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So What’s All This About Adviser Charging

29 Apr

Okay, I think it is important to talk about this. From the beginning or 2013, how advisers charge for the services provided has changed; and the service provided has now changed. There is now Independent or Restricted Advisers.

There has been so much focus on what is paid and the general terms are typically, either an hourly rate (average from what I can see around £175 per hour) or where investment advice takes place it’s typically 3% initial (based on the investment amount) and an ongoing servicing fee circa 1.0% (but some institutions will charge more and few less).

business man writing investment concept or investment plan on white board Stock Photo - 13224684

Personally, I believe the big issue is - a fair price is charged for the work done or being done -  what you receive for what you pay. Should Restricted Advice charge the same as Independent Advice? The answer to this is in the detail – so what is the difference?

What is Independent Advice?

The rules set out a new definition for independent advice, which is unbiased and unrestricted, and based on a comprehensive and fair analysis of the relevant market. This is designed to reflect the idea of genuinely independent advice being free from any restrictions that could affect their ability to recommend whatever is best for the customer. To reflect the range of products that a consumer would expect an independent firm to have knowledge of, and in line with work the European Commission has undertaken.

What is Restricted Advice?

This advice that is not independent and will need to be labelled as restricted advice; for example, advice on a limited range of products or providers.

Where a firm providing restricted advice chooses to limit their product range to certain range of investments or providers, there will be clients for whom this is not suitable. It is not acceptable for a firm to make a recommendation for a product that most closely matches the needs of the consumer, from the restricted range of products they offer when that product is not suitable.

I am an Independent Financial Adviser and have specialised in investments and tax planning with the focus on a high level of service, expertise and support. My view on the argument between the different advice type is simple but then again I am very technically focused targeting tax mitigation and investment returns, profitability and success.

My question to you is should you, as the consumer, pay the same for a Restricted Service as for an Independent Service? 

The first point is be aware of the service being provided – make sure if you are paying for the service being provided and in my opinion that should be a fully comprehensive service. Restricted advice is simply that “Restricted” and Independent is “Independent”. An IFA - Independent needs to take into consideration all available contracts, both packaged and unpackaged, available in the UK Markets – assess, consider, review and recommend from every available structure; whereas a Restricted Adviser will sell you a contract from their permitted range.

Clearly, the time and effort and expertise required under both designations should carry a cost reflective to the service provided. I personally believe that the charge for Restricted Advise should be the less expensive option. It seems that many institutions are not differentiating – I assume they are hoping/expecting the consumer not to notice the difference.

Perhaps also worryingly, a number of institutions and banks have declined to disclose their adviser charges with some saying they would not make their limits public (as reported by Citywire, Investment Adviser, Money Marketing, The Telegraph, Financial Times, amongst others).

Of those who have disclosed mandated adviser charges, there is a typical initial charge of around 3% with ongoing charges ranging up to 3% per annum.

I did think of putting together a list of the institutions and the fees paid but felt that this is not constructive. I believe it is wiser to weigh up the pros and cons of what is being offered and the price you are being asked to pay.

Remember, now you agree to a contractual fee arrangement and as with all contracts the terms are binding both ways. If you are paying for annual reviews, on-going investment advice, portfolio stress-testing and your adviser is remunerated relative to their level of success….make sure you get what you pay for. I know my clients do…and it creates very close and personal relationships where my financial interest and their financial success are aligned i.e. I need my clients to be successful and see positive returns on their investments.

All I suggest is take care and consider your options – what you receive for what you pay.

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Launch of Waverley Court Consulting Ltd – Website www.waverleycc.co.uk

18 Dec

I am pleased to announce the launch of my website - http://www.waverleycc.co.uk

After much work, reviews, re-writing and editing my website is now live. Let me know your thoughts on the content, design and presentation. Personally, I am most pleased with the Testimonials sections – every one who kindly provided their comments presented their views of our relationship.

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The Launch Of My Corporate Website

11 Dec

We are almost there !!!

I expect within a few days my website will be up and available.

The official corporate Financial Services site for Welshmoneywiz is Waverley Court Consulting Ltd.

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Autumn Budget Statement

10 Dec

You have to give George Osborne his dues…we all knew there were failings in the assumptions from the Summer Budget. He didn’t duck the bullet. Rather than just guidelines and review of the Summer Budget (normally what seems to be the Autumn Budget), it was more an introduction to the Spring Budget 2013, giving details of  some of the fiscal changes ahead.

A benefit of knowing about tax policy to be introduced from a future date is, it gives us a chance to plan now.

