News & Views

Bank of Mum and Dad enters lending top ten

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An unusual new bank has taken one of the top spots in a list of the biggest lenders.  It’s not a High Street banking brand, but instead the Bank of Mum and Dad. 

As a result of parents gifting or lending money to get their kids on the housing ladder, the Bank of Mum and Dad has entered the top ten biggest lenders.  According to new research from Legal & General, parents contributed an average of £24,100 to first-time buyers this year. 

This gifting is around £6,000 more than the average parental contribution last year, perhaps a consequence of rising property prices and the challenges faced by younger people trying to buy their first homes. 

It means that parents will give their children around £6.3bn this year, which ranks the Bank of Mum and Dad in tenth place if it was a mortgage lender. 

The research, based on a poll of 1,600 parents, found more than half gave financial assistance to their children to buy homes.  This financial assistance is coming from cash savings, pension withdrawals and equity release. 

The Bank of Mum and Dad would push Clydesdale Bank off the top ten list; it ‘only’ issued lending of £5bn to its borrowers last year. 

According to L&G, thousands of homebuyers are now reliant on their parents to either get a step on the housing ladder or buy more expensive property.  Almost one in five parents said they had or would give financial support to a family member so they could buy a home.  These parents feel it is their responsibility to offer financial support. 

It’s worth noting though that giving financial support to children can worsen your standard of living in retirement.  For this reason, it’s essential to carry out a comprehensive financial planning exercise before gifting or lending money, to consider the impact of this generosity on your financial future. 

The survey found that more than a quarter of parents were not confident that their gifts would leave them with enough money in their retirement.  15% of parents surveyed said they had already accepted a lower standard of living, as a result of making gifts.  

Chris Knight, chief executive of L&G’s Retail Retirement division, said: 

“There are a vast range of considerations today’s retirees face when it comes to planning their finances, from whether they can afford to help their children buy a home, to setting aside funds for any future care needs they may have. 

“Parents and grandparents across the UK want to see their loved ones settled in homes of their own and are giving generously as part of the Bank of Mum and Dad.  Many are using their pensions and savings to help out and unfortunately this could be leaving some facing a poorer retirement, especially if they don’t get the right advice.” 

Working with a Financial Planner before helping children out financially is also the best way to ensure cash is released from the most suitable source, from an investment and taxation perspective. 

Investment company assets reach £200bn milestone

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Although at Wells Gibson we create client portfolios using Open-Ended Investment Company (OEIC) funds as opposed to their closed-ended counterparts, we thought it would be worthwhile acknowledging that fund assets managed by investment companies have surpassed £200 billion for the first time.  

An investment company often referred to as an investment trust, is a form of a collective investment fund.  It has a closed-end structure, which differs from unit trusts or open-ended investment companies (OEICS), where new units are created and cancelled based on investor demand.   

With an investment trust, a fixed number of shares is in circulation, with the share price fluctuating based on the underlying value of assets and investor demand for the shares.  This closed-end structure makes it easier for investment trusts to invest in illiquid or less easy to trade assets, as the fund manager can take a longer-term view.  

Shares in investment companies are traded on a stock exchange, just like other listed companies.  Each has an independent board of directors, who are responsible for looking after the interests of investors.   

An interesting feature of investment companies is their ability to borrow money to invest.  This is known as ‘gearing’ and can result in additional profits from investing, once the cost of borrowing is covered.  The investment company sector passed the £2bn milestone to record assets under management of £200.3 billion on 31st July 2019.  It’s been an impressive run for assets in the sector during the past few years.  

Assets have doubled in less than seven years, after reaching £100 billion at the end of January 2013.  Nearly half of this growth during the period has come from investment companies investing in alternative assets, rising from £34.7 billion on 31st January 2013 to £80.3 billion on 31st July 2019, a rise of 46%.  

Investment companies can invest in a much more extensive range of assets than other types of investment funds.  However, these assets don’t always have an expected return.  They set out their approach to investing in their investment policy.  

