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
Up in smoke - is based on today's recent 60 second presentation to my local business referral group. It came about after reminiscing over my very first "proper" job, running the art department in a social services day centre for people with long term mental health challenges. Cigarettes became a type of currency, with an exchange rate pitched at 10 pence, designed in the main, to be a deterrent to smoking. On a personal level, quitting smoking was probably one of the best things I did and it all got me thinking, if you ever wanted a greater financial incentive to stop smoking, then read on.
Did you know..... that in 2014 the price of a pack of twenty Benson and Hedges is now a staggering £8.87 (according to the Tesco website). For someone who smokes twenty cigarettes a day that's £3,237.55 a year. Bear with me and my financial planning twist but if you gross that up by the basic rate of tax at 20% that will give a £4,406.25 annual pension contribution. For a higher rate tax payer this would become £5,395 per annum.
According to a recent report by a well known nicotine replacement patch manufacturer, the average age for someone quitting smoking is 27. So, imagine if you quit smoking twenty cigarettes a day and instead, the money that would have gone up in smoke was invested into a pension plan. By the age of 55 you could have a fund worth £301,000. This has been calculated based on contributions increasing by 2% per annum, investment growth of 5.4% and factoring in 1% for investment fees. Under current legislation, you could take 25% of that as a tax free lump sum giving £56,250 immediately, leaving the remainder to provide ongoing income. That's all due to change soon but that;s the subject of another blog.
So, for now, if you or anyone you know are trying to quit smoking please give them my contact details as this could be a huge financial incentive. Now, I did say at the beginning this was the basis of a 60 second presentation at a business referral group and not a technical blog, but if this has caught your attention please read on for details of how we can also help you to access the Allen Carr EasyWay to Stop Smoking programme at no charge to you, saving you even more money.
I work closely with Pru Protect, one of the world's leading providers of life insurance, income protection and serious illness cover for my clients. They are the only provider who actively offer incentives and rewards to improve your health. Now that's actually quite sensible of them really because the healthier their policyholders are, the less claims they will pay and in return they will reduce your premiums as you get fitter. Its the only life insurance product that I know where premiums can reduce and stay reduced over the term of the policy.
Pru Protect do this through their Vitality programme, designed to engage you with improving your health and rewarding you. Not only do your premiums go down as you achieve your health targets, you can also benefit with discounts various things including, gym membership, health checks, special offers on bicycles, free cinema tickets and what got me started on this, the free quit smoking course.
Here's the link to the Allen Carr EasyWay to Stop Smoking courtesy of Pru Protect. Yes, you have to be a policyholder but life insurance, income protection or serious illness cover its pretty helpful in its own right and once you've been free of nicotine for twelve months, your premiums will come down in price and you will benefit from non smoker rates, a saving of 30-40% on rates charged to smokers for the extra risk they pose in making a claim on their policy.
Most importantly you will be adding 10 years to your life according to a recent reports from the NHS.
If you want some local motivation in Sheffield we are pleased to recommend Suzy Newson of Train with Suzy.
Employers are undertaking one of the biggest changes to pension provision in UK history, with major with major implications for advisers. So there we all were, a gathering of the clans coming together for the quarterly conference of the Personal Finance Society. Advisers young and old, sole practitioners and large firm representatives, tied and independent all waiting to hear the latest update on 'Auto Enrolment and the Duties of the Employer' from Gareth Hughes, Senior Financial Planning Manager at AVIVA.
It is fair to say we generally expected to hear, firstly an overview of the current experience of auto enrolment, and ways in which we as advisers can help business owners and finance directors navigate the process. What we didn't expect to hear was one bombshell after the other.
To begin with, we heard that traditional pension offices are beginning to cherry pick and close their doors to all but the largest employee schemes. It perhaps makes short term economic sense to turn away employers only willing to make the initial 1% of salary contribution, particularly if they only have have half a dozen employees.
Employers must auto enrol their workforce into a workplace pension by their staging date and have a payroll system that doesn't just manage the pension collections but is also capable of the more sophisticated reports that are needed.
Now for the next bombshell. Speaking from his own company experience, AVIVA, Gareth said that companies with six months or less to their staging date are being turned away, "We can't help if you are six months away from your staging date. My daughter always wishes that she started her homework earlier, its no different, you can't start early enough with this".
Auto enrolment has already started for the largest employers with 1.7 million already enrolled into workplace pensions. According to the Department of Work and Pensions, there is going to be a huge spike in numbers of companies with a staging dates from April to August of 2014 with an overall number of 40,000 companies needing to comply with auto enrolment and possibly £130,000 employees per month needing to be "processed".
Now the third bombshell, the government and the Office of Fair Trading are looking at a charging cap on the annual management charge for schemes used for auto enrolment and it seems likely that this will be set at 0.75% per annum. Yet this still has to be passed by government, who are looking to make an announcement in April 2014 for implementation by 2015. A date after which many companies will have auto enrolled and, if they have chosen to use schemes where the annual management charges are above 0.75% then they may well have to be unravelled in order that lower charges can be applied.
So are we heading for a meltdown - possibly but if not a meltdown employers might only have recourse to N,E.S.T to comply with auto enrolment.
