Two important lessons we can learn from the ‘everything rally’
Market commentators feared the worst for 2023. But despite global uncertainty, the predicted slump turned into the ‘everything rally’ – a surprising surge taking in stock and bond markets. Here are two things it can teach us when it comes to our own investments:
Lesson 1: Never mind appearances, cash isn’t king
As markets went up and down last year, some clients got in touch to ask about cash rates.
The big question: “Why should I risk losing everything on the stock market, when I can put it in a high-yield cash account instead?”
They weren’t alone. Global investors put a record US$1.3 trillion into cash over the course of last year.
But as we discussed back in July, when higher cash rates were turning some investors’ heads, this is not always the great deal it appears to be. Even though current deals are still much improved on previous years (with up to 5.15% for easy access or 5.16% for a fixed-rate account), our advice is the same: cash isn’t king.
Take 2023 as a whole and markets bounced back. The S&P 500 (the largest companies in the US) rose just over 19%, and the MSCI All Country World Index (which includes companies from both developed and emerging markets), rose 15.3%. Bond markets were also up, with short-dated bonds recouping more than half their 2022 losses. Other assets, such as property and infrastructure also made gains. At around the 5% mark, cash was up, but couldn’t match the pace elsewhere.
There’s a popular phrase in investing. “Time in the market is better than timing the market”. Switching to cash to cut your risk would’ve missed this rally, and would also have meant losing out on the compounding effect from remaining invested. Investors who stay disciplined on the other hand, will be rewarded.
Lesson 2: Home isn’t always where the heart is
So what about UK stocks? They also rose in 2023, but didn’t have anything like the standout year experienced elsewhere. That brings us onto the second lesson from 2023: avoid home bias.
When we send out monthly market commentaries, clients often ask us why we focus so much on what’s going on elsewhere, particularly the US – why should a UK investor be worried about what the US Federal Reserve is doing?
The reality is, in global terms, the UK really isn’t that big. With 595 listed companies, UK equities make up around 4% of the world’s market cap. If it was a company, it would slightly bigger than Apple (but not much). By comparison, US stocks account for around 59%. That’s a market just too big to ignore.
True, the UK still punches above its weight (apart from the US, only Japan’s market cap is bigger). But its relevance to the bigger picture is often minimal.
Source: Dimensional Matrix Book 2023. Percentage of market cap. Market cap (US dollars) in billions.
But it’s not just about size. Being too focused on your home market means missing out on potentially key sectors.
The 2023 rally was a case in point. One of the main drivers was investors getting excited about technology, especially the rapid development of artificial intelligence (AI). The biggest market movers were the seven US tech giants (or, at least, tech-related), now dubbed The Magnificent 7, who are leading the way in this field: chip designer NVIDIA, Microsoft (the largest investor in AI game-changer Chat GPT), Google’s owner Alphabet, Amazon, Apple, Meta (Facebook’s owner) and Tesla.
Combined valuations of Magnificent 7 greatly outweigh those of other markets
When there’s a tech rally, the UK gets left behind. Technology makes up only a small fraction of UK indices. So, while the Magnificent 7 dominates the S&P 500, a glance at the top of the FTSE 100 has a very different feel, featuring oil companies, pharmaceuticals, banks, and consumer staples.
|S&P 500 Top 5
|FTSE 100 Top 5
By index weight. Source S&P Dow Jones and FTSE Russell as at 29 December 2023. Alphabet is listed twice in the top 10 as it has two listed share classes.
Home bias – disproportionately allocating domestic stocks in your portfolio compared with their share of the global market – can have a damaging effect on long-term performance. By one estimate, UK investor portfolios contain around five times the allocation of domestic stocks than the UK’s market capitalisation. Analysis from Barclays, comparing different levels of UK home bias against a world benchmark, showed that the greater a portfolio’s home bias, the greater the risk for the investor relative to the benchmark. Portfolios with a lower home bias had a greater investment return.
So while there’s a temptation to stick with what seems familiar and favour UK stocks this isn’t always the best route for long-term investment success.
One last thing: diversification is key.
Of course, no rally can be sustained indefinitely. Even as 2024 began, there were already signs the ‘everything rally’ was petering out. Also, while the high valuations for the Magnificent Seven shown in the chart look impressive, many will be wondering how long until some kind of correction.
But with the two lessons from last year in mind, there’s something else that investors need to remember: diversification.
Particularly with so much noise around markets, it’s vital to maintain a spread of assets, sectors, and regions, to ensure that you’re able to benefit from positive news, but give your portfolio protection whenever there’s a dip.
The key to do this, we believe, is adopting a rigorous, systematic, evidence-based approach. By staying disciplined and diversified we can avoid the need for making impulsive – and expensive – investment decisions.
