Covid concerns – Should I access my pension fund now?

Covid Concerns – Should I access my pension fund now?

The UK is on the brink of a severe recession, with job losses and cashflow concerns for a large proportion of the country.

You may be thinking of the need to access some of your savings to alleviate large short term worries.  What a lot of people however are not aware of, is the fact that by using your pension savings to plug this gap, may mean that you are not able to utilise this vehicle to save again when the time arises.

Currently, anyone over 55 who makes a taxable withdrawal (not the 25% tax free cash allowance) from their pension will find that their annual allowance for this year and future years will be lowered from £40,000 to just £4,000 as a result of the triggering of money purchase annual allowance (MPAA).

This is a relatively new rule that was brought in 5 years ago with the introduction of ‘pension freedoms’ with an initial £10,000 limit, however it was reduced to £4,000 in 2017.  If the MPAA is triggered future contributions to your pension savings in excess of £4,000 per annum will face a tax charge.

The reasons for accessing taxable income from your pension could be for a variety of reasons like replacing lost income from employment or potentially taking extra income out to help a younger relative pay their bills. Regardless of the circumstances, currently the MPAA is applied indiscriminately and permanently.

If a 90% cut in the annual pension allowance was not bad enough, triggering the MPAA also means you lose the ability to carry forward any unused allowances from the three previous tax years in the current tax year. So, someone making a one-off decision to access taxable income from their pension during the current crisis could in fact reduce the amount they can save in the future into a pension in the current tax year from £160,000 to £4,000.

If you feel that you may still wish to make contributions to your pension savings in the future either personally or through an employer, accessing taxable cash just now may not be the most ideal solution.

I am not saying for one moment that in the current times using your pension to ease cashflow worries is to be completely avoided, however knowing all the ramifications of these decisions is of huge importance.

If you have other forms of savings available like ISAs or bonds, these may not have penalties, or taxation regimes which are quite as strict. It is important to make decisions of this nature with your eyes wide open and with all available knowledge at hand, and not regret a decision made in haste.

Please do not hesitate to get in contact if you feel you would like to know more, or to discuss your options.  We are always available for a remote video conference.

Jonathan

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Zoom Meetings

As previously posted, the office is currently closed, much like everywhere else in the country…

We are still however very much open for continued dialogue with all clients and contacts.

We have set up remote working, and are able to fully utilise video conferencing to allow us to conduct review meetings, and discuss any ongoing financial issues.

To set up a zoom meeting please email: nikki@oliverassetmgmt.co.uk

Although we wont be able to offer you a coffee, we will be able to offer the same service as you have come to expect with a full visual cashflow model, which should hopefully add more reassurance as we go through this tough period.

We look forward to speaking with you soon

Jonathan, Roland and Nikki.

 

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EU Referendum – What now?

Brexit – What does it mean for my investments?

Following last week’s EU Referendum vote, there is a high level of uncertainty over what this will mean for the country on many levels.

To attempt to calm market fears, there have been statements made from the Governor of the Bank of England, Mark Carney and this morning from George Osbourne.

At this time there is no clear understanding what leaving the EU will mean for investing in short term, but I believe that the long term nature of our investment philosophy and approach would recommend that although these are uncharted waters, staying in your investment seat at this time is the correct approach.

I work closely with Dimensional Fund Advisers and I share an extract from their newsletter which
better puts in to context our current situation:

“Dimensional has nearly 35 years of experience managing portfolios, including during periods of uncertainty and heightened volatility. We monitor market events—including their impact on trading and trade settlement—very closely and consider the implications of new information as it comes to light. We are paying close attention to market mechanisms and they appear to be functioning well. Our investment philosophy and process have withstood many trying times and we remain committed.

We urge caution in allowing market movements to impact long-term asset allocation. Long-term investors recognize that risks and uncertainty are ever present in markets. A drop in prices is generally due to lower expectations of cash flows, higher discount rates, or both. In some cases, a drop is also due to investors demanding liquidity. In the current situation, some investors and economists may expect lower cash flows due to possible trade barriers that may not be implemented. Higher discount rates may be occurring due to uncertainty about changes in the economic landscape and regulations. We have seen markets increase discount rates in times of uncertainty before, resulting in lower prices and increased expected returns. However, it is difficult to know when good outcomes will materialize in the future. By attempting to time the right moment to invest or redeem, one risks not enjoying the potential benefits of such materialisations. Many of those who exit the markets miss the recoveries. What we have often seen in the past is that investors who remained in well-diversified portfolios were rewarded over time.”

