Lies, Damn Lies and Speculation

As budget day approaches, the volume of rumour, speculation and mistruth is stepping up in traditional fashion.

Of course, there are the old favourites (you know, the things that the media report ‘might’ happen in the budget every single year, but never seem to actually occur) such as the removal of the 25% tax-free cash on pensions and restrictions to pension tax relief (for what it’s worth, I don’t believe we are likely to see either at this coming budget).

Then we have the two new rumours that seem to be doing the rounds, namely the alignment of Capital Gains Tax rates with Income Tax rates and some kind of root and branch reform of Inheritance Tax.

For what it’s worth, once again, I believe that both are unlikely to materialise in a few weeks’ time. The reason for this is that almost all suggestions in this respect would require pretty much a complete rewrite of that particular part of the tax system and a whole raft of changes to HMRC IT systems – projects that could take years to complete at the best of times.

That’s not to say that we won’t see some changes to the tax system (the freezing of the personal allowance and basic rate tax band are looking likely at this stage) however, the point is that no one (myself included) really knows other than the Chancellor himself, and even he would not have completely made his mind up at this stage because the budget document is often only finalised in the days leading up to the budget announcement itself.

What I am trying to get at is that it’s important not to delay planning because of what ‘might’ be coming in the budget. There will always be some big financial event on the horizon to wait for (after this budget, I suspect there will be another in the autumn and then in the spring again).

If you are planning on taking some action that might be impacted by a forthcoming budget, can it be a good idea to accelerate that action – yes absolutely. After all, if you are planning on doing something anyway, why not get it done and then you know where you stand.

However, I would strongly discourage people from delaying action based on what might be included in this budget or the next one or the one after that. I have seen too many examples of families learning this lesson the hard way.

It is frustrating enough looking back and thinking that you should have done something historically that you have never thought of before. But, when you look back on today a year from now, how would you feel if you knew that you should have taken action, but didn’t for whatever reason.

The old rules of financial planning say that we plan based on current and known future tax changes and then we adjust the plan to take any future unknown changes into account. That rule is just as valid in the run up to a budget as at any other time of the year in my view!

Top Rated Adviser’s 2020

This month two Buckingham Gate Chartered Financial Planners have made it into VouchedFor’s Top Rated Adviser Guide for 2020.

The guide is distributed nationally in The Times and digitally through the Telegraph’s website and so this is a great achievement that Buckingham Gate are tremendously proud of.

Congratulations Matthew Smith and Peter Ditchburn for receiving such well-deserved recognition for the fantastic advice you provide to your clients.

What makes their inclusion in the guide so much more special, is knowing that it was thanks to their lovely clients for leaving such powerful reviews on VouchedFor.

VouchedFor is a leading review site for Financial Advisers and helps those looking for advice, find the right adviser for them.

Our unique combination of expertise, makes us a one stop shop for your retirement, investment and estate planning needs.

Matthew and Peter would like to say a huge thank you to their clients for taking the time to leave a review, it really means a lot to them.

If you’re looking for financial advice, you would definitely be in good hands with these two!

Buckingham Gate Portfolio Review – December 2019

Lindsell Train UK Equity : The importance of liquidity

The demise of the Woodford Equity Income fund has shown just how important it is for a fund to be able to manage it’s outflows. For those who need reminding, the fund had suffered from a run of redemption’s over a period of time and was suspended in early June when it was unable to meet the request from Kent County Council to withdraw its investment of circa £250 million in the fund.

The reputational damage incurred has since led to the decision to remove Neil Woodford as manager of the fund in October and an announcement that the process of winding up the fund would begin in January 2020. This leaves the reputation of Neil Woodford, once considered as one of the most successful fund managers during his tenure with Invesco Perpetual, in tatters and seems very unlikely that he will ever recover from this and return to a position where he is trusted to manage other people’s money.

The fallout from the implosion of this fund has seen analysts much more focused on liquidity risk than ever before, and one of the casualties of this enhanced inspection has been the Lindsell Train UK Equity fund. Following our latest portfolio review in early November, Square Mile have taken the decision to downgrade the fund over liquidity concerns and it was removed from all of the Buckingham Gate portfolios on the 18th November 2019 and replaced with the Liontrust Special Situations fund.

The Lindell Train UK Equity fund has long been considered one of the most successful UK Equity funds, and under the management of Nick Train since it’s inception in July 2006, has generated a return of 377% compared to 119% from the FTSE All Share over the same period. However, performance over the last six months has been poor, and the fund has seen significant withdrawals over recent months with September seeing its largest ever monthly outflow of £374 million. While these withdrawals can be explained by a lack of appetite of investors for UK equity markets as a whole due to Brexit etc, the level of withdrawals and the structure of the Lindsell Train fund are causes of concern.

While there are a great deal of differences in the investment approaches adopted by Neil Woodford and Nick Train, there are similarities in that they both have the courage of their convictions in choosing the companies that they invest in. Nick Train’s investment process has been characterised by a low turnover approach and the ability to invest heavily in companies that he believes in. This highly concentrated portfolio approach has been one of the main reasons for his success, but also has the potential to be his downfall.

