Coronavirus (Covid-19) and co-incident falling oil prices

As a company we believe it important to comment on major investment events in order to provide informed opinion and help to quell any potential concerns … Especially given the sensationalist nature of media reporting. The present global market turmoils, which some commentators may describe as ‘freefall’ all stem mainly from the implications of Coronavirus (Covid-19) and co-incident falling oil prices.

To place a perspective we should perhaps firstly say that it is not uncommon for markets to experience 10% falls, indeed it would be unusual for this not to happen from time to time. However, falls of 20% and more are rare and as most investors will measure their wealth in pounds and not percentages or time horizons it is natural for such occasions to generate genuine concern.

Where are we with markets and how bad is it?

Well, whilst it is true to say we are witness to an unprecedented series of events, so we cannot be sure of outcome or timings, but the world has seen many pandemics before (remember HIV, Ebola, SARS , Avian flu and Swine flu) the difference today is that never before have countries isolated their inhabitants in reaction to a new viral disease and so the knock on effect of that remains incalculable. Without the benefit of global control we can expect markets to continue to jerk with every new isolation announcement as the virus spreads from country to country so continued market disruptions appear to be on the cards for a while. However, the good news is that the containment in China appears to be slowing new cases and so we must hope this profile repeats. That said, let us also remember that this pandemic is a virulent flu and is not the black death ! So one could also take the view that as humans we are massively over-reacting and our global stock markets are paying the price as short term trading losses turn into longer term supply chain issues, which lead to future profit warnings and an increased risk of companies defaulting on debts; This in turn is likely to cause the collapse of some companies, with airlines and tour operators presently in the front line. So we think it inevitable that there will be some commercial casualties. That said your portfolios will all be well diversified and markets will eventually recover, for they always do.

Oil prices are an important element of this mix as the national isolations (e.g. Italy and USA) will cause global oil demand fall. It was therefore tragic timing for Russia to announce it’s departure from OPEC membership this week and for Saudia to respond to this by saying it will increase oil supply. An increased supply coupled with reduced demand can only result in much lower oil prices which may be good news for us as consumers in a few months but is very bad news indeed for the entire oil industry now, which comprises c11% of the FTSE 100.

What is the answer ? … Prudent investors will sit out the storm for they know that markets have no memory and such events are all part and parcel of the mechanism of a capitalist society. The most fearful may sell their investments to cash .. however that brings the problem of when one has the confidence to reinvest .. and we all know that selling low and buying high is a perfect recipe for financial disappointment. We would urge all investors to hold a long term view and stay their course. Trying to outguess the timing of market entry and exit is a fools game. Your asset allocations will have been set for a reason and you should trust in the longer term recovery.

By all means feel free to discuss the implications of lower market valuations with your advisers and revisit your positioning relative to your planning objectives .. but trust also that all storms pass. We offer broader guidance below …

Top tips for staying calm in today’s markets

At times like this, it is sometimes worth reminding ourselves that it is this very uncertainty of shorter-term market outcomes that delivers investors with returns above those of placing bank deposits. This allows us to grow our purchasing power over time. In the case of equities, this uncertainty can be high as the market adjusts its view of long-term earnings and the discount rate it uses to establish market prices. If there was no uncertainty, then there would be no equity premium.

In contrast to the recent sensationalist headlines, such as the BBC’s ‘Coronavirus fears wipe £200 billion of UK firm’s value’ the never-published headline of ‘Over the past 10 years global equity markets have turned £100 into £266, so giving a bit back is perhaps to be expected#’ provides some comfort to those already invested. To those who aren’t invested or have money to invest, stocks are cheaper than they were at the start of the year. Good news does not sell as well as bad news!

You may be asking yourself whether this health-driven market event is different to those that have gone before. It is, but only because every market fall is driven by a different combination of events that impact on future corporate earnings. What should remain the same is your response to it: avoid panic, avoid unnecessary emotionally driven investment activity, believe in your portfolio and the power of markets and capitalism to recover in time.

Here are some tips to help keep things in perspective:

10 things to remember during market falls

  1. Embrace the uncertainty of markets – that’s what delivers you strong, long-term returns. Remember that you most likely own bonds in your portfolio too. Your portfolio won’t be down as much as the headlines.

