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So it seems that we have yet another general election, just 18 or so months after the last one! It seems only yesterday that we were voting on the UK leaving the EU.

The assumption, of course, is that we will end up with a larger Conservative majority than we currently have and this assumption would seem to be pretty sound based on the polls conducted to date.

If the last few months have taught us anything however, it is that the polls cannot always be relied upon. In a world where the UK is leaving the EU and Donald Trump occupies the White House (both events which commentators felt were laughable when first proposed), it would take a brave man to say that a Conservative win at the election is a sure thing.

In terms of the markets, once again, it seems that the preferred option will be the expected Conservative win and this will be largely priced in already. Anything other than this expected outcome however could see some more significant market reaction.

I would caution expending too much energy worrying about this however. If the aforementioned surprise events have taught us anything, it is that, even when we do have political surprises and upsets, the predicted market turmoil very often does not materialise and in the above two cases, quite the opposite has been true.

The only thing that is for sure is that we live in fascinating political times and I will be watching the election results with interest come the 8^th June.

The Buckingham Gate Investment Committee stands ready to hold an extraordinary investment review meeting if the circumstances dictate.

There was an unusual sense of de-ja-vu as I woke this morning. I would usually avoid the temptation to check my smartphone, at least until after breakfast, however today was slightly different…

It would seem at the time of writing all but certain that Donald Trump will be the next president of the United States. This is yet another one of those political events that would ‘never happen’ seemingly unfolding right before our eyes.

The pollsters seem to have gotten it wrong, yet again (I do wonder if we might now stop paying any attention at all to the polls).

No doubt, attention will soon turn to the markets and the impact that this decision will have. The media will jump on top of this story and I should imagine it will be a matter of seconds before the words ‘turmoil’ and ‘panic’ are rolled out.

Of course, we had very similar news, not so long ago, with the Brexit decision. This feels much the same (with the exception of the flooding the night before preventing me from getting home to hear the news!). While I have no doubt that what follows will be a few days of volatility and uncertainty, please do remember that what followed the two days of market falls following the Brexit decision, was arguably one of the strongest stock market rallies we have seen in recent years.

Despite the ‘doom and gloom’ predictions of almost every media outlet or so called ‘economic expert’, the recovery in the markets since the Brexit vote has taken almost everyone by surprise and only goes to highlight the lunacy in trying to predict the future direction of travel.

As I wrote after the Brexit decision, the uncertainty is often the worse part. Now that we know the outcome, the markets will quickly react and come to terms with the news, and they often realise that the panic of the first few days was ‘overdone’ and the market subsequently recovers.

While the past is of course no guide to the future, it is just a reminder that things are not always as bad as they first seem.

Added to which any well diversified portfolio should contain some of the ‘safer’ assets where money tends to flow to in these volatile times such as bonds and property, which may actually benefit from any falls in stock markets.

As I write this, my train into London has just been cancelled due to a line fault. At least it’s ‘business as usual’ on the railways!

With the new pension freedoms legislation now firmly part of the retirement planning landscape in the UK, the true implications of these changes are now starting to be truly understood.

What is clear in our day-to-day work with clients’, is that the pension investment landscape (that is, the investment funds that we hold within our pensions) has not quite caught up with the reality of this brave new world.

For a start, we come across clients who are invested in so called ‘lifestyle’ funds on an almost daily basis. These investment strategies gradually pull people out of ‘risk assets’ such as equities and property and move them into ‘safer assets’ such as cash and bonds as they approach retirement.

The problem with this strategy is that it is entirely founded on the basis that most people purchased an annuity at the end of their working life. As such, the funds would be de-risked as the day of retirement approached. The intention being that there would be less risk of the fund falling sharply in value shortly before annuity purchase, when there would be insufficient time to make back any losses.

While this strategy was sound in a world where a good majority of people bought an annuity with their retirement savings, since the introduction of pension freedoms, this appears to be far less common. The figures vary but annuity sales have almost certainly had a significant fall, with one major provider reporting a 75% drop since the pension freedoms announcement. This leads us to the conclusion that many more people are choosing to draw an income from their fund, otherwise known as Flexi-access drawdown.

If someone is invested in a lifestyle fund, but then decides to take an income from the fund over the coming years, rather than purchase an annuity, the investments could have been pulled out of ‘growth assets’ just when growth is needed the most.

If the Flexi-access drawdown option is chosen, a shift of investment thinking is required as the pension funds accumulated will remain invested, possibly for the next 20, 30 or even 40 years. As such, we would suggest that anyone thinking of taking an income from their pension fund directly, rather than purchase an annuity, seriously consider how appropriate the investments held within their pensions are.

It could well be that the perfect investment strategy in the ‘old’ pension world, leads to the perfect storm in the new one.

