IFS Professional Connections

Good Advice Awards 2010

2010-09-18T22:43:00.011+01:00

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 ?

2010-08-20T09:48:00.006+01:00

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 ?

2010-07-18T11:37:00.001+01:00

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

2010-06-28T19:47:00.001+01:00

“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

2010-06-23T10:31:00.005+01:00

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

2010-06-08T06:45:00.004+01:00

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 ?

2010-06-02T23:00:00.003+01:00

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.

The Mark Twain Story

2010-05-27T08:45:00.003+01:00

By acquiring as many assets as possible, you will ensure a foundation base of equity and capital - appreciating assets in your life. These assets will serve you for the rest of your life, as well as your children.

You need an Operations Account. This will include the running of your corporation and business interests. Any associated running costs and taxable items comprise this segment of the master plan.

Individual percentages will often vary, depending on personal income and financial statements. The percentages are up to you. The process is what’s important.

Your third account will be nominated as your Debit Account, which is linked to a debit card. Your debit card in this account will service any non-related investment and non-taxable items only.

With a new financial paradigm in life, we must overcome adversity and Enjoy the greatness of the moment. Unfortunately many individuals are burdened by past negative experiences in life and are unable to raise their level of prosperity, thus continually allowing negativity to dictate their life.

Allow me to further enlighten you with a pertinent story. The financial story of Mark Twain, who was one of the most widely loved and celebrated American writers who became an icon of American culture and humour the world over.

Mark Twain was sitting on his veranda one evening having a beer with his neighbour, who happened to be his local barber. A smartly dressed salesman called and was invited to sit and join them and make his presentation.

The salesman went to great lengths to explain that he represented a business house marketing shares in a new product for a new company that was going to take the world by storm, and would make thousands, and possibly millions, for those who helped to finance the company now, by buying shares. Mark Twain chased the man off his veranda. ‘Get out of here. I’ve been caught before with these wild share schemes. Why, just last year I bought a whole heap of X shares in a new company and within a very few months the company had folded up and I lost all my money. I will never buy shares again.’

The man left and the barber neighbour escorted him off the premises. However the barber, who had not had a bad shares experience, was very interested in what he had heard, and invited the salesman to his place, next door, and he listened to the story again.

The barber bought into the company and made millions! Mark Twain made nothing! Why? Because the company was selling a new invention called the Bell Telephone. Mark Twain surrendered to his deductive mindset and limiting beliefs, hence passing up on a wonderful opportunity.

As for Mark Twain, he remained in debt for a considerable portion of his life until his death in 1910.

The lesson here for all of us is that we must replenish and invigorate our exuberance for life by continually persevering regardless of the circumstances.

Is this crisis the same as the last one ?

2010-05-24T22:20:00.001+01:00

Following the massive proposed 1 trillion euro rescue package for the Euro, we now have the markets worried that perhaps the Europeans and the ECB may not back up that package as much with actions as they did with words.

And so, markets being what they are, the markets are waiting to see if we will get the sovereign debt version of the Lehman Brothers default, with all the financial contagion that followed.

There are two important differences between what happened in the US housing market, which of course then affected the rest of the world in terms of the credit system, and what's happening in Europe. One good and one, potentially, not so good.

The good point is that the liabilities are much more transparent. Thinking back to what happened in the US housing market, especially the subprime market in 2007/2008. It was very difficult to know just what the scale of the problem was, because all of these mortgages had been made and sliced up and resold and securitised in so many different ways. It was very difficult to really quantify the scope of the problem.

Further complicating the situation, you had lots of lots of tasty new products, such as collateralised loan obligations, CDOs, CDOs-squared, etc. which even the "masters of the universe" didn’t really understand.

The current situation in Europe is much more transparent. In particular we know where all the borrowers are and, pretty much, how much they owe, and how much "income" they have to pay off their debts.

The potentially bad news however is that when the US Sub-prime market problems became exposed, the US stock market gave Congress a good kick in the backside and forced the US Congress to realise they were all in the same boat. This was no time to play politics unless they wanted the US financial system to freeze up.

Unfortunately, this may not be the case in Europe, as the Germans, the French, and the Italians are all in very different boats. Some (OK, the Germans) are fiscally much more responsible than others, and so their interests are not aligned in the same way as were the Americans in 2007/2008.

Germany has very different incentives than, say, Italy or Ireland, because their sovereign balance sheets are in a very different shape. This brings the strong possibility of procrastination and the likelihood of actions not backing up the recent bold plans.

At the end of the day this is political risk, and financial markets hate political risk for the simple reason that it is hard to put a price on it. If they can’t put a price on it, the safest route is to price downwards. The Europeans are going to have to realise that we are all in the same boat, and they need to do so pretty soon.

Investors In People Award

2010-05-21T15:25:00.003+01:00

I am delighted to announce that following an intense and detailed assessment, our support services provider, Independent Financial Services (UK) Limited has been awarded Investors in People for a further three years.

This prestigious award is an outward sign of their commitment to training and developing their staff, both internally and externally. They are rightly proud to have achieved it once again.

Some of the comments to the external assessor sum up what IFS is all about :

IFS core values are integrity, honesty, providing good quality work for clients

We get direct access to and support from the directors and an excellent service from the supervisors and all the Head Office staff

The company is well structured, particularly the compliance framework and IT systems

The assessor commented:

There was very positive feedback from everyone about the business and the way it is run, in particular the openness, approachability and willingness to offer help and support from the directors

IFS has always built the business via long term relationships based on trust, be it with over 50,000 clients, our many business partners, or our staff.

The IFS Motto ‘Advice from People you can Trust’ is as relevant today as it was when the company was first launched over 15 years ago and we remain extremely comfortable with our relationship with them and hope it continues for many years to come.

Well Done to All at IFS !!

Five top tips to avoid capital gains tax (CGT)

2010-05-18T21:39:00.000+01:00

On the 22nd June we will have the new Governments first budget. It is widely predicted that we will see a rise in the capital gains tax rate on non business assets – maybe aligning rates with those of income tax.

Analysts are warning thousands of investors could be hit with massive CGT bills if a planned rise goes ahead. There are some practical ways to keep gains out of the taxman's hands, and here I list five of the main one’s:

Fully utilise your ISA allowance and hold as much of your investments as possible into ISA’s. With the full allowance at £10,200 most people will be able to put a large proportion of their investments into ISAs.

Everybody has an allowance of £10,100 in gains before any tax is charged so many people can avoid paying the tax by strategically selling assets in different tax years.

If you have any losses not utilised in previous years then you can carry these forward and offset against gains made, however you need to declare these losses with the Inland Revenue.

Transfer assets into your spouse's name. Transfers between married couples are not deemed as a sale so the original cost and gain is transferred across. This allows you to use both allowances of £10,100 to maximise CGT exemptions.

