lumin news Issue 6 / Autumn 2022

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Page 10 lumin news 6 / autumn 2022 The advantages of discretionary fund management A discretionary fund management model can lead to saved time, peace of mind and significantly improved financial efficiencies via the timely implementation of buy and sell orders. COLIN CHAMBERLAIN Senior Financial Consultant colin.chamberlain@luminwealth.co.uk Phone 01727 893 333 When partnering up with an independent financial adviser it’s important to establish how your investments will be managed. Advice firms operate two modes of investment management: advisory, and discretionary fund management (DFM). Some advice firms, which have achieved the necessary permissions stipulated by the Financial Conduct Authority, may operate their own in-house DFM services. DFM provides a number of advantages in comparison to an advisory model, including more timely placement of buy and sell orders (financial markets can change rapidly), and a reduced time burden for clients, with no need to manage and oversee investments. Advisory vs DFM An advisory service sees your financial adviser make recommendations based on your specific needs and circumstances, but the client maintains full control of the investments, and remains the ultimate decision-maker. A DFM service sees the advice firm provide similar recommendations, but investment decisions are made on your behalf. Advice firms with DFM permissions can implement investment changes – in line with the pre-defined risk profile and investment strategy – without consulting the client first (with any actions taken then reported to the client after completion). DFM provides significant advantages when compared to advisory services Advisory How does an in-house DFM model benefit clients? The ability to make changes to client portfolios without prior approval allows trades to be executed promptly and efficiently. This provides a clear benefit amid the context of fluctuating – and, at times, fast-changing – investment markets. An in-house DFM service provides a number of other advantages in comparison to an advisory service model, including more frequent monitoring of investments, integrated financial planning and investment advice, and less time involved managing and overseeing investments for the client. Under some DFM models, cost savings can be achieved through pooling investments across clients who have the same holdings. Discretionary Decision-maker Client, with input from adviser Investment manager, within set of agreed parameters Time commitment by client Timeliness of investment decisions Monitoring of investments Greater Some delay, due to client approval being required Often less frequent Delegated (investment manager can make portfolio changes without client approval) Investment decisions can be implemented when opportune; frequent rebalancing Full-time/ongoing via dedicated investment team Tax planning Personalised Can be personalised if DFM is integrated with financial advice GOOD TO KNOW Typical in-house DFM services • Bed and ISA: Selling units in a general investment account and repurchasing them within a tax-efficient ISA • Capital gains ‘harvesting’: Utilising clients’ CGT Annual Exempt Amounts in each tax year to avoid letting investment gains run away • Portfolio rebalancing: Rebalancing to ensure portfolios remain true to the agreed asset allocation and risk profile • ISA contribution reminders: Reminder service for clients who have ISA allowances remaining at the end of each tax year • Efficient trading: Inhouse trading teams can process client dealing requests throughout the day, ensuring client instructions are fulfilled in a timely and efficient manner The total cost – typically around 1.55% – of Lumin’s ongoing services is significantly lower than the UK average. The total includes Lumin’s 0.75% annual fee, which encompasses both DFM and financial advice, platform charges, and underlying product costs. Call 03300 564 446 to learn more. FACTSHEET Choosing a financial adviser or wealth manager Request a free factsheet via enclosed response card, info@luminwealth.co.uk, or call the team on 03300 564 446
lumin news 6 / autumn 2022 Page 11 Preserve pension assets and free up cash trapped in the family home Unlocking tax-free cash tied up in the family home can help reduce inheritance tax liabilities and release cash for important expenditures, including helping children onto the property ladder. PETER FLOWERS Senior Financial Consultant peter.flowers@luminwealth.co.uk Phone 01727 893 333 Do you have large pension assets and substantial wealth tied up in the family home? Are you looking to help children onto the property ladder, fund your own expenses, or take measures to reduce your inheritance tax (IHT) liabilities? If so, equity release could be a good solution, as property is part of the estate for IHT purposes, but pensions are not. What is equity release? Equity release frees up taxfree cash that’s tied up in your property, while you continue to live in your home. The most common form of equity release is a lifetime mortgage. This sees a cash loan secured against your main residence. The minimum age is 55 and the older you are, the more you can borrow. The tax-free cash can either be taken as a lump sum, or in flexible chunks. The original loan and accumulated interest is then repaid via proceeds from the property sale when the last partner either dies or moves into long-term care. Equity release myths Many myths still exist, even though lifetime mortgages are very different from certain historical equity release products that gave the industry a bad reputation. Modern products offer much more flexibility and protection for consumers. One misconception is How equity release can cut IHT liabilities Assumptions: Family with total assets of £4,000,000; figures rounded. Current situation With equity release and gift Property £2,000,000 £1,500,000 Pensions £1,500,000 £1,500,000 ISAs/non-pension assets £500,000 £500,000 Total wealth £4,000,000 £3,500,000 IHT estate £2,500,000 £2,000,000 NRB/RNRB £750,000 £1,000,000 Potential IHT liabilities 1 £700,000 £400,000 2 1 Based on current allowances, exemptions and 40% tax rate 2 If the gift (in this example £500,000) is survived for at last 7 years; otherwise potential IHT liabilities are not mitigated that you forfeit total home ownership, when in fact you maintain 100% ownership. It’s also often possible to move house and transfer your lifetime mortgage. Others worry their children might inherit debt, but ‘no negative equity guarantees’, which are offered by Equity Release Council-approved providers, mean your estate will never owe more than the value of your home. Reducing IHT liabilities For many families, property accounts for a large chunk of household wealth. Freeing up tax-free cash from the family home via equity release can mitigate a large IHT liability and provide flexibility when passing wealth on to beneficiaries. IHT bills can be large, even when available nil-rate band (£325,000 per person) and main residence nil-rate band (£175,000 per person) allowances are applied. In the example (left) the ‘current situation’ shows the liability a family with £4,000,000 in assets face. Pensions aren’t part of the estate for IHT purposes, so the total taxable estate is £2,500,000. When an estate is valued at £2,000,000+, the residence nil-rate band tapers away by £1 for every £2 above £2,000,000, meaning £250,000 of the £350,000 residence allowance is lost. An IHT charge of 40% on the taxable assets results in a tax liability of £700,000. In the other scenario, a £500,000 equity release lifetime mortgage is implemented, and this tax-free lump sum is gifted to family, reducing the taxable part of the estate by £500,000. Because the full nil-rate band allowances are now available, this reduces the IHT liability by £300,000. Implementing equity release and using the proceeds to gift to children can be a good way of reducing IHT bills while providing funds for first-home purchases. Gifts of more than £3,000 may be subject to an IHT charge if you pass away within seven years. Equity release is a big decision and it’s advisable to involve your family. An independent financial adviser can help you identify the solution that best suits your needs. Call the team on 03300 564 446 to find out more. Important: Equity released from your home will be secured against it. FACTSHEET/WEBINAR When is equity release a good idea? Request a free factsheet or join our webinar (see page 12). Email info@luminwealth.co.uk, or call the team on 03300 564 446
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lumin news Issue 6 / Autumn 2022

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