Registered Pension Schemes

George Osborne made proposals to cut back on the tax advantages of registered pensions.

The bad news :-

• Annual allowance to be reduced from £50,000 to £40,000 from tax year 2014/15.
• Lifetime allowance to be reduced from £1.5m to £1.25m from 2014/15

The good news :-

•  Allowances to remain unchanged for 2012/13 and 2013/14 (at up to £50,000)

• Carry Forward remains unchanged for tax years 2010/11, 2011/12, 2012/13 and 2013/14 (at up to £50,000)

• Fixed protection available – enabling benefits to be taken up to the greater of the standard lifetime allowance and £1.5m without any lifetime allowance charge

1.  Election by 5 April 2014

2.  Protection lost where further accrual/contributions on or after

      6 April 2014

• Personalised protection option – a possible additional transitional protection

1.  Provides a lifetime allowance of the greater of the standard lifetime

     allowance and £1.5 million, but without the need to cease

     accrual/contributions on or after 6 April 2014.

2. Available to individuals with pension benefits with a value of at least

     £1.25 million on 5 April 2014.

• Maximum capped drawdown income to be increased from 100% to 120% of the relevant annuity rate determined from the GAD tables – date to be confirmed.

Planning Opportunities

The reduction in the annual allowance was expected and was only to £40,000 (it could have been worse). The reduction doesn’t apply until tax year 2014/15. Carry Forward of unused annual allowance of up to £50,000 for each of tax years 2010/11, 2011/12, 2012/13 and 2013/14, is available.

It gives a high earners the chance to maximise contributions before the reduction in the allowance bites. Also, for very high earners, if action is taken before the end of this tax year, they may be able to secure the 50% tax relief.

The changes to the lifetime allowance will mean that any one likely to be affected by the reduction and looking to retire in the near future will need to consider all means to reduce/avoid any lifetime allowance charge. This includes :-

  • Electing for fixed protection and/or, if available, personalised protection.
  • Considering drawing some or all of their benefits in 2012/13 or 2013/14 when these will be set against the current £1.5 million lifetime allowance.
  • Consider how benefits are taken.

Income Tax

So, it seems fair to say, there is actually only a very small change in the potential tax bill payable. Personal allowance has increased and the basic rate band has shrunk. The unlucky few are worse off but in most cases the situation seems to either be neutral or possibly a slight improvement.

The personal allowance is to increase by £1,335 to £9,440 in 2013/14 – an improvement in the terms announced in the Summer Budget.

In 2013/14, the basic rate tax limit will reduce from £34,370 to £32,010. This is offset by the increased personal allowance.

The result of these changes is that all taxpayers who are fully entitled to a personal allowance (where net income is less than £100,000) will be better off. At the lower end, the extra increase in the personal allowance will lift a quarter of a million people out of tax altogether.

From 6 April 2013, additional rate income tax will reduce from 50% to 45%. This rate applies for those who have taxable income of more than £150,000. For those affected, there is an incentive to make investments before 6 April 2013 and defer the resultant income until after that time.

In terms of planning for married couples/registered civil partners, this will mean that:

• There is scope to shelter income from tax if a higher/additional rate taxpayer is prepared to transfer income-generating investments (including possibly shares in a private limited company) into a non-taxpaying spouse’s name

• There is an incentive for lower rate taxpayers to make increased contributions to registered pension plans with a view to ensuring that any resulting pension income falls within the personal allowance.

Age Allowance

As the personal allowance increases, the age allowance is gradually being phased out. The amounts of age allowance are frozen at £10,500 for those born between 6 April 1938 and 5 April 1948 and £10,660 for those born before 6 April 1938.

For those who satisfy the age conditions, the age allowance is still currently worth more than the personal allowance. However, the allowance is cut back by £1 for each £2 of income that exceeds the income limit. The income limit will increase from £25,400 to £26,100 in 2013/14.

For those who are caught in this income trap, you should take appropriate planning i.e. reinvesting income-producing investments into tax-free investments (ISAs, VCTs, EISs, SEISs) or possibly tax-deferred investments (single premium bonds) or by implementing independent taxation strategies.

Business Tax

The Government will reduce the main rate of corporation tax by an additional 1% in April 2014 to 21% in April 2014.

The small profits rate of corporation tax for companies with profits of less than £300,000 will remain at 20%.

The capital allowance known as the Annual Investment Allowance will increase from £25,000 to £250,000 for qualifying investments in plant and machinery for two years from 1 January 2013. This is designed to encourage and incentivise business investment in plant and machinery, particularly among SMEs.

