Issue 126 | Lowes Magazine

Issue 126

“There are always flowers for those who want to see them.” Henri Matisse

INSIDE TRACK

Lowes tax tables booklet WE ARE DELIGHTED TO INCLUDE WITH THIS ISSUE OUR ANNUAL TAX TABLES booklet, giving you updated information on personal tax rates, exemptions and allowances. You can order further copies for family, friends and colleagues by calling 0191 281 8811 or emailing: Contact@Lowes.co.uk

NI top up deadline extended THE GOVERNMENT HAS EXTENDED THE deadline for topping up of past years’ National Insurance payments until 31 July 2023. Anyone with gaps in their National Insurance record from April 2006 onwards can fill the gaps to boost what they will receive from the new State Pension. Any payments made will be at the lower 2022/2023 tax year rates. To obtain the full state pension, individuals must have paid at least 35 full years of National Insurance contributions. Part year contributions do not count towards the 35 years. You can check your state pension forecast at: www.gov.uk/check-state-pension

Retirement advice ever more crucial

Lowes clients already benefit from our support in making good financial decisions in volatile times but if you know anyone else who would benefit from advice, please contact us on 0191 281 8811 and we will arrange for a Lowes Adviser to call. Concerns around funding long term care have also been at the forefront of people’s minds since the pandemic. NEW RESEARCH FROM STANDARD LIFE revealed that knocks to people’s financial confidence, brought about by high inflation, rising interest rates and unsettled markets, are encouraging more people to consider getting financial advice, especially those approaching or in retirement. In fact, 83% of people they asked said they now believe they need financial advice. Key areas people are concerned about are: • the level of risk they are taking with their investments • how much money they should be paying into their pension • how much income they can take in retirement, and • how much and/or when they should pass on wealth.

New service from Lowes DO YOU WANT TO STAY UP-TO-DATE ON THE latest happenings in markets and the economy? Our Ear to the Ground updates collate the week’s events into one easy-to-read article so you can stay in the know. Compiled by our team of Analysts from Lowes Investment Management, a dedicated investment management arm of Lowes Group, these updates are shared weekly on LowesIM.co.uk/Insights For those of you who prefer to leave the delving into markets to us at Lowes, that is fine too.

This magazine is for general information purposes only and does not constitute advice or a personal recommendation. It does not consider your specific circumstances as an individual and/or corporate investor. If you wish to establish if any of the products, services or options discussed are suitable for you then you should contact us for advice. Remember that the value of your investments can go down as well as up and that you could get back less than you invest. Best endeavours have been made to ensure all information contained within the magazine are accurate at time of writing, however they may be subject to change later.

Covershot: The dome of St Paul’s Cathedral, London in springtime. Source: Shutterstock.

2 LOWES Issue 125 · Published January 2023

INSIDE TRACK

Planning for our later life

With many of us living longer and not always in good health, it is important that as part of our financial planning we consider our possible need for later life care. Alongside this we recommend putting in place a lasting power of attorney. Doing these things means we will be better positioned to receive the care we want, in the way that we want, should we need it.

HOW DO YOU FEEL ABOUT LATER LIFE CARE? According to a new piece of research from Just Group, just one in five people over age 45 would want to go into a residential care home. The over-75s also expressed reluctance to go into a care home, with just 29% agreeing that they would be happy to do so if needed. In contrast, 67% of over-45s surveyed said they would be happy to have carers come into their home, rising to 80% among the over-75s. Care homes faced severe pressure during the Covid pandemic, which may have affected people’s perception of them.

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If you would like to receive further information on any of the subjects featured in this issue please call: 0191 281 8811 , fax: 0191 281 8365 , e-mail: client@Lowes.co.uk , or write to us at: Freepost LOWES FINANCIAL MANAGEMENT . Lowes ® Financial Management Limited. Registered in England No: 1115681. Authorised and Regulated by the Financial Conduct Authority.

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COMMENT

THE ROBOTS ARE HERE, AND THEY ARE changing the world as we know it. Whilst long talked about, artificial intelligence (AI) has arrived and is starting to impact many aspects of our daily lives, often without us knowing about it. What’s also clear is that we’ve seen nothing yet. One AI product, Chat GPT, from Open AI, has been making headlines recently, as a version has been made freely available for anyone to use. You can access and test it out for yourself via the Open AI website. It uses artificial intelligence to understand and generate human-like language responses to inputted requests. Ask it to write an essay covering multiple specified points and it will trawl the internet, gather information and produce what’s requested… in seconds. Perhaps more entertaining, ask it to write a song in the style of another, with lyrics referencing specified traits of your pet or a person, and you will be impressed. It is just one example of how AI is rapidly advancing. AI technologies like ChatGPT have the potential to impact all aspects of everyday life and industries, from healthcare to transportation to finance. Just as the introduction of internet search engines such as Google meant hardbacked encyclopedias became redundant, AI will replace search engines before too long. It will become embedded and affect the way in which we live and work. However, whilst first impressions of the likes of ChatGPT are very impressive, on closer examination it has been found to be seriously flawed, outputting answers that seem authoritative but can be dangerously incorrect and, in some instances it would appear, made up. So not so intelligent after all. The ChatGPT software is currently on version 4 and it will inevitably improve, and it has its rivals also. But instances where some AI is arguably fake, demonstrates the risk of becoming too reliant on its capabilities, too soon. Additionally, there are serious concerns about becoming too reliant on it at all. Well known tech entrepreneur, Elon Musk has expressed grave concerns about AI, suggesting it has both positive and negative aspects. He has gone one step further to suggest it could be one of the biggest threats to human civilization. Open your AI’s

