Posts By: Carpenter Rees

Freetirees

Pension freedoms usher in a new generation

The introduction of pension freedoms has been a huge enabler for over-55’s, allowing millions to draw income from their pensions flexibly. Pension freedoms offer the opportunity to transition into retirement by continuing to work with reduced hours beyond traditional retirement age.

This emerging trend enables you to choose a middle path, allowing for reduced working hours and more flexible quality leisure time, while also receiving your retirement benefits. Taking a phased approach to retirement, new research[1] shows, was the preference for half of UK workers over 50, or five million workers[2].

Tailor retirement to your own individual requirements

The flexibility that pension freedoms gives means that older workers can tailor their retirement to their own individual requirements, giving rise to a new distinct and more ‘free’ stage of life in between work and retirement.

A quarter (26%) of over-50s could see themselves continuing to work while collecting their pension, but their motivation for doing so isn’t driven solely by economics. Keeping their brain active and an enjoyment of work as well as the benefits of social interaction all play their part.

Work–life balance has never been more important

Earning an income later in life also provides workers with the opportunity to continue saving, which can mean higher retirement benefits in the future. The research highlights that a work–life balance has never been more important to those over 55. Pension freedoms have allowed them to throw off the shackles of a traditional retirement and follow a plan that suits their individual needs. While historically people benefitted from generous final salary pensions, one drawback of these was that they didn’t offer much flexibility to decide how and when to take benefits.

The pension freedoms have changed the way people think about retirement and are enabling the rise of a more flexible transition into retirement, including allowing people to choose to start accessing some retirement savings to support a reduced working pattern.

Freedoms to continue to live life on your own terms

Pension freedoms have allowed older workers to be more flexible, creating a distinct phase in their later life where they can alter their working pattern to their needs. This allows them to continue working beyond traditional retirement age while also having more time for leisure, for family, for volunteering and to pursue hobbies and travel.

The research also highlights another point that older workers want to be able to continue to live life on their own terms, and pension freedoms allow an increasing number to enjoy a new life stage where they can combine reduced working hours with enjoying more leisure time.

What is your financial action plan?

For many people, it’s not clear where their money will come from when they no longer receive a salary – and that can be stressful. But don’t worry. With our help, you can create a plan of the actions you can take today to prepare you for the life you want tomorrow.  Why not speak to us to arrange a meeting.

 

Source data:

[1] Research conducted by Aegon in conjunction with Opinium, based on responses from 1007 UK workers aged 50+ earning £20k+ between 30 November and 6 December 2018.

[2] Office for National Statistics A05 NSA: Employment, unemployment and economic inactivity by age group

Have You Been Surprised by Retirement?

We can’t know for sure what’s ahead in retirement any more than we know about our career when we take our first job.  We might start out with a plan, but life happens, and before we know it, we can find ourselves in the midst of something entirely different.

The surprises might come right away, when the reality of retirement doesn’t match up with our dreams. They may come later, after we think we’ve got it all figured out . . . only to find we don’t. By definition, we can’t know what surprises are in store for us.

Here are a few surprises …. have you experienced others?

A child moves back home. No one’s surprised if a son or daughter returns home after graduating from university. The surprise comes when for example, a single, 32-year-old son loses his highly paid job in the city, can no longer pay his rent, and moves back in with his parents. Hopefully they find another job and then off they go on their own again, but this could take some time so be prepared and don’t make it too comfortable for them… unless of course you really do want them to stay.

Where are we living now? A close friend of mine told me he always figured he’d retire to Spain. He and his wife spent several years visiting various parts, until one weekend they stayed with some friends in North Wales. They fell in love with area and before the weekend was over, they’d put down a deposit on a new house. Now, two years later, they love it . . . but even they are still surprised they ended up in Wales instead of Spain.

The doctor calls. It is probable that we will all get a nasty medical surprise at some point. You may have had an active lifestyle in your younger days and have visions of this continuing into retirement. But the arthritis in your knees and ankles may make you rethink this. Many people are taken aback when they discover they have to limit their activities or take medication for the rest of their lives.

