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Diversification in Financial Planning

Posted on: March 14th, 2022 by fwAdmin

Diversification in Financial Planning

 

Diversification is at the heart of good long term financial planning, both in the products you use and the investments you make. In this blog post I look at the benefits of combining different financial products to meet your long-term objectives in a tax efficient way.

Typically, the main objective of your investment portfolio is to achieve the highest possible return in line with your attitude to risk. Tax will always have an impact on this return. Using the principle of diversification when structuring your investment portfolio means you can take advantage of any tax allowances you are entitled to. This means you can maximise the returns of your investment portfolio.

Each year there are various tax allowances and exemptions that you can use to make your investment portfolio more tax efficient. Used consistently over a long period of time, you can save substantial amounts of tax.

Your investments can be wrapped or unwrapped. A tax wrapper (which is a vehicle that can be wrapped around a portfolio of assets) determines how the gains and returns of the investments are treated for tax purposes. An ISA and a pension are both examples of a tax wrapper.

As financial planners, we look to make use of your available tax allowances and exemptions each year to reduce your current and future tax liabilities. In the following examples, I show how using the ISA and pension tax wrappers, and unwrapped investments can achieve this:

If you are over the age of 16 (or 18 for a Stocks & Shares ISA), you can contribute up to £20,000 into an ISA in the 2021/22 tax year. If you have children under the age of 18 you can also contribute up to £9,000 into a Junior ISA. Once in the ISA, any growth, dividends or interest is tax-free. Withdrawals from the ISA are also tax free.

Each year we look to make use of our clients’ ISA allowances, and when taking into account investment growth you can build up substantial funds within your ISA. Funds held in an ISA can then be used to supplement income in later life in a tax efficient way, or they can be used for one off expenses.

Depending on your earnings, the annual allowance for a pension in the 2021/22 tax year is up to £40,000 gross. Once in the pension wrapper, any growth, dividends or interest is tax-free.

Not only are funds within a pension held in a tax-free environment, but contributions are also subject to tax relief as well, at an individual’s highest marginal rate of income tax (20%/40%/45%). A pension can be a very effective retirement savings vehicle.

While pension funds are not accessible until age 55 (57 depending on your date of birth), throughout your life you can build up a substantial fund to draw on in retirement. Or alternatively, if you have also built-up funds across a range of investment products, you may not need to draw from your pension and you can pass it on to the next generation without it being assessed for inheritance tax.

There is no limit to how much you can put into an investment account. Income from the assets held in the investment account may be subject to dividend or income tax. Any growth in the value of the assets held may be subject to capital gains tax once sold.

In the case of an investment account, you can use the allowances as follows:

The examples above show how splitting your money between different investment products can reduce your tax liability both now and in the future. Structuring your investment portfolio using both wrapped and unwrapped investments also gives you flexibility when you come to draw an income from your funds in retirement.

As financial planners, we see a broad range of client circumstances and there is no one size fits all approach, but generally making use of your available tax allowances and exemptions where possible in each tax year is a sensible starting point for most clients.

Where a client’s circumstances become more complex, there are a broad range of additional product wrappers that we can use. These include, but are not limited to, onshore bonds, offshore bonds, Venture Capital Trusts, Enterprise Investments Schemes and Seed Enterprise Investment Schemes. The suitability of each of these products depend on a client’s circumstances, objectives and appetite for risk. These products are not suitable for the majority of investors and are considered high risk, they can invest in relatively new startup companies and may be subject to time constraints to benefit from tax. However, when used appropriately, they can help to diversify a client’s portfolio in a tax efficient way and help them achieve their financial planning objectives.

If you would like further information on anything covered in this article, please get in touch.

 

This article is for information only. Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation which is subject to change. Levels, bases of and reliefs from taxation may be subject to change and their value depends on the individual circumstances of the investor. The Financial Conduct Authority does not regulate Tax Advice.

Geopolitical Uncertainty: Russia & Ukraine

Posted on: March 4th, 2022 by fwAdmin

Events unfolding in the last few days with the Russian invasion of Ukraine have been very unsettling for all of us. It is important for us to also consider the impact of this situation from an investment perspective on behalf of our clients. Markets have unsurprisingly reacted to the situation globally. Whilst we recognise that investors may be feeling very nervous about the backdrop of rising inflation and heightened geopolitical threats, we don’t think this is a time to take unconsidered investment decisions. Russia’s invasion of Ukraine has undoubtedly shaken markets which have already been in a period of higher volatility since the beginning of the year. As equity markets have sold off, some investors may consider selling their investments, but with a highly unpredictable course ahead, it would be difficult to take such action with a level of confidence in the outcome. As a firm, we have always believed that “timing the markets” is fraught with danger and can sometimes cause more harm than good. In the short term, you would be crystallising losses based on market momentum. This is not something we would recommend.

 

All clients are likely to see some level of short-term impact in their investment portfolios. However, this might not be in a way they might expect on reading the dramatic headlines which focus primarily on the main equity market index falls. Importantly, we aim to build diversified portfolios for our clients and in doing so, provide a balance of risk to macroeconomic or geopolitical events. There will be some companies, sectors, geographies, and asset classes which will face a direct negative impact from this war. Others will be more insulated from the effects of this situation. For obvious reasons, Russia’s stock market has fallen dramatically since the 24th of February. Broader global equity markets have also felt the impact of a “flight to safety” in the wake of Russia’s actions.

 

Oil/energy prices have risen sharply. As a key exporter of oil & gas but also agricultural commodities, sanctions against Russia will have a knock-on effect on a number of industries. As would any retaliatory action to disrupt supplies of essential commodities from Russia. Some countries are more reliant on these exports than others. The web of globalisation is complex, and the initial momentum driven trades made at the start of this crisis do not reflect the difficulties which would face far reaching parts of the global economy in a protracted war.

