Category Archives: Investments

Property vs Pensions – Where’s Best to Invest?

property vs pension basic

Brits have long had a love affair with residential property; the past 25 years or so has seen a significant increase in the number of people choosing this route for investment purposes.

People like investing in residential property for rental purposes as they enjoy the boost to their income during their working life, they see it as a way to provide an income during retirement, and they like the idea of passing the property to their children and grandchildren following their death. Further, property is a tangible asset (you can see it and touch it) and can be easily understood which many people find comfort and certainty in.

Recently, however, in an effort to make residential property more accessible to first time buyers, the Government has brought in two measures that make investing in buy-to-let property less attractive.

The first of these measures is the Stamp Duty Land Tax (SDLT) Surcharge introduced on the 1 April 2016. This increases the total SDLT applicable to those purchasing an additional residential property by 3% of the purchase price, making the initial outlay required to purchase a buy-to-let property significantly more expensive.

The second is the retraction of mortgage interest relief against rental profits in excess of the basic rate tax band. This has reduced the profitability of buy-to-let property for higher rate and additional rate tax payers.

So what is the alternative for those considering the purchase of a buy-to-let property?

Well, it might just be that wholly unfashionable and infinitely boring of things, the personal pension.

Almost simultaneous to the restrictions being placed on second homes and buy-to-let properties, pension freedom reforms were introduced. This made personal pensions a more attractive proposition for holding investments.

Pensions have traditionally been an inflexible investment vehicle that forced the purchase of an annuity on retirees. However, as a result of the introduction of pension freedom reforms, retirees are now allowed the flexibility to draw as little or as much of their pension as they like in any year that they like by selling down their pension investments.

Furthermore, the reforms changed the way in which pensions are taxed on death of the member. Personal pensions are typically not included as part of the estate of the member on their death and therefore escape assessment for inheritance tax purposes. Instead, personal pensions are subject to income tax at the rate applicable to the beneficiary if the member dies after reaching age 75, and this is only applied when the beneficiary draws from the pension (so can be managed to limit the tax applicable). If the member dies before reaching age 75, the beneficiary will be able to draw on the pension without incurring any tax whatsoever.

Other positive attributes of personal pensions include the following:

• Contributions are income tax relievable and are limited to 100% of UK Relevant Earnings up to a maximum of £40,000 per annum.

• Investments held within a pension tax wrapper are free of income tax and capital gains tax.

• Any person accessing a pension during retirement can take 25% of their pension as a tax free lump sum. The remaining 75% can be accessed either flexibly or by purchasing an annuity and will be subject to income tax.

It should be noted that pension investments cannot be accessed prior to age 55 (increasing in line with the State Pension Age), so will not be the most suitable tax wrapper in all circumstances.

How does this compare to the tax position for buy-to-let properties?

• Instead of being subject to a tax charge on their investment (SDLT + SDLT surcharge), pension investors enjoy tax relief at up to 45%. This boosts the initial investment value which will potentially have a significant impact over a long period of time (as a result of the compounding effect).

• Within the pension, investments are not subject to income tax or capital gains tax. By contrast, buy-to-let property investors will be subject to both throughout the full period of ownership (including whilst they are working and are potentially a higher or additional rate tax payer).

• Finally, unless other arrangements are used, buy-to-let properties will be included as part of the estate on death and therefore could potentially incur a tax charge of 40%.

There are ways in which buy-to-let property can be held more tax efficiently (particularly for higher and additional rate tax payers), such as within a company structure or using a trust, however, rearranging an existing property portfolio in such a way could incur a significant cost.

So, from a tax angle, if the investor is unconcerned by the prospect of tying their money up until they reach age 55 (rising to 57), then pensions potentially present a significantly more efficient investment proposition than residential property.

Beyond tax

The tax position of investments is one thing, but there are other factors to consider when investing your money. One such factor is volatility. In short, the value of investments can fall as well as rise and the more volatile an investment is, the greater the fluctuations in value will be. Different types of investments react to changes in market conditions and world events in different ways. In order to balance the risk of volatility across investments, you ideally want your money to be spread across investment classes that react differently to changes in the market.

As it happens, property and equities are two asset classes that have exhibited extremely low correlation of returns over the past 35 years (we are using equities for this example as, typically, a large proportion of a pension portfolio would be allocated to them). So is there an argument that property and pensions could, in fact, work alongside each other?

