Cashing in on alternatives in 2014

Taking a step up the risk ladder means assessing your appetite for risk

It has been a torrid time for cash savers over the past five years. The Bank of England Base Rate has been on hold at its 300-year low of 0.5% since March 2009. Although there have been murmurings of a possible rise in interest rates on the horizon, savers should still explore all the options available to generate a return from their savings.

In a period of low interest rates and persistent inflation, people are beginning to realise that the purchasing power of their savings is being eroded, yet they are struggling to identify better ways to balance their short-term and long-term financial priorities.

This might mean taking a step up the risk ladder, but before venturing away from cash deposits, you need to assess your appetite for risk. Can you afford to tie your money up for a length of time, or will you need to be able to get your hands on it without delay? What is your ability or capacity to take risk? How much risk are you willing to take?

Shares

History suggests that returns from shares outstrip the returns from other assets, including cash, over the long term. Although past performance is not necessarily a guide to the future, investing in shares is an option for those who can withstand (both emotionally and financially) the ups and downs of stock markets.

You can invest in funds such as a unit trust, an OEIC (pronounced ‘oik’) or an investment trust. These funds invest in a number of shares and are managed by specialist fund managers.
There are blue-chip funds, tracker funds and mid-cap funds – and that’s only the beginning. All have different aims and performance can vary considerably from one type to another. Some will be aggressively managed, investing in a small, concentrated portfolio of stocks, while others may invest in recovery stocks – companies that have fallen out of favour with investors.

Remember the old saying ‘speculate to accumulate’? That’s very true of investing in shares, but you can position your investment at a level that you’re comfortable with. We can help you to review your options – generally the more you want to get back, the higher the risk to your original investment.

Bonds

Bond funds remain popular with more cautious investors looking for a better level of income than cash, and these range from the security of government-backed Gilts through to more speculative and higher yielding corporate bonds. Bonds are investments representing the debt of a government, company or other organisation.

Effectively they are loans, or ‘IOUs’ issued by these organisations and bought by banks, insurance companies, fund managers and private investors. The decision on which bond fund to choose can be a tricky one: different types of bonds perform differently depending on the economic conditions.

Property

Commercial property was badly tarnished by the property crash during the credit crunch – it left many investors who had turned to the asset class for the first time nursing substantial losses.
Historically, commercial property has had a place in a portfolio for income investors. Its long-term track record is strong, while it offers diversification from shares.

Investments into property funds may have restrictions on how often or how easily you can withdraw your money due to the nature of the underlying assets. An investment made directly into property may be difficult to sell and its value is a matter of opinion rather than fact.

Gold

Gold has long been viewed as a safe haven against volatile stock markets and inflation, as well as a hedge against a weak US dollar. In the current economic climate, gold continues to have merit as a store of wealth. Gold as an investment has grown in popularity in recent years, partly because of the risks posed to our modern global financial and economic systems.
There are a number of ways to invest in gold, be it via a unit trust or an exchange-traded fund or actually owning the gold itself in the form of bullion or coins. Gold is not without its risks though, and its value can fall.

Make the most of every available tax-planning opportunity

You’d better get your skates on with the end of tax year fast approaching

No one likes to pay more tax than they have to but one of the challenges of wealth is the high taxation it attracts. With real-terms tax increases the prospect for the foreseeable future the pressure is on to make the most of every available tax-planning opportunity.

Different ideas will suit different people but you’d better get your skates on. With the end of tax year fast approaching on the 5 April 2014, sorting out your finances now is vital. Please ensure that you take professional advice before acting. Here are some examples of the ways in which legitimate planning could save you money by reducing your tax bills:

Make full use of personal allowances and tax-rate bands

Whatever your top rate of tax, if you have some flexibility over the timing of income, consider arranging for investment income, earnings or profits to fall into a later tax year. So long as this doesn’t increase the rate of tax you pay, deferring income may mean you can delay when you have to pay the tax.

Maximise your pension provision

Pension tax relief is due to be restricted yet further from 6 April 2014, so do you need to maximise your contributions now to make the most of your annual and lifetime allowances? Currently the annual pension contribution allowance is £50,000 but will reduce to £40,000 from 6 April 2014. The lifetime allowance will also be reduced, from £1.5 million to £1.25 million but many people may now find their chance to build their pension ‘fund’ up to the lifetime maximum restricted.

Take advantage of tax-efficient investments

There are a number of tax-advantaged investments of varying complexity. Individual Savings Account (ISA) allowances provide a tax shelter for income and capital gains. The 2013/14 limit is £11,520 per person but, if not used, the allowance is lost.

Junior ISAs are also now available which enable parents and grandparents to save up to £3,720 a year tax-efficiently for their children or grandchildren who were ineligible for child trust funds.

Enterprise Investment Schemes (EIS) can have significant advantages such as 30% income tax relief, capital gains tax exemption, a capital gains shelter and potential relief from inheritance tax after 2 years.

Venture Capital Trusts (VCTs) also offer 30% income tax relief and exemption from both income tax on dividends and capital gains tax.

