Are Your Children's Savings Invested Appropriately

How do you save for your children’s future, and are you saving with a particular goal – such as university fees – in mind? If so, are the funds invested in assets appropriate to the length of time until the money is needed?

With the current geopolitical situation causing stock market volatility, parents and grandparents may well be concerned over where best to save for the younger members of the family. However, it is important to bear in mind that most investments made for children are for a term of 10 years plus, and therefore investing in stocks & shares could well be a suitable route to take, on the basis that the investment is regularly reviewed.

It is interesting to note that three quarters of the £578 million subscribed to Junior ISA (JISA) accounts in 2013-14 is invested in cash, with only a quarter subscribed to stocks & shares arrangements. Although the interest rates offered on cash JISAs are superior to those offered to adults, with the majority currently paying between 2% - 3.5% gross AER per annum (source: Money Advice Service), any gains made are at risk of significant erosion by inflation over time. Investing in ‘real’ assets such as stocks & shares can help to protect against inflation and improve the overall return over time (not guaranteed).

Junior ISAs – a popular and tax-efficient way to save

JISA accounts have been available since 1 November 2011 to children under the age of 18 who do not own a Child Trust Fund (CTF) account (CTFs were available to eligible children born on or between 1 September 2002 and 2 January 2011).
According to recently published Government statistics, JISA account openings rose by 46% in the tax year 2013/2014, the second full financial year since the JISA took over from the CTF. £578 million was subscribed to JISA accounts in 2013-14 (source: HMRC ISA Statistics 2014 - http://tinyurl.com/n4l86sx ).

Chapters Financial is not responsible for the content of external websites

 

We expect this figure to continue to rise, with a boost from April 2015 when parents will be allowed to switch funds currently held in CTFs to JISA accounts. It is likely that JISA accounts will prove more flexible and better value than the older CTF arrangements and we would encourage parents to seek advice on the new options available.

Are you taking enough investment risk?

In the current tax year (2014/15), parents and grandparents can invest up to £4,000 in a JISA. Even if you don’t save to this limit, and choose to set aside a small amount each month, this can add up to a substantial amount over an 18 year timescale if invested appropriately.
Understandably, some people will not be comfortable with exposing their savings on behalf of their children to stock market volatility. However, given the long time period over which money is likely to be invested, sheltering the funds in cash may prove counterproductive. An (example) 18 year period provides enough time to absorb short-term stock market movements and investments in stocks & shares offer the potential for real capital growth (not guaranteed).

Maximising the tax efficiency of saving for children

Children are entitled to the same income tax personal allowance as adults (currently £10,000 in the 2014/15 tax year). Most children won’t have ‘earnings’ as such, so this allowance is applied to the income they may receive from sources such as deposit savings or investments. If the return the child receives in a tax year is less than the personal allowance for that year, no tax will be due.
An important point to watch is that if you give your children money outside a tax-efficient investment such as a JISA, and this generates interest of over £100 gross in a tax year, the whole amount of this income will be taxed as if it were your own income, at your highest marginal rate.

This limit applies to parental gifts only, not to gifts from other family members. With Christmas approaching, it may be a good time for grandparents to consider gifting money to their grandchildren, either into a JISA if contributions have not been maximised, or into a savings account or other arrangement. This gifting would have the added advantage of using the grandparents’ annual gift allowance, if not already used. Each individual is allowed to give away gifts worth up to £3,000 in total in each tax year and these will be exempt from inheritance tax from the date of the gift. Any unused part of the annual exemption can be carried forward to the following year.

Summary

If you would like support and advice on saving for your children or grandchildren’s future and maximising the tax efficiency of gifting and investing then please do not hesitate to contact the team at Chapters Financial, who will be able to help you further. No individual advice is provided during the course of this blog. If you would like to receive further information regarding your own family situation and circumstances, please contact the Chapters Financial team in either Guildford or Woking.



Vicky Fulcher
Trainee Financial planner

Chapters Financial Limited is authorised and regulated by the Financial Conduct Authority, number 402899

Financial Review, but also re-balance

At Chapters Financial, we have always noted the benefits of clients reviewing their finances on a regular basis to ensure their existing planning meets with their needs and objectives. Individual circumstances change, markets change and the asset allocation of funds can also change. A review may occur once a year or more regularly, dependent on the needs of the client.

