Tag: bridgewater financial services

Now’s not the time to play ‘financial chicken’

Sometimes it’s good to be the odd one out!

The election is over, now let the dust settle

Finally we have the outcome and a new strong direction for the UK, with Brexit now happening in the way that Boris Johnson has planned. There will be international reactions to the new political landscape and the markets will no doubt respond too. In fact, at the moment the exit poll was announced Sterling rose significantly; and we can expect to see further fluctuations across the board in the UK markets. Which is why, whatever way you voted, I’d like to just focus your attention on your finances and what you should and shouldn’t do next. 

Psychologists tell us that we have been hardwired over the last 100,000 years to behave the way we do. With most of these behaviors being based on primal instincts that determine our survival as individuals and as a species. So in many ways, these behaviors are so deep routed at a biological level, we don’t stand much of a chance of avoiding them as individuals. That is of course, if they are not pointed out and guarded against.

The modern world really is an extremely new phenomenon, especially when we look at it through the lens of evolution. The vast interconnections and the exchange of up to the minute information and ideas are truly phenomenal. So have some sympathy for that part of your brain that has been hardwired to live in a world that lasted for around 98,000 years and now no longer exists; and never doubt the influence it still has over you and your finances!

Here’s how a caveman still influences your decision-making

We all carry around these hardwired modes of behaviour; and one that may come to the forefront in the next couple of months is what psychologists call ‘The Bandwagon Effect’

There is an incredibly powerful compulsion to follow the herd. It’s been bred into us at the very base level of our existence; and in uncertain and stressful times, it comes right to the front of our thinking. That’s because for tens of thousands of years, belonging to and conforming to a group was a very successful strategy for survival. Staying with the group is far better for survival than going it alone. Hence, over thousands and thousands of years the desire to follow the herd has been bread into all of us over time – and is now a fundamental human instinct. 

How many times have you fallen for the appeal of a busy mediocre restaurant verses a fabulous empty one saying “Let’s eat here, it looks full so it must be good”?.. It’s the Bandwagon Effect in full swing.

When the wheels come off and that impacts your finances

An excellent and extreme example of The Bandwagon Effect causing financial problems was laid out in the dramatic rise and crash of Bitcoin. That particular bandwagon was one that people couldn’t get on fast enough, despite common sense telling them that it wouldn’t last. For the majority of ordinary investors, they bought Bitcoin at the height of its value only to watch the value plummet. 

Whilst Bitcoin is an extreme example, I use it to illustrate the Bandwagon’s grip on sane minds. So my words of caution are aimed at the post-election markets in general, over the short-term.

March to the beat of your own drum

Over the next few weeks or months the markets are going to react to the first quarter of the new Government. That may well create fluctuations and the odd perceived stampede toward the Bandwagons. My advice would be to bide your time and wait. 


Think about theold adage ‘If you see a bandwagon, it’s already too late’

Markets hate uncertainty and have been reacting to the political deadlock that we have been living with through the post Brexit Referendum. 

However, now is the time for the markets to settle again. It’s certainly not the time to take peer-pressured decisions on investment acquisitions or disposals. If you spot an opportunity whose value is created by a sudden influx or departure of groups of investors, please think again. Remember that bandwagons often artificially alter a market for the short term. So get some impartial advice and consider your options calmly and pragmatically. Please bear in mind that the powerful drives to follow the herd have been with us for over 100,000 years and have served us incredibly well. However, they are your worst enemy when it comes to the financial markets.

Unleash your inner Spock!

I’m not sure if there is such a thing as The Bandwagon Effect on Vulcan. However, I would say that approaching the financial markets with a Vulcan like emotionless clarity, and a determination not to get carried along with the crowd, is the only way to overcoming the possible pitfalls of market hysteria. 

The markets are probably ahead of you anyway

Most of the serious financial markets have had any political upheavals already costed into them. So what you will be witnessing in any fluctuations is merely a settling of the market.

Also, don’t forget that the markets are now interlinked throughout the world. So, whilst the UK General Election may seem incredibly important to us, to the international markets it’s just a small bump in a very long and well-established road – and nowhere near as significant to performance than many of us believe.

Don’t just take our word for it though – talk to us too!

If you have any questions or worries regarding the current or future financial and investment markets, then pleasecontact us at Bridgewater Financial Services where we will be delighted to help guide you through your individual options and strategies.

Life Assurance

Here’s a lovely Life Assurance idea..

..how about the taxman pays around half of yours?

If you take out a Relevant Life Plan, then he (or she) will.
If you want to provide yourself and your employees with an individual death in service benefit that pays a lump sum if the individual insured dies or is diagnosed with a terminal illness, thena Relevant Life Plan (RLP) is something you should seriously consider.

Is it for you and if not why not?
If you’re an employer, looking to give the peace of mind that Death in Service cover can provide, but you don’t have enough employees to justify a group scheme, then a RLP could be just what you’ve been looking for.

If you’re a Director wanting your own individual Death in Service cover, without including your employees, then a RLP could be for you.

