Loz Gee

Good morning everybody and a very, very warm welcome to our markets and decumulating wealth webinar. I hope you’re well this morning. Just to put a bit of small print on the screen. I’ll leave this here for a couple of minutes for you to have a quick look through our disclaimer.

Loz Gee

Excellent. So good morning. You’ll see our agenda here. What we like to do for those that don’t know is just do a little bit of a team intro so you can get to know us a little bit more and then we have Tim who will be running through a decumulation session. Ben Wattam who’ll be running through an investing session. Please do along the way post any questions that you have for us. I’ll keep my eye on those, and we’ll have a session towards the end where we’ll address these questions and then we’ll just wrap up towards the end. So a little bit about us. This is the picture that we had taken recently of us. It was a nice sunny day. On the far left, we have Neil Wattam, then we follow with Tim Kirby myself, Adrian Mee and Ben Wattam there. We’re quite a close-knit group and we don’t intend on growing massively as a team. We want to keep that personal touch and stay as a close-knit team. We are independent advisors and investment managers and the four founders of the business everybody minus myself have had plus 60 years in the financial services industry. We focus on financial planning, pension consultancy, accounting, audit and tax Planning and Investment Management. We really love what we do. We love that personal touch we have with each of our clients, and we hope they feel that too. We come to work really keen to understand what the markets are doing and how we can help our clients whether that’s going on more holidays, planning for the future, just making sure that we really increase asset value for our clients. So over to Tim now for a decumulation session. Enjoy.

Tim Kirby

Hi, good morning, everyone. Thank you for coming along this morning and thank you Loz for the introduction. So today we’re going to talk about decumulation and what I mean is how we’re going to fund life, either post work or as work slows down from the asset base that we’ve worked hard to build up during probably the working life. There is a big but in terms of decumulation. And for us, it’s very much objective lead, it’s understanding what people want to achieve, when they want to achieve it, what they’d like to do, and really get into the nitty gritty. When will this start and how much they need in order to enjoy life without the stresses and strains of that nine to five or whatever that working situation looks like. One of the things we need to really touch on with people is, will it last? If what we’ve got and what we want to take out is going to continue, when will I run out of money or we I run out of money, will it achieve my objectives from where I am. The next two bullet points are the two things that we work really hard with clients in order to try and achieve as best possible and one of them is tax efficiency, we all want to see our assets work hard for us and draw money out of them in the most tax efficient way possible ie what we draw out we pay as little tax as possible. The next bullet point managing liquidity is something I’m going to touch on a bit later but it’s very much trying to avoid being a forced seller, nobody wants to have to sell at a point when asset prices aren’t where you’d be comfortable with them and a lot of the work we do behind the scenes is to avoid that need to be that forced seller. Working with clients, it’s very much putting in place a plan in order to decumulate assets. But that’s not a one stop shop, it’s very much put the plan in place and then test review, repeat constantly going back to that situation, and ensuring it continues to meet those objectives that we’re talking about with clients in every time we sit down with them. One of the keys to decumulation is cashflow planning. So we use some software, which allows us to build models with clients, we can try and predict what the future could look like. Now, it’s never going to be a perfect situation because life isn’t as straightforward as a model would perhaps suggest but really it’s to try and open the eyes and say, what could the future look like? And what can we do to enhance that or to change the future for the better. We then have to stress test this, as I said, life isn’t a straight line. You know, we have curveballs thrown in, very much over the last 18 months there has been a huge curveball with COVID-19 and the market movements that happened back in March, April last year. But also, people have curveballs they have births, deaths, marriages, etc, etc. So we’ve got to stress test any model that we put in place and add some ‘what if’ scenarios, I sat down with a client a couple of weeks ago, and we were going through their model, and we were talking about well, actually, what if we want to buy a new car in three years time or we want to change our kitchen. So we got to include all of these what if scenarios into any planning that we do to make sure that it’s as robust and thorough as possible, and very much building up multiple sources of income. Tax laws change over time, the chancellor will stand up towards the end of this year and who knows what he’s going to announce but we can pretty much be guaranteed that over the course of this process of decumulating assets there’s going to be changes to legislation and we need to be flexible to have the ability to cope with the changes thrown at us.