The asset allocation of an investment portfolio is informed by the risk profile of a client and the returns that are sought. Over time, market movements can cause one or more asset classes to drift from their initial targets, resulting in the investor holding a portfolio that may not reflect either their attitude to risk or their investment goals. Rebalancing, as one financial planning solution, is about controlling risk and ensuring that your portfolio is not overly exposed to the success or failure of one particular asset class.

Rebalancing can be an important part of financial planning. Simply put, the process involves periodically buying or selling assets in a portfolio to bring it back to its original asset allocation level. However, there is no accepted industry-wide ‘best practice’ on how and when to rebalance a portfolio. Some providers offer an automatic rebalancing model as part of a passive investment approach. There is much data to suggest that this can work, particularly if fairly wide tolerance bands on both the upside and the downside are in place to avoid excessive trades and associated charges which could erode returns. However, automatic rebalancing is just that – automatic – client portfolios are rebalanced once they drift beyond set tolerance bands. If this is set to occur at pre-determined times over the year, e.g. quarterly, it will take place even if market conditions at the time are not optimal.

Chapters Financial prefers to take a more active approach to investment management and review. Our view is that calendar-based rebalancing alone is not the best approach – at each review, it is important to consider the prevailing market conditions, the specific circumstances of the portfolio in question and to tailor the solution to the needs of the client. We are all different and our investments are likely to mirror this.

At a review, we would anticipate examining the performance of the funds, recommending changes where required to improve the potential to meet the client’s investment objectives and also re-allocating fund balances to meet with a client’s attitude to investment risk. Our active approach means that we can take a view on the ongoing performance of each asset class within a portfolio, rather than just following a set of systematic rules for rebalancing. Given the levels of volatility that all financial markets can experience, we believe that this individual and ‘hands-on’ approach offers the best way to work towards our clients’ investment objectives within agreed risk parameters. This does not mean that at a review you would anticipate a wholesale change of your holdings. However, areas of underperformance can be addressed and areas of good performance may see a ‘profit-take’ situation.

As suggested, each of you is individual and your investments are likely to be the same. No individual advice has been provided during the course of this blog. If you would like financial advice on the allocation of your funds/ investment strategy, then please contact the Chapters Financial team in Woking (01483 330800) or Guildford (01483 578800).

Keith Churchouse BA Hons FPFS
Director, Chapters Financial Limited
Chartered Financial Planner
Certified Financial Planner
ISO22222 Personal Financial Planner

Chapters Financial Limited is authorised and regulated by the Financial Conduct Authority, number 402899.

Kicking the US fiscal ‘Can’ down the road

There is a saying of “Kicking the can down the road”, which means to delay a decision in the hope that the problem or issue will go away or that someone else will make the difficult decision easier to swallow, the later it is made. This saying has also recently been applied to the ‘Fiscal Cliff’ of the American fiscal deficit and the ways that it can be brought under control. A hard path to negotiate if ever there was one.

The US ‘Fiscal Cliff’ is the deficit which would have been caused by simultaneous changes in proposed tax rates combined with government expenditure. This was due to occur on 31 December 2012 until the US politicians (Senate and House of Representatives) finally agreed to extend the US Government’s borrowing limit/ debt ceiling. However, they only extended this by a matter of months and effectively “kicked the can down the road”.

You may have noticed in the media recently that the US government has started a partial shutdown after both Houses of Congress failed to agree a new budget. This has meant that the federal government has to save running costs and to achieve this has partially shut down non-essential departments and their related personnel. This could potentially affect more than 800,000 federal employees who will be on unpaid leave until the budget can be agreed. The knock-on effect to America’s GDP could be significant if the situation is sustained for a long period. The shutdown is significant, but is not the ‘main event’. The debt ceiling is.

