A gentle reminder of why one should stay focussed on the long-term during periods of uncertainty!

Many of you will have noticed that financial markets having been through some turbulence of late, the FTSE 100 having fallen from 7,776 on 8th August to just 7,282 as I type, on 10th September, a fall of 6.35%. These falls are largely as a result of the strengthening pound, which in turn has been caused by positive news around Brexit, not that you would necessarily have guessed this from the media!

As a result of this volatility, I thought now might be a good time to issue a reminder of how important it is not to be distracted by short-term events.

The following charts show how a selection of the Clearwater Portfolios (constructed by Evidence Based Investments) have performed over the past few months but also over some longer time periods.

3 Months to 7th September 2018

 12 Months to 7th September 2018

5 Years to 7th September 2018

20 Years to 7th September 2018

The thing that stands out is, although there have been dips from time to time and some of them very sharp, there has always been a subsequent recovery. With every portfolio, the graph always ends up going from bottom left to top right, provided one is sufficiently patient. There is always something in the news that is causing the markets to move in one direction or another but over the longer-term these short-term issues fade into the background and appear just as ‘noise’ on the long-term charts.

We have just added some presentations to the website which I hope you will find helpful in gaining a better understanding of our approach to investing. Please just click on the titles below and you will be taken to the relevant presentation. Hard copies of these are available on request.

Pursuing a Better Investment Experience

UK Bias Portfolios - Performance Report

UK Bias Portfolios - Global Financial Crisis (2007-2009)

As always, if you have any questions on this subject or indeed on any other finance related matter, please do not hesitate to call me.

With kind regards,

Yours sincerely

Graham Ponting CFP Chartered MCSI

Managing Partner

The irresponsible absurdity of new longevity theories

The following is taken from a blog written recently by a friend of mine, Abraham Okusanya, I thought you might find it interesting.

“Ancient scholars would have us believe Methuselah lived to a staggering 969 years, making him the oldest person in history. Little wonder the name became synonymous with longevity.

British gerontologist Aubrey de Grey coined the term “Methuselarity” – a blend of Methuselah and singularity – to describe a future where all medical conditions that cause human death would be eliminated.

Grey is vice president of a US-based biotech firm that applies technology to curing age-related diseases. He believes medical technology will eventually lead to human death only occurring by accident or homicide.

If any of this sounds like science fiction to you, you are not alone. While I do fancy being immortal, the reality of this in my lifetime is rather far-fetched. After all, median life expectancy at birth has increased by about 25 years within the last 100 years.

So, imagine my reaction when it was suggested at a recent event I attended that people in their 60s today should expect to live to 150, and that we should somehow account for this kind of extreme longevity in retirement planning.

This absurd argument is also used as a reason why buying an annuity should be favoured over a sustainable withdrawal framework for drawdown. What the salesperson often fails to mention though, is that, in the event people in their 60s today do live to even 120, annuity providers themselves will be in serious trouble.

An annuity is not a magic money tree. If today’s average annuitants live well beyond their current life expectancy, providers would see their liability grow enormously. So will defined benefit schemes.

Remember, we are not talking about a few years increase here, we are talking 30 to 50 years improvement within a very short period. And presumably, if people start to live that long, they will delay annuity purchases, which makes it harder for life cmpanies to subsidise old rates with new ones.

What is more, since over 90 per cent of annuity purchases are not indexed-linked, inflation will do untold damage to income for people over a 40 or 50 year retirement period. An income of £10,000 per annum in 1977 had the buying power of £1,955 by the end of 2017 – a reduction of 80 per cent using CPI.

The point I am making is that, while there are several good reasons for buying an annuity, sci-fi scaremongering around extreme longevity is not one. Neither annuities nor drawdown would be a failsafe edge against such a risk.

The sustainable withdrawal framework already accounts for the tail-end of longevity risk. This involves planning to an age where the client has only between 10 to 20 per cent probability of surviving, based on the Office for National Statistics mortality projection.

