Archive for the ‘Financial Planning’ Category

Saving Tax

February 16, 2012

Enjoy your maximum tax relief

Making the most of your pension contributions

Are you claiming higher rate pensions tax relief?

If you pay higher rate tax you will not receive tax relief automatically on your personal pension contributions unless you claim it. This means that someone earning more than £42,475 (higher rate income tax threshold plus the basic personal allowance) in the current financial year could potentially be losing a fifth of the contributions to their pension if they are not actively claiming back higher rate tax relief on their contributions.

Claiming tax back If you pay income tax on your earnings before any personal pension contributions, your pension provider claims tax back from the government at the basic rate of 20 per cent. In practice, this means that for every £80 you pay into your personal pension, you end up with £100 invested in your pension fund.

If you are a higher rate tax payer paying 40 per cent, you may able to claim an additional tax relief. Depending on how much you earn over the higher rate tax band, any additional tax relief could range from between a further 1 per cent up to a maximum of 20 per cent.

Additional rate tax payers From 6 April, if you are an additional rate tax payer and pay 50 per cent, you may also be able to claim additional tax relief at your highest rate. Depending on how much you earn over the higher rate tax band and your level of contribution, any additional rate tax relief could range from between a further 1 per cent up to a maximum of 30 per cent.

Claiming higher rate tax relief on personal pension contributions is for many people the single most important relief they can claim, yet hundreds of thousands could be missing out. To obtain your additional tax relief you must file a tax return or get HM Revenue & Customs to change your tax code. To do this, you have to contact your local tax office.

Full tax relief straight away If you are employed, usually your employer will take occupational pension contributions from your pay before deducting tax (but not National Insurance contributions). You only pay tax on what’s left. So whether you pay tax at basic, higher or additional rate you receive the full relief straight away.

Posted in Financial Planning, Money Matters, Retirement Life Planning

Tax Matters

January 27, 2012

How much will your beneficiaries keep?

How much of your hard-earned money will the taxman get his hands on?

Inheritance Tax (IHT) in the UK may be one of life’s unpleasant facts but IHT planning and quality advice could help you pay less tax on your estate.

For the 2011/12 tax year, no IHT is charged on the value of your estate up to £325,000. This is known as the ‘nil rate band’. Everything above this is taxed at 40 per cent. This allowance is unchanged since April 2010 and has been frozen at this level until the end of this parliament. In real terms the allowance is decreasing.

If an individual’s IHT nil rate band is not used up on their death, the unused proportion can be transferred to their surviving spouse or civil partner. Please note that the additional nil rate band has to be claimed by the Executor’s  of the widow(er)’s Estate and that HMRC will require the following documentation (often 20 or more years after death);

  •  a copy of the first will, if there was one
  •  a copy of the grant of probate (or confirmation in Scotland), or the death certificate if no grant was taken out
  •  a copy of any ‘deed of variation’ if one was used to vary (or change) the will

Assets passed between spouses or registered civil partners are exempt from IHT (assuming the spouse or partner is domiciled in the UK), regardless of the worth of the assets and how soon you die after acquiring them.

Reducing your family’s tax bill

Any amount of money you give away outright will not be counted for IHT if you survive for seven years after making the gift. If you die within this period, the amount of the gift will be included within your estate. Taper relief may apply in these circumstances and can reduce the amount of IHT due. If you start gifting early enough each individual can reduce their Estate by £1.3 million over a 28 year period (four times IHT exemption at current levels by gifting every seven years). The type of Trust that you use should be carefully considered – many allow you to retain an interest in an income, some make this “income” available in a similar way to keeping hold of your capital, others allow loans to widow(er)s. Independent Financial Advice is essential as the cost of various Trusts differs enormously.

Certain assets are currently exempt from IHT. Business assets such as privately owned businesses, furnished holiday lettings, some commercial property and certain qualifying investments such as Enterprise Investment Schemes (EIS) and AIM listed shares are exempt, provided they have been held for two years continuously, during the previous five years. Investors should note that the IHT tax concession is given on these investments because they tend to be more risky than mainstream investments. EIS investments also benefit from income tax and capital gains tax concessions as these are perhaps the most risky.

