Trusts: What are they and what are they used for?
A trust may be one of those financial tools you've heard of but know little about. In some circumstances, they can be an excellent way to help manage assets and reduce tax liabilities. However, it's important to understand what they are and where setting up a trust can be useful before proceeding.
What is a trust?
Even the basics of a trust can seem complicated due to the legal jargon used. But the principle is relatively simple.
A trust is simply a legal arrangement for handing assets to one or more people or a company (trustees) to control on behalf of one or more people, known as beneficiaries. Whilst the trustees have control of the assets, they must act according to rules set out by the person that set up the trust (the settlor) and with the interests of the beneficiaries in mind.
Say, for example, you want to ensure a child in your family would be taken care of should something happen. A child won't be able to take control of an inheritance, but you may not want to hand over money intended for the child to another adult without being able to stipulate how it can be used. A trust allows you to set out some rules and have peace of mind that the trustee must act in the interests of the child.
Many different assets can be placed in a trust, including money, investments or property.
There are many different types of trust, which may have different advantages depending on your needs. Among the most common types of trusts are:
Bare trusts: As the name suggests, these are the simplest types of trust. The beneficiary has the absolute right to the assets within the trusts, as well as any income they may generate. Whilst, the trustee will take responsibility for managing the trust's assets, they have no say in how or when the assets or capital is distributed.
Discretionary trusts: This is where you give the trustees the power to decide how to use the income assets which the trust generates. How much power they have is stipulated by the settlor in a letter of wishes. They may, for example, have the power to decide the portion of income that is paid out, which beneficiaries beneficiates will receive income and how frequently disbursements are made.
Interest-in-possession trusts: In this case, a beneficiary has the right to receive an income generated by the trust's assets or the right to use assets it holds. This can be for life or for a defined period of time. For instance, a beneficiary may have the right to live in a property that is held in trust until they die.
Settlor-interested trusts: If you or your spouse or civil partner will benefit from the trust, this is known as a settlor-interested trust.
Mixed trust: This is an option that blends multiple types of trusts. So, a portion of the assets held in trust can be set aside as an interest-in-possession trust, whilst the remainder can be treated as a discretionary trust, giving trustees greater control over a portion of the assets.
The above are examples of just a few of the types of trusts available. There are other options, which may be more suitable to your circumstances, if you're thinking of using a trust.
When can using a trust be useful?
There are many instances where a trust can be a useful way to hold assets, including:
- Providing certain conditions are satisfied, assets held in trust aren't considered part of your estate. This means they will not count towards a potential Inheritance Tax bill when you die.
- Having greater control over how and when assets are distributed after you die.
- Preserving the assets rather than splitting them up between beneficiaries. This may mean the wealth you've accumulated is able to grow further and still benefit loved ones.
- Holding and managing assets for people that are not ready or are unable to do so themselves. This may include children or vulnerable people.
Setting up a trust
If you think that setting up a trust is right for you, it needs to be a carefully considered decision, from both a financial and legal perspective.
Once a trust has been set up it may be impossible or very difficult to reverse the decision. As a result, it's vital that you ensure it's the right choice for you financially before you take any further steps. Ensure you look at the medium and long term when assessing how appropriate a trust is for your financial situation. It's also important to note that beneficiaries may pay tax on distributions they receive, this may play a key role in understanding if it's a good idea for you.
From a legal perspective, a trust needs to be precisely worded. For this reason, you should use a solicitor to help you set it up. You can expect solicitor fees to be around £1,000 or more, though this will depend on your personal situation and the complexity of the trust. It's a fee that could save you from making costly mistakes.
If you'd like to discuss the financial merits and drawbacks of a trust with your situation in mind, please contact us.
Please note: The Financial Conduct Authority does not regulate wills, trusts, tax or estate planning.
Brexit and your finances
Three years after the Brexit referendum, it's still uncertain how and when the UK may leave the EU. With political turmoil, highlighted by the recent EU election and Theresa May stepping down as Prime Minister, you might be worried about how Brexit is and will affect your finances.
Held on 23rd June 2016, the Brexit referendum indicated that 51.9% of those voting supported leaving the EU. Whilst a majority, the vote was incredibly close, and it's led to difficult negotiations, both in the UK and the EU. As well as the close vote, there are many different forms that Brexit could take and navigating a plan that satisfies a majority is, again, proving difficult. The House of Commons has voted against several Brexit deals put forward by Theresa May.
