreams and bringing them alive. We can help you find an answer. Whatever stage of life you’re at, we can guide you through the opportunities and challenges you face.

Start planning decades ahead 

We all want to fulfil our life plans, so the earlier you know where you want to get to, the better chance you have of getting there. Ideally, it’s essential to start planning decades ahead to map out the life you want for yourself and your family. The process of writing the letter should prompt that thinking and planning and hopefully that conversation with your partner and family.

To discuss your situation or to arrange a meeting, please contact us – we look forward to hearing from you.

Source data:

[i] The Brewin Dolphin letter writing project asked 500 UK adults to write a letter to their future selves deep into old age – a letter their ‘future self’ may discover and read as they reflect back on life. Methodology: online survey completed by 500 economically active respondents aged 18–65. Fieldwork by Trajectory from 12–20 April 2018.

[ii] The survey polled over 2,000 UK adults about their life now, their well-being and attitude to money, plus also what they want in the future – personal and financial goals, and how they’ll achieve them. Methodology: online survey was completed by 2,004 UK adults (18+). Fieldwork by Opinium from 11–14 May 2018

What do we do about Bonds…

 

‘You don’t need bonds, until you need them!’

Anon

Challenging times

I sat in our Investment Committee meeting for most of yesterday morning and amongst many things we discussed the current thoughts on Bonds (these include Government Gilts and Corporate bonds). You may feel I am a glutton for punishment on a Monday morning but really …. it was quite interesting!

In response to the very low yield on fixed interest investments (bonds), some investors have been tempted to chase higher yielding bonds, in an attempt to squeeze some return out of what feels like an unproductive portfolio allocation.  This is, unfortunately, an accident waiting to happen.  The phrase ‘picking up pennies in front of a steamroller’ comes to mind.

Others are asking whether they should be holding cash as bond yields are ‘inevitably’ going to rise, denting bond returns, at least in the short term.  Neither, approach according to the research conducted by Albion Consulting who provide the research which helps build our investment portfolios for clients, makes much sense.

We should be looking forward to yield rises

At some point in the future, yields (income) are likely to rise back to higher levels.  The problem is that no-one knows when, how quickly and with what magnitude it will happen.  Investors should be looking forward to yield rises, because in the future their bonds will be delivering them with a higher income, hopefully above the rate of inflation.

When income yields do rise, bond prices will fall, creating temporary losses.  At that point bonds now earn an investor more than they did before the rate rise and they reach a breakeven point where the new higher yield has fully compensated them for the temporary capital losses suffered.  The time to break even is equivalent to the duration (similar to maturity) of an investor’s bond holdings.  Short-dated bonds with a three year duration will breakeven after three years.  Below is a hypothetical example.  Follow it through.

Table 1‑1: The impact of a 2% rise in yields on a 3 year duration bond portfolio

Year end Today Year 1 Year 2 Year 3 Year 4 Year 5
Yield-to-maturity 1.5% 3.5% 3.5% 3.5% 3.5% 3.5%
Immediate yield rise % 2.0%
Capital loss* -6.0% 0.0% 0.0% 0.0% 0.0%
Yield during year 3.5% 3.5% 3.5% 3.5% 3.5%
Total return for the year -2.5% 3.5% 3.5% 3.5% 3.5%
Cumulative total return -2.5% 0.9% 4.4% 8.1% 11.9%
Annualised total return -2.5% 0.5% 1.5% 2.0% 2.3%

Note: * We have assumed that the capital loss is approximated by the rise in yields times the duration.  In reality due to convexity – capital losses would not be quite so great.

The bonds within our portfolios are generally within a 3-5 year duration period.

 Holding cash deposits is not the solution

Imagine that an investor felt that rate rises were likely to occur, with a detrimental – albeit temporary – impact on bond returns in the near future.   They decide to place a deposit for three years, receiving interest of 1.5% p.a., comparable to the current yield on three-year bonds.  In three years’ time when their deposit matures, they end up with the same return as the bond portfolio (green-coloured cell in the table above).  Why bother?

