Adrian Mee

Good morning, everyone. This is my first virtual seminar webinar. So I’m hoping it goes well, for me technology side. What I wanted to look at today is look at financial planning. I started in financial services in 2001 and financial planning was markedly different, we just did not have as much technology around us back then, as we do now, which is assisting financial planning low end. But also that assistance can sometimes lead to some quite quick decisions that maybe we kind of regret later in life. So what I would like to do is just go through how I approach financial planning for clients, I’ll highlight some key areas that have changed most recently, and then we’ll move into some sort of look at ways of how that planning can be basically implemented over the next few months and years. So if we have a look, first off slide, number one, this is our financial plan. It’s a very simple document, but extremely powerful. It’s roughly six slides long and it’s not designed to be for one person. Very commonly, I have clients who are the individual in the family who takes control of family finances, and it tends to be that they kind of bear that on their shoulders, and they run with that plan but the plan isn’t really shared amongst the family. And it just seems a little bit sort of disjointed, that we would really like everyone in the family to know ‘a’ there is a financial plan, and ‘b’ what that kind of entails. We we do get instructed sometimes whereby the individual of the family has passed away and then we’re brought into to see exactly what they had, where they had it, and how it’s performing for those new beneficiaries, that kind of succession piece. Where we come from at Wattam Kirby Mee is that we really value that succession planning for clients and we want everyone in the family to understand exactly what the plan is, and what it’s designed to do. There’s no good having a plan that you think is very, very good for when it comes down to it. If no one knows how to implement it, it can be quite difficult. So first off, want to have a quick look and have a light-hearted example. We’ve cut Forest and Jenny Gump. I quite like my Tom Hanks movies. So I’ve just taken a couple of characters. This is an actual real live enquiry we are working with now at Wattam Kirby Mee. Two very successful individuals, mid 30s and have already amassed quite a lot of capital. And this slide here is just designed to almost eyeball their financial life in one go. What we have behind this is technology that if they become clients, we’ll be able to populate this document very quickly via our app where the client can actually load in their details for us. And we can actually then translate that into this sort of document. Even if they’ve got ISA’s with the likes of St. James’s place, it doesn’t matter, it will all feed through into our system, and we can see exactly where they are because sometimes having assets with different providers can work really well. In this example, you’ve got the pension pots of Forest and Jenny. They’ve got the classic mix, Forest has got about four personal pensions. He’s had a couple from previous employments, he’s put some of his own funds in as well and Jenny’s got two old company pension schemes. At a very young age, they have amassed quite a big chunk of capital. But what you’ve got there are six different companies involved for those clients and very likely six different investment strategies, which can be really, really difficult to kind of keep track of if you’re the client. If you look at 2020 with the investment returns. You’re looking at some very disjointed stock markets right now. You’re looking at the UK market being still 10%-15% below its peak of January 2001. Yet the American market is 10% above and naturally if your pension parts aren’t actively managed, and taken advantage of opportunity. It can be quite tricky. In the same breath, we can’t just transfer pensions around just to seek better performance because if we have something that has a very good intrinsic value for the future, we need to understand that because keeping it wherever it is, might just make sense and here we’re thinking of guaranteed annuity rates, anything with a defined benefit connotation for a final salary pension scheme, their transfer values might value very high at the moment, but their future value might be even greater. What we like to do is review those policies and understand exactly where we sit and translate it into this slide. I also put here in the bottom right hand corner, income, because without income, this planning doesn’t really work, because for this client, especially they have no life cover. So if anything went wrong, what happens to the assets in the family pots, and you’ll see that they’ll get rapidly drawn down against in that period of stress. So whilst they might be quite fortunate in having cash, ISA’s of £100,000, right now, and personal cash in the bank of £120,000, they’ll become quite constrained and quite cash poor, if that were to be an event. Just looking at the next slide, I like to put down some objectives and this is kind of on the softer side of life, you know, what do you actually want to achieve? I meet quite a few clients who actually understand that they know where they want to be from an age perspective and then most of them put this together by saying, well hey, I want to retire at 60 or 65, or 67. What if you could retire early, and still have exactly the same income you thought you were going to have, or maybe sometimes even more, I do have a running joke with some of my clients that I tell them, you could have retired last year. Now I understand if the passion in your life is running the business and keeping employed and doing what you do, because that is a very nice feeling to have, to be fully valued in the company that you’re either running yourself or you’re working for, but understand the value of how things can pay back to you and understand the tax system that’s working around you. Whereby we all know that when we’re receiving income from an employment, the tax on an income can be quite hard, you know, we’re going to see most likely in the budget, a small increase to the personal allowance, come budgets. Now, what that will mean is that when you earn above £100,000 now and you lose that personal allowance, that’s a 60% tax on income between £100,000 and £125,000 a year. If the personal allowance has expanded to say £15,000 a year, that tax trap will expand itself as well, to capture income from £100,000 to £130,000 a year taxable at 60%. That’s very expensive. It’s unusual, we’ll meet clients that have a need for a gross income of more than £100,000 pounds a year when we think of their expenditure. So actually making pension contributions to reduce your gross income below £100,000. If that’s saving you 60% tax, then that sounds like a really good idea. Factor in that when you come to retire from that employment, and you’re no longer receiving an income to your financial planner, all of those tax rates are now nicely come back into the four. So we can then start drawing pension income from your SIPP, or your SSAS or your Aviva personal pension for that matter, using those basic rates allowances. What would be quite handy would be to have them coming back to you