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Alternative Investments

Comparing your spending with others

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Our clients are often interested in how their household spending compares to others.  Do they spend more than their neighbours, about the same, or less?  This financial curiosity has been satisfied with the publication of new official figures reporting on household spending across the UK.

The latest Family Spending Survey from the Office for National Statistics (ONS) offers an insight into the spending habits of UK households, broken down by household characteristics and types of spending.  At a headline level, it shows that average weekly spending is up to £572.60 for the year ending March 2018.  This is the highest level of weekly spending since 2005, when adjusted for inflation.

According to the ONS, this rise in UK household spending is correlated with an improvement in the employment rate, which reached a record high of 75.6% in the first quarter of last year.

The ONS reports that the biggest outlay for households was transport.  The average household is now shelling out £80.80 a week on its transport costs.  A further £76.10 per week was spent on average on housing costs, fuel and power.  This was followed by an average of £74.60 a week on recreation and culture.

In addition to spending habits, the report also looks at how much we are saving.  It found that our savings ratio has fallen to its lowest level since records began, to just 3.9%.  Such a low savings ratio suggests that households are dipping into their savings, and even taking on new debt, in order to spend more and keep up with their lifestyle costs.

Looking at spending habits across different parts of the UK, the ONS report found some interesting differences.  Perhaps unsurprisingly, London households are spending the most each week with an average weekly spend of £658.30 in the City.  Other parts of the country to report above average levels of weekly spending were the South East, South West and East of England.

In contrast, the lowest average spending was reported in the North East of England, where households were spending an average of £457.50 each week.  There was also below average spending in Scotland, Northern Ireland and Wales, at £492.20, £488.50 and £470.40 a week on average respectively.

Another trend identified in the report was less of an outlay on alcoholic drinks.  It’s not the first time the ONS has spotted this downward trend.  Households are now spending an average of just £8 a week on alcohol.  A decade earlier, this figure was £10.90 a week, when adjusted for price inflation. More is being spent on food and non-alcoholic drinks compared to a year earlier; £60.60 a week now compared with £58 a week (inflation adjusted) back in 2008.

Commenting on the figures, Helen Morrissey, pension specialist at Royal London, pointed out they represent a home maintenance time bomb for the over 50s.  She said:

“Today’s figures show that just because people may have paid off their mortgage it doesn’t mean they stop spending on their house and many are facing a home maintenance time bomb.

“The stats show almost a quarter of all housing expenditure in households headed by people aged between 50-74 was on alterations and improvements such as central heating installations and double glazing. This figure is much higher than the average for all households which is more like 14%.

“It demonstrates the importance of having the necessary savings to meet these sizeable and often unexpected expenses for those approaching and in retirement. Being unable to meet these expenses as we get older can lead to people being forced to move from much loved homes because they no longer meet their needs.”

Of course, how you allocate your own household spending each week is likely to vary from these national averages.  What matters is that expenditure is intentional and forms part of your overall financial planning, helping you to achieve and maintain your desired lifestyle.

At Wells Gibson we put your life at the centre of our conversations and design a Wealth Plan which makes it easier for you to visualise and achieve the life you want; answers your big questions and helps you prepare for your life’s transitions; and gives you the greatest chance of a successful investment outcome and fulfilled life from the money you have and will have.

Why market timing is futile and it’s time in the market that counts

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There’s a lot for investors to worry about.  High market valuations, rising interest rates, the prospect of a no-deal Brexit and escalating trade tensions fuelled by Donald Trump, all raise the likelihood of greater market volatility.

When markets are more volatile and investor sentiment turns negative, resulting in short-term falls in value, it can be tempting to try and time the markets.  Timing the markets involves attempting to sell before equity markets hit the bottom and then buying before they start to rise.  This sounds good in theory but, in practice, it doesn’t usually work out that way.  Instead, investors can find themselves selling low and buying high!  If investors repeat this process enough times they will soon run out of money to invest.  At the very least, the value of their portfolios will take a big hit.

One of the biggest problems with attempting to time the market is that you can easily miss out on a few of the best days of returns.  Do this, and your overall long-term returns will be significantly worse.  According to a study from Fidelity International a couple of years ago, an investor who invested £1,000 in the FTSE All-Share index 30 years ago, but missed the best 10 days in the market, would have achieved an annualised return of 7.09% and ended up with a total investment of £7,811.55.  This compares with an annualised return of 9.38% and an investment worth £14,733.64 if they had stayed in the market the whole time – an opportunity loss of £6,922.09.  If an investor had missed the best 20 days, their annualised return would be 5.55%, which would have resulted in an even worse shortfall of £9,676.56.