When the UK invoked Article 50 it was intended to start a two-year process with the UK leaving the EU on the 29th March 2019. The deadline has now been extended to 31st October 2019.
What does it mean for your finances?
As Brexit is uncertain and the long-term impact it will have even more so, you may have concerns about how it'll affect your wealth and investments. Though it's important to remember that Brexit is just one of many influential factors that are outside of your control. It may cause increased volatility, but there are things you can do to minimise the impact and safeguard your wealth.
1. Focus on your long-term plan
Short-term fluctuations in investment values are normal, it's part of the investing process. However, it's easy to panic when you see values fall and think you should take action. Here, a long-term outlook is essential. When you began investing, it should have been with a long-term goal in mind, perhaps to fund retirement or support grandchildren through further education. A long time frame gives you an opportunity to ride out dips in the market and hopefully secure returns.
With this in mind, the volatility UK stocks may be experiencing at the moment should be looked at in the context of the bigger picture. It can be worrying but, typically, holding steady and sticking to your plan is the right option.
2. Check the level of volatility you're exposed to is appropriate
If the ups and downs of investments worry you, it may be time to reassess the level of risk you're taking. There's no one-size-fits-all solution for risk, it should depend on a range of personal factors. However, it's important to recognise that the appropriate level of risk for you may change throughout your life. At some points, you may opt for a more cautious approach, but as your capacity for loss rises, you may decide to increase it, for example. If the impact of Brexit on your finances or potential falls in value makes you nervous, it's a good idea to take a look at how much risk you're taking and whether it's still appropriate for you.
3. Diversify your investments
Whilst you consider risk there's another area to assess in your current portfolio too: how diversified are your investments? By spreading risk across several different types of investments, you minimise the risk of significant falls in value as it's less likely a downturn will affect all investments. Often, it's asset classes that are focussed on here. But in the context of Brexit, assessing where geographically your money is invested, may be wise too. How much of your portfolio is invested in companies that are UK based, for example?
4. Keep an eye on performance
We know we said you shouldn't focus on the short term. But that doesn't mean you should ignore investment performance entirely. Keep an eye on how your portfolio is doing and ensure you regularly review it. Usually, we'd suggest a full financial review once a year or following big life events, this allows you to cut out some of the short-term peaks and troughs to see the overall performance.
A review also gives you a chance to spot opportunities. Brexit uncertainty might often be associated with values falling in the media, but that doesn't mean it can't bring opportunities too.
5. Speak to your financial adviser
If you're contemplating making changes to your investment portfolio or financial plan in light of Brexit, getting professional advice can help you put the impact your decisions could have into perspective, looking at both the short and long term. If you'd like to discuss how Brexit, investment volatility or any other concerns may affect your finances, please get in touch.
Please note: The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.
Is an inheritance important to your financial plan?
As we make financial plans, it's often necessary to make some assumptions. Perhaps you've factored in a few pay rises before retirement or calculated what investments can expect to return. But research indicates some people could be relying on receiving an inheritance with little information about it to reach their aspirations.
If you're expecting to receive an inheritance, it can be tempting to build it into your financial plan. Maybe you hope to use it to fund retirement, pay off mortgage debt or tick something off your bucket list. However, it's a financial area you have little control over, making it difficult to effectively be part of realistic plans.
Recent research has highlighted how making an inheritance key to financial plans could affect security in the future. According to research, one in seven young adults expect to receive some inheritance before the age of 35, with the average expected to be almost £130,000. However, statistics suggest reality is very different. The typical inheritance age is between 55 and 64, whilst the average amount handed down is significantly below expectations at £11,000.
Further research conducted by Canada Life supports the potential gap between expectations and reality:
- 63% of over-45s had not told their beneficiaries how much inheritance they plan to leave them
- Two in five over-45s are concerned they will use up their assets to fund their own retirement, with nothing left for loved ones
- Furthermore, 40% are worried they have not saved enough to cover later life, suggesting they may not be able to leave an inheritance
These findings highlight the two biggest challenges of making inheritance part of your financial plan; you don't know when you'll receive it and can't say with certainty how much it will be.
