The Illusions of Certainty and the Value of a Financial Coach

I would like to start by saying that we do not take any credit for the governments U-turn over the increased probate fees which took place within 2 weeks of our last blog! (see it pays to live).

Since then, we have had Theresa May (or Mummy to her cabinet colleagues) call a snap election, the results of the first round of Presidential Elections in France and the unpredictable first 100 days of the Trump Administration. All of these events could give rise to an increase in investor uncertainty.  On the contrary, this might imply that there is such a thing as investor certainty.  We can assure you this is not the case!

It pays to live …

… or more accurately, it now costs more to die if you live in England and Wales as Probate fees are set to rise in May 2017.

The Ministry of Justice (MoJ) has announced that it plans to go ahead with a revision of probate fees despite a consultation in which only 63 out of 829 respondents agreed with changing from a flat probate fee to a proportionate fee based on the value of the estate. In addition only 13 out of 831 respondents agreed with the revised proportionate scales.

Should I stay for good in this final salary pension scheme?

The overwhelming majority of people who have been fortunate enough to be a member of a defined benefit (also known as ‘final salary’) occupational pension scheme should stay in it. There is certainly much to be said for a guaranteed, inflation-linked income for life

However, for some individuals leaving the scheme might be the right option. One example of this is wealthier clients, who may be more concerned about passing on an inheritance and the amount of income tax they pay on an income they may not need, rather than the prospect of running out of money.  For such people the high level of transfer values currently available will be good news and Carpenter Rees have been advising several clients on this matter.

There are many factors that are driving up transfer values but the first, falling interest rates from UK government bonds – gilts – is having the greatest impact.

Falling gilt yields – The economic uncertainty produced by the vote to leave the EU has seen investors moving into safe havens; gilts have been a major beneficiary of this trend. The increased demand has pushed prices high and as a result reduced gilt yields to historic lows. With the lower expected future returns from gilts, pension schemes have had to assume higher current values to provide the guaranteed future benefits – which in turn have resulted in higher pension transfer values.

Lower expected investment returns – We currently live in an economy with low inflation and low interest rates meaning we should expect lower investment returns. In addition, defined benefit final salary based pension schemes are paying out more of their funds in retirement benefits to pensioners as many schemes are closed to new younger members. As a result, Trustees, are expected to take less investment risk by reducing the proportion of their funds in equities and switching to gilts and fixed interest stocks to match the liabilities of the pensions they are paying out.

Improved life expectancy – Life expectancy at older ages in England has risen to its highest ever level. This is a generally welcome development, but it can be a headache for pension schemes that must now expect to pay pensions for longer and this is again reflected in higher transfer values.

It does not however follow that higher transfer values mean that more people should transfer. Many will be comfortable with the guarantees in place and the fact they do not have to take on the investment risk.  But for those with enough wealth to be confident about their own future financial security and would like to be in control of the level of income and therefore the tax they pay, a transfer of benefits from a final salary would be worth considering.

The decision to transfer will be based around numerous factors including the level of risk a client would wish to take, the income levels required and whether they would view their pension fund as a valuable asset to pass on to future generations outside of the estate. I know that I have mentioned our financial modelling software many times, however, this tool is invaluable in helping our clients understand whether a transfer would be of benefit to them; this is crucial as once the transfer is complete, the decision is irreversible.

If you would like to talk to us about your defined benefit pension plan, or in deed any other pension plan, please do get in touch.   We look forward to hearing from you hear.

CARP01_Z2829_Blog_CTAs_4

You can’t take it with you.

‘You can’t take it with you’ and ‘What’s the point of being the richest person in the graveyard’ are phrases I often use when looking over a financial model with clients.

What does dying with money left really mean?

  • You were a very successful saver?
  • You struck on an amazingly successful investment strategy?
  • You had an idea or business that made you lots of money?

Or perhaps it means that:

  • You died sooner than expected?
  • You were worried about running out of money so were cautious in your spending?
  • You never got to do all the things you wanted?
  • You wanted to leave money to your children?
  • You developed habits or attitudes from life that said you should not spend capital or thrift is good?
  • You never got ‘permission’?

