Ben Toms

Welcome everyone. And good morning. Welcome to the third webinar of the year, where this year has gone, I do not know it’s absolutely flown by. At least in my opinion. Let’s get started. So today we’re joined by two of our directors. So we’ve got one of our financial planners in Adrian Mee, and our investment manager, Ben Wattam. So the style of webinar today is going to follow similar to last August, it’s going to be more of an open Q&A session. We’ve handpicked five most important questions in the Financial Planning and Investment space right now. And hopefully, it’s going to help you to implement those into your financial plans.

Adrian Mee

This is no way because we didn’t want to prepare a big slide deck!

Ben Toms

It’s not laziness. It’s just change of style.

Ben Wattam

We’re also doing this in the office. So if you hear people typing away, it’s because people are busy at work behind us.

Ben Toms

Okay, cool. So those of you who are new and don’t know much about us, we’re a Financial Planning and Investment Management Company. We’re quite unique in that we have our own onboard discretionary investment management platform, which is managed by Ben Wattam on far left or far right for you. So we’re a team of nine now. We’ve grown in line with business growth, which is always good. We’re made up of four financial planners, an investment manager, training investment manager, two administrators, and an operations manager. The guys have got combined around 100 years of experience in the financial services industry, ranging from pension consultancy, to specialized financial planning, and investments as a whole. So that’s enough about us. Let’s crack on with the questions. So the first question here.

Question 1 : How, do the lifetime allowance changes affect your final salary and personal pensions?

Adrian Mee

I mean, this is sort of when it all went crazy in March this year with the budget announcements, and the first thing to say is that there’s been no Finance Act written yet that implements the changes they announced in the budget, what’s happened is that the Treasury or the HMRC have implemented an emergency zero tax measure on anyone that reaches the old lifetime allowance. So legally, it’s still there. But the tax charge is now set to zero. How it is important to understand it is that the lifetime allowance of £1.073 million basically govern the tax efficiency of your pension pot to that point, for a money purchase pension scheme, a personal pension scheme, super easy to understand where you are, because it’s just the sum of the investment values. When it breaks £1.073 million. Looking back. it just meant to say that anything you drew from the pension pots above that limit, have higher tax charge than under the limit. For a final salary pension scheme, hard to work it out. Because it’s just an income that your promised from the pension scheme at your retirement date, which is ordinarily index linked, so you never quite know the capital value that sits behind your final salary pension fund when referencing allowance. So always tricky to work it out. Having had it removed, you can now arguably work for longer under the final salary scheme and have no worries of a penal tax charge when you retire. So it’s incredibly beneficial because a tax charge for the final salary scheme would mean effectively losing an annual income. So it watered you down and you pay the penalty tax charged via sacrifice of that, that ongoing income. Now that’s gone. It’s extremely efficient. But the lifetime allowance still exists, fixed at the £1.073 million level, it will not increase unless by Treasury order. And it still fixes the tax-free lump sum, you can have which is 25% of that bigger. So it doesn’t exist anymore, but still does exist. So it’s going to be very delicate over the next couple of years as to how all these changes work through because what was said, to entice people to go back to work to earn more, to increase their pension funds, more will work. But there are now some interesting add on points to this, what happens on death, because the lifetime allowance govern previous death benefits, tax efficiency, now that’s been removed can just push your pension even harder than pass it all down the line completely taxes free to the next generation. Right now there’s a consultation paper around that someone raised a flag and said, hey, this has been delicate, because they’re getting all this upfront tax relief on building a huge fund. And it all goes to their nearest and dearest completely tax free. So nothing’s in yet in that regard. And it’s quite favourable. But I will be mindful to saying that there are future changes to come.

Ben Wattam

What made them make the changes in March, what was the reason why they brought in these favourable changes?

Adrian Mee

I mean, just hugely political. So NHS workers, doctors, surgeons had maxed out their final salary pension benefits. And were just retiring early. A combination maybe of employment position changes around the European Union, maybe COVID, as well, there’s no influx of professional classes at the moment. So you’ve got a shrinking labour force on the professional side. So if you remove the lifetime allowance, you know, a couple of my clients have said, well, hey, I’ll go back to work, I may as well, I can increase my pension fund. I like doing something if I get a marginal benefit, not just a salary of going back to work, but I’ll sort of do it. And looking at our client book, I’ve got probably half a dozen professional practices, have just said, I’ll go back. It just seems to make sense on that sort of fair level. So I think it has worked. And it’s incredibly beneficial. It’s just with everything like this, it’s quite sort of delicate to have a few changes happening around it that could be sneaky.