Ian Sayers, Chief Executive of the Association of Investment Companies (AIC), said:  

“It’s good news that the investment company industry is growing strongly, reaching a record £200 billion of assets at the end of July.  This growth demonstrates the adaptability of investment companies, which have been helping investors meet their financial needs for more than 150 years.  It reflects growth in mainstream investment companies which are investing in cutting-edge opportunities such as technology, healthcare, frontier markets and venture capital.  

“As investment companies are the natural home for illiquid assets, it is not surprising that a significant part of this growth has been in the alternative sectors, which are often invested in assets that are harder to sell such as property and infrastructure.  

“Investment companies’ income advantages have also come to the fore in the current low interest rate environment. Many investment companies have increased their dividends for decades, making them highly sought after in recent years.”  

At Wells Gibson we believe sensible investing requires a systematic approach which is why we favour Open-Ended Investment Company (OEIC) funds as opposed closed-end investment trusts. 

If you would like more information please contact Wells Gibson. 

Josh Smith, Associate has successfully completed the Chartered Insurance Institute’s, Diploma in Regulated Financial Planning. 

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Wells Gibson is delighted to announce that Josh Smith, Associate has successfully completed the Chartered Insurance Institute’s, Diploma in Regulated Financial Planning.

Commenting on Josh’s achievement, Jonathan Gibson, Managing Director said, “I am delighted for Josh that he has completed the level 4 Diploma.  Much study time is required to develop core technical knowledge and financial planning capabilities across six core areas.  Josh can now look forward to working towards achieving the Level 6 Diploma in Financial Planning.”.

Josh graduated from the University of Dundee in 2017 with a Bachelor of Laws with honours at which point he decided to pursue a career in financial planning.  Josh started with Wells Gibson in July 2017.

Josh now plans to study to achieve the highest global certification available to financial planners in the UK, the CERTIFED FINANCIAL PLANNERTM certification, and Chartered Financial Planner status.

Understanding the financial impact of long-term care

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One consequence of improved longevity is a rising cost of care in later life.  Whether experienced directly or indirectly, long-term care expenses are now a standard feature within the financial plans we construct for our clients.  

The financial impact of this later life care varies depending on a variety of factors, including the age at which it starts and how long it continues.  According to new research, the average cost of caring for an elderly relative is £5,545.  This is the financial cost of either lost earnings or money spent directly on care fees. 

The research, which forms part of The Modern Life Report from Fidelity International, found that nearly a third of people had to care for an elderly relative at some point.  Of these individuals facing care requirements, 20% took time off work to provide care, with 14% cutting their hours at work, and 10% leaving their job altogether to become an unpaid carer. 

Taking time off work or leaving work altogether to provide care to an elderly relative is an expensive proposition.  The financial impact for men was found to be higher than for women, at an average of £8,138 compared to £3,187.  Millennials face the highest indirect care costs of any generation, spending an average of £6,183. 

We are often faced with clients who find themselves as part of the ‘sandwich generation’.  This term describes being sandwiched between the financial pressures of having young adult children, along with time or financial commitments with elderly parents.  In the future, we expect even more people to become part of this sandwich generation, thanks to rising life expectancy and more time spent in poor health in later life. 

Official figures show we can now, on average, expect to spend between 16 and 19 years in failing health as we get older. 

Despite the financial consequences of care in later life, relatively few people seem willing to put in place suitable financial plans to cover the costs.  The research found that 25% of people haven’t considered the cost of long-term care, and 24% believe they will rely on any available state provision.  A further 23% don’t know how they will fund care in later life. 

Perhaps more worrying is the lack of planning among those already in retirement.  According to the research, a little over a quarter of over 50s haven’t considered their long-term care funding.  20% of those in their 60s and 25% in their 70s don’t know how they will meet future care costs. 

With more people needing long-term care in later life, it seems likely that state provision will struggle to keep pace with demand.  Emma-Lou Montgomery, associate director for personal investing at Fidelity International, said: 

“Health, wealth and happiness has long been the prescribed recipe for a good life.  But as we know all too well, if just one of those components is missing the knock-on effect can be devastating. 

