WealthMatters 2014 Investment Outlook Investing in economies with escape velocity
The cost of long-term care A growing issue for our clients and their families
Planning for retirement Legislation changes and best practice
Close Brothers Asset Management magazine
Winter 2014
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2014 Investment Outlook
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Costs of long-term care
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Client focus
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Investing in economies with escape velocity
A growing issue for many of our clients and their families
A client’s story
Planning for retirement Legislation changes and best practice
Remember your ISA allowances Providing you qualify, using your annual Individual Savings Account (ISA) allowance is a good tax planning tool and can be used to shelter investments profits and income from tax. The maximum 2013/14 tax year allowance is £11,520 and this will rise to £11,880 in the 2014/15 tax year. The full amount can be invested in a stocks and shares ISA or up to half (£5,760 in 2013/14 and £5,940 in 2014/15) can be put into a cash ISA.
Although you receive an annual ISA allowance it cannot be transferred to a spouse or civil partner and any unused ISA allowance cannot be carried forward to subsequent tax years. Stocks and shares ISAs should be considered a medium to long term commitment, generally of 5 years or more. The value of investments, and any income taken from them, may fall as well as rise and you may get back less than you invested.
ISAs can be used as part of a tax efficient savings plan and can be used with maturing share save schemes to protect capital gains.
To find out about the best way to use your ISA allowance, to open an ISA for the new tax year or to take advantage of this year’s allowance before it’s too late please contact your adviser.
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Happy New Year and welcome to the first edition of Wealth Matters for 2014 As a valued client, we want to keep you abreast of our current investment outlook and issues that may be of interest to you, as well as improvements we are making across Close Brothers to help our clients. In this edition we have included a selection of topical features. We examine the costs of long-term care and how we are helping our clients to understand the help and assistance available to them and their families. We take an in-depth review of some current regulatory changes affecting retirement throughout 2014 and what you need to know. We include our views on the global economy for 2014 and how we plan to capitalise on this in our clients’ investment portfolios. I would like to thank you for your continued support and I look forward to updating you throughout 2014. For further information or to provide feedback on this newsletter, please contact your adviser or email us at advice@closebrothers.com
Andrew Fay Head of Wealth Management
Wealth Matters
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2014 Investing in economies with
Escape Velocity Equities performed strongly in 2013 and, as we move through 2014, it may come as a surprise that this trend could continue. Indeed, 2014 may be the year that some of the developed economies, led by the US and perhaps even the UK, achieve “escape velocity”. Escape velocity explained In physics, escape velocity is the speed necessary to move away from a gravitational force without further propulsion. Translating this to economics, it is when an economy achieves or exceeds trend growth not just for one quarter, but for successive quarters, without further (or with limited) government support.
Governments created growth in 2013 Growth in 2013 was driven by high levels of Central Bank support. If we include China, 2013 was the year in which 60% of the world’s GDP showed an improving trend, particularly when measured against earlier expectations. The principle driver of growth was excessive liquidity across the developed world with Central Banks printing money and buying debt. This lowered the yields on fixed income investments, forcing investors with higher risk tolerance into equities. For growth to continue actual earnings must increase. However, revenues and earnings at the company level were still relatively lacklustre. If developed market equities are to continue to grow, the strong economic trends of 2013 need to translate into actual revenue and bottom-line earnings growth for companies. In 2014, we will be watching for this improved macroeconomic recovery to become truly selfsustaining – in essence, achieving ‘escape velocity’. To do this, the improved economic environment needs to translate into self-fulfilling consumer and corporate demand, thus generating a material uplift in corporate revenues and earnings growth. For fund managers it will be become critical to identify companies that can benefit from this.
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How are we structuring our clients’ portfolios? We currently see the best opportunities in developed market equities. We believe that 2014 will be another strong year for outperformance by developed market equities. However, as identified, market gains must now come from stronger sales and earnings growth at the company level. It is our view that equities in the developed world will continue to outperform bonds. Hence, where we manage a client’s portfolio for them, we have an overweighting of developed market equities, and an underweighting to government bonds and gilts. As fixed income yields will likely move higher, pushing prices lower, many investors who are still relatively underinvested in equities versus fixed income may be rethinking their asset allocation. This could underpin additional demand for stocks. This transition may however cause some volatility across asset classes in the short term. Where we do invest in fixed income, our exposure remains focussed on high quality corporate credit and those funds with the flexibility to limit interest rate risk. Outside of equity and bond investments, we favour property and other asset-backed alternatives and absolute return funds. Here we can find assets which provide a modicum of growth uncorrelated to equity returns.