This research should remind us that volatility is the price we pay as investors, for long-term outperformance from equities, relative to other investment asset classes.  The potential for long-term returns comes from risk in the form of market volatility.

There are significant risks associated with trying to time the markets.  This is because it is so difficult to predict the best time to get out and then get back in to equity markets, during periods of market volatility.  These risks are magnified by the impact of the very best and worst days of market performance tending to be grouped together during periods of increased market volatility.

A more sensible approach to investing is to keep your money exposed to the markets throughout the entire market cycle, during the ups and the downs.  There’s an old stock market adage which says time in the market matters more than timing the market.  At Wells Gibson, we would tend to agree.

When markets are especially volatile, the value we add as financial planners, is to guide our clients and keep them focused on their long-term, lifestyle, financial and investment objectives.  Furthermore, because we can demonstrate the value of time in the market, and the futility of market timing, we are able to secure the best long-term results for our clients.

If you have been tempted to try market timing in the past or perhaps, during the current bout of market volatility, why not give us a call and see if we can keep you on the right track.

Is the tax tail of EIS and VCT investment wagging the investment dog?

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Enterprise Investment Schemes (EIS) and Venture Capital Trusts (VCTs) represent tax-advantaged opportunities to invest equity capital into very small and often very early stage, or even start-up, privately held businesses.  The words ‘equity’, ‘privately held’, ‘small’ and ‘early stage’ immediately point out some of the risks.

There is a certain human appeal towards investing in the next potential Google or similar tech start-up or to own a share of a biotech firm commercialising some aspect of research for the good of mankind.  Intuitively, one knows that this is a risky, dice-rolling business and that for every winner there are bound to be some losers and some also-rans.  However, the tax breaks afforded by HM Government, for these schemes, risk clouding the due diligence that these investments duly deserve.

It is a mistake to think that these tax breaks are noble in nature.  Their purpose is to encourage the supply of capital to these companies in the hope that they will employ more people, who will pay income tax, make NI contributions (individual and company) and pay VAT on goods bought with their wages – and that they will generate higher corporate earnings on which corporation tax can be charged.  The tax breaks are provided to improve the risk-return relationship that potential investors in these companies face.

EIS was launched in 1993-1994, as an evolution of the Business Expansion Scheme that went before it.  Since it began, it has raised billions of pounds for thousands of small companies.  In fact, according to the EIS Association, the official trade body for the Enterprise Investment Scheme, in May 2018, HMRC released the first of its estimates in respect of the number of companies raising funds and the amounts raised through EIS for 2016-17:  3,470 companies raised a total of £1.8mn of funds under the EIS scheme in 2016/17.  Remember this is an estimate and judging by previous years, we can expect these numbers to increase.

The VCT scheme was first introduced in 1995.  VCTs are similar to investment trusts, raising capital by the sale of shares in the trust, which is then invested into qualifying trading companies.

Researchpoints out that around three quarters of advisers recommend EIS investments and a great majority of these advisers stated that tax benefits were one of the main reasons why they recommend EIS to clients. These findings are surprising and even alarming to us.  The tax tail seems to be wagging the investment dog, particularly because a majority believe these investments should be considered before other more mainstream tax breaks (e.g. ISA and pension) have been fully utilised.

Furthermore, it seems a high percentage of private investors who regard themselves as sophisticated or experienced hold EIS investments and an even greater percentage had considered them.  When choosing an investment, a high percentage stated that the expected level of return was one of the most important criteria.  This alarms us.  Even self-selected ‘sophisticated’ investors would appear to be taking far higher risks than they are aware of, not least the risk of real disappointment that returns are poor (or their capital is lost entirely, before the tax breaks they receive).

The fees on EIS and VCT funds are, as one might expect, high in comparison to passive or systematic mutual funds.  Annual management charges in the region of 2% to 3% and around 3.5% in terms of total costs strip out considerable upside, and that is before any form of performance fee is deducted.  Don’t forget that there are often arrangement fees representing around 2% of each transaction.  In the end, investors only receive returns net of costs.  When costs are high as they are in this case, intermediaries take an unjustified share of the upside.  The proof of the pudding is in the eating.

The risks of EIS and VCT investments are varied and considerable as they both invest in very small unquoted companies.  It is our belief that many investors do not have a clear insight into the risk they are taking on.  These range from the risk of failure, to owning minority stakes in illiquid private businesses and the risk of changes in the tax regime that may affect the attractiveness of the tax breaks on offer.

