As you may be aware, at Carpenter Rees we have many years’ experience in setting up and administering Small Self-Administered Pension Schemes (SSAS) for our own clients. Whilst we are financial planners first and foremost, SSAS do form an important part of many of our client’s financial plans. Set out below is a typical case study demonstrating how the use of SSAS can assist our clients in their financial plan.
Husband and wife team, Roy and Janet have a business which makes and sells garden furniture. The business has been doing so well in recent years that their sons Alan and John have joined the business.
Roy and Janet have indicated that they intend to hand the business over to their sons in stages, as they would gradually like to take more time out of the business to enjoy travelling together and would like to replace some of their earned income with pension income.
The business operates from a rented warehouse and the landlord has recently offered
Chancellor of the Exchequer, Philip Hammond, delivered his first Spring Statement to Parliament on 13 March 2018. In a break with recent tradition, the chancellor did not use the financial statement midway between Budgets to present a ‘mini-Budget’ or pre-Budget report.
The chancellor’s Spring Statement 2018 is a response to the Office for Budget Responsibilities’ (OBR’s) latest economic and fiscal forecasts and provides an opportunity to set out government priorities and consultations ahead of the Autumn Budget later this year.
Projections for growth
Mr Hammond upgraded projections for growth and predicted falling inflation, debt and borrowing in his 26-minute statement. He claimed the UK economy had reached a turning point and there was ‘light at the end of the tunnel’.
The UK economy will grow faster this year than previously forecast and the deficit will be some £5 billion lower, with the overall economic and fiscal picture ‘broadly the same’ according to the OBR.
Future spending rises
He ruled out an immediate end to austerity but hinted at possible spending rises in the future, announcing to the House of Commons that growth was forecast to be 1.4% this year, 0.1% higher than forecast by the OBR in November, with the forecast for 2019 and 2020 unchanged at 1.3%.
Mr Hammond said debt would fall as a share of Gross Domestic Product (GDP) – the main measure of UK economic growth based on the value of goods and services produced during a given period – from 2018/19, which would be the start of ‘the first sustained fall in debt for 17 years, a turning point in the nation’s recovery from the financial crisis of a decade ago’.
Public sector borrowing
Mr Hammond revealed that public sector net borrowing in 2017/18 would be £45.2 billion, down from the £49.9 billion forecast in November and as a share of GDP that would be 2.2%, lower than the 2.4% previously expected.
He also hinted at possible spending increases to come in his Autumn Budget when he will ‘set an overall path for public spending for 2020 and beyond’ with a detailed spending review in 2019.
There is a growing interest among clients in the concept of green and socially responsible investment. This has led to an increase in money managed under responsible investment strategies of 25% between 2014-16 according to the 2016 Global Sustainable Investment Review.
As individuals we can all express our views around sustainability via the ballot box; as investors we can express our preferences through participation in the global capital markets.
The main issue is how this can be done without compromising the desired investment outcomes. How can portfolios reduce their investments carbon footprint, ensure investments are not being made into companies associated with undesirable issues like arms tobacco child labour etc and still have a diversified portfolio proving the desired long-term returns?
There is a challenge in achieving the dual goal of sustainability and social consideration are met while building investment solutions aimed at growing wealth for the future.
For clients who request this type of investment, Carpenter Rees often incorporate a sustainable fund from Dimensional Fund Advisers into their portfolio’s. The Dimensional solution to sustainable investment is to first focus on concentrating on the sources that generate high returns for clients while minimising costs. This is a philosophy that sits across all our model portfolios.
From this base, Dimensional then evaluate companies on a broad array of sustainability measures (such as carbon emissions, land use, toxic waste and water management). That means looking at companies across the whole portfolio and within individual sectors and ensuring that the worst offenders, based on a low sustainability score, are removed altogether. Those that are left are over weighted or under weighted based on how well their score ranks on a set of key sustainability criteria. This process ensures that diversification can be maintained while encouraging good behaviour.
The outcome from research shows that this enables a dramatic reduction in investment into Companies not addressing carbon emissions whilst maintaining diversification and ensuring the focus remains on the drivers of investment return.
In the socially responsible area of factory farming, cluster munitions, tobacco, and child labour there are clearer factors which excludes them. Companies deriving a significant proportion of their income from these areas or from gambling tobacco, or any of the other non-socially sustainable activities can be excluded altogether.
The two functions of return and sustainability need not be incompatible concepts. There is a systematic process to ensure diversification and targeting the sources of higher expected investment returns to ensure a green and pleasant investment portfolio.