Are we going to work? A lot of people plan to take a part-time job after they retire, then are surprised to find out the workforce is not clambering for 65-year olds. Working at the local DIY store isn’t everyone’s idea of a dream job, and whilst some of us may be suited to a consultancy role in our chosen profession, that is not for everyone.   The other ideal is to work whether it is paid or otherwise in a sector that interests you. Volunteer at your local theatre group or independent cinema or a charity.

One of my neighbour’s volunteers to look after hearing dogs (dogs for deaf people) for one or 2 weeks at a time whilst their trainer takes a break.   This means that he gets to exercise and look after the very well-trained dogs but without any long-term commitment.

Money doesn’t matter as much. Although I find that retirement is a great leveller. Most of us expect to live on a reduced income, some savings and maybe a pension. Our income is stable. We’re not pushing for a pay rise or promotion. The pressure is off. So, a lot of people are surprised that success in retirement is less about how big our house is, or what car we drive, and more about having fun, hanging out with a good crowd, and leaving a legacy for friends and family.

We can deal with all the change. I know it’s sounds stupid, but it’s a surprise to me that after retirement, life goes on — meaning things continue to change.  We move; we have grandchildren; our kids do something unexpectedly different. We have different friends, perhaps different interests. We realise we can cope with a lot of change and adapt to new developments. Yes, some of us are surprised that we can do this!

 

Improve Your Relationship with Money by Answering These 5 Questions

Many people have a complicated relationship with money. Hang-ups carried over from childhood experiences get mixed together with positive and negative experiences through adulthood. Few people ever take the time to reflect on what money really means to them and how they can “get right” with money to make smarter decisions.

Take time to answer these 5 questions and you might find that you can do a better job of living your best life possible with the money you have.

1. What’s your first money memory?

Your earliest experiences with money probably happened in your home. You saw how your parents earned and managed their money. You probably compared the quality of your family home and vehicles to what you saw at friends’ and neighbours’ houses. An unexpected job loss or illness might have led to some very lean holidays or none at all. Or, if you grew up in an affluent household, you might have taken money for granted in a way you no longer do now that you’re the one earning it.

Identifying some of these early memories is critical to reassessing your relationship with money. Are you following positive examples towards decisions that are going to improve your life? Or, without even realising it, are you repeating poor money habits that are going to hurt you in the long run?

2. Do you feel like money is your servant or your master?

Sometimes money makes us feel like we’re a hamster on a wheel, running as fast as we can without ever really getting anywhere. But if you never stop chasing after that next pound, when it comes time to retire, all you’re going to have is money, and a whole lot of empty days on your calendar.

People who get the most out of their money recognise that it’s a tool they can use to skillfully navigate to where they want to be in life. So, instead of working too long and hard for more money, think about how to put the money you have to work for you.

3. What would you do if you had more money?

You’ve probably read about studies that show lottery winners don’t end up any happier than they were before their windfalls. This is a dramatic example proving some conventional wisdom: money doesn’t buy happiness. That’s especially true if you’re stuck on your wheel for 40 hours every week just chasing more and more money.

If the idea of having more money gets you thinking about all the things you’d buy, it’s important to remember how quickly even the fanciest new car smell will fade.

If you would immediately quit your job if you had enough money to support your family and live comfortably, then maybe you need to think about a more fulfilling career.

Having more money might not “solve” some issues you’re currently experiencing but asking what you would do if you had more money might lead you to new decisions that improve your current life satisfaction.

4. What would you do if you had more time?

Imagine you don’t have to work. You can spend every single day doing exactly what you want. What does your ideal week look like? What things are you doing? What hobbies are you perfecting? Where are you travelling? With whom are you spending your time?

These things often get pushed to the side when we’re busy working. But if your money isn’t providing you with opportunities to spend time doing what you love with the people you love, then your work-life balance might need an adjustment.

5. What would your life look like to you if it turned out “well”?

Hopefully by now you’re starting to think about how your relationship to money could be keeping you from getting the most out of your money.

The successful retirees that we work with don’t look back fondly on the amount of money they made or how much stuff they were able to buy. They tell us their lives turned out well because they used money to make progress towards major life goals. They say their money provided them the freedom to pursue their passions. And their sense of well-being increased as they committed time and resources to health, spirituality, and continual self-improvement.

When you reach retirement age, we want you to look back happily on a life well-lived. Come and talk to us about how our interactive tools and Life-Centred Planning process can improve your relationship to your money.

