Tag Archive: financial adviser

  1. The Christmas Party & Tax

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    I am often asked what the potential tax implications are to throwing a Christmas party for employees.

    This question needs considering from two angles.  The first is whether the cost would be an allowable expense for business tax purposes, the other being whether it would be a benefit, taxable on the employees via their P11Ds.  Whilst there is a “general rule” answer to both of these queries, there are a number of pitfalls to beware of, so I shall cover each question in some detail.

    Are Christmas parties an allowable expense for business tax purposes?

    The general rule is that the cost of staff entertaining is tax allowable, as long as it is not incidental to the entertaining of others.  If you were to invite your suppliers and/or customers to attend too, careful consideration would need to be taken when apportioning the costs pertaining to staff entertaining and supplier/customer entertaining, as the latter is not tax allowable.

    Are Christmas parties taxable on my employees as a benefit?

    This area has a lot more potential problems to look out for!

    The general rule is that the party is not a benefit, so long as it is an annual event, open to all staff and the total of all such annual events in a given tax year does not exceed £150 (inclusive of VAT) per head.  Now let’s break that down and cover the potential pitfalls.

    • Annual event – pretty self-explanatory, such as a Christmas party or a summer barbecue.  HMRC seem to interpret this as a way of differentiating between this and casual hospitality occurring at frequent intervals (rather than the strict definition of annual being every year), although this has never tested in context.
    • Open to all staff – Not all staff have to attend, but they all have to be entitled to attend.  If you only offer the Party to certain members of staff, it will be taxable on those staff members as a benefit.
    • Total costs do not exceed £150 per head – This area probably has the most potential problems
    • The £150 is inclusive of VAT
    • Per head is the total headcount of attendees, including staff and their partners/family alike (if the invitation is extended to guests)
    • The cost of the event is from start to finish and includes the likes of transport costs to/from the event and accommodation costs if these are provided by the employer.
    • If the cost is in excess of £150 per head, it is the entire cost that becomes a benefit, not just the amounts in excess of £150 per head.
    • If you have more than one annual event of this nature, the £150 per head is for the tax year, not per event.  So if you had an annual summer barbecue which cost £50 per head and the Christmas party came to £105 per head, the whole £50 for the summer barbecue would be a taxable benefit for the employees in attendance (you are allowed to pick and choose which events best utilise the £150 exemption).

    Our Christmas party this year has come in at £160 per head (taking into account employees and guests).  What should I do?

    Essentially you have two options here.

    1. The cost of the Christmas party attributable to each staff member, will need including on their P11Ds (ie £320 if the staff member brought his wife along).  This will result in them paying tax on this amount as if it were normal employment earnings, which is likely to be unpopular with staff.  The business will also be liable to pay 13.8% employer’s national insurance on the total benefit cost.
    2. As an employer, you can agree with HMRC that you will cover the tax and national insurance by way of a PAYE Settlement Agreement (PSA).  This will obviously increase the cost of the party to you as a business.
    • For example, you have a Christmas party, which costs £1,600 and has 10 people in attendance.  Each staff member in attendance is a basic rate taxpayer.  With a PSA in place, the total cost to you as a business would be £2,276 (£1,600 grossed up for tax at 20% to £2,000 plus 13.8% employer’s national insurance).
    • In the same example, if all staff members were higher rate taxpayers, the total cost to the business would be £3,035 (£1,600 grossed up for tax at 40% to £2,667 plus 13.8% employer’s national insurance).
    • If there was no PSA in place, the total cost to the business would be £1,821 (£1,600 plus 13.8% employer’s national insurance) and the staff would suffer the tax personally.

    It is clear, that this subject is not as clear cut as many people believe, and there are many issues to be aware of.

  2. Start with what we know

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    Anyone seeking evidence that investment decisions can be hard often needs to look no further than the front page news. China, oil, VW and Glencore are among the assets that have made the headlines in the past few months after suffering sudden, unexpected and dramatic changes in price.