A simpler income tax scheme for small unincorporated businesses will be introduced for the tax year 2013/14 to allow:

Eligible self-employed individuals and partnerships to calculate their profits on the basis of the cash that passes through their business. Businesses with receipts of up to £77,000 will be eligible and will be able to use the cash basis until receipts reach £154,000. They will generally not have to distinguish between revenue and capital expenditure.

All unincorporated businesses will be able choose to deduct certain expenses on a flat rate basis.

Tax Avoidance and Evasion

As expected the Government unveiled a bundle of measures aimed at countering tax avoidance and tax evasion.

Areas of particular interest are:-

•  The introduction of the General Anti-Abuse Rule. This will provide a significant new deterrent to people establishing abusive avoidance schemes and strengthen HMRC’s means of tackling them. Guidance and draft legislation will be published later in December 2012;

•  Increasing the resources of HMRC with a view to:

•  Dealing more effectively with avoidance schemes

•  Expanding HMRC’s Affluent Unit to deal more effectively with taxpayers with a net worth of more than £1 million

•  Increasing specialist resources to tackle offshore evasion and avoidance of inheritance tax using offshore trusts, bank accounts and other entities, and

•  Improving technology to help counter tax avoidance/evasion

•  Closing down with immediate effect for loopholes associated with tax avoidance schemes.

•  Conducting a review of offshore employment intermediaries being used to avoid tax and NICs. An update on this work will be provided in the Budget 2013.

•  From 6 April 2013 the Government will cap all previously unlimited personal income tax reliefs at the greater of £50,000 and 25 per cent of an individual’s income. Charitable reliefs will be exempt from this cap as will tax-relievable investments that are already subject to a cap.

Inheritance Tax

The inheritance Nil Rate Threshold is to increase, although by only 1% in 2015/2016 to £329,000. Currently, the Nil Rate Threshold is £325,000 and has been frozen since 2009 until 2015. This means, from 6 April 2015, if the first of a married couple to die does not use any of his/her nil rate band, then the survivor will have a total nil rate band (including the transferable nil rate band) of £658,000.

We await the outcome of the consultation on the taxation of discretionary trusts which is due to be released in December. Hopefully this will incorporate some simplification to the current complex system.

Capital Gains Tax (CGT)

The CGT Annual Exemption (£10,600 in 2012/2013) will increase to £11,000 in 2014/2015 and £11,100 in 2015/2016. We do not know what it will be in 2013/14.

Gains that exceed the annual exempt amount in a tax year will continue to be subject to CGT at 18% and/or 28% depending on the taxpayer’s level of taxable income.

Trustees pay a flat rate of 28% on gains that exceed their annual exemption.

Individual Savings Account

The current maximum investment in an ISA is £11,280 in a tax year (maximum of £5,640 in cash). With effect from the tax year 2013/2014, the maximum will increase to £11,520 (with the cash content not to exceed £5,760). Use of the allowance should always be maximised as any unused allowance cannot be carried forward.

The Junior Isa and Child Trust Fund maximum annual contribution limit will move from £3,600 to £3,720 from 6 April 2013.

The Government will consult on expanding the list of Qualifying Investments for stocks and shares ISAs to include shares traded on small and medium enterprises (SMEs) equity markets such as the Alternative Investment Market and comparable markets. This could lead to ISAs becoming even more appealing as a tax shelter.

Venture Capital Trusts (VCTs) and Enterprise Investment Schemes (EIS)

The rule changes, mostly approved months ago, revolved mainly around opening up more companies for investment from VCTs and EIS, and increasing how much can be invested.

The size of companies that the schemes can invest in has been increased from £7 million to £15 million and the number of employees from 50 to 250.

The limit on the amount an individual can invest in an EIS has increased from £500,000 to £1 million, while the amount an EIS or VCT can invest in an individual company has increased to £5 million.

Ian Sayers, director general of the Association of Investment Companies (AIC), commented, ‘The proposed rule changes allow VCTs to invest in a wider range of companies which is a welcome boost to the sector and businesses desperately seeking finance.

‘The Chancellor’s removal of the £1million limit on VCT investment in a single company will ensure more efficient support to smaller businesses in the UK.’

However, the Budget also finalised plans to subject VCTs and EIS to further scrutiny in relation to the investments that they make.

The government will introduce a ‘disqualifying purpose test’, designed to exclude VCTs or EIS that do not invest in qualifying companies and are set up solely for the purpose of giving investors tax relief.

