Is Britain A Future Tax Haven?

The United Kingdom isn’t viewed as a tax haven. Money flows in from across the world to prime real estate in Mayfair and stocks listed in Paternoster Square because investors see opportunity to make money, not save it.

That could soon change, depending on the outcome of the ongoing Brexit negotiations. Over the past three years, as the negotiations between Westminster and Brussels dragged on, Britain experienced an unprecedented wealth drain. Dozens of major companies, including Airbus, Aviva, Credit Suisse, Bank of America Merrill Lynch, Barclays, Dson, Ford, and Honda have either cut jobs, cut investments, or moved to other locations (Ben Chapman and Joe Sommerlad, Independent, 26 Feb 2019).

Joining the exodus are wealthy individuals from across the nation. According to Bloomberg’s latest report (Alexander Sazonov, April 30, 2019), 3,000 millionaires left Britain last year alone, with most citing higher taxation and Brexit-related uncertainties as reasons for their departure.  

Faced with a stampede of job-creators and investors leaving the country, Britain may be tempted to adopt the most popular remedy for this situation - lower taxes. The potential model of turning Britain into what political leaders call “Singapore-on-Thames” suggests the nation could cut corporate tax rates, and deregulate the financial markets (the Local, 25 January 2017).

Indeed, the Tory government has already promised sweeping corporate tax cuts over the next few years. The UK’s corporate tax rate of 19% is already lower than all other G7 countries and 15 European nations (Helen Miller, Institute for Fiscal Studies, 10 May 2017). Just last year, Panasonic announced it was moving out of Britain because of fears the Japanese government could view post-Brexit UK as a tax haven. Britain’s move towards haven status seems on its way.

However, there are several reasons this plan would fail if implemented. Firstly, the UK is already a tax haven in some sense. Money from across the world flows to London after running through a filter in Crown Dependencies and Overseas Territories like the Cayman Islands, Jersey and the Isle of Man (Nicholas Shaxson, the Guardian, 24 October, 2017). Secondly, the European Union is already clamping down on tax havens across the world by placing them on a blacklist. Earlier this year, the EU threatened to include the Cayman Islands and British Virgin Islands on its list of “non-cooperative tax jurisdictions.” (Business Line, March 04, 2019).

Finally, the biggest hurdle to tax haven status may be scale. The UK is the fifth largest economy in the world, and to replicate the Luxembourg or Liechtenstein model it would need to attract more capital than the entire planet currently has (Nicholas Shaxson, the Guardian, 24 October, 2017).

Information is based on our current understanding of taxation legislation and regulations which is subject to change

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Early Retirement: Pipe Dream or Plausible?

If you believe the Guardian (Amelia Hill, 29 Mar 2017), the concept of a retirement is on the brink of extinction. The country’s median age has been creeping up just as the public pension system starts to burst at the seams. People are living longer while also saving less for their later years.

With little money to support themselves as they get older, many Britons are being forced to work past their expected retirement age and some may have to work forever. However, on the other end of the financial spectrum is a growing cohort of young professionals who haven’t just planned for retirement but are actually aiming for financial independence while they’re still young.

The so-called FIRE movement, short for ‘financial independence, retire early,’ is now sweeping across the world. Popular among millenials and digital natives, the movement encourages maximising the savings rate by living extremely frugally for extended periods while trying to maximise income and investment returns in a number of ways (Chris Stokel-Walker, BBC, 2 November 2018).

FIRE proponents are, by all measures, a rare breed. Most young people are struggling financially. According to the Office of National Statistics (Kate Hughes, the Independent, 8 October 2018), the rate of homeownership has dropped in recent years, a third of young people have more debt than assets, and half of all millenials have no savings at all.

Yet for every broke 20-something is another savvy 20-something planning on retiring before the age of 40. Thousands of people claim to have followed the FIRE model to become financially independent early in life so that they can concentrate on raising children, traveling the world, or pursuing passion projects.

A closer look at the FIRE model reveals just how feasible it is. Research published by insurer Royal London (Kate Hughes, the Independent, 8 October 2018), indicates that the average person needs to set aside nearly £260,000 to retire comfortably. Assuming an individual can set aside half of the UK median income of £29,000 every year and earn a rate of return of 4% annually, this threshold can be surpassed in 14 years. This means a savvy saver who starts implementing the model right after graduation (age 21) can realistically retire by the age of 35.

Bear in mind that the model allows for flexibility and savers can hit their goal by earning more than the median income or saving at a rate higher than 50% of UK average income. However, implementing the model requires immense sacrifices - no expensive holidays, car ownership, or frequent lattes while working harder than the average citizen and perhaps living in shared accomodations for over a decade.

Economically, the FIRE model is definitely viable. However, the drastic changes in lifestyle and immense sacrifices required may make the strategy untenable for most people.  

The value of investments and income from them may go down as well as up and you may not get back the original amount invested.


What Comes After Selling Your Business?

Exiting a business you’ve created is a milestone unlike any other. It’s never easy selling an enterprise you’ve probably spent countless days and sleepless nights nurturing. When it comes time to let go, the liquidity created through the acquisition pales in comparison to the emotional and financial toll of closing an important chapter of your life.

However, what comes after selling your business must be planned meticulous to avoid some of the most common mistakes former entrepreneurs make. Here are some of the things retired business owners and celebrity business leaders recommend sellers do:

1. Be Selective

Selling a small or medium-sized business is likely to create more liquidity than average. Suddenly cash-rich former entrepreneurs find themselves inundated with requests for support and investment offers from friends and family.

Gracefully turning down requests for cash under these circumstances is often difficult. April Masini, an online advice columnist at AskApril.com, told US News (Aug. 27, 2014) that the best way to deal with these requests was to be firm, be polite, clearly explain how much you can afford, and offer time or advice instead of cash.  