 

Fixed income markets have had a tough period in recent months, as markets adjust to higher inflation and the prospect of higher interest rates. The yields on sovereign bonds have reversed in recent days, as this asset class reasserts its role as a “safe haven” investment. With the prospect of higher energy costs feeding inflation in the coming months, the threat of higher interest rates remains on the table, but the pace of those rises may now change to accommodate the risk of an economic slowdown. In any case, it would not be surprising to see yields climb again in the coming weeks or months. Other “safe haven” assets which include gold and the US dollar have risen in recent days.

 

Against this backdrop we are in contact with the managers of the investment funds in your portfolios and there has been a strong level of communication across the board. The message we are receiving is consistent and reassuring. They are not making “knee-jerk decisions”. They are reviewing their portfolios and revisiting the investment case for underlying holdings. They remain focused on their investment process, discipline and delivering their long-term objectives.

 

We expect volatility across asset classes to continue until the military and political situation stabilises. Our client portfolios will reflect the risk tolerance and appetite of the individual client and therefore, there will be varying degrees of exposure to numerous assets classes and geographic regions. The most important factor in building our client portfolios is diversification and balance of risk and this is something that we will continue to focus on regardless of the geopolitical or macroeconomic backdrop. The importance of this strategy can sometimes be best demonstrated in these times of market stress. If you would like to discuss the positioning of your own portfolio, please contact a member of the team to discuss this in more detail.

 

2021/22 Tax Year Allowances

Posted on: February 21st, 2022 by fwAdmin

2021/22 Tax Year Allowances

As we approach the end of the 2021/22 tax year, it is useful to review the annual allowances available to individuals.

In the run up to each budget, headlines are littered with predictions of tax rises and speculation as to which areas of legislation might be revisited. Most of the post-COVID changes have been relatively muted, but with UK government debt standing at 103.6% of GDP (£2,223 Bn) as of March 2021, there are increasing calls to cut spending, raise taxes, or a combination of both.

It is therefore more important than ever to ensure you understand what your personal tax allowances are, and whether you can make use of them.

In this article, we have highlighted five of the most commonly discussed allowances.

Personal Allowance – £12,570

The first £12,570 of income in the 2021/22 tax year will fall within an individual’s Personal Allowance and be free from income tax. This figure is set to be frozen until 5th April 2026, having previously increased in line with inflation.

It’s worth noting that for individuals with adjusted net incomes over £100,000, the Personal Allowance is reduced by £1 for every £2 it breaches that threshold. This results in an effective 60% Income Tax rate for individuals with adjusted net incomes between £100,000 and £125,140.

For individuals who do fall into this ‘Personal Allowance trap’, it is possible to reduce your adjusted net income by making pension contributions. This can often work out to be extremely tax efficient as you will obtain tax relief on the pension contribution as well as benefit from having some or all of your personal allowance reinstated.

Another consideration for married couples is to ensure that income producing assets are held in a way which makes use of both partners’ allowances.

ISA Allowance – £20,000

ISAs (Individual Savings Accounts) are a fantastic tool to shelter assets from Income Tax and Capital Gains Tax. As the rules currently stand, an individual can contribute up to £20,000 into ISA products each tax year. Investments held within a Stocks and Shares ISA ‘wrapper’ will grow free of tax and can be withdrawn without triggering a tax liability.

There are two ISA products where the £20,000 limit is not applicable:

Junior ISA – Is available to children under the age of 18 and has a reduced annual limit of £9,000.

Lifetime ISA (LISA) – Is a product designed to be used either towards a first property purchase, or a retirement savings vehicle which benefits from a 25% government bonus. There is an annual LISA limit of £4,000 which counts towards the overall £20,000 ISA limit. Only individuals aged between 18 and 40 can open a LISA, however you are able to make contributions until your 50th birthday. You cannot access the LISA funds without penalty unless you are purchasing your first property, aged 60+ or terminally ill. It is important to understand the terms of LISA products, such as limitations on the values of first house purchases, to avoid incurring an unexpected 25% penalty.

Pension Annual Allowance – Up to £40,000

The amount that an individual can contribute into pension without suffering an ‘annual allowance charge’ is capped at £40,000 (gross) each tax year. There are several caveats to this rule and this area of pension planning can involve some complex calculations. The main points to be aware of are as follows:

Pension contributions benefit from tax relief (and potentially National Insurance savings) at the point you make the contribution. Any contributions that are invested will be able to grow free of tax. With legislation as it currently stands, pensions sit outside of your estate for Inheritance Tax purposes, making them an extremely valuable tool to those that might be facing an IHT bill upon death.

It’s important to remember that any capital contributed into pension wrappers cannot be accessed until age 55, with this rising to 57 from 2028 and likely to increase in future years.

Capital Gains Tax Allowance – £12,300

Capital Gains Tax (CGT) rates have been the subject of much speculation since the Office of Tax Simplification issued a paper in November 2020 recommending that the government should consider aligning Income Tax and CGT rates.

An individual has a personal CGT allowance of £12,300 in the 2021/22 and 2022/23 tax years and capital gains that fall within this threshold are exempt from CGT.

Gifts between married couples are exempt from CGT which often presents a planning opportunity where one partner is not making use of their CGT allowance.

Dividend Allowance – £2,000

An individual does not need to pay tax on the first £2,000 of their dividend income, regardless of the level of their non-dividend income.

For business owners, this presents an opportunity to extract cash from the business free of tax by declaring dividends.

Investments that are taxable and not held within a tax ‘wrapper’ such as a pension or ISA may also generate dividends. It’s important to regularly review whether these are structured in a tax efficient manner, particularly for married couples who will each have their own dividend allowance.