Consider Investing in CGT exempt products such as gilts or Venture Capital Trusts – a couple of investment options at different ends of the risk spectrum. Of course, do not invest simply to gain the CGT exemption, as the investment must match your risk tolerance and match your objectives.

Allocation must be priority for our most valued Assets

2010-05-04T21:32:00.010+01:00

Never a week goes by without me seeing and reading blogs and articles on the pro's and con's of active versus passive investment management.

The majority are written by individuals with somethimg to gain by promoting their views from one side of the fence or the other. The fact of the matter is that which is better remains inconclusive.

What I can conclude, however, is that there is a lack of focus and promotion on the need to correctly allocate assets for a client and the overiding importance of this compared to actual fund selection.

It's getting on for 60 years now, since Professor Harry Markowitz published his doctoral thesis “Portfolio Selection”, marking the introduction of what is now known as Modern Portfolio Theory (MPT.

Professor Markowitz established that for any given level of risk, it was possible to construct an investment portfolio that mathematically delivers the maximum possible investment returns. That portfolio is said to sit on the “efficient frontier”.

MPT states any portfolio that does not sit on the efficient frontier is inefficient, as the portfolio is not maximising the returns for that given level of risk.

More recent research by Brinson, Singer and Beebower (Brinson, Singer and Beebower; "Determinants of Portfolio Performance II: An Update"; 1991) indicates that asset allocation is by far the dominant determinant (91.5%) in the variability of returns in a portfolio. Market timing represents 1.8% and Stock Selection 4.6%.

Furthermore, the Myners report of 2001 clearly states the significance of asset allocation and suggested it offers significant long term benefits in preserving and increasing wealth.

The allocation of assets - how much of a portfolio is invested in a given investment sector - drives our risk assessment and investment process, so much so that we have recently added a dedicated page to our website to explain our approach.

So, yes, there is a conversation to be had about passive and active management, but the first priority has to be asset allocation.

A Hung Parliament - Do the Markets really care ?

2010-04-27T22:25:00.002+01:00

There are three key reasons why the equity markets probably don’t care much.

1. Whoever wins, the independence of the Bank of England’s Monetary Policy Committee looks secure. Therefore the key driver of interest rate policy is unlikely to be affected by the vote.

2. About ¾ of the earnings of FTSE 100 companies are now made overseas, so domestic political developments are only likely to be felt at the lower end of the markets, which of course account for a relatively small proportion of its total market capitalisation.

3. Despite the political scaremongering, only two elections since 1970 have had a significant impact on the stock market. The 1974 election (which led to a hung parliament) sent the UK stock market 22% lower in the month after the vote, and the 1992 election, which saw a surprise Conservative victory boosting the market by 14% in the first month. Neither had significant long term effects.

The fixed income markets, particularly Government bonds, could be a completely different matter, hypnotised as they are by the public finances. All parties agree on the need to reduce the deficit but there is less agreement on balance between spending cuts, tax rises, or the speed of response required. The Conservatives favour rapid spending cuts, although they would probably also implement some tax rises, probably VAT, as well. Labour has said it believes spending cuts should wait until the recovery is more secure.

The bond markets would probably prefer a decisive Conservative win, because this would make it more likely that the UK’s AAA credit rating would be protected. Their proposed faster action and a focus on spending cuts would probably ensure that interest rates were able to stay lower for longer too.

Although Labour’s response would be slower, the effect may not be too drastic as they have a medium term commitment to reducing the deficit. Even a hung parliament would not necessarily be a disaster because the Lib Dems attitude to deficit reduction is pretty robust too.

However, if the market starts to suspect that the deficit is not under control, it can move aggressively to punish weak actions, or a weak Government. If that one starts to roll, the momentum may be difficult to stop

Opportunity Knocks

2010-04-22T08:30:00.003+01:00

Since the 6 April 2010, everybody is able to put aside £10,200 into an ISA. This means a couple now have access to the equivalent of nearly three times the previous maximum ISA allowance.

Given the uncertainty with the UK economy and the possibility of rising taxes in the coming years, the opportunity to put savings out of the Chancellor’s reach is one that shouldn’t be missed. Of course, nothing is set in stone when it comes to tax, but it would take something extraordinary for a Government to risk making significant changes to ISAs, as the political fallout could be dramatic.

The Tax Advantages

These are unquestionable for higher-rate taxpayers – particularly as an ISA means they don’t have to pay tax at 22.5% on dividends. In fact, ISA’s are one of the few benefits higher-rate taxpayers still receive. Furthermore, everyone can benefit from the tax situation on interest-paying investments – though investors sometimes need reminding that this applies to bond investments as well as cash ISA’s.

Generating a tax-efficient income – which would normally be taxed at either 20% or 40% – is particularly useful in retirement, but risk-averse investors of all ages may be interested to know that an ISA can contribute to steady long-term growth when the payments are reinvested.

Capital gains tax is slightly more complicated, as it can be argued that few investors will be in a position to use this benefit. However, there will be those who have significant sums to invest and want to take an aggressive investment approach. You can use other ways to mitigate a CGT liability, but the advantage of ISA’s is that you will have full access to your money at all times, without having to worry about managing a potential tax burden.

For higher-rate taxpayers, and anyone who is self-employed, ISA’s can also be appealing because they do not need to be declared on a tax return. If you have a complex income portfolio could find this particularly useful.

Not just for good times

Although many people use ISA’s to save for particular goals, these savings schemes are also a good way to build up money for a rainy day. The economic troubles of the last few years have shown us all that redundancy is never far away when times are bad – and even people in well-paid positions are not immune to an extended period when they are not working or have to take a job on a lower salary.

In these circumstances, ISA’s have another benefit – because they are not declared on a tax return, the income they pay is not counted in the calculations for Working Tax Credits or Child Tax Credits. As a result, they could help boost your income when times are tough.

The retirement angle

A similar situation occurs in retirement. Once your taxable income is above £22,900, you lose £1 of additional age-related allowance for every £2 you earn, which is an effective tax rate of 30%. However, ISA income is not included in these calculations, so a retired person receiving income from bond investments in their ISA could potentially avoid a taxable situation twice – and save a significant sum.

ISA’s are just one part of effective financial planning and they are often used best when they are combined with pensions.

Here’s an example:

An investor saves £5,000 in a pension every year for two decades. They receive basic-rate tax relief for 15 years and higher-rate relief for the last five. Based on the past performance of the FTSE All-Share index, they would have a lump sum of just under £400,000.

If they put their money into the same funds within an ISA for the first 15 years and then moved it gradually across into the pension once they started paying higher-rate tax, their pot would be worth over £500,000 – an increase of £100,000, without saving anything extra.