Although the schemes escaped any changes to their individual tax benefits, the Budget introduced a cap on tax relief, in an effort to prevent high income taxpayers getting away with very low tax rates.

The new rules will set a cap of 25% of income on anyone seeking tax relief of over £50,000 but, while the proposals are not particularly clear, it appears EIS and VCTs will be exempt.

Paul Latham, managing director of Octopus Investments, explained, ‘The good news is that the government’s new cap only applies to tax reliefs which are currently classed as “unlimited”. This means that tax-efficient investments, such as EIS and VCTs, are unaffected by this legislation.’

 

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Investment Tax Wrapper – Investment Bonds v Collective Investments

20 Jul

I always find the argument around the suitability of the investment wrapper paramount. Too often I see new clients – who maybe non-tax payers with an investment bond wrapper rather than collective. If this is personally owned I struggle with why someone has chosen to pay Basic Rate Tax when they most likely could have paid no personal tax – admittedly the tax is paid within the fund but all costs will affect investment performance.

OK lets start by getting a bit of jargon out of the way…when I use the global term Collectives, I am referring to anything along the lines of OEICs, Unit Trusts, Investment Trusts, SIVACs, UCITS I, II, III, etc. I am just trying to use an all-inclusive term.

Choosing the most appropriate investment for an individual will depend upon many factors including :-

  • personal circumstances
  • investment objectives
  • current and future levels of income

What factors to consider?

The summary below compares bonds and collectives from the perspective of taking an income, capital growth and various tax and estate planning options.  Whilst the choice of investment should not be made for taxation reasons alone it will be a critical factor.  Other key factors will include product pricing, charges, investment structure, administration and service, fund choice, asset classes, death benefits and trust options.

Investment Bonds

Collectives
Taking an income Taking an income
• 5% withdrawals can be taken per annum without incurring an immediate tax charge (deferred but not free of tax) and any unused allowance can be carried forward to future years. • Bonds are a useful way of providing an ‘income’ without any impact on an investor’s personal allowance and/or age allowance, (within the 5% allowance).• If withdrawals exceed the 5% allowance (or higher cumulated amount), tax may be payable depending on the tax position of the investor and whether the bond is either onshore or offshore • Because investment bonds are non-income producing assets there is no need for annual tax returns, unless there has been a chargeable event (such as exceeding the 5% annual allowance) resulting in a chargeable gain (realised profit).                             • The income from a collective will be taxable whether taken or reinvested. Non-Equity funds (which hold greater than 60% in cash or fixed interest) have income paid as an interest distribution net of 20% tax (and non-taxpayers can reclaim). Equity funds (which hold less than 60% in cash or fixed interest) have income paid as dividend income with a 10% non-reclaimable tax credit. • Income paid (or reinvested) from a collective will be included in the assessment of an investor’s personal taxation and/or age allowance – although if the collective is held under an ISA wrapper this problem is solved.• Disposal of shares/units to supplement income is a disposal for capital gains tax, although this may be covered by your annual capital Gains Tax Allowance (currently £10,600 in Tax Year 2012/2013). The rate of CGT payable will depend on the allowances and reliefs available to the investor and on their income tax position.• Because collectives produce income they will normally need to be reported each year to HMRC, even if accumulation units or shares are chosen. Capital gains may also need to be reported when a disposal takes place but only if tax is expected to be payable.
Capital growth Capital growth
• When the bond is surrendered (this is a chargeable event) tax is assessed and may be payable depending on the personal income tax position of the bond owner. This is true whether the bond is either onshore or offshore.• Switching funds in an investment bond can take place with no tax implications for the investor. (This is not a disposal for tax purposes while the funds remain under the bond wrapper.)                                              • When shares/units are cashed in, this is a disposal for capital gains tax although this may be covered by your personal Capital Gains Tax (CGT) Allowance. • Losses on disposals can be offset against other capital gains – so can create effective tax planning scenarios.• Taper Relief and Indexation Allowance are no longer available on personal scenarios.• Switching funds within a collective is a disposal for CGT with possible tax and reporting requirements.
   
Tax & Estate Planning Tax & Estate Planning
• Individuals may be able to alter their level of income to reduce or avoid tax on surrender of the bond.Examples – those who have pension income in drawdown can reduce their income received to minimise tax payable; or could use part of the proceeds to help fund a pension, EIS, VCT, etc. so that the tax credit created offsets the tax bill associated with the investment bond encashment. • Gifting the bond (by assigning it nit not for “monies worth”) to a lower or non tax-payer. So an assignment to a spouse or child in further education may not create any liability (depending their personal tax rate) to CGT or income tax. It could reduce or avoid the tax that would otherwise have to be payable by the investor. • Individuals may be able to make a pension contribution to reduce or avoid any further liability to income tax on the surrender of their investment bond.• Gifting the bond to another (i.e. assigning into trust or to an individual) will be a transfer of value for Inheritance Tax and depending the terms of the trust may be covered by an exemption - more commonly though will be treated as a chargeable lifetime transfer.