Perhaps not if you take Gareth's advice, " you can't start early enough with this". Accepted advice from the experts is you that employers need to start planning for auto enrolment eighteen months before the staging date. This can be found out by entering your PAYE reference number on The Pensions Regulator Website.
Here is a short breakdown of issues that you might want to consider in the workplace around auto enrolment.
1. Identify your staging date and basic duties as an employer.
2. Assess your staff and identify who is classed as a worker, who is an eligible job holder, a non eligible job holder and an entitled worker.
3. Identify what is considered as qualifying earnings, re-examine contracts of employment
4. Examine your existing scheme, are the charges compliant, are the contribution levels sufficient and compliant
5. Budget for cost of options, for consultancy fees and for any improvement to the payroll.
6. Is the payroll system robust, does it have an integrated approach, do you require a third party system ?
7. Is your employee data clean and wide enough to allow assessment. Is hiring and firing done on the same site?
8. Evaluate your communication strategy with the workforce.
9. Send communications to the workforce
10. Train someone within the company to manage the new payroll and reporting responsibilities.
11. Conduct some dummy runs.
.....and at the end of all this if as an employer you fail to stage and auto enrol your workforce in time there is a fixed penalty of £400 plus daily penalties, ranging from £50 for small employers with 1-4 workers to £10,000 per day for those with 500 or more. For wilful failure to comply the employer could face a custodial sentence.
More information can be found at:
It's the money that goes into a pension plan in the earliest years, with the longest time to grow that really makes the difference. Meet my youngest pension clients age four and five.
Thanks to their grandmother, who is paying pension contributions on their behalf, these boys will have a real head start. Whilst they won't be able to access any of the benefits until age 55, if contributions are maintained at the current level there pension funds will be £2,070,000.
They won't have the worry of having to make huge pension contributions in their middle years "to catch up" and there's some great tax advantages to this arrangement too, which benefit the whole family. Let me explain.
Their grandmother, unfortunately widowed, was left financially secure thanks to a number of large life assurance policies and a portfolio of properties generating a secure and increasing income.
As part of the strategy to reduce her estate and ultimately the burden of inheritance tax for the next generation, our grandmother is utilising all the annual gifts and adopting some other strategies. In addition, she is making regular payments as part of her normal expenditure, utilising the fact that third parties can make pension contributions for someone and benefiting from the H.M.R.C. rule that states : " any regular gifts you make out of your after-tax income, not including your capital, are exempt from Inheritance Tax. These gifts will only qualify if you have enough income left after making them to maintain your normal lifestyle and include monthly or other regular payments to someone. "
Now another H.M.R.C. rule allows tax relief on pension contributions at 20% for non earners for gross contributions up to £3,600 per annum. In practical terms, our grandmother can make pension contributions of up to £2,880 for each grandchild, each year. A reduction in her estate of £5,760 each year , without reducing her lifestyle . If this continued for at least twenty years, assuming the property portfolio continued to generate rate this would amount to £115,200 leaving her estate and a potential saving of £46,080 in inheritance tax. Our two grandchildren as recipients of the contributions will be entitled to the tax relief at 20% and will receive £3,600 into their pensions each year. By the age off 55 if the contributions are maintained their funds will be £2,070,000.
Having agreed the framework for the pension contributions part of my work, as a financial planner has been completed. The next stage, that of implementation involved, setting timescales, an assessment of the attitude towards investment risk and capacity for loss. Capacity for loss was an easy one, our grandmother wanted to reduce her estate and therefore could afford to lose the money. However, someone had worked hard for that money and it would be wrong to be complacent, indeed our grandmother has a very cautious attitude and if it made sense she would keep all her money in cash deposits. The boys will be benefiting from the gift of pension contributions, therefore it is their attitude towards risk that we must consider. As they are minors we adopted the risk attitude of their father and given his experience of investments and the timescales involved he felt comfortable with taking an adventurous approach.
With this aspect agreed, it was time to research which included the formulation of an asset allocation, selecting appropriate investments , comparing the annual management charges between different products and platforms before making the final recommendation. The investments also included some ethical investments that although equity based and didn't fit with our grandmother's cautious nature, they did fit in with her ethical outlook so that was an added bonus for her.
Extract from HMRC - IHT Manual
HMRC guidance on IHT exempt gifts
Having a few days away during the school holidays gave me the luxury to read a Sunday paper, goodness knows who has the time to read such a wedge of paper. As I still had my financial planner head on, I turned to the money section first.
There on the back page was an interview with Luisa Zissman, the runner up from the 2013 season of the Apprentice. Whilst she's not the usual suspect that I would expect to be commenting on the UK tax system, her simplification of inheritance tax was both succinct and to the point. Quite right.
The Pharaohs made elaborate efforts to take their wealth to the next world but as Howard Carter and all of us know you can't take it with you. We work hard all our lives in our jobs or businesses hoping that our families will benefit, but if our individual estates are over £325K, the current nil rate band or £650K where a spouse or civil partner is utilising the transferable nil rate band, H.M.R.C. could take 40% of the amount over these figures to Inheritance Tax. Ouch!
It has been said that Inheritance Tax is a voluntary tax and there is a well developed advice sector often targeting the high net worth client but there are some simple steps everyone can take, here's three of them.
Keep it in the family.
The Benefits of using a Financial Planner
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