Beware of the hidden risks of low-risk investing

Most investors recognize and understand the risks involved when investing. However, during times of extreme market decline, even the toughest investors’ risk tolerance is tested. Such dramatic downturns can force many to limit their risk exposure. But, regardless of market highs and lows, investors really need to maintain perspective and proper risk to pursue their long-term financial goals.

“Low risk” investments help protect one from a decline in the overall stock market, but might leave one exposed to other risks not seen on the surface.

Risk #1: Inflation cutting your real return
After subtracting taxes and inflation, the return one receives from a low-risk investment may not be enough to remain ahead of inflation.

Risk #2: Limiting your portfolio’s growth potential
Beware, some portfolios with low-risk investments may be riskier than one realizes due to the limited growth potential of these investments.

Risk #3: Your income can drop when interest rates drop
If interest rates have dropped by the time a low-risk investment becomes due, one might have to reinvest at a lower rate of return, resulting in a lower yield each month.

A properly constructed portfolio with the correct balance between risk and return will mitigate the risks of market volatility. When deciding on how to invest, it is important for investors to take into account their personal attitude to risk and capacity for loss but also to understand the performance characteristics of different blends of equities and bonds and in particular, how their own portfolio might behave. This will ensure that when markets perform in a particular way, investors will appreciate that this is within the range of possible outcomes for their portfolio.

This is where an independent financial adviser can help by guiding investors to the correct choice of portfolio, which has the best chance of helping them achieve their goals. They can also help educate investors so that they better understand what to expect and encourage them to adopt a disciplined approach.

Pension death benefits – you can take it or leave it!

Those looking to pass on their pension fund received a boost today when the Government confirmed they’re following through on their promise to scrap the current 55% tax charge on death. This means the tax system will no longer penalise those who draw sensibly on their pension fund, making pensions a very attractive wealth transfer wrapper.

What’s changing?
Your age at death will still determine how your pension death benefits are treated. The age 75 threshold remains, but with some very welcome amendments.

Death before 75
The pension fund can be taken tax free, at any time, whether in instalments, or as a one-off lump sum. This will apply to both crystallised and uncrystallised funds, which means those in drawdown will see their potential tax charge on death cut from 55% to zero overnight. Using the fund to provide beneficiaries with a sustainable stream of income allows it to potentially grow tax free, while remaining outside their estate for IHT.

Death after 75
DC Pension savers will be able to nominate who ‘inherits’ their remaining pension fund. This fund can then be taken under the new pension flexibility and will be taxed at the beneficiary’s marginal rate as they draw income from it. Alternatively, they’ll be able to take it as a lump sum less a 45% tax charge.

What does this mean for advice?

Taken with all the other pension changes coming in April 2015, this creates a genuine incentive to save, knowing that family members can benefit from the remaining fund. It means that a pension will become a family savings plan, enabling one generation to support the next.

Drawing an income
The current 55% tax charge on death acts as a penalty for scheme members who take a sustainable income from their pension pot. The only way to delay this charge is for a surviving dependant to continue taking an income from the fund.

The option of taking a lump sum is often overlooked in favour of postponing the tax charge until the dependant’s death.

The new rules will mean that beneficiaries other than dependants may now benefit from the remaining fund, without suffering a 55% penalty.

Death before age 75 offers the option of a tax free lump sum. But it also allows the fund to remain within the pension wrapper which the beneficiaries would have flexible access to. And nominating a loved one to take over the flexible pension pot will also be a popular choice when death occurs after this age.

These changes will standardise the death benefit treatment for the different flexible income options from next April. There won’t, for example, be any difference between taking phased flexi-drawdown or phased withdrawal, as crystallised and uncrystallised funds will be treated the same on death.

Making instructions known

It will become even more important that death benefit instructions mirror the scheme member’s wishes. A nomination or expression of wish will help to guide the scheme trustees in their decision making. You wouldn’t knowingly entrust what happens to your home or other assets on death to a stranger. If there are no instructions in place, you’re relying on the pension scheme trustees to second guess your intentions. And with such wholesale changes to the death benefit rules to come, advisers will need to revisit existing nominations at their next client reviews.