I appreciate you will have questions as to how this event may impact your own financial situation and I’d be happy to hear from you at anytime to discuss this further.

Please either phone me or email to get in touch.

We will provide further information as and when things become more clear.

Roland Oliver

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Changing the Weather

That’s it.

I’ve had about as much as I can stand of the Scottish Spring weather. Grey, overcast, wet, windy, freezing, sunny, & generally miserable.

With damp patches.

No amount of positive mental attitude will change the weather but a wee bit of planning might change where the weather I’m exposed to comes from…

It’s been very noticeable of late that the new enquires we have been getting are less concerned with the true nitty-gritty of what my pension/ISA/savings actually are but much more around the use of lifetime cash flow modelling to show me what’s going to happen.

The term peace of mind is often used in conversations with new clients and it’s very interesting that successful, well paid business men & women drive on without a real understanding of what their numbers actually might mean for them.

In other words, they have no peace of mind but rather a nagging doubt that it might not just be enough.

Using a complex powerful cash flow modelling tool like Voyant provides the framework to allow a little dreaming to take place and it’s a tremendous feeling to see people starting believe they might just be there financially or with a bit of further guidance they can get the life they want.

clear skiesOur job is then to become custodian of the wealth, provide sensible investment strategies and use the tax advantages of various “wrappers” to keep the clients in the style to which they’d like to become accustomed!

Malcolm Stewart will be expanding on the details on how, what and why lifetime cash flow modelling is so powerful in his next blog.

In the meantime, as I write the temperature in Sacramento, California is a sunny 33c.

Call me to arrange your retirement in a country and climate of your choosing.

Roland Oliver

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It’s financial planning, stupid!

As I write there have been a few tweets this morning about managers of active funds using index or passive structures for their own investments.

Not earth-shattering news probably, but does make you really question the real worth of active management at those prices if those who do it, won’t pay!

The thread of the tweets led on to question further where the current CEO’s of investment platforms invest their own money.

Do they put their own money where their mouths are?

We await the answer to that particularly thorny question…

All this idle speculation did lead me to consider whether or not these CEO’s (or fund managers for that matter) had actually submitted themselves for some financial planning in the first place.

One question begets another as they say. What would these CEO’s or fund managers actually consider as financial planning?

Would they approach their local bank manager, accountant, solicitor or would they seek out advice from within their own industry?

Would a plain ordinary IFA be the port of call or do they require something a bit more in keeping with their status?

Wealth Management (our current transatlantic term of choice) sounds so much more sexy and enticing than plain-jane Financial Planning and might be sufficiently high brow enough to attract the CEO, but what is it?

Well…its Financial Planning I think.

Which is what we do here. I had a discussion with Malcolm our Client Project Manager today about what Wealth Management actually means and we’ve agreed it’s Financial Planning.

It’s the heart of providing elegant, efficient solutions to making sure you get the best from your money, making sure it goes to the right people when you’ve gone, and that your family won’t be compromised if you die early.

Tax efficiency and legal structures that avoid challenge are provided too.

In other words, a Financial Planning service that takes care of all your current needs and will adapt as your circumstances change in time.

We won’t be getting to carried away with changing our terminology on the website but for all you CEO’s and fund managers out there, before you get concerned about active v passive or if you should put your own money onto your own platform, please see us for some Wealth Management or our particular version which we like to call Financial Planning.

Oliver Asset Management. We do Financial Planning.

Roland Oliver

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Can Your Planning Withstand a Major Loss Event?

Scenario

Meet John, 56, and his wife Janet, 54. John runs ABC Ltd, a company which provides high quality examples in many business settings. Janet is a civil servant.

They have 3 children: Jill, Jenny and Johnny. They will all have flown the nest by the time John is 62. At this time John and Janet plan to travel and spend more for six years. Following this they plan to downsize their house.

They have various investments in the stock market, including John’s pension, although Janet is lucky enough to have a final salary pension. They like to take a medium-high level of risk with their investments.

Assuming the economy and the stock market proceeds at a general average over the remaining period of their lives they will be in good shape, with no deficit at any stage.

Modelling a major loss

Once the media start focussing on other things it’s easy to forget that there is still a substantial chance that Greece or many others may drop out of the Euro, triggering a mechanism that will essentially send confidence back to levels seen earlier in the year, or worse. I won’t get into too much speculation on that because a major loss can come from anywhere when we least expect it.

So is your financial planning robust enough for a tornado to tear through Canary Wharf?

John and Janet would like to know, and we can help them run one of many scenarios.

