FAQs: Financial Planning During COVID-19 | Part 2

We’re pleased to follow up our newsletter of 17 June 2020 with the remaining answers to the questions raised in our Webinar Q&A session on 20 May 2020. If you missed it, you can watch the recording below.

We think we have now answered all the questions we received, but if we have missed any please let us know.  Likewise, if you have a question you want to ask after reading our recent newsletters or if there is anything at all you would like to discuss with us we would be delighted to hear from you. Please email us at info@hlfp.co.uk.

Are there any sectors we should be avoiding or investing in?

Brooks Macdonald has noted that there are potential opportunities in all sectors and geographies and go on to say as follows. 

Those holdings which have performed well in the downturn such as technology and healthcare could continue to perform well. Those working at home as a result of the lockdown have shown how this technology can help the working environment. For example, Zoom and Netflix have seen boosts in customers and revenues. Is this likely to subside significantly after we have come out of lockdown? Probably unlikely. Video conferencing could continue to grow as companies keep travel budgets under more control. 

If we look at sectors which have underperformed over recent months, the oil and housebuilders companies come to mind. The oil sector came under pressure as there was a significantly oversupply globally as a result of economies going into lockdown and businesses going into “hibernation”. This resulted in the oil price decline mentioned in an earlier answer which affected the prices of stocks such as BP and Royal Dutch Shell. However, as we emerge from lockdown then there is more demand for oil once again. The return of smog to some Chinese cities shows that demand is getting back to normal. Whilst the oil price is low, this helps boost economies, particularly oil-importing countries such as Japan. 

Housebuilders have had to mothball construction sites, and many have stopped paying dividends. However, those companies with a good land bank or with a foothold in the affordable housing market should do well. We have already seen construction sites restarting in order to satisfy the pent-up demand for new build property, which should provide a welcome boost to the sector.

Are you adjusting investments during the lockdown? Is it all bad or is there news of how a recovery will happen with a bounce-back?

SEI and their underlying managers are using the volatility to make active management decisions in the long-term interests of their individual strategies. Here is a selection of active positions taken by managers they have mandated:

  • Decreased exposure to the sectors worst hit by the coronavirus crisis, these include tourism, leisure and luxury goods sectors.
  • At the start of the year, SEI had already been reducing exposure to China due to growth concerns, this was accelerated during the early stages of the crisis. 
  • Initiated a position in Gold. Gold tends to be a reliable diversifying asset in times of uncertainty, providing a measure of “risk-off” protection, and should also perform well as a store of value (think hedge against inflation). Precious metals issuers within our high yield asset class should also provide a measure of diversification and counter-cyclical performance.

Once the situation stabilises, we expect a sharp recovery just as we have seen after most other crises in the past. The precise timing of any potential recovery is difficult to predict. Recent actions taken by both governments and central banks around the world will hopefully be enough to fend off the worst-case economic outcomes. This should provide a solid floor under markets once rates of infection slow, and thus provide the foundation for a sustained rebound. This will provide a more favourable environment for active managers making investment decisions based on fundamentals.

What’s the general situation for fund valuations and pension pots, and predictions for the next 12-24 months?

Aberdeen Standard Investments believes that the general situation for fund valuations and pension pots is obviously dependent on their asset allocation mix – those funds with a greater bond exposure will have performed well this year, those with equity exposure less so.

It is important to remember that markets are forward-looking and discount the entire stream of potential future earnings. In that context, a couple of quarters of negative growth is painful, but, so long as the long term earning prospect of firms is not fatally diminished, not a reason why markets must remain permanently depressed. Indeed, the fall in interest rates – all else equal – boosts this argument as future earnings are discounted at a lower rate, which mechanically pushes up prices today.

With regards to predictions, Morningstar says don’t believe that anyone can consistently make predictions about the next year or two and you should be very sceptical of those that try. What we do know is that COVID-19 has contributed to a great dispersion in valuations across asset classes. While some markets (such as the US shares) have recovered rapidly and appear to have a lot of good news ‘priced in’, others such as the UK and some of the emerging markets look much more attractively valued. This presents good opportunities for portfolios managers to improve the returns through careful research and selection of the most attractive assets.

While the benefits of these activities may not be seen in the very near future, over the long term, this approach could have a very meaningful impact on the returns investors receive and the progress they make towards their goals. In the meantime, it is important that the risk of the portfolio is managed carefully so that the portfolio can withstand whatever the next two years bring. 

FAQs: Financial Planning During COVID-19 | Part 1

If you watched our recent webinar, we hope you enjoyed it as much we enjoyed putting it together. For those who didn’t make it on the day, you can watch the recording below.