Millennials ‘misjudging inheritance windfall’

I read an article recently which seemed to indicate that more financial planning education is needed for Millennials.

For those that don’t know, Millennials are those born between 1981 and 1996, so those currently aged 23 to 38, and who grew up during the time when the internet became a normal everyday way of life.

A new survey conducted by Wealth Manager, Charles Stanley highlighted that some young people have an expectation of the amount of money they will inherit and what it could buy. Their survey found that the majority of millennials surveyed misjudged the amount of inheritance they will receive and when they expect to get it.

The survey suggests that whilst young people expected to receive nearly £130,000 from relatives when they die, the median amount handed down was only £11,000!

Similarly, one in seven millennials expected to inherit before they turned 35, while in reality the typical inheritance age is between 55 and 64. There is also an expectation about what an inheritance can go towards. At least 22% of those surveyed planned to use any money to go towards a deposit on a house, although official statistics suggest currently only 7% actually used the funds they had in that way.

“People are living longer than ever, so relying on an inheritance to get on the housing ladder is a risky strategy as you may get less, and much later than planned,” said John Porteous, from Charles Stanley. “In reality, most people save and invest to get on the housing ladder. Starting early and planning ahead is essential to achieving the deposit you need,”

Having said that, according to Your Money, more people are inheriting. Inheritance tax receipts in the UK hit a record high of £5.4bn in the 2018-19 tax year, up £164m or 3.1% on the previous 12 months, which was also a record.

The Financial Times says,

Three Reasons Why You Should Work Even When You Don’t Need the Money

It might sound a little crazy but there are many benefits to working even though you no longer need the money for your living or retirement needs.

These “retirement workers” have discovered that part-time jobs or volunteer positions allow them to keep a nice pace in life and find a balance among using their talents, enjoying recreation, traveling, and spending time with family. Some of our most ambitious clients even start brand new companies in retirement.

Here are three important benefits of working in retirement that might persuade you to clock back in a couple of days a week.

Working is good for you.

Retiring early is a very popular goal. But while it makes sense to want to enjoy your assets when you’re younger, some studies have linked retirement to decreased mental and physical activity and higher instances of illness.

Working keeps your mind and body active. It makes you engage in problem solving and creative thinking. It keeps you mindful of your health and appearance so that you make a good impression on colleagues and customers. It challenges you to keep achieving and rewards you when you do.

And, if nothing else, it keeps you from vegging out on the sofa all day and driving your spouse crazy!

Work can give you a sense of purpose.

Many retirees struggle with the transition to retirement because their sense of purpose and identity is so tied to their work. Without that familiar job and its schedule and responsibilities, some retirees struggle to find a reason to get out of bed in the morning. A part-time job can restore some of that sense of structure and drive.

In fact, you might find that working in retirement gives you an even greater sense of purpose than your former career did. You might have worked a job you didn’t 100% love in order to support your family. Now that you no longer need to worry about that, you can take that position at your local library or work a couple of days every week at that charity that’s making a difference in your community or a charitable organisation that’s close to your heart. You can feel like you’re making a contribution to society without worrying about the size of your salary.

Work can improve your connections to other people.

Early retirement can be a period of isolation for some. Your friends and family might still be busy working and raising children. The familiar social interactions you enjoyed at work are gone. You and your spouse probably share some common interests, but you can’t spend every single second together.

It’s important for retirees to be open to making new personal connections in retirement. A new workplace is a great place to start that process as you will meet new people from different walks of life.

You will work with and help people who can benefit from your personal wisdom and your professional skill set. You might meet other people who, like you, are trying to stay active and put their talents to good use. The more involved you are in your community, the more curious and adventurous you’re going to be about trying new restaurants, shopping in new shops, and interacting with more people.

Of course, working in retirement can affect other aspects of your financial planning even if you don’t need the money, such as taxes, withdrawal rates from your investments, and your relationship with your spouse. If you’re considering a new part-time job, why not set up a meeting to discuss any adjustments we should be thinking about so that you get the best life possible with the extra bit of money you’ll soon have.

 

A New social phenomenon – the ‘sandwich generation’

In recent years, a growing realisation has formed that we’re in the middle of a new social phenomenon – the ‘sandwich generation’. The term ‘sandwich generation’ is often used to refer to those who care for both sick, disabled or older relatives and dependent children.