Warning: The above information is provided for information only. It does not constitute investment advice, recommendation or an offer of any services and is not intended to provide a sufficient basis on which to make an investment decision.
Here at Carpenter Rees, we are very proud of our team and particularly as they all share our passion for providing an excellent service to clients.
To meet growing demands and to ensure that we can continue to deliver the service that we pride ourselves on, we have recently expanded our Technical and Research team (otherwise known as Paraplanners) and would therefore like to introduce you to our two new members, Karl and Joel.
Karl is a resident audiophile – so engage him in conversation about vinyl and speaker cables at your peril! Karl tells us that he loves Paraplanning, which for him is a refreshing change after a lifetime in life offices. He enjoys meeting clients and knowing his work has a positive impact on their lives. He is currently working towards the CII Diploma in Regulated Financial Planning.
In his spare time, he can be found in the swimming pool, at HOME cinema and post-viewing socials or at a wonderful variety of gigs. He is also learning (slowly) how to play the guitar.
The newest member of Carpenter Rees and a recent arrival from Melbourne (Australia), Joel has slotted seamlessly into the Manchester way of life. A staunch City supporter, Northern Quarter aficionado; you’ll often find him down at the Nelson in Didsbury regaling the locals with tales of sun & surf.
Joel has been working in the financial planning industry since 2002 and brings a different outlook to the team at Carpenter Rees. He holds the Advanced Diploma of Financial Planning (Australia) and is currently working towards the Diploma in Regulated Financial Planning with the Chartered Insurance Institute (CII).
When not at the Nelson, he enjoys cycling, running, spending time with the family, and chasing the illusive flat white.
Karl and Joel both bring valuable skills and knowledge to Carpenter Rees …. So if you’d like to put this to the test, or just want to know more about them, please do get in touch.
The sketch above from Carl Richards reminds us of the fact that the calm serene rise of markets year on year does not exist.
Carl explains his sketch as follows: –
“Imagine being in a boat in the ocean on a very still day. No wind. No swell. The water is as flat as a mirror. The calm goes on for a just long enough for you start to feel like it’s normal. Then when a small wave comes, it feels huge, and regular waves feel enormous. As scary as it might feel…remember waves are normal. Occasional storms are normal. And the last thing you want to do when you get into one is abandon ship.”
I know I am probably going over similar ground to last weeks blog but it is important to remember Volatility is the price you pay for participation in equity markets and for the potential for higher returns than cash.
As always, we are bound to see the media and industry commentators put forward lots of very plausible reasons for this sudden spike in market volatility. No doubt many will point to fears of rising interest rates due to Trump’s tax cuts ‘turbo-charging’ the economy…however, we should regard this purely as white noise and ‘sit tight’
Market corrections are a normal part of the market cycle and happen from time to time. It’s nothing to fear, just a part of how equity markets operate.
Our clients with money exposed to global equity markets all share many important attributes:
They are long-term investors. This attribute makes short-term market volatility less important. Rather than looking at how an equity market performs during the course of an hour, day, week, month or even year, we’re interested in multi-year investment returns.
We ensure that our clients remain suitably diversified. This means that equities are not the only element within their investment portfolios. This diversification is important because different investment types tend to behave differently at different times. Having a well-diversified portfolio softens the blow of any short-term volatility in equity markets, as you are never fully exposed to UK, US or global stock price movements.
We take careful steps to assess attitude towards investment risk, your risk capacity and your need to take investment risk in order to achieve your financial goals…including determining the degree of short-term falls that can be tolerated in pursuit of longer term gains.
This deep understanding of investment risks means that the volatility we are witnessing should be tolerable in terms of your emotional response to the event and your financial ability to withstand falls within your portfolio.
Despite these three very important attributes, it’s only natural that market volatility prompts some nervousness.
If you’re feeling at all unsettled, we want you to call us and chat about it…. that’s what we are here for.
In fact, as we have said on many occasions, our job as Financial Planners is less challenging during periods of rising markets, it is when markets experience falls that we work harder and really earn our fees by promoting investment discipline, explaining what is happening, and demonstrating how this fits into your overall financial planning.
The above information is provided for information only. It does not constitute investment advice, recommendation or an offer of any services and is not intended to provide a sufficient basis on which to make an investment decision.
The falls in Global markets overnight and this morning emphasise the fact that equity markets do have periods of volatility. Positive periods are followed by negative periods, which are then followed by positive periods. Because of this, it is common when markets are falling to ask whether it is possible to time investment decisions to sell at the peaks and buy back at the troughs.
