When markets move against you
Return to investing
Protecting your income
Millions of pensioners in debt
Welcome to the autumn edition of our quarterly newsletter
Once again, in this newsletter, we are delighted to announce that a new member of staff has joined our expanding team. We now welcome Neil MacKay who joins us as a Financial Adviser. We have already had the pleasure of working with Neil previously, as our Business Development Manager with Standard Life and welcome his experience and knowledge in the financial services industry to our company.
For those of our client’s whom we haven’t already introduced this to, we would also like to let you know about a new investment proposal, which we have put in place. The Superior Investment Returns System (SIRS) is a risk profiling and investment tool, which enables us to objectively identify the level of investment risk acceptable to you and then select a long term structured asset allocation strategy to help you achieve your desired goals. Another key advantage is that you can monitor the performance of your funds daily by visiting our website (www.wealth-matters.co.uk) and clicking on the Transact link.
As always, customer satisfaction is our key focus and by using SIRS we are able to regularly monitor your investments and provide you with regular reports on the management and performance of your investment. If you would like to find out more about how your investments may benefit from this system then please give your financial adviser a call on 01582 690 095.
In this newsletter we look at the topical subjects of: fluctuating markets, savings, protecting your income & pensioner debt.
We hope that you find the following articles of interest. If you have any comments, questions or views, please email us at:info@wealthmatters.co.uk
When markets move against you
As the past few months have proved, equity markets can go down as well as up – or in this case can provide a “white knuckle” roller coaster ride. But if shares cannot be relied on, what can you invest in that offers the potential for long term growth, without risking reverses?
The answer is, of course, that no single form of investment can ever provide complete protection against occasional downturns. All assets that depend on one person buying and another person selling are bound to be subject to market pressures and this includes shares, government bonds, property, fine art and commodities such as gold.
Even cash deposits are not totally immune from loss (although the Financial Services Compensation scheme provides indemnity in case of default of up to £2,000 and then 90% of losses of the next £33,000). After all, if the interest you receive on money held in a bank or building society is at a lower rate than inflation, then you are effectively seeing the value of your capital fall every year.
The old adage about not putting all your eggs in one basket has never been as true as when it relates to investments. Anyone investing for the future needs to look very carefully at:
- When they are likely to require access to some or all of their capital; and
- What level of risk they are prepared to accept, in the hope of securing positive growth.
Risk and reward are something of a trade-off. If for example you may require access to part of your capital at short notice, you are unlikely to wish to invest in assets that can suddenly fall in value (like shares during May 2006), or those that can take time to realise, like property (where even collective investments can have built-in time delays for the realisation of money).
On the other hand, if you are investing for the longer term, you will be looking for the potential for solid growth, but may not be so concerned about short term volatility or accessibility issues. In such circumstances, you may feel that property and equities offer a better potential. However, you may find that the balance of your asset holdings will change as you approach 60 or 65, when you may require access to part of your investment portfolio in order to fund retirement. After all, your pension scheme is only a tax efficient part of your overall investments and therefore needs to be seen as part of an overall strategy. Assets such as gold and fine art may also be attractive to some investors, but these can also be unpredictable in terms of value and liquidity; both have fallen in value in the past and can be subject to market capacity when the time comes to sell.
The most important reason for asset class diversity – the posh name for spreading your risk – is that there is no positive correlation between the way different investment classes perform – although there can be a negative one. For example, when interest rates rise, investors see deposits as a safe home for their money with an acceptable rate of return, they may therefore move out of equities, producing a fall in share prices.
On the other hand, over the longer term high interest rates can be good for some businesses (those that tend not to borrow money) so that their share values can rise in times of high interest rates, as they become comparatively more competitive.
It is also worthwhile recognising that diversity can be achieved within asset classes. For example, shares are not a uniform investment. Different regions of the world offer varying opportunities and even within domestic markets there are various ‘sectors’ – such as technology, pharmaceuticals, energy and telecommunications which can offer a spread of relative performance.
It is important always to seek independent financial advice before making any decision regarding your finances. If you would like any assistance, please contact us.