Ben Toms

Perfect. Before we move onto the next question, I did forget to mention at the start, if you do have any questions, we’re going to have a little Q&A spot at the end of the session. So please do feel free to put any sort of queries in the chat box below. And we’ll get around to answering those.

Question 2 : on cash savings, instant access versus fixed terms, what are the best options in your opinion?

Ben Wattam

So cash has obviously changed quite a lot and the investment universe has changed a lot over the last 18 months as interest rates have risen quite sharply, not just here, but around the world. And we do have more questions, again, about what to do with cash. And as per everything we do, it’s all about what the objective is what we’re trying to do with the cash because it might be that you’re using it for emergency purposes. And if it’s for emergency purposes, but you need to save X amount, for worst case scenarios, then it has to be safe, has to be liquid and is not something that you want to gamble. If you’re looking at a longer-term use of that cash, then the options have improved quite a lot over the last 18 months. And when you think about whether you want to instant access or fixing it, I think they’re almost the opposite of lending. So a lot of people are going to have the fixed term mortgage rates coming up over the next two and a half years I suspect, mines coming up in October. And I always think of what I want to do from a lending point of view is the opposite of want I want to from a borrowing point of view. So with my mortgage at the minute, I want to keep it on a relatively short term. I don’t want to fix it because interest rates have risen quite a lot. And if you look at what the Bank of England and other central banks are saying it’s likely that interest rates are going to be cut over the next few years ,not down to where we were previously. Because I think one lesson we’ve had over this period is that having interest rates at near zero isn’t actually very useful for anyone, but interest rates are going to fall over the next few years. So at the minute, you don’t really want to be locking in your mortgage, to the higher rates at the minute you want to keep at shorter rates. So it might be that you choose a very short-term fix, or you choose a tracker mortgage or something like that. Flip back to your savings. And what you want to do with savings, well, we’ve been saying over the last year that you want to keep saving short term, don’t fix it, because interest rates have been rising quite consistently. We’re now nearly at the peak of interest rates, so the Bank of England meets tomorrow. And it’s split as to whether they’re going to do a 25-basis point wise, but irrespective we’re about there, they might do a couple more rate rises. But we’re nearing to where we think it’s going to get to. So as we approach that peak, that is when you really want to start looking at, if you’ve got a long-term time horizon, cash savings, start fixing to lock in the higher rates that will come over the next few weeks or months, lock it in over the next couple of years. There’s a big challenge as to how you fix them with bank accounts. Because generally, if you go to the high street banks of HSBC, or Barclays and Lloyds or anything like that, their savings rates are nowhere near what the bank of England’s bank rate is. So there is a bit of a challenge. If you go on MoneySupermarket and places like that. Generally, the higher rates are for banks that generally need the funding more.

Adrian Mee

These banks, I looked yesterday, you’ve never heard of them, and if you start to go into that Alice in Wonderland style, you know, going down the rabbit hole, you’ll find a bank that, yes, has protection for the FSCS. But they’re offering another half percent more if you fixed for two or three years. Which feels so reminiscent to 2007/2008. It’s quite scary.

Ben Wattam

Yeah. So we just got to come back to the objective that generally, if you’re putting a cash saving even if you’re fixing it. You don’t want to take huge amounts of capital risk on that savings, you want it to be safe and secure. So lending it to banks that you might never have heard of, doesn’t feel like a safe, secure way of investing your cash deposit. So there are options out there, I had a look at MoneySuperMarket this morning. And there were about eight banks that offered two year fixed rates over 5%. So not that many. And we’ve been using things like gilts, which is the first time we have used in a long time. There is a couple still at 6%, but whether you would want to lend to them is a different question. So yeah, cash savings have changed over the last 18 months as the whole investment universe has. So there are some interesting options. But just make sure your cash aligned to the purpose of what you’re saving for.

Question 3: For those who are coming up to retirement age, or in retirement, drawing tax free cash. What are the best tactics?

