Good Advice Awards 2010

The Good Advice Awards were launched in 2010 to reward the very best advice organisations in the country, at a time when it has never been more important to recognise and promote those that provide excellent financial advice.

We regularly receive fantastic feedback from our clients, which is really appreciated, so we thought it about time to gauge what our peers within the financial services industry thought about our work, and the advice and services we supply.

With much of our work revolving around tax and estate planning we considered this specialist category to be an appropriate one to enter.

As part of our submission we were asked to expand upon how we get to know clients and understand what it is they want to achieve aswell as presenting an example of the innovative solutions we design for our clients. In addition, we offered detailed information on our financial planning service programme.

Towards the end of August we were extremely pleased to learn that the expert panel of judges had shortlisted our entry, and last Friday we attended the annual Investment Life & Pensions Moneyfacts Awards in London, to find out our fate !

At the lunchtime ceremony our awards were first up, so thankfully we didn't have to wait too long !

We were delighted to hear the sponsor of our award announce that we were Highly Commended within the best tax and estate planner category. The lunch afterwards was even more enjoyable knowing that our peers truly rate what we do for our clients.

The light has now come out from the under the bushel with a real enthusiasm to continue this trend and enter further awards !!

Aiming for University ?

This weekend thousands of young people across England will be celebrating obtaining a place at university, as A-level pass rates rise to another record high of 97.6%, with an unprecedented 27% of entries achieving an A grade.

Just over 8% of the entries were awarded the A* grade, which was introduced this year and is meant to help the most competitive universities select the best candidates.

This is the 28th consecutive year that pass rates have risen, intensifying the battle for a place at university and placing further pressures on the clearing system, leaving a predicted 170000 students without a place.

This can be a very stressful time for students and parents alike, and the pressures for both do not stop once a place has been awarded. The financial cost of funding a university course can place a heavy burden on student and parent.

If you are a parent with younger children and dream that they will go to university, it’s hard to ignore the problems of covering the cost of a degree. However, an analysis of the situation and some pro-active financial planning can be a great way to set those nagging worries to rest.

The rest of this article focuses on the situation in England.

How much does university cost ?

There are two main costs - what it will cost to study and what it will cost to be a student - accommodation, living expenses, food, books, travel and leisure costs etc..

Tuition fees vary from one university/college to another, the maximum tuition fee for England for students starting in 2010/11 is £3,290 a year. Students do not have to pay tuition fees until after they finish studying.

Depending on household income tuition fees will be paid for a student or a student loan for the fees can be applied for.

In a survey conducted by the National Union of Students in 2008, the average cost to be a student was £4,900 per year, with students in London especially hard hit.

Future Funding : A Graduate Tax ?

David Willetts speaking to James Landale on the Andrew Marr show (Sunday 8 August) came close to confirming that the Government favours a graduate tax. He stated that -"We’re talking about a graduate contribution paid by people out of their earnings when they’re in employment subsequently".

So, if this is confirmed as the future method of funding tuition fees, it still leaves parents or students to find the cost of living from somewhere.

How can you estimate what that might be when your child goes to university?
Taking the average of £4900 per year, if we increase this by the annual rate of inflation of 3.16% (average RPI over last 20 years), then parents with a child aged 8 in 2010 could be having to find around £7,000 in 2020 for their child’s first years life as a student.

It’s quite common for students to find some part time work to help fund these living costs, but, too many hours spent at work can affect a student’s academic performance negatively. The Association of Graduate Recruiters reports that more than two thirds of employers require at least a 2:1 degree.

Armed with this knowledge, many parents will want to make a contribution where they are able to, and the earlier consideration is given to this then the less pressure there will be at the time the funds are needed.

So, if you are a parent with young children think about pre-funding university costs in a flexible way and in a way that minimises your tax liability now and that of your child in the future.

A positive overhaul for pensions, perhaps ?

Last week saw Government proposals to shake up the pension system once again, and in a way that is likely to see some radical changes – yes more !

2006 is not that long ago. It was then, when we evidenced the biggest shake up of pensions for a generation and saw the introduction of a whole new pension tax system, that attempted to simplify pensions, and encourage greater saving for retirement.

Since then, some very complex rules have been introduced, targeting high earners and placing restrictions on contribution levels.

Our new coalition Government started their term with an emergency Budget which introduced proposals to change contribution limits and increase the age at which you had to buy an annuity.