Let’s say our disaster event creates the following effect: a 3 year loss of -35%, -25% and -20%. This occurs when John is age 60 (in 4 years).

 

Each investment in the stock market that John and Janet have has been modelled as close to reality as possible in terms of asset allocation, and based on statistics from Novia Market Assumptions.

Each of these investments will be automatically affected by our loss simulation above.

So what do we find out?

Figure 1

 

 

 

 

 

Figure 2

 

 

 

 

 

 

In the cash flow chart we can see a period of red setting in from age 77, unlikely the status quo base plan chart from above.

The effect is more strongly seen in the liquid assets charts, with usable funds running out at age 76.

In the base plan the growth rate was 6-7%. Once we factor in that this major loss will occur, we see that 9.06% growth is required on these assets from the start of the plan, or 10.57% is required once the major loss has occurred, to ensure once again that there will be no shortfall.

So what does this mean? Well, for John and Janet, they would likely have to downsize again at age 77 to free up more liquid assets.

What would it mean for you?

Get in touch for a comprehensive look at your planning.

Malcolm Stewart

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Business Protection – Can you identify a need and are you covered?

As of April this year there were over 2.5 million registered companies in the UK* and a staggering Business Protection gap defined by Legal & General as £1.1 trillion **.

44% of business owners said their businesses would fold within 12 months of the death or critical illness of a key person and only 4% of business owners have shareholder protection in place**.

If you are involved in a business small or large you will know that an integral part of the running costs includes insurance in relation to buildings and contents, key equipment, stock, vehicles and Public liability to name but a few.

The cost of each is taken as a given and paid regularly to ensure a business is functioning within the right legal requirements and to provide backup should the “worst” happen.

There is no doubt that equipment, vehicles, location etc provide the means by which a business can offer goods or services but what is the real backbone of any firm are the people who make it successful and profitable.

A successful business is one which not only makes the most of its key individuals but nurtures their expertise and reaps the reward in terms of the relationships they develop with suppliers and customers.

Have you considered the cost to your business if you were to lose one of your key individuals through ill health or death?  If you can think of someone within the business whose temporary or permanent loss would affect the company’s ability to maintain turnover and generate profit then they are a key individual and they should be covered.

If you lose a Key Person from the firm you need to be able to cover the cost of recruitment and replacement for that individual as well as making up for loss of profit directly attributable to them. You may also require reserves in place to ensure any business liabilities such as overdrafts, business loans or even Directors Loan Accounts can be repaid if they are recalled.

Business Succession Planning

As well as Key Person cover there is a massive need for Shareholder Protection within firms, or more specifically Business Succession Planning.

Business Succession Planning not only protects the company but also the employees, their families and the shareholders.

Some of the most frequently asked questions for shareholders within a company when considering the death or critical illness of a co owner include:

  • What happens to their shares when they suffer a serious illness or die?
  • How would the control of the business change?
  • What would be the cost of buying out the co-owner’s share?
  • Where does the cash come from to purchase shares from the co-owners family if they do not wish to retain an interest in the business?
  • What agreements can be put in place to ensure remaining shareholders and surviving families can exercise their preferred options when it comes to retaining or selling shares?

We can help answer these questions for you.

The partner, shareholders and key people in any business are its driving force, they are a valuable asset and you need to have plans in place that ensure if they suffer a critical illness or die your business can still continue and remain profitable despite the loss.

The death or critical illness of a key person in your company could threaten everything you’ve worked so hard to achieve, is it really worth the risk not to have the correct cover in place?

If you’re not sure where to begin then we can help.  We can take you through a step by step guide which helps you consider who needs to be covered and for how much.   In conjunction with this we will make you aware of the tax treatment of your premiums and benefits paid on any plans and talk you through the appropriate agreements which should be in place to ensure benefits are paid correctly.

It may seem like a minefield of information but we can pinpoint the need within your company and provide you with a complete report on what would be required and the monthly cost, incidentally it isn’t as much as you would think.

Whether you are a Sole Trader, Co-Owner, Partner or perhaps even a Key Person in a firm we will be able to talk you through the options and help you through the process from beginning to end.  We also offer a regular review service and would revisit all your planning on an annual basis to ensure your protection planning is keeping pace with any business changes.

So don’t put off any longer, if you want to speak with us further about how to protect your Business then we’d love to hear from you.

Claire Armstrong

*www.companieshouse.gov.uk (as at 03/04/2011)

**www.legalandgeneralcomms.co.uk/businessprotection

 

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