When the state pension was first introduced following the last war the Government promised to look after its citizens from “cradle to grave” through the national insurance system. Working people who retired at 65 were expected to live for between 1 and 5 years on average. Since then due to lower industrialisation, cleaner air and better medical care people are living much longer lives which has increasingly put pressure on the state pension and this means that a typical 65 year old could expect to be retired for almost 15-20 years.
In more recent times people have been encouraged through tax incentives to invest in additional private pensions to give them a boost in pension income when they retire but the take up of these schemes and the amount people pay into them has been relatively low.
The Government has now introduced a minimum pension of £144 which abolishes a lower state pension topped up with additional benefits. For some people who have not made any additional provision this could be a significant drop in income given that the average UK wage is £509 per week and could amount to a drop of almost 70%. Clearly with such a drop of income in retirement new retirees can kiss goodbye to life’s luxuries like a car, eating out or holidays as the minimum State Pension is designed for subsistence living only.
Even where people do make provision, the average pension pot at retirement in the UK is just £30,000 and for a typical 65 this will produce an income through an annuity of only £1,770 per year, not a huge improvement! For those not fortunate to have access to a Final Salary pension scheme, which is increasingly the vast majority of people in the UK, the outlook is very bleak indeed.
Annuities are the investment that people buy with their pension funds at retirement, the income that a typical annuity pays has dropped significantly in recent years from a rate of around 16% in the 1990’s to less that 6% in 2013. One of the main reasons for this is Annuity Companies buy GILTS which are loans to the British Government to provide a safe means of income for their investors. When the Debt Office of the British Government issues new GILT it has to set a rate that will attract investment, but because UK bank interest rates are so low at present, the YIELD offered by GILTS has also fallen. In addition to this Quantitative Easing and the European debt crisis has also put additional pressure on UK GILT yields as they both increase demand.
Hard pressed retirees have also faced another significant disadvantage in recent times, investment performance. The majority of people who save for their retirement in the UK invest in UK Stocks and shares through their pension funds but the investment returns from this area of investing have been exceedingly flat over the past 15 years. The FTSE index which is the measure of the UK’s top 100 companies is at the same level in early 2013 as is was in 1998, a decade and a half later. During the intervening years the FTSE 100 index has on two separate occasions lost around 40% of its value through the recession of the years 2000-2003, with the technology bubble bursting and later in 2008 with the “Credit Crunch” a period of economic downturn that still exists to this day. With the majority of pension funds depending on equities to provide returns over the medium to long term it is hardly surprising that the average UK annuity is just £30,000!
Pension Fund Managers have also struggled to achieve meaningful returns from other forms of investments in recent years. Before the Credit Crunch commercial property funds would regularly return double digit annual growth for their investors. However since the Credit Crunch some property funds have fallen by as much as 40% and have languished ever since. In the past, Pension Fund Managers would move away from equities in times of market turmoil and move a higher proportion of funds into what is deemed as more secure forms of investment such as GILTS, cash and Corporate Bonds. However, as the Bank of England based rate has been slashed to just 0.5% these forms of investment have also struggled to achieve meaningful growth. With the cost of management fees, fund charges and the cost of ongoing advice being deducted from pension funds it is extremely unlikely that the more cautious forms of investments will produce any growth at all. With no growth, the ever present danger to pension funds is the effect of inflation which currently stands at 3.1%; this means that fund performance after charges must at least be this level just for the value to stand still in real terms.
Inflation could pose a higher risk moving forward as the new Governor of the Bank of England has indicated that future focus will be on the recovery of the UK economy rather that the traditional remit of keeping control of inflation. This indicates that UK interest rates will remain low for some time which will of course affect the more secure forms of pension investments; while at the same time inflation could soar meaning higher fund performance is needed just to keep pace with the higher rate of inflation.
There is no doubt that UK retirees are facing the perfect storm with low interest rates affecting pension fund performance and annuity rates, higher inflation eroding pension fund values and pension income and volatile stock markets giving already nervous investors the “jitters.”
Scott Mullen is a founding member and owner of My Pension Expert and has worked as a Financial Adviser for over 14 Years. From 2009 and with the creation of My Pension Expert Scott has specialised in pensions and the at retirement market becoming an authoritative figure around these areas of advice.
Equity Sharing – How do you choose the right plan for you?
By Ifty Nasir, co-founder and CEO of Vestd, the share scheme platform
In a survey of 500 SMEs, nearly half told us that the pandemic had made them re-evaluate how they operate. That’s not surprising as they’ve been faced with some unique challenges this year. Government support during the early stages of the pandemic, is now being extended till March 2021 but many businesses continue to struggle.