  2. Don’t measure your portfolio’s performance from the top of the market, but over a longer and more sensible timeframe.  Take a look at the charts on the next page. Over the past five years, investors have received handsome growth. Even over the past year, equities are only a little below where they started.

  3. Don’t look at your portfolio too often. Get on with more important things. Once a year is more than enough. If you are looking every day, then have a word with yourself. Stop listening to the news too, if it worries you.

  4. Accept that you cannot time when to be in and out of markets – it is simply not possible. Resign yourself to the fact. Hindsight prophecies – ‘I knew the market was going to crash’ – are not allowed.

  5. If markets have fallen, remember that you still own everything you did before (the same number of shares in the same companies, and the same bonds holdings).

  6. Most crucially, a fall does not turn into a loss unless you sell your investments at the wrong time. If you don’t need the money, why would you sell? Falls in the markets and recoveries to previous highs are likely to sit inside your long-term investment horizon i.e. when you need your money.

  7. The balance between your growth (equity) assets and defensive (high quality bond) assets was established by your adviser to make sure that you can withstand temporary falls in the value of your portfolio, both emotionally and financially. If necessary, your adviser may rebalance your portfolio to make sure that you have the right level of equities to benefit from future market rises.

  8. Be confident that your (boring) defensive assets will come into their own, protecting your portfolio from some of equity market falls. You can see this in action in the one-year chart below. Be confident that you have many investment eggs held in different baskets.

  9. If you are taking an income from your portfolio, remember that if equities have fallen in value, you will be taking your income from your bonds, not selling equities when they are down.

  10. Your adviser is there – at any time – to talk to you. He or she can act as your behavioural coach to urge you to stay the course. They are a source of fortitude, patience and discipline.  In all likelihood they will advise you to sell bonds and buy equities, just when you feel like doing just the opposite. Be strong and heed their advice.

The 2010s: A Decade in Review

It was 10 years of economic uncertainty, political upheaval, and technological disruption—and global stocks more than doubled in value.

Imagine it is early January 2010 and you are reading a review of the financial markets. Investors have been on a roller coaster over the past three years, living through the stress of the global financial crisis and market downturn of 2008–2009, then experiencing the recovery that began in March 2009 and is still going strong.

Investors who rode out the market’s slide are beginning to be rewarded. But the rebound is 10 months old, and markets have a long way to go to reach their previous highs. Opinions are mixed about what might unfold in the coming year. A December 2009 headline in the Wall Street Journal underscored the uncertainty: “Bull Market Shows Signs of Aging.”1 The publication pointed out that, although stocks have rallied and indices are on the rise, worries are mounting in some quarters that the market is running out of steam.

From the vantage point of early 2010, you may be wondering whether to stick with your investment plan or move into cash and wait for more evidence that the markets have recovered. Now, fast-forward to today and consider what the global equity markets delivered to investors who stayed the course.

On a total return basis, global stocks more than doubled in value from 2010 to 2019, as Exhibit 1 shows. The MSCI All Country World IMI Index, which includes large and small cap stocks in developed and emerging markets, had a 10-year annualized return of 8.91%. From a growth-of-wealth standpoint, $10,000 invested in the stocks in the index at the beginning of 2010 would have grown to $23,473 by year-end 2019.

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Despite positive annual market returns during most of the decade, investors had to process ever-present uncertainty arising from a host of events, including an unprecedented US credit rating downgrade, sovereign debt problems in Europe, negative interest rates, flattening yield curves, the Brexit vote, the 2016 US presidential election, recessions in Europe and Japan, slowing growth in China, trade wars, and geopolitical turmoil in the Middle East, to name a few.

The decade also brought technological advances in electronic commerce and cloud computing, the global embrace of the smartphone and social media, increased automation and enhanced artificial intelligence, and new products like electric cars and early iterations of self-driving ones.

Looking back, you could conclude that the decade had its share of uncertainty—just like the decades before. But overall, the US equity market experienced moderate volatility compared with previous decades. Exhibit 2 displays this by looking at returns and standard deviation, where a higher standard deviation reflects wider market swings during that decade.