• Having multiple lives assured can avoid any chargeable event upon death of the bond owner. This is assuming the contract is for encashment on the death of the last life assured. 

• If a chargeable gain arises in a tax year in which the investor is non-UK resident then there will be no further liability to UK income tax.  There may be a tax liability in their country of residence.

• A special relief applies to offshore bonds that reduces the tax liability on chargeable gains for individuals who have been non-UK resident for any period of their investment – Time Apportionment Relief.

• Investment Bonds, depending on the interpretation by local authority, may not be included within the means test for local authority residential care funding – care is needed as this varies from authority to authority, year-to-year, the circumstances surrounding and prior to the investment and many other factors.

 • Individuals may be able to alter their level of income to reduce the tax rate payable on a capital gain e.g. those who have pension income in drawdown may be able to reduce it, by careful selection of funds within the collective to select the desires level of taxable income.• Transferring the collective to another individual or into trust will be a disposal for CGT purposes although this may be covered by your Personal Annual Allowance to CGT, or an exempt transfer between spouses. If into trust, gift holdover relief may also be available depending on the type of trust.• Individuals may be able to make a pension contribution which in turn could reduce the rate at which they pay CGT.• Transferring the collective to another individual or into trust will be a transfer of value for Inheritance Tax purposes, although this may be covered by an exemption.• No CGT is payable on death.

• Investors who are both non UK resident and ordinarily resident will not be liable to UK CGT on disposal of their collective.  However, anti-avoidance legislation means they will need to remain non UK resident and ordinarily resident for five complete tax years for the gain to remain exempt from CGT.

•  Collectives are included within individual’s assessment for local authority residential care funding.
Taxation of Fund  Taxation of Fund
Onshore Bond funds’ internal taxation is extremely complex. In general terms it can be summarised as follows:• Interest and rental income are subject to corporation tax at 20%. Dividends are received with a 10% tax credit which satisfies the fund manager’s liability.• Corporation tax is payable on capital gains at 20%. Indexation allowance is available to reduce the gain.• Investors are given a non-reclaimable 20% tax credit to reflect the fund’s taxation.Offshore Bond funds are typically located in jurisdictions which impose no tax upon investment funds, such as Dublin, the Channel Islands and the Isle of Man. And so:

• Interest, dividends and rental income are tax-free while under the bond wrapper. Some non-reclaimable withholding tax may apply to certain overseas income.

• No corporation tax is payable on capital gains.

• Personal tax position, rates and residence status must be considered carefully as taxation is typically payable at your highest marginal rate when the bond is finally encashed.

 Collectives are only subject to tax within the fund on income received, and so:• Interest and rental income are subject to corporation tax at 20%. Dividends are received with a 10% tax credit which satisfies the fund manager’s liability.• No corporation tax is payable on capital gains within the fund.

 

Summary

There is no black and white answer on this – it is all circumstance specific but an understanding of the differences is essential. My belief is only pay tax when required and lawful – so products with an inbuilt taxation are to be used only when necessary, the lesser tax rate or for a specific reason/purpose.

Investors make money through investments with three key principles - fair costs, minimise taxation and investment performance.

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Ways to Maximise Your Income Returns

11 Jun

I have been giving the problem of poor returns on cash considerable consideration. So what do you do if you need a realistic income yield from your capital?

 

Equity Release 

I am anti this approach as this is simply raising a packaged loan secured against your home where you receive income in exchange for part of the value of your house and/or potentially an escalating loan that will need to be repaid one day.

 

Structured Products

Income Deposit Plans are typically 6 years in length and pay, say between 5% & 7% per annum depending on terms and qualification requirements i.e. pays this on a quarterly basis as long as the FTSE 100 remains between 4,500 & 7,000 or +/- 21% of the initial underlying level with the level expanding +/-6% every year

Deposit Plans are typically 3, 5 or 6 years in length and may pay at maturity up to 17%, 28% and 50%, respectively.

The actual terms need to be reviewed carefully and suggest professional advice is required.

