Known Unknowns

Individual investors may face many ‘known unknowns’ – or, things that they know they don’t know. The UK’s referendum on EU membership is one of them, confronting people with a large degree of uncertainty.

However, it’s not necessary to ‘make the right call’ on the referendum, or its consequences, to be a successful investor. Our approach is to trust the market to price securities fairly, taking into account broad expectations of future returns.

In arguing for the status quo, the ‘remain’ campaign is able to point out familiar characteristics of membership.

The ‘out’ campaign, however, is based on intangibles that can only be resolved after the result of the referendum is known. It’s impossible for any individual to predict the implications of these unknowns with certainty.

But, this is no cause for concern. While the referendum is imminent and its implications are potentially vast and unpredictable, it’s not necessary for individual investors to make any judgement calls on the outcome. We have faced many uncertainties in the past – general elections, market crises, recessions, wars. Throughout all of them, the market has done its job of aggregating participants’ views about expected returns and priced assets accordingly.

And, while these events have caused uncertainty, volatility and short-term losses and gains, none of them have altered the expectation that stocks provide a good long-term return in real terms.

We have a global view of investing and we know that the market is very good at processing information that’s relevant to future returns. Because of this view, we don’t attempt to second-guess the market. We manage well-diversified portfolios that don’t rely on the outcome of individual events or decisions to target the expected long-term return.

The following chart illustrates this very point as it shows the long term performance of world markets from 1970 to 2015 through wars, crises and slumps. So, forget all the short term political manoeuvring and trust the markets in the long term.

Known unknowns

Live longer to enjoy your money for longer ..

As we will be letting you have our Budget summary shortly, I thought it would be good to look at something less financial this week.  So, as we all want to live long healthy lives so that we can enjoy our financial freedom for longer, I thought I would share with you some research undertaken by Dr Doug Wright, medical director of Aviva.

The research indicates that too many of us are not taking the most basic of steps to protect our health, leading to half of the nation being overweight. Dr Wright maintains that simple lifestyle changes will help us feel happier and healthier too.

The obvious changes are, of course, to maintain a healthy weight, eat a good diet, undertake regular exercise and cut down on alcohol and smoking. But, apart from these, what else can you do to help you fly past 70 and feel good in your 80s and beyond?

Here are a number of my favourites that research has indicated, some of which are quite surprising and could help.

  1. Shopping – yes, this apparently reduces mortality rates by 23% for women and over 25% for men. So, while this could make me very unpopular with you men, I must stress that it isn’t about the feel good factor of a new handbag, but more to do with walking and socialising!
  2. Going to work when you are not well.  This is a fairly obvious one in my view, as this doubles the risk of a heart attack. So, get back into bed and don’t spread your germs!
  3. Another popular one,  Dutch scientists have proved that eating 4 grams of cocoa per day can halve the risk of heart disease.
  4. Daily flossing is thought to add an extra year to your life but, in my view, you probably spend a year of your life doing it! Is that a great return on the floss time investment?!
  5. If you exercise in a group, the British Medical Journal suggests that you are more likely to burn off an extra 500 calories a week compared to those work out alone.
  6. Scientists suggest that worrying can shorten your life expectancy. That’s why one of my favourite phrases “don’t sweat the small stuff” applies here.
  7. Being challenged and enjoying your work has more health benefits than feeling bored at work and having a stressful job.
  8. Having a pet helps to lower heart rate!
  9. Walking can act as an anti-depressant giving up to seven years of life, according to a European Study.
  10. According to Californian research, marriage, in many cases, prolongs life expectancy as it means you are less likely to suffer mental health issues, are less stressed and having a spouse can speed your recovery if you get sick!
  11. Laughter lowers the chance of blood clots forming and reduces the likelihood of a build-up of cholesterol.
  12. Have breakfast shortly after you get up as Massachusetts’ scientists found that those who wait 90 minutes before eating breakfast are 50% more likely to be obese.

There are lots more out there, and these got me thinking of the ideal healthy day which I think would pan out as follows:-

  1. Wake up and take the dog for a walk for 20 minutes
  2. Have breakfast shortly after your return
  3. Go shopping with your spouse
  4. Attend a group exercise class (I think Golf counts)
  5. Have a healthy lunch out
  6. Eat some chocolate
  7. Walk the dog again (you might want to do this on your own by now)
  8. Healthy dinner
  9. Go to a comedy club.

