Your Questions Answered

This month Khalil Kasparis our Senior Financial Planner who gives financial advice to our High Net Worth Clients, gives his thoughts to three common questions we are asked regularly by our clients.

How can I generate a reasonable level of income?  

Background

Interest rates remain at historically low levels as central banks around the world have reduced rates to near zero. Not since prior to the financial crisis in 2008 when interest rates were around 4%, were investors able to generate a positive return in excess of inflation on instant access and cash deposits. Given the amount of fiscal and monetary support provided, the expectations are that rates are likely to stay low for a while making the search for a good yield more challenging.  

Our view

While we have seen pressure on dividend payments continue in the short term as corporate profits are lower, the average weighted yield within our income model portfolio is approximately 3% above the current rates available on cash. Large companies with significant cash reserves, have, generally been able to maintain dividend payments. Yield is not only achievable within the UK market (which has struggled to grow of late), but a similar yield can be achieved by investing in select areas in overseas equity markets. Within the fixed income space, many government bonds are offering very little yield, however investment grade corporate bonds issued by companies with significant cash reserves still offer reasonable yields. We would look to achieve this without taking significant credit risk and with little exposure to high yield debt at present. 

In short

A yield of around 3.5% is achievable on a diversified portfolio and you will need the ability to withstand some level of market fluctuation to achieve this. 

How can I invest in a tax efficient manner?  

Background

Everyone’s view on taxation is completely unique. Tax can however be a drag on your investment returns over time, making it more difficult to achieve your financial goals in the long term. Investing in a tax efficient manner and compounding growth at a faster rate can often make a significant difference 

to your financial security over time. Tax legislation will likely change several times over your investment horizon, and while we do not provide specific tax advice, we will guide you to ensure you invest in a tax efficient manner. 

Our view

We would work with you to understand your desired approach and adjust the management of your finances accordingly. Assuming that reducing your tax liability is important to you, there are a number of tax free allowances that can be utilised each year with regards to capital gains tax, income tax and inheritance tax. 

Tax efficient wrappers should be considered. Alongside a pension and ISA, offshore bonds and private investment company investments, allows investors to grow a pot of assets without capital gains and income tax being charged on an arising basis. 

Additional tax efficiency can be obtained by taking advantage of government tax breaks for investment into start-up and smaller business. This can include relief on current and future liabilities, but the investments carry a higher level of risk and are not suitable for everyone. Where appropriate, these could be incorporated into an asset allocation that considers your overall financial affairs and the level of investment risk you wish to take. 

In short

Fully utilise the various tax-free allowances each year and look at investments that provide tax relief. Consider tax efficient wrappers through a holistic approach and transfer investable assets into a tax efficient environment where possible.  

Can I retire now and meet my financial commitments? 

Background

There are several considerations when deciding if retirement is possible. Retirement is unique to you and having a clear desired lifestyle in retirement is important. From this, we can work with you to determine a clear income requirement. Your assets will need to provide this to you and meet your short term needs as they evolve over time, as well as your more long-term goals. This is a process which we commonly discuss with our clients.

Our view

Cash flow modelling and scenario analysis allows you to see how long your assets can support your lifestyle in retirement, determine if funds can be left to your beneficiaries or if you are likely to run out of cash. When doing this, it is important to factor in variables such as a rate of inflation, all fees, your marginal tax rate, and a realistic growth rate (given your preferred level of risk). We can then consider any known inflows and outflows too.

Although these will change over time the result will allow us to outline any changes that will positively impact the outcome (lower fees, less tax etc) and maximise the value of your assets. Once these are factored in, we can then see if retirement now is possible or when it is likely to be in the future. 

In short

Cash flow modelling and looking at different scenarios, while factoring in the appropriate variables will provide a realistic target for retirement, either immediately or in the future. 

Please note

• The value of investments can go down as well as up and you may not get back the full amount invested. 
• Past performance Is not a guide to the future. 
• Income from investments is not guaranteed and the future yield may be higher or lower.  
• Taxation depends on the individual circumstances of the investor as well as tax law and HMRC practices, all of which can change.  
• Tax advice is not regulated by the Financial Conduct Authority.
• Forecasting relies on several assumptions and there is no guarantee that these will be born out in reality. 

Investment Solutions is a firm of independent financial advisers authorised and regulated by the Financial Conduct Authority, registration number 533559. 

The information provided is not intended to be a personal recommendation or advice. It is important to take professional tailored advice before making any decision in relation to your personal finances.