Let’s be clear, any money you do not spend or give away which is left in your estate on death over the inheritance tax (IHT) threshold (currently £325,000) will be subject to tax at 40%.  If nothing else, this 40% loss to your wealth should make you stop and think about your money options.

Striking a balance between today and tomorrow

A great Financial Planner who has you and your family’s best interests at heart, will help you to identify how much money you need to ensure you never run out. I like to call this your ‘enough’.  With ‘enough’ ring fenced, your Financial Planner will then help you develop a strategy to:

  • Be kinder to yourself; maybe spend more doing the things you weren’t sure you could afford to do.
  • Free up your most precious resource – your time. Spending money to engage help (e.g. a cleaner or gardener or maybe even a PA) can make life easier for you.
  • Culture memories by spending money taking friends and family on fabulous holidays or experiences.
  • Give money to your family or friends when they need it, rather than when you die. With the added benefit that you get to see them enjoy your gift.

Use your money for ‘good’ to help causes which are close to your heart and can make a difference. Such giving may also provide income and capital gains tax benefits, along with a real feel good factor.

So, what are you waiting for?

We are all creatures of habit. It takes time to develop the confidence to change lifetime habits and feel comfortable to spend or give more.  But gifting does good and it feels good.  The ultimate win win.

In summary, if you are in the fortunate position of having ‘enough’ take action by spending or giving more now or perhaps build spending and giving into your annual expenditure.  After all, inaction may just lead to the resulting loss of 40% of your family wealth when you go….

If you’re not sure where you are in your accumulation of ‘enough’ or want to kick start your gifting plan, please get in touch.  We look forward to hearing from you.

Remember you can’t take it with you.

CARP01_Z2829_Blog_CTAs_2

Simple steps to becoming a wine tasting expert

In preparation for those long summer evenings, whereby we might get the chance to dine alfresco, I thought I would leave financial planning to one side today and talk instead about one of my other passions … wine!

For anyone who wishes to be able to evaluate and taste wine like an expert, there are a few simple tips you can follow.

 The right environment

 First of all, make sure you are in the right wine tasting environment. For example, a noisy or crowded room can affect your concentration, while any distracting smells can impede on achieving a clear sense of a wine’s aroma. You will also need the right glass – not a glass that is too small, the wrong shape or smells of detergent or dust. And there are other factors to take into consideration: what is the temperature of the wine? How old is the wine? Are there any residual flavours left from what you’ve been eating or drinking previously?

 The sight test

 Ensure that the glass is approximately one third full. Look straight down into the glass, hold the glass to the light and give it a tilt so the wine rolls toward its edges. This will allow you to see the wine’s complete colour range – and not just the dark centre – giving you a clue to the density and saturation of the wine. A murky wine may have chemical or fermentation problems, or it may just be a wine that was unfiltered or has some sediment due to be shaken up before being poured. A wine that shows some sparkle is always a good sign.

 Tilting the glass so the wine thins out toward the rim will provide clues as to the wine’s age and weight. If the colour is pale and watery near its edge, this suggests that the wine is rather thin. If the colour looks tawny or brown (for a white wine) or orange or rusty brick (for a red wine), it is either an older wine or has been oxidised and may be past its prime.

 Sniffing for aromas

 When it comes to sniffing the wine, give the glass a swirl but don’t bury your nose inside it. Instead, you want to be hovering over the top of the glass – think helicopter pilot surveying rush hour traffic. Take a series of quick, short sniffs, then step away and let the information filter through to your brain.

 You want to be looking for aromas that indicate that the wine is spoiled. A wine that is corked will smell like a musty old attic and taste like a wet newspaper – this is a terminal, unfixable flaw.

A wine that has been bottled with a strong dose of SO2 will smell like burnt matches; this will blow off if you give it a bit of vigorous swirling. 

And finally…

 It’s now time to start tasting the wine. Take a sip of wine into your mouth (not a large swallow), and try sucking on it as if pulling it through a straw. Again, you’ll encounter a wide range of flavours, and you should find that most will follow right along where the aromas left off.