1. When will you receive an inheritance?
There's no way to know when you'll receive an inheritance. Whilst in the past people may have received an inheritance in middle age, helping them to pay off a mortgage, support children through university or contribute to a pension, rising life expectancy means this often isn't the case now.
It's normal to think about how an inheritance can be used, but if your plans hinge on receiving an inheritance at a certain point, it could mean they derail. If a benefactor lives five or ten years beyond average life expectancy, how would it affect your financial security?
2. How much will you receive?
The research suggests that some people will be disappointed with the amount of inheritance received. This may simply be down to a lack of communication. Speaking to loved ones about how they intend to distribute their assets and the value of their overall estate can help to avoid misunderstandings.
However, this isn't the only reason for the gap. Potential benefactors may face unexpected expenses that mean the amount they leave behind is reduced. For instance, higher than anticipated living costs throughout retirement can slowly eat into money that had been earmarked for inheritance and often if care is required individuals will have to cover the costs themselves unless total assets are below £23,250. As a result, there's a chance that actual inheritance is below what the benefactor planned.
Should you include an inheritance in your financial plan?
Making an expected inheritance integral to your financial plans could cause financial insecurity and lead to decisions that may not be right for you. For instance, if you choose to forgo paying into your pension with the expectation that an inheritance will come before you expect to retire, what will you do if it's received a few years later than anticipated or not at all? Believing you have a lump sum coming in that you can fall back on may mean you take more risk with investments than you may otherwise have done, for example.
Whilst inheritance can and should be included in your financial plan, ideally, it shouldn't be essential for achieving the lifestyle you want. A plan should ensure the income you have greater control over can provide for you, with inheritance being used as a bonus that can enhance your lifestyle or bring plans forward. It's an approach that can give you more confidence in the future and your financial security.
If you'd like to discuss your financial plan and inheritance, whether you're expecting to benefit from inheritance or want to protect what you'll leave behind for loved ones, please contact us.
Please note: The Financial Conduct Authority does not regulate estate planning.
The World In A Week - Under Pressure
As the mercury rises in the barometers of economic and political hallways, pressure builds across the globe. The rhetoric from policymakers at the beginning of the year has begun to wane and with it, sentiment has dropped. Investors and markets alike need to see significant improvement from a series of geopolitical concerns, which intensified last week.
We begin with the most erratic pressure point, President Trump. The escalating trade tensions between China and the US arguably worsened, with Trump admitting the ball currently sits in his side of the court. Trump wants to see further concessions from China, he also wants President Xi to arrange to meet with him at the G20 summit next week. If not, then he has threatened to impose tariffs of 25% or much higher.
China's woes do not end there. Tensions in Hong Kong overflowed, and government offices were forced to close due to the ferocity of the clashes between the police and protestors, over the proposed extradition law. The timing could not have been worse, as Hong Kong's economy has slowed to a pace not seen since the Global Financial Crisis.
Pressure continues to be added with the attacks on oil tankers in the Gulf of Oman, with suspicion and growing evidence of Iran's involvement. The unknown element is what will be the response? Response is key to all these pressure points, particularly when it comes to the health of the US economy.
Consumer prices in the US, a key measure of inflation for the Federal Reserve, was broadly flat for May, increasing pressure on the Federal Reserve to cut interest rates. Their next meeting to discuss monetary policy is this week, and with pressure building in the form of data reports and political tweeting, the odds of a rate cut are swelling. We think the Federal Open Market Committee will want to assess the employment data for June, to verify the slowdown in the US labour market before pulling the trigger. That would mean an interest rate cut being announced next month, which when can you consider 12 months ago we were looking at a continuing of tightening in monetary policy, sentiment has swung around completely.
It is worth adding that it is extremely rare for the US central bank to adjust interest rates during a Presidential Election year, so Jerome Powell has just six months to get interest rates to a level that he deems appropriate.
Different protagonists under pressure. Which of these will be resolved during the summer? The markets are looking for another measure of goodwill from the policymakers and hoping the politicians can avoid making matters worse. A nice break from the homegrown issues we currently have in the UK.
The World In A Week - The UK / US Alliance
Last week the US and UK commemorated and celebrated their historic alliance and friendship. The week included the rarity of both the D-Day commemorations of World War Two as well as the US President's State Visit.