The conclusion that we arrive at is that we would not recommend EIS and VCT investments in the event that a client’s other tax reliefs (e.g. pension, ISA, CGT) have not yet been fully utilised.  When it comes to investing, diversification, keeping costs low and only taking risks supported by evidence is what matters, yet EIS and VCT products don’t tick these boxes!

These high-risk, tax planning products should only be considered and recommended in very client specific circumstances where all other avenues have been explored, and only for those clients who meet stringent net worth and investor sophistication criteria.

Is the tax tail wagging the investment dog in the UK?  From what we can see the answer is yes.

Hidden value of great financial planning

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Almost everyone worries about money, what the future may hold, and the decisions and choices that they will face along the way; yet few realise that financial planning is the key to sorting it all out.  It is the World’s best kept secret.  Everybody needs it, but only a few have unlocked its true value.

For those who have, the equation between the value that they receive from their financial planner and the fees that they pay needs to make sense.  Yet, because the benefits of good advice are often received in the far-off future, it is sometimes easy to miss, or dismiss, the value received along the way.  Market noise, emotions and periods of what may seem like inactivity on an adviser’s behalf, can also impact on the perception of value.  It is often easy to appreciate the value received in the first year, and easy to forget or appreciate the value on an ongoing basis. The financial planning relationship can be broken down into three key phases of value.

Value phase 1: Sorting out the mess and building the plan

New clients often arrive with a proverbial suitcase of bits and pieces collected over the years, such as a number of pension plans, with-profits bonds, endowment policies, life insurance and a stock broker or IFA managed portfolio.  This collection of ‘stuff’ often has little structure and rarely provides comfort that the future will be bright.  That’s a stressful place to be.

The first and most vital step is to help clients to set out their vision for the future, both in terms of lifestyle goals and the money needed to fund them.  Next comes the analytical work, which may involve using financial forecasting tools, to help empower clients to make sensible strategic choices.  The resulting ‘plan for the future’ becomes a joint effort between client and planner.  Once sorted and implemented, the client is then back in control of their future and their finances.  The value is easy to see.

Value phase 2: Plan progress and progressing the plan

Financial planning is not a ‘set-and-forget’process, far from it, in fact.  Regular review meetings or Progress Meetings as Wells Gibson prefers, help to provide clients with an insight into how things are going relative to the plan.  What is more important is the future and how the plan needs to progress from this point forward.  Some issues and consequent decisions faced may relate to events in the client’s life, or may be more technical or market issues that sit in the financial planner’s area of expertise.  Clients have better things to be doing with their time than trying to understand and tackle these issues alone!

Some years may be quite uneventful, while others are momentous.  In the former, not much may appear to happen, but that does not diminish the value of the financial planner, who is – behind the scenes – constantly on the lookout for issue that may threaten the successful outcome of the plan, or ways in which it can be refined.  At times of crisis, understanding the issues faced, finding a solution that makes sense, facilitating decisions that need to be made and having the fortitude to execute under pressure, is where great financial planners come into their own.

Value phase 3: Long life, death and immortality!

There are also some more subtle areas of the value of a long-term relationship with a trusted financial planner.  For many people, living longer is a two-edged sword.  On the upside, we can all now expect to live materially longer than our grandparents’ generation.  On the downside, we also know that with longevity comes attendant health and financial challenges.

For example, long-term health care costs are rising rapidly and simply knowing that they can be met is a great comfort to many.  A financial planner, who knows the family and their financial circumstances well, is well-placed to provide advice, support and to facilitate the financial consequences of the new change in circumstance, when it is needed.

Many clients, often one of a couple who takes more interest in the finances than the other, worry about what will happen to their partner on their death.  Having a trusted financial planner (and an up-to-date plan), allows them to be confident that, in the event of their death, their partner will be well cared for financially and that their affairs are in order.

Most people would like to feel that they will, in some way, leave behind a lasting legacy.  For some, that can mean spending time and money supporting their philanthropic works and for others it may mean passing on wealth from one generation to the next.  Again, financial planners can play an important role in helping clients to make decisions surrounding such issues.

In conclusion

It is easy to forget when you meet with your financial planner for your review meetings that the scope and value of the relationship is far deeper and more important than worrying about the 12-month market noise that has resulted in your portfolio going up and down, or the fact that neither your portfolio nor the plan has changed much.  Meeting your goals, feeling confident in the future and having the time to enjoy the opportunities that your money provides you, your family and your community are what really matter.

