Autumn Newsletter - 2007
Welcome to the Autumn edition of the Wealth Matters newsletter.
This is the first email written since we moved into our new premises and since The Mortgage Professionals Ltd brand has been merged into the Wealth Matters brand. We ran a very well attended launch party in September to introduce everyone to our staff and our new premises. Feedback on the new offices has been very positive and clients have been impressed with our new meeting room. Congratulations to clients Lynn Frankling and William Wallace on winning our prize draw. If you want to review your finances, why not book an appointment in our new air-conditioned offices!
Unusually for us, the office move coincided with a number of staff changes. Sharon Marsh has emigrated to Australia, Lynn Brooks is relocating and Louise Warren has left to have a baby. We wish them all well in their future lives. We have recruited three new staff members. Deborah Caulfield is our new mortgage broker, and has over 17 years industry experience. Rachelle Fletcher and Tany Pervaiz has joined our administration team.
The markets has been volatile in the last quarter, but in spite of all the scaremongering, the FTSE 100 is almost at the same level as three months ago and well up on this time last year. We noted two things that were of interest in the Northern Rock fall-out, that appeared to be overlooked by many commentators. Firstly, how many people were pulling money out of their accounts in spite of large penalties and despite the fact that some or all of their savings were protected by the Financial Services Authority, even before the Government stepped in. Secondly, there were people withdrawing up to £1 million or more from their savings accounts. Net of tax and their real rate of inflation, these people are seeing the real value of their savings erode. This second point emphasises why expert financial and tax advice alongside diversification is vital. If you, or anyone you know, has recently withdrawn a large lump sum from Northern Rock, we would be happy to help them build up a more sensible investment portfolio!
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
Personal (Pension) Accounts
2012 may sound a long way off but pensions are all about long term planning, so a change that takes place in just five years is well worth thinking about now. The problem is that proposals now being considered by government appear to leave many people worse off.
The current debate is about “auto enrolment” into the proposed new personal (pensions) accounts for anyone who is employed, but is not already the member of a work-based pension scheme.
The idea is that everyone will automatically join the new scheme in 2012 unless they opt-out. In theory, this is a good idea, because it will force every one to start a pension, if they do not already have one. The problem is that for large numbers of lower paid employees, the benefit will be reduced because the pension they eventually receive will offset the pension credit they would receive if they didn't have a pension (other than the basic state one) at all.
Pensions “guru” Steve Bee reports that in some cases, those going into the personal account system could have most or all of their expected retirement income from the new scheme offset by a loss of pension credit. Unfortunately these will be the poorest workers. The government is certainly aware of this, but intends proceeding in any event because people are not actually forced to auto-enrol and the scheme will be suitable “for most people”.
This clearly highlights the importance of independent financial advice – in this case independent not just of insurance companies, but also the government – so that individuals can fully understand the way they will be affected by the new regime.
But it also emphasises the importance of personal planning for retirement generally. Whatever we may think of the proposed personal accounts – and however much we may criticise the government’s “£5 billion-a-year-raid” on pension funds, when it took away the ability of pension fund administrators to reclaim the tax deducted from dividends on UK shares – there is no doubt that most people have inadequate pension provision.
Unless you are a politician or civil servant, it is unlikely that you are still the member of a “final salary” scheme; one that links your pension to your earnings in the run-up to retirement. Most of these schemes have been closed since the turn of the century.
So the income you receive in retirement will depend largely on how much you (and your employer, if you have one) contribute during your career, how much investment return you achieve (after charges) and the annuity rate available to you when you finally give up work.
Investment performance has certainly picked up over the past four years after a disastrous start to the decade, but the FTSE100 has still not quite recovered its heights of 1999. More importantly, annuity rates have fallen dramatically since the 1990s, largely due to increased longevity and long-term low interest rates. It is therefore essential regularly to check your pension arrangements to ensure that:
- You are investing enough – especially bearing in mind that you can receive tax relief on your entire salary up to £225,000 for 2007/8 (and rising next year); and
- Your investment strategy matches the timeframe during which you expect to retire.