2. Invest Wisely

After selling his own business and seeing other entrepreneurs exit with hefty payouts, Yuen Yung CEO of Casoro Capital, a private equity firm, says the most successful sellers are the ones who diversify their investments and try to generate steady passive income from their assets. “Those who focused on replacing their income through investments that paid regular dividends without eating into their principal ended up using the exit as a long-term wealth building experience," he told Inc. (25 September, 2017).

Speaking to a professional investment adviser or hiring a money manager is probably a great idea even if you haven’t sold a business.  

3. Give Back

Creating a foundation or charitable trust focused on issues near and dear to your heart is an efficient way to channel your newfound wealth. Former entrepreneur Bill Gates presents the best model of generating goodwill and helping the world through generosity. Others, like Jack Ma, the co-founder of e-commerce giant Alibaba and China’s richest man, have also channeled their time and resources into giving back to their community after retiring from their businesses (Henry Chu and Patrick Frater, Variety, September 8, 2018).  

With careful planning and a bit of discipline, the transition from business leader to retirement could be easier and more rewarding than you expect.

The value of investments and income from them may go down as well as up and you may not get back the original amount invested.

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3 Changes To Your Personal Finances In The New Financial Year 2019/2020

Financial years officially start on the 6th of April, which means changes that were announced by the Chancellor of the Exchequer Philip Hammond in the most recent Budget have now gone into full effect. The switch could have tangible effects on your personal finances for the next twelve months.

Here are the four most noteworthy changes to your financial life in fiscal year 2019-20:

1. Slightly lower income taxes for everyone

Changes to the income tax framework have the most direct impact on the average taxpayer. This year the tax slabs and allowances have all shifted higher leading to a slightly lower tax burden for everyone across the country. The personal allowance (income on which residents pay no tax) rises from £11,850 to £12,500. That means all Britons get an extra £130 a year in disposable income. Meanwhile, the threshold for the highest tax bracket (40%) has also been raised from £46,350 to £50,000, leading to an extra £860 in disposable cash for the nation’s most well-paid individuals (Sam Meadows, The Telegraph, 6 April 2019).

However, parallel changes to National Insurance thresholds could offset that gain for wealthy taxpayers to a certain degree.

2. Relief for entrepreneurs and investors

A few key changes may incentivise investments and entrepreneurship across the British economy. The Junior Isa limit will increase from £4,260 to £4,368, helping families save more money for their children's future. Capital gains tax (CGT) allowances have been lifted from £11,700 to £12,000, helping investors save more money on their divestments. And the Entrepeneur’s Relief gives a CGT break to those who sell shares in an unlisted company that meets certain conditions, helping entrepreneurs and small or medium-sized business owners keep more of their gains from selling.

3. The crackdown on buy-to-let investors continues

The crackdown on buy-to-let investors that was kicked off by Chancellor George Osborne in 2015 is being implemented in phases and will be completed by the next financial year (Sam Meadows, the Telegraph, 8 February 2018). This year, landlords can only claim 25% of their mortgage interest rate as a business expense for tax relief. Meanwhile, landlords operating Airbnbs will only be able to claim the £7,000 relief under rent-a-room program if they occupy the property and list a spare room.

In other words, the government has tightened the rules on landlords across the country.

Altogether, the new financial year should put more money in the pockets of average citizens, business owners, and investors, while reducing concessions for landlords.

Information is based on our current understanding of taxation legislation and regulations which is subject to change.

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An Early Inheritance Could Be The Best Christmas Gift For Your Children

Some say it’s better to give your children a warm hand than a cold one. In other words, an early inheritance could be an excellent financial choice for the entire family. Gifting a portion of your wealth to your loved ones while you’re still around could give them a much-needed financial boost while saving you from the dreaded inheritance tax.

About a fifth of UK parents have already transferred their wealth to their loved ones (Rozi Jones, Financial Reporter, 8TH OCTOBER 2018). Another fifth of UK parents have not yet transferred their wealth but plan to do so before they pass away. This phenomenon isn’t just driven by UK taxes on inheritances and capital gains.  According to a Merrill Lynch retirement study, nearly 60% of Americans aged over 50 said they wanted to leave their inheritance to their children as soon as possible (Family & Retirement: The Elephant in the Room, 2013). Those surveyed said they wanted to help their loved ones achieve their dreams rather than simply minimise taxes.

Expanding lifespans could be another reason for considering an early inheritance. According to the latest ONS figures, the average UK life expectancy is over 81 years. This means most people won’t receive their inheritance till their 50’s or 60’s. However, people in  their 20’s and 30’s need the financial support most. They’re starting families, paying for their children’s education, and managing a mortgage at this age. A financial impetus might be far more effective during this period.

Any of these reasons could justify an early inheritance. However, parents need to consider three important factors before they decide to hand their wealth over - retirement income, gifting regulations, and wealth longevity.

In other words, parents need to make sure they don’t give too much away too soon. Not having enough of money to live on in your 80’s and 90’s is a dreadful outcome that can be easily avoided with better planning. Planning also goes a long way towards making gifts tax-efficient. According to the current tax rules, residual estates are taxed at 40% on anything inherited above £325,000, or £650,000 for couples in a formal relationship. However, if a large sum was gifted before death and the giver lives seven years or more, the sum is not counted as part of the estate and does not attract inheritance taxes.

These rules and regulations on early inheritances could get complicated depending on your marital status, age, financial circumstances and the structure of your financial assets. To find the best solution for your unique requirements, refer to the  UK Gov Inheritance tax manual or consult a professional financial adviser.  

Information is based on our current understanding of taxation legislation and regulations which is subject to change

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Diversification: How Much Is Too Much?

‘Never put all your eggs in one basket’ may be the most well-known and commonly used financial advice out there. Nearly every wealth manager and financial planner starts off by explaining the benefits of diversification.

