Lowes Magazine Issue 130

ISSUE 130

“Keep your face always toward the sunshine, and shadows will fall behind you.” Walt Whitman

INSIDE TRACK

Launch of Lowes Platinum We are pleased to announce that Lowes has launched its own investment platform. Platforms are essential for holding and managing investment portfolios. Long-standing clients will remember Cofunds, now Aegon and more recent clients may be on Embark, now Scottish Widows, or Quilter / Old Mutual. There are many more, some more expensive than others. All have their limitations. Lowes Platinum has been created to improve the way we manage client portfolios, deliver a broader investments choice and help us provide an improved service. Best of all, it costs less than the others. Via the new platform we can also provide improved access to our structured product expertise, including a discretionary managed service and a greater range of structures from more counterparties. Running alongside our dedicated structured product platform, SP-Perspective, we will be able to provide you with an unprecedented view of your assets. Lowes Platinum will be phased in over the next year and we look forward to introducing it to you.

Lowes tax tables booklet We are delighted once again to be issuing our yearly tax tables booklet. You can order further copies for your family, friends and colleagues by calling 0191 281 8811 or emailing Contact@Lowes.co.uk Bracket creep in 2024

A survey commissioned by Aegon, the pension and investment product provider, has revealed that a fear of outliving savings is the biggest concern for those saving for or in retirement (71% of those surveyed). With the demise of the final salary scheme, combined with people living longer, which typically means living longer in retirement, this will be an increasing concern as individuals have to take more responsibility for building their retirement income. We have tools that can build personal forecasts based on components such as income from pensions, ISAs, non-ISA investments, the State Pension, and any other assets, plotted against predicted expenditure, which can map out how long retirement income streams will last. This is a powerful way to project forward and help tailor strategies to meet individual lifestyle needs and provide peace of mind. HMRC’s data shows that the number of pensioners paying income tax has risen since the introduction of tax freezes. The number of over-65s who are paying tax is now over 8 million. As we pay more money in income tax, it is even more important that we make best use of our tax allowances and exemptions, and invest, save and withdraw our money as tax efficiently as possible. If you’d like help with mitigating the effects of bracket creep, please talk to your Lowes adviser. Bracket creep, if you’ve not come across the phrase before, is where inflation drives up wages, pushing people into higher tax brackets. We are seeing the effect of this in the UK, as the Government has frozen income tax thresholds until 2028. As the rises in the cost of living have pushed up wages and salaries, more people have been moving up the tax ladder where they face paying a higher rate of income tax. The Office for Budget Responsibility (OBR) expects 1.1 million more people will pay income tax and over 800,000 more people will pay a higher rate tax as a result.

Running out of money too soon tops retirement concerns

The content of the articles featured in this publication is for your general information and use only and is not intended to address your particular requirements. Articles should not be relied upon in their entirety and shall not be deemed to be, or constitute, advice. Although endeavours have been made to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No individual or company should act upon such information without receiving appropriate professional advice after a thorough examination of their particular situation. We cannot accept responsibility for any loss as a result of acts or omissions taken in respect of any articles. Thresholds, percentage rates and tax legislation may change in subsequent Finance Acts. Levels and bases of, and reliefs from, taxation are subject to change and their value can go down as well as up and you may get back less than you invested. Past performance is not a reliable indicator of future results.

Covershot: Portrait of Atlantic Puffin in Thrift. Photo: Shutterstock.

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LOWES Issue 130 · Published April 2024

INSIDE TRACK

How to become a Lowes client As this magazine goes out to Lowes clients, we are preaching to the converted. But we know there are very many people around the country who could and would benefit from speaking to a Lowes adviser about their personal finances. We live in an unpredictable world – the past four years have vividly proved that to us all – and having someone in your corner when it comes to long term investment, saving and building wealth for your retirement, as well as passing wealth to the next generation, can deliver invaluable peace of mind. Over the years we have heard questionable arguments against using a financial adviser. Often people think it is only for the super wealthy but as tax, legislation and market changes make our personal finances ever more

complex, getting the right advice is essential for anyone building their wealth. Cost is also raised as an issue, but a carefully, professionally planned investment, saving and tax plan can easily save the cost of advice over the years. And what value do you place on the peace of mind that your financial affairs are being properly looked after? Once introduced people find it’s easy to do business with us. No matter which way a client wants to access our services – face-to-face, phone, video call – we are here to make things as smooth as possible. If you know of friends or family who could benefit from our services, we would be grateful for an introduction. They can get in touch on 0191 281 8811 and we will arrange for an adviser to have a conversation with them.