 Source: Dimensional. Data for S&P 500 and MSCI indices based on returns from Dec. 30, 2022, to Dec. 29, 2023.
 Source: Dimensional Matrix Book 2023. As of 31 December 2022.In US dollars. Market cap data is free-float adjusted and meets minimum liquidity and listing requirements.
 Barclays Private Bank Overcoming home bias when investing Comparing hypothetical risk-adjusted returns of equity portfolios using the MSCI All Countries World Index ex UK and FTSE 100 between 1999 and 2023.
Scotland’s tax changes – could upping your pension contributions help soften the blow?
If you’re classed as a higher earner in Scotland, the latest proposed income tax changes might have you searching for ways to reduce your tax liabilities. Increasing your pension payments to gain tax relief could be one option to consider.
What’s happening with Scottish tax rates?
Plans outlined before Christmas included a new advanced tax band from April for 2024/25. Covering those earning between £75,001 and £125,140, this is well above the median income level. Even so, many falling into this bracket might have considered themselves well paid, but still on a relatively ‘normal’ salary.
Assuming they’re approved, the changes, which also include a rise in how much the very top band pays, mean Scotland’s tax rules now look more complex than ever. There will be six separate tax bands – the rest of the UK has just three.
It’s even more complicated when you factor in that other taxes, including national insurance, capital gains tax and dividend income, are decided at a UK level.
The brighter side – tax relief
But looking only at tax liabilities is focusing on just one side of the coin.
Yes, the latest budget’s aim is for those with “the broadest shoulders” (that is, the highest earners) to bear the brunt of taxation. But in general, tax policy is based around the idea that higher-than-necessary tax rates are tempered by tax breaks.
Tax breaks help encourage particular behaviour, or help grow certain areas of the economy, for example, promoting more donations to charity, or providing more aid for entrepreneurs.
Think of it like a reward scheme, akin to Tesco’s Clubcard. Tesco isn’t the cheapest supermarket by a long stretch. But the promise of savings on the weekly shop and other loyalty bonuses makes the consumer feel more comfortable with the higher costs and less likely to look elsewhere.
Tax relief is your loyalty bonus. There’s much you can do to reduce your tax liabilities at a personal level, simply by arranging your finances in a more efficient manner. Importantly, this isn’t avoiding some civic duty or evading tax. It’s within the rules – and the spirit of the rules – of what the government is trying to achieve.
Tax relief by paying into your pension
This brings us onto one form of tax relief that can sometimes go overlooked – pension contributions.
Previous research from PensionBee found that between 2016/17 and 2020/21, UK high earners left £1.3 billion pension tax relief unclaimed. This is like going to Tesco every week, but never claiming back your Clubcard points (but on a much larger scale).
How does pension tax relief work? You can get relief on private pensions worth up to 100% of your annual earnings – this is either added automatically at source, or claimed back via self-assessment.
Tax relief from your pension contributions is effectively exchanging jam today for jam tomorrow. Depending on what type of pension you have, you can increase your contributions through your employer – via a salary-sacrifice scheme – or by making additional voluntary payments yourself. While more of your earnings are unavailable now, the trade-off is either reducing your tax bill in the short term or benefiting from an additional government contribution of tax relief into your pension pot.
When considering increasing your contributions, the important thing to remember is what kind of tax rates will apply in the future. Ideally you want to have a higher rate of tax relief on entry than you would expect to pay when withdrawing your pensions later. If there’s no premium there, there’s not much real benefit in upping your contributions.
By increasing income tax rates for the higher brackets, the Scottish Government is also increasing the potential tax relief on entry. This could make additional contributions more attractive.
But is it right for you?
Whether you should attempt to gain tax relief in this way, comes down to a few variables, including how able you are to tie up money now and the specific rates of tax you’re likely to see on entry and exit to your pension. There can be other complications too, for example, if you’re getting tax relief ‘at source’ (where the tax is claimed back directly from HMRC) getting back the full relief can sometimes prove tricky, particularly if you’re unfamiliar with detailed tax filings.
And remember, pension contributions aren’t the only route to consider. Another notable lever we often speak to our clients about is managing tax with your partner, particularly if one of you earns below the high-earner thresholds.
These latest changes highlight the importance of taking advice, especially if you’re not accustomed to the complex and opaque world of taxes and pensions. Above all, a comprehensive strategy, that considers all levers together, not just one in isolation, is the best way to determine your position. At AAB Wealth, we can consider and manage all of this for you, ensuring you’re not missing a trick.
Proposed Scottish income tax levels 2024/25
|Starter rate (£12,571-£14,876)
|Scottish basic rate (£14,877-£26,561)
|Intermediate rate (£26,562-£43,662)
|Higher rate (£43,663-£75,000)
|Advanced rate (£75,001-£125,140)
|Top rate (£125,140)
The personal allowance of up to £12,570 reduced by £1 for every £2 earned over £100,000.