We held a Q&A session at the end of the Webinar and answered as many questions as we could on the day, but we couldn’t answer them all.   Some of the questions were specific to individual circumstances and where this was the case, we should have been in touch with you directly. 

Unsurprisingly, we received lots of questions on the state of the economy and investment markets which we covered in general terms in the webinar, but as you know, we are financial planners and not economists or investment managers.  However, we are constantly in touch with our trusted investment partners and thought it would be useful to set your questions to some of the firms we rely on to manage your investments.   

Look out for your own question, but if it’s not in this issue it may be in our next newsletter which will follow soon.

With the UK likely to be in recession very shortly does that mean that the markets are unlikely to start to get back to their pre-Coronavirus positions or are we likely to see further falls from the present positions?

Aberdeen Standard Investments’ view is that it is almost certain that the UK will experience a recession this year on any reasonable definition of the term. However, it is important to remember that markets are forward-looking and discount the entire stream of potential future earnings. In that context, a couple of quarters of negative growth is painful, but, so long as the long-term earning prospect of firms is not fatally diminished, it is not a reason why markets must remain permanently depressed. Indeed, the fall in interest rates – all else being equal – boosts this argument as future earnings are discounted at a lower rate, which mechanically pushes up prices today.

Jonathan mentioned the bank base rates potentially going negative. What are the practical implications of this?

The Bank of England is considering pushing its interest rate into negative territory say SEI. Many analysts, however, believe this is still unlikely. The motivation for reducing interest rates below zero is to try to spark economic growth through additional borrowing and spending. In theory, lower interest rates would encourage businesses and households to save less, spend more, potentially even take out loans thereby facilitating greater investment and consumption.

In addition, the negative rate at which governments can borrow money allows politicians to spend more, this increased level of spending may bring the recession to an end sooner.

However, negative interest rate policy allows otherwise unsuccessful companies to refinance debt, at lower levels and as such stay in business. A side effect is that these companies may not be successful enough to grant employees pay rises, so while unemployment remains low, so does wage growth.  In addition, lots of uneconomic companies remaining in existence means the most productive companies in a sector are effectively dragged down by being unable to charge higher prices, this could hinder overall productivity, and potentially even economic growth, over the longer term.

What does this mean for you?

Does it mean you would be charged a fee by the bank to save money?

Does it mean the bank would pay you to take a mortgage out on your house?

Perhaps as appealing as that second option would be, the general view is that whilst commercial banks will pay a fee to the Bank of England for money held on deposit, thus encouraging banks to lend this money out to the population, they are unlikely to pass that charge onto their depositors for fear of losing business.

Regarding mortgages, it’s likely we will see rates reduce and potentially this would allow banks to make mortgages more readily available to people they previously would not.

Given the mind-boggling amounts of money the government needs to service the costs of COVID-19 induced expenditure, would the team like to speculate what targets they think it likely the Chancellor will choose to provide the money?

Morningstar says the only thing that is more difficult to predict than market prices is the actions of politicians. It is unclear how the Chancellor plans to pay for the current expenditure. However, it does seem clear to us that the risk of a sharp upward movement in UK bond yields is not currently discount in gilt prices. We, therefore, have a lower than usual exposure to UK government bonds in our portfolios. While the threat of increased taxes could result in a slower UK economy, it is worth remembering that the UK economy is different from the UK stock market. Most of the profits in the latter come from overseas and so these company may not be very susceptible to UK economic weakness and higher taxes as smaller UK companies. As ever the important question is not ‘what will happen next?’ but rather ‘What is currently in the price?’ and what risks/opportunities does this present for investors who are prepared to be patient.

Is there a sense that companies who have historically been high dividend payers using COVID-19 as a cover to cut or cancel dividends?

The answers were very similar across all fund managers, however, Brooks Macdonald said:

There are a number of reasons for companies to have stopped or cut dividends. However, the overarching reason is to retain the funds on the balance sheet and therefore provide an increased element of balance sheet security. In some cases, this was further enhanced by the raising of capital through share placings. 

The UK banking sector for example probably could have maintained its pay-outs however they came under increased pressure from the Prudential Regulatory Authority (PRA) to be lenient on borrowers, both corporate and household, affected by the lockdown, through debt repayment holidays or covenants extensions/waivers. One could argue this was a “pay-back” for the Government bailouts from 2008/09. This meant retaining this extra cash on the balance sheet has helped mitigate some of the effects.