Unfortunately, legislation dictates that residential property cannot be held within a pension. However, it is reasonable to assume that the majority of individuals who are considering an investment in a buy-to-let property will already own the residential property in which they live. By investing in equities (whether or not this is within a pension portfolio), such an investor improves their ability to manage risk via diversification (and will thus potentially improve the growth characteristics of the portfolio) and improves the liquidity characteristics of their overall portfolio of wealth.

Returning to our original question – Property vs. Pensions – what is the answer?

Whilst some people will find it difficult to be swayed from property, for those who have previously overlooked pensions and alternative asset classes, perhaps now is the time to take another look. Initially, you should review the pension provision that you have in place and the level of contributions that are being made. Depending on your income and income tax position, thinking about refocusing your excess income and making additional contributions may allow you to take advantage of the numerous tax breaks available.

For more information on any of the above, or to discuss reviewing your pension position with one of our Chartered Financial Planners, please contact us.

This email, written by Daniel Ardern, originally appeared on Pro Manchester’s website.

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Bitcoin – What do you Need to Know?

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Read any article about investments over the past 12 months and you will probably find that Bitcoin features.

There’s no doubt that Bitcoin has performed remarkably to date, with early investors generating staggering returns over a relatively short period.

Considering the sheer number of column inches dedicated to Bitcoin, it’s no surprise that everyday investors are sitting up and paying attention; wondering whether they should invest before they ‘miss the boat’. As with any form of alternative investment, the risks associated with investing in Bitcoin are high.

Here we look at Bitcoin in more detail.

What is Bitcoin?

Created in 2009, Bitcoin was the first global cryptocurrency and was created by an anonymous individual who is now known under the pseudonym of Satoshi Nakamoto.

As a virtual currency, Bitcoins aren’t printed; individual Bitcoins are created by computer code. To receive a Bitcoin, a user must have a Bitcoin address – a string of 27-34 letters and numbers – which acts as a virtual post box. You can then set up a virtual wallet to store, keep track and spend your digital money.

In a world where everything is going digital, some view Bitcoin as the future of currency. However, due to the anonymous nature of Bitcoin ownership and trading, it is being used to conduct illicit activities. This has created a dark cloud over all cryptocurrencies.

Should you believe the hype?

There are two sides to every story and alongside the reported positives of Bitcoin, there are numerous negatives. The volatile nature of cryptocurrencies means that they have the ability to plummet as quickly as they shoot up.

The main drawbacks of cryptocurrencies such as Bitcoin are as follows:

  • Cryptocurrencies are not regulated financial instruments so they do not have the consumer protections associated with traditional assets. For example, the Financial Services Compensation Scheme does not cover Bitcoin investments.
  • The value of cryptocurrencies is extremely volatile. They are vulnerable to sharp changes in price due to unexpected events or changes in market sentiment. The value of some cryptocurrencies recently fell by more than 30% in a single day.
  • With any ‘get rich quick’ strategy, there are those that will look to take advantage of naïve investors through unscrupulous means. As cryptocurrencies are unregulated, the potential for fraudulent activity is heightened. At the risk of sounding trite, the saying ‘if it sounds too good to be true, it usually is’ might well apply here!

It should also be noted that any investment in Bitcoin leaves you effectively wading into unchartered waters. For this reason, investment in Bitcoin has been likened to gambling, with Andrew Bailey, chief executive of the UK’s Financial Conduct Authority (FCA), recently issuing the following caution: “If you want to invest in bitcoin be prepared to lose your money – that would be my serious warning”.

Our advice

Predicting the future for Bitcoin or any other cryptocurrency would require a crystal ball. In general, our advice is to think very carefully about Bitcoin, or any other cryptocurrency linked investment strategy, before ploughing in. Past performance is not an indicator of future performance and Bitcoin carries as much risk, and arguably even more, than other forms of investment such as equities or other commodities. If you do choose to gamble on Bitcoin, be sure to follow a tried and tested route. You should consider what you are willing / can afford to lose, and remember that long term sustainable returns are best generated via a balanced portfolio of investments.

NB. The value of investments can fall as well as rise. You might not get back what you invest.

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Legal Entity Identifiers – Why, What, When and How Much?

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Legal Entity Identifier or LEI were introduced following the global financial crisis in 2008 so that all participants in the financial system would be identifiable to facilitate monitoring of worldwide financial transactions. A LEI is a unique 20-digit alphanumeric code which is specific to legal entities including investment firms, corporations, charities and Trusts.