What should you be looking for in a Financial Planner?
I would be the first to admit that my introduction to the financial planning profession was a happy accident. After graduating I took on an admin role at Mathieson Financial Consulting, who were subsequently acquired by Thornton’s Wealth.
While working there, my curiosity got the better of me – I acquired a keen interest in all things financial planning. I wanted to understand the ‘why’ behind the documents I was processing. I also realised that I thoroughly enjoyed working closely with clients. And so began my journey to becoming a fully qualified financial planner. In fact, I’m now studying towards achieving Chartered status, such is my passion for continuously refreshing my knowledge and professional practice.
For me, relationship is everything. Clients are understandably, initially quite hesitant to let us advisers in, to give us access to their hopes and dreams. But it’s important for me to understand what drives them – it’s a personal relationship, because once I understand what they want out of life, I can advise them on how financial planning measures can help them to achieve their goals.
I really enjoy building personal relationships with clients. With every conversation I feel I get to know them a bit better, and they increasingly trust me with what’s going on in their lives. For example, if they have experienced a bereavement there may be inheritance issues to resolve, and that’s something I can help with at a very challenging time in their lives.
What does ‘good’ look like?
There’s no one all-encompassing definition of a ‘good’ financial planner! Like all personal relationships, a variety of different styles, processes and personalities will suit different clients and their needs. Equally, there’s no universal structure that can be applied to all client scenarios – which is where a good adviser adjusts their knowledge and expertise, tailoring their guidance to each and every individual client.
The key is to establish and maintain a consistent service over the long-term – I find myself working with clients over the course of many years, which becomes particularly gratifying and rewarding for both parties. Of course, life happens, things change – I encourage regular annual in-person meetings, to discuss what’s happening and what needs to be adjusted to reflect those changes.
I think that being good listener is also high on the list of skills required to be a good planner – listening carefully to what our clients are telling us and apply our specialist knowledge to helping them resolve the challenges being faced. It’s a cliché, but like most clichés, has a solid foundation in fact – financial planning really is a journey. Over the past year I’ve found this ‘whole journey’ ethos to be really well embedded at AAB Wealth.
To achieve the best outcome for a client, we need to gain a holistic understanding of their financial circumstances along with their aims and ambitions, and not focus on any area in isolation, for example, your pension. The various pieces of the puzzle are inextricably intertwined – from saving for retirement, helping your children onto the property ladder, paying for your grandchildren’s education, to buying your dream car, to that round-the-world-trip you have always dreamed of. It would be a disservice to address one issue without considering your own bigger picture, and a financial planner should be able to help bring all of these goals together and create a plan on how best to save and spend to achieve your own individual aims and ambitions .
Why inheritance tax isn’t the villain it’s made out to be
Inheritance tax is ‘the most hated tax in Britain’ – many are likely to be relieved, then, to hear that the government is considering abolishing the tax if they win the next election. Although the Chancellor made no new announcements in the recent Autumn Statement, it is still believed that the government would like to announce changes in the next budget.
“People know that there’s something deeply unfair about being taxed all their lives and then being taxed in death as well,” said defence secretary Grant Shapps.
It’s easy to see why people might resent the taxman for taking a chunk of their children’s inheritance. When most people hear the words ‘inheritance tax’, they assume that 40% of their estate will be deducted soon after they pass away. But IHT is, in fact, largely misunderstood. Figures from the Treasury show that only 3.73% of UK deaths result in an inheritance tax charge.
The inheritance tax system is much more complex than it may initially seem, due to a series of exemptions designed to protect smaller estates and family homes. If you’re wondering what impact inheritance tax will have on your estate, here’s what you need to know.
The first £325,000 of your estate is usually protected – more if you’re a homeowner and parent
It’s true that eligible estates are typically taxed at a rate of 40%, but each individual has what’s known as a ‘nil-rate’ allowance of £325,000 (£500,000 if they leave their main home to a direct descendant). This means that those who pass away with an estate worth less than their allowance won’t pay any inheritance tax at all.
The £325,000 threshold hasn’t been raised since 2009. This can be particularly frustrating for those who come from humble beginnings and bought a home when prices were much lower than they are today. A property bought for £18,000 in the late 1980s, for example, can be worth much more than £500,000 today.
Married couples and civil partners get preferential treatment
If you’re married or in a civil partnership, you can inherit your spouse/civil partner’s entire estate without paying a penny in inheritance tax. You can also inherit any unused IHT allowances from your spouse, meaning you could have a total allowance of up to £1m if you pass your home onto your children or grandchildren.
