Welcome to the Summer edition of the Wealth Matters newsletter. The last twelve months has been one of the most unstable in the history of finance. Investment values have plummeted, banks and financial institutions have gone bust or been propped up by Governments. It has been a difficult time to invest and more a case of minimising losses than making gains for most clients. At Wealth Matters, we never forget that it is your money that we manage, not our money. As a consequence, we are very wary of the investments we recommend. Whilst it has been difficult to make money in this period, our investments have generally fallen by less than the markets and have rallied well since March. As an example of this, one client reviewed recently in mid-July, who has been investing in WRAPS for 2 years with regular contributions on our confident portfolio, has only seen a drop of 3.9% per annum over the two years, net of all investment returns and charges. In the last 12 months, the FTSE 100 had dropped by nearly 30%, even with the recent rally.
Our investment principle remains that if we cannot understand a product within ten minutes and see that it is transparent, we steer well clear. As a consequence, we have not recommended foreign property purchases offering fantastic returns, Madoff schemes, high paying foreign bank accounts, Structured Products, Absolute Returns products, Hedge Funds, With Profits (except for some annuities). We are also predominantly fee based on investments, meaning we are not tempted by high commission paying products that rarely produce a decent return. The returns on our funds reflect that fact that we are trying to obtain decent long term returns on our funds. For most people, that is all that is required to achieve their financial goals. Many of our funds perform extremely well, especially compared to their benchmark, but we always look at good returns in relation to risk. Relating back to our Confident portfolio, this has returned 10.31 % per annum over the last 5 years, including the last twelve months. This should be enough for most people to achieve their goals over the medium to long term. Aiming for 12% returns every year rarely works and puts your capital at such risk that the benefits rarely out weigh the risk. Whilst our approach may mean that we miss the odd headline grabbing return, we don’t invest in the likes of Lehman Brothers, Key Data, Cru where clients have lost all their money.
Wealth Matters continue to believe in improved education for our advisers and support staff to help you with your finances. Since our last newsletter, Bruce Nash has passed his J01 Taxation exam and Paul Cleworth his J05 Pension Income Options exam (giving him the prestigious Diploma in Financial Services). We are running a number of seminars to provide information to our clients. Our next Seminar will take place in the Autumn, focusing on advice for our contractor clients. We have decided to postpone our Summer seminar at Luton Hoo, as many people were on holiday at that time. We are planning to run more seminars at Luton Hoo. The next one will be either late Autumn 2009 or in Spring 2010. We will keep you updated with the finalised arrangements.
We hope that you enjoy the newsletter. If you would like to discuss any part of the newsletter with your adviser, they will be more than happy to talk with you.
The similarity lies in the fact that you can put lots of different things together inside them and enjoy the benefits. Just like the edible variety, there are various types of investment ‘wrap’ and it is really no more than a generic description.
The most obvious sorts of wraps are those like Individual Savings Accounts (ISAs) and pensions (particularly the ‘self invested’ sort), which provide a specific tax efficient vehicle within which investments can be held and in respect of which special rules apply.
The more modern Wrap
The term Wrap with a capital “W” generally applies these days to an idea imported from Australia and US. This new way of managing your investments is based primarily on the internet (although these by no means exclude use for ISAs and pensions). They are platforms which allow investors to manage their investments through one portal and, because of the way most of them are set up, they can be highly flexible.
In principle, a Wrap is a mechanism set up by an IFA that allows clients access to their investments 24 hours a day, seven days a week. The main advantage of this is that you can, if you want to, get access to information about what your investments are worth and how they are actually distributed between different funds.
Switching fund managers
One of the principal advantages is that many Wraps make it much easier to move your investments from one investment manager – which may not be performing as well as when you made your original investment – to another that is faring better.
Outside a wrap, particularly where the investment is within an ISA or pension, this can be a complex matter and could in some cases count against your annual investment or contribution limit. Because of the way Wraps are set up, this is seldom the case with most investments, because they are held on your behalf by the trustees of the Wrap and all they are doing is altering the investment on your behalf, rather than making a structural change that involves realising one asset and purchasing another.