Under the sustainable withdrawal framework, a 65-year-old should be planning to age 95. An inflation-adjusted withdrawal of £3,000 from a £100,000 portfolio of 60 per cent global equity and 40 per cent bonds lasted from age 65 to 100 in 80 per cent of historical scenarios between 1900 and 2017. And, yes, that is after accounting for 1.5 per cent in fees.

In any case, if the medical technology was to become so profound as to improve longevity significantly, is it such a leap to think this will result in longer working lives and retirees, now cured of their ailments, being able to return to the labour market?

What is more, the technology that drives this sort of improvement will presumably deliver handsome returns for those invested in the capital markets, of which a drawdown investor is one.

Good retirement planners already account for reasonable longevity improvements. But obsessing over the likelihood of extreme longevity is unhelpful and does not aid financial planning in any way”.

As always, if you have any questions on this or indeed on any other finance related matter, please do not hesitate to call me.

With kind regards,

Yours sincerely

Graham Ponting CFP Chartered MCSI

Managing Partner

Advance Notice – New Secure E-mail System

Following the introduction of the new General Data Protection Regulations (GDPR) we have decided to send all future e-mails which contain personal and/or potentially sensitive data in an encrypted format. This is to ensure greater security of your personal information but the impact on you will be minimal.

E-mails you receive from us, that we consider contain personal and/or sensitive data, will now initially look like this in your Inbox:

In order to read our message and to access any attachments, you will need to:

1. Click on Read my message in the e-mail you will have received.
2. You will then have the option to view in Web Browser or download the Mailock App.
3. You will need to complete a very simple sign-in procedure – You will only need to do this once!
4. You will then be asked a security question which has been set by us to identify that you are the intended recipient – You will also only need to do this periodically.
5. You will then be able to read and reply as normal.
6. You will also have the option to compose and send secure e-mails to us, if you wish.

We do appreciate this is an extra step in what is normally a very straightforward process, however, we believe the security of your personal information is of paramount importance.

If you experience any difficulties in opening our e-mails using this new process, please do contact us immediately.

For your information, I will be away on a family holiday now until 27th July, however, Adam and Denise will be here should you have any urgent queries and I will be reading my e-mails (encrypted or otherwise) whilst away!

With kind regards,

Yours sincerely

Graham Ponting CFP Chartered MCSI

Managing Partner

Where has £17.5bn of pension freedoms money gone?

This is a follow up to an e-mail on Pension Freedoms I sent to you all around about 10 days ago. In that communication I was highlighting the results of a study which showed that retirees were not recklessly spending their pension funds, just because they now had unfettered access them. The following tells us where the money that has been withdrawn has been spent (or in some cases not spent), I found this interesting:

About £3bn that has been flexibly withdrawn from UK pensions is currently sitting in low yield bank accounts, with investors facing the “double jeopardy” of tax on withdrawals and low returns, according to research by AJ Bell.

Research conducted by FWD on behalf of AJ Bell has shed light on what has happened to the £17.5bn that has been flexibly withdrawn since pension freedoms began in April 2015.

The research, released on 26 June, surveyed 370 people who have accessed their pension flexibility since April 2015.

Bizarre and surprising

One of the research’s key findings was that despite pensions being designed to fund life in later years, only a quarter (£4.7bn) of withdrawals had been used to fund day-to-day living.

AJ Bell said one the most “surprising” results was that £3bn is “languishing in low yield bank accounts”.

A further, £1.6bn has “rather bizarrely” been withdrawn from pensions to invest in other products such as ISAs.

A whopping £2.3bn has been spent on luxury items such as holidays, cars and home improvements.

‘Sensible’ spending

On the more positive side, £2.9bn had been used to pay off debts and reduce interest payments.

Despite stories of boozing and gambling, only £245m had been spent on entertainment such as eating out, season tickets or gambling, AJ Bell said.

Politics over practicality

Tom Selby, a senior analyst at AJ Bell, said regulators and policymakers have been playing catch-up since chancellor George Osborne first introduced pension freedoms.