 

Fixed interest funds

These include :-

Corporate Bond Funds - M&G Strategic Corporate Bond (yielding 3.6%), Threadneedle Corporate Bond (yielding 4.2%),  Close Bond Income Portfolio (yielding 3.5%) and Fidelity MoneyBuilder Income (yielding 3.9%)

Strategic Bond Funds - M&G Optimal Income (yielding 3.9%), Jupiter Stregic Bond (yielding 5.4%) and Fidelity Strategic Bond (yielding 3.2%)

High Yield Bond Funds – Threadneedle High Yield Bond (yielding 8.0%), Baille Gifford High Yield Bond (yielding 6.3%), AXA Global High Income (yielding 6.5%) and Kames High Yield Bond (yielding 6.4%)

– all are above at least 1% more than the best cash ISA rates. 

It is important to remember that the capital value of bond funds will trend to follow the sentiment and expectations of the wider economy to a greater or lesser extent. It is expected that a good fund manager should be able to hold the payout if further turbulence lies ahead. 

If you are willing to accept a greater capital volatility, you could look to equity income funds. Please remember that you are focussing on payouts rather than the day-to-day capital value movements.

These include :-

UK Equity Income Funds - Invesco Perpetual High Income (yielding 3.9%), Trojan Income (yielding 4.3%) and Fidelity MoneyBuilder Dividend (yielding 4.8%)

UK Equity & Bond Income Funds - Ecclesiastical High Income (yielding 4.7%), Jupiter Monthly Income (yielding 5.1%) and Close Brothers Diversified Income Portfolio (yielding 2.4%)

North American Income Funds - JPM US Equity Income (yielding 2.3%), Jupiter North American Income (yielding 1.7%), Legg mason UK Equity Income (yielding 2.4%) and Neptune US Income (yielding 4.4%)

Global Equity Income Funds - Newton Global High Income (yielding 4.8%), Invesco Perpetual Global Equity Income (yielding 3.3%), Aberdeen World Growth & Income (yielding 4.6%) and Baille Gifford Global Income (yielding 4.5%)

Emerging Markets Income Funds - UBS Emerging Markets Equity Income (yielding 5.7%)

Asian Income Funds – Newton Asian Income (yielding 5.1%), Schroder Asian Income (yielding 4.7%), L&G Asian Income (yielding 5.3%) and Henderson Asian Dividend (yielding 4.9%)

With Equity Funds :-

  • It is important to focus on funds with a good track record of performance and payout growth
  • Payout growth doesn’t have to mean every stock in a fund must grow its yield. (A significant proportion of growth in dividends comes from businesses “normalising” dividend payouts.)
  • There are some outstanding UK equity income funds, but to invest solely in the UK is to miss out on some fantastic potential globally.
  • It is expected that the greatest investment opportunities may lie in Global and Asian markets.
  • There are also companies outside the UK who may have less debt on their balance sheet and some fo the regulatory changes will encourage higher dividend payouts.

Investors may be avoiding Asia and Global markets because of perceived risk but it is clear they could be missing out or at best limiting the diversity of their portfolio.

My contact details are :- tel 029 2020 1241, email welshmoneywiz@virginmedia.com, twitter welshmoneywiz, linkedin Darren Nathan

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What’s The Scenario if Greece Exits The Euro & Eurozone?

26 May

Greek Flag

If Greece left the Eurozone, I expect this would be bad for Greece with a hike in inflation, unemployment, panic and social unrest likely.

There are some powerful factions within the Greek political system who are clearly anti the austerity measures imposed. I, as we all, can sympathise to some extent with the plight but there is a limitation as the problem is partly home-grown – where other countries made cut backs and tough decisions in the last decade these where not in Greece.

If Greece can’t satisfy the demands of the European Union and the IMF, then they will cut off Greece’s last remaining lines of credit. Without this, Greece will not be able to pay its bills and could drop out of the euro altogether.

Who should pay for these mistakes? Is there an answer? We can’t change the past and can only deal with the current and plan for the future.

 

So what is opinion on this :-

 

Carsten Brzeski, senior economist, ING Belgium

  • Chaos.
  • Greek banks vulnerable from collapse (lack of support if problems arise)
  • Greek companies vulnerable from collapse (lack of support if problems arise)
  • Unemployment would spike
  • Expect the new drachma would drop drastically in value
  • Food and energy prices would leap (poor exchange rates worsen the situation)
  • The turmoil would undermine any opportunity for growth
  • The outlook for the Eurozone would worsen.