Make your money work. Best bank & building society rates

Amount

Provider

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Gross Rate

Contact

£1,000 - £1 million

Easy access savings account Issue 70

Unrestricted instant access accounts

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Kent Reliance

4.96% 1

www.virginmoney.com

£1 - £250,000 Virgin Money Defined Access E-Saver 23 5.01% 2

Bonus/restricted accounts

£10,000 - £85,000 £1,000 - £250,000 £10,000 - £85,000

SmartSave

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5.17% www.smartsavebank.co.uk

DF Capital

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5.07%

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Fixed rate bonds

SmartSave

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4.71% www.smartsavebank.co.uk

Notes: Not to be considered an endorsement for any institution or account. 1 Rate drops to 0.10% on balances under £1,000. 2 Maximum 3 withdrawals per annum, then rate drops to 2%.

Measures of inflation - The average change in prices of goods and services over a 12 month period to March 2024 Retail Prices Index (RPI) 4.3% Consumer Prices Index (CPI) 3.2% Sources: Providers’ websites, Office for National Statistics, www.thisismoney.co.uk, www.moneysupermarket.com, www.moneyfactscompare.co.uk 17/04/2024. All accounts subject to terms and conditions.

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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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3

COMMENT

Put Your Affairs in Order: A Call to Secure Your Legacy

Our time on this earth is finite and when it does end, those we leave behind are going to have an awful lot to deal with. This could be made very difficult and take a lot of time if your affairs are not in order. If you have ever been on the receiving end, following the death of a parent or other relative, you will know this. Even when everything is well-organised, the process of obtaining probate, and managing and distributing an estate, still represents a substantial amount of work for those you leave behind. When financial affairs are not organised or not easy to establish, it can take many years and can destroy families. Simply engaging with a financial planner can make all the difference, helping to bring some order, or at the very least, a first port of call for those you leave behind. Our services go beyond managing investments and mitigating taxes; we recognise that safeguarding your legacy is just as crucial as helping you to accumulate your wealth. The first thing we do is encourage everyone to have a valid, up-to-date Will in place which can be located when required. A Will serves as a roadmap for your loved ones, outlining your wishes and ensuring that your assets are distributed according to your intentions. It’s a simple yet powerful document that can provide peace of mind and prevent unnecessary issues and conflicts down the road. Creating a Will doesn’t have to be a daunting task and nowadays, can be done from the comfort of your own home. Simply email us at enquiry@Lowes.co.uk with “Will” in the subject line, and we’ll refer you to someone who can guide you through the process. Whether you’re a young professional or a retiree, having a will is a fundamental step in protecting your legacy and easing the burden on your loved ones. Another legal document that can mean the difference between unwelcome and unbearable for your family is a Lasting Powers of Attorney (LPA). An LPA allows you to appoint trusted individuals to make decisions on your behalf in the event that you become incapacitated. It’s a vital tool for ensuring that your wishes are honoured, even if you’re unable to communicate them yourself. You can create an LPA online at gov.uk/power-of-attorney or alternatively, if you would like us to refer you to someone who can guide you through the process, please get in touch. Putting your affairs in order is not just about preparing for the inevitable; it’s about taking control of your legacy and ensuring that your loved ones aren’t unnecessarily burdened after you are gone. The time spent on creating or updating your Will and establishing Lasting Powers of Attorney could be one of the best investments you can make for your family, providing clarity and guidance ultimately saving them substantial cost, inconvenience and anguish at what would already be a very distressing period.

For over fifty years we have been helping clients to build, protect, and pass on their wealth for future generations. Whether it’s optimising tax-efficiency or implementing investment solutions tailored to your goals, we are here to support you. By taking a holistic approach to financial planning, we aim to empower our clients to achieve their long-term objectives while safeguarding their legacy for the next generation. If you haven’t yet engaged with Lowes, your circumstances have changed, or you simply feel you are due a financial health check, please do not hesitate to get in touch. Ian H Lowes, Managing Director

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RETIREMENT

New data for a comfortable retirement

Why women should better prepare for retirement Office for National Statistics data show that there are four times as many widows as widowers aged 80 and over – 1.1 million against 259,000. Women have typically built up smaller pension pots than men, which means that men enter retirement with far higher levels of income than women. So, where women are the surviving partner, often they have less income for the remainder of their lives than men. This highlights the importance for couples of making financial plans for later life. We find that in many households it is usual for one person to deal with the finances and to want to ensure the other is looked after and has the support of Lowes as and when the need may arise. Areas to look at are what benefits each couple may receive from their spouse’s/partner’s pension and what would happen to the survivor’s standard of living. This is because many expenses, such as house maintenance, insurance premiums and standing charges for utilities remain the same. Having the conversation and creating a plan, financial and practical, to cover eventualities and ensure the surviving spouse/partner is well provided for, can give peace of mind as well as make a real difference to the comfort and security of loved ones after death.

