Income In Retirement – A Shift In Thinking

Posted on June 1, 2016 by - Uncategorized

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.

The Impact of the EU Referendum – Part 3

Posted on May 18, 2016 by - Uncategorized

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.

 

The Impact of the EU Referendum – Part 2

Posted on May 11, 2016 by - Uncategorized

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.

 

The Impact of the EU Referendum – Part 1

Posted on May 4, 2016 by - Investments, News

The Buckingham Gate blog is back after a short hiatus over the busy tax year end period. Thank you to all of our clients both old and new for making 2016 our best year yet.

Many clients have enquired about the possible impact of a UK exit from the EU (or Brexit) and in this series of blog posts, we will explore some of the issues and the potential impacts on the UK economy and the markets.

Please note that while we have tried to take views from the most unbiased sources possible, it does seem that almost everyone has some ‘skin in the game’ when it comes to the EU Referendum, so it is important to filter out facts from opinions.

Given the sheer size and scale of the issues surrounding the UK’s membership of the EU, I’m not convinced that anyone really knows all the answers, however this next few weeks of blog posts will be dedicated to some of the key questions.

We start with Financial Services and the City…

We all know that London is one of the world’s financial centres and many have made the argument that this is because we offer a ‘gateway’ into Europe. Some have pointed out that London on it’s own as a financial centre may not be as strong as London within the larger EU.

In the event of an EU exit, if the latter argument is to be believed, then this could cause a lower level of investment into financial services in the UK economy and whether you like them or loathe them, banks and financial services businesses do make up a large part of the UK economy (and the UK stock market).

As I suggested earlier, most commentators on the EU referendum have something to lose or gain based on the outcome, so I am keeping my ear to the ground for independent views. The Governor of the Bank of England, Mark Carney, has, in my view, one of the most relevant opinions on the debate and he has cautioned against a UK exit from an economic perspective.

On the other side of the coin, some have argued that if we were able to break free from some of the bureaucracy and red tape that come with the EU, the City could become even more competitive on the global stage.

With regard to stock markets, there is no doubt that the lead up to the referendum and the outcome itself will move markets. It is fair to say that ‘the markets’ would prefer if we remained in the EU as this is a known quantity, so I would suggest that the risk is on the downside if we do decide to leave. There could well be a ‘relief rally’ if we do remain in the EU, however this may not be quite so pronounced as the falls if we leave.

The issue is, with recent polls at precisely 50/50 (Source: whatukthinks.org), it really is too close to call. As such, we will not be making any extreme movements in our portfolios on the basis of the EU referendum. Whatever the outcome, we remain confident that any impact on the markets will be relatively short term when considering investment time horizons of 5 – 10 years or longer.

Woodford Joins the Team

Posted on February 12, 2016 by - Investments, News, Review

In the recent meeting of the Buckingham Gate Investment Committee, we deliberated long and hard about adding the Woodford Equity Income fund to the Buckingham Gate Portfolios.

While Neil Woodford’s experience and performance in this sector is almost undeniable, the reason we had pause for thought is that the track record of the fund is only 18 months. We usually like a fund to have a 3 year track record before we would consider adding it to the portfolios.

In this case however, we have made an exception to this rule for what we feel are a number of very good reasons:

  1. The performance of the fund during it’s 18 month history is outstanding by almost every measure. We have considered no less than 12 different fund performance metrics and the Woodford fund tops the tables in all of them. The case for including the fund was compelling based on these factors alone.
  2. While Woodford Investment Management is a new venture, Neil Woodford has been managing a UK Equity Income fund with a very similar mandate for more than 20 years at Invesco Perpetual with similar success. If we combine Neil Woodford’s track record across the two funds, it makes for some very impressive viewing.
  3. Given the ‘brand name’ of Neil Woodford, he has been very successful in gathering new monies to invest in his fund, with the Woodford Equity Income Fund having over £8bn of funds under management at the time of writing. As such, the fund does not have the same characteristics as many other ‘start up’ funds. In fact, the fund is considerably larger than many other more established players.

With all of the above taken into account, we have decided to include the fund within our portfolios.

