Lessons from the FTSE 100 Record.

Although it has recently fallen by 10 per cent, the FTSE 100 reached an all-time high in late April, surpassing its previous peak achieved on the eve of the millennium.

This illustrates just how long it can take for the stock market to recover from a crash, but it’s not really representative of an investor’s experience since 1999. People tend to fixate on headline indices, but it’s important to understand that there’s more to a real return than the numbers that make the news.

A more realistic measure of the investment return of the UK’s largest listed companies is the total yield, which includes the reinvestment of dividends. By that measure, £100 would have fallen in value after the dot.com crash but would have recovered its original £100 value by the end of 2005 and since grown to £168.

The total return is more meaningful than the headline you see in the paper, but it’s still far from accurately representing a diversified investor’s experience over the past 14 years.

Diversifying beyond the FTSE 100 might involve holding small companies that offer important diversification benefits and have a history of performing better than large companies in the long run. During this period, UK small companies more than tripled in value, so an investment in the whole UK market, measured by the FTSE All-Share, would have made the £100 investment grow to £190 over the same period.

On top of that, investing in global markets can improve expected returns and increase diversification; over this period, a global portfolio of shares returned £176 from the initial £100 investment.

As advisers, we like to ensure that you have exposure nationally, internationally and across all the major asset classes – shares, bonds and property – and we like to ensure these investments are made at minimal cost, so that you keep more of the return.

The next time you hear that one of the world’s headline indices has risen or fallen …. you should  think hard about how meaningful this news is to your broad portfolio of investments.

A good headline, that unfortunately TAPERS off…

From 6 April 2016, a date not too far away, the annual pension contribution allowance – currently set at £40,000 per annum – will start to taper away for people with high income.

The proposed legislation has not received Royal Assent and could change, but I suspect it won’t. The Government estimates that only 1 per cent of taxpayers will be affected by these changes (approximately 300,000 pension savers).

Will this apply to you?

If you have ‘threshold income’ of £110,000 or more AND ‘adjusted income’ of £150,000 or more, then this will apply to you.

‘Threshold income’ is broadly all of your taxable income, including salary, interest, rent and dividends.

‘Adjusted income’ is broadly your threshold income above the amount paid into any pension by you or your employer.

How will this apply to you?

For every £2 of ‘adjusted income’ you have over £150,000, the annual allowance will reduce by £1 to a minimum of £10,000. Therefore, for individuals with adjusted incomes of £210,000 or more, the annual allowance will reduce to £10,000. If your adjusted income falls between £150,000 and £210,000, then a tapered amount applies, as follows:

taper allowance

Your opportunities

This does present the opportunity for some individuals to maximise their pension contributions in this tax year through thorough planning. However, these options may not be available to everyone:

Option 1.

There is a prospect for those that will be affected to maximise their pension contributions now. This could be done from savings, or by bringing some remuneration forward to this tax year.

For example, a business owner who takes a total annual income of £130,000 and receives £40,000 of pension contributions into their pension from the company each year would find the maximum pension contribution being capped at £30,000 next year – their adjusted income is £130,000 + £40,000 = £170,000.

However, if the individual brought forward £20,000 of income into this tax year, their net income averaged over the two tax years would be broadly the same. However, the business would be able to pay £40,000 into their pension during the next tax year, as their ‘threshold income’ would be £110,000 and their ‘adjusted income’ would be £150,000. They could also potentially fund their directors loan account with the additional £20,000 brought forward and draw it next year.

Option 2. 

If you are not yet a member of a registered pension scheme, joining a scheme this year will generate up to £40,000 of contribution to carry forward for future years.

Option 3.

Make full use of any accumulated payments that you could have paid in previous years and use this amount in this tax year.

 

We would be happy to discuss this further, so please get in touch and if you know of others that may be caught out by this,  feel free to pass this blog onto them.

 

 

 

Your Personal Financial Landscape – Cash Flow Modelling

Some of you will have been lucky enough to have been through this process with us and I have to say, we really enjoy the interaction this involves!

Our job is to ensure you can live the life you wish without running out of money in the process. Cash flow modelling is therefore an essential tool as it can illustrate where you are now, where you would like to be and what you need to invest to get you there – or how long your will money last.

This detailed picture of your assets includes existing investments, debts, income and expenditure. These are all projected year by year, using assumptions for the rate that your wealth will grow, rates of inflation, wage rises and interest rates.

There are some of you who will have a clear plan for your life but don’t know if you’re on track to achieve your goals. However, there are many of us who don’t have a long-term financial strategy at all. Others may have a goal, but no method of determining whether it can be achieved.

Without some form of financial model, it’s very difficult to make financial decisions about critical things such as:

  • When can I retire?
  • How much do I need to sell my business for?
  • Can I afford to buy a second property or a new car?
  • What level of investment risk do I need to take to achieve my financial goals?
  • What level of tax will apply upon my death and my partner’s death?

