I do trust you have summered well and have enjoyed the mild Autumn sunshine and that the first firing up of boilers and the recent round of Covid boosters has not caused any unexpected problems. So first off, an apology, my notes are supposed to be quarterly, and the last communique was February, so I have missed a couple! It’s been one of those years, but we are now back on track I promise.
What has happened in the world since February?
The themes and trends we knew were likely to happen have come to pass; economic uncertainty prevails, interest rates have increased, and house prices are falling. Our landscape is dominated by the cost of living rises, the UK is struggling to fulfil or maintain its economic position as it struggles to produce sufficient GDP (Gross Domestic Product) to compete in international and inflationary markets.
There is little likelihood in the short term of a miraculous change of fortune but (as I have mentioned in previous notes) all of this needs to be put into context and perspective; if it ends up being a maximum five-year cycle of woe and pressure, is that in the grand scheme of things so unexpected and what happens when we start to come out the other side as surely we will. The end of a tightening cycle has historically heralded some strong returns from equity markets. 1999-2000 was the exception in the US due to the burst in the bubble in technology-related (‘TMT’) stocks, represented by the purple line. Consequently, it is imperative to stay in the market!
What of the one perceived bit of “good news” in the above commentary – higher deposit rates!? It is certainly a welcome return to a risk-free return on capital but again context is needed, and it shouldn’t fundamentally change your understanding of risk and reward. Investing is different from saving and is designed to achieve different objectives and while you may decide just to hold a higher amount of cash in the interim, most financial planning objectives are medium to long term and so must be deployed in assets not cash.
Deposit rates need to be balanced with high inflation (eroding the “real” value of money) and the fact that they may not be tax efficient. For savings income there is a Personal Savings Allowance (PSA) of £1,000 for a basic rate taxpayer and £500 for a higher rate taxpayer. Any interest after that is taxable and HMRC will automatically collect the tax you owe through your pay-as-you-earn (PAYE) tax code.
What have we been doing since February?
We have been busy and predominantly acting as a sounding board to allay fears and to prevent any “knee jerk” reactions. Calming emotions and advocating patience are a crucial part of our role in managing a client’s portfolio and expectations. A key part of the consultation process is to confirm that despite all the noise, a client remains on track to achieve their goals.
The freezing of personal allowance and the changes to Capital Gains Tax (CGT) in the Autumn statement last year has meant a great deal of work re-calibrating the tax efficiency of portfolios again to ensure where necessary tactical switches are made to the overall strategy. Fiscal drag is the new enemy; the freezing of allowances (according to the Office for Budget Responsibility) creating for example 3.2m new taxpayers and raising £26bn for the Treasury. An appropriate financial plan can undoubtedly mitigate any additional tax you may be exposed to!
We have also been extolling the virtues of diversification to mitigate risk. This is highlighted in the resetting of portfolios to hold “structured” investments. This tactical switch is akin to a football manager making substitutions to alter the composition of the team to achieve a positive outcome in adverse conditions.
A structured plan is simply a different style of investment which has a pre-determined upside and a known downside but crucially the plan can deliver a positive return even if the market falls in value. Rather than a wide range of underlying funds and stocks, the plan is normally linked to an index such as the FTSE100. In addition, there are also structured deposits whereby the returns are not based on interest rates (which will start to come down!) but investment returns and so actually almost the perfect home for the cash that clients are naturally wanting to retain in the current conditions.
It is our primary job to ensure you have all the options available to make an informed decision: structured plans are not suitable for all but certainly over the coming months they will be on our agenda to debate the pros and cons. As always, any comments and questions please do not hesitate to contact me or one of the team.
Chartered Financial Planner