Once they have retired, they could then take the tax-free lump sum from their pension and drip feed it into an ISA. This could produce a tax-efficient income and they will also have the comfort of knowing it can be left to their family in their will.

One final point in favour of ISAs that is much more straightforward. There is no additional cost or penalty for holding funds inside an ISA, rather than outside, so why not take advantage of the benefits? As long as you plan to invest the money anyway, there really is nothing to lose from choosing an ISA.

Big Changes to State Pension from 6th April 2010

2010-03-31T11:44:00.004+01:00

There will be some very important changes to the state pension system in the next week, especially for women.

New Qualifying conditions

The positive news is that both men and women will only need 30 qualifying years of national insurance payments to receive the full basic state pension of £97.65 a week.

For women, this is a reduction from its present level of 39 years to 30, and for men a similar change will apply – as at present men need 44 qualifying years to get the full pension but, from the 6th April, will only need 30 years.

Although the reduction is greater for men than it is for women, it is women who stand to gain most from the change, as through lifestyle and other factors presently a much lower percentage of women than men currently qualify for the full BSP in their own right.

A qualifying year is one in which you have paid or had credited to you sufficient NI contributions. If you have less than the full number of years required you will receive a corresponding proportion of the full pension.

State pension ages

Whilst many more women will qualify for a better state pension in the years ahead, the not so positive news is that they will have to wait longer for it.

Currently, women can claim their state pension from age 60 but between 2010 and 2020 their state pension age will increase to 65 to bring it in line with men's. This will be phased in gradually starting on 6 April 2010.

During this 10 year period, for women born between 6 April 1950 and 5 April 1955, their state pension age will be set at a date somewhere between their 60th and 65th birthdays depending on their date of birth.

In addition to this and for both men and women, between 2024 and 2026, between 2034 and 2036 and between 2044 and 2046 the state pension age will rise to 66, 67 and 68 respectively. Anyone, born after the 6th April 1959 will be effected by these changes and have to wait longer for their state pension.

Political changes?

It should be noted that the issue of longer term changes to the state pension age is now the subject of political debate, and a change of Government may well result in further changes.

At the most recent Conservative party conference proposals were made to raise the state pension age beyond 65 earlier than currently planned.

For men the increase from 65 to 66 would happen from 2016. For women the existing phased changes up to 65, between 2010 and 2020, would remain in place but the age would rise again to 66 from 2020.

You can check your own state pension age here and use the State Pension Age calculator.

Budget 2010: Key Financial Planning Points

2010-03-25T08:58:00.003Z

The following is a high level summary of some of the key points from yesterday’s Budget Report.

Despite the Chancellor confirming that borrowing for 2009/10 is projected to be some £11 billion lower than expected, the overall debt and continued need to borrow over the next four years means there was always going to be very little in the way of 'giveaways' in this Budget Report.

The Chancellor stressed the successful measures taken to 'secure the recovery', such as the car scrappage scheme increasing sales by 30% and the one-off tax on Banking Bonuses, introduced in the Pre-Budget Report, reaping some £2 billion in tax revenue.

However, there is a long way to go to reduce the country's debt and many of the changes announced today are minor alterations to the existing tax and financial system. In a theme which has been constant in recent years, further anti-avoidance legislation is also proposed.

Impact on financial planning

Income tax and allowances

In April 2009 Budget the Government announced that with effect from 6th April 2010 individuals receiving an income of more than £100,000 per year would face a cut in their Personal Allowance. This would reduce by £1 for every £2 of income above £100,000.

This was restated in the March 2010 Budget.

New 'additional rate' band of tax

In April 2009 Budget the Government announced that it would be introducing a new 50% rate of tax on income above £150,000 from April 2010.
This was restated in the March 2010 Budget

Winter Fuel Payments

The Government will guarantee payments for another year - this will be at least £250 for pensioners (£400 for those over-80's).

Business Rates

Business rates will be cut for one year from October for SMEs (Small and Medium Enterprises).

Tax credit

Individuals over the age of 60 will now be eligible for Working Tax Credit provided they work for at least 16 hours a week.

National Insurance

In the March 2010 Budget it was restated that employee, employer and self-employed rates of National Insurance contributions (NICs) will increase by 0.5% from April 2011 in addition to the 0.5% increase announced in 2008.

However the level at which people start to pay NICs will increase in April 2011 by £570 above the level previously announced.

Pensions and retirement planning

Implementing the restriction of pensions tax relief (BN33)

Legislation will be introduced in Finance Bill 2010 to recover tax relief above the basic rate on pension contributions made by or on behalf of individuals with high income.

For people with annual income of between £150,000 (inclusive of employer contribution for those with incomes of £130,000 or more) and £180,000, tax relief on pension contributions (including the value of employer contributions for those in employment) will reduce gradually from the individual's marginal rate to the basic rate as income increases. Where income is £180,000 or over the measure restricts tax relief on pension contributions to the basic rate.

The restriction of pensions tax relief will have effect on and after 6 April 2011.
Current law and proposed revisions

The Government announced in Budget 2009 its intention to restrict tax relief on pensions savings with effect from 6 April 2011 for high income individuals.
These rules will affect individuals with income of £150,000 or over. For the purposes of this measure, income is calculated before deduction or relief for pension contributions and charitable donations.

For those in employment it includes the value of any pension benefit funded (or eventually funded) by their employer where the individual's income is £130,000 or more.

A taper will apply for those on incomes between £150,000 and £180,000, gradually reducing tax relief on pension contributions until it is restricted to the basic rate. This restriction will apply to the individual's contributions and to any pension benefit funded (or eventually funded) by their employer. The rate of tax relief on pension contributions will be determined by where individuals lie on the taper.

To prevent bringing forward pension contributions that would otherwise have been paid after April 2011, a special annual allowance applies for the 2009/10 and 2010/11tax years for individuals with income of £130,000 or over. Tax relief above the basic rate is recovered from pension savings above an individual's special annual allowance by the application of the special annual allowance charge. An individual's special annual allowance is the higher of their regular pension savings and £20,000 (or in certain circumstances where contributions have been less regular than quarterly, £30,000).

Lifetime Allowance and Annual Allowance (BN34)

As announced in the 2008 Pre-Budget Report, the 2010/11 Lifetime Allowance of £1.8 million and Annual Allowance of £255,000 will continue to apply, with their rates held constant for a further five tax years, ie up to and including the tax year 2015/16.

A Treasury Order has been laid before Parliament today to put this into effect.