Effect on the US Economy and Dollar

The planned budget agreement to resolve borrowing limits was meant to be ratified by both Houses of Congress by 30 September 2013. As you may know, this was not achieved. One consequence of the first shutdown in 17 years has seen an initial weakening of the dollar on 01 October 2013. Some commentators in the media are suggesting that these recent events could derail the world’s largest economy. I believe this is somewhat of an extreme view and do not hold this opinion. But the short term impact will be felt by the markets while uncertainty remains.

Outlook for US Economy

I believe that the main thrust of this impasse is partly due to President Obama’s health care bill and this is effectively being seen by some as a game of poker between the Democrat held White House and Senate, and the Republican held House of Representatives. Who will blink or fold first? As is usual in politics, I expect that some hurried negotiations will take place in some corners of Washington which will allow a new budget to be in place with a revised healthcare bill and the proverbial can will be kicked down the road again – possibly until there is a change of occupier in the White House or balance of power in the Houses of Congress.

At Chapters Financial Limited we remain optimistic for the outlook of the US economy and financial markets, although allocations to this area should be invested as part of an overall investment allocation process.

Past performance is not a guarantee of future performance. Fund values and currency values can fall as well as rise and are not guaranteed.

It should be noted that as financial planners, Chapters Financial remain positive about North America as an investment area and of the dollar as a currency.  

Each investment and its allocation/ recommendation is different and individual to the Client. To consider your circumstances with regard to savings and investments, you should take individual financial advice. No individual advice is provided in the content of this Blog. The team at Chapters Financial can help you with your planning and look forward to working with you.

Simon Hewitt

Financial Planner
Chapters Financial Limited

Chapters Financial Limited is authorised and regulated by the Financial Conduct Authority, number 402899.

Where to go next? Investment allocations

There is a very old saying and theory that some investors 'sell in May and go away' ....usually with the plan that they return in early autumn to pick up where they left off and take new investment opportunities for the future period. Investing in real assets though should always be seen as a medium-longer term strategy, usually with the objective of investing for a 5+ year period.

The question however would be where to invest? Chapters Financial has always recommended diversity when investing, usually spreading any proposed investment across a range of funds to diversify risk and to offer the potential for returns based on a client’s attitude to investment risk. More information on our investment risk scale can be found here. Your view is also likely to be swayed by why you are investing, either for income generation, growth or a mix of the two, as an example.

Chapters Financial also maintains 'house views' on investment areas and the purpose of this blog is to share these with our readers as we enter the autumn season of 2013. Obviously, views can change quickly, with no individual advice being provided during the course of these current investment notes. You should take individual advice based on your own circumstances to meet your needs. Some of our current thinking is as follows:

Generic Investment Area	Current View
UK Equity Growth	Positive
UK Equity Income	Positive
Europe	Negative
Corporate Bonds	Neutral
North America	Positive
Japan	Negative
Property (Commercial)	Neutral
Emerging Markets (including BRICs)	Neutral

There are many other investment areas and opportunities and you should seek individual advice on any specific areas you wish to consider. We would however recommend diversity across a range of areas.

The value of investments and pensions and the income they produce can fall as well as rise and is not guaranteed.

However you plan to invest, through pensions, SIPPS, ISAs, Investment Bonds, portfolios, Unit Trusts, OEICS and the like, Chapters  Financial can help you with your asset allocations with the aim of meeting your needs into the future. We recommend that investments and pensions should be regularly kept under review to ensure that your financial planning continues to meet your needs and attitude to investment risk.

No individual advice has been provided in the content of this blog. The team at Chapters Financial would be pleased to help you with your individual or business (SME) financial planning. Please contact us on 01483 578800

Keith Churchouse FPFS

Director

ISO 22222 Certified Financial Planner

Chartered Financial Planner

Chapters Financial Limited is authorised and regulated by the Financial Conduct Authority, number 402899

The continuing conundrum for savers / 'Forward Guidance'

The new economic tool deployed by the new Governor of the Bank of England, Mr Mark Carney, in August 2013 was heralded as the opportunity to manage economic, and to some extent financial, expectations into the future. 'Forward Guidance' as it is known, provides all those affected by the economy with the opportunity to know how the Bank of England predicts the future, and more importantly, what they plan to do if these expectations are met.

