Finances can be confusing, so we have created a series of free, educational events, books and online resources to help build your knowledge and confidence.
Markets sold off sharply on Monday, on the back of a fall in the oil price of well over 20%. Saudi Arabia had been attempting to organise production cuts to support the oil price after COVID-19 impacted demand, but Russia failed to back the plan leading to Saudi Arabia threatening to raise production next month and offer its crude oil at a deep discount. The FTSE 100 was down around 7.7%, a significant portion of this driven by index heavyweights BP and Royal Dutch Shell which are down between 15% and 20%. The S&P 500 was down almost 6%.
It is at times like these that we see the importance of investing in a diversified portfolio. The chart below shows the losses received on portfolios ranging from 1/100 on the risk scale (low risk) through to 100/100 (high risk). As you can see, even the highest risk portfolios have fallen significantly less than the markets.
The oil price fall was a serious shock to the market, as is evident by its dramatic spill-over into equity and bond markets. It is, of course, also linked to the ongoing effects of the coronavirus, both in the sense that COVID-19 caused the initial oil price weakness that flared into Saudi Arabia/Russia disagreement but also in the sense that falls have been magnified by general coronavirus uncertainty in markets.
The oil market has bounced back a bit, from a low of under $32 per barrel to almost $37, but clearly the energy industry is under pressure, as are most cyclical sectors exposed to global growth that is likely to be challenged this year.
Market falls, and the falls in portfolio values they cause, are always unpleasant to experience. Diversification can help mitigate the magnitude of these falls (and is doing so currently) but clearly cannot eliminate the falls completely. After all, volatility is the ‘cost’ of achieving above inflation returns over the longer-term. Composure is definitely tested in extreme markets. Some clients deal with challenges to composure by not focusing closely on the day-to-day fluctuations of their portfolio, but for those that do get stressed by daily/weekly/monthly falls, it can be helpful to take a step backwards to look at the bigger picture, and specifically the performance of equities over multi-year time-horizons more in-line with the typical horizon of a client’s financial plan.
As an example of this, the below looks at the price returns of the S&P 500 over a 120-year period using a log-scale. Over this longer time period, even the falls that occur during a recession (the grey bars), however horrific they feel at the time, don’t look as serious.
Source: J.P. Morgan Asset Management
And please keep in mind that the index above doesn’t include the dividends paid out by the S&P 500 over time. If you did that, the long-term returns would look even better, more than compensation enough for sticking with your investments during difficult times. We are not yet in a recession. Sliding into one isn’t what we expect, but even if we do the PortfolioMetrix portfolios are very well diversified and made up of what we think of as very high-quality funds with solid underlying investments. We believe in them for the long-term.
In fact, rather than seeing times like this as scary, instead consider them a chance to buy into a market at a much lower cost; i.e. getting more value for your money, with more scope for future growth. Thankfully as a result of the work we do educating clients about risk, we have overwhelmingly had more calls from clients wanting to invest more than we have had with worry at their heart.
The secret to getting long term growth is withstanding short term falls!
The Budget 2020
Chancellor Rishi Sunak has delivered his first Budget in the House of Commons, announcing the government's tax and spending plans for the year ahead. There wasn’t a huge amount that relates to personal finance, but here are the key bullet points that are worth being aware of:
The big ones;
Use it or lose it ...
With the end of the tax year a mere month away here is a reminder of the allowances you should not miss out on.
Chancellor resigns weeks before budget
We touched briefly on the Budget last month in regard to the tax break for high earners in the NHS. However, what the Budget will look like has been thrown into question following the resignation of Sajid Javid just a few weeks ago.
Javid resigned because of a conflict over a request for him to fire his existing team of advisers in order to remain in his role. Unable to accept these conditions, he was replaced by Rishi Sunak who only seven months ago held the role of Junior Housing Minister.
Despite this turmoil, the Budget is still set to go ahead on 11th March and is expected to bring much reform. The large Conservative majority means that the Chancellor has practically free rein to bring about whatever change he sees fit.
Changes to tax, pensions, housing and social care are all likely to feature, as well as increased spending in the north of England as the Conservatives tip their hats to the voters who helped the party come to power. We will need to wait to see exactly what changes will be implemented and whether the recent Chancellor-swapping has any effect.
Trust registration service delays
You may have heard that HMRC plans to implement the amended trust registration service this year. The effect of this will be that almost all express trusts will have to be registered, rather than only those that have tax liabilities. This is a large administration task and the registration process involves collecting and providing details of the people affected by all trusts, e.g. settlors, trustees and beneficiaries, as well as the trust assets.
The initial consultations indicated that this change would come into place at the start of 2020. Over 200 responses were received to the consultation and these responses need to be properly considered. Therefore, the proposed deadline of March 2020 for implementing the changes to trust registration has been put on hold.
The technical consultation on this matter closed on 21st February 2020 and we are currently waiting for the outcome to be announced. This will hopefully provide more clarity on when the trust administration service changes will come into force and we will be in touch to let you know how this might affect you.
Premium Bonds on balance
NS&I Premium Bonds are the UK's biggest and most popular savings product, with around 22 million people saving more than £85 billion. In a nutshell, Premium Bonds are a savings account where a monthly prize draw determines any interest (prizes!) that is paid. The prizes, which range from £25 to £1 million, are paid tax free and you can access your money whenever you want to.
However, since the launch of the Personal Savings Allowance (PSA) in 2016 this tax-free incentive for savings is no longer seen as such a bonus. However, for those who would pay tax, Premium Bonds still have something to offer as prizes do not count towards the PSA. With Premium Bonds there is also no risk to capital as NS&I is backed by the Treasury and this safety net is often seen as a real advantage.
Some not-so-good news for Premium Bond holders is that from May 2020 the annual prize rate is dropping to 1.3% (from 1.4%), meaning the chance of a £1 bond winning any prize will be lowered to 1 in 26,000, from 1 in 24,500. This is only an 'average' benchmark of the potential returns however, as there is obviously no guarantee you will win anything at all - and of course it's still the case that the more bonds you have the more likely you are to win.
Overall, Premium Bonds can still have a place for "on deposit" savings if they complement your other savings and investments. They are likely to be most advantageous if you are particularly lucky, or if you are a higher or additional rate taxpayer who has used up their Personal Savings Allowance, your ISA allocation and your Capital Gains Tax allowance. They are a good home, for example for relatively short-term savings, like money you’ve put aside for a future tax bill. Of course, you may have better than average luck, but don't bank too hard on winning the jackpot ...
New £20 for 2020!
Following the success of the new polymer £5 and £10 notes, the Bank of England fittingly launched the new £20 note on 20th February. Equipped with new security considerations, the plastic cash is harder to replicate, making it difficult to counterfeit. A hologram image with the words "Twenty" and "Pounds" along with see-through windows with metallic pictures in blue and gold foil make forging more difficult for fraudsters. There is currently no set date for the withdrawal of the old paper £20 notes so you can continue to spend your paper notes as usual and six months' notice will be given once the final withdrawal date is agreed. For collectors out there, keep an eye out for any low or sequential serial numbers such as 123456 or 333333 on the new notes.
Charlie’s Mini Blog
Last week I was at the Science of Retirement conference in London. What is amazing is that whilst much of our industry is stuck in a very product focused approach, selling often what is best for them rather than the client, there is a core of financial planners that are trying to do things better.
Whilst not all of the speakers were for the faint hearted, due to the technicality of their approach, what is amazing is the work that is being done into the science of retirement. Essentially, make sure that people don’t have too much life at the end of their money, and run out when they are no longer able to return to work.
The research that is being done and the technology that is being developed in this area is fantastic. Running models to assess the probability of every client in retirement’s success, and using that to make adjustments to their withdrawal rate to ensure they don’t, is incredibly powerful planning.
The cornerstone of this type of planning is of course Lifetime Cashflow Forecasting. In retirement, it is vital you have the foresight to ensure that whilst you don’t run out, you also do live out your very own dream retirement. The balance of the 2 is most definitely a science, and without careful planning, you risk failing. Ultimately, if you don’t know where you are going, any road will lead you there!
