After October’s turmoil, the great autumn sale begins!

As you are doubtless aware, October has been a difficult month for global stock markets but sometimes corrections such as these can present buying opportunities. The following article by Holly Black is taken from the Money Section of yesterdays’ Sunday Times.

“A worldwide stock market sell-off means you may get more for your money if you buy now

October may have been a monstrous month for the stock market, but that means now may be a great time to put more money into your investments.

The FTSE 100 index suffered its worst month since August 2015 with a 4.7% fall. Markets around the world fared even worse. America’s S&P 500 dropped 6.9% — its worst month since September 2011. In Japan, the Nikkei sank 9.6% and China’s Hang Seng index fell 10%.

The sell-off was driven by a number of concerns, including interest-rate rises in America, the winding down of quantitative easing, Brexit and the trade war between America and China.

However, anxious investors should think again if tempted to stash their cash under the mattress. Experts say this could be the perfect time to stock up on shares.

Ryan Hughes, head of funds at the investment supermarket AJ Bell, said: “Some investors will have checked their investment account balances in October and panicked, but it’s crucial to remember you are investing for the long term and have time to ride out these ups and downs.

“This has been a timely reminder, after a record bull run, that stock markets can go down as well as up.”

Investing money when stock markets are falling may seem counterintuitive. However, provided you believe in their long-term prospects, it is like shoppers getting a bargain in the sales, because the shares you are buying now were more expensive a month ago.

If you quit the market now, you are crystallising losses.

David Coombs, manager of the Rathbone Strategic Growth fund, said: “ ‘Buy low’ is a pretty basic investment philosophy. We look at companies we already invest in and, if we still think they’re just as good as they were a month ago, we just buy more at a cheaper price.” He has been putting more money into American giants such as Amazon, Visa and Mastercard, as well as the British sales and marketing company DCC. Coombs also likes video-game makers, including Electronic Arts, home of the Fifa series and The Sims.

His fund is down 4.4% over the past month but up 22.8% over three years.

Nathan Sweeney, senior investment manager at the funds firm Architas, has taken the opportunity to put more money in US tech giants. The share price of Amazon and Netflix plunged by about 20% last month. Alphabet, the owner of Google, fell 10% and Facebook 8%.

Sweeney said: “You just have to work out the reason for the sell-off and whether there’s anything to actually be concerned about. People will continue to use search engines and social media regardless of the economy, so there’s no reason not to invest in these firms.”

Sweeney likes the Artemis US Extended Alpha fund, which is down 5.3% over the past month but has returned 67.9% over three years. Its big holdings include Microsoft and Apple.

Alex Wright, manager of the Fidelity Special Situations fund, is a contrarian investor, buying the shares that others hate. His current top holdings include Lloyds Banking Group, the oil giant Royal Dutch Shell and the struggling education group Pearson. The fund fell 6.7% over the past month but is up 29% over three years.

Wright said: “I am feeling increasingly positive about the outlook for the UK market, and the reason for that is chiefly how negative everybody else seems to be.” Investors still need to be selective, though. Coombs said the key, during a sell-off, is to add to investments you already hold rather than gambling on risky, new names just because their share price has plunged.

October is historically a rollercoaster ride for investors. Some of the biggest stock-market crashes have occurred during the month, including Black Monday in 1987, when the FTSE 100 plunged more than 20%. In October 2008, when the financial crisis took hold, the index of Britain’s biggest public companies fell by 12% over the month.

Staying invested during such tumultuous periods means you benefit when share prices recover.

Setting up a regular savings plan is a good way to ensure you are in a position to reap the rewards.

Hughes at AJ Bell said: “Even professionals struggle to time the stock market, so investors who think they can predict exactly when it will rise and fall will find it’s nigh on impossible and they will probably miss out on returns by trying.”

Investing every month has the added benefit of pound-cost averaging. You end up getting better value for money from investments over the long term because your money buys more shares when they are cheap and fewer when they are expensive.

Coombs said: “I can’t predict what is going to happen in the stock market but I can ignore all the noise from people saying we’re all doomed.”

As always, if you have any questions on this subject or indeed on any other finance related matter, please do not hesitate to call me.

