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A New Year and a New Financial You

Happy 2018!

It’s that time of year again, when we all make our New Year’s resolutions. Whilst I can’t help you with getting fit, quitting smoking or learning the piano, I can certainly help with any resolutions you may have made regarding getting your finances in a better order.

Whether you’re planning to spend less, or save more, this blog may help guide you away from the many potholes that throw our best intentions off course.

I’ve broken things down into easily digestible sections. Covering Pensions, ISAs, Investments, Insurance and Wills and LPAs. With some hints and tips to help keep you on track with all of them.

As a rule, I would say that realistic and well-defined objectives work far better than general goals and ambitions. For example, if your goal is to build up a nest egg, then a defined resolution to put £500 into a savings account each month works far better than the general intention to just ‘save more’. It sounds obvious, but you would be surprised how a well-defined objective can achieve a successful outcome.

Another way of gifting yourself a head start in your quest for a ‘new financial you’ would be to examine your existing tax and pension position. Making sure that you are taking full advantage of the available tax relief, as well as ensuring you are getting the most out of investments and any insurance plans you may have. Again, a little effort here at the beginning of the New Year can pay dividends further down the line.

Ponder your Pension

I’ve deliberately started with pensions, as I feel that sometimes we don’t give pensions the attention that they deserve. They are one of the most valuable assets we can have, yet they are often overlooked. As legislation has changed massively in the last few years, if you haven’t reviewed your pension position, then now would be a very opportune moment.

Have a look at where you are with your current scheme and ask yourself:

• Have I got the level of my contributions right? Too little and you could find yourself wanting in retirement and too much could create problems with your Reduced Lifetime Allowance)
• Does my investment strategy still fit with my attitude to risk, time horizon and any changes in my current situation?
• Is my pension scheme able to take advantage of the new pension freedoms, or is it one of the older schemes that can’t benefit?
• Does my pension fit with my retirement and estate planning?
• If my pension is a Final Salary Scheme, then with the increases in transfer values, is it worth requesting a transfer value and restructuring my pension?

Although not an exhaustive list, these are certainly the questions you should know the answers to if you want to make sure that your pension is in the best place it can be.

Investigate an ISA

If you are not taking advantage of ISAs, then I would suggest that it becomes top of your list of things to consider.
You can invest in an ISA up to a limit of £20,000 of which £4,000 can be paid into a LISA (for those eligible). It’s a great way of avoiding tax on your investments and guaranteeing a fixed return.

Please also remember that the annual ISA deadline is 5 April. So you can take advantage of the rest of this years ISA tax-free opportunity before the deadline, then do the same again after. It’s also worth mentioning that some providers take several working days to process new ISAs, so don’t leave it until the beginning of April, or you may miss this year’s deadline.

Examine your Investments

Now is a good time to check that your investment strategy is on course to achieve your goals. Start by looking at the latest report regarding your mutual funds, check to make sure that they match your appetite for risk and that you are happy with where your money is being invested.
When considering your investments, especially your exposure to risk, always include your pension, ISA’s funds and stock together, even when the funds are spread around different accounts and investment products. That way you will get a better feel for your overall portfolio.

Revisit your Insurance

Although good insurance cover is an essential part of strong financial planning, the wrong product can end up costing you a great deal of unnecessary expense.

Now’s the time to review your insurance plans. Check what each plan covers and how much it costs. Any changes in your circumstances since you took the cover out may require a different plan and could even lower your premium.

Look into your Will and LPA

More than half of UK adults, including many in their 50’s and 60’s, don’t currently have a Will in place. If you’re amongst that number, then I would suggest that writing one should be high up your list of financial things to do in 2018.

The same can be said regarding Lasting Power of Attorney (LPA), as incapacity can strike without warning. Getting LPA sorted before it’s too late will save your family and your estate considerable costs and lengthy delays.

Putting a Will and a LPA in place is nowhere near as difficult or costly as many people think. We have contacts with a number of specialist law firms across the UK who can assist you in preparing both.

If you do already have a Will or LPA, then take the time to review it. Checking that it is up to date and that it reflects your current wishes.

We’re here to help the new Financial You

I hope that this blog goes someway to starting the new financial year off on the right foot and helps keep you focused and moving towards your goals for 2018.

If there is something specific you would like to talk to us about regarding your plans, then please get in touch. We’d be delighted to help.

Wishing you all a Happy and Prosperous 2018.

A little insight into the great investment question

Can we really beat the Markets?

Over the years, and because of the vast sums of money involved, top investment companies,
governments, national banks and academics have carefully studied the investment markets.
Consequently there is a vast body of research out there that carefully looks at investment
strategies, as well as the markets in general. So I’ve taken the trouble to sift through the
mountains of information, hints, tips, guides and strategies in order to produce this Top Ten
Tips of perceived wisdom.

