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AM&A Blog

When it comes to funds, the best advice is personal

10th July 2019

The recent problems with the suspension of dealings in a heavily promoted UK equity income fund have exposed the blurred line between advice and guidance.

According to the Investment Association (IA), there are around 3,500 funds on sale in the UK. The IA sorts these into over 30 individual investment sectors, although about 10% are listed as being in the unclassified sector. Faced with such a large choice, understandably many private investors want some help in making their fund selections. The assistance they receive has come under the spotlight following the recent suspension of trading in the Woodford Equity Income Fund (WEIF).

WEIF's manager, Neil Woodford, established a strong track record with Invesco Perpetual before leaving the group in 2014 to set up his own fund management business. Unsurprisingly, a large amount of money followed him to his new company. He was helped by a common feature of today's fund marketplace: favoured fund lists. These typically consist of 50 - 100 funds, spread across those 30+ IA sectors, chosen by firms whose main business is marketing funds to the public. The criteria for selection are not always specified, but there is often a heavy reliance on past performance. However, there is one aspect that is clear: if you pick a fund from the list, then it is you who are making the choice.

Favoured fund lists do not constitute personal financial advice, even if may investors think that is what they are receiving. At best they are a form of general guidance, attempting to sort some of the wheat from a large volume of chaff. A select list only supplies the selector's opinion at the time. It does not offer you a recommendation based on your personal circumstances, including consideration of the other investments you hold, whether held directly or indirectly, e.g. via pensions. Nor does the provider of the list offer any ongoing support, an important factor in current market conditions.

There is a role for recommended fund lists, but there is no substitute for personal, regularly reviewed advice on your investments.

The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Investing in shares should be regarded as a long-term investment and should fit in with your overall attitude to risk and financial circumstances.

How well do you understand inheritance tax?

13th June 2019

A survey by HMRC published in May concluded that the public have a relatively poor knowledge of inheritance tax (IHT) rules and lack of confidence in what they do know.

HMRC recently commissioned a survey of 947 people who had made gifts in the last two years. To assess knowledge of the IHT system among these donors, they were asked eight questions, which are shown below.

Now it is your turn to try - which of the following statements is true and which is false?

  1. A donation to a charity or a qualifying political party can count as a gift that is exempt from inheritance tax - true or false?

  2. Inheritance tax may be paid on gifts totalling more than £325,000 if the person who makes the gifts dies within seven years of making them - true or false?

  3. A person can give as many gifts of £250 as they want in a year and not be subject to inheritance tax, as long as each gift is to a different person - true or false?

  4. Inheritance tax may be charged at 40% on gifts to individuals given by the deceased in the three years before their death - true or false?

  5. A gift can be the difference between the value of property and the actual price that the buyer pays - true or false?

  6. Inheritance tax will always be payable on gifts over £3,000 given in the seven years before death - true or false?

  7. A gift up to £1,500 to a niece or nephew getting married is always tax free - true or false?

  8. A married couple or civil partners can leave up to £950,000 to their children without paying inheritance tax - true or false?

How did you get on?

58% answered five or more questions correctly, while just 37% gave themselves a confidence rating of over 6 out of 10 on answering the questions. After adjusting for confidence levels, the survey concluded that the proportion with a “high knowledge” - as opposed to simply lucky with their answers - was just one in four.

The correct answers are shown below. Whatever your score, it is worth considering why HMRC should have undertaken such a survey at this time. It may be no coincidence that the Office of Tax Simplification is due to publish its second report on IHT simplification soon. Rationalising the rules on lifetime gifts is an obvious target, but as ever with simplification, there would be some losers. We can help you consider where you might stand on the winning and losing scale.

Answers - True: 1, 2, 3, 4, 5, 8; False: 6, 7

Suspension of Woodford Equity Income Fund

5th June 2019

Some observations on the temporary suspension of the Woodford Equity Income Fund

There has been a great deal of publicity surrounding Monday's announcement of the temporary suspension of the Woodford Equity Income Fund, managed by Neil Woodford, one of the best known and most respected investment managers in the UK, who was appointed a CBE for services to the economy in 2012.

Mr Woodford became a fund manager with Eagle Star in 1987, then moved to Invesco Perpetual in 1988 where he ran the highly successful Income and High Income funds which featured in AM&A's recommended fund lists at the time.

