Welcome to the Wealth Matters Autumn newsletter. So much has happened in the last 3 months, without doubt the most uncertain times financially that can be remembered. Banks going bust, multi-billion pound bail-outs worldwide, stock markets in turmoil; if it weren’t for fish, Bjork and Sigur Ros no doubt Iceland would be bankrupt by now. There is a Chinese proverb that says, ‘may you live in interesting times.’ We could all do with some uninteresting times over the next few months. We feel that there is no point in repeating what you may have heard on the news. Instead, we would prefer to provide a fresh perspective.
It has been a challenging time operating as financial planners in this environment. Mortgage rates are high and lenders often pull their rates with no notice, whilst investments are extremely volatile. None the less, we can still obtain competitive mortgages for our clients and advice is more important then ever.
The recent stock market turmoil has made individuals look at their pensions and investments more closely. There are a number of key benefits of our WRAPS™ investment system. The following lists some of the benefits over the last few months:
- Most Group Pensions offer a default managed fund with typically 75-85% equity content, whilst many ISA’s are invested purely in equities. An average (moderate) investor in our system will have only 60% equity exposure, so moderating losses
- Our annual rebalancing process reduced many clients exposure to equity
- Active management means that our clients have had much lower exposure to bank shares than tracker funds. 25% of the FTSE 100 is banking and finance, which is part of the reason for such a large down turn recently.
It is important to understand that shares do not operate in unison. Between July 2007 and August 2008, FTSE 350 bank shares fell 33.21% and General Retailers 45.85%, yet FTSE 350 Mining shares rose 12.86% and FTSE 350 Oil and Gas stayed steady at 0.41%.
We would like to finish on a positive note. Firstly shares do look good value for money at the moment, if you look at important factors such as price/earnings ratios, thus there is a buying opportunity. Secondly, corporate bond returns could well improve with falling interest rates. If you have any concerns about your finances, please contact your adviser at Wealth Matters.
Finally, we would like to congratulate Dawn Ashworth, our trainee para-planner on passing her CF4 Retirement Planning exam in September.
Our top tip this month comes from Vivien Powell, Associate Director and Office Manager of the practice:
How to make additional payments quickly and online to your WRAPS™ investment
Advise your bank that you wish to make an electronic payment.
Supply your bank with the following bank details
- Account: Natwest
- Payee: Transact Client Account
- Sortcode: 60-00-01
- Account Number: 36298921
- Reference: Please use your portfolio number or your name
The payment will be received by Transact usually within 3-4 working days. Email Vivien@wealth-matters.co.uk to confirm you have made the payment and we will ensure the funds are invested as per your risk portfolio.
Of course, we are not technically in a recession yet; although with house prices falling and the rate of growth in gross domestic product slowing, it certainly feels like it to some.
The reasons for an apparent propensity towards increased ‘nest building’ during a recession are probably varied and largely psychological. This does not, however, imply that it is illogical to do so. After all, although disposable income is squeezed in inflationary times – you need only consider the unbelievably fast rate in the rise in energy and food costs to know that – people tend to expect things to get worse and therefore have a tendency to restructure their financial lives so that they have more put aside for later on.
It is likely that much of this increased saving is directed towards cash (including within ISAs) and there is much sense in this, because there is clearly an expectation that access to the money will be required within the short term. This means that the costs and volatility associated with equities makes it difficult to use them in such a situation.
Conversely, it is important to keep an eye on the ‘bigger picture’ so putting too much money into cash, some of which may not be needed in the short term, can mean that you loose out on potential investment returns.
One of the insurance industry’s leading consultancies, Cazalet Consulting points out that the average total return outperformance of UK equities over long term gilts (similar to cash) over each of the past 20 rolling 20-year periods is 3.8% per annum compound. Since cash returns, net of tax where applicable, seldom do much better than inflation, investing in equities is often seen as the best way of achieving positive returns.
