Lifetime Allowance Protection Deadline Is Approaching

With almost two months left, there is still plenty of time for the usual tax year end optimisation tasks (we will provide detailed guidelines at the beginning of March). However, this year’s 5 April also marks the deadline for Lifetime Allowance Individual Protection 2014 application, which may require longer time to prepare. If you are still unsure whether you should take advantage of it, now is the time to review your pension and make the decision. Below we will summarise the most important facts and rules.

Lifetime Allowance and Its Reductions

The Lifetime Allowance (LTA) caps the total amount you can draw from your pension throughout your life before triggering the so called LTA charge – a rather high special tax, currently at 25% for benefits taken as income and 55% for a lump sum.

In the recent years, as part of the overall effort to make public finances more sustainable, the Government reduced the LTA on three occasions:

  • In 2012 from £1.8 million to £1.5 million
  • In 2014 to £1.25 million
  • In 2016 to £1 million

LTA Protection

Those who have built up pension pots large enough to exceed the new lowered LTA have the option to apply for LTA protection, as a compensation for the unfavourable rule changes. There have been different versions of LTA protection, always specific to the particular LTA reduction (year) and subject to different conditions (e.g. whether you can continue contributing to your pension plan).

The one whose deadline is approaching now is Individual Protection 2014 (IP 2014), designed for those affected by the 2014 LTA decrease from £1.5m to £1.25m who have continued to contribute to their pension plans after 5 April 2014 or intend to make further contributions in the future.

What Individual Protection 2014 Does

IP 2014 sets your personalised LTA to the lower of:

  • The value of your pension at 5 April 2014
  • £1.5 million

For example, let’s say your pension was worth £1.4 million at 5 April 2014 – within the old LTA effective before the 2014 reduction (£1.5m), but above the new one (£1.25m). As a result, part of your pension would become liable for the LTA charge upon withdrawal. If you apply for IP 2014, you can have LTA set individually to £1.4 million, possibly saving 25% (income) or 55% (lump sum) of £150,000 in LTA charges.

Applying for IP 2014

IP 2014 is not granted automatically and you must make a formal application by 5 April 2017. After that date the opportunity is lost forever.

In order to do so, you first need to know the value of your pension (or the combined value of all your plans if you have more than one) at 5 April 2014. Depending on pension provider, this may take considerable time to find out, which is why we recommend to start immediately.

In general, an application makes sense for those with pensions worth above £1.25m at 5 April 2014. You can apply even if your pension was worth more than £1.5m (above the old LTA) – in such case your personal LTA would be protected at £1.5m.

If You Already Have LTA Protection

Note that you can have multiple versions of LTA protection at the same time. In other words, you can also apply for IP 2014 even if you already have some of the other kinds of LTA protection in place, such as a fixed protection (any of the years) or enhanced protection (but those with primary protection are ineligible).

Applying for IP 2014 can make sense even when you already have a more favourable LTA protection in place. Different versions are subject to different conditions, and some actions (such as making further contributions to your scheme) may invalidate certain kinds of LTA protection going forward – then you will be able to use the next best version you have.

More Information and Assistance

You can find more detailed official information on the HMRC website. We would be happy to provide more detailed explanation, or assist with obtaining pension scheme details and making the application. You can contact us here

Inheritance Tax Planning and the New Main Residence Nil-Rate Band

Effective from 6 April 2017, a new main residence nil-rate band (RNRB) will be available on top of the existing inheritance tax (IHT) threshold. It can potentially save tens of thousands in IHT, but at the same time, compared to the existing IHT threshold it is subject to stricter conditions. Let’s have a look at the key points.

Summary of Existing IHT Rules

First let’s start with the basic rules which are already in place and will continue to apply:

  • IHT is due when passing assets to your children, or generally to anyone other than your spouse, civil partner, a charity or a community amateur sports club.
  • The headline IHT rate is 40%, reduced to 36% if at least 10% of the estate is given to charity.
  • The first £325,000 of your estate is free of IHT. This is called the IHT threshold or nil-rate band. Unused portion can be transferred to your spouse, which effectively makes the IHT threshold £650,000 for couples.
  • Besides the IHT threshold, there are various reliefs applying to different kinds of assets and subject to different conditions, which can further reduce the IHT liability. The Business Relief is a common example.