 

Michael Arghyrou, senior economics lecturer, Cardiff Business School

  • The drachma would be devalued (at least 50%), causing inflation
  • Interest rates will double and all mortgages, business loans and other borrowing will become much more expensive.
  • There will be no credit for Greek banks or the Greek state.
  • Expected shortage of basic commodities, like oil or medicine or even foodstuffs.
  • A lot of Greek firms rely on foreign suppliers, who may cut off Greek customers.
  • Greek companies could be driven out of business.
  • Greece will lose its only reference point of stability, which was its euro status.
  • The country would end up in a volatile period.
  • There would be institutional weakness.
  • The worst case scenario would be a social and economic breakdown, perhaps even leading to a totalitarian regime.

 

Sony Kapoor, managing director of the Re-Define think tank

  • Greeks or European policy makers talking about an exit in a casual blase way are being highly, highly irresponsible.
  • Total cost versus the total benefit remains overwhelmingly negative, both for the Eurozone and Greece.
  • A Greek exit could undo a large part of good work in Ireland and Portugal.
  • If you are a Portuguese saver with money in the bank, even if there is a small likelihood of losing that money, it would make perfect sense to move euro deposits while you can to a safer haven, like the Netherlands and Germany.
  • There would be a significant deposit flight in peripheral countries.
  • It would immediately weigh on investment in the real economy, because corporations would be very reluctant to invest anything at all.

 

Megan Greene, director of European economics at Roubini Global Economics

  • Cascading bank defaults in Greece would be expected
  • Everybody would take money out of Portuguese and Spanish banks.
  • A big part could be plugged by the European Central Bank (ECB) through a liquidity operation that would backstop the banks. The ECB has already done that several times and it would step up to the plate again.
  • Political contagion or unrest.
  • Greece is a small country and the rest of the Eurozone has been making provision for this for a long time now.
  • The Eurozone could survive a Greek exit.
  • The exit could be better for everyone involved if managed in a co-ordinated orderly way. 
  • If a unilateral default, an exit would be a worse option for Greece.

 

Jan Randolph, head of sovereign risk, IHS Global Insight

  • If credit is withdrawn by the EU and IMF, then Greece becomes a cash economy. It means the government can only pay what it collects.
  • The government starts shutting down, 10-15% of state employees don’t get paid and unemployment surges from 20% to 30%.
  • But Greece can still use the euro.
  • It would be difficult for the ECB to keep banks afloat.
  • The Greek banking sector would collapse.
  • More unemployment, as credit for companies would dry up.
  • What happens next is a political question.
  • European nations would probably not accept another Western European country descending into chaos and collapse.
  • The EU and IMF would probably negotiate some kind of aid.
  • Greece could continue with the euro.

 

 My contact details are :- tel 029 2020 1241, email welshmoneywiz@virginmedia.com, twitter welshmoneywiz, linkedin Darren Nathan

 

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Greece and a Change to the Eurozone?

24 May
So with the Greek election (take 2) looming only weeks away, the questions is – will Greece remain in the Eurozone? Personally, I believe if they left it would be both political and financial suicide but that is just an opinion. For the Eurozone such an option is unthinkable and hugely damaging – let alone the fear of the domino effect (so who would be next) and I guess that would/could lead to the end of the Eurozone.
 
Drachma may become legal tender in Greece again
 
It seems clear that there is growing support for the opinion that the current strategies for resolving the Eurozone Debt Crisis are doomed to failure. The most likely scenarios are :-
  • a Greek exit, or 
  • a rapid shift to a fiscal union.
If Greece is anything to go by, the current approach of forcing austerity on crisis economies and preserving their membership of the euro leads to dissent by the voting population. If we look at the voters behavioural changes, this seems to have led sentiment towards more extreme parties, both on the left and on the right.
 
In recent opinion polls, the majority of Greek voters (in excess of 75%) want to remain in the Eurozone (but also reject the austerity programme). The issue being, if there is a change/relaxation of the agreed commitments would send a destructive message to all other member states who are part of austerity programmes. This could lead to financial markets losing confidence, outflows of funds from Greece and other associated economies would accelerate, yields on financial instruments would sore. If this was the case it would be realistic to see the Euro could unravel and collapse.
 
A Greek Exit
A Greek default and exit from the Euro could have dire knock-on effects possibly leading to similar financial disasters in Spain and Italy. To prevent this contagion would require the ECB to lend several trillion euros to banks, and the available funds in this scenario are unlikely to be sufficient to cope with the fallout.
 