But whether we like it or not, the AI evolution is here. It could be more a revolution – swift and significant, potentially making a bigger impact on our daily lives over the next 20 years than the internet did over the last 20. It will of course bring with it investment opportunities and fortunes will be made – and lost! Our investment team will be monitoring its progress. Whilst the Lowes Changing World Portfolio and others won’t be becoming significantly exposed to AI companies in the short term, we are confident that the managers of relevant elements of the portfolio will be closely monitoring developments, as it is set to become one of the new ‘megatrends’. As far as our business is concerned, we are always on the look out for ways in which we can improve the service we provide to clients and it might not be long before variations of artificial intelligence can help us in the way we provide assistance to you. That said, you can be sure that whatever the future holds we will endeavour to continue to be a business that sticks to our motto of “personal finances cared for personally” - by real people rather than any artificial intelligence.

Ian H Lowes, Managing Director

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SAVING

Are NS&I Premium Bonds now more attractive?

Lowes consultant, Chris Large takes a look at this popular Treasury-backed product.

A PREMIUM BOND WIN CAN MAKE YOUR DAY. BUT DOES the recent boost to the NS&I Premium Bonds prize draw fund make the bonds worth saving into? And if so, for which savers? NS&I Premium Bonds have always had a distinct advantage for savers in that they are backed by the UK Treasury. This means unless the British Government defaults on its debt, your money is safe. Recently, NS&I raised its Premium Bond prize fund for the fifth time in the past year. From March 2023 it has been 3.3%, giving an extra £15 million in prizes to be won. The number of prizes worth £50 to £100,000 have also increased. In answer to the question of whether this makes Premium Bonds worth saving into, let’s look at the benefits and whether they stack up against other forms of saving. 1. Government backing for Premium Bonds. Provides a high degree of security and confidence, but the Financial Services Compensation Scheme (FSCS) now gives protection of individuals’ capital up to £85,000 per financial institution, which in theory, gives equal protection to that set amount. 2. Premium Bond winnings are free of tax. The introduction of the Personal Savings Allowance – £1,000 for standard rate tax payers, £500 for higher rate payers and zero for those in the additional rate tax bracket – means many people no longer pay tax on their savings income in any case. The tax free nature of Premium Bonds can make Premium Bonds attractive to the highest rate tax payers who receive no savings allowance. 3. Chance to win prizes up to £1 million. The prize draw element is a large part of the appeal of Premium Bonds. Selected at random, every bond has a chance of winning no matter when or where it was bought. But NS&I says the odds of each £1 bond winning a prize is 24,000 to 1. The more bonds you hold, the maximum is 50,000, the greater the chance you have of winning.

As well as boosting the premium Bond fund, NS&I also increased the interest rate it is paying on its Direct Saver and Income Bond products from 2.60% to 2.85% gross (2.89% AER). For savers who want a defined income, these bonds may be more attractive. But neither of these rates are above the current rate of inflation, so unless you need to keep your money in cash, it is worth considering whether to invest instead in a stocks and shares ISA, which could deliver a higher rate of return on your capital.

Green Savings Bond In early February, NS&I announced a new issue of Green Savings Bonds, paying 4.20% gross/AER fixed rate over a three-year term. NS&I said savers putting money into Green Savings Bonds will be helping fund “vital green projects across the UK” as part of the UK

Government Green Financing Framework. The bonds accept investments between £100 and £100,000 and the money is tied up for three years. Due to its Treasury backing, NS&I has limits on the amount it can accept into its savings products in any one tranche, so as not to suppress competition in the market. ERNIE ERNIE is the system that randomly selects premium Bond numbers each month to win the various prizes. But do you know what the acronym ERNIE stands for? It is, Electronic Random Number Indicator Equipment. The system is on its fifth version since inception: ERNIE 5.

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SAVING

Good news for the Treasury Why we need to review our Wills WILL REVIEW IS JUST AS IMPORTANT AS TAKING ACTION to make a will in the first place.

