This month we have seen an uplift in the markets, and I have included a market commentary from Richmond House Investment Management to give insight into last month’s market view and performance which is showing dividends in August’s performance. Peter has written an article on missing pensions; Dan has written about trying to avoid Inheritance tax whilst keeping control of your money and Kristina has written about Pension v Property as investment options so a nice spread of topics to close the month.
The Curse Of The Lost Pension
One of the most common questions we get asked is “How do I find out if I had a pension when I worked for XYZ Ltd. 20 years ago?” The advent of Workplace Pensions is only going to exacerbate this situation, particularly for persistent job-hoppers and those in transient industries.
While the vast majority of lost pensions, when found, will only have a few hundred or a few thousand pounds in them, there are occasions where the amounts involved are life changing. We recently had two cases of note. One where the individual knew they had a pension but had no idea how much was in it – turned out to be over £1m. The second was an individual who swore blind they had no pensions, but a chance find of some paperwork led to a pot with over £600,000 in it. These plans created their own unique problems, but the problems were far more preferable, and much more easily solvable, than the problem of getting near retirement and finding you have no pension at all.
The current way of tracing lost pensions revolves around a government website https://www.gov.uk/find-pension-contact-details. Entering details of your previous employer will then provide contact details of pension schemes associated with that employer and, from there, it’s a case of phoning or emailing along the lines of “I worked for you from March 1998 to July 2001. Was I in a pension scheme and, if so, who would know the details?”
Unfortunately, the results you get are by no means foolproof since the data supplied is on a purely voluntary basis and often is not updated when companies change pension provider or are taken over etc.
The light at the end of the tunnel is the Pensions Dashboard. In essence, the idea is that at some point in the future, you will be able to log in to the website of a government approved body and once you’ve passed the relevant security, you will be able to see all pensions that you’ve accumulated during your working lifetime and the State Pension all in one place.
A great idea but, unfortunately already several years behind schedule, and as it’s on a phased roll-out, not all pension providers will show from day one. Until then it’ll still be the above combination of hit-and-miss plus legwork.
Author: Peter Murphy, Benefits Adviser
Mitigate Inheritance Tax and Retain Control/Access to your Money
In some ways Inheritance Tax is largely an optional tax and one that with careful planning can be mitigated. Inheritance Tax is applied to the value of an individual’s estate exceeding the available Nil Rate Band (NRB) and Residence Nil Rate Band (RNRB) and is currently charged at a rate of 40%.
A common means of reducing an individual’s estate value is via an outright gift, however, this isn’t without its drawbacks, namely loss of access to capital, and the length of time it takes to successfully leave the estate (seven years).
Losing access to capital is often a major deterrent when making gifts, particularly when the future and your income/capital requirements are uncertain. This can lead to delaying the decision to gift until much later in life and as a result reduces the likelihood of the gift successfully achieving its objective.
Inheritance Tax planning is often best addressed early when the possibility of success is higher, but how can this be done without running the risk of being left with insufficient funds to support yourself, particularly if you live longer than anticipated, or meeting the cost of care is required?
One potential option is investing in assets that qualify for Business Property Relief (BPR).
What is Business Property Relief?
Business Property Relief is a tax relief that applies to some companies listed on the Alternative Investment Market (AIM), or certain unlisted companies.
‘Business Property Relief (BPR) has come a long way since it was first introduced in the 1976 Finance Act. Then, its main aim was to ensure that after the death of the owner, a family-owned business could survive as a trading entity, without having to be sold or broken up to pay an Inheritance Tax liability. Over time, successive governments recognised the value of encouraging people to invest in trading businesses regardless of whether they run the business themselves.
BPR is a well-established relief dating back 40 years, however, you should keep in mind that the value of an investment may go down as well as up and investors may not get back what they originally put in. Tax rules may change in the future, and the value of tax reliefs depends on your individual circumstances.’
Source: Octopus Investments
How can this help?
The main advantage of investing in this way is that once the investment is held for a qualifying period of two years and assuming it is held until death, these assets will not be subject to Inheritance Tax. This means the assets remain in your control and can be withdrawn if the need arises to cover capital, or income requirements.
The two year qualifying period is far quicker than the seven year period for gifts, increasing the likelihood for success, particularly for an older individual, or someone in poor health.