So what I want to do is go through a fairly simple example and just show how assets can be decumulated in many different ways but looking at a non advice solution, and then one where we would sit down with clients and try and achieve those bullet points that I alluded to earlier. So in this situation, we’ve got a husband and wife, they’re about to turn 60 and they’ve had enough, they want to call it a day from the working life and enjoy what retirement looks like for them. They want to retire as soon as possible, and they’re targeting an income of £3,000 net per month but they want to include some inflation proofing in this, i.e. that their incomes going to hopefully keep pace with the increased cost of living throughout their lifetime. Ideally, if possible, they’d like to leave a legacy to the next generation. So when they are no longer here, they’d like some of their assets, if at all possible, to cascade down through the generations but that’s a secondary objective for these guys, it’s very much targeting that £3000 income that’s prevalent and the most important part for them. They’ve saved hard during their lifetime and they’ve built up pensions of £350,000 and 3150,000, which is a fantastic achievement and also, they’ve utilized ISA allowances over the years and built up some cash ISA’s, and have a cash base as well outside of that. So a good strong balance sheet to start with, and one that they then want to make work hard as possible in order to achieve their ongoing goals. They’ve worked for long enough that they know from age 67, they’ll have full state pensions. Historically they’ve been a middle of the road, from an attitude to investment risk perspective in respect to their pensions, their invested assets. So quite typically, people with pensions with mainly insurance companies, they’ll get what’s called a wakeup pack, a period of time before they reach their retirement age and then as they’re looking to start drawing benefits from their pensions, the insurance company will send out a big wedge of paperwork with some options and in the main those options will be for the purchase of an annuity, and many people will just follow down that process. From a non advice perspective, this couple received that pack of paperwork, they look through the options and as we know, with pensions legislation, up to a quarter of the pensions can be taken tax free. So it’s tax free, and it’s now available, so why wouldn’t you and this couple have identified that actually, the chances are that one of them will unfortunately pass away before the other one and they want to provide some protection, i.e. they want to include a spouse’s pension, so that the pension continues to the survivor on first death. But they haven’t included any inflation protection in this. Inflation protection within annuities is expensive and for a joint life annuity with a 50% spouse’s pension, the current rate for 60 year olds is about 4.01%, it would go down markedly if they did include inflation protection, hence, very few people do select that route.

In terms of this couple, they’re quite comfortable in this situation to spend capital to supplement any income shortfall during their retired life. So using a model, we want to look at what that looks like from firstly, an income position and secondly, we’ll come on to the capital position. We can see along the bottom axis, we’ve got the years throughout retirement from where they are at the moment at 59, shortly to turn 60, all the way up to age 99. Hopefully, they’re still around at this point and therefore that’s something that we need to plan for that longevity. And at the side there, we’ve got the level of income that they’re going to generate throughout those years. The thick black line that runs horizontally through the screen here is that £3000 per month, £36,000 per year. And important to know that anything that runs level across the screen means it has inflation protection, so it’s always going to be worth £36,000 in today’s monetary terms. Where something hasn’t got inflation protecting you’ll see the inflation cost of that income will erode it over time, and therefore it will decrease. We can see in the first year that actually they’ve got oodles of income, that tax free cash that they’ve taken out of the pensions, this orangey mustard and green line here means that their income is significant in that first year and we can see the blue and red bars which are the annuity income. As I said, they’re not inflation proofed. So you can see the inflation cost eroding away at the value of that. So throughout the first sort of six or seven years of retirement up to state pensions kicking in, these light green bars are where they’re spending capital. So they’re overspending from the income that they’re generating from their assets. Once state pensions kick in situation gets significantly better in that the two state pensions are a good chunk of income, as you can see their level because state pensions benefit from the triple lock at the moment and the annuity income changed colour because I’ve changed the tax position because they will have some income tax to pay on those annuity incomes on top of the state pensions post that age, but you can still see there is an income shortfall and the concerning thing is that at age 87, actually the light green bars cease, which says to me from looking at this chart, that actually their income is insufficient, or their capital is insufficient to meet their income needs. If we skip down a chart and look at the capital position, you can see that in the mid to late 80s, actually, this couple based on this scenario would run out of capital, and therefore they’d be creating an overdrawn account position, and their income would significantly reduce. This would be, as I said, a non advice scenario.

