inBrief

Edition 3 2019 | Wealth into words

Life after rugby It’s hard to stop a supertanker

From banking to business with Andy Nicol

Is the world economy travelling like a 400,000 tonne supertanker?

Nest egg or pension plan?

How are you saving for the future?

Investing in pleasure What could your wine be worth?

INTRODUCING

7IM Live & Direct!

We’re delighted to announce our speaker series for 2020.

The 7IM Speaker Series convenes leaders, thinkers, and innovators each quarter where exciting concepts are presented and a broad scope of ideas are shared in relaxed surroundings.

To register your interest in joining us at an event near you, please visit www.7im.co.uk/events or speak to your Private Client Manager.

Welcome Welcome to our latest edition of inBrief, a magazine designed for you; our 7IM clients.

Contents

As usual, we have chosen topics that we hope will be of interest to you. For this edition, we have given the publication a light refresh to ensure we strike a balance that talks to you, and your busy lifestyles.

04

It’s hard to stop a supertanker

Terence Moll, Chief Strategist, shares his comparison between the world economy and 400,000 tonnes of floating steel.

06

Being smarter with retirement planning

Chris Hardie, Financial Planner, reviews the ways in which pension rules have changed, and what to look out for in retirement.

08

Life after rugby

Andy Nicol, CEO of Abstract and former Scotland Rugby Player looks back at life after rugby and what comes next.

10

Investing in pleasure

Tom Harrow, Director at Honest Grapes, explores how a well-stocked wine cellar can end up being a wise investment.

12

7IM case study

Olivia West, Private Client Manager, looks at how our team have helped one particular client in planning for their future.

The last 6 months have been extremely hectic, as seems to be the norm these days, especially where politics are involved and it seems to be increasingly more complex, with the ongoing Brexit beat underlying everything. This adds to the task ahead in terms of how, and importantly where best to manage your money over the long term. But we’re up for the challenge.

It has always been a privilege to talk to our clients, to help them and engage with their financial needs. Therefore, do please get in touch with your Private Client Manager, myself or any of the wider management team if there is anything we can do to help – whether it’s to discuss how we can improve our service to you, how we are plotting our way through these short-term issues, or just for some reassurance that we’re doing the right thing for you and your money. Investing is all about having a long-term plan, making adjustments as you go, but ultimately ensuring you get to where you need. We are here to help you.

Stewart Sanderson, Managing Director, Private Clients

Get in touch with your Private Client Manager or call us on 020 3823 8678 & we’ll be happy to answer any of your queries.

Edition 3

www.7im.co.uk

@7IM_Private

03

It’s hard to

stop a supertanker

T Terence Moll Chief Strategist

04

he world economy is like a 400,000 tonne supertanker crossing the Indian Ocean.

It speeds up and slows down and can change direction, but rarely does anything very quickly (apart from in huge financial crises like 1929 and 2008).

No wonder. The economic world is pretty stable most of the time. Companies make and sell stuff, people work hard, earn incomes and buy stuff, governments collect taxes and spend, goods are traded internationally if it’s cheaper.

The supertanker moseys along.

More recently, bond yields have fallen like a stone across the developed markets. US 10year rates went from 2.5% in May to 1.5% at the end of August. German 10-year rates fell from zero to -0.7%. Investors now have to pay the German government for the privilege of lending it money.

But market perceptions of the economic world do change… sometimes dramatically.

Late last year investors turned pessimistic about global growth and trade, and the S&P 500 index of large US companies lost 20% in the three months leading up to Christmas Eve. Then investors recovered their mojo, helped by falling interest rates, and the S&P 500 made up its losses by April 2019.

Why? Some of this is due to the US Fed changing its noises on policy interest rates early this year, and cutting its key Fedfunds rate at the end of July. Falling short-term rates have dragged long rates down.

Equally importantly, investors have become fearful about slowing global growth and deflation this year. They’ve been buying bonds by the truckload.

“We think the world’s investors are suffering another bout of deflationary psychosis, as they did in mid-2017.”

Far from disastrous Their fears are exaggerated. Okay, the world economy has been slowing: JPMorgan, the investment bank, expects 2.6% real growth in 2019, compared to 3.2% last year, with most of the major economies weakening. But 2.6% growth would be far from disastrous, and it looks as though global manufacturing – the most erratic part of the economy – will bounce late in the year.