The performance of value stocks vs. growth stocks (i.e., stocks trading at high relative prices), and small vs. large cap stocks, also varied between decades. Small cap and value stocks outperformed large cap and growth stocks in the 2000s, while the 2010s produced mixed outcomes. Small caps underperformed large caps in the US and emerging markets but outperformed in the developed ex US market. Value underperformed growth in all three market regions. Despite underperforming large cap and growth in the US, small cap and value delivered 11.83% and 11.71%, respectively, for the decade.

Exhibit 4 shows the cumulative investment experience over both decades, with small cap and value stocks outperforming large cap and growth stocks, respectively, across the US, developed ex US, and emerging markets. The annualized 20-year returns illustrate how diversification can help investors ride out the extremes to pursue a positive longer-term outcome.

Over the past decade, global fixed income also posted returns that may have surprised some investors. In 2010, investors looking at historically low interest rates may have expected rising rates as financial markets and economies recovered from the crisis. But over the decade, short-term rates increased while long-term rates decreased. Realized term premiums were positive, as long-term bonds generally outperformed shorter-term bonds. Realized credit premiums were also positive, as lower-quality bonds generally outperformed higher quality bonds.

Enduring Principles

That brings us to now—January 2020. Stocks and bonds in the US, and in many other developed markets and emerging markets, logged strong returns last year. The US bull market is 10 years old, and current headlines can give investors other reasons to worry about the future—for example, a pushback on globalization, the effects of climate change, the limits of monetary policy, the fate of Brexit, and the vagaries of the 2020 US presidential race. And those are merely the known unknowns. Looking ahead, who can say what the next 10 years will bring? The only certainty is the decade will have its own set of surprises.

Here’s what we can learn from the past decade (and the ones that came before it): Despite all the change and uncertainty, the fundamentals of successful investing endured. Diversify across markets and asset groups to manage risks and pursue higher expected returns. Stay disciplined and maintain a long-term perspective. Take the daily news with a grain of salt and avoid reactive investment decisions based on fear or anxiety. Don’t try to predict future performance or time the markets. Instead, develop a sensible investment plan based on a strong philosophy—and stick with it.

Investors who follow these principles can have a better financial journey in any decade.

Pensions & Divorce

With pensions being most people’s second-largest asset, they can become a major consideration in any divorce settlement.

1. Previous Legislation

Whilst the consideration of pension benefits within divorce settlements was an issue in the 1969 study by the Law Commission, the key legislation has been:

  • Matrimonial Causes Act 1973 – Ss 23-25 deal with the provision of a ‘clean break’ wherever possible.

  • Pensions Act 1995 (PA) – The PA requires courts to take pension rights into account when assessing assets on divorce. It introduced the concepts of earmarking pension benefits as well as the basis for cash equivalent transfer values (CETVs) for assessing the value of a pension on divorce.

  • Welfare Reform and Pensions Act 1999 – The Act brought in the option of Pension Sharing On Divorce from December 2000. The thrust of the legislation is to attempt a ‘clean break’ settlement for pension funds on divorce. The legislation states that pension benefits will still be taken into account in divorce settlements. Offsetting and earmarking will still be options to consider, however a new (and probably much more appropriate) option was introduced which allows the pension benefits to be shared or split between the parties at the time of the divorce.

2. Offsetting

This simply means that the pension funds are valued, included within the overall assets of the divorcing parties and, instead of one party being awarded a portion of the other’s pension pot, they are instead given a greater share of a different asset (often the family home) and the pension is left alone.

In an ideal world, this system would be by far the simplest and arguably the best solution. Unfortunately, however, many people do not have sufficient non-pension assets to enable offsetting to be used.

3. Attachment Order (Earmarking Order in Scotland)

Attachment (earmarking in Scotland) can apply to all private pensions (including those in payment), but not state benefits.

It involves the court issuing an attachment order to the pension scheme. This attachment order requires the scheme’s trustees to pay a proportion of the member’s benefits directly to the ex-spouse, when the benefits are taken.