A Rapid Shift to Fiscal Union
This is expected to avoid the risk of contagion and financial collapse in at least some of the peripheral nations. This would require a substantial move towards a more centralised or federal style control of Eurozone government revenues and expenditures. This includes the concept currently being negotiated of Eurozone government issued bonds on behalf of all member states collectively.
 
If Brussels were to take over the debts of Greece and other struggling peripherals the immediate credit crisis would recede and the Eurozone credit would establish itself alongside US Treasury debt as one of the foremost debt markets in the world.
 
The outcome is stability but the unknown – is at what cost, both short and long-term?
 
This is in direct comparison of the current situation, where the current approach has led to  the Eurozone capitulation to the need to bail out Greece, Ireland and Portugal has undermined the monetary union, and the risk of contagion to Spain and Italy now threatens its very existence.
 
My contact details are :- rel 029 2020 1241, email welshmoneywiz@virginmedia.com, twitter welshmoneywiz, linkedin Darren Nathan

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Relief Rally or the Start of Something More?

22 May

Yesterday saw stocks rebound from last weeks losses – the debate is whether it’s just a quick relief rally or the start of a new move higher?

In order to break that gravitational pull, we’ll need evidence suggesting the worries are at least containable and that the market and growth contractions realistically are expected to reverse – yes, I mean sustainable growth. I am looking for signs the rally is sustainable.

Personally, depending on information and data in the next few days, we have the potential to see a rally at least short-term. The question I want answered currently is, “Is all the recent bad news and woes already priced into the market?” Although, on the time horizon, there are other factors that could start worrying stocks - the so-called “fiscal cliff,” combination of budget cuts and tax hikes for next year, issues around China’s growth story, etc.

The worries over the Eurozone hangs over the market and any further negative headlines could easily derail the market’s rally if this recent positive market move is the start of a rally. The European leaders summit Wednesday could well be a good barometer to this risk.

The G8, over the weekend, helped give markets a bounce after leaders embraced Greece, saying they want it to stay in the Eurozone and they would also seek ways to motivate ways to create and stain global growth. China also helped, with Premier Wen Jiabao staing that China will focus on boosting growth.

Some believe that with the efforts taking place, we may have seen the bottom of the recent correction on Friday, but it is not clear-cut. The opposite opinion on the situation provided by some analysts is, “we’re not there yet” and believe “we‘re going to be in more of a ‘sell in May and go away’ trend”. Here, the belief is the summer is going to flatten out, then we come back in the fall. If this is the case we easily could have another month of the current market trends.

My contact details are :- tel  029 2020 1241, email welshmoneywiz@virginmedia.com, twitter welshmoneywiz, linkedin Darren Nathan

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Taxation of Collectives within an Offshore Bond

14 May
Taxation of the collective investment when held as an asset of an offshore bond – income

Any income received (dividends or interest) within the offshore bond wrapper from the collective is deemed to be received gross. Withholding taxes may apply which may not be reclaimed.

The 10% notional tax credit issued alongside any UK dividend income cannot be reclaimed by the offshore bond provider or investor.

The income will remain in the fund, untaxed, until encashment from the bond by the investor.

Taxation of the collective investment when held as an asset of an offshore bond – capital gains

The collective would suffer no ongoing capital gains tax within the offshore bond.

Realised gains would be subject to tax when the investor encashes the bond.

Investment losses cannot be carried forward although any deficiency loss created on encashment may be available to offset any higher rate income tax suffered by the investor.

Switches made within the bond will not generate a tax charge.

Principally, where a collective is held within an offshore bond, the policyholder is only liable to tax when they encash the bond.

Encashment of the bond by the policyholder

On encashment, assuming a chargeable gain has been made, a chargeable event would occur and the investor would be liable to income tax on this gain at their HIGHEST MARGINAL RATE.* However, personal allowances and the 10% tax band** would be available where earned income levels were sufficiently low. A basic rate taxpayer would be liable to tax at 20%.

* Finance Act 2009 increased this to 50% for trusts and for individuals with income in excess of £150,000 from April 2010.
** Bond gains are deemed to be savings income.

This article is based on interpretation of the law and HM Revenue & Customs practice as at March 2010. I believe this interpretation to be correct, but cannot guarantee it and the Tax Relief and tax treatment of investment funds may change in the future.

 I do not accept any liability for any action taken or refrained from being taken on the basis of the information contained in this or any related article. With all tax planning, it must be reviewed on each person’s personal circumstabces and the information provided in this article is for information purposes and is not advice nor recommendation.
 
My contact details are :- tel 029 2020 1241, email welshmoneywiz@virginmedia.com, twitter welshmoneywiz, linkedin Darren Nathan

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