Woodford Equity Income fund

By | Financial Planning, Investment News, Latest News

A number of our clients have contacted us for reassurance that they are not affected by the suspension of the high profile Fund Manager’s flagship fund, and we are pleased to be able to confirm that this fund is not included in any of our model portfolios.

The fund was suspended on 3 June following a raft of redemptions as investors lost patience with the fund’s under-performance and the managers found it difficult to sell enough of their holdings to repurchase units from clients.

Neil Woodford had built a reputation as a star manager when he ran a number of income funds for Invesco Perpetual in the early 2000s and earned further praise for how he guided his clients through the financial crisis in 2008, so that both retail and institutional investors followed him in large numbers when he left Invesco Perpetual to set up his own management company in 2014.

Despite his reputation for always being on the right side of markets, our biggest concern was the unlisted part of his portfolios. These are companies that are not listed on any major stock exchange and therefore can prove difficult to obtain accurate valuations on, as well as the possibility of it proving difficult to sell them when you wish to do so. His initial allocation to these companies was 5% but we became increasingly concerned when it grew to around 10% of the portfolio towards the end of 2015. Further concerns were raised when it became clear that the valuations of these holdings had not been reduced when the markets experienced a significant dip around that time.

Since early 2016 the Woodford fund has fallen in value by almost 15% whilst the UK Equity Income sector is up 28% over the same period. In terms of funds under management, Woodford had £10 billion of assets two years ago but had fallen to £3.7 billion today. This was clearly unsustainable and the inevitable has now happened.

Whilst we are pleased that our due diligence on the funds we hold in our portfolios means that we have avoided the direct problems with the Woodford funds, their announcement that they were suspending dealings raised concerns about liquidity across the market with the prices of some of the Woodford holdings being heavily marked down. This could impact the performance of other funds and we are closely monitoring any potential issues that could arise as a result.

Government backs pension flexibility to stop taxes undermining NHS workforce by Senior Consultant Chad Atwal

By | Financial Planning, Latest News

The government is looking to make pensions more flexible for senior doctors and will consult on this matter.

In recent months, fears over staff attrition in the NHS have increased due to the tax implications of breaching the lifetime or annual allowance.

Under the proposals now put forward, known as a 50:50 plan, the government argues high-earning clinicians would be able to take better advantage of pension provision and working patterns by building their NHS pension more gradually, with steadier contributions to avoiding significant tax charges on a regular basis. By halving pension contributions in exchange for half the rate of pension growth, the government argues that doctors would be able to take on additional shifts or fill rota gaps with less concerns over the tax implications.

Health and social care secretary Matt Hancock said: ‘Each and every senior consultant, nurse or GP is crucial to the future of our NHS, yet we are losing too many of our most experienced people early because of frustrations over pensions.

“We have listened to the concerns of hardworking staff across the country and are determined to find a solution that better supports our senior clinicians so we can continue to attract and keep the best people.”

The government said the new pension flexibility would be available to ‘senior clinicians who can demonstrate they expect to face an annual allowance charge’, which would mean doctors who have built up more than £40,000 of benefit in their NHS pension in a year, or those who have an adjusted income of over £150,000.

If you are concerned about the impact of tax charges on your Public Sector pension, please get in touch to discuss with one of our consultants.

The Benefits of a Regular Savings Plan by Consultant Elliot Gothold

By | Financial Planning, Latest News

Establishing a regular savings plan using  surplus income can be an extremely effective route to building wealth and achieving your financial goals over the medium to longer term.

There are a number of benefits to “drip-feeding” even modest sums  into an investment portfolio each month via a direct debit, as outlined below.

First, regular contributions can help in achieving smoother returns and mitigate timing  risk.  Part and parcel of investing is the fact that investments go up and down in value.  Investing after prices have fallen means buying into your portfolio at a lower level and bringing down the average price you have paid since the start of the investment.  This is known as “pound-cost averaging” and through regular investing, the peaks and troughs will be ironed out or ‘smoothed’ over the longer term.

Second, market timing is extremely difficult and even investment professionals do not have a crystal ball and cannot predict, with any certainty, which direction markets will move in the short term.  Regular investing helps take the guess work out of when to invest, as investments will be made automatically on a given date each month.  Empirical evidence indicates that the average investor tends to follow the crowd – allowing the herding instinct to displace rational thinking – investing more when the markets rise and disinvesting when it falls; this can lead to inferior long term rewards.

Third, investing smaller sums on a regular basis could enable you to start investing sooner than if you were to wait for a lump sum to build up.  This gives you more time to take advantage of the growth potential of compounding investment returns.

Fourth, you  do not have to commit to a fixed amount each month; you can change the amount invested as required, to suit your circumstances.  Even investing a relatively modest sum each month can lead to a significant pot over the long term, as shown in the following table, which assumes net investment returns of 4% per annum.

Monthly Investment 10 Years 20 Years 30 Years
£50 £7,359 £18,252 £34,376
£100 £14,718 £36,504 £68,752
£250 £36,795 £91,260 £171,880

Fifth, and finally,  you will not forget to invest, as the investments are made automatically and you will come to view the contributions as part of your regular monthly spending.  Indeed, after time, the regular debits will become of no consequence – and when that happens, it is possibly time to raise the ante!

When it comes to investing, we highly recommend that you seek financial advice and we are happy to discuss your requirements with you.

By Elliot Gothold, Consultant.

