Page 1

the barrister

Personal Finance & Wealth Management Supplement DBE

Investing with a Dynamic, Innovative Wealth Manager

Citroen Wells - Chartered Accountants

Dream your dreams with open eyes and make them come true

ACCOUNTING SERVICES •Accountancy • Taxation • • Consultancy Services •

T. E. Lawrence

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At Citroen Wells we’re all about taking the pressure o‌ we believe in providing an unrivalled level of service. So whether you’re a barrister or chambers – we’re here to help. Whatever the ďŹ nancial issue, Citroen Wells has the expertise in:

Tax, PAYE and VAT investigations Accounts and tax return preparation Bookkeeping, VAT return and payroll services Constructive tax and ďŹ nancial planning Accountants reports for commercial litigation, investigations, asset tracing and insolvency

We all have friends and family who have worked hard, been well rewarded and dreamt of retiring in the knowledge that they and their family’s futures are secure. Often the reality is that they have lost significant amounts due to bad advice from unscrupulous investment salesmen, wealth advisers or investment management companies. The main reasons for this are:

Together we stand, together we fall

1 : The salesmen / wealth advisers / intermediaries are frequently paid large fees by the investment management companies, which makes unbiased advice difficult. The larger the amount invested, the larger the fees received by the investment management company, and often the larger the kickbacks to the intermediaries.

The answer is to choose a company and team that are passionate about managing money. A team that is respected as technical experts and asset allocation strategists, and have a reputation for behaving ethically and always putting investors and clients at the heart of all decision making.

2 : The investment management companies are normally owned by companies directly or indirectly via the stock market. These owners exert significant pressure for short-term results. This pressurises the investment managers to flog as many high fee products to as many unsuspecting, trusting clients as quickly as possible irrespective of the long term consequences for these clients.

Email us using our dedicated Barrister and Chambers e-mail address: barristers@citroenwells.co.uk, visit www.citroenwells.co.uk or call 020 7304 2000 Citroen Wells, Devonshire House, 1 Devonshire Street, London W1W 5DR Ask to speak to David Rodney or David Marks

4 : Investment managers tend to behave like sheep following the herd into the latest fad as well as dealing frenetically to justify their active management fee - even though research shows these hyperactive fund managers cost their clients dearly. The marketing departments focus on pushing the latest fad products rather than the best products for investors.

Taxation

Value added tax, personal income tax, business income tax, corporation tax and capital gains tax.

SCM Private is a unique passionate investment house who run a contrarian investment style that is modern and innovative. The SCM team believes in managing money efficiently, transparently, actively and at fair costs; with the founding partners personally investing seven figure sums of their own money on exactly the same terms, conditions and costs as clients.

Consultancy

Computerised accountancy systems and company secretarial services.

Initial consultation is free

3 : Few investment managers invest significant amounts of their own capital into the same funds or portfolios they manage for investors. If they did then they would not be so incentivised to gamble as they would know that if they got it wrong they would also bear the losses. Heads they win, tails they win - but the client loses.

Registered to carry on audit work in the UK and regulated for a range of investment business activities in the UK by the Institute of Chartered Accountants in England and Wales.

Bookkeeping, financial and accounts preparation, budgeting and forecasting, management accounting, payroll.

33 Anglesey Court Road, Carshalton SM5 3HZ

SCM PRIVATE

Business / fax line 020 Mobile 07533

www.scmprivate.com enquiries@scmprivate.com • tel: 020 7838 8650

Article sponsored by SCM Private

Accredited Employer

SCM Private is authorised and regulated by the Financial Services Authority. Risk and performance can change over time. The value of investments and the income from them can go down as well as up and you may not recover the amount of your original investment. Past performance is not necessarily a good indication of likely future performance.

Wealth & Investment. A wealth of knowhow Chartered Certified Accountants And Registered Auditors

investing their money wisely, Investec Wealth & Investment have the knowledge and expertise you need regarding your investments, pensions or other financial matters. Our recently enlarged network, incorporating the added strength of Williams de BroĂŤ, means that we now have 15 offices from Edinburgh to Exeter. To see how we could be of service to you

High value financial solutions

please visit our website for details. Please bear in mind that the value of investments and the income derived from them can go down as well as up and that you may not get back the amount that you have put in.

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Member firm of the London Stock Exchange. Member of NYSE Liffe. Authorised and regulated by the Financial Services Authority. Investec Wealth & Investment Limited is registered in England. Registered No. 2122340. Registered Office: 2 Gresham Street, London EC2V 7QP. Offices at: Bath Belfast Birmingham Bournemouth Cheltenham Edinburgh Exeter Glasgow Guildford Leeds Liverpool London Manchester Reigate Sheffield

C31111.006_W&I_Barrister Mag_17 Sep_297x210_v3.indd 1

Broadstairs 01843 608081

our personal approach to banking,

relationship bank serving over 130

which is one reason Handelsbanken

towns and cities across Great Britain.

has been independently ranked top

Our branch staff are experienced

for satisfaction and loyalty for the last

bankers with strong roots in the

three years by both corporate and

local community. They specialise

individual banking customers.

in providing highly personalised and competitive traditional banking

Handelsbanken has been rated one of the world’s ten strongest banks for the past two years by financial information provider Bloomberg. We would be delighted to talk to you about your specific banking needs and how we can help you to address them. To find your local branch please visit www.handelsbanken.co.uk.

“As my work is sometimes stressful and I’m short of time, it is really helpful that my Account Manager is empowered to make decisions, and can do so swiftly.� Judy Claxton, barrister

We are also pleased to have been

services for local individuals and

rated the Best UK Private Bank 2012

businesses. Each branch operates

by the readers of Financial Times

“The beauty of Handelsbanken is that

as a small business, enabling it to

and Investors Chronicle magazine.

they tailor their products to fit my needs

make decisions locally. This means

Although we do not think of ourselves

and not the other way around. I know

that our customers benefit from

as a ‘private bank’, this particular

that Handelsbanken is not a private

swift decisions based on a strong

award recognises “the bank that

bank, but I get the same service and

understanding of their individual

offers customers outstanding tailored

attention that I would expect from one.�

needs and circumstances.

Jon Straw, barrister

banking services�, which is something we always strive to offer.

Relationship banking

“It's refreshing to deal with people I

One of the world’s strongest banks

actually know and have confidence in,

everything we do. Instead of call centres, we offer everyday access

Handelsbanken takes a conservative

Staff in my local branch understand my

Customer service is central to

International

David Ealing is licensed and regulated by the ATT under license number 3878

WELCOME TO HANDELSBANKEN

With more than 150 years’ experience of serving clients by

Individuals

8395 1031 286346

dbeaccounting@hotmail.co.uk

rather than a stranger in a call centre.

to one point of contact - a dedicated

approach to risk, only dealing with

specific banking requirements as

local account manager - whether

customers that branch staff can meet

a barrister."

face-to-face, by direct line, email or

and develop a long-term relationship

mobile phone. Customers appreciate

with. These factors help explain why

George Rowell, barrister

www.handelsbanken.co.uk Handelsbanken is the trading name of Svenska Handelsbanken AB (publ). Registered in England & Wales No. BR000589. Incorporated in Sweden with limited liability. Registered in Sweden No, 502 007 7862 Head office in Stockholm. Authorised by the Swedish Financial Supervisory Authority (Finansinspektionen) and authorised and subject to limited regulation by the Financial Services Authority. Details about the extent of our authorisation and regulation by the Financial Services Authority are available from us on request.

22/08/2012 10:09

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At the heart of our culture is putting the needs of our clients first, recognising that no two clients’ needs are the same. Our aim is to form a long term relationship with our clients and their advisers whether we are providing tailored investment management or holistic financial planning. We continually adapt to meet the changing needs of our clients throughout their lifetime.

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City Asset Management Plc is authorised and regulated by the Financial Services Authority. City Wealth Planning is a trading name of City Asset Management Plc. Registered Company Number in England and Wales: 2215617. The value of investments and the income arising from them, can go down as well as up, and is not guaranteed, which means that you may not get back what you invested. Levels of taxation depend on your individual circumstances and the value of any applicable tax reliefs. The Financial Services Authority does not regulate tax planning.

Supplement 2012


Wealth & Investment. A wealth of knowhow With more than 150 years’ experience of serving clients by investing their money wisely, Investec Wealth & Investment have the knowledge and expertise you need regarding your investments, pensions or other financial matters. Our recently enlarged network, incorporating the added strength of Williams de BroÍ, means that we now have 15 offices from Edinburgh to Exeter. To see how we could be of service to you please visit our website for details. Please bear in mind that the value of investments and the income derived from them can go down as well as up and that you may not get back the amount that you have put in. investecwin.co.uk

Individuals

International

Charities

Financial Advisers

Court of Protection

Member firm of the London Stock Exchange. Member of NYSE Liffe. Authorised and regulated by the Financial Services Authority. Investec Wealth & Investment Limited is registered in England. Registered No. 2122340. Registered Office: 2 Gresham Street, London EC2V 7QP. Offices at: Bath Belfast Birmingham Bournemouth Cheltenham Edinburgh Exeter Glasgow Guildford Leeds Liverpool London Manchester Reigate Sheffield


Contents: 4

Those with the broadest shoulders By Danny Cox

Invest for growth: A woodland might be just what you need in your portfolio By Crispin Golding

9

Investing for retirement By David Tiller

The long middle – where next for investors? By Danny Cox

14

28

12

Investment Special: Why London Central Residential Bucks The Trend By David Alexander

In praise of Investment Bonds By Nigel Bolitho

20 24

6

Philanthropy in the art market: Tax breaks for art donors By Mark Wingate

18

How to ensure your money is in good hands By Matthew Aitchison

22

The changing retirement landscape - what it means for estate planning By Julie Hutchison

26

Financial Services Face Olympian Hurdles By Chris Green

Trust: less is more when dealing with investment firms By Stuart Fowler

Joining the “AA”? By Justin Urquhart Stewart

30


Those with the broadest shoulders The coalition government has made reducing the budget deficit one of its core priorities and Barristers will already be feeling the effects. Changes to income tax, capital gains tax and national insurance contributions have already started to bite. Danny Cox a Chartered Financial Planner with Hargreaves Lansdown, looks at the easiest ways Barristers can save tax. 1. Make the most of both spouse’s income tax allowance and tax bands Often ignored as De minimis, at the extreme, this measure could save as much as 50% tax on income this tax year. Married couples (or those in a registered civil partnership) should hold incomeyielding savings and investments in the sole name of the spouse who pays the lowest rate of tax. The aim should be to make full use of personal allowances and basic rate tax bands, where applicable. The personal allowance increased from £7,475 to £8,105 from 6 April 2012, providing an even greater opportunity for tax-free income. The top rate of income tax will fall from 50% to 45% from 6 April 2013. Those additional rate taxpayers able to defer income until the next tax year will save 5% on this slice of income or profits. 2. Protect personal allowances From April 2012 taxable income of more than £100,000 reduces the personal allowance. For every £2 of taxable income over £100,000, £1 of personal allowance is lost. Once taxable income is above £116,210, the whole personal allowance is lost costing an additional £3,242 in income tax. One way to retain the personal allowances and reduce taxable income to £100,000 is by making a pension contribution. For example, someone with a taxable income of £106,000 loses £3,000 of personal allowance costing £1,200 in tax. To solve this problem, an additional pension contribution of £6,000 gross could be made. Not only will this save £1,200 in tax allowances but there would also be additional tax relief on the pension contribution, giving a total tax saving of £3,600. 3. Use the ISA allowance Within an ISA (Individual Savings Account) there is no capital gains tax and no further tax on the income. It is therefore important to use the full allowance each year. Investments of up