The New Main Residence Nil-Rate Band

The new RNRB will be available on top of the existing IHT threshold. It will be phased in gradually over the next four tax years, from £100,000 in 2017-18 to £175,000 in 2020-21. From 2021 on it should continue to grow in line with inflation. The full RNRB will be available only for estates worth under £2 million. It will be reduced by £1 for every £2 above the £2 million taper threshold.

Like the existing IHT nil-rate band, the new RNRB will be transferable between spouses or civil partners. Transfers will be possible even when the first partner died before 6 April 2017, even though the RNRB wasn’t available at that time (the unused portion of the RNRB is transferred as percentage rather than amount).

Importantly, while the existing IHT threshold has no restrictions in terms of how many items or which kinds of assets are included or who the beneficiaries are, the new RNRB only applies to one residential property being passed to children or direct descendants.

Who Qualifies As Direct Descendant

The new RNRB can be used only when passing your property (or a part of it) to the following:

  • Your children and their lineal descendants (e.g. your grandchildren). There are no age restrictions – the beneficiary can be under or over 18 at the time when you die.
  • Spouses or civil partners of the above, also including widows/widowers.
  • Your step-children, adopted children or foster children.

On the contrary, your siblings, nephews, nieces and other relatives do not qualify.

What Qualifies as Main Residence?

The RNRB has been designed to reduce the tax burden for families when passing on the family home to the next generation. Therefore, it can only be used for one property where the deceased has lived at some stage. A holiday home may qualify. A buy-to-let property won’t. When the estate includes multiple properties where the deceased has lived, the beneficiaries or personal representatives can choose one (but only one).

If you downsize or cease to own your home prior to your death and lose access to the RNRB as a result, your personal representatives may be able to make a claim for the so called downsizing addition to compensate for the lost RNRB. Conditions apply and the claim must be made within 2 years after the end of month when you die.

What It Means for Inheritance Tax Planning

The new RNRB is a welcome tax saving opportunity, making the total potential allowance £500,000 for individuals or £1 million for couples. When used to its maximum potential, the RNRB can save a couple as much as £140,000 of IHT (2 x £175,000 x 40%, using the 2020-21 RNRB). A good understanding of the rules and careful advance planning are essential for minimising future tax liability.

Start the New Year with a Financial Health Check

New Year is a perfect time for a complete review of your finances. Run through all your financial arrangements, like investments, pension, insurance plans and bank accounts. The following checklist may help.

Setting Goals and Budgeting

Finances are a popular area where people make (and fail to fulfil) New Year’s resolutions. “Spend less” and “save more” are particularly common ones – and particularly bad ones. When setting goals, you are more likely to achieve them if they are specific and measurable. “Deposit £500 to my savings account every month” is obviously much better than “save more”.

That said, even a well-defined and accurate objective won’t work if it’s either too soft or unrealistic. Make your goals ambitious, but keep them within reach with respect to your current lifestyle and habits. Keep in mind that besides spending cuts there are other ways to improve your bottom line, especially in the long run. They are often less painful and easier to stick with, but can have enormous effect. For example, optimising your taxes or pension contributions, taking advantage of various allowances, changing the way you save and invest or choosing a better insurance plan.


Pensions are among the most valuable assets for most people, but they often do not receive as much attention as they deserve. Moreover, pensions legislation has undergone substantial changes in the last few years. If you haven’t reviewed your pension for a while, do it now. The following are some of the questions to ask:

  • Are you contributing the right amounts? Make sure you don’t contribute too little (you may have too little to live off in retirement)) or too much (you might create a problem with the reduced Lifetime Allowance).
  • Does the investment strategy still fit your changing situation, risk attitude and time horizon?
  • Will your current pensions allow you to take advantage of the new pension freedoms? Many older schemes don’t.
  • How does your pension fit in your retirement and estate planning?
  • If you have a Final Salary Pension, have you recently requested a transfer value? These have recently gone up quite a bit and this could provide a good opportunity for you to restructure.


Pay particular attention to ISAs. If you are not using them, you are again leaving money on the table. The annual ISA allowance is £15,240 for the 2016/17 tax year and it goes up to £20,000 for the next. These are significant amounts of money you can invest tax-free. Remember to use this year’s allowance by 5 April and don’t leave it to the last moment, as some providers take several working days to process a new deposit.


Do you have a proper investment strategy which is intended to achieve specified goals held by you? Do not confuse speculation with disciplined investment. The former is for fun and the thrill. The latter is what you need to do to achieve your financial goals. If you hold mutual funds, look at their latest reports and check where your money is actually invested. Is the risk exposure in line with your preference? When assessing investment risk, remember to always consider all your investments (including your pension, ISAs, funds and stocks) together, even when the money is technically in several different accounts and investment vehicles.