Dividends in excess of the Dividend Allowance will be subject to the below rates in the 2022/23 tax year, a 1.25% increase from the current position for each band:

Basic Rate Taxpayers – 8.75%

Higher Rate Taxpayers – 33.75%

Additional Rate Taxpayers – 39.35%

 

 

Your capital is at risk. The value of your investment (and any income from them) can go down as well as up and you may not get back the full amount you invested. Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.

This article is for information only. Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation which is subject to change. Levels, bases of and reliefs from taxation may be subject to change and their value depends on the individual circumstances of the investor. The Financial Conduct Authority does not regulate Tax Advice.

Pension Pitfalls Part 3 – Approaching Retirement

Posted on: February 7th, 2022 by fwAdmin

Pension Pitfalls

Part 3 – Approaching Retirement

This post is the third in our ‘pension pitfalls’ mini-series. The series is intended to highlight some of those areas which we feel can catch individuals out when it comes to their pension planning, or could mean that the tax advantages of the pension aren’t being fully utilised.

  1. Triggering the Money Purchase Annual Allowance (MPAA)

When income is drawn flexibly from a pension, this triggers the Money Purchase Annual Allowance (MPAA). This reduces the amount that can be contributed to a pension to just £4,000 per tax year (including both personal and employer contributions). Any contributions in excess of this limit would be taxed at an individual’s marginal income tax rate (20%/40%/45%).

With increased pension flexibility and income-drawing options for plans, individuals may look to use some of their pension capital whilst still working and accruing pension contributions on a month-by-month basis (say through the workplace pension offered by their employer). By way of example, an individual earning over £50,000 of salary with 8% pension contributions (4% employer, 4% personal), total pension contributions would exceed £4,000 per tax year.

When not taking advice, it can be quite tricky to navigate the world of pension legislation and we do come across individuals who have triggered the MPAA without being aware of this, and as a result have since contributed in excess of this allowance to their pensions. Some of the main situations where the MPAA could be triggered are:

  1. Understanding Income Options

When it comes to drawing income from pensions, there are a number of ways in which this can be actioned. In broad terms, these ways are split into two separate categories:

There is no ‘one size fits all’, and when it comes to the most suitable option for an individual then consideration must be given to personal circumstances, objectives, wider wealth and attitude to risk (to name just a few things!). Purchasing an annuity would give comfort and security over the level of income which will be paid during retirement, but there would be no flexibility to amend this, whereas drawdown offers the flexibility to amend the income level drawn but carries the risk of managing a fund to last for your full retirement (adviser input certainly needed!). For many, a hybrid set up combining both elements will likely be a strong solution.

It is important to be aware than some pension plans may not offer all of the flexible income drawing options, and it may be necessary to move your fund to an alternative contract if this is deemed to be appropriate. As you approach the retirement age of your pension plan, the plan provider will provide details of those options available within the existing contract – it is not a given that those are the only options available to the policyholder, but more that those are the only options available within the existing plan. Many newer-style pension contracts offer the full suite of options.

  1. Losing Pension Guarantees or Benefits on Transfer

We understand that for many people, consolidating all of your pension pots to one place ahead of retirement can be very attractive. Whilst the majority of schemes will offer a transfer-out for this purpose, it is important that full details of the scheme have been read and understood as there may be some valuable benefits hiding within the scheme rules that could be lost on a transfer.

Some of the guarantees or benefits we see are:

If you do have a pension with one of these guarantees attached, it would be crucial to take advice in order to fully understand how this guarantee ties in with your own planning and circumstances, the trade-offs involved with transferring and whether the plan should be retained.

  1. Invalidating Pension Protections

A number of individuals will hold a form of pension protection (e.g. Fixed Protection, Individual Protection, Enhanced Protection) in respect of their lifetime allowance – this is to total value of pensions that can be held without HMRC levying a tax charge.

The protections are extremely valuable, and each has its own criteria attached in terms of actions that may result in the protection being lost. For example, if a form of Fixed Protection is held (either 2012, 2014 or 2016) then no further pension accrual can occur (except in limited circumstances) whereas Individual Protections allow you to continue accruing benefits. There are also rules around the types of transfers which can be actioned by someone holding protection. If protection is lost, it is the pension member’s responsibility to report this to HMRC (in writing) – HMRC will levy monetary penalties if this reporting is more than 90 days after the event.

We see cases (thankfully not too frequently) where individuals hold a form of pension protection and have invalidated this without realising – for example by being auto-enrolled into a workplace pension scheme whilst holding Fixed Protection, or by actioning an unauthorised transfer (e.g. where an enhanced transfer value has been offered).

  1. Not Keeping on Top of State Pension Entitlement

Whilst working, entitlement to the UK State Pension is accrued through National Insurance Contributions (NICs). In order to be eligible for the full level of pension (£179.60 gross pw in 2021/22), 35 ‘qualifying years’ are needed. We see State Pension often being overlooked by individuals however this provides a secure source of guaranteed income that can underpin your retirement position.

‘Qualifying years’ can be accrued by those working (both employed and self-employed), but credits are also given for those who claim Child Benefit, get Jobseeker’s Allowance, Employment and Support Allowance or Carer’s Allowance. If there are gaps in your NI record which means that a full qualifying year hasn’t been achieved, there is the ability to pay voluntary NICs. These can generally be done for the past 6 years (hence the importance to stay on top of your entitlement), but there is currently an additional period available for those born after 5th April 1951 (men) or 5th April 1953 (women) whereby gaps between April 2006 and April 2016 can be filled – the deadline for this ends in April 2023. Of course, the ability to pay voluntary contributions (by way of lump sums) will depend on affordability, but on a purely financial basis we tend to find that these payments represent very good value for money

We often find that many individuals are not aware of their state pension entitlement, and therefore haven’t looked into whether they should be looking to ‘top-up’ any missing years. State pension forecasts can be obtained here: Check your State Pension forecast – GOV.UK (www.gov.uk), and this will show not only the current accrual (in £’s terms) but also how many additional years are required to achieve the maximum accrual.

