Five times as strong as steel and the main fabric of bulletproof vests. This post is inspired by the late Stephanie Kwolek, award winning chemist and inventor of Kevlar. It made me think, can I make a bullet proof financial plan for clients that will deflect the bullets and absorb the shocks of our volatile, uncertain, changing and ambiguous world.
Hello, my name's Jill Turner, I love to engage people with financial planning and it was my priveledge to put this presentation together for the Dales and Peak Business Networking Group
Here's 10#Hacks that can be implemented in your financial planning that will definitely make an impact on your lifestyle, beginning with :
1. Reduce uncertainty - underpin your financial goals with life, serious illness cover and income protection.
What will happen to our goals if we fall ill along the journey, we cannot work and our income dries up. " I'm saving, I have money in the bank", I hear you say - but how long will that last? The office of national statistics have published the average household savings as £177 per month. Leaving the money on deposit would take 12 years and nine months to save the average salary of £27,000.
Why not take a small portion of the £177 and buy life assurance or income protection. A 30 year old non smoker can have £13,470 per annum of short term income protection, paid after 13 weeks for up to five years, for £18.94 per month. That will go a long way to keeping the wheels turning.
2. Use a menu of protection benefits
You can buy differing levels of life protection, serious illness cover and income protection. For example if serious illness cover for the full amount of your mortgage borrowing blows your budget, then buy an amount equivalent to one or two years salary, this could be enough to take time out of work or pay for some medication that may not be available on the N.H.S.
Buy what you need, mix and match covers, make sure its index linked and there are guaranteed insurability options - then adapt as you journey on.
3. Make use of the appropriate trusts
Life insurance companies love trusts, it means they know who to pay any claims money to and there's no need to go through the probate process. It also keeps the money outside of your estate, essential if you are using life assurance to cover any inheritance tax bill.
4. Switch to clean share class funds
If you are saving through mutual funds or collectives ( OEICS ) examine a switch to the clean share class version, with no bid offer spread, no exit or entry charges and no kick backs to platforms or wealth managers. This could provide an immediate improvement to your financial planning but beware of incurring a capital gains charge.
An interesting paper was published in the 80's, "Determinants of Portfolio Performance" where 93.6 % of the variations in return on investments were attributed to asset allocation. Getting the right mix of assets and an investment strategy for your purposes, can seriously improve your financial planning outcomes.
6. Don't follow the herd.
There's a rather unsavoury phrase that sticks in my head when it comes to investments, "buy on the sound gunfire" apparently attributed to Nathan Rothschild in the 1800s. It means buy when things are out of favour or having a torrid time. The media is always full of what's doing well, its an easier story but Warren Buffet said, if everyones's talking about it, its time to sell. Sell before the doom mongers move in with greater negative sentiment by which time, its too late. Examine the figures and make decisions on facts.
7. Save little and often
How many times have I heard I can't afford to save, my business or my children are taking me for every penny. Its always easiest to save first rather than wait to the end of your pay period to see what's left. Besides, if you were to save the price of a coffee for five days a week, that would be £50 per month. With an investment return of 5% in a stocks and shares ISA over 10 years it could be at least £7,718. Regular investments can also give a better return through participating in pound cost averaging ( a subject for a future post ).
8. Use your tax allowances.
Most higher rate tax payers aim to be basic or non tax payers in retirement. If you can receive tax relief on your pension contributions at the higher rate of 40% or more when the money goes in and pay tax at the lower rate of 20% when you take your retirement income, its a no brainer to get an immediate uplift on your investment. Tax relief is costing the exchequer billions and in an age when the chancellor wants to bring in as much tax as possible, higher rate tax relief is definitely under threat. There has been a stay of execution with the introduction of the L-ISA. Higher rate tax relief for pension contributions may not be around forever so take advantage while you can, maximise contributions in this current tax year and even go back three years and carry forward any unused annual allowance in those years.
9. Consider blended retirement income solutions
Once upon a time there was a standard cup of instant coffee and fairly similarly there was a standard annuity that gave you an income in retirement in return for giving an insurance company your pension pot.
Then you were told annuities are bad because the insurance companies keep all the money if you die. Then interest rates fell which gave less annuity income in return for your pension pot. Then came drawdown, taking an income straight from the pension pot, which seemed a good idea until volatility entered the investment markets. So what do you do?