Papers, politicians and pensions

I was moving house last week and you’ll no doubt know how stressful that can be, but it didn’t make me quite as stressed as the previous weekend’s reporting of Mr Osborne’s proposed pension changes.

This last weekend’s press put paid to the article I was planning this week about the rumoured pension changes. If the papers are to be believed, the good news at the weekend was that the Chancellor intends to leave pensions alone for the time being.  This is a welcome relief as there is a real need for some stability at the moment.  Rest assured however, there are likely to be future changes!  A frustration of mine is the quality of the media coverage, even from the so called superior press.  My recent experiences of this is that articles have not been great and have led to a number of people panicking and potentially making wrong decisions.

Let us now remind ourselves of the attraction of the current pension regime. The combination of tax relief on contributions and the freedom rules allowing flexibility to take money out again, make pensions once again the prime vehicle for saving for your future financial freedom (I prefer this term to retirement).

The additional advantage which allows unspent pension funds to become a legacy for family is hugely significant. All of these changes have removed many of the barriers to saving via pension schemes.

Tax relief on contributions – individuals contributing to pension schemes obtain tax relief on the contributions made. Personal contributions are paid in net of basic rate tax relief with any additional tax relief being claimed via self-assessment.

Income tax payable on withdrawals – The first 25% of your pension fund can be received as a tax free payment whilst the remainder can be drawn as a regular income, a lump sum, or a series of ad-hoc payments and will be subject to income tax at the time of drawing.

Let’s look at an example to illustrate how attractive that could be: –

An individual who is a higher rate tax payer makes a gross personal contribution of £10,000, so the net cost is £6,000. If the individual is over 55, in essence they could immediately draw £2,500 as a tax free payment leaving £7,500 as a taxable payment.

If the income tax payable on that £7,500 is 40%, then the net amount of income received will be £4,500, which when added to the £2,500 tax free withdrawal equates to a net payment received of £7,000 for a net cost of £6,000!

An individual earning £50,000 per annum would not pay 40% tax on all of their income, but only on approx. £7,000 of their income.  In fact, the maximum amount of income tax that a high earner, earning up to £100,000 with a full personal allowance will pay is 29% of their overall income.   This is because our tax system works in bands so you don’t pay a fixed rate of tax on all of your income.  This fact makes the figures look even more attractive.

Investment returns- the growth on investments within a pension fund is not taxable and is the same as an ISA in this respect. However, the tax relief on contributions means that investors enjoy this tax free growth on an increased fund.

Death Benefits- Pensions are generally inheritance tax free and added to this, the benefits of the inherited drawdown rules this means that funds can be retained in the pension fund for the future benefit of other family members.

That is enough for the time being, but as I am sure you can see from the numbers, some tinkering by the government is probably inevitable in the future, but for the time being, make the most of pensions in their current form.

When the SPA makes you angry

I don’t know anyone who gets angry at a Spa, it always seems a nice relaxing place to be,  not that I have been to many!  In this instance however, SPA stands for ‘State Pension Age’ , a subject which is currently generating a lot of sentiment.

Of course, this is nothing new.  The Pensions Act 1995 started the equalisation process by bringing the SPA to age 65 for both men and women; although even this has been subsequently amended by further Pension Acts (namely 2007 and 2011).

So, when will you get your State Pension; and believe me, its not quite as straightforward as you might think?

Date of Birth
SPA Range
SPA Retirement Date Range
Who is Affected?
6 March 1953 – 5 December 1953
63 – 65
6 March 2016 – 6 November 2018
6 December 1953 – 5 October 1954
65 – 66
6 March 2019 – 6 October 2020
6 October 1954 – 5 April 1960
6 October 2020 – 6 April 2026
6 April 1960 – 5 March 1961
66 – 67
6 May 2026 – 6 March 2028
6 March 1961 – 5 April 1977
6 March 2028 – 6 April 2044
6 April 1977 – 5 April 1978
67 – 68
6 May 2044 – 6 April 2046
6 April 1978 onwards
6 April 2046 onwards


The Government confirmed that a regular review of the State Pension age, at least once every five years should be undertaken. The review will be based around the idea that people should be able to spend up to a third of their adult life drawing a State Pension. The first review must be completed by May 2017.

