Spring 2018 high

: Spring 2018

Fed raises US rates once again The US Federal Reserve (Fed) raised its key interest rate by 0.25 percentage points at its December meeting. The Federal Open Market Committee (FOMC) has implemented a total three rate increases this year, taking the federal funds rate from a range of 0.5% to 0.75% to a range of 1.25% to 1.5%. Although the decision was widely anticipated, it was not, however, unanimous: two of the nine members of the FOMC voted against the rate increase.

Policymakers still anticipate three further rate increases in 2018 against an economic backdrop that has continued to strengthen. According to Fed forecasts, the federal funds rate is predicted to reach 2.1% in 2018 and 2.7% in 2019, rising to 3.1% in 2020. The US economy grew at an annualised rate of 3.3% during the third quarter; meanwhile, the country’s rate of unemployment declined to 4.1% in November, reaching its lowest level since December 2009, and is expected to continue to decline to 3.9% in 2018.

Although the Fed appears to be relatively sanguine about the outlook – the central bank upgraded its forecast for US economic growth in 2018 from 2.1% to 2.5% – policymakers still believe further interest­rate increases will be “gradual”, reflecting the persistently subdued inflationary backdrop. Looking further ahead, however, the economy is predicted to grow by 2.1% in 2019 and 1.8% in the longer term, which is considerably lower than President Donald Trump’s goal of 4% growth.

Wells Financial is a a financial advisory service, specialising in mortgages, insurance, pensions and investments.

Seek independent advice Securing your financial future has become more important than ever before. Against a seemingly relentless backdrop of newsflow about pressures on state benefits – and particularly pensions – we have to prepare for our own financial futures by taking greater levels of responsibility for our personal savings and investments.

At the same time, however, making these decisions has become even more complicated. There are hundreds of providers out there, offering thousands of products; all of them seem to offer different benefits for different needs at different prices. In such a busy and crowded marketplace, how can you find the products that are most suitable for you?

As independent financial advisers, we look across the entire market to assess all the different providers, the products they offer, and how the various options can best meet the different needs of our clients. We are registered with the Financial Conduct Authority (FCA), which monitors and regulates the way in which we give advice. We have to ensure that our recommendations are appropriate for your specific situation and requirements.

We can help you to save or invest your money, to plan for your retirement, to buy a property, or to formulate strategies to address major changes in your family life. Because we are independent, we are not limited to just one or two providers; therefore, we can seek out the most suitable products to match your particular circumstances and thereby help you to meet your goals.

Choosing a suitable Cash ISA Cash Individual Savings Accounts (ISAs) are designed to appeal to investors who want their cash savings to work as hard as possible in a tax­efficient way. Although most investors are likely to focus on building society and bank deposit accounts, cash ISAs can also invest in certain National Savings & Investments (NS&I) accounts or in unit trusts or open­ended investment companies (OEICs) that are invested in money­market funds. Some structured products qualify for cash ISA investment and may offer a more managed risk/reward profile for certain investors. However, it’s important to seek expert advice before making the decision to invest.

Make the most of your ISA allowance Investors often leave any thought of Individual Savings Accounts (ISAs) until the last minute, choosing instead to invest close to the 5 April end­of­tax­year deadline. However, it is never too early to start thinking about the best home for this year's ISA allowance and how to make the most of the associated tax breaks. You can invest a single lump sum or a series of smaller amounts through regular monthly savings. Your ISA allowance for 2017/18 is £20,000, but the end of the current tax year comes around more quickly than you might expect, so don’t leave it too late.

Time in the market ­ not "timing" the market It’s impossible to predict the “right” time to enter or exit the market consistently. Financial markets move very quickly, so getting in at the bottom or out at the top is a matter of luck rather than judgement. Over the long term, history has shown that, the longer you remain invested, the better your chance of achieving a positive return. Dipping in and out increases the risk that you will miss out in the longer term. Ultimately, it’s not about timing the market – it’s about time in the market.

With this in mind, it’s worth considering the benefits of “pound­cost averaging”. This might sound complicated; essentially, however, it is just regular saving. Smaller amounts that are regularly invested over time will incur a range of prices; if you regularly invest smaller amounts of money – rather than one large lump sum – in your chosen investment, you will reduce your portfolio’s sensitivity to short­term market fluctuations. Moreover, investing a small amount of money every month will help you to get into a regular savings habit without putting too much pressure on your cashflow.

It’s true that, during periods of increasing prices, regular savings won’t reap the full benefit of the initial rise in the same way that a lump sum would have done. However, during periods of market instability or decline, your regular sum will invest at a lower price, buying a greater number of shares or units in your chosen investment.

Allocating your wealth Although retirement may seem like something that might happen in the distant future, it is important to plan ahead. Time is your most valuable weapon. Building sufficient assets to fund your retirement will take a long time and it's worth getting into the savings habit as early as possible.

Even putting away a small amount on a regular basis can make a real difference over the long term.

Investors receive income tax relief on their contributions to occupational and personal pension schemes, subject to certain limits. You can contribute up to £3,600 or 100% of your net relevant earnings (whichever is the greater), up to an overall maximum of £40,000 in the current tax year (2017/18). Your contributions to company pension schemes are deducted before income tax is calculated. For contributions to personal pension schemes, your pension provider will reclaim any tax that you paid before you made your contributions.

If you have worked for more than one employer, check your previous company schemes and work out your entitlements. It is also worth considering individual savings accounts (ISAs); these are tax­efficient 'wrappers' and all income and capital gains generated by the investments within are paid out free of any further tax. The amount of money you can invest in an ISA is subject to an annual limit (£20,000 during the tax year 2017/18), and this can be invested in stocks and shares or cash, or a combination of the two.

Gifting your house Inheritance tax (IHT) allowances have failed to keep pace with house prices and many more people now have to consider the IHT burden they leave to their beneficiaries. In the current tax year 2017/18, your individual IHT allowance stands at £325,000 (£650,000 for married couples and civil partners), with an additional “main residence nil­rate band” of £100,000 per person that was introduced in 2017. This means that parents or grandparents can leave a property worth up to £850,000 to their direct descendants before IHT kicks in.

Despite the urban myths, the one thing you definitely cannot do is simply to sign your house over to your descendants whilst continuing to live in it.

This is called a 'gift with reservation' and is ultimately inefficient for tax­planning purposes as the house will continue to form part of your estate. The only way to get around this is to pay the beneficiaries a market rent; however, this is unlikely to be a popular option for those who have paid off their mortgage in order to enjoy a comfortable retirement.

Your beneficiaries will also have to pay income tax on the rental income; moreover, it leaves you vulnerable to the possibility that the house might have to be sold from under you if your beneficiaries find themselves in financial trouble.

So what options do you have? You could sell, move out and rent, or buy somewhere smaller and gift the balance of your gain to your beneficiaries. This is called a potentially­exempt transfer (PET) and becomes IHT­free as long as you survive seven years. If you have a big enough house, you could arrange joint ownership and live together in the house. That proportion of the house then becomes a PET and again, is IHT­free as long as you survive for seven years. For larger estates, there are more complex schemes to consider; however, these schemes need to be constructed with the help of a financial adviser to ensure not only that they meet the regulations, but also that an equitable deal is reached.

There are no easy ways to avoid IHT if a lot of your equity is tied up in your main house. However, you can at least maximise use of all the other allowances available to ensure that you manage the tax liabilities, whilst keeping a roof over your head.

Contact details Wells Financial Ltd 26 High Street Tunbridge Wells Kent TN1 1UX