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Covering the cost of long-term care Meeting the cost of care in old age is a growing issue for many of our clients and their families. As life expectancies increase, more of us can expect to require some form of long-term care. The costs involved can be daunting to say the least: according to the NHS website, the average cost of residential care in the UK is currently estimated at £27,612 a year. If nursing is also required, this can rise to £38,012. Whether you are planning for your own long-term care or are helping an elderly relative with an immediate need, there is some support you may access from local authorities and the NHS but this varies and is limited to means testing. Understanding what support is available and how to access it can be difficult. Recognising more and more clients are facing this issue, Close Brothers have developed a service to help and your adviser will be able to assist.
Will the State help me? The subject of state funding for long-term care has received increased attention following the government’s recent announcement that from 2016 a new £72,000 cap will be introduced to limit the amount people need to contribute to their own care costs. This is an important step forward in adult social care. However, concerns have been raised that there is insufficient clarity about exactly what the cap will cover. State assistance with the cost of social care for the elderly is means-tested, primarily by imposing upper and lower capital limits on the value of a person’s savings, property and other assets. There are different lower capital limits in Scotland, Wales and Northern Ireland and the current limits are set out in Table 1.
The average cost of residential care in the UK is currently estimated at £27,612 a year
Table 1 Qualifying for support Capital limits for care funding 2013/14 England
Scotland
Wales
Northern Ireland
Upper limit
£23,250
£25,250
£23,750
£23,250
Lower limit
£14,250
£15,500
£23,750
£14,250
If a person’s assets are more than the upper limit, they must pay for their care in full If a person’s assets are less than the lower limit, their care will be paid in full by the local authority Source: www.nhs.uk as at 30 June 2013
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In England, for example, if an individual’s assets including property have a total value of less than £14,250, care bills are met in full by the State; although the individual may have to contribute to care costs depending on the level of income or benefits being received. If personal assets exceed £23,250, an individual will normally be expected to pay for their care costs in full. A reducing scale of support applies between these two limits based on the individual contributing £1 a week for every £250 in assets over £14,250. Someone with assets of £18,000 would therefore be expected to contribute £15 a week (£3,750 ÷ £250 x £1 = £15) towards their care.
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Financial assessment Local authority means-testing will look to include most capital and savings held in an individual’s name, including: • Bank and building society accounts • National Savings and Premium Bonds • Stocks, shares and investment products • Income from state, personal and occupational pensions • Property and land (less any mortgage) Jointly-held savings and assets are generally divided in two to calculate an individual’s share. Some assets are disregarded by the means test, including: • The value of life policies/annuities • Some compensation payments held in trust or by the courts • Some investment bonds with a life assurance element • Property that continues to be inhabited by a partner, dependant or certain other parties Some forms of income are also disregarded including War Widows’ special payments, the mobility component of the Disability Living Allowance and – within certain limits – spouse/partner payments from a private or occupational pension.
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In calculating an individual’s assets, local authorities assume that income from such benefits as the Pension Credit is being fully claimed. For this reason, it is important that you take up all relevant benefits. Local authorities may also want to look at recent transactions to check that you have not deliberately deprived yourself of capital to qualify for care support by, for example, transferring property to a family member.
Reviewing qualification These rules are stringent and mean that many people receive no State help with the cost of care. However, an individual’s assets can be reassessed at any time and once assets fall below the upper capital limit, authorities will start to help with funding.