4

to £11,280 can be made this tax year (the tax year runs from 6 April 2012 to 5 April 2013) of which £5,640 can be in cash. Even Barrister’s non-taxpaying spouses should use ISA. It usually costs no more, and in some cases much less, to hold an investment within an ISA so in most cases the tax breaks come free. 4. Gains not income Capital gains tax is now 18% for those with taxable incomes under £42,475 and 28% for those with taxable incomes of £42,475 and above. However, these rates are generally still lower than the rates of income tax paid. It therefore makes sense to position high income bearing funds/shares in an ISA to save income tax. It also makes sense to use the annual capital gains tax allowance (£10,600 for 2012/13). One way to do this is to sell shares or funds then buy them back in an ISA or Self Invested Personal Pension (SIPP) as part or all of an annual contribution. This is known as Bed & ISA or Bed & SIPP and enables gains or losses to be realised with the added advantage that future income or gains are free from further tax. 5. Consider other tax-efficient investments Premium Bonds offer tax-free returns, more details are available at www. nsandi.com. More sophisticated investors might also consider venture capital trusts (VCTs). They offer tax relief of up to 30% (up to a contribution of £200,000) saving as much as £60,000 in tax if the investment is held for five years. Furthermore the dividends are tax-free and any growth is exempt from capital gains tax (CGT). However, these are higher-risk long-term investments and they are not suitable for everyone. 6. Make full use of pensions Fundamentally, making full use of the pension allowance is still one of the most tax-efficient ways to save. Basic rate tax relief at 20% is available on all contributions to pensions. Higher rate

personal finance & wealth management supplement the barrister 2012

taxpayers can claim up to a further 20% relief and additional rate tax payers up to 30% more tax relief. There has been a considerable simplification of the contribution rules in recent years. The annual allowance, the upper cap on total contributions that can be made to pensions in one year and benefit from tax relief, is £50,000 for 2012/13. Personal contributions also have to be within 100% of relevant UK earnings (broadly earnings from employment or self-employment) to obtain tax relief. “Carry forward” is back There is now significant scope to catch up on contributions missed or give pension funding a boost. Investors can now carry forward any unused annual allowance from the previous three years. Providing there are sufficient earnings in the year, contributions of up to £200,000 (using the £50,000 annual allowance from the current year and an assumed £50,000 allowance from the previous three years) could be made. This assumes membership of a pension scheme during this time. Tax relief will be available depending upon the rate of tax and how much tax the investor pays. However, care needs to be taken not to overfund. The overall cap (the lifetime allowance) on tax benefits of pensions reduced from £1.8m to £1.5m from 2012. Benefits in excess of £1.5m will effectively be taxed at 55% on death or at retirement/ semi-retirement. Despite the potential tax charges on excess value, in the vast majority of cases Barristers should continue to fund pensions. Finally, building up pension income in both spouse’s names is important to maximise the increasing age related allowances at retirement. Spouses with low or no earnings can contribute a deminimis limit of £3,600 per annum and benefit from tax relief.


Investing with a Dynamic, Innovative Wealth Manager Dream your dreams with open eyes and make them come true T. E. Lawrence

We all have friends and family who have worked hard, been well rewarded and dreamt of retiring in the knowledge that they and their family’s futures are secure. Often the reality is that they have lost significant amounts due to bad advice from unscrupulous investment salesmen, wealth advisers or investment management companies. The main reasons for this are:

Together we stand, together we fall

1 : The salesmen / wealth advisers / intermediaries are frequently paid large fees by the investment management companies, which makes unbiased advice difficult. The larger the amount invested, the larger the fees received by the investment management company, and often the larger the kickbacks to the intermediaries.

The answer is to choose a company and team that are passionate about managing money. A team that is respected as technical experts and asset allocation strategists, and have a reputation for behaving ethically and always putting investors and clients at the heart of all decision making.

2 : The investment management companies are normally owned by companies directly or indirectly via the stock market. These owners exert significant pressure for short-term results. This pressurises the investment managers to flog as many high fee products to as many unsuspecting, trusting clients as quickly as possible irrespective of the long term consequences for these clients.

SCM Private is a unique passionate investment house who run a contrarian investment style that is modern and innovative. The SCM team believes in managing money efficiently, transparently, actively and at fair costs; with the founding partners personally investing seven figure sums of their own money on exactly the same terms, conditions and costs as clients.

3 : Few investment managers invest significant amounts of their own capital into the same funds or portfolios they manage for investors. If they did then they would not be so incentivised to gamble as they would know that if they got it wrong they would also bear the losses. Heads they win, tails they win - but the client loses. 4 : Investment managers tend to behave like sheep following the herd into the latest fad as well as dealing frenetically to justify their active management fee - even though research shows these hyperactive fund managers cost their clients dearly. The marketing departments focus on pushing the latest fad products rather than the best products for investors.

SCM PRIVATE

www.scmprivate.com enquiries@scmprivate.com • tel: 020 7838 8650

Article sponsored by SCM Private SCM Private is authorised and regulated by the Financial Services Authority. Risk and performance can change over time. The value of investments and the income from them can go down as well as up and you may not recover the amount of your original investment. Past performance is not necessarily a good indication of likely future performance.

www.dentonspensions.co.uk


Invest for growth: A woodland might be just what you need in your portfolio By Crispin Golding, Woodland Investment Advisor, UPM Tilhill Market Performance Amidst all the financial gloom and austerity there is a ray of light shining in from the countryside; the forest property market. This market has successfully bucked the trend and has gone from strength to strength against a wider investment background that seems weak at the best of times. Aside from woodland’s very favourable tax status (see later) their financial strength seems to speak for itself. The evidence for this is clear and is clearly set out in the recently published IPD UK Forestry Index to December 2011 (www.ipd. com) which has tracked the performance of the UK’s private sector coniferous plantations since 1992. The following graph,

using data taken from the IPD Index, illustrates the point rather nicely. The graph shows that, for the 140 forest properties in their data set, returns over 2011 amounted to 34.8% which is the best annual performance since the Index began. This contrasts rather sharply with the one year return on equities which managed to decrease in value by 3.5% Forestry is of course a medium to long term investment that lacks liquidity so it would be fairer to contrast the performance of each asset class over a longer period than just one year. Again the graph shows this relationship rather clearly, over the past 10 years forestry has significantly outperformed gilts, commercial property and equities. It’s only if we look 19 years back do we begin to see parity of performance with all classes returning between 7% and 9% annualised total return. The UK commercial forest market remains stubbornly small with around £50 million of property traded in the year to October 2011, according to the UPM Tilhill and Savills Forest Market Report 2011. This market report looks at what was traded over the year and what it sold for so each year the sample changes.

6

personal finance & wealth management supplement the barrister 2012

The IPD index tracks individual properties over time to assess their individual commercial returns. Although both reports look at the asset class from a different view point they both come up with the same conclusion and coincidentally, almost exactly the same number too. The Market Report claims a 34% rise in average forest property values on 2010 while IPD claim a 34.8% annualised return over almost the same period. Either way, the message is clear, forest properties are performing very strongly. So How Do I Get In? The uncomfortable truth is that with a market constrained by supply and a range of established, experienced, investors on the prowl it is not an easy task to actually get exposure to forest investments. The strategy for success has therefore to be one of confidence building through knowledge. It’s all about getting the key parameters correct, i.e. • keep an eye on the market • know what you want out of the investment • know how much capital its right for you to put into this asset class • get comfortable with the key issues • get specialist advice • be realistic • be prepared to act quickly and decisively when required Keeping an Eye on the Market Although relatively few properties are traded in a year it is always helpful to have a feel of what is available. By considering particular properties as they arise you will test your thinking about what you really want and what really fits your personal and financial requirements. Commercial properties are sometimes marketed with local agents but mostly they appear with national agents such as John Clegg & Co (www. johnclegg.co.uk), Savills (www.savills.co.uk), Bidwells (www. bidwells.co.uk), Strutt and Parker (www.struttandparker.co.uk), Smiths Gore (www.smithsgore.co.uk) or Fisher German (www. fishergerman.co.uk). It is worth investigating the larger local agents too, e.g. Stags (www.stags.co.uk) in the west country. Know What you Want Is the most important thing really to acquire an attractive broadleaf woodland near your home? I

The articles in this supplement are intended for general information only and should not be construed as advice under the Financial Services and Markets Act


WELCOME TO HANDELSBANKEN

Experience the difference Handelsbanken is a fast-growing

our personal approach to banking,

relationship bank serving over 130

which is one reason Handelsbanken

towns and cities across Great Britain.

has been independently ranked top

Our branch staff are experienced

for satisfaction and loyalty for the last

bankers with strong roots in the

three years by both corporate and

local community. They specialise

individual banking customers.

in providing highly personalised

Handelsbanken has been rated one of the world’s ten strongest banks for the past two years by financial information provider Bloomberg. We would be delighted to talk to you about your specific banking needs and how we can help you to address them. To find your local branch please visit www.handelsbanken.co.uk.

“As my work is sometimes stressful and I’m short of time, it is really helpful that my Account Manager is empowered to make decisions, and can do so swiftly.” Judy Claxton, barrister

and competitive traditional banking

We are also pleased to have been

services for local individuals and

rated the Best UK Private Bank 2012

businesses. Each branch operates

by the readers of Financial Times

“The beauty of Handelsbanken is that

as a small business, enabling it to

and Investors Chronicle magazine.

they tailor their products to fit my needs

make decisions locally. This means

Although we do not think of ourselves

and not the other way around. I know

that our customers benefit from

as a ‘private bank’, this particular

that Handelsbanken is not a private

swift decisions based on a strong

award recognises “the bank that

bank, but I get the same service and

understanding of their individual

offers customers outstanding tailored

attention that I would expect from one.”

needs and circumstances.

banking services”, which is something

Jon Straw, barrister

we always strive to offer.

Relationship banking

“It's refreshing to deal with people I actually know and have confidence in,

everything we do. Instead of call

One of the world’s strongest banks

centres, we offer everyday access

Handelsbanken takes a conservative

Staff in my local branch understand my

to one point of contact - a dedicated

approach to risk, only dealing with

specific banking requirements as

local account manager - whether

customers that branch staff can meet

a barrister."

face-to-face, by direct line, email or

and develop a long-term relationship

mobile phone. Customers appreciate

with. These factors help explain why

Customer service is central to

rather than a stranger in a call centre.