Other sectors have had mixed outcomes, such as the oil and gas sector. With the oil price falling significantly due to oversupply and the standoff between OPEC and Russia regarding production cuts, oil companies such as BP and Royal Dutch Shell saw a significant reduction in their margins to negative levels. However, BP maintained its dividend pay-out level whereas Royal Dutch Shell cuts its dividend by 67%, its first cut since 1945.

The bulk of the commercial property sector has also seen significant cuts in dividend payments as tenants struggle to pay rents or have been given payment holidays.

Would some of these cuts have happened if COVID-19 had not appeared? We think this is unlikely. Have some companies used it as an excuse to reduce what could be regarded as too high a pay-out? Inevitably yes, however, we consider them to be in the minority. The majority of companies, who cut or stopped their dividend payments, we do expect to resume dividend payments later in 2020 or more likely in 2021. It might though take 12-24 months to get back to pre-Coronavirus levels.

Get in touch

Hopefully, this article has answered a lot of the questions you may have had, but we will also be posting a follow-up article in the coming days with some more frequently asked questions.

If however, you would like more specific advice based on your individual circumstances in the meantime, please get in touch with our financial planning team at info@hlfp.co.uk

Coronavirus & Market Update

As we are sure you will be aware, the coronavirus outbreak has impacted on investment markets over the last few weeks, and more significantly in recent days, with stock markets once again dominating the news.  

Concerns about the economic impact of COVID-19 will understandably draw the focus of investors from the long-term horizon to the here and now and it is easy to react to alarming headlines and panic when events such as this occur. However, we believe that taking a more measured approach is key.  Numerous epidemic outbreaks in the past have led to short-term losses in global equity markets.  However, these losses have tended to be recovered relatively quickly.

Concerns around the continued spread of the coronavirus abound, particularly the potential isolation measures that may be required to prevent, or at least slow, the progress of the virus across the USA and Western Europe in the coming months. The reduced number of new cases being announced in China and the increased number of those who have recovered from the virus provides some encouragement.  Despite being brought largely to a standstill little more than a month ago, companies say that their staff are now returning to work, factories are getting back towards full capacity, and consumers are resuming their usual spending habits in some areas.

Whilst there are many ways this virus can impact the assets in which you invest, it is important to separate permanent damage which will impact the long-term value of an asset from temporary damage which will quickly be forgotten.

It is important to highlight that our portfolios were well structured leading into this, with a highly diversified investment mix.  We believe they will remain equally well-structured during the recovery phase because our approach is sensible and built in line with your risk tolerance.

Our investment partners, with whom you are invested, are actively assessing what remains a very fluid situation with a view to taking advantage of investment opportunities, where available, and making prudent changes as required in this challenging market environment.  If the impact is short-term, price declines may produce buying opportunities.

Warren Buffett, chairman and CEO of Berkshire Hathaway, said recently that “you don’t buy or sell a business based on today’s headlines. If the market gives you a chance to buy something you like and you can buy it even cheaper, then it’s your good luck.”  

We continue to focus on providing quality financial advice, and unless your circumstances have changed, our view is that now is not the time to react to current market conditions.  

As always, we are happy to explain further.  Please contact us if you have any questions.

Jim Wilson
Managing Director, MHA Henderson Loggie Financial Planning

Employee to Self-Employed: Things to Consider

Making the leap from employment to self-employment is a hugely exciting time. You may have funding agreed and a business plan ready to go, but have you thought about some of the staff benefits that you are likely to lose from your employed role and how you are going to replace these?

In this video, Ricky Clark from MHA Henderson Loggie Financial Planning takes a lot at some of the common issues and considerations when moving from an employed to a self-employed position.

Covered in this video:

✅ Some common staff benefits that will be lost
✅ A recent client example & how we were able to help them
✅ Some of the products and solutions that can be put into place

📌 If you have any questions, please drop them into the comments section below 👇 or contact Ricky directly at ricky.clark@hlfp.co.uk

What are the most common issues?

As an employee, you are often provided with different forms of remuneration via your staff benefits, such as pension contributions,  life cover, critical illness and income protection, private medical care, car benefits, and childcare vouchers. These benefits are valuable and when transitioning from your employed role to self-employed, unfortunately, these will be lost. However, there are solutions that can be put in place and these should be considered.

Transitioning from an employee to self-employed

We were recently approached by a client who had been considering transitioning from being an employee to owning a limited company herself. After careful consideration of the pros and cons, she decided to take that step. Through our discussions, we were able to identify some of the benefits she enjoyed as an employee that were unfortunately lost. We were able to identify some good solutions for her with her budget that she felt comfortable with in order to plug the gap of the ones that she’d lost.