This month’s book recommendation is the brilliant ‘When; The Scientific Secrets of Perfect Timing’ by Dan Pink. Most of Dan Pink’s previous books have been recommended here, and this just might be his best yet. You will notice that we have featured a Learning Lunch on this specific book, so that will give you a feel for it, but I encourage you to read it all the same.
Who would have thought timing was so important to the shape of our lives? School children’s grade’s being determined by the time of day they are tested. Whether someone appearing in court is sentenced or not significantly influenced by the time of day they make their appearance. Which tasks are we better at in the morning than the afternoon, and vice versa?
A brilliant book that will make you think about your day from a totally different perspective.
At times like this, it is very easy to get caught up in all the negativity around us. It seems as though there is nothing but bad news coming at you from every angle, and it is easy to let that become all consuming. Whether you are worried about your investments, your business or your health, the current landscape can feel bleak, but it is important that we become stronger and practice mental positivity and look for ways to make things better.
As a business we will work to find ways to provide our service to you remotely, so that you can still be confident with your wealth and gain some reassurance from our expert team. But what else can be done to get through this in the best shape possible?
Instead of focusing on your own worries, focus on how you can help the people around you. Whether in your business or in your personal life, providing value to others will not only help you identify ways that you can get through these times in better shape, but they will help you feel better about it too. A good example of this is restaurants and café’s offering to deliver food to people’s homes and home support services helping the elderly with their shopping.
Exercise creates endorphins that result in you feeling significantly happier. Whether you go for a walk, run or ride, or you do some yoga or a workout at home, getting active for at least 30 minutes each day will lift your spirits and keep you in good health. There are loads of free classes online that you can follow too, so maybe now’s the chance to try something new? Nelson Mandela credited exercise as the key factor that helped him to remain positive throughout his 27 years of incarceration. Even if you are house bound, you have infinitely more space and resource than he had in his tiny cell in Robben Island.
The healthier you are, the better you feel and the more resistant you are to illness, so you need to stack the odds in your favour. Eat plenty fruits and vegetables, the more colours the better. Consider taking some vitamin supplements, Vitamin B complex, Omega 3 and maybe wheatgrass, which is believed to boost your immune system. The healthier you are, the more positive and the more protected you will be!
With anything like COVID-19, it is easy to get depressed by the cancellation of things you have been looking forward to: trips you have been planning and people you were going to see; not to mention the plans you had for your business. Spend at least 10 minutes each day doing something to improve your wellbeing. Whether that be meditating using the Headspace App, writing a list of things you are grateful for, or discussing the best things that have happened in the last day/week/year. Creating positive a mindset can have a powerful impact on the rest of your health.
Bad news is bad news! In times of crisis, it is easy to keep referring back to the news for the next wave of misery. This will continue to bring you down time and again. As a result, be a better gatekeeper to your mind, and pick your bad news strategy. Maybe commit to only look at the news once or twice a day, and at a set time each day. Not first thing when you wake up, and certainly no where near the time you want to go to sleep. That way you can keep more positivity in your mind whilst still getting the news you need to survive.
If we are not growing, we are dying, so we need to always keep learning. In times of crisis, this is even more important. Get a good book that will help you grow as a person and read/listen to it every day. Instead of diving into meaningless rubbish on TV, take the time to consume stuff that will actually benefit you, and the people around you. You’ll feel a whole lot better for it.
Even under lockdown, stay in communication with the people you care most about. One of the biggest regrets of people on their deathbed is that they didn’t keep in touch enough with the people they cared most about. Don’t make the same mistake. In this day and age, that can be via video conferencing with someone on the other side of the world (or street) or in person; stay in touch and connect with the special people in your life. In a world of social media, video calls and advanced telecommunications, now’s the time to embrace technology and stay in touch.
In addition to writing down each day what you are grateful for, another way to feel grateful is to watch educational documentaries and films. Recently I have watched ‘1917’ and ‘Unbroken’, both incredible war stories. It puts a lot of our problems into perspective. There is so much great content on iPlayer, Amazon & Netflix, we don’t need to waste our time-consuming lots of stuff that creates no value in our lives. A little of course is fine; sometimes it is good to switch off. But the more we can find our minds with the right stuff, the better shape we are in to deal with the world around us.
At Efficient Portfolio, we want to help our clients in everyway we can. If you need our help, even it is far beyond the realms of financial planning, please just ask. We’ll do our very best to help. Stay happy, healthy and safe.
At Efficient Portfolio we have taken the decision to minimise the risk of COVID-19 affecting the service we provide to our clients by working from home. Whilst some external meetings will still happen in the office, and for the time being reception will remain manned, the rest of the team are already working remotely. We are in the fortunate position that we are a very technology focused business, and that means working from outside of the office is perfectly feasible.
As such, we don’t expect our service levels to be affected. We already use video conferencing for meetings, so this will be extended to more client meetings going forward. If you need any advice as to how you could do this better in your business, please don’t hesitate to ask.
Market-wise, we’re living in truly unusual times. It may not be fair to call them unprecedented - markets have experienced and recovered from plenty of previous extreme sell-offs - but each sell-off is distinctive in its own way and this one is unique in its sheer speed.
Source: John Authers, Bloomberg Points of Return 17 March 2020
The above chart doesn’t cover off the falls in the S&P 500 yesterday which were extreme, with the S&P 500 down another 12% (its biggest one day fall since 1987).
The comparison of recent falls with 1987 is apt. Although the falls of 2000/2003 and 2007/2008 were bigger overall, this has been an incredibly rapid fall, unmatched by any in in terms of speed since 1987:
Data Source: Financial Express and PortfolioMetrix, as of end of Thursday 12 March 2020
The current sell-off is, of course, accentuated in the above graph given it comes off a higher base (and the 1987 fall is likewise de-emphasised because it comes off a lower base). In order to see the scale of percentage changes accurately, you need to look at a chart plotted on a log-scale:
Data Source: Financial Express and PortfolioMetrix, as of end of Thursday 12 March 2020
The reason for the sell-off is extreme uncertainty. Markets are frantically trying to price the effects of countries going into lockdown to slow the spread of COVID-19. A good measure of uncertainty is the VIX Index (also known as the ‘Fear Index’) which measures the implied forward 30-day volatility of options on the S&P 500 and which reached its highest ever level at yesterday’s close.
The bad news is that the economic effects of these lockdowns and consumers pulling back on spending, due to uncertainty, is going to be severe. We should expect many countries, including the UK, to go into a technical recession (2 consecutive quarters of negative GDP growth) and this to severely impact global growth for 2020.
The good news looking forwards is that markets are already more than pricing in a recession. There is also plenty of scope to limit the duration and severity of it by bringing the virus under control (as has already been successfully achieved in China and South Korea) and policymakers taking decisive monetary and fiscal policy action to limit the effects of social distancing. We are already seeing concerted action here. Central banks, including the US Federal Reserve and Bank of England, have cut rates aggressively and restarted QE or brought in new funding schemes to ensure liquidity. And governments are in the process of launching significant fiscal spending to assist people and hard-hit industries, such as airlines, pubs and restaurants. The headline of the Financial Times online as I write this is: “UK to launch coronavirus rescue package for business”. We should expect the US to agree to a host of measures to do the same very soon.
We are in a bit of a ‘messy’ period as the world adapts to a new situation, but although the short-term outlook is uncertain, the longer-term one is actually far less so. We will get through this.
The PortfolioMetrix portfolios continue to be impacted by the market’s falls, but diversification continues to moderate the magnitude of those falls with even the riskiest PortfolioMetrix portfolio still significantly better off than the FTSE 100 year to date:
Data Source: PortfolioMetrix, as of end of Monday 16 March 2020
Unfortunately, given the magnitude of the falls in the market, we are in the situation where some clients in riskier portfolios are starting to receive their second 10% drop notification for the year. PortfolioMetrix, Efficient Portfolio and our other DIMs all continue to monitor and manage portfolios carefully. They are not making any knee-jerk changes as portfolios remain fundamentally sound, but they are rebalancing clients back to target risk weights where appropriate i.e. making very modest purchases of quality equity funds at these lower levels.
