21 December 2010

Baby Boomer Investing

As someone at the tail end of the baby boomer era I have often wondered when "our" bulge in the population would start to assert itself. Why is it that most advertising is targeted at the 20's and 30's? Why is the TV at the gym always showing MTV (a constant stream of music videos if you haven't heard of that channel!)? There is an assumption that the world is for the young. Now, up to a point that is true, and as someone with an entrepreneurial leaning I can fully understand advertisers' desire to target their marketing spend at those who will buy (some would say - at those who haven't yet learnt only to buy what matters!).

So it was good to hear an investment fund manager having thoughts along the same lines. Stewart Cowley manages the Old Mutual Global Strategic Bond fund. Presumably because of that he thinks all the time about where the economy is going and what might be profitable in the future. So he created a list of goods and services which might increase in price in future due to the increased demand of baby boomers. Here is his list. 
  • Bungalows - nobody will want to live in multistorey ‘trophy house’ accommodation
  • Healthcare - the desperate need to live longer will overwhelm the accumulation of wealth and they will pay anything for it
  • Bonds* - a secure income without having to bother with the daily volatility of stock markets interrupting their day on the golf course
  • Travel - having worked for the past 30 years, it’s time to live a little and see more of the world than the hotel room and airport with which they became familiar whilst away on business trips
  • Internet connectivity - their children probably live far away, so keeping in touch will be a priority
  • The secondary or tertiary career - sitting at home all day will become boring and a desire to have a portfolio of activities will be attractive, especially if it involves ‘putting something back’ into the community
  • Cheap transport - getting around at an affordable price, especially as the oil price rises
  • Funding their children - the alternative to having them live at home will see them investing in housing and subsidising the beginning of their careers
  • Tax planning - how can they legally hand as much of their accumulated wealth as possible on to the next generation?
  • Care homes - in their final years, where can they live comfortably in security and surrounded by like-minded people?
Whether there is any opportunity to benefit from that list in terms of investing, I don't know. Changes of a demographic nature do, by definition, tend to arrive rather slowly giving everyone a chance to jump on the bandwagon.

The other interesting point he made in the same article was that the emphasis will (continue to?) shift towards bonds* and away from equities. As a fixed interest (bond) fund manager he would say that wouldn't he? But the point he makes about the golf course is a good one.

It all goes to show that you can't just invest in isolation. The world is ever-changing and being aware of the wider implications of what you are doing is always going to be helpful - or at least working with someone who can keep you aware.

* "Bonds" is an over-used word in finance. Here he (and I) are referring to "fixed interest" investments such as government gilts and corporate bonds (loans to companies) which pay a regular income and are fairly stable relative to equities.

6 December 2010

The End of National Insurance?

The Centre for Policy Studies (CPS) has published a new report which proposes the abolition of National Insurance.

That sounds kind of drastic, but given that it has changed significantly since its introduction and that the Government are considering a flat rate, non-means-tested state pension, it becomes little more than some extra tax to pay.

Of course, that doesn't mean that we will end up paying less tax (you didn't really expect that did you?) but it could mean a significant saving in government costs - always worth aiming at.

The CPS describe National Insurance as "complex, cumbersome, misleading and ramshackle". There is no longer any real relationship between what you contribute and what you get, since most benefits paid for out of NI are now flat rate benefits, even though contributions are still related to earnings.

However, I can't see its abolition happening any time soon. It is useful to politicians who are still able to hide behind it as a way of raising taxes without calling it a tax. And with all the reform going on in the pensions world - mostly good stuff - tackling NI in the near future is probably a step too far.

12 November 2010

Effective Charity Giving - II - Other Taxes and Higher Rate Taxpayers

In the previous article I looked at Gift Aid and Payroll Giving. But there are other ways of giving to charity which enable it to be as effective as possible, both for you and for the charity. “Effective” generally means saving tax and that’s what we will look at here.

I mentioned previously that higher rate taxpayers could reclaim the difference between higher rate tax and basic rate tax on donations made via Gift Aid. In effect, your basic rate allowance is increased by the gross amount of the donation (the net amount of the gift plus basic rate tax reclaimed by the charity). This has a big advantage for those whose taxable income is in the range £100,000 to £112,950 because in this range your personal allowance is progressively withdrawn, so there is an effective tax rate of 60%. Giving to charity and thereby increasing your basic rate allowance means that less of your income (or possibly none) will fall into that band.

There is a similar effect for those with taxable income over £150,000 and subject to the top rate of 50% income tax. Reducing the taxable income to below that level is worthwhile.

Here’s a useful fact: Gifts to charity are free of Capital Gains Tax (CGT). What that means is that any capital gain you have in an asset (such as shares) which would cost you 18% or 28% CGT if you were to sell it can be avoided completely if you donate the asset to a registered charity.