Risk management is an essential part of sound financial planning. At the same time, insurance is an area where you can waste a lot of money if you choose the wrong product.

Go through all your insurance plans. Check how much each costs, what exactly it covers and what it doesn’t. Changes in your circumstances (e.g. your health, family situation or driving experience) may not only require a different plan, but may also qualify you for a lower premium.

Wills and LPAs

Numerous studies have shown that more than half of adults living in the UK don’t have a Will, including many in their 50’s and 60’s. If you are one of those people, writing a Will is a good New Year’s resolution to make – and one that is not that hard to arrange or anything like as expensive as you would think. We have connections with a number of law firms and can refer you to appropriate specialists.

If you already have a Will, this might be a good time to review it. Check whether it still accurately reflects your wishes and make updates if needed.

The same applies to Lasting Power of Attorney (LPA). Incapacity can strike at any time, not only in old age. If you get it sorted before it’s too late, you will save your family considerable costs and lengthy dealings with the courts. If you already have an LPA in place, check that it’s still up to date.

Contact Us for Help

If you would like help with getting your financial affairs in order and keeping them that way, we would be happy to help. Contact us. We also offer specialist pensions advisory services.

Further Details

If you live in the UK visit UK pensions advisory service. If not, visit expatriate pensions advisory service.

Record High Transfer Values: A Good Time to Act?

In a world full of uncertainties and low interest rates, final salary pension schemes are widely considered a treasure but they can be inflexible and are often not specifically targeted at individual members’ needs. Members of such schemes often transfer out for a variety of reasons. These include: to access greater flexibility under the new pensions freedoms brought in last year; to draw their cash lump sum to reduce debt and to ensure that their families better benefit from the fund, in the event of their death.

In the recent months we have seen transfer values (the capital value of the benefits promised by a scheme, sometimes called the CETV or Cash Equivalent Transfer Value) at unusually high levels – sometimes as much as 40x the annual pension income. This has been driven by recent reductions in government bond returns brought about by the Brexit vote and also the measures taken by The Bank of England to prop up the economy. It is fair to say that this combination of factors is unusual and likely to be short lasting. When Bond returns revert to their traditional range, it would be reasonable to expect transfer values to reduce. So there is a bit of a window of opportunity to extract quite a bit of value for your pension, which can not be expected to last. This is definitely a good time to review whether your final salary pension is in the right place.

Differences Between Pension Schemes

One important thing to point out is that different pension schemes use a variety of factors when calculating transfer values. These include your current age and when you are entitled to draw the benefit, as well as the scheme specification in terms of escalation of benefits before and after retirement and any spouses and dependents benefits. In general, the closer you are to retirement, the higher the CETV multiple. Conversely, the more time left for the assets to grow, the lower the present value. The only way to know the exact figure is to request a CETV quotation from your pension provider. The state of funding and therefore the security of your benefits can have a bearing on the transfer value as well. If the scheme is very underfunded, transfers values can be subject to a discount.

When to Transfer (and When Not)

Guaranteed income is the main advantage of defined benefit schemes. When you transfer to a defined contribution scheme, you lose these guarantees and your future pension income will depend on returns earned on the invested assets. When you get a CETV quotation, you can actually calculate the exact rate of return needed to beat the income which you would have received from the old final salary scheme. The current high CETV multiples make these required rates of return lower than usual – sometimes as low as one percentage point above inflation.

When transferring out of a final salary scheme, investment risk shifts from the pension provider to you. One of the key things to consider when deciding about a transfer is your ability and willingness to take this risk. The former is mostly about your financial situation and whether you have other assets and income sources to possibly rely on in case your investment returns turn out lower than expected. The latter is mainly about your risk attitude and psychological factors.

Risk and return are major parts of the decision, but not the only ones. Your existing pension plan may come with other (often non-financial) benefits which you would be giving up. At the same time, final salary schemes are typically quite restrictive and inflexible – transferring out opens up new ways to access your pension pot and thereby new options for retirement and inheritance tax planning.

To sum up, those with more wealth and other assets besides their pension, those who intend to pass a substantial portion of wealth to children, or those looking for greater flexibility and control over their retirement savings are more likely to find a transfer suitable. Conversely, those with limited assets and those who prefer security and guaranteed income will probably want to keep their existing final salary scheme. These are, of course, generalisations – the actual decision will depend on the particular numbers, as well as many unique, personal factors.

