Archive | February, 2012

Long Term Care & Choosing the right Inheritance Tax Plan

29 Feb

I have recently been looking into issues around Long Term Care and Inheritance Tax Planning. Many people who were looking to manage their investments after retirement were primarily concerned with Inheritance Tax (IHT) planning. Now there is the growing further complication of funding sheltered accommodation and/or residential care, should it be needed.

The average cost of care is now around £25,000 per year, but for many the costs are much higher.

This leaves the dilemma for Inheritance Tax Planning – as it maybe necessary to set aside in excess of £200,000 to fund care they may not need. If this sum is liable to Inheritance Tax then £80,000 could be the tax liability payable.

In 2010-11, Inheritance Tax was more than £2.7bn and it’s believed perhaps half of this tax is paid needlessly due to a lack of appropriate planning.

Remember, on death, the assets of a UK-domiciled individual valued above £325,000 will be taxed at 40% on the excess (£650,000 for couples). Assets caught could be anything including assets held in trust, gifts, family home, other property holdings (UK and overseas), contents, payouts from insurance and other policies, non-qualifying business assets, lump sum pensions payments, cash, stocks, shares and other holdings including jewellery; and so on.

There is no panacea to Inheritance Tax or Care Fee Planning, but the starting point is that everyone with assets must make a Will.


Choosing the right strategy

Assuming that plans chosen are affordable, the first consideration is risk and the definition of risk.

1. Risk of Challenge by HMRC – some scheme’s are more aggressive than others, and are more at risk of challenge by HMRC. In comparison, others are tryed and tested techniques which follow an accepted approach.

2. Investment Risk – some investments are cash based and are not expected to keep up with inflation, so eroding future buying power; some investments are portfolios and so the capital value is at risk to market movements, and so maybe worth less in the future

3. Loss of direct ownership and control – some schemes involve trusts and so once assets have been assigned into trust , the assets become owned by the trust and administered by the trustees

4. Loss of control of capital and access to liquidity – some schemes, once implemented the asset cannot revert to the original owner


The Scheme Itself

1. Avoid schemes which have obvious failings. For example do not do the following :-

  • take out a loan against your home (as a mortgage or Equity Release/Home Reversion Schemes) and invest this into a suitable Inheritance Tax Planning Product

2. Exemptions. These are immediately free of Inheritance Tax and are detailed allowable exclusions to Inheritance Tax.

Examples are :-

  • Annual Exemption (you can give away gifts worth up to £3,000 in total in each tax year and can carry forward any unused part of the £3,000 exemption to the following year for one year only)
  • Wedding gifts/civil partnership ceremony gifts

    • parents can each give cash or gifts worth £5,000
    • grandparents and great grandparents can each give cash or gifts worth £2,50
    • anyone else can give cash or gifts worth £1,000
  • Small Gifts (you can make small gifts up to the value of £250 to as many individuals as you like in any one tax year)

You also can’t use your small gifts allowance together with any other exemption when giving to the same person.

  • Regular gifts or payments that are part of your normal expenditure

3.  Gifts and potentially exempt transfers.

These are simple ways of passing wealth on free of Inheritance Tax, but it must be an absolute gift absolving any future rights to this money. The Seven Year Rule applies and is subject to Taper Relief, if applicable.  

It’s common practice to set-up a seven-year term life assurance policy in trust to cover the associated Inheritance Tax liability, especially on larger gifts to mitigate the risk of the tax liability, if you were not to survive the seven years.

The above approaches require losing ownership of associated wealth. They should be used, assuming you know the money will not be needed in later life.

4. Use of Tax Reliefs. Agricultural Property Relief and Business Property Relief attracts 100% Relief to Inheritance Tax after owning the qualifying asset for two complete years. These assets are typically less liquid and carry potentially additional risks, which need to be considered.

5. Use of Trusts

Trusts can be highly complex and require professional advice. There are many options and legislation has targeted this area in recent years.