Some Wraps enable you to record assets via the website that are not held by the trustees; this might include some forms of insurance bonds and pension plans and your home, for example. The benefit of including these is that it can give you a more comprehensive picture of your overall assts, even if you cannot make changes on-line.
Giving instructions
In some cases it is possible to give instructions over the internet for funds to be switched and new investments made or existing holdings sold. This is something that you should always discuss with your Independent Financial Adviser, not least because transactions executed without his or her knowledge may affect asset allocation strategies.
Tax certificates
One other benefit of a Wrap is that it allows the operator to produce a consolidated tax certificate for the year covering investments held within the Wrap (but not those simply recorded on it) in respect of any income and capital gains that may be liable to tax. This can save a considerable amount of work, for those with a relatively diverse range of assets.
As ever the value of investments is not guaranteed and will fluctuate; you may get back less than you put in. You should always take individual professional advice before making any decision relating to your personal finances.
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.
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.
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Historically, tracker mortgages have appeared a good idea because when bank rate falls, the lender has no choice but to follow; although as some borrowers have found, they may not follow all the way down because of the seldom-noticed ‘collars’. These are a mechanism whereby the lender has a level below which they will not follow base rate.
As reported in the press, this has led to some borrowers with trackers at below base rate actually paying no interest at all at the moment, because the lenders concerned had not imposed a collar.
Sounds great …
The problem is that anyone entering into a tracker arrangement now is not following base rate at 5% or 5.5%, but at 0.5%. Because banks have to make a living, they not unnaturally set their rates at a level which generates an income for themselves even in unusual times such as these. This means that the current tranche of “best buys” (at the time of writing) includes deals that are set at base rate plus several percentage points; so a headline of 2.79 % for 2 years is actually “base rate plus 2.49%”, in this case (the fact that it is not shown as 2.99% when base rate is 0.5% is to do with the way Annual Percentage Rates work).
The example given is unusual in that it is actually capped at 4.99% until June 2012; it also has a collar set at 2.49%, so the rate cannot fall. Other deals are not apparently capped, but may not have a collar and this is where the danger lies, because if base rate should rise back to its previous level, the actual interest rate paid could easily rocket to 7% or even higher.
Will interest rates go up?
Nobody can predict what will happen to interest rates over the next year or so with any degree of certainty. However, with the government having authorised the Bank of England effectively to ‘print money’ (so called quantitative easing, by which the Bank buys gilts and adds them to its balance sheet, thus increasing the money supply) means that inflation could soon become a real threat. That may sound odd when the Retail Prices Index is at 0% or even negative, but the Consumer Price Index is actually quite a bit higher and (although it excludes housing costs) it is this which could drive up inflation overall, as people feel less well off and start to demand higher wages.
To combat this, the Bank may have to hike interest rates quite quickly. There are times when one could even feel sorry for members of the Monetary Policy Committee!
So are trackers bad?
This does not make tracker mortgages bad; it simply means that taking professional advice is even more important that ever.
You should take individual professional advice before making any decision relating to your personal finances. Your home may be repossessed if you do not keep up repayments on your mortgage. Think carefully before securing other debts against your home. Fees for mortgage advice may be charged and for details of these please contact your usual adviser.
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.
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.
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Crystal ball gazing has never been a good idea in investment markets and the FTSE100 could now be above 4,000 points or below 3,000. In some respects the actual position at the moment does not matter, because all the usual rules have been ‘knocked for six’ by economic conditions.
Well, not all the usual rules, because one remains: investment values can go down as well as up and should be viewed over the longer term. This applies not just to equities and property, which have historically tended to rise over the medium to long term and can often (as we have seen) fall over the shorter term, but also to cash deposits.
Viewing cash over the longer term …
With few exceptions, cash tends to hold its monetary value over time; deposits of up to £50,000 are protected by the Financial Services Compensation Scheme and this might even be extended soon, at least for temporary large deposits (for example, the temporary deposit of the proceeds of a house sale or inheritance). However, this is really a short term protection because inflation tends always to erode the real value of cash, because interest rates are frequently lower than the rate of inflation. In fact for many people, whose ‘personal’ rate of inflation is much higher than the headline Retail Prices Index (RPI) or Consumer Price Index (CPI) figures because of the nature of their spending habits, the interest rate they receive is almost by definition below the rate of inflation. So even cash needs to be seen over the longer term to compare it with other forms of investment.