Gifting your nil rate band into a Will Trust still has advantages despite the ability to transfer any unused nil rate band to the surviving spouse. It ensures that the assets cannot be used to pay for Nursing Fees, or squandered by a subsequent spouse, while allowing the survivor to enjoy income or the benefit of residing in the matrimonial home. Many Will Trusts allow the survivor access to capital by way of loans that accrue interest and count as a debt against their Estate, further reducing the final IHT liability. Good advice is essential in this area and Trustees should be chosen with care as they will control the Trust’s assets.

Conclusion

Inheritance Tax is often described as a voluntary tax as, with careful planning, steps can be taken to avoid it altogether or, at worst, mitigate the effects of it. The old adage, “if you fail to plan, you plan to fail”, is perhaps most pertinent in this area of Financial Planning as the cost of failing to take action can be enormous.

Posted in Financial Planning, Inheritance Tax, Legacy, Money Matters

2011 predictions

January 13, 2012

It’s that time of again, when harried finance editors ask reporters to call investment professionals and cobble together top predictions for the coming year. These are fun to write. But for readers, they’re more entertaining a year later.

Take the late 2010 Barclays Capital Global Macro Survey of more than two thousand institutional investors. The pick for the best performing asset class in 2011 was equities (with 40% support), followed by commodities (34%) and bonds (less than 10%).1 The consensus prediction was a 15% gain in the US S&P-500 for the year to around 1,420.

As we now know, the truth turned out to be rather different. To the beginning of December and using broad indices, diversified fixed income was the best performing asset class of the year, followed by government bonds. Returns from commodities and equities were negative. The year-to-date return for the S&P-500 was close to zero. (And remember, these are the forecasts of big institutional investors.)

Barron’s (America’s premier financial magazine), meanwhile, was telling readers this time last year that smart stock pickers were “looking eastward” in 2011. The year was to be dominated by fast growth and rising inflation and the smart thing was to reweigh toward China and other tigers.2

That didn’t really turn out to be such a good idea, as China had another bad year. The Hong Kong Hang Seng index was down nearly 17% to early December. The Shanghai Composite was down by a similar amount.

Conversely, the gloom around fixed income in late 2010 was all pervasive. Barron’s surveyed 10 strategists and investment managers and found nearly all expected stocks to outperform bonds in 2011. “You’ve got to believe in outright deflation to put new money into bonds right now,” said one investment banker.3

The logic might have been impeccable, but the strategy wasn’t so. As of early December, US debt securities, as measured by a Bank of America Merrill Lynch index, had risen by 8.7 per cent in 2011, their best performance since 2008.4

In other words, bond yields might have been seen as unusually low a year ago. But they have fallen even further since and those who tried to profit by market timing or making concentrated bets elsewhere have paid a heavy price for doing so.

So if the experts can’t get the broad asset class movements right, what chance on earth have they of correctly and consistently predicting individual stock or commodity performances? But year after year, that doesn’t stop them from trying.

One prominent investment bank team was quoted by The Australian Financial Review last January as saying that platinum was the metal to back in 2011. As of early December, the spot platinum price was down nearly 14% for the year. On the Australian stock exchange, platinum stocks Platinum Australia and Aquarius Platinum – both recommended by the bank – had delivered total returns to the end of November of -83% and -53% respectively. Ouch! 5

Stock picks often go wrong because forecasters base their calls on what turn out to be incorrect assumptions on macro-economic variables like base lending rates and inflation. Take the AFR Smart Investor magazine “expert panel”,6 who in late 2010 suggested to readers moving out of international fixed income and into cash given expectations of rising cash rates in Australia. As it turned out, Aussie rates did not move until November and when they did, the direction was down, not up.