How much do we need a year for a comfortable retirement?

While this is a question which can only be answered based on individual circumstances and desires, for a number of years the Pensions and Lifetime Savings Association has published generic calculations of the annual amount needed for a minimum, moderate or comfortable retirement. The association has recently updated its figures, which unsurprisingly, given the cost of living increases over the past two years, have gone up. The figures are based on the rise in annual inflation, perceptions of what constitutes varying levels of retirement and the State Pension. They factor in housing, food, transport, holidays and leisure, clothing and personal items and helping others. The latest figures are shown in the table. They should be viewed as a general guideline. One of our key objectives for Lowes clients is to build our client’s wealth so that, as part of long term financial planning, you will have enough to give you the retirement you want and, importantly, you will not run out of money in retirement. As we all know, there are plenty of hurdles that can come along to make that a less than smooth path, including market fluctuations, different Government tax policies, as well as changes to individual circumstances. Something we see more of these days is the desire of retirees to want to help out younger family members who are struggling financially or need a boost to get on the housing ladder. It is important that retirement planning is taken over the long term and regularly reviewed. These days that applies as much to planning in retirement as it does before retirement. Latest PLSA figures for differing standards of retirement Single Income Joint Income Comfortable £43,100 £59,000 Moderate £31,300 £43,100 Minimum £14,400 £22,400 (Full State Pension calculated at £11,500 a year)

Paying into a spouse’s pension Lowes adviser Matt Henry says: Where a spouse is not earning, up to £2,880 a year can be contributed into their pension. With tax relief from the Government this takes the amount saved to £3,600 a year.

It makes sense for other reasons to build a couple’s joint pension wealth, as they then benefit from tax relief on each pension. Where a couple are over reliant on a single source of income, to enjoy the lifestyle they want they may have to take income that pushes the pension holder into a higher tax bracket. Drawing on two, well-funded pensions, money can be drawn from both pensions, making for a more tax-efficient and so longer lasting income stream.

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PENSIONS Is backing British good for your ISA?

The State Pension – don’t make assumptions Many people assume they will receive the full State Pension when they retire. But this is not necessarily the case. While sound investment and saving through our lifetime should reduce the importance of the State Pension to our retirement plans, for many people it remains a valuable element of their retirement income. Currently, to obtain the full State Pension an individual must have contributed national insurance payments (or received NI credits) for 35 years or more. Anyone who has not contributed the full 35 years will receive a reduced pension. If you paid NI at a lower rate – for example, if you contracted out of the Additional State Pension scheme – you may need more than 35 years of contributions or get less than the full amount. What people often don’t realise is that it is not the total of years or part years worked but rather 35 years of full-year contributions. This can leave a hole in what people expect they will receive. At the moment, the Government is allowing anyone who has missed years to back pay NI contributions. Your personal situation can be easily obtained from the gov.uk website.

In his Spring statement the Chancellor of the Exchequer announced plans to introduce a British ISA. When implemented, this will allow a further £5,000 allowance free of income and capital gains tax, on top of the current £20,000, but only for investments into the UK. The increase is good news for those who currently max out their ISA limits, providing scope for an overall £25,000 tax free saving. It will also appeal to those who wish to be certain their investment is staying within the UK. But it won’t be introduced until the idea has been through a consultation; so, if implemented, at best this is likely to be in the 2025-26 tax year. Also, there will need to be an unambiguous definition of what qualifies as a UK investment within a ‘British ISA’, so investors know exactly what they may invest in. With several types of ISA now available, the question is whether this just adds to the complexity of the ISA system. Will it incentivise people to invest in an ISA, rather than leaving their money in cash accounts? Another factor is investment risk. Putting a large part of a yearly ISA and therefore, over time, of your ISA portfolio, into ‘one basket’ increases the risk. We typically advise clients to diversify across different asset types and geographical locations as an important way of managing investment risk. ISAs are an excellent means to grow your wealth tax efficiently. However, for individual financial plans there may be alternatives, or other vehicles to complement ISAs, as part of an overall investment strategy. It is important to consider these and the nuances when investing in relation to personal goals. You can rest assured that we are here to guide you through this process as required.

Go to: www.gov.uk/check-state-pension or contact the Future Pension Centre on the helpline 0800 731 0175 .

Lowes adviser Alex Molyneux points out: The State Pension doesn’t have to be taken at State Pension age, which currently is age 66 but will rise to 67 between May 2026 and March 2028. Deferring will provide a higher weekly payment when the pension is eventually taken – equating to a 1% increase in the weekly State Pension for every nine weeks that payments are deferred. If the pension is deferred for the whole of the 2024-25 tax year, this will equate to an extra £664.58 a year. Deferring can benefit anyone who doesn’t need the pension immediately, for example if they are continuing to work or have other sources of income, offering a higher income in later life that is currently guaranteed to keep up with inflation. However, these terms are not as generous as they were, therefore if you have deferred already for a number of years it is worth reviewing whether now is the time to start drawing your State Pension. Remember, this pension cannot be passed on to your beneficiaries, so if you don’t use it, you lose it.