Effective 3 January 2018, legal entities will be required to hold a LEI if transacting reportable instruments. Reportable instruments include:

  • Shares
  • Exchange Traded Funds – ETFs
  • Venture Capital Trusts – VCTs
  • Warrants
  • Gilts
  • Corporate Bonds
  • Structured Products

Bare Trusts are currently exempt from acquiring a LEI.

Natural persons are not required to hold a LEI although may be asked by Platform Providers to provide National Insurance, Passport Numbers and details of nationality (or dual nationality) to transact investments if the information has not been recorded.

LEIs must be obtained via an LEI issuer that has been accredited by the Global Legal Entity Identifier Foundation (GLEIF) or an entity endorsed by the LEI Regulatory Oversight Committee (LEI ROC). In the UK the designated LEI issuer is the London Stock Exchange (LSE) https://www.lseg.com/LEI

The legal entity will provide to the designated LEI issuer the following information: Official name of the legal entity, Country of formation, legal form of the entity, current registered address and reference number of the legal entity e.g. company registration number. Supporting documentation may be submitted, including Articles of Incorporation, Trust Deed etc.

Registration does not come free of charge. The initial cost per LEI is £115 + VAT with annual renewal fees of £70 + VAT. Fee savings can be made if you batch requests (10) however this generally only reduces the initial fee by £25 per request.

It is anticipated that the expected volume of LEI requests during January 2018 could slow down the issue of LEI codes. Therefore we recommend that any affected legal entities register for a LEI code without delay.

In summary, act now and consider if you need to obtain a LEI code for your clients otherwise after 3 January 2018 you will not be able to buy or sell shares or ETFs.

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How Biases Affect Investor Behaviour

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In February, we held a masterclass for professional contacts on the topic of risk. One of the areas we looked at during the CPD session was attitude to risk when investing; in particular, the different effects our existing biases can have on the way we approach financial planning decisions.

Behavioural finance is a rapidly growing area of interest within financial services. The simple fact is that investors do not always operate in a rational or logical manner and are very easily swayed by biases. Depending on the significance of the decision, biases can, and do, have a direct impact on the performance of an investor’s portfolio.

Generally speaking, there are two types of biases that affect our financial decision making process. These are:

  • Cognitive biases – Biases based on errors of perception, memory, judgment or reasoning.
  • Emotional biases – The tendency to believe things that give us a good feeling and disbelieve things that make us feel uncomfortable.

Here we look at some of the most common biases people hold and how these manifest themselves in financial decision making.

Confirmation bias

This is the tendency to interpret new evidence as confirmation of one’s existing beliefs or theories. Think about the last car you bought. After you initially made the decision which make and model you were interested in, did you suddenly start to notice that car every time you drove past it? This is confirmation bias in action. If we already have a certain view about a particular type of investment, any information we are presented with will work to confirm our decision in this regard.

Framing bias

Framing bias refers to how people react to a particular choice depending on how it is presented. Framing bias is exploited frequently as a marketing tool; with prices presented in a certain way to make us feel we are getting a good deal, or else encouraging us to spend more than we originally intended. The FCA conducted an interesting piece of research on framing in relation to retirement planning options. One finding from the paper was that potential losses appear more important than the potential gains to the retiree; in this particular scenario impacting on their choice of whether to take an annuity or access flexibly via drawdown. This is a finding that has been mirrored by other research into framing bias in investor behaviour.

Loss aversion

Loss aversion is linked very closely with framing bias and centres around our tendency to strongly prefer avoiding losses than acquiring gains. Some studies have suggested that losses are twice as powerful, psychologically, as gains. This is clearly an important bias in relation to investment behaviour as investing in stocks and shares always carries a risk of loss. Although the gains can be significant, some investors with a particularly strong bias for loss aversion will automatically lean towards a cautious portfolio. Establishing attitude to risk is one of the first steps we take when meeting with a potential client so that the portfolio suggestions we make are tailored correctly.

Overconfidence

Overconfidence is a person’s tendency to overestimate their skills and abilities or predictions for success.

In investing, overconfidence can lead to rash decision making – such as selling stocks at the incorrect time, or favouring one particular asset type over another resulting in a poorly balanced portfolio.

 

Investing is more than just analysing numbers and making decisions to buy and sell. A large part of investing involves individual behaviour, preferences and emotions.