All eyes on 3rd December

It’s worth stressing that more detail is awaited, particularly on the operational elements of how the new rules will work in practice. The next step is to see the full details in the Autumn Statement on 3rd December. We’ll provide updates on the final pieces of the pensions reform jigsaw, as it all starts to slot into place. Watch this space.

The Seven-Day News Diet

The financial media recently has been consumed by the issue of ultra-fast computer-driven trading and what it might mean for ordinary investors. But arguably what does the most harm to people are their own responses to high frequency news.

The growth of 24/7 business news channels and, more recently, financial blogs, Twitter feeds and a myriad of social media outlets has left many people feeling overwhelmed by the volume of information coming at them.

The frequent consequence of the constant chatter across mainstream and social media is that investors feel distracted and unanchored. They drift on tides of opinions and factoids and forecasts that seem to offer no single direction.

The upshot is they end up second guessing themselves and backing away from the resolutions they made in less distracted times under professional guidance.

Remonstrations by advisors can steer them back on track for a little while, but soon enough, like binge eaters raiding the fridge, they’re quietly turning on CNBC and opening up Twitter to sneak a peek at what’s happening on the markets.

Quitting an ingrained habit is never easy, particularly when asked to go cold turkey. But there are ways of gradually weaning oneself off media noise. And one idea is a “seven-day news diet” that eliminates the distractions a little at a time:

Day: 1 Switch off CNBC. Business news is like the weather report. It changes every day and there’s not much you can do about it. If you really want drama, colour and movement, stick to Downton Abbey.
Day: 2 Avoid Groundhog Day and reprogram the clock radio. Waking up every day to market headlines can be more grating than Sonny and Cher.
Day: 3 Read the newspaper backwards. Start with the sports and weather at the back and skip the finance pages. Small talk will be easier, at least.
Day: 4 Set up some email filters. Do you really need “breaking live news updates” constantly spamming your inbox?
Day: 5 Try “anti-social” media. Facebook is great, but it’s like a fire hose. If you want to be social, pick up the phone and ask someone to lunch.
Day: 6 Feeling the pangs of withdrawal? Go to the library and look up some old newspapers. They can give you a sense of perspective.
Day: 7 You’re nearly there. Use this window to decide on a long-term financial media diet. You might decide to check the markets once a week, instead of once a minute. The important point is to have a plan.
Those who swear off the financial media, if only for a little while, often find they feel more focused and less distracted. The ephemeral gives way to the consequential and they come away from the hiatus with a greater sense of control.

Any changes they make to their investments are then based on their own life circumstances and risk appetites, not on the blitzkrieg of noise coming at them minute to minute via media outlets.

Ultimately, going on a news diet can be about challenging our patterns of consumption and thinking more intently and less reactively about our decisions.

We can still take an interest in the world, of course, but at our own pace and according to our own requirements, not based on the speed of the information coming at us from dozens of gadgets.

In the words of the American political scientist and economist Herbert Simon “a wealth of information creates a poverty of attention”. So it follows that if you economise on your information diet, you can maximise your attention.

Pensions Institute: ‘Almost all’ active managers fail to beat the market

Pensions Institute: ‘Almost all’ active managers fail to beat the market

This article confirms something that those of us involved in looking after client money have known for quite a while, namely that most active fund managers, despite charging extra for the pleasure, are incapable of beating the markets. This underpins our evidence based investment philosophy. To cut a long story short, the evidence from years of academic research, in many cases by Nobel Laureates, firmly suggests that the factor which has the greatest eventual impact on the returns (strictly variability and therefore expected returns, to those of you who are investment boffins) of a portfolio is the high level asset allocation, i.e. the split between equities and bonds. Strategies such as market timing (when should I buy or sell or should I hang on a little longer for the turn?) and stock selection (should I buy Tescos or M&S?) have been shown to have very little impact. Since these are the main methods supposedly used by active fund managers to add value, it comes as no real surprise that most of them fail. I say ‘supposedly’ because many simply track the markets and charge extra for doing so!

