Elections don’t have to spell panic for your portfolio
Is a Labour or Conservative government better for my investment portfolio? Will markets crash if Donald Trump gets into the White House? 2024 is a year of big elections, but they might not have the impact that you think.
This year will see a record-breaking number of elections worldwide. Around 2 billion people are voting across 64 countries. Among them, a rematch between Donald Trump and Joe Biden for the US presidency, and in the UK, a Tory party hoping to hold off a serious challenge from Labour, after 14 years in charge.
Investors don’t tend to like big changes or surprises, so election time can be quite a nervy affair. In the last few months, we’ve had a number of questions from clients about how this year could affect them. Will Trump ‘Mark 2’ be good or bad for markets? Will a Labour victory mean higher taxes?
The good news is that with the benefit of prudent long-term financial planning, things needn’t change much for you at all.
How politics impacts your portfolio
There’s no denying the influence politics can have on markets. A change of policy, new regulation, or a tax increase can push share prices up or down.
Sometimes a single event has an instant and dramatic effect (just look at what happened after the Liz Truss mini-budget in 2022). But, when viewed through a more long-term lens, things don’t just fall off a cliff. The big losses are only temporary.
To illustrate this point, let’s look back to 2016 – a year of two serious political shocks. The UK voted to leave the European Union, and Donald Trump defeated Hillary Clinton in the US. Both events went against poll predictions. Initially, both caused a stir in investment markets.
The UK market fell in the immediate aftermath of the Brexit vote on 23 June (as the chart shows, the FTSE All Share was down 9% down the following day at its lowest point). Six months on though and the market had recovered. Global markets also fell in the November when it became clear Trump was likely to win but the slump didn’t last long. In fact, the US market actually ended the day after the election slightly up.
Of course, these are just snapshots, but they illustrate a wider point that markets tend to shrug off elections, even the really surprising ones. Looking long term, the volatility evens itself out. So, when voters go to the polls, there’s no need to panic.
Source: Investing.com, Chart shows performance change between the day before the Brexit vote (23 June 2016) and Trump’s election victory (8 November 2016) and the lowest point in the market the day after, the end of the next day and six months on. UK market data is FTSE All Share (in sterling), US market data is S&P 500 (in US dollars).
Planning not panic
Of course, with wall-to-wall election coverage, dialling down this panic can be difficult. This is where good financial planning becomes so important.
Our role at AAB Wealth is about making sure we get the details right. That means making the most of any tax advantages available at the time (such as ensuring you’ve used your full ISA and pension allowances), ensuring your plan is always aligned to your goals, and checking in with you to ensure the strategy is up-to-date.
These details may seem small at the time, but they make a huge difference. And they mean we’re always prepared for potential surprises.
Additionally, as part of the wider AAB Group, you benefit from expert financial planning and tax advice all under one roof. This comprehensive approach helps us to create a truly in-depth plan that can withstand any short-term shockwaves.
- When you speak to us, our Chartered Financial Planners create a detailed personalised lifetime cashflow forecast. They then stress test it in different scenarios, considering outside influences such as rising interest rates, or the impact of changing personal circumstances.
- At the same time, our tax experts explore in greater detail areas such as reducing your tax liabilities (including inheritance tax and capital gains) to help you get the maximum out of whatever assets or investments you have.
A final thought
Imagine a big rugby match, the final weekend of the Six Nations at Murrayfield. The coach has carefully worked out a game plan to take on the opposition, with carefully judged tactics on how to approach every line out, maul and scrum.
But as game day approaches, the weather forecast changes. Instead of a calm, sunny day, it’s now looking like wind from the east. Does this mean throwing out the whole play book and starting again?
Quite simply, no. It’s just one of 101+ variables that have already been prepped for. A successful coach takes the new information, makes small adjustments where necessary and adapts the game plan. It’s very similar to our approach to planning – no single event will ever undo the strategy we’ve carefully created.
Speak to us about how our services can help you create a plan that withstands short-term shocks and gives you confidence in your portfolio.
AAB Wealth Accredited as one of the Top-Rated Financial Advice Firms for 2024
AAB Wealth, a leading independent chartered financial planning firm, has qualified as one of the top-rated financial advice firms for 2024 by VouchedFor, following outstanding client feedback.
This marks AAB Wealth’s inaugural VouchedFor accreditation since the initiative launched four years ago. The 2024 application process required firms to meet a higher standard of client experience than previous years, rendering the qualification particularly noteworthy.
AAB Wealth is one of 112 firms achieving this status from across the United Kingdom with an overall rating of 4.8 out of 5.
In addition to qualifying as one of top-rated firms, eight of AAB Wealth’s financial planners have been recognised as top-rated financial advisers, demonstrating their commitment to delivering client service excellence.
Aberdeen – Lisa Tait, Ian Campbell, Martyn Paterson
Belfast – Debbie Connolly and Alastair Moore
Glasgow – Alan Turner
Edinburgh – Richard Johnston
Leeds – Tom La Dell
Head of Financial Planning at AAB Wealth, Ian Campbell, expressed a deep sense of accomplishment, stating, “I am incredibly proud of this achievement for AAB Wealth, and I commend the individuals who have deservingly secured their place in the list of top-rated financial advisers in the UK. This achievement is testament to our team’s commitment to providing the best advice to our clients across Scotland, England, and Northern Ireland.”