And although we remain very careful about the short-term, we are not losing focus on the long-term. We do expect markets to recover eventually and we are positioned for this too. Jeremy Grantham, one of the founders of asset manager GMO, put it well in March 2009 when he stated: “the market does not turn when it sees light at the end of the tunnel. It turns when all looks black, but just a subtle shade less black than the day before.”
We would also stress that the FTSE 100 is a pretty flawed index with lots of concentration risk in oil and other commodities as well as banks (amongst other problems) - the PortfolioMetrix portfolios are far better diversified and constructed, and we would expect them to deliver far superior risk-adjusted returns than the FTSE 100 over the long-term.
History can be a useful guide, but it’s also helpful to focus directly on the concerns of today. Clearly, there remains a lot of uncertainty around the spread of coronavirus and how it will affect day-to-day life and the wider economy over the next few months. We do not know the answer in the short-term and markets could fall more from here. But if we cast our minds even one year forward it is difficult to see COVID-19 being a major problem for humankind. Although more serious than flu, it is perfectly possible for human society to function if we got to the stage of having ‘cold, flu and coronavirus season’. It seems scary now, but we will adapt and markets, as they are wont to do, will also recover.
Whilst we appreciate this is a scary time, it is vital that we put our tin hats on and sit it out. The only way you can lose money in a market fall is by selling investments at the low. Either that, or if all of the largest companies in the world have gone bust. Whilst there will inevitably be some business casualties, most of which would have been struggling prior to this crisis, it is unlikely that the governments will let sound companies go to the wall given this is a worldwide issue.
Sit tight, and if you have spare cash, even consider investing more. The best companies in the world just went on sale!
Pound Cost Ravaging
For those of you in retirement or drawing an income from your investments, there is something you can do to minimise the impact the market fall has on you. I appreciate this isn’t possible for everyone, but if you have savings in cash, which most of you will, or the ability to spend less, research shows that the best thing you can do is to pause or reduce the drawings from your investment in periods of market uncertainty. The same research also showed that trying to reduce your investment risk at times like this had little or even negative effects on your long-term wealth.
As you draw an income at the point at where the market falls sharply, you lose a larger percentage of the total portfolio than you previously would have. When the market rises again, because there is less money invested to benefit, your portfolio does not fully recover. This is known as ‘Pound Cost Ravaging’!
As a result, if you want to protect your retirement funds, the best thing you can do is to minimise or stop your investment drawings, thus allowing your portfolio to recover. As we saw in 1987, this could be as quickly as by the end of the year!
What should you do when markets crash?
As part of our ongoing improvements to client services, we are delighted to announce the launch of two, new portals. Designed to help you keep a better track of your financial planning, these free portals will give you far more simplicity, control and transparency when it comes to your wealth.
After speaking with our clients, we have learnt that keeping up to date with your financial planning can be time-consuming and complex. It can often feel that there are countless documents to review and it can be a struggle to know where to even find them. Even straightforward tasks, such as updating your current address, can seem like a hassle.
In addition to that, security has also become a key concern of both us as a firm and our clients. Sadly, unsecured email is a prime target for fraudsters, who can use this medium to steal your confidential information and use it to illegally try to access your funds. This issue is something that we have been tirelessly trying to resolve for many months, and thankfully we have now found a reliable solution.
You will be aware that you currently do have one portal provided by your selected platform; that will still remain, as it is useful for providing trading history and tax reporting. However, we do not feel that this portal alone is sufficient and will automatically upgrade your service to include some new and beneficial features.
1. The Personal Finance Portal (PFP)
Following on from the introduction of our new back-office system, Intelligent Office, we are now able to offer our clients the Personal Finance Portal. This innovative system will give you a clear insight into what you hold, enable you to easily update your information and offers an exceptional level of security. Not only will this portal be used for secure messaging, it will also provide information on non-platform based accounts, house all documentation, such as plans and Suitability Letters, and provide live values.
The PFP offers the following:
A secure messaging service, so you can safely send sensitive information to Efficient Portfolio, without worrying that this may be intercepted by fraudsters. The team will also use this service when they contact you about your financial planning.
A consolidated client area, where all of your policies, documents and personal information is stored in one, easy access place. This means that you no longer need to sift through numerous documents to find what you are looking for.
The ability to update and upload your information. Whether you’d like to amend Your Portfolio Explorer to reflect some lifestyle changes, or upload a new policy that you’ve personally implemented, the PFP gives you full control. Efficient Portfolio will happily do this on your behalf, if you would prefer.
The PFP app, so that you can check your portfolio when you’re on the go or away from home. This is great if you need to make a withdrawal whilst you’re on holiday, or quickly need to check if you’re covered on your insurance policy.
PFP Premium, for those that would like to add their banking information onto the portal. PFP Premium allows you to synchronise your accounts with the portal, so you can review your current balances and transactions at the same time as you are reviewing your planning. There is a small charge for this optional service of £2 per month.
We will enrol all clients for the free PFP Portal, however, if you would prefer to use the PFP Premium Service, the process is very simple. Simply contact the office on 01572 898060 or email email@example.com and we will send you a link. You will then need to follow the straightforward online instructions to register.
If you need any support in setting up your account, we would be more than happy to help. We can offer help though a live chat and screen sharing service, or simply over the telephone. As a brand-new service, we are anticipating some ‘teething issues’, but the team will also be able to make any necessary changes to your portal as required.
2. The Investor Reporting Portal (IRP), provided by PortfolioMetrix
Our Discretionary Investment Managers, PortfolioMetrix have just launched another portal to help our clients to quickly gain access to the detailed, quarterly performance analysis of their investments. This portal will show you all of your quarterly reports, for investments managed by PortfolioMetrix, and provides client specific data that has been used in your investment planning, but most importantly it will show you the values and growth rates of your funds.
Most of our clients wait until their Client Review Workshops to view this information, but now you can access a range of charts detailing investment elements such as your asset allocation, performance over time and where your investments sit in the Efficient Frontier.
We believe that this portal will place you in a much more knowledgeable position throughout the year, and will enable both you and us to quickly raise any concerns and find solutions.
You will be automatically enrolled for this free service, but please contact the office on 01572 898060 or email firstname.lastname@example.org if you have any questions.
We hope that the introduction of both the PFP and the IRP Portals will help you to get a better handle on your financial planning, and allow you to clearly see how your money is performing. We will be on hand to help you through the registration of both portals, but if you have any questions along the way, please do not hesitate in contacting us.
EP Help If Isolated
Being based in Oakham since our move from Seaton 2 years ago, we have very much come to feel part of the community. With that in mind, we want to continue to help our community of clients, and the people around us at what is clearly a very difficult time.
If any of you do have to self-isolate but are struggling to get access to food or other necessities, let us know. We’ll do our very best to help you if we can.
At Efficient Portfolio, we regularly host 3 different seminars. We have taken the approach to turn these into webinars, so that people can access them more easily. They are as follows:
The Leaving a Legacy Lunch: Helping people post retirement leave a legacy for their loved ones whilst protecting their wealth for their own future.
The Dream Retirement Dinner: Helping the people in the lead up to retirement create their own dream retirement.
The Entrepreneurs Guide to Financial Planning: Helping business owners better understand how they can financially plan their future and protect their business.
If you, or anyone you know would like to watch one of these webinars, you can do so by clicking here. This is a great way for people you know to get a feeling of how we work, how we help people in specific situations and what they can do to create a better financial future, so please don’t keep them a secret!
It has featured previously in The Efficient Wealth Update, but there couldn’t be a better time to revisit ‘The Rational Optimist’ by Matt Ridley. This is not about being blindly optimistic, but it is about being an optimistic realist. By learning to take that approach, you will find you go through life a lot happier. If you haven’t already read it, I suggest you make a point of reading it now. It might just keep you sane through these difficult times.