With an ageing population and many people starting families later in life, ‘sandwich caring’ responsibilities are on the rise. However, new research from the Office for National Statistics (ONS) has highlighted the fact that a pensions injustice could be making life even more difficult for this group.

Twin responsibility

The report shows that almost 27% of sandwich carers show symptoms of mental ill health[1] while caring for both sick, disabled or older relatives and children. With life expectancy increasing[2] and women having their first child at an older age, around 3% of the UK general population[3] – equivalent to more than 1.3 million people – now have this twin responsibility.

Sandwich carers are more likely to experience symptoms of mental ill health – which can include anxiety and depression – than the general population (22%), according to the ONS analysis for 2016 to 2017[4].

The prevalence of mental ill health increases with the amount of care given. More than 33% of sandwich carers providing at least 20 hours of adult care per week report symptoms of mental ill health, compared with 23% of those providing fewer than five hours each week.

Health satisfaction

People providing fewer than five hours of adult care each week report slightly higher levels of life and health satisfaction, relative to the general population. Some of the differences between the two groups could be explained by demographic differences. For example, more than 72% of the sandwich generation are aged between 35 and 54 years, while 62% are women. Whereas among the general population, 38% are aged 35 to 54 years, and 51% are women.

Around 76% of those providing fewer than five hours of adult care say they’re satisfied with life, while just 10% are dissatisfied. Meanwhile, 74% of the general population are satisfied with life, with 16% saying they’re dissatisfied. However, when sandwich carers spend more than five hours a week providing adult care, they report lower levels of life and health satisfaction than the general population.

Sandwich carers

Those providing between 10 and 19 hours of adult care per week are least satisfied according to both measures, even compared with those giving at least 20 hours each week. This could be because 69% of carers in the 10 to 19-hour category are in work (either employed or self-employed), compared with 41% of those providing at least 20 hours a week.

Similarly, many sandwich carers are not satisfied with the amount of leisure time they have. Those looking after their relatives in their own home – half of whom provide at least 20 hours of adult care per week – are least satisfied.

General population

Overall, around 61% of the general population are happy with their amount of leisure time, compared with 47% of sandwich carers looking after their relative outside the home and 38% of those providing care within their own home.

As well as reporting a lack of leisure time, 41% of sandwich carers looking after a relative within their home say they’re unable to work at all or as much as they’d like. The ONS report also shows that women sandwich carers – who account for 68% of those providing at least 20 hours of adult care per week – are more likely to feel restricted than men. Around 46% of women feel unable to work at all or as much as they’d like, compared with 35% of men.

Labour market

Women sandwich carers are also much more likely to be economically inactive than men – 28% are not part of the labour market, compared with just 10% of men in the same situation. It should be said, though, that the majority of sandwich carers are able to balance their job with caring responsibilities. More than 59% of those providing care at home say this does not prevent paid employment.

Clearly, caring for two generations could have an impact on carers’ finances. One in three sandwich carers say they are ‘just about getting by’ financially, while one in ten are ‘finding it difficult’ or ‘very difficult’ to cope. Meanwhile, only 17% say they are ‘living comfortably’, compared with 32% of the general population.

Preparing for a more secure financial future

As concern grows among sandwich carers, so too does the need to financially plan for ageing dynamics and family relationships. If you’d like to talk about how we can help you understand the big questions of where am I right now and how you might get to your own financial freedom then call or pop in for a coffee.

Source data

[1] This is based on the General Health Questionnaire (GHQ), where a score of four or more indicates symptoms of mild to moderate mental illness such as anxiety or depression. The GHQ is self-reported.

[2] Life expectancy at birth in the UK did not improve in 2015 to 2017, having risen consistently for decades beforehand. The ONS investigated the stalling of improvements in life expectancy and its links to mortality rates.

[3] For the purposes of this article, the general population is all adults (including sandwich carers) aged 16 to 70 years.