 Learning how to taste wine is a straightforward adventure that will deepen your appreciation for both wines and winemakers. Starting with your basic senses and expanding from there, you will learn how to taste wines like the pros in no time. Keep in mind that you can smell thousands of unique scents, but your taste perception is limited to salty, sweet, sour and bitter. It is the combination of smell and taste that allows you to discern flavour.

Now that you understand the basic steps with our wine tasting tips, it’s time to experiment on your own. Enjoy!

CARP01_Z2829_Blog_CTAs_3

 

Spring Budget 2017

The Chancellor of the Exchequer, Philip Hammond, delivered his Spring Budget to Parliament on 8 March 2017. In our guide, we consider the key measures and outcomes and look at the impact on you, your family and your business.

This Budget was the last one to take place in the spring. The Chancellor said last year that he wanted to simplify the whole business of setting taxes and government spending, which had become too complicated.

So, Spring Budgets will again become autumn ones (the first will be later this year), while the other big set piece event, the Autumn Statement, will become a spring one (the first will be in 2018).

As the UK begins the formal process of exiting the European Union, this Spring Budget was relatively low-key, with many changes having already been announced.

Opening his statement, Mr Hammond said the UK economy ‘continued to confound the commentators with robust growth’, and promised his Budget would provide a ‘strong and stable platform’ for the Brexit negotiations to come.

The Chancellor increased National Insurance for self-employed people. He also made provision for £2 billion for social care services in England, as well as offering additional help for firms impacted by business rate rises.

Mr Hammond announced a reduction in the total amount of dividends company directors and shareholders can receive from businesses without having to pay taxes, from £5,000 to £2,000. He said the move was meant to ‘address the unfairness’ around the dividend tax advantage, which he claimed was ‘an extremely generous tax break for investors with substantial share portfolios’.

As predicted, there were improved economic forecasts via the Office for Budget Responsibility (OBR). On the economy, Mr Hammond said growth was expected to be higher – and borrowing lower – than forecast in November.

Want to discuss the impact of Spring Budget 2017 on your personal or business situation?

The Chancellor resisted making far-reaching tax changes in this last Spring Budget, but some of the announcements could have an impact on your personal or business situation. If you would like to discuss your situation, or if you have any further questions, please contact us.

Click here to view our Guide to the Spring Budget 2017.

CARP01_Z2829_Blog_CTAs_4

The Tailor Made Pension Scheme for the Family Business….

Family businesses in the UK employ over 9.5 million people and two thirds of this country’s businesses are family owned. We have a great deal of experience in dealing with family businesses, a lot of which comes as a result of the fact that we administer the ultimate family business pension vehicle, the Small Self- Administered Pension Scheme (SSAS).  

These schemes are the made to measure family business pension plan – the family are trustees, members and also have the facility to use the scheme’s funds to invest into the family business by way of a loan to the company (now referred to as pension led funding, but we still call it loan back) or by using the funds to purchase commercial property for the business.

The key here is that the family has control over the investment strategy, the membership (family members only) and the level of contributions (within limits set out by our good friends at HMRC).

In addition to this, the fund can assist with the family’s succession plans in that Mum and Dad can draw their benefits from the pension fund making them less reliant on drawing funds from the business. This enables more to be paid to younger family members working in the business, when they probably need it most.

In our dealing with the family pension schemes, we have grown into the role of family business advisors and developed the soft skills necessary to help families with their future planning. It is not always about the money, but often about how and who is best to take the business forwards and where to have the assets i.e. in the company or the pension fund to help with the future generational planning.

I am probably teaching to the converted in many cases, but please feel free to pass the word on to other family businesses that could benefit from a bespoke made to measure pension scheme or simply have a scheme but are not receiving any proactive advice on what they can do.

CARP01_Z2829_Blog_CTAs_4

Warren Buffett says low-cost funds founder is my hero

I know I go on about the cost of active investment management, but I am sure you will agree that Warren Buffett has more clout than me.

In his latest annual letter to his investors he referred to Jack Bogle the founder of Vanguard, which transformed investing forever with the index fund, as a hero for protecting millions of investors from the high cost of active investment.