As financial advisers, it is our role to make recommendations for clients based on their personal circumstances and what they are aiming to achieve via their financial planning. Ultimately however, any investment decision must be made by the client, thus leaving the opportunity for investment biases to rear their head in place of rationality or good judgment.

Having an awareness of one’s own biases can help to reduce the extent of the impact expressed.  However, a bias is not always something we are aware about; it’s often an inherent inclination or prejudice existing in our subconscious.

As an evolving area, the advisers at Gresham will be keeping an eye on the research surrounding behavioural finance and how we can help steer clients in the right direction when making investment decisions.

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Ethical Investing – What do you Need to Know?

Ethical Investing, IFA Manchester

With issues such as global warming, recycling, the environment and cancer affecting so many of us in our everyday lives, the ethical and public health agenda is now far beyond being the domain of a small minority of ‘activists’, having become virtually mainstream in today’s society.

The proliferation of information surrounding these issues online and via social media has further brought them to the fore and as a result, there’s now a growing swathe of conscious consumers out there who actively seek out ways to make positive decisions about what to buy and where to buy it from.

In line with this, the financial advisers here at Gresham have certainly seen an upturn in the number of clients requesting a more ethical approach to their investments over the past couple of years.

Ethical investing is an investment strategy which seeks to consider both financial return and social good to bring about a social change. Specifically, it is a method of investing that considers the social impact on people and the sustainability of the environment and will discount stocks from industries such as alcohol, tobacco and oil production, animal testing and armament firms.

But is there a conflict between ethical investing and achieving healthy investment returns from your portfolio? Or does ethical investing just require a bit more thought and planning? Here we discuss some of the factors you need to consider in relation to ethical investments.

Choice of funds

One of the main things to consider in relation to ethical investments is the reduced choice of funds that will be available for investing into. Some ethical or ‘green’ funds take a very restrictive approach to investing and as such, clients going down this route may lose out on the gains seen in some potentially lucrative markets. For example, by choosing not invest in tobacco company stocks, which have shown strong investment returns over the last 12 months, it may be that your portfolio produces lower returns, compared to a portfolio that did. Whilst this may be a moral standpoint that you are happy to take any potential hit on, it is important to be aware of this from the outset so you can weigh up the strength of your feelings against your desire to see the best possible returns on your investment portfolio.

Exposure to market volatility

Whilst ethical investing does reduce the variety of funds available for investment, this doesn’t inherently mean that the outcome will be any less favourable. In fact, due to the volatility in the oil market over the past 18 months, some ‘ethical’ funds have actually outperformed other indices. For example, based on investment performance over the past 3 years, a typical ethical fund had returned circa 32%-35%, compared with 28% for the FTSE All-Share index and 24% for the AFI Balanced index, which is based on financial adviser fund recommendations. (NB These figures refer to the past and that past performance is not a reliable indicator of future results).

Are all ethical funds truly ethical?

One of the trickier aspects of planning an ethical investment portfolio is performing due diligence on the underlying companies held within a fund. Certain funds are ‘greener’ than others and even some financial institutions that you hold ISAs or bank accounts with, along with pension companies or even your workplace pension provider, could in fact be investing money into areas you would rather not support. Although controlling who you give your money to directly is easy to manage, matters become much harder when your money is put into the hands of third parties.Even so-called ‘ethical’ providers may not be as ethical as you might expect and there have been some instances brought to light in which customers are failing to get the green/responsible investment they thought they’d signed up for.

Short of spending hours of your time researching and contacting all of the financial institutions you are involved with, and thereafter moving your funds to those with a more favourable approach, there isn’t an easy way to address this. The financial advisers and technical research team at Gresham Wealth Management have a great deal of knowledge and insight into the ethical stance of funds and can therefore ensure that clients’ wishes in relation to ethical preferences are followed.

With a growing number of people taking a stance on environmental and other issues of public concern, it seems that ethical investing is only set to develop as a way of approaching stocks and shares investments.  Gresham Wealth Management have an ethical investing questionnaire that seeks to ascertain a client’s preferences in relation to investing, and in particular, the strength of their ethical stance on a number of key issues of concern.

For further advice or assistance in relation to ethical investing, Gresham Wealth Management’s team of IFA’s will be happy to assist. Contact us here.

 

NB The value of your investments can go down as well as up, so you could get back less than you invested.

 

 

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