Making good people redundant improves cashflow in the short term but will have a long-term damaging impact on the business. At the same time, motivating employees, who are working remotely and worried for their jobs, is not easy. It’s therefore not surprising that equity sharing, in the form of ‘share’ and ‘option’ schemes has become even more popular, with one in four SMEs now sharing equity with their employees and wider team
However, sharing equity can be a complex area and is easy to get it wrong. When it goes wrong there is a danger that you create tax issues (for you and your employees), de-motivate your team and even create future funding issues for the company. It is therefore really important that you choose the right scheme to set-up, but make sure you manage it too.
Below is a brief summary of the main schemes used by Start-ups and SMEs in the UK today. There are similar schemes and considerations globally.
- EMI Option Schemes – This is the most tax efficient scheme. Recipients pay just 10% Capital Gains Tax (CGT) on any value growth. The employer can also offset both the cost of the scheme and the value growth achieved by employees against its Corporation Tax liability. You can also set conditions to control the release of equity, such as time served or performance. The recipient can’t simply walk away with shares, having delivered no value (which is one of the top concerns of many of the businesses and founders we talk to). EMI Option Schemes are used by 41% of SMEs (who share equity) and, for good reason, are the most popular. Read our full guide to EMI for more information.
- Ordinary Shares – This is the issuance of full ordinary shares in the business, often without conditionality and with immediate effect. They are most often issued against cash investment. Once an employee (or any other recipient) has ordinary shares, you have no control over what happens to the shares thereafter. The individual can simply walk away with the shares, so we don’t normally recommend them for contribution that’s yet to be delivered. They’re also not tax efficient, as the recipient will have to pay tax at their marginal Income Tax (IT) rate, on any value the shares have at that point. These are used by 31% of SMEs.
- Growth Schemes – These are a good option when the founders have built value into their company. The recipient only shares in the capital growth of the business from the date that the shares are issued. You can give growth shares to anyone (not just employees) and you can attach additional conditions. These shares limit the risk of the recipient having to pay income tax on receipt of the equity, as they do not hold any value when they are issued but do pay CGT on the value growth at sale. Growth schemes are used by 31% of SMEs. Read the full details on Growth Shares here.
- Share Incentive Plan – SIP – This is a tax efficient plan for all employees that gives companies the flexibility to tailor the plan to meet their needs. Share Incentive Plans are used by 23% of SMEs.
- Unapproved Options – These are not very tax efficient as the recipient will pay IT on any value inherent in the share, above the exercise price, when they exercise the option. That said, they do provide more flexibility than the other options and are the easiest to set up as you don’t need HMRC approval. Unapproved Options are used by 22% of SMEs.
Is it worth the hassle? Earlier this year (i.e. during the first lockdown ) we carried out a piece of research with business leaders, exploring their attitude towards sharing equity with employees and wider team. We spoke to over 500 owners of SMEs and identified six main business benefits to doing so:
- Recruitment. You can combine salary with equity, to create compensation packages that match, or improve on, offers made by other more established companies with deeper pockets.
- Retain the best talent. Share schemes are proven to increase employee retention and can help you reduce if not avoid hiring costs.
- Increase productivity and performance. Studies have shown that employees who are also shareholders are more committed to their work and contribution because they feel directly vested in the growth in value of ‘their’ company.
- Improve employee engagement and happiness. The more all employees feel included in the mission, direction, and success of the business, the more they’re motivated to contribute to the company.
- Relieve cashflow pressure. Equity can be used to reduce the need for finance. Instead of paying people top rates and large bonuses, you can incentivise them via shares or options…giving them a share of the future they are helping to create.
Recruitment and retention are clearly the key drivers. It’s not too surprising to see why. Companies succeed or fail largely due to the quality of the people they manage to attract and retain. However, for smaller and start-up employers, attracting the right people can be difficult. Good people are typically attracted to the idea of working for a house-hold name brand, they look for job security and are enticed by comprehensive employee benefit packages and high salaries that are unaffordable by most smaller companies. Employee share schemes are an effective way for smaller companies to compete in the job market against larger companies, with that potential for a massive/significant upside.
However, at this challenging time, it’s not all about money, keeping people focussed and motivated during the pandemic is at the top of most employers’ worry list. If you choose the right scheme, equity sharing encourages employees to align their motivations to that of the long-term success of the business, over the immediate or short-term gains. And, right now, that is perhaps worth more than anything.