So are we seeing the green shoots of recovery?
Predicting the start of a recovery is dangerous for anyone, not just politicians, but there are some who consider the current price of many leading shares to be below their real value; just as much as they were probably over-valued some years ago. The ‘worth’ of shares is initially the price that someone will pay for them in the market, at the time, But this is driven largely by sentiment. Taking a step back shows that the real value of a share relates to the rate of return it offers; this is made up of potential for capital growth and the possible dividend stream that it offers.
Clearly the possibility of future dividends relies in part on the strength of the economy. But even in a recession there are some sectors that will thrive including food, energy and other essentials. Investing in some market sectors can offer potential dividend streams and thus capital growth, as others see the opportunities and start to invest gain.
In addition, many pension schemes receive a regular inflow of money simply by virtue of regular contributions from individuals and companies. The investment managers therefore have an ever-growing amount of money to invest, but enjoy only limited alternatives to equities, particularly since gilts (government bonds) and cash generally offer less potential for long term growth than shares. This could well exert an upwards pressure on market values.
A false dawn?
It is almost inevitable that the recovery seen during March and early April will be reversed – to some unknown extent – within a few months. What matters is how deep the reversal is and to what extent it is another stepping stone on the long road to recovery. Because we are confident that there will be a recovery; there always has been in the past and there is no logical reason to assume that it will not happen again. The question will be over timing. Crystal ball, anyone?
As ever, you should take individual professional advice before making any decision relating to your business finances.
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.
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.
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The main issue relates to claiming expenses, but it has also come to light that some MPs have been deciding which of their homes is treated as their principal residence, in order to save capital gains tax (CGT).
The rules on gains made on property are fairly clear. As far as your main home is concerned, there is no CGT to pay, provided it was primarily for use as your home rather than with a view to making a profit, that it was your only home throughout the period you owned it (ignoring the last three years of ownership) and you did actually use it as your home. There are other rules which your financial or mortgage adviser can outline for you.
Importantly, if you are married or in a civil partnership and not separated you and your spouse or civil partner can have only one such residence between you.
As far as second residences are concerned, you will normally be expected to pay CGT on any gain you make, after certain allowances.
Can you flip too?
The question is, of course, if MPs can decide which residence is their ‘principal’ one, can you do so too? The surprising answer is – at least until the government moves to close this gap – that you can. If you own and occupy more than one residence, you can chose which one is to be your primary residence for CGT purposes (subject to some restrictions).
This is particularly helpful for those who buy a holiday home with the intention of retiring to it later on. If they move to the retirement home a year or so before selling their main family home, they can still opt to have the old home treated as their principal residence, so that it is exempt from CGT. More importantly, if they decide, while still living in the main family home, that the ‘holiday/retirement’ home is in the wrong place, they can usually designate the ‘holiday/retirement’ home as their principal residence, sell it, buy another one elsewhere and then re-designate their family home as their principal residence. In this way, just as for MPs, there will be no CGT payable.
Let property
Where a second property has been let, in order to generate an income, it may be possible to obtain letting relief, which can reduce the chargeable gain by as much as £40,000 per owner.
How much will CGT be?
As indicated above, a couple can only have one principal residence at a time, but each has a personal allowance against CGT. For the current tax year, this is £10,100 per individual. So imagine that a married couple were to sell a property that did not qualify for relief as their principal residence, for £500,000 that they had bought some time earlier for £350,000. This would make a gain of £150,000. Each would be entitled to an exemption of £10,100 so, assuming equal ownership, the taxable gain would be £129,800. With the rate of CGT at 18%, this would create a tax charge, between them of £23,364 (provided no other chargeable gains had been made during the year).
If the property had been purchased with a view to passing it down the generations, making the children joint owners from outset would mean that they, too, could use their annual exemption to reduce the liability.
You should take individual professional advice before making any decision relating to your personal finances. Your home may be repossessed if you do not keep up repayments on your mortgage. Think carefully before securing other debts against your home. Fees for mortgage advice may be charged and for details of these please contact your usual adviser.
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.
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.
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