There have been a number of innovations in product design since the Taxation of Pensions Act in 2014. Short term annuities are coming back into favour providing secure income for set periods and leaving the remainder of the pension pot untouched or available for income drawdown. Annuities are now available with improved capital guarantees and longer guarantee periods, up to 30 years. There are even hybrid products which combine features of annuities with an income drawdown.
It's no longer all or nothing, a blended solution, mixing income drawdown with some secured income through annuities, could be the caramel machiatto of retirement income planning.
10. Nominate Beneficiaries
Good practice in financial planning has always included a discussion of what is to happen to any remaining pension fund upon the death of the member. The Taxation of Pension Act 2014 has widened out the class of beneficiaries from just dependants to include non dependants and introduced the concepts of nominee and successor beneficiaries. It's important to fill out the nomination forms correctly and consider nominees and successor beneficiaries.
In the course of my work as a financial planner, legislation and politics are always changing. We are living in a VUCA world, volatile, uncertain, changing and ambiguous but these things remain consistent:
These 10#Hacks won't constitute a bullet proof vest on their own and the caveat that this article is for information purposes only and does not constitute advice, applies. But I hope it gives food for thought and if you have any queries about your own position please don't hesitate to get in touch.
Jill Turner : May 2016 http://www.jillturnerassociates.co.uk
I listened with anger and frustration to a recent feature on Radio Four's “You and Yours” programme. Our profession is seemingly brought into disrepute yet again, by unregulated and unscrupulous individuals, who were cold calling individual pension scheme members to “unlock” their pension funds. One seriously ill man thought he was doing the right thing and responded to a cold call in order to unlock his pension.
There were quite a few things that got my hackles up. In part, I feared regulated professionals would be tarred with the same brush but also this practice and the disastrous consequences for individuals is, unfortunately, nothing new. The banking crisis of 2008, the slow road to recovery and the difficulty some businesses have in borrowing, has led to the targeting of pension funds as a way to release money, that in turn, can be diverted to organisations seeking working capital. Now it would seem, the forthcoming changes in pension legislation and the fact that not everyone is up to speed with the implications, are creating new opportunities for scams and criminal activity.
In 2013 the Pensions Regulator initiated a consumer campaign with a black scorpion, a creature with a sting in its tail, to raise awareness of various pension scams. Commonly they go something like this...
Members of pension schemes or those with personal pensions are cold called via text or telephone and promised that they can get their pension money early. They are promised that their pensions can be “unlocked” and they will either receive their pension money back or for it to be diverted into something else with better or guaranteed returns such as holiday lets, bio-tech start ups and in the case of this current radio programme, to apparently fund the construction of storage units. It's frighteningly easy to set up a glossy looking website and work out an 8% guarantee on the “back of a cigarette packet”. These alternative investments are not regulated and come with no guarantees or consumer protection.
What these unlocking organisations also fail to mention is their charges and any tax penalties. They will charge you 10-20% commission for their part of the process which will be deducted from the money. Taking pension money before the age of 55 is seen by HMRC as receiving an unauthorised payment so it will not be long before a brown envelope hits the doormat with a demand for 55% of the gross money received ( ie any unlocked money including any commissions deducted) as a tax charge by HMRC as they look to claw back the tax relief throughout the life of the pension. Even if you are unfortunate enough to lose all your money to these scams you will still be responsible for the tax charge.
Its been eighteen months since the black scorpion campaign was launched yet it was reported in August 2014 in a Money Marketing article that some £495 million of people's pension funds have been lost to pension scams despite the checks and measures put in place by HMRC, The Serious Fraud Squad, The Financial Conduct Authority and The Pensions Regulator. The same article reports that small self administered schemes are now the target of ever sophisticated organisations.
And as if matters couldn't get any more dramatic, the seriously ill man who has twice survived cancer, has had to chain himself to offices in Speke, near Liverpool, in order to try and get recompense.
So what's the answer. Education, education, education.
The government wants us to save more and is placing pensions at the heart of their strategies. Legislation has been introduced to make Auto Enrolment into workplace pensions compulsory and yet, so many people don't know the basic facts as to how pensions work.
Here's some basics......
1. Pension schemes registered with HMRC are eligible for tax relief on contributions. If you are an employer or running a business, pension contributions are a tax deductible expense. If you are an employee and you make a pension contribution you make a contribution net of basic rate tax relief . Pension funds grow free of income tax and capital gains tax.