With kind regards,

Yours sincerely

Graham Ponting CFP Chartered MCSI

Managing Partner

Sunday Times Article – 14th October 2018

The following is taken from an article by Ian Cowie, writing in the Money section of the Sunday Times this weekend, I thought you might find its central message reassuring:

“Short-term stock market shocks are very harmful for day traders or speculators but need not necessarily matter much to medium and long-term investors. At times like these, it may pay to remember that shares reflecting the changing composition of the London Stock Exchange delivered higher returns than cash over three-quarters of all periods of five consecutive years since 1899.

In plain English, that means if investors could hang on for five years, they had a 75% chance of beating bank deposits, according to comprehensive analysis in this year’s Barclays Equity Gilt Study. Despite much worse setbacks than the current crisis — such as the Great Depression and two world wars — shareholders who remained invested for a decade had a 90% probability of beating deposits.”

Here is the link to the full article:

https://www.thetimes.co.uk/article/ian-cowie-october-can-hurt-but-ride-out-its-storms-and-things-should-look-up-3ncsmptxs?shareToken=4bcec7d870b5667b3ab1b2d96f1e831d

As always, if you have any questions on this subject or indeed on any other finance related matter, please do not hesitate to call me.

With kind regards,

Yours sincerely

Graham Ponting CFP Chartered MCSI

Managing Partner

It’s been a wild week for stocks!

In case you hadn’t noticed, stock markets across the world have been experiencing some wild gyrations (Financial Adviser speak for plunging) over the past week or so. The US markets have suddenly woken up to the fact that a trade war with China is probably not a good idea and that the Federal Reserve is intent on increasing interest rates to cool the US economy. President Trump has said he thinks the Fed has ‘gone crazy’, pots and kettles anyone? He did also say that the large falls in markets over the last couple of days have been expected, as markets cannot keep going up unchecked and I wouldn’t disagree with him there.

The UK markets, which are already being constrained by uncertainty over Brexit, are not immune from wider global concerns and inevitably they have headed south in line with the US and Asia. The FTSE 100 has now retreated to where it was in late March at around 7000.  

In view of this continuing turbulence, I thought you might find the following article interesting; it is by Heidi Chung, a reporter at Yahoo Finance:

 “Initially, lower-than-expected Consumer Price Index (CPI) data sent interest rates lower and stocks higher in early trading on Thursday before stocks pared those gains and took another dip lower. 

This comes after a brutal session on Wednesday, when the S&P 500 (^GSPC) tumbled more than 3% — its worst one-day drop since February — and the Dow (^DJI) fell more than 800 points. The S&P 500 is now on pace to close in the red for the sixth consecutive day. 

But one market strategist says not to fear the market volatility in October.

“October should be known for volatility, as no month has seen more 1% changes (up or down) for the S&P 500 Index going back to 1950,” Ryan Detrick, senior market strategist at LPL Financial said in a note on Thursday.

Volatility is normal in October, according to LPL Research (LPL Research, FactSet).

The S&P 500 actually had one of its least volatile third quarters in history, and had gone 74 consecutive days without a 1% move, so some type of volatility was likely, according to Detrick.

These kinds of pullbacks are normal, he says. “Even though stocks tend to average a 7%–8% gain each year, they also tend to have three to four pullbacks each year (5%–10% drops) and at least one 10%–20% correction. We got both earlier this year, but history tells us we may get more,” Detrick said.

He attributes the recent volatility to the upcoming midterm elections and the spike in interest rates but remains optimistic.

“Given the fundamentals, we expect the markets to weather this recent volatility, and we see potential for a year-end rally,” Detrick explained.”

As a reminder, we have recently added some presentations to the website, which I hope you will find helpful in gaining a better understanding of our approach to investing. Please just click on the titles below and you will be taken to the relevant presentation. Hard copies of these are available on request.

Pursuing a Better Investment Experience

UK Bias Portfolios - Performance Report

UK Bias Portfolios - Global Financial Crisis (2007-2009)

As always, if you have any questions on this subject or indeed on any other finance related matter, please do not hesitate to call me.

With kind regards,

Yours sincerely

Graham Ponting CFP Chartered MCSI

Managing Partner

A gentle reminder of why one should stay focussed on the long-term during periods of uncertainty!