AAB Wealth will be listed in 2024 Guide to Top Rated Financial Advisers which will be distributed in The Times, The Telegraph and The Mail on Sunday, reaching over 3 million people across the UK.
Three key points from the Chancellor’s Spring Budget
Jeremy Hunt says he wants to keep taxes low and boost investment in British business. So what will his latest plans mean for your finances? We’ve picked out some highlights for you to consider from the latest Spring Budget.
No big surprises, no rabbits produced from hats. But that’s not to say there wasn’t anything of note in the latest Budget that won’t impact your short-term financial planning. We’ve taken a look at the main points below:
1. Cutting National Insurance – will it make a difference?
Having already announced reductions in his autumn statement, Jeremy Hunt announced a further cut in NI contributions. From 6 April, the main rate falls to 8%, while self-employed NI contributions drop to 6%. Looking further to the future, Jeremy Hunt wants to scrap NI contributions altogether, claiming they penalise those who work with double taxation. This cut is funded, in part, by phasing out the ‘non-domiciled’ tax status.
Will this make a difference?
While NI cuts are welcome, income tax bands are still frozen, so many could still end up paying more tax. The total tax take (including income tax, NI, VAT, and other areas such as property sales) is at a post-war high. It’s also worth bearing in mind that, if the ultimate plan is to abolish NI altogether, then it’s likely income tax would go up (a fact the Chancellor has acknowledged following his budget announcement).
2. Buy British– big plans to boost UK equities
There were several measures aimed at reinvigorating investment within the UK. The Chancellor wants to create a ‘new generation of retail investors’, selling off the government’s remaining NatWest shares this summer, and creating a new British Savings Bond, offering savers a guaranteed fixed rate over three years,
The biggest announcement was plans to create a new British ISA, which will focus solely on UK equities. This will offer investors an additional £5,000 on top of their other ISA entitlements (currently £20,000 for adult ISAs and £9,000 for Junior ISAs) with the same tax advantages.
Mr Hunt hopes this will lead to more UK investment into domestic growth stocks (the proportion of UK shares held by UK-resident individuals has fallen to just above 10%)[1]. He also wants defined contribution pension schemes and local authorities to declare how much of their holdings are in UK equities.
Diversification is better
We’ve highlighted before the advantages of seeking a balance of sectors, regions, and avoiding a home bias in investment portfolios, most recently here. Staying disciplined and diversified in stock selection protects your investments when markets are volatile and allows you to make gains when different sectors are doing well.
Therefore, an ISA that’s only focused on UK equities could be risky if that’s an investor’s only exposure to the market. As we highlighted here, being too focused on your home market means missing out on potentially key sectors. Another potential side effect could be that investors simply reallocate existing UK exposure held elsewhere to the new wrapper, meaning the overall investment into UK stocks doesn’t increase.
Consultation on the scope of the new British ISA runs until 6 June, so we will have to wait and see if it sees the light of day.
3. Could property reforms see more sales?
The Chancellor also announced changes that could affect whether some property owners decide to sell.
He’s put an end to stamp duty relief for people buying more than one property in a single transaction (Multiple Dwellings Relief). While intended to support investment into the private rental sector, Mr Hunt said there was ‘no strong evidence’ this had happened and added the system was regularly abused. He’s also abolished special tax rules for furnished holiday lets, which means that income from these will no longer be relevant UK earnings for pension purposes.
The government also cut Capital Gains Tax on some properties, reducing the higher rate from selling a residential property from 28% to 24% (the lower rate stays at 18%). This move is designed to generate more transactions in the property market. It could mean that if you own a second home, it might make more financial sense to sell it. However that 4% difference would have to be offset against other considerations.
What next?
With a general election due by January 2025 (at the very latest), this year’s Budget speech was all about this government showing voters it wants to cut taxes, while others want to put them up. Jeremy Hunt painted a positive picture for the economy: inflation down from 11% to 4% and could go below 2% in the next few months. GDP is growing again, albeit slowly, and debt is predicted to start falling too.
All this is potentially good news. However, despite Mr Hunt’s references in his budget speech to ‘permanent’ cuts in taxation, nothing is written in stone – particularly with a potential election on the horizon. When it comes to looking at your financial plans, it’s important to take note when changes occur – but make sure that short-term changes don’t steal focus from your long-term plans.
Speak to us today about your financial planning.
[1] Office for National Statistics. Ownership of UK quoted shares: 2022
What the Magnificent Seven can teach us about hindsight in investing
The seven biggest US technology giants, known as the Magnificent Seven, completely dominate global markets. While it might seem now as if their time at the top will go on and on, it’s important to remember that nothing lasts forever.
The big guns are dominant – but how long can it last?