Coronavirus Update – Where do we stand?
On Thursday 30th January, the World Health Organisation (WHO) declared a public health emergency of international concern (PHEIC) over the new coronavirus epidemic. The WHO flagged the risk of the coronavirus (so called because of its spiky, crown-like appearance under a microscope) spreading to countries outside of China with weaker health systems which have less ability to deal with it.
As of the morning of 12th February, 44,000 cases of novel coronavirus (nCoV) had been confirmed worldwide with at least 1,018 of those outside China, Hong Kong, Taiwan and Macau (including 8 cases in the UK). Whilst the number of cases has been rising quickly, it does appear to be plateauing in China.
Should we be worried?
We should be wary, but we shouldn’t panic. So far 1,018 people have died from the disease, a far cry from the roughly 400,000 deaths a year caused by flu. nCov is, however, more deadly than flu, with an estimated mortality rate of 2-3% vs flu’s less than 0.1%. Whilst serious, that 2-3% is lower than the roughly 10% mortality rate of Severe Acute Respiratory Syndrome or SARS (another coronavirus which killed 774 people in 2003) and Middle East Respiratory Syndrome’s 34% mortality rate (a coronavirus outbreak that erupted in 2012). It is also certainly less than the 10-20% mortality rate of the last truly serious global pandemic, the 1918 Spanish Flu which infected about 500 million and killed between 50 and 100 million.
What is troubling is that nCov is obviously quite contagious, about as much as flu, with each new case infecting on average about 2.5 other people, so it’s important that it is contained. This has been made more difficult in China because it emerged in the Chinese city of Wuhan at a particularly unfortunate time, just before Chinese New Year which sees a mass migration of people back to their family homes to celebrate.
There are some important unanswered questions though which affect how easy it will be to contain, such as how long the virus incubates for and whether it can be passed along before symptoms show.
How is this affecting markets?
It’s difficult to completely disaggregate the causes of market moves, but fears about the virus have certainly been a large factor in the recent pullback in global equities. So far this is only a mild sell-off, but beneath the headline figures individual stock prices have moved more materially with defensive sectors (utilities, healthcare, tech, quality as a style in general) rallying, and more cyclical sectors (autos, resources, value as a style in general) as well as China-exposed travel and luxury goods retailers selling off.
Source: Financial Times, 31 January 2020 (measuring the Europe’s Stoxx 600 index)
This flight to safety has also been evident in bond markets, which have rallied strongly over January as fears have risen, and yields have fallen. This also briefly led to a US yield curve inversion on Thursday 30 Jan (10-year maturity minus 3 months maturity) - yield curve inversions over an extended period have historically been a reasonable indicator of recession, so they are closely monitored.
How is this likely to affect markets going forward?
We don’t know for certain. In previous outbreaks (such as SARS), economic damage wasn’t really caused by the primary effect of the disease (people getting sick & dying) but by the secondary effects of the fear of the disease (people hunkering down and not travelling, shopping, interacting with other people, all of which affects company profits and economic growth). Given China is such a strong engine for global growth and the virus is centred there, the secondary effects are particularly worrying. SARS managed to knock 2% off China’s economic growth in Q2 2003 so it’s likely that the virus will have a measurable effect on global growth in 2020, although any dip is likely to be temporary, as long as the disease is contained.
As for markets, in previous outbreaks like SARS, the market sold-off sharply but then bounced back even more strongly once the outbreak started to peter out. Selling out of the market is thus risky as it risks locking in losses but not being present for the rebound.
Source: John Authers, Points of Return, Bloomberg
Every outbreak over the last 100 years has been contained and so has had little effect on the market, so the virus petering out remains the overwhelmingly the most likely prospect here. But it’s impossible to completely rule out the incredibly serious tail risk of a global pandemic. This should definitely concern us, but careful action such as that being taken by the WHO and global governments is the correct response, rather than panic.
Source: Charles Schwab
How is this affecting PortfolioMetrix portfolios?
Coronavirus is a classic ‘black swan’ – an unexpected but high impact event. But the PortfolioMetrix portfolios are diversified precisely because although they don’t know about specific black swans in advance (or when they’ll occur) they have always believed that it’s best to prepare for them in advance by building robust portfolios, rather than trying to react after the fact. Indeed, the rebalance in December, which amongst other objectives aimed to further diversify portfolios by adding in listed infrastructure and trimming emerging markets, has proved helpful month to date. Recently added M&G listed infrastructure was up 4.15% over January.
It is likely, however, that portfolios will be volatile for the next few weeks as we learn more about how serious this strain of coronavirus actually is. They are not planning any knee-jerk reactions (which risk missing out on a rebound) but they are monitoring the situation closely.
Changes at Wealthtime
There are a few changes afoot at Wealthtime, the investment platform company that quite a few of our clients use. Founded in 2006, Wealthtime is going to be acquired by AnaCap Financial Partners, in a move we believe will enhance the experience for both you and us. In fact, one of the first things they’ll be looking at are upgrades to their system to make the processes even easier to use, something we feel should benefit you.
Probably Wealthtime’s only weakness over the years was their size; so being acquired by a well-established European financial services specialist will, I am sure, help them. It's early days for now, and the acquisition is still subject to FCA approval, but we look forward to this continuing to enhance what is already a market leading offering. If you have any questions or would like to know more information, please just ask us.
Is your overdraft about to make you more overdrawn?
Whilst you may try to avoid being overdrawn, it can be comforting to know that you have access to an overdraft should you need it. However, it might be time to rethink your borrowing as the fees connected to overdrafts are changing and could give you an unpleasant surprise if you're not prepared.
The changes arise from the implementation of new rules from the Financial Conduct Authority that allow banks to increase the interest rate on overdrafts to a huge 40%! The new fees are the banks' response to no longer being able to fine you for going over your overdraft limit.
According to money-saving-expert, Martin Lewis, Nationwide has already changed their 50p per day charge to 39.9% interest and, from 14th March 2020, HSBC, M&S and First Direct will make similar changes.
Therefore, it may save you money to shop around for a bank that still offers a 0% overdraft, or even to consider using some of your savings to pay off or reduce what is currently in your overdraft. Act now and avoid getting caught out.
Inheritance - will your loved ones get what you want them to?
You have probably heard it before and you will no doubt hear it again: it is important to make a Will. Not only does it give you peace of mind but it also keeps things simple for your loved ones while ensuring that your estate is divided amongst the people you want.
As the law currently stands, the estate of anyone who dies without a Will is governed by statutory provisions. Unless you leave a surviving spouse or civil partner, your estate will normally be distributed to one class of beneficiaries, e.g. any surviving children. This includes any illegitimate children known to the administrators of your estate. For your surviving spouse or civil partner to receive anything, they must survive you by 28 days. If they don't, they will be excluded from your estate.
BREAKING NEWS: The amount that is assigned to a surviving spouse when the deceased also leaves behind children has increased from £250,000 to £270,000 as of 6th February 2020.
A simple way to explain these rules is shown below:
Within those categories the estate will be divided equally; for example, if you have two surviving parents they will each get half. However, your estate can only go to one group of people - it cannot be divided equally between any surviving parents and siblings, for example. If you are not survived by anyone in the above categories the Crown will take the whole estate.
There may also be examples of partial intestacy, so if there is any part of your estate that isn't covered under your Will the above rules of intestacy will apply to the portion that hasn't been accounted for.
Although rules are set out to distribute your estate in a fair way, without a valid Will there will be no way of explicitly determining who your estate goes to, what exactly they should receive and when they should receive it. If you want to write a Will or if you want to make sure your current Will is up to date, one of our advisers will be happy to help.
High earners' tax break under discussion
The tax situation of high earners in the NHS has been a hot topic over the last few months because of the negative tax implications to which they have been subject. There has been much speculation about how the government is going to solve this ongoing issue.