So, if you are looking for a portfolio that collects as much as possible of the market rate of return, according to the level or risk that you wish to take, start with the high level split. Then choose low cost funds and perhaps tilt towards sectors that have demonstrated an ability to provide extra returns given a certain amount of extra risk. Above all, avoid succumbing to the perfidious temptations of the financial porn which is regularly pushed out by the active fund management industry. They are thinking about themselves, not you.

What price for Brazil to win?

Every four years, in the build-up to the World Cup, lots of people attempt to predict the results of the competition.

Economists at Goldman Sachs, one of the world’s biggest investment banks, suggest that Brazil is the overwhelming favourite with Argentina trailing a distant second. England has a 1.4 per cent chance of winning, according to the bank.

Stephen Hawking has used a scientific method to calculate that England’s best chances lie in a 4-3-3 formation, playing in temperate conditions, with a European referee, kicking off at 3pm. Even so, he also backs Brazil to win.

And who can forget Paul, the captive German octopus, who correctly predicted the results of all of Germany’s matches in the 2010 World Cup?

People go to great lengths to make credible predictions but it is rarely worth the effort because seldom are they accurate. A more meaningful alternative to making individual predictions is to use the aggregate of all the analysis expressed in book-makers odds. Brazil are currently 11/4 favourites.

We use this idea as the root of our investment philosophy. We do not believe it is possible to reliably predict future events and think it is a waste of money to attempt to do so. We assume that all the relevant information has been taken account of by other people and we trust the aggregate of all analysis.

That aggregate is expressed as the price of a security and is the most reliable expression of the company’s prospects and expected returns.


Whatever happened to worries about Eurozone collapse?

Today, as we wake up to the European election results it is opportune to reflect on the state of the Eurozone.

Cast your mind back just over a year to March 2013. The Eurozone was going through its fifth bailout, with Cyprus on the brink of meltdown. There was a fear that a major country, like Italy or Spain, might follow, exhausting the Eurozone bailout capacity. A test looked imminent for that famous 2012 pledge made by the European Central Bank’s (ECB) chairman, Mario Draghi, that the Bank would do “whatever it takes” to save the euro.

Fifteen months on and the word Eurozone is no longer automatically twinned with the word ‘crisis’:

• Ireland officially left its bailout programme at the end of 2013, after three years of treatment.

• Greece, which had two bailouts, was able to able to raise €3bn of five year government debt in April at a cost of only 4.95%. The bond issue was eight times oversubscribed, despite Greece having a B- ‘junk’ credit rating.

• Portugal followed Greece by raising €750m of 10 year bonds at a rate of just under 3.6% later in April. It was the government’s first bond auction in three years and comes ahead of a likely exit from its bailout programme.

• Spain, which did not have a formal bailout, but did receive EU funds to support its banks, is also finding favour in the markets. Its 10 year government bonds are now yielding about 3%, against over 7.5% in 2012.

Does all this mean that the Eurozone is on the road to recovery? The answer is, perhaps inevitably, yes and no. The ‘periphery’ countries are no longer the concern that they were, but serious economic issues remain. Greece still has a mountain of debt that experts expect will require another write down at some point. Spain continues to have an unemployment rate of over 25%, with a youth unemployment of double that level.

Ironically, worries are now moving from the periphery to the core, and in particular France. The Eurozone’s second largest economy is struggling to meet its 3% EU government borrowing target – already twice deferred – has 10%+ unemployment, almost no economic growth and a deeply unpopular President.

In the Eurozone background is the spectre of deflation (falling prices). Inflation in the zone is now 0.5%, a long way below the ECB’s target of slightly under 2%. Mr Draghi could yet end up doing “whatever it takes”…

With the success of eurosceptic parties throughout Europe, we live in interesting times.

Read between the (head) lines

Too often, money gets a bad press. Just in the past few weeks headlines have reported that “Yes, the stock market is rigged”[1] and “City watchdog to probe 30m financial products”[2]. At the same time, investigators are still looking into the alleged manipulation of foreign exchange rates and the rate that underpins most savings and mortgages.

It is hardly surprising that people are put off saving and investing when there are so many scandals. But it’s not all bad news: in fact, there are some very good news stories about money that will never make the headlines.
One of them is that many investors have doubled their investments in the past five years. They didn’t go to great lengths to pick the right funds, or devise a complex investment strategy. They could have spent more time digging a new flower border than poring over stock prices. All they did to achieve this great return was to hold a diverse and low-cost portfolio of global shares and stick with it.