Many of you will have noticed that financial markets having been through some turbulence of late, the FTSE 100 having fallen from 7,776 on 8th August to just 7,282 as I type, on 10th September, a fall of 6.35%. These falls are largely as a result of the strengthening pound, which in turn has been caused by positive news around Brexit, not that you would necessarily have guessed this from the media!

As a result of this volatility, I thought now might be a good time to issue a reminder of how important it is not to be distracted by short-term events.

The following charts show how a selection of the Clearwater Portfolios (constructed by Evidence Based Investments) have performed over the past few months but also over some longer time periods.

3 Months to 7th September 2018

 12 Months to 7th September 2018

5 Years to 7th September 2018

20 Years to 7th September 2018

The thing that stands out is, although there have been dips from time to time and some of them very sharp, there has always been a subsequent recovery. With every portfolio, the graph always ends up going from bottom left to top right, provided one is sufficiently patient. There is always something in the news that is causing the markets to move in one direction or another but over the longer-term these short-term issues fade into the background and appear just as ‘noise’ on the long-term charts.

We have just added some presentations to the website which I hope you will find helpful in gaining a better understanding of our approach to investing. Please just click on the titles below and you will be taken to the relevant presentation. Hard copies of these are available on request.

Pursuing a Better Investment Experience

UK Bias Portfolios - Performance Report

UK Bias Portfolios - Global Financial Crisis (2007-2009)

As always, if you have any questions on this subject or indeed on any other finance related matter, please do not hesitate to call me.

With kind regards,

Yours sincerely

Graham Ponting CFP Chartered MCSI

Managing Partner

The irresponsible absurdity of new longevity theories

The following is taken from a blog written recently by a friend of mine, Abraham Okusanya, I thought you might find it interesting.

“Ancient scholars would have us believe Methuselah lived to a staggering 969 years, making him the oldest person in history. Little wonder the name became synonymous with longevity.

British gerontologist Aubrey de Grey coined the term “Methuselarity” – a blend of Methuselah and singularity – to describe a future where all medical conditions that cause human death would be eliminated.

Grey is vice president of a US-based biotech firm that applies technology to curing age-related diseases. He believes medical technology will eventually lead to human death only occurring by accident or homicide.

If any of this sounds like science fiction to you, you are not alone. While I do fancy being immortal, the reality of this in my lifetime is rather far-fetched. After all, median life expectancy at birth has increased by about 25 years within the last 100 years.

So, imagine my reaction when it was suggested at a recent event I attended that people in their 60s today should expect to live to 150, and that we should somehow account for this kind of extreme longevity in retirement planning.

This absurd argument is also used as a reason why buying an annuity should be favoured over a sustainable withdrawal framework for drawdown. What the salesperson often fails to mention though, is that, in the event people in their 60s today do live to even 120, annuity providers themselves will be in serious trouble.

An annuity is not a magic money tree. If today’s average annuitants live well beyond their current life expectancy, providers would see their liability grow enormously. So will defined benefit schemes.

Remember, we are not talking about a few years increase here, we are talking 30 to 50 years improvement within a very short period. And presumably, if people start to live that long, they will delay annuity purchases, which makes it harder for life cmpanies to subsidise old rates with new ones.

What is more, since over 90 per cent of annuity purchases are not indexed-linked, inflation will do untold damage to income for people over a 40 or 50 year retirement period. An income of £10,000 per annum in 1977 had the buying power of £1,955 by the end of 2017 – a reduction of 80 per cent using CPI.

The point I am making is that, while there are several good reasons for buying an annuity, sci-fi scaremongering around extreme longevity is not one. Neither annuities nor drawdown would be a failsafe edge against such a risk.

The sustainable withdrawal framework already accounts for the tail-end of longevity risk. This involves planning to an age where the client has only between 10 to 20 per cent probability of surviving, based on the Office for National Statistics mortality projection.

Under the sustainable withdrawal framework, a 65-year-old should be planning to age 95. An inflation-adjusted withdrawal of £3,000 from a £100,000 portfolio of 60 per cent global equity and 40 per cent bonds lasted from age 65 to 100 in 80 per cent of historical scenarios between 1900 and 2017. And, yes, that is after accounting for 1.5 per cent in fees.