What can we do to try and improve the situation? Just by taking some pretty simple planning steps to try and look at making that longevity of income better, but also to make the assets work hard and look at the tax position? What I’ve actually said is, let’s look at using drawdown for the pension. So rather than buying the annuity and giving away capital for a guaranteed income, let’s leave the money invested in the pensions and let’s look to draw from that on a yearly basis to provide for the income requirements. Now, this couple haven’t got a massive capital requirement at retirement, there’s no mortgage to pay off, there’s no boat to buy or around the world trip that they want to take. So actually, rather than taking a big chunk of tax free cash and leaving it sitting in the bank going backwards in real terms, we say to them, let’s look at taking that over a number of years. If we actually slice and dice that tax free cash, equally over 15 years, and look to take it over that time, let’s treat that as tax free income from the pensions. Each year, we’ll then look to draw up to the personal allowance from the pensions. So we’re able to earn £12,500 or just over in the current time, tax free each year. So let’s look to draw that amount from the pensions. In terms of the ISA’s, rather than leaving them in cash ISA’s, I have suggested to this couple that we look at investing those into real assets to try and generate an income and through a good investment mix we could generate tax free income from ISA’s of let’s say 4% per year, but with the ability still to maintain or hopefully grow that capital over the long term. We’re not doing anything here that takes them beyond that balanced approach to investment risk that they were comfortable with at outset. Let’s look at the income position now from taking those steps and apologies for the messiness of the chart but again, we can see the black line that runs horizontally being the £36,000 per year. In the early years pre state pensions, we’ve now got a number of different income sources being the ISA incomes, so tax free income from the ISA’s, the tax free cash that we’ve sliced and diced over the 15 years, and then the drawing of pension income up to the personal allowance. So just by looking at this chart, and the main for the first sort of seven years of their retired lives, we’re generating the income of actually just over £40,000 pounds per year. Once state pensions kick in, we’ve reduced the amount of income they draw from the pensions, because we don’t want to go above the personal allowance. And the state pensions take up a big chunk of that and actually, we can see here that the income level increases in the early years, and then sort of settles down again at the £40,000 mark. So by carrying out those simple steps of planning on the decumulation plan for this couple, we’ve got up to age 75 and we’re generating more income than actually the target is. Now there is some green creeping in later on in life whereby we’re going to have to either spend some capital from surplus income that we’ve generated, or dip into the pensions and unfortunately suffer some tax on doing that. But as we can see, and what I really like about this is we’re generating excess income in those early years, retirement isn’t a straight line process. Generally, people do spend more in those first years of retirement because they’re young, healthy active, they’ve got more bucket list things that they want to do and maybe later life, they’ll slow down a bit and not fly around the world and be jet setters as they would be in the early retirement years. The really powerful thing here, all of these coloured charts, with the exception of the light green, are tax free income based on current legislation. So we’re generating all of this lovely income throughout lifetime, and we’re not paying any income tax based on this scenario. What does that mean from a capital perspective? Well, actually, by making the assets work harder, we’re actually growing the capital for this couple over the long term. We talked about earlier wanting to potentially leave a legacy if we can achieve the income requirements or by carrying out these fairly simple steps, we’re managing to tick that box as well. Nothing out of the ordinary, just some good solid, making assets work hard and decumulating our assets in a sensible manner, has achieved many goals for these clients. I’ve touched earlier on liquidity management, and this is more about what we do in house for clients to make sure that we’re never that forced seller. So it’s very much about agreeing what’s an acceptable level of cash to have in place and everybody will have different views on this but it needs to cover that emergency fund, that short term income need and making sure that we never have to sell something at any given time when we’re planning for whatever requirements are coming down the track. So in house, we hold quarterly liquidity reviews, we actually did them earlier this week. We as a team sit down and talk about client’s income needs, what cash they’ve got at the moment, whether now’s a good time to raise some more cash or whether we’re comfortable with the position. All of those meetings are documented internally and uploaded to our client portal, so that clients are fully aware of what we’re doing. And then when we sit down with clients will very much go through that process and make sure we’re still comfortable with what we’ve got, what we’ve raised, and what the plan is going forward, something we take really seriously and we think it’s an important part of this decumulation process. Before I hand you over to Ben, just some conclusions from my section of the webinar. There’s many ways to decumulate assets and fund post life work but in our opinion, the next two bullet points there are massively important in doing this effectively, making your assets work as hard as possible for you, and minimizing that income tax position so that as much as we draw as possible is paid gross and net. But importantly, it’s not a one off process, life changes, objectives change, we need to regularly revisit this process and make sure it continues to be fit for purpose for clients. So thanks so much for listening. I’m now going to hand the reins over to Ben who’s going to talk about investment markets in general and give you a bit of an update on that side of things. Thank you.