THE TREASURY’S COFFERS HAVE BEEN GROWING OVER the past year, with £368.5 billion received from income tax, capital gains tax and National Insurance contributions between April 2022 and January 2023 – up £44.9 billion on the previous year. Office for National Statistics (ONS) figures also showed a jump in inheritance tax (IHT) receipts to £5.9 billion in the months between April 2022 and January 2023, an increase of £0.9 billion on the same period of last year. Inheritance tax receipts for January 2023 alone totalled £578 million, compared to £443 million in the same month a year ago. These figures highlight how the government’s freeze on tax allowances and thresholds is bringing in more money to the Treasury. This is likely to continue, as in November 2022 Chancellor Jeremy Hunt announced that income tax and IHT thresholds would be frozen until 2027/28. Meanwhile, the Office for Budget Responsibility (OBR) has substantially increased its estimates for IHT revenues over the coming six years. Between 2022-23 and 2027-28, it now estimates the Treasury will receive nearly £3 billion pounds more than expected in the November 2022 statement, with a total tax take of £45.0 billion, compared to the estimates at the end of last year of £42.1 billion. As personal estates grow while the tax allowance remains static, more people will find they are liable for IHT charges. By 2027-28, it is estimated that one in every 15 deaths, around 47,000 a year, will trigger an inheritance tax charge. This is an estimated 6.7% of cases, up from 4.1% in the 2020/21 tax year. Professional advice is ever more invaluable to help work out the total value of an estate, calculate how much inheritance tax is likely to be charged and understand what options are available to manage that tax bill. Acting as early as possible is the best way to mitigate against paying unnecessary tax. As is regularly reassessing the value of an estate and reviewing estate planning.

Most people want the right people to be the recipients of their wealth, yet a large number of people haven’t made a will and if they have made one, they do not review it. This can be fine in some circumstances but when significant events happen in a person’s life – such as birth, deaths, marriage and divorce – it is important that a will is reviewed to ensure it accurately reflects a person’s wishes. Without a will, the State gets to decide who receives a person’s wealth. Recording and regularly updating your will is the first step in this process. We recommend that you make sure also that your beneficiaries know where your will is kept – alongside other important documents. Also consider areas like pension death benefit nominations and Lasting Power of Attorney. Pension trustees will need to know who you want to receive the benefits of your pension. Without that information, they can make the decision for you. With more people in the UK living longer but not necessarily in good health, putting in place Lasting Power of Attorney (which can cover property and financial affairs and/or health and welfare issues) ensures if you are unable to make decisions your attorney can do so for you. Where large sums of money are being bequeathed, then a trust can be a sensible option. There are different types of trust available to use, depending on an individual’s circumstances and need, but they can enable you to retain more control over the money. In planning ahead, we should also consider the potential need to finance long term care if it is required, as part of the process. Your Lowes Adviser can talk you through any of these options.

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PLANNING

Our clients want to pass on their wealth to their beneficiaries as tax efficiently as possible. Lowes Financial Planner, Chris Brown looks at the issues and solutions available to help with intergenerational wealth transfer. IT IS ESTIMATED THAT IN THE NEXT TWENTY TO THIRTY years, the ‘great wealth transfer’ will occur. This is when around £5.5 trillion will be transferred between the generations as either inheritance or gifts. At the same time, we are seeing increased levels of revenue generated by the Treasury from inheritance tax receipts. The Chancellor’s tax strategies announced in the 2022 Autumn Statement saw the IHT nil rate band of £325,000 and the residence nil rate band of £175,000, frozen until at least April 2028. This will bring more families into the scope of IHT and increase the amount of IHT that families must pay. The Office for Budget Responsibility estimates that in the next five to six years one in 15 people will be paying IHT on their estates, pulling in around £45 billion in IHT over the period. These figures alone point to the need for effective estate planning if we are to pass on more of our wealth to our beneficiaries rather than to the taxman. Concerns around inheritance taxation is one reason why more people are looking for independent financial advice. Most people want to know that when they pass on their wealth it will be done in a controlled way and used sensibly. They want to know that when they pass on their wealth to the next and possibly future generations, it will be done tax efficiently so that their beneficiaries won’t be subject to an unnecessary tax bill. And they also want to know that the younger generations have the support they need to manage the family wealth. Attitudes to money Differences in attitude to money is an area which affects decisions around wealth transfer. Recent research from abrdn, among those aged 55 to 73, found they were less likely to pass their wealth to someone if they felt they had a different attitude to money than themselves. Unsurprisingly, they wanted to know that the wealth they had accumulated in their lifetime, would be well looked after and managed for the benefit of the next and potentially, future generation(s) too.