[4] The ONS analysis defines sandwich carers as people aged 16 to 70 years who have a dependent child (one aged under 16 years, or 16 to 18 years, who is in school or non-advanced further education, not married and living with parent) in their home, and also provide regular service to a relative (usually parents, parents-in-law, grandparents, aunts or uncles, or another relative) who is ‘sick, disabled or elderly whom you look after or give special help to’. The analysis is taken from Understanding Society, the UK Household Longitudinal Study. Households are surveyed each year either through a face-to-face interview or a self-completed online survey. Data collection takes place over a 24-month period, and the sample size for the general population in the 2016 to 2017 period was 34,000 individuals.

 

To downsize, or not to downsize?

Planning your next move for a comfortable retirement

It can be a daunting prospect to think about selling the family home, but it is a decision that many decide is the right choice for them once the children have long moved out and the upkeep seems too onerous. However, people don’t often consider the impact this could have on their retirement, according to new research[1].

This has revealed that if people have decided to downsize, they could unlock value from their home, providing the often-overlooked solution to helping them achieve a comfortable retirement. The new report found that UK adults would like an annual retirement income of £39,773 to be comfortable in their later years. This is up from £26,184 in 2016.

UK adults’ retirement savings expectations

Expectations for larger incomes in later life may stem from retirement savings increasing substantially over this time. The research found that the average size of a pension is up 7% over two years, from £174,555 to £186,617. In keeping with this, UK adults expect to have retirement savings of £215,852 by the time they stop work – up 27% from 2016 – when the expected amount was £169,594.

After the State Pension of £8,546 per year[2], £31,226 per year extra would be needed to meet people’s desired income target of £39,773. At current low annuity rates, this income would need a pension pot of £600,515 for a level annuity.

Mind the gap – funding a desired lifestyle

Despite the increase in pensions savings, the bigger increase in expectations for income in retirement has meant that the pensions gap – the shortfall from what people will need to fund their desired lifestyle, if they bought an annuity, and what they expect to have in their pension pot at retirement – has gone up from £370,000 to £385,000 over two years.

Post-pension freedoms, there are several options for retirees to consider rather than having to buy an annuity, providing myriad ways for retirees to meet their income goals. For example, the research showed that figures revealed that those choosing to move to a smaller property, or ‘downsizing’, could release a significant amount of capital that could help them achieve the lifestyle in retirement that they really want. 

Providing motivation for a move to a smaller property

Once the children have left home, moving closer to public transport links or to a single-story home can often provide motivation for a move to a smaller property that may be more suitable. Using average UK house prices for homes of different sizes, figures show that the £385,000 shortfall could be significantly plugged if downsizing from a four-bed to a two-bed property. This would immediately increase savings by £287,286, or if invested over five years could be worth nearly enough to fill the gap, at £349,527[3]. If the decision to downsize is made earlier in life, then the funds could be invested over ten years[3], amounting to £425,253.

Planning to fund retirement by continuing to work

Despite the benefits of downsizing and increasing retirement savings, 83% of those surveyed said they did not intend to downsize to fund their retirement, increasing to 87% for over-55s. More people said that they plan to fund their retirement by continuing to work, either in their current role (11%) or by taking up a new job (9%), than by downsizing their property.

Considering the maximum annual pension contribution per tax year of £40,000, releasing a large amount of cash in one go from downsizing your property would mean only a portion can be invested directly into a pension. However, any money that is invested in this way would benefit from 20% tax relief before any investment return. The remainder can be invested or held in cash based on appropriate advice for that individual.

Monumental life decision that can be unnerving

Making the choice to downsize is a monumental life decision that can be unnerving to think about, but it can also have a great financial impact, providing a major boost to your retirement fund. Deciding on the right time to downsize can also be difficult, but the process can be easier if not left too late.

Moving to a smaller home nearby will lower the pressures that come with the upkeep and expenditure of a large property while keeping you near to any friends or family who live in the same area. Also, moving wealth from an illiquid asset such as property to a liquid asset such as cash has the added benefit of enabling tax planning, which could reduce any potential Inheritance Tax liability. It can be useful to take emotion out of the equation and try to be as pragmatic as possible – it’s easier said than done, but it can help with some very tough decisions that need to be made.

Looking towards a patchwork of savings and assets

The research showed greater realism about how long it might take to accumulate assets to fund retirement, and what will be needed to reach financial goals in retirement. On average, people would like to retire at age 61, up five years from when the survey was last undertaken in 2016, when this was 56. However, many admit that early retirement is unrealistic, with 67 being the average at which respondents think they will have enough money to stop working, coinciding with the rising State Pension age.