Growth has slowed in the most important economy, the USA, but is still bumbling along at about 1.5% per year.

And our proprietary Recession Risk Indicator says a US recession is unlikely in the next 6-12 months.

Meanwhile, US consumer inflation was 1.8% in August, and looks set to drift up.

The labour market is tight and wages are rising steadily, while trade tensions with China are likely to raise consumer prices a little. This does not look like deflation to us.

The madness should pass quickly… the global economic supertanker has slowed but is not grinding to a halt. ‘Investing’ in negative-yielding Swiss, German, Dutch and French bonds right now looks downright reckless.

From a long-term viewpoint, today’s ultra-low rates look like madness.

Bonds are supposed to be a safe investment – but it’s hard to imagine circumstances in which holders of German bonds could make money, after inflation, over ten years.

We prefer to focus instead on assets with good macro stories that look fairly priced by historical standards. Two examples in our portfolios are US Healthcare stocks (political risks look exaggerated) and emerging market hard currency debt (underlying economies are in good shape).

We think the world’s investors are suffering another bout of deflationary psychosis, as they did in mid-2017.

05

Being smarter with your retirement savings Chris Hardie, Financial Planner

I

t has been widely publicised that retirement and the way we fund retirement has changed significantly in recent years. Final salary pensions are less affordable for employers, leading to these types of schemes being replaced by money purchase equivalents. Similarly, annuities are becoming less popular due to dwindling annuity rates.

However, for most money purchase pensions (SIPPs, Personal Pensions etc.), the fund value on death can be paid to whoever you like, completely free from inheritance tax (which is usually 40% above certain thresholds/exemptions). In addition, depending on whether you die before or after the age of 75, funds can be drawn from the pension free from income tax.

This, in addition to the pension freedoms introduced in 2015, has given individuals centre stage in managing their own income throughout retirement.

Whilst this freedom comes with the daunting responsibility of ensuring that you don’t run out of money in old age, it also offers you the opportunity to maximise tax efficiency when creating a retirement income plan and also passing assets down the generations. This article looks at the different aspects you should consider when you are in the ‘decumulation’ stage of retirement.

Tax allowances

Suitable investments The first and probably most obvious step is ensuring that your investable assets (pensions, ISAs etc.) are invested in a portfolio suitable for your retirement objectives and risk profile.

According to the FCA’s ‘Retirement outcomes review’ in July 2019, 33% of people who are in pension drawdown and haven’t received advice hold their plan in cash. Their review states that someone drawing down their retirement pot over 20 years could increase their expected annual income by 37% if they instead invested in a mix of assets rather than just cash.

Inheritance tax In the old world of final salary pensions and annuities, inheritance tax didn’t play a big part in retirement planning. On death, a portion of the pension income would continue to be paid to your spouse and then on their death the income would stop in most cases.

06

Due to this favourable tax treatment on death, it is common to use other assets to fund retirement first (ISAs, property etc.) and draw on pensions when required or even use them to pass wealth on to future generations.

Given the flexibility people now have with their retirement savings, it is possible maximise the tax-efficiency of your assets by using your various annual tax allowances, which often go unused.

In addition to being able to withdraw 25% of your pension tax-free, assuming you have no other income, you can also use your personal allowance (£12,500 in 2019/20) to offset income tax on withdrawals from your pension. So, even if you are using your ISAs to fund retirement initially, it would be sensible to utilise your personal allowance every year by making a taxable withdrawal from your pension.

If you have an investment portfolio that isn’t held in an ISA, you can use your dividend allowance (£2,000) and Capital Gains Tax allowance (£12,000) by investing in income producing assets or crystallising investment gains, respectively.

Similarly, if you have an offshore investment bond, you can surrender part of the bond, crystallising gains up to your savings allowance (£5,000) and personal savings allowance (up to £1,000 depending on your other income).

Finally, although most gifts only fall out of your taxable estate after 7 years for inheritance tax purposes, annual gifts up to your £3,000 gift allowance can drop out of your estate immediately, along with any level of regular gifts that are made out of surplus income, officially referred to as normal expenditure out of income.