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Return to investing
Of course, most aware investors have never gone away, but with total personal indebtedness at more than £1,200 billion in the UK one could question whether the savings habit has died out. Fortunately, there are indications that investors are returning to the market and there could be good reasons for this.
The recent dip in equity markets should act as a timely warning to us all that investments can go down as well as up. But most investors are not there for the short haul – at least not as far as their overall investment strategy is concerned.
After all, most of us have three principal assets, our home, our pensions and our “free” investments such as shares, unit trusts and cash. At one time, people looked down on cash as a ‘poor relation’ when it came to investments. But while the potential returns are certainly less exciting that those available from equities, they also offer a high degree of security.
Balance is important in any investment strategy, so while less common investments like commercial property and buy-to-let houses may seem like a good option, it is important to see these in the context of your overall assets. If, for example, you live in a house worth £250,000 and have a pension fund worth £150,000 (which is likely largely to be invested in equities, commercial property and cash) then buying further property, whether commercial or residential, could actually be altering the balance of your overall portfolio.
Property is, of course illiquid; that is it can take time to sell and has relatively high associated costs. Cash on the other hand is almost totally liquid, except when invested in timed deposits or bonds, in which case a conscious decision has been made that access is not required for some time – or if it is, a redemption penalty is acceptable.
Where equities can score is that they offer the potential for growth (as well as loss, particularly over shorter timescales) but are usually rather more easily accessible than many other investments. Provided you invest in popular shares or well constructed collective investments, it is usually possible to access your cash, should you need it, relatively quickly.
Equities are never a short-term investment (other than for professional investors, who seek to trade, rather than hold, shares in order to make a series of small gains). This is because there are trading costs associated with buying and selling shares (which carry across to collective investments) as well as the short termvolatility that can affect them.
For the medium to longer term, however, any share based investment is likely to be of value to most investors taking account of their other assets in order to avoid imbalance as they offer the potential for strong performance as well as relative ease of access.
Most investments are potentially liable to tax, so using tax efficient vehicles for making investments can make sense. With the new tax year, almost everyone has a new £7,000 allowance for investing in Individual Savings Accounts (ISAs) and this can all be invested in equities, or a proportion put into cash or similar investments. But everyone can also put up to £2,808 into a pension plan (to which the government will add £792 in tax relief). Of course, unlike ISAs, only 25% of the fund can be taken as tax free cash (and then only after age 50 – rising to 55 on 6th April 2010).
In addition, you can receive tax relief on pension contributions up to your entire earnings from trade, profession or employment, provided you do not exceed the annual allowance (set at £215,000 for the tax year 2006/7 and rising thereafter). There is a lifetime allowance (set at £1.5 million for the tax year 2006/7 and rising thereafter) above which pension funds are subject to a 55% tax. The important thing is that, particularly using a self invested personal pension, you can build your own portfolio, looking at asset balance across your entire investments.
It is important always to seek independent financial advice before making any decision regarding your finances. If you would like any assistance, please contact us.
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Protecting your income
With so much emphasis on investment markets and pensions recently, it can sometimes be all too easy to “take your eye off the ball” regarding the basics of financial planning; to make sure that should disaster strike, you and your family are properly protected against the financial consequences.
The whole point of insurance is to “put you in the same position after a loss as you were in before it”. In the context of personal financial planning, this means to ensure that if something should happen to you or a family member, then you have sufficient funds to continue living in the manner to which you have become accustomed.
In many cases, families may consider arranging life assurance on the ‘principal breadwinner’ … and that is as far as it might go. But if we consider the sort of events that might occur, there are a number of financial consequences that this simply will not cover.
For example, a family of four might include a father working full-time, a mother working full- or part-time and two children. They rely on both incomes to cover the mortgage and all living expenses, including investments. The loss of either parent to death would be devastating both personally and financially, so it makes sense to insure both earners for enough to replace the income that would be lost for a sustained period at the very least. This should be until the children are completely out of the education system, as a minimum. But there will also be additional costs – particularly if the children are quite young – such as child care and the cost of ferrying them around. So life cover should be adequate not just to replace the ‘lost’ income but also to provide a handsome surplus.
