My regular readers will be aware enough of the emphasis I place on estate planning. The reason for this is straightforward enough: having spent a lifetime building up family wealth, you are loath to see nearly half of it go into the government’s coffers to be spent on not always deserving causes. Given the choice you’d be rather more comforted by the thought that your children and grandchildren will benefit from the careful husbandry of your wealth.
Financial planning also involves other basic motivations however. If for example you have a capital sum to your name it is only natural you want to see it work for you rather than to see it fester in a deposit account not even making enough to keep pace with inflation. A further planning topic is retirement planning. The idea here is to ensure you have enough income to last the rest of your days. The underlying concepts are simple enough and they usually interact, which is where matters can sometimes get complicated.
As I am going to explore a number of estate planning ideas in more detail in the next issue of Barbican Life, I’m going to share some thoughts about investments and pensions in this issue.
Periodically I come across people who tell me that they don’t need my help to choose investment funds. It’s simple enough, I’m told. With the internet it’s easy enough to compare investment funds and one can glean the thoughts of experts in the business pages of the Sunday newspapers. There is no shortage of information out there. So far so good!
Taking this DIY approach, you can go to an online service that offers an execution-only facility and away you go! You can then select your funds, monitor their performance online and change your strategy as necessary. Cheap and cheerful indeed! Some of the criteria you’d be advised to consider if you are going to take this path, in addition to the obvious one of past performance, are the size of the fund, its volatility, its liquidity and the biography of the fund manager.
Having done the careful research though, it’s still only too easy to come up with the wrong answer. Even industry professionals got things badly wrong when piling their clients’ money into Woodford UK Equity Income or Arch Cru. The latter was marketed as a cautious option that for several years topped the performance tables. The data was there but it was unreliable as we discovered after the event. Similarly Neil Woodford was the superstar fund manager of the noughties, achieving top quartile performance for his Invesco Perpetual funds month in and month out. When he set up his own fund it was a no-brainer to make his flagship UK Equity Income fund the core holding of your portfolio. It turned out that a significant percentage of the holdings were illiquid, which meant that when investors got cold feet and decided to bail out, they simply couldn’t. So when things go badly wrong you can find that cheap becomes expensive and cheerful is no longer the adjective that springs to mind. One of the advantages of paying an adviser fees then is that should things go wrong you at least have some recourse, ultimately to the Financial Services Compensation Scheme.
Following on from the previous thought: if choosing your ISA is taking longer than you were expecting, it’s not a reason to miss out on your annual allowance. What I recommend if time is short, is take out a cash ISA at your bank as a stop-gap and then transfer at a later date to a suitable stocks and shares ISA if more suitable for your objectives after a sufficient ponder. By doing this you avoid losing out, as the annual allowance for this year can’t be used once the 5th April has passed.
It is possible however to use allowances from previous tax years when making a pension contribution. If you need to boost your retirement savings and have money in the bank you can use the £40,000 annual allowance for the preceding three tax years in addition to the current one and get tax relief at your marginal rate. First you need to work out the aggregate of your contributions and those of your employer for the tax years in question, which is then subtracted from the potential maximum contribution. You need to be aware that the contribution amount is capped at the earned income figure for the current tax year, no matter how much allowance is unused. A useful tip is to make a nominal pension contribution even if you aren’t in a position to go the full Monty, as you may wish to do so in a future year. This is because you will only be permitted to use a previous tax year’s allowance if you make a contribution into a registered pension scheme for that year. Pensions are in fact a hot topic, as there is talk of tax relief on contributions being severely curtailed.
A technical point regarding pensions that is worth bearing in mind concerns applying for IP2016, which enables you to register for the pension fund Lifetime Allowance available in 2016 of £1.25m. Theoretically this is not time-limited, however scheme administrators are not obliged after 6th April this year to provide you with a cash equivalent of your existing benefits, thus making it impossible to apply for IP2016. If you think you might be affected it is essential to act immediately and make your request for information now.
Finally, I’d like to repeat the caveat that some of the planning topics I’ve described are less than straightforward. You should not take action without obtaining professional advice. As you know: cheap is not always cheerful!