What solutions were we able to put in place to help the client?

Firstly, we looked at her pension provision, her longer-term objectives, covering things like risk and the amount she wanted to pay in.

Secondly, we looked at income protection. This is really important for individuals changing from an employed role into a limited company role as they are reliant on their income. This plan provided her with a level of cover so that in the event of long-term illness or injury, she could rest assured she would have an income to cover her outgoings on a monthly basis.

Thirdly, we looked at the loss of death and service (life cover), which was an important factor for her and we were able to put in a term plan where it covered her for a set amount, which was payable on death. We also looked at the private medical cover, which was also able to include her husband and provide that security that she was concerned about.

Finally, we were able to identify that there was no mortgage protection in place that she had held with her partner, and therefore we agreed to put in place a plan that covered them both for death or critical illness. We were able to provide her tailored solutions, which protected her current and future financial security.

In conclusion

If you’d like more information, please contact Ricky directly (ricky.clark@hlfp.co.uk) or complete the contact form below.

Planning for Retirement: 10 Things to Consider

Retirement planning is vital for ensuring that you can meet your goals for retirement, but it can be fairly easy to put off and worry about later. However, chances are that you don’t want to work forever and you may already have big ideas for how you want to spend your retirement.

In this video, Ricky Clark from MHA Henderson Loggie Financial Planning shares the top 10 things you should be thinking about when planning for retirement.

Covered in this video:

✅ Reviewing your pension provisions
✅ Knowing your options at retirement
✅ Consider other investments
✅ How you can improve your position, & more!

📌 If you have any questions, please drop them into the comments section below 👇 or contact Ricky directly at ricky.clark@hlfp.co.uk

1. When do you want to retire and how realistic is your time frame?

You want to be thinking of a few important factors. You may wish to work on past your retirement, or you may indeed wish to retire early.

2. What pension provision do you have in place?

It’s really important to review everything that you’ve gathered throughout your employment history and this could be a variation of different types of pensions. This may be looking at your current employment pension or previous employment pensions. You may have also saved into a personal pension yourself, and of course not forgetting the state pension, where you can have a look to see what you may get and when you will indeed retire.

3. What will you get from your state pension?

Ultimately, what you will receive from your state pension is based on your national insurance contributions that you’ve built up over your employment years. You can find more information about this on the government website with only a few of your personal details.

4. Consider what income you will need to maintain your current lifestyle

After having looked at all the pensions that you have in place, it’s important to consider the income that you’ll need in retirement and the way that we would advise you to do this is by analysing it via an income vs expenditure worksheet.

5. Will you have any major expenditure plans?

When you retire, it’s often the case that individuals will consider spending large amounts of their pension they’ve accumulated. This may be on a planned holiday of a lifetime to celebrate your retirement, maybe to reduce outstanding mortgage debt or maybe to build a house extension, for example, or it could be that you’re simply looking to give some money to your family.

6. Knowing your options at retirement

After considering what pension pots you have and the income & expenditure you may need, it’s really important to understand the options that your pensions provide. This may be purchasing an annuity, which is an income for life or drawing down on your pensions in a flexible way.

7. Consider your appetite for investment risk

When approaching retirement, it’s important to consider your appetite to investment risk. Depending on the result and outcome of your feelings, this may have an influence on the income options you have in retirement.

8. Consider other investments you may have

So you’ve considered the fact that you may be entitled to a state pension and considered all of your other pension pots that can create an income in retirement. However, it may be the case where you have other assets that can produce an income for you, such as a rental property or any other types of savings and investments.

9. Think about your death benefits

So with your overall planning for your future retirement, it’s important that you review all of your pension plans in place and consider your future income options, and nominate your beneficiaries. This will ensure that in the event of death, money will pass on to your loved ones or those that you want to receive it.

10. How can I improve or help my position?

So having reviewed your overall pension position for consideration of your retirement, if you feel that you’re not where you need to be, there are a few easy steps that you can take to improve your current position.

First, you could consider increasing your pension contributions. Second, you could look at the funds you’re invested in and whether they’re appropriate or not. And thirdly, you could review your existing pension plans that you have in place to ensure that they are doing what they need to, and whether or not they may be better placed elsewhere.

In conclusion

Hopefully, you’ve been able to take some helpful information away from this video. If you’d like further guidance on it, please contact Ricky directly (ricky.clark@hlfp.co.uk) or complete the contact form below.

Pension Contributions: Personal vs Company

Pension contributions can be very tax-effective – but should these be paid from personal income or directly by your company?