If we consider that at different points in our lives we will have different financial concerns, it makes sense that the generations may differ in their view on money. They are likely also to be facing different challenges. Those in retirement usually will have paid off their mortgage and may have a final salary (defined benefit) pension. Millennials, on the other hand could be focused on getting on to the property ladder rather than saving for the future. This is where Lowes can help by working with families to help pass on their financial values and for the next generation to build strong financial foundations. Practical ways to pass on wealth It is important that discussions take place around tax and estate planning. We do not want to see families stray into paying inheritance tax which a good financial plan could have avoided. There are several tax efficient ways to pass on our wealth but all of them require planning ahead of time. Gifting is a useful tool for those whose estate will breach the £325,000 nil rate band. We can gift money throughout our lifetime and it will pass out of our estate for inheritance tax purposes after seven years. These gifts are known as potentially exempt transfers (PET). They are ‘potentially exempt’ because if the benefactor dies within the seven years, then the value of the gift will fall within the person’s estate for IHT purposes, which could mean tax bills for those receiving the gift. There is a sliding scale applied which reduces the tax, where payable, from year three. Known as taper relief, this reduces the 40% tax rate to 32% in years three to four, and thereafter to 24%, 16% and finally to 8% in years six to seven, before passing out of the estate altogether. There are also annual allowances for gifts. These can be made in assets or cash, up to £3,000 a year in total, free of IHT; on marriage – parents and grandparents can gift £5,000 and £2,500 respectively, plus £1,000 to others; and as gifts from normal expenditure out of income (i.e. ‘surplus’ taxable income) – up to £250 per person. Gifting allowances have not increased with inflation, and so have declined in value over the years, and it is worth maxing out these allowances before making other gifts.

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PLANNING

What needs to be considered in all these cases is that once assets or money are gifted, the money passes out of the donor’s control. This might not be desirable if the donor then needed the money in later life or the money became part of a beneficiary’s divorce settlement. So we advise anyone considering gifting money or assets, particularly of a substantial amount, undertakes a proper assessment of their wealth and needs – including financial provision for the future, such as for long term care. We can use cashflow forecasting to show how long a pension pot and investments might last given foreseeable expenditure over the years. This can be particularly sensible for anyone in retirement who may not be able to top up their retirement pot, factoring in that costs may rise through inflation. Trusts can be invaluable when estate planning and passing on wealth to younger generations. In particular they can address concerns around attitudes to wealth and retaining a degree of control of the money. A trust allows for wealth to be held for a named individual or individuals, but the person making the payment, the settlor, can receive payments from the Trust should they need it. Assets, such as property, can also be given away but they are subject to the seven year rule and importantly, they must pass outside of a person’s control or use to fall outside of the estate. Pensions are another tax efficient way to pass on wealth. Since 2015 when the Pensions Freedoms rules came in, flexible pensions can be passed on free of tax to beneficiaries on death of the pension holder if that occurs before age 75. After that age, the beneficiary pays income tax at their marginal rate of tax when money is withdrawn. While we have only touched on some of the ways we help families with intergenerational wealth transfer and estate planning, these are core services we offer our clients. Lowes advisers can also help support those inheriting wealth to manage it and find the best financial products and investments to help meet their own financial needs.

The CGT/IHT gifting tax trap With house prices pushing more people into the inheritance tax band, and the capital gains tax (CGT) allowance being reduced from £12,300 to £6,000 from April 2023 and to £3,000 in April 2024, more people will find themselves above these thresholds and facing a potential liability to these taxes. While CGT is a separate tax to IHT, both are at play when it comes to making gifts. Some gifts made will be considered a disposal for CGT and the gain could be liable to tax – however, vitally, this only applies on gifts made to children or unmarried partners and not to spouses or civil partners. Transfers between spouses and civil partners are exempt from CGT. Calculating the gain is based on the market value of the gift minus the original purchase price. This can affect shareholders and property investors, for example, where the asset has increased in value in rising markets. However, a main home is usually exempt from CGT. The likelihood of being liable to CGT on a gift deemed to be a disposal will therefore increase as the CGT allowance continues to reduce. On top of this, if the donor then dies within seven years of the gift being made, the value of the gift will be deemed to still be part of the estate and may be liable to IHT. This is a complicated area, not least as there are considerations outside of IHT when gifting. Among them is that once gifted, the money passes out of the donor’s control. Therefore, anyone gifting their wealth should first consider whether they may need the money further down the line, for example for later life care, and whether outright gifting is the best option. So if you are considering making gifts, whether as part or estate planning or not, please talk to your Adviser first.