Changes to pensions taxation – NEST and unauthorised borrowing (BN35)

This measure will:
• allow the National Employment Savings Trust (NEST) to register with HMRC for tax purposes, and be subject to the same tax rules as other tax-registered pension schemes;
• remove the tax liability on any interest charges on late pension contributions made by an employer to qualifying pension schemes;
• provide a regulation-making power to deal with any unintended tax consequences that may emerge as a result of the implementation of NEST and the employer duties and compliance as set out in the Pensions Act 2008; and
• remove the tax charge on borrowing linked to the cost of establishing and operating a registered pension scheme, subject to conditions.
The amendments will have effect on and after the date that a Finance Bill introduced in the next Parliament receives Royal Assent.

Pensions Act 2008: employer duties

The Pensions Act 2008 places a duty on employers to ensure that their jobholders are active members of a pension scheme. The introduction of this 'automatic enrolment' duty is planned for 2012.

The Pensions Act 2008 also obliges the employer of a jobholder to make pension contributions to qualifying pension schemes. When the contributions are paid late the employer may, at the Pensions Regulator's discretion, be asked to pay interest to their jobholder's pension account.

Under section 369 of the Income Tax (Trading and Other Income) Act 2005, the jobholder would be taxed on any interest paid by employers to a jobholder's pension account. This tax charge on the jobholder will be removed.

Tax-efficient vehicles

Indexing Individual Savings Account limits from 2011 (BN28)

From 6 April 2011 and on an annual basis thereafter, ISA limits will be increased in line with the Retail Prices Index (RPI).

The annual increase will be based on the RPI figure for the September before the start of the tax year and, if the RPI is negative, the limits would be unchanged. The new annual limits will be rounded to the nearest multiple of 120 – this is to ensure increases to monthly savings ISAs are divisible by 12.

The cash ISA limit will remain at half the value of the stocks and shares ISA limit after indexation. This new approach will therefore allow the benefits of ISAs to be increased in real terms in future years. The ISA allowance for the 2010/11 tax year is £10,200.

Venture Capital Trust Schemes and Enterprise Investment Schemes (BN12)

Changes will be made to the operation of Enterprise Investment Scheme (EIS) and Venture Capital Trust (VCT) schemes, effective from the date that the Finance Bill receives Royal Assent.

This means that VCTs will be able to be listed on markets throughout the EU/European Economic Area (EEA). The changes therefore expand the geographical scope of VCT and EIS schemes, as well as making additional classes of shares available. The tax treatment and operation of other aspects of these schemes remain unchanged.

Stamp Duty Rates and thresholds (BN24)

The new higher rate will apply to residential purchases where the effective date (normally the date of completion) is on or after 6 April 2011.

At present the highest Stamp Duty Land Tax (SDLT) rate of 4% applies to purchases where the consideration exceeds £500,000. A measure will be included in Finance Bill 2010 to add a new rate of 5% for transactions in residential property where the consideration for the transaction exceeds £1 million.

First time buyers (BN25)

Legislation in Finance Bill 2010 will introduce relief from SDLT for purchases of residential property at up to £250,000 where the purchaser or all the purchasers is/are first time buyers and intend to occupy the property as their only or main home. The new relief will be available for residential purchases where the effective date (normally the date of completion) is on or after 25 March 2010 and before 25 March 2012.

Capital Gains Tax (CGT)

The rate of tax for mainstream CGT remains at 18% and the annual exempt amount of £10,100 remains unchanged.

Entrepreneurs' relief (BN27)

Legislation will be introduced in Finance Bill 2010 to increase the lifetime limit on gains qualifying for entrepreneurs' relief from £1 million to £2 million. The change has effect for disposals on or after 6 April 2010.

Where individuals or trustees make qualifying gains above the previous £1 million limit before 6 April 2010, no additional relief will be allowed for the excess above the old limit. But if they make further qualifying gains after 5 April 2010 they will be able to claim relief on up to a further £1 million of those additional gains, giving relief on accumulated qualifying gains up to the new limit of £2 million.

The other rules for entrepreneurs' relief are unchanged. Gains qualifying for the relief will continue to be reduced by the fraction 4/9, leaving the effective rate of capital gains tax on these gains at 10%.

Inheritance Tax (IHT)

Nil-rate band (BN31)

The 2009 Pre-Budget Report announced that legislation will be introduced in Finance Bill 2010 to freeze the IHT nil-rate band limit for the tax year 2010/11 at the current level of £325,000. This will now be extended to cover the tax years 2011/12 to 2014/15.

Anti-avoidance

The remittance basis: relevant person (BN38)

The remittance basis is an optional basis of taxation available to individuals who are resident but either not domiciled or not ordinarily resident in the UK. Any foreign income or gains of an individual, which are remitted to the UK by way of a relevant person or for the benefit of a relevant person, are taxed on the individual.

A relevant person is widely defined and includes the individual, their spouse, civil partner, children and grandchildren under the age of 18. It also covers close companies and their subsidiaries in which such people are participators.

A relevant person is defined in Section 809M Income Tax Act 2007; this definition is being amended to clarify that a subsidiary of a non-UK resident company, which would be a close company if it was resident in the UK, will be treated as being a relevant person for the purposes of the remittance basis. This change comes into effect on 6 April 2010.

Review of HMRC powers, deterrents and safeguards: tackling offshore tax evasion (BN68)

Legislation is being introduced to provide greater penalties for taxpayers who fail to declare the full extent of their offshore income or capital gains. The penalty framework will work in the same way as it does currently, however the absolute level of the percentage used to determine the tax-geared penalty will be determined by the jurisdictions in which the failure to declare arises.

There are a number of factors which need to be assessed before determining the level of percentage, the outcome of which could result in the individual paying the level currently set or 1.5 or 2 times the current published percentage. This new penalty framework is expected to apply to the tax period commencing on or after 1 April 2011.

I hope you find this summary useful. The links below will take you to HM sites for further information.

HM Treasury

HM Revenue & Customs

Review your Will during Divorce & Separation

2010-03-21T22:12:00.003Z

When couples get divorced (or a civil partnership is dissolved ) or have separated it is particularly important to review any existing Wills that are in place or to put in place a Will if there isn’t one.

The scenarios that follow offer some reason why:

Pre Divorce or Separation and a Will is in place:

Until a spouse is divorced (or a civil partnership is dissolved), property will still pass upon death under the terms of any will and, commonly, one spouse ( or civil partner) will have bequeathed the whole or a substantial part of his or her estate to the other.

Thus a situation could arise where assets pass to an individual whom a spouse ( or civil partner ) no longer wishes to benefit from their wealth.

Pre Divorce or Separation with no Will in place:

Where there is no Will, the rules on intestacy will apply. As such a large part of the intestate’s estate will pass to the surviving spouse including all personal belongings.

A separated spouse ( or civil partner ) may therefore inherit most of the deceased’s assets unless action is taken at the time of separation to reverse the position by executing a Will.