Ben Wattam

Thanks, Tim. Now, I think we’re having a few technical issues. I don’t know whether you can actually see me or not. If you can, great. If you can’t, it’s probably for the best, you can’t see me anyway. I’m just going to talk a bit about what’s going on with markets for the next 10 minutes or so. Now we’re in summer in August, so markets are actually a little bit dull. I’m going to concentrate more on the macro side and what we see and whether it’s a good time to start investing. Now the first chart on the left is from the Bank of England that shows average earnings in the UK and you can see that average earnings have actually picked up quite strongly following the height of the pandemic last spring. So in the UK, average earnings are higher, the consumer is actually in a decent space from a from an income perspective and on the right, you can see that the consumer has actually started saving quite a lot as well. Excess savings is on the vertical axis, and the amount of fiscal support is on the horizontal axis. You can see it’s not just the UK, around the world, there’s been a big boost in consumer savings, which should mean that consumers are in a good place the next couple of years, more support, if we have some choppier economic times the next few years. It’s not just the income perspective either from the consumer, the left hand chart is from Halifax house price index over the last 12 months and you can see on the right hand side of the annual change, house prices in the UK have gone up quite sharply as probably most of you will be aware of and that provides a nice wealth boost, because the majority of wealth for a lot of people in the UK is actually their house and when house prices increase, it gives them a wealth effect that gives them a positive feeling, and gives them more confidence to go out and spend. It’s not just a rise in income, but we’ve also had a wealth effect. Now the right hand side shows the mortgage rate, average mortgage rate in the US, which can see have come down quite sharply. So not only we’ve had a positive income effect and wealth effect, actual cost of debt has dropped. It’s not quite as large in the UK as the US but it’s still rates at very, very low levels. So the consumer is in actually a really good place at the minute. Now, if you’ve heard me speak in the last six months, you’ve probably seen me talk about this chart before this is called the Purchasing Managers Index and it asks purchasing managers around the world whether effectively they’re going to be buying more stuff for their business or not. Now this is for manufacturing companies and a score above 50 suggests they’re going to be buying more stuff that month, the score below 50 suggests they are going to be buying less stuff. Pretty simple and JP Morgan have done a nice colour coordinated chart so you can quickly eyeball to see the strength of manufacturing companies around the world. You can see at the minute the May and June figures on the right are near all time highs, not just in Europe or in some developed markets but pretty much around the world. Now, I don’t need to tell you, if you go and try and buy a big ticket item at the minute in the manufacturing space, whether it’s a car or something for your house, there’s big supply problems. There’s excess demand at the minute so in a manufacturing space, it’s actually a really positive story at the minute and the important thing for companies as well as is cost of finance. So how cheap is it for companies to borrow at the minute? Now, the blue line is the cost of borrowing for high quality businesses in the US and this is the cost above government bonds about government debt. But as government debt is very, very cheap at the minutes near zero, then this is almost an all in cost. So you can see the blue line. It’s costing high quality companies in the US about one and a half percent or so a year on top of the government rate to borrow at the minute, which is really cheap and it’s pretty much the cheapest we have had post financial crisis in 2008. There’s not just high quality companies either, more cyclical businesses or less quality is the orange line and you can see that it’s near all time lows as well. So companies can find it very, very cheap at the minute to borrow credit, which is a positive space for companies to be in. You can tell the strength of companies from earnings from profits. And this, this chart is from the S&P 500. So the biggest 500 companies listed in the US and the chart goes from 2012 on the left and we’ve got a bit of forecasting in here on the right hand side, the forecasting is from S&P who run the index. You can see the big drop in earnings and profits we had in the pandemic last year but look at the bounce back. We’re now in the US we’ve got profits higher than they were pre pandemic and there’s still expectations that they can grow those profits further. So overall, companies are in really good shape. Now, you’ll have heard me recently talk about tech and growth and we’ve been saying that it’s not about Apple and Amazon and Google and Facebook of the world anymore in tech, it’s trying to find smaller businesses and medium sized tech businesses around the world. We buy two assets for portfolios, one called Draper Esprit and one called Chrysalis. You can see there, the total return performance on the left hand chart over the last 12 months, they’ve both done very, very well, both at nearly 100%. Draper Esprit is up another 8% since I pulled this chart. You can see the holdings, some of the largest holdings that these two companies own on the right. Most of them are private named still. But they’re all tech enabled businesses. They’re not necessarily technology, but tech enabled and whilst growth has had a bit of a difficult spell earlier this year, we think if you’re in the right sorts of growth businesses, we still think it’s the right place to be. Now, it’s not all pretty. The first part that you have to be a little bit cautious of is the level of government support. Now, we’ve seen huge levels of fiscal and monetary support, not just in the UK, but around the world. We’ve got the furlough scheme ending next month in the UK but the overall mentality of government support is changing. So you can see this from these charts from the Federal Reserve. The left hand side is what the Federal Reserve Board of Governors think interest rates are going to be going forward. Now, this was taken at December last year. So eight months ago. The chart on the right shows the Board of Governors, the Federal Reserve in the US what they think interest rates are going to be as of June, and that each blue dot is what each governor thinks interest rates are going to be going forward. You can see in December, pretty much the whole board of governors thought that interest rates weren’t going to move in 2021, one person thought they might move in 2022. If you look at what happens in the latest one in June, there’s a lot more governor’s now thinking that the rates are going to rise in 2022 and definitely in 2023. So whilst rates aren’t going to go much higher, anytime soon, the change of mentality is important. We’ve seen other governments as well trying to crack down on different areas. Now this is an asset we actually own usually I’ll just show you charts of prices going up and values going up because it’s easier. But this is one asset we own in portfolios, which is managed by Morgan Stanley in Hong Kong. It’s an Asian equity fund and you can see in the last six months it has been pretty painful. So it’s down nearly a third this asset is and it’s all to do with regulation in China. Now, if you’ve seen in the news, China’s been trying to tighten technology regulation, but it’s not really technology, it’s all about data. The EU had GDPR a couple of years ago, this is what China is going through, understanding how data is being used in China and where data is going and they’re really concerned about data leaving China. So they’re trying to crack down on data management in China, which is spooking investors. We still think it’s a great place to be investing in the long term but short term sentiment is really negative on regulation in China. This is something that could come in the US as well, from a regulatory point of view. Markets have done really well in the last year and this is a chart showing the S&P 500, the main market in the US, on the bottom horizontal axis, we’ve got a ratio showing valuation and on the left hand side on the vertical axis, what the annualized total return is, for the next 10 years based on the starting valuation on the horizontal axis. You can see where we are at the green bar at the minute, which suggests that the next 10 year annualized returns, they should be positive, but they’re not going to be standout for the S&P. Whilst we’re still positive, you’ve got to probably be a bit more active in your management. We’ve had such strong growth in passive indices that you’ve got to be wary of where you’re investing and have a bit more active stance.