1 Embrace Market Pricing – it know the worth of a stock

In 2016 there were 82.7 million trades every day across the world’s exchanges. That’s an
incredible £280Billion worth of activity, each done on the back of new information. The market
reacts to these trades like an enormous information processing machine, which in turn sets
the current price. As no one knows what the next trade or piece of information will be, the
future price is always uncertain. But in this uncertainty, the market price is always the best
indicator of a stocks actual value. To go against this would mean pitting yourself against the
collective wisdom of the marketplace.

2 Trying to outguess the market isn’t a sensible strategy

Whilst there is never a guarantee that any investment strategy will be successful, assuming
that you can identify mispriced stocks and take advantage of the low price is flying in the face
perceived wisdom. Research proves time and again, that market pricing works against
individuals and even mutual funds that attempt to outguess the market.

3 Past performance is no indicator of future positions

Whilst it may seem a prudent investment to select funds based upon track record, research
shows that there is strong evidence to avoid investing on this criterion alone. Think about how
much the world has changed in the past year or so, combined with how unsettled things still
are. Previous returns are from a different economic and political situation and may not be able
to be repeated.

Some fund managers may also be better than others, but past performance alone is not a
reliable indicator of future results, with some impressive past returns possibly being just down
to luck. The understandable assumption that past performance will continue unabated often
proves incorrect and can leave investors both puzzled and disappointed.
4 Play the long game and let the markets do the work

If you are intending to use the financial markets as a wealth creator, then the good news is
that the capital markets have always rewarded the long-term investor.

The markets are a manifestation of capitalism at work in the world’s economy. The great
news for investors is that historically, free markets provide a long-term return that offsets
inflation. You can see this in the growth in the performance of a £1 investment in UK small
cap stocks and value stocks over the past 50 years. A pound invested in the whole market in
1956 would be worth £1,000 in 2016; compared to £4,012 for value stocks and £7,643 for
small cap stocks.

5 Have a look at the woods as a whole, not just the trees

Academic research suggests that, instead of viewing the market opportunity in terms of
individual stocks and bonds, we should approach the market in a way that allows us to have a
broader view and identify investment ‘factors that have linked characteristics. Factors are
defined as any aspect of an investment that is backed by robust data, both over time and
across the market.

In Equity Markets the key factors would be size (small cap vs large cap), price (value vs
growth, momentum(the surge effect seen in rising markets)) and profitability (high vs low).
In the Fixed Income Market the factors would be term and credit quality.
If you decide upon a factor-based approach, then your returns will not be based upon which
stocks, bonds or market areas will outperform in the future. Your goal would be to hold a well-
diversified portfolio that emphasizes higher expected returns, controlled costs and a low
turnover.

6 Fish in the wider oceans

Most people seem to only invest in their country’s stock market. In the UK this might mean
that they only ever pick UK stocks and mutual funds, yet still consider their portfolio to be
diversified. However, this limiting of the investment into one market can lead to problems with
possible implications to risk and return.

If you think about the uncertainty in the UK as we negotiate Brexit, then you may begin to
understand why diversifying out of the UK could be worth considering. Research suggests
that a global diversified portfolio should be structured to hold multiple asset classes, that
represent different market areas across the world.

7 Try to avoid bandwagons

It’s because we never know which market segments will outperform expectations that it’s
considered a good idea to hold a globally diversified portfolio, so that we ensure we are well
positioned to enjoy returns wherever they occur. As there is a strong case to support the
notion that investors should rely upon portfolio structure, rather than tempting market
movements, or the sudden rush towards a particular investment.

8 Keep your emotions out of your investments

If your strategy is to be in it for the long-term, then don’t let your emotions take over. A good
example of the dangers of letting your emotions rule can be seen in the 2008–2009 global
market downturn. Fear drove some investors to sell up and get out of the market.
Unfortunately for them, as the rebound began, they had already locked in their losses and
had to sit and witness the market’s climb back.

Understandably people can find separating their emotions from their investments a difficult
thing to do. As by their very nature markets go up and down, investors can find themselves
on a psychological rollercoaster. However an emotional reaction to any current market
condition may lead to a poor investment decision. Staying disciplined and sticking to your
strategy is crucial for long-term success.

9 Don’t believe all that you read in the papers

Newspapers don’t sell and television news isn’t watched unless there is some emotion and
sensation around what is being reported. Don’t let market commentary challenge your overall
investment strategy.

If headlines start to unsettle you, try to maintain your longterm perspective. Sustaining a
growing portfolio and increasing your wealth has no shortcuts. It requires a solid investment
approach, a long-term perspective, and the discipline to stick to your strategy.

10 Stick to your plan – focus on staying on course

Always focus on the elements of your investment strategy that you can control and try to
avoid reacting to fluctuations in the markets. Work with your adviser to create and maintain a
long-term investment plan, based on market principles and informed financial research. Make
sure your plan continues to be tailored to your needs and goals. Structure your portfolio along
the dimensions of expected returns. Diversify globally and stay disciplined throughout the
various market conditions you will face.