The Window of Opportunity

While a decision to transfer a pension must never be taken lightly or made hastily, keep in mind that the current high transfer values are caused by recent short term market developments and these are unlikely to last. When bond rates go up, the CETV multiples can be expected to decline.

Contact us now for a free initial consultation to check out your options. You can find more details about our pension transfer advisory process by visiting our sections on UK Pension Transfers and Expat pension Transfers

Recent FCA Asset Management Study: A Case for Passive Funds

The Financial Conduct Authority (FCA) has recently published a comprehensive study examining the British asset management industry. While the report is over 200 pages long and most of it is of little interest to the end customer, there are a few points worth noting – and some reasons for concern. We will discuss the key findings below, as well as implications for your investment strategy.

You can find the full report here (interim report; the final is due in the second quarter of 2017).

6 Key Findings

  • The FCA has found weak price competition in the UK’s asset management industry, with negative effects on clients’ net returns. Generally, fund managers are unwilling to reduce their charges, as they don’t believe a resulting gain in volume would offset the fall in margins.
  • Not surprisingly, the cost for the client of actively managed funds is significantly (often as much as four or five times) higher than the cost of passive funds. The difference has actually increased in the recent period. While charges for passively managed funds have fallen in the last five years, actively managed funds have maintained their fees at broadly the same level.
  • When a fund is marketed as active (and priced accordingly), it does not necessarily mean that its investment exposures are significantly different from its benchmark, or from passively managed funds tracking the same market. In other words, clients often pay for active management which they don’t really get. This affects as much as £109bn of assets invested.
  • Overall, the FCA has found that actively managed funds (even when they do invest actively) do not outperform their benchmarks after fees. In other words, you are unlikely to get better performance by choosing an active fund over a passive fund – quite the opposite.
  • While some investors may want to invest in funds with higher charges, expecting these to deliver better investment management skills and higher returns, there is no evidence of this being the case. In general, more expensive funds do not perform better than cheaper funds.
  • While many investors consider past performance when choosing funds, it is not a good indicator of future performance. A vast majority of active managers are unable to outperform their peers for longer periods of time.

What It Means for the Investor

If you could summarise the report’s key message in one sentence, it would be the following:
Paying more for active management is usually not worth it.

This is nothing new. There have been many reports by various academics and research institutions, working with data from different markets and time periods, and most have come to the same conclusion. It is also in line with the Efficient Market Theory, which became popular in the 1960’s, but research with similar ideas occurred as early as the first half of the 20th century.

Beating the market is extremely hard, especially after the higher costs which inevitably come with active management. Even when a manager is able to beat a broad market index in one or two years, sustaining outperformance over a longer period, in different phases of the economic cycle and in different market conditions, is close to impossible. The massive growth of index tracking and passive funds in the last two decades is an evidence that investors all over the world have noticed.

Asset Allocation and Passive Management

The above does not mean everybody should just buy a FTSE 100 tracker and sit back. Different investors have different needs, time horizons and risk profiles, and therefore should have different market exposures. For instance, an investor in his 60’s and about to retire would most likely want to have a portfolio structured differently (perhaps more conservatively) than someone in his 30’s. This should be addressed in the asset allocation phase, where the approach should be highly individual. Passive management only applies once asset allocation (i.e. the weights of factors such as equities vs. bonds, developed vs. emerging markets, large vs. small cap stocks, or growth vs. value) has been decided.

At Bridgewater, we have sophisticated models in place to find the best asset allocation for the particular investor’s needs. Once portfolio structure is determined, we invest in passively managed funds, which deliver appropriate exposures to the individual factors at the lowest possible cost. You can find more detailed explanation of our investment approach here.

Autumn Statement 2016: Things to Know

Chancellor Philip Hammond has delivered his first Autumn Statement. Unlike most of his predecessor’s Budgets and Autumn Statements, it didn’t contain major pension or tax surprises and mostly confirmed the policies and trends previously announced by George Osborne, although there are a few new things worth knowing. The following are the key points with respect to your pension, investments and taxes.

Money Purchase Annual Allowance Down to £4,000

The most significant change concerning pensions is the Money Purchase Annual Allowance (MPAA) going down from the current £10,000 to £4,000, effective from April 2017.