Whilst previous solutions have been considered "sticking plasters" rather than long-term fixes, the Treasury has recently announced a proposal to raise the threshold for the tapering of the Annual Allowance from £110,000 to £150,000 for everyone, something they seem to consider to be a longer term solution.
This further tinkering with the already complex taxation system around pensions has raised concerns across the industry, with many people calling for the tapering of the pension Annual Allowance to be completely scrapped to simplify things going forward.
There is no doubt that raising the threshold income limit by £40,000 will allow a large percentage of NHS high earners to work extra shifts without being penalised with large tax bills, but whether this is the final solution to such a complex problem is yet to be seen. What probably should happen is an overhaul and simplification of the pension and taxation process, which will take a huge amount of time and resources.
The outcome and final decisions on proposals to resolve this issue are due to be confirmed in the Budget, set for 11th March this year, which does not allow enough time for the overhaul needed, so I am sure this issue will raise its head again in the not so distant future.
Individual Protection 2016 - could be your last chance
There are two types of pension protection you can currently apply for: Individual Protection 2016 and Fixed Protection 2016. Each type provides a different form of protection and therefore requires different information in order for you to apply.
You can apply for Individual Protection 2016 (IP16) if your pension savings were worth more than £1 million at 5 April 2016. In order to apply you will need to contact all of the pension providers with whom you held policies as of 5th April 2016 to obtain their value on that particular date. The total of all amounts is the "relevant amount". Where this is greater than £1.25m, the protection is capped at £1.25m. Where the relevant amount is between £1 million and £1.25m, it becomes the personalised protection amount. Where it is less than £1 million, IP16 is not available.
Whilst there is no official closing date for this pension protection, it is worth noting that the statutory obligation on pension scheme administrators only applies for four years. This means that administrators are only obliged to provide the information you need until 5th April 2020, after that it's at their discretion and they can't be made to do so.
To be eligible for Fixed Protection 2016 (FP16) it is a condition that no individual or employer contributions have been made to your pension arrangements since 5th April 2016. Whilst there may be data gathering required to find out this information, it should be much less onerous to access than IP16.
As you can imagine, this restriction on data release could prevent you from being able to apply for the protection you may be eligible for in the future. So, if you think you might qualify then please get in touch and we can help you put together your application.
Financial wellbeing scheme in pipeline
The government is launching an initiative to focus on making Britain a nation of savers by 2030 and cutting the number of households relying on credit cards for everyday spending.
Studies report that 11.5m people have less than £100 saved as emergency funds, often having to rely on credit to cover unexpected costs and everyday living expenses. In light of this, the government is setting up a plan to improve the situation over a ten-year period that will see an extra 2m people saving and 2m fewer relying on credit cards by 2030.
Although not all credit card spending is bad, providing you have the reserves to cover the debt and as interest rates are currently so low, it may be that the money works harder and better for you if it was invested than it would if you used it to clear your credit card debt. Everyone's individual circumstances are different, and advice should be sought on what is best for you, but relying on credit cards for everyday expenses with no back up is less than ideal.
The initiative will also focus on education in schools about finances and how they apply to the real world, as well as debt advice to adults who may be struggling.
This plan fills the gap left by the Money Advice Service, which was scrapped in 2016 and which had a similar enterprise in the pipeline that never came to fruition. Let's hope this endeavour has more success.
Many of you are well versed in the tax return system and will likely just have submitted your own return by the online deadline of 31st January. The facts and figures involved can really make your head spin and can cause us to be more susceptible to any scams surrounding tax and HMRC.
With so many emails, letters and general communications between tax- payers and HMRC the scammers see this as an opportunity to send their own communications to try to catch you out. Scammers are producing more convincing communications than ever before, using official-looking logos, gateway account numbers and even calling from similar phone numbers to HMRC.
The general process is that they send you something that looks official (usually promising you a tax rebate or threatening penalties for tax fraud for unpaid tax), then ask you to click on a PDF which asks for your bank details for the rebate to be paid. With so many official-looking communications and HMRC moving towards more digital avenues, the scams are getting increasingly difficult to spot.
Top tip: HMRC will never contact you via social media.
Please stay vigilant and, if you are suspicious, we recommend contacting HMRC before taking any action, either from letters, email or speaking to anybody who calls you directly.
Notes on Brexit
The end has arrived. The Withdrawal Agreement Bill received Royal Assent and was ratified into UK law. The final steps were a vote in the EU Parliament on 29th January and written approval from the European Council. As of 11pm on Friday 31st January the UK is no longer a part of the European Union.
Now that we have crossed that particular hurdle, which has been almost four years in the making, it is all eyes on trade talks between the UK and the EU in March. Because leaving is just the beginning. As it stands, trade talks seem to be starting off with strong opposition. The UK government is firmly declaring a desire for zero tariffs, while the EU is adamant that in order to have that the UK will need to be fully aligned with EU regulations. Chancellor Sajid Javid has ruled out capitulation in this, stating that the UK will not be a "rule-taker". Don't assume you'll be hearing any less about Brexit going forward.
Charlie’s Mini Blog
On Tuesday morning of this week, we were hosting a monthly event we organize for business owners and professionals called The Breakthrough Business Breakfast. Each month we spend roughly 1/3 of the time networking, 1/3 learning about a concept for our business and the final 1/3 working on this principal as a group. The aim is to help business owners improve what they do, getting closer to what I call Entrepreneurial Happiness, whilst they expand their network.
This month’s theme was delegation; something that all business owners need to master if they are to be successful. Delegating more and more of your jobs inside your business has many benefits; you end up with a more sustainable business, one that can grow more without the constraints of one person and one that is ultimately more valuable.
Afterwards, it occurred to me, that the same applies to your finances. Many of you are bright enough to spend your time researching the ins and out of the pension legislation, portfolio contraction, taxation and financially planning your future, but is that best? In the same was as delegating as a business owner, when you have the help of a professional managing your money, your financial wellbeing is more sustainable, it will more than likely grow more and you are able to explore more opportunities.
As someone that has numerous tax qualifications, I have no doubt that I could do my own tax return, and even that of Efficient Portfolio. That said, I employ an accountant as I know he will save me tax and time. If you know someone that isn’t delegating this part of their life, it might just be worth introducing them to us to see if we can do the same.
Finally, if you are a business owner or a professional and would like to attend our Breakthrough Business Breakfast, please just email email@example.com.
This month’s book recommendation is Nudge: Improving Decisions About Health, Wealth and Happiness by the well-known social economist Richard H Thaler. The Times summed it up pretty well when it said ‘Nudge has changed the world. You may not realise it, but as a result of its findings you're likely to live longer, retire richer and maybe even save other people's lives’. Not a bad review, and one that is difficult to improve on.
The key to this book is that it looks at how you can stack the odds in your favour to make good financial decisions. For example, it is difficult to save more money into a pension today, but immediately after a pay rise it is much easier; so set your pension increase ahead of time to come out of money you aren’t used to spending yet.
A book that can teach you how to be smarter with all decisions, not just those that involve money.
New Year’s Resolutions for your savings pots
With the financial burden of Christmas behind us, your savings pots could probably benefit from a little boost. Having savings and investments is not only good for the wallet but also good for the mind. The feeling that you have a financial cushion can really put your mind at ease.
Some basic tips and tricks listed below may help you or your family get into the habit of saving the pennies to make the pounds.
Get the best rates - most cash savings are earning next to nothing but that doesn't mean there aren't competitive rates out there that are worth looking into. If you want to save for the longer term, don't forget to consider adding to or starting investments as a way to get potentially much larger growth on your savings.
Save without noticing - you may have heard of apps that work with your bank or provide an account that will round up your spending and put the rounded-up amounts to one side as savings. This may seem like slow progress but, over time, this is a way to build up a small sum without even feeling the pinch. Many banks, including digital-only banks such as Monzo and Starling, can do this for anyone who is interested.