Unfortunately, the system is less rewarding for unmarried couples. If you pass away without tying the knot, your partner may be hit with an inheritance tax charge if your estate is over the nil-rate (and residence nil-rate) band.
Different rules apply for those with estates worth £2m or more
If your estate is worth more than £2 million, your residence nil-rate band will be reduced by £1 for every £2 over the £2 million threshold. If your estate is worth more than £2.35 million, the residence nil-rate band won’t apply. Don’t worry if this applies to you. Thanks to a number of other exemptions and estate planning strategies, it’s possible to gift and spend your way to a smaller tax bill.
You can reduce your tax bill by giving generously while you’re alive
Instead of passing on a sizable inheritance, it can make financial sense to spoil your loved ones while you’re alive. Pay for those driving lessons, top up their house deposit (something our client Gary chose to do) and help them fund the wedding of their dreams — your money will go further if you give with a warm hand.
You can give as much as you like to family or friends while you’re alive, though the taxman might get involved if you pass away within 7 years of giving a large gift.
If you don’t reach the 7-year mark, the tax will be charged on a sliding scale depending on how recently you made the gift. If you pass away within 3 years, for example, it’ll be taxed at the full rate of 40%. This rate gradually reduces each year.
As if that wasn’t complicated enough, there are additional rules. You can give away £3,000 a year without having to worry about paying inheritance tax on it when you pass. Even if your time comes within 7 years of giving the gift!
You can also give as many gifts of cash or assets worth £250 as you like, as long as you haven’t used another gift allowance on the same person that year. Confusing, yes?!
You can give each child £5,000 for a wedding and each grandchild £2,500 when they tie the knot. Combine these wedding gifts with the annual £3,000 exemption and you could make an £8,000 wedding gift each year.
Donations to charities or political parties are also exempt from inheritance tax. If you leave 10% of your estate to charity, you’ll be taxed at a lower rate of 36%.
Inheritance tax offers a valuable life lesson
As confusing as inheritance tax can be, its complexity tends to work in most people’s favour. Those with small estates are unlikely to pay it, while those with large estates can often reduce their tax bill anyway with good financial planning.
One of the most challenging things about planning for retirement is finding the perfect balance between having enough and having too much. You want to be protected in case you live to 100, but you don’t want the taxman taking a huge cut if you don’t.
If this sort of thing keeps you awake at night, we can help! We’ll work out how much you need, put protections in place in case you live longer than expected, and help you make the most of your money while you’re alive and kicking.
For all its flaws, perhaps inheritance tax offers a valuable lesson. Hoarding huge amounts of wealth in the hope of passing it onto the next generation is a risky endeavour. Since you can’t take it with you, you may as well enjoy it while you can.
AAB Wealth Director collects Financial Adviser of the Year Award
Debbie Connolly, AAB Wealth Director for Northern Ireland, has been named Financial Adviser of the Year – Northern Ireland & Scotland, at the Women in Financial Advice Awards 2023.
Debbie, who has more than 16 years’ experience in tailored financial services became part of the AAB Wealth team in January of this year, based in their Belfast office. This national award recognises her exceptional talent, dedication, and expertise in the financial advice industry, as well as her impact as a woman financial planner.
Combined with AAB Wealth’s recent win of the coveted Top Planning Firm award across the whole of the UK, this latest accolade cements the team’s position as a leader in the financial planning industry.
Now in its sixth year, The Women in Financial Advice Awards celebrate the achievements of women, who continue to be underrepresented within the financial advice community and across the UK financial services sector.
The glittering ceremony, hosted by comedian Lucy Porter and Professional Adviser Deputy Editor, Jenna Brown, took place at the Marriott Grosvenor Square in London earlier this month.
Debbie was commended for her achievements and contributions to the industry, with the judges revealing that her nomination stood out from the other 1,200 nominations submitted.
“To me, financial planning is much more than providing advice; it’s about providing unwavering support to my clients on their financial journeys. Taking the time to understand their unique needs and goals, and working with them to develop a personalised financial plan that helps them achieve their dreams.
“I am honoured to have been recognised for this work, as it reaffirms my belief in the power of personalised financial advice to positively impact lives. I hope that my achievements can inspire others and empower more women in my profession.”
Cross-border accountancy and business advisory firm FPM merged with AAB Group, in May 2022, creating a significant regional presence across the UK and Ireland. As part of AAB Group, Debbie is based in the FPM Belfast office.
Feargal McCormack, FPM Managing Partner, congratulated Debbie on her achievement, saying:
“Debbie’s win is a testament to her foresight and knowledge in the financial advice industry. We are so proud of her accomplishments and the positive impact she has on our clients.”
Worried that markets look uncertain? Remember these 3 simple rules
Inflation, high interest rates, financial markets moving up and down. In this sort of environment, it’s tempting to hit the panic button. When you’re looking for reassurance you’re doing the right thing, there are three golden rules to hold onto.
