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Does Anyone Plan to Fail? So Why Do So Many Fail To Plan?

6 May

I have recently been reviewing many stats. It seems shocking how many situations are so poorly planned out. I mean a slight financial hiccup and everything is at risk to fail – so why do so many not take precautions.

I’m not suggesting that you insure against life and everything but rather to evaluate and make sure the most important at least there is a ‘B’ Plan and possible even a ‘C’ Plan…rather than hoping everything will always be fine.

OK, I accept that as a Financial Planner I consider the options, scenarios and possible outcomes more than most but if you never consider – what happens when things go wrong? And in life, things always go wrong at some point – SO BE PREPARED!!!

Protect your income

The Daily Mail quoted a survey showing that 2 in 5 families could not survive more than 8 weeks without their main household income. Only 5% of employees have insurance that will pay out if they are off work through illness – but one in five workers will be off work for at least three months before they reach retirement.

The Mail surveyed the costs of protection, citing Family Income Benefit as a cheap form of life cover (£10,000 a year for 25 years at age 35 for under £10 per month) and Income Protection insurance to provide a long-term replacement income if you are off sick (at age 35, £1,500 per month to age 60 after 6 months off work costs under £25 per month).

For healthy young people, protection is cheap and can make all the difference to the family’s well-being if disaster strikes.  But do get proper quotes and beware the small print (don’t miss vital points, constraints, terms and conditions).


Cash Savings and Inflation Can Imposes 12% Losses

The Daily Mail reported that only 7 of 868 available UK savings accounts pays an interest rate above the latest annual inflation rate of 2.8% after the basic rate of tax (20%) is taken into account. Over the past 5 years, the spending power of £10,000 in the average savings account has dropped to £8,870 because inflation has persistently been above the interest rates paid on these accounts.

The insidious effect of inflation on the value of savings accounts really is a form of water torture for savers. And nobody expects interest rates to rise any time soon. If you rely on capital related income, such as deposits, income portfolios or alternatives – talk to us about income generation, investment and planning strategies, and alternatives.

Take Advantage of The Tax Amnesty

A  ‘tax amnesty’ for people with undisclosed bank accounts in offshore tax havens ends at the end of May 2013, as warned in the Daily Telegraph. Those who disclose before then will face lesser penalties, but the recent imprisonment of people on charges of tax fraud also sends the message that HMRC is steadily getting tougher and tougher on evaders.

HMRC has specific agreements with Switzerland, Lichtenstein, Guernsey, Jersey and the Isle of Man. Information-sharing agreements mean HMRC will be able to track down evaders more easily, so tax consultants advise coming clean before carrots are replaced by sticks.

Property Sales – Did They Shrink The House I’m Buying? 

The Financial Times ran an alarming story about buyers of properties discovering that the floor area of their homes was less than shown on agents’ particulars. It claimed discrepancies of up to 10% existed between the floor areas shown in different agents’ particulars about hundreds of London properties. Such differences are more than enough to make a significant difference to the market value. Experts advise you request your own surveyor to measure as part of their survey, and to query the floor area figure with an agent if you suspect it is wrong.

Make the Most of Retirement Savings

The Financial Times ran a 2-page feature on how to make the most of retirement savings. There is now a wide range of alternatives to the traditional annuity, including fixed-term annuities, investment-linked annuities, with-profit annuities, and the capped drawdown and flexible drawdown schemes. While some of these pose risks, the conventional level annuity also carries the risk that its real spending power will shrink in line with inflation.

 For many people, it makes sense to review all the options before making a decision. 

Annuity Service – DIY or Professional Advice ?

The Sunday Telegraph warned that DIY online ‘enhanced annuity’ services, where buyers seek the best income for life from their pension fund but do not technically get any advice, can be risky. The amount of ‘enhancement’, or extra income for life you get from your annuity, depends on the degree of ill-health you suffer. But you need to be quite precise about your condition, and slight variations can make large differences to the amount of income payable. It’s easy to get it wrong thanks to the medical jargon used in many applications. 

The Telegraph suggests that getting personal advice from a qualified adviser is the best way to ensure you get the best possible deal.


About to retire? Changing Terms Of Your Company Scheme Or Options Available – So What’s The Best Choice?

The Sunday Times reported that many companies are targeting employees approaching retirement with pension offers that could leave them much worse off.  Typically, this comes in the form of an offer of a higher pension provided you give up the right to all future increases. In one example, a man of 65 might be offered a starting pension of £26,000 instead of £20,000, which sounds terrific – but if he lives for the average 22 years and inflation averages 5%, he would be £240,000 worse off as a result of taking the offer.