One way to do this might be to analyse forward-looking information such as economic and corporate data and make predictions about the direction of the markets. But it is hard to make predictions, especially about the future.
Another approach might be to look back at data from previous cycles and identify patterns that could be repeated going forward. Researchers at Dimensional Fund Advisors did exactly this, running almost 800 tests on data from 15 world equity markets to identify signals that might point to a change of market cycle and simulating the trading activity that might improve investment returns.
Most of the 800 tests failed and resulted in worse performance than would have been achieved by just going with the flow of the market. But some of the tests worked and produced positive performance results.
You might think this is good news for investors—that they can replicate the trading patterns suggested by the positive tests. Unfortunately, the number of positive results was no greater than one might expect with such a large number of tests.
As the researchers explain, the odds of one-person coin flipping 10 heads in a row are small. But if you asked 100 people to try, you would expect around five of them to be successful. The same proportion of the 800 market tests were positive and the research was unable to determine if any of them were more than just a sequence of lucky coin tosses.
The conclusion of the research is that, on average, investors are better off sticking to their long-term investment goals and riding out short-term market volatility, rather than trying to time their trading to coincide with the peaks and troughs of the market. This is also the approach we advocate at volatile times such as these.
The main defensive assets within our portfolios are short term, high quality bonds, these bonds are less volatile than long term bonds and their prices will be less effected by any rise in interest rates. High quality bonds tend to be where money flows to at times of equity market trauma and this has indeed been reflected today.
It is easy to become concerned about the present and life as an investor will involve many of these days making life less comfortable unless you view them in context so remember:
The value of your portfolio simply tells you how much money you would have if you liquidated everything immediately which you do not intend to do. Losses are only made if you sell assets but if you don’t do this they remain in your portfolio to generate future returns.
Your portfolio has a well thought out structure and is designed to provide you with the best chance of a long term favourable return.
Some assets will be doing well at times and others not so well and nobody can predict which assets will be doing what at any given time.
Your adviser cannot control what markets do and neither can fund managers.
In a nutshell, try not to worry about the short-term impact on your portfolio and instead, focus on your longer term financial plan.
We’ve now entered a new age of retirement planning with the introduction of pension freedoms. But Britain has an ageing population, highlighted by the fact that the number of telegrams sent by the British Monarch to 100-year-olds has risen from 24 in 1917 to nearly 7,000 today.
It is projected that the number of centenarians – people who live to 100 years old and beyond – will continue to rise by more than tenfold over the next 30 years (when the NHS will also celebrate its 100th birthday). This growth is due to the higher birth rate between the First and Second World Wars, and dramatic improvements in health and healthcare.
Thinking about pensions sooner rather than later can mean the difference between a comfortable retirement and struggling to make ends meet. Unfortunately, some people put off retirement planning when they are young because they think they’ve got time on their side. However, the earlier you start saving for your future, the bigger the pension pot you’ll end up with when you’re older.
Seven pension tips for nurturing your nest egg
Research shows we’re more likely to achieve our financial goals if we write them down and start with a clear plan of action. Work out what financial goals you want to achieve, then break them down into realistic steps that will lead you there. We’ve provided seven pension tips for you to consider to keep your retirement plans on track at the start of the New Year.
Consider consolidating your pension pots – while it might be hard to keep track of pensions with job changes, the Government offers a free Pension Tracing Service. Bringing your pension pots together may help you manage them but take care to understand the benefits associated with the existing contract, along with any potential risks/disadvantages of transferring the funds – and always seek professional financial advice to see if it’s suitable for you.
Make use of your tax reliefs on pension contributions – when you can do this, particularly at higher rates, this can be beneficial. The Government may well revisit pension tax relief post-Brexit to help ‘balance the books’.
Maximise your workplace pension contributions – if your employer pays a contribution that is linked to your contribution, see if it’s affordable for you to pay the maximum to receive your employer’s maximum.
Invest for the long term – there have been various moments of uncertainty in the markets – think back to the ‘crash’ of 1987, which now looks like a blip. Keep an open mind, and don’t panic or have a knee-jerk reaction. You must remember that when investing in the stock markets, it is inevitable that there will be times of volatility when you need to weather the storm.
Review your State Pension entitlement – given so many changes, it is worth keeping your finger on the pulse and looking at what you may need to do to top up to the maximum entitlement available.