Rule 1: ‘The good things outweigh the bad’
When stock markets are as volatile as they’ve been in the last year or so, it’s natural for anyone but the most seasoned investor to get nervous.
But watching the day-to-day movements of a market, currency, or a company’s share price are a distraction – they can spring back up as quickly as they fall. It’s always better to ignore the short-term noise and view things with the benefit of some longer-term perspective.
The chart below (Chart 1) gives about 100 years of this perspective. The reassuring message behind it is that, more often than not, the good things outweigh the bad.
Investors talk in terms of ‘bull markets’ and ‘bear markets’. The bull when stocks rise and keep rising, the bear when they continue to fall. As we can see, since the 1920s, there have been some notable bear markets, taking in some high-profile occasions where global stock markets have blown up: the Wall Street Crash in 1929, Black Monday in 1987, the dot.com boom and bust in the late 1990s and the 2007/08 global financial crisis.
But, over time, the bulls tend to outnumber the bears. Not only that, but the up periods last longer, and the highs are much greater than the lows. For the example below, the S&P500 saw 18 bear markets, averaging 10 months long, and falls of up to 80%. By comparison, there were 19 bull markets. But these lasted considerably longer (averaging 52 months long) and had much higher peaks (rising as much as 936%). While this chart only focuses on US stocks, it’s a trend that is also evident in UK and global markets.
Chart 1 Bulls last longer than Bears
Source: Dimensional. Past performance does not guarantee future returns. Indices are not available for direct investment; therefore, their performance does not reflect the expenses associated with the management of an actual portfolio.
Rule 2: ‘No one can predict the future’
We’ve written a lot about high inflation and rising interest rates over the last couple of years. We know it’s something that worries clients as they think about how this could impact their long-term financial goals.
We even get asked by some clients if they should move their money temporarily into cash (rising interest rates might be bad news for mortgage holders, but they have pushed up savings accounts to 6% or more). In theory, one could dip in and out of the market, avoiding the biggest drops and gaining maximum benefit when share prices begin to surge once more.
No one can predict exactly where those inflection points between bear and bull market will come. And missing the market’s worst, often means also missing out on its best. As Chart 2 shows, a hypothetical investment in the Russell 3000 index from 1998 to 2022 could have turned US$1,000 into more than US$6,000.
But missing the best week (in November 2008, as the global financial crisis rolled on), cuts the final investment pot by around US$1,000. Missing the best six months, would have meant losing out on more than US$2,000.
What does this tell us? Trying to ‘time the market’ is at best a risky move. At worst, it could be potentially catastrophic.
Chart 2 Avoiding the market’s worst days may mean missing its best as well
Source: Dimensional. Past performance does not guarantee future returns. Indices are not available for direct investment; therefore, their performance does not reflect the expenses associated with the management of an actual portfolio. In USD. For illustrative purposes. Best performance dates represent end of period (November 28, 2008, for best week; April 22, 2020, for best month; June 22, 2020, for best three months; and September 4, 2009, for best six months). The missed best consecutive days examples assume that the hypothetical portfolio fully divested its holdings at the end of the day before the missed best consecutive days, held cash for the missed best consecutive days, and reinvested the entire portfolio in the Russell 3000 Index at the end of the missed best consecutive days. Frank Russell Company is the source and owner of the trademarks, service marks, and copyrights related to the Russell Indexes.
Rule 3: Stick to a plan
So, what’s the final golden rule?
Whatever you want to achieve financially, whether it’s a comfortable retirement, or leaving a legacy, a plan is vital.
And like the other two rules we’ve featured here, it’s important to follow the evidence.
At AAB Wealth, we take a rigorous, evidence-based approach to help make the best financial plan for you.
We use cashflow modelling to explore the impact of events or lifestyle choices. This helps you answer those all-important questions such as “Can I retire early?”, “Is my wealth protected?”, and “How do I make sure I leave something for my loved ones while still enjoying my retirement?”
The plan isn’t rigid. It adapts when necessary, depending on changes to your personal circumstances, your financial objectives and sometimes the economic environment, but it allows you to look past the short-term ups and downs, to concentrate only on the long-term health of your finances.
First, we get a clearer picture of what’s most important to you – including any goals you have on your ‘bucket list’. Then, we analyse your current arrangements in more detail, so we can recommend an appropriate investment plan and advise on tax-efficient succession planning. Once you’re on board, we review your goals and objectives regularly, including an annual progress meeting.
Uncertainty is a fact of life, but with longer-term perspective it can look a lot less daunting. Remembering these three rules can help ease the pressure and take some of the sting out of saving.
 The threshold for a bull market is a rise of 20% or more in the index, while a bear market is falling by 20% or more.