There’s loads of investment managers and banks that will give you predictions for next 10 years, I’ve taken to here as to what predictions are going to be for next 10 or 15 years. JP Morgan’s is on the left, Schroeder’s is on the right, and look, they’re going to be wrong but it’s interesting to see what they think is going to happen. So JP Morgan’s on the left, the bars are what they think returns are going to be for the next 10 to 15 years. The purple dots are what they have been since 2009 and you can see pretty much across the board, returns going forward are going to be lower than they were historically according to JP Morgan. You can see at the bottom part of that, investment grade corporate bonds, cash gilts, inflation linked gilts, safer areas of investing are going to really struggle. You can see in Schroeder’s table on the right as well, the top part of that table is lower risk assets and forecast returns are really, really low. So it’s not a cheap time to be investing, you’ve got to be active in your stance. Now our outlook, we do this every month, and we try and let the data do the talking for us. So we look at data and see what data is telling us whether we should be positive or not. And pretty much across the board data saying be positive, have a positive outlook & take risk. Now on the next slide, this is growth estimates. This is from Goldman Sachs. Again, they’re going to be wrong, but it’s a positive outlook and it’s not just certain countries, it’s across the board having a positive outlook. The US economy actually last week said that the nominal size of the US economy is now bigger than it was pre pandemic. We think it’s a positive time to start investing and the estimates of growth are positive. When you have positive estimates of growth, from an economic point of view and an earnings point of view, it can be dangerous to go against that. Which is what this this last slide shows, so on the left hand side, you can see the probability of the US market having a negative total return during a time of economic expansion is relatively low. The probability is that you’ll get positive total returns from investing in equities when we have an economic expansion, which is where we think we are, we might not be as early stage as we were earlier this year or late last year but we’re still in an expansion mode. So the probability is that you’re going to going to be rewarded for taking equity risk. The right hand side shows where we are from the bottom of the market last spring. We’ve made a decent gain in the US market but comparing it against previous expansions, we’re still in the really early stages of this recovery. Most of the data is telling us to take risk, be positive. So most of our portfolios are still taking on risk but you’ve got to be aware of where you’re taking that risk. It’s not a blanket approach where you invest anywhere anymore, you’ve got to be really specific on where you want to take that risk. So with that, I’ll hand back to Loz for the Q&A.