And here’s another useful fact: Gifts to charity are free of Inheritance Tax (IHT). Whether you make the gift in your will, or whether it is before your death the value would not be added back into your estate in order to calculate IHT. (It would be in most circumstances if you made the gift to a non-charity within 7 years of your death.) The gift to charity also leaves the annual IHT gift allowance of £3,000 unaffected and available for other gifts.

And the third in the trio of our most common taxes is of course Income Tax. The good news here is that (quite apart from Gift Aid and Payroll Giving covered in a previous article) certain gifts to charity can get you Income Tax relief. They include shares, land, or buildings. In effect, you can deduct the value of the gift from your taxable income.

Companies which make gifts to charity can also save tax. The gift is made gross (before deduction of Corporation Tax), and the value may be deducted from profits when calculating the Corporation Tax liability.

8 November 2010

Contracting Out - Bringing some Clarity

"Contracting out" has been - to many people - a confusing aspect of pensions for a good number of years now. What does it mean, and does it matter?!

What you are contracting out of is the State Second Pension, or S2P, and its predecessor the State Earnings Related Pension Scheme, or SERPS. Those are pension schemes set up by the Government aiming to supplement your basic State Pension in retirement, based on your earnings.

However, many people are not part of that scheme because they have another pension plan which will provide at least equivalent benefits. In return for not receiving that additional pension from the State, your National Insurance contributions (and those your employer pays) are reduced.

And just to add to the complication you are either contracted in or contracted out at any one time, but many people will find themselves switching back and forth as they change jobs or pension plans. So for some of your working years you will find that you have an entitlement to the State Second Pension but for others you won’t.

Most "final salary" or other defined benefit schemes are contracted out. So you won't receive anything from the Government beyond the basic State Pension for the years you were in that scheme.

Where your employer provides a "money purchase" or defined contribution scheme, it’s possible that the whole pension scheme has contracted out or that you may have decided to contract out on an individual basis, while a "group personal pension" or "stakeholder" plan would require you to have made the decision to contract out individually.

If you are not sure whether you are currently contracted in our out you can ask your employer or check your annual statement. Any reference to "rebates" or "protected rights" would indicate that you are contracted out. You can also check by ringing HMRC’s Contracted Out Pension Helpline on 0845 915 0150 - see HMRC Helpline information

Even if you have been contracted out, whether you are now better to be in our out is not a straightforward decision. From 2012 only final salary pension schemes will be able to contract out, so are you better off contracting back in before that? You can make the decision to do so before each tax year, although the decision will not affect previous years.

There are several factors to bear in mind in making the decision:

• If you remain contracted out, your employer or pension plan takes the responsibility of providing the additional pension, either from the employer's scheme or from the investment returns in a money purchase plan - and you may have a view on the risk involved with that

• Contracting back in will increase your National Insurance contributions a little

• The Pensions Advisory Service Contracting Out Planner suggest that you are likely to be better to be contracted in if you are aged 40-45 or older

• You will have more flexibility if you are contracted out - in a money purchase plan you can take up to 25% of your pension plan as a tax-free lump sum after age 55, and contracting out means a higher value in your pension plan, and therefore a higher lump sum

• As well as a lump sum you can take other pension benefits from age 55 out of your own pension plan (boosted by contracting out) whereas contracted in benefits (the State Second Pension) can only be taken from state pension age (increasing to 66 by April 2020)

• Legislation may change that reduces the value of contracted in benefits, whereas contracted out benefits are yours

• Conversely you may end up being better off with the state benefits, particularly if you are responsible for choosing the investment funds and those funds under-perform or have high charges

Here are some further information links:

The Department for Work and Pensions has a leaflet called Contracted Out Pensions available on the Directgov website.

The government-funded information website Moneymadeclear also has a leaflet on contracting out which you can download.

And the government’s Directgov website also has a Guide to Contracting out

3 November 2010

Effective Charity Giving - I - Gift Aid

Many of us like to give to charities, so here are few ways to make sure that your giving is as effective as it can be. This article mainly covers Gift Aid, while a later one will cover other ways of giving, and giving by higher rate taxpayers. Just to be clear... when we talk about charities they have to be registered as such to gain tax benefits.

First of all it is worth identifying for yourself what charitable concerns you have. It is far more effective for a charity if you give a regular amount - and potentially support them in other ways as well - rather than drop a few coins into a collecting tin occasionally. Much as we would like to, none of us has the resources to support every charity there is.