The leading corporations, Apple, Alphabet (Google’s parent company), Amazon, Microsoft, Meta (owner of Facebook), Nvidia and Tesla have soared ahead of the pack in the last year. Their profits outstrip those of all other listed companies in almost every G20 country. If they were a stock exchange in their own right, only the US would be larger. [1]
We briefly touched on this group in our last blog post, looking at how their combined valuations greatly outweigh those of every other markets.
The question is, where do they go from here? Can they keep up the momentum? Some investors are certainly counting that these stocks will keep riding the crest of a wave.
The brutal truth is that this period is probably already over.
Rise and rise, or rise and fall?
Technology has dominated markets over the last decade. But, as this research from Dimensional shows, the Seven’s best may already be behind them.
Looking at annualised returns for the US market, the years before a company enters the top 10, are usually extremely fruitful for investors. At 10 years before entry, the average was 12.1% ahead of the average index returns. This increased to 27% ahead at three years before they entered. However, once these companies reach the top, things are less promising. Three years after a company entered the top 10 and annualised returns were only 0.6% ahead of the market, a decade on, they were 1.5% below.[2]
The lesson is, once a company becomes a ‘mega-cap,’ you might not be able to rely on the big returns anymore.
A warning from history
Over the last few decades, market leadership has changed hands several times. As this animation looking at the S&P 500 between 1980 to 2020 shows, IBM, Exxon Mobil, General Electric, AT&T have all had their times at the very top. When they’re there, it’s very difficult to visualise them ever losing their spot, but none of them are in the top 10 now.
Looking back even further, in the ‘60s and early 70s, the major force was the ‘Nifty Fifty’, blue-chip stocks, including American Express, McDonald’s, Kodak and Coca-Cola, that investors believed would just keep growing. The bubble burst in the mid-1970s with big share-price falls (Kodak’s fell more than 90%). Some recovered, but investors no longer lauded them in the same way.
It’s also worth bearing in mind that while big companies do keep getting bigger (in 2007 saw the first trillion-dollar company, there are now seven), the average lifespan of a company is falling. According to McKinsey, In the mid-1930s, the average S&P 500 company would expect to last 90 years, today, this lifespan has shrunk to 18 years.
Diversification is better than hindsight
If you’d invested £1,000 in Apple in on 24 January 1984, when it launched its Mackintosh computer, you’d have close to £2 million today.[3] But betting that this company would go on to become one of the world’s largest would’ve been a major gamble – the kind that rarely comes off.
There’s a far less stressful and risky way to invest your money, one that doesn’t rely on being in exactly the right place and right time to come off – diversification.
Having a diversified portfolio helps avoid the trap of trying to second guess when a stock will start to lose its lustre, or watching to see if a particular kind of firm is back in fashion. These portfolios help you spread the risk by ensuring you’re not too concentrated in one region, and have a mixture of defensive stocks, that hold up better in times of economic stress, and cyclical ones, which are usually expected to do better when the economy is on the up.
Diversification is also about maximising your opportunity. Let’s not forget, there are plenty of well-run, profitable companies out there, operating across a variety of industries, and outside the US in Europe, the UK, Japan and in emerging markets. There’s more to life than the Magnificent Seven.
Want to find out more about how diversification can help you weather financial storms? Get in touch today.
[1] Magnificent 7 profits now exceed almost every country in the world. Should we be worried? (cnbc.com)
[2] Source: Dimensional. Based on annualised returns in excess of the US market before and after joining the largest US stocks. January 1927–December 2022. Market is defined as the Fama/French Total US Market Research index. Past performance is not a guarantee of future results.
[3] Source: Apple historical price data from Yahoo finance, 24 January 1984 to 28 February 2024.
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[1].
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%.[2] 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).[3] 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 |
| Apple | Shell |
| Microsoft | AstraZeneca |
| Amazon | HSBC |
| Nvidia | Unilever |
| Alphabet (Google)* | BP |
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.[4] 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.[5]
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.
Speak to us today to find out more.
[1] Source: Reuters Cash the big flow ‘winner’ of 2023 – BofA
[2] Source: Dimensional. Data for S&P 500 and MSCI indices based on returns from Dec. 30, 2022, to Dec. 29, 2023.
[3] 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.
[4] Vanguard: Global equity investing: The benefits of diversification and sizing your allocation)
[5] 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) | 19% |
| Scottish basic rate (£14,877-£26,561) | 20% |
| Intermediate rate (£26,562-£43,662) | 21% |
| Higher rate (£43,663-£75,000) | 42% |
| Advanced rate (£75,001-£125,140) | 45% |
| Top rate (£125,140) | 48% |
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 .
Kelly Shek (formerly Kelly Pitcairn) is a Financial Planner at AAB Wealth, part of the AAB Group, and is based in the firm’s Aberdeen office.
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.
SPEAK TO US TO FIND OUT MORE ABOUT how inheritance tax could impact your estate.
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.
Debbie said:
“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.[1] 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%).[2] 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.
Except…
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.[3]
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.
Find out more about our systematic, evidence-based approach here.
[1] 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.
[2] Source: Dimensional.
[3]Source: Dimensional