I spend much of my working week talking to clients about pensions and delivering plans that help people achieve their retirement goals, and it is very encouraging to read about these recent proposals.

We have some seven million people in the UK who are likely to retire with either none or very little savings, so the implementation of changes that can offer more reasons to save are welcome.

The key proposals and consultations we have seen introduced over recent months are:
An annual contribution allowance for all people saving for retirement. This is likely to be in the region of £30,000 to £45,000. It will be on this amount which you can receive tax relief.

We saw an increase in the age at which you have to buy an annuity with your pension fund, from 75 to 77, with last week the Government announcing its intention to scrap altogether the need to buy an annuity.

The ability to take an unlimited amount of income from your pension fund in retirement, as long as you first secure a minimum level of income of about £10000 per annum.

The removal of the current flexibility to not take an income from your pension fund, if you do not buy an annuity, once you have taken your tax-free cash sum.

A potential larger tax bill for your dependants if you die whilst drawing an income from your pension fund. Currently, the tax charge is 35% of the fund if it is taken as a cash lump sum. This could increase to 55% if proposals are implemented – clearly bad news for your children and grandchildren if you wanted to leave them most of what was left in your pension fund. Dependents can escape this charge by taking the money as an income.

All proposals remain open to consultation, but much of what is proposed looks very much like a step in the right direction. As always, pensions form an essential ingredient of retirement planning and once again these new proposals enforce the need to continue to get professional guidance and help.

IFS Market Commentary June 2010

“Economic data releases remained mixed” might as well be the entire content of each of the sectors below. With world markets having recovered relatively well from the banking crisis on we roll to the next financial crisis. Again the content of every sector below could simply read “fears of a contagion from Greece’s debt crisis undermined investor confidence”. The enormous bailout plan and the widespread austerity measures seem to have calmed the markets and, amid the doom and gloom, the emerging markets and the Far Eastern economies (possible even Japan)continue to drive the world economic recovery. As one door shuts....

EQUITY MARKETS

United Kingdom - Economic data releases remained mixed. Revised data from the Office for National Statistics (ONS) showed that GDP grew by 0.3% in the first three months of 2010, compared to an earlier estimate of 0.2%. The increase in the growth rate was due to an upward revision to output from the production industries. However, the annual rate of inflation rose to 3.7% in April from 3.4% in March, returning to 3.4% in May. This was mainly driven by higher transport costs. The latest data from the ONS showed that the number of people claiming unemployment benefit fell more than expected in April. Meanwhile, the Bank of England’s policymakers voted unanimously to keep interest rates on hold at a record low of 0.5% and not to extend its quantitative easing programme.

UK equities declined in May and early June as concerns mounted that Europe’s debt crisis will hamper economic growth. A $1 trillion eurozone rescue package, designed to stop potential debt defaults in the region, only partially helped to ease these worries. Investors were also apprehensive about the newly proposed Australian tax on resources companies’ profits. BP’s disastrous actions in the Gulf of Mexico has had a serious impact on the FTSE 100 as well as their own share price. Meanwhile, following an unclear election verdict, a Conservatives-Liberal Democrats coalition government immediately announced plans to cut the nation’s budget deficit. There is still much debate in the economics community as to whether the cuts proposed in the emergency budget could be too much too soon.

USA - Economic data releases remained mixed. The US economy added 290,000 jobs in April, the largest monthly increase in nearly four years. Perceived signs of labour market recovery helped fuel an improvement in consumer confidence in May. While consumer spending remained flat in the previous month, the gain in real disposable income provided hope that things would improve. Supportive news also emanated from the housing sector where new and existing home sales rose, as buyers rushed to purchase houses before a federal home buyer tax credit expired. However, data revealed that the National Home Price Index fell 1.3% (seasonally adjusted) in the first quarter of 2010. The revised GDP data pointed to weaker-than-forecast growth at an annual rate of 3.0%. Within that, the pace of growth in the services sector remained unchanged in April, while the manufacturing sector grew at its fastest pace in almost six years.

US equities witnessed a broad-based sell off in May, as concerns about the financial health of peripheral eurozone countries dominated sentiment. Investors feared that sovereign debt problems in Europe could escalate and that austerity measures enacted in the afflicted countries may impact the global recovery. The prospects of an uncertain demand environment weighed upon energy and materials stocks. Shares in industrial firms, which generate a large part of their sales internationally, also came under pressure. Elsewhere, financial stocks ended lower after the US Senate approved regulatory reforms that could potentially hurt profits in the sector.

