Marginal Gain – May 2019
In this edition of Marginal Gain, we look at the role of structured plans within a portfolio, as positive returns can be achieved when markets remain flat which is probably the likely outcome for the next few years. The markets are dominated by the Trump versus China trade discussions which will continue to drag on and BREXIT which you start to feel may not be resolved for years!
We come across “inertia” with clients across a number of key areas and there is no doubt that making a financial decision can be daunting as a client will essentially be outside their comfort zone. Add in the huge choice available, the ability to be DIY or to have a make decision with emotional consequences e.g. drafting a Will and “decision fatigue” plays a role. Obviously, our role is to help you make informed decisions so as usual if anything prompts you to ask a question or take action, then please just let us know how we can help!
The latest research from Scottish Widows has found that Brits say they do not have enough mental space to make the right choices when it comes to tackling difficult decisions.
Four million of us are put off financial planning because of decision fatigue and a further 6.4 million people claim they simply do not have time to do important life admin.
Worryingly, the data revealed that 51% have not made a decision on whether to purchase critical illness cover, while 47% have never even thought about making changes to their pension.
The analysis also found that 38% have not come to a decision on whether they will buy life insurance. When asked for the reason why, 19% said that they are put off because it is too time-consuming, while 17% claim it’s too stressful.
Mark Fenton-O’Creevy, Professor of Organisational Behaviour at The Open University Business School and expert on financial decision making, said: “Important decisions about our lives can be easier to tackle if we create the mental space to deal with them. Putting lots of time and effort into everyday choices not only reduces our time and mental resources for more important decisions, it can be a way of avoiding difficult choices we should be making. So, to recap an article of a few months ago – the benefits of using a Financial Planner are;
• Asset allocation – the overwhelming factor in determining investment performance
• Rebalancing – keeping a portfolio’s risk and return profile on course
• Lowering costs – the one factor guaranteed to improve returns
• Behavioural coaching – avoid the costly mistakes of giving in to fear and greed
• Tax allowances – tax-efficiency is key to getting the best results
• Cashflow Modelling – crucial to maintaining the value of a portfolio in retirement
• Total return versus income – making the most of a portfolio for both income and capital
The Cost of Pensions
The cost of pension tax relief hit £38.4bn in 2017-18, up £1bn on 2016-17, according to figures published by HM Revenue and Customs.
Figures published today (30 April) by HMRC put the gross cost of pension tax relief at £38.4bn in 2017-18, up from £37.3bn in 2016-17, but still slightly lower than the £38.6bn in 2015-16.
The small increase in the tax relief bill was despite millions of workers being enrolled into workplace pensions in recent years, which suggests that the amount of tax relief being claimed by each saver is coming down.
Steve Webb, Director of Policy at Royal London said: “The Treasury needs to make up its mind whether it wants more people to save in a pension or not. What is remarkable is how little the cost of pension tax relief has risen in recent years given the millions of extra workers who have been automatically enrolled into workplace pensions.
“Every time the Treasury attempts to cut the cost of tax relief, they add new complications such as the ‘tapered annual allowance’ and the ‘money purchase annual allowance’ which make the system bewilderingly complicated. These new figures provide no justification for further fiddling and salami slicing with a system that should be stable over the long-term.”
According to the figures, £16.3bn was granted in pension national insurance relief, up from £15.5bn in 2016-17.
For 2016-17 the effective tax relief granted is 40 per cent suggesting there were few basic rate tax payers taking advantage of saving for retirement, analysis by Hargreaves Lansdown has found.
Altogether the figures show that there was £48bn in tax and NI relief granted on pension contribution in 2017-18.
The chancellor of the exchequer, Philip Hammond, has previously said pension tax relief was “eye-wateringly expensive” and “extraordinarily generous” which has prompted speculation he may try to reform the system.
One in four women homeowners over 55 have no private pension, according to new research.
The disparity was highlighted in the latest research by SunLife, which was released today and found that one in five women over 55 believed they were worse off than they expected to be at this stage of their lives
Meanwhile only one in 20 male homeowners over 55 had no private pension.
Time to look at Structured Plans?
The Meteor FTSE/STOXX Kick Start Plan April 2018 that started on 13 April last year matured last week after just one year in force, providing an investment return of 14% on initial capital invested.
The plan, designed to be observed annually from the end of year 1, was structured as a “Kick Start” so that the potential investment returns were weighted to the earliest observation point. When the plan started, the FTSE 100 and EURO STOXX 50 were at 7264.56 and 3448 respectively – these were the levels the indices needed to be at or above for the plan to kick out.