One of the best ways to give to charity is also the simplest - Gift Aid. Your gift is treated as a net amount on which you have already paid basic rate tax. The charity is then able to reclaim that basic rate tax adding to the value of your donation. All you have to do is sign their form to say that you want to give in that way - and the form only has to be done once.

If you are a higher rate taxpayer (40%) or “additional rate” (50%) then you need to declare your gifts on your self-assessment tax return (or the P810 Tax Review form from HMRC if you don’t do a tax return), and the tax you have paid on that donation above the basic rate can be reclaimed by you.

Here’s an example: you give £10, the charity reclaims basic rate tax on that - an additional £2.50. And as a higher rate taxpayer you could reclaim an additional £2.50.

One thing to look out for with Gift Aid - you do need to make sure that you have paid enough tax in the year to cover the donation. That can be either Income Tax and/or Capital Gains Tax. Otherwise HMRC may ask you to make up any shortfall (the tax “rebates” they have paid out to your charities). If you haven’t paid enough in the current year then you can ask HMRC to carry back a donation as if it were paid in the previous tax year.

There is more detail on the HMRC website at: http://www.hmrc.gov.uk/individuals/giving/gift-aid.htm

If your employer operates a payroll giving scheme, you can achieve a similar result as Gift Aid. In this case, the donation is made gross (before any tax is deducted).

23 October 2010

Investment charges in the News

I have come across several news items this month which talk about investment charges. There was a rather ill-informed Panorama programme on pensions and on how much money people were supposedly losing. and there was a MoneyMail supplement "revealing" the extent of the problem.

The fact is that it is important to look at the charges on an investment or pension. Over the long term they can have a significant impact on the growth (or otherwise) of your investment. And it is the annual charges which are the most significant, even though they are likely to be smaller than any initial charge. If you invest £10,000, the difference between growth at 5% and 4% (with an extra charge for example) is approaching £1,500 over 10 years.

Nevertheless, investment companies do have a right to make a profit as well as having costs.

Investors can fall into one of two camps - either they think any charges are a bad thing, and stick to a poorly performing bank account (remind yourself who gets the profit from that!), or they ignore the charges. Neither is the best approach.

A realistic look at the numbers for two different options - invest or don't - will normally indicate what is the best option for you. The key thing is that the charges have to be clear, and while there is room for improvement that has improved a lot in recent years.

15 October 2010

Pensions Change (again)

For something that, by its nature, is long term, pensions have an amazingly large number of legislative changes. The changes announced this week are pretty significant for many people coming up to retirement, but fortunately are pretty sensible, given the financial situation of the country. (The change may just affect some people who are already retired if they have large pension funds not "crystallised", but that is less common.)

The headline was about the Annual Allowance which has reduced to £50,000 per year (from £255,000). In other words that's the limit to the "value which can be added" to all your pensions in a year.

You may think that that doesn't apply to many people, but where someone is a high earner and has a final salary ("defined benefit") pension, there may be a danger of hitting the limit. Also, where someone is in the habit of putting lump sums into their pension when their business has cash available, perhaps, they too could be limited.

There is also a reduction in the Lifetime Allowance - that's the maximum value of all your pension benefits you are allowed to have at retirement before there is an additional tax charge.

As ever, there are details to be considered (like the fact that a year is not necessarily 12 months long!, and that any unused Annual Allowance can now be carried over), but overall it could end up costing some people a five-figure sum in the near future!

21 August 2010

Raiding Savings - Good News

Almost a third of adults have raided savings in the past year to cover income shortfalls, according to investment firm Schroders (quoted by the BBC: http://www.bbc.co.uk/news/business-11039316).

Obviously it's not good to have an income shortfall, but given that "life happens" it's much better to have thought ahead and accumulated some savings than to cover an income shortfall with borrowing! And let's face it, there is little incentive to keep money in savings accounts at the moment.

The key thing is to have the strategy to accumulate savings in the first place. A quarter to a third of your annual income set aside and easily available is a good rule of thumb - perhaps up to a half if your income is less certain (self-employed perhaps?) or outgoings are very "lumpy".

12 August 2010

The End of Final Salary Pension Transfers?

Health Warning: This may all sound like gobbledygook! If it does, don't worry about it! If you have any questions about final salary pension schemes we may be able to help.

At the moment it is possible to transfer from a final salary pension scheme into a defined contribution scheme prior to retirement. Although it is not often worthwhile (since the employer guarantees the ongoing benefits), it can be worthwhile if you have doubts about the ongoing viability of the scheme or if you need extra flexibility of income - by transferring to an "income drawdown" scheme, for example.

But it looks like the Department for Work and Pensions are proposing to abolish transfers from final salary schemes into defined contribution pensions from 2012 onwards. Part of the reason may be that final salary schemes are often contracted out of the State Second Pension and "contracting out" will be abolished for defined contribution schemes.