These people have benefited from one of the most powerful wealth-generating machines in the world; the stock market. They ignored the Eurozone crisis and they ignored the lumpiness of the global economic recovery. Instead, they just sat back and watched the steady climb of their investments, while taking care not to give up any returns to bad timing or paying too much in fees and costs.

It might not sound exciting, and there are very few reporters in the world that would be interested in writing about it, but right now, all around us, are people easing their way to their financial goals.



Following the recent UK Budget, major changes have been announced for pensions. From next April, it will no longer be necessary to draw an income. Instead the whole fund can be cashed-in. The first 25% will be tax free to UK residents (but not necessarily to residents of other countries) and the balance will be subject to tax at the pensioner’s marginal rate. So far so good. At the same time, the Chancellor has announced, since this might encourage a lot more people to take their pension funds as a lump sum and, since government pensions are unfunded (that is to say they are paid out of annual tax revenue as they arise), he would be enabling such pension schemes to no longer offer transfer values.

This leads me to the reason for the title to this article, as clients of ours have already been approached by ‘advisers’ recommending that they get on and transfer their pension to a QROPS before the opportunity to do so runs out. The question is, just because you might not be able to do something in future, does that mean you should do it now?

On our travels, we see all sorts of extremely poor advice regarding pensions, amongst other things. All manner of completely spurious reasons are given for transferring. These include, that the UK pension is ‘frozen’, it will be subject to UK tax, it might all be lost if the employer goes bust, to name but a few.

Lets start with what you are giving up by transferring out of a UK defined benefit scheme, such as the Teachers Pension Scheme or any major employer’s scheme. Under long standing UK legislation, such benefits are effectively inflation proofed both before and after payment. They are guaranteed by the government in the case of public sector schemes. For private sector schemes, in the first instance, they are backed by the financial strength of a major corporation but even if they go bust, there is the mandatory Pension Protection Fund (to which all UK pension schemes must subscribe) , which provides protection for 90% of the benefits for most people. It is therefore completely untrue that UK pensions are ‘frozen’ once you leave or that they are at risk of being completely lost if your ex-employer goes bust. There is there no justification to transfer out on the grounds that the benefits will be static or somehow at risk.

Furthermore, UK pensions can be paid anywhere in the world and due to the large number of double taxation treaties between the UK and other countries, in many instances, the income can be paid free of UK tax. Even if it is subject to UK tax, British citizens still have their personal allowance of over £10,000 per year, which covers most people’s pensions. So, there is no justification for transferring in order to improve the tax treatment.

Of course, there are circumstances when a transfer may be worth considering. These include: funds in excess of the lifetime allowance, the need to secure benefits on a different basis to the original scheme or sometimes improve death benefits, or to use the fund for specific purposes perhaps by a business owner wanting to use it to acquire trading premises.

Occupational Pension Transfer advice is a very specialist area. It requires a balancing of the benefits to be secured with those which will be lost and a determination as to whether the proposed transfer is worth it, or not. This involves the carrying out of a transfer value analysis calculation which determines the rate of return (the critical yield) needed by a private scheme to match the benefits being given up. It also analyses and compares things like tax free cash entitlement and death benefits in the existing and proposed schemes. You would usually expect to receive a pretty comprehensive suitability letter either recommending that you transfer or, actually more likely, that you do not. Prior to receiving the advice, you should expect to be asked lots of questions about your requirements and preferences and most likely be required to complete a range of questionnaires on your investment risk and on your specific attitudes to your pension arrangements. UK advisers are required to presume that the default, most appropriate course of action is for pension benefits NOT to be transferred and therefore when giving advice, the case for transferring must be made, not the other way round.

In the UK, advice on occupational pension transfers may only be provided by financial advisers with specialist qualifications. It is actually a regulatory offence, liable to result in a fine, striking off and possibly even a criminal conviction for a non-regulated adviser in the UK to provide advice in this area. Such restrictions do not apply to people operating in this market from outside the UK. Here is a summary of the FCA’s requirements.