    Investors with exposure to those volatile assets might be licking their wounds and reconsidering their positions. This is because many investors have an investment strategy that relies on their (or someone else’s) forecasts about the future. In the simplest terms, their starting point is a blank sheet of paper, where they build a portfolio of assets they think will do better than the alternatives. Sometimes those decisions are right; sometimes they are wrong.

    We have a different starting point. Our investment philosophy is based on things we know rather than things we don’t know. For example, we know that financial markets do a good job of setting prices, so we don’t try to second-guess them. Instead, we begin with the belief that investors will, on average and over time, receive a fair return for investing their money.

    Our aim is to give our clients access to that long-term return through broadly diversified, low-cost portfolios of assets that aim to beat the market average. The portfolios do this by using information in market prices that tells us about a security’s characteristics and its expected future returns.

    The decisions we make about what assets to hold are based on decades of academic research rather than short-term hunches. This means we can focus on meeting your long-term goals rather than becoming absorbed by short-term market movements.

    Generally speaking, investment decisions are hard, but if, like us, you start with information you know is backed by decades of evidence and build an investment philosophy and strategy around it, we think you can improve your chances of being a successful investor.

  3. Sticking with it!

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    It’s often said that the secret of success in any endeavour is “stickability”, your capacity for staying committed to a goal. But success also depends on having goals you can stick with. Managing that tension is what an adviser does.

    Inspired by the impressive weight-loss of a work colleague, a portly middle-aged man decides to copy the programme that gave his friend such results. It’s a crushing regime, involving zero carbs, 5am sprint sessions and mountain biking.

    You can guess what happened. The aspiring dieter lasted about a week on the programme before throwing it all in and returning to sedentary life, donuts and beer.

    It may have been better for this individual to get some advice first, starting slowly, swapping the mountain biking for brisk walks around the block and dumping the zero carb diet for light beer. He may not have shed weight as quickly as his friend, but he probably would have had a better chance of sticking with the plan in the longer term.

    Similar principles apply with investment. You envy acquaintances who seem to have succeeded with high-risk strategies, but that doesn’t necessarily mean those are right for you. And in any case, their barbecue talk may leave out key information, like how they sit up all night watching the market and worrying.

    Just as the want-to-be weight loser can’t live with 5am sprints, not everyone can stick with highly volatile investments that keep them up at night or that cause them to constantly second-guess themselves. And few people can do it without a trainer.

    On the other hand, reaching a long-term goal like losing weight and building wealth requires accepting the possibility of pain and uncertainty in the short-term.

    The trick is finding the right balance between your desire to satisfy your long-term aspirations and your ability to live with the discomfort in the here and now. Quite often, this tension can be managed through compromise. In other words, you can accept some temporary anxiety or you can moderate your goals.

    The point is you have choices. And the role of a financial adviser is to help you understand what they are. So, for example, an adviser can assist you in clarifying your goals and setting priorities. Which is more important—the family holiday or the education fund? Perhaps you can do both by swapping the overseas resort for a camping holiday without dipping into the education fund.

    It’s just like a personal trainer would be unlikely to recommend an out-of-shape sedentary business executive to start running marathons or try to halve his body weight in six months. The job of the trainer, or an adviser, is to manage your expectations and ensure the goals you are pursuing work with everything else you want to achieve in your life.

    An adviser can also assess your capacity for taking risk. Not all of us are thrill seekers. And that’s perfectly OK. A portfolio that’s right for one person may be all wrong for another. That’s because each individual’s circumstances, risk appetites and goals are different. A financial plan shouldn’t be a cookie-cutter approach.

    A third contribution an adviser can make is to help you manage through change. Our lives are not static. We change jobs, our incomes evolve, we take on new responsibilities like children and mortgages, we deal with aging parents, we move cities and countries. Nothing stays the same and a financial plan shouldn’t either.

