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what do ESG and impact investing mean for investors?

Sustainable investing has grown rapidly over the last couple of decades. Investors are increasingly committed to the social and environmental impact of where they put their hard- earned money. Getting good financial returns and having a positive impact on the world are not mutually exclusive. Impact investing and ESG investments allow investors to ‘kill two birds with one stone’, as they say

American financial association SIFMA estimates the market size of sustainable investments to be $8.72 trillion. That figure was calculated in 2016, so it’s likely to be substantially larger than this now.

ESG and impact investing are two terms frequently confused in the world of sustainable investing. They’re often used interchangeably, which is a shame because it risks obscuring what the different terms actually mean; they are quite different. ESG is a framework for determining the impact of an investment whereas impact investing is an approach.


ESG
ESG stands for environmental, social and governmental. It’s a framework that can be integrated in the risk-return analysis of different investment opportunities. By drawing from a variety of data, some gathered from company and government disclosures among other sources, it allows investors to examine how companies manage risk and opportunities in three key areas:

Environmental

This refers to a company’s impact on the environment. It looks at certain aspects of a company’s operations, such as how they dispose of their hazardous waste or how they manage carbon emissions.

Social

Does the company take measures to have a good social impact? This can include philanthropic and community focused activities or any measures the leadership takes to promote diversity in the workplace.

Governance

This deals with the leadership and strategy of a company. It addresses aspects such as staff pay and communication with shareholders.

An ESG framework is a valuable tool that may be used to evaluate how certain behaviours can affect a company’s performance. However, it’s not an investment strategy in and of itself. With ESG, the wider impacts of investments are considered but financial performance still takes precedence.


Impact Investing
Impact investing means using investments to cause positive social or environmental change. Examples include supporting access to clean energy or working to improve social mobility by investing in companies operating in underprivileged areas. In contrast to ESGs, in impact investing financial performance is secondary to the overall social or environmental impact.

The financial return of impact investments varies between cases. Some investors intentionally invest for below market rate returns in line with their strategic objectives. Others pursue competitive, market-rate returns. According to GIIN’s 2017 Annual Impact Investor Survey, these account for the majority, with 66% of impact investors aiming for market rate returns.

Because maximum returns are sacrificed in favour of investing for a particular social or environmental agenda, there’s the possibility that certain opportunities may underperform relative to other widely available options. When maximum profit isn’t the goal, sometimes the financial returns can suffer.

This said, impact investing shouldn’t be confused with charity. The objectives of impact investing are financial as well as social and environmental. There are many companies whose operations have a positive impact on the world and investing in these is an effective way of contributing towards long term social and environmental progress.

The shift towards impact investing and ESG highlights a growing desire among investors to do well by doing good. They are increasingly a core offering, rather than something that is ‘nice to have’. However, as with any investment decision, it’s a good idea to do plenty of your own research and seek financial advice to see how ESG and impact investing could fit with the rest of your portfolio.


Sources
https://www.investmentnews.com/article/20180220/BLOG09/180229985/esg-and-impact-investing-do-you-know-the-difference

the longevity challenge and how to tackle it

In the UK, we are faced with the challenge of an ageing population. Many of us will live longer than we might have expected. Already, 2.4% of the population is aged over 85. Because of improvements in healthcare and nutrition, this figure only looks set to rise.

The Office of National Statistics currently estimates that 10.1% of men and 14.8% of women born in 1981 will live to 100. A demographic shift to an older population brings unprecedented change to the way the country would operate, from the healthcare system to the world of work.

In addition, a long life and subsequently a long retirement, bring challenges of their own from a personal financial planning perspective.

Firstly, it means you have to sustain yourself from your retirement ‘nest egg’ of cash savings, investments and pensions. You need to ensure that you draw from this at a sustainable rate so you don’t run the risk of outliving your money.

Secondly, there’s the question of funding long term care. If we live longer, the chance that we will one day need to fund some sort of care increases. Alzheimer’s Research UK report that the risk of developing dementia rises from one in 14 over the age of 65 to one in six over the age of 80.

Of course, there are many different types of care, ranging from full time care to occasional care at home, with a variety of cost levels. All require some level of personal funding.

The amount you pay depends on the level of need and the amount of assets you have, with your local council funding the rest. This means that it’s definitely something that you need to take into account in your financial planning.

Having the income in later life to sustain long term care really does require detailed planning. Because of the widespread shift from annuities to drawdown, working out a sustainable rate at which to withdraw from your ‘nest egg’ is essential.

There is no ‘one-size-fits-all’ sustainable rate at which to draw from your pensions and savings. Every person has their own requirements, savings, liabilities and views on what risks are acceptable.