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PLANNING

Unlocking our pensions: What is flexi-access drawdown?

Lowes adviser Helen Grieves looks at the most popular means to draw income in retirement – flexi-access drawdown – what it is and the benefits and risks associated with it.

Ten years ago, then Chancellor of the Exchequer George Osborne announced the ‘pensions freedoms’. These were dramatic changes to UK pensions legislation which, he said, meant people no longer had to buy an annuity with their pension and instead could keep control of their pension savings and any remaining money when they died could be passed on to their beneficiaries. In fact, at the time, people didn’t have to buy an annuity although most people did, but for a number of years the products had been offering poor rates compared to their long-term highs and most locked the money in and swallowed it up when the policyholder died. The alternative to annuities, drawdown products kept the pension savings invested and the individual would draw down the income they needed. How much could be taken in a year was capped at a figure set by the Government Actuary. The Chancellor also scrapped the limits on how much people could take from the other retirement products to give themselves an income. This had three effects: First, almost overnight the bottom fell out of the annuities market; flexi-access drawdown became the most popular and flexible option for individuals; and there arose a need for professional planning to ensure people didn’t draw too much out of their retirement income fund, potentially leaving themselves destitute in later old age. So, what is flexi-access drawdown? In a nutshell, flexi-access drawdown allows individuals aged 55 or over to withdraw money from their retirement pot while leaving the rest invested for potential growth. Unlike traditional annuities, which provide a fixed income for life, flexi-access drawdown offers more flexibility and control over pension savings. This better enables individuals to tailor their income streams to suit their lifestyle and financial needs. For example, many people are more active in early retirement and so incur greater expenses then than they do in later life.

At retirement, pension savings are transferred into a dedicated drawdown account, typically managed by a pension provider or other financial company. Once the funds are in the drawdown account, the individual has the freedom to decide how much income to withdraw, how frequently, and when. This enables adjustment of income withdrawals according to changing financial circumstances. While any funds remaining in the drawdown account can continue to be invested, providing the opportunity for the retirement pot to continue to grow over time through investment returns. It’s easy to see why the flexi-access drawdown approach has proved so popular over the past decade. Not all pension providers allow for a drawdown arrangement so individuals might find it necessary to transfer to a new provider in order to use their retirement pot flexibly, or simply to look around to see who is offering the best terms. These issues and the complexity of investing to maintain a steady income stream, protecting capital as much as possible, and calculating a sustainable level of income over the long term, is why most people prefer to have the help of a financial adviser with their drawdown account. While annuities have been out of favour since 2014, over the past year it has been possible to achieve higher annual rates of payment from annuities. This has made them more of an option again for anyone who has a smaller retirement pot and/ or who wants a guaranteed income from some or all of their retirement pot. As can be seen, flexi-access drawdown offers retirees flexibility and control over their retirement savings, allowing them to tailor their income streams to suit their lifestyle and financial needs. But it’s essential to carefully weigh the advantages and disadvantages of flexi-access drawdown as they will be influenced by personal circumstances. This is where professional financial advice from your Lowes adviser will be invaluable.

Contined...

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PLANNING

Disadvantages of flexi-access drawdown • Investment risk: As the drawdown funds remain invested in the markets, they are exposed to investment risk. Just as the overall funds can benefit from staying invested as markets go up, they are also affected if markets fall. A sound investment strategy is needed to help mitigate against this. • Income is not guaranteed: Unlike annuities, which provide a guaranteed income for life, flexi-access drawdown income can be affected by market fluctuations and investment returns. If the pot falls in value, the income strategy may need to be reviewed. • Management charges: Providers typically charge fees for managing flexi-access drawdown accounts, including investment management fees and administration costs. These fees can reduce the overall value of the retirement pot over time. Weighing fees against value of the service received is important. • Complexity: Managing a drawdown account requires a certain level of financial knowledge and understanding of investment principles. Having financial advice from a professional is the best way to manage a drawdown approach.

Contined...