Covering the cost of care A big problem is that nobody can predict how long we will need care and, unfortunately, 1 in 4 of those who fund their own care run out of money (Source: LGIU, Independent Ageing 2012). This means relying on the local authority to fund care and most local authorities put a cap on the amount they are prepared to pay. Unless the family can make up the difference, this may result in compromises having to be made regarding accommodation or moving to an alternative care home. Of course, using up all the money to pay for care means that there is no legacy for loved ones. It is therefore critical that you consider all the options open to you or take proper advice. With financial planning it may be possible to ensure that care can be funded for as long as required, whilst safeguarding as much of your capital as possible. Your adviser will be able to help with this.
Other benefits and allowances A number of other benefits and allowances are available to help those requiring care:
Attendance Allowance
Registered Nursing Care Contribution (RNCC)
Personal Care (Scotland only)
Personal Expense Allowance
This is a non means-tested, tax-free benefit for over-65s needing help with basic functions such as bathing or eating whether at home or in care. There are two rates: a higher rate for care around the clock and a lower rate for part-time assistance. The current weekly rates are £79.15 (higher) and £53.00 (lower). This is a contribution towards nursing care costs paid directly to the nursing home. It is important to discuss with a home how the RNCC is accounted for in their fees. The level of RNCC varies across the UK. As well as receiving a contribution towards nursing care, self-funders in care homes in Scotland can also receive a weekly payment towards their personal care, currently £163.00. If a resident receives Personal Care, they are no longer eligible to receive Attendance Allowance. Individuals who have their care fees paid by the State are allowed to keep a small allowance from their pensions for their own personal use. This Personal Expense Allowance is currently £23.90 per week (£24.50 in Wales).
Wealth Matters
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Paying for care: some options Here are some ways in which you can meet your long-term care needs. From your income Some people may receive sufficient income from pensions and existing savings and investments or rental income from their home to pay for their care in full. From savings and investments Money held in deposit accounts, cash ISAs and National Savings can provide some income. Whilst these are very low risk investments, the interest generated will need to be sufficient to meet their care home fees and so their capital isn’t used and eroded too quickly. Investing in higher-risk assets with the objective of generating a total return in excess of that needed to meet care home fees is another option. However, the investments with the potential to be most profitable are usually the highest risk, and a balance may need to be struck. There is no guarantee that values won’t fall and you could get back less than invested. By family contribution A person’s family may be able to cover the cost of care or make-up the funding shortfall. Via care fees plans Also known as Immediate Needs Annuities, these are specialist insurance plans which are designed to convert capital into income to help pay for care fees. In return for a one-off lump sum payment, a guaranteed income is paid directly to the care home for as long as the policyholder lives. Whilst there is no risk that the income will ever cease, if the person dies earlier than expected, the aggregate payments to date may come to less than the initial lump-sum invested. In addition, once an annuity is bought it cannot be changed or cancelled. In the absence of any of the above choices, using capital from the family home via equity release or a sale, may need to be considered.
Using up all your money to pay for care means that there could be no legacy for loved ones
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How we can help As we have seen, increasing life expectancies mean that more people can expect to require some form of long-term care. Although the State can help with some of the costs, eligibility is limited and can be confusing to understand and access. Our team of specialist advisers provide national coverage, on a face-to-face basis and over the phone. We work with the individual concerned, their families, a Power of Attorney, if appointed, and/or their legal representatives. If you would like help to review your long-term care planning, your adviser will be able to refer you to one of our dedicated long-term care specialists.
If you do not currently have an adviser you can call the team direct on 0844 2640705 The value of investments can go down as well as up and you may get back less than invested. Telephone calls may be monitored for training and quality control purposes.
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Client focus
We hear many interesting stories from our clients and here is the first in a regular feature focussing on them.