Conclusion

As always this blog is written to enlighten and inspire you to consider the options available to
you. It is not meant to be financial advice. For that you are very welcome to contact us for a
free initial consultation.

The Chancellor’s Autumn Budget 2017

The Rt Hon Philip Hammond MP

Following a turbulent few months across The Palace of Westminster, with a call for more spending and a more aggressive approach to growing the economy, the Chancellor’s budget was largely seen as a business as usual approach, albeit within the ever-present shadow of Brexit.

So now that Philip Hammond has had his day in Parliament, let’s see what kind of impact it’s going to have on yours.

Well firstly, there were no significant announcements regarding tax or pension changes. Nor was there anything that set the markets alight, or sent them into free-fall. In fact this market apathy was manifested in the non-movement of the FTSE 100, Benchmark 10 year Government bond or guilt and with the pound largely static during the Chancellors hour-long delivery.

What the Budget might mean for you

INCOME TAX

Your personal income tax allowance is set to rise to £11,850 for the fiscal year 2018-19 throughout the UK apart from Scotland. As Scotland will set its own personal tax threshold, should it choose to, in the Scottish budget due on 14 December.

The higher rate of income tax in the UK will rise to £46,350 for the fiscal year of 2018-19. Again with the exception of Scotland, who may address this in their impending budget.

STAMP DUTY

First time buys will not have to pay Stamp Duty on properties up to a value of £300,000, which would also see those buying properties up to £500,000 paying no stamp duty on the first £300,000. A move that should benefit 95% of first time buyers

PENSIONS

The pensions lifetime allowance will rise in line with the consumer price index to £1.03Million. One highlight for pensions is that there will be no changes in the pensions funding limits, with the annual allowance remaining at £40,000 and not tapered until adjusted income exceeds £150,000.

ISA’s

The Junior ISA limit is set to rise to £4,260. Whilst the overall ISA limit will stay at £20,000 of which £4,000 can be paid into a LISA (for those eligible).

CAPITAL GAINS TAX

There will be a £400 increase in the capital gains tax allowance, seeing the threshold rise to £11,700.

INHERITANCE TAX

The nil band rate for inheritance tax will remain at £325,000 until April 2021, with the residence nil rate band increasing from £100,000 to £125,000. Which means that, in the future, couples can leave assets up to £900,000 to future generations free of inheritance tax liability.

TRUST

Although no specific details were announced, there is a planned consultation, to be published in 2018, which will consider the simplification and fairness of trust taxation.

STOCKS

The UK Stock Market was largely indifferent to the Chancellors speech. In fact, when he stood up to speak the FTSE100 was trading at 7,448 and when he sat down an hour later, it was largely unchanged.

The real movement in the market came about through the changes in Stamp Duty. With large house builders witnessing their shares drop between 1% and 3%. Possibly reflecting some disappointment in the detail of the chancellors £44 Billion Housing Package, along with the lack of an extension to the popular Help to Buy scheme, compounded with an investigation into the speed at which permitted land banks see the building of new homes taking place.

In true Stock Market traditions, where the tide goes out for one group, in it comes for another.
With the increase in the Stamp Duty it is widely believed that we will see a reinvigoration of the housing market, as well as the driving up of house prices. All this leads to higher profits for Estate Agents and, as a consequence of that, national chains saw an increase in the value of their share price.

CURRENCY MARKETS

The downgrade in the UK’s GDP growth forecast for the next three to four years, along with the rest of the budget, went through without any real reaction from the currency markets. With Sterling ending the budget in much the same place as it started against the Euro and Dollar.

2017 BUDGET SUMMARY

All in all, the Chancellor delivered a steady budget, without any radical changes to the landscape. As always, if you have any questions regarding a specific area of the budget, or your own personal circumstances, then please don’t hesitate to get in touch, where we will be happy to help you in any way.

Making sense of Capital Gains Tax and your Property 2017 – 2018

Capital Gains Tax (CGT) is a complex area to dip into, so here I’ve tried to give a brief
explanation for the normal situations that many of us face, broken down into the following
sections:

When you don’t have to pay Capital Gains Tax
When you are eligible to pay Capital Gains Tax
How much you will have to pay?
What if you have a second residential property?
Letting relief and Capital Gains Tax
Capital Gains Tax on inherited homes
Capital Gains Tax on gifted homes
Capital Gains Tax Liabilities for UK Non-Residents
Capital Gains Tax on investments
Claiming Entrepreneurs’ Relief against Capital Gains Tax

As always, our advice is to seek clarification on any issues from your Financial Adviser.

When you don’t have to pay Capital Gains Tax.

If you are selling your own home (main place of residence) then the good news is, that it’s
very unlikely that you will need to pay CGT as you will benefit from 'Private Residence Relief'.
If however you are selling a home that you currently rent out, or you are selling a second
home, then CGT may become applicable. That said, there are a number of ways you may be
able to reduce your CGT bill through letting relief or by nominating which of your homes you
wish to be viewed as tax-free.