Both occasions demonstrated the continuing bond between the two countries. One focused on humanity and the enormous courage and personal sacrifice made to defeat Nazi tyranny, and the other focused on their relationship and their bilateral approach going forward.
Much can be written about the importance and the success of both of these occasions. For the investment community though, there was one stand-out development.
At his press conference the President emphasised his keenness for a free trade deal with the UK. He claimed there could be '2 and 3 times of what we're doing right now'. This builds on his previous comments that his administration would 'work on it very, very quickly.'
This will be very welcomed by investors in the UK, especially at a time when many are concerned with Brexit, as this demonstrates the UK's trade appeal and thus the potential for such trade deals to be replicated globally too.
It should be noted; the UK and the US are the largest investors in each other's countries (as measured by total Foreign Direct Investment). For example, as at 2017, the UK had invested $541bn in the US and the US had invested $750bn in the UK.
Regarding trade, as at 2018, the UK had a $5.4bn goods deficit with the US and a $14.5bn services deficit too thus an overall trade deficit of $19.9bn with the US. This is likely to be something the UK will aim to address in any free trade agreement.
It was a successful and welcome week for both countries that also demonstrated the importance and enjoyment of good relations.
The World In A Week - Mexican Standoff
Markets faced a tough week as a risk-off environment prevailed. The Pound Sterling fell against all major global currencies. Bond markets rallied across the world, with the Bloomberg Barclays Global Aggregate Index (hedged to GBP) returning +0.63%, while Sterling Denominated Investment Grade Bonds returned +0.27%. Equities suffered across the globe. The MSCI ACWI Index of world markets returned -1.20% in GBP terms, this was led by the US market, which fell -1.91%. Value stocks underperformed growth stocks -1.54% vs -0.87%.
This downside volatility was driven by a number of events, most of which stemmed from the Oval Office. The continuing trade tensions between China and the United States spurred a move out of Equities and into perceived safe assets. The German 10 year Bund yield traded at -0.16% on Tuesday, with the 10 year US Treasury yield touching a fresh two-year low on Friday. In what Bloomberg described as a true black swan event, President Trump suddenly threatened to slap a five percent tariff on all Mexican imports unless it stepped up efforts to stop illegal migration. Tariffs are increasingly being employed by the President as a weapon of policy, across multiple fronts.
In spite of the bluster from 1600 Pennsylvania Ave, US stocks remain very much in favour on a global basis. The gap between the valuation of US Equity markets and the rest of the world is at record highs. As a result, many investors are looking for ways to protect against a falling dollar and/or falls in the value of the Equity market itself. Local Currency Emerging Market bonds may offer such protection and are becoming increasingly popular with GBP based investors.
The World In A Week - All By Myself
We have seen an uptick in volatility. Hostilities between the US and China show no signs of abating. The US Federal Reserve minutes indicate that it is unlikely there will be rate moves of any kind for some time and, the UK have no leader, following the tearful resignation of Prime Minister, Theresa May, on Friday. It would be an understatement to say that last week was anything less than eventful with the Bank Holiday weekend in the UK providing some welcome respite for all.
On Friday, Theresa May resigned as the Prime Minister after failing to deliver her Brexit deal in her 3-year tenure. Mrs May's departure will now lead to a chaotic Conservative race, where staunch 'no-deal' Boris Johnson is the clear favourite to succeed her; a new Prime Minister will be in situ by the end of July. Further compounding May's sadness was the Conservatives defeat in the European Elections, which were held in the UK last Thursday. It was expected that the results would be disastrous for the Conservatives and they did not disappoint; Nigel Farage Brexit Party secured the majority vote of c.31% followed by the Liberal Democrats and Labour with c.20% and c.14% respectively. Conservatives limped in to 5th, behind the Green Party, with c.9% of votes. The UK, politically, will remain in an uncomfortable limbo.