Pros and cons of flexi-access drawdown Advantages of flexi-access drawdown • Flexibility: This is perhaps the most significant advantage. The individual has control over how much income to withdraw, when to withdraw it, and how to invest the remaining funds, giving them the freedom to adapt their retirement finances to any changes in their circumstances. • Tax efficiency: As with other pension arrangements investment returns on the portfolio are exempt of tax and up to 25% of the pension pot can be tax-free, with the remaining withdrawals subject to income tax at the individual’s marginal rate. Management of withdrawals will help ensure an individual does not pay more tax than they need to. • Potential for growth: By keeping your retirement funds invested in the markets, there is the opportunity to continue growing the remaining pot over time. This potential for growth can help offset the impact of inflation, which is an important factor affecting retirement income. • Passing on wealth: Any remaining funds in drawdown can be passed on to beneficiaries. This would be free of tax where the donor dies before age 75 – see ‘Death benefits’ box. • Accessibility: Unlike traditional annuities, which provide a fixed income for life, flexi-access drawdown gives access to the savings when needed. This can be useful if an individual is faced with unexpected expenses. However, the benefit of taking money out of the pot has to be carefully weighed against the impact on its long term ability to provide the retirement income needed.

Death benefits Another key point for individuals to consider is the death benefits offered with a flexi-access drawdown arrangement. Any money left in the drawdown pot can usually be left to an individual’s beneficiaries. It works like this: • The pension is not subject to Inheritance Tax. • If the individual dies before the age of 75, any money left in their drawdown fund passes tax-free to their nominated beneficiaries, whether they take it as a lump sum or as income. The money must be paid within two years of the provider becoming aware of the benefactor‘s death. If the two-year limit is missed, payments will be added to the income of the beneficiary and taxed as earnings. • If the individual dies after the age of 75 and their nominated beneficiary takes the money as income or a lump sum, the money will be added to their other income and taxed as earnings. A beneficiary might be able to choose to continue drawing down from the pension pot, taking a one-off lump sum or buying an annuity. It will depend on the terms of the drawdown arrangement.

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TAX

Tracking down your pension pots Many people have accumulated pensions throughout their working career, and continue to do so, as they change jobs and employers. This has left a considerable £26.6bn estimated to be currently sitting in around three million small and lost pots, according to the Pension Policy Institute. Most pensions that have not been paid into since the individual left the company will be frozen. Some may be for small sums but when added together could be a valuable contribution to an overall retirement savings pot. Where an individual has had a workplace pension, in particular when the company has also contributed to their pension payments, through the cumulative power of saving, they can have built into not inconsiderable amounts. Tracking down any lost pension pots, therefore, is essential. Once located, what further actions can you take? Up to three small pots, those under £10,000, can be cashed in for a lump sum. There are three things to consider here: first, the full sum has to be taken out of the pension; second, that income tax will be payable on 75% of the sum; third, that as income received, it could push you into the next tax bracket. For pensions above the £10,000, these can be held until needed or they can be moved into one pension. Many people don’t know they can do this, or think it is complex to do so, or they might make a mistake which will adversely affect their retirement income. There are plenty of reasons why combining pensions with a single provider can be a good idea. Most obviously, a single retirement pot is much easier to track and manage than having various pensions with different providers Also, older pensions can often have higher charges, so consolidating can bring down costs and charges. It is also possible to increase income flexibility and more investment choice by moving older pensions into more manageable arrangements. However, this might not be right for everyone. It will depend on the type of pension pot and the individual circumstances of the pension holder. But it is good for people to know the choice is there. Lowes can help you track down lost pots and then help you make the right decision on whether to combine them.

Dividend tax allowance cut bites harder

A new dividend tax allowance amount of £500 is now in place, requiring more careful consideration of the tax implications of dividend-bearing investments. Changes to the annual dividend allowance in recent years have seen the amount investors and company directors could receive before tax fall from £5,000 a year from 2018/19 onwards to £1,000 in 2023/24 tax year. From 6 April this year, the allowance has been cut further, to £500 a year. This will mean many more people start paying dividend tax as well as having to declare the tax by completing a self-assessment form. A portfolio of £12,000 yielding 4.2% will exceed the £500 limit. The tax payable on dividends over the £500 is currently 8.75% for basic rate taxpayers, 33.75% for higher rate taxpayers, and 39.35% for additional rate payers. If investing into dividend yielding investments, maximising the current annual ISA limit of £20,000 could be the first step. Another consideration is increasing payments into a pension, as pension payments are subject to income tax only, on withdrawal in retirement. Combined with the reduction in the capital gains tax exemption from £6,000 to £3,000, also from 6 April 2024, with respective tax rates of 10%, 20% and 28% for the various tax bands, investors can expect to pay more tax on their investments. It pays more than ever to seek professional advice when investing, in particular where dividend payments are being used for income. Your Lowes adviser can talk though the new taxation landscape and how it will affect your individual circumstances.

