Investing in Structured Products, by Consultant Elliot Gothold

By | Financial Planning, Investment News, Latest News

Structured Products are one of the more complex and less well-known types of investments but at NLP Financial Management we believe they can play a useful role within a broad investment strategy for our clients.  This article outlines how they work and some of the different products available.

In simple terms, a Structured Product is a pre-packaged finance product offering a given return, or coupon, over a specific period of time linked to the performance of a financial instrument, for example the FTSE 100 Index.  The main attractions of investing in structured products are that the potential annual returns can be quantifiable at the outset, albeit they are not guaranteed, and they provide useful diversification from other more traditional investments such as equities and fixed interest.  Although capital invested can be tied up for up to eight years, most plans offer the potential for early maturity on any investment anniversary, usually from the second year but sometimes after one year, subject to the performance of the underlying index.

There is a wide range of structured products available at any point in time, covering the full width of the risk spectrum, from lower risk products to high risk.   We carry out extensive research into the various structured products available to retail investors, and maintain a panel of approved products which can be offered to clients.

There are two types of product available; Structured Deposits and Structured Investments, and each product will target capital growth or income.  Structured Deposits are plans with a given rate of interest, which is payable subject to the performance of, for example, the FTSE 100 Index over the period of the plan, with each plan having specific conditions.  If the underlying index underperforms, investors may not receive any interest at all, but the capital invested is secure, while the products have the same protection of £85,000 under the Financial Services Compensation Scheme (FSCS), as with any other savings account.

Returns from Structured Investments usually depend on how a stock market index performs, and we only recommend plans linked to the FTSE 100 Index, rather than more than one index or individual stocks, which may offer higher returns but are higher risk.  We often favour more defensive plans, which can pay out even if the FTSE 100 Index falls, even by as much as 35% during the full term of the plan.  Some plans offer a “step-down”, whereby on each anniversary the measurement level of the FTSE 100 Index falls, so the plan can mature early even if the market has fallen since the start of the plan.  However, there is a risk that capital may be lost if the underlying index falls significantly, typically by more than 35% on maturity.

Another risk is that the provider purchases underlying financial instruments from one or more banks, known as counterparties, and if these institutions fail or become insolvent during the term of the investment, investors may lose their full investment as they are not covered under the FSCS.  Understanding the financial strength of counterparties is essential and a key part of our research process, and we will only invest in products where we are completely comfortable with the counterparty, or in some cases multiple counterparties, involved in that product.

In times when the FTSE 100 Index has fallen, investing in structured products arguably becomes more attractive, as the likelihood of loss of capital reduces, simply on historical levels of the Index.  Furthermore, the returns offered from structured products are often higher during periods of stock market volatility.  From a tax perspective, returns from growth plans are usually subject to Capital Gains Tax, providing the opportunity for investors to utilise their annual CGT exemption of £12,000.

In conclusion, due to the wide range of products available, their complexity and associated risks, we believe it is essential to obtain financial advice when investing in structured products.  Investing in a portfolio of carefully selected products, perhaps at different times to provide diversification between counterparties and a range of maturity dates and returns, can be an appropriate strategy to adopt alongside a broader investment portfolio.  Returns can be attractive relative to other investments, but it is essential to fully understand the risks involved, and due to their complex nature structured products are not suitable for all investors.

Elliot Gothold is a Consultant with NLP Financial Management Limited and can be contacted on 020 7472 5555 or at [email protected]

 

 

Incorporating Financial Planning into Company Benefits

By | Financial Planning, Investment News, Latest News

It’s become relatively standard practice over recent years, for medium to large companies to offer their employees access to a range of staff benefits that are over and above the traditional areas of private healthcare and life insurance.  Some even provide free food, holidays and unlimited flexi-time!*

A benefit that is growing in both popularity and need, is that of financial education, with the opportunity for employees to meet professional financial planners who can demystify what can be perceived as a complicated subject.  With 94% of UK workers experiencing money worries, 77% of these say their work is impacted and productivity is impaired, with protection, budgeting/planning and tax being among the highest concerns.**

There are various ways in which financial education can be implemented within businesses, from workshops and presentations on a range of financial topics, to one-to-one meetings; or as in the case recently, attending a benefits fair at Goldman Sachs, with whom NLP Financial Management has had a long-term business relationship.

Whilst events such as these usually cover a wide selection of wellbeing providers, employees can informally meet finance professionals and ask questions in a relaxed environment, with the option of continuing the discussions afterwards, should they wish to do so.