Use a jar - this back-to-basics approach can really work and is great for those who are self-confessed technophobes! Every day or week put your spare change in the jar - or even just save all your £2 coins or 50p coins, whatever works for you. Seeing the money in the jar build just by setting aside spare change can be quite motivating. You have to deal in cash for this approach though, so if you trade in plastic cards alone then sadly it won't work.
Set a goal and a target - why are you saving and how much do you need? Once you know this, make your target reasonable and achievable as well as relevant to your situation; if you can afford to save more, then do it. As a simple example, you may spend £10 per person on a takeaway per week, if you save this money instead it equals £520 per year. I f you have a family of four this could equate to £2,080 per year, all saved by cutting back or cutting out one weekly habit.
Do a finances health check - do you know where all your money goes each month? Sometimes it can feel like it just disappears. Combing through your outgoings may reveal unused subscriptions that are eating into your finances or bills where you may be paying more than the going rate. It may feel hard to find the time to do this, but the financial reward could be great. Once you work out where you may have been overpaying, make sure that the extra you identify goes into your savings account and doesn't get swallowed up by your everyday spending.
Property values remain static
In the last month of 2019 house prices achieved an annual increase of 1%, meaning slow overall price growth for the whole of the previous year.
This is good news for first-time buyers, so if your children or grandchildren are looking to get on the property ladder now is as good a time as any. However, this assumes they can get together the deposit they need; finding a deposit remains one of the biggest challenges for first-time buyers - enter the bank of mum and dad (or nan and grandad).
With so much political and economic uncertainty throughout the last year (or two or three), to see any growth means things are surprisingly stable, albeit with much more caution than usual from sellers and buyers. With the election outcome decided and Brexit on the horizon it is forecast that growth may accelerate in 2020, or at least start in a positive position. Potentially bad news for first-time buyers as their deposit goals will increase but, for those already in the market who want to sell, perhaps there is more reason to rejoice.
However, with Brexit still on people's minds it is difficult to predict how and when the property markets, along with the rest of the economy, will be affected.
Travelex cyber attack
Travelex took its platform offline on 2nd January in an attempt to protect its sensitive data from a cyber-attack on New Year's Eve. At the time of writing it is not known when or if the platform will be back online.
Many banks, such as Sainsbury's Bank, Barclays, Virgin Money and HSBC, depend on the Travelex platform to provide online travel money services, which are currently unavailable to customers.
The extent of the data breach and the effects of the attack won't be known until the incident is investigated in full, but if you were planning on jetting off any time soon it might be wise to look elsewhere for your currency.
Beware of 2020 dating
A top tip when signing legal documents, such as letters of wishes, solicitor's paperwork, etc., is to not abbreviate the year 2020.
When abbreviated, e.g. 3/3/20, the date could be easily doctored to read 3/3/2004, 3/3/2015, etc. Always write out the full dates where possible, including any zeros, e.g. 03/03/2020.
This may never cause any issues but it's better to be safe than sorry!
New governor in charge
Andrew Bailey, the current chief executive of the Financial Conduct Authority is due to become the new Bank of England Governor on 16th March this year.
With over 30 years' experience at the Bank of England he was a strong candidate and widely considered to be the right person to take over from the current Governor, Mark Carney.
For those who would like a reminder of what the Bank of England does:
- it sets the official interest rate, which determines the cost of borrowing money
- it supervises the financial system, seeking to ensure it is stable and no banks are running out of cash
- it acts as the government's bank and a lender of last resort in times of financial difficulty
- it issues the UK's banknotes (coins are issued by the Royal Mint)
- it stores the UK's gold reserves, as well as those of other central banks
Although not officially confirmed, Bailey is expected to re-introduce an element of quantitative easing as well as keeping interest rates at their current level of 0.75%, with low growth forecast for 2020 going into the new year. Unfortunately, this is bad news for those who may have large amounts on deposit in banks and building societies as these will be earning less than 1% for the foreseeable future. With inflation currently hovering around 1.5% this means that savings in the banks are losing money in real terms.
However, this could be good news for investments over the next year or so. Many people are turning to investments in an attempt to achieve growth on their savings, which pushes the markets upwards and escalates investment growth. A word of caution though: with investments we can never make promises, we can only speculate!
Push for pension review
You may have seen in last month's Efficient Wealth Update that we discussed a remedy for the NHS pension issue that results in many top earners being penalised because of the tapered annual allowance. This is not the only issue surrounding pensions, with lower earners in other industries also potentially missing out on tax relief over the course of their working lives if they are part of certain schemes. Basically, a review of pensions is long overdue!
The Conservatives promised to act fast on these issues if they won a majority in the recent election and, now that has happened, there are calls for them to deliver on their promises. The interim measures, or "sticking plasters" as they are being referred to, are not enough and do not solve any of the ongoing and complex issues.
Hopefully the Conservatives will keep their promises and bring reform and continuity to pensions that will see many of the difficulties with which people are struggling resolved; it would be a shame for this to be shelved again in favour of what are considered bigger issues.
Notes on Brexit
Boris Johnson's Brexit deal finally passed through the final stage in Parliament, thanks in part to the large majority the Conservatives now hold in the House of Commons. The agreement has now been passed to the House of Lords, who are expected to debate it at length and request a couple of changes relating to provisions for child refugees and the role of Parliament in the upcoming trade talks.
However, the Northern Ireland border could still prove to be troublesome for our PM. HMRC have advised that it could take up to five years to put the infrastructure in place to manage the border, but planning for this can't happen until trade talks have been finalised. This timeline is a lot longer than the one-year transition period promised.
This month’s book recommendation is ‘Happy Money; The Japanese Art of making Peace with your Monday’ by Ken Honda. I have never read a book before that asked me to say thank you when paying my tax bill, but I am actually coming to terms with it.
It is a really easy book to read, and it will definitely make you think differently about your money. In time, I can see that yes, it could make you happier around your money, as you exercise more gratitude and awareness around the money you receive and the money you spend.
Charlie’s Mini Blog
Last weekend I ran the Folksworth 15 event, a 15 mile run around the Cambridgeshire countryside. I’d never run an event of that distance before, so it was difficult to plan how to approach it. I’d run that distance in training runs where I am not pushing myself to the limit, and I’ve now run a couple of marathons, but both are very different to running 15 miles as fast as I can.
I decided to set off at a 8 minute mile pace. That is the pace I’d target if I was running 5 miles, maybe even 10, but I had no idea if I could sustain it for 15 miles. I knew that would bring Mee in around 2 hours, however from all my previous running, I knew 2.10 was far more realistic. As it happens, I could sustain that pace, however I missed the 2 hour mark by just under a minute due to a quick toilet stop! Looking at my Garmin after each mile gave me the confidence to keeping pushing that target, and it worked. Missing 2 hours could be seen as annoying, however in reality, this approach took nearly 10 minutes off my realistic time.
The beautiful thing about embracing Lifetime Cashflow Forecasting is that is what replaces your Garmin. Each year you can check your savings or spending rate, and you can reassess. Can I keep this pace up and till make it to the end of the race. There is nothing worse than running out of gas and falling face down into the dirt in the last mile of your race, and spending money in retirement is no different. Lifetime Cashflow Forecasting can ensure you get the best possible life, like I got the best possible time, whilst making sure you have enough fuel to get you over the finish line!
If you want your money to start working for you over and above inflation, then to make real gains you have to look at taking some risks. I’m not talking about putting your money on the 3.15 at Doncaster. You are almost certainly already taking some risk with the money in your pension, so why wouldn’t you do it with the money outside of your pension?
The most obvious way to do this is to use your ISA allowance. Your ISA is not just for cash savings; it can also hold investments. These can be low-risk and high-risk investments. We’ll look more how to attack that problem later on, but for now, know that ISAs may give you a higher yield than cash and inflation, but doing so can take a little more time. You need to put this money aside for at least three years, and ideally for at least five years—hence the need for the buffer account. This doesn’t mean you can’t draw an income during this time, but when you use investments that can go up as well as down, you need to give them time to average themselves out before you can see the benefits.