If you’d like to get into the detail then check out our guide to employee share schemes.
Millennials driving high net worth parents and grandparents in a shift to sustainable investing
- Seven in 10 among older wealthy generations say the millennial generation is leading their family towards more sustainable investing
- Four in five of allgenerations of high net worth family members indicate that responsible investing is important to them
- Four in five wealthy families have already changed their investments to express more of their beliefs in social and environmental responsibility
- Whilst outlook on responsible investing is shared, three in five say that different appetites for risk between generations have influenced financial and wealth transfer planning
A new research series from Barclays Private Bank on the intergenerational transfer of wealth shows that ESG investing has been brought into wealthy families’ consideration by the younger generations. This has led to increasing family allocations to sustainable assets and is acting as a common ground for the different generations in financial planning, despite competing priorities and different views towards risk.
Barclays Private Bank’s Smarter Succession: The Challenges and Opportunities of Intergenerational Wealth Transfer research, undertaken by global intelligence business Savanta, identified that two thirds (68 per cent) of older HNW individuals say that their children have been leading the family on sustainable and responsible investment matters.
As a result, sustainable investing is now resonating with more high net worth (HNW) individuals of all ages and generations, uniting families around shared goals of investment responsibly and making financial returns. One in ten (11 per cent) of all generations say that having a positive environmental impact is a top personal aim, and over a third (37 per cent) strongly agree that responsible investing is now important to them, demonstrating the potential of ESG issues to align with overall wealth objectives across generations and bring families together around securing their financial future.
Furthermore, for around four in five of each of the studied age groups, investing responsibly is important to them to some extent, with 81 per cent of under 40 year-olds, 77 per cent of 41 to 60 year-olds and 86 per cent of over 60 year-olds agreeing.
Changing family attitudes are shifting portfolio allocations
Changing attitudes have led to a substantial shift in the way HNW families are investing, with almost four in five (78 per cent) expressing their views on social and environmental responsibility in their investments.
This shift is highest in the UK (83 per cent) and the Middle East (82 per cent). India is lower in comparison, but still with 62 per cent investing with social and environmental considerations, this indicates that there is a significant international movement towards a more sustainable investment approach.
For those who aren’t already investing this way, 22 per cent of the elder generations would like to find out more about their sustainable investment options, and 19 per cent are interested in understanding more about investing specifically for positive social and environmental impact, suggesting that the trend is likely to continue to grow.
Finding sustainable common ground in succession planning
Sustainable investing may provide a place for common ground between the generations, where issues such as risk appetite continue to bring conflicting views from different generations. Sixty-one per cent of family members cite different risk appetites between the generations as affecting the direction they collectively take on investments.
High net worth families say that broadly different life values (57 per cent), the impact of social media (47 per cent) and differing educational backgrounds (40 per cent) are also areas that are contributing to different outlooks and priorities between the generations, and in turn affect financial and succession planning.
Half (50 per cent) of this millennial generation say that these factors contribute to them feeling that their overall financial aims and objectives are not understood by the rest of the family.
Older generations passion for philanthropy
Philanthropy is another area where the younger generations are taking a role in using family wealth to positively affect the world, but in contrast to sustainable investing, charitable giving tends to be led by the older generation, showing that each age group is finding different ways to give back to society.
Over 60 year-olds more commonly say that philanthropy is their passion (38 per cent) than the under 40 year-olds (20 per cent), but in the majority of families (74 per cent), the older generation hands responsibility for managing philanthropic activity to their children.
Damian Payiatakis, Head of Sustainable and Impact Investing, Barclays Private Bank comments:
“Our research shows how the younger generations, who have been engaged longer with sustainable investing, are providing a vocal impetus within their families to shift the perspectives of older generations.
“As well, most of the narrative around sustainable investing focuses on the benefits for your portfolio alongside people and planet. Now, we can see its potential benefits for aligning your family around shared values and supporting intergenerational wealth transfer.
“With the heads of the families thinking about succession planning and investing beyond their personal lifespan, our conversations has extended to include how sustainable investing can secure their children’s future, their readiness to inherit family wealth, and a common ground for family discussions around wealth.”
Is now a good time to consider art as an investment?
By Anita Choudhrie, Founder of Stellar International Art Foundation
Back in April, as Covid-19 began to have a significant impact on museums and galleries across the world, the Association of Art Museum Directors described it as a “crisis without precedent”. Now, nearly seven months on, the re-introduction of lockdown measures and the uncertainty around the looming Brexit deadline continue to undermine the art market.