Our view is that long-term investors should stick with their bond holdings.  At some point they will need them to protect against turmoil in the equity markets and that is what they are there for. Remember ‘You don’t need bonds until you need them!’.

Warning – The above information is based upon the views  of Carpenter Rees Limited.  It is not intended as a personal recommendation and should not be relied upon as such.  The value of your investment can go down as well as up, and you can get back less than you originally invested.

4 Ways to Feel More “At Home” in Your Home

Do you feel “at home” in your home?

Your home is often the biggest financial purchase you’ll ever make. But is it also giving you the emotional payoffs you hope for?

Your home is an important part of your financial plan because we have to consider your rent or mortgage, utility bills, maintenance, and taxes as part of your monthly and long-term financial picture. But to get the best life possible with the money you have, your home should also be a safe place that makes you feel comfortable and relaxed.

Here are four things to consider when trying to make your residence feel more like home.

Your personal touches.

In this age of social media and free two-day delivery, it’s never been more tempting to get sucked into “Keeping up with the Joneses.” But if you’re always trying to surpass you neighbour’s latest big splurge, you won’t be creating a space that’s truly yours. You’ll just be buying a copy of someone else’s idea of home.

Forget about the celebrity Instagram boards, and instead think about how to make your house reflect your family’s passions and stories. Turn an unused bedroom into a workshop or personal study. Bring those old family photo boxes down to a framer and breathe new life into your walls. Brighten up shelves with mementos from favorite trips.

If you’re considering additions or garden amenities, try thinking about these changes in terms of the experiences they can create for you and your loved ones. Sure, a hot tub sounds nice. But a new patio and some green space might be a more versatile and welcoming environment for family gettogethers. Upgrading your kitchen might allow your inner master chef to blossom into a truly talented cook.

Your personal comfort.

Sometimes less flashy upgrades to your living space have the biggest impact. A brand-new mattress isn’t as exciting as a garden hot tub, but you’re certainly not going to spend 8 hours every day soaking!

If you’ve been sleeping in the same bed and siting on the same settee for close to a decade, do some furniture shopping. Get some new pillows and sheets, or an ergonomic computer chair. These improvements aren’t just cosmetic – they’ll help you rest better and feel better.

Many of us also live with little quirks that have a negative impact on how we feel about our homes: that room that doesn’t get warm enough in the winter, a leaky sink, a living room with enough lighting for TV but not enough to read by, that cupboard under the stairs that’s going to explode someday. Minor household repairs and good old-fashioned spring cleaning can bring some welcome calm to the clutter we all accumulate.

Your personal geography.

Real estate pros like to say the three most important qualities in a home are: location, location, location. But the perfect spot for your first home might not be the perfect place to get married, raise a family, and start your own business. Once your kids move out of the house and have families of their own, your feelings about where you live might change yet again.

Your home city might become more or less appealing to you over time as well. Beloved businesses and restaurants close. New establishments take their place. Friends come and go. The cost of living can fluctuate.

If your community no longer provides you the same comfort, activities, social circle, and engagement that it once did, it might be time to consider a move. This could be another reason to explore buying a second home for extended weekends closer to your family or vacations that allow you to explore your passions.

Your personal journey.

As your life changes, your experience of home will change along with it, especially as retirement nears. The big family home might become a difficult empty nest for you and your spouse to maintain as you age. The familiar comforts of home might start to create a restless sort of discomfort. You might feel drawn to new places, new people, and new experiences to keep your golden years fresh and stimulating.

Or, like more and more retirees, you might decide that your current home truly is where your heart is. You might “retire in place” and give your current home some TLC that will prepare it for the next phase of your life.

So what does “home” mean to you? We are happy for you talk to us about creating a financial plan that will provide you with as much comfort as your favourite reading chair.