Loan Trusts allow the original investment ownership to be retained, while the beneficiary receives capital growth IHT free. There are limitations tote effectiveness of the solving of Inheritance Tax through these schemes due to the longevity of removing assets from the chargeable estate.

Normally, the donor relinquished ownership, although some trusts do allow a change of beneficiary and discounted gift trusts allow the donor to receive income.

Alternative Investment Market (AIM) shares allow retention of ownership, but few regularly pay income dividends, so most people invest for capital growth.

These are classed as higher risk as the value of many AIM shares are volatile and can fall considerably in a market downturn, and liquidity may be an issue.


These are complex issues and there are a raft of solutions with many variations. Each circumstance must be reviewed on its own merits to select the appropriate method(s) to resolve these issues.

Inheritance Tax Planning and Long Term Care Funding can be resolved on a combined approach but every circumstance will be unique because of personal circumstances, views and goals.

I would always recommend professional advice is taken.

Any questions, contact me

Prudentil Plans to Relocate Overseas, So What Will Happen to M&G ?

29 Feb


OK, let’s be blunt about this, it is concerning Prudential seems to be planning to relocate to Hong Kong, a destination widely suggested as the insurer’s new home. In particular, this raises doubts over the future of M&G, Prudential’s UK asset management business.

On Monday, Prudential released a formal statement confirming they are considering a move out of the UK in response to an “adverse outcome” of Solvency II. The ruling, due to come into force in 2014, could mean European insurers have to hold extra cash reserves against subsidiaries in countries with less strict rules.

The concern being, if Prudential is looking to relocate in search of less stringent solvency rules then this raises serious concerns over the fundamental health of the business; and in turn, will raise grave concerns over the future of the UK business and particularly M&G.

Prudential has attempted to appease shareholders by increasing dividend.

I will keep you posted on this matter as M&G, were the founder of the Unit Trust industry in 1962 and is a very well-respected UK asset management company.

Any questions, please email me at or add comments below

Europe’s Second Cash Injection of Cheap Money

29 Feb

In December 2011, the first mass injection of cheap money into the European banking system from the European Central Bank was seen as a major success. This helped fuel the market rally at the end of 2011 into 2012; and the markets have opened higher on the expectation that the results from the second installment will be successful again.

Estonia Using Euro








The first time around, the market did not initially appreciate how popular this three-year term refinancing operation (LTRO) would be .

With the second round, there are a several central questions to be answered:-

  • How Big Will It Be? The estimates suggest 400 Billion Euros and this would be seen positively by the markets
  • How Much of the Total Sum Is Actual “New Money”? Analysts are predicting up to 300 billion will be new liquidity.
  • How Will It Affect Markets? Immediately after the LTRO, a large takeup by European banks should help boost the recent risk rally in stock markets, which is hoped could help bolster the recovery around the world, in the longer term.
  • How much of this money makes it into the Real Economy? If banks choose to lend it, or to buy sovereign bonds, they could help struggling Eurozone economies and bolster the productivity of SMEs (Small and Medium Sized Enterprises). Otherwise, I fear it will merely postpone the Eurozone’s troubles but for how long? 

Financial Services Authority (FSA) Announces Pension Transfer Rules are Being Aligned with The Board of Actuarial Standards

28 Feb

I’m pleased to see that the rules are being aligned so both groups will use the same rules and assumed parameters.

The Financial Services Authority (FSA) has outlined plans to change the way pension transfers from defined-benefit to defined-contribution schemes are calculated. The idea being to prevent Defined Benefits being undervalued by the Scheme.

The FSA says the proposed changes :-

  • will ensure assumptions used to calculate pension transfers are consistent and growth rates used for illustrating the comparison to the member are “reasonable”
  • the rules for calculating life expectancy (mortality) will be aligned with those used by the Board for Actuarial Standards, making them consistent with the annual pension statements personal pension holders receive
  • changing the inflation measure used in pension transfer assumptions to take account of the Government’s decision to switch to CPI indexation
  • annuities will be calculated on a gender-equal mortality rate in line with the European Court of Justice’s decision in March 2011
  • the comparison provided to the member when a transfer takes place will have to take into account the likely returns of pension fund assets as well as the transfer of risk from the Defined Benefit Scheme to the member

Any questions please email me :-

Financial Ombudsman Service Top Ten Business Groups Complaints List

28 Feb

Someitmes, as the adviser, you forget the quality of service offered in the “advice” world and so it is healthy to review the stats just to remind oneself.