 Source: Dimensional.
AAB Wealth wins Top Planning Firm award
AAB Wealth, a leading independent chartered financial planning firm, has been awarded the prestigious ‘Chartered Financial Planning Firm of the Year’ award at the Personal Finance Society Awards 2023/24, following a year of significant growth and geographical expansion.
Head of AAB Wealth, Andrew Dines, Chartered Financial Planner, Ian Campbell, and Head of Operations and Compliance, Vikki Venerus represented the firm at the award ceremony, which took place on Thursday, October 12, at the exclusive 12th Knot Bar venue in London.
The Personal Finance Awards, presented by Claudia Winkleman, co-host of Strictly Come Dancing and the BBC gameshow The Traitors, recognise and celebrate excellence in the financial planning profession. These awards highlight the vital role the industry plays in providing clients with the confidence and clarity to meet their financial needs and long-term aspirations.
The event brought together financial advisers, paraplanners, and their support teams to acknowledge the high achievers in the financial planning profession, honouring the teams and individuals who have shone brightest over the past 12 months.
AAB Wealth’s commitment to delivering client service excellence and their highly innovative approaches were commended by the judges. They were also praised for their positive team spirit and dedication to supporting clients and colleagues in achieving their goals.
Andrew Dines, Head of AAB Wealth, expressed his immense pride in receiving the award, stating, “We are truly humbled to be recognised as the best Chartered Financial Planning Firm in the UK by the Personal Finance Society, the leading professional body for the financial planning industry. This achievement is a testament to our team’s unwavering dedication and commitment to helping our clients across Scotland, England, and Northern Ireland achieve their goals.”
Succession without the backstabbing – how to be positive with your estate planning
Betrayal, backstabbing and bitter sibling rivalry in HBO’s Succession made for gripping TV. But in real life most people would prefer their estate planning to be a little less complicated. Here’s how to get it right – without all the drama.
“I love you. But you are not serious people.”
So says the fearsome Logan Roy to his children in the final season of Succession.
In a series that’s chock-full of quotable dialogue, it’s a typically cutting putdown from Brian Cox’s media baron. Not for the first time, he lets his offspring know how he really feels about their ability to carry on his legacy.
Succession had everything. A cutthroat patriarch unwilling to let go of his hard-earned empire; entitled (and incredibly rich) siblings – each believing they are most deserving; and an entourage of hangers-on hustling for a slice of the action. The winners take everything, the losers go home with their tail between their legs.
Few families are as dysfunctional as the Roys. But it’s true that everything can get more complicated once money is involved.
It doesn’t have to be this way though. Here are some of the things to think about when taking care of your own legacy.
But first… what is estate planning?
Estate planning is a lot more than just dividing up your wealth (or indeed, nominating a ‘successor’).
Deciding who benefits from your estate and sharing out your assets is a vital component, but there are other equally important issues to address. For example, naming guardians for your children or giving a trusted person Power of Attorney should you not be able to make decisions for yourself later in life.
There’s likely to be a multitude of motivations – providing for loved ones, securing the future of a business, and avoiding putting undue burden on other family members after you’ve gone.
Where should you start? Have a conversation with those who matter
As reported in the Financial Times, the number of wills being contested in court is on the rise. Recent high-profile cases have included Priscilla Presley (Elvis’s widow) who challenged an amendment to her daughter Lisa Marie’s will, removing her as one of the estate’s co-trustees. Meanwhile, a US court will hear a challenge from three of Aretha Franklin’s four children challenging the validity of two hand-written wills.
In Succession, Logan Roy is constantly keeping his children guessing on who he wants to take over – often playing off one against the other. But having open conversations with family and loved ones – letting them know your wishes and talking them through any changes – is of course a much more positive approach. It also makes the possibility of bitter contests less likely in the future.
What next? Taking care of the essentials
Here are some of the essentials to consider when estate planning:
- Make a list of your assets – shares, properties, or other items of value.
- Prepare a will – Not having one means leaving a court to decide who inherits your assets and possessions.
- Assign an executor for your estate – someone who’ll manage your will when you’re gone.
- Nominate a guardian for your children and dependents.
- Make arrangements for Power of Attorney.
- Make sure your will is securely stored and your executors know where it is.
- Make sure your will is up to date – and let people know if you have made changes.
Managing inheritance tax through gifting
One area of estate planning that needs careful attention is limiting your inheritance tax (IHT) liabilities. Estate planning isn’t about dodging tax or finding loopholes, it’s ensuring you optimise your estate in line with the rules – and don’t lose out unnecessarily. You’ll need a full list of assets and liabilities to assess your inheritance tax position.
A common way to reduce IHT is through gifting. Giving away cash or assets (such as property, stocks and shares, or other personal goods) will limit how much you go over the all-important £325,000 IHT threshold.