George Rowell, barrister

www.handelsbanken.co.uk Handelsbanken is the trading name of Svenska Handelsbanken AB (publ). Registered in England & Wales No. BR000589. Incorporated in Sweden with limited liability. Registered in Sweden No, 502 007 7862 Head office in Stockholm. Authorised by the Swedish Financial Supervisory Authority (Finansinspektionen) and authorised and subject to limited regulation by the Financial Services Authority. Details about the extent of our authorisation and regulation by the Financial Services Authority are available from us on request.


suspect not, especially if you are interested in a commercial investment and one that attracts the available tax advantages. Of course if you ask your wider family they may well disagree and insist you purchase with your heart rather than your head. It’s not just about listing your requirements but prioritising them too. This will help with the inevitable compromises that have to be considered if you are going to be in with a chance of being a successful purchaser. Know How Much Capital Its Right For You To Put Into This Asset Class Knowing when to stop is not everyone strength. Equally, realising what represents a minimum stake can also take time to determine. Woodlands typically only become strongly commercial over £100,000, below this their commercial aspects can very easily fail to deliver; properties over £200,000 are much better placed and properties over £2,000,000 are very rarely on the market. Within this range it is entirely dependent on an individual’s ability to create a balanced portfolio of assets with woodlands, as medium to long term, relatively illiquid assets, comprising perhaps 20% of the total fund. Woodlands can also, with the right advice, be included in a SIPP. Get Comfortable With The Key Issues The commercial strength of woodlands is largely derived from trade in timber. This makes timber a commodity much like any other, it has ups and downs and it is subject to the pressures of the world market as well as domestic demand. On top of this there is value to be had through, for example, capital appreciation over time, other trading opportunities such as sporting and recreation and the, unbelievably rare, lottery ticket that is a wind farm development. Rarely if ever do residential development opportunities arise. None of the above are of any use to a woodland that lacks a viable and legal access. If houses are about location, location, location, woodlands are about access, access, access. Get Specialist Advice Along with any specialist market comes a need for specialist knowledge. Whilst you can build up some market intelligence and an understanding of what you want out of it all it is always recommended to speak to a suitably qualified advisor. Getting to grips with the quality and potential of the crops, how cash flows will look and what capital investment will be required are all essential parts of assessing the investment potential of the property and ultimately what to bid for it. Acquisition fees are typically 2% to 3% of the agreed price, usually on a success only basis. The need for specialist advice also applies to the legal side of things too. Lawyers who are unfamiliar with land sales may miss critical issues or take longer than necessary to understand that the property does not have plumbing and does not need an energy efficiency certificate.

8

personal finance & wealth management supplement the barrister 2012

Be Realistic Realism will save your sanity. It’s all very well having a long list of must haves but the more that is on the list the longer the wait will be to satisfy them. Of course focus on the commercial aspects but don’t expect to get strong cash flows with a bargain price and great amenity. Knowing where to compromise is going to be critical to your ability to buy anything, if you can’t compromise you may well wait for ever and miss some perfectly viable opportunities along the way. Be Prepared To Act Quickly And Decisively When Required When a good thing comes along don’t be afraid to grab it quickly; subject of course to the above points. Decisive action will lead you to either walk away or bid, not necessarily in that order. Reacting slowly, wavering or realising critical things too late will scupper your chances of completing a purchase; it also wastes your time and that of your advisor. Taxation Taxation on woodlands is very favourable and encourages investment into commercial forestry. A commercial woodland owned for two years will be 100% exempt from Inheritance Tax (IHT) at 40%. Now that the threshold has been frozen at £325,000 until 2015, commercial woodlands are more attractive than ever as a means of passing on wealth. Timber sales are exempt from income tax. If an owner harvests £100,000 of timber from a property he pays no income tax on that income, to a 40% or 50% tax payer this is quite a bonus. Other income, e.g. from sporting rents, is treated as taxable. Capital Gains Tax (CGT) is not charged on the increase in value of the trees, it only applies to an increase in value of the underlying land. In many cases the underlying land is only a minor part of the value at purchase and does not increase over time as timber values go up so CGT liabilities can be very minimal. CGT liabilities can be rolled over into land purchased then planted with trees, this can absorb quite large CGT liabilities that then diminish as the property value transfers to the trees. Obviously tax issues need specialist advice and are dependent on an individual’s circumstances. Conclusion A woodland might be just what you need in your portfolio. They have significant tax benefits and it can provide long term security as well as enjoyment and green credentials. Does it get better than that? Crispin Golding | Woodland Investment Advisor UPM Tilhill, The Barn, Hitchcocks Farm, Uffculme, Cullompton EX15 3BZ, England Tel. 07920 592 973, or 01884 840160 Email: crispin.golding@upm.com www.upm.com


Investing for retirement By David Tiller, Head of Strategy & Propositions (Investments), Standard Life

Investing for retirement has two distinct phases: • accumulation; and • decumulation In the accumulation phase we are building up wealth, investing our hard earned cash to create as large a pot as possible. This pot will be used to fund our retirement. The decumulation phase is about spending it. This is perhaps a little simplistic, but nevertheless it can be a useful way to view retirement investing as each stage has quite different requirements and challenges. Accumulation

More return usually equals more risk and it does not pay to gamble with your retirement. Having an appropriate target or benchmark The key to success is to ensure that your investment strategy is managed to an appropriate target. For most people, a traditional market-based benchmark isn’t necessarily appropriate - the things you will want to spend your money on in retirement do not fluctuate in price in line with investment markets. A pint of milk costs the same the week after the market crashes! There are two relevant targets for investors approaching retirement:

Accumulation is about working to have the life you are aiming for in retirement. It is all about certainty of outcome.

• A strategy that looks to maximise return for a given level of risk • A strategy that looks to deliver a specific return for the minimum risk.

While we may profess to some flexibility around certain things such as our retirement age, this is usually limited and few of us are willing to accept flexibility around a basic sustainable level of income. In other words we need to know the money will be there when we want to retire.

Investment products that are targeted in this manner are relatively new to the market, and Standard Life is one of the leading companies in this area. Examples are risk-based funds such as our MyFolio range and private client discretionary services such as Standard Life Wealth.

Delivery of a specific outcome at a specific date is a major investment challenge. As we have witnessed, equity markets do not always rise. In fact they can fall substantially, which can be very damaging for your retirement plans. An investment pot held in UK equities in June 2008 would have been 28% smaller by October of the same year.

What marks out these solutions is the ability to select specific levels of risk or return targets, and the highly diversified nature of the investments held within them, which use a wide variety of investment markets and strategies. These attributes make it easier to match your particular requirements and choose the best strategy to help you meet your goals, while reducing the influence of individual markets on your investment pot.

As if this did not create enough potential uncertainty, the annuity purchasing power of your pot fluctuates over time broadly in line with the long dated bond market. The annuity income purchasing power of an investment pot held in August 2011 would have reduced by 14% by August 2012.

They are also flexible and allow you the opportunity to make adjustments over time, in order to reduce risk as you reach the all important retirement date. Decumulation

Investing to achieve a specific outcome requires a change of focus away from looking only at potential investment returns. Priority must also be given to the management of risk, to help minimise any negative impact of short term market movements on your retirement pot. The importance of risk management grows as you approach retirement, as the market will simply not have time to recover from any fall before you need to start living off your investment. Having a realistic view of return potential is also important.

For many of us the early years of retirement are seen as the time to fulfil life ambitions and reap the rewards of our hard work. We aspire to travel and explore new places, enjoy new pastimes and spend quality time with our families. After these initial years, we expect our income needs to fall. Research reinforces this view, with individuals approaching retirement anticipating higher income requirements over the first period of retirement (up to around age 70) before settling

personal finance & wealth management supplement the barrister 2012

9


to a lower income requirement for the remaining years of retirement. They anticipate needing a smaller income for a more relaxed life, more tea and biscuits than Machu Picchu! The Retirement Smile Unfortunately, this view of retirement is incorrect. It is based on the false assumption that we will all retain our health through retirement. This is simply not true. Statistics show that the majority of us will decline in the later years, requiring additional help and support and often long term nursing care which can be very expensive. The real shape of our retirement needs therefore has an increase in income required in the latter years of our lives. We nearly all also fail to fully appreciate just how long we are likely to live. With a 55 year old today likely to reach over 85 years of age, many of us simply do not appreciate just how long we will be living off the pot we have accumulated. Retirement Smile The shape of our income requirements is important in considering how to invest for and in retirement. Clearly an initially high but steadily decreasing income is not what most people will require. Other requirements

is not necessarily a good fit to post retirement income needs. Also, annuities do not offer the additional flexibility, control and death benefits that many of us are also looking for. Finally, we know that annuity rates fluctuate and it is often not desirable to ‘lock in’ to a particularly poor annuity rate merely as a result of your retirement date. This is not to say that an annuity is never appropriate. For many people, the certainty attached to a guaranteed income stream means that an annuity is the right solution for them, and an annuity could also be appropriate for other people at a particular stage of their retirement journey, or for part of their retirement pot. However, to secure a complete solution it may be necessary to think more broadly than simple annuity purchase. Post retirement investing Clients are often unaware that many pension investments can continue to be invested after retirement, whilst withdrawing an income. This is often referred to as drawdown.

A sustainable income is a key requirement for retirement. However, research shows that we want more than this. As well as a sustainable income we also want access to additional funds, the ability to pass on wealth to dependents, flexibility and most importantly control.

Unlike buying an annuity, drawdown is not a once and for all decision and so can be combined with an annuity as part of a strategy. For example you could choose to purchase an annuity many years after retiring when your age and the markets make annuity rates more favourable.

Annuities Purchasing an annuity may be seen as the obvious answer to securing an income in retirement. For many, however, this may prove inadequate.

Of course there is risk associated with staying invested and this risk is even more acute in drawdown than when you are accumulating wealth. As regular income withdrawals are funded from your investment pot, any market falls will increase the percentage of the pot spent on providing this income. This leaves fewer assets to gain in value when markets rebound. Clients in drawdown do not have the ability that clients who are still accumulating wealth do, to wait-out market uncertainty and make additional contributions if necessary.

The nature of annuities means that they offer a flat income stream, or one that gradually increases with inflation. However we know, through the retirement smile, that this income stream

This heightened sensitivity to market movements means the focus of investing after retirement should move away from performance onto volatility management.

Unfortunately, all of this means that merely getting to retirement with your investment pot secure is not sufficient. The post-retirement phase of investing is just as important as the accumulation phase.