As we have seen, Forward Guidance has linked the Bank Base Rate (currently 0.5%) to UK unemployment levels (currently 7.8%) with the plan that Base Rates will remain at their current level until the unemployment level falls below 7.0% (Subject to anything unexpected happening, which it can). With this plan in mind, the Governor does not expect the target of 7.00% being reached for around 3 years, and therefore does not expect Bank Base Rates to move either in this time.

This new direction provides the benefit of certainty for some (such as businesses and mortgage borrowers as examples), but also provides the negative certainty of continuing low returns for savers.

Many savers have seen returns falling in recent times, with Premium Bond returns also falling from August 2013 onwards. Many are resigned to this situation, sensibly using their tax efficient ISA allowances where possible to reduce the tax take on any gross savings earned.

Against this backdrop, some clients and enquirers are reviewing their attitude to investment risk, where appropriate, and applying this review to their future investment decisions. As an example, UK Dividend returns have remained relatively firm over the last year and these have typically been between 3.00-4.00% gross pa (Not guaranteed, past performance is not a guarantee of future performance). Obviously, by moving into this investment area, the risk to the capital invested increases significantly, with the value of funds varying daily. This volatility (and overall investment risk) is detailed on our Investment Risk Scale further here (Link). However, if an investor is prepared and able to accept this level of investment risk, this investment alternative may be suitable in some investment cases. It should be noted that diversifying any investment is usually worthwhile and we have noted that committing smaller sums initially may be worthwhile to get used to the chosen investment medium before committing larger sums.

Each investment plan and recommendation is different and individual to the Client. To consider your circumstances with regard to savings and investments, you should take individual financial advice. No individual advice is provided in the content of this Blog. The team at Chapters Financial can help you with your planning and look forward to working with you.

Keith Churchouse FPFS
Director
ISO22222 Certified Financial Planner
Chartered Financial Planner
Chapters Financial Limited

Chapters Financial Limited is authorised and regulated by the Financial Conduct Authority, number 402899.

From capital growth to income. The possible life phases of Investment & Savings

Everybody tends to move through their personal life phases over time. It would be natural for their money to do the same as their needs develop and evolve.

This usually requires some financial planning and I have considered below some of the issues that might need to be considered through the phases of a lifetime.

Starting the savings process 

Capital accumulation usually needs (amongst others) time and money. This might sound a bit obvious, but the sooner you can start saving the better, and the more you can put in at the earliest points usually creates the most capital (not guaranteed ) for the future. This might start with smaller amounts in your early working years and build as the pressures of household and family expenses come under control and household income rises as your career develops.

The desire to save can be fuelled by any number of objectives, from buying a house, to saving for a wedding, to paying for school fees, to name just a few examples. It might be simpler than that, just paying for this year’s summer holiday.

Accumulation phase / Capital Growth 

As you move through your working life, and savings are invested, many will focus on capital growth as the objective. They have no real need for additional income and their investment objective is capital growth, with any income produced being re-invested accordingly.  Savings might be invested in tax efficient plans, such as ISAs and pensions, and also balanced across spouses/ partners to ensure that annual allowances are maximised where possible. This last point also has the potential to help balance income using income tax allowances in later years, such as retirement.

Attitudes to investment risk might be balanced or aggressive in this phase to endeavour to maximise returns, accepting that this is likely to import volatility in returns. More information on investment risk (and notes on volatility) can be found on our website here. The important issues of volatility can be considered further at our Investment Risk Scale here.

Income Phase 

It is possible that at the end of a working life (and usually the end of the accumulation phase), savings and investments would be re-balanced with the emphasis being focussed on income generation (rather than capital growth previously targeted) to boost income in retirement.  Attitudes to investment risk should also be checked at this time to re-test tolerance to risk and capacity for loss (ability to withstand falls in the value of the investment and/or reductions in the amount of income it can generate). Some may want to reduce their previous investment risk ratings, becoming less accepting of significant volatility in the capital they have accumulated.

This income phase may sometimes be deferred if not needed, being initiated when higher costs are incurred in later life, such as Long Term Care. More information on this topical point can be found on our website here.