I am a financial adviser (IFA) who has specialised in Investment & Tax Planning. I spend my working life trying to do the best for my clients. It is clear to me that each and every one who I advise, support and guide have placed their trust, wealth and financial well-being in my hands. I will always do my very best fopr them, wherever I can.

In comparison, the volume and type of complaints clearly identify that there are moany out there whos’ role is simply to sell whatever they can and without due care and consideration for the end user – there clients.

I think the figures speak for themselves.

The Financial Ombudsman Service deals with complaints about financial products, sales and associated issues. The majority of these complaints were upheld i.e. 93% against RBS, 87% against Lloyds TSB, 84% against Barclays Bank, 80% against HSBC, and 55% against Santander.

Payment Protection Insurance claims – 11% upheld against Capital One, 98% against Black Horse, 99% against Lloyds TSB, and 87% against HSBC.


Wealth Accumulation, Retirement Planning and Family Commitments

27 Feb

I was recently asked how much should I save and how much is enough?

The simple anwer is, whatever you can afford – save and in my book that means invest. The exception is a pot of cash for unexpected eventualities and known commitments.

The whole idea of saving and investing is for money to grow in value at a greater rate than inflation, otherwise in real terms you are losing money. What you think of as your target growth rate and risk profile is a personal matter.

You must be realistic and be aware that the higher the possible returns, the more risk and volatility you will be requested to accept. Also, more risk does not automatically mean higher returns. What it means is more risk the higher range of returns, so you could lose or gain more but there are no guarantees. My role as your financial adviser is to guide, inform and advise you on this as it will have a serious effect on the potential outcome. So, planning, reviews and planning agian is paramount.

So where to start?

OK, this may well be different depending your stage of life.

Pre-retirement is all about accumulating wealth for self (you and possibly spouse) and family.  You need to accumulate for when one day you stop working, so in most cases this is Pension Planning, ISAs, EISs, VCTs, Collectives amd possibly Investment Bonds; and of course the clearing all debts. This is so, when children go to University, need a deposit for their first flat, get married, first car, start a buiness or whatever else then, as with all us parents, we help. And one day, when it’s time to retire, we have sufficient wealth to support and fund the rest of our lives to the standard we had planned.

There are two key important factors, firstly you only get what you put in; and secondly, you need to make sure whoever looks after your investments help them to grow. We are talking effective wealth management. If you only hear from people annually or worse, never then it is fair to say they aren’t managing but they maybe being paid for the “service” they are not providing.

Post-retirement is all about wealth preservation with the target of sustaineable and growing income over time but most importantly protecting the underlying value of the investments.

The key factor being, you need to make sure whoever looks after your investments takes a suitable approach/strategy to help sustain and hopefully grow the investments. You will recognise this comment from above – we are talking effective wealth management. If you only hear from people annually or worse, never then it is fair to say they aren’t managing but they maybe being paid for the “service” they are not providing.

Here are some simple concepts :-

If you invest £500 per month and just make 5% per annum, compounded annually :-

  • 20 years – you would have invested £120,000 and be valued at £203,728.89
  • 25 years – you would have invested £150,000 and be valued at £294,060.44
  • 30 years – you would have invested £180,000 and be valued at £409,348.92

If you invest £3,000 per month and just make 6% per annum, compounded annually :-

  • 10 years – you would have invested £360,000 and be valued at £489,792.87
  • 20 years – you would have invested £720,000 and be valued at £1,366,937.30
  • 30 years – you would have invested £1,080,000 and be valued at £2,937,769.39

If you invest £100,000 and just make 5% per annum, compounded annually :-

  • 5 years – valued at £127,628.20
  • 10 years – valued at £162,889.50
  • 20 years – valued at £265,329.80

If you invest £500,000 and just make 6% per annum, compounded annually :-

  • 3 years – valued at £595,508.00
  • 5 years – valued at £669,112.80
  • 10 years – valued at £895,423.80

All you need now is your investment adviser to make in excess of 5% or 6%, to make these figures come true. Also, if we look at the last decade, the figures could be far superior to these.