That’s because spreading out capital in different asset classes, geographies, and funds is the easiest way to mitigate risk and limit the downside. According to Modern Portfolio Theory (Ben McClure, Investopedia, Dec 12, 2017), a portfolio of uncorrelated stocks or bonds can eliminate the unsystematic risk, leaving the investor exposed only to systemic risk. In other words, a basket of stocks of companies from different industries will cancel out the individual risks of each company and leave the investor exposed only to the average risk of the market, which should be comparatively lower.

However, there is such a thing as too much diversification. In Edwin J. Elton and Martin J. Gruber's book "Modern Portfolio Theory and Investment Analysis," they concluded that there was a limit to the risk mitigation benefits of diversification. Every new stock added to a portfolio would lower the overall risk down, but the risk could never be lowered than the average market’s risk (systemic risk). In other words, adding stocks beyond this point had diminishing returns and was a waste of effort.

So, how many stocks is too many? According to  Elton and Gruber's book, the first 20 stocks added to a portfolio reduced the vast majority of unsystematic risk. Stocks added beyond that point had a negligible impact on the overall risk the investor faced.

It’s important to note that these 20 stocks need to be highly uncorrelated. The stock prices of different companies need to move differently at different times. For example, energy companies may perform badly when the market price of crude oil plunges, but lower oil prices reduce the costs of airlines which might boost their stock. Holding stocks from both industries neutralizes the effect.

With this framework in mind, it’s easy to see how most investors over-diversify. Every new mutual fund or debt fund adds hundreds of securities from a wide range of different companies, sometimes spread across the world. This adds to the complexity of the portfolio without adding much value. Investors would be better served by striking the fine balance between diversification and overextension.

Warren Buffett, arguably one of the world’s best investors, also believes in striking this balance. “Diversification is a protection against ignorance," he once said. "[It] makes very little sense for those who know what they’re doing.”

For the average saver, it’s best to hire wealth managers or financial planners who “know what they’re doing.

The value of investments and income from them may go down as well as up and you may not get back the original amount invested.

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Rise of the Robo Advisors

Historically, savers have had two options for their investment strategy. Savvy investors with a knack for numbers can pick and choose their own investments while those who lack the time or will to manage their finances can delegate the responsibility to professional financial advisors.

Now it seems there’s a third option. Advances in artificial intelligence technology have allowed some developers to create computer software that can automate many of the more mundane aspects of personal financial management. So-called “robo advisors” are based on algorithms that can determine a person’s risk tolerance, risk-bearing capacity, and time horizon. The robo advisor can then allocate capital to different asset classes, periodically rebalance the portfolio, and even harvest tax-losses without human intervention (NERDWALLET, Jan. 25, 2019).  

Robo advisors offer a number of advantages. For one, they’re tightly bound by the parameters and rules baked into their algorithm, which can help infuse discipline into a long-term financial plan. By automating many of the routine tasks of a traditional financial advisor, the technology can help eliminate inefficiencies in the asset management process and substantially reduce the costs of these services.

The promise of better financial management at lower costs is so alluring that a number of multinational asset management companies, including Charles Schwab and Vanguard, have launched their own robo advisory services (Steve Garmhausen, Barron’s, Dec 4th, 2018).

The market for AI-powered advisory services is growing so rapidly that experts estimate that these robo advisors could be managing assets worth over $16 trillion by 2025 (Barbara Friedberg, US News, June 27, 2018). Vanguard’s robo advisor already has over $101 billion in assets under management.

However, these sophisticated algorithms haven’t made human advisors redundant just yet. Robo advisors offer a cookie-cutter solution for investors with simple portfolios and straightforward financial goals. AI-based tools can’t help investors with their tax planning, compliance issues, estate planning, or alternative investments. Since these software solutions are intended for mass commercial use, customisation or personalisation isn’t really an option.

Another weakness of these robo advisory platforms is their lack of soft skills. Algorithms can’t explain complex financial concepts to the average saver. The software package can’t express empathy with a user anxious about losing their job, debate the government’s tax policies, or assist a veteran entrepreneur with succession at her family business. The personal and intangible aspects of the advisory relationship may never be automated away.

With this in mind, a combined service may be the best solution for most investors. Combining the experience and soft skills of a professional human advisor with the precision and efficiency of robo advisory services could help more people achieve their long-term financial ambitions faster.      

The value of investments and income from them may go down as well as up and you may not get back the original amount invested.


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The Biggest Tax Mistakes British Expats Make

Taxation, residency, and cross-border financial regulations are notoriously complicated. Most people will never have to dig deep into the labyrinth of rules and special requirements built into the UK tax system. However, for the hundreds of thousands of people leaving the UK every year, understanding the treatment of money earned and assets purchased abroad is a necessity (The Migration Observatory, 24 AUG 2018).  

British expatriates migrate to different parts of the world looking for better jobs, cheaper retirement, or special opportunities. However, many of these expats leave without a clear understanding of their domicile status and tax position. Here are some of the biggest mistakes British expats make and how to avoid them:

1. Not determining domicile status

Research shows that nearly 81% of British expats mistakenly believe they are no longer domiciled in the UK, while they still hold property here and have not ruled out returning to the country at some point in the future (Kirsten Hastings, International Advisor, 19 July 17). In fact, it is remarkably difficult for an expat to shake off domiciled status even if they’ve been living in another country for many years.

Fortunately, HMRC periodically publish a guidance note to list all the factors they consider while determining a tax-payer’s domicile status (HMRC, 19 July 2018). According to their latest note, the department considers factors such as time spent abroad, property held in the UK, and intentions to return home as part of a rigorous statutory residence test. If you’re planning on leaving the UK soon or have already left, it’s worth reading through the notes (preferably with a professional advisor) to see where you fit.

2. Assuming only UK assets are subject to inheritance tax (IHT)

High-income expats may have properties, investments, and financial assets spread across the world. Nevertheless, most expats mistakenly assume only their British assets are subject to UK inheritance taxes when they pass away. This misunderstanding could have a profound impact on beneficiaries.

Indeed, all assets owned across the world are subject to UK IHT, currently set at 40%, if the individual is deemed UK-domiciled at the time of death (HMRC, 19 July 2018).