The ISA allowance goes up most years (£20,000 each at the point of writing), and it’s important that you utilise as much of this allowance as you can each year. The ideal scenario is that you reach retirement with a lump of money in pensions and another lump of money outside of pensions. The advantage of pensions is that you get tax relief on the money at the outset. The problem is that this simply defers the tax, as you then pay tax on the income as you draw it. The advantage of ISAs is that whilst there is no tax relief at outset, when you come to draw the money out, it is tax-free. Therefore, a blend of ISAs and pensions allows you to minimise the tax you pay in retirement. You can draw up to a certain tax threshold from the pensions, e.g., up to the higher-rate tax threshold, and then take the additional income you need from the ISAs, ensuring you are not taxed at a higher rate.
This blend also gives you flexibility. If you need capital for that once in a lifetime trip or want to stop work a couple of years before you can access your pensions, ISAs allow for this. You can access the capital held here when you need it, without restriction.
If you want to save more than the allowance, do not be alarmed. You can use the same investments as you would have put into the ISA, just unwrapped. By holding these funds unwrapped you will pay some tax on the growth, but as most of this growth will be capital growth, it is taxed through the Capital Gains Tax regime. Few people use up their Capital Gains Tax allowance each year, so most of this growth will also be tax-free. The other advantage of this strategy compared to other investment types, like Investment Bonds, is that if you have years where you cannot save the full ISA allowance, you can transfer the money from unwrapped into the ISA wrapper to avoid losing the allowance. These types of investments can generate you a flexible income when you need it. The amount of risk you take usually determines the level of returns. The level of returns determines the amount of income you can draw without eating into the capital, though after retirement eating into the capital may be acceptable, as long as it’s managed in a sensible way. Later in life (during retirement) some other tax wrappers like Investment Bonds can be useful, but for most people this just adds unwanted cost and tax.
You should also be aware of two other kinds of investment groups.
Once you’ve built up a good foundation in ISAs, cash, pensions and possibly some unwrapped investments, some of the wealthier amongst you may be looking for other options. Particularly if you are fully funding your pension (£40,000 in 2015/16), then you may be looking for long-term saving alternatives. This is where the EIS, SEIS and VCT might come into play.
The Enterprise Investment Scheme (EIS) and the Seed Enterprise Investment Scheme (SEIS) are investments in unlisted companies. Venture Capital Trusts (VCTs) are funds that invest in a portfolio of unlisted companies. These all offer very attractive tax breaks, both in ways that are similar to pensions and ISAs, but also in that VCTs can offer some additional savings in the areas of deferring or reducing Capital Gains liabilities, while also reducing Inheritance Tax. These products are generally very high risk and highly specialised. Not many financial advisers have much experience in them either, so if you think this area might be of interest, make sure to get experienced, specialised advice before you proceed, or you might find you’ve saved a load of tax but have lost the original capital.
In recent years, some ‘advisers’ have increasingly pushed unregulated investments on prospective retirees. As enthusiasm for pensions wanes, more people are willing to risk their pension in risky unregulated investments. These tend to take the form of more obscure investments into ‘teak forests’, ‘foreign property’, ‘second-hand endowments’, ‘land banks’ or ‘foreign exchange’.
I am not saying that all investments in this area are rubbish, but what I will say is that many so far have cost their investors their shirts. When regulated, if mainstream investments go wrong they might fall by no more than 10%; even in a financial disaster, high-risk funds might fall 50%, but at least you can get that back 50% back through a compensation scheme. When unregulated investments go wrong, it usually means you lose everything. Even when it hasn’t gone wrong, these investments often prevent you from accessing your funds, only to go wrong further down the line.
Most concerning are the people pushing these products. Many of these pushers have approached me asking for help in moving their clients into environments where they can then invest in their solutions. I refuse point blank, even though it could be quite profitable, because I believe that these clients don’t genuinely understand the risks involved. People at networking meetings approach me to see if I would recommend these products to my clients. These are the sort of people who last week were promoting ‘Utilities Warehouse’ and are now apparently now investment experts.
I met a client once who had been advised to put all of the life insurance pay out from her husband’s death into these types of investments. Nearly every one of them tanked, costing her all of the money she needed to support the rest of her life. Because these investments are unregulated, you cannot make a complaint to the Financial Ombudsman, so if a problem arises, you have to go through the courts, which is a much more complicated and costly process. Avoid these investments like the plague.
One final, but vital, point worth making: Never buy shares off anyone who approaches you on the phone! There are still a lot of share scams going on, and the older and more vulnerable are duped into buying worthless shares for a fortune on the promise of future riches. It is a very slippery slope; once you have made a purchase, you will be targeted time and again.
We had a client come to us who, over a three-year period, gradually sank a total of over £300,000 into these scams. He will never get a penny back from any of them. The scammers are amazing on the phone, and so it is easy to be convinced. You have to be strong and tell them that you never buy any investments over the phone. Just say no and put the phone down. It will save you a fortune!
Without question, being a parent has made me realise that I am not the most important person in my life. Giving my kids security and the hope of a bright future is what gets me out of bed in the morning. I fight to succeed everyday so that my children can have a great life. But what if I suddenly wasn’t there or wasn’t able to provide for my family? I wouldn’t want my untimely death or an illness to scupper my daughters’ futures.
Let’s bite the bullet and get the worst case scenario out of the way first. Death only affects those left behind. Despite being one of the only certainties in life, none of us really want to think about it. But come out of your comfort zone and face this fact now. When you die, your loved ones will be the people left behind. What would happen to your family if you suddenly died tomorrow? Would they cope? Would they be able to live out all of their hopes and dreams? Or would they struggle financially? Obviously, they would be affected from an emotional point of view, but how would it affect them financially?
Financial security, peace of mind, an inheritance or just certainty that bills can be paid, are all legacies we’d like to leave behind for our loved ones. A Life Insurance Policy can help to deliver all of these things, so it is a pivotal part of your financial planning strategy. How much you need will depend on your age, wealth and circumstances, but, generally speaking, as a good rule of thumb, you will probably need twenty-five times your income. Why so much? If you earn £20,000, a lump sum of £500,000 will generate a sustainable income of around £20,000 per annum for your loved ones.
The chances of you dropping down dead tomorrow are relatively small. It’s not impossible, and the impact could be huge on your family, but the chances are still slim. Sadly, it’s far more likely though that you could be diagnosed with a critical or even terminal illness.
According to ‘Contractor Weekly’, ‘a recent study has revealed that one in two people born after 1960 will be diagnosed with some form of cancer during their lifetime.’ These are frightening figures, but those statistics don’t even take into account other life-threatening illnesses that could have a seriously detrimental effect on your finances.
If you are diagnosed with a critical illness, chances are that you would not be able to work for a significant period. If your salary sustains your family, can you image what this would do? They might not be able to pay the mortgage, meet household costs and would generally struggle to get by. Yes, you may be entitled to some form of statutory sick pay, but would this be enough? If you’re self-employed, this problem is compounded even further: If you don’t work, you don’t earn any money.
Many illnesses require specialist treatments, home modifications or professional care, all of which can be very expensive. Say for example that you needed to build a downstairs wet-room, as you could no longer use the stairs. The cost of this would run into the thousands, but would be necessary for you to continue to lead a comfortable standard of living. You may have money put aside to cover this expense, but would you really want to spend your long-term savings on this modification, when it was originally designed to generate your Financial Freedom?
The beauty of Critical Illness Cover is that the payout is tax free and you can spend it on what you need to, whether that is medical bills, your mortgage or home modifications . You are also free to invest the money, so you can build a passive income for your loved ones in the years to come. In other words, Critical Illness Cover will give you a lifeline at this demanding and difficult time. You won’t need to worry about the financial implications of your illness, instead be able to focus on getting better.