In April 2014, Mr Woodford left his role as head of UK equities at Invesco to set up Woodford Investment Management where he opened his flagship Equity Income fund. Many investors followed Mr Woodford from Invesco Perpetual to his new company; however, based on our fund selection process, we made a decision at the time to move the UK Equity Income allocation in our model portfolios away from Invesco Perpetual and Mr Woodford to an alternative fund in the sector.

For the record, since the launch of the Woodford Equity Income Fund to date, our recommended fund in the sector posted a return of 32.5% against a benchmark return of 24.4% whilst displaying considerably lower risk and volatility ratings than the benchmark IA UK Equity Income sector. By comparison, the Woodford Equity Income Fund has posted a return of -0.8% over the same period whilst displaying considerably higher risk and volatility characteristics than the benchmark. (Source FE 4 June 2019)

The decision to temporarily close the Woodford Equity Income fund, once valued at £10bn and now valued at under £4bn, came as a result of two events on Monday 3 June. The first was the decision by Kent County Council to withdraw all of the £250m it had invested in the fund through its pension fund. Also on Monday, Keir Group, one of the fund's substantial holdings, announced a profit warning, prompting its shares to fall by 40 per cent, booking another big loss for Mr Woodford.

The drop in the value of Keir Group shares, combined with the outflows seen in recent weeks as nerves about global trade tensions and a potential no deal Brexit saw investors withdraw their cash at a rate of £9m per working day in May, with the £250m withdrawal by Kent County Council adding to the outflows.

The underperformance of the Woodford Equity Income Fund has been down to multiple factors: Firstly, Mr Woodford's contrarian investment style has been out of favour. He holds many unloved and undervalued UK companies but as Brexit drags on and on, they are not being given the opportunity to recover.

There have also been a number of stock-specific issues. The knock-on effect is that the fund has suffered large redemptions as many investors have taken their money elsewhere. This, in turn, has meant Mr Woodford has been a forced seller of some of his stocks, even if they have done well, in order to meet those redemptions. It's a vicious circle.

The first signs liquidity might be an issue came when it was revealed that Mr Woodford had listed some of his stakes in unquoted companies on the Guernsey Stock Exchange, which meant they no longer counted as unquoted under Investment Association rules. The problem had been that due to the quoted stocks' poor performance, the unquoted holdings became a bigger part of the total portfolio, reaching above the 10 per cent limit permitted under IA rules.

The culmination of these events prompted the fund to be closed to outflows and inflows until further notice. The decision will be reviewed after 28 days and the Financial Conduct Authority will be contacted, at which point the fund could be reopened or the closure may be renewed.

There are a number of lessons we believe that should be derived from the temporary closure of the Woodford Equity Income Fund.

The asset allocation decision is especially important in the management of risk. Diversifying across different asset classes, such as UK shares, foreign shares, fixed interest securities, property and commodities, can reduce an investment portfolio's volatility. What is bad news for one asset class might be good news for another. Exposure to the UK Equity Income sector is currently between 5% & 7% in most of our model portfolios. Investors whose entire portfolios were built around Mr Woodford are undoubtably feeling the pain while those who included LF Woodford Equity Income as part of broad mix of funds are feeling less discomforted.

Fund selection is not a simple matter of looking at a set of performance league tables and picking one of the top three. League tables only tell you what has been achieved, not how it was done, nor the likelihood of continued performance. Fund selection involves an in-depth analysis of a variety of components which are undertaken at AM&A.

Large platforms "over-promoted" the Woodford Equity Income Fund with Hargreaves Lansdown still listing the fund on Monday as one of their “Wealth 50” recommended funds. Hargreaves Lansdown kept recommending the fund when there was no objectively good reason to do so and the reason that the fund was finally removed from their “Wealth 50” list was probably because the fund could no longer be traded.

We anticipate numerous complaints from investors holding the Woodford Equity Income Fund on these “execution only” platforms like Hargreaves Lansdown who cannot access their funds and who believed that they had received advice to invest in the fund.

Another of Mr Woodford's key backers was St James's Place whose chief investment officer issued a statement last week reaffirming its confidence in Mr Woodford. According to the Financial Times, some SJP clients had asked to be moved out of the SJP - Woodford managed fund resulting in £200m outflows over the past 18 months.

Back in 2014, our due diligence on Mr Woodford's new fund failed to meet our criteria to recommend the fund and we were surprised that despite the fund's poor performance over the past three years, large platforms, ratings agencies, advisers and investors blindly following the herd without fully investigating the fund's underlying exposure.