When you are eligible to pay Capital Gains Tax.

Although not an exclusive list, below are the most common scenarios that activate CGT on a
property sale:

• It is not your main place of residence
• You have developed your home. For example you may have converted part of it into flats
• You have sold part of your garden, where your total plot, including the area you are selling,
is more than half a hectare (1.2 acres)
• You exclusively make use of part of your home for business
• You let out all or part of your home. This doesn’t include having a lodger. To count someone
as a lodger you need to be living in the property too, or they are classed as a tenant
• You moved out of your property 18 months ago
• You bought the property for the purpose of renovating it and selling it on

How much you will have to pay?

The CGT rates for 2017 – 2018 state that when you sell a property, you are allowed to keep a
proportion of the profits tax-free. This is called your Capital Gains Tax Allowance.
In the 2017 – 2018 tax year, you can make a profit of £11,300 before you have to pay CGT.

With basic rate taxpayers paying 18% CGT on property sales over this profit allowance.
Whilst higher-rate and additional-rate taxpayers will have to pay 28%.

What if you have a second residential property?

As long as you haven’t bought your second home with the sole intention of selling it in order
to make a profit, and you use it, then you can nominate which of your two homes will be tax-
free. Just make sure you make the nomination before the two-year deadline from the time you
acquire your new home.

It’s worth noting that the property you nominate doesn’t have to be the one where you live
most of the time. So it makes sense to pick the one you expect to make the largest gain on
when you come to sell.

Civil partners and married couples can only nominate one main home between them, but
unmarried couples can each nominate different homes.

Letting relief and Capital Gains Tax.

Providing the property has been your main home at some point, and you have let out either
all or a part of your home, then you can claim tax relief in the form of Private Residence Relief
for the time it was your main residence, along with the last 18 months of ownership. You can
even claim if you weren't living in the property during those 18 months.

You may also be able to further reduce your capital gains tax bill by claiming Letting Relief.
However, you can't claim Private Residence Relief and Letting Relief for the same period.
The amount of letting relief you can claim will be the lowest of these three:

• £40,000
• The total you receive from the letting proportion of the home
• The total Private Residence Relief you get

Capital Gains Tax on inherited homes.

When someone leaves you their home in their will, you inherit the property at the market
value at the time of their death.

As there is no CGT payable on death, the value of the home is included in the estate and
inheritance tax may be payable instead.

If you sell the property without nominating it as your own home, you won’t be able to claim
Private Residence Relief, so there will be CGT to pay if the value has increase between the
date of death and the date of the sale.

Capital Gains Tax on gifted homes.

If the property is gifted to you during the owner’s lifetime (while they are still living there), this
is termed as a ‘gift with reservation’ and essentially means it still counts for inheritance tax
when the gift giver passes away.

So there will be CGT to pay when you sell the home if the value has increase between the
date of the gift and the date of the sale.

Capital Gains Tax Liabilities for UK Non-Residents.

Unfortunately, being an expat or non-resident in the UK no longer avoids CGT duties. Since
April 2015 British expats and non-residents are required to report the sale or disposal of
properties to HMRC. With the CGT being payable on gains made after 5 April 2015.

Please be aware that you must inform HMRC within 30 days after the ownership transfer
date, even if there is zero tax to pay.

Capital Gains Tax on investments.

Making regular investments is often seen as the smartest way to get into the stock market.
However it can present some challenges if you decide to partially sell your investments. If you
are completely liquidating your portfolio, then the CGT is straightforward – being the total
amount paid into the fund deducted from the proceeds of the final sale gives you the size of
your capital gain. With anything exceeding the £11,100 CGT limit becoming liable at your tax
rate.

It’s when you only liquidate part of your investments that things can become complicated. As
a rule of thumb, if you have bought units at a variety of prices over a period of time, then you
will need to work out the average price per share. You can then calculate your investment
against your gain. Again your financial adviser can help you with this.

Liquidating funds often allows investors to ‘Bed and ISA’. Where investments that are held
outside an ISA are sold and then the same investments are bought back within an ISA
avoiding CGT in the future.

Claiming Entrepreneurs’ Relief against Capital Gains Tax.

Business owners who are selling all or part of their business can claim Entrepreneurs’ Relief
(ER) on the sale and reduce their tax liability to 10% on all qualifying gains.

The main qualifications for ER, are if you dispose of any of the following:

• All or part of your business, including the business’s assets, once it has been closed
– either as a sole trader or business partner
• Shares or securities in a company where you have at least 5% of shares and voting
rights
• Shares you got through an Enterprise Management Incentive (EMI) scheme after 5
April 2013
• Assets you lent to your business or personal company
Once again, this is not an exclusive list and further information can be found here

If you have any questions regarding Capital Gains Tax

As always, if you are in any doubts as to your current situation, or potential CGT obligations,
then you should consult a financial adviser. You are welcome to contact us where we
will be happy to help answer any questions you may have.