Post Divorce and a Will is in place:

Decree absolute is the final decree and marks the conclusion of the marriage. Under the current law, a divorced spouse ( or civil partner ) will be treated as if he or she predeceased the deceased person on the date of the divorce for all purposes.

A gift in a Will to a former spouse ( or civil partner ) will therefore lapse on divorce. This may possibly disinherit the children of a former marriage.

Similarly, the appointment of a former spouse as executor and trustee will be void unless the Will provides otherwise.

Should there be a wish to leave property to a former spouse, it should be borne in mind that the spouse exemption does not apply to divorced spouses and as such a gift may therefore be liable to inheritance tax.

Following the divorce, either or both former spouses may marry a new partner. Marriage revokes a Will unless the Will was made in contemplation of the new marriage.

Post Divorce with no Will in place:

Where no Will has been made and there are children of minority age involved it is not uncommon for a situation to develop where the assets of the deceased pass into trust for their benefit, wholly, but are under the control of the former spouse (as the legal guardian of the children).

The former spouse could appoint additional trustees (their new partner for example ?) should they wish to.

Similarly, the children of a new partner will have no rights under intestacy. However, if the children of a new partner are adopted, they will then rank equally with the children of the former marriage. This may well be in accordance with the wishes of those immediately concerned, but if other people, such as grandparents, have left property to `the children of X’ this will equally also include the adopted children.

So, the message we have is a simple one. Either review any Will you have in place or consider putting one in place if you separate and / or are getting divorced so that these changes in your circumstances and your future plans and objectives can be catered for.

Overcoming the 60% tax trap

2010-02-17T07:26:00.009Z

The new headline 50% tax rate has been well publicised - From 2010/2011, a 50% rate of tax will apply to individuals with taxable income in excess of a higher rate limit of £150,000 per annum.

However, not quite such a headline grabber is the fact that in addition to increased rates of income tax for high earners, those with an adjusted net income in excess of a £100,000 high income limit will see their basic personal allowance reduced or removed entirely from April 2010.

There will be a loss of £1 in personal allowance for every £2 of income earned over £100,000. The personal allowance will be lost when earnings equal £112,950 (the personal allowance for 2010/2011 will be £6,4750)giving an effective 60% tax rate.

Adjusted net income can essentially be defined as taxable income reduced by specified deductions e.g. such as trading losses and payments made gross to pension schemes, as well as grossed-up gift aid and pension contributions which have received tax relief at source.

This means that provided an individuals adjusted net income is below or equal to the £100,000 limit, they will continue to be entitled to the full amount of the basic personal allowance.

Example

The following example considers the tax relief available if the pension contribution is paid in 2010/2011.

The personal allowance in 2010/2011 will be £6,475 and the basic rate tax band £37,400.

Mr X is earning £112,950, and he makes a pension contribution of £12,950.

If Mr X has earnings of £112,950 - and no other income - in 2010/2011 he would not only be liable to 40% tax on the top £12,950 slice of his salary, but would also lose all £6,475 of his personal allowance (£1 for every £2 above £100,000).

This amount of £6,475 would be liable to 40% tax, meaning the overall tax liability on his top £12,950 slice of salary is effectively £7,770, or 60%.

If Mr X made a personal pension contribution of £12,950 gross, his adjusted net income would be reduced to £100,000.

Not only would this reduce his higher rate tax liability, but it also means that he would retain his full personal allowance.

Mr Xs effective tax relief on the £12,950 pension contribution is £7,700 which equates to 60%.

Investment Fund Selection - Getting It Right

2010-02-15T21:30:00.004Z

When we conduct our fund research we'll typically ignore the latest trends, new funds and star managers, and concentrate on analysing the actual performance achieved.

Trustnet - a website devoted exclusively to investment reseacrh - recently published their list of 112 Alpha managers, these being fund managers who add real value to the investment process. Over 1100 managers have been analysed for this rating. After the exclusions, this falls to below 1000. The top scoring managers that still meet the calculation criteria are deemed Alpha Managers - The full list is here

Having reviewed the top managers on their list against our recommended funds it is pleasing and reassuring to know that our clients money has 12 of the top 15 managers looking after it !

Advice from someone you can trust

2010-02-10T22:57:00.005Z

It is getting easier to find an independent financial adviser (IFA) you should be able to trust.

Advisory firms who adopt what has been termed the New Model approach tend to portray similar characteristics - running good businesses that put the interests of their clients first.

The result is that locating an adviser who works for you, and not a life insurance or a pension provider, is easier than it used to be.

Some of the key determinants that separate a New Model Adviser from the traditional and outdated methods are:

Planning

A new model adviser will generally be looking to help you attain your life goals and ambitions with financial advice tailored to help you attain the future desired lifestyle you seek.

You will buying from them advice and not being sold a product.

Genuinely Fee Based

All IFAs must offer clients the option of paying a fee rather than agreeing to the adviser being paid commission by a financial services product provider. Paying a fee means you are much more likely to get unbiased advice.

New Model Advisers will have clear charging structures for their different levels of service.

Highly Qualified

New model advisory firms will contain planners who have qualified as either certified financial planners (CFP) and/or chartered financial planners. These are the two highest qualifications IFAs can attain. Do not confuse the CFP with the certificate in financial planning, which is the most basic qualification all IFAs must have.

By the end of 2012, the bar will be raised and all advisers will need to have a certain minimum qualification to be able to continue to advise.

Satisfied Clients

Asking for feedback from clients on services offered is a sign of a well run business. This allows the firm and its advisers to learn what is and what is not working and helps in strengthening ongoing client relationships.

Technologically Advanced

Forward thinking firms will make good use of information technology, not something that can be said of the ordinary IFA, with websites that enable clients to track their investment portfolio online.

Additionally, the use of blogs and social media are becoming an increasingly valuable tool to aid effective and efficient communication with clients.

What Midlife Crisis ?

2010-01-27T22:45:00.005Z

Is a midlife crisis now a thing of the past ? Do we all now accept changes in our appearance and ability to do things with less resilience ? And, if not, will having a mild makeover provide that extra re-assurance and confidence ?

Scientists say increased life expectancy and good job prospects are taking the sting out of ageing.

They claim that the sudden awareness of mortality that has led many men to exchange their wives and cars for newer models no longer has such a potent effect : take note if you are a divorce lawyer !

Instead, an increasingly confident and hardy generation is embarking on a productive second life as it approaches the age of 50.

This generation is aware that at 50 it still has at least 30 good years of life.

The myth of a midlife crisis as represented in Hollywood films such as 2003s Lost In Translation, in which Bill Murray plays a bored husband tempted by a younger woman, has been put to the sword by Carlo Strenger, a psychoanalyst and associate professor of psychology at Tel Aviv University in Israel.