Most people invest in an equity income fund with the expectation that it will invest in large, secure, dividend-paying shares. A glance at the holdings of the Woodford Equity Income fund shows how different it is from its peers and therefore does not do what is stated on the tin as evidenced by the fact that the managers chose to benchmark the fund against the IA UK Equity rather than IA UK Equity Income index.

Finally, this week's event has highlighted the need for regular portfolio reviews either to rebalance existing holdings because of intervening moves in investment values or, at the fund level, manager changes, revised fund objectives or disappointing performance can all prompt adjustments. The discipline of a regular review is therefore a key component of successful investment planning.

In conclusion, the temporary suspension of the Woodford Equity Income Fund highlights the importance of diversification as well as drawing on our extensive market knowledge and experience in recommending appropriate asset allocations, fund and platform providers.

How long do you want to work?

8th May 2019

As people are living longer, a parallel older-age profile is emerging in the labour force.

How long do you want to work?

Source: National Statistics 16 April 2019

Labour market statistics for the period December 2018 to February 2019 revealed some impressive results. In the UK, employment of those aged 16-64 was running at 76.1%, the joint highest level ever and up 0.7% on a year ago.

Drill down into National Statistics numbers and some interesting facts emerge:

  • The increases are being driven by more women aged 50-64 in the workforce. At the start of the decade, 58.5% of women aged 50-64 were in employment, whereas the latest figure is 68.1%. Coincidentally in 2000, that was the male rate of employment in the 50-64 age band.
  • The proportion of men aged 50-64 in work has also risen over the same period, but less dramatically - from 71.4% in 2010 to 76.8% now.
  • At 65 and beyond, employment is reaching record levels for both men and women, as the graph shows. Women and men aged 65 and over have an employment rate of 7.9% and 14.2% respectively, compared to 5.5% (women) and 10.8% (men) in January 2010.

There are several reasons for the increase in employment beyond age 50:

  • For women - and now men - the rise of state pension age (SPA) has undoubtedly had an impact. As recently as April 2010, the SPA for a woman was 60. By October next year, both men and women will share a SPA of 66.
  • The ending of compulsory retirement ages has encouraged longer working lives.
  • The gradual disappearance of final salary pension schemes, particularly in the private sector, has forced some people to revise their retirement plans.
  • Economic conditions have played their part. Real (inflation-adjusted) wage growth has been virtually zero over the last 10 years, limiting the scope for retirement savings.

Working for longer can be beneficial to health, although the case is by no means clear cut: continuing work-related stress could be life shortening. The key is to be able to choose when to stop work, rather than have the decision forced upon you. To get into that position, there is no substitute for adequate retirement planning - preferably well before the age 50, yet alone 65, is reached.

Living longer, but...

12th April 2019

A recent report shows that life expectancy is still improving, but not as quickly as was once expected.

“British life expectancy falls by SIX MONTHS for men and women”

That was one recent headline in response to the latest report of the Continuous Mortality Investigation (CMI) of the Institute and Faculty of Actuaries. While it was not inaccurate, like many such headlines it was open to misinterpretation.

The CMI research suggested that mortality improvements had slowed down from over 2% a year between 2000 and 2011, to about 0.5% now. The CMI was not the first to notice the trend. The Office for National Statistics, some large insurance companies and pension providers have all made similar observations. Various possible reasons have been put forward, including a fading benefit from the reduction in smoking, the impact of austerity and the spread of obesity and diabetes.

The life expectancy for a pension scheme member aged 65 is now 21.9 years for man and 24.2 years for women, according to the CMI. These are effectively averaged numbers, so there is roughly a 50/50 chance that today's 65 year old pensioner will live longer, even if the CMI's current calculations prove to be perfectly accurate in 20+ years' time.

Whether or not the CMI turns out to be 100% correct, there is little doubt that the timescales involved mean anyone retiring at 65 today needs to think in terms of drawing their pension for at least a couple of decades. If you are approaching retirement, that should serve as a reminder of the importance of establishing the right long term structure for drawing your future income. Make the wrong decision and it could be hanging over you for the next 20-30 years.

Footnote: While the CMI uses age 65 as a benchmark, the relevance of that specific age is fading. State Pension Age is no longer 65 but is now about 65¬, on a path of phased increases that will reach 66 by 6 October next year.