There are some things which you will be able to more accurately plan when working out the sustainable rate to draw from your pension. These include your portfolio asset allocation, the impact of fees and charges and the risk level of your investments. Speaking with your financial adviser will help you on your way to working out the right withdrawal rate for you.

There are, however, some unknowns. These include the chance of developing a health condition later in life and exactly how long you’ll live. It is best to withdraw leaving plenty of room for these to change unexpectedly, improving your chances of having a financial cushion to cope with what life throws at you.

Sources

Prevalence by age in the UK


https://www.ons.gov.uk/peoplepopulationandcommunity/populationandmigration/populationestimates/articles/overviewoftheukpopulation/july2017

Defining and evidencing Sustainable Withdrawal rates

explaining fund charges and investment fees

If you hold any investments or already work with a financial adviser then it’s likely that you are familiar with the fees you pay to invest or receive advice.

But what are these fees and why are they so important to keep a handle on?  This video gives you information on what fees you might be charged and why  you should keep track of them.

is buying a state pension top-up worthwhile?

As part of your overall financial planning, one item that is worth considering is your state pension and whether you are on track to get the full amount. If not, it is possible to buy top-ups, which could boost your payout by £244 a year for life.

The 2017/18 voluntary payment, under the Class 3 National Insurance top-up scheme, costs £741 and will get you nearer to, or over, the threshold for the maximum state pension payout – currently £164.35 a week. Such an opportunity can be particularly relevant for those who have contracted out of part of the state pension at some point previously during their working life.

A word of caution though before proceeding – some people have paid the top-up only to discover that it made no difference to their state pension and subsequently struggled to get a refund from HM Revenue and Customs.

Some of the confusion arose because of the major shake-up in April 2016 when the single-tier pension system was introduced. Under the old system you had to have 30 years of NI contributions to get the full basic £122.30 a week pension, whereas under the new one you have to have 35 years. The top-up system was letting some people pay for extra contributions when to do so was futile.

Despite the problems encountered by some, Steve Webb, former Pensions Minister, says it is still worth investigating whether the additional payment would boost your future state pension. ‘Ironically, I think it would be really unfortunate if lots of people who could now top up for 17/18 at incredible value were put off doing so or didn’t do so because they were still unaware of the option, and where the decision to top-up or not is much more straightforward and less likely to go wrong,’ he said.

To know where you stand, the first thing to do is to get an official state pension forecast from the Government website. This will highlight whether you have any gaps in your National Insurance record of contributions. The top-up scheme can be particularly relevant for women who took time out to look after children.,

If you reached state pension age before 6 April 2016, the old system will apply to you (that’s men who were born before 6 April 1951 and women born before 6 April 1953). However, if you reached state pension age after 6 April 2016 (men born after 6 April 1951 and women born after 6 April 1953), the new system will apply.

You also need to work out if 2017/18 was a qualifying year for you – when you were under state pension age for the whole year and in which you either paid or were credited with enough NICs to earn one year towards your state pension entitlement.


Sources
http://www.thisismoney.co.uk/money/pensions/article-5770947/Should-buy-state-pension-up.html

what are asset classes

An asset class is a broad group of investments that have similar financial characteristics.  Traditionally, there are four main asset classes:
Cash
Shares
Property
Fixed-interest securities (also called bonds)

At its simplest, an asset class can be defined as a broad type of investment. The video below should help to explain it in visual terms.

Sources:
ClientsFirst
https://www.moneyadviceservice.org.uk/en/articles/asset-classes-explained

what financial wellbeing means for your health

The latest Financial Wellness Index has revealed that people with very little savings and those who are struggling to pay their bills are also those who are suffering from poor health. Conversely, those enjoying good health are more likely to experience a higher level of financial wellness. The findings raise the question of whether working to improve your financial situation could have a positive impact on your health, or indeed whether a healthier lifestyle might also lead to healthier finances.

The Financial Wellness Index from Momentum UK is put together by the Personal Finance Research Centre at the University of Bristol. It examines a number of fundamental elements of subjects’ financial lives, as well as the macroeconomic state of the UK, to generate the country’s overall Financial Wellness score out of 100.

The latest report has revealed that 17% of people who consider their health as being ‘poor’ have also missed at least one bill payment over the course of the last year, considerably more than the 5% of those who class their health as being ‘excellent’. Similarly, only 5% of those who have a healthy diet have missed a bill payment, compared to 11% of those who eat unhealthily.

The trend can also be seen in the amount of savings held by healthy and unhealthy people. 15% of people in poor health have no savings, compared to just 8% of those in excellent health. There are also considerably more unhealthy (29%) than healthy people (19%) with less than £100 put away. This in turn has an impact on standard of living, with 42% of people in poor health having to reduce their lifestyle expenses such as socialising and holidays, compared to just 23% of people in excellent health.