It is also worth considering that traditional pensions are not the only way to save for retirement; Individual Savings Accounts (ISAs) also benefit from “tax free” status, and while there is no relief on contributions, income and capital withdrawals are also free of tax. Other investments can offer tax-efficient ways of investing although some will be accompanied by higher risk and should only be used with proper advice.
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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A fall in savings?
According to the Investment Managers’ Association, the amount of money being invested in Individual Savings Accounts (ISAs) during the first half of this year (after allowing for encashments) has fallen by 16.8%. The fall for June was 43%. Does this mean that ISAs are losing their popularity?
The simple answer to this is probably no. Looking behind the headline figures, it is clear that actual sales have risen by just under 5% for the first half of this year, compared with last; but that the value of “encashments” has risen by more than 20%, producing a fall in the “net” figure.
There could be several reasons for this, one of which amply demonstrates the value of this form of investment. With interest rates rising – particularly on credit cards and other unsecured borrowings – the flexibility afforded by ISAs to access money at any time makes it easy for investors to release their cash, in order to repay loans, as they become more expensive. There is little evidence to suggest that this is actually happening however as, according to Credit Action (1/8/07), the level of personal debt is 10% higher now than twelve months ago, at £1,345 billion; that is £28,600 for every adult in the UK (including mortgages).
Conversely, the net outflow of ISA investments, just when interest rates are rising, suggests that some people at least are using investments to reduce borrowings – or at least to finance major purchases, rather than borrowing even more. This would certainly make good sense, unless investments are expected to grow at a faster rate than the cost of servicing borrowings, which is impossible to predict.
The juxtaposition of increasing borrowings and less net savings suggests that it is those who do not benefit from having independent financial advice who are failing to manage their money in the most cost-effective way.
More than 85% of ISAs are arranged through professional financial advisers. By helping clients to make investments of this nature, they are not just providing the potential of future financial security, but also allowing them to hold an investment that is highly tax efficient but – unlike pensions – can be accessed at any time, either as a lump sum, a small withdrawal, or even an income, totally free of tax.
ISAs are not, of course, risk free investments, although the money held in a cash account is about as safe as it can be – and the investment return (with no tax deducted) is usually within touching distance of the rate of inflation, so there should be little loss of “real” value. Most people hold the majority of their ISA capital in equities and these are subject to the vagaries of the stockmarkets. However, they are generally relatively easy to access, when required. So while they should be seen as long term investments – ideally at least five years – they are also suitable as a “back-up” should the need arise for immediate access to cash. There may be a loss of value, if markets are down at the time, but provided they have been held for some time, the overall return should be positive.
Next year brings some subtle changes to the ISA market. Firstly, the difference between cash and equity ISAs is to be swept away in April. Secondly, PEPs (the old Personal Equity Plans) will be brought within the ISA regime. Thirdly, it will be possible to move money from the cash segments of an ISA to the equity part (but not vice versa). Lastly, the investment limit will be increased to £7,200, of which half can be invested in cash. This will mean that the more cautious investor may prefer to keep a higher proportion of money in cash, switching it periodically as conditions suggest, into the equity section.
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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Enjoy high interest rates
July brought with it the fifth interest rate rise since August 2006. While this might sound alarm bells for borrowers, it has quite the opposite effect on savers. And, perversely, some people with offset mortgages.
Higher interest rates should feed through to savers relatively soon – although some banks can sometimes appear more willing to pass on interest rate cuts to savers and interest rate hikes to borrowers. But what does this mean, other than that those with savings in banks and building societies should soon be better off?
When putting together an investment portfolio, many people will include cash as well as shares or collective investments such as investment bonds and unit trust and property, in order to achieve what is called “asset class mix”. Put simply, not putting all your eggs in one basket means that if one asset class falls in value, the others may not – or at least not to the same extent, so that overall, the value of investments is not so severely affected.