4 August 2010

Financial Services - A Culture Needing a Crisis - Part 2

part 2... (read Part 1 first by clicking here)
I’d have to say that I would have agreed with the view that financial markets should be left to act according to the free markets a few years ago. Ultimately buyers and sellers sort out what works and what doesn’t and how much things should cost. The trouble with the financial world is that it has become global, and it is now far removed from a single buyer and a single seller (or a borrower and a lender in the banking world). Complicated financial products were invented which enabled various high risk debts (particularly mortgage loans for low income families in America) to be packaged up (into things called Collateralized Debt Obligations – CDOs) and sold on to other banks as low risk debts.

Transparency was lacking, and also, since it was in everyone’s interests that this whole financial product edifice worked, no-one acted as the whistle-blower. To put it another way, it wasn’t in the culture to flag up a potential calamity:

  • Politicians were happy – low income families were in “their own” homes which was good for votes (and that goes right back to Bill Clinton)
  • Bankers were happy – their high risk loans had magically become low risk so they could borrow more against them as assets
  • Shareholders were happy – since bank profits increased
  • Bank employees were happy – their bonus structures (thanks to the culture – which I haven’t heard has changed) were based on profits they generated, not on the risks they generated, and after all, the taxpayer could pick up the pieces if anything went wrong (not that I think they actually thought about failure)
That’s why I don’t see any alternative other than legislating on things like bankers’ bonuses. If the culture is to reward profit and not worry too much about loss then an enforced cultural change is needed. I find it amazing that the boss of failed RBS – which has cost the taxpayer dearly – still expected a massive pension payout. As an intelligent person (presumably), one can only assume that he sees the world differently to the average man – and that’s a sign of a culture incompatible with reality. He and many others might well say that they have performed the particular task they were given well, and therefore their full rewards are due to them. The rest of us would say that they failed to see the bigger picture which they were uniquely capable of seeing and therefore they have failed.

In the meantime, the culture continues to generate complication because it looks clever, and cleverness is what counts in the banking world. RBS, for example, are currently advertising a retail product which uses “sophisticated dynamic investment techniques” to monitor an index (which itself they have invented using a combination of other indices) and which then uses various parameters to decide whether to buy long or sell short.... all presented as though that’s a good thing!

One could also highlight the culture within financial services regulation as being significant in getting us to where we are. The Treasury, the Bank of England, and the Financial Services Authority could all say that they did what was asked of them. But collectively they failed to prevent a global financial crisis, or even, apparently, to see it coming. I’m quite sure that nobody feels bad about that because they continued to meet their various targets, while continuing to receive their public sector benefits packages.

Here too, there are signs of a culture needing to change. Sadly, I don’t see the proposed reorganisation of the FSA as making any realistic change, and they will continue to regulate the easy bits rather than the bits that matter; but let’s hope I’m wrong.

3 August 2010

Financial Services - A Culture Needing a Crisis - Part 1

A bit of a longer article this time, so I've split it in two...

Ever since doing an Open University management course many years ago I have been interested in the culture of organisations. So much of how an organisation works – including the actions of individuals – is down to the culture. It’s rarely explicit or easy to describe, but it’s vital in the success or otherwise of that organisation.

Basically the culture says what is really important to us – never mind what any published mission statement says, or how the organisational structure is put together.
  • If the important thing is to cover your rear-end to avoid the big boss getting angry, then that will certainly take precedence over providing a good service to your customers
  • If it is more important that you can’t be blamed for anything in case you are reprimanded, then you are not going to take any risks in what you do
  • If there is a strong “can do” attitude, then that is likely to be more important than sticking to the rules
One other example of a culture is that you might call someone a “jobsworth” – it’s more important to them to do exactly what is expected of them and no more, than it is to go the extra mile and actually help someone.

What has this to do with personal finances? Well, quite a lot, actually, because it is quite possible for a culture to apply across organisations, too. In fact, I would contend that the whole financial services world has a culture... and I’m not alone in that – “Whoops!” by John Lanchester is one of quite a few books on the global financial crisis of the last two years, and it says the same thing.

Although there have been changes resulting from that crisis which have cost eye-watering sums of money (to the taxpayer mostly), I can’t help avoiding the feeling that nothing has really changed. The culture is still the same. John Lanchester describes people in the City as having “fundamental assumptions based on the primacy of money, and the non-reality of other schemes of value”. The culture is all about letting the free market do its thing.

I can’t help thinking we have gone way past that. It’s time for some real change.

continued soon...

23 July 2010

Good News - Banks Fail Stress Tests!

Stress Testing the Banks
Seven out of the 91 European banks which were stress-tested failed those tests. So what are the stress tests and why is that good news?