The information featured in this article is for your general information and use only and is not intended to address your particular requirements. Whilst knowledge is power, the best way to naturally avoid any of these pitfalls is to take financial advice along the way from a pension specialist. Five Wealth Ltd offer independent financial advice to a wide variety of clients, at various stages throughout their investment and retirement planning journey. If you feel that our expertise would be beneficial to you, please get in touch.

The information contained within the article is based upon our understanding of HMRC legislation and practice. Thresholds, percentage rates and tax legislation may change in subsequent Finance Acts and their value depends on the individual circumstances of the investor.

A pension is a long-term investment not normally accessible until 55 (57 from April 2028). Your capital is at risk. The value of your investment (and any income from them) can go down as well as up and you may not get back the full amount you invested.

Workplace pensions are regulated by The Pensions Regulator.

Please keep an eye on our blog posts/linked where parts 1 and 2 of this ‘pension pitfall mini-series’ have been published, specifically focusing on considerations for pre-retirement and those approaching retirement.

Pension Pitfalls Part 2 – High Earners

Posted on: January 28th, 2022 by fwAdmin

Pension Pitfalls Part 2 – High Earners

This post is the second in our ‘pension pitfalls’ mini-series, which is intended to highlight some of those areas which we feel can catch individuals out when it comes to their pension planning, or could mean that the tax advantages of the pension aren’t being fully utilised.

  1. Not Claiming Tax Relief

Personal pension contributions are eligible for tax relief at an individual’s highest marginal income tax rate. There are two types of way in which these contributions can be made, either using the ‘net pay’ method or the ‘relief at source’ method.

When contributions are made via ‘net pay’, income tax relief is automatically given at your highest marginal rate. Where contributions are made via ‘relief at source’, the only tax relief immediately given is basic rate (20%) – this uplifts the net contribution to a gross contribution. If eligible for 40% or 45% tax relief, this would need to be reclaimed as part of the individual’s tax return.

We find many individuals are not aware of the practicalities of pension tax relief, and have been high earners for a number of years without maximising the tax relief available to them. It is possible to backdate any claims to cover relief which should have been claimed in the last 4 tax years.

  1. Reduction to Tapered Annual Allowance

The tapered annual allowance was introduced on 6th April 2016. This impacts the amount that high earners can contribute to their pensions by tapering the allowance down from £40,000 to £10,000 for individuals with ‘adjusted income’ in excess of £150,000 (by £1 for every £2 of income) – this meant that if someone earnt £210,000 or more, contributions to their pension which were eligible for tax relief were capped at £10,000.

In April 2020, changes were made to this tapering which brought the lower limit to just £4,000. At the same time, the ‘adjusted income’ limit was increased to £240,00 and therefore the £4,000 limit would apply for those with earnings in excess of £312,000.

We find many individuals were aware of the initial tapering and reduced their pension contributions to the £10,000 limit but have overlooked the further reduction. Any contributions in excess of the allowance will be subject to an annual allowance tax charge, which is at an individual’s marginal rate of income tax – for those impacted by the tapered allowance this will be 45%.

  1. Not Utilising Available Carry Forward

Whilst the amount that can be contributed to pension in a tax year (and is eligible for tax relief) is limited, it is possible to use ‘carry forward’ to sweep up missed contributions from the previous three tax years. Before using any carry forward allowance, the full contribution allowance for the current tax year must be fully utilised.

Once the current tax year’s allowance has been utilised, the order in which any available allowance is used starts at the furthest tax year back. This is shown in the table below.

 

Tax Year Order (1) Order (2)
2022/23 1
2021/22 1 4
2020/21 4 3
2019/20 3 2
2018/19 2

As the carry forward rules are based on a rolling 4-year period, moving into a new tax year means the loss of the oldest allowance – once we enter 2022/23, there will no longer be the ability to use unused scope from 2018/19.

Given the preferential tax treatment of pensions, this is often valuable scope and it’s important to be on top of your available allowances and when these need to be used by.

  1. Being Auto-Enrolled

Auto enrolment was introduced in 2012, and since this date there has been a requirement for employers to provide pension funding for ‘eligible employees’. If an individual doesn’t want to receive pension contributions then they would need to ‘opt-out’.

Most workplace pension contributions are expressed as a % of salary, and for high earners, these contributions can be sizeable. For an individual who earns £300,000, an 8% pension contribution (4% employee, 4% employer) would equate to a contribution of £24,000 and would be in excess of the available Annual Allowance (covered in point 2 above). Any contributions in excess of the Annual Allowance will be taxed at your marginal income tax rate.

We also find this to be a common scenario for those who change their employment status – for example, moving from being a Partner to more of a consultancy role where they are classed as an employee. This employee position will come within auto-enrolment, and it’s important to be mindful of this and the contribution limits. We also tend to see these individuals have built up large pension pots throughout their working career, and whilst not covered in detail here the ‘Lifetime Allowance’ would also be a consideration.

Some employers may offer an alternative remuneration structure if pension contributions are not feasible, and it’s important to ensure all options are thoroughly explored.

  1. Not Using Pension Contribution Strategically

As well as offering tax-relief at an individual’s highest marginal rate, personal pension contributions can be used as a strategic tool to minimise tax liabilities and even reinstate tax allowances which may have been lost during the year. The calculation for any personal pension contributions made will work by extending an individual’s basic rate tax band by the gross contribution amount, which in turn then provides higher/additional rate tax relief by reducing the amount of income that is subject to that tax level.