If you’re a high earning individual where Death in Service isn’t currently a part of your lifetime allowance of £1,055,000 (2019-2020), then considering an RLP could prove to be advantageous.

However, if your business is a sole trader, equity partnership or equity members of a Limited Liability Partnership, and doesn’t have an employer/employee relationship, then unfortunately a RLP won’t be suitable.

How does the tax saving work?
Almost all company directors who have some life assurance are paying the premiums personally. This usually this means that they are paying premiums out of pre-taxed income or they’re paying through their company and attracting a P11D benefit-in-kind penalty. However a RLP is paid directly by the company, with premiums allowable as a business expense. This obviously means that Corporation Tax Relief can be claimed and no Employer’s National Insurance is payable either. But that’s not all, the RLP policy does not count as a benefit in kind, so it doesn’t attract Income Tax or National Insurance payments either.

For example, the real cost of a £200 per month insurance policy, to a high rate taxpayer, after tax and NI is around £392 gross. By taking out a RLP, and paying premiums through the company, avoiding the income tax and NI; the remaining £192 produces an extra £98pm of net income available to the high rate taxpayer, whilst providing the same cover. This is a real saving of 49% and for a basic rate taxpayer; the saving is around 36%.

So why isn’t everyone doing this? 
It seems like a no-brainer that anyone who falls into the category of qualifying for a RLP would immediately switch to one. So why aren’t they more popular?
The simple answer is most company directors and, I’m sad to say, their accountants simply haven’t heard of a Relevant Life Plan.

That’s possibly because when the RLP was originally launched, it was only offered by one provider and the message didn’t really get out to a wide audience. Fortunately for you, you read my blogs and I’m here to tell you all about it

Who can you talk to regarding a Relevant Life Plan?
Not so long ago there was only one company who spotted the opportunity to offer a RLP. Their unique approach took advantage of pension simplifications, which meant that due to the way that life insurance was set up under trust, and because the limited company paid the premiums, no benefit in kind issues impacted upon the director or employee.

Understandably other providers held back from entering the RLP market, whilst they waited to ensure that the legislation that the RLP took advantage of was robust and unchallenged. Happily, now that the principles have gone unchallenged, a further half a dozen or so big name providers have now also entered the RLP marketplace, which helps ensure that premiums remain low.

Let’s have a quick look under the covers
The first question people generally want answering is, how much cover can I have?

Just like any other Death in Service policies, the sum assured with a Relevant Life Policy is based upon a multiple of the insured annual remuneration. As a director, remuneration is based upon salary with the addition of dividends and the addition of any bonuses.

Depending upon the provider you pick for the RLP, the multiples may vary depending upon the age of the director being insured. Usually though, you can expect the range to be anything from 10 to 25 times remuneration. So get some independent expert financial advice, before picking your RLP provider.

Get the right advice
As always, if you have any questions regarding your current or future financial situation, especially regarding a Relevant Life Policy and which provider best suits your individual needs, then please contact us at Bridgewater Financial Services where we will be delighted to help guide you through your individual options and strategies.

Smart thinking AIMed to reduce your inheritance task exposure

An IHT opportunity you may not know about

As the game of cat and mouse continues with the government and taxpayers, the scope of tax planning opportunities that are legitimately open for high earners has been steadily reducing in number and variety.

The latest industry figures show that taxpayers paid £5.3bn in inheritance tax in the last year to February 2018. That’s a rise from the £4.7bn paid in 2016/17. UHY Hacker Young, have suggested that there is a real scope to use Business Relief (BR) to further lessen Inheritance Tax (IHT) bills to HMRC. With forecasts predicting that the value of BR to have risen 8% in 2017/18, from £655m in 2016/17.

Investing in the Alternative Investment Market (AIM), with an Inheritance Tax (IHT) Plan,enables qualifying taxpayers to reduce IHT bills, through investments made in unlisted companies and other business assets.Not only that, but both investors and the government seem to like what’s on offer; as it can produce healthy savings and returns, as well as contributing to the wider economy and create jobs and growth.

An alternative to a Trust that’s worth considering

When you invest in the AIM market, most companies are eligible for Business Relief (BR); and, if held for at least two years, the shares are classed as business assets, so are completely free from IHT.

An AIM Portfolio IHT Plan can also provide you with greater flexibility than a trust and can also be less expensive and time-consuming to set up.

Unlike a Trust, you don’t have to wait for seven years in order for your assets to escape the remit of IHT, as your AIM IHT Plan qualifies for tax relief after just two years as opposed to seven – provided the AIM shares continue to be held thereafter.

Another benefit over a Trust, is that you no longer run the risk of losing access to your investments, as you retain control of your assets at all times. You are also free to increase contributions in the future, as well as possibly earning equity related returns on your AIMs investments.

You can even utilize an existing, or new, (ISA) 

You can either transfer an existing ISA, or set one up in your AIM IHT Plan. Which has the double advantage of the holdings in the AIM companies qualifying for BR. You’ll also be exempt from any income tax on dividends and capital gains tax on profitable disposals. 