The Rate Rise is here – but what does it mean?

Well we all new it was coming, but what now? What does the first interest rate rise for more than a decade mean for you?

Despite the fact that it’s a small increase from 0.25% to 0.5% it will have an immediate impact on UK households and businesses. On one hand it means higher costs for those with mortgages and other borrowings but on the other it’s better news for all those with savings.

Is it misery for Mortgages?

Mortgage rates will inevitably rise following the increase in base rate. The main group affected in the short term are those on a standard variable rate (currently average 4.6%), along with those who are on tracker mortgages, where rates are likely to raise this side of Christmas.
Although the scale of the rise is unlikely to push many people into hardship, as a 0.25% rise on a 25 year mortgage of £200,000 at a standard variable rate of 4.5 per cent means an extra payment of about £300 a year.

Is a Fixed-rate fantastic?

With The Bank of England announcing that further rate rises can be expected, brokers are anticipating a rush on fixed-rate deals of five years and over. Although over the last few months there have been a lot of fixed-rate product withdrawals and rate increases, as the banks anticipate the rush to a fixed-rate product.

Is it the right time to Remortgage?

Anyone looking to remortgage or move to a fixed rate can still access the historically low rates available in the market, with two year fixed-rate deals available at 1.09% or fixed for five years at 1.68% for those with a 40% deposit.
It is generally thought that borrowers should be encouraged by the comment accompanying the announcement by The Bank of England “The expectation at the moment is that the speed of future increase in rates is going to be relatively slower than we thought.”

Is it super for Savers?

For those living with near non-existent returns over the last few years, it would seem like welcome news. Although that depends upon whether the banks choose to pass this increase onto their customers. A move looking increasingly unlikely, as the link between base rate and savings rate appears to have been severed sometime ago. Following the announcement, the Nationwide says the “majority” of its savers will benefit from a rise, while Newcastle Building Society and Yorkshire Building Society pledged to pass on the full rate rise to all savers. So it’s not a clear rate rise for every saver in the UK. One to watch carefully!

Is it perfect for Pensions?

With annuity rates closely linked to movements in interest rates, according to experts, the rate rise is likely to be fed through resulting in higher income for pensioners.
Richard Eagling of Moneyfacts suggests “The interest rate rise is good news for those on the verge of retirement who may be looking to secure an income through an annuity, as it is likely to boost gilt yields, which underpin annuity rates.”

Is it time up for Transfer Offers?

The rise in the interest rate is more than likely to end the record high transfer offers currently available to members of defined benefit pension schemes. Head of Royal London, Sir Steve Webb says “The one group who may be concerned by today’s news are those planning to take a transfer from a final salary pension. Transfer values are likely to track down as interest rates rise. Anyone considering a transfer may wish to take impartial advice on the pros and cons of a transfer as a matter of urgency, as transfer values are unlikely to remain at today’s very high levels.”
So if you’ve been considering your potential transfer value now is the time to look at what the opportunity might be, before the rate rise causes an end to the current offers, that can be 30 or 40 times projected pension income.

Is it interesting for Investments?

The markets have already priced in the rate rise decision, so it is predicted that there will be little impact on stock prices in the short-term. With political uncertainties like Brexit still having an affect on company’s ability to make investment decisions.

Is the Rise repeatable?

It’s because the Bank of England is forecasting inflation falling below 3%, that many believe that further rate rises in 2018 are unlikely. On-going increases risk slowing or halting an already weak economy, currently experiencing the uncertainty of Brexit. So the feeling is that this rate rise is probably going to be an isolated incident, until Brexit is behind us and the economy is more stable.

Record High Transfer Values

Final Salary Pensions, Hurry Whilst Shocks Last!

Well here’s something that doesn’t happen that often. The turmoil in the financial markets is actually presenting an interesting opportunity – and even Brexit may have had a hand in generating this particular happy shock!

I’m talking about Final Salary Pension Schemes here. In a world of future uncertainties and undetermined risk, a final salary pension can be seen as something to hold onto at all cost. But just consider the following for a second. They are often inflexible and are not usually targeted to accurately meet individual members’ needs. Which can cause members to transfer out to access things like greater flexibility under the new freedoms to pensions introduced last year. Or they might want to access a cash lump sum, to reduce debt or to ensure their families benefit more greatly from the fund in the event of their death.

Recently we’ve seen more and more people transferring values, by which I mean the capital value of the benefits promised by a scheme (sometimes called the CETV or Cash Equivalent Transfer Value) at unusually high rates. By high rates, I’m mean as much as 40 times the annual pension income!

So why are values so high and will it last?

The conventional wisdom here is that values have been driven up significantly by recent reductions in the returns one can achieve with government bonds, brought about by the result of the Brexit vote, combined with The Bank of England’s attempt to prop up the economy. Which is great for anyone looking to take advantage of the CETV on their final salary pension. But like all good things, it is likely that it will be coming to an end soon, because when the bonds return to their normal range, we can expect to see transfer values to reduce too.