The cash flow modelling can help you to answer these questions and assist Carpenter Rees in mapping out your personal financial planning landscape. The output from the cashflow modelling is easy to understand and, in many cases, it helps to provide clarity to our clients’ financial affairs.

Inevitably, there will be unexpected twists and turns along the way, so it’s necessary to regularly review the plan in order to ensure you remain on course. The cash flow therefore becomes the centre of your financial plan.

If you’d like to see an example of a cash flow model and how it works, please contact us and we can forward an example to you.

Too much too young?

I remember that during the 1980s, The Specials were at their peak and both business owners and professionals were encouraged to put as much into pension schemes as possible due to the generous tax advantages.  At the time, many major employers had a superb final salary pension scheme, sadly not available to those small to medium sized enterprises.  Interest rates on mortgages were 15 per cent and inflation was well into double digits. Ah, those were the days!

The game has now changed and the needs of austerity measures have driven the Government to introduce the Lifetime Allowance.  More clients are being caught out by the introduction and subsequent amendments to the Allowance, which is enabling the Government to raise more tax. It was brought in by the Government in 2006 and is a cap on the amount that a client can build up in a pension scheme(s). The Lifetime Allowance applies at the time that benefits are taken and any excess funds are taxed at 55 per cent of the fund, or an extra 25 per cent above a client’s marginal rate of tax, if taken as income.

The cap started at a level of £1.5 million and rose to £1.8 million in 2011 and was expected to affect only a small number of people. Since those heady heights, the Allowance has been reduced over the last few years by 0.8 million to the level of £1 million from April 2016. This new figure will increase with inflation but, as inflation is currently close to zero, there will be little improvement over the short term.

A fund of £1 million may sound quite substantial but it would only provide maximum income of around £54,000 for a 60 year-old after drawing their tax-free cash sum.

Reaching the cap is easier than you may think, as a 30 year-old looking to reach a fund of £1,250,000 paying in a contribution of £1,000 per month would reach the figure before age 57, assuming an annual investment return of 5 per cent per year. As a result of this, it’s important that people look at their pension projections earlier than a few years prior to retirement, as by then it could be too late.

The Lifetime Allowance is very important for a client who is a member of a final salary pension scheme, or those that have a benefit from a previous employer with such a scheme. The pension figure from such a scheme is multiplied by 20 and, as such, they can take up a large part the Lifetime Allowance as the income earned up to the date of leaving will generally be increased by inflation or a fixed percentage up to the date of retirement. For example, a benefit of £10,000 per annum for a 40 year-old leaving service with a retirement age of 65 would equate to approximately £21,000 assuming 3 per cent per annum increase which would use up £420,000 of the lifetime allowance.

It is possible to plan ahead to avoid hitting the maximum by either taking benefits early, reducing the risk and therefore, the expected return on your investments within the pension or stopping contributions. In addition there will be an option for this tax year to elect for Fixed Protection which will allow for the current Lifetime Allowance cap of £1.25 million to be maintained, but no further contributions can be paid by them or their employer.

This is a complex area and one in which will become more and more involved, advice from a specialist is vital and clearly, that is where we can help.

What is it you ‘do’?

I  often think about how we articulate what we do – our ‘elevator pitch’! We will do this as a group shortly and that should be interesting! To be honest I’ve struggled to articulate this for years. I dread that dinner party question, “so, what do you do?” For some reason saying you are a Financial Planner/Adviser tends to elicit a nervous or negative response from the enquirer, as if I am about to sell them a pension or give them the next hot investment tip.

The stuff we do

Sure we draft Financial Plans, do cash flow planning, pension planning, income and capital gains tax planning, risk profiling, arrange investments, select tax ‘wrappers’, recommend protection contracts in case of disaster, identify when Wills, Lasting Powers of Attorney and Trusts are needed, support our clients’ other professional advisers (solicitors, accountants, mortgage brokers), tell people to save more if they aren’t going to achieve their goals or suggest that they give money away if they have too much, provide an Annual Planning Service, respond to personal, economic and legislative changes…I could go on. But that is the ‘stuff’, albeit very important ‘stuff’ we do. But what is it that we really ‘do’?

What our clients tell us we do

So I have done what I often do and listened to what our clients tell us we do for them. That’s when the magic begins. Our lovely clients tell me that we provide ‘peace of mind’, give them ‘space to think’, we are their ‘sounding board’, we ‘keep them organised’, that they welcome our nudging (and sometimes nagging), that we are proactive, we simplify complex stuff, we introduce them to other professionals when needed and perhaps, the greatest compliment, the second person their wife/husband/partner/son/daughter would call in the event of a disaster. Wow! That really makes us feel proud and reminds us of exactly why we do what we do.