How are savings on Inheritance Tax achieved? 

Providing you have held the shares for over two years then, under the current taxation rules, there us unlimited exemption from IHT on all shares that qualify for BR held by you when you pass away.  

Pretty much all of the companies traded on AIM, with the exception of those principally engaged in property or investment activities, qualify for BR. Which means that, under the current legislation, all of the applicable shares in your AIM portfolio will be seen to be business assets, which means that they are exempt from IHT if owned for more than two years.

As the IHT exemption is only available on the qualifying shares, held at the point of death, any AIM IHT Plan should be viewed as a medium to long-term investment, with a view to keeping it for a minimum of five years. 

Upon your death, your portfolio can be sold, or transferred to a spouse, without attracting IHT. 

Is an AIM IHT Plan right for you? 

If you’re concerned that a large portion of your wealth may not get to the people you wish to leave it to, because of the likely IHT charges to be made on your estate, then the AIM IHT Plan could be just what you are looking for.

As it provides you with an investment opportunity that could not only deliver a strong performance, but can also reduce your IHT liability. 

If you are considering investing in an AIM IHT Plan, then it’s important that you get the right kind of independent advice. As it should always be viewed as a long-term investment option that carries a slightly higher risk than other investments and my not necessarily be the best option for your immediate requirements.

The usual minimum investment you should consider with an AIM IHT Plan is £100,000. An additional contribution of a minimum of £25,000, or the full annual ISA contribution, can be made at any time after you start the plan.

A cautionary word about the Plan

Firstly, it’s important to appreciate that the current rate of IHT as well as the value of this option regarding IHT savings and the exemption afforded by an AIM IHT Plan could all change in the future.  

Having said that, BR has been around for a number of years and under various different Governments, and doesn’t appear to be drawing attention in any of the current manifestoes. 

It is important to recognise the long-term, and higher risk, aspect of the plan. As I would suggest that you especially consider the following points, in order to ascertain whether this type of investment fits your personal investment profile:

  • As most AIM shares tend to be illiquid, it might be more difficult to sell them. Also obtaining reliable information regarding their value and the risks they are exposed too can also more difficult to find.
  • Any AIM company can revert to private status. This would mean that shares may become impossible to trade and the value and protection offered by AIM would end. 
  • Like the FTSE, past performance is no guide to the future and the value of shares purchased on AIM (and income received) may go down as well as up; and you may not get back your full investment
  • Not all investments into the AIM market qualify for BR, plus the amount of tax relief available may change at any time. 

Need to know more?
As always, if you have any questions regarding your current or future financial situation, especially around AIM IHT Plans, then please contact us at Bridgewater Financial Services where we will be delighted to help guide you through your individual options and strategies.

Don’t sleep through the changes in your pension statement

Wake-up packs and how NOT to lose sleep over them

“Pensions Statement” is possibly the right word for those of us who have thought about these things. Wake-up pack feels a little more like a hysterical last minute plea!

However, whatever your thoughts on the name, as of Friday 1 November 2019, The Financial Conduct Authority (FCA) has determined that every pension customer should receive a Wake-up pack, from the age of 50 onwards. The pack will be provided by the pension provider and will contain a one-page summary of the pension details and should be updated every five years until the pension is eventually cashed in.

The one-page summary will include:

• The value of your private pension
• Your assumed retirement date
• The contributions made that year by you and your employer
• General information on retirement planning

All Wake-up packs will also carry a risk warning that is tailored for the individual that the packs is being sent out to. So as you will imagine, the risk warning to a 50 year old will be different to that of someone who is 75 years plus. These warnings will be tailored according to the information that the pension provider holds on the client receiving the pack.

Although providers will have free rein to include whatever risk warnings they want, most will cover the risks of pension scams, contributions and investment risk as well as an explanation of tax issues.

What’s the big idea?

The motivations and idea behind this new wake-up pack is to encourage you to consider your approaching pension and to give you the time to put more money aside to cover your retirement, if it seems necessary.

The wake-up pack will also contain information regarding the Government’s Pension Wise Service. Along with a summary of the possible advantages of shopping around when purchasing a pension in the first place, as well as the best practice to follow when exploring this. Assuming you haven’t already covered all of this off with your Financial Adviser.

Packs will start to arrive:
• Within two months of you reaching your 50thBirthday
• Four to ten weeks before reaching the age of 55 years
• After 55 they will arrive every five years until your pension is cashed in

Additional triggers for the packs are:
• When you ask for a retirement quotation (if it’s more than six months before you intend to retire)
• When you are considering, or have stopped, an income withdrawal arrangement
• When you decide to take further benefits from your pension.
• When you request to access your benefits for the first time

Although packs do not need to be sent out, if you have already received one in the last year. Which is good news for the trees, as all wake-up packs must highlight that guidance is available from Pension Wise and, apart from the one sent at aged 50, will also have to be accompanied by a brochure from the Money Advice Service.