3. Underestimating the need for a power of attorney (POA)

Assuming that loved ones can sign legal documents and handle personal finances if a person becomes mentally incapacitated is one of the most enduring misconceptions people have.We have previously discussed how important it is to implement a lasting power of attorney (LPA) as a fail-safe for your finances and family’s well-being. Without one, your family could be left in a vulnerable position if you lose the capacity to make critical financial or healthcare-related decisions.

4. Assuming the power of attorney applies everywhere

Finally, a British power of attorney (POA) document may not be valid under the laws of the country where you live. As an expat, you are covered under both the British legal system as well as the laws of the country where you live. You may need to create another POA in your adopted country and acknowledge the UK one in the document to ensure they do not supercede each other.

Moving to another country is never easy, but with a little research and some expert assistance you may be able to manage your personal finances across borders more effectively.

Information is based on our current understanding of taxation legislation and regulations which is subject to change

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Will Technology Eventually Cut The Costs Of Elder Care?

A comprehensive report prepared for the Guardian (Delphine Robineau, 1 Feb 2016) showed the structure of Britain’s public healthcare system and the way resources are split between age groups. In 2016, nearly two-thirds of the NHS budget was spent on people over the age of 65. As people live longer and the fertility rate declines, the number of people in this age group will expand, eventually straining the Treasury’s healthcare budget further.

It’s an issue developed countries across the world are now facing together. From North America to South Korea, the ratio of working age population to retirees and pensioners is expected to decline over the next few decades. Japan probably faces the biggest demographic challenge of all. By 2065, the country is on track to lose a third of its population (Hisakazu Kato, the Japan Times, 5 Sept, 2018). Japanese policymakers and entrepreneurs have now turned their attention to a possible solution - innovative technology.

Automation, robotics and sensor-driven technologies could replace the workers needed in the elder care sector and lower the costs for operators. Both factors could eventually reduce the pressure on government pension and healthcare schemes.

Japanese developers have been working on simple robotic devices that help frail residents get out of their bed and into a bathtub or wheelchair. The Japanese authorities believe these robots will eventually evolve to fill more complex roles in nursing homes across the country. Future robots could help elderly patients take their medicines on time, use the toilet when needed, and even fulfill their need for social interactions (Daniel Hurst in Tokyo, the Guardian, 6 Feb 2018).

Meanwhile, on the other side of the planet, researchers are trying to use sensors and connected devices to streamline healthcare operations.  Research teams led by Diane Cook, Ph.D., of Washington State University and Nirmalya Roy, Ph.D., of the University of Maryland, Baltimore County, supported by a grant from the National Science Foundation (NSF), found ways to retrofit homes with artificial intelligence-powered sensors to recognize behavior patterns such as eating, sleeping, and movement, and then identify any signs of illness or cognitive degeneration and alert caretakers and physicians online. A comprehensive system like this could cost less than $2,500 (£1,975) and allow people to age gracefully in the comfort of their home (Anni Ylagan, Andre Bierzynski, and Shrupti Shah, Deloitte Consulting LLP, 28 July, 2014).

Innovations in self-driving cars, AI-enabled sensors, internet-enabled alert systems, and caregiving robots will eventually fill the gaps in senior care. It’s not difficult to imagine a future where an elderly person can track their own heart rate with a smartwatch, hail a self-driving car to visit their family and use a home monitor to alert loved ones of medical emergencies. Exponential progress in healthcare technology should lower the costs and improve the quality of senior care across the developed world.


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What Makes A Good Income Fund Great?

Income generating mutual funds and exchange traded funds should be the cornerstone of any retirement plan. Later in life, investors are more likely to prioritise capital preservation and income generation than capital appreciation. By focusing on dividends, bonds and rental properties, income funds fulfill this need perfectly.

However, picking the right income fund is nearly as tricky as picking stocks. Investors need to take a look under the hood to understand how a particular income fund is managed, how the portfolio is constructed and where the income is generated. Here’s a brief overview of all the factors that make a good income fund great:

Credit Quality

The relative quality of credit assets is, arguably, more important than the income yield. Corporate bond issuers run the risk of defaulting on their debt, which has a direct effect on the income funds that hold these instruments. Ordinary investors can’t judge the credit quality of their income funds independently, which is why most rely on credit ratings issued by agencies such as Moody's or Standard & Poor’s. However, based on facts that emerged during the financial meltdown of 2008-09, these ratings are best taken with a grain of salt (The Credit Rating Controversy, CFR, February 19, 2015).

Fees

Another critical factor is the expense ratio of income funds. Considering the single digit yield most UK income funds offer, every basis point in fees can have a drastic impact on wealth compounded over decades. According to Morningstar (Jackie Beard, FCS, 23 October, 2018), the average fee for actively managed bond funds fell by 10% since new financial regulations were introduced in 2013. However, exchange traded funds or ETFs were still cheaper than actively managed income funds.  

Cyclicality

Picking the right type of income fund depends on the business cycle. All income funds can be described as either Growth, Defensive or Uncorrelated. Growth funds such as high-income debt funds perform better when the market is expanding, while investment grade corporate and government bonds outperform during a recession which makes them ‘defensive’. Uncorrelated instruments, such as insurance, provide a stable return regardless of market conditions. Picking the right type of income fund boils down to the investor’s preferences, risk tolerance, and long-term objectives.

It’s important to note that these factors may help investors pick an income fund traditionally deemed as ‘high quality’, but they cannot predict performance over the long term. In fact, research published by Morningstar (Performance Persistence Among U.S. Mutual Funds, January, 2016) showed that the correlation between short-term and long-term mutual fund performance was negligible. This implies that past performance shouldn’t be used as an indicator of future results.

Instead, by focusing on investment-grade, low-fee income funds in recession-proof sectors, investors can mitigate the effects of inflation and preserve their capital for the long run.  

The value of investments and income from them may go down as well as up and you may not get back the original amount invested.