If anyone knows how I can boil all of that down into a snappy one liner, I’d love to know. I may even look forward to dinner parties again!

Holiday Home Succession Simplified

For those with Holiday or second homes, the EU Succession Regulation – which came into force on 17th August – will be very relevant. The regulation gives much more freedom to families as to how they pass on assets they own in the European Union (EU) in their wills.

This could be particularly important for UK families with holiday homes in the EU or for those with parents and grandparents living in the EU.

George Hodgson, Deputy CEO of STEP, the professional body for specialists in family inheritance and related areas commented: “Many European countries have so-called ‘forced heirship’ rules, where the law lays down precisely how someone’s assets have to be passed on within the family after death. Until now, for example, a UK family with a holiday home in France had very limited options as to how that could be passed on through the family. The new regulations change that, and should be a prompt to everyone with EU assets to review their inheritance plans”.

Mr Hodgson cautioned that the new rules are complex, but even though the UK itself has opted out of the Succession Regulation, they still give potentially valuable new rights to those with property or other assets in the EU. Given the complexity, however, it would be wise to seek specialist advice for changing any inheritance plans. British owners of holiday homes in EU member states such as France should update their wills and draw up French ones to avoid the country’s forced heirship rules.

The EU Succession Regulation has the potential to affect the estates of any individuals with any connection to any EU Member State in which the Succession Regulation has direct application.

Details on the new regulation can be found at http://ec.europa.eu/justice/civil/family-matters/successions/index_en.htm and an example of how the new rules might work is covered below.

Clare is a British citizen who is resident in England but has a French holiday home she uses a few weeks each year. French forced heirship rules would oblige her to leave her holiday home to her husband and children, with clear rules as to how it would be divided. She would like instead to leave it to her brother, since it was bought with money from their grandparents.

Until today, the law governing who receives the French house on Clare’s death was generally French law. But as of 17 August 2015, this need no longer be the case.

The new regulations state that someone can generally choose the law applicable to their inheritance. This can either be the law applying where the deceased had their ‘habitual residence’ at the time of death, or the law of the state of nationality at the time of making the choice, or at the time of death.

As a British citizen, therefore, Clare can now opt to have her French holiday home treated under English law and leave it to her brother.

The new rules do make things a little simpler and it is great to see some sensible legislation in this respect.

Update – If you can keep your head when all around you are losing theirs…

It has been quite a year for stock markets. In the past 12 months shares have soared to record highs; higher than the tech boom and higher than the credit bubble of 2008, and then subsequently shot down again.

But let’s not get carried away. Being disciplined with an investment strategy is important when times are both good and bad, but in some ways the excitement of a rising market makes it harder to do. Here are three things that investors should remember when markets are rising or falling.

Maintain the right balance of investments.

  • Every investor should have a carefully considered mix of assets with the appropriate proportions of cash, bonds, shares, property and so on.  However, as the value of each asset class rises and falls at different rates, these proportions drift. Maintaining the intended balance is important because your allocation of assets is one of the bedrocks of the strategy that will help you reach your goals. So we rebalance your investment portfolios regularly by trimming the things that have performed well and adding to the things that have lagged. This might seem counter-intuitive, but it helps keep your investment portfolio in the best shape to achieve your long-term goals.

Avoid getting swept along with the market.

  • When the market is rising it is easy to be tempted to take more risk to increase your returns and the opposite is the case if they are falling. The pain and uncertainty of a falling market can quickly be forgotten when shares are on an unbroken year-long rally and vice versa. But sticking to your guns and remembering your original goals and strategy are essential – chopping and changing your approach when the market shifts can detract from returns rather than enhance them. Our investment philosophy is not influenced by the cyclical nature of the market; rather it evolves over time as the science of investing evolves.

Guard your gains.

  • When money is tight, people tend to watch their expenses more closely than when they are feeling flush. In the same way, some investors can neglect to monitor their fees and transaction costs when markets are rising. Letting expenses slip is like trying to fill a bath with the plug out. This is why we keep portfolio expenses low in good and bad markets.

Sometimes the key to successful investing is simply to remain disciplined; to remember to stick to your well-considered decisions; and to keep your head when everyone around appear to be losing theirs. It’s as important to remember this simple philosophy when markets are rising as it is when they are falling.

Dividend taxation

The Chancellor of the Exchequer recently announced the biggest shake-up to dividends since Gordon Brown removed the ability for pensions to reclaim the tax credit.

From 2016/17, the 10 per cent dividend tax credit will disappear and the taxable dividend will be the actual dividend paid, rather than a grossed-up amount, which never seemed to make a lot of sense to most investors anyway.

The majority of people will continue to pay no tax on their dividend income because a dividend allowance will be introduced – starting at £5,000 per person.

For dividends above the allowance, new tax rates will apply:

  • 7.5 per cent for basic rate taxpayers,
  • 32.5 per cent for higher rate taxpayers, and
  • 38.1 per cent for additional rate taxpayers.