Crucially, these events help employees to start having conversations about aspects of their current or future finances that they may have pushed to one side.  It’s a common misconception that individuals need a large capital sum of money before speaking to a Financial planner, when in fact, a beneficial relationship can be started early on, that can help people effectively formulate their financial futures and put themselves in a far better position later on in life.

If you’d like to discuss the option of NLP Financial Management attending your workplace please contact us at [email protected]

*https://www.glassdoor.co.uk/blog/best-place-to-work-with-great-comp-and-benefits/

** https://www.closebrothersam.com/for-employers/news-and-insights/25-million-uk-employees-affected-by-money-worries-while-at-work/

Pictured – Ed Beaber (Business Development Consultant), Adam Katten (Managing Director) and Elliot Gothold (Chartered Financial Planner).

Driving our continuous professional development

By | Financial Planning, Investment News, Latest News

We believe it’s crucial to keep supporting our staff in developing their careers and experience.  Not only does this benefit our clients, but also enables us to be an employer of choice, attracting and retaining talented individuals within a fast moving industry.

For this reason, we recently held an event in London for our para-planners across the NLP Financial Management group.  The day focussed on developing their existing knowledge of tax efficient investments including:

BPR: Business Property Relief – Investments that qualify for BPR can be passed on free from inheritance tax upon the death of the investor, provided the shares have been owned for at least two years at that time.

VCT: Venture Capital Trusts – after ISA and pensions allowances have been exhausted, VCT’s could be the next best option.  Adventurous investors get the chance to invest (up to £200,000 annually) in small firms to help them thrive, with the Government offering generous tax breaks in the process.   You get up to 30% income tax relief on the amounts invested (up to the total tax due), tax free capital gains, and tax free dividends.  However they are high-risk and longer term than more traditional investments.

EIS: The Enterprise Investment Scheme – run by the Government, this aims to help younger, higher risk businesses raise finance by offering risk-taking investors substantial tax relief; up to £1m worth of investments in companies per person that qualify.

The staff then received important updates on Compliance and HR from relevant experts, before heading out as a team for some rest and relaxation!

Due to the high risk nature of BPR, VCT and EIS products, financial advice should be sought before making an investment. Tax reliefs stated are subject to change and are dependent on individual circumstances.

We made the top 100!

By | Financial Planning, Investment News, Latest News

We’re delighted to have received the news that NLP Financial Management has been featured in the Top 100 financial planning businesses in the UK.

The New Model Adviser Top 100 list is a prestigious accolade to obtain, especially as it takes into consideration financial planners the length and breadth of the country, from very small firms to companies much larger than ourselves.  We are also one of only 16 London financial organisations to be included, which in itself is highly significant, taking into account the number of financial planners who are based in the capital.

Our willingness to share our knowledge and expertise with external bodies and individuals was also noted, which is part of our company’s ethos.   In the same way, our drive to develop our people has helped us become both an employer of choice and a company respected and trusted by our clients, who refer to us on a consistent basis.

Recognition in this form is also an appreciation of the efforts and hard work by our staff, to ensure we are consistently delivering a personal service and putting our clients at the heart of everything we do.

Inheritance Tax Simplified? By Senior Consultant Chad Atwal

By | Financial Planning, Investment News, Latest News

A recent report by the Office for Tax Simplification (OTS) proposing a series of changes in connection with the Inheritance Tax (IHT) system was on the whole welcomed and well received.
The report looked at making the administration around this deeply unpopular tax less complicated and published a series of proposals with the aim of simplifying IHT and in particular:

• Helping executors who administer a deceased person’s estate
• Helping us as individuals distribute our assets during our lifetime.

I took some time recently to review the report. Whilst some of these changes will be appreciated and positive, I feel that if these proposals are enacted by Government, this will inevitably result in a more complex system and potentially a higher IHT burden for many estates. It will also be interesting to see how the proposals will interact or interrupt any existing planning.

I detail below some of the OTS proposals and suggest you speak to your Financial Planner, so you can put the proposed changes into context and understand your personal position.

The main changes proposed are as follows:

• Currently, many gifts which are not exempt from IHT tend to be subject to a 7 year rule. In summary, the gift will not form part of your estate for IHT purposes after a period of 7 years. In     addition, after the third anniversary and subsequent anniversaries thereafter, the IHT payable on the gift may reduce on a sliding scale. This will happen for larger gifts in excess of £325,000.