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5 Investment Lessons In Memory of Jack Bogle

“Jack did more for American investors than any individual I’ve known,” said Warren Buffett (CNBC, Jan 16 2019). Last week, investment legend and the founder of Vanguard, John Clifton "Jack" Bogle, passed away at the age of 89. His lasting legacy is the dramatic reduction in fees charged by money managers and mutual funds across the world.

Bogle pioneered the idea of an index fund, a type of mutual fund that passively tracks a major index rather than pick specific stocks to create a portfolio. Since these funds don’t require much management, the fees could be a lot lower than the typical actively-managed mutual fund.

Bogle once summarised the underlying principle by saying, “don't look for the needle in the haystack. Just buy the haystack!” While the idea was controversial at the time, the model has since been accepted as a legitimately effective investment strategy. Passive index funds now account for $8 trillion in assets under management, representing 20% of the total mutual fund industry (Michael Cannivet, Forbes, June 27 2018).

In Bogle’s memory, here are some of his most well-known investment and business lessons:

1. Stay the course

Bogle championed consistency and persistence in investing. Investors, he argued, must hold onto their stocks when the market gets risky (Jeff Sommer, the New York Times, 11, 2012). Long-term investors are helped by the dual effects of compounding and dollar-cost averaging, however investors need a structured strategy to take advantage of these economic benefits.

2. Think independently

A contrarian approach to investing is exactly what led Jack Bogle to indexing while the rest of the financial services industry was obsessed with chasing returns and charging high fees. The business community derided him when he first introduced his index fund in 1976, calling it “Bogle’s Folly,” “a sure path to mediocrity” and even “un-American” (Steven Goldberg, Kiplinger, January 17, 2019). Being able to drown out the noise and focus on his underlying principles helped Bogle eventually revolutionise the industry he worked in.

3. Cut costs

Lowering costs is the cornerstone of the passive investment strategy. Every percentage point of cost savings can be reinvested into the fund that should compound at an accelerated pace over time. If you consider the $8 trillion invested in passive index funds now, every basis point of fees represents $800 million in annual savings. The difference between the average active and passive fund is estimated at 100 basis points (Kent Thune, the Balance, September 06, 2018).

4. Impulse is your enemy

Both good and bad investors have periods of over and under-performance. Investments are a non-linear endeavour and the worst thing an investor can do is act on impulse. Bogle championed a pragmatic approach based on realistic expectations of the future.

5. Culture trumps strategy

One of Bogle’s key principles extends beyond the realm of investing. He was a firm believer that an organisation’s culture mattered more than its strategy. According to Vanguard’s current CEO, F. William McNabb, the company’s culture is based on the late-founder’s principles of hard work, treating everyone with respect, always doing the right thing and putting clients’ interests first. Vanguard now manages over $5 trillion assets for 20 million investors in 170 countries (Shawn M. Carter, CNBC, Jan 18 2019).

The value of investments and income from them may go down as well as up and you may not get back the original amount invested.

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Give Yourself a Financial Health Check

Every year your car needs a MOT test for roadworthiness. Twice a year you probably visit the dentist and switch out your toothbrushes. Everything that’s deemed critical in your life gets checked at regular intervals, so why overlook your finances?

It’s easy to get caught up in the grind and forget the fact that life can be unpredictable. Millions of people suffer from the consequences of inadequate financial planning every year. In fact, the Insolvency Service, a government agency, said the number of people going insolvent reached a six-year high in 2018 and the rate of insolvencies has been rising steadily since 2015 (Phillip Inman, the Guardian,27 July 2018).

Across the country people of all ages are financially insecure and a sudden blow to the economy could have devastating effects on their life. So a regular check on your financial status and the resilience of your long-term financial plan is absolutely necessary. Here are some of the aspects of your personal finances you must review periodically:

Emergency Funds

As a rule of thumb, most people are advised to have at least three months of living expenses saved up in case of emergencies. Unfortunately, most people fail to meet this benchmark. In fact, a survey from last year found that 27 percent of people in the UK said that they have no savings they can quickly access if needed in a emergency (Vicky Shaw, Independent, 8 February 2018).

It’s important to note that emergency funds are what most people would consider liquid cash savings. This is money you can dip into and access within a short period like a few hours or a day, which means wealth accumulated in fixed deposits, stocks, or property do not qualify.  

Debt

Another critical aspect of financial health is debt. Household debt in the UK is also at record highs (Phillip Inman, the Guardian, 26 July 2018). Although debt itself isn’t intrinsically harmful, the level and cost of your borrowing will have a tangible impact on your lifestyle and well being.

To measure the level of your indebtedness, calculate the ratio of your total debt to your accumulated wealth. Also calculate the ratio of your monthly earnings to the amount you pay in interest every month. These two ratios should tell you how healthy your finances are.   

Stress test

Finally, your personal finances deserve a stress test. You should test to see what would happen if the interest rates suddenly spiked and you had to pay more on your debt, if the stock you rely on most suddenly declares a cut in dividends, if the company that employs you goes bust, or if the rate of inflation skyrockets without notice.

Calculating the outcomes of such pessimistic hypothetical scenarios should help you test the resilience of your personal finances.

These regular financial health checks could mitigate the risks of economic uncertainty for you and your family.

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How to never run out of money in retirement

A retiree’s greatest fear may well be outliving her savings. Unfortunately, more than 28% of retirees across the country currently face this harsh reality (Rozi Jones, Financial Reporter, 13th July 2018). According to the Pensions Policy Institute, uncertainties about life expectancy, inflation and expected returns on investments make retirement planning too complex for the ordinary saver. With rising life expectancy and record-low interest rates, these complexities are magnified.

Furthermore, recently introduced pension freedoms rules mean millions of people taking up to 100% of their defined contribution pension savings at retirement could be at increased risk of outliving their pension pots (Sarah O'Grady, Express, Apr 13, 2018).

