Question the Committee – 2025 Edition

Firstly, a big thanks to everyone who submitted questions in support of this week’s blog. One area that differentiates us from most Financial Planning businesses is that our clients have direct access to our planning, tax and investment teams, and to that end it was great to get so many questions across this spectrum and put them to the test.

Given the volume of questions, it is not possible to publish them all, so in the main we have gone with those that reflected a consistent theme. If yours is not detailed below, rest assured we will be sending a response directly to you.

This is a great question, and in many ways it summarises why it is attractive to invest today. Before answering, it is worth remembering that before 2022, we had around 15 years where the level of interest rates was below inflation, and in certain geographies interest rates were negative, Germany and Japan for example!

We are now in a different environment, where interest rates are above the level of inflation, and therefore it is possible to generate above inflation returns without taking too much investment risk.

The direct answer to the question is yes, though it is worth highlighting a few points here. Firstly, the 5.7% quoted was the income yield on a UK 30 year bond on 3rd September 2025. A bond is effectively a loan from an investor to a third party in return for a fixed sum for a fixed period. At the end of that period the loan is repaid assuming the issuer has the cash to do so. Loans to the Government are known to be ‘risk free’, as they are assumed to always be returned. What is not guaranteed is the value of your investment (your loan/bond), if you were to request it back prior to the end of the fixed rate period. This value is priced daily and will fluctuate based around a number of factors, though, the issuer financial health is a key contributor to this number. If the government is in good health and the outlook for inflation and interest rates looks attractive relative to the price paid for the bond, then there is a chance you could make money if you sold the debt before the term. The opposite is also true.

So, back to the 30-year bond with a 5.7% yield, that is the return you would receive, in addition to getting your capital back at the end of the period. That said, your capital value will also erode from an inflationary perspective, so it’s important to get the right level of compensation (income yield), for the time you are committing your funds (30 years). Is 5.7% good value based on future inflation expectations?

For most people however, holding a single investment for 30 years is not realistic, not least because if you need access to capital you would need to sell all or part of it before maturity. Therefore there is a chance you would realise a capital loss if you sold at the wrong time (such as in 2022 when inflation was high).

From our perspective, we can buy bonds with maturity dates ranging from overnight to 30 years. On average our bond duration sits at just over 5 years. We need to ensure clients have accessibility to income and capital, and therefore, ideally we want to hold a reasonable amount of cash and short dated securities to provide clients with this level of flexibility.

There is also far more volatility in the price of long dated bonds versus shorter dated bonds. So given that the income rate paid is similar, why would you take on much more risk to be paid only fractionally more in income? You might feel that would want much more compensation for investing for an extra 25 years than just the c1% per annum currently on offer.

So, to clarify, the income is guaranteed each year until maturity, and at that point the capital is guaranteed to be returned. In the interim the capital value will fluctuate depending on expectations for inflation, interest rates and future economic health.

Overall and to the question, given the annual contribution from income that we are receiving, we are far more confident that we can achieve a total return of 5.7% pa over the next 5 years at least, and we can achieve it with taking less investment risk than has been required for the fifteen years prior to 2022. If we can get our calls right with regard inflation and interest rates, we can hopefully add some capital upside by buying bonds at the right price.

Another really interesting question, and one that we spend a lot of time thinking about. Each sector or theme has very different drivers, some are controllable such as investment and expenditure, and others non controllable such as legislation change and economic conditions. Additionally, we have lots of data points to help us assess the value of a company versus its peers or the market in general, and we are looking for areas where we are confident that current expectations will be improved upon.

The two examples you reference (pharma and defence) are very interesting for different reasons. Pharma we feel is largely un-investable at present, given the huge uncertainty over US policy and drug pricing. This is really the confidence point, that you cannot predict company earnings accurately when one of the biggest variables (the price they can sell drugs in their biggest market) is unknown.

Defence was very interesting 6-12 months ago, but now market pricing already reflects a huge increase in production pipeline on the back of the various government spending pledges. Given how fiscally constrained most economies now are, it feels unlikely that there is further upside in this respect. Obviously further geopolitical tension would likely see an increase in the value of defence stocks, though this would not be a rational reason to invest as obviously we have no control over that!

Themes we currently hold include technology, financials/banks, specialist insurers, and water & waste management. Using banks as an example, they have really been transformed in the more normal interest rate world, with a much greater ability to consistently grow profits and pay money back to shareholders. Moreover, they trade at low multiples of earnings, meaning expectations for future profit growth remains low, and pay high levels of dividend. As with the first question, this income is a valuable asset and helps to underpin the investment case.