As a result you may feel that, while saving more is a great idea, putting everything into cash will certainly provide security (currently up to £35,000 per customer for each bank) and offer ease of access to your money, the trade off in potential loss of investment growth makes it important to be flexible in how you invest.
One good point is that if you decide to use ISAs, and put the maximum (currently £3,600 out of a total annual allowance of £7,200) into cash, you can later switch this into, without affecting your investment allowance when you make the change.
On the other hand, investing in equities immediately might make sense if you believe that markets are likely to recover soon. After all, buying at the bottom and selling at the top is every investor’s dream. Unfortunately, few (including most professionals) are able to get their timing exactly right. Not everyone is agreed on the short-term future of share prices; equities should, in any event always be seen as a long-term investment.
Whatever you do, saving more for the future, especially towards eventual retirement – when you rely on pensions and other investments built up during your working life – always makes sense.
The value of investments is not guaranteed; you may get back less than you put in. It is important always to seek independent financial advice before making any decision regarding your finances. For further information, please contact your usual independent financial adviser.
FINANCIAL NEWS ON THE WEB HAS BEEN PRODUCED BY THE INSURANCE MARKETING DEPARTMENT LTD. YOUR INDEPENDENT FINANCIAL ADVISER DOES NOT EXERCISE ANY EDITORIAL CONTROL OVER THE CONTENT AND MERELY PROVIDES THIS INFORMATION AS A SERVICE TO ITS CLIENTS, WHO SHOULD SEEK PROFESSIONAL ADVICE BEFORE TAKING ANY ACTION IN CONNECTION WITH ANY INFORMATION PROVIDED THEREIN.
THE VALUE OF INVESTMENTS IS NOT GUARANTEED; YOU COULD GET BACK LESS THAN YOU INVEST. NOTHING CONTAINED IN THE ARTICLE SHOULD BE CONSIDERED AS GIVING INDIVIDUAL FINANCIAL ADVICE. PLEASE NOTE THAT THERE MAY BE VARIATIONS FOR THOSE LIVING IN SCOTLAND AND NORTHERN IRELAND.
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The reason that this is so important is simple; the insurance companies which help you build up your retirement fund are almost never those which offer the best income in retirement. There are a number of reasons for this, which relate to the way insurance companies manage their investments (and to a certain extent, how keen they are to keep, or attract, lump sums against which they will offer an income for life – or annuity).
According to data issued by the Financial Services Authority, the difference between the top and tenth annuity provider for a couple of 65 with a lump sum of £100,000 is almost 20%. That means buying an annuity from the tenth office would provide just £463 a month, while the best offers £554 a month. If you survive 10 years the difference is £10,920; over 20 years – which is by no means unrealistic – the difference is a whopping £21,840.
It is therefore important to be aware that you have the choice of where you buy your retirement income from, when the time comes. Unless you are in a defined benefit occupational pension scheme (often called ‘final salary’ schemes) where the income you receive relates to your pre-retirement income rather than the size of your pension pot, you would be wise to seek quotations from a number of annuity providers.
There are, however, additional considerations.
First, you do not have to use your entire pension fund to purchase an income; you can normally take up to 25% of your total fund (in some exceptional cases even more) as a pension commencement lump sum. This is currently free of tax, so it is traditionally called the ‘tax free cash’.
Secondly, you do not have to buy an annuity. If your fund is large enough, or you have alternative sources of retirement income, you may decide to draw an income directly from your pension fund. The amount you can take depends on your age and can be anything from nothing at all (you simply leave your money to grow in a tax-favoured environment) up to 120% of the annuity that a person of the same sex could purchase in the open market. (The government Actuary publishes the figures.)
The benefit of this is that your income can be highly flexible and, should you die, the remaining fund can be used to provide a dependant’s income or repaid to your estate (less a 35% tax charge).
From your 75th birthday the rules change; you can no longer take any tax free cash and while you can still convert to an annuity at any time, if you do not do so, you must draw between 55% and 90% of the annuity available to a 75-year-old of the same sex. On death, any monies not used to provide a dependant’s income are taxed at anything up to 82%.