The court can also earmark a proportion of the member’s ‘death in service’ lump sum, and widow(er)’s pension benefits, for the protection of their ex-spouse.

Earmarking has many problems, not least that the pension remains under the control of the member. If he or she decides not to retire, invest riskily, or take any other action prejudicial to the ex-spouse there is nothing that they can do about it. In addition:

If either party remarries, the earmarking lapses.

Earmarked benefits are all taxed at the highest rate of the pensioner, irrespective of the tax rate for the ex-spouse.

If there is the likelihood that either party will remarry prior to retirement age, then – except for some safeguard on the life cover side – this procedure is probably a costly waste of time.

4. Pension Sharing

Pension sharing applies to all pensions, apart from the state basic old age pension and the new state pension (except any protected payment).

All pension benefits are valued (see CETV below). The share can be granted by way of a transfer to from one scheme to another, or by one party becoming a ‘paid up’ member of the other’s company pension scheme.

This latter option is rarely used, as the retaining scheme will not wish to have the increased costs, disclosure requirements and administrative inconvenience associated with additional members (non-employees).

The rules allow schemes to insist on ‘buying out’ the spouse’s benefits, if the scheme considers it appropriate. Most schemes insist on this route. The exception is usually the government and Local Authority schemes, which are ‘pay as you go’ (unfunded except for the local government scheme) and therefore reluctant to pay large transfer values.

Pensions that are already in payment (eg. through an annuity) can be ‘unbought’, split and ‘rebought’ using the annuity rates applicable at the date of divorce.

The biggest problem with pension sharing is the cost. Schemes are entitled to charge for the calculations and administration involved in splitting the benefits. The recipient must also consider the cost of any required financial advice, which may make the entire process uneconomical.

At present, little consideration has been given to “co-habitant” relationships, although it is the subject of significant lobbying.

5. Cash Equivalent Transfer Value (CETV)

A CETV represents the expected cost of providing the member’s benefits within the scheme. In the case of money purchase benefits, this is generally straightforward – it is the accumulated contributions made by and on behalf of the member together with investment returns. In the case of defined benefits, the CETV is a value determined on actuarial principles, which requires assumptions to be made about the future course of events affecting the scheme and the member’s benefits.

6. Summary

Pension sharing could be used in many divorce cases, where offsetting is not an option. The cost though will be a key issue. Any transfers will have to be sufficient to warrant the large costs involved in calculating and organising the new arrangements.

A pension is a long term investment. The fund value may fluctuate and can go down. Your eventual income may depend on the size of the fund at retirement, future interest rates and tax legislation.

#Pensions #Divorce

Your Retirement Options

On 6 April 2015 new pension rules came into force, giving you much greater flexibility over how you use your money purchase pension savings and the options you have in retirement.

These changes include the freedom to access the whole of your pension fund, more choice over how to receive the tax-free cash from your fund, changes to death benefits and changes to the contributions you can make.

Whether you have a personal pension, a group personal pension or a stakeholder pension these new rules are far-reaching, and they could have significant tax implications. It is therefore important to take advice on the various options open to you.

Flexi-access Drawdown

The first of the new options is “flexi-access drawdown” which in essence places no limit on the amount of income you can take from your money purchase pension fund once you reach the minimum pension age, currently 55. This means that it would be possible to take the whole of your pension fund in one go, however it may not be tax efficient to do so.

If you will be dependent on your pension fund to support you through your lifetime you may need to consider taking a lower level of income to sustain you.

You will be able to take 25% of your fund as a tax free lump sum if you have not previously used that fund for drawdown purposes with the remainder of the fund staying in your pension to provide you with an income.

It is important to remember that the amount of flexi-access fund withdrawn to provide you with an income will be taxed at your marginal rate of income tax therefore if you take too much income this may move you into the next tax bracket and result in you paying a higher rate of tax.

Uncrystallised Funds Pension Lump Sum

A new option has been introduced by the Government which is called the Uncrystallised Funds Pension Lump Sum (UFPLS).

This option is for funds not already in drawdown and allows you to take a one-off payment from your pension or a series of lump sums leaving the remainder of the fund in your pension invested, the first 25% of each UFPLS is tax free, with the balance being subject to tax.