Europe – Economic data releases remained mixed. Data revealed that Europe’s economy expanded at a faster pace than most economists anticipated in the first quarter as a global recovery boosted exports. However, sentiment in the region was adversely affected by the debt crisis in the less developed regions. Germany is not particularly happy at being the main source of funding for the bailout. Manufacturing figures were weaker than expected but the services sector index was encouraging. The annual inflation in the region was estimated at 1.6% in May, a marginal rise from 1.5% in the previous month. However, a fall in core inflation, which strips out the most volatile components, showed inflation pressures remain low. The euro declined sharply during the month against the US dollar and the yen.

European equities fell in May as fears of a contagion from Greece’s debt crisis undermined investor confidence. Moreover, there were growing concerns that the tough austerity measures across Europe would dampen growth in the region. Germany’s move to ban naked short sales of a range of financial assets in a bid to curb speculative trading had a negative impact on financials stocks. Resources firms were hurt by a proposed tax on mining companies’ profits by the Australian government. However, the larger-than-expected emergency loan package of around $ 1 trillion for European countries quelled fears that the debt crisis would spread to the rest of peripheral Europe. Defensives, including consumer staples and health care, were among the best-performing sectors. Markets started rebounding towards the end as investors speculated that recent declines might have been overdone.

Japan – According to revised data released by the Cabinet Office, Japan’s real GDP expanded at an annualised rate of 5.0% in the January-March quarter, exceeding consensus forecasts of a 4.2% gain. It marked a fourth consecutive quarter of economic growth. While exports continued to lead the upturn, personal consumption and housing investment surprised on the upside amid signs of a broadening recovery. Corporate capital investment was also firmer than expected. The data supported the view of the Bank of Japan, which upgraded its assessment of the economy, stating that signs of a self-sustaining recovery had started to emerge. Although the pace of growth is expected to slow in the coming quarters as export demand moderates and the effects of government stimulus start to fade, the economy should continue to expand beyond its potential growth rate as domestic demand gradually improves.

In line with global equity markets, Japanese equities trended sharply lower in recent weeks, relinquishing gains accumulated since the start of the year. Mounting concerns about sovereign credit risk in Europe, stricter financial regulations and steep currency fluctuations contributed to a renewed upswing in volatility. Certain Japanese stocks were notably weaker against this backdrop and the broad-based Topix fell by 10.8% in May. Over the month, non-bank financials, exporters and resource stocks suffered the steepest declines, whereas defensive sectors held up relatively well. Meanwhile, beneficiaries of weaker oil prices, most notably paper companies and tyre manufacturers, suffered only mild declines.

Far East Ex Japan – Asia Pacific ex Japan continued with its steady pace of economic expansion. Hong Kong’s GDP growth for the first quarter came in stronger than expected, up 8.2% from a year ago. The export sector contributed strongly, driven by strong trade flows among Asian countries as well as a moderate recovery towards the US market. In Malaysia, real GDP rose by 10.1%, the fastest pace in a decade, driven by domestic demand and improved exports. Taiwan, Singapore and Philippines also recorded solid economic expansion.

Problems in Greece continued to hurt Asian equities, which fell in tandem with global markets in May. Investors feared that sovereign debt issues in Europe could escalate and that austerity measures enacted across afflicted countries may impact the global recovery. Concerns over slower growth in China and increased tension in the Korean peninsula also took a toll on sentiment. Commodity prices fell, weighing
down mining companies, while financials and industrials came under pressure in view of rising risk aversion. Although all sectors lost ground, utilities and consumer staples were relatively resilient.

Emerging Markets - At the start of May, the People’s Bank of China increased bank reserve ratios by half-a-percentage point for the third time in order to curb speculative property investments. Meanwhile, in Brazil, retail sales data for March showed a substantial increase from a year ago; these signs of robust economic activity prompted the Brazilian Finance Minister to forecast a GDP growth rate of 5.5% to 6% in 2010. Elsewhere, manufacturing activity in India continued to expand in April, with the Indian economy growing by 8.6% from a year ago.