So if you’ve been thinking, it might be time to start doing!

Right now there is an unusual opportunity to extract some significant value from your pension. However the situation is predicted to return to normality soon, so now is the time to act.

Working out your transfer value

It’s important to understand that there are a variety of factors that different pension schemes use to calculate transfer values. These usually revolve around your age now and what your age will be when you are entitled to start drawing the benefit. They may also include the specifics of the escalation of benefits before and after retirement as well as any benefits your spouse or dependents are entitled to.

As a rule of thumb, the closer you are to your retirement, the higher the CETV multiple will be. Oddly, the further away you are, with more time for the assets to grow, the lower the present value is. The state of your schemes funding and security of your benefits will also have an impact on final figures, as will the scheme being underfunded in any way.

The best way to know exactly what your potential opportunity might be, is to request a CETV quotation from your pension provider.

You can look before you leap

The main advantage with a defined benefits scheme is the guaranteed income. As you lose these guarantees when you transfer, your future pension income will depend upon the returns you earn on the invested assets. That’s why, once you’ve received your CETV quotation, it’s vital to calculate the exact rate of return you need to ensure you would exceed the income you were set to receive on your final salary scheme. But right now, the high rate of the current CETV multiples mean that these required return rates can be as low as just one percentage point above inflation to make the move a sound choice.

You should also consider that when you transfer out of a final salary scheme, the investment risk moves from the pension provider over to you. So you must consider your attitude toward risk. This will be influenced by factors such as your financial situation, other assets and income sources you might have that you could fall back on if you need to, should returns be weaker than predicted.

Apart from the questions of risk and return, there maybe other things to consider. Your existing plan may have other non-financial benefits attached to it, which you may not wish to give up.

Having said all that, final salary schemes are well known for their restrictions and inflexibility. So transferring out may open up some new ways to access your pension pot and therefore open some new options for your retirement and inheritance tax planning too.

So what does everyone else do?

Generally we find that individuals with more wealth and other assets beside just their pensions, who are looking for greater flexibility and control over their retirement savings; or are planning to pass a substantial portion of their wealth to their children are more likely to opt to transfer out of a final salary scheme.

Whilst those with more limited assets, who prefer the security of the guaranteed income, tend keep to their final salary scheme.
Like everything in financial services, it’s your individual circumstances and aspirations along with where you are in terms of your timeline that will help determine what’s right for you.

One thing’s almost certain – this opportunity won’t last

If you are considering requesting a CETV quotation, I’d do it sooner rather than later. As the current high transfer values have been caused by the short-term market developments I covered earlier – and the situation is unlikely to last much longer. As when we see the increase in bond rates, we will most likely see the decrease in the multiples you can currently secure with your CETV.

If you would like some help deciding what’s best for you, then call us now for a free initial consultation. We would be delighted to go through your individual circumstances with you and help you decide on the best option for you.

For more information of our pension transfer advisory process, you can visit our sections on UK Pension Transfers and Expat Pension Transfers.

Do you know the current position of your Defined Benefit Pension?

I only ask because things have changed quite dramatically recently. In fact, according to PwC, the combined deficit of defined benefit pension funds in the UK is currently standing at a whopping £460bn.

It doesn’t seem to be calming down either, with PwC chief actuary Steven Dicker stating:
“The deficit calculation is based on a ‘gilts+’ approach and is sensitive to even modest market movements. Compounding with the uncertain economic and political climate, the deficits calculated on this basis are likely to remain volatile.”

According to their firm’s Skyval index (which tracks 5,800 DB pension funds), in July and August this year we saw a continued increase in the deficits by a further £40bn.

As always, politics has a role to play

Skyval also tracked the impact of political events and policy decisions on DB deficits in 2016. Unsurprisingly the Brexit vote had the biggest short-term impact on DB pension deficits in 2016 and has an £80bn increase from 23 June to 24 June attributed to it.

PwC’s global pensions head Raj Mody predicts that 2017 will see pension fund trustees and sponsors having to reach much more informed conclusions about how to tackle their pension deficit and to put robust strategies in place.

Mody goes onto suggest “Those involved are increasingly realising the importance of transparency in order to decide appropriate strategy. DB pensions are long-term commitments stretching out over several decades and so there is limited value in pension funds making decisions based on simplified information.”

Time for a plan!

Schemes affected by the deficit have to have a recovery plan in action. So it might be worth looking into what your scheme has mapped out in terms of a action.

What if your sponsoring employer goes bust?

If the sponsoring employer goes bust, the scheme will automatically go into the Pension Protection Fund (PPF).

Unfortunately the likelihood of a sponsoring employer going bust is on the increase, with big names like BHS famously included on the growing list.

Not only that, but with Brexit just around the corner, you can pretty much guarantee that economic uncertainty is here for a while longer.

So what will the PPF do to protect your current pension?