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PLANNING

How we help clients

Financial planning in divorce While recent figures show that divorces in England and Wales are down by nearly a third – a 29.5% decrease between 2022 and 2021 and the lowest number since 1971 – for those going through divorce and separation it can be an emotionally and financially traumatic time. While there are obvious financial assets to cover in divorce discussions, such as property, bank accounts, investments and savings, other aspects of a couple’s finances which are less day-to-day, can be overlooked. Pensions is one asset that the law requires to be considered, not least because they can have an enormous impact on the future financial resilience of individuals. The impact on retirement plans of a relationship ending can be particularly difficult. This can particularly affect those who have taken career breaks or earned lower average salaries than their partners, and so typically have built up lower pension pots. Pensions can be missed out of divorce discussions because they are personal and also, they appear complicated. This is leading to one party missing out on future income which probably should have been theirs. Although a pension is earned by one spouse, it is generally considered a joint asset. This means it is subject to division in divorce. Divorces among older adults, those aged 60 and above, has been rising in recent years. By this time in life, pension pots

Lowes adviser Debbie Ramm explains how Lowes can help with the financial planning when couples divorce.

Unmarried couples Another reason for the decline in divorce numbers is that not all couples are choosing to marry, opting to co-habit instead. If the couple separate, often the female can be most affected in terms of financial security. Advice is also advisable here, as there are limited legal rights when a cohabiting relationship ends. and talk through the most appropriate options to share pension assets. Once decisions are made there will be administration to be undertaken with pension providers and there could be tax implications, depending on whether the pension assets are accessed. can be of significant size, making it one of the biggest assets alongside property. When people do divorce in later life, they face the prospect of supporting two homes and any financial retirement planning made as a couple needs to be completely redone. Dividing the assets and pensions after a lengthy marriage at retirement age can be tricky where there may be no means of building up future assets or income. So pension sharing will need careful planning. This is where a professional adviser can help, working alongside solicitors on the legal side of proceedings, to help ascertain valuations

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INVESTMENT

How sequencing risk affects portfolios One area of concern for portfolios is what is known as sequencing risk. This is the effect of losing or taking out money from a portfolio at the wrong time. If capital is lost from an invested portfolio in the years around entering retirement, for example, it can be very difficult to recover the capital, especially in a short period of time. Think how long it has taken to build the retirement pot in the first place. This then affects how much income a person can take out of their pot if it is to last their lifetime. Taking money out to retire when prices have fallen and returns are low, means more of the portfolio needs to be drawn down to meet the desired level of retirement income. This will run down the portfolio much more rapidly than if returns were high. Then when returns improve, and the market recovers, there are fewer units left to take advantage of the rising market. This effect is compounded, meaning their prospects worsen come the next market downturn. The opposite applies if retirement begins when returns are trending upwards. Ways to help deal with sequencing risk, are first to diversify the portfolio so that if one area of the market falls, but others remain less or not affected, the rest of the portfolio can help keep the portfolio growth and/or income stream more robust. A typical way to do this was to invest in equities and bonds, which historically have been uncorrelated, so when one went down the other did not. In recent years this has not worked as well, as equities and bonds have been more correlated than is usual. However, that now seems to be reversing. Having a portfolio with a wide spread of investments, including equities and bonds, should be considered. Also important is to plan ahead. Using powerful forecasting tools, we can map out scenarios where a fall in the market happens around retirement and then factor in different levels of market impact, so we can see and plan for, those eventualities. This way we can think ahead and plan, for example, to save more than is needed for a comfortable retirement into a diversified portfolio to help mitigate against this risk, should it occur. Also, to understand that in the event of a market fall, it may be necessary to push back retirement, or to take a lower income than desired. These are areas where Lowes advisers can help, backed by our expert investment team.

Ways we assess an appropriate portfolio There are two ways to ensure the approach taken when recommending a portfolio of investment aligns with the individual client’s own feelings on investment. These are Attitude to Risk and Capacity for Loss. Attitude to Risk is an individual’s willingness to take on risk in their investment portfolio, bearing in mind that risk is more often necessary to achieve higher returns. It’s how comfortable someone feels with the level of fluctuations in the value of their investments and seeing the value of their portfolio go up and down. There are a number of tools accepted as a way to measure attitude to risk, which generally take into consideration financial goals, the length of time a person is investing, whether they need a steady income, and to what extent they feel they could tolerate losses. This information is collected early on and then reviewed along the investment journey. Younger investors may want to take more risk with their money, looking for the opportunity to maximise potential returns. Clients who are heading towards retirement will more often want to be more cautious, as wealth protection will be at the forefront of their minds. Capacity for loss is a measure of how much financial loss an individual can afford to sustain without negatively impacting their financial situation or lifestyle. Capacity for loss is a particularly useful measurement for those who are at or in retirement. At this stage in our lives, we are primarily looking to generate income from capital and if that capital declines it can affect our income stream. This is described as sequencing risk (see left). Capacity for loss takes into account factors such as income, assets, liabilities, and expenses. Our view In general, our experience is that what affects people most is not so much market volatility but rather losses to capital. What’s important to most people is to maintain capital on which they can build wealth. Our approach therefore, is to focus on helping our clients do just that.