Shareholder Protection Shareholder Protection is effectively an agreement between shareholders which is backed up by a series of Life Assurance policies and trusts. In this agreement, the conditions are set out regarding what should happen to the shares in the event of death. For example, will they go the deceased’s family, will they be evenly split with the remaining shareholders or will they be sold on the Open Market. The Life Assurance Policies would provide the finance in this instance. As we saw in ‘Example 2’, a Cross Option can be embedded into this agreement, which means that the surviving shareholders have an option to also buy the shares from the deceased party’s family. In terms of ensuring that your business will continue to thrive in the event of your death, this is, in our opinion, the best Protection product to look into. Shareholder Protection Insurance guarantees that in the event of the death of a shareholder, the surviving owners will be given sufficient funds in order to buy the deceased’s stake in the business. By doing this, the surviving shareholders will remain in control of the company and the beneficiaries of the deceased’s estate (i.e. your family) will receive any interest accumulated from the shares, or indeed the profit of the sale of them. Shareholder Protection Insurance will enable your business to continue to be operational and your family to receive a financial gain.
Colin and Ravi are equal directors and shareholders of a catering company, which they set up 4 years ago. Both of them are involved in the day to day operations of the business, even though they employ over 40 members of staff. The two men both have wives and children, but none of the family members have the skills to run a business and the children have no urge to follow in their father’s footsteps. Colin and Ravi decide to set up two Keyman Insurance policies in order to protect each other’s lives if the worst were to happen. This would mean that in the event of sickness, incapacity or death, the two families would be looked after and the business could still continue to operate. In this instance, Shareholder Protection policies are set up under a business trust with a cross option agreement. This means that if one of them should die, the payment received goes straight into the company and the shares that the deceased owned go to the respective family. Of course, the family have no interest in the business so do not want the shares, they want the money. Conversely, the surviving business owner wants the shares, not the cash. This is where the Cross-Option Agreement comes in to play.
This agreement means that if one party is dissatisfied with the outcome and wishes to contest it, the other party must oblige. In this case, both parties are eager to do this, so that the family get the cash and the remaining business owner receives the shares. The family are financially comfortable and the surviving business owner has full control of the company. Everyone is happy. There are two perspectives to consider when looking at the benefits of Shareholder Protection Insurance. Firstly, if you have a business partner, or rather fellow shareholder, you will benefit if this type of insurance is in place. Imagine that your co-owner falls ill or even dies. By having Shareholder Protection Insurance in place, you will be given a lump sum which you can use to buy their shares and keep control of the business. By having complete ownership of the company you make the decisions. You can decide what is best for the company, for example you may want to replace the deceased or incapacitated Shareholder and bring someone new onboard. The terms of the Shareholder Protection Insurance state that the deceased Shareholder’s family will not be involved in the running of your company (they will sell the shares to you, so they benefit financially and you gain control of the business). This is reassuring, as you can be safe in the knowledge that someone who is not familiar with your business will not be in control. You should also take comfort in the fact that you have been able to purchase the shares in company without having to borrow money. This means that you have put the company in a financially strong position, i.e. no debts to repay or loans from the bank that are hanging over your head. In the second perspective, imagine that you are the Shareholder who is ill, or has sadly passed away.
Shareholder Protection Insurance will make sure that your family will receive a fair value for your interest in the business. This type of insurance will give you peace of mind, as the sale of your shares will realise the true value of your stake in the company. By having Shareholder Protection in place, you are also preventing any added pressure on your family in the event of your death. They will not have to try to find a buyer for your shares in the business, as they will automatically be obliged to sell them to the fellow shareholders. All of the hard work that you have put into your business will be paid back to your family. There are also benefits that can be attributed directly to you from Shareholder Protection Insurance. Say for example you fall ill. The last thing you need is the added worry of financial matters, which could hinder your recovery. This type of Protection will eradicate this, meaning that you can get well without any stress. You can also be safe in the knowledge that you are preventing the company ending up in financial jeopardy, caused by them having to borrow funds to buy your shares. Finally, Shareholder Protection will enable to you to retire with no money worries-as long as you are a shareholder, your family will always benefit. As you can see, Shareholder Protection does not only benefit your family, but it also benefits your company- whether you pass away or if a fellow Shareholder dies or is taken ill. This type of Protection is something that we would recommend to all business owners.
Partnership Protection comes in three main forms; ‘Buy to Sell’, ‘Cross Option’ and ‘Automatic Accrual’. In essence, this type of Keyman Insurance is the same as Shareholder Protection, however this deals with the actual ownership of the business, rather than just shares.
As the owner of a Company, Keyman Protection should be something that is a strong consideration for you. At the end of the day, the implementation of such a scheme could save you hundreds, thousands and in some cases millions of pounds. Keyman Protection is a safety net that could also ensure that your business is protected for the future. This type of insurance can be incredibly complicated, so we highly recommend seeking professional advice from an independent financial planner. At Efficient Portfolio, we have years of experience dealing with corporate clients, so we are here to help you with your Keyman Insurance.
Protecting your estate for your loved ones is a key priority for many of our clients, but how can you be sure that your wealth will be safeguarded from issues such as divorce, Inheritance Tax and care fees? In this short video, Charlie Reading explains how a Trust Framework operates in practice, and how it could be beneficial for your estate planning strategy’.
We wanted to look at a type of Trust which will safe-guard your loved ones inheritance from divorce.
As a married couple, if your total estate including your pensions exceeds the nil-rate band (currently set at £650,000 for a couple), your next generation are likely to be faced with a 40% Inheritance Tax bill on the excess. It is also worth considering that the UK has the highest divorce rate in the EU. With this in mind, it seems a shame to work hard to save into your pension, only to have some or all of it taken away from your family by the state or from a divorce in the family. A special type of trust for your pension can help to safeguard this valuable asset against these issues.
Trusts are a very cost effective way to protect your family’s assets and to reduce your Inheritance Tax (IHT) bill. However, many people are oblivious to the issues that can arise without them. Trusts provide probably the best protection when it comes to making sure that everything you have worked hard for stays in the family. The Spousal Bypass Trust is a specific way of using a traditional trust arrangement to protect your pension fund; often the second largest asset someone has. So how does it work? The best way to answer this is to look at an example of what usually happens without one.
Mr and Mrs Smith have a joint estate worth £1 million, plus Mr Smith has a pension policy worth £500,000 and has nominated Mrs Smith as the beneficiary of any death benefits.
On Mr Smith’s death before retirement, Mrs Smith inherits the whole estate, including the pension as a tax free lump sum. No Inheritance tax here, so all seems fine at this stage.
The problem arises when Mrs Smith dies. At that point, the pension value is now added to the estate, so her total estate is now £1.5m. As a result, Mrs Smith’s Inheritance Tax liability after the joint nil rate band (£650,000) would be £340,000.
That is a significant reduction to the family’s wealth, but this could have been worse. What if Mrs Smith had remarried Juan, and then divorced him later in life? That might have cost the family £750,000. Or worse still, what if Mrs Smith had remarried Juan and then died; that could cost the family the full £1.5m if Juan gets his hands on it! Finally, if Mrs Smith went into long term care at a typical cost of £48,000 per annum, the estate will rapidly be eroded.
So how would a Spousal Bypass Trust help?
Nothing changes during Mr Smith’s lifetime other than the need to assign the death benefits of the pension to the Spousal Bypass Trust that has been created. On Mr Smith’s death, the death benefits pass to the trust. Family or friends, including Mrs Smith, are trustees to keep the running costs to a minimum, and they make an interest free loan of the full £500,000 to Mrs Smith.
Mrs Smith can use the funds as she needs during her lifetime, but on her death the funds can return to the trust to be reallocated to the children. This would save Inheritance Tax on the £500,000 that had come from the pension, an immediate tax saving of £200,000.
Furthermore, if Mrs Smith had got remarried to Juan and then divorced, the £500,000 is not her asset but a loan, so the Trust should ensure that is excluded from the divorce settlement. Equally, if she remarried and then died, whilst the rest of the estate may go to Juan, the £500,000 will return to the trust and pass down to the children. The same protection would apply against care costs too.
The first step in achieving your goals is to discuss your current concerns with one of our qualified Financial Planners.