In any case, if the medical technology was to become so profound as to improve longevity significantly, is it such a leap to think this will result in longer working lives and retirees, now cured of their ailments, being able to return to the labour market?

What is more, the technology that drives this sort of improvement will presumably deliver handsome returns for those invested in the capital markets, of which a drawdown investor is one.

Good retirement planners already account for reasonable longevity improvements. But obsessing over the likelihood of extreme longevity is unhelpful and does not aid financial planning in any way”.

As always, if you have any questions on this or indeed on any other finance related matter, please do not hesitate to call me.

With kind regards,

Yours sincerely

Graham Ponting CFP Chartered MCSI

Managing Partner

Advance Notice – New Secure E-mail System

Following the introduction of the new General Data Protection Regulations (GDPR) we have decided to send all future e-mails which contain personal and/or potentially sensitive data in an encrypted format. This is to ensure greater security of your personal information but the impact on you will be minimal.

E-mails you receive from us, that we consider contain personal and/or sensitive data, will now initially look like this in your Inbox:

In order to read our message and to access any attachments, you will need to:

1. Click on Read my message in the e-mail you will have received.
2. You will then have the option to view in Web Browser or download the Mailock App.
3. You will need to complete a very simple sign-in procedure – You will only need to do this once!
4. You will then be asked a security question which has been set by us to identify that you are the intended recipient – You will also only need to do this periodically.
5. You will then be able to read and reply as normal.
6. You will also have the option to compose and send secure e-mails to us, if you wish.

We do appreciate this is an extra step in what is normally a very straightforward process, however, we believe the security of your personal information is of paramount importance.

If you experience any difficulties in opening our e-mails using this new process, please do contact us immediately.

For your information, I will be away on a family holiday now until 27th July, however, Adam and Denise will be here should you have any urgent queries and I will be reading my e-mails (encrypted or otherwise) whilst away!

With kind regards,

Yours sincerely

Graham Ponting CFP Chartered MCSI

Managing Partner

Where has £17.5bn of pension freedoms money gone?

This is a follow up to an e-mail on Pension Freedoms I sent to you all around about 10 days ago. In that communication I was highlighting the results of a study which showed that retirees were not recklessly spending their pension funds, just because they now had unfettered access them. The following tells us where the money that has been withdrawn has been spent (or in some cases not spent), I found this interesting:

About £3bn that has been flexibly withdrawn from UK pensions is currently sitting in low yield bank accounts, with investors facing the “double jeopardy” of tax on withdrawals and low returns, according to research by AJ Bell.

Research conducted by FWD on behalf of AJ Bell has shed light on what has happened to the £17.5bn that has been flexibly withdrawn since pension freedoms began in April 2015.

The research, released on 26 June, surveyed 370 people who have accessed their pension flexibility since April 2015.

Bizarre and surprising

One of the research’s key findings was that despite pensions being designed to fund life in later years, only a quarter (£4.7bn) of withdrawals had been used to fund day-to-day living.

AJ Bell said one the most “surprising” results was that £3bn is “languishing in low yield bank accounts”.

A further, £1.6bn has “rather bizarrely” been withdrawn from pensions to invest in other products such as ISAs.

A whopping £2.3bn has been spent on luxury items such as holidays, cars and home improvements.

‘Sensible’ spending

On the more positive side, £2.9bn had been used to pay off debts and reduce interest payments.

Despite stories of boozing and gambling, only £245m had been spent on entertainment such as eating out, season tickets or gambling, AJ Bell said.

Politics over practicality

Tom Selby, a senior analyst at AJ Bell, said regulators and policymakers have been playing catch-up since chancellor George Osborne first introduced pension freedoms.

“The pension freedoms, while hugely popular, were undoubtedly announced with politics rather than practicalities in mind. Because the reforms were almost entirely untested, it has taken the Financial Conduct Authority (FCA) a while to build a picture of consumer behaviour and recommend any possible market remedies.”

He said while the FCA’s interim report concluded most people are not squandering their hard-earned pensions, there is evidence some people are making poor retirement decisions.

“For example, 17% or £3bn of withdrawn pension money has been shoved straight into a bank account.