He says in a paper published in the Harvard Business Review that while some Midlife Change is inevitable, traumatic raptures are increasingly rare.

In his paper, based on interviews with business people aged in their 40s, 50s and 60s, he argues that middle aged workers are less fretful, hurried and self critical than their younger counterparts.

By middle age, most executives have gone through protracted crises that seemed insurmountable at the time; through these crises they have discovered their strengths, he says.

No longer riddled by the anxiety that they may not be good at anything, or by the need to prove that they are good at everything, they have the freedom that only self knowledge can impart.

He advises middle age people seeking a new challenge to take time studying their options and not take drastic steps.

Changes in the work market in the past few decades have increased the opportunity for midlife career moves, he writes.

The trend for big companies to rely on outside consultants was particularly good news for mature, independent professionals.

He says The baby boom generation is getting older but its work is far from finished. Many people can anticipate and enjoy a second life if not a second career.

The professor says the best way to avoid suffering a crisis is to appreciate how many adult years someone has to live and make imaginative plans for using them.

To ensure these imaginative and creative plans can be fulfilled, one not only has to make a lifestyle plan but also a financial plan : with the two being inextricably linked.

Knowing that you can do all that you seek and desire in later life without any fear of ever running out of money ensures a financial peace of mind and allows for greater certainty that all you want to do you can do.

You can have the most inspired and original of ideas and plans for later life but without the resource to fulfil these dreams and ambitions, they will simply fall apart.

So, the midlife crisis may well be over and planning for an active life all the way into your 80s is much more of a reality these days, but what you do not want to do is let your plan fail simply because you have neglected to dovetail a financial plan in with your life goals.

Market Commentary January 2010

2010-01-15T19:25:00.008Z

In many respects the recession is, to a great extent, behind us. But, as one door opens another one shuts. With consumer price indices creeping upwards, inflation looks to be the factor most likely to concern investors later in 2010. Some commentators believe inflation is set to return in a 1970s style, others do not think inflation is going to be as big an issue as the inflation scaremongers might suggest (but nevertheless, want to keep their options open). As always, only time will tell.

In response to the economic slowdown and financial crisis, world governments have facilitated an explosion in the money supply through quantitative easing measures. Their aim was to reinvigorate credit markets (unfortunately also providing bankers with an open goal for bonus earning). These measures are however, untested and experimental on this scale. While these monetary injections may have had the hoped for effect of avoiding a 1930s style depression, the risk now is that this aggressive monetary policy risks over-stimulating the economy, causing a return to much higher levels of inflation.

Governments are caught between a rock and a hard place as they have relevant, and recent, case history with the Great Depression, and Japan in the 1990s, where governments moved too quickly to withdraw liquidity and the economic recovery faltered before it had a chance to build a strong foundation. The political pressure not to repeat that mistake today is enormous. Inflation has not taken off yet because banks are still reluctant to lend and much of the new money is just sitting around on bank balance sheets.

There are other factors which influence inflation, for example, energy and food costs, the two largest components of CPI calculations. But other factors should also be kept in mind. For example, as the oil price rises, this tends to be passed on to consumers in the form of higher electricity and gas prices. Through 2009, the oil price more than doubled. With inflation measures comparing prices today to those twelve months ago, such large swings have an enormous bearing on inflation levels. Workers seeing that the cost of living is increasing may be encouraged to push for higher wages, adding yet more inflationary pressure. With the economy as weak as it is, and unemployment as high as it is, wage pressures are currently fairly muted. But, as the recovery takes hold increased wage demands will inevitably reappear.

Paying too much attention to whats going on at home risks missing the pressures from abroad. For example, the UKs large fiscal deficit puts sterling under pressure in international currency markets. That influences not just Britains competitiveness abroad but also increases the cost of imports. Likewise, China has been accused of exporting deflation in the form of cheap goods. With its own economic pressures growing, China may have to re-evaluate their currencys real value, in particular against the dollar, with ramifications for inflation rates right across the globe.

Controlled inflation at, say 1.5% to 2% in 2010 might be no bad thing, but if the price of oil and other raw materials continue rising, there is the risk of higher inflation. The worst case scenario sees inflation pushing over 2.5%, anything higher will mean that the Bank of Englands policymakers will only have the blunt instrument of increasing base interest rates in their toolbox, and blunt instruments can do a lot of damage. One thing is for sure - inflation is an issue that is not going to go away any time soon.

EQUITY MARKETS

United Kingdom - Revised numbers from the Office for National Statistics showed GDP had contracted by 0.2% in the third quarter, up marginally from the previous estimate of 0.3%. The upward revision was mainly prompted by a better-than-estimated recovery in construction, although this was undermined by downward revisions in industrial and services output. However, the annual inflation rate accelerated more than economists forecast in November, to 1.9%, the fastest pace in six months. This was driven primarily by fuel and transport costs. Elsewhere, unemployment fell for the first time since February 2008. The Bank of England’s policymakers voted unanimously to keep interest rates on hold at a record low of 0.5% and to maintain its £200 billion quantitative easing programme.

UK equities advanced for a second consecutive month in December as investors grew increasingly optimistic about the global economic recovery, and a bright outlook for demand helped lift commodity prices. The benchmark FTSE All Share Index returned 4.3% over the month. Mid-sized companies, with a monthly return of 4.6%, outperformed their large and small sized peers, who recorded 4.4% and 2.4%, respectively. Most sectors ended positively, indicating broad-based support.

USA - Economic data continued to be mixed in December. The Federal Reserve Chairman warned that the US economy faces "formidable headwinds", a weak labour market and tight credit. However, the unemployment rate fell to 10% from 10.2%, with employers cutting the lowest number of jobs since the recession began. Although the car industry remains on its knees, there were signs that the manufacturing sector was returning to health, as inventories at factories increased for the first time in more than a year, while factory orders also rose by an unexpected 0.6%. In the housing sector, existing home sales rose in November at the fastest pace since February 2007.

The S&P 500 rose in December, ending 2009 with significant gains. Technology stocks fared particularly well and health care stocks moved higher after a less damaging reform bill passed in the Senate. The materials sector also benefited on the back of the general upturn. Industrials stocks gained ground despite General Electric issuing a cautious outlook for 2010. In contrast, financials ended the month lower, Citigroups stock and bond offering attracted weak demand, while earnings estimates for Goldman Sachs Group and Morgan Stanley were lower (though not at the expense of their controversial bonus structures).