You’re entitled to give a total of £3,000 in IHT-exempt gifts each year. You can also make larger one-off gifts, depending on your relation to the recipient – for example wedding gifts to children or grandchildren.
Should you gift now or gift later?
There are advantages to both. Gifting earlier on means you’re less likely to fall foul of the ‘seven-year rule’. No IHT is due on gifts (no matter the amount) if you live for seven years afterwards. If you die within that time, there’s a sliding scale of how much will be due. Another advantage could be that you get to see the fruits of your donation, especially if you’re giving money to charitable causes.
However, gifting later also has advantages. Money wisely invested might result in a larger final amount. And, if you’re gifting the money to a charity or cause, holding off on that gift gives you more time to gather research and make sure your intervention is the right one.
When it’s time, take professional advice
It’s important that we’re all thinking about these issues (and talking about them with families) as early as possible. We already find that, in most cases, our clients are comfortable discussing their affairs with their children and others in the estate planning process.
However, estate and tax planning are complex areas, so there does come a point when professionals need to be involved. We can help advise the best course of action on inheritance tax and advising on how best to use your money efficiently. We’ll also help you through issues such as the technicalities of appointing executors or advising on issues such as ‘probate’ (in Scotland this is officially known as a ‘grant of confirmation’) which provides the authority to deal with someone’s estate after they die.
It can be a natural question at this point from children or other family members to ask why a third party is getting involved. So we encourage them to get to know us too. After all they have a right to know who’s dealing with their future inheritance.
If you or your family have any questions about estate planning, please get in touch for a consultation.
As the world heats up, how can we help investors make a more positive impact?
This summer’s heatwave provides more evidence that action is needed to control climate change. Despite recent backlash against the ‘woke capitalism’ investors do have a part to play. This doesn’t mean they have to be worse off as a result.
If you’ve spent the summer chained to the pool trying to avoid the searing heat, or even just seen the headlines of wildfires in southern Europe, the impact of climate change seems pretty clear – inescapable even.
The heatwave puts into focus efforts to get a grip on global warming: curbing carbon emissions across industry, greater adoption of greener transport solutions and, in the investment world, moving more money into sustainable and responsible investment strategies.
Even so, despite the rising temperatures (and warnings that this sort of weather will eventually become the norm) there’s been pushback in some quarters at the move towards ‘mission-driven’ investing, especially the theme of ESG (environmental, social and governance). In the US, as reported in the Financial Times, 49 anti-ESG bills have been introduced this year alone.
For the critics, this kind of investing is too ‘woke’ – and focusing on sustainability only compromises financial returns.
What the critics get wrong
It has to be said, this negative slant hasn’t been the response from our clients.
We’ve had very positive conversations with clients who want to know more about the changes they can make to their investments, how they can make a positive impact – and the services we provide that will help them do that.
We think the main reason for that positive interaction is that, yes, we’re serious about sustainability, and yes, our approach is firm wide (more on that in a moment) but, above all, we believe in taking small steps in the right direction – without putting financial returns at risk.
In short, we never lose sight of our primary objective: helping our clients grow their money.
So how can sustainability help?
Sustainability is a very broad topic, and the term ESG has become something of an over-used buzzword. While we don’t ignore social and governance as factors that can impact the profitability of an investment, we’re primarily concerned with where we can make a difference in making the portfolios we offer (and our behaviour as a company) greener.
The table below from our sister company FPM, sets out the benefits that focusing on ESG factors can bring for managing your investments.
|Looking through the sustainability lens can be a useful way for companies to identify potential areas where they can reduce resources and enhance efficiencies. McKinsey has estimated that this can improve operational profits by up to 60%.
|There’s fresh drive for firms to consider their long-term impacts from Millennial and Gen Z customers and investors. Companies that neglect sustainability are losing their younger employees, who are opting instead to work for more sustainability-conscious organisations.
|Reporting and regulatory compliance
|Failing to comply with tougher and more widespread reporting requirements can leave companies with significant fines. In the UK, the Taskforce on Climate-related Financial Disclosures require UK-registered companies to report on their financial exposure to climate risk.
|Access to finance and insurance
|Sustainability-focused financing is on the rise. Companies that consider reputational risk factors and mitigate concerns may be able to access funds more readily than those who fail to embrace ESG.
Our approach to sustainability
We last discussed our approach to sustainable investing in March 2022. We’ve also written to clients setting out how we’re embracing the drive to create a more sustainable world, making changes that lead to a real difference.
There are two key aspects to this:
The sustainability choices we make won’t come at a cost to returns. Our default portfolios are evidence, not ideologically driven. So, our portfolios will leave out the worst-offending polluters, for example, but may still include the more carbon-conscious oil and gas companies.