Summary 

As the notes above indicate, a regular review of the allocation of your investment assets is worthwhile, partly to ensure that they continue to match your attitude to investment risk and partly to ensure that they match the life phase (and its requirements) that you reach. Past performance is not a guarantee of future performance.

No individual advice has been provided in the content of this blog. For individual advice on your pensions, savings and investments needs, please contact the team at Chapters Financial on 01483 578800.

Keith Churchouse FPFS
Director
Chartered Financial Planner, ISO22222 Certified Financial Planner Chapters Financial Limited

Chapters Financial Limited is authorised and regulated by the Financial Conduct Authority, number 402899.

The importance of regular financial reviews

For some, pension and investment planning are both fascinating and dynamic in the way that various factors can be applied to provide the overall balance required. Others do not find this topic so consuming, although this does not alleviate the need to regularly review existing financial arrangements to ensure that they continue to meet your expectations.

In many cases, this can be viewed from two specific angles, detailed below:

The Tax Wrapper Angle

Like many issues, tax legislation rarely stands still for long, changing with budgets or possibly amended in Autumn Statements.

It will be interesting to see what our Chancellor achieves in this month’s Autumn Statement. Reviewing the tax wrapper being used (or available) in a pension or investment is worthwhile to ensure, where possible and prudent, that tax allowances are being used efficiently. Headline examples might be this year’s ISA allowance (£11,280) or annual gift allowance (£3,000) for IHT purposes, with many focussing on this later note as we approach the festive Christmas season. There are other less well known (or well used) allowances that can be overlooked, but may remain effective for you and your family’s financial planning. An example might be pension funding (usually to a limit of £3,600 gross in a year) for children. This example might seem an unusual idea, but the effects of very early pension funding for an individual can be significant.

Another great example of change in legislation, in this case in the provision of financial advice, is the ending of commission and a move to fee based advice and implementation from January 2013. This may have an effect on the way you take and pay for future advice. We have detailed this change in previous Blogs on this Chapters Financial website.

The Investment Angle

If you hold existing invested assets, you will have made decisions about the level of investment risk you are prepared to accept and confirmed your objectives for growth, income or possibly both, among many other points. The same would apply for new money being added, taking into account existing arrangements, your expectations and the diversity you expect. Investment markets and fund/ asset allocations usually move constantly, and it is possible to see past/ historic decisions of how you want an Investment Bond (as an example) to be balanced changing because of market movements. Your own circumstance and tolerance for investment risk may have changed from previous times and the current allocation may now be different from the preferred choice. You may, an example, have moved from an accumulation phase for your investments to a required income phase. This could usually be referenced at the time of retirement.

Regular Financial Review

A regular review allows the previous decisions to be considered and challenged to ensure that your existing holdings meet with your expectations and anticipated aspirations. If required, fund switches are usually easy and cheap to arrange and this planning can be used to change asset allocations to meet your on-going requirements and to reflect views of future investment opportunities.

Personal needs may have changed where capital or income may need to be released from existing holdings to meet a specified requirement and reviewing diversified holdings to see where best to release gains ( if available, possibly using tax allowances, such as the Capital Gains Tax (CGT) allowance/currently £10,600 2012/2013) is usually worthwhile and recommended.

Summary

Each client is an individual and we will provide financial planning advice on this basis. Therefore, no individual advice has been provided during the course of this Blog. The team at Chapters Financial Limited will be pleased to help you with your own individual requirements and to review and make recommendations for your existing arrangements.

 

Keith G Churchouse, Director
Chartered Financial Planner
ISO 22222 Certified Financial Planner

Chapters Financial Limited is authorised and regulated by the Financial Services Authority, number 402899.

Active or Passive Funds, which is best?

Investing funds for your future can prove to be a minefield for those who do not take suitable advice. Chapters Financial hope that through our informed processes, we are able to educate enquirers in investment planning and what can be achieved and possibly, more importantly, which investment styles can be used. As an example, some investors are not aware of the difference, or even the existence, of active and passive investment funds. You may have spotted the long list of funds listed in the financial sections of the weekend newspapers and the Broadsheets during the week.