Death is not the only threat to family life. Should either of the breadwinners become ill or suffer an accident, there could be a sustained period during which their income is restricted, or lost completely. There are, of course, some state benefits, but these tend to be minimal and do not really cover the increased costs associated with a sustained period of incapacity, let alone cover essential living expenses.
Fortunately, there are various forms of insurance that can provide a replacement income, such as permanent health insurance or accident and sickness cover (to which unemployment cover can often be added, if the cover relates to a mortgage). There are also forms of cover that can pay out a lump sum on diagnosis of a number of critical illnesses.
It is often forgotten, however, that the illness of a child can place an inordinate financial – as well as emotional - strain on any family. While it is not practical to arrange ‘income protection’ for a child, it is certainly possible to ensure that children under 18 (sometimes older if still based at home) are included in Private Medical Insurance plans. These provide anything from cash benefits through to full medical treatment.
In the former case, additional income can help cover the cost of constant hospital trips and other additional expenses, in the latter case, swift private treatment could reduce the time it takes for a full recovery, resulting in a shorter disruption period for the family.
As a final thought, remember that if your income is disrupted, for any reason, it is not just immediate needs that suffer; you will find it more difficult to save for future needs, including retirement. So it is well worthwhile ensuring that your cover provides enough to make good this loss, as well.
It is important always to seek independent financial advice before making any decision regarding your finances. If you would like any assistance, please contact us.
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Millions of pensioners in debt
Prudential – one of the UK’s best known life assurers – has recently estimated that more than a million pensioners have debts of about £15,000. 70,000 have debts above £50,000 and 2.7 million say they do not have sufficient income to meet their financial commitments.
It would be all too easy to blame the government for the fact that so many pensioners are poorly off. After all, there have been more than 80 tax rises since 1997, according to the Daily Telegraph (5thJune 2006) and this has clearly impacted on pensioners just as much as anyone else.
But there is a deeper issue, for which all politicians since 1945 need to accept some responsibility and that is the impression given to the current generation of pensioners that the welfare state would look after them. After all the aim of the post-war settlement was to provide a cradle-to-grave health service including a realistic state pension.
Never substantial, the hand-to-mouth nature of the state pension has meant that reserves have never been built up for the future and made it a target for governments needing to save money. It was the Thatcher government of 1979 which removed the link between average earnings and state pensions, replacing it with a inflation link (which usually lags behind earnings), further eroding its value; a link that should be renewed by 2012, by which time the gap will have widened even more.
There is a clear call to action in the news about pensioner debt; we must ensure that our own and future generations do not expose themselves to similar problems in old age.
Pension planning is, of course, essential. Few people believe that the basic state pension will ever make up for lost ground. The proposed National Pensions Savings Scheme is unlikely to offer value for money and could even lead to a reduction in the value of occupational schemes, should employers reduce their contributions to match the proposed 4% of earnings between lower and upper limits.
There is no substitute for personal provision for retirement, if we are to avoid the pitfalls facing the current generation of pensioners. That the current means-tested pension credit system can be a positive disincentive to low level savings for those without additional pension arrangements or other retirement income should not deter people from making personal provision. After all, even with a full pension credit, the guaranteed minimum income in retirement for a single person over 60 is less than £6,000 a year (including the basic state pension); hardly enough to live comfortably on.
While personal pensions may be the obvious choice for retirement planning, after all, you receive tax relief on the contributions you make, but there are restrictions on how you access your money. Only 25% is available as tax free cash and the balance has to be taken as a taxed income, either by purchasing an annuity, or drawing an income directly from your fund.
Using Individual Savings Account (ISA) offers you the same growth free of UK income and capital gains tax (other than the 10p tax already deducted from dividends paid by UK companies), but tax free access to your money whenever you want, either as an income or lump sum. There is no tax relief on contributions you pay in, but the enhanced flexibility can be of greater value, in many cases.
In fact ISAs are so attractive that the government limits the amount you can invest each year to £7,000. Pensions, on the other hand can accept contributions up to your entire income from employment, trade or profession (up to £215,000 for the 2006/7 tax year and rising thereafter).
Anything you put away now is likely to reduce the chance that you will join the million pensioners in debt, later on.
It is important always to seek independent financial advice before making any decision regarding your finances. If you would like any assistance, please contact us.
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