Sustainability is firm wide – not just an optional extra
Some firms treat sustainability as an ‘addition’.
Clients can choose an ESG-focused fund in much the same way they might select a fund that’s focused on a particular sector or country. Even if that fund is classed as ‘dark green’ (those investment products classed as having the highest sustainability standards), other customers might as easily be carrying on as normal.
Instead, we’ve made our pragmatic but sustainability-focused approach the default option. Just as a rising tide lifts all boats, we believe having sustainability a common thread through our investments allows us to make more impact.
Making your money count
There are many ways you can help make little contributions to a more sustainable world. It could be thinking more carefully about your travel options (such as more caution over taking long-haul flights or switching to electric car), conserving electricity or water use, or increasing the amount you recycle.
The biggest impact you can have is through your capital.
Pooling your money into shared investments like pension funds, which have millions of pounds under management, means you are adding your voice to influence change at a company level. This can have a greater longer-impact than driving a Tesla for a few years.
Our approach to sustainability is still baby steps in the right direction, but it’s one that we’re proud to be taking our clients on with us.
Why ‘lane envy’ can be dangerous for your finances
Chopping and changing lane doesn’t help you get to your destination quicker. And it isn’t any better a strategy for your finances either. Higher interest rates can make some short-term measures more appealing – but they can actually be damaging for your long-term goals.
Picture this, it’s summer holiday time and you’re sitting in traffic. Cars either side on the busy motorway are inching past. Frustrated, you switch lanes, only to find that it’s now the other lines of traffic moving ahead.
It’s an illusion though, as studies, like this one from Stanford University, show that switching in and out can be unnecessarily risky.
We’re seeing evidence of this ‘lane envy’ just now with regards to the UK’s current economic climate.
Interest rates are at their highest in nearly 15 years, meaning some conventional savings accounts look – at least temporarily – more attractive than investing in stocks or bonds. Clients have come to us tempted by the short-term potential of moving some of their money into cash, thinking they’re getting a better deal.
We always advise strongly against this. Ultimately, it can be harmful for your finances.
The current state of play
Let’s take a brief look at what’s happening now.
In June, the Bank of England put interest rates up to 5%. It’s the highest level for the cost of borrowing in nearly 15 years – and a far cry from the rock-bottom levels seen over the last decade.
At the same time, equity markets have been up and down. Since the start of the year, the FTSE All Share Index rose at one point to more than 7% from the start of the year but has dropped back down to roughly where it started (go further back, however, and the market returns looks much healthier).
Why we should avoid thinking short term
During these times of what we call market volatility, it’s a natural reaction that investors consider heading for so-called ‘safe havens’. With interest rates pushing up the potential returns from cash savings, could these deliver what they’re looking for?
Firstly, we need to consider the negative impact of changing lanes.
Taking your money out of the market and into cash can be disastrous for the long-term earning power of your portfolio. If we take a hypothetical portfolio of 100% equities with a return of 7% (a fairly conservative estimate over the long term) and compare it with one that’s split between cash and equities over 20 years the mixed portfolio earns considerably less. The example in the chart below, assuming cash return of 1% interest of 3% interest shows that the split portfolio brings the investor between £66,000 and £95,000 less.
For illustrative purposes only. Assumes a hypothetical 7% return for shares after costs
Secondly, growth is like London buses. It goes away, then it all comes at once.
The main problem for investors is that once out of the market, it’s extremely difficult to get back in. Few – if any – investors can time the market to the degree they can avoid the worst days and still be there for the best. As an example, the chart below shows how much the return would be from various points over the last decade.
So, when growth does return to the market, it will be too late to buy back into any potential bounce. You’ll have missed a golden opportunity.
Chart shows FTSE All Share returns from start of calendar year to end of May 2023.
Open road ahead
Let’s return to that situation we discussed at the beginning of this article. Stuck in heavy traffic en route to your summer holiday. Imagine if after 20 minutes of queuing you’re offered the chance to get on a bike.
In theory, you’ll be free to weave in and out of the traffic. In the short term you’ll be well ahead of those around you. But of course, you know that once you hit open road and the traffic clears, you’ll be left with the wrong tool for the job.
That’s the difference between a short-term fix and long-term thinking. It’s putting the temptations of a temporary good deal to one side, knowing that it could be detrimental to the end goal.
Despite a fair amount of doom and gloom in the news headlines, markets are on a slow and steady march upwards. We’ve discussed here before the benefits of having a plan and sticking to it. So this summer, when panic sets in and you feel like you’re in the wrong lane – remember the fear you’re not moving as fast as you should be could just be an illusion.
If you are unsure about the state of your investments or of the financial markets and would like more information, please contact us or get in touch or your usual AAB Wealth contact.
 Money Saving Expert as of 22 June 2023