With this in mind, savers need to start considering ways to sustain their retirement nest eggs for longer. Here are some of the ways you can outlive your savings:

Test-drive your budget

Absolutely nothing beats practical experience. Your expectations of retired life could change if you take a few months to live on the amount of money you’ve chalked into your budget. Testing your assumptions will help you make your long-term plan more realistic.

Make realistic assumptions.

Another key pillar of effective retirement planning is to make realistic assumptions. Take the time to objectively study your country’s economic conditions, your household expenses, and the basic expectations of your loved ones. Always assume your assets will earn the average rate of return and inflation will gradually erode your spending power.

The best way to make your plan more realistic is to build in a margin of safety with each assumption. This could simply mean expecting less than average returns and more than average expenses over a long time horizon. In other words, assume inflation will be higher than it is now (2.7%), you’ll live longer than the average person (82.9 years for women and 79.2 for men), and you’ll earn less on savings than retirees do at the moment (3% to 4% in income funds).

Consider the tax bills

Prematurely withdrawing cash from your retirement account negatively impacts your finances in three critical ways - it shrinks your nest eggs right away, reduces the effects of long-term compounding, and may have tax implications. Only the first quarter of any sum you withdraw will be tax-free, with the remaining amount taxed at your individual marginal rate. These one time tax bills can have amplified effects on your retirement.

Have a plan B

As with any plan, a contingency is always a great idea. Consider ways to generate income in retirement such as renting out a bedroom temporarily, teaching young students the skills you picked up over the course of your career, or selling artwork online. Even marginally boosting your income in retirement could significantly increase your chances of never running out of money.

The value of investments and income from them may go down as well as up and you may not get back the original amount invested.

Information is based on our current understanding of taxation legislation and regulations which is subject to change

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Your Retirement Plan May Be Missing This Critical Fail-safe

Every three minutes, another person in the UK develops dementia. The chances of mental illnesses tend to accelerate as people get older. The World Health organization (WHO, 12 December 2017) claims that 15% of people across the world aged over 60 have some symptoms of mental disorder.

Unfortunately, most people fail to account for this increased risk to mental health in retirement. Retirement plans are so focused on expected returns and draw downs that families and loved ones are left unprepared when an elderly person becomes mentally incapable of managing their estate.

By 2037, there could be as many as 9 million unpaid carers across the UK, many of whom will be unable to dip into their elderly friend or relative’s bank account to pay for their care (Harriet Meyer, the Guardian, 9 June 2013). A legal document that can prevent this terrible situation is known as a lasting power of attorney (LPA).

A LPA is a legal document where someone (while they still have mental capacity) nominates a trusted friend or relative to look after their affairs if they lose this capacity. Having an LPA in place can, for example, allow a loved one to adjust the investment choices of a retirement savings account, disinvest some of the investments to pay for immediate care, designate funds to a drawdown, adjust the level of income being drawn, or stop income payments altogether. The carer can also sell your property and pay your bills on your behalf. None of these would be possible for a third party without a LPA (gov.uk).

LPA don’t just have to be focused on finances. A special LPA can be created for health and welfare alone. This seperate document allows a third party to make decisions regarding daily routine (washing, dressing, eating), medical care, moving to a care home and deploying life-sustaining treatment.

A financial LPA doesn’t give a carer any rights over your health and welfare and vice versa.

The versatility and simplicity of the LPA makes it a powerful tool that deserves a spot on all retirement plans. This legal instrument is designed as a precautionary fail-safe, which means it is a lot easier to implement when the donor is healthy and has full mental capacity.  With this in mind, setting up a LPA should be done sooner rather than later. A Lasting power of attorney (LPA) in England and Wales has no legal standing until it is registered with the Office of the Public Guardian.

A pension is a long-term investment. The fund value may fluctuate and can go down. Your eventual income may depend upon the size of the fund at retirement, future interest rates and tax legislation.

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Are Investors Gearing Up For A Recession in 2019?

In the midst of a trade war between the the US and China, and with the looming uncertainty over Brexit negotiations, traders and investors have started mentioning the ‘R’ word again.

Data from Debtwire (Sylvia Amaro, CNBC, 15 Feb, 2018) showed that 56% of private equity executives and 57% of distressed debt investors expect a recession before the year 2021. Prominent investors like Ray Dalio and professor Nouriel Roubini (the Guardian, 13 September, 2018) have voiced concerns that the world, and the US in particular, is now due a recession.

The inversion of the US treasury yield curve last week alarmed investors who consider it an important indicator of an oncoming recession. The inversion of the 5-year and 3-year Treasury note has now turned the market’s attention to the 2-year and 10-year notes. The inversion of the latter pair has preceded every US recession since the Second World War (Dion Rabouin, Yahoo Finance, May 24, 2018).

As one of America’s biggest trading partners, the UK should be concerned about these recent developments. A global recession could have an immediate impact on the stock market and a lasting impact on the living standards across the country.

What can investors do to prepare for a financial catastrophe? Some institutional investors believe buying short term government bonds may be the best way to hedge against a downturn in the wider economy. Singapore-based Kamet Capital Partners Pte, a multi-family office with a number of wealthy Chinese investors, bought the 2-year US treasury notes recently as part of a bet that a downturn will hit within the next year (Chanyaporn Chanjaroen  and Ruth Carson, Bloomberg, December 11, 2018).

However, David Kelly, chief global strategist at JP Morgan Asset Management, believes investors shouldn’t ditch stocks even if a recession is due soon (Bernice Napach, Think Advisor, July 06, 2018). Kelly believes investors should focus on a value investing strategy when the economy turns for the worse. Stocks that are already deeply undervalued tend to retain their price when the market sentiment turns from optimistic to pessimistic. He also recommends international diversification, saying the correlation between international stocks is lower and emerging markets could also offer better growth opportunities when UK and US stocks plummet.     

It’s important to note that traders and economists get these predictions wrong all the time. No one indicator or academic can accurately predict a recession. However, staying vigilant, diversifying investments and seeking out value is never a bad idea for investors.  