Europe - European economic indicators were encouraging in December. The Bundesbank raised growth forecasts for Germany, Germanys GDP is expected to rise 1.6% in 2010, as against the banks earlier prediction of 0% in 2010 and growth of 1.2% in 2011. The European Central Bank revised its GDP forecasts for the eurozone upwards for 2010 and expects economic activity to recover even further in 2011. Data showed that Europes service and manufacturing industries expanded at the fastest pace for two years in November on the back of a recovering global economy. German business confidence increased to the highest level in 17 months in December, sparked by a revival in exports and manufacturing growth. Greece, Spain and Portugal may well have a different story to tell in 2010.

European equities had a solid end to the year, stocks rising significantly in December. Positive data strengthened confidence, materials stocks gained due to rising metal prices, stemming from encouraging growth in industrial production in China. Oil prices were up and energy shares advanced in line, unlike in the 70s OPEC are playing the game. Investors also invested in defensive consumer stocks and utilities firms amid occasional volatility, although telecommunications companies declined in response to broker downgrades. Despite the upward trend, financials performed poorly owing to concerns about new regulations and credit downgrades of some European countries. Greek debt has been particularly downgraded and Standard & Poors warned about the nation’s expanding government deficit. S&P indicated that Spain is only 12 to 24 months behind Greece if the government does not take tough action.

Japan - In December, indicators were mixed, but pointed towards generally robust economic activity in the fourth quarter. Japanese exports to Asia increased for the first time in 14 months. The decline in total export volumes narrowed to -1.5% year-on-year, compared to -13% in October. Industrial production increased for a ninth consecutive month, with forecasts pointing towards a sustained uptrend into the new year. Strangely, confidence among major manufacturers improved for a third consecutive quarter, whilst confidence among retailers, smaller companies and consumers deteriorated. The Bank of Japan implemented further monetary easing measures in a bid to combat deflation and, the Japanese government compiled a ¥7.2 trillion economic stimulus package.

After three consecutive months of decline, Japanese equities staged a sharp bounce back in December, outperforming other developed markets, the broad-based Topix returning 8.1%. Factors that had previously precluded a turnaround in share prices, notably the appreciation of the yen, began to recede and the Bank of Japans announcement of additional monetary easing measures bolstered investor sentiment. Large-cap cyclical stocks and major exporters were the top performers, reflecting a weakening of the yen and signs that US unemployment was close to peaking. In common with other markets, banks and other domestic-oriented names lagged behind.
Far East Ex Japan - In China, economic data confirmed that the upbeat momentum in industrial activity is continuing. The government indicated that it planned to renew its stimulus policy for consumer durables, including cars, to support the domestic economy. Chinese demand for durables boosted exports in Korea, which rose by 33.7% year-on-year in December, compared to 18.1% in the previous month. Manufacturing output again expanded in Korea and Singapore with labour market conditions improving in Australia and Hong Kong. Singapores GDP is estimated to have contracted by 2.1% in 2009, below expectations.

Stock markets in the Asia Pacific region advanced in December, ending 2009 positively. Investors favoured Korean and Taiwanese technology stocks following encouraging growth in overseas exports. Improvement in the global growth outlook for 2010 supported metal prices which, in turn, benefited materials shares. Consumer discretionary stocks surged as more jobs were created, while financials lagged in all major markets in the region (spot the trend ?). Foreign investment inflows drove Indian stocks higher.

Emerging Markets - Many emerging markets are recovering from the recession quickly, and policymakers may soon have to contend with the onset of rising inflation in 2010. South Korean manufacturers confidence is on the rise, as the countrys central bank raised its growth forecast for 2010. Meanwhile, Chinas exports fell by the lowest amount in 13 months and imports surged in November due to resurgent trade with Asian nations (is China really still an “emerging market” ? – discuss). Brazils economic growth in the third quarter was less-than expected, owing to a decline in agricultural output.

Emerging market equities continued to gain ground and, in a reversal of recent trends, emerging Asia and EMEA (Eastern Europe, Middle East and Africa) outperformed their Latin American rivals. Turkish, Chilean, Taiwanese and South Korean equities led returns amid an improvement in industrial activity, boosting investors optimism. In contrast, markets in the BRIC countries (Brazil, Russia, India and China) underperformed the broader index (though still performed positively) . Technology and consumer discretionary stocks were favoured, energy companies, financials and materials were laggards.

Bonds - UK government bonds (gilts) ended December in negative territory as rising equity markets dampened demand for relatively safe fixed income assets. Gilt performance was impacted by a rise in house prices and mortgage approvals and increasing inflationary pressures. After being the best performing fixed income asset class in 2008, gilts ended 2009 in negative territory as unconventional measures and improving economic indicators prompted investors to favour riskier assets.

For similar reasons, European government bonds ended lower in December. Despite the increased appetite for risk and the unconventional measures available from the European Central Bank, government bonds ended the year as a whole on a positive note.

US government debt declined in December and ended the year in negative territory. US Treasuries weakened over the month amid signs that the economic recovery had gathered momentum. US treasuries were the worst performing sovereign debt market in 2009 as the US sold record amounts of debt to fund efforts to bolster the economy and financial markets.

Japanese government bonds continued to advance in December (!) although at a slower pace than last month, as signs of economic recovery in Asia spurred demand for more risk. The Bank of Japan held interest rates near zero while policy makers watch the effect of their lending programme. Elsewhere, the Japanese government proposed exempting overseas investors from paying 15% tax on interest income from corporate bonds, starting 1 June 2010, in a bid to boost inward investment. Form an orderly queue.

Commercial Property - The UK commercial property market continued its recovery, the sector rising by 16.5% over the last six months of 2009, as the combination of an oversold sector and a weak pound made for some attractive deals for overseas investors.

The UK housing market trends continued to show improvement in December. House prices rose by 5.9% in 2009, according to Nationwide, who also said that the rise in prices during 2009 was driven by significant pent-up demand and record-low interest rates. Don’t forget though that residential property fell by 15.9% in 2008, commercial property by 30.1%.

The outlook for residential property in 2010 remains unclear. Although interest rates are likely to remain low, at least in the first half of the year, and generally supportive of the housing market and borrowers, there is still uncertainty over unemployment and whether cash-rich buyers will continue to fuel demand.

CONCLUSION

Things look better now than six months ago, significantly better than twelve months ago, and a world away from the Armageddon scenario of eighteen months ago. But, as always, in the same way that investors should not be tempted to sell what they wish they had sold a year ago, they should not be looking to buy now what they wish they had bought a year ago.

At the risk of being repetitive, for investors who suspect that inflation may be a risk but are not sure of the timing of that risk or of its extent, a well-diversified portfolio still makes sense. Asset allocation flexibility is a key consideration in any investment strategy.

Stick To Your Guns

2010-01-12T23:47:00.008Z

The final years of the last decade were a real rollercoaster ride for investment markets as the following figures will illustrate:

In 2009, the FTSE 100 Index returned a very credible positive return of 27.3% against a previous years fall of 28.3%.