    So not only do different people have different goals, but each person’s own goals evolve in unique ways as they move through life. Reaching those goals requires a detailed and realistic plan, plus a commitment to stay with it. Some people may be up for the triathlon when they’re young and fit. But in later years, they might just need a more conservative programme of stretching and walking.

    You can try doing this on your own, of course. But it makes it easier if you have someone to keep you focused, keep you disciplined and help you change course when the circumstances of life require it.

    Now that’s stickability.

  4. Which hat are you wearing?

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    Most of us have multiple roles—as business owners, professionals, workers, consumers, citizens, students, parents and investors. So our views of the world can differ according to whatever hat we’re wearing at any one time.

    This complexity of people and their range of motivations, depending on their circumstances, highlight the inadequacy of cookie-cutter or automated investment solutions.

    For instance, if you work for a taxi booking firm, you’re naturally going to take greater-than-usual interest in technology that allows consumers to book cabs directly. That’s because these new disintermediated services might affect how you make your living.

    On the other hand, as a consumer you may welcome any initiative that increases competition, widens your choice and lowers prices.

    As a taxpayer, you may look kindly on efforts to encourage user-pays systems in universities. But as a parent, you may be concerned about your teenage children taking on excessive debt to fund their education.

    As citizens, we might champion a laissez faire approach to economic policy. But as investors, we may feel uncomfortable about certain policies and seek to express our values by placing limits on how our money is invested.

    The point is everyone has the right to their own opinions and intelligent people can legitimately and respectfully disagree on many issues, including about what might happen in the world economy and about how policymakers should act.

    The trick is in being clear with ourselves about which hat we are wearing when we make investment decisions and the trade-offs involved in reconciling our personal opinions with our desired investment outcomes.

    For example, you may have an opinion on what central banks should do in normalising interest rates. But do you really want to hang your decision about your portfolio allocation to longer-term bonds on your view of the interest rate outlook?

    As a worker in an industry undergoing digital disruption, you may have an aversion to the technology putting you out of a job. But as an investor, do you want to forsake earning a share of the wealth from the new forces created by this disruption?

    As a resident of a suburb near the airport, you may oppose on noise grounds a government decision to build a new runway, but as an investor and a worker you might benefit from the increased productivity generated by the investment.

    The point is we have many roles in life and there often can be conflicts between our personal beliefs and opinions in one area with our desires in another.

    Our strong view on the economic outlook may lead us to think the market will come around to pricing assets based on that opinion. But the power of markets is such that they reflect the views of millions of people, many of whom may hold contrary views.

    Keep in mind, also, that competitors in those markets include professional investors with multiple sources of information and state-of-the-art technology. And even they have trouble getting these forecasts right with any consistency.

    This isn’t to say we can’t invest based on our personal principles. But we first have to start from the assumption that in liquid markets competition drives prices to fair value. Prices reveal information about expected returns. That leaves us to diversify around known risks according to our own preferences and goals.

    In short, life is full of trade-offs. It is the same in investment. We may pursue higher expected returns, but we want to do so without sacrificing diversification or cost.

    The over-riding principle is to understand what we can and can’t control. We can have an opinion on government policy and we can express it through our vote, but we can’t control the investment outcome. We can have an opinion on what should happen to interest rates, but we can’t control what happens. So we diversify.

    The role of a financial adviser is to help you understand these trade-offs and to separate opinion from fact, to balance your risk preferences with your desired wealth outcomes, and to accommodate your personal values within a diversified portfolio.

    People with many hats require many different investment solutions. And that’s a good thing.

  5. Unhealthy Attachments

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    Have you ever made yourself suffer through a bad movie because, having paid for the cinema ticket, you felt you had to get your money’s worth? Some people treat investment the same way.

    Behavioural economists have a name for this tendency of people and organisations to stick with a losing strategy purely on the basis that they have put so much time and money into it already. It’s called the “sunk cost fallacy”.

    Let’s say a couple buy a property next to a freeway, believing that planting trees and double-glazing will block out the noise. Thousands of dollars later the place is still unlivable, but they won’t sell because “that would be a waste of money”.