Which leads me to my conclusion. If you have been been approached by an adviser based out of an office in Eastern Europe, Spain, Malaysia, Thailand or, anywhere other than the UK, suggesting that you should transfer your UK pension to a QROPS – think twice. You might want to ask them what specific pensions qualifications they hold. Ensure that you obtain a proper report from them covering all of the points above. If they don’t burden you with lots of questions and send you a lengthy and probably tedious report with lots of numbers crunched, ask yourself why. How can they possibly know that the transfer is good for you and having perhaps determined that it is, how without a proper report, can they be sure that you are making a properly informed decision? Better still, seek advice in the UK from a properly qualified and regulated adviser. As an expatriate, you may not benefit fully from UK regulation but the adviser is obliged to conduct himself in a fit and proper way and to provide advice to the required standard, no matter where they are based.

This is only a brief summary of the issues. The UK regulator is so concerned about the shenanigans that have been going on and the predatory activity, particular from offshore, I hesitate to call them ‘advisers,’ that it has issued a fact-sheet, which you can access here.

Our associated UK regulated independent advisory firm provides qualified specialist pension transfer analysis service to UK clients and expatriates. It also assists other advisory firms who don’t hold the required qualifications or regulatory permission to provide such advice to their clients. If you have a UK pension are concerned about whether it is suitable for your needs, or have been approached by someone suggesting that you transfer it, they would be happy to help. For further details please contact Phill or myself.

Christopher Wicks ACII FPFS CFP
Chartered Financial Planner

Retirement Planning for Expatriates

Retirement Planning, in common with all financial planning is just a funding exercise. It deals with a fundamental fact of life that confronts all of us, namely that at some stage, whether you like it or not, you are going to have to stop working. When that happens your earnings will cease and you therefore need to build up a replacement income sufficient to maintain the standard of living to which you have (or would like to) become accustomed. It does not matter where the replacement income comes from but it needs to come from somewhere. One thing is for sure, it is not going to magically appear, so a plan is necessary.

The starting point is to work out how much you need to live off in retirement. This can be difficult because your circumstances can have changed quite a bit. That said begin by looking at your current expenditure. Apart from totting up all of your payments you should take note of what you are spending your money on. Some items should have stopped by the time you retire, at least in theory, such as mortgage and children’s education costs. However if you are on an expat contract and your rent is paid, you are going to need to start to pay full housing costs. So you add things on that you will need to spend and deduct items that will have stopped. Incidentally, when you carry out this analysis, look at what you are spending on utilities, insurance, and bank interest. If you shop around now, can you save some money?

Once you have worked out how much you need, the next thing is to calculate the level of income that you already expect. If you are entitled to the UK state pension you can obtain a forecast. The same should go for state pensions from other countries. You can also obtain projections for private pensions from the UK and other territories. You should also take into account the value of existing savings and investments as well as any rental income if you have investment properties. Do not include rent from the home you intend to return to, since this will stop when you move back into it. You may need to run some projections based on your current rate of saving and the present value of your investments and pension funds. Bear in mind that these need to take the effect of inflation into account.

Having determined what you need and how much is coming in, the final step is to work out the difference. This is what you need to fund. If you are going to build this up using regular savings, you need to convert it to a capital sum. In order to ensure that your target income is realistic, you should assume a similar rate to an index linked annuity in the UK and back calculate from there. You then need to calculate the regular monthly amounts that you need to save in order to arrive at the amount of capital needed to provide your target income. Simple!

Of course, all of the above is complicated by the fact that you are expatriates. You may not return to your country of origin. You need to consider the likely rate of inflation where you plan to retire and also the effect currency fluctuation on your savings. You also need to decide in which currency you wish to make the savings. Taxation is also an important consideration and you will need to plan for this well before you implement any transactions.

If this sounds daunting, it need not be. It is all in a day’s work for any competent financial planner with experience of dealing with expatriate personal finances. In addition to helping you with the basic funding calculations they will also be able to advise you on the best way to build up the necessary retirement income and hopefully help you to adopt a sound evidence based investment strategy, which gives you the best chance of achieving your goal for the level of risk that you wish to take.