Should you have any questions or want my help, my email address is :-



Global Growth is Under Threat and Market Expectation

27 Feb

We are in a very volatile market, with fear indicators reaching levels where we expect to see market corrections. The question is with the expected news in the near future will this calm or panic the markets? We have the 20th March 2012 Greek Debt repayment date, UK Budget on 21st March 2012, and the forthcoming elections in both Greece, France and United States; and there are many more.

European stocks are expected to open lower on Monday, tracking losses in Asia where shares fell over concerns of high oil prices which could stall the global growth. Oil prices remain high due to fears over conflictual relations between Iran and Western powers plus the mounting tensions generally in the Middle East.

The ongoing Eurozone’s problems remained in the spotlight as G20 Finance Ministers met in Mexico on Sunday over growing issues from the Eurozone Debt Crisis. This is in relation to a deal to boost financing for the International Monetary Fund in April, assuming Europe had strengthened its bailout fund by then.

The European Central Bank is expected to provide a further three-year funding operation on Wednesday. This is to lend around 500 million euros to European banks in, what has been  called “a closely watched operation”.

It is believed that the first european refinancing programme helped to ease the funding markets, and the second such programme is planned to achieve similar goals.

Investment Trusts – Funds for Your ISA?

24 Feb

What is an Investment Trust?

An investment trust is a type of collective vehicle, investing in a portfolio of shares and securities.

It is a listed company with shares quoted on the London Stock Exchange, which invests in the shares of other companies or in fixed-interest securities, unquoted securities or property. An investment trust has an independent board of directors who are responsible for looking after shareholders’ interest.

An investment trust works by pooling together investors’ money and then investing in the stocks and shares of a wide range of companies, supplemented by other securities. This enables individuals with relatively small amounts of money to gain exposure to a diversified and expertly managed portfolio of investments.

Take care with the mandate and on-going risk profile of the Investment Trust as they may use alternative assets and borrow (gear up) to buy more shares.  You need to ensure that the actions taken by management in the Investment Trust are aligned with your attitude and acceptance to risk and volatility.

You can invest into Investment Trusts directly or through tax efficient wrappers, such as ISAs and Pensions.

Why Pick Investment Trusts?
Personally, as an IFA specialising in Investments & Tax Planning, Investment Trusts commonly will form part of a clients portfolio, to target above average returns and to diversify their portfolio.
Emerging markets, growth and income focused portfolios are expected to dominate Investment Trust selections for 2012 (research from the Association of Investment Companies).
Low Interest Rates, inflation and other concerns over the global markets, predictable income streams and the long-term growth story of developing nations are set to feature heavily in investment recommendations this year.
I recommend that you take investment advice, from a suitably qualified person before making any investment  decisions.
I would at all times recommend combining different asset classes and investment vehicles, to diversify your portfolio and these need to be managed effectively to help you benefit from the market imperfections.
The following is not a recommendation, it is to highlight some successful and popular Investment Trusts, which I either use or may use in the future:-
1.  Personal Assets Trust – the investment objective of the Company is to protect and increase (in that order) the value of shareholders’ funds over the long term and to earn as high a total return as is compatible with a lower level of volatility than the FTSE All-Share Index.
2. The Edinburgh Investment Trust – invests primarily in UK securities (but upto 20% outside the UK) with the long term objective of achieving growth in value and dividends (by more than the rate of UK inflation). The Company borrows money to provide gearing to the equity portfolio up to a maximum of £200 million. Use of derivative instruments is permitted (to a maximum of 10% of the value of the portfolio and a maximum of 15% may be invested in FTSE 100 futures. Other derivative contracts may be employed subject to an aggregate of the above limits and to the prior approval of the Board.)
3.  Aberdeen Asian Income – the objective of Aberdeen Asian Income Fund Limited is to provide investors with a total return primarily through investing in Asian Pacific securities, including those with an above-average yield. The Company does not expect, at least initially, to have any significant Japanese exposure.
4.  Schroder Asia Pacific – aims to achieve capital growth by investing in equities of companies in Asia, (excluding the Middle East and Japan) and the Far East pacific rim (excluding Australasia).
5.  Templeton Emerging Markets – seeks long-term capital appreciation through investment in companies operating in emerging markets or whose stocks are listed on the stock markets of such countries. The base currency of the Trust is GBP.
6.  3i Infrastructure – is a listed infrastructure investment company investing mainly in Europe and Asia, with a focus on the Utilities, Transportation and Social Infrastructure sectors. The portfolio is planned to delivered steady returns and a robust cash yield.
7.  City Merchants High Yield – objective is to seek to obtain both high income and capital growth from investment predominantly in high-yielding fixed-interest securities. It seeks also to enhance total returns through capital appreciation generated by investments which have equity-related characteristics.