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personal finance & wealth management supplement the barrister 2010




  

If income withdrawals are your only source of income, it is therefore vital that the investment solution has low volatility and avoids as far as possible any prolonged negative periods. In this way erosion of capital is minimised making your income withdrawals much more sustainable. This is something we have been working on in Standard Life. We have built a specialist range of decumulation investment solutions which, like our accumulation solutions, offer a range of risk/return characteristics. Over a three year period, these solutions are targeted to run at 1/3rd or less of the volatility of global equities while meeting a specified level of target return based on cash rates. They also aim to give positive returns over rolling one year periods. The graph below, based on a Standard Life Wealth portfolio, shows how one such solution has performed. Avoiding the equity market cycle of boom and bust is essential to provide the required stability. The smoother and more consistent growth profile makes the portfolio more appropriate for sustaining a long term income. Remember of course, that as with any investment, its value is not guaranteed and may be less than originally invested. Conclusion When you consider investing for retirement, the two most important things to be kept front of mind are (1) that the solution must match your goal; (2) that the management of risk is absolutely vital. Whatever approach you consider, make sure you have clarity around these points. Investing for retirement is complicated and needs regular attention, so I would suggest that the most important thing is to get advice from a good financial adviser. Hopefully this article will help you ensure that you get the most from their services. Few people really anticipate what retirement is like. Asking a 50 year old what it is like to be 70 is a bit like asking a 20 year old what it is like to be 40. We are all living longer and with good planning we have the opportunity to do so in reasonable comfort.

        

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personal finance & wealth management supplement the barrister 2012

11


The long middle – where next for investors? By Danny Cox Head of Advice, Hargreaves Lansdown Volatile markets, low interest rates, above target inflation

investors have to believe that the stock market will be higher

and the UK double dipping back into recession constitute a

one day, otherwise they should stick with the guarantees of

worrying mix for investors. The government are blaming the

bank deposit. Stocks with good dividend yields provide a first-

euro zone crisis for the UK’s economic problems. Whilst UK

class compensation whilst investors wait for stock markets to

exports to Europe are undoubtedly suffering, the real causes of

perform. The income is also free from further tax if sheltered

our problems lie at home. There is a chronic lack of demand in

in ISA or pension – please note tax rules may change. When

the economy. UK consumers are overtaxed, real wages are not

that income is higher than the arguably safer and more reliable

rising, and the prices of non-discretionary items such as petrol

returns from bank deposit, it is not difficult to understand the

and energy more generally are rising faster than inflation,

appeal. More and more investors are seeking income producing

sucking money out of people’s pockets.

assets such as ordinary shares – and history has rewarded these income investors.

While a sharp rebound is expected in the third quarter, in part owing to the Olympics, this shouldn’t distract us from the fact

A £100 investment in UK equities made in 1900 would have

that the situation is pretty dire. We are in an extended period of

grown to £11,808 by the end of 2010 without reinvesting

little or no growth – a “long middle” – where the economy flat

dividends, but to £1,639,368 with income reinvested (source:

lines for a number of years. This means interest rates staying

Barclays Equity Gilt Study, 2012). Although investors don’t have

low and there could be further rounds of quantitative easing.

a 100-year time horizon, this illustrates the powerful effect of compounding. Each time dividends are reinvested more

Perversely this could boost the stock market despite our economic

shares are bought, meaning dividends are earned on an ever

situation. Investors should remember that stock markets and

increasing number of shares.

economies do not move in tandem. The stock market is a forward-looking measure, looking at future corporate earnings,

These figures don’t take into account the effect of inflation. The

and is therefore likely to rally long before our economic woes

transition between low and high inflation can be a difficult time

are over. It is also important to note that many UK companies

for equities, particularly in the short term. Revenue growth

generate large proportions of their revenues in faster growing

can struggle to keep pace with rising costs, putting pressure

areas of the world, and therefore have little exposure to the

on profits. Yet over the long term, other things being equal, if

weakness of the domestic economy. Furthermore, while the

revenue and costs rise in line with inflation so should profits.

UK economic outlook remains bleak, many companies are in robust financial health. They have spent the past three years

The ability of companies to grow profits over time raises the

repairing balance sheets and reducing debt.

prospect of increased dividend payments. The best companies will find ways to increase revenue over and above the rate of

The importance of income

inflation, or reduce their costs, significantly increasing profits and so the scope to pay dividends. As dividends increase the

In these unprecedented times, it is hard to overstate the

value (and therefore price) of each share should also, in theory,

importance of dividends and today, investors’ regard for income

rise. So as well as a healthy level of income, investors could also

has never been higher. To those seeking income their merits are

benefit from capital growth.

clear. However for growth investors, reinvesting dividends is one of the most powerful (and reliable) ways to grow wealth.

Equities and inflation proofing

Dividends might go up, they might go down, but in general,

UK equities have produced an average annual return of 9.2%

well-run businesses improve their profits and their income over

since 1900, comfortably ahead of the average rate of inflation

time.

(3.9%). In comparison, gilts have returned 5.3% annually and cash 4.9%, although equities have been a much more volatile

Although sentiment in the stock market waxes and wanes, all

12

personal finance & wealth management supplement the barrister 2012

investment.


The ability of equities to provide long-term inflation proofing

have received more than double their initial investment back in

thorough a combination of rising dividends and capital

income alone, while their capital would have grown fivefold to

appreciation demonstrates the importance of dividends to all

over £50,000.

investors, not just those seeking income. As the table shows this compares favourably to cash deposit. Consider the example of the Invesco Perpetual High Income

However,

Fund, one of the most popular UK equity income funds among

Investments fall as well as rise in value, so you could get back

unlike

cash,

dividends

are

not

guaranteed.

less than you invest, and past performance is not a guide to the future. The outlook for dividend growth is also good. A total of £78.6bn is expected to be paid in dividends by UK companies during 2012, a UK record, and up over 15% on 2011. Investors, whether seeking income, growth or both, should aim to take advantage. Danny Cox Head of Advice www.hl.co.uk our clients over the past 20 years. For growth investors reinvesting the income a £10,000 investment made in 1992 would now be worth over £105,000. Those taking the dividends

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personal finance & wealth management supplement the barrister 2012

13


Investment Special: Why London Central Residential Bucks The Trend By David Alexander, Personal Finance Reporter Diamonds, gold, prime London residential property; why are

upward correction to hit the long term trend line could be – and

they so sought-after? Why do they persistently rise in value?

was – anticipated.

Why do they continue to appeal to global investors? It’s simple: they are coveted and they are scarce.

Back in 2009, during the depths of the banking crisis, London Central Portfolio (LCP), specialist fund and asset manager,

Prime London Central (PLC) falls in the Royal Borough of

predicted that prices would reach £1.25 million by the time

Kensington & Chelsea and the City of Westminster, just two

Olympics came to London. There were many doubters at the

boroughs of the 33 which make up Greater London. With little more than 200,000 households, it is only six square miles, around Hyde Park and houses some of the most globally desirable real estate in the world.

time but LCP put their money where their mouth was and launched their second fund, the aptly-named Recovery Fund.

The

audited

most

accounts

recent show

overall capital growth of 35% and a 23% increase in its Net

The

idea

that

Asset

central London

Value

the

property is a

last

in

year

alone.

bubble about to

burst

T h e r e

arises from

are

alarmist

that

m e d i a

argue that

reports

property

those will

and a short

prices have

termist

become

view the

of market,

combined

so

high

they

are

unsustainable

with a lack of

and have to fall.

understanding of

It is true that on

PLC’s world status.

average, prices in RBKC are 24 times

Since in

1996,

PLC

prices

have

increased

from £221,679* to over £1.3 million now.

Commentators may

be staggered by this six-fold growth but believe it or not, this represents growth of 9% per

higher than salaries in the borough, whilst in CoW they are 16 times higher. This compares to a ratio of 6.5 in the rest of the country. However, does that mean they are unaffordable? The answer is probably no.

annum, spot-on the long term growth trend over the last 40 years.

The factors affecting the UK’s housing market – mortgage availability, employment and economic confidence – simply do

Of course, taking the short term view, prices have increased

not apply to PLC, which is no longer a nation capital but a world

rapidly from the depths of the credit crunch by 16.3% per

capital. Central London is not governed by the same criteria

annum.

of affordability as the rest of the country. Its performance is

14

However, for those taking a long term view, this

personal finance & wealth management supplement the barrister 2012


City Asset Management City Asset Management is an independent investment management company dedicated to the maintenance and preservation of the asset base and wealth of its clients. The company was founded in 1988 and is mainly owned by the working directors. Our financial planning arm, City Wealth Planning, offers a highly personal and service led approach to meeting our clients’ wider financial planning needs. Whilst our clients include charities, trusts and corporate bodies, the majority of our relationships are with private individuals and their professional advisers.

A Personal Approach At the heart of our culture is putting the needs of our clients first, recognising that no two clients’ needs are the same. Our aim is to form a long term relationship with our clients and their advisers whether we are providing tailored investment management or holistic financial planning. We continually adapt to meet the changing needs of our clients throughout their lifetime. Our Philosophy

For further information on our services please contact:

Our investment management philosophy is to invest on a multi-asset basis, utilising a wide range of different asset Nicholas.Coghill@city-asset.co.uk classes and investment strategies in order to create Address: bespoke portfolios that aim to achieve our clients’ City Asset Management Plc investment objectives. Suite B4, New City Cloisters Our range of financial planning services include 196 Old Street retirement and tax planning, cash flow modelling and London protection advice in order to develop a financial plan that EC1V 9FR continually addresses our clients’ evolving requirements. Telephone: 020 7324 2920 Website: www.city-asset.co.uk

City Asset Management Plc is authorised and regulated by the Financial Services Authority. City Wealth Planning is a trading name of City Asset Management Plc. Registered Company Number in England and Wales: 2215617. The value of investments and the income arising from them, can go down as well as up, and is not guaranteed, which means that you may not get back what you invested. Levels of taxation depend on your individual circumstances and the value of any applicable tax reliefs. The Financial Services Authority does not regulate tax planning.


not even correlated to the rest of London. PLC is literally and

over the global recovery and the Eurozone have further

metaphorically miles apart from The City and Docklands. In

reinforced their appetite for blue chip tangible assets. London

Canary Wharf, average prices are just one third of those in the

Central is perceived not only as a hedge against political and

heart of the capital and there is extensive over supply. Since the

economic instability elsewhere but there is an underlying belief

Olympic bid in 2005, prices in the London borough of Newham,

in its longevity. London Central’s performance against gold,

which houses the Olympic Stadium, home to so many British

the perennial safe haven investment, demonstrates an uncanny

golds, have still only risen by just 6%, compared with 112% in PLC.

correlation.

Both are proven performers at a time when the

stock market continues to fluctuate but PLC is the investment of PLC is a financial centre, an educational hotspot, an

choice in good times as well as bad.

international playground, a ‘go to’ destination and for some, simply an investment of passion, like art or fine wine. It is

Prices are fuelled by growth in demand and diminishing

arguably the greatest capital city in the world with probably the

availability: PLC has both. So, how do smart investors capitalise

lowest availability of property to buy, due to the conservation

on this safe haven asset class?

of its architectural heritage and almost zero land development potential. In fact, only 5,366 properties changed hands last

LCP’s

year (less than 15 a day!). Given there are now 10.9 million

Apartments Ltd (LCA) is open for subscriptions. It provides

people in the world, with over $1 million of investable assets,

access to this market that investors acting on their own do not

this makes a potential 2,000 investors for every PLC property.

get – diversification, professional expertise, market leverage to

Investors’ loss of confidence in stocks and shares, concerns

source and buy the best properties and a hands-off management

16

personal finance & wealth management supplement the barrister 2012

third

residential

property

fund,

London

Central


Risk: Any investment in the ordinary shares of any new property investment company carries a degree of risk of losing some or possibly all of your investment and whilst investors may wish to consider the positive past performance of London Central residential values, both long term and over the more recent credit squeeze, it is not necessarily a guide to the future.

service. It enables investors to access this market for a fraction of the price that it takes to buy an individual property and investors can use their SIPPs and ISAs too. The fund is currently buying a diversified portfolio of one and two bedroom properties and has already identified excellent opportunities in Kensington, South Kensington, Lancaster Gate, the Pimlico Grid and Marylebone. LCA finds the best deals, adds value through renovation and lets to blue chip executive tenants.