There are lots of options available and taking professional and independent financial advice is, as ever, essential.
The value of investments is not guaranteed; you may get back less than you put in. It is important always to seek independent financial advice before making any decision regarding your finances. For further information, please contact your usual independent financial adviser.
FINANCIAL NEWS ON THE WEB HAS BEEN PRODUCED BY THE INSURANCE MARKETING DEPARTMENT LTD. YOUR INDEPENDENT FINANCIAL ADVISER DOES NOT EXERCISE ANY EDITORIAL CONTROL OVER THE CONTENT AND MERELY PROVIDES THIS INFORMATION AS A SERVICE TO ITS CLIENTS, WHO SHOULD SEEK PROFESSIONAL ADVICE BEFORE TAKING ANY ACTION IN CONNECTION WITH ANY INFORMATION PROVIDED THEREIN.
NOTHING CONTAINED IN THE ARTICLE SHOULD BE CONSIDERED AS GIVING INDIVIDUAL FINANCIAL ADVICE. PLEASE NOTE THAT THERE MAY BE VARIATIONS FOR THOSE LIVING IN SCOTLAND AND NORTHERN IRELAND.
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Whatever is likely to be the chosen option, early planning is essential if the business is to have the right value at the time. It is not just a question of maximising your value; in the case of family succession, this might be the last thing you wish to achieve, in case you should die within seven years of making a transfer, as inheritance tax would then apply.
There is also the important factor of capital gains tax. Thanks to changes introduced in April 2008, there is no longer taper relief with its lower effective rate of tax on business assets. Instead everyone pays tax on capital gains at 18%. The introduction of Entrepreneurs Relief of 4/9ths on the first £1 million of lifetime gains reduces the effective rate to 10% on this relatively modest amount. But it is important to note that this relief may not always apply to commercial property, depending on how it is owned.
Planning efficiently in advance allows you to consider all the implications of your intended strategy and ensure that necessary processes and plans are in place to facilitate a smooth transition.
Clarifying objectives
When you come to retire, you may wish to retain an interest in the business, rather than selling up altogether. In this case, you need to consider how you will be able to retain some degree of oversight over the new management, to ensure that the value you have built up is not lost altogether.
It is also important to consider the impact of whatever you decide on various interest groups. These could include ‘external’ shareholders, to whom you owe a special duty of care, as well as customers, suppliers and staff. This last group is vital, because in most businesses they are the greatest resource and need to be husbanded.
Understanding your business
However well you know your business, it can be very difficult to stand back and understand what it is really worth. Many of us will naturally perceive the business we have built up as having a greater value than is necessarily the view of a purchaser; after all, both have the objective of maximising the value of their investment, but this means a vendor’s value is likely to be higher than that of potential purchasers!
Having an independent valuation at an early stage could act as a firm foundation that allows you to plan more effectively for the future.
Mechanisms
Having a dedicated, capable and reliable workforce is one factor that is likely to increase the value of your business. Investing in such issues as training, retirement benefits, group sickpay, private medical insurance and death in service benefits will not just help you to secure workforce loyalty. It can also – provided the remuneration package is flexible enough to reflect the needs of each individual employee – encourage greater dedication and productivity that can be perceived by a potential purchaser as increasing the value of the business.
The value of investments is not guaranteed; you may get back less than you put in.
FINANCIAL NEWS ON THE WEB HAS BEEN PRODUCED BY THE INSURANCE MARKETING DEPARTMENT LTD. YOUR INDEPENDENT FINANCIAL ADVISER DOES NOT EXERCISE ANY EDITORIAL CONTROL OVER THE CONTENT AND MERELY PROVIDES THIS INFORMATION AS A SERVICE TO ITS CLIENTS, WHO SHOULD SEEK PROFESSIONAL ADVICE BEFORE TAKING ANY ACTION IN CONNECTION WITH ANY INFORMATION PROVIDED THEREIN.