Crystal ball territory this one, but we are going to say no. The price at the time of writing is 9,234, so that would be a further 1.8% gain over the next two weeks. If the recent equity market run continues then it is possible, but I would say unlikely. That said, it is not out of the question that it passes 10,000 at some stage in 2026.

Given how negative everyone is heading into this budget we will start with our optimistic view. The best case scenario would involve a combination of a sensible tax policy that promotes growth and the rowing back of some of the spending pledges into parts of the economy that give an unproductive return on capital. Done with conviction and good planning, these two things together would give markets confidence that tax receipts should rise in the future and the books might become more balanced over time. This in turn would mean the government is more likely to be able to repay its debt (bonds), through an economy that is generating more tax. To create a better future the tax revenue then needs to be spent effectively to enable further economic growth. Examples of this would be the introduction of policy that promotes inward investment in the UK, such as incentives for start-ups and smaller businesses, and incentives for companies to invest their capital.

The worst case would be the opposite, further tax rises that constrain growth and unproductive spending increases into parts of the economy such as health, welfare and benefits. Both of those unfortunately have quite complex and sadly inefficient infrastructures resulting in lower returns on investment. As we’ve discussed in previous blogs, this just creates a vicious cycle where despite taxes going up, the money is poorly distributed, and we don’t make the return on the capital that is required. This means we have to borrow significantly more than we spend, further increasing the black hole, and so the cycle continues.

Additionally, from a planning perspective, it would be great if they did a U-turn on the pensions change so they stayed outside of your estate from an Inheritance Tax perspective.

This is definitely something at the top of a lot of people’s minds, though the benefit of withdrawing it right now will depend on each clients unique circumstances and financial position. Although taking your tax-free amount now will guarantee that you can withdraw it without a tax penalty, the challenge for most people is that you are then taking it out of an environment where it is growing tax-free, to one in which the future returns generated will be taxed. You can put some in an ISA, though that’s only £20k per person per annum, so the balance of your withdrawal will have to be placed somewhere which is less attractive from a tax perspective.

The circumstances point is key though, as the answer isn’t the same for all people. As an example, where your combined pension assets are over £1,073,100, your tax-free element is already limited to the maximum amount (£268,275), and therefore you cannot grow it further (all future growth will occur in the taxable portion). In this situation it may be advantageous to consider drawing it out if you are concerned that legislation will reduce or remove the tax free cash option.

Our view is that changes to pension legislation of this nature would require a period of due process, where a bill is put forward and all the ins and outs challenged. In this respect it is not quite as simple as changing an income tax rate from 20% to 21%, and hence, we would expect there to be time between such a change being announced and it coming into force. We will of course give an immediate update on this following the budget on November 29th.

As you say, not a simple answer, but hopefully some context as to some of the main factors to consider. Of course our planning team are always available to consider your position and provide appropriate advice tailored to your circumstances.

This is a good question, and something we are in the process of writing to clients about ahead of the VCT season, which starts in a few weeks.

For those that don’t know, Octopus Titan was, and still is, the largest VCT in the market, though in recent years it has posted negative returns for investors. As VCTs invest in early stage companies, they have specifically struggled given the higher interest rate environment. Where you have young companies, the cost of capital required to grow their revenue is now much higher than it was prior than 2022, and therefore if costs are higher, profit is lower, and valuations go down. Additionally, the current economic sentiment is weak, and therefore there is less desire to float a company in the UK at the current time, so growth plans and exit dates are revised, pushing back forward profit projections, reducing net asset valuations.

Octopus have recently completed a ‘strategic review’ and made changes to their strategy to try to improve how the VCT is managed going forwards. In general we are pleased with the steps taken, which at the very least should help to stabilise returns and over time, provide a better outcome.

Positively, despite the performance challenges, most of our clients who invested in Octopus Titan are still ahead in total performance terms once the tax relief and dividends paid have also been taken into account. We will, of course, keep this position under review and make recommendations to each client accordingly once any investment passes its 5 year anniversary and is therefore able to be withdrawn without a loss of tax relief.

We are releasing more detail on this next week.

Ok, in no particular order:

1) Interest rates will not come down as quickly as projected in the US (markets are currently pricing in that rates will reduce by close to 1.5% over the coming 12 months). We have sold most of our US Government bond positions which had made a nice capital return based on this assumption.

2) Bonds will provide another solid year of returns between 5% and 7%. Returns will be to the higher side if the UK needs to cut rates more quickly than is currently priced into markets.

3) Diversification will remains key – western economies are likely to continue to slow, and although there is still excellent value in certain equity sectors as we have referred to in question 2, we want to continue to implement a disciplined approach with lots of diversification.