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BUDGET

Spring Budget Review

The Annual Allowance The Annual Allowance, the maximum amount that can be paid into or built up in a pension each year without suffering a tax penalty, used to be £255,000 but was reduced to £50,000 on 6 April 2011 and to £40,000 in April 2014. In the Budget, this was increased to £60,000 from April 2023. Any unused relief from the previous three years can be carried forward. This means in the 2023/24 tax year, as well as the £60,000 allowance for that year, any unused annual allowance from the past three years of up to £40,000 can be used as well. This is a useful tool for a member of a pension scheme, who may not have been able to pay in as much in past years but can The tapered annual allowance restricts the maximum contributions on which tax relief is given for high earners. The income threshold was set at £240,000 but this has been increased to £260,000. For every £2 of income an individual may have over £260,000, their annual allowance is reduced by £1. The Budget change reduces the impact of the taper, with the allowance falling to £10,000 once adjusted income exceeds £360,000. Money Purchase Annual Allowance (MPAA) The MPAA was a tax trap affecting many people who were accessing their pension during the pandemic and cost of living crisis – around 25% of pension savers aged 55 and over in 2020/21, which is the latest available data. The allowance was introduced to stop people taking money out of their pension and then paying it back in again, thereby receiving double the pension tax relief. The rules restricted the amount that can be paid into a pension once a flexible payment has been taken, from £40,000 a year to just £4,000 a year. Exceeding the contribution amount incurs a tax charge. Without financial advice, often people do not realise these rules exist and what the consequence of their actions could be. And, of course, once triggered, the rules apply for life. The Budget increased the MPAA from £4,000 to £10,000. This will make it less likely that someone over 55 who has accessed their pension flexibly and then wants to continue contributing will be affected. contribute more in the current tax year. Tapered Annual Allowance

Associate Director, Andy Gardiner looks at the financial planning implications of changes announced in the Spring Budget.

PLENTY HAS BEEN WRITTEN ABOUT THE LATEST Budget, including the OBR predictions of a reduction in the rate of inflation to 2.9% by the end of the year. Here we focus on four items from the Budget that will affect the pension and retirement planning of Lowes clients. The Lifetime Allowance The lifetime allowance, which is a cap on the total value of pension benefits you can build up during your lifetime before a potential lifetime allowance tax charge is applied to your pensions, is being completely abolished. This is officially from April 2024. Meanwhile, for the 2023/24 tax year, any lump sums currently subject to the 55% tax charge are being taxed at an individual’s marginal rate of income tax. With no maximum in future on how much an individual can build up in their pension, there was an appealing prospect of taking a significantly increased 25% tax free cash lump sum on retirement. However, the Chancellor has restricted this sum to 25% of whatever an individual’s lifetime allowance was before the new rules came into effect – typically 25% of £1,073,100, which is £268,275. Pension savers who have protected their lifetime allowance at a higher rate (which occurred as previous governments systematically cut the lifetime allowance) will keep the right to 25% of their protected amount. However, there is no indication any of these sums will be indexed, so over time, especially in times of high inflation, the purchasing power of the lump sum will diminish. In addition, money taken from a pension in excess of the lump sum is typically subject to income tax in the UK, which could boost Treasury coffers from pensions.

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RETIREMENT

How we help our clients Wealth Manager,

contributions (employer and employee contributions of 8%) from the age of 22, would build up a total retirement fund of £263,000 by the age of 65. However, if the individual retired five years earlier at the age of 60, this would result in a total pot of £203,000, a loss of £60,000. By contrast, if they chose to work up until the age of 68, they would see their pot increase to £304,000. We can extrapolate this calculation to any size pot and any contribution level. But this simple calculation serves to illustrate the power of contributions and returns compounding over time. Lowes clients will have benefited from their years of advice to help enable them to retire at the time they want. Sometimes it is possible or we need to retire earlier than planned and Lowes Advisers can work through the calculations to show the financial effect of doing so. We will look at important elements like total wealth and how that is made up – pensions, tax free and taxable investments, etc. We will calculate how much pension money can be taken as a lump sum, tax free and where future income may best come from. In the past this was a pension but since the pensions freedoms legislation of 2015, which enabled pensions to be bequeathed tax free or at the beneficiaries marginal rate of income tax, pensions have become useful tools in IHT planning. As you can see, it is far from simple, but this is where we use our many years’ experience and technical knowledge to help clients make the right decision. A useful tool we can use in these calculations is cashflow planning software. This allows us to map various assets – pensions, investments, savings etc – along a timeline to show how much income you are likely to have at any point in time during your retirement. Of course, none of us know how long we will live for, and we don’t want to run out of money, so we plan to a default date, usually 100 years. Cashflow planning is a snapshot of our finances at a certain point in time, and we do need to review it on a regular basis, particularly where there are changes – with life events such as inheritance or a need/desire to retire earlier than planned, being among them. In our experience, long-term financial planning and having the support of an Independent Financial Adviser, is the best way to achieve your retirement goals.

Michael Stowe tells how we help clients when they need to make changes to their retirement plans.