Check your April pay slip

13th March 2019

Your April pay may look much the same as March's, but it is it worth giving your pay slip a closer look.

If you are an employee, your April pay slip is always worth checking, even if you pay little attention to the other eleven you receive over a year. The items to check include:

Salary: Many employers change pay rates from 1 April, often coinciding with the start of their new financial year. If you were notified of a pay increase in March, it is worth making sure the number on the April pay check agrees with what you were promised.

Tax code: Your April pay check will be the first for the 2019/20 tax year and your PAYE tax code will have almost certainly changed from what was on your March pay slip. If you are entitled to a full personal allowance and have no deductions, your code number should increase by 65, reflecting the £650 increase in the personal allowance.

If you have a company car, then it is likely to move your code in the opposite direction. For most cars (other than those with the highest emissions), the percentage of list price that is taxable rises by 3% - £300 per £10,000 of list price. A £22,000 car will therefore more than counter the rise in the personal allowance. The higher scale percentage also means a similar increase in taxable value of employer supplied fuel. In practice you might be better off paying your own fuel bills, even if your employer pays you nothing in compensation.

National insurance contributions (NICs): The primary threshold (that is, the starting point) for NICs rises by £4 a week while the upper earnings limit (the top level of earnings on which you pay full 12% NICs) jumps by £70 a week. As a result, if your annual earnings are more than £46,600 a year, you will be paying more NICs from April. If you earn over £50,000 a year, your extra NICs will be just over £28 a month.

Pension contributions: These are generally linked to salary, although not necessarily your full pay, so should increase if you have an April pay increase. If you are in an automatic enrolment pension scheme, your contributions are usually based on “band earnings”, which were £6,032-£46,350 in 2018/19 and are £6,136-£50,000 in 2019/20. The contribution rate will rise, too. How much will depend upon your employer's contributions: you might see the rate increase by two thirds to 5% of band earnings (4% after basic rate tax relief). If your pay in April is lower than in March, the auto enrolment change could be the culprit.

For more insight on the tax, NICs and pension deductions from your pay and options to limit their impact, please talk to us.

The value of tax reliefs depends on your individual circumstances. Tax laws can change. The Financial Conduct Authority does not regulate tax advice.

Happy birthday to tax-free savings

11th February 2019

The arrival of the new tax year on 6 April means it is time to consider your Individual Savings Accounts (ISA) investments, which will celebrate their 20th birthday in April.

Over the last 20 years, the maximum annual contribution has risen from £7,000 per tax year to £20,000 for 2019/20. If you managed to set aside the maximum each tax year since 1999/2000, you would now have placed over £205,000 into ISAs and largely out of HMRC's reach.

The relatively simple single investment option has also morphed into a range of plans covering everything from retirement planning (the Lifetime ISA) to children's saving (the Junior ISA).

However, one aspect has been common throughout the ISA's lifetime: new investment is concentrated at the end of the tax year. For example, in the 2017 calendar year Investment Association data shows that net ISA investment in the second quarter was £1,421 million against a net total of £1,068 million for the entire year (the first and fourth quarter showed net outflows).

This means, if you are in that 'leave-it-until-the-last-moment' majority, now is the time to start thinking about your 2018/19 ISA investment.

The benefits of ISAs

Whilst the value of ISAs has changed over 20 years, as successive Chancellors have altered the tax treatment of interest, dividends and capital gains, the main tax advantages are largely unchanged:

  • There is no UK income tax to pay on interest, whether from cash or fixed interest securities. With low interest rates and the personal savings allowance of up to £1,000, this benefit is less valuable than it once was.
  • There is no UK tax to pay on dividends - This is a more valuable benefit now the dividend allowance is £2,000 and even basic rate taxpayers can face 7.5% dividend tax.
  • There is no capital gains tax on profits.
  • There is no personal reporting to HMRC.

One extra feature added in recent years is the ability to allow ISAs to be effectively transferred to a surviving spouse or civil partner on first death. However, ISAs ultimately remain liable to inheritance tax unless appropriate AIM-listed investments are chosen.

For year-end ISA investments, please contact us.

The value of your investment can go down as well as up and you may not get back the full amount you invested.

Past performance is not a reliable indicator of future performance.

Investing in shares should be regarded as a long-term investment and should fit in with your overall attitude to risk and financial circumstances.