and maybe only 10% 15% marginal tax rate, but you’ve saved at the 60% level. So before you’ve even made a start with the investment returns, as Ben will talk about later, you’ll have made some significant gains. Considering where you are now with cash ISA’s versus stocks and shares ISA’s, it isn’t as straightforward as saying, well, we just need to move our cash assets into equity ISA’s because cash ISA’s now the returns are so low, perhaps below 1% for a majority of cases and that might be the continuation for the next four or five years that Central Banks don’t really have an ability or an appetite to increase interest rates because they’re looking a bit apathetic about inflation. So if we consider the cash ISA’s will be low returners. Do we want to move them into equity ISA’s. And if we’re taking a 5-10 year view, with a medium risk client, maybe that’s something we’d entertain, we need to make sure that cash is there as an emergency assets. And there’s nothing wrong with having your cash ISA’s as your emergency pots. But for this example, in this client, it would not make sense to carry a personal cash account as well. So here looking at the next slide, we’ll kind of look at what do we think this client needs? Now at 36, it’s very difficult to kind of envisage what you’d be spending at the ages of 55 and beyond. But if we look at a pension pot example, if we had a hypothetical £1.6 million pot, split between two people, that becomes tax perfect. Because we have an £800,000 pot each, which will allow £200,000 tax free lump sum, then we have the residual fund of £600,000. Now, if we assume that we want to receive a 6% income from that pot a year, that’d be £36,000 pounds gross a year. If the pension scheme was growing at an investment return of 5% a year, which we’d hope to think will still be consistent for the next 25 years, that capital that £600,000 would last 36 years. So every year you’re spending some growth but also spending some capital. Again, that decumulation side of your retirement planning can be quite alien, because you’re now decumulating capital rather than increasing your capital base, which is what you’ve done your entire working life. That £36,000 worth of income at current rates, £12,5000 will be tax free, then the balance will be taxed at the basic rate tax. Add in the most people receive a state pension of circa £10,000 a year in retirement, their gross income in this example becomes £46,000 a year. So you’re not a higher rate taxpayer. You receive 60%, 40% or 45% tax relief in building the pension fund and you’re now paying a marginal tax back in retirement a 15%, 10%, sometimes even as low as 5%. Which is for me, that the whole nub of why we push into pension schemes, yes, tax exempt growth over that duration of its investment life is important but so is the tax system to draw the money back, factor in the pension funds are outside of your estate for inheritance tax, you can then sit quite nicely with this. Alongside I would advocate building up an ISA portfolio because whilst ISA’s don’t receive an upfront income tax relief, they will receive exemptions from income taxes and capital gains taxes throughout that life of the client. Again, yes, they’re inside your estate for inheritance tax planning. So perhaps that will be the first pot that we will draw against because everything we spend from that part, if we’re worried about inheritance tax is saving the next generation 40%. In this example, I’ve just put in red, the life cover, there is £500,000 worth of need here, because as we can see from their income, everything’s coming from the company and the company has no life cover for the key individuals, which is a bit of a red flag for us as planners, that if the company does not continue to do well, because the death of one of the key stakeholders, everything could be derailed in this financial planning and we wouldn’t be looking anything like these numbers in retirement. So here looking at that capital decumulation piece, again, not to go into the numbers, but to show that what we have here are four distinct areas of capital, we have a very small current account, because we appreciate that cash won’t make as much of an investment term moving forward. But this client, we have a general investment account, which is something that we’re investing capital into, above their pensions, above their ISA allowance into a portfolio where we can harvest their annual capital gains allowance. So as we’re taking use of that £12,300 annual capital gains, so is when we come into wanting that money back, we aren’t paying taxes to have it back. Here we can see these four kind of areas of capital, growing from ages 36, all the way up sort of 57/55, which is when we assume this client will start to retire. And then you can see the gradual progression of capital decumulating throughout that client’s life. This graph is not to predict the future. It won’t be what you experienced in retirement, but it’s to simply say, are we on track? If you’re receiving this amount of money from your pension scheme, this from the ISA’s, this from the investment account? Are we going to run out? Because I’ve only got two questions that clients should ever ask me. One, do I have enough capital to retire? And two, will the capital ever run out? Running this software through your existing investments and pushing it forward? With the tax planning, we can answer those two questions. So the last slide for our clients is looking at next steps. I love giving people homework. My clients will kind of echo with that kind of sentiment and it is serious that I need to hand over things to you to pass back to me. If you mentioned you’ve got a will and a power of attorney. Well, I want to see it. I want to review that every year. And I want to make sure that that still is a fit for purpose document. I am going to be an advocate of discussing more life cover, is there something that I’ve missed in that equation? Is there something else that we need to look at and evaluate? Do we need that much cash? Cash historically has been a great diversifier for the clients where the return was better than inflation. We’re entering an environment or maybe we’re going through an environment where the return on Cash is lower than inflation. So in a real world sense, cash is now costing us every year. Factor in that you never know we could have, rather than negative bank interests, we could have charges implied on cash accounts in the future, which would then make it even harder to hold cash. Lastly, really key is the engagement with other professionals. On my own, I’m good. As a financial planner, when I work with your accountant and solicitor, we’re unbeatable as a team, because we all know different parts of your history as an individual. So putting everything together creating a plan that’s been tested. and the idea of this document is so it can be shared with other professionals. So as you can see, whereby everyone’s on the same page understands their involvement, and understanding the end objectives. I hasten to add, this is a bit of a new document that we have created. So for some of my clients, you’ve not yet seen it yet, you will be seeing this in your next meeting. So now I’d like to hand over to Ben Wattam, who will go through his updates on the markets.