So has your financial adviser been asleep then?

You would assume that all these issues and more would have been taken care of by your financial adviser – and in most cases, you’d be right (depending upon who your adviser is).

So don’t worry, as these new requirements are mainly aimed at helping non-advised clients make better decisions for themselves. If however there is anything in your wake-up pack that you have any questions about, then don’t hesitate to contact your adviser and ask.

As always, if you have any questions regarding your current or future pension strategies, then please contact us at Bridgewater Financial Services where we will be delighted to help.

Dealing With Redundancy – what to do right now.

TC Plane
What you need to do, if you are facing redundancy

With the shock collapse of Thomas Cook, leaving over 21,000 people now facing certain redundancy and countless thousands working in support industries with an equally uncertain future, I thought that I might share some thoughts on what to do if you are facing immediate redundancy.

What to do right now

Finding yourself facing redundancy may have a profound psychological effect upon you, but it’s also a time when you need to be strong and take some immediate action.

If you are being made redundant, then you should spend today doing the following things as a matter of urgency. Taking back control of things starts here:

Claim everything you are entitled to. Nobody want’s to sign on, but you’ve been paying into the system; and it’s there for your benefit too. So sign on today, as you may be eligible to claim benefits such as Universal Credit, whilst you are looking for a new job.

There are also other benefits such as Housing Benefits, Council Tax Reductions, Jobseeker’s Allowance and Tax Credits that may be available to you. Here’s a link to the Citizens Advice Benefit Checker, that will quickly show you what benefits you are entitled to:
https://www.citizensadvice.org.uk/benefits/benefits-introduction/what-benefits-can-i-get/

Deal with your mortgage. As you won’t know just how long you will be without an income, notify your mortgage lender (and other lenders) today. That way, if you have problems keeping up payments, they will likely work with you to overcome short-term difficulties and may offer things like payment holidays, or a switch to interest only repayments. They are usually helpful and sympathetic, but they can only offer assistance if they are aware of what’s going on – so tell them as quickly as possible.

Claim on any policies. If you took out insurance against being made redundant, that should cover your mortgage and loan repayments, so claim today. The process of being paid out may take some time, so start the ball rolling now, to help avoid missed payments whilst you wait for the insurance money.

Work out your budget. Calculate what your assets and liabilities are, along with other household income and expenditure. That way you’ll get a clear picture of your current financial standing. Cut any unnecessary expenditure and prioritise remaining expenses in order of importance. Knowing exactly where you are financially will significantly help with any negative emotions you may be having.

Once you’ve done the basics, then it’s time to tackle the rest

I can’t stress how important it is to have done the above points – for both your financial and mental health. Once you’ve dealt with immediate actions, then it’s time to think about the following:

Get professional advice. If the whole situation seems daunting, reach out for some help. Talk to a properly qualified financial planner. You don’t know what you don’t know – and getting expert advice could save you a great deal of stress and money.

Clear existing debts. If you can, clear any outstanding credit cards or loans. Especially because the cost of most debts vastly exceeds any interest you’ll be earning on savings.

But keep access to emergency funds just in case you need them.

Those you can’t clear, move to the cheapest rate. Your credit score may take a post redundancy knock, so now’s the time to move debt to the best possible rate, such as the interest free balance transfers of certain credit cards

Once you’ve received your redundancy payment

Following the receipt of your final lump sum, there are one or two things you may want to consider.

Top up your pension. You could choose to take advantage of the tax relief available on the first £30,000, as you top up your existing pension from your redundancy payment.

Invest for your future. If you cleared your debts, and have a nest egg, you may want to consider your redundancy payment as a windfall and use it to make some longer-term investments.

Early retirement. You may even be in a position that your financial situation allows you to consider an early retirement, or at least a significant step away from the world of work.

Redundancy is a strange and stressful time

Facing redundancy can be emotionally draining and it’s easy to try to avoid meeting it head on. However, if you want to lessen the impact it may have on you, both psychologically and financially, then early planning and preparation is the answer.

Sorting out your existing finances and planning for the short and long-term future are fundamental and very wise moves. Talk to your financial adviser about the points I’ve highlighted in this blog. Then explore those areas of your individual finances that will also be impacted.

It’s not the end of the world, on the contrary, it’s a new beginning; and taking charge of the situation is your first step down the road to a brighter future.

As always, if you have any questions regarding your current or future financial situation, especially if you think that redundancy may be a future possibility, then please contact us at Bridgewater Financial Services where we will be delighted to help guide you through your individual options and strategies.

Some helpful links:

https://www.citizensadvice.org.uk/work/leaving-a-job/redundancy/preparing-for-after-redundancy/

https://www.gov.uk/redundancy-your-rights

http://www.executivestyle.com.au/what-they-dont-tell-you-about-being-made-redundant-gwacfd

Market Volatility a lesson from NASA

aldrin

Don’t Take A Giant Leap

Back on the 20thJuly we celebrated the 50thanniversary of the moon landings. I was totally in awe of Neil Armstrong, who took over the piloting of Eagle, from the computer once he noticed that the preselected landing place wasn’t going to be suitable.

