Monthly Archives: March 2016

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.