“The link between financial and physical health is strong in this year’s index, which is not wholly surprising when you start to analyse the similarities in behaviour needed to achieve both”, says Momentum UK’s managing director Samantha Seaton. “Whether you’re improving your fitness or trying to improve your financial picture, success will be found by taking small steps to achieving your longer-term goals”.

Sources
http://www.mindfulmoney.co.uk/mindful-news/new-research-finds-clear-link-between-healthy-living-and-financial-wellness/

ISA Questions Answered …

One of our suggested Financial New Year’s Resolutions for everyone this year is to pay less tax and one possible solution is to make sure that you are paying into an ISA and, if possible, using up your yearly ISA allocation.

These tax efficient savings vehicles have been around since April 1999 and are a great way to save and invest but many clients still have queries about them. We’ve put together the following answers to common questions, to help you understand ISAs better in the run up to end of the financial year, when your chance to use your 2013/2014’s allocation ends.

1. Exactly what is an ISA?

An ISA is a ‘wrapper’ that’s designed to go round an investment, making it more tax efficient. There are two types of ISA; Cash ISAs and Stocks and Shares ISAs. Cash is like a normal deposit account, except that you pay no tax on the interest you earn. Stock and Shares ISAs allow you to invest in equities, bonds or commercial property without paying personal tax on your returns.

2. How much can I contribute?

For the tax year ending 5th April 2014, the maximum level is £11,520 per individual (so a husband and wife could contribute £23,040). The maximum that can be contributed to a Cash ISA is £5,760. But there is no limit on the Stocks and Shares ISA, so if you only contribute, say, £3,000 to your Cash ISA, then you could contribute up to £8,520 to your Stocks and Shares ISA.

3. What are the crucial dates?

The ISA limits apply to a tax year – so the current allowance applies to the tax year running from 6th April 2013 to 5th April 2014. The next tax year starts on 6th April 2014 and the overall ISA limit for that year will rise to £11,880. It’s important to note that your ISA allowance cannot be carried forward from one tax year to the next.

4. Can children have an ISA?

Children aged 15 or under cannot have a Cash ISA, though there are other ways for them to save depending on when they were born. They become eligible for Cash ISAs at the age of 16 and 17, when they can have a Cash ISA, with the same limits as an adult.

5. Are the returns guaranteed?

Some ISA providers guarantee their interest rates on Cash ISAs but the return on a Stocks and Shares ISA cannot be guaranteed, and you could get back less than you invested. As with all forms of investment it makes sense to take advice from an independent financial adviser, and Stocks and Shares ISAs should be seen as a medium to long term investment.

6. I’ve heard people say ISAs are better than pensions: is that right?

No, not necessarily. ISAs and pensions are entirely separate and both can, and most likely should, play a part in your financial planning. The best idea is to talk to us about your long term financial goals, and we’ll discuss the advantages and disadvantages of both ISAs and pensions and help you decide on what’s best for you.

7. My ISA was with XYZ Building Society last year. Do I have to stay with them this year?

No, absolutely not. You can have a different ISA provider every year if you so choose. For Cash ISAs, it obviously makes sense to choose the provider who’ll give you the best rate of return, and for a Stocks and Shares ISA, you’ll naturally want to consider the past performance of the provider (although it’s no guarantee of the future returns) and the range of funds offered.

8. I have ISAs with several different providers. Can I consolidate them?

Yes, you can – and you won’t lose the tax ‘wrapper.’ Many previously attractive savings accounts cease to have a good rate of interest and naturally some Stocks and Shares ISAs don’t perform as well as investors would have hoped. Consolidating your ISAs may also substantially reduce your paperwork. We’ll be happy to talk you through the advantages and disadvantages of doing it.

9. Can I save regularly in an ISA? I prefer saving on a monthly basis.

‘Yes’ is the simple answer to that question. We’ll happily advise on which providers accept monthly savings.

10. Someone mentioned ‘re-registering’ an ISA. What does that mean?

Some clients are now choosing to keep track of their investments via what’s known as a ‘wrap.’ Essentially this means that investments with different companies and/or investment groups are brought together under an overall ‘wrap’ for ease of administration. If an ISA is included in this type of arrangement it will need re-registering to the wrap provider. The underlying investment doesn’t change.

If you’d like any further details or advice on your current or planned ISA investments or you have any other questions, then as always, don’t hesitate to contact us.

 

The value of investments and the income from them can go down as well as up and you may get back less than you originally invested.


Sources: http://www.hmrc.gov.uk/

 

building your financial future

An ISA millionaire shows the real power of tax free saving

Lord Lee, hailed as Britain’s first ISA millionaire, tells a compelling tale about how a sensible approach to investment, which includes the prevalent use of the tax free accounts, can pay huge dividends.