The strategic example of this we see most often is related to the Personal Allowance (the 0% income tax band) which is lost at a rate of £1 for every £2 of earning above £100,000 – therefore an individual who earns in excess of £125,140 would lose the full amount. Making a personal pension contribution which then brought the ‘adjusted net income’ (income, less personal pension contributions) down either below £100,000 or between the tapered amounts would provide tax relief at an effective rate of 60%.

Other ways in which pension contributions can be used are to reduce the impact of the tapered annual allowance or to reduce the impact of the high-income child benefit tax charge.

This is a technical area of strategic planning, and whilst we would always advocate taking advice in relation to this, it’s important to be aware of the broad ideas and tax levels involved.

The information featured in this article is for your general information and use only and is not intended to address your particular requirements. Whilst knowledge is power, the best way to naturally avoid any of these pitfalls is to take financial advice along the way from a pension specialist. Five Wealth Ltd offer independent financial advice to a wide variety of clients, at various stages throughout their investment and retirement planning journey. If you feel that our expertise would be beneficial to you, please get in touch.

 

The information contained within the article is based upon our understanding of HMRC legislation and practice. Thresholds, percentage rates and tax legislation may change in subsequent Finance Acts and their value depends on the individual circumstances of the investor.

 

A pension is a long-term investment not normally accessible until 55 (57 from April 2028). Your capital is at risk. The value of your investment (and any income from them) can go down as well as up and you may not get back the full amount you invested.

 

Workplace pensions are regulated by The Pensions Regulator.

 

Please keep an eye on our blog posts/linked in to see parts 1 and 3 of this ‘pension pitfall mini-series’, specifically focusing on considerations for pre-retirement and those approaching retirement.

 

 

Investing in a rising inflation environment

Posted on: December 22nd, 2021 by fwAdmin

Investing in a rising inflation environment

What is happening?

Inflation has been a challenging factor for investors to grapple with in 2021 and this is likely to be a central concern as we now move into 2022. More recently, we have seen high CPI data coming out of the US and UK. So, what are the causes of this surge in inflation?

The global vaccination program has enabled economies to reopen and has driven a recovery in sectors that have been most severely impacted by the pandemic. At the same time, monetary policy in developed markets remained accommodative, fuelling the strength and pace of recovery, and leading to supply shocks across global industries. A steep rise in energy and raw material prices has raised concerns about inflation and the prospect of central bank action in the form of interest rate rises. Labour shortages, supply issues and shipping and distribution bottlenecks are all contributing to inflationary pressures. There are also structural changes that will potentially drive longer-term inflation such as climate change (i.e. energy transition).

All of this will impact investor sentiment and asset prices directly. Equities have already come under pressure as markets adjust expectations to the prospect of higher rates. Bonds markets have moved in reaction to shifting expectations with yields moving higher. There is the risk of further, more significant moves higher in yields, as we see central banks act.

Is the inflation transitory?

It is still difficult to determine how persistent this inflation will be and there are strong views on either side of the debate. Some believe we will remain in a low-inflation environment, but the new normal may be above the historic lows we had grown used to before the pandemic.

There are concerning signs as inflation has remained elevated for several months now. One of the key areas in consideration is the labour market and the question of whether wage pressures will drive inflation higher? Central banks will be monitoring this closely. Ultimately, they will aim to balance the risk of higher, persistent inflation with the task of supporting the fragile economic recovery. Indeed, concerns about high debt levels in the economy may temper the strength and speed with which central banks move to combat price pressures. In not acting swiftly, they open the possibility of a policy error, allowing inflation to become unmanageable. If market concern of a policy error grows louder, we could see significant rises in government bond yields.

The steep surge in energy prices may be the precursor for recession. The knock-on effect of higher energy/utilities costs is likely to hit consumers hard. For corporates, the higher input costs will lead to declines in corporate profitability. As global central banks begin the process of tightening policy, with QE tapering (where asset purchases are reduced), we might expect weaker economic growth.

There are significant factors that could derail the current economic drivers. For example, the emergence of a high-risk variant of Covid 19 as we have seen in recent weeks could change the landscape for inflation as the potential for partial or full lockdowns re-emerge, leading to slower economic activity and demand.

The peak in inflation and the timing and extent of any slowdown is more difficult to predict and therefore we believe positioning portfolios for a higher degree of economic and market uncertainty (and potentially higher volatility) is sensible.

What can investors do to combat inflation?

Inflation erodes the purchasing power of cash. In other words, when the rate of inflation is higher than your current fixed rate of interest on cash savings, it reduces the value of that money over time. Whilst interest rates remain at historic lows, this makes cash an unattractive asset class for investors.

From an asset allocation perspective, investors should review the level of exposure to fixed income within the scope of their own individual investment risk tolerances. Rising real yields and inflationary pressures are a real concern for investors. Unconstrained or strategic fixed income funds have greater flexibility to position a portfolio in a way that lessens the impact of rate rises. Where investors do hold direct conventional fixed income, they might opt for a short-duration portfolio of bonds, which are less sensitive to interest rate rises.

The mix of a bond portfolio might be altered to include high-yield corporate bonds which are typically shorter duration and have a credit spread to compensate for the risk of default.

Some investors hold inflation-linked bonds (gilts or US TIPS) to insulate the portfolio from the effects of inflation. Short-duration TIPS have tended to be less sensitive than long-duration bonds during periods of rising rates. Floating rate bonds, which move in line with interest rates, may also be a useful way to reduce interest rate sensitivity of a portfolio.