The Budget 2012 & The Possible Reforms to Pension Tax Relief

23 Feb

The Liberal Democrats have pledged to raise the threshold at which people start paying income tax from current levels to £10,000. To pay for this many experts are predicting the government will cut tax relief on pensions.

There are a number of ways to reduce the pensions tax relief bill, and each has potential consequences for your clients…

Current tax relief

In October 2010, the government reduced :-

  • the annual allowance on pension contributions from £255,000 to £50,000 per year
  • the lifetime allowance was also reduced from £1.8m to £1.5m.Cutting higher rate relief
  • pension savers can withdraw 25% of their fund from age 55 free of tax, when they crystallise their benefits


Proposal 1. – Remove Higher Rate Tax Relief

  • the Lib Dems are in favour of cutting tax relief on pension contributions for all to 20% (i.e. no additional tax relief for 40% & 50% tax payers) 
  • the Conservatives are not in favour of this change.

Proposal 2. – Cutting Tax Free Cash

  • the possible taxation of the pension commencement lump sum (PCLS)

Proposal 3. – Cutting the Annual Allowance

  • the Annual Allowance could be reduced from £50,000 to £40,000.


Lloyds Banking Group Revamping its Financial Advice Arm

23 Feb

Lloyds Banking Group has announced it’s planning to revamp its direct financial advice arm. This is in relation to RDR .

What is the Retail Distribution Review (RDR) – this is a key part of the consumer protection strategy being introduced by the start of 2013. It is establishing a resilient and effective retail investment market, where consumers can have confidence in the advice and help they receive through financial advice on retirement and investment planning. 

In preparation for the RDR, Lloyds Banking Group is the latest bank to change its’ offering. They have stated they plan to split the offering between basic protection advice and a “financial planning” service. They have not confirmed if this will be provided by sales people or if they plan to offer an advice service (other than in name).

Lloyds currently operates an advice/sales team offering investment and protection products across its branch network, which includes Lloyds TSB, Halifax and Bank of Scotland.

 Lloyds refused to disclose details of the current size of its branch staff network dedicated to financial product sales but under the new structure the number of staff dedicated to this area of their business is expected to grow.

They have published, no decisions have yet been taken over how to charge customers for its financial planning service. Although, Ernst & Young suggested banks would have to charge clients at least £200 an hour just to cover costs after the RDR. (Assessment and report was in 2011.) Personally, assuming Ernst & Young’s figures are correct, this raises a concern how much will banks’ charge to offer financial services products to their customers.

A Lloyds spokesman says: “Customers require advice and support to understand and make decisions about their financial future and we are very well placed to take advantage….”

“As the IFA sector moves up market, there will be significant opportunities for bancassurers….through their high-street branch network.”

Last year Barclays closed its advice arm while HSBC cut 460 “financial planning managers” due to the RDR.