Currencies are another variable that defy even the most assiduous forecasters. In its 2011 outlook, published in the London Daily Telegraph7 in December 2010, a major British bank forecast sterling would be the best performing currency of the year. The banks also predicted stock markets would outperform bonds, with the FTSE-100 rising about 18%. A year later, sterling ranked only a distant fourth behind the Japanese yen, Norwegian krone and Swiss franc and the FTSE was nearly 6 per cent lower.

It’s a tough business isn’t it? And remember these are major financial institutions with armies of expert analysts, mountains of data and sophisticated forecasting tools. So what is an ordinary investor supposed to do?

The first lesson might be that forecasting is hard, particularly about the future! You can do all the analysis you want, but events have a way of messing with your assumptions.

The second lesson is you don’t really need forecasts to succeed as an investor. Yes, equity markets were rocky again this past year. But a properly diversified fixed income portfolio provided excellent returns. Staying diversified both across and within asset classes provides a cushion in down times and ensures you are still positioned to reap returns when riskier assets come back into demand.

The third lesson is that the past has gone. The news may be gloomy, but that information is in the price. When risk appetites are low, the price of safety is higher than at other times. But the expected reward for risk is higher. Conversely, when risk appetites are high, the expected rewards are lower.

It’s human to feel anxious about bad news because we fear loss more than we like gains. But in this case, the loss isn’t real unless you realise it, so it makes sense to stay with the asset allocation your advisor has tailored for you.

The final lesson is that nothing lasts forever. In fact, of all the forecasts ever made, the only one really worth counting on is that things change. What’s more they often change in ways we least expect.

 

1. ‘For 2011, It’ll Be All About Equities’, Pensions & Investments, Dec 27, 2010

2. ‘Asian Trader: Stockpickers, Look Eastward’, Barron’s , Dec 20, 2010

3. ‘Outlook 2011′, Barron’s, Dec 20, 2010

4. ‘Treasuries Rise on Concern Europe Struggling to Resolve Crisis’, Bloomberg, Dec 7, 2011

5. ‘Platinum to Become the Price of Metals in 2011′, Australian Financial Review, Jan 7, 2011

6. ‘How to Rebalance Your Portfolio in 2011′, AFR Smart Investor, Dec 17, 2010

7. ‘Sterling Best Major Currency Next Year, says Barclays’, The Daily Telegraph, Dec 10, 2010

 

 

Posted in Financial Planning, Investments, Money Matters

What does a Winning Streak tell you?

December 29, 2011

What does a Winning Streak tell us?

Bill Miller is one of the most closely watched money managers in the industry, so it was big news when he announced his decision last week to step down as portfolio manager of Legg Mason Capital Management Value Trust (LMVTX) early next year. His departure also adds an intriguing chapter to the long-running debate regarding the value of active stock selection.

Miller’s most frequently cited accomplishment is the fifteen-year period from 1991 through 2005, during which Value Trust outperformed the S&P 500 each calendar year, the only US equity fund manager to have ever done so. His success attracted a wide and enthusiastic following: Morningstar named him Portfolio Manager of the Decade in 1999, Barron’s included him in its All-Century Investment Team that same year, and a Fortune profile in 2006 described him as “one of the greatest investors of our time.” A former US Army intelligence officer and philosophy student, his formidable intellect covered a wide range of interests, and he believed that conventional investment analysis could be enhanced with insights drawn from literature, logic, biology, neurology, physics, and other fields not obviously related to finance. His expressed desire to “think about thinking” suggested an unusual ability to assess information differently from other market participants and arrive at a more profitable conclusion.

Miller’s bold and concentrated investment style would never be confused with a “closet index” approach. Big bets on Fannie Mae, Dell, and America Online, for example, were rewarded with handsome gains (as much as fifty times original cost in the case of Fannie Mae). Unfortunately, similar bets in recent years revealed the dangers of a concentrated strategy as heavy losses in stocks such as Bear Stearns and Eastman Kodak penalized results. For the five-year period ending December 31, 2010, LMVTX finished last among 1,187 US large cap equity funds tracked by Morningstar. Considering the enormous variation in outcomes among these carefully researched ideas, Miller’s overall investment record presents an interesting puzzle: How can we disentangle the contribution of good luck or bad luck, of skill or lack of skill?