Many people are now looking towards a patchwork of savings and assets to fund retirement. While only 17% of people expect to downsize, over one in three (34%) expect to draw on other savings to fund their retirement, and a fifth (20%) expect to at least part-fund their later years by continuing to work. In addition, 14% hope to use inherited money or property.

Complexities around optimal financial planning

Despite the complexities around optimal financial planning for retirement, 52% of people do not seek advice regarding retirement and do not plan to. This number increases to 70% for retirees, which may be why one in ten (10%) of them still don’t know how they will fund their retirement.

Pensions have long been seen as the foundation of retirement saving, but many people now recognise that they will need to draw on other available assets to finance their retirement. The answer used to be to ‘buy an annuity’. Whilst annuities still have a place as one of the few ways to guarantee an income, they are expensive. A successful retirement plan involves making the most of not just your pension, but all your savings, other investments and assets.

Want to discuss your options?

Clearly, there is a lot to consider, and making the wrong retirement decisions can be costly. Many people approach retirement with little or no idea how much money they will need or the best way to take an income. Obtaining professional financial advice in the lead-up to and at retirement is essential. We use Financial Modelling Software to help you understand how your retirement can be funded, so please do contact us if you would like to discuss your requirements.

Source data

[1] Research conducted by Opinium Research amongst 5,000 UK adults between 30 August and 5 September 2018.

[2] Full State Pension 2018, https://www.gov.uk/new-state-pension/what-youll-get

[3] This assumes a 4% p.a. growth rate with dividends re-invested net of charges and no Capital Gains Tax to pay on the property sale.

 

 

Safeguarding your wealth for future generations

Unforeseen life events and circumstances can potentially impact your finances in several ways. We can help you to safeguard your wealth for future generations. But for many of us, there can be a remarkable gap between our intentions and our actions.

Inheritance Tax (IHT) affects thousands of families every year. It comes at a time of loss and mourning and can have an impact on families with even quite modest assets – if you thought IHT was just for extremely wealthy people to worry about, think again.

Tackling IHT sooner rather than later

There are legitimate ways to mitigate against IHT, which is why it is sometimes called the ‘voluntary tax’. Unfortunately, some of the most valuable exemptions must be used seven years before your death to be fully effective, so it makes sense to consider ways to tackle IHT sooner rather than later and to seek professional financial advice.

As property prices make IHT a reality for many in the UK, we’ve looked at a few ways to prevent HM Revenue and Customs being one of the largest beneficiaries of your estate. IHT is levied at a fixed rate of 40% on all assets worth more than £325,000 per person (0% under this amount) – or £650,000 per couple if other exemptions cannot be applied.

Parents and grandparents who are passing on their home will be able to leave up to £950,000 to their children without them having to pay IHT.  This figure will rise to £1 million by 2020. The current allowance of £325,000 remains unchanged, but a new tax-free band worth £175,000 per person on your main residence will be added to the £325,000, making it £500,000 per person. The new tax-free band was set at £125,000 in 2018, eventually rising to £175,000 in 2020.

Steps to mitigate against IHT

  1. Make a Will

Dying intestate (without a Will) means that you may not be making the most of the IHT exemption that exists if you wish your estate to pass to your spouse or registered civil partner. For example, if you don’t make a Will, then relatives other than your spouse or registered civil partner may be entitled to a share of your estate – and this might trigger an IHT liability.

  1. Make lifetime gifts

Gifts made more than seven years before the donor dies to an individual or to a bare trust are free of IHT. So, if appropriate, it could be wise to pass on some of your wealth while you are still alive. This may reduce the value of your estate when it is assessed for IHT purposes, and there is no limit on the sums you can pass on. You can gift as much as you wish, and this is known as a ‘Potentially Exempt Transfer’ (PET).

However, there is a catch: if you live for seven years after making such a gift, then it will be exempt from IHT. But should you be unfortunate enough to die within seven years, it will still be counted as part of your estate if it is above the annual gift allowance. You need to be particularly careful if you are giving away your home to your children with conditions attached to it, or if you give it away but continue to benefit from it. This is known as a ‘Gift with Reservation of Benefit’.