Like with any form of investing there are various types of investment opportunities, from funds that aim to simply provide a very modest level of growth with the main objective being the 40% Inheritance Tax saving, to more volatile investments invested directly in the AIM market.
Capital is at risk and could fall in value; due to the nature of unlisted and AIM listed companies these can be more volatile as well as less liquid than listed companies. As with any tax relief, legislation could change in future (which reinforces the importance of reviews to revisit and adjust plans on a regular basis).
Inheritance Tax Planning is best tackled with a diversified approach where a combination of gifting, Whole of Life policies, Pensions and Business Property Relief are used to achieve the objective of reducing the tax due on an estate. What is suitable for you will be dependent on your priorities, objectives, personal situation and risk appetite. As always, this article is not intended as personal investment advice. If you feel this is an area of interest, I would encourage you to arrange a meeting with your financial planner to discuss the best way forward for you.
Author: Daniel Robertson, Chartered Financial Planner
Pension or Property?
When the markets are not behaving as well as we would like and there are drops in the value of our investments, some might think of alternative options when it comes to investing for retirement income.
I have been asked if buying property to create an income could be a good investment instead of a pension, after all nothing is safer than bricks and mortar. But is this true?.
Property prices have certainly enjoyed growth over the years, but it is important to view the whole picture if you are thinking of becoming a landlord.
If you are considering buying a property in anticipation that the value will rise in the future, then you may find that the costs of buying and maintaining the property eat into or eliminate any profit. In addition, there is no guarantee that the value will rise at all.
Tax is a big consideration if you plan to sell the property in the future. You may have to pay 18% or 28% in Capital Gains Tax on any increase in the value. This is after any Income Tax on the income you have received.
There is also Stamp Duty that would need to be paid on the purchase of a property and if this is a buy to let it is higher than for a main residential property. According to the government website www.tax.service.gov.uk buying a second property for £300,000 would result in Stamp Duty of £14,000. This is on top of solicitors’ costs which could range between £800 to £1,500 depending on the purchase price. You should always get a quote from your solicitors to be clear on costs and bear in mind that even if the sale falls through you could still be liable to pay these.
Additionally, there may be renovations needed to ensure the property meets all the necessary letting regulations.
According to Track Capital the average UK rental yield is 3.63% – a reasonable source of income to help fund retirement, but actual yields vary depending on location and cannot be guaranteed. If you have gaps where the property is not rented this could leave you without any income for a period of time.
You should not underestimate the time and stress that can be involved in managing a property. Are you ready for the call complaining that a bulb has blown? Believe me, this happens! You can reduce stress by employing a management company but the downside is paying a percentage charge thus reducing your profit.
Relying solely on property for an income in your retirement means that you are putting all your eggs in one basket. You could find that you have a property that is costing you each month if you are not able to cover your costs from the rental income.
One benefit of property is that you would be able to release cash at any age, whereas with a pension you could not do this until at least age 55, increasing to age 57 in 2028. However, there would be costs to do this and limitations on the amount you could release.
Benefits of pensions
Pensions aren’t perfect but they have some real benefits over property. If you are employed, under current automatic enrolment rules your employer must contribute the equivalent of 3% of your qualifying earnings. You get an uplift on any personal contribution of 20% and possibly more if you pay a higher rate of tax.
Normally 25% of your pension pot is tax free and 75% is taxable, but you choose when to take this and depending on your type of pension, withdrawals can be managed to make the best use of personal allowances and the 20% tax bracket.
You can decide on how your pension is invested and will likely benefit from a mix of investments and professional fund management, meaning you do not have the stress of day-to-day investment decisions and a diversified approach.
There is no UK Income Tax to pay on any dividends or interest from investments within your pension and any growth is free from Capital Gains Tax.
You won’t need to find a large lump sum to get your pension started and can save little and often, as well as adding lump sums as and when you can.
On the whole, setting up and running a pension costs far less than buying a property. The way you take income from the pension is far more flexible and can be managed to be tax efficient. Although investments are subject to the vagaries of the markets, they can be invested at your own level of risk and are not relying on one asset class, they are far more diversified.
When you take money from your pension you are not subject to Capital Gains Tax and you will not have to pay a tax charge to get the pension started.