Emerging market stocks ended substantially lower in May amid a worldwide sell off in equities. Concerns about the impact of the European debt crisis on the ongoing global economic recovery unnerved investors. Sentiment was also subdued by China’s measures to curb speculation in its real-estate sector, which included a half-a-percentage point increase in the reserve requirement ratio for banks. Geopolitical issues involving North Korea and South Korea also hurt confidence. At the sector level, export-dependent and commodity-related stocks suffered steep declines. These included shares in industrials, materials and information technology firms.

BONDS

UK government bonds (gilts) ended May in positive territory, benefiting from a flight to safety due to fears over the European sovereign debt crisis. The sterling fell against the US dollar over the month amid concerns over the country’s fiscal deficit situation. On 8 June, the Bank of England (BoE) kept its bond purchase program on hold for the fourth month and left the interest rate unchanged at a record low of 0.5%.

European government bonds ended higher in May, as concerns that the sovereign crisis in Europe may derail economic recovery and increase financial losses prompted investors to move to the relative safety of government bonds. In credit markets, spreads widened across the board. On 6 June, the European Central Bank (ECB) kept its key interest rate at a record low of 1%.

US Treasuries climbed in May amid speculation that efforts to contain Europe’s debt crisis may slow the global economic recovery. The gap between yields on 2 and 10-year notes narrowed as equities dropped and stagnant US consumer prices shifted the focus from inflation to deflation. Elsewhere, the Federal Reserve (Fed) restated its intention to keep the benchmark interest rate near zero.

Japanese government bonds gained in May as concerns that Europe’s credit crisis could worsen boosted demand for the relative safety of government debt.

COMMERCIAL PROPERTY

The UK commercial property market continued its recovery, the sector rising by 5.5% over the first six months of 2010, as the combination of an oversold sector and a weak pound made for some attractive deals for overseas investors.

The latest housing market data released by Nationwide Building Society showed that house prices in the UK rose to the highest in almost two years in May and may keep climbing because of a lack of properties for sale. The average cost of a home increased 0.5%, the highest level since July 2008. Similarly, mortgage approvals data released by the BoE rose to a four month high as the ending of a transaction tax on house purchases helped boost demand. Nevertheless, the number of mortgage approvals are still about half the total that were granted at the peak of the UK’s housing boom in 2007. Since reaching a trough in February 2009, house prices have risen by 12.2% and are now just 9.5% below the October 2007 peak.


CONCLUSION

Another year, another financial Armageddon ! Every market was affected by the European Sovereign debt crisis, but once again things look better now than they looked like being a few months ago. If investors are looking to fly to safety, and sovereign debt isn’t safe, no wonder the markets get jitters.

At the risk of being repetitive, for investors who see risk in the safest of markets, a well-diversified portfolio still makes sense. Asset allocation flexibility is a key consideration in any investment strategy.

Emergency Budget 22 June 2010

Pensions

The Government has announced it is considering restricting pensions tax relief from 6April 2011 by reforming the existing pension tax allowances.

There will be a consultation exercise to determine what level the annual allowance should be set at but provisional analysis suggests this will be in the range of £30,000 - £45,000 and will commence on 6 April 2011.

Legislation will be introduced in the next Finance Bill 2010 to introduce powers to repeal the current plans for a high income excess relief charge.

In the meantime the existing 'anti-forestalling' measures will continue to restrict higher rate tax relief for certain individuals from 22 April 2009 through to 5 April 2011. Less complication please !

The Government has also announced the end of so-called compulsory annualisation at age 75. This will take effect from April 2011 following consultation. In the meantime, pension scheme members and dependants, who reach age 75 on or after 22 June 2010 without having secured a pension, won’t have to buy an annuity or otherwise secure a pension income until they reach age 77.

This will enable them to defer their decision on what to do with their pension savings until the new rules are finalised next year. Potentially good news - but the devil will be in detail.

Income tax and national insurance

The basic personal allowance will increase to £7,475 from 6 April 2011. The basic rate tax threshold will reduce to effectively restrict the benefit of the increased allowance to lower earners. The long term objective is to increase the personal allowance to £10,000.

The 1% national insurance rise will still apply from April 2011, but employers will benefit from an increased secondary threshold which will reduce the impact of the increase. Many employees can still reduce the impact of increased national insurance charges by using salary sacrifice. Pension planning is clearly going to become an even more important area for personal financial planning.