Adrian Mee

This is the classic that repeats itself every tax year. Is tax free cash still going around in the future? That’s the biggest because if it’s not, then you should have it all today. If you’re sort of a bit more battle weary like myself, this conversation always eventually comes around. Little and often is a really good tactic to sort of marry up that not many individuals need a big wedge tax free lump sum from day one of retirement, but they want a really nice long-term income, and you can blend in some tax free cash to some taxable income, that’s a little and often approach. And you can be able to extract someone that had no income, you can extract £66,000 a year from the pension fund , and only be paying £7,500 worth of tax. The marginal tax rate on income of £66k is something like 12-13%, which for me makes perfect sense. The new lifetime allowance rules. As I say they are new rules for it, even though it’s set to zero govern the tax free cash. So you can’t have more than 25% of £1.073 million. That’s the big headline grab. So if your pension scheme is already have that level, think about your objectives. Think about how upset you’d be if they removed tax free cash completely. Think about how drawing tax free cash goes into your own hands immediately which is then inside your estate for inheritance tax. So if you don’t spend it, then it’s liable to 40% tax. And even if you do spend it, then surely you could have been spending other capital. So one thing that I try and advise clients against is, try not to draw the tax free cash just because it’s there, and also have this whacking great ISA portfolio that’s also subject to inheritance tax, maybe think of spendings, both simultaneously. It’s just really balance, balancing how you’re drawing down benefits, is key, it blends away investment risk if you get the cash flow management right. If you get cash flow management wrong, then you really hit hard investment risk.

Question 4 : What’s the latest on government bonds, so UK gilts for US Treasuries, and how do people buy them?

Ben Wattam

So in our portfolios at the minute, we’ve solely got US Treasury bonds, because we felt like the US was much further along this path of raising interest rates, inflation was coming down quicker in the US than in the UK. And we thought US Treasury bond market offered better value. So in our portfolios, we have US Treasury bonds, some of them are conventional bonds, so we just get a fixed level of interest. Some of the other bonds, we hold are inflation linked so the interest rate is linked to US inflation. We own them just through ETFs. So an ETF is just a tracker effectively. So it just tracks the US government bond market. It’s a cheap and cheerful way of getting access to exposure to the US bond market. And you can buy them on the London Stock Exchange. So it was a quick, easy, cheap way of accessing US government bond markets, we have bought bonds with a slightly longer duration. So we’re buying bonds, generally between 5 and 10 years in duration. The benefit of that is that when interest rates do fall, over the next couple of years, you get a bigger capital uplift from lending longer, if you lend really short, say for one year, the impact isn’t much at all in capital value. So we’re holding bonds on 5-10 year durations, hopefully benefit from slightly higher interest rates and capital value should increase when interest rates do fall. Gilts, we haven’t held any gilts in portfolios, because we always thought that the Bank of England’s been a bit behind and the value just hasn’t been there for GILTS over the last few years. But we are starting to add them to portfolios. And they can be really useful actually, especially for personal planning. GILTS that have been issued over the last five or 10 years have generally got low coupon payments. So the actual interest rate that gilts pay is generally very low. But what’s happened over the last 18 months is the price of those GILTS has fallen. So whilst you get a very low coupon interest rate, the actual total return you make for a two or three year gilt at the minute is around 5%. But with a very low interest. So for higher rate taxpayers as an alternative to a two year fixed deposit, where you’re lending to banks that maybe have questionable credit ratings themselves. You can lend to the UK government, which touch wood should be risk free. And you benefit from capital gains, which are tax free rather than interest. So they can be not only is it now an interesting investment in its own right, they can be really useful tax planning tools as well.

Adrian Mee

So we ran those net numbers, net numbers on a 6% fixed two year bonds to a higher rate taxpayer, you are netting down, but looking at a government bond, you’re netting down four and a half, which is a huge increase, 25% of your return is boosted by having better security. So we really like the government bond market for the first time but the timings have got to be so pin point accurate, we have got to think, we expect rates to peak therefore at that point that’s when purchasing government debt makes sense. Yeah and the benefit of GILTS, as you said, it’s to lock in today’s interest rates for the next two or three years, we think that two, three, maybe four year durations is the sweet spot, because you’re not taking 20 or 30 year interest rate risk. But we think over the next two or three years that interest rates will fall a little bit so you’ll get a capital kicker.
We’re looking at four and a half percent a year, for 4 years. Base rate feels like it’s going to fall below four and a half percent within that time period. So hold your bond all the way down the road, you’ll make what it says on the tin.