Retirement planning, especially the tax planning element, can quickly become complicated and overwhelming. If you think your retirement plans could use a review, please get in touch with your Private Client Manager, or call 020 3823 8678.

Tax rules are subject to change and taxation will vary depending on individual circumstances.

07

Life after rugby

Andy Nicol’s journey from banking to business – what comes next?

Andy Nicol, Former Scotland Rugby Player, and CEO of ABSTRACT

T

he hardest decision a professional sportsman or woman has to make is when to retire. Sometimes, the decision is made for you. Fortunately for me, it was all my decision – born out of a curiosity of what the next challenge was.

I had achieved everything I could in my rugby career so I was ready to see what was next.

I didn’t know what that was in its entirety at that moment but I knew I wanted to get involved with the media. After officially retiring from the pitch in 2003, I had the opportunity to work on BBC radio for the Rugby World Cup in 2003. I snapped at the chance, booked my flights and hotel straight away – the opportunity to show the BBC my commitment and desire to work with them was one I couldn’t miss.

This initiative has paid off. I have been working for BBC Sport on every Six Nations since and developing new skills at the same time. I knew though, back in 2003, that I couldn’t just rely on the work with the BBC as my sole income – there is only so much rugby that can keep me in a job – so I started to consider what else I should be doing. Using a network built up over many years in the rugby world, I took my first steps in to the business world – I spent three years trying out different industries and different roles to see what I liked, what I didn’t like, what I was good at and what I wasn’t good at.

My first full-time business role was with RBS Private Banking in Business Development. Although some may consider this a far cry from the scrum on the rugby pitch, I really enjoyed working in a corporate environment and seeing how corporate teams functioned. After being promoted into a managerial role, I was able to use all the leadership and people management skills I had learned in rugby.

08

Leading a team well, whether in the sports field or in the office, can come down to two key areas – people development and communication. At RBS I was sent on a training programme run by David Nikolich from ABSTRACT, a company that focuses on improving performance results within business, and it was this course that set me on my way to do what I was passionate about doing; helping people develop in the corporate world.

David asked me to join the business in January 2013 and we have not looked back.

We are a Training, Development and Thought Leadership company running programmes focussing on Diversity and Inclusion as well as Judgement and Decision Making.

Whatever the subject is, we are looking to embed behavioural change and get the right people with the right behaviours working in the right environment. Get that right and businesses can flourish.

The career journey I’ve taken through my adult life won’t be that dissimilar to a lot of people out there – we may all change our jobs from time to time, consider different careers and how we can make that change a success. What I have learned is that we all have transferable skills from previous roles that can help with the current role and we should embrace these rather than leave them in the past.

Whether leading the Scottish team to victory against England, leading a group of employees in a training programme, or leading my own team as CEO of ABSTRACT, I’ve learned that planning is very important.

It enables you to establish what your next move needs to be, driving your business, or your team, forward to success. Failing to plan means you may get left behind.

Stewart Sanderson Managing Director, Private Clients This article from my friend and long-time business associate, Andy Nicol, highlights a valuable lesson in life; the need to plan.

Having first met Andy in person nearly 15 years ago at RBS it’s been interesting to follow his second career, transitioning from sport to business. A tremendous communicator, with the ability to direct and work with individuals in order to bring them together as a collective is a huge achievement and significant skill – something no doubt that he refined on the pitch. But it doesn’t happen by accident – the work of David Nikolich, who Andy mentions, and whom I have also worked closely with, helps people and businesses prepare whatever the challenge.

“I’ve learned that planning is very important. It enables you to establish what your next move needs to be, driving your business, or your team, forward to success.”

American Author, Stephen Covey and his ‘7 Habits of Highly Effective People’ can polarise opinion. However, something as simple as “seek first to understand, before being understood” is in itself a great place to begin. These simple steps are critical when building teams – and is something we use within our Private Client business, which now manages over £2bn of assets across London, Edinburgh and Jersey. I’m sure Andy does too in planning for the future he wants. Through ideas, the value of Emotional Intelligence and its practical application, a plan for your future can be formed.