 

 

 

Early Retirement is good for your health

Sound financial planning is not only good for your bank account – it could improve your life expectancy. If you’re reading this then you probably don’t need to be convinced of the benefits of looking after your money, but here’s another reason to add to the list.

The idea of retiring early can be most appealing. For some it will already be a reality, whilst wise financial planning may mean it’s perfectly achievable for those thinking about it. Research now suggests that an early retirement can also lengthen your life. Economists from the University of Amsterdam published a 2017 study in the Journal of Health and Economics which confirmed that male Dutch civil servants over the age of 54 who retired early were 42% less likely to die over the subsequent five years, compared to those who continued working.

Researchers put this life-extending phenomenon down to two main factors. First, when you retire you have more time to invest in your health. Whether that means you find more time to sleep, more time to exercise or simply more time to visit a doctor when an issue arises, you’ll see the benefit.

Secondly, work can be a great contributor to stress, creating hypertension which is in turn a huge risk factor for potentially fatal conditions. In the study, retirees were shown to be significantly less likely to fall victim to cardiovascular diseases or strokes.

Of course, there can be benefits to continuing to work. Participating in a work environment is a good way of keeping your mind and body active. On top of that, being part of a team helps develop and maintain a sense of purpose and belonging that is essential to cognitive health and development.

That’s not to say that all these benefits can’t be achieved outside of work; the key is to find a hobby, interest or cause to involve yourself in. As is so often the case, there’s no single solution. It’s important to find the best path for you, whether that’s staying in work, retiring early or going part-time. Whatever you choose, spend your time wisely as it could have a major impact on how long your retirement turns out to be.

Why Simple Beats Complex

One of Carpenter Rees’ guiding principles of investment is ‘keep things simple’.  Ben Carlson, a very well respected Financial Adviser in the USA, wrote a whole book on the topic aptly named ‘A Wealth of Common Sense: Why Simplicity Trumps Complexity in Any Investment Plan’.

Ben’s view is that a simplicity-based framework can lead to better investment decisions and whilst he couldn’t prove that as an 100% fact, below are what he believes are the main reasons why simple beats complex in the investment world –  and being a fan of simple, who are we to argue:

Intelligent people are drawn to complex solutions. There are plenty of intelligent people in the world of finance, but that intelligence often comes at a cost because smart people can more easily fool themselves into believing they have all the answers. Simple is not stimulating enough for some people, therefore intelligent people tend to overthink things and that can get them into trouble.

Complexity is about tactics; simplicity is about systems. Tactics come and go but an overarching philosophy around the way the world works can help you make better decisions in multiple scenarios. Simple doesn’t go out of style but complex does.

Simple is harder. To keep things simple, you have to fight harder because our human nature makes us susceptible to stories and narratives. Simplicity is more of a psychological exercise while complexity is more about trying to be cleverer than anyone else.

Trying harder does not guarantee better results. Outsmarting the competition is easier said than done because putting in more

Giving: How to Do The Most Good Without Disrupting Your Financial Plan

Many studies have shown that charitable giving provides greater happiness than buying more stuff. Eventually, you get used to your fancy new car, and the level of  enjoyment it provides goes down. But giving forges feelings of connectedness and community that don’t fade away.

Incorporating charitable giving into your financial plan is a great way to make sure that your generosity is aligned with the things that are most important to you. Some forethought about these key issues will also make sure that your good intentions don’t throw off the rest of your own long-term planning:

  1. Have a purpose.

The most effective charitable giving is thoughtful and intentional. It may be helpful for you and your spouse to ask yourselves some questions that will narrow your focus, such as:

  • Do we want to give to a national or local cause?
  • Are there pressing issues in our community that we feel we can help impact?
  • Do we have any personal connections to causes, such as medical research or support for the arts?
  • Do we want to support friends or family by contributing to causes that impact their lives or fulfill their passions?
  • Do we want to support a religious organisation, such as our church?
  • Are our charitable impulses motivated by on-going problems, such as education or homelessness, or would we rather position ourselves to react to events such as natural disasters?
  1. Do your homework.