The MPAA applies only to those who are over 55, have already taken cash from their pension using the new pension freedoms and are still contributing to their pension. For instance, when approaching retirement, you may decide to reduce working hours and start drawing from your pension to supplement your income, but keep contributing and benefit from employer’s contributions at the same time. Or you may return to work after a few years in retirement. Currently, you can contribute up to £10,000 per year under these circumstances and get a tax relief at your highest rate.

The intention behind the cut (same as the intention behind the very introduction of the MPAA in April 2015) is to prevent abuse of the new pension freedoms for “aggressive tax planning” or “pension recycling”, where taxpayers would withdraw cash from their pension and contribute it back, effectively enjoying an “inappropriate double tax relief” on the same amount. This, unlike the legitimate examples above, would be against the spirit of the pensions legislation.

Luckily, there are still ways to access your pension without triggering the MPAA in the first place. For example, you can take a tax-free lump sum without drawing income, buy a lifetime (non-flexible) annuity, or take up to three “small pots” capped at £10,000. Any of these will enable you to keep the standard Annual Allowance of £40,000.

The takeaway is: Before taking any cash from your pension, make sure you understand the consequences. Contact us for more details.

Salary Sacrifice Rules to Tighten, But Pensions Exempt

Salary sacrifice schemes allow employees to give up part of their salary in exchange for non-cash compensation, such as mobile phone subscriptions, gym memberships or health checks, provided by the employer and effectively paid for with the employee’s pre-tax income. Chancellor Hammond considers these tax perks “unfair” and has announced tightening of the rules. As a result, most will be taxed as standard cash income and no longer provide any tax or National Insurance savings.

Fortunately, pensions and pension advice won’t be affected, as well as childcare, the Cycle to Work scheme and ultra-low emission cars.

Unchanged or Previously Known Things

Besides the MPAA, the Autumn Statement does not change other pension allowances. The Annual Allowance remains at £40,000 and the Lifetime Allowance at £1m.

Income tax allowances and rate thresholds will grow as previously planned. The Personal Allowance, currently at £11,000, will increase to £11,500 in 2017-18. The Higher Rate Threshold will increase from the current £43,000 to £45,000 in 2017-18. Philip Hammond has reiterated the Government’s intention to increase these to £12,500 and £50,000, respectively, by 2020-21.

The Personal Savings Allowance remains at £1,000 for basic rate taxpayers, £500 for higher rate taxpayers.

The annual ISA Allowance will increase to £20,000 in 2017-18 as planned. The Chancellor did not mention Lifetime ISAs, which were first announced in the 2016 Budget and should be launched in April.

The triple lock will continue to apply to State Pension at least until 2020. Introduced in 2010, the triple lock guarantees State Pension to grow by the highest of inflation, average earnings growth and 2.5% per year.

Corporation Tax will decrease to 19% in April as previously announced. The Government still intends to cut it to 17% in 2020.

Autumn Statement 2016 in Full

The above are just the most significant points with respect to pensions, investments and taxes. You can find Philip Hammond’s full speech here.

Trump’s Presidency and Your Portfolio

The unthinkable has (again) become reality: Donald Trump will be the 45th president of the USA, contrary to forecasts by vast majority of pollsters, big media outlets and experts.

After an unusually emotional and hostile campaign, with numerous strong statements from both Mr. Trump and his critics, many investors are worried that Trump’s presidency could bring radical changes which would negatively affect the economy and their investments. Are the worries justified? Should you expect losses in the months and years ahead? Are there any actions you can take to minimise them, or even profit from Trump’s policies?

Market’s Reaction to Election Result

Many of the same experts who got their election forecasts all wrong were also predicting a potential Trump’s victory would cause a stock market sell-off, weaken the dollar and boost gold price. This is in fact exactly what happened in the first hours, as more key states like Florida and Ohio started to turn red. The US stock market was closed at night, but the Dow and S&P500 index futures, which trade round the clock, were down more than 5% at one point. However, the panic quickly turned to optimism and the major indices were actually up at the end of Wednesday’s trading session. The Dow Jones closed at a new all-time high the next day and finished the best week since 2011 on Friday. So is Trump good or bad for the stock market?

Key Points Many People Forget

Due to the sheer intensity of the election campaign and its coverage in the media, many people have become overly emotional about the outcome – not only in the US, but also in the UK and elsewhere. Whether you personally supported Trump or Clinton, it was easy to feel like the world would be coming to an end if your candidate lost. Because strong emotions are rarely useful when making investment decisions, let’s remind ourselves of several key points.