When we combine Neil Woodford’s experience in the UK Equity Income space, with that of Nick Train (Lindsell Train UK Equity Fund) in the UK Equity growth sector, we are left with a duo of the most experienced and successful managers in the UK equity sector.

It is important to remember that past performance is no guide to the future, however we do feel that there is significant value to be added by experienced managers in the UK equity space. This is in an unusual contrast with the US equity sector, where there are very few, if any, ‘active’ managers who consistently add value.

For this reason we continue to adopt our hybrid approach to fund selection, choosing more expensive active managers where we feel they can add value, and using low cost ‘tracker’ funds where they may not.

Are We On The Verge Of The Next Industrial Revolution?

Posted on January 15, 2016 by - Media, News

Ok, so perhaps in this day and age ‘industrial’ would be better replaced with ‘technological’, but the sentiment is the same.

The smartphone has defined the last decade in terms of technological advancements and has also spawned the potentially more valuable ‘app’ space which has seen several companies go from ‘start up’ to $1bn+ valuations almost overnight.

My own personal view (and it is just that), is that while these apps and other technologies are undoubtedly valuable, I’m not sure they have always made us more productive in business (think Facebook, twitter etc).

Please don’t get me wrong, new technology has undoubtedly driven greater efficiencies in business, however my feeling is that this will pale into insignificance compared to what is to come next.

My view is based on two interlinked new technologies, driverless cars/vehicles and artificial intelligence (AI).

A recent study in the USA suggested that we spend around 1 hour and 40 minutes driving each and every day. A disconcerting feature of my car is that it keeps a tally of all the time I have spent driving. The result – 41 days in the past 18 months – more than 1/18th of my entire life!

If we then factor in the volume of time spent by people driving for business (think taxi’s, HGV’s etc), then the numbers must be huge. Imagine the increase in company and personal productivity when all of this time can be used for something else!

If we also consider the potential for AI to begin to make a significant dent in our boring and laborious tasks, then the economic benefits could be huge.

While these technological changes will undoubtedly cause some people to have to look for new employment, we have been through several of these ‘revolutions’ in the past and history tells us these people can be redeployed in the economy with great new skills and insights. When all of this time spent driving and doing simple IT tasks can be replaced with other productive, or leisure activities, we will surely see a new era of economic growth.

 

The Overview Effect

Posted on December 16, 2015 by - News

As Tim Peake blasted off into orbit yesterday, I couldn’t help but be inspired by his journey from pilot to astronaut. It seems that against all the odds, he has achieved what many of us dream of as children (I know I certainly did) and will be one of the lucky few to see the world from a different ‘point of view’.

Space has always fascinated me and I guess it is a sign of our increasingly technological world that one day in my lifetime it may well be possible to travel to space as a fare paying passenger with the likes of Virgin Galactic. A dream that I sincerely hope will become a reality.

Many astronauts report feeling what has been coined the ‘overview effect’ when in outer space. They say that seeing the world in space allows them to see things differently, more clearly. In that moment, they realise that viewed from above, some of those little things that we worry about day-to-day don’t matter. They say that they see how fragile the world seems, when suspended in space as a ‘pale blue dot’.

I think that sometimes all of us could do with experiencing the ‘overview effect’. In our busy lives, there rarely seems time to stop, sit back and really think about what we are doing, where we are going or what it is that’s really important in our lives. It’s so easy to get caught up in the day-to-day, week-to-week routine of our lives and before we know it, another year has passed.

In my daily meetings with clients, so many people say that having two or three hours of quiet, un-interupted time to talk about them and their goals both financially and in life is, at the very least, highly refreshing and energising and in some cases, even life changing. Our meeting is often the only time in the year that they get that opportunity.

Christmas is one of the few times of the year when most of us get that chance to stop and have some down time to think, plan and consider where we want to go from here. In some cases, it may be that nothing needs to change, in which case thats great and hats off to you. Most of us however, have something that we would like to see improved, goals that we want to work towards or changes that we wish to make in our lives.

The holiday period is the perfect time to review 2015, consider what went well, what could be improved and what to leave in the past.