Over the May 1982–October 2011 period, annualized return was 11.28% for the S&P 500 Index and 11.76% for the Russell 1000 Value Index. Value Trust slightly outperformed the S&P and underperformed the Russell index by over 0.40% per year. A three-factor regression analysis over the same period shows the fund underperformed its benchmark by 0.08% per month.

Do these results offer conclusive evidence of the failure of active management? Not necessarily. The fund’s expenses are above average at over 1.75% and provide a stiff headwind for any stock picker to overcome. Gross of fees, the fund’s performance over and above its benchmark goes from –0.08% to 0.07% per month. This swing from negative to positive raises an interesting point that Ken French speaks to at every Dimensional conference. There are almost certainly some mistakes in market prices and almost certainly some skillful managers who can exploit them. But who is likely to get the benefit of this knowledge—the investor with his capital or the clever money manager? If stock-picking talent is the scarce resource, economic theory suggests the lion’s share of benefits will accrue to the provider of the scarce resource—just what we see in this instance.

To cloud the discussion even further, both of these results, positive and negative, flunk the test for statistical significance; in neither case can they be attributed to anything more than chance. So even with twenty-nine years of data, we cannot find conclusive evidence of manager skill—or lack thereof. This is the inconvenient truth that every investor must confront: The time required to distinguish luck from skill is usually measured in decades, and often far exceeds the span of an entire investment career.

Miller is well aware of the challenge of distinguishing luck from skill and has conspicuously declined to boast about his results, even when they were unusually fruitful. He has acknowledged that topping the S&P 500 each year for fifteen years was an accident of the calendar and that using other twelve-month periods produced a less headline-worthy result.

Commentators have said that Miller has “lost his touch” or that his investment style is no longer suitable in the current market environment. These arguments strike us as the last refuge for those who find the idea of market equilibrium so unpalatable that they search for any explanation of his change in fortune other than the most plausible one—prices are fair enough that even the smartest students of the market cannot consistently identify mispriced securities.

Where does this leave investors seeking the best strategy to grow their savings?

When asked by a New York Times reporter in 1999 to sum up his legacy, Miller replied, “As William James would say, we can’t really draw any final conclusions about anything.” Twelve years later, this observation seems more useful than ever. And investors would be wise to treat even the most impressive claims of financial success with a healthy degree of scepticism.

REFERENCES

Andy Serwer, “Will the Streak Be Unbroken,” Fortune, November 27, 2006.

Edward Wyatt, “To Beat the Market, Hire a Philosopher,” New York Times, January 10, 1999.

Tom Sullivan, “It’s Miller Time,” Barron’s, October 12, 2009.

Diana B. Henriques, “Legg Mason Luminary Shifts Role,” New York Times, November 18, 2011.

S&P data provided by Standard & Poor’s Index Services Group.

Morningstar data provided by Morningstar Inc.

Russell data copyright 2011, Russell Investment Group 1995-2011, all rights reserved.

Posted in Financial Planning, Investments

Trust in your future

December 15, 2011

 

Trust in your future

Passing on wealth in a tax-efficient manner

Inheritance Tax (IHT) is an issue affecting increasing numbers of households across the country. Changes introduced in Chancellor Alistair Darling’s pre-Budget report in October 2007 have made it possible for couples and civil partners to combine their individual IHT allowances, so that it is easier for them to protect their families’ inheritance.

IHT is currently payable at 40 per cent on any amount over £325,000 – the nil rate band (tax year 2011/12). The nil rate band is the term used to describe the value an estate can have before it is taxed (£650,000 for married couples). So if you have an estate worth £500,000, £175,000 is taxed at 40 per cent, meaning the IHT bill would be £70,000.

Estate planning tool

Trusts are a well-established and useful tool in estate planning. A trust allows someone (the settlor) to make a gift of assets, without completely losing control of those assets, by placing them with a third-party (the trustees) to administer on behalf of the trust beneficiaries.