Warren Buffett has estimated that the search by the elite for superior investment advice has caused it, in aggregate, to waste more than $100 billion over the past decade.

Buffett stated: “If a statue is ever erected to honour the person who has done the most for American Investors, the hands down choice should be Jack Bogle. For decades, Jack has urged investors to invest in ultra-low-cost index funds. In his crusade, he amassed only a tiny percentage of the wealth that has typically flowed to managers who have promised their investors large rewards while delivering them nothing – or, as in our bet, less than nothing – of added value.”

Buffett saved his most brutal attack for the hedge fund industry, stating that a number of smart people are involved in running hedge funds, but to a great extent their efforts are self-neutralising and their IQ will not overcome the costs they impose on investors. He then went on to say the problem, simply, is that the majority of managers who attempt to over-perform will fail. The probability is also very high that the person soliciting your funds will not be the exception who does well.

He advised investors of all spectrums to make more use of index funds and went on to say: “The bottom line: when trillions of dollars are managed by Wall Streeters charging high fees, it will usually be the managers who reap outsized profits, not the clients. Both large and small investors should stick with low-cost index funds.”

Bearing in mind that investment management fees are generally higher in the UK than the US, UK investors are likely to be even better off long-term by following Warren Buffett’s advice. This is why we advocate the use of low-cost funds by using the likes of Vanguard and Dimensional, so that you, as our client, retain more of the investment performance than you would if you invested in actively managed funds.

CARP01_Z2829_Blog_CTAs_4

2016/17 Year End Planning

The 2016/17 year end for tax planning purposes is now only a matter of months away with the deadline approaching on 5 April. Effective tax planning is about knowing the personal and business taxes you are liable to pay and acting to legally minimise them. It is also about maximising your net income and creating opportunities to invest and save tax-efficiently for the current and future needs of your business, your family and yourself.

While there is no doubt that the tax system is complex, you should not let complexity deter you from a simple goal: keeping your taxes as low as possible. We have provided some of the key areas you need to consider if applicable to your particular situation.

Personal Allowance

Ensure each spouse uses their full Personal Allowance for Income Tax purposes where possible. Annual income of less than currently £11,000 is not liable to tax. Spouses and registered civil partners should consider the possible transfer of income-producing assets to ensure that Personal Allowances are not wasted.

Personal Allowance for high earners

Your Personal Allowance goes down by £1 for every £2 that your adjusted net income is above £100,000. This means your allowance is zero if your income is £122,000 or above.

Spouse remuneration

If a self-employed person or family company employs a spouse to assist in the running of the business, the spouse could be remunerated fairly to utilise the tax-free Personal Allowance. It is possible to set the earnings at a level whereby no tax or National Insurance Contributions will be due but entitlement to State Retirement Pension and other benefits is protected.

Minor children and teenagers 

Minor children are entitled to Personal Allowances. There are restrictions on the amount of income that a child can derive from a parent, but gifts from other relatives can be considered. Junior Individual Savings Accounts (JISAs) can be funded by parents. Teenaged children can be employed in family businesses providing legal restrictions and national minimum wage issues are taken into account.

Individuals with no taxable income

Pension contributions of up to £3,600 gross per year can be made by individuals with no taxable income. The net contribution after tax relief contributed at source by the UK Government would be just £2,880.

Tax-relievable pension contributions

The Annual Allowance for making tax-relievable pension contributions is £40,000, so consideration should be made to utilising the full Annual Allowance for 2016/17 by 5 April 2017. It is also possible to carry forward unused Annual Allowances from the previous three tax years, so it may be possible to receive tax relief in the current tax year on contributions well in excess of £40,000 with a little planning.

Tax-relievable pension for high earners

For high earners, the Annual Allowance definition is more complicated, but those with an annual ‘adjusted income’ of more than £150,000 will be reduced to as little as £10,000 for 2016/17.