  1. Leave a proportion to charity

Being generous to your favourite charity can reduce your tax bill. If you leave at least 10% of your net estate to a charity or number of charities, then your IHT liability on the taxable portion of the estate is reduced to 36% rather than 40%.

  1. Set up a trust

Family trusts can be useful as a way of reducing IHT, making provision for your children and spouse, and potentially protecting family businesses. Trusts enable the donor to control who benefits (the beneficiaries) and under what circumstances, sometimes long after the donor’s death. Compare this with making a direct gift (for example, to a child), which offers no control to the donor once given. When you set up a trust, it is a legal arrangement, and you will need to appoint ‘trustees’ who are responsible for holding and managing the assets. Trustees have a responsibility to manage the trust on behalf of and in the best interest of the beneficiaries, in accordance with the trust terms. The terms will be set out in a legal document called ‘the trust deed’.

Types of trust

There are now three main types of trust.

Bare (Absolute) trusts – with a bare trust, you name the beneficiaries at outset and these can’t be changed. The assets, both income and capital, are immediately owned and can be taken by the beneficiary at age 18 (16 in Scotland).

Interest in possession trusts – with this type of trust, the beneficiaries have a right to all the income from the trust, but not necessarily the capital. Sometimes, a different beneficiary will get the capital – say, on the death of the income beneficiary. They’re often set up under the terms of a Will to allow a spouse to benefit from the income during their lifetime but with the capital being owned by their children. The capital is distributed on the remaining parent’s death.

Discretionary trusts – here, the trustees decide what happens to the income and capital throughout the lifetime of the trust and how it is paid out. There is usually a wide range of beneficiaries, but no specific beneficiary has the right to income from the trust.

Some trusts will now have to pay an IHT charge when they are set up, at ten-yearly intervals and even when assets are distributed.

The sooner you start planning, the more you can do

We can work with you to ensure you make use of all the reliefs and exemptions you can. We can build a tailor-made succession plan based on your individual circumstances to make sure the allowances work best for you. We can give you the peace of mind of knowing that you have laid the firmest foundations for your family’s future. Please contact us to discuss your situation.

Warnings

This article is distributed for educational purposes only and must not be considered to be advice.  The information is based upon our current understanding of taxation legislation and regulations.  Any levels and bases of, and reliefs from, taxation are subject to change.  Errors and omissions excepted. 

 

How to make a good decision when life throws you a tough choice

No matter how thorough our planning is, life inevitably tosses curveballs at us. Often these challenging moments are linked to major life transitions that affect our families, our careers, and our money. Balancing these variables can make arriving at the best decision that much more complicated.

Snap decisions are usually the least effective in the long run. Instead, take a deep breath, and let these decision-making strategies lead you towards the best possible outcome.

  1. Discuss the decision openly and honestly with your spouse

The harder the decision, the more serious it probably is, especially if it involves your family finances. Hiding problems from your spouse almost always makes a difficult situation even harder. If this is truly a fork in the road moment, both of you should be on the same page. Your spouse’s perspective might be just the thing you need to make sure you’re making the right choice for the right reasons.

  1. Consider how this decision aligns with your values

You might think of this as the “mirror test.” If you make this choice, are you going to be able to look yourself in the mirror tomorrow? If not, you might be leaning towards a decision that’s at odds with what’s really important to you.

Think about the reasons for this disconnect. Are you considering the easier of two possible choices? Living by your values isn’t always easy in the moment, but that face in the mirror is going to be looking back at you for the rest of your life.

  1. Identify an objective

Sometimes we don’t understand our true reasons for the choices we make until we dig a little deeper. “Why?” can be a simple but very powerful question, especially if you keep asking it.

For example, why do you want to buy a bigger house?

Because we need more space.

Why do you need more space?

Because I don’t have room for a home cinema.

Why do you need a home cinema?

Because my job is too stressful, and I need to destress.

Turns out your housing decision isn’t really about your house. It’s about work and a bigger TV isn’t going to make your job any less stressful.

  1. Think about everyone involved

Step outside of yourself and think about the other people who are going to be affected by your choice. Your spouse, your children, your friends, your colleagues, your neighbours. What’s best for you right now, might not be what’s best for the people closest to you. Is this decision going to damage any relationships that are important to you? Is that damage worth it?