We saw the MSCI World Equity Index generate a positive return of 30%, compared to a fall of 40.7% in 2008.

UK commercial property also turned in positive results last year with a return of 8.5%. This is against an index fall of 30.1% in 2008.

Finally, UK Gilts showed a small loss in 2009 of 1.2%, compared to a 12.8% positive return in 2008.
Information source: http://www.ishares.co.uk/

During, the recent turmoil, we held firm to our principles of taking a medium to long term view, offering investment diversity across a broad asset base, all in line with an investors personal risk profile.

With much of the losses of 2007 & 2008 being recouped by investors in 2009, we do feel our approach has been the right one and we will very much maintain a similar approach going forward.

From the above figures it is easy to see why The IMA's latest Investor Confidence Index stands at 99, when a year ago it stood at only 71. Yet, it is a little way of its high of May 2009 when it stood at 106.

Whilst 2009 has proved to be good year for the markets, the outlook for 2010 does seem mixed.

There will be a general election between now and June, with the likely battleground being how best to deal with our record budget deficit. The Government, whatever colour they may be, has to implement a strategy to deal with our huge debt, that looks and is, both convincing and plausible to world markets. Otherwise, there is a real risk that our “AAA” financial strength could be downgraded.

Interest rates are expected to rise to 1% - 1.5% by the end of year and markets have already priced this in.

So, many analysts are predicting a moderate first six months for 2010, with this to be followed by a more demanding six months and end to the year.

During this continued period of uncertainty, we remain firm to our core beliefs that individuals with investment and pension portfolios should continue to align the way their money is invested to match their investment risk profile and their aims and objectives – with this being reviewed at a frequency appropriate to an investors personal situation ( at least annually).

Quite regularly, when we start to work with new clients, we come across investments and pension plans that are either wholly or partly invested in With Profits or Managed funds ( these could be Cautious, Balanced or Adventurous and may also be called Mixed or Distribution funds).

These packaged funds, for some, may well be just the type of investment approach they are looking for, as effectively investment management and asset allocation is out sourced to the insurance company running the fund.

But for many, it is wholly inappropriate as these funds fall short of the mark in being able to control risk, offer diversity and bespoke investment solutions to the personal risk profile of an investor.

Our key message to investors for 2010 is to remain firm to basic investment principles, which we have already alluded to, to re-asses and re- position your portfolio (if deemed appropriate) to match your attitude to investing money and maintain a portfolio that is balanced in line with this, with coverage across a broad variety of asset classes.

For those who have "packaged" funds, do review where your money is invested, think carefully if such an approach is right for you and take advice if you deem it necessary.

FSCS New Limits

2010-01-07T13:28:00.004Z

On 1 January 2010, the compensation limits for investment, insurance and home finance intermediation claims changed.

The new limits will apply to claims against firms declared in default on or after 1 January 2010 following a rule change announced by the FSA earlier this year.

Compensation limits for investment and home finance advice and arranging claims will increase to £50,000, bringing the compensation limit for these classes in line with the limits for deposit claims.

Compensation for non-compulsory insurance will be paid at 90%, with no upper limit. Cover for compulsory insurance will remain at 100% protection with no upper limit.

The new limits will make it easier for consumers to understand the cover the FSCS provides.

Here is an overview of the new limits applying to eligible claims

Investments:
Provision and mediation of investments: protection for 100% of 50,000

Home finance mediation: Advising on or arranging house purchase finance: protection for 100% of 50,000

Insurance Business: Non-compulsory insurance provision (both general and life insurance): protection for 90% of the claim, with no upper limit.

General Insurance intermediation: Non-compulsory general insurance and pure protection contracts (e.g. term, critical illness and income protection insurance): protection for 90% of the claim, with no upper limit.

The With Profits Minefield

2010-01-06T00:11:00.005Z

It is quite amazing that the regulator, the Financial Services Authority, has allowed one of the biggest single sectors of the UK investment market to end up in such a mess. With-Profits, both as a concept and in reality, is often completely opaque. Despite the obligation for With-Profits providers to publish a PPFM - Principles and Practices of Financial Management- it is still often impossible to uncover all the relevant facts and figures.

The PPFM documents themselves are often crammed with impenetrable jargon and detail and, like With-Profits in general, appear designed to make things as unclear as possible. The attitude of many With-Profits companies with regard to transparency is often nothing short of abysmal, and is in direct conflict with the FSA Treating Customers Fairly initiative.

It is hard to believe that in the modern investment world With-Profits still plays such a large part. It is clear that the concept of With-Profits has been mis-sold, allowing Insurance Companies and their sales people to present With-Profits as something it is not - not all IFA’s are wholly innocent either. With-Profits has undoubtedly regularly been sold as a direct alternative to deposit accounts.

There remains somewhere in the region of £300 billion invested in With-Profits, many are trapped by redemption penalties (often called, MVR, MVA etc.) but the funds themselves continue to deliver appalling results.

However, a small minority - Step forward: Prudential, Aviva, LV= and Wesleyan - have achieved positive and very acceptable results for their plan holders. These companies aren’t rocket scientists, they simply applied the original principles and benefits of with-profits, not chasing market trends and fashions, and investors with these companies are likely to be pleased with the results. Although there are another few companies who have achieved, at best, reasonable returns, somewhere in the region of 40% of all With-Profits investors are in funds that are doomed to underperform substantially in the future.

One of the many contradictions for With-Profit investors is that those in good plans with good companies, achieving good results, are likely to be in a position where redemption penalties (MVR, MVA, or some other element of the With-Profiits alphabet soup) do not apply, and they can move out of the fund quite easily. Sadly, this is another opportunity for the unscrupulous sales person to lump all With-profits funds under the same umbrella. In a nutshell, the poor funds usually have the highest penalties, the good funds often have no (or very low) penalties.

Yet another contradiction is that the good funds, with the best results, are usually those that have the highest asset allocations in shares and property which, ironically, makes them more vulnerable to market downturns and less suitable for the cautious investor that they are aimed at. Help !

If you have a With-Profits based investment, or are considering investing in one, do look to take advice now.

Minimum Pension Age

2009-12-29T13:28:00.002Z

From 6th April 2010 it will no longer be possible to receive an income or a tax free lump sum from a private pension before your 55th birthday, except on the grounds of very poor health.

If you are between the ages of 50 - 54 and wish to access your pension benefits in the near future you must do so before 6th April 2010, otherwise you will lose the right to access any benefits until you attain the age of 55.

Many of the pension changes introduced in 2006, where very positive, this was one change that was not.

If you are in the above age bracket and think you may need to access the pension you have before you reach 55, you do not have much time left to take action.

Do give careful consideration to this change in the minimum retirement age and if you want to consider what your options do contact us as soon as possible.