The value of investments and income from them may go down as well as up and you may not get back the original amount invested.

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Mince Pies Beat Cardigans As British Retail Gears Up For Another Christmas

Those who’ve either worked or invested in the British retail sector understand the importance of the last quarter of every year. Sales start surging from the end of September, online shoppers splurge during Black Friday, and thrifty shoppers hold on for a Boxing Day bonanza. All this culminates in a critical golden quarter for retailers.

In recent years, this competition during this quarter has intensified. A confluence of rising inflation, stagnant wages, aggressive discounting and a growing number of foreign retailers entering the British market have squeezed profits across the sector (Angela Monaghan, Julia Kollewe and Zoe Wood, The Guardian, 11 Jan 2018).

Last year was particularly bleak, with John Lewis Partners reporting a mediocre rise in sales but lower profits due to its ‘Never Knowingly Undersold’ promise. In the first half of this year, JLP reported a 99% plunge in profits, which makes this upcoming holiday season more critical than ever before (BBC, 13 September 2018).

Forecasts from Global Data Retail (November 8, 2018) suggest this year could be slightly better. Retail sales for the last three months of the year are expected to cross £98.8 billion. That’s 2% higher than last year. However, much of the growth is driven by inflation-adjusted food and groceries. Non-food spending is forecast to grow only 1.6%, driven mostly by beauty and health-related products.

With this in mind, investors have a better chance of picking losers and winners over this holiday season. Tesco (LSE:TSCO), the UK’s largest supermarket chain, beat the competition last year to report 3.4% growth in its food business. Group sales are already up 12.8% to £28.3 billion over the first half of the year,while underlying operating profit is up 24% to £933 million. The company’s "strategic alliance" with French retail giant Carrefour should help it keep costs low as it heads into the holiday season (BBC, 2 July 2018).

Similarly, Sainsbury’s (LON: SBRY) is using mergers and partnerships to survive the retail storm.The company’s merger with Argos managed to deliver a 8.2% surge in sales at the group’s convenience stores and a 7.3% sales boost online last year. A bigger merger with Asda, expected to complete next year, will have even bigger implications, cementing the brand’s position as one of the country’s largest and most successful retailers (Adam Leyland and Ian Quinn, The Grocer, 04 May 2018).

Finally, pure play online retailers like ASOS (LON:ASC) and boohoo (LON:BOO) are likely to be the biggest winners this Christmas given the incredible demand for their mix of discounts, quick service and convenient fulfilment.

With Brexit just months away and consumer confidence at record lows, this upcoming holiday season is especially critical. British retail is working its way through a transition period. Investors need to keep a close eye on the companies striking the right partnerships, cutting costs and modifying their business model to ensure their survival.

The value of investments and income from them may go down as well as up and you may not get back the original amount invested.

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5 Interesting Facts About Inheritances

The transfer of wealth from parents to their children is an age-old tradition across the world. However, few people appreciate how demographic and economic factors will shape their wealth in the coming years. Here are five interesting facts about inheritances across the United Kingdom:

1. The average inheritance is nearly the value of a house

According to data published in The Generation Game (Ollie Smith, New Model Adviser, 19 Jul, 2018), about 5.1 million people expect to receive more than £50,000 in inheritance, with the average value of their inheritance estimated at £233,000. That should come as no surprise to people who expect to inherit the family home, with the value of an average semi-detached house estimated at £227,912 (UK House Price Index for April 2018). The value of the family house is likely to contribute the bulk of the average inheritance for the foreseeable future.

2. Generational wealth is extremely persistent

A study tracking 634 rare surnames to detect patterns in wealth creation and retention across centuries discovered that most families remained relatively wealthy for multiple generations (Gregory Clark and Neil Cummins, the Economic Journal, 3 June 2014). There was a high correlation in the wealth of families across five generations, indicating that inheritances were a lot more persistent than previously expected. The study suggests that despite the higher wealth taxes and meritocratic social mobility policies implemented by successive governments over the past century, the rate of social mobility has changed little since the Victorian era.  

3. Inheritances are more common now

The proportion of elderly households expected to leave an inheritance of £150,000 or more has jumped from 24% to 44% over the past 10 years. At the same time, 75% of people born in the 1970s have either received or expect to receive an inheritance, compared with less than 40% of those born in the 1930s (Andrew Hood and Robert Joyce, the Institute for Fiscal Studies, 5 Jan 2017). This makes generational wealth transfers more common than a few decades ago.

4. Most millenials won’t receive an inheritance till they’re pensioners.

According to a report by the Resolution Foundation (30 December 2017), people between the age of 25 and 35 can expect a larger inheritance than any other generation since the two World Wars. However, the average age for receiving this inheritance is 61, which means nearly half of all young people will experience this wealth transfer only after their own retirement.  

5. The concept of an inheritance could be ending

Estimates from the Office for National Statistics suggest the number of people aged over 75 will double by 2040, reaching 10 million. With people living longer and the government already struggling to fund adult social care, many pensioners may have to spend their savings on taking care of themselves rather than leaving their kids wealthy. Experts suggest this could mean the end of the traditional inheritance in a few decades (Bronwen Maddox DECEMBER 22, 2017).

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Ethical, Sustainable or Impact Investing: What’s The Difference?

Should your investments fund a company that supplies military-grade weapons? Is a company in your portfolio directly harming the environment? Should you move your funds to companies trying to make a positive difference? These are the questions investors have been increasingly grappling with in recent years.

According to fund house Schroders, 56 per cent of UK investors having upped their allocations to ethical funds over the past five years (MYRON JOBSON, THIS IS MONEY, 2 October 2018). At the same time, the number and types of these funds have expanded. There’s no doubt that wealthy investors are taking responsibility for the social and environmental impact of their investment decisions. The wealth management industry has started to take notice, giving rise to an industry trend some like to call socially responsible investing.