“When it comes to health, we aren’t always in control of what happens, and while we are living longer and spending more years in good health, the number of years we live in poor health has also increased.  This is especially true for women, who live longer than men, and unfortunately, the majority of these extra years can be spent in poor health. Our research shows this not only affects those suffering from ill health or illness, but it affects their loved ones too. 

“While the government is committed to solving the social care crisis it won’t happen overnight – there is no easy fix. 

As we await further clarity from the new prime minister people must take their future into their own hands and ensure they are prepared for life’s twists and turns. While our own mortality or possible ill health is something few of us like to dwell on, taking steps to plan for your own care in later life is essential.” 

It’s all too easy to bury your head in the sand when it comes to the relative unknown of long-term care funding. 

A better approach is to factor in some later life care scenarios, for yourself and close relatives, when creating your financial plan, to fully understand the consequences of this as you work towards your goals. 

Contingent charging ban designed to tackle unsuitable pension transfers

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The scandal of unsuitable transfers from defined benefit (final salary) pensions to private pension plans has been a regular feature in the financial press in recent years. Moving from the certainty of a guaranteed income for life to a capital sum, which is subject to investment risks, is not an easy decision to make.

While most financial advisers and financial planners operate professionally and impartially when advising on pension transfers, a minority have given the regulator cause to update their guidance and introduce new rules, all with consumer protection in mind.

The latest package of measures from the Financial Conduct Authority (FCA) includes a proposed ban on ‘contingent charging’ for pension transfer advice.  Contingent charging is a remuneration style where the financial adviser is only paid if they recommend the pension transfer takes place.  Critics of this approach to charging believe it can introduce a conflict of interest, resulting in a higher propensity for unsuitable advice.  By introducing a ban on contingent charging, the FCA aims to protect consumers from this conflict of interest.

It’s not, however, a complete ban on contingent charging; advisers can still make use of this method of charging on pension transfer advice in limited circumstances. Where an individual has an illness or condition which results in a materially shortened life expectancy, contingent charging can still take place, to facilitate access to advice for this group of investors who could benefit from transferring their pension.

An exemption also applies to those who may be facing severe financial hardship, including the risk of losing their home.  Individuals facing severe financial hardship will continue to have the option of paying for pension transfer advice using contingent charging.

For all other groups of consumers, contingent charging is taken off the table as a result of these new FCA proposals.  Advisers will not be allowed to charge less in total for advice on pension transfer than if they provided and transacted investment advice for the same size of non-pension investments.

This measure is designed by the FCA to prevent advice firms from gaming the contingent charging ban by charging a token fee for their advice.  Advisers will also be banned from offsetting charges for advice on pension transfers against other advice services provided to the client.

There will be a limit on any subsequent ongoing adviser charges in respect of the pension funds that are transferred.  This measure is designed to make sure that ongoing charges are not higher than if the funds had not been subject to a transfer, therefore limiting the opportunity for cross-subsidies between initial and ongoing advice on transfers.  To ensure that ongoing fees are not excessive, advisers will have to demonstrate why any pension scheme they recommend is more suitable than the individual’s workplace pension scheme.

Finally, advisers will have to charge for advice where any services related to full pension transfer advice have taken place, including the appropriate pension transfer analysis and transfer value comparator.

Christopher Woolard, Executive Director of Strategy and Competition at the FCA, said:

“The FCA’s supervisory work has revealed continued problems in the pensions transfer advice market.  By making changes to the way advisers are paid for transfer advice and the other changes to transfer advice we are proposing today, we want to ensure people receive suitable advice and drive down the number giving up valuable defined benefit pensions when it is not in their interests to do so.”

Other measures being introduced by the FCA around pension transfers include introducing abridged advice, allowing advisers to deliver low-cost advice to clients who should not transfer their final salary pension.

There will be an improvement to the way in which charges are disclosed, and advisers will need to take steps to confirm that clients understood their advice explicitly.

Advisers will also have to complete a minimum of 15 hours of continuing professional development specific to pension transfers, to retain regulatory permissions to be a pension transfer specialist.

This FCA consultation on improvements to pension transfer advice will remain open until the end of October.