Once you’ve settled on a cause, do some research on potential recipients. Visit the local charity you’d like to support and meet with its leadership team. Is the organisation running itself responsibly? Are there good, competent people in charge? Will these people get the job done? Don’t sink your money into a well-intentioned black hole.

If you’re looking to give to a national organisation, keep in mind that even some of the biggest names have come under fire lately from watchdog groups for misusing donations. Make sure you’re giving to an organisation that’s doing what it says it’s going to do with your money.

Also, remember that big organisations – even charities – must manage things like overheads, salaries, and insurance. Are you happy supporting the organisation itself? If you want to see your money in action more visibly, you might be happier giving locally.

  1. Beware the internet.

Whenever something bad happens in the world, our inboxes and social media are flooded with donation links. Read before you click. Be especially wary of crowd-funded campaigns on sites like GoFundMe. The cause may sound worthy, but these sites do not provide meaningful oversight on every campaign. Your money could be going to a cause, or it could be going straight into a scam artist’s pocket. You’ll never know

Is Your Money Being Used to Improve Your Life?

There’s a movement toward redefining money: instead of accumulating money for what it can buy, more of us want to use money to live the best life possible with what we have––a concept known as Return on Life™ (ROL).

With ROL, money becomes a tool to help you live the life you want. Accumulating as much wealth as possible is no longer the primary objective of your financial plan.

The traditional path to saving and investing has been to focus on the future (retirement), and rely solely on numbers and return on investment (ROI). However, this approach often can be misleading because it doesn’t consider your individual circumstances. “Beating the market” is often an artificial objective because it is not likely to have a substantive impact on your unique situation. Consider this: what does beating the market by one percent less (or more) mean to how you live your life? Do market returns have an impact on how you live your life?

What is relevant is developing a financial plan that considers the following:

  • How much do you currently have invested?
  • What is your current cash flow?
  • What transitions are you currently experiencing, or expect to experience (examples include paying down debt, divorce, concern about illness, job loss, retirement, purchasing a home, providing financial assistance to a family member)?
  • Do I feel comfortable with my level of financial obligations (examples include housing expenses, leisure activities, and healthcare expenses)?

By incorporating these factors into your planning, we can begin to understand what needs to change (or not change) in order to live the best life possible without overextending yourself. You may even be pleasantly surprised to learn you can enjoy the fruits of your labours sooner than expected!

Money does not exist for its own sake. Money exists as a utility that we use to improve our lives.  How your returns compare to any index, fund, investment category, or another person are less consequential than whether you are meeting your own ROL goals. Measure your success against your objectives, not someone else’s. You don’t need to keep up with the Jones’—or anyone else.

In order to enjoy ROL, you need to understand where all your money is coming from and where all your money is going––and why.

Understanding the “why” enables us to create a plan that works for you and your individual circumstances. You may be living above your means and need to make changes to your lifestyle. Or you may already have enough, and be able to take a trip or enjoy another experience you have been putting off.

Together we can address the following questions:

  • What challenges and opportunities are you currently facing?
  • What key transitions are looming on the horizon?

Your answers to these questions will determine the inflow and outflow of money, as well as your financial progress or decline. Knowing your age, and how long you expect to live isn’t enough to develop a financial plan that works.

With ROL, you don’t give up the best of life or the best parts of yourself just to get money. The money is there to serve you, not vice versa. Instead of focusing on someone else’s definition of success, write our own. ROL puts quality before quantity by managing your assets in a way that improves your life and provides peace of mind.

In traditional financial planning, the primary components include asset, risk, and debt management, as well as tax, estate, and income planning. All of these areas are essential and necessary for a strong financial plan, but there is more to developing a strong financial plan than numbers.