NOTHING CONTAINED IN THE ARTICLE SHOULD BE CONSIDERED AS GIVING INDIVIDUAL FINANCIAL ADVICE. PLEASE NOTE THAT THERE MAY BE VARIATIONS FOR THOSE LIVING IN SCOTLAND AND NORTHERN IRELAND. YOU SHOULD BE AWARE THAT THE FINANCIAL SERVICES AUTHORITY DOES NOT REGULATE TAXATION ADVICE.
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‘Boiler room’ fraud depends, for much of its success, on investors seeing an opportunity to make money from ‘inside information’ ahead of the market and thereby benefiting from the sudden upswing in the value of shares that either do not exist at all, or are in a worthless business.
They now have a counterpart in ‘recovery rooms’ which offer (for a substantial up-front fee) to recover the money you lost in the ‘boiler room’. Many people will also have, at some time or other, received an e-mail asking them to help ‘liberate’ money held in an overseas state in the name of a dead person, for a large percentage of the money. (This is not only going to lose you money, but could also land you up in prison for attempted money laundering.)
But there are many other threats to personal finances that do not require you to be taken in by a trick; instead they relay on the accidental side effects of what might appear to be normal behaviour.
Identity theft
One of the greatest threats we all face today is identity fraud, which can come in a number of forms. The most common probably results from the theft of old credit card, utility and other statements that can be used to establish identity so that criminals can establish bank and credit card accounts in your name. This enables them to run up large debts, ostensibly as you, which can at the very least damage your credit rating; at the worst you may have difficulty in proving that the debts are not, in reality, yours. Destroying old documents that identify you is essential.
This form of crime can also come from cloning or other misuse of credit cards. Fortunately, the new Chip and Pin cards reduce the risk of misuse in the UK. But some on-line purchases – and almost any use in the United States where the old ‘swipe’ system is still used – are still vulnerable. Protecting your card by hiding the Pin when you input it and never letting the card out of your sight in a shop, pub or restaurant can help protect you.
Phishing
We have written about phishing (where by a letter ostensibly from your own bank or someone respected like Google or e-bay asking you to ‘re-register’ your details as they have had a computer failure) before. By entering your details to their fake website, you have given the criminals total access to your account on the real one; allowing them to empty your account or incur liabilities for purchases they make.
In addition to never under any circumstances responding to such requests (because banks just don’t issue requests of this sort) it is not a bad idea to check your credit rating regularly to ensure that nothing is being counted against your financial record that you are unaware of. The golden rule is always to look at the real address you are being sent to (which should include https:), not the one that appears in an e-mail and always look for the closed padlock 
symbol.
Computer fraud
A more recent area that needs looking at is that if you use a wireless connection to the broadband, you must use password protection. If you do not, anyone can link in to your home network and not only ‘steal’ the internet access you are paying for, but also to look at your files, banking details and other information, in order to defraud you.
Perpetual vigilance is, unfortunately, the watchword.
FINANCIAL NEWS ON THE WEB HAS BEEN PRODUCED BY THE INSURANCE MARKETING DEPARTMENT LTD. YOUR INDEPENDENT FINANCIAL ADVISER DOES NOT EXERCISE ANY EDITORIAL CONTROL OVER THE CONTENT AND MERELY PROVIDES THIS INFORMATION AS A SERVICE TO ITS CLIENTS, WHO SHOULD SEEK PROFESSIONAL ADVICE BEFORE TAKING ANY ACTION IN CONNECTION WITH ANY INFORMATION PROVIDED THEREIN.
NOTHING CONTAINED IN THE ARTICLE SHOULD BE CONSIDERED AS GIVING INDIVIDUAL FINANCIAL ADVICE. PLEASE NOTE THAT THERE MAY BE VARIATIONS FOR THOSE LIVING IN SCOTLAND AND NORTHERN IRELAND.
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