Efficient Wealth Update – May 2021
Deeds of Variation
Regular readers of our Efficient Wealth Update will know that Estate Planning has been a key focus of ours in the last months. In times of uncertainty, careful planning can help to replace feelings of fear with feelings of comfort and clarity, but all the planning in the world won’t help to predict when we will ‘meet our maker’. COVID-19 has tragically brought about a large number of untimely deaths, as well as financial hardship, so what happens if your loved one meets an unexpected end? Will their existing planning ultimately benefit those who need it most? Will you want or even need their money at that time? Will the younger generations in your family be excluded from this legacy?
In a year of furloughs, redundancies and turbulent economies, it has been the younger generations who have been hardest hit. Many people under 35 are now struggling to get onto the property ladder, and even more are experiencing erratic, unpredictable and unstable incomes.
For many parents and grandparents, it is the younger generations who they want to support in these current times, as it is this generation who has been the most adversely impacted and potentially disadvantaged.
Traditionally, most of us will leave our estates and assets to our spouses and children; however, with life expectancy currently set at around 81, people often inherit from their elderly parents when they are in their 50s or 60s. By this period of our lives, most of us are financially comfortable, but we may have children of our own who are more in need of support.
So, what can you do if you’ve been a left an inheritance that you don’t necessarily need? How can you legitimately pass this down to the generations who will benefit most?
The first solution is to be pre-exemptive. The first step in any Estate Planning strategy is to write a Will and this is generally sage guidance; however, the needs of your loved ones, your relationships with them and your own needs will evolve over time, so it’s important to regularly review what you have in place, and where you want your intended wealth to go. Conducting regular reviews and re-writes will enable you to help the younger generations, such as your grandchildren or even great-grandchildren, especially if they’ve been financially hit by the effects of the global pandemic.
Whilst prevention is often better than cure, sometimes we can’t predict the future needs of our intended beneficiaries, and we of course can’t plan for unexpected deaths. Thankfully, there is a second solution that can help families in this exact situation.
When a loved one dies unexpectedly, there is rarely time for them to change their Will to accurately reflect their wishes. Equally, if someone is in the final stages of life, the legal burden of paperwork is not appropriate, and would only add further distress to an already difficult and upsetting situation. As a result, some people look to find a way to change the terms of the Will after their loved one has passed.
Over the last few months there has been a spike in families using something called a ‘Deed of Variation’, which helps them to divert assets to younger generations. Not only does this legal process direct funds to where they are most needed, but it can also help to mitigate some Inheritance Tax, and of course helps to fulfil the wishes of the deceased, without causing any undue stress in their final days.
A Deed of Variation can be used in various ways, but it usually seeks to gift a fixed proportion of the estate to beneficiaries who were not necessarily stated in the Will. It can also be used in conjunction with Trust planning, so that funds can be taken appropriately, some taxes can be reduced, and named beneficiaries can still access the funds, if required.
There are of course some restrictions and certain conditions must be met:
- The Deed of Variation must be applied for within 2 years of death;
- All Beneficiaries of the original Will must agree to the change;
- All suggested changes must be sent to HMRC for approval;
- All Deeds of Variation must be signed in person;
- Deeds of Variation can be used on an existing Will of when someone dies intestate.
A solicitor will need to conduct the work for you, and they will usually charge a fixed fee, depending on the level of complexity required.
As a client of Efficient Portfolio, we will discuss changes to your Will on an annual basis, but if you have experienced an unexpected loss, a Deed of Variation could form an important part of your planning. As a firm we work closely with a range of local, expert solicitors, so if you would like to find out more about Deeds of Variation please let us know and we will put you in touch with the best legal professional for your needs.
Have DIY Investments Had Their Day?
In years gone by, investing was the preserve of people over a certain age. The thought of researching markets, picking stocks and imparting with your cash were not trends that featured heavily in ‘pop culture’. That is until now.
If you have followed the financial news over the last couple of months, you may know that there has been somewhat of a phenomenon sweeping through our younger generations, namely in the form of ‘The GameStop/Reddit/Robinhood’ DIY-style Investments. Coupled with this, we’ve seen increased enthusiasm from youngsters who are embracing the cryptocurrency boom of the last few years, meaning that more and more, risk-hungry, ambitious under 40s have been playing the Stock Market. But is this a sensible move? Will everything come crashing down?