The OTS report suggests reducing this period from 7 to 5 years, but simultaneously also proposes to remove the taper relief benefit. Therefore, the tax on the gift will be charged in full for the entire 5 year period as opposed to potentially reducing after 3 years. This presents a “cliff edge” scenario whereby on death, after 4 years and 364 days, tax would be payable on the full amount, but if the donor lives one more day, the gift would become entirely tax-free.

On the whole, I believe that this is a positive change as it will ease administration and encourage gifting. However, it’s important to consider the health of the Donor before advising on such a gift.

• When making gifts, there are a number of allowances which can be utilised in order to make the gift immediately exempt from IHT. The new OTS proposals include removing many of these allowances and just giving everyone one higher allowance per year. From a simplification perspective, I personally welcome this change and believe it would ultimately encourage better utilisation of the IHT exemptions.

However, one current exemption enables individuals to annually gift a limited amount of money. This is referred to as ‘the normal expenditure out of income exemption’ but the OTS is recommending its removal. A number of our clients who have significant excess income utilise this exemption and this is an important part of their IHT planning, so these arrangements will require review if the proposals are enacted.

• The OTS also suggest changes to Capital Gains Tax (CGT) and how it interacts with IHT. Currently, if you inherit an asset, no CGT is payable until you dispose of the asset when CGT is then payable on the increase in value from the date of inheritance to disposal, ie the base cost is uplifted to the value on death.

The OTS proposes changing the base cost to when the original owner acquired it rather than the inherited value, which is likely to bring a significant increase in capital gains tax bills. In my view, it is very important to keep a close eye on this proposal and if the legislation is passed, suitable action should be taken.

• The Residence Nil Rate Band (RNRB) was introduced recently and many of our clients will be familiar with this new exemption as it is often discussed during our regular meetings in order to maximise its potential benefit. However, the RNRB conditions have been branded as unfair as an estate would only qualify for it, providing the main property is left to children, grandchildren and step children / step grandchildren. The OTS have acknowledged this and suggested it requires review in the future.

• At the moment, holdings in many AIM shares are free from IHT liabilities, due to them qualifying for Business Property Relief (BPR). The BPR rules were introduced to prevent family farms and businesses being split up to pay IHT bills but the report raises a question about whether it is within the policy intent of BPR to extend the relief to such shares, in particular where they are no longer held by the family or individuals originally owning the business.

• Currently, term life insurance policies which are not written into trust form part of one’s estate when one dies, meaning they can be liable for IHT. Policies written into trust do not form part of the estate. The report said it would be ‘desirable’ for there to be a standard rule that term life insurance policies fall outside of a deceased person’s estate for IHT purposes, whether or not the policies are written into a trust. We welcome this proposed change.

• From a pensions perspective, no major changes have been proposed. However, the OTS has indicated that in the future, it may be appropriate for the Government to consider a wider review of the tax system and pensions.

The above summary only touches the surface on these potential changes and so it is important to discuss your own particular circumstances in regard to estate planning with your financial planner. We offer IHT guidance and advice as part of our service and part of our initial review, so please do not hesitate to contact us if you wish to discuss this further.

 

England bring Home the Cricket World Cup

By | Investment News, Latest News, Uncategorized

Sunday 14th July was history in the making when England won the Cricket World Cup against New Zealand, at the iconic Lord’s cricket ground, known as the Home of Cricket.

Leading the team was England Captain Eoin Morgan, who plays county cricket for Middlesex where NLP Financial Management (NLPFM) sponsor his 2019 One Day Middlesex CCC shirt. The atmosphere in the cricket ground was electric with a massive audience watching it on TV, online and radio with the win resulting in a fantastic platform from which the sport can build.

With the England team having previously endured a number of embarrassing defeats on the world stage, Morgan has led a transformation of England’s One Day team since the last World Cup in 2015, and has successfully developed a new way of playing without fear, backing the players he wanted and leading the team to thrive in a positive environment. This is the atmosphere we have hopefully also created with the team here at NLPFM without of course taking any undue risks in regard to our investment selection and we are proud to be associated with Eoin Morgan as a leader.

The England victory can only be good for the quintessentially perceived British sport, which could now see a surge in interest, investment and participation from within schools and clubs throughout the UK. For the England and Wales Cricket Board and cricket fans across the country, Morgan and his team could not have done anything more!

(Photo – NLPFM Consultant Elliot Gothold and Eoin Morgan)