    This is an example of a sunk cost. Despite the strong likelihood that you’ll never get your money back, regardless of outcomes, you are reluctant to cut your losses and sell because that would involve an admission of defeat.

    It works like this in the equity market too. People will often speculate on a particular stock on the basis of newspaper articles about prospects for the company or industry. When those forecasts don’t come to pass, they hold on regardless.

    It might be a mining stock that is hyped based on bullish projections for a new tenement. Later, when it becomes clear the prospect is not what its promoters claimed, some investors will still hold on, based on the erroneous view that they can make their money back.

    The motivations behind the sunk cost fallacy are understandable. We want our investments to do well and we don’t want to believe our efforts have been in vain. But there are ways of dealing with this challenge. Here are seven simple rules:

    • Accept that not every investment will be a winner. Stocks rise and fall based on news and on the markets’ collective view of their prospects. That there is risk around outcomes is why there is the prospect of a return.
    • While risk and return are related, not every risk is worth taking. Taking big bets on individual stocks or industries leaves you open to idiosyncratic influences like changing technology. Think about what happened to Kodak.
    • Diversification can help wash away these individual influences. Over time, we know there is a capital market rate of return. But it is not divided equally among stocks or uniformly across time. So spread your risk.
    • Understand how markets work. If you hear on the news about the great prospects for a particular company or sector, the chances are the market already knows that and has priced the security accordingly.
    • Look to the future, not to the past. The financial news is interesting, but it is about what has already happened and there is nothing much you can do about that. Investment is about what happens next.
    • Don’t fall in love with your investments. People often go wrong by sinking emotional capital into a losing stock that they just can’t let go. It’s easier to maintain discipline if you maintain a little distance from your portfolio.
    • Rebalance regularly. This is another way of staying disciplined. If the equity part of your portfolio has risen in value, you might sell down the winners and put the money into bonds to maintain your desired allocation.

    These are simple rules. But they are all practical ways of taking your ego out of the investment process and avoiding the sunk cost fallacy.

    There is no single perfect portfolio, by the way. There are in fact an infinite number of possibilities, but based on the needs and risk profile of each individual, not on “hot tips” or the views of high-profile financial commentators.

    This approach may not be as interesting. But by keeping an emotional distance between yourself and your portfolio, you can avoid some unhealthy attachments.

  6. The Patient Principal

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    Global markets are providing investors a rough ride at the moment, as the focus turns to China’s economic outlook. But while falling markets can be worrisome, maintaining a longer-term perspective makes the volatility easier to handle.

    A typical response to unsettling markets is an emotional one. We quit risky assets when prices are down and wait for more “certainty”.

    These timing strategies can take a few forms. One is to use forecasting to get out when the market is judged as “over-bought” and then to buy back in when the signals tell you it is “over-sold”.

    A second strategy might be to undertake a comprehensive macro-economic analysis of the Chinese economy, its monetary policy, global trade and investment linkages and how the various scenarios around these issues might play out in global markets.

    In the first instance, there is very little evidence that these forecast-based timing decisions work with any consistency. And even if people manage to luck their way out of the market at the right time, they still have to decide when to get back in.

    In the second instance, you can be the world’s best economist and make an accurate assessment of the growth trajectory of China, together with the policy response. But that still doesn’t mean the markets will react as you assume.

    A third way is to reflect on how markets price risk. Over the long term, we know there is a return on capital. But those returns are rarely delivered in an even pattern. There are periods when markets fall precipitously and others where they rise inexorably.

    The only way of getting that “average” return is to go with the flow. Think about it this way. A sign at the river’s edge reads: “Average depth: three feet”. Reading the sign, the hiker thinks: “OK, I can wade across”. But he soon discovers the “average” masks a range of everything from 6 inches to 15 feet.

    Likewise, financial products are frequently advertised as offering “average” returns of, say, 8%, without the promoters acknowledging in a prominent way that individual year returns can be many multiples of that average in either direction.