With a projected IRR (annual return) of 10-13% per

annum after five years, it is easy to understand how London Central can be to investors what diamonds are to a girl.

London Central Portfolio is a specialist fund and asset manager, focusing in prime London residential. Their third fund, London Central Apartments Ltd is currently open for subscriptions. For more information go to www.lcpfund.com or call 020 7723 1733. London Central Apartments - Key Features Target return: 10-13% average annual growth Target fund value: ÂŁ50 million Minimum investment: ÂŁ50,000 Structured finance: Up to 50% of purchase price fixed for the Investment Term Investment Term: Closed ended fund running for 5 years (with 2 annual options to extend) Regulatory Status: C.I. Stock Exchange, domiciled and regulated in Jersey, Sharia compliant Eligibility: UK resident, non-resident and non-domiciled investors, SIPPs, SSASs, ISAs and QROPS Sources: Office for National Statistics, HM Land Registry (City of Westminster and Royal Borough of Kensington & Chelsea), Cap Gemini World Wealth Report 2011, City of Westminster Economic Report August 2011, LCP In-house research

personal finance & wealth management supplement the barrister 2012

17


In praise of Investment Bonds By Nigel Bolitho, BV Services Investment bonds (bonds) are technically single premium life assurance policies. They have been available via life companies for over 40 years but more recently have had a bad press. That’s not surprising: for starters returns on with-profit bonds have been conspicuously poor in recent years. That’s because life companies overpaid bonuses in the 1990s to head league tables. Since 2000 that problem has been compounded by stockmarkets going nowhere. Bonds have also lost out to more tax efficient investments such as Individual Savings Accounts, commonly called Isas. Also some investment advisers have been ripping off clients by taking enormous commissions upfront. But for the wealthier investor, investment bonds can have their place in an investment portfolio providing the terms are right. They have become a niche product but one that has plenty of uses in specific circumstances.

First the technical bit Investment bonds are sold by UK life offices or life offices offshore and situated mainly in the Channel Islands, Eire and the Isle of Man. Their biggest attraction is that UK resident investors can take up to 5% of the original investment as “income”. And, because that “income” is deemed to be a return of capital, it’s not taxable for 20 years- ie 20 x 5=100%. As it is not taxable it does not (like Isa income) have to be detailed on a tax return. In return for the 5% concession, the taxman will attempt to tax withdrawals of more than 5% a year and on part or full surrender. Onshore bonds bear an internal tax charge of 20%, offshore bonds nil. If, say, the bond is fully surrendered then any tax charge will be calculated by so-called “top-slicing”. Essentially what happens is that the gain in the value of the bond with any withdrawals added back is divided by the number of complete years the bond has been owned. This fraction is then added to the owner’s taxable income in the tax year in which the bond is en-cashed. If that fraction pushes the investor into higher rate tax then in 2012-13, that investor will either pay 20% or 30% tax on an onshore bond (40% or 50% less 20%) or 40% or 50% on the gain in an offshore bond. Got that?! So if, for example, a bond was bought for £100,000 20 years ago and proceeds on full encashment including withdrawals today = £150,000. Top slicing gain of £50,000/20 years= £2,500. If when added to taxable income, the investor pays a higher rate of tax then the tax on an onshore bond will be top rate of tax less 20% and top rate of tax for an offshore bond.

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personal finance & wealth management supplement the barrister 2012

But there are also plenty of situations where a tax charge can be avoided. Putting bonds into joint or more names helps as then the gain is split between the owners and less of the gain may be liable to tax. Buying now and cashing in when retired on a lower income or when resident overseas should avoid an exit tax. Note, however, that top-slicing still takes place when a UK-based bond owner dies: so one of my golden rules for bonds and general tax efficiency is to advise clients to die early in a tax year: not too early else they may not cover their annual personal allowance but early enough to be a basic rate taxpayer if at all possible.

Now their uses One of the biggest attractions of investment bonds is that with top-slicing etc they come under a quite different tax regime. Mixing tax regimes for income, capital gains and bonds and making maximum use of their different exemptions and allowances is essential personal tax planning in a high tax country like the UK. And in terms of bonds there are a number of niche investment and tax planning areas where they can be extremely useful. The simplest of them is that if a bond is owned jointly, it can continue and so continue paying out regular “income” on the death of one investor or spouse. Because every adult is taxed separately there is always an income tax incentive to put all cash-type accounts earning interest into the hands of the lower or non-taxpaying spouse. But on death the money in any single bank account or single-owned bond or other single-owned investment such as an Isa is effectively frozen (apart from paying funeral expenses) until probate goes through- and that can be many months ahead. People who are too old (normally over age 88/89) to qualify for a bond investment on their own can invest with a younger person; bonds are extremely flexible. Another interesting use of a bond is to assign it to somebody else. If you do that the top-slicing calculation starts with the date that the bond was originally purchased even though there is a new owner. There are two situations where this situation can make extremely interesting tax planning. One is where I have a client who is going to remarry. Before he does that he assigns his bonds to the children of his previous marriage. He is a prudent person because this way the value of the bonds won’t form part of any subsequent divorce settlement! Two, bonds can be very useful in financing future or even


current university education. Parents/grandparents/uncles and aunts etc can invest in a (normally offshore) bond and assign segments of the bond to the children when over 18. Any chargeable gain on the money assigned is deemed to the income of the children. But because those children are almost certainly non-taxpayers- but are fully entitled to a personal allowanceno tax is actually paid on the assigned money. There are also lots of ways that bonds can be used in trusts to minimise tax. For inheritance tax (IHT) purposes Discounted Gift Trusts are quite popular. In return for giving up control of the money invested, the investor receives an immediate IHT discount which is larger the younger the investor is and the healthier the better. So the taxman is likely to challenge plans where the investor is a 90 year old in poor health. The donor can also take out 5% withdrawals. It may be rather obvious but if the investor takes out 5% withdrawals (by selling units) and investment performance is poor, the value of the bond can fall fast. So keep a close watch on performance; on the other hand switching funds is easy, there’s usually lots of choice and probably no switching charges. But there is also a looming deadline on the sale of bonds. That’s because of the introduction of the Retail Distribution Review (RDR) in January 2013. It effectively bans the payment of commission on investment products and is probably the right way ahead because, as said before, some epic amounts of commission have and still can be paid out on bonds- eg 8% of the original investment. Also RDR says that if commission includes so-called “trail commission” as part of the annual management charge, that commission reduces the 5% tax free withdrawal.

has been owned for 5 or 6 years. But the big attraction is that if the bond has grown in value from, say, £50,000 to £100,000 then 5% annual withdrawals are twice as much- and most people these days could do with a bit more untaxed “income”. But I don’t know all the ins and outs of investment bonds. Recently I have come across two bonds issued more than 20 years ago. They are separately-owned bonds for husband and wife but based on joint lives assured. When the wife died, the ownership of the bond was transferred to her executor. I suspect the bonds were set up this way to avoid a harsher IHT environment but why then were they not put in trust? So perhaps now we have a new vehicle to deal with a new problem: care home costs. This set up seems to prevent the local authority grabbing the bond money to pay for her husband’s care and the executor can direct the proceeds to her beneficiaries. That is as long as one trusts the executor! Nigel Bolitho Owner of BV Services, authorised and regulated by the Financial Services authority. Tel: 01954 251521 Fax: 01954 252420 Email: bolitho@enterprise.net Web: www.bvmoney.com

But if the adviser is not greedy there is also a once in a lifetime opportunity for the investor to benefit from generous commission rates: then most of the commission is rebated to enhance the value of the investor’s bond. Life companies will also be offering extra marketing allowances to drum up last minute business. For an investment of just £30,000, 10% can be added via commission and marketing enhancements and, generally speaking, the bigger the investment, the bigger the enhancement. Note, however, that 5% withdrawals cannot include the enhancement: they have to be based on the money actually invested.

Old for New I am also quite busy right now working out if it’s worth re-broking client’s old bonds and replacing them with new ones with big enhancements. Top-slicing is a key element obviously as are any early exit penalties- although they usually disappear after the bond

personal finance & wealth management supplement the barrister 2012

19


Philanthropy in the art market: Tax breaks for art donors By Mark Wingate, Partner, Private Client Tax Services, Smith & Williamson New legislation introduced in April 2012 will allow donors of pre-eminent works of art to the nation to receive a tax deduction based on the value of the donation. The scheme is open to companies as well as individual donors, but not to trustees and personal representatives. This initiative is part of the Government’s wider strategy to stimulate and encourage greater philanthropy. The existing acceptance in lieu scheme allows personal representatives to offer HM Revenue & Customs pre-eminent objects, land and buildings to offset inheritance tax charges. The definition of ‘pre-eminent’ for the new scheme is taken from the acceptance in lieu definition and will apply to any work of art which the Secretary of State of the Department for Culture, Media and Sport is satisfied is pre-eminent for its national, historic or artistic interest. In practice objects or collections of objects may be pre-eminent if they have: - an especially close association with our history and national life, or - are of especial artistic or art-historic interest, or - are of especial importance for the study of some particular form of art, learning or history, or - an especially close association with a particular historic setting. The new scheme will operate within a fixed annual limit for the total tax reductions resulting from the donations. A significant point is that the funding is to come from the same annual budget as the AIL scheme; albeit this will be increased from £20million to £30million a year. The potential donor is responsible for submitting a market valuation of the pre-eminent object with their submission. An expert panel will both assess the merit of the application and the valuation. If necessary the panel will advise the potential donor of an alternative valuation at which it would recommend acceptance of the gift. Agreement on the valuation of the preeminent work in turn determines the associated tax reduction and therefore the panel will need to take into account offers it has already recommended under both the new scheme and the AIL scheme before making a final recommendation. Respondents to the Government’s proposals during the consultation period over the summer 2011 were particularly concerned that the annual funding limit could result in items being lost to the nation and that there will be an element of competition between the two schemes. For the first year the Government will operate the finite funding resource on a first come, first served approach whilst gauging demand. Intending applicants should therefore make their submission early in the tax year.