Both he and Buzz Aldrin calmly worked together, whilst the vital fuel that would get them home was used to pilot Eagle over the rocky surface to a safe point of touchdown.

It was this calm, panic free approach that saved their lives, the mission and the hopes of the whole planet.

They trusted what they knew to get them through what must have been a terrifying descent. But they stuck to the plan established by NASA and they achieved what they’d all set out to accomplish.

I can’t help thinking that this idea of sticking to a plan, no matter how appealing it may be to abandon it, is a lesson for us all in the current investment markets, as we go through periods of increased volatility.

I say this because, unlike Apollo 11, we are not actually in uncharted territory. History shows us that volatility is a normal function of the markets.

Our long-term journey as investors will have highs and lows. However we should no more emotionally jump from a growing market than we should from a declining one. As reacting emotionally to market volatility could be far more harmful to your portfolios performance, than the market drop itself.

Here’s something to remember

This interesting graph showing the Dimensional UK Market Index returns by year (from 1956 – 2018*), should help put things in some perspective. As we can see, the markets have provided positive returns for investors for 47 of the 62 years shown (that’s 75% of the time).

So whilst it is sometimes difficult to remain calm during a market decline, it is however important to remember that volatility really is a normal part of investing.

Investors, who do seem to be able to time the market, usually do so with more luck than judgment. With the general wisdom suggesting that the big returns in the total performance of individual stocks over time, are usually produced in a small handful of days.

As investors can never really accurately predict when these days will come along, the prudent strategy would seem to suggest that remaining invested during these periods of volatility, rather than abandoning the stocks, means that investors won’t be on the sidelines on the days when the strong returns occur.

 

Screen Shot 2019-09-23 at 19.53.06

In a changing market, knowledge is power

Hear are the most frequently investment questions I get asked in times of volatility:

I’ve been looking at funds with strong past performances; can I assume that they will do well in the future?
Whilst some investors are known for selecting mutual funds based on past returns, research suggests that most US mutual funds in the top 25% of previous five-year returns did not maintain that ranking in the following five years.

So the short answer would be: No, past performance is just that, history. It offers little insight into possible future performance.

Is being a successful investor all about out-thinking the market?
The short answer is to let the markets do the thinking for you. It’s a fair assumption that people want a positive return on any capital they invest. Over time history shows us that the equity and bond markets have provided growth of wealth that has more than offset inflation. So instead of fighting the markets and trying to out-think them, let them work for you. Remember, financial markets reward long-term investors.

Should I think of stepping out of the UK and exploring international investing?
It’s a good question. We all know that diversification can help reduce risks and that diversifying only within your home market limits that benefit. Not only does global diversification extend your investment opportunity; but by holding a globally diversified portfolio, you are better positioned to seek returns wherever they occur.

To give you an idea of the opportunity, according to MSCI UK and ACWI Investable Market Index (IMI), the UK is one country with 364 stocks; whilst the global opportunity for investments ranges across 47 countries with 8,722 stocks.

Will constantly changing my portfolio help me achieve better returns?
As it’s almost impossible to know what market segments will outperform the others, it’s better to avoid unnecessary changes that can be costly.

Can my emotions affect my investment decisions?

There is a vast body of psychological research that shows that we struggle to separate our emotions when investing our money. Just remember that markets go up and down. So kneejerk reactions are usually poor investment decisions.

Every time I hear the news, I’m tempted to make changes to my portfolio,
is that a good idea?

Day to day commentary can make us question our investment discipline. Some news will stir anxiety about the future, whilst other news tempts us to chase the latest faddy investments.

My advice is to always consider the source and to keep your long-term objectives in focus.

I feel like I need to do something – so, what should I be doing?

Get another perspective on things, especially and independent and expert one. Talk with your financial adviser who can help you focus on actions that add value.
Sticking to actions that you know you can control can certainly lead to a better investment experience.

  • Create an investment plan to fit your needs and risk tolerance.
  • Structure a portfolio along the dimensions of expected returns.
  • Diversify globally.
  • Manage expenses, turnover, and taxes.
  • Stay disciplined through market dips and swings.

Stay on mission

Neil and Buzz didn’t panic. They didn’t cancel the mission, because things looked tough. They trusted in the plan. They stuck to a pre-agreed course of action and rode out the challenges that faced them on the descent to their ultimate goal.

I totally appreciate that market volatility can be a nerve-racking time for investors. However, reacting with your emotions and altering long-term investment strategies could prove more harmful than helpful.

Sticking to a well-thought- out investment plan, ideally agreed upon in advance of these periods of volatility, you’ll be better prepared to remain calm during periods of short-term uncertainty.

As always, if you have any questions regarding your current or future investment strategies, then please contact us at Bridgewater Financial Services where we will be delighted to help.

* Past performance is not a guarantee of future results.