Firstly, I do think the very fact that younger investors are taking such a fervent interest in their finances is genuinely a positive step forward. Whether it has been driven by the fear caused by the pandemic, or a cultural shift in mindset, by starting to save for the future at a young age means that they are likely to have more wealth without having to work as hard for it. However, the very risky, restrictive and reactive strategy they are taking may lead to a sharp shock.
When it comes to investing, diversification, education and continual reviews are fundamental to anyone’s success. Markets will always go up and down, but a good strategy should be built so that if one area of your investments fall in value, the rest of your investments effectively help to smooth over this drop. By placing all bets on one company, or one stock, you are taking a huge gamble, which could cost you a lot, if not all, of your money. And making these decisions alone will only compound the impact. Ultimately, you only know what you know, and unless you are a financial expert, there are likely to be many holes in your approach.
An investment strategy is not just about picking stocks and shares. It’s so much more. A solid strategy looks at your life’s goals, your future needs and the means you have to achieve your goals. It should also have a degree of diversification and should ideally sit within your own ideological preferences. Your investment strategy should form part of your overall financial plan, which also considers factors such as potential (and indeed very real) taxes, the need for protection and c your tolerance to risk and capacity for loss. In short, simply ‘jumping on the bandwagon’ of a stock that’s on the rise will neither give you future security, nor provide a long-term plan that covers all bases.
The reality is though that this guidance will fall on deaf ears whilst the markets are high; it’s only when stocks start to tumble, or investment decisions become complex do people question if they need professional help. Sadly, if you wait for markets to crash though, it may be too late.
Financial Planning may be regarded as something that ‘older people’ do, but I believe that it’s something that everyone should do. Working with an expert will help you to understand how markets work, how you can protect yourself from risks, and give insight into long-term planning that can help to give you a secure, and predictable, future.
Our younger generation are our future clients, so we want to help to educate and inspire them. To help with this, in 2017 we wrote SMART Money, which can download for free here. This quick-to-read book provides insight into how investments work, how to manage your money and helps to nurture a savings psychology that will help for years to come.
House Prices: Can They Continue to Rise?
When it comes to buying and selling houses, the times we are living in are record setting! According to the Halifax price index, house prices in the UK rose 8.2 per cent year-on-year to £258,204 in April, surpassing the record high of £254,606 recorded in March. But what factors are impacting these exceptional figures, and will they continue to rise throughout 2021?
Why Are Prices High?
For anyone who lived through lockdown in a cramped, city setting, it will come as no surprise to hear that more and more of us are now seeking sanctuary in new homes that offer greater space and that are more suited to our new working patterns. This has of course led to huge demand in the marketplace, where optimal properties are in short supply, in turn, or course, helping to inflate the price of housing.
The Stamp Duty Holiday has also played its part, encouraging more and more of us to take advantage of the reductions available. The impact that this factor has had will of course fade over the coming months, but low interest rates and continued demand will help to keep prices relatively high.
The loosening of restrictions and the successful vaccination programme will also play their part, and it’s anticipated that more and more of us will see the next few months as an opportunity for new beginnings and a chance to ‘start afresh’, be that in new home or even a new part of the UK. Of course, as we awake from lockdown, the economy as a whole should also start to see a much-needed boost over the coming months.
When Will It End?
There is of course no way of predicting how the housing market will perform as we enter the final two quarters of the year. Some schools of thought are being cautious and considering the impact that further unemployment could have, especially once the furlough scheme ends on the 30th September 2021.
Rates are also exceptional at present, which does indicate that they must, at some point, see a correction; however, with interest rates not looking like they are going to shift for some time, many experts believe that house prices will continue to remain high throughout the rest of 2021.
One thing is certain though- if you are looking to sell, now is the time.
If you are looking to move to a new house or remortgage and would like some professional guidance, please get in touch with our Mortgage Adviser, Andrea Harrison, who would be delighted to help you: [email protected] | 01572 898060
Review Your Financial Planning
As we go through life, many of us ‘collect’ a wide array of financial products. Whilst saving for your future is a pivotal step to help you achieve your goals and the lifestyle you want, it can often be counter-productive if you scatter your seeds too wide or if you neglect the plans you’ve cultivated.
So, what should you be reviewing?