On 15 April 2019, the FTSE 100 finished at 7436.87 and the EURO STOXX 50 ended at 3450.46. Although the FTSE 100 comfortably met its requirement, the EURO STOXX 50 finished just 0.07% above its required level!
This is yet another example of a structured product providing significant returns in benign market conditions.
The Organisation for Economic Cooperation and Development (OECD) recently warned that in a no-deal Brexit scenario, the UK economy would probably sink into recession…and the timing couldn’t be much worse. The global economy is losing steam and the US-China trade war continues to bubble in the background.
The signals are undeniably ominous too. Unemployment can’t go much lower, the property market is slowing, financed consumption is increasing and the interest rate yield curve is flattening. Economists will know that this last one is a particularly damning signal.
This chart shows the comparison between UK government funding rates now (green line) and a year ago (yellow dashed line). Short term rates have risen, and long-term rates have fallen.
This is important because banks borrow at short-term rates and lend at long-term rates. At any point in time, banks are required to hold an adequate amount of liquid assets, such as cash, to ensure they have enough to give to customers when they make withdrawals. To keep their reserves up, they borrow from other banks that have excess cash and pay interest at the short-term interest rate. At the same time, banks offer longer-term lending services in the form of personal loans, credit cards, overdrafts, commercial loans, mortgages etc.
Banks will, therefore, make more money when the difference between their lending and borrowing is greater. So, when the yield curve flattens and the gap between short-term and long-term rates shrink, profits shrink, and it becomes less attractive for banks to lend. The risk here, of course, is that when lending dries up, businesses can’t expand, and neither can the economy which increases the likelihood of a recession.
Clients may, understandably, be cautious, but we’re still quite a way off a crisis yet. The European Central Bank, for example, continues to support lending with promises of low-interest rates. It’s important, therefore, to look at the bigger picture and recognise that there are still opportunities to be had.
The Meteor plan described above was a capital-at-risk plan and some or all of the investors’ invested capital would have been lost if the plan had failed to mature early and the level of the indices had fallen significantly by the final observation date. It was also subject to counterparty risk.
Have you discussed your Will?
Following on from our article last month we reported that when it comes to talking about your Will with loved ones, 26% of people don’t want to discuss it because they do not want to think about dying. It is therefore not surprising that Royal London provided research showing that over six million adults refuse to discuss their Will with their loved ones.
Due to the emotive aspect of a Will, it is thought that many people simply fear talking about death in general and don’t want to think of a time when they will no longer be with their family. One conversation can ensure that beneficiaries are conscious of your wishes and ensure that they understand what you want to happen.
Why is talking about death seen as such a ‘taboo,’ why do people feel the conversation is better left unsaid?
Explaining to your executors and beneficiaries the contents of your Will can leave them better prepared for when the time comes. It is vital that you have discussed certain decisions in your Will with family members.
This is also hugely important when deciding who would look after your dependents should both parents with parental responsibility die. No parent would ever want to think of the possibility they would not get to see their children through to adulthood, but should such a situation arise, then it is crucial that the new guardian of the child is fully aware and ready to take on the role.
When deciding who will become legal guardian for your children there are many aspects which need to be taken into account. It is wise to consider some of the following;
- Will your children be happy with the decision?
- If you have two or more children will they be able to stay together?
- Does the intended guardian already have children? If they don’t then will they be able to cope with children coming into their lives? Would they have to change their work?
- Is the family home suitable for your children? The size of their family home is important if your children are likely going to have to move in with the family.
- Do they live close by? Maintaining stability is important
- Would your children have to move schools/location?
This is a traumatic time for any child and if they have to move to a different area and leave friends and familiar surroundings behind it can make the process even more difficult. With this in mind, it is concerning that 45% of parents with children believe that their Will is ‘no one else’s’ business.’
Often people who have a high net worth are unwilling to talk about their Will and how they want their estate to be distributed. Financial advisers have found that the number of clients who are willing to talk about their Will significantly decreases when there are large sums of money involved. Many people believe that if their beneficiaries know what they are set to inherit and what assets may be passed down then they may decide to stop working as hard or even give up work.
However encouraging clients to discuss their Wills with their loved ones will ensure that inheritance is used exactly as intended, for example paying for school or university fees.
Without a doubt money can be disrupting. Some individuals may wish to leave a significant amount of their wealth to a charity or good cause, which reduces the amount left to children or grandchildren. One of the most common conflicts between families occurs when probating an estate which has not previously been discussed. Communicating your wishes throughout your lifetime can eliminate resentment from beneficiaries and reduce tensions in an already stressful situation.
Discussing your wishes and your Will with family may be a daunting task but although difficult it is clear that it is an important conversation to have.