Firstly, things said during an election campaign do not always translate into actions (this is not specific to Donald Trump). In the first days after the election, we have already seen Trump becoming softer on some of his plans, like repealing Obamacare.

Secondly, while having undeniably an enormous power, a US president cannot and does not govern alone. As one of the strongest, most established democracies in the world, the US political system has a number of measures and institutions in place to insure against a president going mad.

Thirdly, Trump’s surprise win has overshadowed another very important outcome of the election night: the Republican Party’s success in retaining its majorities in the House and Senate. The Republicans are traditionally considered the more pro-business party and therefore their victory may justify careful optimism in the financial markets. That said, we can hardly consider Trump a typical Republican president. Many of his plans will face tough opposition from “his own” party and the future outcomes are very uncertain.

Trump’s Economic Program and the Markets

Trump’s plans are a mixed bag with respect to the economy, corporate profits and share prices.

Making the US more protectionist would certainly hurt the stock market. Punitive measures against corporations outsourcing production to China or Mexico would not only harm these particular companies, but might also cause inflationary pressures and thereby pressures for interest rates to go up, with further negative effects on both stock and bond prices. That said, it is unlikely that Trump will find sufficient support for taking these plans very far.

A wider Republican support is more likely for tax cuts, another key point of Trump’s economic program. While clearly positive for company profits, lower taxes could also further stretch public finances, possibly repeating the fiscal cliff and debt ceiling crises of 2011-2013. Trump’s promised infrastructure investments (those “bridges, tunnels, airports, schools and hospitals” from his victory speech) would have a similar combination of effects.

In today’s complex and interconnected world, individual economic policy measures often have a mix of both positive and negative consequences, as you can see from the examples above. Therefore, it is very hard to predict the aggregate effects on the markets, even if we knew how exactly the new laws and policies will look (even Mr. Trump himself doesn’t know that yet).

What to Do with Your Portfolio

Luckily, sound long-term investing is not about making predictions. With the risk of repeating ourselves, it is “time in the markets, not timing the markets” that builds wealth in the long run. This is easy to forget when a strong story like the recent US election occupies our minds.

To conclude, the appropriate action to take right now is stick with your long-term plan and avoid making impulsive, emotional decisions. That said, we will continue to carefully monitor the developments in the US and the global economy and may review our recommendations going forward.

Decumulation Planning: Risks and Key Questions to Ask

Most retirement planning advice focuses on the accumulation phase – how big a pension pot you need, where and how to invest, or how much you should save each month. However, there is also the decumulation phase, when you start to rely on your savings to finance part or all of your living costs. Savers (and advisers) often underestimate its importance and complexity.

Clear Objectives But Many Unknowns

There are two main objectives in the decumulation phase:

  • Make sure you don’t outlive your savings.
  • Enjoy the best quality of life possible.

Although these sound fairly simple, there are many uncertainties complicating your decisions.

Firstly, you don’t know how long you will live. This is called longevity risk.

Secondly, you don’t know how much income you will need in future years due to unpredictable inflation and lifestyle changes. For instance, you will probably spend less on travel or hobbies in older age, but the cost of healthcare may go up.

Last but not least, the remaining part of your savings will continue to be invested and therefore subject to market risk (and don’t forget currency risk, especially if you plan to retire overseas).

Key Questions to Ask (Yourself or Your Adviser)

With the above mentioned objectives and risks in mind, decumulation planning involves particularly the following decisions.

How much can you draw from your savings every month or every year?

The popular rule of thumb says that if you withdraw no more than 4% of your retirement savings in any individual year, you won’t run out of money before you die. Unfortunately, this rule ignores all the above listed risks (longevity, inflation and investment risk) and comes with assumptions which may be questionable in today’s world, when an increasing number of people live well into their 90’s, when interest rates are near zero and your portfolio is far from guaranteed to beat inflation, regardless of your investment strategy. Simple universal rules like this one can be taken as rough guidance or starting point, but you should never rely on them blindly and always consider your personal situation.

If you have multiple assets or accounts, which ones should you use first and which ones should you leave for further growth?

Most people retire with a number of different assets or savings vehicles, such as pensions, ISAs, stocks, mutual funds, savings accounts or property. Besides different risk and return profiles, these assets are also subject to different tax treatment or different rules with respect to inheritance. When deciding which ones to use for income now, consider not only the taxes payable in the current tax year, but also your future tax liabilities. Remember that tax allowances such as the Personal Allowance or the CGT Allowance can still be used in retirement.

What is the optimum asset allocation and investment strategy?