Loz Gee

Thank you, gents. I hope you all got something really useful out of those sessions there and thank you to those who have posted questions. If you’ve got any last minute ones, please post them whilst the gents answer these ones.

So first question is over the pandemic, I saved more than I thought I would, how much cash would you suggest I keep for contingency?

Tim Kirby

I think it’s different for every single person. It will very much depend on what capital requirements you’ve got coming up, making sure you’ve got sufficient to cover any short term income shortfalls. We’ve seen furlough coming off, as Ben mentioned earlier and we’ve seen sort of regular lock downs and talks about the country’s going into lockdown. We’re still not out of the woods yet and there could still be possibilities that income levels, reduce or cease in certain sectors. Not a straightforward answer, but it is very much sort of person dependent, and you know, your cost of lifestyle dependent as to what you should keep but generally, as a rule of thumb, you should probably have at least six months income as a sort of cash base, plus any short term capital requirements on top, just in case would be my view.

Loz Gee

Great. The next question is I have a number of different assets, and I’m thinking I should touch my pension pot last, am I right in my thinking?

Tim Kirby

Again, person dependent, but from an inheritance tax perspective, pensions are probably the most tax efficient asset that most of our clients hold. And therefore those that can afford to not touch their pensions until last is generally the way they go and they will look at the decumulating other assets first and generating income elsewhere. But again, it’s person dependent, you’ve got to sit down and go through what you’ve got, what you want to achieve, and how best to access those assets to fund life. Often pensions can be the last one due to that inheritance tax friendliness that they provide.

Loz Gee

Okay, and final question is, I’m reading a lot about inflation at the moment, what can I do to protect my cash?

Ben Wattam

It’s difficult at the minute because, as we shared on that chart earlier on that the majority of so called safe assets are at very high valuations and the outlook is somewhat challenging, I think, for some of those safer assets. But cash over the longer term, I think over the next 10 years is going to be a really dangerous place to be. You need to diversify your assets. Diversification is one of the best ways to reduce risk overall. So whilst there’s no silver bullet to this, I think if you can diversify into a number of different bond markets, but still take some equity risk, which will reduce your overall risk through diversification, have some property and have some gold in there. It’s not an easy time to start investing in cautious mandates at the minute. So you’ve got to be aware that diversification is about your only friend at the minute.

Loz Gee

Okay, excellent. No more questions have come through so we’re just wrapping up now onto next steps. It really is a pleasure for us to do these webinars and it’s great to see you connect with us and dial in to listen and watch. Thank you ever so much for taking the time to do that. We’ll be holding our next webinar in November, which will be here before we know it. A recording of today’s webinar will be made available online. I’ll drop some emails around with the link to the video and we’ll attach a copy of the deck. Please get in touch with us if you do have any questions you’ve not posted during the webinar, and we’ll happily talk to you and we’ll see you at the next webinar. Thank you ever so much and have a great day.