Within an equity portfolio, it can be useful to hold exposure to beneficiaries of inflation (e.g., financials or commodities/energy sectors). It is also worth considering a tilt in the portfolio towards companies with strong market share, pricing power and the ability to pass on price increases to end consumers. They should be able to weather a period of inflation better than more economically sensitive businesses.

There are also a number of “alternative” assets that may be considered in a risk balanced portfolio. Infrastructure assets can provide revenues linked to the rate of inflation and therefore have a part to play a diversified portfolio. However, it should be noted that listed infrastructure is highly correlated to equity markets and therefore there are limitations to its diversification benefit in the shorter term.

Metals and minerals used as raw materials in industrial production will typically offer a positive correlation between commodity prices and inflation. Gold has been historically considered as a hedge against inflation.

How we think about inflation at Five Wealth

At Five Wealth we are not trying to predict the path of inflation, but we do seek to mitigate risk where we can through our asset allocation and fund selection process. We understand that our clients invest to their own time horizon which does not neatly tie in with the market/economic cycle. We believe that investors benefit from investing in a range of asset classes which having differing performance characteristics. We believe that diversifying across global markets is vital. Different regions/countries will be at various stages of the economic cycle providing risks and opportunities.

Whilst we believe there can be a place for passive investments in a client portfolio, we firmly believe that active management can add value and help to mitigate the negative effects of a shifting economic backdrop. An actively managed fund enables the fund manager to make stock and security selections based not only on the fundamental characteristics of the asset but also taking account of how broader economic conditions might impact it. For example, they might select an equity investment in a company with the ability to pass on rising prices to their end consumer. In the fixed income space, this might mean selecting a security with less interest rate sensitivity. The multi asset fund managers that we recommend to clients also can invest in alternative asset classes which have lower correlation to equities or bonds.

As we move forward, we remain aware of the risks posed by inflation and are in active dialogue with fund managers to determine how they might position portfolios for the shifting macro environment. As inflation rises, consumers and investors will find their disposable income squeezed. In such an environment, we look to help our clients achieve positive “total returns” in real terms which will ultimately help them combat this inflationary pressure.

 

 

Please remember that your capital is at risk. The value of your investment (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.

 

Pension Pitfalls: Part 1 – Pre-Retirement

Posted on: December 7th, 2021 by fwAdmin

Pension Pitfalls: Part 1 – Pre-Retirement

This three part ‘pension pitfalls’ mini-series is intended to highlight some of those areas which we feel can catch individuals out when it comes to their pension planning, or could mean that the tax advantages of the pension aren’t being fully utilised.

  1. Underlying Investments

We find that many individuals are not aware of how their pension is invested, let alone knowing whether this is appropriate for them. There is no ‘one size fits all’, and the strategy which is suitable for you should take into account factors such as how much involvement you want to have, your wider wealth position, your timeframe to retirement, your investment experience, your tolerance for value fluctuations/losses (risk) and how you intend to draw income in the future.

The underlying investments within pensions are typically into ‘funds’, structures which have multiple diversified investments within them. Allocations within these could be into a combination of asset classes including equities (company shares), fixed income (bonds/gilts), cash, property or commodities. Each of these asset classes has a different risk/return profile, and therefore offers different growth potential. Workplace pensions tend to have a ‘default strategy’ which is set at scheme level and often has a mixture of each of the asset classes within it.

It’s important to take the time to understand how the current strategy aligns with your views, as well as assessing options available and whether something alternative could be more appropriate (either through your own research or with professional assistance). Investments carry risk. The value of your investment (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.

  1. Pension Access Age

It has recently been announced that the minimum pension access age will rise to 57 (currently 55) from April 2028 – this will therefore automatically apply to any individual born after 5th April 1973, and for those born between 5th April 1971 and 5th April 1973 it will apply if benefits aren’t drawn between their 55th birthday and 6th April 2028.

Some schemes will offer the protected right to take benefits at age 55 (if an ‘unqualified right’ was already written in the scheme rules), but there is no longer the option to transfer into a scheme which offers this before the change comes into force as the window to do so was closed in a follow-up to the 2021 Autumn Budget.

This rise to age 57 will keep a 10-year gap between that and the UK state pension age, which is in the process of both equalising between men and women and rising to 67.

  1. Keeping Track of Older Pensions

One of the common questions we get asked in relation to pensions is to do with the sheer number of them that people accumulate throughout their working lives, especially where a number of job changes have been involved – now that auto-enrolment into pension schemes is mandatory for employers, this is something we expect to continue seeing.

As each pension will have a value to you and your retirement (either by way of an invested pot or detailed as an income stream for life), it’s vital to keep on top of each plan by keeping your own personal details to hand (e.g. plan number/website log-in) as well as a record of the pension provider/scheme administrator.

If you are struggling to locate details on one of your schemes, GOV.UK has launched a helpful tracing service which can be accessed here: Find pension contact details – GOV.UK (www.gov.uk)

  1. Pension Nominations

Each pension you hold should have a nomination form attached to it, which details your intentions for distribution of the value on your death. A common misconception is that your Will would guide this distribution, but as (under current legislation) pensions don’t form part of your ‘estate’ on death, this isn’t the case.

Your pension provider will be able to provide you with a nomination form for completion, with each of these varying slightly in format – it’s common to see an initial section which can be completed with names and %’s, followed by a free text section in which further guidance can be given (e.g. should the named individual pre-decease you or feel that they don’t require the full amount involved).

As well as ensuring that a completed form is held, it is important to regularly review this to ensure it is up to date and continue to reflect your current wishes.

  1. Death in Service Cover

Death in service (DIS) cover is a benefit provided by many employers for their staff members, and is often quoted as a multiple of salary (e.g. 3x, 4x) which is paid out to nominated beneficiaries. Some of these DIS schemes when written on a group basis are subject to the rules of registered pension schemes and for this reason, their value will be taken into account for any pension lifetime allowance calculations.