The tests pose several scenarios, like "What if a country like Greece fails to repay its debt? Where does that leave the banks? Which of them are exposed to that debt and have to call on their own capital?"

The big problem we are all suffering from in the financial world is ongoing uncertainty. If the European regulators had said "everything is fine - no need to worry", no-one would have been sure whether to believe them - so more uncertainty. But at least now we have some hope that we know where the problems are.

Five of those banks are in Spain, one in Germany, and one in Greece.

20 July 2010

Annuities – The Product you Bought But Never Heard of

At the time of your selected retirement age, insurance companies will send out some information to holders of money purchase pension plans. This gives information on the pension income available from your fund.

Recent rule changes mean that the option of taking your pension money to another pension provider must be stated (the “Open Market Option”). In reality the easy route for most people is just to tick the box and take an income from the same insurance company. That suits the insurance company, since, apart from anything else, they will take a percentage of your fund for the privilege of setting up your pension. What you are actually doing is buying an “annuity”.

An annuity is a financial product like any other but for some reason our regulators do not require any advice at this vital stage of life. As a result, by just ticking the box, many people are getting the second or third best option. Annuities seem to be viewed by the Financial Services Authority as risk-free, but that certainly isn’t the case. It is possible to buy a totally inappropriate annuity – perhaps with no provision for a spouse if the purchaser dies first, or perhaps with no allowance for a reduced life expectancy for someone who has health issues (which could get you a higher income).

Currently, Government more or less forces everyone to take an annuity at some stage (this is under review, but any change may only be useful to the most wealthy pensioners). If they are doing that, then the least the FSA can do is to make sure people know what they are buying and take a conscious decision. Isn’t that what the FSA exists for?!

More on annuities and other retirement income at http://www.primetimefinancial.co.uk/retirement-income-info

19 July 2010

National Savings Withdraws Savings Certificates from Sale

From today, National Savings & Investments (NS&I) are pulling their Savings Certificates from sale. That includes the Index-Linked variation which were helpful in protecting against inflation.

It's a sign of these volatile times really. As a government agency, their mandate is to match inflows of money against outflows (within reason - and that means within £2 billion!!), and their various products have proved too popular, so there has been too much money coming in. It's easy to guess why that might be - even with unattractive interest rates (not that 2.5% tax free was too shabby) the attraction was government-backed security.

The result is that the search for good returns on savings remains difficult.We'll shortly be launching our "Campaign Against Lazy Money" to help address this.

6 July 2010

Lifetime Cashflow Planning

I'm getting excited about this - it's the ability to map out your cashflow for the rest of your life (in broad terms, of course). There are big questions which people ask (or perhaps they don't but should do), including:
  • Is my money going to run out before I die?
  • Can I afford to spend a bit more?
  • Am I saving enough for a reasonable income in retirement?
  • Is there going to be a big Inheritance Tax bill for my estate to pay?
  • What will happen if I need to pay for long term care?
By looking at expected income and expenditure, growth on investments, and the result on the value of your assets you can start to get some answers.

There are some nice software tools around which can help, but they do tend to be a bit more complicated than I think is needed, and more expensive! A simple Excel spreadsheet version should do the job quite nicely. Watch this space!

29 June 2010

Absolute Returns - for those interested in investment detail!

Many people with money to invest are really not interested in investing. If leaving your money in a savings account was at all viable over the long term then I think that many would go for that option. But the trouble is, as we know, (a) savings rates are poor, particularly at the moment (and over the long term they do little better than maintain their value against inflation), and (b) investments go up and down.

The big question is whether there is any middle ground. One possibility here is the growing range of "absolute return" funds. A good investment will tend to out-perform a market index such as the FTSE 100 - that's a "relative return". But out-performance may just mean it doesn't fall as far, but you still lose value which is not good if you were planning to spend that money shortly, or if your financial plan assumes a constant increase in value. Absolute return funds, on the other hand, aim to keep on going up, whatever the markets are doing.

Of course, that comes at a price, and when markets are rising you would not generally get such a big increase in value. And it is still an investment after all, so all the funds that I know of still have the possibility of falling in value - absolute return is an "aim" not a guarantee.

There are lots of different ways of achieving an absolute return, some more complicated than others. A recent survey (Citywire) identified 11 different strategies. The general rule of diversifying your investments would apply here, too, so using more than one absolute return fund with different strategies would make sense.

Other general rules of investing also still apply - funds should be selected with the investor's attitude to risk in mind, and with an eye on asset classes, too.

Not More Budget Stuff

I certainly haven't ignored the recent Budget - it was one of the most significant ones recently for financial planning. However, I have summarised it's importance elsewhere - see the home page of the main website - http://www.primetimefinancial.co.uk/ for that.