“The pension freedoms, while hugely popular, were undoubtedly announced with politics rather than practicalities in mind. Because the reforms were almost entirely untested, it has taken the Financial Conduct Authority (FCA) a while to build a picture of consumer behaviour and recommend any possible market remedies.”

He said while the FCA’s interim report concluded most people are not squandering their hard-earned pensions, there is evidence some people are making poor retirement decisions.

“For example, 17% or £3bn of withdrawn pension money has been shoved straight into a bank account.

This might not be a problem in the short-term – indeed it makes sense to have some ready-cash available in most cases – but it almost certainly isn’t an advisable long-term investment strategy, particularly with interest rates at record lows and inflation returning to the UK economy,” he said.

One solution being proposed, Selby says, is for people to be given help through a ‘mid-life MOT’ in order to assess their retirement income strategy, “although this will require buy-in from both politicians and the regulators”.

This is me again! One major issue that is not mentioned above, is the fact that in most cases pension assets remain outside of one’s estate for Inheritance Tax (IHT) purposes, whereas, once moved into an ISA or a Bank A/C these funds become potentially liable to IHT at 40% on death!!! By all means withdraw money from your pension if it is your intention to spend it and you have no other source of funds, otherwise it is usually better to leave as much money within one’s pension wrapper as possible, for as long as possible. In your pension, the funds grow free of income tax, free of capital gains tax and they remain outside of your estate for IHT!

There are some potential income tax considerations for beneficiaries, if death occurs after age 75.

As always, if you are unclear on this or if you have any concerns about your financial arrangements and whether you are truly making the most of your money, please do not hesitate to call me.

With kind regards,

Yours sincerely

Graham Ponting CFP Chartered MCSI

Managing Partner

Retirees not recklessly spending pension wealth!

Ever since the Pension Freedoms were announced in 2015, there have been concerns that many people would simply cash in their retirement savings and squander the money. A recent study however, suggests that this is far from the truth.

Older people are holding onto their savings and are reluctant to spend money impulsively, according to research from the Institute for Fiscal Studies (IFS).

A survey published on 11th June 2018, looking at how individuals use their wealth once they retire finds many are not drawing down as much wealth as they could.

It says, on average, individuals will draw down just 31 per cent of net financial wealth between the age of 70 and 90.

Even among individuals in the top half of financial wealth distribution, net financial wealth appears to be drawn down by just 39 per cent, on average.

The IFS suggest this wealth, whether held in housing or in financial assets, is likely to be passed on to later generations.

However, inheritances will typically only be received at relatively older ages and so someone currently aged 40 might expect to receive a bequest from their parents at age 63.

IFS associate director Rowena Crawford says the way wealth is inherited will have implications for the level and distribution of resources among current working age individuals, particularly those with wealthy parents and few siblings.

Therefore, the increased freedom people now have over how they spend their pension wealth in retirement will require careful monitoring, she adds.

Royal London policy director Steve Webb says: “This report confirms that the vast majority of pensioners who have saved through their working life are cautious with their money and leave unspent wealth at the end of their lives.

“This is great news for those who believe in pension freedoms. The IFS research suggests that the biggest concern about pension freedoms is likely to be about excessively cautious retirees spending too slowly than it is about reckless retirees blowing their pension savings on lavish living.”

The key takeaways for me from the above are as follows:

1. ‘Individuals will draw down just 31 per cent of net financial wealth between the age of 70 and 90.’
2. ‘Someone currently aged 40 might expect to receive a bequest from their parents at age 63.’

Regular visitors to my office will know I stress these points at virtually every client meeting. The whole point of proper financial planning is to ensure that you are able to enjoy the best lifestyle possible, within your means and if your primary objective is to help your children, to enable you to do this before you die and the children are really too old to benefit! A robust Lifelong Cashflow Model should be able to give you the confidence to make these hugely important decisions.