ONE OF OUR KEY ROLES AS INDEPENDENT FINANCIAL Advisers is to help our clients plan their finances for their retirement. We do this through effective investment and savings strategies, and our technical know-how around the complex tax landscape we have in the UK. Our aim, with a strategy built over time, is to help our clients invest and save to accumulate a retirement pot of sufficient size (or more) to give them the lifestyle they want in retirement. Typically, this will include pension saving, carefully selected investments spread across a diverse range of options to spread risk, including ISAs for tax efficiency, and some cash for emergencies. But life is a moving feast and sometimes the best-laid plans go awry or we simply change our mind about when we want to retire. When this happens it can have a profound impact on our finances and so needs careful assessment, calculation and management. So what is the financial cost if your plan is to retire at 65 but you then change your mind, and want to retire and access your pension at, say, 60? Pensions are a very tax efficient means to save for your future. A key benefit is that based on what you contribute, the government effectively tops up your pension by 25% or more, depending on your tax bracket. Over time, this money accumulates and can grow through compounding of investment returns. Often towards the end of our career, when we may be earning more money, we are able to contribute more in to our pension. Standard Life recently calculated the value a pension saver would miss out on by retiring five years earlier. According to the group’s figures, an individual who began working on a salary of £23,000 per year and paid the standard monthly auto-enrolment

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INFLATION

Inflation is more personal than you think

In simple terms, inflation driven by price tends to be temporary. For example, where food supply is more limited, this can drive up food prices. Once those supply factors have been resolved, then inflation usually comes down again. The Bank of England seeks to influence the supply/demand equation by increasing interest rates, restricting consumer spending power, thereby reducing demand, which then brings down prices. However, wage inflation, where wages/salaries rise in recognition of the rise in inflation, sometimes known as ‘embedded’ inflation as wages and salaries tend not to come down again, means people have more money to spend and inflation can become more permanent. Combating inflation The question is, how can we use our savings and investments to help combat the effect of rising/high inflation? Returns on cash deposits are far below the current inflation rate and to get the highest rates for your money, usually means tying it up for a set period of time – typically one, three or five years. If inflation stays high, this effectively means the spending power of your money is reducing year on year by the difference between the interest rate you are receiving and the rate of inflation (bearing in mind that we all have our personal inflation rate). What we are looking for therefore, is to achieve a net rate of return closer to or exceeding inflation (taking into account charges on the investment/savings products). This is more likely to be achieved by putting money in investment funds, which derive their returns from the stock market. Stock markets are affected by investor views of future returns, whereas economic performance is based on historic data. This means investment sentiment, and so performance, is not usually directly aligned to economic performance. Diversifying investments within a portfolio is important also to spread the investment risk. An investment we favour in this kind of economic and market scenario, as a way to manage risk and maximise returns, is structured products. We firmly believe that structured products are key to a well-diversified portfolio especially in uncertain times where their defined return profile can perform exceedingly well in range bound and even falling markets, thanks to snowballing coupons. Structured products also build in the fees, so you know the defined percentage return is what you will receive. To enter, please visit www.lowes.co.uk/client-comp or use the tear-out card included with this magazine and send it to: FREEPOST LOWES FINANCIAL MANAGEMENT . No further address is required.

HIGHER INFLATION THAN WE HAVE BEEN USED TO MAY be with us for some time to come. The rise in the rate of inflation over the past year has been causing concern, understandably, as it makes for bold headlines in national newspapers. But it is important to remember that we are unlikely to be paying the national rate of inflation personally or as a household. The national inflation rate is the measure of how the prices of the goods and services bought by households rise or fall. It is based upon items in a basket of goods put together by the Office for National Statistics (ONS). This basket is reviewed annually to better reflect consumers’ buying trends and to make sure the indices are up-to-date and representative of consumer spending patterns. Items in the basket are sorted into categories, such as food, transport and home appliances, and each category is weighted according to aggregate consumption, so that more commonly purchased items have more of an impact on the inflation figure. As this basket can contain around 700 items, few if any of us will purchase that exact basket of goods. Our personal shopping list is likely to be considerably different and so our personal/ household rate of inflation will also be different. The table shows the 12 categories in the basket of goods used to calculate Consumer Prices Index (CPI) and the percentage weighting applied to each category as of March 2023.

CPI basket of goods 1. Food and non-alcoholic beverages 2. Alcoholic beverages and tobacco

Weighting

11.90% 4.20% 5.80%

3. Clothing and footwear

4. Housing, water, electricity, gas and other fuels 14.10% 5. Furniture, household equipment and maintenance 6.80% 6. Health 2.40% 7. Transport 13.70% 8. Communication 2.30% 9. Recreation and culture 13.80% 10. Education 2.90% 11. Restaurants & hotels 13.80% 12. Miscellaneous goods and services 8.30%

11 Lowes.co.uk

Lowes recommended structured product maturities INVESTMENT

The maturity returning the lowest annualised return was still very respectable given that it was a deposit based, rather than capital at risk contract. Having returned interest equivalent to 5% per annum for three years when Base Rate was at 0.1% for most of the term, we speculate that the Investec FTSE 100 Kick-Out Deposit Plan 90 was one of, if not the best deposit-based solutions over that term. The collapse of the Silicon Valley Bank in March had a knock on effect for banks elsewhere in the world. It was encouraging to see the swift action by central banks to help address the situation. Credit Suisse was one bank very much in the headlines, ultimately being taken over by UBS. Whilst assurances have been given that all senior unsecured creditor obligations and as such, structured product obligations, will be honoured, none of our advised clients have anything to be concerned about in any event, as Credit Suisse are no longer counterparty to any of our structured products.