We all have different values and principles regarding money. Each of us has a history, present circumstances, and future hopes that are unique. By focusing only on numbers, we miss enjoying life now and in the future because we only concentrate on accumulating wealth. A financial plan designed with ROL as its foundation is designed to build freedom, relieve the pressure of ROI-focused planning, and ensure your plan meets your goals.

There is no greater freedom, and no greater wealth, than living the best life you can with the money you have.

 

There is no such thing as Plain Sailing

Embarking on a financial plan is like sailing around the world. The voyage won’t always go as planned and there will be rough seas, but the odds on reaching your destination increase greatly if you are prepared, disciplined, patient and well advised.

A mistake many inexperienced sailors make is setting sail without first having charted a course to embark on or without a clear sense of direction and once they finally decide on their destination, they find themselves lost at sea, in the wrong boat with inadequate provisions.

Likewise, in your financial planning journey, you need to decide on your goals. A first step might be to consider whether these are realistic and achievable. For instance, whilst you may long to retire to the South of France, you may not be prepared to sacrifice what you want to do today to satisfy tomorrow’s longer-term goal.

You need to ensure you have the right planning tools to get you there. Have you planned for contingencies? What degree of bad weather can your plan withstand along the way?

The key to a successful voyage is a good navigator. A financial adviser is like that, regularly taking coordinates and adjusting, if necessary. If your circumstances change, the adviser may suggest you re-plot your course.

As with the weather at sea, markets can be unpredictable. A sudden squall can whip up waves of volatility, tides can shift, and strong currents can threaten to blow you off course. Like a seasoned sailor, an experience adviser can help navigate you through these conditions.

Once the storm passes, you can pick up speed again. Just as a sturdy vessel will help you withstand

Landscape – Why Delay? You Can Start Improving Your Health Right Now!

A busy 40- to 50-hour work week, kids that need shuttling to and from school and extra-curriculars … and a gradually decreasing metabolism.

Sound familiar?

Young, working couples with no kids may have more time to be active and healthy. Long morning walks, three trips to the gym every week playing sport with friends cooking their way through gourmet recipes.

Then life happens. Children, promotions at work that lead to more responsibility and longer hours.

A couple’s free time together begins to dry up. Five-a- side night turns into crashing on the couch for a few hours before bed. Weekend bike trips or trivia nights turn into weekend rushes to and from kids’ parties or sporting activities and gourmet cookbooks are replaced by fast food menus.

Then there’s the money crunch. Even couples with a financial plan in place tend to worry more about money once a mortgage, car payments, and children enter the picture. Many couples start pinching pennies at the expense of their creature comforts and well-being. New clothes and a replacement for that worn-out mattress aren’t as important as saving for college tuition or eventual retirement. Frozen meals and take-aways are quick fixes when there’s so little time to cook a good meal before your daughter’s dance lessons.

The Result

The risks involved when we start neglecting our health are real, and harder to correct as we continue to age. But there are emotional consequences as well, especially if one spouse slips out of shape faster than the other. Innocuous suggestions like, “Let’s take a trip to the farmer’s market” or “How about we re-start our gym membership?” can feel laced with criticism. A loss of confidence, feelings of depression, and inattentiveness to basic hygiene and appearance can follow. Money – already the most common source of marital friction – will continue to be a barrier to self-improvement. Unhealthy people don’t like being told they’re unhealthy, and will often put off preventative care, like annual checkups.

If you or your spouse are struggling with a similar scenario, take a moment to work through the following questions and suggestions together:

Questions to Ask

Are you and your spouse able to maintain your health without any financial stress?

Do you and your spouse regularly confirm your health and overall well-being with your doctors?

Is your level of physical activity higher or lower now than it used to be? If you’re about to retire, do you anticipate a more or less active lifestyle?

What are some physical recreational activities that you enjoy?

What is a recreational activity you’ve never tried, but deep down always wanted to try?

How old is your furniture, especially your bed and mattress?

How many fresh meals do you and your spouse cook and eat at home every week?

Steps to Take