The lifetime allowance currently stands at £1,073,100 (for 2021/22) and any pension value above this limit will be taxed. Tests for the lifetime allowance can occur at multiple times during an individual’s lifetime, including when pension income commences, at age 75 and on death.

There are ways in which a DIS policy can be written on an induvial basis rather than on a group basis, and this would mean that they aren’t subject to the same pension rules. If you feel this is something that could be relevant, I would suggest speaking to a financial adviser in order to help navigate the complexities involved.

Whilst knowledge is power, the best way to naturally avoid any of these pitfalls is to take financial advice along the way from a pension specialist. Five Wealth Ltd offer independent financial advice to a wide variety of clients, at various stages throughout their investment and retirement planning journey. If you feel that our expertise would be beneficial to you, please get in touch.

Please keep an eye on our blog posts/linked in to see parts 2 and 3 of this ‘pension pitfall mini-series’, specifically focusing on considerations for high earners and those approaching retirement.

 

Five Wealth vs the Yorkshire Three Peaks

Posted on: November 22nd, 2021 by fwAdmin

Five Wealth vs the Yorkshire Three Peaks

We are very pleased to announce that a group of the Five Wealth team completed the Yorkshire Three Peaks challenge last Saturday raising total of £2,206.25 (including gift aid) for Support Dogs Ltd.

The walk started in Horton in Ribblesdale, with a sunrise walk up Pen-y-Ghent followed by Whernside in the early afternoon and finally Ingleborough at sunset. Planning the walk in November, we expected the weather to be challenging, but fortunately it was on our side and we had perfect walking conditions.

In total, the team of 7 walked a total of 40.29 km with over 1,500 m of elevation gain in just over 10 hours!

Support Dogs Ltd are a fantastic charity based in Sheffield and are very close to our hearts at Five Wealth. The national charity is dedicated to increasing the independence and quality of life for people with various medical conditions. They provide, train and support specialist assistance dogs to achieve this. The charity specializes in autism assistance dogs, seizure alert dogs for people with epilepsy and disability assistance dogs.

Please visit their website to find out more about the fantastic life changing work they do at Support Dogs

Thank you to all those who have supported, liked, commented and shared our challenge, we are very grateful.

If you would still like to donate, you can do at

Tom Mitchell is fundraising for Support Dogs Ltd (justgiving.com)

The dividend outlook for income investors

Posted on: October 16th, 2021 by fwAdmin

The dividend outlook for income investors

Global dividend picture

Against the backdrop of the global pandemic, companies cancelled dividends in the face of unprecedented economic uncertainty. However, following a torrid period for income investors in 2020, we are seeing a much brighter picture emerging for dividend pay-outs.

Global dividends jumped 26% higher in Q2 2021 compared with Q2 2020, but there is a great degree of variance in the dividend picture from country to country.

Europe is generating a robust recovery in dividends. According to the Janus Henderson Global Dividend Index, the recovery has been led by France and Sweden. Germany lagged behind the recovery to date.

The US market is traditionally a lower dividend payer and last year proved more sustainable as dividend cuts were much lower than that seen in Europe and the UK. Consequently, dividend growth/recovery this year has been markedly lower from this area.

Asia Pacific ex-Japan region registered a notable rise in pay-outs, driven by the financial sector in Australia and in South Korea via a special dividend from Samsung.

Link’s UK Dividend Monitor reports a 51% jump in pay-outs during the second quarter, as many companies began to reinstate dividends. On an underlying basis (i.e., excluding special dividends), pay-outs rose 43%. Janus Henderson said that 85% of UK companies in its index had increased, restated, or held their dividends this year. We have also seen an increase in share buyback activity in recent months and outside of the main market, AIM listed stocks are also boasting strong dividend growth (56% according to Link’s AIM Dividend Monitor). Note that AIM dividends fell by nearly 40% last year.

The sector perspective

Mining dividends grew strongly against a backdrop of rising commodity prices in Q2. Industrials and consumer discretionary dividends were also sources of good dividend recovery.

However, dividends from the leisure sector remained subdued perhaps reflecting the continued uncertainty impacting this area of the market.

The more defensive dividend payers in 2020 were the telecom, food, food retail, household products, tobacco, and pharmaceuticals sectors. These areas of the market have continued to grow pay-outs, albeit at a lower, more sustainable rate.

Janus Henderson state that banks accounted for half the fall in global dividends in 2020. Regulatory restrictions have now been lifted allowing these companies to recommence dividends.

What lies ahead?

Dividend cover is an important indicator of the strength behind a company’s decision to pay a dividend. If dividend cover is below 1, the companies are paying a dividend beyond their profits. According to AJ Bell’s Dividend Dashboard, dividend cover in the UK is improving and currently sits at 1.83x for the FTSE 100. This is good news for the sustainability of dividends beyond this period of recovery.

Janus Henderson have upgraded their global dividend forecast for 2021 by 2.2% since their May publication. This results in expected headline dividend growth of 10.7% on a year-on-year basis. They have forecast that global dividends will return to pre-pandemic levels within 12 months. For the UK dividend market, AJ Bell expect the FTSE 100 to yield 3.7% in 2021 with the total pay-out reaching £76.9bn. This underlines that the UK remains an attractive market for investors seeking income and arguably it is now stronger and more sustainable shape following a period of rebasement. Link believe AIM’s dividends can regain their previous highs by in 2023, almost two years sooner than expectations for the main market.

What does this all mean for Five Wealth Investors?