 

Tax Year End Planning Checklist

The end of the tax year is approaching again; therefore it’s time to think about maximising allowances, minimising taxes and taking all the other steps to ensure your tax position will be as favourable as possible going forward. Although there are still almost two months left, it’s better to start now rather than leave it all to the last days, for some of the necessary steps can take some time to process.

When going through the checklist below, you may find this page useful. It contains all the key thresholds, rates and allowances for 2015-16 as well as 2016-17.

Income Tax and National Insurance

If possible, delaying an invoice (if you are self employed), salary, bonus or dividend payment (if you have a company) until 6 April can save, or defer, a considerable amount of taxes. Company owners should also find the right mix of salary and dividends to minimise taxes. Don’t forget to include all of them when making the decision – personal income tax, both employee’s and employer’s NI, corporation tax and dividend tax.

The key figures are:

  • £5,824 = Lower Earnings Limit – minimum to qualify for State Pension and other benefits
  • £8,060 = Primary Threshold – employee’s NI (12%) kicks in
  • £8,112 = Secondary Threshold – employer’s NI (13.8%) kicks in
  • £10,600 = Personal Allowance – basic rate income tax (20%) kicks in
  • £31,786 = higher rate income tax (40%) kicks in

Many company owners choose to pay themselves a salary equal to the Primary or Secondary Threshold, in order to avoid paying NI, and take the rest in dividends. However, if your company is eligible for the Employment Allowance (first £2,000 of employer’s NI free), it could make sense to pay yourself up to the Personal Allowance (£10,600) in salary. Of course, your other income, family situation and other circumstances could alter the figures and must always be considered.

Pension Contributions

Making pension contributions can save you a lot of money in taxes, as long as you stay within your annual allowance, which is £40,000 for the 2015-16 tax year. At the moment, pension contributions are subject to tax relief at your marginal tax rate, which makes them particularly attractive to higher and additional rate taxpayers.

Normally you need to make the contributions before the tax year end (5 April), but this time it is recommended to act before the Budget Statement, which is due on 16 March.

There is high risk that Chancellor George Osborne will announce important changes which may affect the tax relief. The exact outcome is not known, but experts have been speculating about a flat rate replacing the marginal tax rate (this would effectively reduce or eliminate the tax relief for higher and additional rate taxpayers). The Chancellor has also mentioned the idea of cancelling the pension tax relief altogether and using a completely new mechanism for taxing pensions in the future, perhaps similar to ISAs (after-tax money in and tax-free money out).

It is not clear if this will eventually materialise and when any changes would come into effect. However, pension tax relief has clearly been one of the Chancellor’s primary targets in the effort to reduce the deficit and raise tax revenue. In light of the uncertainty, the safest approach is to make pension contributions before 16 March to avoid potential disappointment.

Note that if you didn’t use your full allowance in the three previous tax years, you might still be able to get that money in, on top of this year’s £40,000. The previous three years’ allowances were £50,000, £50,000 and £40,000, respectively. One condition is that your total contribution must not exceed your earned income for the current tax year. Another thing to watch out for is the lifetime allowance (currently £1.25m, but falling to £1m in April), as exceeding that could be costly when you retire.

NISAs

If you have the cash, you should always use your annual NISA allowance to the maximum. A NISA is a tax wrapper which allows you to build savings and investments without incurring taxes on income and capital gains going forward. The allowance is £15,240 for 2015-16 and it is use it or lose it – if you don’t deposit the money by 5 April, this year’s allowance is gone forever. You may also want to use your partner’s and your children’s allowances (£4,080 per child under the so called “Junior ISA”).

If you have existing cash ISA accounts, now is also a good time to review them and check the interest rates. Banks like to lure savers with attractive rates, only to slash them after 12 months or some other period. In such case you may want to transfer the funds elsewhere. There are two things to keep in mind:

  • Always transfer from ISA to another ISA directly. If you do it via your regular bank account, once you have withdrawn the money, it loses the ISA status (and withdrawals do not increase your annual allowance – that will only change the next tax year).
  • Each tax year you can only deposit money to one cash ISA account and one stocks and shares ISA account.

Capital Gains Tax

You can often save on capital gains tax even outside ISAs. There is an annual CGT allowance, which makes the first £11,100 (for 2015-16) of capital gains tax-free. You need to realise these by the tax year end; otherwise the current year’s allowance is lost forever.

Depending on the investments you are holding, whether there are unrealised gains or losses and whether you want to sell any of them, the decisions to make can become quite complicated, but may save you a lot in taxes. A potentially large CGT bill can be reduced (by crystallising losses) or deferred (if you wait with the sale until 6 April). On the other hand, if you are well within your CGT allowance you can crystallise gains to reduce future taxes.

Always keep in mind that tax issues are an integral part of any investment strategy (and tactics), as taxes can affect net return substantially. At the same time, don’t forget to consider transaction costs.