Turning to trade wars, the question is; who is really winning? There is only one measure that shows if Trump is 'winning' and that is the bilateral trade balance, and while the global superpower that is the US is still lagging by a huge margin, to March this year, the trade deficit has narrowed. While all equity markets suffered last year, Chinese equity markets tumbled by fourfold that of the S&P 500 in 2018 by more than 25%, this had a knock-on effect to the Chinese economy, which slowed more notably than that of the US. However, it's not all bad news for China; import tariffs imposed by Trump do not affect the Chinese consumer, as many are a tax on industrial inputs and not end-use products, whereas the opposite is true for the US. The US are also missing out on investment from China with foreign direct investment slumping by more than 80% between 2017 and 2018; in the US, investment in China fell marginally by c.7.5%. We will call this a draw.
One thing that is for certain; is that markets do not like uncertainty and while there is political limbo in the UK, UK equity markets will continue to be hindered and uncertainty over trade wars is likely to be more costly than trade tariffs themselves.
The World In A Week - Making your mind up
Trump has asked the US trade department to begin the process of raising tariffs on essentially all remaining imports from China, which have an estimated value of $300 billion. This final myriad of goods will place pressure firmly on the US consumer, a timely reminder that the importer pays the tariff in the shape of higher prices.
The consultation period for the next set of tariffs takes us neatly to late June, coinciding with the G20 meeting in Japan, where we would expect a meeting between President Trump and President Xi.
Trump is confident that a deal will be struck when the time is right. However, is that when the time is right for the country or for him? The 2020 election must be on his mind and opinion polls suggest that playing tough with China seems to be going down well with voters. A dangerous balancing act between hubris and Presidential position; doing what is best for Donald or doing what is best for the US, might not necessarily be wholly compatible.
In the UK we have the announcement that we all expected: Theresa May will be stepping down as Prime Minister. Bored with Brexit and seemingly lacking a sense of purpose, the Conservative party is arguably on the floor, forcing May to offer her resignation. A poor showing at the recent local elections and the threat of a similar defeat in next week's European Parliament elections has opened the door to ex-foreign secretary Boris Johnson.
Ironically, according to a YouGov survey in March, Boris Johnson was the most popular Conservative politician, as well as the most disliked. That perfectly sums up where we are with UK politics and why the people behind Johnson's bid do not want a lengthy campaign. If only it were that simple; it would seem to be time for politicians across both sides of the Atlantic to start making their minds up.
The challenges of balancing different goal time frames
When you think about financial and lifestyle goals, there are probably several, each with a different timeframe. Juggling them and weighing up your priorities can be challenging. Should you focus on paying off your mortgage quickly now, or saving into a pension for retirement that's still many years away?
With conflicting goals, it can be difficult to have confidence in your finances and long-term financial stability. When you start thinking about goals, it's likely there's several with different time scales, and it can be tempting to focus on those that are closer at the expense of the long term. For instance, someone in their 40s may have goals that include:
- Building up a financial safety net
- Paying school fees or supporting children through university
- Paying off the mortgage
- Using investments and savings to go travelling in ten years' time
- Contributing enough to a pension that it's possible to retire at 65
So, how do you balance these?
Owning your home can mean a greater sense of security, lower monthly repayments and an asset to pass on to loved ones when you die. As a result, you may consider cutting pension contributions to make overpayments. However, pensions often benefit from tax relief and employer contributions, effectively giving you free money. Add in potential investment returns, compound growth and the annual allowance, which limits contributions you'll receive tax relief on, and you could find yourself worse off in the long term.
But, with so many influential factors, understanding which goals to focus your attention on and how to split up your assets or income can be challenging.
The first thing to do here is to define what your goals are and when you want to achieve them. We often think about the immediate future when saving; perhaps you're looking forward to a family holiday or your child will be heading to university in September. But the medium and long-term goals are just as crucial and shouldn't be overlooked in favour of the short term.
Understanding the impact of your decisions
One of the key challenges of balancing different goals is understanding the long-term impact different decisions will have. This is where effective financial planning can help. One tool we use in particular, cashflow planning, can give you a visual representation of your wealth.
By inputting details about your current wealth and projected income, cashflow modelling can give you an idea of how your wealth will change over time based on your current lifestyle. However, it offers greater value than this. You can use the tool to show how your wealth will change based on decisions, giving you the information needed to base them on.
For example, you may be thinking about voluntarily increasing pension contributions but would the short-term sacrifice in disposable income be worth it? Or would you be better off directing that spare money to savings, investment or reducing mortgage debt? Often, there's no clear right or wrong answer, but cashflow modelling can help you understand how a choice will affect medium and long-term goals that you may have.