As always, if you have any concerns about your financial arrangements and whether you are truly making the most of your money, please do not hesitate to call me.

With kind regards,

Yours sincerely

Graham Ponting CFP Chartered MCSI

Managing Partner

As the late Jim Bowen might have said, “Look at what you could’ve won!”

Financial management is not normally a particularly humorous subject but I hope you will enjoy the video below, produced by a fictional US firm called ‘Hindsight Financial’!

Click here

I do hope our advice proves rather more helpful!

As always, if you have any concerns about your financial arrangements and whether you are truly making the most of your money, please do not hesitate to call me.

With kind regards,

Yours sincerely

Graham Ponting CFP Chartered MCSI

Managing Partner

Taking income under ‘Flexi-Access Rules’ from a Personal Pension – for the first time!

As you are probably aware, since April 2015, it has been possible to take as much as you like from your pension (assuming it is a defined contribution plan and the provider has amended their rules) and, at any time once you are age 55 (in most cases).

However, determining how much tax will be deducted by the pension provider can be quite a challenge. A number of our clients have been unaware of how the tax rules are applied; I hope the following guidance will provide some clarity around this issue.

Income can be withdrawn from appropriately flexible schemes either under Flexible Drawdown or by taking an Uncrystallised Fund Pension Lump Sum (UFPLS). In both cases tax will be due on any income (although not the pension commencement lump sum component, which is paid tax-free) at the recipient’s marginal rate of income tax. The amount of tax deducted by the provider is processed under the Pay as You Earn (PAYE) scheme but the amounts deducted can sometimes provide an unwelcome surprise.

What happens when income is first taken?

If the pension scheme does not hold an up-to-date tax code and the individual does not have a P45 for the current tax year, the scheme administrator must tax any payment under the emergency tax rules. Where this is the case, it is assumed that the amount being withdrawn will continue to be paid each month, even if it is a one-off payment. This is known as the ‘Month 1’ basis and the administrator will apply 1/12th of the personal allowance to the payment and 1/12th of each of the income tax bands to the extent that they apply.

UFPLS Example:

£20,000 withdrawn, of which £5,000 (25%) is Tax-Free Lump Sum and £15,000 is income.

£ 987.50 (£11,850 / 12) taxed at 0% =             £0

£ 2,875.00 (£34,500 / 12) taxed at 20% =        £575

£ 9,625.00 (£115,500/12) taxed at 40% =        £3,850

£1,512.50 taxed at 45% =                                 £680

Total Tax Paid =                                                 £5,105

So, the £15,000 income has an effective tax rate of 34.03%.

Shortly after making the payment, the pension provider would normally receive an updated tax code from HMRC to use against any other income payments in the tax year and can usually help to address any overpaid tax.

However, this will not immediately recover any overpaid tax for clients who do not intend to take any more income during the tax year. Ordinarily, they would need to wait until the end of the tax year to claim back the over-paid tax.

On the other hand, it is also possible that income is paid from other sources that also use up the Personal Allowance or other income tax thresholds. In this scenario, using the emergency code will mean that more tax is due on the payment and this could increase the amount of tax deducted on future payments.

If there are no further income payments, any refund due can be claimed at the end of the tax-year, although this may require the completion of the self-assessment tax return. Alternatively, it is possible to submit an “in-year” claim from HMRC using the relevant claim form:-

• P50Z – For withdrawals that exhaust a pension fund and the client has no other sources of income.
• P53Z – For withdrawals that exhaust a pension fund and the client receives income from other sources.
• P55 – For use with a partial withdrawal of a pension fund and where there will be no further withdrawals in the current tax year.

One way to avoid such nasty tax surprises is to request the scheme administrator to make a nominal payment (up to £988 gross) prior to the main withdrawal. The small payment will be taxed on the emergency basis but will not attract any tax if below £988. The pension administrator’s provision of Real Time Information (RTI) PAYE data to HMRC usually triggers a revised tax code to be issued shortly after this payment and this code can be applied to future payments. This will avoid the need to apply the emergency code to the main withdrawal (although, please note, that the revised code could also be issued on a Month 1 basis).