The value of a trust in IHT planning is that it enables you to reduce the wealth on which your beneficiaries will pay IHT without making a valuable outright gift – something you might be reluctant to do if the potential recipients are quite young or might take an irresponsible approach to a substantial sum of money, for example.

Passing on wealth

Other trusts, known as discretionary trusts, allow the trustees to retain control of the assets under the terms of the trust, which set out when and what the beneficiaries receive. They can also allow the trustees to react to changes in the beneficiaries’ circumstances. Again, the settlor can be named as a trustee.

Bare (Absolute) trusts

With a bare trust you name the beneficiaries at the outset and these can’t be changed. The assets, both income and capital, are immediately owned and can be taken by the beneficiary at age 18 (16 in Scotland).

Interest in possession trusts

An interest in possession trust is one where the beneficiary of a trust has an immediate and automatic right to the income from the trust after expenses. The trustee (the person running the trust) must pass all of the income received, less any trustees’ expenses, to the beneficiary.The beneficiary who receives income (the ‘income beneficiary’) often doesn’t have any rights over the capital held in such a trust. The capital will normally pass to a different beneficiary or beneficiaries in the future. Depending on the terms of the trust, the trustees might have the power to pay capital to a beneficiary even though that beneficiary only has a right to receive income.

Discretionary trusts

Here the trustees decide what happens to the income and capital throughout the lifetime of the trust and how it is paid out. There is usually a wide range of beneficiaries but no specific beneficiary has the right to income from the trust.

 

This article is for your general information and use only and is not intended to address your particular requirements. It should not be relied upon in its entirety. Although endeavours have been made to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No individual or company should act upon such information without receiving appropriate professional advice after a thorough examination of their particular situation.

 

Posted in Financial Life Planning, Financial Planning, Inheritance Tax, Legacy, Money Matters

Getting a good mix of assets

November 29, 2011

Getting a good mix of assets

Spreading your capital across different investment vehicles

Having the right mix of investments will enable you to plan to keep your savings ahead of any inflationary concerns you may have. Spreading risk and getting a good mix of assets is known as ‘diversification’. This is a relatively simple concept; it means spreading your capital across different investment vehicles rather than placing all your capital solely in one place.

Spreading risk
Diversification is an important factor for advisers and investors to consider. By spreading risk across different investment types, you reduce the chances of your entire investment capital being adversely affected by any sudden market movement in the sector that you happen to be invested in.

Taking calculated risks is an important part of managing your money. Saving money in deposit-based accounts is usually the safest option; however, the real value of your savings can be eroded over time by inflation. For most of us, savings alone may not deliver high enough returns to support our lifestyle in the future, for example the next five to ten years, let alone in retirement.

Diversified approach
If you are willing to accept the added risk of investing in asset-backed investments, it is important that you take a diversified approach. This means you spread your investments, and therefore your risk, among several asset classes. No investment is completely free of risk so the asset classes you choose and your relative exposure to each class must reflect your attitude to risk. You can build your own diversified portfolio by selecting your own investments, or you can entrust it to fund managers who will do it on your behalf.

When diversifying your portfolio, you will probably invest in a combination of UK equities, overseas equities, property, bonds and cash. Your relative weighting in each asset class will depend on your attitude to investment risk. You will also need balance within each asset class to ensure you do not overexpose yourself to one industry or currency. You’ll probably hold a basket of assets that behave differently in differing investment conditions. This can have a smoothing effect during volatile investment conditions, stabilising your overall investment return.

Collective investments
Investing directly into the markets may be too risky for some people, which is why many investors choose to invest in collective investment funds, such as unit trusts and Open-Ended Investment Companies (OEICS), where you can pool your investment with others and spread your risk much wider.

You can also diversify within the geographical areas and asset types in which you are investing. This provides more scope to spread your portfolio across different-sized companies, from the big blue chips to smaller ones, and across managers with different investment styles. This enables you to reduce the impact on your investments from one region or sector or from a particular manager.