Inheritance Tax

If your estate is likely to exceed the IHT threshold (£325,000 for individuals or £650,000 for couples), you may want to take steps to reduce it. Estate planning can obviously become very complex, but the easiest thing you can do is make gifts to your beneficiaries. These are subject to annual allowance of £3,000. If you didn’t use the allowance last year, it can still be used now (making it £6,000 in total), but after the tax year end it is lost. As long as you live for seven years after the gift, it is out of your estate.

Other Considerations

The above are the most common points which apply to most people. Depending on your circumstances, there may be other opportunities, further allowances and other things to do before the tax year end. In any case, it is best to discuss your entire financial and tax position with your adviser, as some actions might have unexpected consequences. Don’t forget the key date is 5 April, with the exception of pension contributions where it is safer to act before 16 March this year. Also remember that some actions will require longer time to process and don’t leave everything to the last days.

 

 

 

 

Bear Market Coming? Stick with Your Strategy

Following a multi-year rally, 2015 wasn’t particularly successful in the global markets and, so far, the start of the new year hasn’t been any good either. The UK’s FTSE 100 index is below 6,000, lowest in more than three years. It’s times like this when various doomsday predictions start to appear, warning against events “worse than 2008”, using words such as “crash” and “meltdown”, and pointing to factors such as rising interest rates, growing political tensions, China, rising commodity prices, falling commodity prices and many others.
The truth is that no one really knows what is going to happen. Not the TV pundits, not the highly paid bank strategists and stock analysts, not even the Prime Minister or the Bank of England Governor.
That said, when you have significant part of your retirement pot invested, it is natural to feel uneasy when you hear such predictions, especially if they come from an analyst who got it right last time and correctly predicted some previous market event (he was lucky).
When the markets actually decline and you see your portfolio shrinking in real time, the concerns may become unbearable. Fear and greed get in charge, both at the same time. It is tempting to think about selling here and buying the stocks back when they are 20% lower a few months from now. Easy money, so it would seem. Nevertheless, that would be speculating, not investing. The problem with the financial industry (and the media) is that these two are confused all the time.
Time in the Market, Not Timing the Market
While some people have made money speculating, academic research as well as experiences of millions of investors have shown that it is a poor way to save for retirement. When a large number of people take different actions in the markets, some of them will be lucky and get it right purely due to statistics (luck). However, it is extremely difficult to repeat such success and consistently predict the market’s direction with any accuracy.
In the long run, the single thing which has the greatest effect on your return is time, not your ability to pick tops and bottoms. The longer you stay invested in the market, the more your wealth will grow. You just need the patience and ability to withstand the periods when markets fall, because eventually they will recover and exceed their previous highs.
Time Horizon and Risk Tolerance
The key decision to make is your risk tolerance – how volatile you allow your portfolio to be, which will determine your asset allocation. While personality and other personal specifics come into play, the main factor to determine your risk tolerance is your investment horizon. The longer it is, the more risk you can afford and the more volatility your portfolio can sustain. If you are in your 40’s and unlikely to need the money in the next 20 years, you should have most of your retirement pot in equities. If you are older and closer to retirement, your portfolio should probably be more conservative, because you might not have the time to wait until the markets recover from a possible crash. It is important to get the risk tolerance and the asset allocation right (an adviser can help with that) and stick with it.
How to Protect Your Portfolio from Yourself
Because the above is easier said than done, here are a few practical tips how to protect your retirement pot from your emotions and trading temptations:
1. Have a written, long-term investment plan. It is human nature to consider written rules somehow harder to break than those you just keep in your head. It is even better if you involve your adviser to help you create the plan. Not only is an adviser better qualified and more experienced in the investment process, but another person knowing your rules makes them even harder to break.
2. Do not check fund prices and the value of your portfolio every day. This doesn’t mean that you shouldn’t review your investments regularly. But the key is to make these revisions planned and controlled, rather than emotion-based. You will be less likely to make impulsive decisions, which more often than not are losing decisions.
3. Maintain an adequate cash reserve. This should be enough to meet any planned short-term expenditure and also provide a reserve for unexpected expenses. It will help you avoid the need to encash investments at a time when investment values are low.

Would you like to discuss this article with an adviser?

The Seven Roles of an Advisor

What is a financial advisor for? One view is that advisors have unique insights into market direction that give their clients an advantage. But of the many roles a professional advisor should play, soothsayer is not one of them.

The truth is that no-one knows what will happen next in investment markets. And if anyone really did have a working crystal ball, it is unlikely they would be plying their trade as an advisor, a broker, an analyst or a financial journalist.

Some folk may still think an advisor’s role is to deliver them market-beating returns year after year. Generally, those are the same people who believe good advice equates to making accurate forecasts.

But in reality, the value a professional advisor brings is not dependent on the state of markets. Indeed, their value can be even more evident when volatility, and emotions, are running high.

The best of this new breed play multiple and nuanced roles with their clients, beginning with the needs, risk appetites and circumstances of each individual and irrespective of what is going on in the world.

None of these roles involves making forecasts about markets or economies. Instead, the roles combine technical expertise with an understanding of how money issues intersect with the rest of people’s complex lives.