The main point of note here is that, if a large withdrawal is required and it is intended to use the mechanism above to avoid a tax headache, more notice of intentions will be required.

Lump Sum vs Annual Payment

Where a one-off lump sum is taken, and the provider is not operating a Month 1 tax code, the Personal Allowance available to that point in the tax year can be applied to the extent it has not been used by earlier payments. If, however, the intention is to only take one payment during the tax-year, it can be requested as an annual payment. In this scenario, the whole personal allowance for the year can be applied, thus saving the need for any later reclaims.

I appreciate the above is a little complicated but if you are planning on making a withdrawal, please contact either myself or Adam and we will be happy to provide some guidance. Please do not be alarmed by any of this, it usually is a fairly straightforward process and with enough notice, it can be managed quite easily.

As always, if you have any concerns about your financial arrangements and whether you are truly making the most of your money, please do not hesitate to call me.

With kind regards,

Yours sincerely

Graham Ponting CFP Chartered MCSI

Managing Partner

General Data Protection Regulation (GDPR)

As I am sure you have heard, Data Protection laws are changing on 25 May 2018.  The EU’s General Data Protection Regulation (GDPR) is being introduced to unify all EU member states' approach to data regulation, ensuring all data protection laws are applied identically in every country within the EU. It will protect EU citizens from organisations using their data irresponsibly and puts them in charge of what, where and how their data is shared. 

Despite ‘Brexit’ all UK companies must comply with GDPR, as we remain in the EU at the time the new rules come into force.

Clearwater Wealth Management never share your data with third parties, without your express permission to do so, but we want to take this opportunity to provide you with a chance to review your communication preferences with us.

I am sending you this email because you are on our distribution list for my regular ‘Round Robin’ communications.  If you find these helpful, and would like to continue receiving them after 25 May 2018, please indicate this using the options below.  Clicking on the appropriate link below will generate a pre-populated email for you to send back to us.

By clicking here, you give us at Clearwater Wealth Management consent to continue contacting you by email with information we feel might be of interest to you.

By clicking here, you are ‘opting-out’ and will be removed from our contact list. 

If you do not reply we will assume you would like to opt out and will ensure we update our records.

You can, of course, change your decision at any time in the future by emailing us or giving us a call.  You will also notice the introduction of an ‘unsubscribe’ option on my Round Robin emails from now on so please feel free to make use of this.

As always, if you have any concerns about your own financial arrangements and whether you are truly making the most of your money, please do not hesitate to call me.

With kind regards,

Yours sincerely

Graham Ponting CFP Chartered MCSI

Managing Partner

Some words of wisdom for the nervous investor!

I am a great fan of a man called Nick Murray, a Financial Adviser in the US, and what follows are a few of his beliefs around investing. I subscribe to these views 100%!

I thought you might find these pearls of wisdom reassuring while markets seem to be going through a turbulent period.   

I believe that the great long-term risk of stocks is not owning them

On July 8, 1932, the intra-day low of the Dow Jones Industrial Average was 40. On October 14, 1996, the Dow closed over 6000. The intervening period was the worst in human history: Depression, WWII, Cold War etc. However anecdotally, I infer from these data three things. The right time to buy stocks is now (as long as you have the money); the right time to sell them is never (unless you need the money); the great risk is not owning them. Incidentally the Dow Jones, even after recent setbacks, sits at around 25,000.

I believe that everything you need to know about the movement of stock prices can be summed up in eight words: the downs are temporary; the ups are permanent.

I never mistake fluctuation for loss. Share prices go down all the time – 25% or so on an average of every five years (albeit not lately) – but since they never stay down, it turns out not to matter. Markets fluctuate but do not create losses. Only people can create permanent loss by mistaking a temporary decline for a permanent decline, and panicking out. No panic, no sell. No sell, no lose. The enemy of investment success is not ignorance, it’s fear. So, it’s my faith, not my knowledge that saves the investor’s financial life.