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personal finance & wealth management supplement the barrister 2012

As well as promoting philanthropy and planned giving the new scheme aims to broaden public access to pre-eminent objects by placing them on long-term loan to public collections. The scheme therefore operates by the donor gifting the object to the nation and the panel of experts determining to which institution the object should be assigned on loan. The Government has accepted that there must be enough of an incentive to encourage more donations above and beyond what would normally have been given to institutions without the tax reduction. First, the object will be exempt from capital gains tax on the gift. Then, the individual donor can receive a tax reduction to 30% of the value of the object. The tax liability of the individual that may be reduced can be income tax and/or capital gains tax. In the case of a company, the corporation tax reduction can be up to 20% of the value of the donated object. Individual donors will be able to spread the tax reduction across up to five tax years – being the year of registration of the offer and the next four tax years. However, the terms of the reduction will be agreed during the offer process and, once agreed, are irrevocable. By way of illustration, For example, the value of a pre-eminent painting is agreed at £500,000. The donor’s tax reduction would therefore be £150,000 (£500,000 x 30%). This amount can be spread over 5 years in any way the donor wishes, such as £80,000 in Year 1, £30,000 in year 3 and £40,000 in year 5. There are obviously a number of ways in which the tax reduction can be spread, for instance it is possible to use the whole amount in the first year. Planning for full utilisation of the available relief will be most straightforward for those with regular annual income or someone who can accurately predict a substantial one-off tax liability such as arising from a property sale or the maturity of investments. The gift to the nation under the scheme will be exempt from inheritance tax. Furthermore, in the event the donor of the object has received it by gift from someone else as a potentially exempt transfer, there is no chargeable transfer if that transferor dies within seven years of making their lifetime gift. Where a donor gives an object which is already conditionally exempt, the gift will not be a chargeable event which would otherwise result in the inheritance tax heldover becoming payable. Finally, where a person inherits a conditionally exempt object on the death of its previous owner, that person may give the object to the nation under the scheme within three years of the previous owner’s death without triggering the inheritance tax recapture charge that would otherwise have become due on the death of the previous owner and without any need to renew its conditional exemption. Furthermore, in the event the donor is a non-UK domiciled


individual and the work of art had been acquired with unremitted offshore income and gains, the donation and transfer of the object to the UK will not result in the income and gains coming in to charge. Companies must use the reduction against their corporation tax liability of the accounting period of registration of the offer and cannot spread utilisation against future years. In conclusion, it remains to be seen what interest the tax reduction incentive will make to the donation of important art to the nation. Some critics feel that the annual limit to the combined fund for this and the existing acceptance in lieu scheme will not assist in the case of very valuable items. Others see the existence of a scheme based on tax incentives as a deterrent to the unconditional altruistic giving that has taken place until now. The Government is hopeful this will be a successful part of its ‘Big Society’ agenda. Mark Wingate Partner Private Client Tax Services Smith & Williamson accountancy and investment management group T: 020 7131 4888 E: mark.wingate@smith.williamson.co.uk

Disclaimer By necessity, this briefing can only provide a short overview and it is essential to seek professional advice before applying the contents of this article. No responsibility can be taken for any loss arising from action taken or refrained from on the basis of this publication. Details correct at time of writing. Note to editors Smith & Williamson is an independent professional and financial services group employing around 1,500 people. The group is a leading provider of investment management, financial advisory and accountancy services to private clients, professional practices and mid-to-large corporates. The group has eleven principal offices in the UK and Ireland; these are in London, Belfast, Birmingham, Bristol, Dublin, Glasgow, Guildford, Manchester, Salisbury, Southampton, and Worcester. Smith & Williamson LLP Regulated by the Institute of Chartered Accountants in England and Wales for a range of investment business activities. A member of Nexia International The word partner is used to refer to a member of Smith & Williamson LLP.

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personal finance & wealth management supplement the barrister 2012

21


How to ensure your money is in good hands By Matthew Aitchison BA (Hons) APFS , Chartered Financial Planner The decision of who to entrust with the management of your

their own products, they may push this course of action whether

money is one that can have huge ramifications on your future.

it is in your best interests or not.

However, whether you choose IFA’s, financial planners, wealth managers or private bankers; those who manage private client

The Adviser

money can be very slick convincing salesmen. So, how do

Secondly, you need to look at the individual adviser. This

you sort the wheat from the chaff and pick yourself a genuine

extends beyond the sales talk and drills down into how adept

adding-value adviser?

they are at what they do.

The purpose of this article is to identify the main areas that I

Qualifications – What level of qualifications does your adviser

believe should influence the quality of advice you receive, and

have? The current minimum level of qualification within the

the red flags that you should avoid. This checklist can be used

UK is QCF level 3, rising to QCF level 4 at the end of 2012.

when assessing both new advisers and those who currently

This, although being an improvement, does not mean that

advise you.

all advisers will be qualified to deal with your situation. You should look at what specialist qualifications your adviser has

The Firm

and whether they fit with your requirements. For example, if

The first place you should start with is the firm behind the

you have complex pension arrangements, look for an advanced

advice.

pension qualification such as G60 or AF3.

Ownership & Influence –Who owns the company behind your

Experience – What experience does the adviser have of dealing

potential/current adviser? Also, if they are part of a network

with clients like you? This is an important point as there are

or group, who owns the parent or principal firm? This is very

many advisers out there who are inexperienced in dealing with

important as there are financial advice firms that are owned

large and/or complex situations. You need to find out exactly

or part owned by companies with vested interests. This

what the past experience is of your adviser to establish if they

includes product providers, banks, fund houses and insurance

will be in their ‘comfort zone’ when advising you. You do not

companies. Where this is the case, how can you be sure that

want to be their first ‘test’ case.

the owners are not putting pressure on the advisers to sell their own products? To the best of your knowledge, you need to be

Remuneration – How is your adviser remunerated? This

happy that the motivations and goals of the owners are not

is an important point as it affects their motivation. Are they

going to cause a conflict of interest with your own.

remunerated on adding new clients, servicing old ones, selling products, or some other means? If they are remunerated on

Independence – Does the company operate from a list of

new clients, the motivation will be purely to add you as a client

products? If this is the case, how can you be sure you are being

and move on; there is no motivation to look after you going

given the best advice? You may receive the best advice the

forward. Linked to this, is the question of targets that come

adviser can give, but this might be different to the best advice

from their supervisors. If they are being pressured from above

you could receive from the whole of the market. You need to be

to sell more equity funds, you may be sold products you don’t

receiving advice from an adviser who chooses products from

need.

the whole of the market and operates on an open architecture basis in terms of investment choice.

Client Numbers – How many clients does the adviser currently have and is there an upper limit set? Your adviser only has a finite

Source of Income – Where does the firm secure its income from?

number of meetings they can have during a year, especially if the

Many professional firms have multiple streams of income.

meetings are to be high quality. If your adviser has too high a

Examples of this may be initial planning fees, commission from

number of clients, or doesn’t set an upper limit, client servicing

transactions, ongoing fees, and rebates from fund managers as

may suffer. In reality, if your adviser has more than 100 clients,

well as earnings from internal products. This naturally creates

you need to find out what kind of support structure is behind them

bias and conflicts of interest. If the firm earns extra by selling

and whether you think they can deliver the service you require.

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personal finance & wealth management supplement the barrister 2012


Point of Contact – Is the adviser in charge of the investment

your adviser gets paid more on the equity portion than fixed

strategy formation? Will they be the point of contact moving

interest or cash, there may be the temptation to weigh the

forwards? Very often, the person you deal with is a ‘relationship

portfolio towards equities, which would result in higher risk. By

manager’. This means they have very little input into the

ensuring the adviser is paid the same no matter the asset class,

actual strategy. How can a back office person design a strategy

you can ensure there are no conflicts of interest. As an aside,

accurately if they don’t know you and your goals?

your adviser should be charging an ongoing fee. If they’re not, your ongoing advice will likely be paid for by other sources and

Service Levels – What will the ongoing service include? You

this may influence the recommendations made to you.

need to know what frequency of meetings you will have, as well as what the content of these meetings will be. You should also

Additional Charges – Are there any other charges or commission

find out about what kind of regular reports you will receive. You

that will be levied? Sometimes advisers will earn commission

need to know what is and isn’t covered by the ongoing fee so

on product sales in addition to fees. Equally, sometimes they

you are aware of any extra charges that may become payable.

charge extra for other miscellaneous items. Again, this is not necessarily a bad thing, but you need to ensure you are made

Fees

aware of the full charging structure and are happy that it is

This is an issue that has been well written about in the press;

conflict free.

however, it is important to know what to look at when speaking to advisers. Your adviser should have a clear charging structure

The professional management of money can add innumerable

that they are happy to discuss. It should not be based on

value to your situation through actions such as managing risk,

product sales (i.e. commission) and should be as conflict free

helping to protect and grow your assets, minimisation of taxes

as possible.

and organising the efficient transfer to the next generation, to name but a few. However, it can also cause irreparable damage

Initial Fees – What are the upfront fees payable to the adviser?

when the interests of the firm or adviser are put ahead of

This will include fees for both planning and implementation.

your own, either through poor structure, lack of expertise or

These fees can be expressed in monetary terms (e.g. £5,000) or

a remuneration structure that is in conflict with your interests.

in percentage terms (e.g. 1% of £500,000) or both (e.g. £2,500

For this reason, it is important that you conduct a thorough due

for planning plus 1% transaction fees). Whichever way they

diligence on any potential adviser and the firm that supports

are expressed, it is important to understand them from both

them, to ensure that they are the correct partner for you.

a monetary and percentage basis. A difference of 1% sounds small, but on a portfolio of £500,000 it equates to £5,000. There

One final thing to bear in mind throughout this process, your

is nothing wrong with your charge being a percentage, as long

adviser should be able to answer all questions truthfully and

as you understand what you are paying for and there is value

fully, with nothing hidden. They will expect full information

being received.

and co-operation from you when collating their background research... why shouldn’t you expect the same?!

Transaction Fees – What are the costs levied for buying and selling holdings in the portfolio, and who do these get paid to?

Matthew Aitchison BA (Hons) APFS

It is important to bear in mind that transaction fees can lead to

Chartered Financial Planner

an incentive to change and trade. If there are transaction fees

Managing Director

involved, you need to ask enough questions to ensure you are

Clear Vision

comfortable that this will not lead to excessive trading. 01234 851 797 Ongoing Fees – What are the ongoing fees being paid to your

07854 769 815

adviser? This is a key point as these will be paid for a much longer time period. These fees can range between 0.35% and

maitchison@clearvisionfp.co.uk

1.50% per annum. The objective is again to match up the

www.clearvisionfp.co.uk

amount being paid to the value delivered. This is not to say that you should automatically opt for the lowest fee. Higher fees can be acceptable if they cover areas like advanced financial planning or are inclusive of transaction fees. Importantly, there should be no bias between asset classes or products. If

personal finance & wealth management supplement the barrister 2012

23


Financial Services Face Olympian Hurdles By Chris Green, Senior financial planning consultant

On the 1st January 2013 the Financial Services Authority’s Retail Distribution Review (RDR) comes into to force, but

Adviser charging and the end of commission

what does it all mean?

to pay a fee out of their capital but could make it less clear

A popular way to pay for financial advice has previously been through commission paid directly to the adviser by the product provider. This had the advantage of avoiding the client having how much the adviser had received for the advice given. In the

The RDR will be one of

future, clients will agree a total fee for financial planning with

the of since

biggest

overhauls

their adviser in advance. It is likely to be more common to pay

financial

regulation

an upfront fee as that makes the overall cost of advice more

1986

when

the

clear.