In this video, Ricky Clark from MHA Henderson Loggie Financial Planning shares the main differences between pension contributions when made on a personal basis vs a limited company basis.

Covered in this video:

✅ How personal pension contributions work
✅ How company pension contributions differ
✅ The benefits of both options

📌 If you have any questions, please drop them into the comments section below 👇 or contact Ricky directly at ricky.clark@hlfp.co.uk

How do personal pension contributions work?

Pension contributions paid on a personal basis initially attract basic rate tax relief meaning that your pension contributions are increased towards your pension fund. As an illustration, if you were to pay £100 net from your salary, you would have your pension grossed up by basic rate tax relief, meaning you’d receive £125 into your pension fund.

If you’re an individual who draws an additional rate or higher rate tax income from your business, you may be entitled to further tax relief via your pension. This is done by completing a self-assessment tax return on an annual basis. Whilst higher rates of tax can be obtained on personal contributions, those that may be drawing on a smaller salary will be limited to the amount of personal contributions they can pay.

An individual can make contributions up to 100% of their relevant earnings, subject to annual allowance limits for tax purposes. However, be aware that relevant earnings include salary but not dividends.

How do company pension contributions differ?

Rather than having to draw extra income to pay contributions towards your pension, your company can pay contributions on your behalf. Company contributions are not limited to an individual’s relevant earnings. However, there are certain rules around the pension contribution to ensure that it’s appropriate for that individual in question.

What are the benefits of company pension contributions?

A benefit of a company contribution is it’s a tax relievable expense for the company. However, unlike a personal contribution, there will be no tax relief added on a personal basis. Making a pension contribution from the company is a tax-efficient way of withdrawing money from your business with no tax or national insurance contributions payable on the amount paid to the pension.

In conclusion

As an individual or a business owner, you’ll have many important things to think about like the day-to-day running of your business. However, considering your own financial circumstances is as important, and a common way of doing so is withdrawing capital from your business and paying this towards your pension. The benefits of doing so are that you’re covering your future pension outcomes in retirement, and you’re also able to withdraw capital from your business in a tax-efficient way.

If you’d like any further information, please contact Ricky directly (ricky.clark@hlfp.co.uk) or complete the contact form below.

How to Use a Pension to Buy Commercial Property

We are often asked by business owners, “Can I use my pension to buy commercial property?” and for some individuals, this could be very beneficial and tax-efficient. In this video, Jonathan McDowall from MHA Henderson Loggie Financial Planning shares why you might consider using a pension to buy commercial property and the pros and cons of doing so.

Covered in this video:

✅ The positives of buying commercial property via your pension
✅ A client example and the long-term benefits
✅ The main considerations to take into account

📌 If you have any questions, please drop them into the comments section below 👇 or contact Jonathan directly at jonathan.mcdowall@hlfp.co.uk

What’s the benefit of buying a commercial property with your pension?

Firstly, if your business already owns the property, then purchasing within a pension can release capital back into your business for investment elsewhere. Or if you are buying new premises, using your pension can provide a very tax-efficient way to buy that property.

Key positives

  • One of the key positives of holding property within a pension is that when the property is held within the pension, it can grow free of tax, so there’s no capital gains tax on the sale.
  • The rental income that you receive from the property, within the pension, would also be free of income tax. If you’re still the occupier of the property as your business, then the rent you would pay to the pension will be deemed as an allowable business expense.
  • Once the property is held in the pension, it will no longer be subject to Inheritance Tax if that was an issue for you. 
  • When the property is held within the pension it is not accessible to creditors, for example, in the event of personal or business insolvency.
  • If you don’t have enough pension funds as an individual, to buy the property, you can combine your pension funds with other fellow business owners/individuals to purchase the property within a pension.
  • In a similar way, if the pension funds weren’t sufficient to be able to buy the property, a pension can borrow up to 50% of its assets to help it purchase that property.
  • Finally, holding the property within a pension can serve as a good form of exit planning at retirement, if you’re intending to sell your business. You could retain the property within the pension and still receive ongoing rental income to help towards meeting your retirement income needs.

Client example and the long-term benefits

We recently had a client who was looking to expand his business and acquire new premises to do so. He needed advice on how best to acquire that property. He had three options; he could have either rented a new property, his company could have purchased a property, although that would have involved borrowing to do so, or thirdly, we introduced the option of using his pension fund to buy the property.

After a detailed assessment of the individual’s pension provision and financial circumstances, we were able to advise that using his pension funds to buy the property was a suitable option for him. In this case, the individual had enough funds within his pension to be able to buy the property in mind. However, if he hadn’t, we could have looked to make additional pension contributions to allow him to do so.