It's also covered in our new printed newsletter which has just been sent out. Let us know if you would like a copy - www.primetimefinancial.co.uk/contact-us

21 June 2010

Reality Revealed - Public Sector Pensions

I'm glad to see that public sector pensions are into the news. They need to be! We have moved on from thinking about "classes" in society (working class, middle class, upper class), but we now have a two-tier society - those with a public sector pension and those without.

That may be a bit harsh since the various public sector schemes do vary from each other in terms of how valuable they are, but I certainly believe that public sector employees are generally unaware of the value of what they have, and of the cost to the rest of us!

The BBC's Stephanie Flanders has provided a great analysis of the current situation:
www.bbc.co.uk/blogs/thereporters/stephanieflanders/2010/06/some_of_the_truth_about_public.html

These are the key points from that blog (and elsewhere) for me:
  • Most public sector pensions are "unfunded" - in other words it will be down to our children's taxes to pay for the pensioners in years to come, depending on how many pensioners there are (the exceptions are the local government scheme and the MPs' scheme)
  • The greater the number of people in the public sector and the higher their wages the more the schemes are self-funded (i.e. by today's public sector workers' pension contributions paying today's pensioners)
  • The shortfall in funding has to be picked up by the Treasury (that means the rest of us who pay taxes), so, reducing the number of people in the public sector will actually make that aspect of public finances worse!
  • It's not fair (or contractually possible) to change employment benefits that have already been accrued by staff (and certainly not fair to pensioners already receiving a pension!) so the cost of funding public sector pensions will unavoidably increase massively whatever we do due to the large number of those who joined the public sector 30-40 years ago now retiring
  • That liability would - if bought on the open market rather than being guaranteed by our taxes - cost around £26bn in a year (according to the recent Office of Budget Responsibility report)
  • And the benefit to public sector employees? - a public sector pension could be worth an additional 30% - 40% on their salary - that would be the "real" cost if it were paid for up front like private sector schemes must be

11 June 2010

Savings for Children

One approach to putting money aside for children is to use the "Designated Account" method.

You could, of course, simply have in your own mind that a particular savings or investment account is destined for a child or grandchild. In some cases it will be possible to record that fact by having a "designation" on the account - just a second name for it, really. But the account will be taxed as yours - the investor - because it really is still yours!

On the other hand, if you make the designation "irrevocable", then you are creating a trust - a "bare" (or "absolute") trust to be strictly correct. The provider of the investment account needs to know about it, because the child is the beneficial owner, and when they reach 18 they will become entitled to it.

Because you - who provided the money for the account - do not have any access to it (you cannot surrender it) you have no tax to pay. (It is a gift for Inheritance Tax purposes, but in most cases it will be exempt.)

The mechanics will vary but an account provider should be able to help.

7 June 2010

Useless Financial Products

Which? Money Quarterly has come up with an interesting list of its top ten useless financial products. Here's what they think, with my comments ["PTF"] where there is anything worth adding! I'm very glad that they recommend going to an independent financial adviser for expert help.

Mobile phone insurance: Most people are already covered by their home insurance

Extended warranties: These are too expensive to ever be worthwhile. Cost: Up to half the cost of the product itself
[PTF comment: I always think that the harder someone tries to sell you something the more important it is to them to sell it - and less valuable to you! - certainly agree with that one]

Structured products*: Can be confusing, complex and costly - put your money into an Isa
[PTF comment: Care is certainly needed - there is more awareness these days on the "counterparty" who backs the product - but I don't agree that they are useless products - they have a place in a larger portfolio at least]

ID fraud cover: Most losses will be met by your bank

Payment protection insurance: Choose income protection, and avoid over-priced PPI
[PTF comment: yes - Income Protection is the most under-used life insurance - it replaces (some of) your income if you are ill - essential unless your employer pays out generously. That way YOU can decide what payments to keep up.]

Secured loans: Are risky - only take out unsecured loans

Store cards: Have high interest rates - try a Which? Best Rate credit card instead

Debt management plans: Ditch this expensive product and get free debt advice from CCCS, the National Debt Line or your local Citizens Advice Bureau

With profits: Can incur high charges, so invest your money in stocks and shares Isas
[PTF comment: I would tend to avoid With Profits plans for a new investment / pension (although there are still a handful of good products around). The case is less clear if you have such a product already - worth reviewing at the very least.]

Packaged accounts: Often not worth the money, so replace with a Which? Best Rate current account

17 May 2010

Risk and Return

One of the most important parts about recommending where an investor should put their money is to assess their attitude to risk and return.