Reduce your risk exposure
By diversifying your assets and classes of assets more widely you can actually effectively reduce your risk exposure, although even with a diversified portfolio the value of investments can go down as well as up.

It’s not always easy making decisions about how to invest your hard-earned money. There’s a lot to consider and it can be difficult to know where to start. We can provide the essential information you’ll need to enhance your understanding of investment and the products available, allowing you to make better choices.
This article is for your general information and use only and is not intended to address your particular requirements. It should not be relied upon in its entirety. Although endeavours have been made to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No individual or company should act upon such information without receiving appropriate professional advice after a thorough examination of their particular situation.

Posted in Financial Planning, Investments, Money Matters

Living with volatility

November 24, 2011

The current renewed volatility in financial markets is reviving unwelcome feelings among many investors—feelings of anxiety, fear and a sense of powerlessness. These are completely natural responses. Acting on those emotions, though, can end up doing us more harm than good.

At base, the increase in market volatility is an expression of uncertainty. The sovereign debt strains in the US and Europe, together with renewed worries over financial institutions and fears of another recession, are leading market participants to apply a higher discount to risky assets.

So, developed world equities, oil and industrial commodities, emerging markets and commodity-related currencies like the Australian dollar are weakening as risk aversion drives investors to the perceived safe havens of government bonds, gold and Swiss francs.

It is all reminiscent of the events of 2008, when the collapse of Lehman Brothers and the sub-prime mortgage crisis triggered a global market correction. This time, however, the focus of concern has turned from private-sector to public-sector balance sheets.

As to what happens next, no one knows for sure. That is the nature of risk. But there are a few points individual investors can keep in mind to make living with this volatility more bearable.

  • Remember that markets are unpredictable and do not always react the way the experts predict they will. The recent downgrade by Standard & Poor’s of the US government’s credit rating, following protracted and painful negotiations on extending its debt ceiling, actually led to a strengthening in Treasury bonds.
  • Quitting the equity market at a time like this is like running away from a sale. While prices have been discounted to reflect higher risk, that’s another way of saying expected returns are higher. And while the media headlines proclaim that “investors are dumping stocks”, remember someone is buying them. Those people are often the long-term investors.
  • Market recoveries can come just as quickly and just as violently as the prior correction. For instance, in March 2009—when market sentiment was last this bad—the S&P 500 turned and put in seven consecutive months of gains totalling almost 80 percent. This is not to predict that a similarly vertically shaped recovery is in the cards this time, but it is a reminder of the dangers for long-term investors of turning paper losses into real ones and paying for the risk without waiting around for the recovery.
  • Never forget the power of diversification. While equity markets have had a rocky time in 2011, fixed interest markets have flourished—making the overall losses to balanced fund investors a little more bearable. Diversification spreads risk and can lessen the bumps in the road.
  • Markets and economies are different things. The world economy is forever changing, and new forces are replacing old ones. As the IMF noted recently, while advanced economies seek to repair public and financial balance sheets, emerging market economies are thriving*. A globally diversified portfolio takes account of these shifts.
  • Nothing lasts forever. Just as smart investors temper their enthusiasm in booms, they keep a reserve of optimism during busts. And just as loading up on risk when prices are high can leave you exposed to a correction, dumping risk altogether when prices are low means you can miss the turn when it comes. As always in life, moderation is a good policy.

The market volatility is worrisome, no doubt. The feelings being generated are completely understandable. But through discipline, diversification, and understanding how markets work, the ride can be made bearable. At some point, value will re-emerge, risk appetites will re-awaken, and for those who acknowledged their emotions without acting on them, relief will replace anxiety.

*World Economic Outlook, IMF, April 2011.

Cautionary note

Investment types or areas mentioned may not be suitable for all investors and therefore no actions should be taken as a result of this article. Guidance should be sought before making any investment decision.

The value of your investment may go down as well as up.

Past performance is not a reliable indicator of future results.