Pension Lifetime Allowance

The pension Lifetime Allowance – the total amount of UK pension savings each individual is allowed to build up in their lifetime – is currently £1m. If you exceed the Lifetime Allowance, you could be facing a 55% tax bill. The ‘flexible drawdown’ pension rules now in place from 6 April 2015 onwards allow individuals the opportunity to plan their affairs to manage the level of the money they take from their pension pot to both minimise annual Income Tax liabilities and keep within the Lifetime Allowance. A review of what you could draw down as income from your pension funds before 6 April 2017 could prove worthwhile.

Tax-favourable investments

If appropriate to your particular situation, the use of tax-favourable investments such as Individual Savings Accounts (ISAs), Enterprise Investment Schemes (EIS), Seed Enterprise Investment Schemes (SEIS) and Venture Capital Trusts (VCT) should be reviewed. Up to £15,240 per person (so up to £30,480 for a married couple) can be invested in an ISA for the 2016/17 year.

Timing of income

Taxable incomes may fluctuate from year to year as a result of one-off payments or changes in circumstances. Consideration should be given to the benefits of accelerating or deferring the taxation point of investment income and employment bonuses, and also to the timing of the payment of dividends paid out by family-owned companies.

Company dividends

From 6 April 2016, company dividends are still treated as the top slice of income but will no longer be grossed up, and will be taxed at 7.5% in the basic rate band, 32.5% in the higher rate band and 38.1% in the additional rate band. However, the first £5,000 of dividends will be tax-free to the recipient, no matter which tax band you fall in.

Capital Gains Tax

It’s important to consider utilising your tax-free Capital Gains Tax Annual Exemption, currently £11,100. Each spouse or registered civil partner is entitled to the exemption each year, so gifts between spouses prior to sales of assets may be tax-effective. It may be worth crystallising capital losses where gains in excess of the Annual Exemption have been made. The deferral of sales until after 5 April may see tax paid at lower rates and provide significant cash flow benefits in terms of when tax needs to be paid.

Inheritance Tax

The use of and the carrying forward of the £3,000 annual exemption should be reviewed, together with other possible exemptions such as those for small gifts of up to £250 per individual, regular gifts out of normal annual income and tax-free gifts in consideration of marriage, which can range between £1,000 and £5,000 depending on the relationship with the person getting married.

Review your Will

A review is due if there has been: a birth or a death; a marriage or a divorce; a move abroad; a significant change in the value of your estate; a new business or the disposal of a previous business; a retirement; or a relevant change in tax law. We can help you to work through changes to keep your estate plan up to date.

Want to explore the options available to you?

We all have to pay our taxes, but within the legal framework there are numerous ways of saving tax and making sure you do not pay more than is absolutely necessary. If you would like to explore the options available to you in preparation for the 2016/17 year end, please contact us sooner rather than later.

CARP01_Z2829_Blog_CTAs_3

Keep your heart out of investing

Hello and Happy Valentine’s Day to you all.   Tonight, I will be spending a lovely evening with Nicky, cooking and eating a great meal and employing the kids as waiters or minders to keep our two-year old son out of the way with his football – just long enough for us to have some quality time together.

The thought of the day ahead, as I planned the menu for the evening, got me thinking about whether there was a place for the heart in investment and financial planning. Oh dear, get a life I hear you say…maybe you are right, but here goes!

Emotion and money seldom make good bedfellows and I think we have empathised this many a time together with the view that investment should be boring.

Hot funds or stocks aren’t guaranteed to keep going up and those that have plummeted may not go lower, in fact the opposite is likely to be the case. We get overconfident in our investment ability and put too much into a certain share or our favourite sector, and fail to diversify. We also try to predict the markets, but do we really think that the Sunday paper columnist (if he could predict the future) would be telling everybody how it can be done or would they just keep it to themselves and make their own fortune?

So, unfortunately there should be no emotion in your financial plan. It is a long term document and there will be mishaps along the way, but if you stick to the plan they will iron themselves out.   Hey, wait a minute, isn’t that is a lot like relationships?  They aren’t all plain sailing either. Except that the plan is there to achieve your financial goals and, if they are achieved, then it makes your emotional life far less stressful, so you can both enjoy yourselves without having to think about the money.

If music is the food of love, feel free to play on, but if your heart rules your head in finance, don’t expect to play for too long!

CARP01_Z2829_Blog_CTAs_2