We have a great deal of experience in dealing with family businesses a lot of which comes because we administer the ultimate family business pension vehicle, the Small Self- Administered Pension Scheme (SSAS).
These schemes are the made to measure Family Business Pension! The family are trustees as well as members and have the facility to use the funds in the scheme to invest into the family business by way of a loan to the company (now referred to as Pension Led Funding but we still call it ‘Loan back’) or using the funds to purchase commercial property for the business. The key here is that the family has control over the investment strategy, the membership (family members only) and the level of contributions (within limits set out by HMRC).
We have been involved in a couple of recent interesting cases involving the use of the Family Business Pension:
The first was for a family business looking to reduce their debt to the bank but at the same time secure the assets owned by the family business for the current and future generations. The solution was for the company to sell its main site to the Family Business Pension, whose members are the generation currently running the business; the proceeds received by the company were then used to reduce the bank borrowing. The asset remains in the control of the family as trustees of the scheme and the company has achieved its goal at the same time.
The second involved the pension fund helping the family business buy a competing business out of Administration. A collection of 4 Family Business Pensions, from within the group of companies acquiring the business, purchased the business property as part of this transaction – thereby improving the scale of the business group and preserving over 100 jobs.
In our dealing with Family Business Pension Schemes we often get involved in interesting projects such as those outlined above. It is not always about the money it is often about where to have the assets (i.e. in the Company or the Pension) or sometimes it is simply about where there is access to funds and all too often in the latter case, the Pension can be the ideal solution.
I am probably preaching to the converted in many cases but please feel free to pass the word on to other family businesses that could benefit from a bespoke, made to measure pension scheme or who simply have a scheme, but are not receiving any proactive advice on what they can do.
Where will the money come from? This is a question often asked by our clients as they think about working less or stopping work (you will note from previous blogs that I do not like the term retirement!).
It is certainly an understandable concern as most of us are used to getting a monthly salary or drawings, so it is vital to know what happens when that stops.
This is where the financial planning process comes in, especially if the hard task of saving and investing has been done along the way and we can prove using our financial modelling that you have enough!
If properly planned during the saving and investment period, it is probable that we as financial planners will have suggested you invest across a broad range of tax efficient investments to help achieve a tax efficient and sustainable income stream. These investments are likely to include ISA’s, Pensions, General Investment accounts, Life Assurance Bonds and sometimes a buy to let investment or two.
The tax allowances available are likely to include: –
- Income tax personal allowance
- Dividend Allowance
- Savings allowance
- Capital Gains Tax allowance
When working with a couple, then we have two lots of tax efficient investments and exemptions available. It is best to illustrate what can be done by way of an example; let me introduce you to Harry and Rachel.
Harry has just sold his publishing business and Rachel recently retired from her own separate business earlier this year. The children have all left home. Over the years we have helped them build a pot large enough to let them stop working for money and follow their dreams of travelling combined with their interest in art.
When they both worked they paid a lot of tax at higher rates however post retirement we can structure their income and their savings and investment to get them to a position where they have all the income they need whilst paying minimal tax, which is a massive boost as it ensures their pot can last for longer and they feel great about paying minimal tax after all those years.
Their income and tax position looks something like this:
|Total Taxable Income
|Pension Tax free cash
|Capital withdrawal within
|Total Tax-free Income
|Net Spendable income
|Overall tax rate
The above figures are based on 2017/18 tax allowances and exemptions which are subject to change, but as the financial plan should be reviewed annually, then we can adjust where funds come from to minimise tax and meet requirements from year to year.
So, the answer to the question is that the money post work is likely to come from a multiple of sources. This can take a bit of getting used to when you are used to one monthly salary payment but that is where working with a Financial Planner really helps in creating the income you need, saving tax and taking care of the administration surrounding your plan. This then allows you to get along with having the life you want, happy in the knowledge that your finances are in good hands.
At Carpenter Rees, our investment philosophy adopts a systematic buy-hold-rebalance approach to investing. This approach could prompt some of our clients to question why their portfolio seems to be largely unchanged from one period to the next and what the firm is doing for its fee. That would be unfair.
Wear a risk manager’s hat, not a performance manager’s hat
A good place to start is to look at the investment process, not from a performance perspective – as most stock brokers and investment managers tend to do – but from a risk perspective. Performance-focused managers inevitably look busy as they regularly change portfolio allocations and fund holdings; yet more activity does not equate to better outcomes. Plenty of evidence exists to back this up. Those who focus on chasing returns are at susceptible to taking unknown or poorly understood risks and getting it wrong. They also incur higher costs. On the other hand, focusing on taking risks that are fully understood and adequately rewarded offers an investor every chance of a successful outcome.
Your portfolio, as it stands today, should provide you with the comfort that it is robust under the wide range of testing scenarios that could be thrown at it by the markets. Let’s consider some of the key risk decisions that have been made when establishing it.
- Key decision 1: own a highly diversified pool of global companies to avoid concentration risks and capture the broad returns of capitalism.
- Key decision 2: tilt the portfolio toward higher risks, such as value (less financially healthy) and smaller companies to pick up incrementally higher returns
- Key decision 3: own shorter-dated, higher quality bonds to balance equity downside risk. Chasing higher yields in bonds simply dilutes their defensive qualities. The lower the credit quality the more these bonds act like equities.
- Key decision 4: use systematic rather than judgemental fund managers. Although picking a manager who promises to beat the market sounds appealing, the stark reality is that true skill is hard to discern from luck, it is extremely rare, and it is almost impossible to identify in advance. Employing managers who capture the returns delivered by taking on specific market risks makes good sense.
- Key decision 5: avoid owning an increasingly risky portfolio by rebalancing. Over time, the riskier assets (equities) in a portfolio tend to rise in value and begin to overpower the more defensive assets (bonds) in the portfolio. Periodically realigning – or rebalancing – a portfolios back to its original structure avoids this risk.
The role of the Investment Committee
The firm’s Investment Committee is responsible for the oversight of these risks in client portfolios and the wider investment process. Meetings are held regularly and minutes are taken, which include all action points to be followed up on. Third-party inputs and guest members provide valuable independent insight, where necessary. Its responsibilities include:
- Responsibility 1: ongoing challenge to the process. If new evidence suggests that doing things differently would be in clients’ best interests, then the firm will revise its approach. The investment process is evolutionary, but change is most likely to be rare and incremental.
- Responsibility 2: review of the best-in-class funds recommended. Each fund has a role to play in a portfolio and its ability to deliver against this objective is regularly reviewed. Any fund-related issues are raised and resolved, although this is pretty rare.
- Responsibility 3: review the portfolio structure. Risks (asset class exposures) and their allocations within a portfolio are evaluated and from time to time these may change as the firm’s thinking evolves, given the latest evidence.
- Responsibility 4: screen for new funds. New, potential best-in-class funds face detailed due diligence and approval, before they are recommended to clients. It would take a material improvement to knock an incumbent fund off its perch, but it can and does happen from time to time.
- Responsibility 5: reaffirm or revise the investment process. Risk (asset) allocations and fund changes are approved by the Investment Committee. Any actions arising from portfolio revisions will be undertaken, after discussion with, and agreement by, clients.
It is entirely possible, and likely, that your portfolio will look much the same between one time period and the next with little activity, except for rebalancing. That most definitely does not mean that nothing is happening. In fact, it takes quite a lot of work to keep our portfolios the same!