Writing in The Telegraph, Lord Lee describes how, after 16 years of investing a total of £126,000 into ISAs, his pot had grown to a hugely impressive £1 million.

Of course, not everyone who invests in ISAs will reach the level of return achieved by Lord Lee, but as we approach the April deadline for using your 2013/2014 annual ISA allowance, his examples proves a potent reminder of just how valuable ISAs can be to your investment portfolio.

Using mainly Stocks and Shares ISAs, Lee preaches patience to ISA investors and revealed that his own biggest investing flaw was a lack of it. Certainly Lee now seems to have little reason to worry, but with one holding sold early for between £4.88 and £11 now worth north of £20, the investor still clearly has some regrets.

For any investors who are not currently following Lord Lee’s example, April 5th is a key date. The end of the current tax year marks your last chance to invest up to the government imposed maximum ISA limit. This year the limit has been set at £11,520, with no more than £5,760 able to be held in a Cash ISA.

Lee ends his article by hailing British business and by saying that we, as a nation, should be encouraging responsible savings and investments. Certainly, using your ISA allowance is one very sensible way of starting to do just that.

Sources: http://www.telegraph.co.uk

building your financial future

Financial Planning in your fifties, sixties and seventies …

Last month we looked at basic financial planning in the early part of your life – through your twenties, thirties and forties.  If you missed it just click on this link Financial planning in your twenties, thirties and forties 

What about the second stage of life? It’s easy to assume that all the major changes in life – finding a job, marriage, a family – take place in the early years. In fact there are just as many major changes in later life and the need to keep on top of your financial planning is, if anything, even greater.

In your fifties

Along with your forties, your fifties are almost certainly the age when your earnings are at their peak – and by now there’s a good chance that your children will no longer be dependant, giving you the chance to take two important financial planning steps.

First of all, your fifties are the time to maximise your savings ready for retirement, and to make sure that they are invested as tax efficiently as possible. The right action now could make a lot of difference when you eventually retire, whether it is in maximising your pension contributions, or opting for the flexibility and tax efficiency of Individual Savings Accounts.

A good independent financial adviser will be able to prepare you a ‘lifetime cash flow’ forecast showing how much cash is required for your ideal retirement – and how much you need to save in order to guarantee it.

If your income allows it, your fifties is also a good time to reduce debt, be it long term debt like a mortgage or shorter term debt like credit cards. Conventional financial wisdom dictates that you should almost always pay off the debt with the highest interest rate first – which would normally mean paying off your credit cards before your mortgage. But for many people the allure of being mortgage free is a very powerful motivating factor: in addition there’s always the danger that if a credit card is paid off it can be built up again – especially with the winter winds of February making a week or two in the sun seem almost irresistible.

For may people their fifties are the decade in which they inherit wealth from their parents. If the amount is significant then specialist financial planning advice is always a good idea – there may be a choice to be made (or a balance drawn) between saving, spending and reducing debt with any sum that you’ve inherited.

In your sixties

If you’re planning to work on and retire in your mid-sixties or later, then the early part of the decade should simply be a repeat of your fifties: continue to save, reduce debt and work with your financial adviser to keep your plans on course.

However, at some time in our sixties the vast majority of us will retire – at which point some serious financial planning needs to be done. The options around taking your pension can be many and varied, whether it is deciding how to take your income or deciding how to invest any tax-free lump sum you receive. The options at retirement are outside the scope of this article, but retirement is a time when working with your financial adviser is crucial: the decisions you take now could well affect your standard of living for the rest of your life.

Your sixties may also be a decade where you start to think about your long term health and any care you may need in later life. There are very few of us that reach our sixties without some health worries along the way and it may be that private medical insurance or long term care planning are all subjects that you now start to think about.

If you are wealthy, then your sixties are also the decade in which you may need to start considering inheritance tax and ways in which you can protect your estate against the tax man. As above, there are several different routes you can go down but the first and most sensible option is to take independent financial advice from an expert.

In your seventies

To a great extent financial planning in your seventies will be dictated by your health. Hopefully your income for the rest of your life is now secure and, if you are wealthy, you may also be able to look at giving away some of your income and/or wealth to reduce an eventual inheritance tax bill.

Essentially, your seventies are a decade in which to relax and reap the rewards of a lifetime of sensible financial planning. Continue to have regular meetings with your independent financial adviser and continue to take all the prudent steps with regard to tax efficient investment and savings. But above all, the message for your seventies is simple: “You’ve worked hard: you’ve planned your finances: now enjoy it!”

As with last month’s article, this look at financial planning through the second stage of your life can at best only be a general overview. As always, if you would like any more  information or advice on any of the topics covered, please don’t hesitate to contact us on 01737 225 665 or advice@conceptfp.com

 

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