The net effect of these changes is that:

  • Basic rate taxpayers will pay more tax on their dividend income over and above their £5,000 dividend allowance.
  • Higher-rate taxpayers save £1,250 on their first £5,000 of dividends and will only be worse off if their total dividends exceed £21,667.
  • Additional rate taxpayers save £1,528 on their first £5,000 of dividends and are worse off to the extent that their dividends are more than £25,250.

It is expected that a lot of dividends will be brought forward to this tax year in order to keep the current, more favourable rules, then we will see a lull in dividends next year and a return to normality the following tax year (2018/19).

The main target of this change is not ordinary shareholders or investors, but rather private company directors who draw a minimal salary and large dividends in order to avoid paying National Insurance contributions (NICs) – a situation HMRC has been steadily attacking over the last 10 years, and is likely to continue in the future.

It should be noted that where a company has sufficient retained profits, drawing dividends instead of salary remains more tax-efficient (due to the lower tax rates applied, the dividend allowance and the lack of NICs), although individuals will see their tax bills rise.

The changes present some points for consideration:

  • Accelerating the dividend payments from your company into the current tax year could potentially credit your directors loan account for the next tax year.
  • Adjusting how income is drawn could be tax advantageous for you
  • Dividends will become more valuable for most higher and additional higher rate taxpayers.
  • The new allowance will create opportunities for independent tax planning, as have the revised starting rate band and next year’s personal savings allowance.

If you would like to discuss this in more detail, please do not hesitate to contact us.

Invest in a system, not a legend.

Whilst Pimco is not a household name in Europe, it is one of the biggest investment managers in the world. The departure of two high-profile members of the investment and executive team  in 2014, resulted in investors pulling money from Pimco’s funds.

In one month alone, investors withdrew $23.5 billion from Pimco’s flagship bond fund! Yes, you read that right – $23.5bn, from one fund, in one month.

Something similar happened in the UK when Neil Woodford, manager of one of the country’s largest funds – the Invesco Perpetual Income Fund – announced that he was stepping down, prompting investors to pull £2 billion out.

Both cases illustrate the faith that investors are prepared to put in the individuals who look after their money when performance is good. However, that special ingredient can evaporate overnight, leaving many investors with little choice but to switch to other funds.

The approach we have to managing money doesn’t rely on any one individual, but on a system.

That system begins with the idea that markets will reward all patient investors over time – especially if they concentrate on the things they can control, like keeping costs low and only taking risks that are rewarded. It runs right through to the people we select to manage your money who, in the nicest possible way ….. are interchangeable!

 

A Summer Holiday without Headlines: The Holiday Challenge

This is a version of an article I read recently which struck a chord with me.

Did you read, listen, or watch the news in the last 24 hours?  If so, you probably came across one or more of these headlines:

  • Grexit remains the likely outcome of this sorry process
  • Carney hints at move in interest rates
  • Commodity prices head for 13 year low
  • Dollar rise threatens US growth.

Any one of these items could keep you up at night. But they shouldn’t, because you can’t do anything about any of them. These events, and others like them, are completely out of our individual control. However, that won’t stop the 24/7 news channels from trying to convince us otherwise.

That’s why I’m suggesting something sort of radical for your summer holidays of 2015: go on a ‘media fast’.

Specifically, you should ignore the top headlines and the breaking news for the period of your holidays. Instead, read something interesting – something that you really want to read.

If you’re feeling really crazy, go outside. Play with your kids, or grandkids. Go on a walk or spend time with your partner. But whatever you do, avoid anything that’s ‘trending’ for those vital weeks.

For some of you, I know this fast will be really difficult. I, for example, will still look at the football gossip every day. You soak up news like a sponge – you probably can’t imagine going without it for more than an hour or two, never mind a week or two! If you fall into this camp, you should ask yourself one question: does knowing what just happened make me any happier, or does it just increase my stress?

If we’re being honest, I suspect it’s the latter for 90 per cent of the time. We have no control over these events, yet we’re encouraged to devote attention and energy to things that make us feel bad.

Let’s hit the pause button for a short time and see how it feels. How do we feel during a day when we focus on what’s right in front of us, versus what’s happening halfway around the world?

To be clear, I believe there’s a huge different between being well informed about current events and staying glued to news channels. I think we’ve got into the bad habit of confusing one with the other. This media fast will help us do a better job of separating the two and identifying the situations we really care about as opposed to the steady stream of nonsense masquerading as ‘important news’.

I think this summer should be memorable for a lot of reasons, but I’m hoping it’s because of the memories we choose to make, instead of what we happen to read or see on the news.

Now, I’m off on holiday for two weeks, so there won’t be another blog until 11 August. I will practise what I preach, with the exception of the football gossip…..