Corporation tax

The planned increase in corporation tax from 21% to 22% for companies with chargeable profits of less than £300,000 has been reversed. Instead the tax rate will be reduced to 20% from 1 April 2011. The full rate of corporation tax will reduce from 28% to 27% on 1 April 2011, with further reductions applying every year until it is down to 24%. Good news for many companies and may encourage further company investment.

Tax efficient investments

The Government announced prior to the Budget that it will reduce and then stop Government contributions to Child Trust Funds. This always had an air of gimmickry, no great loss.

From 6 April 2011 the ISA subscription limits will increase annually in line with inflation. Good news.

Capital gains tax

From midnight, 22 June, a new rate of capital gains tax (CGT) of 28% will apply to individuals with total income and gains that exceed the basic rate limit. This will apply to gains arising on or after 23 June 2010.

The increase in CGT rates from 18% to 28% will re-ignite the debate on the merits of mutual funds versus investment bonds, while further reinforcing the benefit of using the ISA allowance.

The CGT increase will make investment bonds more attractive for some customers, although the CGT allowance continues to allow scope to manage capital gains from mutual funds. A good independent financial adviser should be able to add serious tax-efficencies for most investors.

Appoint a Bodyguard to look after your Trust

When a trust is established the legal ownership of the assets and therefore control passes to the trustees, and for some this loss of control may cause the jitters and impact upon the decision to act - notwithstanding that as a settler they are one of the trustees.

Appointing a Bodyguard or more correctly a Protector may be the answer.

The idea being the employment of a protector is to provide the settler with an additional element of control over the trust and its assets.

The protector is not a trustee, but in practice the person appointed will normally also be a trustee. The protector oversees the activities of the trustees and their primary role is to ensure that the trustees are aware of the requirements of the beneficiaries.

The protector will also usually have the power to appoint and remove trustees which could be advantageous if trustees fall out with eah other.

It’s good practice for the first protector to appoint a successor protector on establishing the trust, so either upon the death or incapacity of the current protector a second protector can take over the role and the responsibilities.

In appointing a successor protector at outset the settler/protector can keep a degree of control of the trust beyond the grave by selecting a person who will have the power to change the trustees and who must give consent before beneficiaries are changed or capital is appointed to a beneficiary.

Consider the following example: Sam establishes a discretionary trust. He appoints himself and his second wife as trustees with the potential beneficiaries including his adult children from his first marriage. Sam wants to ensure during his lifetime and beyond that he has some control over what appointments are made to the children from his first marriage, and therefore appoints himself as a protector at outset. He also executes a deed appointing his eldest son from his first marriage, who he trusts to act impartially, to act as protector on his death.

By doing this Sam has put in place additional controls and security that gives him peace of mind and greater confidence to go ahead and implement the trust.

Who should you appoint as a Trustee ?

If you establish a trust during your lifetime it’s important to remember that you are transferring legal ownership of assets - whether cash, policies or other assets -to the trustees. The trustees then hold the trust assets in accordance with the trust provisions for the benefit of the beneficiaries. In other words ownership passes from the person establishing the trust to the trustees.

Trustees should be aged 18 or over and be of sound mind i.e. have mental capacity. This may seem like an obvious point however while a person appointed as trustee may have mental capacity at the date the trust is established, if they are in their seventies or eighties, there is a real chance that they may subsequently lose that capacity as age catches up with them.

If a trustee is no longer mentally competent to act, the remaining trustees are prevented from acting unless and until a replacement can be appointed. Where a trustee has appointed an attorney under an Enduring Power of Attorney or Lasting power of Attorney this will not help because a trustee cannot delegate their duties as trustee except in very limited circumstances.

The trustees should be trustworthy and familiar with the beneficiaries’ financial situation and other circumstances. This will help them when they are exercising their powers. For example, trustees of a flexible trust usually have a duty to consider which of those beneficiaries should benefit, by how much and when. The trustees need to give consideration to all of those beneficiaries even though they might not appoint assets to all of them.

Beneficiaries can be trustees as well as beneficiaries, as long as they can be trusted to comply with their duty to act impartially as between the beneficiaries.

Trustees also need to get on with each other, as they must act unanimously when carrying out their duties or exercising their powers

If there are frictions within a family or between the beneficiaries, then you may want to consider appointing a professional trustee, such as an accountant or solicitor, preferably one who specialises in trusts and estates e.g. a Trust and Estate Practitioner (TEP). Should you decide to go down this route, the professional trustee will charge for their services.