We also come across many people who review and manage their other investments on an almost daily basis, but who have not reviewed their pension investments for 20 years or more. The days of the pension being a ‘set and forget’ investment could now be truly behind us and we would encourage people to consider pension investments as active, just like any other.

In the next article, we will look at how the consistency of returns is now more important than ever in the new pension landscape.

In this weeks instalment, we will consider the impact that the EU referendum might have on foreign investment in the UK and our much loved Pound Sterling.

Many multi-national companies choose to base their operations (or a significant part of them) in the UK. This can be for a number of reasons, but for  many the prospect of a listing on the UK stock market, access to the finance markets of London and the perception of having a base in one of the major ‘global’ cities will all have an influence.

There is some evidence that the EU Referendum is already having an impact here, with many foreign companies holding off on further investment into the UK until after the result of the referendum. This suggests that these companies may not be so keen to invest in a UK that is not a member of the EU.

While trade and capital treaties would no doubt be re-negotiated over time, one of the few areas where most commentators seem to agree is that if the UK did decide to leave the EU, there would most likely be a fall in investment in the UK, in the short term at least.

There will also undoubtedly be an impact on sterling as a currency, and we have already started to see this with sterling losing value when compared to some other global currencies in the run up to the referendum. While this is good news for businesses who export goods and services (as it makes our goods cheaper to buy overseas), in general terms, this would be seen as a negative by most people whose only interaction with the currency markets is to fund their summer holiday.

Finally, some have suggested that the property market in London could be adversely impacted by the UK leaving the EU with some foreign buyers pulling out or delaying purchases. However, it is more than likely that this would have the greatest impact on the very top end of the London market.

Following on from our last post, today we will be considering the possible impact of the EU referendum on UK trade and manufacturing businesses.

Like the majority of the issues surrounding the debate, there does not seem to be a clear right or wrong answer here, with a number of well respected bodies making seemingly contradictory arguments.

Possibly the biggest issue at play is that the UK exports just over 60% of it’s goods and services to the EU, so any change here will undoubtedly have an economic impact. In the event that we decide to leave the EU, we would have to re-negotiate trade agreements with several different parties and nations, most notably the EU. The two campaigns seems to be at loggerheads over how long this might take, with pro-leave organisations suggesting that these deals could be wrapped up in less than 6 months, while remain campaigners have suggested trade deals could take a decade or more to negotiate with some parties.

Some have suggested that being outside of the EU may allow the UK more flexibility to negotiate trade deals with emerging economies such as China and India, which will undoubtedly make up a larger portion of global consumption in the future.

Finally, the imposition of so called ‘tariffs’ on goods that we export to other EU countries could make UK products less attractive to foreign buyers if we decide to leave the EU. The US has recently imposed ‘tariffs’ of up to 500% on steel exports from China for example and we could potentially see similar punitive charges applied to our own goods by other nations.

Like all of the debate surrounding the EU referendum, there does not seem to be a clear argument either way. Some parties will argue strongly in one direction, with the opposing campaign presenting an almost completely contradictory argument. By definition, only one of them can be right.

The cynic in me would suggest that no-one really knows the full impact of an EU exit on trade and we would simply have to ‘wait and see’ how things develop over time.

With the announcement of the new pensions freedoms, many people have considered the option of taking money out of their pension funds with a view to investing in a buy to let property. I have written a previous article about this here, however Prudential have now created a far more detailed case study on this very topic.

Buy to let property can be a fantastic source of income and capital gains, and can certainly form a part of any well diversified investment portfolio, however the tax consequences may mean that it is less attractive than it seems to use pension funds for this purpose.

The conclusion of this case study is that a very attractive yield of 6% on a buy to let property, could be effectively reduced to as little as 2.7% if the property if funded from a large pension withdrawal.

During the run up to events that are likely to cause volatility in the markets, such as the recent general election, there is the temptation to try and hide. To pull all of the money out of the market and sit safely in cash. As various academic studies have shown, this is a strategy that is unlikely to work.

For a start, at what point do you pull out of the market? Just when will be the highest point before the fall?

The other issue, is when to go back in. When have the markets reached rock bottom?

The surprise Conservative election victory is a case in point. If you had pulled your money out of the markets in the days before the election, you would have missed out on the nearly 2.5% growth in the FTSE 100 that followed on the Friday.

This study, based in the US, has shown that if you had remained fully invested in the market for the past 20 years, you would have averaged an impressive 9.22% average annual return. However, if you had missed just the best 40 days during that same 20 year period, your return would actually have been negative.

Given that the FTSE 100 rarely has jumps quite as large as what happened on the 8th May, I suspect that this may well be one of those 40 days in the 20 years to come.

As I continue my studies into the value of financial planning advice for my masters degree, I have been amazed at the level of academic research that has already been done into this interesting area. Of particular note is the fact that much of this research concludes that financial planning advice can add significant value for clients with all levels of family wealth.