- Investments
As we all know, market fluctuations, tax and a reduction in interest rates can all damage the return on our investments; however, it’s also important to consider how risk can also make an impact. Keeping money in cash may feel like the solution here, but in reality, cash is not riskless, and its value will also fall over time due to inflation, thus reducing your purchasing power and jeopardising your future goals.
So, how can you make your cash work harder and reduce the amount of risk you are exposing your wealth to?
Diversification is key here. Putting all of your eggs in one basket, for example one asset-class, could mean that all of your hard-earned money can be wiped out in one fell swoop. By electing to employ a diversified strategy you may still experience losses on some of your assets, but you could also see gains in other areas, hence your overall performance will be smoothed over time and the impact of losses is greatly reduced. However, it’s crucial to keep your investments continually under review, so that suitable adjustments can be made as required.
- Pensions
When it comes to pensions, having numerous pots strewn here and there can actually be damaging to your overall objectives. Time and time again we hear the same concerns about ‘untended’ and scattered pensions: it’s hard to keep track of performance; it’s an arduous task to monitor or review what’s in place; there are a multitude of fees and charges; the administration is a burden; and it’s unclear if there are sufficient funds for retirement.
So, what should you do if you’re considering pension consolidation? The first step is to seek expert independent guidance. Pensions can be quite complex and are governed by various regulations, come with differing benefits, and can sometimes be subject to exit penalties. It’s important to look at the pros and cons before you commit to any type of transfer, to make sure it’s suitable or the best available for your specific needs. Pension consolidation may not be appropriate for everyone, but if you are considering a ‘spring clean’ of your pensions, we strongly recommend seeking the assistance of an independent expert.
- Review Your Estate Planning
Whether you have a Will or a Trust, your life will change over time and these elements of your planning will need to be updated. Whether you have experienced the joy of the arrival of new children in your family, or whether you have sadly experienced loss or divorce, the circumstances of our lives are constantly evolving, so it is important to ensure that your estate planning reflects those changes. Afterall, the last thing you may want is for your former partner and their family to walk away with your wealth after you’ve gone.
Wills, Trusts, and even documents such as Lasting Powers of Attorney, are the backbone to ensuring that your wishes are carried out, and Trusts especially can help to protect your wealth from factors such as tax, divorce and care fees, but the effectiveness of these devices will depend on how up to date they are. This area of financial planning is also subject to continual changes in legislation, such as tax laws, so it is crucial that your planning reflects what is legal, what is suitable for your situation and your wishes.
- Review Your Protection
Very much like estate planning, your protection needs will change over time. Whether you change your career, health complications transpire, or your overall expenditure increases, or indeed decreases, it is important that the protection you have in place covers your unique situation.
You certainly don’t want to find out that the policy won’t pay out when you need it most, or it doesn’t cover the elements you need it to. Equally, you don’t want to be overpaying for a product that is no longer relevant.
Through continually reviewing your protection, you can gain some peace of mind that you have the most suitable cover for your situation, so that if the worst does happen, you and your loved ones can continue to live with security and comfort.
Charlie’s Mini Blog
Who’d have thought we could become so grateful for the simple things. A couple of weeks ago we were able to host The Efficient Portfolio golf day at Luffenham Heath. Whilst it wasn’t quite in the format we’d have preferred and eating outdoors certainly had a few of us shivering by the time to depart, it was a wonderful thing to be able to return to.
Seeing so many clients on the day, being able to chat over a pint afterwards and sing the virtues of a lovely golf course are all things we took for granted for so long; and hopefully we will again in the future. For now, it is a time to appreciate the little things.
For example, we always start our Monday team meeting with ‘The Best Things’ that have happened personally and professionally in the last week. To hear stories this week of people meeting up with family, drinks with friends in the pub and even a trip to the cinema is fantastic. So, lets revel in the simple things for as long as we can; after all, many of them are also the most important things!
Book Recommendation
This month’s book recommendation was interesting enough to give me some fantastic insights about life in business, and life in general, but also funny enough to have me laughing out loud. How to fail at almost everything and still win big by Scott Adams is the story of his own life. As the creator of Dilbert, one of the world’s most famous syndicated comic strips, he describes himself as only being better than average at a few key traits, but it is the combination of those traits that has been the key to his success.
In the book he looks at so many winning traits, but the innovation stack really got me thinking about how we are all unique and can bring a different slant to the world of business. Great to read as an entrepreneur, and want to be entrepreneur and also as a young person starting out on their career path. A book I will certainly come back to again.