Square Mile’s analysts are very concerned that the large concentration of assets in the fund’s top 10 holdings could see the fund struggle to sell these at a cost effective price should significant outflows persist.

It is important to reiterate that Square Mile have no immediate concerns about the ongoing viability of the fund, and it has consistently met its performance objectives and redemption requests. However, the fall from grace of the Woodford Equity Income fund has made analysts very mindful of history repeating itself and are keen to look at other investment strategies that may work better in current market conditions.

There is absolutely no way of telling if this will be a good or bad decision for the portfolios in the future, but it is clear that Square Mile are very conscious of avoiding the trap that what has worked in the past will continue to work in the future.

If you have any questions on the above, please do not hesitate to get in touch with us by calling 020 3478 2160 or emailing [email protected]

The Perfect Week In Retirement

When we work with clients on their retirement planning, we often ask them to complete an exercise we call the ‘perfect week’.

In this exercise, clients are asked to map out what the perfect week looks like for them in retirement. We create a grid with the days of the week along the top and we divide each day into an AM, PM and evening slot, making a total of 21 ‘slots’ to fill for the week.

Most clients find this exercise fairly simple. Most of us have a pretty good idea about what we would like to do for a week in the ideal world.

Most people will build in some form of travel (perhaps spending the whole of their perfect week on holiday). There will often be meals out with family and friends and ‘experience’ activities like going to the theatre or sailing.

This exercise is incredibly valuable, but it is not the full story.

Retirement is about so much more than just a single week.

As such, we then ask clients to think about repeating this exercise 52 times for each week in the year (to be clear, this is a theoretical exercise – we don’t ask people to actually fill in 52 perfect week sheets).

At this point, people are often a little stuck. It is really easy to visualise a single week or even two or three weeks, but planning out a whole year is a bit harder.

Most people don’t want to (or couldn’t afford to) be on holiday all of the time, so some more thought is required to map out a year.

Once people have given some thought to the 1-year picture, we then ask them to repeat this exercise 30 or 40 more times. This is because there is now a very real possibility that retirement could last 30, 40 or dare I say 50 years for some people.

Thats a total of between 1560 (30 years) and 2600 (50 years) weeks. That’s a long time to plan for.

But plan for it we must. Research has shown that those people who spend significant time planning their retirement are quantifiably happier when they actually do retire than people who have done very little or no planning.

The irony here is that the average American (and one assumes the average person in the UK also) spends longer planning a 2 week holiday than they do a 30 year retirement!

If we are to live a long, and more importantly happy, retirement, we really must give retirement planning the time it deserves.

 

The New Science Of Spending

In the good old days, retirement was simple.

You worked for 30 years with the same employer, received your gold watch for long service and then retired with a 2/3rds final salary pension – what could be more straight forward!

Nowadays, things are a little more complex.

We don’t tend to work for the same employer. Gone are the days of the final salary pension, leaving individuals to take more responsibility for their own retirement income. This retirement income will often come in many forms. Gone are the days of a single employer final salary pension that was completely automatic (no thought required).

Now we often work for 5 or more employers, collect various personal pension plans, company pensions, ISA’s and other savings vehicles for our retirement.

All of this needs far more management and input than has previously been the case. We no longer have the automated final salary pension where your retirement income was simply dictated by your final salary and length of service.

Now we have decisions on how much to pay in, what investment funds to choose, how much tax free cash to take and so on.

Now, the new auto-enrolment legislation has gone a small way to automating the pension system again, but most people acknowledge that this is just a sticking plaster and much more will need to be done to see the population at large enjoy a prosperous retirement.

The psychological shift

Perhaps the biggest shift (and one that people are yet to fully get their head around) is the psychological shift from an accumulation to a de-cumulation mindset when people retire.

Back in the days of fixed income final salary pensions, you didn’t really have to worry about this. You never accumulated a pot of money in the first place, you simply earned membership in the pension scheme which gave entitlement to an income in retirement.

At retirement that income turned on and you then had a nice monthly deposit into your bank account.

In the new world of pension freedoms, people will spend 20, 30, 40 or dare I say perhaps 50 years accumulating a pot of money. All of a sudden, when they retire, they then need to start de-cumulating (i.e. spending) that money.

The problem is that this is not an easy shift to make

When you have spent a lifetime saving money and building up your nest egg, it can be very distressing to see it start to fall in value.

Various studies have shown that in the investment markets, human beings feel the pain of loss about twice as strongly as the pleasure of gain.

I suspect that the same psychological forces are at work when we start to spend down our nest-egg – it hurts!

This often results in people holding back on their retirement spending plans because they simply don’t want to see the value of their pot fall. But this can lead to some real problems.

Occasionally we meet people who are living on a shoestring, despite having 7 (and sometimes 8) figure retirement portfolios and this is all because they don’t want to see the value of their precious nest egg go down.