Also of interest is the fact that financial planning advice would appear to add the most value during times of financial stress. It seems that financial planning advice helps to reduce losses, even more than it seems to enhance gains.

I am looking into the intangible benefits of financial planning advice. My clients often report feelings of security and peace of mind once we have concluded our initial financial planning process. These feelings are only enhanced as the relationship develops over time. I am seeking to find out the value that clients place on these intangible benefits. This is quite an undertaking and has lead me to consider research in many other areas such as healthcare, public services and economics.

As the time for me to begin my dissertation draws closer, I am surprised by the parallels that can be drawn between financial planning and many other professions. When I started this project, I never thought that research into inhaled insulin for diabetics would be having such a significant influence on how I design my research project!

I will keep you updated on my progress (if I have time) as the big deadline for submission draws closer.

Since the government announcement on pension legislation changes in the March Budget, a commitment to reduce the taxation of death benefits from pension funds has been expected. However, the timing and the extent of these proposed changes confirmed by George Osborne on Monday at the Conservative Party Conference has taken everybody by surprise.

What is the situation currently?

For the majority of Defined Contribution (also known as money purchase) pension schemes, any lump sum benefit payable on death from a pension where benefits have not been taken, is payable as full return of fund which is tax free. As pensions are set up under a trust, this payment does not require probate, and is not part of the deceased’s estate for the purposes of any calculation of Inheritance Tax.

For pension funds that have been used to provide benefits via income drawdown (or where death occurs after 75 years of age) the fund is subject to a 55% tax charge if paid as a lump sum. This penal level of tax can be avoided if the fund is used to provide an income, but the income can only be paid to a dependant as defined by pension legislation, and this income is taxable at the marginal rate of the recipient.

HMRC have long been opposed to the concept of passing pension benefits to future generations, and the argument in favour of the 55% tax charge is that it allows a pension in payment to provide a lump sum payable to anybody which is not the case with other retirement options such as an annuity (typically only allows the continuation of income to a spouse).

What is changing?

From April 2015, any pension benefits payable on death before 75 will be tax free if taken as a lump sum, or if taken as income via the new flexible drawdown arrangements. On death after 75, any lump sum is taxable at a rate of 45%, but income can be paid to any beneficiary and taxed at the marginal rate of the recipient.

It should be noted that, regardless of when the policyholder dies, if the fund is used to provide an annuity, the recipient will pay tax on this income in all cases.

What does this mean if death occurs prior to April 2015?

If benefits have not been taken and death occurs prior to age 75, there is no difference as to how death benefits are taxed. However if benefits are in drawdown, a lump sum paid before April 2015 would be taxed at 55%, but any lump sum payable after April 2015 would be tax free (if the policyholder was under 75 at time of death).

The option on taking the lump sum from a drawdown policy can be deferred for up to two years, and so if payment of death benefits is delayed until after April 2015, the lump sum tax charge can be avoided.
What planning opportunities do these changes represent?

The proposals to allow people full access to their pension funds from age 55 will make investing in pensions much more attractive to many people, and the opportunity to pass this benefit onto family members’ tax free on death will only increase their appeal.

The fact that the lump sum or income can be passed on tax free to any beneficiary means that pension funds can become genuine family savings plans that will allow assets to be passed down the generations.

Even in cases where death occurs after 75, the fact that income can be paid to any beneficiary, and is taxable on the recipient, makes the use of a pension to fund education costs for grandchildren very attractive.

Every UK resident (including newborn children) has a personal allowance – this is the level of income below which no income tax is payable, and for the 2015/16 tax year is expected to be £10,500. This means that a pension fund where the policyholder was over 75 on death, can be used to pay up to £10,500 every tax year to multiple beneficiaries (including children); if the recipient has no other income, this payment will be tax free. With a bit of planning, a pension fund could be used to fund school and university fees for grandchildren with no tax payable at all.

What needs to be done now?

The proposed changes make it even more important that pension administrators are aware of the wishes of the policyholder for the payment of benefits on death. You should check with your pension provider to ensure that a nomination of beneficiary form has been completed, and that it is up to date – the nomination can be changed at any time, and multiple beneficiaries can be named.

In the absence of a completed form, the provider will have to make a decision as to whom benefits should be paid to which will delay payment, and could see payment paid to the wrong persons.

While pension benefits are not liable to Inheritance Tax, any lump sum paid is part of the recipient’s estate, and may be liable to Inheritance Tax on their death (which could be up to 40% of the inherited amount).

The impact on Inheritance Tax can be avoided by ensuring that any benefits on death are payable to a trust instead of a named individual – this ensures that benefits remain outside of Inheritance Tax considerations for multiple generations. For many middle aged individuals, their pension fund could be the second biggest asset they own after their home, and if their assets are above the current Nil Rate Band of £325,000, then a Death Benefit Trust should be seriously considered.