The result of this advice was, that it allowed the individual to buy the property in a tax-efficient manner using his pension fund without having to borrow to do so. In the long term, this should provide a very beneficial asset to hold within the pension with rental income accumulating to help grow the value of his pension fund. He will also have the ability to sell the property in the future, free of tax, for example, at retirement.

Main considerations

There are several considerations to take into account when you’re buying commercial property within a pension.

  • Firstly, there’s going to be costs involved; for example, legal costs, tax and VAT. There will also be costs associated with the pension. These could be initial costs and ongoing costs.
  • Once the property is held within the pension it’s no longer on the company balance sheet, so it can’t be used as collateral for any loans. 
  • The firm occupying the property within the pension, even if it’s your own business will still need to pay rent. There would need to be regular revaluations in the property and reviews of the rent on an ongoing basis, which could incur a cost. 
  • There will still be ongoing expenses associated with the property and ongoing maintenance, whether or not a tenant was in place in the property.
  • If the property is the primary asset of your pension, it could leave the investments held within your pension poorly diversified. Property is generally an illiquid asset so it can take longer to sell if capital is needed at short notice.

In conclusion

Hopefully, this video has provided a useful summary of using your pension fund to buy a commercial property and also highlighted a potential option as to how we can use our pensions, that you may not have been aware of. If this is something you’d like further advice on, please feel free to contact Jonathan directly (jonathan.mcdowall@hlfp.co.uk) or complete the contact form below.

Saving vs Investing: What’s the Difference?

Is it better to have cash savings or should you look to invest your money? Whilst cash savings won’t fall in value, they will be impacted by inflation. On the other hand, investments could provide an effective option for your money over the longer-term, but there are risks involved.

In this video, Jonathan McDowall from MHA Henderson Loggie Financial Planning provides an overview of cash savings vs investments to highlight the differences between the two options.

Covered in this video:

✅ The pros and cons of savings and investments
✅ Why you could consider investments
✅ The risks of investing
✅ A comparison of saving vs investing over a longer period

📌 If you have any questions, please drop them into the comments section below 👇 or contact Jonathan directly at jonathan.mcdowall@hlfp.co.uk

Why would I use cash savings?

By cash savings, we mean a bank or building society savings account. These come in different forms, ranging from instant access savings accounts, notice accounts, fixed-term deposits and cash ISAs. The return that you receive on cash deposits will be determined by the interest rate that the bank or building society provides. In turn, the interest rate that they provide is influenced by the Bank of England base rate.

Cash savings are regarded as safe, and the value of your money will not fall. There is also protection offered by the government under the Financial Services Compensation Scheme, so if a bank or building society were to become insolvent your money would be protected by up to £85,000. 

Generally, cash savings are better suited for shorter-term needs, so money that you know you may require in the short-term or money used for an emergency fund.

Are cash savings risk-free?

Whilst savings in a bank or building society won’t fall in value, they will be impacted by inflation. Interest rates have been very low since 2009, so over that period you will have received a very modest return from cash savings. The main risk is inflation eroding the purchasing power of your money, in other words, your money will buy less for you in the future.

Why would I consider using investments?

Investments come in various forms and differing levels of risk. This could range from holding individual shares where you own a small part of an individual company, to managed investment funds that can invest across a range of assets and are managed by an expert for you.

When investing, the returns that you receive are based on the performance of the assets held, for example, shares, property and bonds. These offer the potential for greater returns than interest rates can provide and also the potential for your capital to grow or an income to be received that can outstrip inflation, providing a real return over the long-term. 

Investments are generally best held for longer-term periods of at least five years. Therefore they’re better suited to meet longer-term financial objectives.

What are the risks of investing?

All investments carry some form of risk and this varies depending on the type of investment held. The value of an investment can fall as well as rise, and you may get back less, depending on when the investment is sold and the market conditions at that point in time. The returns received are also variable and they’re not guaranteed.

What does saving vs investing look like over a longer period?

Because of the potential risks of investments, they are better to be held over a long-term period. By taking this approach this offers the opportunity to benefit from the higher returns that can be provided by investments, but also gives you time to recover from any falls in value that may occur along the way. 

In this graph, we highlight the performance of an average investment that is invested across a range of assets including shares, property, bonds and cash. This is set against the Bank of England base rate and it’s also set against the Consumer Price Index, as a measure of inflation. 

This graph shows both negative and positive periods throughout the timeline. In particular, it highlights the financial crisis of 2007/2008 showing a significant market event and the impact it had on the investment value, but also the recovery that was experienced after that.