I process the experience which most people describe as a ‘Bear Market’ in two different words; BIG SALE!

Since all declines are temporary, I regard all major generalised equity price declines as an opportunity to stock up on some more truly safe investments before the sale ends.

I don’t believe in individual stocks, I believe in managed portfolios of stocks

I can break a pencil; I cannot break 50 pencils tied together. That’s diversification. Thus, one stock can go to zero but stocks as an asset class can’t go to zero.

I believe that dollar-cost averaging (making regular investments over a long-period of time) will make the dumbest person in the world wealthy. Hey, look at me; it already has! 

The more ‘knowledge’ you have the more you try to outsmart the market, and the worse you do. The more you see the market as long-term inevitable/short-term unknowable, the more you’re inclined to just dollar-cost average and the better you do. Dollar-cost averaging rewards ignorance with wealth.

I love volatility

Volatility can’t hurt me because I am immune to panic. And, it can help me in a couple of ways. First, in an efficient market, higher volatility means (and is the price of) higher returns. Second, higher volatility when I’m dollar-cost averaging means even higher returns. Higher returns are good. Trust me on this.

I’m not afraid of being in the next 25% downtick. I’m afraid of missing the next 100% uptick!

And I’ve noticed that I have no ability whatever to time the markets. Still, I have found a way to machine the risk of missing the next 100% uptick down to zero. It’s called staying fully invested all the bloody time. Works for me.

I believe that prior to retirement, people should own as close to 100% equities as they can emotionally stand. Then, after retirement, I believe they should own as close to 100% equities as they can emotionally stand.

If it follows that stocks will always rise (eventually), then the above has to be true. Whether your emotions can stand it is perhaps a different matter. Many would happily sacrifice some of those higher returns for a good night’s sleep.

If you have any concerns about market gyrations over the coming weeks and months, just come back to this and every time you get an attack of the jitters (we all do, even me); keep rereading it

As always, if you have any concerns about your own financial arrangements and whether you are truly making the most of your money, please do not hesitate to call me.

With kind regards,

Yours sincerely

Graham Ponting CFP Chartered MCSI

Managing Partner

It’s that time of the year again!

As we approach the end of the 2017/18 tax-year, thoughts inevitably turn to end of year tax planning and any unused allowances (ISA, Pensions etc.) that may be available.

The ISA allowance for 2017/18 is £20,000 and if you have not made a subscription (or perhaps you have only made a part subscription), there is still time to use this allowance, if you have the funds available.

Since 6th April 2016, in addition to the subscription, it has been possible to top-up ISAs by any amounts withdrawn during the tax-year, including any charges deducted. This means that even if you have not made a subscription this year but have ISAs from previous years, your personal ISA Allowance may be more than £20,000 because of charges deducted during the year. If you made a subscription at the beginning of the tax-year, you may still have a residual allowance left because of these deductions which can be utilised by 5th April 2018.

If you have a Standard Life Wrap Account, the scope for top-up (in addition to any unused subscription) does not apply, unless you take physical withdrawals from your ISA. This is because Standard Life deduct ISA charges from the cash held in your Portfolio and not from the ISA itself.

If you have a Transact Wrap Account and you would like to know your personal ISA allowance for the remainder of the 2017/18 tax year, you can access this information on the Transact website. From your home page, select reports and from the drop-down menu, select ISA Subscriptions.

If you would like to use the balance of your allowance before 5th April, please ensure you advise us of your intentions before the end of March; we will be very pleased to assist. If your ISA is with Transact, please give us as much notice as possible, as a form may be required, if you have not made a subscription since Tax year 2016/17.

Just for information, the ISA Allowance for 2018/19 will remain £20,000 each, so £40,000 per couple.      

If you have any concerns or questions about the above or indeed any other finance related matter, please do not hesitate to call me at any time.

With best wishes,

Yours sincerely

Graham Ponting CFP Chartered MCSI

Managing Partner