17 Dec 2021
5 ways to leverage your bonus
From buying a home to diversifying an investment portfolio and kick-starting financial planning, here are some of the ways that our investment banking clients are leveraging bonuses to meet their goals.
This bonus period occurs amid a sharp rebound in levels of business activity. The past year has seen a high number of deals, IPOs and enquiries, as many sectors recover from the impact of pandemic restrictions. While the threat of inflation and new Covid-19 variants remain, those working in the financial sector will be well aware of the opportunities in the markets.
For some, this could mean increased levels of performance-based pay coupled with a need to carefully consider financial goals because of future uncertainty. “We’re told that bonuses will form a significant part of the compensation packages for many of our investment banking clients this year,” says Investec Private Banker Louise North.
How individuals use a bonus will largely depend on its composition – including the split across cash and shares, deferral and vesting conditions.
“At Investec, we understand the complexities that individuals face when they're employed in investment banking, such as income earned in foreign currencies, deferred payments and personal tax considerations, to name a few. This insight enables us to establish meaningful relationships when providing banking solutions.” Louise explains.
In terms of lending, for example, “as well as looking at past compensation, we also consider some forms of guaranteed future cash flows, such as deferred bonuses and vesting stock, when assessing affordability.”
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1. Upsize or refurbish property
“Our clients are often looking to make improvements to their existing property or upsize to a new one,” says Private Banker Zoe Ross. “Some are well ahead of the game and will notify us in advance that they are expecting a bonus so that we can begin to explore their options.”
We often meet investment banking professionals whose bonuses or profit distributions make up the bulk of remuneration, with just 30-40% of income received through a cash salary or fixed allowance. They’re often interested in mortgages with a high loan-to-value ratio and then utilise bonuses or vesting stock income to reduce their level of debt as part of a bespoke repayment plan”. Of course, bonuses can be variable because they are usually tied to company performance and this can make financing a new home seem more complicated, but working with a specialist lender can help.
“We consider an individual’s bonus history and career trajectory when making a lending decision. Our typical client is a high achiever in their field, so we are able to make responsible decisions based on known future earnings such as vesting stock, whereas the mortgage industry norm is to take a more formulaic ‘one size fits all’ approach," says Zoe. “Where there is a foreign currency element to bonuses, we’re able to take that into consideration when building a mortgage solution – as well as managing foreign currency exposure through our FX desk,” she adds.
Our clients are often looking to make improvements to an existing property or upsize to a new one.
The UK property market is expected to see a high volume of transactions in 2022 and for many, the New Year may be an attractive time to buy. “Lockdown has prompted many people to evaluate what they need from a home and there is a lack of stock available,” explains Zoe. “Clients now tend to have more urgency and because of our understanding of our clients’ income profiles, we can work efficiently and often find them a financial solution in short timeframes when they find the right property.”
In some cases, we can also look to provide bridge finance to clients to help them purchase a new property before selling their existing one. Other clients are choosing to refurbish their current home rather than move and in this case our bankers are able to discuss other mortgage solutions.
2. Invest in a second home or buy-to-let
“We’re seeing investment in buy-to-let properties in and outside of London,” says Zoe. "Despite a less favourable tax environment, clients remain interested in diversifying their wealth and are attracted to longer-term capital growth prospects.
“We are also seeing heightened interest in purchasing second homes in areas such as the Cotswolds. In some cases, clients are renting out their primary residence and looking to convert their mortgages to buy-to-let loans, sometimes combined with capital from a bonus to assist with the purchase.”
As an investment banker, you may have unique priorities. Our team understand the nuances of the sector and strive to find tailored solutions to accommodate needs in one place.
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3. Diversify your investment portfolio
Liquidity events can be an opportunity to review an investment strategy, consider centralisation of assets, or ensure that your investments mirror personal values. Even with extensive experience in investment, these considerations can be time-consuming, and you might benefit from bespoke portfolio management to give you back your free time and put your investments in the hands of a partner you trust.
“As an investment banker, you may have unique priorities and requirements,” says Zoe. “Because our team works with many investment banking professionals, we understand the nuances of the sector and strive to find tailored solutions to accommodate needs in one place. This includes introducing clients to our Investec Wealth & Investment colleagues.
“A client, who is a managing director at an investment bank, recently asked our team at Investec Wealth & Investment for a holistic strategy to manage his financial affairs. A bespoke solution was created that included an ESG-linked portfolio, a steady-growth portfolio and JISA portfolios for his children. They were also able to manage the stock element of his bonus package and incorporate that into his annual Capital Gains Tax allowance.”
4. Manage UK cashflow with FX
If you work for a US investment bank you may have elected to receive your bonus in US dollars. This means you’ll need to consider when and how to convert the payment to Sterling to give you appropriate value and spending power in the UK.
“We have UK-based clients who are partly compensated in US dollars. This means they have ongoing exposure to GBP/USD currency movements over time,” says Private Client FX Dealer Greig Tonks. “For clients who share their immediate conversion requirements, we proactively monitor the market, aiming to capture sudden movements in the rate. Secondly, we aim to facilitate longer-term solutions. If eligible, this may include the use of FX forward contracts*, which look to hedge ongoing exposure and help secure an exchange rate on expected funds up to two years in advance.”
5. Plan for the future
Finally, you may want to consider your bonus in the wider context of your circumstances and ensure that your finances are set up appropriately to meet your goals for the future. You may be at an early stage in your wealth journey and looking to create a financial roadmap for the years ahead, or you might have a specific life event approaching and want to feel informed about the choices you’re making.
“We work with our clients to make sure that their money is working towards their goals as efficiently as possible – and that may include using bonuses to fund goals such as meeting education costs or retirement, or even to begin succession planning,” says Investec financial planning team leader Simon Bashorun.
“By creating a financial plan with ongoing advice and regular reviews, we help our clients and their families take advantage of all relevant opportunities, while ensuring that there is flexibility to accommodate changes to their personal situation or the tax and investment environment.”
For more information about how we can help you with your lending needs, please get in touch today.
This article is for general information purposes only. The opinions featured are not to be considered as the opinions of Investec Bank plc and do not constitute financial or other advice. It is advisable to contact a professional advisor if you need financial advice. Your use of and reliance on any of this content is entirely at your own risk.
Investec residential mortgages are only available for residential properties in England or Wales and are primarily available to UK residents and subject to eligibility. Separate terms and conditions apply to Investec Wealth & Investment Limited.
* You can only book an FX Forward which is for an underlying personal or commercial spending purpose. Additional terms and eligibility criteria apply for FX Forwards.