Financial Services Act was It certainly has the potential to create some anomalies. For

introduced.

example, it was difficult for advisers to recommend nonThe Financial Services Authority (FSA) state on their website,

commission products without going out of business. It also

that the RDR is about establishing a “resilient, effective and

meant advisers normally needed to recommend a product to

attractive retail investment market that consumers can have

get paid, when in fact, no product might have been the right

confidence in and trust at a time when they need more help

answer to a client’s needs. Equally, it meant there was some

and advice than ever with their retirement and investment

unintentional cross-subsidy across clients.

planning”. All financial advisers will now have to outline and agree fees The RDR has led to new FSA rules and regulations and aims to

for their advice in advance. Clients will become responsible for

ensure that, in the words of the FSA:

meeting these fees and product providers will no longer be able

• consumers are offered a transparent and fair charging

to pay a commission in any form. For many clients this will be

system for the advice they receive;

the first time they have had to pay a fee directly for advice.

• consumers are clear about the service they receive; and

The idea is that this will make the process more transparent

• consumers receive advice from highly respected professionals.

as it should be easier for clients to work out what their adviser is charging, what they are doing in return for that charge and

As things stand, all the changes required for RDR compliance

then to compare their proposition with that of other advisers.

will come into effect on 31 December 2012 and will apply to every adviser across the retail investment market, including

A new definition of independence

independent

and

‘Independent’ has always been a description that could only

stockbrokers as well as banks and other providers of financial

be used by those advisers who researched the whole financial

products.

market. Under RDR, the definition of ‘whole of market’ has

financial

advisers,

wealth

managers

expanded and will now cover areas such as ETFs, private equity Customers of financial advisers have tended to see financial

and other more esoteric asset classes. An independent adviser

advice as ‘free’ under a commission-based system. The RDR

must demonstrate they have considered all of these products

will mean that customers will clearly see what they are being

in the process of addressing a client’s financial requirements.

charged for advice. This is a healthy development but will

Under the new rules, if an adviser cannot meet the definition

involve a significant change in culture for the industry.

for independence, they will be deemed to be ‘restricted’. This

24

personal finance & wealth management supplement the barrister 2012


means they will use a smaller range of potential solutions in

or financial advisers. In some cases, the “adviser” did not have

addressing a client’s financial requirements. In practice, of

the appropriate qualification or experience. This resulted in a

course, this may be perfectly sufficient for many clients whose

mix of financial products which do not link to a client’s goals and

financial needs are not all that complicated.

aspirations. Various investments, policies and arrangements have accumulated (or been sold), with insufficient clarity or

Higher qualifications

purpose to tie everything together with their own personal

Although there has always been a minimum qualification

identity and goals.

standard to provide financial advice, this standard has been increased under RDR. All financial advisers will have to hold a

RDR will engender a shift towards a more holistic approach to

relevant QCA level 4 qualification, a statement of professional

Financial Planning. Financial planning is a dynamic process. A

standing (SPS) from an Accredited, professional Body and be

client’s financial goals may change over the years due to changes

bound by that body’s professional and ethical code of conduct.

in lifestyle or circumstances, such as an inheritance, marriage,

While this has been an onerous requirement for some firms, for

birth, house purchase or change of job status. A Financial

others, this has simply meant refreshing existing qualifications

planning relationship will enable the planner to work with the

and sometimes adding qualifications in new areas.

client to revisit and revise their financial plan as time goes by to reflect these changes so that they stay on track with their short

Greater information and transparency

and long-term goals. A thorough plan may also include a look

In conjunction with other recent legislation, the Retail

at the impact of ‘catastrophe events’ and how proper planning

Distribution Review has specific rules about how clients should

can, at least, alleviate the financial impact of these.

be treated and what information they should receive on an ongoing basis. Approved individuals within each advisory business are also legally accountable for ensuring those rules are followed. This provides clients with the added reassurance their adviser’s business is being closely monitored within a regulatory framework. In the unlikely event anything does go wrong, there is both a set process and a chain of personal accountability to ensure things are put right. Better business model Advisers are likely to offer a menu of different advice options as part of the changing charging structure. Many advisers are moving to a financial planning rather than product recommending role. Alongside the developments in regulation and communication, developments in financial-planning technology have taken the industry by storm. In various areas, more secure, more flexible and more user-friendly systems mean the way in which financial plans and products are checked and monitored has improved immensely. Financial Planning in practice Many clients have, unintentionally, had a confused approach to their financial management, usually as a result of inputs from

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various ‘advisers’ be it solicitors, accountants, bank managers personal finance & wealth management supplement the barrister 2012

25


The changing retirement landscape - what it means for estate planning By Julie Hutchison, head of international technical insight at Standard Life The changes to pension drawdown rules and lump sum death

drawdown income is likely to further erode the pension fund a

benefits mean there is now greater freedom for inheriting

smaller amount will eventually be subject to the 55% charge.

pension benefits. But with that comes decisions over the most appropriate and tax efficient way to pass on those benefits. With

The drawdown income will be subject to income tax at the

pension pots of £1.5M or even more for those who protected

spouse’s highest marginal rate. Higher rate income tax at 40%

their pre 2006 pension funds, many individuals will need to

or even the additional rate of 45% from April 2013 compares

consider how best to structure how that wealth is inherited.

favourably to the 55% tax charge on the fund on death. However, any unspent income which is accumulated within the estate

Lump sum death benefits

could then be subject to inheritance tax at 40%. However, with

Prior to 6th April 2011 strict rules applied for drawdown

careful planning any IHT charge can be mitigated.

income taken after the age of 75. On death the combination of tax charges could be subject to a potential tax charge of 82% on

If the ultimate objective is to pass on as much of the pension

any lump sum death benefit. This led many pension providers

fund as possible to future generations, gifting any surplus

to only offer payment of a lump sum to a charity where death

income could be a solution. Regular gifts of surplus income can

occurred after age 75.

be immediately outside of the estate if they fall within the IHT normal expenditure out of income exemption. To be exempt the

The new drawdown rules saw changes to the levels of income

gifts must be part of an established pattern of gifting which

that could be taken but also the charges that would apply on

does not affect the individual’s normal standard of living. One-

death. This opened up lump sum death benefits for the over

off gifts of surplus income do not benefit from the exemption.

75’s. Funds can now be distributed with a 55% tax charge on death. Funds which may have previously been paid to charity

The new drawdown income rules have also removed some

will now be available to family members. This opens up the

of the restrictions on the amount of income that can be taken

estate planning options for pensions.

from the pension. Provided the spouse has ‘secured’ pension income of more than £20,000 each year then no income limits

Mortality tables suggest that a male going into drawdown (i.e.

are imposed on the drawdown income that can be taken. State

taking an income) at age 55 is likely to survive beyond their

pensions, pension annuities, and final salary occupational

80th birthday. This means for most individuals in drawdown,

pensions, including dependant’s pensions, can all be part of the

the new rules are much more favourable.

required £20,000 income.

For individuals who die before age 75 and who are in drawdown,

This additional income flexibility may mean that more of the

the 55% charge also applies. This is less favourable as it is an

pension could be stripped out using the exemption reducing

increase from 35% under the old rules. But for those who die

the eventual fund subject to the 55% charge on death. Stripping

before age 75 who have not yet touched their pension pot, there

out the entire pension fund over a short period of perhaps 2 or

is no tax charge.

3 years may not be enough to satisfy HMRC that a pattern of gifting has been established. It may be more tax efficient to limit

The spouse’s options

drawdown income so that total income falls within the higher

Where there is a surviving spouse there is still a decision to be

rate tax band.

made whether to take a lump sum from the remaining pension fund or to continue in drawdown. Continuing in drawdown

Using a trust for control and asset protection

will delay any 55% charge until the second death. And as the

But there are other important considerations which may

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personal finance & wealth management supplement the barrister 2012


influence

decision-making.

Where

the

surviving

spouse

continues to take drawdown income, they will then take control

during their lifetime, even where the earlier pensions have been transferred or consolidated into a single arrangement.

over determining where the residual fund is eventually paid. This may be a concern particularly where there may be children

The result is that when death benefits are paid to the deceased’s

from previous marriages.

discretionary trust it may be treated as a number of different settlements for IHT each relating to a different pension scheme.

What if the surviving spouse loses capacity and does not have a suitable power of attorney in place? Or what if they meet a

The good news is that ten year anniversary charges could be

new partner and decide to leave everything to them? For some

eliminated due to the existence of multiple settlements, each

surrendering control over the final destination of their death

with its own nil rate band. Consultation is underway aiming to

benefits could be a step too far.

simplify IHT charges for discretionary trusts. This could be a welcome development for the trustees of a discretionary trust

Where a lump sum is paid to a discretionary trust on first death,

which holds the death benefits arising from several different

none of these negative outcomes arise as the trustees are in

pension schemes.

control of the funds. In summary, there is now greater freedom for inheriting The discretionary trust is typically set up during an individual’s

pension benefits. Income limits and requirements, as well as

lifetime, to receive any future death benefits. It is of course a

the need to control who and when benefits are paid, will all

vital step to check that the pension scheme rules allow payment

need to be considered. And going forwards pensions can now

to a trust.

be considered along with all other estate assets in future family wealth planning conversations.

Using a discretionary trust is an effective way of controlling who will benefit from any pension death benefits. Asset protection, flexibility and IHT outcomes are all possible benefits, as well as an element of “control beyond the grave.” If the surviving spouse opts for a lump sum (instead of taking income) but then doesn’t spend it, it will remain in their estate. As a result, on their subsequent death, it could be subject to a further 40% IHT (on top of the 55% it has already suffered) depending on their available nil-rate band.