Andrew Southall is an entrepreneur with more than 30 years’ experience in building and nurturing businesses across the UK. Here he talks about his work with Brain in Hand, an organisation that offers a unique support system for people who have difficulty responding to unplanned events and social situations which require immediate action. Simon Duncan, one of our Bristol advisers, has helped Andrew with his own personal financial planning for the last seven years. “It is very interesting working with Andrew, as it is with all my entrepreneurial clients, because his business and lifestyle goals constantly evolve. It is essential, therefore, that we regularly review and make any necessary changes to his personal financial plan to make sure it remains on track to meet his long-term goals. We look at tax savings, cash flow planning, planning to meet children’s university fees, retirement plans, and how I can support his business through my network of contacts.” After attending a pitch by Brain in Hand at the South West Angel Investment Network (SWAIN) in 2011, Andrew knew there was something special about this new business idea and most importantly the remarkable passion of the CEO who gave the pitch. He also knew that using his experience and key contacts, he could help the founders take their idea to the next level. Brain in Hand operates differently to other providers as it focuses on identifying the precise nature of each client’s problems and then working with them to help them think through and resolve the problems they face: these include working on memory, verbal reasoning, attention and planning. All of which are delivered by a simple-to-use smartphone app. In this way, Brain in Hand aims to give its clients far greater independence in day-to-day life. But, as with most great ideas, there were many hurdles to overcome. “Brain in Hand is a new solution in the healthcare industry and it takes time to persuade individuals to try our product instead of sticking with more traditional methods of help. The market is inherently conservative so we factored this into our growth plans and worked closely with key figureheads in the healthcare industry to help overcome these barriers. As well as building relationships with key figureheads, it was essential for us to build a robust marketing plan to support our efforts. Using social media channels are a great way of raising your company’s profile if you have a limited marketing budget. We have had great success through using channels such as LinkedIn, and Twitter and maintaining an active blog to demonstrate our expertise in this market” says Andrew. “We were incredibly proud when our business was nominated for, and subsequently won, ‘Innovation of the Year 2013’ in the Exeter Business Awards.” If you would like to know more about Brain in Hand or register for their newsletter please visit www.braininhand.co.uk
Andrew (right) and Simon
So how do you take a good business idea and turn it into a success? There are three pieces of advice Andrew would give to budding entrepreneurs.
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You need a realistic business plan. Anyone can produce a set of numbers showing seemingly great potential but investors are wary of anything that looks too good to be true. In their experience, it usually is. ‘Quick wins’ are very rare. In setting up a business, hard work and attention to detail are crucial: even brilliant ideas need a solid implementation plan behind them. Don’t be afraid to change the plan. If you think things aren’t working, look at alternative ways to implement the plan. Some successful businesses have had to change their plan three, four or ten times until they found the formula that works. There is no better feeling than knowing you’re making progress and have the results to show for it. Wealth Matters
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Planning for Retirement Legislation changes and best practice There has been a lot in the press in recent years about changes to the State Pension, increasing the pension age and reforms to pension savings. For those clients who are not yet retired but who are planning towards that, or approaching pension decisions, we summarise here some key changes that need to be considered. Lifetime Allowance reduces to £1.25 million in April 2014 If you expect your total pension savings to be more than the lifetime allowance of £1.25 million, when you come to take your pension benefits on or after 6 April 2014 (and if you have not previously applied for pension “protection”), you are likely to need additional pension planning to reduce or eliminate liability to the lifetime allowance tax charge. However, the practical impact on pension savers is not often as straight forward as it may appear. For example, take the case of a pension saver aged 50 who has pension funds in a Self-Invested Pension Plan (SIPP), valued at £625,000, which is only half the reduced lifetime allowance of £1.25 million. This person is not intending to take retirement benefits until 65, and confidently expects a rate of return on the pension investments of at least 5% per annum between now and retirement. Even without further contributions the pension savings are likely to exceed the £1.25 million level, so additional planning would be beneficial.
Annual Allowance The March 2013 budget confirmed that the annual allowance will reduce to £40,000 (from the current level of £50,000) with effect from 6th April 2014. Although this reduction is not on the same scale as previously when the allowance reduced from £255,000, there will be an impact for those who use their allowance each year. Some active members of final salary schemes will have little choice but to suffer an annual allowance charge. The calculation of what goes towards the annual allowance limit is not straightforward. For example, the annual pension entitlement under a final salary may only have to increase by £2,500 to give an annual pension input amount equalling the reduced allowance. Prior to April 2014, there is still an added window of opportunity to make use of the higher £50,000 allowance, but this will need to be carefully looked at if carry forward planning is being used through the effective use of “Pension Input Periods” (PIPs). Understanding the PIP rules is essential when considering maximising the annual allowance, but it is recommended you seek advice.
What is fixed protection?