Indeed, there are at least seven hats an advisor can wear to help clients without ever once having to look into a crystal ball:

The expert: Now, more than ever, investors need advisors who can provide client-centred expertise in assessing the state of their finances and developing risk-aware strategies to help them meet their goals.

The independent voice: The global financial turmoil of recent years demonstrated the value of an independent and objective voice in a world full of product pushers and salespeople.

The listener: The emotions triggered by financial uncertainty are real. A good advisor will listen to clients’ fears, tease out the issues driving those feelings and provide practical long-term answers.

The teacher: Getting beyond the fear-and-flight phase often is just a matter of teaching investors about risk and return, diversification, the role of asset allocation and the virtue of discipline.

The architect: Once these lessons are understood, the advisor becomes an architect, building a long-term wealth management strategy that matches each person’s risk appetites and lifetime goals.

The coach: Even when the strategy is in place, doubts and fears inevitably will arise. The advisor at this point becomes a coach, reinforcing first principles and keeping the client on track.

The guardian: Beyond these experiences is a long-term role for the advisor as a kind of lighthouse keeper, scanning the horizon for issues that may affect the client and keeping them informed.
These are just seven valuable roles an advisor can play in understanding and responding to clients’ whole-of-life needs that are a world away from the old notions of selling product off the shelf or making forecasts.

For instance, a person may first seek out an advisor purely because of their role as an expert. But once those credentials are established, the main value of the advisor in the client’s eyes may be as an independent voice.

Knowing the advisor is independent—and not plugging product—can lead the client to trust the advisor as a listener or a sounding board, as someone to whom they can share their greatest hopes and fears.

From this point, the listener can become the teacher, the architect, the coach and ultimately the guardian. Just as people’s needs and circumstances change over time, so the nature of the advice service evolves.

These are all valuable roles in their own right and none is dependent on forces outside the control of the advisor or client, such as the state of the investment markets or the point of the economic cycle.

However you characterise these various roles, good financial advice ultimately is defined by the patient building of a long-term relationship founded on the values of trust and independence and knowledge of each individual.

Now, how can you put a price on that?

Gravel Road Investing

Owners of all-purpose motor vehicles often appreciate their cars most when they leave smooth city freeways for rough gravel country roads. In investment, highly diversified portfolios can provide similar reassurance.

In blue skies and open highways, flimsy city sedans might cruise along just as well as sturdier sports utility vehicles. But the real test of the vehicle occurs when the road and weather conditions deteriorate.

That’s why people who travel through different terrains often invest in a SUV that can accommodate a range of environments, but without sacrificing too much in fuel economy, efficiency and performance.

Structuring an appropriate portfolio involves similar decisions. You need an allocation that can withstand a range of investment climates while being mindful of fees and taxes.

When certain sectors or stocks are performing strongly, it can be tempting to chase returns in one area. But if the underlying conditions deteriorate, you can end up like a motorist with a flat on a desert road and without a spare.

Likewise, when the market performs badly, the temptation might be to hunker down completely. But if the investment skies brighten and the roads improve, you can risk missing out on better returns elsewhere.

One common solution is to shift strategies according to the climate. But this is a tough, and potentially costly, challenge. It is the equivalent of keeping two cars in the garage when you only need one. You’re paying double the insurance, double the registration and double the upkeep costs.

An alternative is to build a single diversified portfolio. That means spreading risk in a way that helps ensure your portfolio captures what global markets have to offer while reducing unnecessary risks. In any one period, some parts of the portfolio will do well. Others will do poorly. You can’t predict which. But that is the point of diversification.

Now, it is important to remember that you can never completely remove risk in any investment. Even a well-diversified portfolio is not bulletproof. We saw that in 2008-09 when there were broad losses in markets.

But you can still work to minimise risks you don’t need to take. These include exposing your portfolio unduly to the influences of individual stocks or sectors or countries or relying on the luck of the draw.

An example is those people who made big bets on mining stocks in recent years or on technology stocks in the late 1990s. These concentrated bets might pay off for a little while, but it is hard to build a consistent strategy out of them. And those fads aren’t free. It’s hard to get your timing right and it can be costly if you’re buying and selling in a hurry.

By contrast, owning a diversified portfolio is like having an all-weather, all-roads, fuel-efficient vehicle in your garage. This way you’re smoothing out some of the bumps in the road and taking out the guesswork.

Because you can never be sure which markets will outperform from year to year, diversification increases the reliability of the outcomes and helps you capture what the global markets have to offer.

Add discipline and efficient implementation to the mix and you get a structured solution that is both low-cost and tax-efficient.

Just as expert engineers can design fuel-efficient vehicles for all conditions, astute financial advisors know how to construct globally diversified portfolios to help you capture what the markets offer in an efficient way while reducing the influence of random forces.

There will be rough roads ahead, for sure. But with the right investment vehicle, the ride will be a more comfortable one.

Article by

Jim Parker, Vice President, Dimensional Fund Advisers