THE TABLE BELOW SHOWS THE STRUCTURED products most commonly held by Lowes clients that matured in the first quarter of 2023. These first quarter results are typical of what we have come to expect from these products and which, with the same careful selection, we expect to see going forward. They yet again demonstrate why we embrace these solutions for use within our own and our client portfolios. All these maturities were linked to the FTSE 100 or it’s ‘close twin’ the FTSE CSDI, one was an income plan and the rest, autocall / kick-out contracts. It is worth noting that seven of the 11 were designed with Lowes input and two of these we were able to make exclusively available to our clients. This results from our many years experience and influence in the structured products market. The top performing maturity was Option 3 of the February 2019 10:10 Plan which returned a gain of 58.04% on its fourth anniversary – equivalent to 12.11% per annum and more than 5.5 times the rise in the FTSE 100 Index over the same term.

Counterparty

Maturity date

Term (years)

Gain (%)

HSBC

10/01/23 10/02/23 17/02/23 20/02/23 20/02/23 21/02/23 22/02/23 24/02/23 27/02/23 27/02/23 03/03/23

3 3 2 2 2 3 4 2 2 6 6

21

Investec Bank

15.75 1

Barclays

14

Morgan Stanley Morgan Stanley Goldman Sachs Goldman Sachs

21.5

17

24.3

58.04

Citigroup Barclays

14 15

Investec Bank

36 2

Societe Generale

58.2

1 Deposit based

2 Income plan

12 Lowes.co.uk

SPOTLIGHT

Spotlight on Lowes staff

Academy gave Alex an excellent foundation to gain knowledge, but he sees it as a profession where there is no upper limit to knowledge or experience. “So, while it started

ALEX MOLYNEUX, FINANCIAL PLANNER joined Lowes in 2020 after being the first Graduate Trainee to pass through the Lowes Academy, the company’s dedicated training facility. Despite Alex having an interest in economics from an early age and exposure to the profession through his father, he did not immediately gravitate towards personal finance after graduating from university with a degree in Sport and Exercise Science. “Having talked to a couple friends who had begun training as financial advisers, I started to realise this could be a great fit for my interests, personality, and lifestyle. So, after some enquiries, I had a conversation with Ian Lowes who explained that the company had recently setup an Academy as a way for someone with or without any financial services experience to both study and sit their exams whilst gaining valuable experience at the same time”. Now, with two-and-a-half years under his belt as a Financial Planner for Lowes, Alex considers it his career for life. “It really suits me. The work is varied, and I get out and about seeing clients all over the UK. During my time advising clients, I have seen turbulent market conditions and quick changing economic policies in the UK and although it has been testing for my first few years, it has also been extremely rewarding”. Alex sees his value in providing an ongoing service to individuals and families to help navigate them through their stages of life, e.g., moving into retirement after a 50-year career. “I believe it’s essential to work backwards and talk with people about what they enjoy, their life goals and ambitions before you can consider the correct solutions for the individual, something an online service could never provide”. Alex has a network of professional connections he and the company are building to better help clients on a broad range of matters. He sees his job as helping his clients meet the right people and introducing them to trusted professionals. Becoming a financial planner through the

as a slight leap of faith for me, I can honestly say I love what I do and working for Lowes. Sadly, this is evidenced by the

switch away from the typical smash hits on Netflix to financial planning podcasts on YouTube!” Currently, Alex is sitting his last module for the Chartered Insurance Institute, giving him the highest designation of Fellow of the Personal Finance Society (FPFS).