Combined with a financial plan that focuses on your goals, cashflow planning can give you real confidence in the progress you're making. You'll know that you have a blueprint in places that takes into account all your different aspirations, from those that are just around the corner to the ones that are still a few decades away.
One key thing to remember is that cashflow planning is restricted by the data that's input. As a result, you need to regularly update the information, reflecting both positive and negative changes. This allows you to respond effectively to these changes and make adjustments where necessary. For instance, an unexpected salary increase may mean you may be able to retire two years earlier than anticipated if you choose to. On the other hand, poorly performing investments could mean it's wise to delay your plan, allowing time for the markets to recover.
When it comes to financial planning, we're here to provide you with support. Using a range of tools and techniques, we'll help you see how the decisions you make now will have an impact in the near, medium and long term.
Longer lives and retirement plans
Retirement is a huge milestone and one that's lasting longer for many people. You now have more choice around when you want to retire, how to take an income, and what you want to do after you've given up work. Whilst more flexibility has certainly been welcomed, it can present you with some challenging decisions too.
Retirement used to be associated with kicking back and taking it easy. That might still be an important part of what you're looking forward to. But, today, retirement is just as likely to be associated with new experiences. It's not just the retirement lifestyle that's been transferred over the last few decades either. As life expectancy has increased, our time after working lives has gotten longer too. It's not uncommon for people to spend 30 or even 40 years in retirement.
On top of these two key factors, the way we take an income in retirement has changed as well. The introduction of Pension Freedoms in 2015 gave retirees far greater flexibility when they decided to access the money saved into a pension. It means retirement no longer follows a fairly similar path for most; retirement can be what you make it.
Financing a longer retirement
When you think about retirement planning, it's often the financial side that first springs to mind. That's natural, after all, it's your finances that will allow you to achieve aspirations you may have.
Spending longer in retirement will clearly have an impact on finances, as they'll need to stretch further. As a result, you'll need to think carefully about how you'll access the provisions in your pension and how you'll use other assets. Purchasing an Annuity, which provides a guaranteed income for life, can offer security, but it may not suit your lifestyle.
On the other hand, your pension can remain invested and accessed flexibly using Flexi-Access Drawdown. But you'll need to ensure you're accessing your pension in a way that's sustainable and considers life expectancy. If you only plan to make withdrawals for 20 years but end up living for another decade, it could place you in a financially vulnerable position.
Your life expectancy is a crucial part of calculating a retirement income and setting out your goals. However, it's not just finances that should be considered in a longer retirement.
When and how to give up work
Have you thought about when you'd like to give up work? You may have a firm plan or a rough idea in your head, but if you've not considered life expectancy, you're missing a crucial factor. If retiring at 60 means you'll have four decades of not working, would it still appeal to you? For some, that will sound like a dream, but for others, it will give a reason to rethink.
In addition, you should think about how you'll retire. More workers are attracted to giving up work gradually. Whether it's cutting down current working commitments or launching a business, blending retirement and work is becoming more common. You may even decide to give up work entirely for a set period of time, before returning to the world of work further down the line. When you think about longer retirements, it makes sense that some will want to continue employment in some way once they pass traditional retirement age.
Filling your time in retirement
How do you plan to fill your days when you've retired? What one-off experiences do you want?
Answering these questions is important to create a retirement lifestyle that suits you. Perhaps you're looking forward to spending more time with grandchildren, have grand plans to travel, or want to invest your free time in a hobby that's been neglected.
However, whilst retirement is a time to look forward to, will you still be happy and fulfilled a few years into it? This is where planning your lifestyle is important. Retirement can promise much, but leave something to be desired if you don't think about what's important to you and set out priorities. Keep in mind how long you're likely to spend in retirement as you set out making plans that will fill your time.
Of course, the above considerations are still linked to finance too. If you'd like help understanding what your retirement provisions could offer you and how to achieve your goals after giving up work, please contact us.
Please note: A pension is a long-term investment. The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Your pension income could also be affected by the interest rates at the time you take your benefits. The tax implications of pension withdrawals will be based on your individual circumstances, tax legislation and regulation which are subject to change in the future.