Carry Forward
An individual who registers for fixed protection keeps the lifetime allowance (LA) at the same level prior to it being reduced by legislation. Fixed protection 2014 keeps the LA of £1.5 million after 6 April 2014 (when the lifetime allowance reduces to £1.25 million). Anybody who does not have either primary protection or enhanced protection is able to apply for fixed protection 2014. However, by opting for fixed protection individuals must pay no further contributions, nor have further contributions paid on their behalf to any registered money purchase pension scheme. Registering for fixed protection isn’t right for everyone and will depend on your individual circumstances. We strongly recommend that you speak to your adviser to ascertain if this is the right solution for you.
In the absence of any future legislative changes, the annual contribution allowance can be “carried forward”, allowing unused allowances from previous tax years to be utilised. Where allowances are being carried forward from tax years prior to 2014/15 the higher allowance of £50,000 will continue to be available.
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Remember, when utilising carry forward, the current tax year annual allowance must be used in full before the unused allowances from the previous three tax years can be carried forward.
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Flexible Drawdown
State Pension Age
This is a form of “income withdrawal” (principally from a SIPP, although some defined contribution schemes may also allow this) where your pension is paid direct from your pension scheme. There is no limit on the amount that your pension scheme can pay you in any year and when annuity rates are low, drawdown may provide a better pension income solution. Your pension scheme rules will confirm whether flexible drawdown is available, and to what extent. Again, this is an area in which you should consider seeking advice.
Future changes to the State Pension Age (SPA) will be driven by a guiding principle that people should expect to spend, on average, up to a third of their adult life in receipt of the State Pension. This implies that the increase in SPA to 68 could come forward to the mid-2030s, and the SPA could increase further, to 69, by the late 2040s.
If your pension scheme offers this facility there are various conditions that need to be met, which include the following points: • You must have pensions in payment from other sources of at least £20,000 (called the minimum income requirement) payable in the tax year in which you make your flexible drawdown declaration. In other words, it is the amount of pension received that counts not the annual rate of your pension, so you must actually be due to receive at least £20,000 pension income in the declaration year • You must have received at least one payment from each pension in payment for it to be included in meeting the minimum income requirement • You will need to have ceased active membership of any final salary scheme when you make your declaration, and you cannot have made any contributions to any other money purchase arrangement held under a registered pension scheme in the tax year that you go into flexible drawdown. In addition, no-one else should have made contributions to your other money purchase arrangements in that tax year.
“Switchable Annuities?” The pensions minister Steve Webb has recently floated plans to allow pensioners to switch annuities as part of proposals for a radical overhaul of the private pensions market. The minister said he wanted pensioners to be able to change to better annuities, in the same way homeowners can switch mortgage deals every few years. This is not formal policy at this time, but it will be interesting to see if this develops further, and the consequent impact on annuity costs as it is likely to significantly increase the cost of providing this flexibility.
We can help One of the most fundamental and common areas of advice we work on with our clients is around pension planning; during their career, when approaching retirement, and to help clients maintain their desired standard of living in retirement. If you are concerned about the impact of any of these changes or would like further help, please speak to your adviser or call 0800 588 4064
Wealth Matters
We value your feedback Your ideas, thoughts and opinions about this newsletter are important to us, as we are always looking at ways in which we can improve the service that we provide to you. Please feel free to contact us with any comments you would like to share or any investment issues you would like us to write about. Tel: 0800 588 4064 Email: advice@closebrothers.com
How would you like to hear from us? If you would prefer to receive future newsletters by email, please contact us and we will be happy to arrange this for you. For further information please contact your Close Adviser or the Client Services Team Tel: 0800 588 4064 Email: advice@closebrothers.com www.closebrothersam.com
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Close Brothers Asset Management is a trading name of Close Asset Management Limited (Registered number: 01644127) and Close Asset Management (UK) Limited (Registered number: 02998803). Both companies are part of Close Brothers Group plc, are registered in England and Wales and are authorised and regulated by the Financial Conduct Authority. Registered office: 10 Crown Place, London EC2A 4FT. VAT registration number: 245 5013 86. Š Copyright Close Asset Management Limited 2014
CBAM2623_Wealth Matters, Winter 2014