Ben Wattam

But you can buy ETFs, you can buy actively managed funds on gilts, I wouldn’t recommend it. But you can buy just ETFs trackers on gilts, which just gives you a cheap, cheerful way of getting access.

Question 5 : Inheritance tax planning by pension contributions, following the budget announcement, what would you recommend?

Have a real long look at how you’re setting yourself up to pass money down to the next generation. That’s on the precursor that you don’t do what I tell most clients do, which is spend it, you’ve accumulated it, kids have grown up, most likely are quite successful, just spend the wealth and have the conversation with the kids. But if you are looking at having accumulated capital that you just can’t see yourself fully spending or you want to keep back some capital for later life care funding. Pensions are a really efficient way of doing it. If you’re already receiving pension income, it’s delicate how you can manage process. But if you haven’t yet retired, still working, still earning and through that 40% or 45%, higher rate tax bracket pension contributions going in, are immediately exempt from inheritance tax, there’s no two year wait no seven year wait, it’s instant. So they make a lot of sense to push capital on not just for you as the primary saver, but also next generation as the lifetime allowance has been removed, as I say there’s a consultation document going through talking about, do we not want to address this position that exists right now that if you make a pension contribution the saver gets tax relief, if that person dies before age 75, all of their pension capital value passes to their next of kin, completely tax free. So we’re in a very quirky position that the budget was announced. Then the next day, pensions office said hey, we now want income tax from the estates of the individual who die passing on pension fund when they were dead before age 75. Pretty much instantly the industry came back and said, look, we just can’t possibly work that. So it’s likely there’s going to be some change in that space. But the primary reason of saving into pensions is 40% taxpayer, you get the 40% relief. What’s the worst that can happen? You can have 25% tax free cash from that contribution. And perhaps your beneficiaries pay income tax to receive it, ut at what rate, 20%, 40%, 45%?With a long enough timeframe that would work really, really nicely. But in classic deathbed sort of planning, pension contributions don’t really work that effectively. But it’s worth the conversation.

Ben Toms

We’ll move on to the question and answer section now. Thanks for sending your questions in. We’ve got one question here. Fitch has cut the US credit rating to AA+. Is this likely to impact bond rates? And does this change/alter our views on investments into the US bond market?

Ben Wattam

Good question. I should have mentioned that earlier with the government US bond rating. In 2011, Standard and Poor’s cut the US government bond rating by one notch from AAA+ to AA+ . And last night, Fitch, who’s one of the second of the three big ratings has cut the US government bond credit rating to AA+ as well. So in 2011, markets had a bit of a jittery response to that. In the grand scheme of things, it doesn’t matter. The US government issue the US dollar, which is basically the world’s currency, everything’s bought in and traded in dollars around the world. And the US government is about as credit worthy as you can get. So if you read Fiches report on why they’ve downgraded it, they basically were saying that they’re concerned about political problems and the US and the debt ceiling. That was troublesome about six weeks ago, a couple of months ago. So a lot of what Fitch was saying is because they’re worried about the impasse that can come, they can’t come to an agreement on things. So Fitch’s is report overnight is very, very political. It’s not actually anything to do with the structure of the US government. Government US bond prices are up this morning. As I said, it doesn’t really matter what the government bond, the rating agencies think. The US government bond market still looks attractive. And it’s not really going to change because Fitch have changed their mind on on the US politics effectively. So we still think the US bond market looks attractive. We also think GILTS look attractive as well, even though gilts have got a lower credit rating than the US. Bizarrely, now that such as Microsoft, they’ve got higher credit rates than the US government, even though Microsoft use the dollars that the US government print. So it’s a bit odd. But it doesn’t really change things. I think markets might have a little bit of jitter again, because it’s not a great news story that the US government’s been downgraded. But it’s not really to do with finances.

Ben Toms

So another question here, I am receiving a pension income. But I’m also considering making pension contributions. Is this a good idea?