After the review has reported, the Government may then propose to bring forward changes to the State Pension Age. Any proposals to do so would, like now, have to go through Parliament before becoming law.

So what should I do?

Review your financial position, with a particular emphasis on the at retirement portion of your cash flow.

  • Obtain a forecast from the DWP to ensure you are due the full state pension
  • Check your private pension, or join your company scheme if you haven’t already done so
  • Estimate how much income you will need to live comfortably in retirement
  • Speak to us; we will help you get on the right path for the best chance of success

How do you get there?

We have written a number of blogs about what it is we do and how we do it, so I thought I would share with you a great sketch from our friend Carl Richards of Behavior Gap which illustrates perfectly the purpose of our guidance.

how do you get there

The first thing we need to find out is where you are today financially and then from there, determine; where do you want to go? Now the first bit is relatively easy, but the ‘where do you want to go’ part will be a little more difficult. For this we need to understand why money is important to you, particularly as this will guide every financial planning decision looking forwards.

Knowing where you want to go will also involve some element of “guess” work as none of us know what will happen over the next 20 to 30 years and therefore, we make predictions as to future investment returns, earnings, inflation, family and numerous other variables.

Once we know why money is important to you and what your goals are, then it is our job to tell you how to get there; I guess you could say that we are the financial sat nav! Now as I’m sure you are aware; sat navs are not always right and things such as traffic congestion mean that you occasionally have to go off course in order to get to your destination. This is exactly what will happen with your financial plan, but by working together we can get back on track.

Many of our clients are smart, and as successful people you might say that they are clever enough to manage their own finances. But, as Carl Richards often points out, you don’t employ a financial adviser because you are not smart enough to do it yourself, you employ one because they are not you!  Having a plan will help you to stick to your goals and we will remind you of this by getting between you and any potential slip-ups so that you can stay on track,  or certainly get back on track more quickly.




The Cost of Investment

Remarkably it is quite difficult, even for us, to get a firm handle on what the true cost of investing is.
First you need to understand what the components of cost actually are; for simplicity let us just focus on investment costs here (rather than the broader costs associated with obtaining financial planning advice, portfolio administration etc.).
 1.Ongoing Charges Figure (OCF):
For anyone who has invested money I am sure they will have heard about the ‘Annual Management Charge’ (AMC) for the chosen fund(s).  More recently investors will have heard about the ‘Total Expense Ratio’ (TER).  Both of these measures include certain expenses and exclude others – accordingly the ‘new’ measure is known as the ‘Ongoing Charges Figure’ (OCF).
This measure is the explicit cost that investors incur by investing in a fund. This is usually the sum of the AMC / TER and the other direct costs incurred by the fund, which can be offset against the fund’s performance. As such, the OCF is nearly always higher than the AMC / TER. OCFs can be found in the Key Investor Information Documents (KIIDS) that each fund is required to produce.
2.Turnover (dealing) costs:
These are the concealed costs incurred when stocks within a fund are bought and sold. The costs relate to the proportion of the fund that has been turned over (i.e. traded) and the costs of the transaction. Currently funds do not have to reveal the turnover costs that they incur when managing your assets within the fund.
Costs in practice
The figure below provides a summary of the estimated cost differential based on the latest research, capturing both the explicit and concealed costs. The figures relate to a 60% growth assets (equity) and 40% defensive assets (bond) mix, for an actively managed and a passive portfolio.  

60  40 costs matter chart

Figure 1: Cost comparison – costs matter (Source: Albion Strategic Consulting)
The cost differential may not seem that large but, due to the power of compounding over time, it is!
Obtaining value for money
The most important thing about incurring costs is that they should, each in turn, represent value for money. It could, perhaps, be argued that using active funds in a portfolio is likely to be poor value for most.  Over the past few years, passive fund costs have fallen significantly along with wrap platform fees, which is great news for investors.
Difference in terminal wealth
Figure 2: The relative difference in terminal wealth over different time periods (Source: Albion Strategic Consulting)
It is impossible to overstate how important it is to manage costs. It is something that we continue to do on behalf of our clients, through our systematic, low cost, scientific approach to investing.
As the legendary Jack Bogle once said:
‘In investing, realise that you get what you don’t pay for. Whatever future returns the markets are generous enough to deliver, few investors will succeed in capturing 100% of those returns, simply because of the high costs of investing—all those commissions, management fees, investment expenses, yes, even taxes—so pare them to the bone.’
We agree!