Delivering ‘peace of mind’may sound a bit trite, but that is the goal, consequence and value of great financial planning and at Wells Gibson it’s our mission to bring clarity, contentment and certainty to your financial life.

 

A picture of wealth in retirement

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The post-war baby boomer generation is often seen as a ‘fortunate’ generation, holding the majority of the wealth in this country.

Many in this generation have benefited from rising property values, gold-plated final salary pensions and booming stock markets during their working lives.  As a result, those older members of society tend to hold a lot of wealth.  Those on the cusp of retirement, aged 55-64, had average housing wealth of £185,000 and other wealth excluding pensions of around £33,000.

A set of new reports – funded by the Institute of Fiscal Studies (IFS) Retirement Savings Consortium and the Economic and Social Research Council – shows that this wealth, whether held in housing or in financial assets, is not in general drawn down in retirement.  We might imply from this finding that the wealth held by older people today is likely to become the inheritance received by the younger generations tomorrow.

There were some interesting findings when looking at the use of wealth by current retirees.  Perhaps unsurprisingly, the majority of wealth is tied up in the value of the main residential property.  80% of over 50s are homeowners and the majority would not be expected to move home before they die.  The study found that of the slightly over two-fifths who would be expected to move, few are moving for financial reasons, but something like two-thirds of house moves do release some wealth.  Sticking with property wealth, the research shows that around one-in-six of those aged 55-64 own a second home.  This frequency of second home ownership changes very little at ages 70 and over, increasing only slightly in the late 50s and 60s.  Those in their late 50s and 60s tend to shift second home ownership towards income-generating properties.

The studies also found that financial wealth is on average drawn down, but only slowly. On average, individuals are drawing just 31% of net financial wealth between the ages of 70 and 90. Even for individuals in the top half of the financial wealth distribution, who we might expect to draw down and spend more, are only withdrawing their wealth at a rate of 39% during this twenty-year period.

Commenting on the research, Steve Webb from Royal London said:

“This report confirms that the vast majority of pensioners who have saved through their working life are cautious with their money and leave unspent wealth at the end of their lives.  This is great news for those who believe in ‘pension freedoms’.

“The IFS research suggests that the biggest concern about pension freedoms is likely to be about excessively cautious retirees spending too slowly than it is about reckless retirees blowing their pension savings on lavish living.”

Another finding pointing towards the availability of an inheritance for the younger generations is most people not experiencing large end-of-life expenses that would use up remaining wealth before they died.

Looking at a sample of those who died between 2002/03 and 2012, only 7% received help with daily activities from a privately paid employee in the two years prior to death.  The research also found that one in five stayed in a nursing or residential home for some length of time before death, with only 7% resident for longer than six months.  Not all will have paid for their own care.

The patterns of bequest evidenced by this research made for interesting reading too.  Married couples nearly always bequeath only to their spouse.  This is in line with our experiences, with the study finding the surviving spouse then most often bequeaths all of their assets to their children. This happens in 60% of cases for those with financial assets to pass to the next generation.  Only 16% of those with financial assets and no surviving spouse directly left any assets to grandchildren, despite 74% having grandchildren who could have received an inheritance.

This research offers a useful insight into how wealth is being used in retirement today.  However, what about in the future?  As many working age people expect to draw on non-pension wealth to provide money in retirement, housing wealth could become a bigger factor in determining future spending in retirement.

With future retirees expected to have lower pension incomes than those of current retirees, it could become more normal to draw higher levels from housing wealth in the future.  It is currently those with high housing wealth, and those with the greatest housing wealth relative to their incomes, who draw most on their housing wealth when they move.

Rowena Crawford, an Associate Director at IFS and author of the set of reports said:

“Older people do not draw on their wealth much during retirement. The majority of homeowners do not move or access their housing wealth, and even financial wealth is drawn down only slowly.  This means that most wealth held by retired people is likely to be bequeathed to future generations, rather than spent.

“This will have implications for the level and distribution of resources among current working age individuals, particularly those with wealthy parents and few siblings.

“Given the increased freedom people now have over how they spend their pension wealth in retirement, carefully monitoring how the use of wealth evolves in future will be important, both for the living standards of the retirees themselves, and also for younger generations.”

Retirement is one of life’s important transitions and at Wells Gibson we make it easier for you to visualise and achieve the life you want.  If you would like to discuss your own retirement please get in touch.