Many small and medium sized galleries were already facing an uncertain future before the pandemic. Now, this has only been exasperated, with auction sales postponed, art fairs cancelled and galleries having to shut their doors for the second time this year. According to a survey by Art Newspaper, UK galleries are expecting a shocking 79 per cent fall in revenue in 2020.
With such market uncertainty, it is understandable that collectors may be feeling hesitant about whether now is a wise time to be investing in art. People are generally more cautious with their money during a period of economic uncertainty, including with their spending and investments. Naturally, this has a substantial impact on the entire art ecosystem, affecting artists and galleries, as well as the huge number of other people who make a living from the community. Moreover, during Covid-19, social distancing requirements have made it near impossible for collectors to physically inspect and transport purchases.
Art market resilience
Yet despite this hesitation, people are in fact still purchasing new works, just in a more considered and calculated manner. This is unsurprising when you consider the resilience of the art industry. In recent history there have been many other periods of precarity, including recessions, previous health pandemics and unpredicted events which have sent shockwaves through the world…but the art industry has always recovered. According to a Statista report, in 2019 the global art industry was valued at $67 billion, a stark contrast to the art market’s $39 billion evaluation in 2008 and 40 percent decline between the recession years of 2007 and 2009. It cannot be denied that COVID-19 is an unprecedented event which will have rippling effects for years to come, but it will do collectors well to remember that as we have seen before, normality will eventually resume. Whether it takes a couple of months, or even a year, the markets will recover – and once shops and restaurants re-open, holidays resume and employees return to offices, the art markets will assertively bounce back once again.
Considering art as an investment opportunity
Whilst investing in art may seem like a daunting prospect and an unnecessary expense during the middle of a global pandemic, now is a crucial time for collectors to be supporting the delicate art ecosystem wherever possible. Despite the precarious situation, artists have proven time and time again that their work can hold value during periods of economic upheaval, so there may still be wise investment opportunities to explore. For example, over the past five years, some of the most collectable contemporary art pieces have increased in value by over 160 percent. Over the past year, this same index has risen in value by nearly 5 percent, demonstrating how resilient the market can be.
In addition to this, many auction houses and galleries have set up charity sales, offering collectors an opportunity to purchase credible art at amazing prices, whilst doing their bit to keep the market afloat. Therefore, along with providing collectors with an opportunity to pick up some fantastic bargains, the pandemic is also helping to open up the art world to new, first time buyers, encouraging younger generations to become collectors as well.
The digital boom
Ultimately, the pandemic may be wreaking havoc on the world, but it is also providing the long-needed incentive for the art industry to fully embrace change. Art works have been available through multiple online platforms for years, however, the scale of investment into digital channels has rapidly expanded in recent months. For example, the renowned Galerie Thaddaeus Ropac invested extensively in state-of-the-art technology to facilitate virtual visits, starting with a walk-through of the Daniel Richter show in its Salzburg gallery.
Additionally, the organisers of Art Basel created an online viewing room dedicated exclusively to artwork produced this year. Not only did this decision give some of this century’s most overlooked artists a chance to shine in the digital spotlight, but it also opened up the exhibition to a much broader audience than ever before.
Although the pandemic has forced the industry’s hand, total online sales have risen from a 10 percent share of the business market in 2019 to over 35 percent in the first half of 2020. The importance of this shift in making art more accessible to everyone and in turn, supporting the industry to stay afloat, cannot be overlooked. This online market growth also demonstrates how there is still significant demand among buyers, and therefore, that the art market isn’t going anywhere anytime soon.
Ultimately, with the global economy currently disrupted and with no real indication of when ‘normality’ will resume, it is understandable that collectors may be treading carefully with their next purchase. Yet as we know, art has long proven to be a stable investment, often outperforming other asset classes and weathering the most difficult of global financial storms. Of course, every collector’s situation is different, but there are certainly great deals to be had across the entire spectrum of the art market; whether you are in the fortunate position to invest in fine art, or are looking to make your first purchase from the emerging category.
The Stellar International Art Foundation:
Established in 2008, The Collection has become internationally renowned for its content, coverage and activities around the globe and is a particular champion of female artists and feminist art. Currently the foundation comprises over 600 works dating from the late 19th Century to the present day, including international artists and ranging from sculptures to paintings. It distinguishes on individual talent rather than regions and gives an insight into the cultural viewpoint of individuals with diverse understandings of the world.
For more information, please visit: https://sia.foundation/
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