While the general recommendation is to make your portfolio more conservative than during your working life (due to shorter time horizon), there are no universal rules. Keep at least a portion of your wealth in very conservative instruments like short-term government bonds and even cash. These should cover at least your basic income needs for the next few years. At the same time, a part of your portfolio should remain invested in assets like stocks or high-yield bonds to allow further growth. Within your equity subportfolio, you may want to increase the weights of low beta or high dividend stocks to keep risk under control and boost income.

The exact weights and securities to choose depend on market situation as well as your personal circumstances – particularly your wealth and other assets you hold. In general, the poorer you are, the more conservative you should be, and vice-versa – if you have other assets to possibly use for income if some of your investments go wrong, you can afford more risk in your portfolio.

Should you buy an annuity?

Even with the new pension freedoms, buying an annuity is still an attractive option to many. When making the decision, treat it as a very conservative component of your portfolio. Its main purpose is to cover your essential income needs and to protect you from the already mentioned risks (longevity, market risk and – with some annuity types – inflation risk). Of course, this protection comes at a cost. Again, if you are wealthier and have other assets to use as potential reserves, you may not need an annuity at all.


One important thing to keep in mind is that decumulation planning does not start on the day when you retire. The two phases – accumulation and decumulation – are not isolated. Decisions made and actions taken during your working life can make your options wider and generally better in retirement.

Overcoming Home Bias: Why You Should Invest Globally

Not surprisingly, for vast majority of British investors, domestic stocks and particularly the FTSE 100 index represent a substantial portion of their portfolios – often to the extent of neglecting or completely ignoring other markets. Today we will have a closer look at this phenomenon, known as home bias, and discuss the benefits (and costs) of taking a more global approach to asset allocation, particularly in light of the uncertainties ahead.

Home Bias

The home bias, or the home bias puzzle, was first recognised in the early 1990’s. It has been observed that investors tend to over-allocate funds to their domestic market – more than what would be justified when taking a purely rational risk and return optimisation approach. Numerous research reports have been published by bank analysts and academics, examining the causes of home bias and its effects on investment performance and risk.

Costs of International Investing and Causes of Home Bias

In general, there are three groups of factors which discourage investors from investing internationally:

  • Financial, such as currency conversion costs, higher fund management fees or custody fees. The significance of these has declined (but not disappeared) in the last two decades due to technology and the rise of ETFs and other passively managed funds.
  • Administrative, such regulatory restrictions, paperwork or tax issues.
  • Psychological. For instance, for someone living in the UK it makes more sense to invest in shares of familiar companies like Tesco or Marks & Spencer, rather than their foreign counterparts. Being able to see actual products or stores behind a stock symbol helps with trust and comfort – essential ingredients of the psychology of investing.

Benefits of International Investing.

If your portfolio only contains a negligible portion of international equities, or even worse, if you have all your funds in the FTSE 100, your risk and return profile is far from efficient. It is very likely that in the long run you will see lower performance and higher volatility than you otherwise would with a portfolio containing just a bit more of international equities. Of course, the actual future performance of equity markets in individual countries is impossible to predict, but it is the probabilities and the outcomes across a wide range of possible scenarios which must be considered. In one word, diversification.

Geographical, Sectoral and Idiosyncratic Diversification

One argument against international investing is that shares in the domestically listed corporations already provide sufficient exposure to economic developments in other regions, as many of these companies trade worldwide. The FTSE 100 is a good example, as 77% of its constituents’ revenues come from outside the UK.

That being said, the FTSE 100 lacks sufficient exposure to important parts of the global economy which you may not want to ignore. It is traditionally heavy in consumer staples and energy, but severely underweight in the technology sector. If your portfolio mimics the FTSE 100, you have over 8% of your funds invested in a single energy company (Royal Dutch Shell), but you completely lack exposure to companies such as Google, Apple or Amazon, for instance. These are at least as important to the global economy, and to the British economy too.

How Much Is Enough?

According to a recent report by Vanguard, which refers to the latest available (31/12/2014) IMF statistics, British investors hold 26.3% of their equity investments in domestic stocks – on average. In line with the home bias theory, this is much higher than the UK’s share on global market cap (7.2%) or GDP (4% nominal / 2.5% by PPP).

Does this mean you should only have 7% or 4% of your portfolio in British equities? Of course not. After all, if you live in the UK and your general interests, liabilities and future expenditures are in this country, there is nothing wrong with British assets representing a significant portion of your investments. The exact optimum weight of foreign equities is subject to personal circumstances, such as your income, other assets and liabilities. For instance, the property you own represents substantial exposure to the future well-being of the British economy, justifying a higher share of foreign equities.

