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.

Residential Nil Rate Band – Planning actions for estates worth more than £325,000 but less than £500,000 (unmarried) or more than £650,000 but less than £1,000,000 (married couple)

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

People in this bracket are well placed to make full use of the new Residential Nil Rate Band, so long as the correct planning is put in place.

In effect, people in this category who own a residential home worth at least £175,000 (unmarried) or £350,000 (married couple) and who have children, should be in a position to pass their estate down to their direct descendants with no inheritance tax to pay.

There are however, a number of potential pitfalls to look out for as follows:

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?

We are running a series of free estate planning seminars where you can learn more about the new Residential Nil Rate Band and how to avoid some common mistakes.

Residential Nil Rate Band – Planning Actions for Estates Worth Less Than £325,000 (unmarried) or £650,000 (married couple)

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

The introduction of the new Residential Nil Rate Band is unlikely to effect people in this bracket, so long as the estate is forecast to remain below these limits (which have now been frozen again until at least 2021) for the foreseeable future.

For those who are expecting their estate to increase over and above these limits, additional planning may be required. We would suggest that you attend one of our free estate planning seminars to learn more about the Residential Nil Rate Band and how to avoid some common mistakes.

As a matter of course, it is good practice to review your will every 5 years or so to ensure that it fully reflects your wishes and remains up to date with current legislation.

People in this category may still wish to consider the use of trusts to protect their family assets, despite the absence of large tax advantages.

The Insanity of ‘Predicting’ Markets

Posted on November 9, 2015 by - Investments, News

I have followed the recent commentary on the decision by the Bank of England to hold interest rates at their current lows yet again with some interest. Of particular note was not the decision to hold interest rates for the month of November (which was widely expected), but more the ‘forward guidance’ that we should not be expecting an interest rate rise for even longer than the markets had been expecting (perhaps as far as late 2016, or, dare I say it, early 2017).

As usual, various media outlets jumped on the story, commenting that even the Monetary Policy Committee or MPC (the people who actually make the decisions to change rates) actually had no idea when rates were going to rise. This came as no surprise to me at all. The MPC will make their decisions each month based on the information that they have available to them at the time. This information is constantly changing and evolving as world events, new economic reports and various geopolitical developments unfold. As such, it should come as no surprise that the people in charge of setting rates often change their minds because the information on which they base their decisions is changing constantly too.

Which brings me onto the topic of trying to predict markets. There are numerous industry ‘experts’ that voice their views on the future direction of markets and how the economy will evolve over time. Given that interest rates are such a key component of the economic activity of a country, they tend to feature quite heavily in the ‘experts’ analysis.

This begs an interesting question to me … If the people who actually have full control over setting rates have no idea when they are going to change, how do the rest of us have any hope and more importantly, how accurate can any ‘prediction’ ever be.

I recently reviewed an academic study on this topic and the results were fairly unsurprising. When we look back on previous predictions made by ‘experts’ in the financial field and see if they came true, you could just as well flip a coin. Approximately 50% of them were correct and 50% incorrect.

So which will it be, heads or tails?

We feel that a far better approach is to design a strong long-term asset allocation and stick to it, rather than trying to ‘time’ or ‘beat’ the markets because, surely if the insiders don’t know what’s going to happen, the rest of us have no hope at all.

The New Property IHT Allowance

Posted on July 15, 2015 by - Budget, News, Taxation

One of the more predictable elements of the summer Budget was the introduction of a new ‘Property Nil Rate Band’, which will mean that eventually individuals can pass on a further £175,000 tax free to their direct dependents, in addition to the current £325,000 nil rate band that exists at present.

As with all new legislation however, there are some things to be aware of.

First of all, the new allowance will be introduced in tranches as follows:

  • 2017/18 – £100,000
  • 2018/19 – £125,000
  • 2019/20 – £150,000
  • 2020/21 – £175,000

These amounts are given with reference to the date of death of the deceased.

In addition, the new Nil Rate Band will only apply to a family home (i.e your main residence), passed onto direct descendants, which in the legislation are taken to mean children and grandchildren. There is some further consultation on where the property could be left to certain types of trust.

As with all new legislation, it is important to review you current plans to make sure you get the full benefit. Any older will that include gifts into trust, may not be eligible to claim the new nil rate band, and this could also be true for those who do not own a home, or who choose to leave their home to people not considered to be direct descendants.

We will be covering the new changes in detail during our updated Estate Planning Seminars, running from September onwards. You find out more information here.

Summer Budget Summary

Posted on July 10, 2015 by - Budget, News

The Summer Budget contained little in the way of surprises (nice ones anyway), however the rate of change seems to be building, creating a more dynamic and fluid financial planning world. There are already hundreds of budget summaries online, so I will cover here some of the key points that might impact on Buckingham Gate Clients:

 

1. Dividend Tax Changes

From 2016, dividends will no longer come with their 10% tax credit, which used to satisfy the basic rate tax liability for those in the 20% tax band. From 6th April 2016 dividend income will be taxed at 7.5% for basic rate taxpayers, 32.5% for higher rate taxpayers and 38.1% for additional rate taxpayers, once income from dividends exceeds a £5000 tax free allowance. This news will be unwelcome for business owners who receive large amounts of dividends as part of their remuneration and those with large share portfolios outside of a tax wrapper such as an ISA.

Business owners especially, may wish to review how they are remunerated from their companies.

 

2. New IHT Property Nil Rate Band

I have written a more detailed article about this change here.

 

3. Removal of Higher Rate Tax Relief on Buy to Let Investment

I have written before about the potential pitfalls of using pension assets to fund buy to let purchases, however the case has just become even less compelling. The Chancellor has announced that over the coming years, tax relief on buy to let mortgages will be restricted to just 20%. This will have the effect of reducing the net returns from buy to let investments for higher rate taxpayers. While buy to let property is undoubtedly a success story for many, there are risks and pitfalls.

Lifestyle Funds That Put Your Lifestyle At Risk

Posted on June 26, 2015 by - News, Pensions

People with their pension savings invested in lifestyle funds have suffered losses of 9% since February, says the Telegraph.
It criticises the insurance companies running these funds for not changing their methods since the pension reforms were introduced in April. The losses have occurred because the lifestyle funds progressively switch money from shares to fixed interest as you near retirement age and in recent months bond prices have dropped sharply. Experts say these lifestyle funds were designed for people intending to buy annuities at retirement, but many people will now use the pension reforms to keep their fund invested and make regular or occasional withdrawals, so a lifestyle approach will not be appropriate.

As you approach retirement, it is essential to review the investments within your pension fund and make sure they match the way you plan to use your fund in later years.

If you would like a professional view on your retirement investments, please contact us for a no-obligation Discovery Meeting, provided at our expense.