 

 

Posted in Financial Planning, Investments, Uncategorized

Anthony Bolton’s mistake

July 15, 2011

Which one is the fraud?

Anthony Bolton, Fidelity’s star fund manager, says his flagship China fund has suffered losses from investing in two small US-listed Chinese companies accused of fraud.

“You learn from your mistakes and move on,” said Bolton.

The fund launched in April 2010 amid much trumpeting and noise in the financial pages and media. Assuming that the fund has been fully invested for about a year, how has it compared to just buying the Shanghai index?

The answer is “Not well”. The fund is trading at 99 pence (14th July 2011), having launched at 100 pence, while the index is up 13.76% (source FT.com 14th July 2011).

This would appear to be another example of why investors are better off buy passive index funds in a disciplined asset allocation model, rather than letting Star Fund Managers make mistakes and move on. It also demonstrates why Financial Advisers and Private Investors should ignore the noise and fanfares about funds and types of investment that fill the financial pages.

Cautionary note:

Investment types or areas mentioned may not be suitable for all investors and therefore no actions should be taken as a result of this article. Guidance should be sought before making any investment decision.

The value of your investment may go down as well as up.

Past performance is not a reliable indicator of future results.

Posted in Financial Planning, Investments

Apocalypse Barbeque

May 9, 2011

At a summer barbecue, guests were being assailed by an apparently knowledgeable gentleman who was providing in some detail a grim prognosis for the global economy for the next decades.

Aside from killing the relaxed vibe of the occasion, the prognosticator (we’ll call him ‘Fred’) was keen to give the guests some free financial advice. This largely consisted of buying gold, storing up on food and petrol, and heading for the hills.

Asked by one guest where he received this sombre information, Fred said ‘they’ were all saying it. The next question, of course, was if ‘they’ were all saying it, where was the evidence that ‘they’ were acting on the advice? A quick survey of the neighbourhood did not suggest people were packing their 4X4s with tinned food and vacating the city. Indeed, life appeared to be going on as normal. Maybe the mysterious ‘they’ hadn’t spread the word here yet.

One astute guest asked Fred that if things were so glum, why he himself was not acting on his own advice, selling up and putting the mattress and jerry cans on top of his Land Rover, with the cash stacked underneath.

His answer was that it wasn’t quite clear when this catastrophe would occur, so he was staying put for now “see how things panned out”. He also was keeping one foot in the market “just in case”. And he had some cash on hand in a bank deposit and six jerry cans in his garage.

It turned out Fred had spent a lot of time on chat forums engaging with the sort of people who sit up all night watching overseas market action and news events on their mobile devices, second by second and headline by headline and trade by trade. The world was a scary place, he had decided. And the best way to deal with the resulting anxiety was to plot his escape. All he had to decide was when.

The guests at the barbecue mulled on his dilemma, until one man wearing the chef’s apron and flipping steaks offered Fred some free advice of his own.

“These theories about financial and economic apocalypse—does anyone else know about them and believe them?” the chef asked. Fred nodded.

“Well, wouldn’t those fears be reflected in the market prices?” the chef added. Fred nodded again, this time more slowly.

“So presumably the people who agree with you would be getting out of the market or at least thinking about? And if they are selling their holdings, someone else must be buying them, obviously someone with a different view to your own?”

Fred, a little less confident now, looked around the group for support. But all were quiet, apart from some nervous clearing of throats.

“But let’s just say you are right,” the chef said, now tossing the salad. “If your scenario is as bad as you say it will be, won’t the price of our investments be the least of our concerns? I mean you’re talking about living on dog food.”

Fred at this point was no longer thinking of heading for the hills, but backing out of dinner and just driving home to spare himself any further embarrassment. But the chef wasn’t quite finished with him.

“But say you’re only half right and things won’t be so bad, there’ll be some opportunities in the market won’t there? And if you’re diversified across a range of assets, you’ve got some protection, haven’t you?”

The chef was now piling everybody’s plates high and getting ready to add the dressing to top things off.