The unavoidable fact is that risk and return always go together – if you put your money in a current account there is very little risk of losing it, but very little opportunity for it to grow. Conversely, if you invest in a small company which is just starting up there is a high risk of losing all your money, but if it works out, there is a possibility of a high return.

But the risk to your capital value is not the only type of risk. If you regularly follow the FTSE100, for example, you might consider it an unacceptable risk to be under-performing that index. The volatility of an investment is also something to consider (and is often used synonymously with "investment risk"): if an investment goes up and down rapidly (such as small company shares) that is a different level of risk to one which goes up and down more slowly (such as property).

There’s a lot of maths behind assessing risk, including the “normal distribution” curve, and “standard deviation” which you may (or may not!) remember from O-level / GCSE maths. But to make it more palatable for the average investor a risk questionnaire is typically used, resulting in a score of 1 to 10. That result encapsulates the investor’s desired balance between risk and return.

For a simple portfolio it is then sufficient to pick a fund or two which match that level of risk – typically a managed fund which itself invests in a range of different types of asset. For a larger portfolio, it is worth considering the “asset allocation” – in other words, the asset classes like equities, fixed interest, property, and cash (although these can be sub-divided further). That’s because diversification is an important part of reducing the level of risk for the same level of return - particularly over a longer time period.

Having said all that, there is a lot more detail possible, and a lot more questions which could be asked of the investor which will affect the recommendation, including whether you are investing for growth or income, how long you expect to invest for (or at least the minimum time), the level of loss you would be prepared to see in any one year, how far you are willing to stray from a benchmark index (like the FTSE 100), and how much notice you expect to give when considering surrendering an investment.

So if I ask lots of questions about your attitude to risk, the level of return you want, and so on, just humour me! Ultimately it is about understanding and then delivering your objectives without scaring you too much on the way!

19 April 2010

Managing Your Investments

Many investors make use of what are variously called "platforms", "fund supermarkets", or "wraps". These are tools which provide you (or perhaps your adviser) with the means to manage your investments online. By way of example, one of the most popular is "Cofunds".

There are various advantages in using a platform, and they include the means to see all your investments in one place (or at least investments of a particular type, like unit trust funds / OEICs) - even if that is just an annual statement. Costs are generally lower than going direct to individual fund managers, too.

Now the FSA is, to my mind, muddying the water by proposing "unbundling" the charges so that they are clearer to investors and their advisers. It's not yet clear what that will mean in practice, but in principle it seems to be about making it clear how much of the annual / initial charges are down to the platform itself, how much is the charge from the fund managers, and how much is the advice charge (although for Prime Time Financial clients that is already a separate charge since we charge a fee for our advice and don't take commission).

That sounds good at first sight, but when you stop to think about it the last thing investors really need is further complication. It would be like Sainsburys having to show a number of prices on a carton of milk - what part of the cost is down to the farmer, the packaging, the transport, and the retailing. Would that be helpful? Or what about low cost airline flights which already "unbundle" the charges - you still have to pay the unbundled "booking fee", and the charge to get your luggage on board, etc., and most travellers would say it is confusing and unhelpful.

Greater transparency is a good principle, but perhaps there is a lack of realism and business sense among the regulators, since they are not the ones to have to explain it to the average investor, who may only think about their investments a couple of times a year, and who, above all, need simplicity.

The danger is that investors will be too confused to bother, and that will be to everyone's detriment. Let's hope it turns out better than I fear. But whatever happens I'm here to do my best to explain it!!

8 April 2010

The Budget and Tax

Well I guessed wrong! Capital Gains Tax remains at 18% and the Chancellor even increased CGT Entrepreneurs' Relief to £2m (I'm happy to explain that if it might affect you!).

But more in line with the country's current tax situation, the Inheritance Tax Nil Rate Band ("allowance" to you and me) is set to remain at £325,000 until 2015. That means more and more people will fall into the tax - another stealth tax in the usual style of this government.

19 February 2010

Pensions for Children

That sounds like a contradiction in terms, I’m sure you’d agree. But a client has highlighted to me the value of starting a pension early – and that means as soon after birth as possible – and I thought it was worth passing it on to a wider audience.

The source of the information was a recent Saturday Telegraph article, and it highlights what keen investors will know about – let’s call it the miracle of compounding.

Basically, if you (on behalf of the new-born baby!) contribute the maximum allowed for a non-taxpayer into a pension plan (yes, even children can have one) - that's £2,880 net per year – for the first 18 years of their life, then they could have a pension pot of £1.8m. That’s worth having! (although the real value would be less due to inflation during their lifetime).

There are potential Inheritance Tax advantages for you, too, particularly if you are older (perhaps a grandparent), since that amount fits into your annual allowance for gifts of £3,000. However, if you have more than one grandchild you have to make sure that you live at least seven more years to take full advantage.