But go down it must if we are to enjoy a great retirement – indeed, one must ask the question – if you wont spend the money in retirement, when exactly will you spend it?

 

 

 

Why Don’t We Ever Feel Wealthy?

In our seminars I often talk about the fact that no one really ‘feels’ wealthy.

This might strike you as odd, given that we spend our working day looking after people who are generally fairly well off by most standards.

It does seem however, that no matter how much money we have and how rich we appear to others, we don’t ever appear to feel wealthy in ourselves.

If I were to mention that this phenomenon occurs to people with £100,000 in wealth, then perhaps you could understand. Most would agree that £100,000, while a very nice sum indeed, is not enough to live a totally worry free financial life.

But we see this happening to people with over £1,000,000 in liquid wealth (that is excluding property values and other intangibles). Surely when you have £1 million in cold hard cash or investments you can call yourself wealthy?

Based on our experience, apparently not!

We regularly speak to people with £5 million or even £10 million in liquid cash and investments and yet they still do not feel wealthy in themselves.

Why should this be?

I don’t have any scientific evidence on this topic (perhaps this is a subject for my next dissertation?), but I have a few potential reasons why this could be:

  1. There is always someone richer. Whether you have £10 or £10 million, there is always someone richer who lives down the road or whom you know and associate with.

2. Some people don’t feel ‘worthy’. This is especially true when people have perhaps come from a less advantaged background and have made significant wealth with their own hands. In many cases, they don’t feel worthy of this new found wealth or perhaps they feel that they don’t deserve it.

3. I think the main reason though is down to mindset. Some people seem to be natural savers. They feel guilty about making large expenditures and always feel inclined to save as much as they can (even if they already have £10 million).

Other people, are natural spenders – they tend to spend money as they earn it, even if they do earn a lot.

This creates a bit of a problem because savers, generally, will continue to save and feel that they are not ‘allowed’ to spend, even when they have become incredibly wealthy.

Spenders on the other hand, tend not to become so wealthy in the first place.

So what is the solution? Well, as with most things, the middle ground is perhaps the best place to be.

It helps to have made a plan in advance about how much money you actually need to (insert goal here – retire early, but a boat etc). When you have defined the goal in advance you:

A – know when you have achieved the goal – you know when you can ‘stop’ and

B – generally feel less guilty about spending the accumulated money, if there was a specific goal or reason for saving it in the first place.

We call this ‘defining the finish line in advance’.

Much like in a race – you generally know the distance when you start and the type of pace you will need to run to win.

If there were no finish line already defined, how would you know when to stop? How would you know what training and preparation you needed to do?

The same is true with financial planning.

We find the clients who experience the greatest freedom around money are those who have a goal laid out in advance. This way, when they ‘make it’ they know that they have reached their finish line and can give themselves permission to stop (and go and spend some of that hard earned money).

 

 

 

 

The Folly Of Predicting The Markets

I think it is fair to say that the market reaction to Brexit took most people by surprise. While there were the inevitable few days of falls following the announcement of the result, the following stock market recovery across the globe was beyond the predictions of even the most respected market analysts and experts.

This single event is a good example of how completely futile it is to try to predict or guess the direction of stock market movements, now matter how sophisticated the models or assumptions being used.

In fact, when we look back in retrospect at predictions that have been made by analysts and financial experts, it turns out that you might just as well flip a coin to determine the future direction of travel, because these people are correct almost exactly 50% of the time.

These issues are particularly dangerous when thinking about investment planning for retirement.

I wrote last time about the significant shift in thinking required when investing during retirement. In the ‘new world’ of retirement planning, many people will choose a drawdown pension and keep their fund invested for life.

The danger here is that people get tempted to ‘trade’, rather than invest their retirement fund. I am aware of more than one case where people sold down all of the investments within their pension fund the day after the Brexit vote on the basis that the market was ‘definitely’ going to plummet.

Of course this did not transpire and these people have now missed out on the significant recovery, in which many global markets have grown by 10% or more. If we assume that many of us would be happy with an average growth rate of 5-6% per annum on our pension funds, this could mean that 2 years worth of growth has been foregone, just by being out of the market for a matter of weeks.

The irony here is that had we remained in the EU, I strongly suspect that the markets would have risen as well – a theoretical win-win situation. Of course, no-one knows what the markets might have done in the event of a remain vote, nor will we ever know.

Another good example of people trying to predict markets has been in the corporate and government bond space. Since 2009, I have heard countless people say that bonds are ‘definitely’ going to plummet or that they are ‘overpriced’. What has happened since 2009? Probably one of the strongest bond markets we have ever known, helped further still by the recent decision by the Bank of England to reduce interest rates.

The moral of the story here is that even when during retirement, investing should be seen as a long-term game. Given the inability of most people in retirement to top up their funds with earnings (once retired, for many people, what they have is what they have), it is easy to see the temptation to take rash actions to try to ‘protect’ the fund value.

If recent events are anything to go by however, quite the opposite can happen and much needed growth is missed due to being out of the market for just a few short weeks.