This might not be a problem in the short-term – indeed it makes sense to have some ready-cash available in most cases – but it almost certainly isn’t an advisable long-term investment strategy, particularly with interest rates at record lows and inflation returning to the UK economy,” he said.

One solution being proposed, Selby says, is for people to be given help through a ‘mid-life MOT’ in order to assess their retirement income strategy, “although this will require buy-in from both politicians and the regulators”.

This is me again! One major issue that is not mentioned above, is the fact that in most cases pension assets remain outside of one’s estate for Inheritance Tax (IHT) purposes, whereas, once moved into an ISA or a Bank A/C these funds become potentially liable to IHT at 40% on death!!! By all means withdraw money from your pension if it is your intention to spend it and you have no other source of funds, otherwise it is usually better to leave as much money within one’s pension wrapper as possible, for as long as possible. In your pension, the funds grow free of income tax, free of capital gains tax and they remain outside of your estate for IHT!

There are some potential income tax considerations for beneficiaries, if death occurs after age 75.

As always, if you are unclear on this or if you have any concerns about your financial arrangements and whether you are truly making the most of your money, please do not hesitate to call me.

With kind regards,

Yours sincerely

Graham Ponting CFP Chartered MCSI

Managing Partner

Retirees not recklessly spending pension wealth!

Ever since the Pension Freedoms were announced in 2015, there have been concerns that many people would simply cash in their retirement savings and squander the money. A recent study however, suggests that this is far from the truth.

Older people are holding onto their savings and are reluctant to spend money impulsively, according to research from the Institute for Fiscal Studies (IFS).

A survey published on 11th June 2018, looking at how individuals use their wealth once they retire finds many are not drawing down as much wealth as they could.

It says, on average, individuals will draw down just 31 per cent of net financial wealth between the age of 70 and 90.

Even among individuals in the top half of financial wealth distribution, net financial wealth appears to be drawn down by just 39 per cent, on average.

The IFS suggest this wealth, whether held in housing or in financial assets, is likely to be passed on to later generations.

However, inheritances will typically only be received at relatively older ages and so someone currently aged 40 might expect to receive a bequest from their parents at age 63.

IFS associate director Rowena Crawford says the way wealth is inherited will have implications for the level and distribution of resources among current working age individuals, particularly those with wealthy parents and few siblings.

Therefore, the increased freedom people now have over how they spend their pension wealth in retirement will require careful monitoring, she adds.

Royal London policy director Steve Webb says: “This report confirms that the vast majority of pensioners who have saved through their working life are cautious with their money and leave unspent wealth at the end of their lives.

“This is great news for those who believe in pension freedoms. The IFS research suggests that the biggest concern about pension freedoms is likely to be about excessively cautious retirees spending too slowly than it is about reckless retirees blowing their pension savings on lavish living.”

The key takeaways for me from the above are as follows:

1. ‘Individuals will draw down just 31 per cent of net financial wealth between the age of 70 and 90.’
2. ‘Someone currently aged 40 might expect to receive a bequest from their parents at age 63.’

Regular visitors to my office will know I stress these points at virtually every client meeting. The whole point of proper financial planning is to ensure that you are able to enjoy the best lifestyle possible, within your means and if your primary objective is to help your children, to enable you to do this before you die and the children are really too old to benefit! A robust Lifelong Cashflow Model should be able to give you the confidence to make these hugely important decisions.

As always, if you have any concerns about your financial arrangements and whether you are truly making the most of your money, please do not hesitate to call me.

With kind regards,

Yours sincerely

Graham Ponting CFP Chartered MCSI

Managing Partner

As the late Jim Bowen might have said, “Look at what you could’ve won!”

Financial management is not normally a particularly humorous subject but I hope you will enjoy the video below, produced by a fictional US firm called ‘Hindsight Financial’!

Click here

I do hope our advice proves rather more helpful!

As always, if you have any concerns about your financial arrangements and whether you are truly making the most of your money, please do not hesitate to call me.

With kind regards,

Yours sincerely

Graham Ponting CFP Chartered MCSI

Managing Partner

Taking income under ‘Flexi-Access Rules’ from a Personal Pension – for the first time!

As you are probably aware, since April 2015, it has been possible to take as much as you like from your pension (assuming it is a defined contribution plan and the provider has amended their rules) and, at any time once you are age 55 (in most cases).