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INVESTMENT

Structured product maturities The table shows the structured investments held by Lowes clients which matured in the first quarter of 2024. Seven of the quarter’s maturing products were designed in co-operation with Lowes, or exclusively for Lowes clients. All of the maturities utilised FTSE 100 or its very close ‘cousin’ the FTSE CSDI as underlying measure and all outperformed the performance of the respective index – in most cases by a considerable margin. We maintain a constant panel of new offers on similar terms, a current example of which offers potential returns of 8.5% for each year held, with maturity triggered by the FTSE being higher on any relevant bi annual observation date. A capital loss would arise at maturity only if a positive outcome had not been triggered during the term and at the final maturity date the FTSE finishes more than 35% down, or if the counterparty – a strongly rated, globally systemically important bank defaults. If you would like to discuss adding further structures to your investment portfolio, please talk to a Lowes adviser.

Maturity date

Term (years)

Gain (%)

Counterparty

Goldman Sachs

29/01/2024 31/01/2024 05/02/2024 19/02/2024 26/02/2024 26/02/2024 26/02/2024 26/02/2024 28/02/2024 04/03/2024 11/03/2024 18/03/2024 18/03/2024 22/03/2024 25/03/2024

2 6 2 3 2 2 2 2 2 2 2 6 2 5 2

16

BNP Paribas

50

Société Générale Morgan Stanley Morgan Stanley Morgan Stanley Morgan Stanley Morgan Stanley Morgan Stanley

15

19.8 14.7 16.2 15.1 18.7

*

* *

13 15 15

Citigroup

* *

Société Générale

BNP Paribas

50

Citigroup

14

Natixis

70

* *

Goldman Sachs

14.8

* Developed in cooperation with Lowes or exclusive for Lowes clients. Adviser and intermediation fees apply.

Lowes.co.uk

12

SPOTLIGHT

Spotlight on Lowes people Straight out of university, Josh Mayne knew he wanted to be a financial adviser. “My degree was in Finance and Investment Management and in the third year one of the modules was financial planning,” he explains. “We were given a case study where we had a client and we had to build them a financial plan, including pension and investment

management and tax-efficiency. It was very objective driven, taking into account what the client wanted to do with their money and the lifestyle they wanted to live. I saw how financial planning can really make a difference to someone’s life and I knew from then, financial planning was what I wanted to do as my career.”

On leaving university, Josh applied to Lowes and was accepted, joining the company in 2019. His first role was as an Investment Analyst in the structured product department, where he stayed until 2022. “I gained a lot of invaluable experience there, as over time I took on more responsibility,” he says. “I would analyse the structured products being launched and help assess them for use with our clients, and I worked and negotiated with the banks and providers as Lowes became more involved in the design of structured plans. This was invaluable experience, while I was also developing my analysis skills and knowledge of how plans can be used within client portfolios to diversify risk.” With his eyes firmly set on being a financial adviser, during this period Josh undertook all the qualifications he needed to become a financial adviser. And he didn’t stop there. He has now passed the necessary exams to become a Chartered Financial Planner. “To become Chartered, you must pass all the requisite exams and to have five years’ experience under your belt. I’ll have that five years in August,” Josh says. In 2022, Josh came under the tutelage of Gershom Chan, Head of Financial Planning at Lowes, and Chartered Financial Adviser Chris Brown, working with them for eight months on their client cases and building on his knowledge. This was the final stepping stone to becoming a Lowes adviser in July 2023. Josh says the role is fully living up to the expectations he had way back when he was at university. “Becoming an adviser is a big step, because you are dealing with real people and their very individual financial situations and you want to do the very best for them. “Everyone is different and everyone has different objectives. You could have two people with the same level of wealth but they want to do totally different things with their lives and you have to advise them on how they could move forward and create a sound financial plan with very different takes on life. “I see my role as helping people to make informed decisions about their financial future so they can get the best out of life.” Not only is he enjoying being a financial adviser he is enjoying being a part of Lowes, he says. “There’s a huge amount of knowledge and experience here and although it’s now a sizeable and growing company, it still has that family run feel to the culture. It really is a case of everyone knows each other and will help each other out. It’s a fun place to work and there is plenty of support as an adviser.”

Lowes.co.uk

13

EAR TO THE GROUND

Are we there yet??