It is very difficult to insulate a portfolio from the sort of dividend cuts we saw last year. At Five Wealth we have always appreciated the attractiveness of the home market as a source of income (particularly for sterling investors), but also recognised the risk associated with a narrowly led schedule of dividend payers. Our cautiousness has been made greater in recent years by market concerns around dividend sustainability. Consequently, we have conviction in a small number of funds to navigate this market, providing a consistent approach to maintaining and growing dividends over time.

One could say that recent years have provided a more attractive (if contrarian) time to invest in UK equities. Valuations remain attractive on a relative basis because this market has been a largely “out of favour” since the EU referendum result.

Nevertheless, we feel a global approach to dividend investing is favourable. By combining a blend of dividend sources, diversified globally and by sector, we feel that we can smooth out some of the bumps in the road that might originate from sector-based stresses, political shifts in policy or other unforeseen shocks to the economy. The UK has historically been an attractive market for income focused investors, as there is a strong dividend paying culture. However, alongside that dividend friendly backdrop, it is important to consider the level of concentration risk within the UK market. According to AJ Bell’s latest Dividend Dashboard publication, 52% of the forecasted dividends for 2021 is set to come from just 10 stocks.

At Five Wealth we believe that we can work with clients to build an investment strategy that meets their objectives and attitude to risk. For income investors, this might mean looking beyond the natural income generated by an equity focused investment portfolio, ensuring that there is not a reliance on a single asset class as a source of income and using various products and tactical financial planning to provide “income” from a number of sources and in a number of manners. A diversified multi asset portfolio can be a sensible way to navigate the economic and market turbulence that we have experienced over the past 18 months and the positive but far from certain investment environment that lies ahead.

Please note: This blog is for general information only and does not constitute advice. The information is aimed at retail clients only. Your capital is at risk. The value of your investment (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Changes in the rates of exchange between currencies may affect the value of the investment.

The Five Wealth response to Sustainable Investment evolution

Posted on: August 24th, 2021 by fwAdmin

The Five Wealth response to Sustainable Investment evolution
The recent FCA guidance on Environmental, Social and Governance ‘ESG’ funds comes amidst an intensification of activity in the fund management industry to assert the ESG qualities within their fund range. This in large part stems from a strong growth of interest and demand from investors, who want to explore ways to make a positive contribution to society through their investment strategies. It has also been driven by asset manager requirements to comply with the EU’s Sustainable Finance Disclosure Regulation (SFDR) where they are operating in the EU. The SFDR requires robust ESG disclosure and reporting from fund providers. As a result, it has been clear over the past year that the industry is moving towards a future where ESG factors are front and centre in their propositions and they are increasingly focused on demonstrating their commitment to integrating ESG factors in their processes. In some ways this has muddied the waters as on face value it is now less obvious which strategies are mandated to invest only within an ESG framework, which funds are simply considering those factors as part of their research process, which are actively engaging with company management on ESG factors, and which appear to be labelling themselves as ESG funds where there is a less than robust ESG research process in place.

ESG investment is not new, what has changed?

ESG investing is certainly not a new phenomenon, but fund providers are now much more vocal in demonstrating their ESG investment credentials. This has always been part of the promotion of funds with an ESG related objective but what is new is the active promotion of how ESG is integrated into research processes and shareholder engagement of those funds without a specific ESG investment objective. This has long been part of many strategies, particularly those with a quality focus but because it was not the main driver of investment decision making, it was perhaps not highlighted so much to investors. However, with the industry now pushing the ESG aspect of their products, front and centre, it is important to distinguish funds with an ESG objective, from those funds with an ESG integrated investment process.

ESG should form part of all fund due diligence

This emphasises the importance of fund due diligence to ensure that we understand how ESG factors are incorporated in an investment process and how important they are in driving investment decision making. There is no right or wrong way to integrate ESG in a fund process or objective, but a clear understanding is essential in aiding our decision making about how a particular fund may or may not be used to meet a client’s objectives.

The latest FCA publication is a step towards providing clarity on what is obviously a trending theme. This can only be a positive step in what we believe will be a permanent change to the fund management industry.

What is the FCA view?

The FCA has recently released their ‘ESG & sustainable investment principles’ with the aim of improving quality and clarity in the fund management industry. In particular, these principles relate to the design, delivery, and disclosures of ESG and sustainable investment funds.

They suggest that they have received a high volume of applications for sustainable investment funds but have been disappointed with the overall quality of these proposals, as often they do not contain sufficient, clear information explaining their chosen strategy and how this relates to the assets selected for the fund.

The guiding principles relate only to FCA authorised investment funds which pursue a responsible or sustainable investment strategy and claims to pursue sustainability characteristics, themes, or outcomes.

They do not relate to those funds that integrate ESG considerations into mainstream investment processes.

However, I think an important outcome of this review, will be that the lines should become less blurred, and it will be easier to determine the ESG credentials of a fund.

The guiding principles

The principles that the FCA hopes will drive improvements in the quality of ESG can be summarised as follows:

We expect this investment theme to be subject to further regulatory scrutiny in the coming months and years, but we believe that this is a positive step in improving the quality and clarity around ESG investing and ultimately in improving client outcomes.

What does this mean for Five Wealth clients?

At Five Wealth we help clients to invest across a wide spectrum of investment strategies, both ESG focused and mainstream. For a number of years, we have been intensifying our research in this maturing investment theme, in order to build a strong panel of recommended ESG strategies. For those funds with an ESG objective, these principles provide a supporting framework to our existing fund research and due diligence. They will enable us to direct our research to these key identified areas and challenge fund managers to demonstrate how they meet the guiding principles.

As we look to the future, we will continue to refine and develop our investment research process to address this increasingly important aspect of investment markets.

Your capital is at risk. Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances. The value of your investment (and any income from them) can go down as well as up and you may not get back the full amount you invested.