13 Lowes.co.uk

DOUG’S DIGEST When Fixed Interest became interesting

UK EQUITY MARKETS BEGAN 2023 STRONGLY, WITH THE FTSE 100 index closing at an all time high of 8,014.31 on the 20th February, having risen 7.55% since the beginning of the year, on a capital return basis (i.e. not including reinvested dividends). The first week in March, however, brought rumblings about Silicon Valley Bank (SVB), a regional bank in the United States, specialising in providing banking services to small startup businesses. Within days it had been placed under receivership and given special authority from the U.S. Treasury to guarantee all depositors capital with the bank, not just the first $250,000 as is normally the case in the U.S. Unlike in the Credit Crunch in 2008, SVB’s problems had not arisen from excessive lending or holding highly illiquid, hard to value assets. It had large amounts of its capital invested in bonds. Bonds issued by the U.S. Treasury and as such backed by the U.S. Government, similar to gilts here in the UK. These were very secure assets and extremely easy to trade. Bonds such as these are also known as fixed interest assets, because they pay a fixed amount of interest each year in monetary terms, set at the outset. As interest rates rise the value of these bonds falls as investors are not prepared to pay as much for the fixed level of income, being able to get similar from a cash deposit. It was this fall in value that was the issue with SVB, as whilst they held the bonds, a quirk in the accounting rules meant they could show them on their balance sheet at their nominal value, the value they would be repaid when they matured. As depositors started withdrawing their capital the bank had to sell the bonds to meet the withdrawals, and as soon as they did they created an instant loss. There are ways banks can protect against rising interest rates through what are known as ‘interest rate swaps’, but SVB had not done this, so their failure was more a result of their poor risk control than a systematic problem in the banking sector like 2008-09. This didn’t stop investors becoming nervous and equity markets fell sharply, with the FTSE 100 giving up all its earlier gains and actually being down on the year by the 15th March. Especially when other regional banks in America fell into trouble in the same way. Investors began to look around at other banks, and quickly settled on Credit Suisse. Despite being one of the oldest and largest European banks, Credit Suisse has had many public failings in recent years, and had just begun a plan to return them to credibility. The problems in America meant that investors were no longer prepared to give them the time, and to head off any more fears in the banking sector, a ‘shotgun wedding’ was quickly arranged by the Swiss regulator between Credit Suisse and UBS. Part of this deal involved Priority of Payment in Liquidation

For a long time, when interest rates were low, fixed interest was seen as a boring asset class, with capital values staying fairly steady and paying out a regular level of income. As these two very different situations highlight, there is a lot of variation in this asset class behind the scenes, and investors need to understand fully what they are investing in. Whilst an equity investor might decide that a particular company is worth investing in, that is only the first step for a fixed interest investor. At the end of March, for example, according to Bloomberg Lloyds Banking Group had a total of 495 bonds in issue, with maturities ranging from later this year out to 2050. They also have issues in 16 different currencies, and a range of credit ratings showing they occupy different positions within the credit structure. Therefore, whilst they all have their term and coupon determined when they are issued, their value will move very differently on a day-to-day basis, depending on market confidence, inflation expectations, currency movements, future interest rate expectations, let alone the outlook for Lloyds Banking Group itself. Lloyds Banking Group - Bonds in issue by year of maturity

Bonds in Issue 90 80 70 60 50 40 30 20 10 0

N/A

2023

2024

2025

2026

2027

2028

2029

2030

2031

2032

2033

2034

2035 Year of Maturity 2036 2037 2038 2039

2040

2041

2042

2043

2044

2045

2046

2047

2048

2049

2050

Lloyds Banking Group - Bonds by Currency

Australian Dollar Brazilian Real British Pound Sterling Canadian Dollar Chinese Yuan Renminbi Euro Hong Kong Dollar Japanese Yen Mexican Peso New Zealand Dollar Norwegian Krone Rand Singapore Dollar Swedish Krona Swiss Franc US Dollar

0

50

100

150

200

250

Number in Issue

Diversification is key to reducing the risk of a portfolio, not only between asset classes, but also within the asset classes. Recent events have shown that when it comes to fixed interest a level of expertise is required when gaining that diversification, so a portfolio is not over exposed to a single type of risk, be it capital values falling as interest rates rise, which was the problem with SVB, or a clause in the small print which wipes out a particular bond holding as with Credit Suisse AT1 holders. Here, investing via a collective fund as we do in our portfolios can be beneficial, especially when the fund managers are backed up by a large and experienced team of expert analysts. Whilst they cannot guarantee values will not fall in the short term, they are better positioned to identify and mitigate the variety of risks through diversification. More importantly, they also have the experience to spot short term opportunities, with the capacity to take advantage when they arise, hopefully leading to better returns in the future, with fewer bumps along the way.

completely wiping out the value of Additional Tier 1 bonds issued by Credit Suisse, also known as AT1’s. Again, these are a type of fixed interest asset, and would normally have been higher in the hierarchy of a company’s creditors than ordinary shareholders, meaning investors would normally expect to receive their capital back on these before shareholders received any money for their shares. Peculiar

First

Senior Secured Debt Deposits Senior Unsecured Debt Subordinated Debt Tier 2

Additional Tier 1 Preferred Equity Common Equity

Last

Credit Suisse Additional Tier 1

to Swiss banks, however, the small print within the documentation for these bonds did allow for this possibility, catching some by surprise.

Lowes Financial Management and Lowes Investment Management are authorised and regulated by the Financial Conduct Authority Visit: www.Lowes.co.uk | Call: 0191 281 8811 | Email: enquiry@Lowes.co.uk

14 Lowes.co.uk