Landscape – Simple Pensions are just a dream…………..

The 2006 ‘A –day’ was meant to be the start of pension simplicity; its purpose was to reduce the high level of legislation and complexity built up over the years which was often seen as a barrier for people when planning their retirement.

The last 10 years has shown very little evidence to suggest that these changes have been successful in making pensions simple. In my view, pensions have become even more complicated, and to be honest, even I am becoming a little fed up with the constant changes.

From this April (2016), the amount that can accrue in pension arrangements is £1m and savings in excess of this level will be taxed at a penal rate of 55%. The impact of the change penalises the prudent saver, business owners, doctors, teachers, civil servants and senior executives in occupational pension schemes.

There will be some protection available to help shelter funds that have accrued to date for those who have funds above and below the current maximum of £1.25 million. If you stop making pension contributions or leave your final salary pension scheme by April 2016 you may retain the £1.25 million limit by applying for fixed protection.

Alternatively, individual protection is available for pension pots between £1 million and £1.25 million. This protects the value of the fund at 5th April 2016 and this fund value becomes your lifetime allowance up to a maximum of £1.25 million. This option enables further contributions to be paid however there could be a tax charge at a later date.

A further possibility is to draw benefits early or opt out of the scheme if you are at least 55 years of age. For some individuals, this may be a better option as it gives a higher lifetime allowance and allows you to continue making contributions. This would involve withdrawal of the full 25% tax free cash allowance.

In addition to these changes the government has tapered the annual amount that can be paid to pension schemes and this reduction can in the worst case reduce contributions from £40,000 to £10,000 for those earning over £210,000 (see  our previous blog which covers these changes).

In addition to this, there is a very good chance that the government will reduce tax relief to a flat rate of up to 30% which will be a large reduction for higher and additional rate tax payers. We await the detail on this but the current chancellor has to raise more tax revenue.

The combination of all of these appear to make pensions less attractive for some, when the opposite should be the case. It is clearly important to maximise opportunities now so that you can have a dream retirement …   leaving us to battle with the ever changing pension landscape.

Who’d be a landlord?

Landlords – and prospective landlords – have had a tough time recently in respect of legislation changes. Below we’ve summarised the key changes you need to be aware of if you’re already a landlord or considering becoming one:

February 2016 – right to rent checks

This is an ongoing reform borne out of the government’s policy to tackle illegal immigration and deter individuals who do not have the right to stay in the UK from remaining here unlawfully. As part of this reform new legislation will come into force on 1 February 2016 which will impact landlords, anyone who sublets and anyone who takes in lodgers.

This is referred to by the government as the ‘right to rent checks’ and will apply to new tenancy agreements in the UK from 1 February 2016 onward, whether written or verbal.  These checks must be undertaken within 28 days before the start of the new tenancy agreement, and the records should be kept.  The aim of these checks is to ensure that the adult tenants have the right to rent these properties from an immigration perspective, namely, by verifying the perspective tenants’ right to stay in the UK.

Landlords, their appointed agents and those who sublet properties or take in lodgers may be liable for civil penalties of up to £3,000 per tenant, where those tenants are found not to have the right to rent properties in the UK due to their immigration status.  To assist, the Government has provided an online checking tool which can be used by landlords and others to conduct the right to rent checks:

April 2016 – Stamp Duty Land Tax (SDLT) on new buy-to-let properties

As we have previously highlighted, this legislation will come into from 6 April 2016.  The draft guidance states that an extra 3% stamp duty charge will apply to any purchaser(s) who owns more than one residential property at the end of the day of its purchase – irrespective of the intended use of the property.

April 2017 – removal of higher rate income tax relief on mortgage interest

Thousands of buy-to-let landlords will see their earnings hit after George Osborne cracked down on mortgage interest tax relief in the 2015 summer Budget.