Adrian Mee

I think it can be a good idea, it can be a bit of a problem. So pension income doesn’t necessarily allow you to make matching pension contributions and save that income tax, because it’s not tax relievable. So too want to have pension contributions in receipt of a pension income, you’d need to have taxable source of income that you could get tax free. So give an example. Let’s say you’re taking from your pension seen £50,000 a year. Therefore, your tax, bill is going to be about £7,500. If that’s your only source of income, any pension contribution made above £3600 is not getting tax relief. Important to understand how the rules work, you can also not contribute over £10,000, if you are in receipt of a flexi access drawdown pension, which is basically everyone can now join pension, you can have quirky scenarios where you got a member of a company, it wants to validate your pension contribution. If you’re in receipt of an income, that’s from a defined benefit scheme, can receive that contribution above £10,000. So those rules were tweaked around, they’ll be revised again, because the government doesn’t want to see this as being that recycling of your wealth, try and push forward your tax free lump sum because that’s effectively what you’re trying to do. You could though, put the money in not get tax relief on it because it benefits my inheritance tax position, which is kind of a an extreme strategy. But I have seen that adopted by a couple of clients and can work.

Ben Toms

It’s getting interesting now, we’ve got an AI question. So how much of an impact is AI having right now on investments?

Ben Wattam

AI has been around for years, I would guess I don’t know 15 years or so. But a lot of interest has started since chat GPT was launched last October. And it allowed access to everyone to generative AI effectively. And the potential of AI is enormous. Nvidia, which is a US technology company, have been creating chips, basically for AI for years, and about 80% of all AI uses NVIDIA’s chips at the moment. So Nvidia has gone up over 300% this year. So it’s now valued at over a trillion dollars. And it’s definitely got first advantage of the chips that everyone kind of uses at the minute. NVIDIA’s margins are enormous on those chips as well. But the opportunity set is much, much, much broader. We spoke to a US manager about two weeks ago who invests in medium sized US businesses, he gave an example of John Deere, which make tractors and farming equipment, they’ve got a seeding bit of kit which is completely automated, but it’s got AI that can look at the ground and decide whether it’s a plant or a weed, and treat that individual plant or weed. So it massively increases the efficiency of farming and should improve crop yield and improves cost basis. And that is going to be a big thing over the next few years. The use of AI is enormous. And it’s definitely going to reduce cost. We’ve been chatting to our IT supplier about how we can use AI in business, it’s just going to take time for people to understand how we can use AI efficiently in businesses, and for IT suppliers to be able to provide it as well. But it’s not a gimmick. And it’s here to stay. And it’s really exciting. We’ve got quite a bit of exposure, but it’s generally in the small and medium sized and private, end of the market, which haven’t really moved yet despite the big US stocks that have.

Ben Toms

What effect could a new government have on the recent pension changes?

Adrian Mee

Well the answer is they can do anything. New government comes in and says look, you know, we don’t like the removal of this lifetime allowance, then they could just go back to it. Now, every time we’ve had changes in pension legislation, there’s always be the ability of either opting out of those changes, or remaining under the rules that were in force, when you were contributing to that pension scheme. So latterly, we’ve had the fixed protection rules that came in every time a lifetime allowance was dropped, that you could protect your pension scheme at that higher limit and not be adversely affected by the new limit. So I was really thinking about this when the budget was announced, thinking okay, what if clients contribute and then all of a sudden, a new government comes in and says, hey, we’re going back to the old lifetime allowance. Well, on the basis that your contributions now don’t automatically rescind your old fixed protection as they used to, you still got that in the pocket. So if the lifetime allowance comes back in and again, at what level would it come in, it could come out at half million pounds, which will be absolutely catastrophic. But they could do that. Then we’ll have to think that you’ll still have your old fixed protection or the ability of protection at the £1.073 limit, some sort of fixed protection 2024. But it is very, very subjective. Still reading some of the transcripts of discussions around this issue. Can’t plan for it, just got to roll with it in a way it sort of does happen. I wouldn’t say that it’s on the top of my radar things to worry about right now, in terms of creating long term plans, the immediacy of getting that up front tax relief at the 40% or 45% level, and looking to find yourself to say I had that relief, but I’m only going to pay half of that tax back, when I draw my pension payment. That’s the overriding, planning position to be concerned about everything else is sort of a side show that will just move with when it happens.

Ben Toms

Thanks, everyone for sending those questions in. That’s all we’ve got time for today. So thank you very much for tuning in this morning. Hopefully you found session informative. As always, we’re very very open to feedback. We’re looking to improve our webinars and so on as time goes on. If you do have any more questions or feedback then please do get in touch but thank you everyone and have a good day.