This does not

happen where funds are retained in a discretionary trust. Trustees may be able to make loans to a beneficiary (such as the surviving spouse). The benefit here is the loan could be a deduction from their estate. Care would be needed where the surviving spouse had made 3rd party contributions to the deceased’s pension. It is possible in such cases that the loan would not be deductible for IHT. IHT and the ongoing trust Where a large sum is held within the ongoing discretionary trust, a question will arise about the ten year charge for IHT. It is entirely possible that what appears to be one trust is in fact several “settlements” for IHT. This may often be the case where someone has contributed to several pension schemes

personal finance & wealth management supplement the barrister 2012

27


Trust: less is more when dealing with investment firms By Stuart Fowler, Director, Fowler Drew Limited

It’s hard work, investing. Like poker is hard work. Do it yourself

RDR forces agents to be explicit about what their customers are

and in capital markets you risk being systematically, constantly

paying and what service the charge buys. Hitherto, a service

outsmarted by professional investors. Efficient markets will

could consist of advice but appear to be costless because a

exploit people who think they are Warren Buffett and aren’t.

commission was paid by a product provider, even though the

Hire a financial adviser or wealth manager to do it and you still

cost of the product included the commission, so clearly the

risk picking one who will be outsmarted by better professionals.

customer always was paying. After 2012, the product cost has

It may after all be just as implausible that you can pick successful

to be independent of charges made by people choosing the

agents as it is that you can pick successful investments. But it

product on your behalf.

doesn’t end there. Trusting an agent in no way guarantees you will not be exploited by them. Financial services are rife with

To show you how commission bias has impacted wealthy

agency/principal conflicts.

investors I can share a recent case of a new client, a lawyer, coming to us from the investment operation of a bank. The

The events of recent years have probably made us all a little

client was persuaded by the bank, when pension contributions

more cynical about the people we need to engage with if we want

were capped by the Government, to divert saving to an ‘offshore

to put our money to work in public markets, whether because

investment bond’. This is an insurance-based ‘wrapper’ that

of lending money to people who couldn’t afford it, flogging

like pensions is a way of deferring tax, like pensions is then

toxic products to their own customers, foisting unwanted and

taxed as income not capital but unlike pensions does not balance

unnecessary products and services on account holders or trying

the increased eventual tax bill by giving an allowance against

to fix interbank markets. Even before we reached some kind of

income tax at the point of saving. There are only very few,

tipping point in attitudes to financial services firms, the UK’s

specific circumstances in which this can be good advice. They

Financial Services Authority had decided to impose radical new

did not apply in this case. The commission paid to the bank,

rules on firms manufacturing investment products and firms

out of the client’s investment, was £48,000. It so happened that

providing financial advice. Product providers will not be able

we had recently received a CV from an adviser working for

to ‘buy distribution’ by paying advisers commissions for selling

the same bank which showed how successful he had been in

their products and advisers will have to agree a separate,

exceeding his commission targets, which, incidentally, would

discrete fee with their customers.

have required 15 such sales. Sharing all this information with him, the client realised he had been playing in the wrong game.

Individual users of the market in investment products and services would be wise to think about how to turn this initiative,

After RDR this transaction would probably not have taken

known (horribly) as the Retail Distribution Review, or RDR,

place. The client would never have agreed to pay that much for

to their advantage. It offers the chance to tilt the poker table

the advice to buy a product or for the time spent implementing

towards the sucker money and against the pros.

the transaction. He only agreed when it appeared to be an unavoidable part of the cost of the product. But, more

Barristers are amongst the people who can benefit most, as they

important, the bank would have had to come up with a proper

are typically more dependent than other groups of workers on

service proposition and pay incentives to its staff to deliver that,

self-funded retirement plans and they accumulate larger pots

instead of dodgy products.

than most. The aim of this article is to share some professional insights into what they can do.

Across the entire wealth spectrum, the main impact of the ban on commissions is likely to be a reduction in the use of actively-

The main focus of the insights is actually really straightforward

managed investment funds in favour of index tracking funds.

and perfectly intuitive: costs. What you pay and how you pay

Funds attempting successful security selection are typically

to put your money to work in markets has been a key way in

known as ‘active’ and funds seeking only systematic exposure

which the odds were stacked against you.

to market returns are known as ‘passive’, although tracking the

28

personal finance & wealth management supplement the barrister 2012


index does require activity to match the changing constituents

I should not need to point out that for affluent investors the

of the index. Active management is by definition a zero sum

compounding effect of this is a lifetime transfer measured not

game, as the average of all inventors’’ returns relative to the

in terms of tens of thousands but hundreds of thousands. Very

index must be zero, minus costs. For every winner in the stock

wealthy individuals are making a transfer to agents of more

selection game, there must be a loser. Bundling product and

than a million pounds without a second thought.

advice costs led to a bias to active management because only active funds loaded commissions to agents into their product

The FSA hopes that its RDR initiative will cut the cost of products

costs. Passive funds do not pay commission.

by forcing manufacturers to compete on factory-gate prices. This is what happens in functioning markets. The first signs

Prior to RDR, most investors hiring active managers (or advised

are that unbundled active fund units are being set at an annual

by agents who bias to active managers) will have been paying

management charge of 1.0%, close to current net margins. We

about 1.7% pa as the typical combined cost of products and

think that competition will erode the typical price for equity

portfolio management. The average is remarkably similar even

funds to 0.6%. This is not good news for the funds industry but

though it has been arrived at by different routes, such as using

they have resisted market economics for too long.

low-cost ‘institutional units’ plus a portfolio fee or using retail units on a ‘platform’ and using commissions to pay for the

RDR now forces customers to work out what they want to pay

platform cost.

for investment services, as opposed to products. Otherwise they will not be able to agree explicit charges, in writing, with

This captures only the agency costs. Active management,

their agents in the way the FSA will require. We anticipate

regardless of how it is packaged, involves trading costs which

two factors will come into play. First, we think they will be

take three forms: brokerage, dealing spreads (differences

angry and mistrustful when they find out what they have been

between buying and selling process) and market impact (the

implicitly charged up to now. Second, we think they will focus

effect on prices of the activity itself). Over the last decade or so,

more directly on the value proposition and will suspect that the

dealing costs have plummeted as technology and deregulation

typical agent is not adding much value. They will be right.

have deepened liquidity in most market conditions but activity has also increased commensurately. A fair assumption is that

There is no question individuals need advice and the process

transactions in a typical fund add about 0.25% pa, making the

of exposing capital to markets clearly involves time and

overall costs of actively-managed products about 2% pa. This

administrative costs as well as some unavoidable transaction

is the typical position on a ‘cost wedge’ that UK retail investors

costs. However, the cost of exposure has to be cut to make it

find themselves on.

rational and the focus of advice has to be made more useful. The economic value lies in planning-based, goal-focused

Tracker costs have also fallen with increased competition,

management of risks, taxes and costs. It answers questions

notably with the arrival in the UK of the US price leader

like what different jobs are my money supposed to do; what

Vanguard. Gloabally-diversified market exposure can now be

different sources of risk matter most to each goal; what will

enjoyed for no more than 0.25% pa. This is the thinnest end

it cost me (in greater required resources or lower expected

of the cost wedge. The excess cost of active management is

outcomes) to avoid risks; if embracing risks, can I see clearly

therefore now about 1.75% pa. Investors not using agents or

how they are being managed and why; how do I organise my

platforms that rebate initial or up-front selling commissions are

investments most efficiently to minimise tax. Its objective is

effectively paying even more depending on their turnover.

maximising capital efficiency for a household. Value requires clients to focus on what they are paying to obtain efficiency

There is overwhelming evidence that the chances of making up

gains. It’s still hard work. But better than poker.

even 1.75% over long periods of exposure is negligible. From a collective, national perspective it is a vast waste of resources,

Stuart Fowler

a transfer from individuals to agents with no economic value

Director

whatsoever. I say ‘vast’ because the typical investment return,

Fowler Drew Limited

after inflation, for private capital is itself only about 3.5% pa,

22 Quayside, William Morris Way, London SW6 2UZ

being made up of returns to equity-type risks (shares and

+44 (0) 207 736 2434

property) and less risky fixed-income investments and cash.

www.fowlerdrew.co.uk

Viewed as a share of the engine of growth, we can now see that half the power is being diverted to agents.

Authorised & Regulated by the Financial Services Authority No 402423

personal finance & wealth management supplement the barrister 2012

29


Joining the “AA”? Such a phrase has many interpretations from a mildly tedious motoring repair conversation to an admission of an unfortunate bottle swigging habit. In fact in this particular case, it means neither. I am referring rather to ‘Asset Allocation’. By Justin Urquhart Stewart, Seven Investment Management Sadly this has become somewhat of a fashion term in the investment world and is bandied around by some as a broad term of financial sophistication, with the aim of implying that they might know what they are talking about. In fact the concept of asset allocation is very simple – don’t put all your eggs in one basket! This astonishing piece of the stunningly obvious would seem like common sense to all except those involved in the investment world. For years, the traditional stockbrokers and private bankers had a simple method for investing which was based on the concept that most investment equated to stock and shares and thus, 70/80% of a portfolio would be made up of those along with a sprinkling of government Gilts, and a unit trust for overseas coverage. Job done apparently – a “balanced” investment portfolio! This delightfully simple mechanism certainly pleased the old brokers as shares needed trading and trading meant commissions, and so long as you probably executed twenty purchases and twenty sales each year, you would in all likelihood get your bonus. Good for the broker, but not necessarily for the client. In fact such a structure, although common was in reality extremely risky, in that not only was it focused primarily upon one asset class – equities - and mostly UK ones at that, but also it was likely to be quite volatile. Leaving family finances to the vagaries of the stock market is potentially rather toxic, especially when set against the risk tolerances of most people. For those who are older frankly wholly unsuitable to have such a risky and capricious portfolio. Traditionally, it had been a narrow range of these asset classes that were used, perhaps with some occasional adventures into property. It was not until the exponent of ‘modern portfolio theory’, the Nobel Prize winning Professor Harry Markowitz, started asking serious questions that due regard began to be given to the reliability of longer term returns and the accompanying risk. The concept from the good Professor was that if you could measure the volatility, rather than the actual performance of different asset classes (because past performance is no guide to future returns), you could start to plot their likely behaviour under different circumstances and thus attempt to improve the predictability of the proposed portfolios at different levels of risk.

With this type of information, it was becoming easier to start to build a more robust portfolio with some greater resilience to try and withstand the shocks and horrors of a storm-tossed stock market. Thus with these measurements of a range of other asset classes, and with a greater geographical spread around the globe, the portfolios would start to change quite significantly away from some top UK stock tips, into a broader based and globally spread multi asset classes portfolio. So instead of having a portfolio of someone’s ‘best ideas’ we are now achieving a greater ‘appliance of some science’ in construction of portfolios which no longer look like a typical private client portfolio, but now look more of an institutional style structure – and hopefully with the lower institutional level cost. You will see from the ‘mosaic’ asset chart that the different colours of the asset classes seem to have little or no pattern and are seemingly random in their behaviour. If anything, it looks as though this year’s fashion icon becomes next year’s embarrassment. The answer then is to blend a range of the asset classes and the result should be, if regularly monitored and managed, that your melange of asset classes would run through the middle of the chart and avoid the horrors of the horrific crashes and fall from grace of the star performers of the previous few years. So does it work or is this just academic theory? Well the past decade has been a fairly torrid time for most investors. Stock markets seems to be roughly where they were a decade ago, although this disguises the roller coaster ride in between, the banking bubble burst, and the economic boom turned to a vicious bust. However, despite this list of woes, portfolios based on an intelligent asset allocation process would have not just protected clients’ hard earned assets but also grown them as well. So here in my view is one AA that we should all the queuing up to join. Asset Class Performance Best and Worst Performers – the question is always ‘What Next?’

You then need to add to this plotting the comparison of the likely behaviour of one asset class against another, you have a better idea of the combinations of asset classes such that they do not all move in the same way at the same time.

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Source: Ecowin, Bloomberg, Barclays Capital, Reuters Seven Investment Management personal finance & wealth management supplement the barrister 2012


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