To Buy (To Let) Or Not To Buy (To Let)

Posted on June 22, 2015 by - Uncategorized

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.

 

Beware Of Temptation

Posted on June 19, 2015 by - Budget, News, Pensions

A majority of pensioners who were asked if they would sell their annuity – a reform the government is currently consulting on – said they would not sell, reported the Financial Times. Almost half said they thought they would get a poor deal. But almost one in five said they would sell either to pass on an inheritance or to fund healthcare costs in old age.

The sale of existing annuities is likely to be tricky and even if the government does go ahead with its proposals, many annuitants can only expect to get back a much smaller sum than they paid originally.

What needs to be remembered here, is that it is likely to be the same insurance companies who offer the annuities that will be offering to buy them back, and the cynic inside me says that they will want to take some profit along the way.

Pushing Through The ‘Comfort Zone’

Posted on June 11, 2015 by - News

For some time now I have been a keen runner, typically covering 5-6 miles at a time, 3-4 times a week. Hardly marathon distances, but enough to pose a challenge to those like me who enjoy moderate fitness. Around 18 months ago when we moved home, I had to find a new running route, which was quite enjoyable given the surroundings of the Suffolk countryside. I settled on my route and continued to increase my distance along said route sightly each day until I came to a t-junction.

Now this T-junction seemed like a sensible place to stop and turn around whenI first reached it, so that is exactly what I did. I then proceeded to run this same route (and stop at the same t-junction) for the next 12 months. While I always set out with good intentions to go further, by the time I reached the t-junction, my mind would say “right, we have made it, time to go home”.

You see the human brain is designed to find solutions to problems. When it finds a solution to a problem, it remembers this solution and this information can be re-called whenever the same problem is encountered. Before too long, this solution has become a habit. It is this same function that makes it very difficult to push past our ‘comfort zone’, whether in business, sport or life. The problem is that while the solution you came up with before might have solved the problem, it may not have done so in the best or most efficient way. For this reason it is important to push past these mental barriers and carry on.

I did just that this morning. After weeks of trying, I finally turned right at the t-junction, and carried on my run for another 1/2 mile. It turns out, it wasn’t so bad after all!

 

What Does The Conservative Election Victory Mean For You?

Posted on May 14, 2015 by - Budget, News, Pensions

With the Conservatives surprising just about every pollster, media outlet and individual in the country with their majority election win, people may now start to wonder what might change from a financial planning point of view. Here we summarise some of the key Conservative manifesto pledges (a word of warning – these changes are yet to be implemented in law yet):

The conservatives have pledged to increase the tax free personal allowance to £12,500, while at the same time raising the higher rate tax threshold to £50,000.

Introduction of a new help-to-buy ISA, which will offer a bonus from the government for those who are saving for their first home.

The addition of a new Inheritance Tax allowance that can be used to pass on the family home. The proposal here is to give each individual a further £175,000 allowance to use for a family property, on top of the current £325,000 allowance.

Protecting various pensioner benefits such as the free bus pass and winter fuel payments.

Reduce tax relief on pensions for those earning over £150,000.

The key thing to remember here is that these are currently just manifesto pledges. These changes have not become law, nor has draft legislation been published. As with many things the devil will be in the detail so we will have to wait and see just how many of these proposals will become a reality.

The Importance Of Holding Your Nerve

Posted on May 11, 2015 by - Uncategorized

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.

The Value Of Advice – Part 2

Posted on April 17, 2015 by - Uncategorized

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.

Freedom Comes With a Health Warning

Posted on April 10, 2015 by - Budget, News, Pensions

With all of the excitement and media comment surrounding the new pension freedoms, the 6th April itself seemed to pass without incident. While some providers have reported an increase in call volumes, it would appear that for the moment, there has not been a gold rush on the nations pension pots.

All of this new freedom and flexibility is fantastic for those who wish to use their pension pots to fund a lump sum purchase, a holiday or even a Lamborghini. However for those of us who still wish to generate an income for life with our pension funds, we have a tough choice to make. Do you purchase an annuity with the guarantee of an income for life, but with loss of your capital sum, or, do you opt for a drawdown pension and draw an income out of your invested lump sum.