What does this comparison show us?

This highlights how an investment can perform versus cash savings and inflation over a longer-term period, even with a significant market event. It also highlights the potentially greater returns that can be received from an investment over the longer-term, even with fluctuations along the way.

So, for an individual that has surplus capital that isn’t required over a longer-term period and they wish to achieve greater returns, an investment can potentially provide a good solution for this. However, it is important to point out that past performance is not necessarily a reliable indicator of future performance.

In conclusion

We believe in diversifying and having an element of your portfolio in cash as well as an allocation to longer-term investments, where appropriate. Firstly, it’s important to have the security of an emergency fund in place and then have money set aside for use and enjoyment. Then you should think about the future and money that you wish to work harder and earn a better return, could be allocated to investments.

Hopefully, this video has provided a useful comparison of cash savings versus investments. If this is something you’d like to discuss in more detail please contact Jonathan directly (jonathan.mcdowall@hlfp.co.uk) or complete the contact form below.

5 Ways to Reduce Inheritance Tax

Are you wondering how Inheritance Tax may affect your assets and the money that you leave to your family in the future? As with many other areas of tax, there are ways in which you can minimise IHT.

In this video, Jonathan McDowall from MHA Henderson Loggie Financial Planning explains what Inheritance Tax is and shares 5 ways that you can reduce your Inheritance Tax bill.

Covered in this video:

✅ What is IHT and how can it affect you?
✅ How spending can help reduce your IHT liability
✅ Gifting
✅ Using trusts
✅ Investments that qualify for IHT relief
✅ Life assurance policies

📌 If you have any questions, please drop them into the comments section below 👇 or contact Jonathan directly at jonathan.mcdowall@hlfp.co.uk

What is Inheritance Tax and how can it affect you?

Inheritance Tax (IHT) may affect individuals when their estate is above a certain value on death or if they make certain gifts during their lifetime above a certain value. 

Each individual has a nil-rate band, which is your exempt amount for Inheritance Tax. This is currently £325,000 per person. The nil-rate band can be transferred between spouses, so a total nil-rate band of £650,000 could be available on second death. It’s important to consider that assets passed between spouses are exempt from IHT. 

One potential issue with the nil-rate band is that it has been frozen for many years now, but over those years we’ve had a significant rise in asset prices, which could potentially be an issue, leading to more individuals being liable to IHT.

A further nil-rate band is also available in relation to your main residence. As long as you leave your main property to your direct family, whether that be your children or grandchildren, a further exemption can be claimed. The current main residence nil-rate band is £150,000 per person and this will rise to £175,000 from April 2020.

It’s important to be aware that the main residence nil-rate band could be reduced if your estate value exceeds two million pounds. The main residence nil-rate band is a complex area and I would suggest that you seek professional advice to assess your position towards this. 

If your assets exceed your available nil-rate bands, then IHT is applied at a rate of 40%, so a significant tax can be applied.

5 ways to reduce your Inheritance Tax

There are several options that you can consider to help mitigate an IHT liability. Five of these, that are beneficial ways to reduce IHT are highlighted below:


Although it sounds a bit strange coming from a financial adviser, spending is a simple way for you to reduce the value of your assets/estate and resulting Inheritance Tax liability. It’s important to consider when spending, to spend on something that’s not a tangible asset. For example, go on a nice holiday, but if you were to buy an expensive car, that’s still going to be an asset in your estate. You need to be mindful about what you’re spending, making sure it’s within your means, and making sure you’ve still got enough to last the remainder of your lifetime.


Gifting is another option that I’d always recommend to consider, allowing you to gift assets or money directly to your beneficiaries and also allowing you to see them enjoy the benefit of these gifts. There’s a number of exemptions that you can consider when gifting that allow you to reduce your Inheritance Tax liabilities. Firstly, we have an annual exemption, which allows you to gift up to £3,000 in total per tax year. We also have the Small Gift exemption allowing you to give up to £250 per person, per year. In addition to this, we can make gifts in respect of marriage. We can gift up to £5,000, to children, up to £2,500 to grandchildren and up to £1,000 to other beneficiaries in respect of marriage. 

Gifts made to charities are also exempt, either during your lifetime or through your will. 

If you make any gifts that exceed your exemptions, these are regarded as Potentially Exempt Transfers and this means that you need to survive a period of seven years from making the gift for it to be regarded as fully out with your estate, for Inheritance Tax purposes.