“You see, those things that keep you up at night, I don’t worry about. I let the market do my worrying for me. Chances are all those concerns are already in the price. And with the greatest respect, it’s very unlikely that you know anything that someone else hasn’t already thought about.

“Me, I only take risks I’m comfortable with. I know the returns aren’t going to be there every day or every month or every year. But my focus is 20–30 years from now. Of course, there is a risk that things could be worse than I’m hoping. But there are also risks they might be much better. There’s always uncertainty, isn’t there?”

Fred couldn’t agree with that statement. Indeed, he was fairly certain he wanted to be out of this place right now. But the chef had put a kindly hand on his shoulder.

“Look, Fred, let’s eat,” he said, handing him a plate piled high. “Then we’ll have some dessert and then we’ll watch the cricket match on TV. After that, you can tell me whether you still think the world is about to end.”

For the first time that night, Fred smiled.

Cautionary note

Investment types or areas mentioned may not be suitable for all investors and therefore no actions should be taken as a result of this article. Guidance should be sought before making any investment decision or storing Gerry cans of petrol in your garage.

The value of your investment may go down as well as up.

Past performance is not a reliable indicator of future results.

Posted in Financial Planning, Investments

The new tax year

April 18, 2011

Crunching the numbers

As the start of the 2011 tax year is upon us, and the noise in the media has subsided post-Budget, it is useful to recap on the salient points for personal taxpayers.

The biggest news on personal tax to emerge from the Budget will have no immediate consequences. The Government – as part of its tax simplification programme – plans to consult on merging income tax and National Insurance. This will be a major undertaking and will have significant repercussions if it goes ahead but, for the time being, it remains a distant prospect.

Changes in the threshold levels for personal taxation will have more immediate implications. Chancellor George Osborne is raising the personal allowance by £1,000 to £7,475 from 6 April of this year. From April 2012, it will move up to £8,105. At the same time, he is bringing down the rate at which people start to pay higher rate tax from £43,875 to £42,475. As a legacy from the last Labour budget, the personal allowance will still be withdrawn completely at an income of £115,000.

The Chancellor has also said that, in future, tax allowances will be increased in line with the Consumer Prices Index rather than the Retail Price Index. Historically, the Retail Price Index has been higher, so this is likely to hurt taxpayers.

The rules on inheritance tax and capital gains tax (CGT) remained largely unchanged. Anyone leaving more than 10% of their estate to charity will see their inheritance tax bill fall by 10%. This is not as generous as it first sounds; the rate at which Inheritance Tax is charged falls from 40% to 36%, not from 40% to 30%. The amount of Entrepreneur’s Relief on CGT has doubled from £5m to £10m. At this rate, a lower rate of 10% (rather than 18% or 28%) is levied.

Elsewhere, the biggest news was the Chancellor’s dropping of the proposed rise in fuel duty and shaving 1p off existing fuel duty from 1 April. However, the change comes relatively hot on the heels of the 20% VAT rise in January and there are worries that oil companies, which are being charged a ‘windfall’ tax to finance the moves, may put up pump prices anyway. Osborne has said he will take action if this happens. Excise duties on cigarettes and alcohol will increase in line with inflation.

There was little for adult savers in the Budget with Isa allowances having already seen a chunky rise in the last tax year but the Treasury said it would shortly be publishing details of the Junior Isa account. This is the much-anticipated replacement for the Child Trust Fund, which is likely to have similar tax incentives but without government contributions.

There were no changes to venture capital trust allowances but upfront tax relief on Enterprise Investment Schemes will rise from 20% to 30% while the amount that can be invested annually will rise from £500,000 to £1m. The Chancellor is also relaxing some of the rules around eligible companies.

Cautionary note
Investment types or areas mentioned may not be suitable for all investors and therefore no actions should be taken as a result of this article. Guidance should be sought before making any investment decision.
The value of your investment may go down as well as up.
Past performance is not a reliable indicator of future results.
Tax advice should be sought on your individual circumstance before acting on anything contained in this article.

Posted in Financial Planning, Money Matters

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