Offers of this type are hard to evaluate, so we recommend you seek our advice before making a decision.

Is Gold Still Worth Buying – Or Are All Commodities Best Avoided?

A sudden 8% slump in the gold price to $1,400 per ounce prompted many newspapers to ask if the 12-year bull market in gold  – the price was just $263 per ounce in January 2001 – was over. Experts and fund managers cited fears about an impending sale of gold by Cyprus, big sales by some hedge funds and the end of worries about inflation as reasons for the slide. As ever, a minority of investors have kept faith in gold and still expect the money-printing efforts of central banks to result in rising inflation at some point, with gold seen as the best form of insurance against this possibility.

This may no longer be a good hedge against inflation, and with the weakness in global growth and the phenominal growth over the last 12 years in the value of this asset are we in for a period of stagnant growth or possible a decline in value. On a risk adjusted return basis, I believe there are alternate assets where the potential returns are higher and more expected and defined.

Don’t forget the taxman – when buying and selling online

A survey cited by the Sunday Times claims as many as 8 million people buy and sell items online. That’s twice as many as the number officially self-employed, so it may be that many of these people haven’t yet registered with the taxman. The self-employed section of the HMRC website sets out the basic rules – for example, you need to pay Class 2 NI contributions to qualify for the State pension. It’s important to remember that because you pay income tax (on your profits) in arrears, you need to set aside money for the tax payments that become due at the end of January and July.

Investors That Turn to Buy To Let Properties 

According to a specialist lender cited by the Sunday Times, over 29,000 landlords entered the BTL market for the first time in 2012, attracted by returns much higher than those available on deposit accounts. As a recent Financial Times feature on BTL made clear, the best net returns are secured by those who use borrowings to finance their purchases and offset mortgage interest against rental income.  Both papers featured the wide regional variations in rental yields available.

The pity was, they forgot to mention the work involved, the risks, the lack of liquidity, this is a long-term investment. There is no guarantee the rent is paid and that capital value will increase. Sadly, many actually lose money on the investment or could have made better returns in a fixed term deposit account.

Property as an investment can generate good returns. I suggest it is only suitable for some and the actual returns are precarious. I speak as both an experienced IFA (Independent Financial Adviser), so I have seen the success stories and the failures; and also, as a landlord myself – with all the problems, costs and hopefully successes in the future.

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.

Pension Drawdown Receives A Boost To Income Limits From March 2013

26 Jan

Pensioners in drawdown will be able to take an increased income from 26 March 2013.

The Government surprised many in the Autumn Statement, the maximum drawdown limit on income that can be taken in capped drawdown was increased from 100% back to the 120% level. However, investors currently in a drawdown year will remain on the 100% GAD rate until their new drawdown year starts. 

Drawdown allows retirees to keep their pension fund invested and take an income from it each year. The amount of income that can be taken from an income drawdown policy is based on calculations made by the Government Actuary’s Department (GAD), known as GAD rates.

These GAD rates are linked to the annuity rates offered by insurance companies, which have fallen dramatically. This meant that drawdown income falls and so the government decided to decrease the amount of income that could be taken from 120% of the GAD rate to 100%.

The last few years have been difficult for many drawdown clients and some may be tempted to simply push income back up to the maximum 120% as soon as allowed.


However, it is important to tread with caution. Taking maximum income each year runs an increased risk of quickly eroding capital. Investors must consider, if this is the case their ‘capacity for loss’. This is so clients can cope with any nasty surprises.

Drawdown members are facing unprecedented times, with many seeing their income drop by over 40%. The reduction in the maximum allowable income was not the only reason behind this drastic fall. Pushing income back up to 120% of GAD rates would only cut the income drop to a ‘mere’ 20% or so.

The cause was a combination of many factors – 

Low gilt yields played a part, as did the high income levels some people were stripping out of their drawdown pots. Taking 120% each and every year means people need high investment returns to maintain that income. This is  where the client’s capacity for loss becomes crucial.

A client’s capacity for loss (their ability to absorb falls in the value of their investment and associated pension income, is a key focus. This needs to be considered separately from attitude to investments and their associated potential risks.

There are two things to consider. One is around the type of investment needed to try to achieve a higher yearly return and how this fits with a client’s attitude to investment risk; and their capacity for potential losses.

Bare cupboard (cartoon) - Income drawdown: the pension that could leave you penniless

Investment performance, risk and volatility suitability and portfolio stress testing must be reviewed (in my opinion) on a regular basis, taking into account changes in the customer’s health and personal life, as well as what has happened to their pension and other investments. In that way clients are more likely to understand, and be able to deal with, any drops in income and the portfolio can be managed and adjusted as required.