Explaining the Scheme Pays option to settle pension tax liabilities – by Consultant Tom Burrill

By | Financial Planning, Investment News, Latest News

Current pension rules limit the amount of tax relievable pension inputs that can be made into a pension scheme in each tax year. This is known as the Annual Allowance. Exceed this Allowance and you are likely to face a tax liability, known as the Annual Allowance Excess Charge.

Pension inputs can take the form of monetary contributions in money purchase schemes or the ‘deemed’ contribution, in the case of a defined benefit scheme. The Annual Allowance is made up of all pension inputs you, your employer and/or a third party make to your pension.

If your threshold income remains at £110,000 or lower, then you retain an Annual Allowance of £40,000 for that tax year.

Where threshold income is in excess of £110,000 and adjusted income rises above £150,000 in a tax year, you lose £1 of your Annual Allowance for every £2 of adjusted income.  By the time your adjusted income reaches £210,000, your annual allowance will be tapered down to the minimum level of £10,000.

The Annual Allowance Excess Charge will only apply if, in addition to using all of your Annual Allowance in the current tax year, you have also exhausted your unused annual allowances from the previous three years.  This is known as carry forward.  If, however, having accounted for all carry forward, you still have an excess tax charge and it arises on a money purchase pension, then you have the option to ask the Scheme to pay some or all of the tax on your behalf, out of your accumulated fund. Simple. There are some restrictions around this, which may differ on a scheme by scheme basis. But what is the position for Defined Benefit schemes, where there is no fund to pay from?

If you are a member of a Defined Benefit pension, such as a “final salary scheme”, again you have the option to ask the Scheme to settle this tax charge via “Scheme Pays”.   This gives you an alternative to paying the tax due from your already taxed income, but the trade-off is that your eventual pension is reduced in retirement. The Scheme has paid the tax on your behalf after all.

The way it works is complicated, but think of it as similar to a loan that sits alongside your pension. It will likely attract interest at a rate equivalent to the Consumer Price Index (CPI) or higher. This interest is accumulated year on year. It has no impact on the accruing pension, until you choose to retire and crystallise the pension.  At that point, the initial loan – equivalent to the amount of tax paid by the scheme – plus the accrued interest, crystallises. The Scheme actuary will then apply a “Scheme Pays” commutation factor to this sum and reduce your pension accordingly. This can often be advantageous, particularly for larger pension pots, where there are likely to be dependents.

The calculations to determine whether the scheme pays option is good value are complicated and naturally we would recommend you seek our advice about whether it may be appropriate for you.  Everyone’s situation is different and therefore we review your pension on an individual basis.

Threshold Income is defined as an individual’s total income minus allowable deductions such as member pension contributions.

Adjusted Income is defined as an individual’s total income, less allowable deductions, but plus the total pension inputs arising in the tax year.

As featured in the Saturday Times…..

By | Financial Planning, Latest News

Last weekend our Managing Director, Adam Katten, appeared in the Saturday Times talking about pensions and the fact that it’s never too early to start financially planning your later years.

Coming not long after two successful lectures for final year students at the British College of Osteopathic Medicine, as a father of four children himself (aged 20-27 years) he understands the difficulty in conveying to a 22 year old the importance of putting aside money each month into a pension, especially when it can’t be touched until the ripe old age of 57.

When we also factor in living expenses, studying, potentially moving away from parents for the first time, pension planning for the younger generation is challenging although the figures clearly speak for themselves.

As Adam explained “The tax reliefs associated with pensions are generous, as they attract tax relief at source. Therefore £100 invested into your pension only costs £80 for a basic rate tax payer and £60 for those paying tax at the higher rate. The growth of your pension is tax free and when you reach retirement, 25% of the fund can be drawn tax-free.”

“The benefits of starting a pension aged 25 rather than 35 can be illustrated by comparing the projected pension fund at 65 based on an individual earning £50,000 per year with a growth rate of 4% above inflation. Starting at 25, this individual will achieve a pension fund of £741,000 at 65 years old whilst starting a pension at 35, would reach £437,000. Those extra 10 years made the pension fund almost 70% larger!”

As demographically we are living longer, it is more important than ever for younger people to recognise the importance of starting to save as early as possible and give themselves the opportunity to spend their money during retirement. We would even encourage parents or grandparents to start pensions for younger children as there are no minimum ages.

Adam Katten delivers the second financial education lecture to the British College of Osteopathic Medicine

By | Financial Planning, Latest News

Last month our Managing Director Adam Katten gave his second lecture in financial education to final year students at the British College of Osteopathic Medicine.

The college are offering students the opportunity to gain a better understanding of financial planning before they leave and step into the world of work, either through joining a current osteopathic practice or setting up as self-employed consultants.

The first lecture that Adam gave late last year focused on financial and protection planning; March’s lecture concentrated on pensions and investment opportunities to help students make informed decisions on maximising tax efficiencies and starting to save for their futures as early as possible.

With financial education now part of the secondary school curriculum, children are starting to learn the basics of budgeting, savings and getting to grips with bank accounts, however it isn’t until they leave home for university, or to work, that the responsibility of paying rent and bills becomes a reality.  Combine this with potentially running your own business, thinking about pensions with or without auto-enrolment and tax implications, the fact that the College are providing financial education is a great way to increase students’ preparation and awareness.

One student commented “I felt Adam’s lecture was really interesting and gave useful information for financial planning. I would certainly trust him for information or advice in the future!”

With the average pension pot for people aged 45 years currently at only £60,000, it’s critical that young people start saving as early as possible and learning how to make their money work efficiently and NLP Financial Management are delighted to be involved in initiatives such as these.