UFPLS is not available from any part of your pension that is already in drawdown.

How Can I Access the New Pensions Options?

For anyone who was in drawdown before 6 April 2015 (capped or flexible) the new options differ depending on which one you have/had.

Capped Drawdown

Currently, if you are in capped drawdown you will have a maximum level of income that you can take each year and this is reviewed every three years up until you are 75 and annually thereafter.

From 6 April 2015 you are able to continue to take capped drawdown or you have the option to switch to the new flexi-access drawdown whereby the amount of income you can take will be unlimited and there will be no further mandatory maximum income level reviews.

It is important to remember that if you take the decision to move from capped drawdown to flexi-access drawdown and take any income from the flexi-access drawdown fund the maximum amount you can contribute to money purchase pensions each year without suffering a tax charge will reduce (to £4000 currently).

Flexible Drawdown

Anyone who had a flexible drawdown plan before 6 April 2015 automatically had their plan renamed flexi-access drawdown on 6 April 2015. This had no effect on how you take benefits but does enable you to make tax-efficient contributions of up to £4,000 each year to money purchase pensions.

Phased Drawdown

Phased Drawdown is where unvested pension funds are used in tranches to provide an income. It is not normally available through occupational schemes.

Phased Drawdown is used to allow a pension holder to gradually cut back on their working hours and replace the associated loss in income by partially crystallising their pension fund. Historically, the preferred method used the Pension Commencement Lump Sum (PCLS) to fund the majority of the required income, this also minimised the amount of funds which needed to be crystallised which had additional advantages in terms of the taxation of death benefits. However, the Taxation of Pensions Act 2014 moved the pivotal point for death benefits from the previous uncrystallised funds versus crystallised funds, to pre and post age 75. As such, the additional tax on death, previously associated with phased retirement no longer applies.

New Death Benefit Rules

You can nominate whoever you choose to receive your death benefits, this can be your spouse, children, grandchildren or even someone unrelated to you, you can also leave some or all of your pension fund to charity.

The beneficiaries of your pension fund can elect to take the fund as a lump sum or leave the fund invested and take an income under the new flexi-access drawdown rules. If they do choose the flexi-access option then they can take income as and when required or leave the funds invested thereby benefitting from the tax advantaged pension.

What about tax on the death benefits?

The tax treatment of your death benefits will depend on two things.

Your age when you die.

Whether or not the funds are designated to your beneficiary within two years.

If you die before your 75th birthday and your pension funds have been designated to your beneficiaries within two years they will be paid tax-free. If the beneficiaries choose drawdown the funds must be placed in their drawdown pot within 2 years but they do not need to take the money out of the drawdown plan within the two year period.

If you live beyond your 75th birthday or if you die earlier but your pension funds are not designated within the two year period, then the death benefits will be taxed; the taxation that would normally be applied would be at the beneficiaries marginal rate of income tax.

If your beneficiary has not withdrawn the whole of the pension fund before their subsequent death then the pension funds can be passed on again so your beneficiary will be able to nominate anyone they want the funds to go to following their death.

It is possible to have unlimited successors so in essence your pension fund could be passed on for generations if it is not all withdrawn. Each time the fund is passed on, the tax position is based on the age at death of the most recent beneficiary (tax free if they die before 75 and taxed at the beneficiaries’ rates if they die after 75).


You will of course still have the option of purchasing an annuity with some or all of your pension fund which for some people may still be the right choice to give a guarantee of an income for life paying a level income or increasing over time.

From 6 April 2015 new flexible annuities also became available which will allow the income level to decrease as well as increase providing this is stated in the annuity when the contract is started.

The new rules are far reaching and far more flexible therefore we would be more than happy to discuss these options with you in more detail so please contact us to arrange a meeting.

The above taxation information is based on our current understanding of taxation legislation and regulations. Any levels and bases of, and reliefs from, taxation are subject to change.The value of your investment can fall as well as rise, and you may not get back all of your original investment.

A pension is a long term investment. The fund value may fluctuate and can go down. Your eventual income may depend on the size of the fund at retirement, future interest rates and tax legislation.

#Retirement #Drawdown