    Now there may be nothing wrong with that sort of volatility if the individual can stomach it. But others can feel uncomfortable. And that’s OK too. The important point is being prepared about possible outcomes from your investment choices.

    Markets rarely move in one direction for long. If they did, there would be little risk in investing. And in the absence of risk, there would be no return. One element of risk, although not the whole story, is the volatility of an investment.

    Look at a world share market benchmark such as the MSCI World Index, in US dollars. In the 45 years from 1970 to 2014, the index has registered annual gains of as high as 41.9% (in 1986) and losses of as much as 40.7% (2008).

    But over that full period, the index delivered an annualised rate of return of 8.9%. To earn that return, you had to remain fully invested, taking the unsettling down periods with the heartening up markets, but also rebalancing each year to return your desired asset allocation back to where you want it to be.

    Timing your exit and entry successfully is a tough ask. Look at 2008, the year of the global financial crisis and the worst single year in our sample. Yet, the MSCI World index in the following year registered one of its best-ever gains.

    Now, none of this is to imply that the market is due for a rebound anytime soon. It might. It might not. The fact is no-one can be sure. But we do know that whenever there is a great deal of uncertainty, there will be a great deal of volatility.

    Second-guessing markets means second-guessing news. What has happened is already priced in. What happens next is what we don’t know, so we diversify and spread our risk to match our own appetite and expectations.

    Spreading risk can mean diversifying within equities across different stocks, sectors, industries and countries. It also means diversifying across asset classes. For instance, while shares have been performing poorly, bonds have been doing well.

    Markets are constantly adjusting to news. A fall in prices means investors are collectively demanding an additional return for the risk of owning equities. But for the individual investor, the price decline only matters if they need the money today.

    If your horizon is five, 10, 15 or 20 years, the uncertainty will soon fade and the markets will go onto worrying about something else. Ultimately what drives your return is how you allocate your capital across different assets, how much you invest over time and the power of compounding.

    But in the short-term, the greatest contribution you can make to your long-term wealth is exercising patience. And that’s where your adviser comes in.




    At the start of each year, many of us make it a habit to ask ourselves the two above questions. The answers help us map out a strategy, make resolutions and set goals. This annual exercise offers us the opportunity to take stock of our current situation and see the areas in which we want to improve. Maybe it’s to save a little more money each week, carve out more family time every day, make a big career move, or spend more time on your favourite hobbies. Big and small things, alike.

    One problem with these two questions: We don’t ask them enough. Now that we have inched past the halfway point of 2015, it could be a good time to ask them again: Where am I now? Where do I want to go from here? This midyear checkup allows you to reassess where you want to spend two of your most precious but limited resources: time and energy. Asking these questions lets you examine whether the goals you identified in January are still where your focus should be. It allows you to review what has changed in your life and whether those changes have brought about new challenges or, better yet, opportunities.

    Simply, asking these questions allows you to account for what you didn’t know then. And that’s often the key to successfully carrying out a plan — accounting for and adapting to changing circumstances.

     Think back 10 or 20 years. Did you have any idea you’d be doing what you’re doing now? Living where you’re living? Earning what you’re earning? Or that you’d be contemplating chucking it all and pursuing some kind of radical change?

    When we put it this way, planning seems pointless, even silly … Don’t get me wrong. We do need to plan. But we’re far better off setting specific but flexible goals that reflect our personal values and our best guesses about the future. Then we can do our best to reach those goals, revising our guesses and making course corrections when things change.

    For more information on your financial plan, contact warren at Lexington Wealth on 01793 771093 or [email protected]

  8. Video Testimonial from Denise Fryer

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    Here is the next video testimonial which features Denise Fryer at our Launch Party at the beginning of the year. (more…)

  9. Has your financial adviser disappeared?

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    A major shake-up in the financial services industry has resulted in a reduction in the availability of financial advice. A number of large players, including the banks, have shut down their advisory divisions and many smaller adviser firms have elected to leave the market. (more…)