Make full use of Capital Gains Tax (CGT) reliefs and exemptions

Individuals have a CGT-free allowance of £10,900 in the current tax year. If you have not realised gains of this amount, you should look at whether assets can be sold before 6 April 2014 to take advantage of this tax-free amount. If you are married or in a registered civil partnership and want to realise a gain on shares to use up the exemption, but want to keep the benefit of those shares in your family, your spouse or registered civil partner can buy back a similar number of shares to those sold –although a direct sale or gift to your spouse or registered civil partner will not achieve the desired result. If your relationship is not formalised by marriage or registered civil partnership, a gift to your partner will achieve the same result without the need to incur dealing costs.

Reduce CGT charges from 28% to 18% or 10%

If you own assets on which you qualify for Entrepreneurs’ Relief (ER) you can claim to pay a reduced rate of 10%. This relief is subject to certain criteria being met for at least a year and there is a lifetime limit of £10 million, so it is extremely important to ensure your assets qualify for this relief where possible.

Use CGT losses to the full

If you already have taxable gains, review your other assets to see if you can crystallise losses to reduce the gains on which you pay tax. If you do this, take care only to realise enough losses to reduce your gains to below the level of the annual exemption. If you have made losses that you don’t need to set off against this year’s gains, you should still claim them.

Ensure wills are up to date

You should ensure that your will is up to date and reflects your wishes. The will should be written in a way that both minimises tax and gives your family flexibility and protection in the future, for instance, by using tax-efficient trusts. Trusts may enable your heirs to make more tax-efficient plans than if assets were put into their hands absolutely, as well as helping to protect assets.

Make full use of allowances and reliefs

Inheritance Tax (IHT) allowances and exemptions to be aware of include:

£3,000 annual allowance and any unused allowance from last year

£250 per individual donee

gifts in connection with marriage

lifetime gifts that are ‘normal expenditure out of income’

Take advantage of IHT-efficient investment structures
There are numerous types of structure that offer the ability to reduce your estate for IHT purposes whilst still retaining the benefit of income or underlying capital. The amounts can be adapted to your personal needs and wishes and, for some of these investments, a portion of the amount transferred reduces the value of your estate immediately.

The Financial Conduct Authority does not regulate taxation & trust advice or will writing.

Navigating a shifting landscape

Prioritising short-term needs as opposed to long-term goals

Recent years have brought tremendous change around the globe, change that affects us all. People are trying to navigate this shifting landscape, but it’s not easy.

In the first Investor Pulse survey conducted by BlackRock, half (50%) of the people surveyed said they feel in control of their financial futures and are confident they are making the right savings and investment decisions. However, this means that many (50%) may still need to take steps to achieve their financial goals.

The long-term impact of inflation

Only 19% describe themselves as ‘active investors’, with the majority choosing to hold their assets in what are perceived to be ‘risk-free’ assets, notably cash, often unaware of the long-term impact that inflation may have on their purchasing power (i.e. what they can buy with their money).

Tomorrow’s retirees aspire to an active lifestyle

As more people look forward to a lengthy retirement, expectations about retirement lifestyles are rapidly changing. Aspirations for an active retirement are very strong as people expect to travel more, take frequent exercise and take up new hobbies.

Working patterns in particular look set to undergo massive changes: whereas one in ten of current UK retirees combine work and retirement, this figure is set to rise with 30% who see ‘continuing to do some paid work’ as a retirement goal.

Biggest current financial priority

‘Funding a comfortable retirement’ came up as the biggest current financial priority for the people surveyed. However, there’s a gap between people’s retirement goals and their confidence in achieving them. Only four in ten (41%) of UK adults are confident that they will achieve the retirement lifestyle they aspire to.

The simple problem is that many are prioritising short-term demands over long-term planning, with retirement suffering greatly because it is such a distant goal. Over half of people in the UK (53%) admit to not saving anything specifically for retirement. That number remains the same among those aged 35-54, typically the age at which earning power should peak and planning for retirement should become more of a priority, especially as people are living longer.

A better financial future

People are adopting a broad range of positive aspirations for their later life, but it is clear that savings and investments behaviour often falls short of what is required to meet these aspirations. Over half claim to take their financial planning seriously, yet much of this planning is focused on meeting short-term goals.

Spending is often prioritised over long-term savings. Even where individuals are taking steps on the journey towards a better financial future, the sense of concern among savers and investors means that half of all people remain very much risk-averse. Also cash is seen as the asset class of choice.

Source:
[1] BlackRock Investor Pulse survey, conducted in association with research agency Cicero Group in September 2013 amongst a nationally representative sample of 17,600 individuals in 12 countries aged 25 to 74 years old, of which 2,000 were UK residents. The results of this survey are provided for information purposes. The conclusions are intended to provide an indication of the current attitude of a sample of citizens in the UK to saving and investing and should not be relied upon for any other purposes.
You should be aware that moving out of cash in search of higher returns will involve accepting a greater risk of capital loss. There are no guarantees that financial market investments will provide an effective way of combatting the impact of inflation on your savings. Past performance is not a guide to future performance.