2. Upon crystallisation of benefits a maximum of 25% of the crystallised funds can be taken as a tax free lump sum.
3. Taking money out of pension funds before the age of 55 is considered an unauthorised pension payment and subject to a 55% tax charge.
4. Special provision exists for people with serious illness, subject to the lifetime allowance and medical assessment the entire pension fund could be released as a serious ill health lump sum commutation with no tax charge.
Please please don't let fraudsters and scamsters benefit from your life time savings through ignorance. If in doubt contact the Financial Conduct Authority, HMRC or a trusted regulated financial adviser.
My name is Jill Turner and I work hard to make financial planning engaging. It might seem strange that an investment professional states, “that I care more about how my clients are doing than how the markets are doing”, but let me explain what I mean in this article, which is an expanded version of the latest sixty second presentation to my business referral group.
My inspiration came from what has affectionately become known as the patchwork quilt, to the left. Designed for investment professionals, it graphically represents the rise and fall of different asset classes, ( e.g Gold, UK Smaller Companies, Property, Large US companies etc. ) showing the percentage growth or loss in any given calendar year. If you're struggling to see the small print, it might be handy to download a full page version here and refer to as I go through two, possibly polar extreme examples, of investment journeys that both start at the beginning of 2005. At least you will be able to check my calculations.
For our first journey, let's dust off our crystal ball and chase the investment returns. At the beginning of 2005, we invest £1,000 in Japan and benefit from a cracking return of 40.49%. It would be tempting to stay put and hope for a repeat of these gains but along with our crystal ball we have a nephew working in the City who gave us the inside track that markets were getting tricky. So we sell our Japan fund and invest everything into Gold where we remain until the end of 2008. We managed to keep our powder dry, ready to invest on the gun fire and surely enough as equity prices fall we sell our Gold funds and buy into a UK Smaller Company fund. We stay with this asset class until the end of 2013 and our £1000 has become £8,439 in nine years.
An extraordinary return, an average of 93.7% per annum but remember we were relying on our crystal ball.
But it could have been so different. It's the beginning of 2005 and we open the Sunday papers. There in the money section journalists tells us that Japanese funds are the winners for 2005 and as luck would have it, we get a good return. That's great we file the annual statement and look forward to similar returns next year and the next. As we haven't reviewed our arrangements we don't realise that our Japanese fund has gone down three years in a row. Okay its not too bad, we grit our teeth and hold out for a gain but after another year of losses we get impatient and sell our fund, keeping everything in cash where inertia takes hold and there we remain until the end of 2013. An overall loss of £118 or 1.3% each year and our £1,000 is now worth £882.
So where does this leave me as an adviser and my clients.
I can't influence the markets. My role as a financial planner is strategic planning. This includes working out how much volatility you can tolerate, why you are saving or investing, what timescales you have allowed, recommending an asset allocation and calculating the expected returns and therefore how much you need to save to achieve your goals. Can we second guess the markets or effectively time the markets and know where and when to invest? Maybe with the use of technology, information feeds, inside knowledge, constant monitoring of the markets, talking with politicians about impending changes in legislation and monetary policy. But do we have the time that all of this takes and can my clients in turn afford extra fees for all the extra time this takes? And if its that straightforward to chase returns by switching in and out of different asset classes, why aren't all funds chasing “the next big thing”?
High risk, that's why.
The majority of clients will have their needs satisfied with model portfolios or multi manager multi asset funds, where funds and assets are selected to work together, to create the broadest diversification and to harness expertise across the various asset classes as well as different market conditions. This in turn helps to reduce volatility and give a smoother client journey. Where my clients have more bespoke needs we work in partnership with a number of discretionary fund managers. With market monitoring and outsourced investment solutions taken care of I can devote my time and concentrate on what I do best, caring about how my clients are doing.
How easy do you find it to make investment decisions ? Get in touch and tell us about your investment successes and disasters or use the comment section below for a free copy of "Our Guide to Investing".
Jill Turner 26th June 2014
Whilst reading the blog articles please be aware of the following:
Welcome to the blog curated by Jill Turner. The pages are not intended to give advice, they are just the real life stories from a real life financial planner and the wonderful people I get to meet.
I want the pages to be engaging, informative and purposeful.
The information contained within this blog is based on our understanding of current government proposals and tax
law, both are liable to change in the future.
Jill Turner is a member of the Personal Financial Society