Using trusts

Trusts allow you to make a direct gift into trust, allowing you to remove money/assets from your estate. Providing you survive seven years from the date of the gift, it would be exempt from Inheritance Tax. 

A common use of trusts is gifting money to children or grandchildren for them to benefit from that money in the future. When we place money in trusts, we will place it in an appropriate investment so the money can still grow. The advantage of this is that any growth received would be out with your estate once placed in the trust. 

There are various types of trusts available and different options as to how money can be accessed in the future, from the trust. However, as this is a complex area, I would recommend you seek professional advice if you would like to discuss this further.

Investments that qualify for Inheritance Tax relief

Another solution available is investments that qualify for an exemption called Business Relief. Providing these investments are held for two years and at the date of death, they would be exempt from Inheritance Tax. 

One of the benefits of these investments is that they would still be your investments allowing you to retain control and access to the money. However, these investments do come with significant risks and wouldn’t be appropriate for all individuals. Again, professional advice would be needed on the subject to assess the suitability of these types of investments.

Life assurance policies

The final solution we could consider is arranging a Whole-of-Life assurance policy, held in a trust. This option will provide a capital sum on death that would cover the potential IHT liability. The potential benefit of this being that your beneficiaries wouldn’t need to sell your other assets to pay the IHT bill. Arranging a life assurance policy isn’t going to reduce your Inheritance Tax bill, however, it will just provide a means to pay that tax liability.

In conclusion

Hopefully, this article has provided a good overview of Inheritance Tax and the potential considerations as to how you can mitigate any liability that may exist. However, as you can see, it is a complex subject and there is a need for professional financial advice. So if this is an area of concern for you, please feel free to get in touch with Jonathan directly (jonathan.mcdowall@hlfp.co.uk) or complete the contact form below.

Risks in Retirement: Are you prepared?

There are many risks to navigate in later life, including those which can impact your financial health. Added to that list is a potential financial shock that comes about as a result of a little-noticed change to the state pension system. The risk, identified by insurer Royal London, follows a state pension system charge in 2016.

That change could result in older couples facing an unexpected financial shock when one of them dies. The change means a typical pensioner could lose between one-half and two-thirds of their household income following such a bereavement. The death of a partner in retirement often results in a fall in household expenditure, although not usually by as much as this forecast fall in household income.

This means potential living standards can be squeezed. Steve Webb, Director of Policy at Royal London, said: “As well as the emotional impact of bereavement, losing a spouse in later life can have a huge impact on living standards. Under the new state pension system, widows and widowers will inherit little, if anything of their late spouse’s pension and income from an annuity often ceases when the recipient dies. Household outgoings may reduce somewhat following a bereavement, but income is likely to fall by much more. Couples in retirement need to make sure they know where they would stand and plan ahead to make sure they do not face an unexpected financial shock.”

So, what has prompted this new retirement risk?

Before the state pension system was changed in 2016, the death of one member of a married couple in retirement would result in the surviving spouse claiming an enhanced state pension, based on the late spouse’s National Insurance record.

The introduction of a new state pension system in 2016, came with a new set of rules for bereaved spouses. Instead of the ability to claim an enhanced state pension, there is now minimal scope to inherit a superior National Insurance record.

Pensioners in receipt of an occupational pension income in retirement will often continue to receive half of the income, in the event of the spouse dying. Where retirement income comes from a standard “single-life annuity”, it’s often the case that no future income passes onto the surviving spouse. Ongoing income in this scenario will depend on whether death occurs during the guarantee period for the annuity, which is typically the first 5 or 10 years.

Things to consider

There are three key matters for couples approaching or in retirement to consider that will help them deal with this potential retirement income risk:

  • Firstly, you should find out where you stand. Finding out your likely financial position means checking how much occupational or private pension income would continue to pay, should your spouse die before you in retirement.
  • Secondly, you need to be careful with your finances earlier in retirement. One way you can mitigate this retirement risk is by building up a pot of savings or investments, creating a useful financial buffer in the event your income suddenly falls.
  • Finally, you should consider a financial product that would payout if one partner were to die. This financial product could take the form of life assurance, although the cost of such cover can be expensive as we get older.

Regardless of the action, you decide to take; it’s essential to recognise this retirement risk and plan to mitigate its financial impact on your life. MHA Henderson Loggie Financial Planning would be happy to help.

Get in touch

Jim Wilson
Managing Director

Ricky Clark
Financial Planning Consultant

Jonathan McDowall
Financial Planning Consultant

David Legge
Senior Consultant

Henderson Loggie Financial Planning Ltd is authorised and regulated by the Financial Conduct Authority.