Does Brexit Change Anything?

The Brexit uncertainty does not enter the equation, unless you personally have a strong opinion regarding the future development and want to gamble on that. If you don’t, remember that in line with the Efficient Market Theory, the stock prices (and the pound’s exchange rate) are already reflecting the market’s consensus and thereby all the currently available information.

In the long run and under the “hard Brexit” scenario, looser economic ties with Europe might result in a decrease in correlation between the UK and EU in terms of economic and stock market performance, increasing the diversification potential of European equities. However, this effect will most likely be marginal, if any.

Understanding Property Capital Gains Tax in 2016/17

Since April British investors enjoy some of the lowest capital gains tax (CGT) rates among developed nations, following the decrease from 18% to 10% and from 28% to 20% for basic and higher rate taxpayers, respectively. However, this does not apply to residential property where the old rates (18% or 28%) still apply. Property taxation has been a sensitive issue in the last years due to the large number of taxpayers affected, large amounts of money (and tax) involved and Britain’s notorious housing shortage. As a result, the rules are quite complex and hard to understand to many. Let’s put some clarity into them and their implications for your financial and tax planning.

How CGT Works for Most Investments

When you sell investments such as shares or funds (held outside a tax wrapper like a pension or ISA), your gain (selling price less purchase price) is subject to CGT of 10% (if you are a basic rate taxpayer) or 20% (if you are a higher or additional rate taxpayer).
There is an annual CGT allowance, which is independent of (in addition to) your personal income tax allowance and lets you earn the first £11,100 (for 2016/17) of capital gains tax-free. Beyond that amount the CGT rates apply.

Residential Property

The general mechanism is the same with residential property, but there are a few specifics worth knowing.
The rates remain at 18% and 28% – effectively there is now an 8 percentage point surcharge on capital gains made on residential property vs. other investments. When announcing the changes in the 2016 Budget, the former Chancellor George Osborne stated that the intention was to create an incentive for people to invest in businesses (and help grow the economy) rather than property (and help grow property prices).
The CGT allowance applies to property in the same way as to other investments. Therefore, if you have made capital gains on both property and other investments in a given tax year, it makes sense to first use the allowance on the property portion to save a higher amount of tax.
With property there are generally more opportunities to deduct costs when calculating taxable gains. You can deduct transaction or administrative costs such as estate agent’s and solicitor’s fees. You can also deduct the cost of improvements which increase the value of your property, such as extensions, but not the cost of regular maintenance or decorations.

Private Residence Relief

If you are selling your own home (“your only or main residence”), or part of it, chance is you won’t have to pay CGT. This is covered by the so called Private Residence Relief. The rules what qualifies are quite complex, but the key points are the following:
You must have lived in the property the entire time, with some exceptions, such as a short period at the beginning (to allow time to prepare the home and move in) or when you had to live elsewhere due to employment duties.
It must have been your main residence. Second or holiday homes don’t quality and are always subject to CGT. Also note that if you are married or in a civil partnership, you can’t have a different “main residence” than your partner, unless you are separated.
It can be a house, flat, houseboat or fixed caravan.
It also includes the grounds, such as a garden and any buildings on it, but not larger than the “permitted area” (0.5 hectares or 5,000 m2 including the buildings). Any part beyond that does not qualify for the relief.
Any part of the property must not have been used exclusively for business purposes at any point of your ownership period.
You have not let part of the property to others at any time, except when having a single lodger.
You can find detailed official information, as well as some examples, on

CGT Liabilities for Non-Residents

Keep in mind that being an expat or non-resident in the UK is no longer a way to avoid CGT duties. Since April 2015 British expats and non-residents who have sold or disposed of UK property are required to report this to HMRC and CGT is payable on gains made after 5 April 2015.
You must inform HMRC even if there is zero tax to pay. The deadline is quite harsh – 30 days after the ownership transfer date.


Taxpayers often underestimate the importance and potential of CGT in their tax planning. Unlike regular income, such as salary, you often (though not always) have more control over the timing of your investment sales and which tax year the particular capital gains are attributed to.
The first rule is to try to use the CGT allowance in full every year.
The second rule is to take advantage of tax wrappers like pensions or ISAs, or other ways to reduce or defer your CGT liability, depending on your circumstances.