If you’ve already retired, the good news is that things shouldn’t change much at all. If you were over the scheme’s normal retirement age when your employer went bust, the PPF usually pays the full 100% level of compensation.
If you retired early, and you did so before you reached your scheme’s normal pension age (before your employer went bust), then the PPF usually pays up to a 90% level of compensation. However the compensation is capped. The cap at age 65 is, from 1 April 2017, £38,505.61 (this equates to £34,655.05 when the 90 per cent level is applied) per year. With this cap being set by DWP.
There is also a Long Service Cap for members who have 21 or more years’ service in their scheme. Which increases the cap by 3% for each full year of pensionable service above 20 years, up to a maximum of double the standard cap.
If you haven’t retired just yet, when you do reach your scheme’s normal retirement age, the PPF should pay compensation based on a 90% level subject to a cap, as described above.

So who’s most affected by this?

The very simple answer is, that this immediately affects people on high salaries who are approaching retirement.
Which is why it’s important that you have a good understanding of what the impact of this deficit might have on your retirement. That way you will be aware of any difference to what you expected to receive from your pension and can plan accordingly.

Finally, the most important question… what can YOU do about this today?

If your scheme is showing increased deficits, combined with higher transfer values, then now is an opportune time to carry out a full review. Especially as things may have dramatically changed since you started on the scheme and your expectations may no longer be on course to be achieved and delivered.

The MPAA (Money Purchase Annual Allowance) and what it means for you

One pre-election promise that’s here to stay

Despite dropping the clause reducing the MPAA from £10,000 to £4,000 on 25 April 2017, in order to help get the Finance Bill 2017 to come into force before Parliament dissolves on 3 May, the Government did promise that it would re-introduce the dropped clauses after the general election (assuming they got re-elected). Although it may not have made campaign headlines at the time, it’s certainly worth looking at now.

As we stand right now, the clause has been re-introduced with retrospective effect back to 6 April 2017. With a reduction in the MPAA from £10,000 to £4,000. Although the current Annual Allowance rules are not replaced by the MPAA, nor does it reduce the normal annual allowance.

So what do the changes mean?

Ever since 6th April 2015, it has been possible to access all of your Money Purchase Pension Savings, following the reforms known as ‘Freedom & Choice’.

However there is a catch, as accessing your entire fund will result in those monies (with the exception of the tax-free cash) becoming subject to income tax; with this possibly being charged at a rate that could be higher than you usually pay.

What triggers the changes to the MPAA?

The MPAA applies when your pensions flexibility has been accessed. However this will only be significant where there is £4,000 or more total contributions to a money purchase arrangement in a Pension Input Period.

This accessing flexibility is referred to as a ‘Trigger Event’ and can be defined in the following examples:

  • Uncrystallised Fund Pension Lump Sum (UFPLS)

    This occurs when you access your pension fund via an UFPLS.

  • Flexi-access Drawdown Income

    Any designation of funds for flexi-access drawdown doesn’t necessarily trigger the MPAA, nor does the payment of a PCLS. Having said that, once any income (or any lump sums from the designated pot) is taken from the funds designated to a flexi-access drawdown plan, the MPAA applies.
    It’s important to note that, should the income be taken from assets that can be wholly attributable to a Disqualifying Pension Credit, then the MPAA is not triggered. Just to clarify disqualifying pension credits are pension credits from divorce pension splitting orders.

  • Capped Drawdown Income Above Cap

    If you were in “capped drawdown” on 5 April 2015 you can then continue in capped drawdown. The existing system for reviewing and calculating the cap is expected to remain in place. It is only if you then choose to take an income in excess of your cap that the MPAA will apply.

  • Existing Flexible Drawdown

    If you had flexible drawdown fund before 6 April 2015, then that is treated as having accessed flexibility on 6 April 2015 as your drawdown became flexi-access on this date.

  • Stand-Alone Lump

    In some circumstances where a stand-alone lump sum is paid out from 6 April 2015 the MPAA will also apply.

What happens when the trigger is pulled?

Once the trigger occurs, then the MPAA applies from the day after the trigger event. The only exception to this is any pre-6th April 2015 flexible drawdowns, which invoked the restricted allowance immediately from 6th April 2015.

So What’s The Tax Implication To You?

With the new annual allowance at £4,000 there are bound to be many more scheme members having to pay an excess tax charge. With these extra charges being paid direct to HM Revenue & Customs after the end of the tax year.

Don’t make a Snap Decision as a result of the Snap Election!

number 10 downing street

Have you settled down after the election yet?

I think it’s fair to say that the shock General Election returned a huge shock of a result, no matter what you political affiliations.

The political correspondents are really earning their money at the moment and the TV satirists are having a field day with the fresh new material they’ve all been supplied with.

If your head is still in a spin with regard to the outcome and it’s implications on the economy and Brexit, just imagine how the markets must feel. Not just here in the UK, but in Europe as well as the rest of the world.