However, determining how much tax will be deducted by the pension provider can be quite a challenge. A number of our clients have been unaware of how the tax rules are applied; I hope the following guidance will provide some clarity around this issue.

Income can be withdrawn from appropriately flexible schemes either under Flexible Drawdown or by taking an Uncrystallised Fund Pension Lump Sum (UFPLS). In both cases tax will be due on any income (although not the pension commencement lump sum component, which is paid tax-free) at the recipient’s marginal rate of income tax. The amount of tax deducted by the provider is processed under the Pay as You Earn (PAYE) scheme but the amounts deducted can sometimes provide an unwelcome surprise.

What happens when income is first taken?

If the pension scheme does not hold an up-to-date tax code and the individual does not have a P45 for the current tax year, the scheme administrator must tax any payment under the emergency tax rules. Where this is the case, it is assumed that the amount being withdrawn will continue to be paid each month, even if it is a one-off payment. This is known as the ‘Month 1’ basis and the administrator will apply 1/12th of the personal allowance to the payment and 1/12th of each of the income tax bands to the extent that they apply.

UFPLS Example:

£20,000 withdrawn, of which £5,000 (25%) is Tax-Free Lump Sum and £15,000 is income.

£ 987.50 (£11,850 / 12) taxed at 0% =             £0

£ 2,875.00 (£34,500 / 12) taxed at 20% =        £575

£ 9,625.00 (£115,500/12) taxed at 40% =        £3,850

£1,512.50 taxed at 45% =                                 £680

Total Tax Paid =                                                 £5,105

So, the £15,000 income has an effective tax rate of 34.03%.

Shortly after making the payment, the pension provider would normally receive an updated tax code from HMRC to use against any other income payments in the tax year and can usually help to address any overpaid tax.

However, this will not immediately recover any overpaid tax for clients who do not intend to take any more income during the tax year. Ordinarily, they would need to wait until the end of the tax year to claim back the over-paid tax.

On the other hand, it is also possible that income is paid from other sources that also use up the Personal Allowance or other income tax thresholds. In this scenario, using the emergency code will mean that more tax is due on the payment and this could increase the amount of tax deducted on future payments.

If there are no further income payments, any refund due can be claimed at the end of the tax-year, although this may require the completion of the self-assessment tax return. Alternatively, it is possible to submit an “in-year” claim from HMRC using the relevant claim form:-

• P50Z – For withdrawals that exhaust a pension fund and the client has no other sources of income.
• P53Z – For withdrawals that exhaust a pension fund and the client receives income from other sources.
• P55 – For use with a partial withdrawal of a pension fund and where there will be no further withdrawals in the current tax year.

One way to avoid such nasty tax surprises is to request the scheme administrator to make a nominal payment (up to £988 gross) prior to the main withdrawal. The small payment will be taxed on the emergency basis but will not attract any tax if below £988. The pension administrator’s provision of Real Time Information (RTI) PAYE data to HMRC usually triggers a revised tax code to be issued shortly after this payment and this code can be applied to future payments. This will avoid the need to apply the emergency code to the main withdrawal (although, please note, that the revised code could also be issued on a Month 1 basis).

The main point of note here is that, if a large withdrawal is required and it is intended to use the mechanism above to avoid a tax headache, more notice of intentions will be required.

Lump Sum vs Annual Payment

Where a one-off lump sum is taken, and the provider is not operating a Month 1 tax code, the Personal Allowance available to that point in the tax year can be applied to the extent it has not been used by earlier payments. If, however, the intention is to only take one payment during the tax-year, it can be requested as an annual payment. In this scenario, the whole personal allowance for the year can be applied, thus saving the need for any later reclaims.

I appreciate the above is a little complicated but if you are planning on making a withdrawal, please contact either myself or Adam and we will be happy to provide some guidance. Please do not be alarmed by any of this, it usually is a fairly straightforward process and with enough notice, it can be managed quite easily.

As always, if you have any concerns about your financial arrangements and whether you are truly making the most of your money, please do not hesitate to call me.

With kind regards,

Yours sincerely

Graham Ponting CFP Chartered MCSI

Managing Partner