Of course, the other side of the coin is that when investment values rise within one class, others will not benefit in the same way. But on balance, many people believe that they are likely to win more that they lose, by adopting a diverse investment strategy.
However, when there is an underlying shift in one asset class – in this case a 27% increase in base rate from 4.5% to 5.75% in less than 12 months, with little prospect of a softening of rates within the foreseeable future – it could be time to consider a re-balancing exercise.
While the FTSE100 grew by over 13% during the year to the end of June 2007, and the FTSE250 by more than 22% in the same period, such a substantial hike in interest rates at least means that it is worthwhile considering whether some of the gains made on equity markets should be locked in to cash, while interest rates are so attractive. After all, past performance is no indication of what will happen in the future, which is why actively reviewing your asset allocation strategy is so important.
There are others who might benefit from higher interest rates, especially if these are likely to be sustained for some time, as appears likely at the moment. Annuities are based not just on life expectancy – which is improving (making annuity rates lower) – but on gilt returns (which are based on interest rates). This means that with higher interest rates, annuity levels could improve, at least marginally. So for those who have been using income drawdown (or unsecured pensions, as we have to call them now) as a hedge against the time when annuity rates might improve, now could be the time to re-consider your options.
Perhaps perversely, those with offset mortgages could also benefit, especially if they have a reasonable level of savings in their offset accounts. The reason for this is that actual repayments are based on the initial mortgage and the current interest rate. Because offset mortgages balance your savings against your borrowings, so that you only pay interest on the difference. So if you have a positive balance in your savings and or current account, you are almost bound to be overpaying, each month. This means that your balance is going down faster than would normally be the case. If the interest rate rises and your bank increases your payments, then – in an overpayment situation – the speed at which you are repaying your mortgage accelerated even more. Not by much, but every little helps.
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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Cost of childcare
Recent reports indicate that the cost of day care for children can be as much as £180 a week or more in some parts of the UK. Employing a childminder can cost almost as much, at £141 a week, in some places. So thinking about how to cope with the loss of a parent – even one who is not in paid employment – can be important.
When you consider that average earnings in the UK were £447 a week last year, child care can take a large proportion of income; especially when tax is taken into account. Even if there are two incomes, this is still a significant expense.
But how would a widowed parent manage to cover the cost of child care alone? For someone on £25,000 a year, a child care bill of £180 a week would average £720 a month, assuming a 48-week year; that is not far short of half their take-home pay of £1,561 a month, allowing for tax and national insurance. And these costs are per child.
Of course, there is likely to be a substantial Working Tax Credit available (including Childcare element) under such circumstances. But child care is not the only financial challenge faced by a family when a parent dies, or is long-term incapacitated. Other “costs” can include:
- Extended support for children beyond normal school hours;
- Reduced principal income as remaining parent has to cut the hours worked to cope with children’s personal and emotional needs;
- Additional expense for catering and home responsibilities; and
- Extra “occasional” costs.
The death or long-term illness of a parent places a financial as well as emotional strain on any family, even if the parent was not in paid employment. Where they were economically active, the position is even worse because of the loss of their income.
It is therefore important to consider the need for life assurance not just to cover the mortgage, should either partner die or become seriously ill, but also all living and potential additional expenses.
It is not unreasonable to suggest that a sum of at least ten times each parent’s income should be provided as a lump sum on death, or an income of at least two thirds of their gross earnings for long term illness. For a non-earning partner, then a lump sum of £250,000 or more on death might be considered reasonable.
Premiums will depend on age, but to insure the life of a 25-year-old mother for £250,000 over 15 years could cost less than £10 a month for a non-smoker; more if critical illness cover is also required. Nothing can compensate for the loss of a much loved parent or partner, but the right life insurance can at least alleviate the financial cares naturally occurring at such a time.
Providing an income to cover the long term illness of a “non-working” parent is not quite so straightforward, as the maximum level of cover available is normally related to income; so if there is no salary, how can a reasonable level be established? There are, however, a small number of companies recognising the importance of providing permanent health insurance for parents who are not economically active and the level of cover can be negotiated with them.
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