I hope you enjoyed his article and I am delighted Andy remains a friend of mine, and 7IM. 09

Investing in pleasure Tom Harrow, Honest Grapes At Honest Grapes we really believe that creating and growing your cellar is first and foremost about investing in your future drinking pleasure. With regular allocations of funds over the course of a few years, you'll be drinking maturing wines and saving money in the process. With the right approach, buying and storing can save you 20-25% on wines that you know you want to drink. A well-stocked cellar can also end up being a wise investment. Cleverly managed, it should start to pay for itself after 10 to 15 years of consistent purchasing as you can sell off the surplus on the secondary market and reap the rewards.

Portfolio planning – wine as a tangible asset Those considered as investment grade wines can come from regions all over the world, but those from certain estates and vintages tend to appreciate considerably more in value. If you're looking to sell the wines on, consider reserving a percentage of your annual budget to cherry pick these.

Over time, these stocks diminish as they mature and reach their perfect drinking window, therefore shrinking supply and making them even more desirable.

Simple supply and demand economics.

Furthermore, the luxury factor of fine wines in the last decade has introduced a new breed of wine collectors, adding further demand. If the ultimate goal is a selffunding cellar, our advice is to buy three cases: two to drink and one to sell.

Buying En Primeur/Pre-Shipment En Primeur is a system that both merchants and vineyards rely on as a sort of futures market for wines that need time in the cellar. It refers to the process of buying wines before they are bottled and released onto the market. This allows the Domaine a chance to recoup some costs, and in return they offer the wines at pre-release prices, allowing you to get hold of fine wines at cheaper rates. It can also be the only way to secure wines that are available in very limited quantities. These wines are usually 10

shipped six months to two years after release as they often need time in barrel and/or bottle.

Buying wines In Bond What does ‘In Bond’ mean?

When the vintage is bottled and delivered in the UK, the cases are held initially in a bonded warehouse. Wines In Bond (IB) have not yet had the Duty and VAT paid on them.

They must be stored in a bonded warehouse approved by HM Customs & Excise. The advantage of buying In Bond is that the Duty and VAT is deferred and should you choose to sell the wine on (In Bond) at a later date, you will never pay it. If you choose to have the wine delivered at a later date, the VAT is payable on the original sale price of the wine, NOT its current market value.

Wines stored In Bond are therefore much more attractive to prospective buyers and brokers. They are also much easier to trace (there are a limited number of bonded warehouses) and guarantee correct storage conditions.

How much should you spend?

There are no hard and fast rules on how much you should spend on building your cellar, but you should set out a clear plan, dividing it by wine type and region, and go from there. As most new vintage releases take place in Q1 and Q2 you should budget on having at least 60% of your funds in place at the start of the year to take prompt advantage of offers in this period. If starting from scratch the first couple of years will require a slightly heavier investment. To get started with this type of collection, we recommend spending a minimum £6,000 to £12,000 per year for the first couple of years. The greater the discretionary spend beyond this the better access you will have to the most desirable, investable wines. Also – two cases (or ideally three) are always better than one – as you’ll never have to agonise over whether a) to treat your best performing case as an asset to liquidate or b) to just enjoy the liquid itself!

Investable wine regions – blue chip bottles:

Italy Blue chip Supertuscans and top Brunello Riserva are increasingly finding their way in to portfolios, whilst Barolo, Italy’s finest and most long-lived wine, is the last undervalued fine region in the world.

US & South America Whether the legendary Cabernets of Napa or, in both Chile and Argentina, the joint ventures with the great chateaux of Bordeaux, the top wines from the Americas are gaining icon status and a gathering to match.

Bordeaux Arguably the most important fine wine region, given its heritage and global prestige. The quantity, consistency and longevity of the wines ensures Bordeaux is a firm favourite for collectors and investors.

Tom Harrow For eighteen years, Tom ‘Wine Chap’ Harrow, listed in SPEAR’s 500 (top advisors to HNW community), has written regularly about wines and winemakers for a variety of luxury titles. He has put together fine wine portfolios for clients around the world, as well as organizing extraordinary wine and gastronomic experiences with luxury partners that have been described by the Financial Times as, “Sideways on steroids.”

If you’d like to join one of the wine tastings we hold on a regular basis in partnership with Honest Grapes, get in touch with your Private Client Manager, or call 020 3823 8678.