Tailored to your needs
If you would like to discuss your retirement income planning then a meeting with a financial adviser is highly recommended to make sure your plans are not only tax efficient and cost effective, but are tailored to your future.
Author: Kristina Bailey, Financial Planner
Investment commentary – August
Economic data continues to point to a further slowdown, with growth forecasts being cut and activity indicators such as Purchasing Managers’ Indices declining. Inflationary pressures remain acute in most key regions, albeit we have recently seen a marginal decline in core inflation (which excludes food and energy) in some countries.
This weaker economic backdrop raised expectations of a softening, and potential reversal, in rate policy in the US, perhaps as early as next year, and this drove equity markets sharply higher over the month. Global equities rose nearly 8% with growth stocks leading the way (returning 11.5%) and recovering some of their underperformance so far this year.
In terms of regions, the growth and technology-heavy US market was the key beneficiary while emerging markets lagged, pulled down by US dollar strength and weak returns from China where concerns over the property market and continued Covid restrictions weighed heavily. The eurozone continues to face the most acute energy supply risk stemming from the conflict in Ukraine and, notably, the euro dipped below parity against the dollar during July as recession fears heightened.
In the UK, the resignation of Boris Johnson has to date caused little discernible effect on markets, despite the potentially significantly different fiscal policies being put forward by the two potential new leaders. Elsewhere growth orientated sectors within the UK market outperformed more defensive and value sectors, and the mid-cap area of the market staged a strong recovery.
The continued heightened inflationary environment in Europe led the European Central Bank to announce the first rate increase (50bps) in 11 years and end the negative rate environment that has existed since 2014. As expected, the US Federal Reserve also announced a further 75bps rise in rates as it continues its stated aim of targeting lowering inflation. This led to the US yield curve ‘inverting’ (i.e. 2-year Treasury yields being higher than 10-year yields) and to some concern that their actions to combat inflation will damage already fragile economic growth. Bond markets had already priced in further rate rises and the weaker economic data and some less hawkish rhetoric from central banks led to sovereign bonds rallying overall. Higher risk areas of the corporate bond market outperformed.
Returns within commodities were mixed, with agriculture and gold falling, and natural gas rising further on Russian supply concerns.
Within the equity component of the strategies, we are looking to further reduce exposure to Europe in favour of a higher allocation to Asia. The eurozone economy still looks vulnerable to continued energy supply disruption and tighter borrowing conditions, particularly for the region’s weaker periphery, and fragmentation risks are growing. In contrast we expect Asia to produce the strongest levels of economic activity globally, with China in particular expected to pursue more expansive monetary and economic policy.
Market volatility is heightened, and we prefer to stay invested and follow longer-term themes. The volatility in both equity and bond markets is, however, throwing up opportunities that we believe we can profit from.
We remain committed to equities – company earnings announcements remain relatively robust, valuations look undemanding, and we believe equities continue to offer the best potential for real returns over the medium term. We continue to favour the US market based on the resilience and strength of both the economy and the corporate sector. We remain comfortable with the exposure to infrastructure, which has performed strongly so far this year and offers relatively stable returns and valuable inflation protection.
Bond yields have moved quite dramatically so far this year and the likely shorter-term actions of central banks has largely been priced in. Given the relative movement in yields. we see limited future opportunity at the front end of the curve and have marginally increased allocation to the longer end. The overall duration of strategies has therefore increased slightly.
We expect the alternatives component of the strategies to continue to play a very important role in contributing absolute returns and reducing overall volatility. In some of the strategies we have initiated a new investment in an equity market neutral absolute return fund managed by UK investment boutique Tellworth. During periods of market stress this fund has proven an ability to provide both protection on the downside and positive returns.
Author: Richmond House
Past performance should not be seen as an indication of future performance. The price of shares/units and income from them may fall as well as rise and is not guaranteed. The models used are typical of portfolios managed by Richmond House Investment Management. Your actual portfolio may differ depending on your individual circumstances.
The heat has definitely been on this month with record temperatures and a new prime minister to find! With this in mind we have asked Waverton to give us a view on the markets and Jonny has looked at how to combat a tough market by using structured products. John has written about claiming tax relief for working from home during Covid and John D has looked at when to draw from your pension and the impact that it can have on the long term performance.