What is next?

As always with these announcements, the devil is in the detail (we’ve already seen the announcement in March of free face to face advice for all retirees being subsequently diluted to guidance) and the full picture will only become clearer in the Autumn Statement on 3rd December 2014.

The fact that income from an annuity on death will continue to be taxed means that the popularity of annuities will wane. However, the Autumn Statement is likely to see changes in annuities such as proposals to vary income, and receipt of lump sum benefits on death so there may yet be a place for them in the new regime.

The pension landscape will be unrecognisable in six month’s time to that which was in place at the beginning of the year, and we would strongly encourage all investors to seek advice and ensure that they use the new opportunities to the maximum.

In this second part of our Scottish Independence coverage, Kevin Herron looks at financial security, pensions and interest rates.

1. Financial Security

Something that could see a great deal of movement of assets is the area of financial compensation – if one country were to offer a greater level of investor protection, then it could see an influx of new investment at the expense of the other. During the height of the credit crunch, there was a massive influx of deposits from banks in Northern Ireland to banks in the Republic of Ireland due to their greater level of investment protection.

A number of the biggest banks and investment companies in the UK such as Lloyds, RBS and Standard Life are registered in Scotland, and a number of them have already stated their intention to move to re domicile to England in the event of Scottish independence. However, if the majority of them decide to stay in Scotland, what impact would this have on investor security?

A number of commentators have raised concerns about the impact of a large proportion of the economy of a small country like Scotland being dominated by the banking, investment and insurance sectors. If we were to go through another credit crunch, would Scotland go the same way as Iceland in 2008 when their three main commercial banks collapsed and they narrowly avoided national bankruptcy.

2. State Pensions and Auto Enrolment

In 2016, the state pension system in the UK will change to a single tier basis and will pay the equivalent of £146.30 per week. In the event of a Yes vote, the Scottish Nationalist Party (SNP) has confirmed that they will continue to retain the single tier pension, but considerable doubt has been expressed by the No Campaign as to the ability of an independent Scotland to do so.

The effect of increased longevity, and the increase in the ratio of pensioners to the working population has put a great deal of pressure on state pensions worldwide, and the government have taken steps to counteract this by increasing the state pension age to 68 between now and 2036.

Unpublished data from the Department of Works and Pension (DWP) suggest that this impact will be much more pronounced in Scotland than in the rest of the UK – by 2030, the number of Scots over the age of 60 will increase from 20% of the population to 30%. The impact of this could be counteracted by the fact that average life expectancy in Scotland is lower than the rest of the UK – in other words, it is likely that a pension will be paid to more people in Scotland but may not be paid for as long as it would in England and Wales.

Another key tool in reducing the pressure on the state pension is auto enrolment – by 2018, every employee in the UK will have access to a pension scheme that their employer will have to make a contribution to. Will an independent Scotland continue to enforce a version of auto enrolment, and if not, how would this affect Scottish companies and employees that have already gone through the process?

Auto enrolment can be an expensive and time consuming process, and if Scotland were to not continue auto enrolment, would English companies try to register in Scotland to avoid their obligations?

3. Interest Rates

Regardless of whether fiscal union is retained or not, an independent Scotland would almost certainly receive a lower credit rating than the UK enjoys currently, which means that it will cost more to borrow money on the international market. This will be passed down to consumers as higher interest rates which could see mortgage costs increase, but be good news for savers and those looking to purchase an annuity.

If there is a substantial difference in interest rates between both countries, it will be very interesting if there is a migration to one country or the other to take advantage of the differential.

The impact of differences in interest rates as well as currency and tax will see a great deal of cross border movement by consumers – the border between Northern Ireland and Republic of Ireland has long seen people flocking to one side of the border or the other to buy items such as petrol and electrical goods depending on the relative strengths and weakness of Sterling against the Euro, and differences in VAT and excise duties.

Summary

We will be keeping a very close eye on the results of the Scottish referendum on Thursday and of course will be keeping on top of any financial developments in the event of a yes vote. As a general position, it would appear that the ‘markets’ would prefer a no vote as evidenced by the volatility we have seen since the yes campaign has been gaining traction.

In the event of a yes vote we do expect that there will be some movements in the markets and we will be keeping a very close eye on client portfolios and may make some recommendations outside of the usual review process if the impact on the markets turns out to be particularly profound. As with many of these things we expect that any movements in the market will be a reaction to the result itself rather than any specific financial implications (most of which are unknown at this point).

In the event of a yes vote there will be many un-answered questions about the continuing operation of pensions, NISA’s and other investment plans. While people will be very keen to know how the operation of these products will work in the future, we would expect the impact on investors in England being relatively limited. We will, of course keep you updated on any developments as they happen.