While the latter option will be appealing to many, especially given the ability to pass on any unused funds to a beneficiary, it does come with a health warning.

You see the problem with this approach is that none us knows exactly how long we are going to live and therefore, how long this pot will need to last for. The main risk here is what we would call ‘sequence of return’ risk. That is to say, in what order do the returns on your fund occur. We all know that over the long term asset backed investments tend to out-perform cash, but they are volatile. The impact on your retirement of a 10% fall in your fund value during the first year will be very different to a 10% fall in year 10. It is very important to diversify and smooth the returns of the market as far as possible in order to protect your fund from sudden falls, especially in the early years.

This article from the Telegraph sums this up fairly well and is worth a read if you are considering taking a drawdown pension. While I am certainly in favour of the new flexibility rules, it is important that we consider all of the risks involved before taking the leap!

The Value Of Advice – Part 1

Posted on March 17, 2015 by - News

As some of you may already know, I have committed to completing a masters degree in Financial Planning and Business Management with Manchester Metropolitan University this year. Given that it has been several years since my last true academic endeavors (numerous professional qualifications aside), I have been pleasantly surprised by how much I am enjoying the process.

Having viewed the financial planning world through the lens of an adviser on the ‘front line’ it has amazed me how much academic research is going on behind the scenes in the financial planning profession.

What is amazing about this research is that is it completely independent and unbiased and in may cases, is reviewed by academic peers to ensure its quality.

I have chosen to base my masters dissertation on the value of the intangible benefits of taking financial advice, which clients often inform me are far more valuable than the significant financial gains made as a result of our advice process. I will be trying to establish exactly what intangible benefits of the advice process that clients value and then to determine what monetary value might be placed on those benefits.

All of this is quite an undertaking, however I am looking forward to conducting my research with access to a whole new world of academic information.

I am sure I will have some further updates for you as my dissertation progresses throughout the year, but for now – I’m off to hit the books!

Perhaps We All Need A Time Tikker?

Posted on January 20, 2015 by - News

I was attending a presentation on Estate Planning for clients the other day and the presenter had a rather interesting little wrist watch called the Tikker (http://mytikker.com). It is essentially a wrist watch that counts down your life. So for example, it might say that you have 44 years, 213 days, 12 hours and 23 minutes left to live (based on average life expectancy of course). While the idea of having a wrist watch to constantly remind you of your impending mortality might be a little too depressing, it probably wouldn’t hurt for most of us to consider the time we have left a little more often.

A good point that Tikker make on their website, is that if we were told we have only 1 year left to live, it would probably change the way we live our lives. The one resource that we have no power or control over is time. The rest of our lives can be shaped to be the way we want them to be, but time will always be limited.

While a wrist watch might be just one step too far for me – It would probably be wise to consider how you wish to use the time you have left, before it’s too late!

How To Blow Your Pension

Posted on January 13, 2015 by - Pensions

You may have seen the Panorama programme on television on Monday night attempting to explain the new pension reforms. While the programme did highlight some of the potential pitfalls to be aware of, there were a couple of the sections that I felt were a little lacking:

  • At the beginning of the programme, the presenter looked at an average pension pot of around £32,000 and then proceeded to go on an imaginary shopping spree with the funds. The one problem was, he did not appear to account for the tax that would have been paid if you had taken this whole pension pot in full. Unfortunately, many people seem unaware that there is tax to pay on any pension withdrawal after the 25% tax free portion has been taken.
  • There was also a case study of a lady who had recently been ‘forced’ to purchase an annuity. The concept of a drawdown pension has now existed for over a decade and, since it’s introduction there has not been a ‘requirement’ to purchase an annuity. The sad truth is that many people did not understand the options available to them when making the once-in-a-lifetime decision about how to use their pension funds.

What the programme highlighted is the increased need to ensure that you are aware of all of the options available to you at retirement. A qualified Chartered Financial Planner can help you to do just that!