The amount landlords can claim as relief will be set at the basic rate of tax – currently 20 per cent. Currently landlords can claim the tax relief at their highest rate of income tax, potentially up to 45%!

This change will be phased in over a four-year period from April 2017. Mortgage interest relief is estimated to cost £6.3billion a year, a Freedom for Information request revealed recently.

The Chancellor claims the move will ‘level the playing field for homebuyers and investors’. We anticipate the changes will only deter smaller investors in the buy-to-let market and put it into the hands of larger operators, which won’t necessarily be a good thing.


Should I stay or should I go now?

A number of clients have asked this week whether they should get out of the market based upon the scaremongering of RBS… i.e. the very bank that we the tax payers bailed out because it could not predict its own problems!  Okay, so that’s harsh but probably fair.

Within the investment world there is a Clash (see what I did there) of strategies – there is the traditional theory that value can be added through selecting the right shares and timing the market. This “active “approach strives to exploit inefficiencies in the stock markets. Research has shown that most active investment managers fail to add value for investors as they are concentrating on market forces that are neither controllable nor predictable.

The alternative is what we call “evidence based” investing, which is still a relatively new way of investing in the UK. We at Carpenter Rees believe that this is a smarter approach to investing and is built upon the following principles:-

  1. Determine the level of risk you wish (or need) to take.
  2. Diversify to deal with uncertainty – as we are all too aware, nothing is guaranteed and investments will fall as well as rise.   Markets (whether it be stock markets, gilts, property etc.) behave differently and move in different directions.  Therefore, you can reduce your risk by ensuring you do not have all your eggs in one basket.
  3. Manage the effects of inflation – inflation will erode the true value of your money, i.e. what cost you £50 twenty years ago would cost you approximately £100 in today’s money.
  4. Costs matter – keeping the costs of investment down ensure more of the investment profit stays in your pocket.
  5. Control your emotions as they have the power to destroy investment returns – selling close to the bottom and buying back in close to the top is a recipe for disaster.
  6. Rebalance regularly – Higher risk assets have historically provided greater returns over the longer term and as a result, if your portfolio is left unattended then the amount allocated to the more risky investments increases. Regular rebalancing, back to the original allocation, controls the risk and keeps your investment portfolio focused on your long term goals.

So if you want to time the markets, and it can be an exciting thing to do, you should ask yourself; if the experts can’t get it right consistently what chance have you got? Our job I guess is to make it all rather “plain vanilla” so that you can enjoy life and not worry too much.

So in answer to The Clash’s question, my view is that you should stay!

Second home stamp duty surcharge

HM Treasury has recently published details of how it will apply the new stamp duty land tax (SDLT) surcharge on second properties from 6 April 2016.

The draft guidance states that an extra 3% stamp duty charge applies where a purchaser(s) owns more than one residential property at the end of the day of its purchase – irrespective of the intended use of the property.

An exception applies to properties bought to replace the main residence, on the condition that the original main residence has been sold. However, if the new main residence is bought before the old one has been sold; the buyer must pay the charge but can claim a refund providing the old one is sold within 18 months.

It is not clear exactly what the definition of ‘main residence’ will be, or how closely it will mirror the principle private residence (PPR) for capital gains tax purposes. There is to be no right to elect which residence is the main residence for SDLT purposes, so HMRC will instead determine it by ‘taking into account ‘a group of ‘factors’.

Properties bought as furnished holiday lets will be treated in the same way as all other residential properties, in that the surcharge will apply if the property is purchased as an additional property.

Married couples and civil partners will be treated as a single unit, so that each couple may only own one main residence between them at any one time for the purposes of the SDLT surcharge. This could cause issues where the property is owned by one member of the couple, as the other member would incur the surcharge if they purchased another property.

HM Treasury has not yet decided how to deal with scenarios where two or more people who are neither married or in a civil partnership purchase property jointly (this could be cohabitee’s, parents and children, property partnerships etc.). If one of the people already owns a property but another does not, then either applying or not applying the surcharge seems unfair to one of the parties.  They are inviting suggestions on how to deal with this.

The proposed rules may also present some problems for trusts and their beneficiaries. Those who obtain a life interest or interest in possession (IIP) in a second property will be liable to the surcharge.

If you plan to make a future property purchase you therefore need to take this issue into consideration.