9 February 2010

Capital Gains Tax to increase?

Political parties are fighting over what public spending to cut, and where to raise taxes, but there's general agreement that both of those have to happen. One tax area which seems ripe for attention is Capital Gains Tax (CGT).

The current flat rate of 18% was introduced only in 2008, but the rate feels lower than the general tax environment. So an increase after April 2010 seems a good possibility, and the annual allowance is unlikely to increase - effectively a stealth tax. So what could you do to prepare?

One thing you are unlikely to be able to do anything about is second (and third, ...) homes. If a property which you rent out has increased in value since you bought it, then you will have capital gains tax to pay when you sell. However you are unlikely to start thinking about selling now if you weren't already, and selling in a short space of time in the current market seems unrealistic.

Other than that, investments which are not protected in an ISA (or some other) tax wrapper are potentially vulnerable to CGT. Selling them now would be a good thing if you had considered selling in the near future. Making use of your annual ISA allowance is generally worthwhile since it will avoid CGT in future.

Transferring assets between spouses may be appropriate prior to selling - there is no CGT implication of doing that transfer, and you could make use of two lots of the annual allowance when you finally sell.

Other than that, taking professional advice is good advice - remember that this blog does not provide personal financial advice.

2 February 2010

A New Start - Prime Time Financial

After something of a delay while the Financial Services Authority sorted out their paperwork(!), I am now providing financial advice as "Prime Time Financial" - part of Keystone Financial Ltd (FSA registration number 501917 should you care to check).

Feel free to get in touch ... click on "View my complete profile" on the right for email address and Prime Time's website. I'm happy to talk to anyone, but my focus will be on the over 50's, pre- and post-retirement.

31 January 2010

With Profits Policies - time to reconsider?

With profits policies were appropriate for many investors when they came along 10 - 12 years ago. They include a mix of asset types (shares, fixed interest, etc.) and are managed by the insurance company to "smooth" the ups and downs of investing.

The trouble is they have become synonymous for many people with an opaque investment which does the opposite of what you expect. It is up to the insurance company actuaries to decide on the annual bonus rate - the amount by which your investment increases - or the Market Value Reduction (MVR) - the amount by which it decreases (in effect). The way that the smoothing is done can mean that values are now going in the opposite direction to the stockmarket, since they take into account the average performance over a longer period of time.

Combining this with a more cautious approach to asset allocation than when a policy was bought (to protect the bonus pool) means that for many people it is time to get out. Having an MVR doesn't necessarily mean that it is the wrong time to sell, but it is worth checking if there is a time when your policy waives the MVR - this can happen on the 5th or 10th anniversaries, for example.

Having said that, there are still worthwhile With Profits policies out there.

3 January 2010

Investing in 2010

What are the prospects for investors in 2010? Remembering that this is not personal advice, here's a quick summary of some basic asset types.

Savings look set to be un-rewarding, with low interest rates set to stay for the time being. So apart from a minimal "rainy day fund" it is not worth keeping too much in a deposit account.


Corporate bonds were a big story in 2009 - certainly for the types of investor I deal with (in the cautious half of the scale). There still seems to be some mileage left, but I would hesitate to put new money into corporate bonds now. High yield bonds are following a similar path - just a step behind, and when we begin to see the end of Quantitative Easing their attraction will reduce further. The "strategic bond" category may be a safer bet with fund managers having the ability to switch between different types of fixed interest holding (corporate bond, high yield bonds, global bonds, gilts, etc.). Having said that, government gilts may have rough waters ahead with the end of QE (causing higher inflation, causing reduced value in gilts since their fixed interest rates become less attractive), and with doubts about the UK’s ongoing credit-worthiness.

Equities (shares) look very positive. Although the full effects of the recession have not yet been felt (when ARE the government going to be up-front about how our massive debt is going to be repaid?!) shares tend to recover early in the economic cycle. In particular (again, thinking of more cautious investors), equity income funds are a good story (if chosen well) since the dividend income introduces some stability if re-invested, and in the worst case reduces any loss in capital value.

For the more adventurous, Emerging Market funds continue to look good in terms of increasing valuations. Countries which were "third world" in the not-too-distant past are increasingly going to be the engine-house of the world economy in the not-too-distant future.

Property funds have been bad news in recent years, and some have been closed for withdrawals due to the difficulty there was in selling commercial property to provide the liquidity. However, with a long term view in mind, and particularly for income investors (yields up to 6 or 7%), property is once again on the agenda, and is worth considering (although probably not in the first 90% of a portfolio, since liquidity issues may rear their head again at some point in the future).

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