Burgundy The most romantic and venerable of regions, and home of the worlds greatest Chardonnays and Pinot Noirs, Burgundy has more latterly become the most sought after in wine portfolios. Top wines are made in tiny quantities and mature vintages command extraordinary prices at auction globally.

Honest Grapes Alongside its award-winning website and wine list, active events calendar, and loyal and enthusiastic club members, Honest Grapes manages a number of individual wine portfolios and shared cellar plans of differing sizes and horizons. Their team of personal wine advisors offer a level of customer service, irrespective of spend, that is second to none and widely admired.

Champagne The prestige cuvée releases from top maisons are highly investable and often overlooked by those who fail to realise that Champagne’s high acidity gives it exceptional longevity.

Others to look out for The top producers from the Rhone Valley (north and south), Barossa (Australia), and Priorat (Spain), are making exceptional wines that cellars should be peppered with. Port too is making a comeback with a string of successfully declared vintages and attractive release prices.

Please contact tom@honestgrapes.co.uk to discuss your cellar building/wine portfolio requirements.

11

7IM case study:

What comes first – the pension or the plan?

Olivia West, Private Client Manager

We need advice on our pensions This is one of the most common reasons people come to 7IM for help. However, in the example below, and with a lot of cases we work on, it turned out that there was much more to it than that…

1 Setting the scene Mr and Mrs R, based in Oxford, came to us for advice on their pension, having recently retired from the family business.

The real question quickly became apparent – ‘how would they fund their future lifestyle in retirement, for the rest of their lives whilst providing a legacy for their children’?

Prior to retirement, they were spending around £50,000 per year after tax, and although they had built up a variety of savings, ISAs and pensions, and considered their first year of retirement covered, the question still loomed – could this level of spending be sustained or would they need to make changes?

2 What did they need and when?

Many people think their spending will go down in retirement, when in actual fact it often goes up initially, as you spend more time doing the things you enjoy.

This tends to drop off as you get older and are less willing/able to do those same things and then it goes back up again in later life as care costs start to rise – a phenomenon we call the ‘retirement smile’.

After reviewing their assets and expectations of spending in retirement, we created a bespoke ‘cash flow model’ using 7IMagine, our award winning app. This allows us to estimate how long a client could drawdown on their savings in retirement once their employment income stops.

In this case, their savings, investments and pensions, when combined with rental income from an existing buy-to-let property and state pensions, would last the rest of their lives quite comfortably with a few minor adjustments. It also gave us an idea of how much could be left to pass onto the next generation – the ‘legacy’ they wanted.

3 What next?

Working with our in-house financial planning team, we looked at maximising pension contributions from excess cash in their business. This included using ‘carry forward’ from previous years’ annual pension allowances – moving cash from a business straight into a pension is a very tax-efficient way of contributing, as all payments are made gross of Income Tax and National Insurance.

Next, the required income for the next five years could be covered by cash savings and ISAs, and the following five years (when combined with state pensions) by using the 25% tax free pension ‘lump sum’, but drawn ‘flexibly’ – not all drawn out in one year. The result? Nearly 10 years of income in retirement with minimal income tax to pay, while retaining the maximum amount in the pension, which, under current legislation, is outside of your estate for inheritance tax purposes. I’d like to highlight the importance here of seeking advice when it comes to pension rules and regulations – they’re an ever changing beast, and can be extremely complicated.

4 A two stage investment approach All money we estimated the client would use during their lifetime was invested in a more cautious strategy with a target of providing the required level of annual income. Any money earmarked as a legacy for future generations was invested more adventurously, in line with the attitude to risk and the longer term nature of this investment.

The most important thing to understand is that any plan is only as good as its review – we will continue to work with the clients and adjust the plan as often as necessary.

You should address any questions to your financial adviser. The value of investments can vary and you may get back less than you invested. Tax rules are subject to change and taxation will vary depending on individual circumstances.

Seven Investment Management LLP is authorised and regulated by the Financial Conduct Authority, the Jersey Financial Services Commission and the Guernsey Financial Services Commission. Member of the London Stock Exchange. Registered office: 55 Bishopsgate, London EC2N 3AS. Registered in England and Wales number OC378740.