So what are these active and passive funds and what might you want to consider?

• What do they do with your money?
• How do they differ?
• How can their performance be measured?

Active Fund examples

Active funds are, as the name suggests, actively managed by professional fund managers who make decisions on the individual holdings within the overall fund.

Invariably, they will be buying, and selling, different shares / gilts / commodities / etc. based on what they believe to exhibit the most, or least if selling, value at the time within their chosen sector. It could be suggested that you are effectively buying the expertise, skill and experience of fund manager’s team you are investing in, along with the assets of the fund. You are paying for this skill, expertise and experience within the fund’s Annual Management Charge (AMC/ known as On-going Charge in many investments). Investments are usually made for a return and the payback you wish to see for your decision is that your investment return is good (and some ‘benchmark’ their return against a corresponding index for comparison purposes). This benchmarking should demonstrate that the fund, and correspondingly the investment fund manager, is outperforming its peers (or not) within the marketplace.

Passive Fund examples

Conversely, passive funds are not (as you may have already guessed by now) actively managed.

They usually aim to track an chosen index, or benchmark, by being invested in a ‘basket’ of holdings which are designed to closely replicate the index, or benchmark, to varying degrees of accuracy depending on the type of passive fund. This ‘basket of holdings’ (usually unit holdings) is not changed unless the index, or chosen benchmark, is changed. One example of an index is the FTSE100 which is comprised of the top 100 leading companies listed on the London Stock Exchange (LSE). A FTSE100 Tracker Fund will buy shares in the FTSE100 companies and it will be unlikely to amend the basket of FTSE100 company shares unless certain companies fall in and out of the FTSE100 list. Due to less analysis, fewer transactions, minimised administration and reduced manpower required for passive funds the Annual Management Charges (AMC) tend to be lower than the Active funds noted above.

Benchmarking

Some investors prefer to have a measure to judge performance of their fund against the area they are targeting, such as Growth or a Stock Market, such as the FTSE, as examples. For Private Investors, one reasonable tool that can be used is APCIMS (Association of Private Client Investment Managers) FTSE benchmarks. There is a range available and a link to these can be found below:
http://www.ftse.com/Indices/FTSE_APCIMS_Private_Investor_Index_Series/index.jsp

Which to go for?

One question often posed is ‘why not just buy passive funds only to keep costs down you may ask?’
Although the costs of fund management are important and should be considered carefully, the answer is reasonably simple. If you are trying to achieve better returns than a chosen index or benchmark, then passive funds are highly unlikely to ever achieve this index return. Why? Due to the fact that the index, or benchmark, will not be reduced by the Annual Management Charge made to your fund and therefore the index return should always be greater.

It could then be suggested that the higher charges applied by an actively managed fund will require the investment to work harder to achieve the same return achieved in a passive fund/investment. There is some mileage in this argument, but without the constraints of an index to adhere to, this usually gives the manager a greater range and flexibility of investment choices. Some would argue that smaller funds can be more agile than larger funds, but without being tied to a (potentially) restrictive index, the scope of the manager for investment and, most importantly, returns should be increased.

Chapters Financial usually prefers actively managed funds, however a mixture of both active and passive funds can be used to great effect to generate capital growth (or income or both) depending upon the clients risk profile, objectives and timescale. Benchmarking, as noted above, may be a way of way of helping measure the success of this investment planning strategy.

Investment is about clients’ needs and desires for their money and its future. Any financial/investment planning should be based on your objectives and attitude to investment risk. For reference, an Investment Risk Schedule can be found on the Chapters Financial website here.

As you would expect, no individual investment/planning advice has been provided during the content of this Blog. This is because each client’s needs are individual and so is their planning. Chapters Financial Limited would be pleased to help you with your investment planning, in all its many formats, into the future, continuing to provide the independent financial advice (IFA) into 2013 and beyond.

Past performance is not a guarantee of future performance. Fund values can fall as well as rise. Chapters Financial is not responsible for the content of external Website links.

Simon Hewitt BSc (Hons) DipPFS, Financial Planner
Chapters Financial Limited is authorised and regulated by the Financial Services Authority, number 402899.