I wish all of our clients, contacts, professional connections and suppliers a very merry Christmas and a happy new year. We look forward to seeing you all in 2016!

 

 

The Worst Day in …. A Day??

Posted on December 15, 2015 by - Investments, Media, News

I have been slightly amused recently by the apparent desperation of financial media outlets to run a ‘panic’ story. The problem the media outlets have is that ‘normal’ does not make a particularly good story.

‘FTSE rises steadily by 0.5% this month as usual’ does not have that much of a ring to it.

You see, we all seem to like bad news stories, ones filled with disaster and fear. Accordingly, this is what the media generally creates.

It is important to remember what the main objective of a media outlet is (that is any media outlet and not just financial ones) and that is, to get you to consume their content, visit their website, read their blogs and, most importantly, see the adverts that they place alongside that content (or pay for it up front). The main objective of a financial media outlet is not to provide you with impartial, balanced views that are likely to enhance your financial decision making. Of course, there are a range of financial media outlets out there that go from the sublime to the completely ridiculous and some do provide useful insight and analysis, however it’s important not to take one view too seriously.

Sidetrack over, back to my point. You see, over the past month or two I have been noticing a trend towards increasingly short term assessments of the markets to generate a ‘panic’ headline. ‘FTSE has its worst week in a month’ was one recent example.

Now, I’m sorry, but a month is not that long in investment terms. In fact a month generally contains 4(ish) weeks. If we assume that the markets are generally random when considered over such short periods of time, surely there is approximately a 1 in 4 chance of every week being ‘the worst week in a month’.

The past few days have been a prime example in my view. Given the recent slip in oil prices, markets have been reacting, sending the FTSE 100 below 6000. Of course, the financial media outlets reacted with horror.

The irony is, these blips tend to be (most of the time) just that, blips. Things recover soon enough and ‘normality’ ensues.

True to form, the headline yesterday: ‘FTSE has best day in over two months’!

Residential Nil Rate Band – Planning actions for estates worth more than £2,000,000

Posted on November 20, 2015 by - Estate Planning, Taxation

Those with estates worth over £2,000,000 will begin to lose out on the new Residential Nil Rate Band. The new allowance is ‘tapered’ away at a rate of £1 for every £2 that your estate is over £2,000,000.

For example, if your estate was worth £2.1m, you would lose £50,000 of the new Residential Nil Rate Band.

While this is clearly unwelcome news for those with larger estates, it does present some significant planning opportunities.

For example, if a couple had an estate worth £2.2m, they would lose £100,000 of their Residential Nil Rate Band, increasing their inheritance tax bill by £40,000.

If considered planning via trusts or qualifying investments was used to bring the estate back under £2m, not only would the £200,000 excess be outside of the estate for tax purposes, but the full Residential Nil Rate bade could be re-claimed.

Estates of this size should also consider other estate planning and succession actions to ensure that the maximum value can be passed down to future generations.

Our estate planning seminars cover all of the topics outlined above, as well as some other innovative methods by which you can preserve and protect your estate. The events are free to attend and you can book your place here.

Residential Nil Rate Band – Planning actions for estates worth more than £500,000 (unmarried) or £1,000,000 (Married), but less than £2,000,000

Posted on November 20, 2015 by - Estate Planning, Taxation

People in this category stand to gain significantly from the new legislation, however careful planning is required to ensure that you gain the maximum benefit.

Estates of this size are likely to be facing an inheritance tax liability, despite the introduction of the Residential Nil Rate Band, however this should be significantly reduced.

Some wills created historically contained what is known as a ‘nil rate band’ trust. The use of this type of trust has the potential to cause the Residential Nil Rate Band to be lost, as the transfer of the assets would be to the trust and not to direct descendants. It would be good practice to review you will for the presence of a nil rate band trust.

Your direct descendants (i.e children or grandchildren) will need to be the ones who inherit the residential home to qualify for the new relief. Does your current will meet these criteria?

Consideration should be given to other inheritance tax planning actions that could reduce the inheritance tax liability further or eliminate it altogether. This could include the use of lifetime trusts or qualifying investments.

Our estate planning seminars cover all of the above topics in detail and are free to attend. You can book your place here.