Paul Milburn, Lowes Investment Manager

expected. Whilst the cut had been expected by the market to be in March, this has now been put back to June, possibly July after the recent inflation print. In the Euro area meanwhile, inflation has fallen to 2.4%, closer to the 2% target still. Yet, the European Central Bank (ECB) are yet to move and, like others, remain data-dependent and would like to see more compelling evidence that high inflation has been defeated. Now admittedly the Swiss National Bank did catch the market by surprise and decided to reduce their key rate by 0.25% last month. But, given that inflation in these major developed economies has moved in the right direction, why are we yet to see a move by either the Bank of England, the Fed or the ECB? In part this could be due to reputation. All three were heavily criticised for not reacting quick enough when inflation was rising sharply, with some questioning if inflation would have hit the dizzy heights which were seen. They perhaps do not want to cut too early, but at the same time they will not want to be too late. History could also be playing its part here. For those of us old enough to remember, there was not one, but two inflation peaks seen in the US during the 1970’s and early 1980’s. When we map the current inflation cycle with that cycle, you could argue that there is an uncanny resemblance. Whilst we do appear to have potentially entered a new inflation regime, that of course does not automatically mean that history will repeat itself. There were very specific reasons as to why we saw a peak in inflation in this current cycle, including of course supply/demand issues caused by the pandemic and the Russia-Ukraine conflict. All the same, the Fed and friends will be very keen to avoid a repeat of the 1970’s path. But does the timing of the first cut really matter? Is it not the size or magnitude of that first cut rather than its timing, or the number of cuts we see subsequently thereafter? Is it the reason for the decision to cut, rather than when that is more important? Is it not the timing of the last rate hike, rather than the timing of the first rate cut, which is important? All of these considerations could have an impact on the economic outlook and asset class returns. For now, volatility around inflation and economic data releases which could impact the path of interest rates is a possibility. As always, look through the short-term noise, and remain invested for the future. Are we there yet? Not quite. Visit lowesim.co.uk/insights and sign up to our weekly Ear to the Ground emails to receive insights, industry news and our thinking on current market trends straight to your inbox.

For those of you with children and/or grandchildren with whom you have endured a long journey with, this has to be the most dreaded question. Especially when it comes so early into the journey! With regard to the future direction of interest rates, however, it feels just as apt right now. We are now all very familiar with the meteoric rise which saw the UK base rate rise from 0.1% in December 2021 to 5.25% in August 2023. This was one of the steepest rate rising cycles we have seen in history as the Bank of England looked to defeat exceptionally high inflation, which was proving not as transitory as first envisaged. Sharp increases in interest rates were also seen in the US and Euro area for the very same reasons. With the annual rate of UK inflation, as measured by the consumer price index, having now fallen sharply from its peak of 11.1% in October 2022 to 3.2% in March this year, the rhetoric has now changed to when we will see the first interest rate cut. At 3.2%, inflation still remains above the target set for the UK central bank of 2%. Latest forecasts, however, suggest that this could be attained within the next few months. Key contributing factors include base effects, which is the comparing of prices now to 12 months ago. From April we saw a reduction in the energy price cap as set by Ofgem, which fell by £238 a year compared to the current price cap. So, with inflation moving nicely towards target, why have we not seen interest rate cuts in the UK already? At the last rate setting meeting in March, we perhaps received a hint that they were gearing up for the first one. At previous meetings two members of the committee had been advocating a rate hike. In March however, their opinion changed to one of ‘hold’ and we saw one member vote for a rate cut. We also saw Governor Andrew Bailey express optimism about the economic trajectory, suggesting that conditions were favourable for the central bank to begin cutting. As always there came a caveat, whereby he stressed the need for greater certainty regarding the control over price pressures. This is not just prevalent to the UK, but also to overseas economies. At the end of 2023 we saw the US Federal Reserve (the Fed) appear more amenable to interest rate cuts than previous. Markets were quick to price this aggressively, with some forecasters believing that we could see somewhere between six and seven cuts in 2024. Rolling forward to today and ‘sticky’ inflation, along with a slight pick up in the year on-year rate over the last couple of months, has seen the market roll back its forecasts, with two to three rate cuts now

Historical US Inflation Rate

Source: www.usinflationcalculator.com

9% 8% 7% 6% 5% 4% 3% 2% 1% 0

14% 12% 10%

8% 6% 4% 2% 0%

Dec 1969 to Dec 1983 (lhs) Sept 2017 to Mar 2024 (rhs)

1968

1970 1971 Jun Sep Dec Mar Jun Sep

1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 Jun Sep Dec Mar Jun Sep Dec Mar Jun Sep Dec Mar Jun Sep Dec Mar Jun Sep Dec Mar Jun Sep Dec Mar Jun Sep Dec Mar Jun Sep Dec Mar Jun Sep Dec Mar Jun Sep Dec Mar Jun Mar Dec

1982 1983 Sep Dec Mar Jun Sep

Mar

Dec

Dec

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