I’m not sure uncertainty quite sums it up.

Will Teresa May be able to hang on in a hung parliament?

The implications of a hung parliament are huge. There’s a great deal of horse-trading going on behind the door of Number 10, with alliances being formed in order to ensure that the Queen’s Speech passes smoothly. However all of these deals come with a cost, in both financial and political credibility terms.

On top of all of that are the noises coming from the more vocal dissatisfied conservatives, as well as telling silences from very senior members of the party. So all things point to a leadership challenge looming large on the horizon.

Not the most ideal way to launch into Brexit negotiations. But we are where we are. We live in the greatest democracy on the planet and the British people have spoken to the Mother of Parliaments – and she must listen.

Who would be brave enough to predict the next six months?

Well none of the political or economic experts feel that they are in a position to comfortably give an opinion of what the next six months might look like. To say that we face a period of instability and choppy waters is about the only thing they can say, with a degree of certainly.

So what do the market’s think?

We know that the one thing that the markets love more than anything else is stability. We also know that that is something that will return at some point; but seems to be a little way of at the moment.

With that in mind, from an investment perspective now might be the time to sit tight, ride things out and see how the markets look when things settle down. We are a few days into this period of turmoil and a wise captain never plots a new course from within the eye of the storm. Far better to let the turmoil play out and re-asses things once the maelstrom has dissipated. And dissipate it will. It always does.

Political and economic history shows us that things calm down. Politicians will do deals, or elections will be called. Either way, a new normality returns; and from the new status quo, the markets settle and return to the long-term trends of growth.

So what are the smart investors doing right now?

Well sometimes the best course of action is no action at all. Leaving your investments alone and waiting for the markets to settle back to a steady state is a proven a strategy that has worked in the past when the markets face ‘interesting times’.

Consider the medium to long-term performance of the markets. They are robust and they unrelentingly move forward, despite what the politicians across the world try to do to stop them.

So, unless you need to liquidate your portfolio because your circumstances have changed, the consensus of opinion seems to be to hang on and let things settle.

Elections and Referendums

Just when you think you’ve seen enough of elections and referendums, they’re starting to appear like busses.

Rollercoaster Elections Referendums

Here we all go again!

It seems like only yesterday that David Cameron and Ed Miliband were battling for the keys of Number 10. Then, just as we all got our breath back, we had the EU Referendum.

Hot on Brexit’s heals, we then witnessed President Trump’s march toward The White House. Right now the EU is in the midst of it’s own electoral battles and Turkey is undergoing historic changes that may well bring about fundamental alterations to it’s constitution.

So with all that literally days behind us, Teresa May has now announced a snap General Election for June 8th.

So, what does it all mean for our investments?

Not so steady as we go.

We all know that the markets love stability and that we haven’t had very much of that recently, but things were starting to settling down. Granted there is the sabre rattling regarding Brexit and the UK’s future economic relationship with Europe – but there always has been.

It can’t be good for business though. As we all know that political uncertainty leads to a volatile market. However, we need to remember that political uncertainly doesn’t last, but the markets do!

It’s fair to say that changes in the status quo often disrupt the domestic and international markets, especially if the changes are unexpected or seem to signify a departure from the established order of things. Couple that with the fact that many observers are pointing out that the political and economic landscape of Europe hasn’t changed so much since the end of the Second World War. What is happening in the UK, Europe and America is huge and no one knows exactly where it will all settle. But settle it will. And when it does the markets will adjust themselves, dust themselves down and go about their usual business.

The markets love time more than politics.

Analysts tell us to take great comfort by looking back at long-term market performance. For when we examine how the markets behave historically, the further back we go the more we see steady growth.

In saying that, it doesn’t mean that growth was more assured or stronger years ago. What it means is that if we look at the markets over years rather than months, then the robust nature of investment growth becomes apparent.

It’s by looking back in time that we can clearly see that investments generally return the best options in order to grow a lump sum of cash. This knowledge should arm us with the confidence to look to retaining our market positions in times of uncertainty.

We may not all share the same politics, but we’re all in the same boat.

We are all facing uncertainty. We are all second-guessing the results of the General Election. What that will mean to Brexit? How will the victors navigate the UK on it’s maiden voyage as an Economic power in its own right?

But take comfort in the fact that the markets are used to uncertainty and they can cope with it way better than us mere humans. Just think of the markets as a reflection of life and society. They have their ups and downs and often face periods of calm certainty as well as violent change.

Our approach is evidence-based, long-term buy and hold, concentrating on getting the right mixture of risk and return for our clients. Essentially this is a ‘steady as she goes’ approach which avoids market timing or stock selection as far as possible since these have not been shown to add value. This has generally served them well over time. Unless people’s goals have changed, we do not advocate any changes in the levels of risk taken. We have already made changes to our portfolios to remove the bias to UK equities and these are being rolled out through our regular client review process. So we are not complacent but we do base our approach on our understanding of the long term behaviour of the markets.