  1. Are past experiences influencing this decision? For better? For worse?

Our decision-making can sometimes feel like it’s automatic. We make choices without ever really thinking about why we made that choice. We might say after the event that we were “going on instinct” or “listening to our gut feelings.”

But the way we respond to major choices is often a result of our past experiences. For example, your attitudes about an investment decision or high value purchase might be heavily influenced by how you saw your parents handle their money when you were a child. You might continue to work a safe but unfulfilling job because that’s what your father did to provide for you.

Think about whether your experiences are helping you make a good choice or reinforcing some bad habits.

  1. Consider seeking professional advice

It can be difficult to admit when we need help. But pros are pros for a reason. There are probably plenty of people who have benefitted from your professional expertise over the years. Don’t be too proud or too embarrassed to contact a solicitor, doctor, counsellor, contractor, or tax expert if you need the best possible advice.

And if your decision will occur at a major intersection of your life and your money, we want to be at the top of your call list. Come in and talk to us about how this choice could affect your Financial Plan, and how we can help.

A ‘set-and-forget’ investment approach? Forget it!

Systematic, evidence-based investing often results in very little activity in a portfolio. It is wrong to think that this is the result of a ‘set-and-forget’ strategy. The Firm’s Investment Committee would be aggrieved at such a suggestion! Considerable effort goes on behind the scenes to allow this state of calm consistency to exist. The fortitude and discipline to deliver ‘not much needs to be done to your portfolio except for rebalancing’ advice, comes from a rigorous process of ongoing challenge to the status quo.

The broad terms of reference of the Investment Committee are set out below:

Manage risks over time
The Investment Committee is responsible for the oversight of the risk in portfolios and the wider investment process. Meetings are regular and minutes are taken, which include all action points to be followed up on. Third-party inputs and guest members – such as Albion(our strategic analysts) – provide independent insight and challenge.

Challenge the process
The investment process at the Firm is driven by the latest empirical evidence and theory available. It is always open to challenge. If new evidence suggests that doing things differently would be in our clients’ best interests, then we will revise our approach. The investment process is evolutionary, but change is most likely to be slow and incremental.

Review the portfolio structure
The underlying characteristics of the Firm’s client portfolios are reviewed, including performance and risk level attributes. Risks (asset class exposures) and their allocations within a portfolio are evaluated. Any issues are raised and resolved. Existing asset classes are reviewed alongside asset classes and risk factors that currently sit outside the portfolios. Areas of interest are placed on a longer-term ‘watch’ list.

Review the incumbent ‘best-in-class’ investment products
The incumbent products are ‘best-in-class’ choices seeking to deliver the returns due to investors for taking specific market risks. Each product has a role to play in a portfolio and its ability to deliver against this objective is regularly reviewed. Any product-related issues are raised and resolved.

Screen for new products and undertake appropriate due diligence
Although the incumbent products were recommended as ‘best-in-class’, new products are regularly being launched. Tough screening criteria are in place against which new funds are judged. New, potential ‘best-in-class’ products face detailed due diligence and approval. They are included only when they make the grade. Given the quality of the products already in portfolios, the threshold for replacement is high, but not insurmountable for newer products.

Reaffirm or revise the investment process
The Investment Committee is accountable for reaffirming or revising the structure of client portfolios. Risk (asset) allocations and product changes are approved by the Investment Committee. Any actions arising from portfolio revisions will be undertaken, after discussion with and agreement by clients.

So, the next time you open your latest review report, remember that despite the lack of activity on the surface, the Investment Committee continues to paddle furiously behind the scenes to allow this be the case. In the immortal words of the investment legend and author Charles Ellis:

‘In investing, activity is almost always in surplus.’

Perhaps we should amend this slightly to:

‘In investing, activity is – except for the Investment Committee –almost always in surplus.’

Risk warnings
This article is distributed for educational purposes only and must not be considered to be investment advice or an offer of any security for sale. The reference to any products is made only to make educational points and must, in no circumstances, be deemed to be any form of product recommendation.
This article contains the opinions of the author but not necessarily the Firm and does not represent a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable but is not guaranteed.
Past performance is not indicative of future results and no representation is made that the stated results will be replicated.
Errors and omissions excepted.