However, the three most popular subsets of this emerging investment class could be confusing. Here’s an overview of the three key terms the wealth industry uses to differentiate these types of investment strategies:

Environmental, social and governance (ESG)

Accounting for a firm’s environmental, social and governance policies is a basic version of ethical investing. Investors who’ve adopted this strategy tend to seek out companies with great boards, high integrity management, good employee welfare policies, and a small carbon footprint.

The underlying thesis is that strong, socially-conscious policies could have a positive impact on long-term performance. Investors may subscribe to the philosophy that companies driven by ethical policies will be able to better retain talent and brand reputation, which will ultimately trickle down to the bottom line.

Unlike other ethical investment strategies, the focus here is squarely on financial performance.

Socially responsible investing (SRI)

SRI goes one step further than ESG. This form of investing involves actively cutting out opportunities which clash with the investor’s religion, personal values or political beliefs. This means the financial performance could sometimes take a back-seat to ethical considerations.

For example, an investor may decide to avoid alcohol, gambling, and tobacco stocks regardless of how lucrative the opportunity seems. Similarly, Islamic bonds and financing fall under this category of ethical investing for Muslim investors seeking investments that align with their faith.

According to a report by Morgan Stanley, the amount of money invested in SRI crossed $6.5 trillion in 2018.  84% of millennials are interested in responsible investing, which means this trend is likely to continue (Kate Stalter, US News, June 7, 2018).

Impact investing  

Finally, impact investing is the most proactive of them all. This strategy involves seeking out and investing in companies that are trying to have a positive impact on society. This could include investing in a social enterprise that offer microloans to entrepreneurs in the developing world, a sustainable energy producer or a low-cost medical supplies manufacturer.

According to the Global Impact Investing Network (GIIN), investment professionals in this rapidly expanding industry currently manage over $114 billion (GIIN's 2017 ANNUAL IMPACT INVESTOR SURVEY).    

Regardless of the strategy, an increasing number of investors are taking social and environmental factors into consideration before making investment decisions. This trend could have monumental implications not just for the wealth management industry, but for society at large.  

The value of investments and income from them may go down as well as up and you may not get back the original amount invested.

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How To Protect Your Money From Cyber Attacks

Digital technology is a double-edged sword. On one hand, it’s made it easier than ever to learn and make investment decisions on the go. On the other hand, it’s put your data and privacy at risk.

With the proliferation of digital devices and online platforms your money is more accessible to you no matter where you are,  but it is also exposed to the risk of online fraud and sophisticated cyber attacks. In 2016, hackers managed to infiltrate the international banking system through the SWIFT protocol. They stole tens of millions of dollars (Michelle Fox, MAY 13 2016).

If a global network of the largest banks and sovereign institutions could be hacked, one can only imagine what risks the ordinary saver faces.

According to a study by the Stanford Center on Longevity and the United States Financial Industry Regulatory Authority’s Investor Education Foundation, people over the age of 60 were particularly vulnerable to such attacks (FINRA, 5 May 2016). Not only were these people a prime target, but the amount of money they lost was greater than average.

Banks and financial institutions are well aware of the threat and have spent the past few decades bolstering their security systems and spending billions on countermeasures (Kara Scannell and Gina Chon JULY 29, 2015). Regulators have also done their part to ensure these institutions shoulder the responsibilities of protecting their clients’ assets and savings.

However, savers must also take the time to learn about the threat and take appropriate measures to prepare for an attack. Last year, Santander launched the Scam Avoidance School (SAS) to help savers deal with the most frequent forms of online financial fraud. Dr Paul Seager, Psychology Professor at Lancashire University, is an expert advisor to the bank’s education initiative (Mortgage Finance Gazette, 11th April 2018).

Lessons include tips and tricks for spotting the telltale signs of a fraudulent email, password security training, and basic principles of online data security. SAS isn’t the only way to learn these best practices. Savers can sign up for a range of online courses or local workshops to help them learn how to protect their identity and money online.

While the growing number and sophistication of cyber attacks may seem insurmountable, picking up a few basic data security skills could help you better protect your nest egg.

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A Guide to Pensions for the Self-Employed

Nearly 4.8 million citizens are self-employed (Office for National Statistics). It’s a number that’s been rising since the start of this century. While being your own boss is undoubtedly liberating, self employment could add complexity to your taxes and retirement savings.

All Britisher employers provide a workplace pension scheme to employees who meet the eligibility criteria. A few decades ago this meant the company set aside a defined benefit scheme for every full-time employee, however this has been replaced with defined contribution plans where the employers pays in to a pot along with the worker.

As a professional or a business owner, the responsibility of saving for your retirement falls squarely on your shoulders. There’s no large corporation saving for you or contributing to your retirement, so you might have to create your pension the way you created your business - independently.

Unfortunately, this adds to the pressure of being in business. According to a report from IPSE/Demos (24 APR 2018), 46 per cent of self-employed people in the UK are worried about their lack of retirement savings. The report asks regulators to reform the system so that self-employed individuals (who are now nearly as numerous as public sector workers) are treated more fairly.

Among the team’s requests is a call for flexible pensions options. This could make it easier for freelancers and self-employed individuals to set aside money to support themselves later in life.

At the moment, retirement options include either a personal pension or a self-invested personal pension (SIPP). SIPPs are a better option if you’re trying to invest in a broader range of assets. You can also sign up to the government-backed auto-enrolled pension scheme NEST. This will help you put a cap on fees and invest your savings more efficiently.

These considerations may be amplified when you switch from being simply self-employed to running a business that employs others. Employees earning over £10,000 and aged between 22 and the state pension age will need you to set up a pension scheme for them.

Saving and investing money efficiently could be complicated when you’re self-employed. Reaching out to a financial advisor will help you structure your own savings effectively and comply with the state pension requirements for your employees.

A pension is a long-term investment. The fund value may fluctuate and can go down. Your eventual income may depend upon the size of the fund at retirement, future interest rates and tax legislation.

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