Review your expected expenditure in retirement – it’s key that you clearly establish ‘essential’ and ‘discretionary’ spending, so that in poor market conditions you can always look to reduce income from pension funds if necessary to cut back on discretionary expenditure that can wait for another day.
Ensure your income in retirement is set up as tax-efficiently as possible –making full use of all available tax allowances/exemptions is crucial. Don’t forget to look at how different tax wrappers can work for you.
What does retirement mean to you?
From stopping work altogether to a slow and gradual reduction of commitments, retirement means different things to different people. Making sure you can sustain the level of income you need as you move away from full-time employment or your business interests is key to a long and happy retirement. To discuss your requirements, please contact us.
Investor Pulse Survey – BlackRock’s Global Investor Pulse Survey examines investing attitudes and behaviours across the world. The 2017 survey included 28,000 respondents in 18 countries. The UK sample included 4,000 respondents between the ages of 25 and 74. Survey conducted in Q1 2017.
You may have had it drilled into you from an early age that you should save. Being a diligent sort of person, you may have always done that; maximising your yearly ISA allowance, putting 6% of your salary into your pension, investing wisely, even purchasing a buy-to-let property as an additional investment.
But once you’re into the habit, is there a danger of saving too much? More importantly, when can you afford to stop?
Of course, it’s different for everyone. Perhaps a more relevant question is what kind of lifestyle are you planning for when you have financial independence and how much will you need to meet those requirements?
Our culture today is focused on acquiring things: the latest iPhone, that designer jacket you’ve seen, a top of the range sports car. There comes a point, however, when we reach a kind of saturation point without even realising it. That’s why it’s good to take a step back and consider how much money you really need.
Repeated pay-outs to children could have a detrimental impact on your own long-term saving
Many parents who are in a position to do so would want to provide financial help to their children. However, in many cases, this financial support ends up being gifts from Mum and Dad rather than the loans from the Bank of Mum and Dad they start out as.
These written-off loans risk making a long-term dent in the finances of parents, often at the stage in their lives when they would like their money to be invested for the future and working hard for them in a pension. If the choice is between providing loans to their children or continuing to contribute to a pension, parents should obtain professional financial advice before making that decision.
On average, those who have lent money to their children or grandchildren are owed £12,700, and more than one in ten (11%) of the Bank of Mum and Dad’s loans are for figures of more than £20,000.
Repaid in full
Research from Prudential[i] has revealed that in many cases, the Bank of Mum and Dad doesn’t expect its loans to be repaid in full, with more than two in five (44%) parents who have lent money to their families admitting it is unlikely that they will ever see the full amount of money again.
However, the potential for significant financial loss from written-off loans doesn’t appear to deter them. More than two thirds (68%) of the parents interviewed have already loaned money to their families, or have definite plans to do so in the future, while the remaining (32%) all hope to be in a position to act as their children’s preferred lender sometime in the future.
Of those parents who are considering lending to their offspring in the future, many are also unsure they will get the money back – nearly two fifths (37%) think it is unlikely
Bitcoin and other cryptocurrencies are receiving intense media coverage, prompting many investors to wonder whether these new types of electronic money deserve a place in their portfolios.
Cryptocurrencies such as bitcoin emerged only in the past decade. Unlike traditional money, no paper notes or metal coins are involved. No central bank issues the currency, and no regulator or nation state stands behind it.
Instead, cryptocurrencies are a form of code made by computers and stored in a digital wallet. In the case of bitcoin, there is a finite supply of 21 million, of which more than 16 million are in circulation. Transactions are recorded on a public ledger called blockchain.
People can earn bitcoins in several ways, including buying them using traditional fiat currencies or by “mining” them—receiving newly created bitcoins for the service of using powerful computers to compile recent transactions into new blocks of the transaction chain through solving a highly complex mathematical puzzle.
For much of the past decade, cryptocurrencies were the preserve of digital enthusiasts and people who believe the age of fiat currencies is coming to an end. This niche appeal is reflected in their market value. For example, at a market value of $16,000 per bitcoin, the total value of bitcoin in circulation is less than one tenth of 1% of the aggregate value of global stocks and bonds. Despite this, the sharp rise in the market value of bitcoins over the past weeks and months have contributed to intense media attention.
What are investors to make of all this media attention? What place, if any, should bitcoin play in a diversified portfolio? Recently, the value of bitcoin has risen sharply, but that is the past. What about its future value?
You can approach these questions in several ways. A good place to begin is by examining the roles that stocks, bonds, and cash play in your portfolio.
Companies often seek external sources of capital to finance projects they believe will generate profits in the future. When a company issues stock,