I believe income drawdown is undoubtedly a good contract which can be hugely beneficial for some clients.

Recent history has shown that drawing 120% income comes with repercussions – higher investment returns are needed to maintain that income, and, for most clients, investments have simply not achieved these high hurdle rates over the last five years.

Relying on critical yields to work out whether investment returns are acceptable is unlikely to be a good strategy. Instead, using some form of cash flow modelling along with regular scrutiny of whether a lifetime annuity or investment linked annuity may be more suitable, could pay dividends for both adviser and client.

A possible strategy is to take an income no more than the natural yield generated from the underlying investments is the optimum way to protect a drawdown fund over time. 

Experts Predict Zero Or Negative Growth in Property Valuations in 2013

18 Jan

The performance of the UK property market was disappointing in 2012, with growth of just 1% by the Land Registry’s measures. Strong growth in London and the South-east helped to offset losses in most of the UK.

Even prime central London may be on the brink of retreat as property specialists claim tax reforms could hit the market in the coming year.

Knight Frank, which currently places the UK in the middle of the longest housing market recovery on record, says it expects the prime central London market will undergo no further price moves in 2013. It attributes this impending slowdown primarily to tax changes; namely the introduction of a 7% Stamp Duty Rate on properties valued at £2 Million or more in March as part of the Budget.

This view is shared by property agents Savills, although its research shows the prime central London market has already started to slow. 

World research director Yolande Barnes says: “Buyers should now expect price growth to hover around zero in 2013, particularly as the prime central London market absorbs the impact of increased taxation.

Nationwide chief economist Robert Gardner suggests an improvement in the overall situation in the Eurozone could also present a contributing factor since the prime central London market has benefited so prominently from foreign capital inflows.

He says: “Part of London’s out-performance is reflected in safe havens of money flows from the Eurozone, which has disproportionately benefited London, especially the top of the market. Whether or not that is maintained over the next year will depend on the developments in the Eurozone and the market stability of other EU states.”

There is optimism for the super-prime property market and growth is expected to continue, the prime London property market is expected to stall (at least for 2013) and the majority of the rest of the UK is expected to see nil or negative growth. Regional factors will affect the housing valuations, such as corporate failure, Public Sector shrinkage and weakness in demand and the valuations could see serious declines.

If property is your investment focus expect poor returns in 2013.

HMRC Focusing On Tackling Tax Avoidance by the Wealthy

17 Jan

HMRC Letter 480

It’s official, HM Revenue & Customs is doubling its team tackling potential tax avoidance of wealthy individuals. The number of inspectors has increased to over 200 inspectors.

The Affluent Compliance Team is to begin recruitment of 100 additional inspectors. The focus of the unit has expanded from those with annual incomes from £150,000 and accumulated wealth of £2.5 Million to £20 Million; to include those with wealth above £1 Million.

HMRC has reported that the unit had received additional tax receipts of £75 Million (by the end of December 2013). This is expected to rise to a target of £586 Million by the end of 2015.

Exchequer Secretary David Gauke says: “The team has made a great start by bringing in £75m in additional tax that would otherwise have been lost to the country…… Dodging tax is immoral, illegal and unaffordable and the minority who cheat are increasingly finding that, thanks to the work of the Affluent Team, they have made a big mistake.”

Director of the Affluent Team Roger Atkinson says: “Good quality intelligence is central to catching the cheats and so we are expanding our Affluent Intelligence Unit fourfold. This is very good news for all honest taxpayers.”

Bill Mott and Neil Woodford Issue Warnings For 2013

15 Jan

Neil Woodford has warned investors to expect further downgrades to profits forecasts for those companies more sensitive to the economic cycle.

Neil Woodford (manager of the Invesco Perpetual Income and High Income funds) paints a pessimistic story for the rest of 2013. He has grave concerns pertaining to the existing problems (eg the ongoing crisis in Europe, a possible slowdown in the US and reductions in borrowings across the western world) will limit the pace of global economic growth. Conversley, in his monthly update, he states he believes there is a “population of stocks that can grow consistently through this difficult period”.

Bill Mott (manager of the Psigma Income fund), has always raised his concerns over the effect of central bank policies,  he has warned that these have raised the chances of increasing inflation by continually introducing unprecedented policies into the market. He believes that these have increased the expectation of a growth in inflation.

“To some extent, inflation is already with us. The Bank of England has exceeded the middle of its target inflation range for 38 months in a row. What is remarkable is that despite this persistent inflation, the UK gilt market is trading at such low yields. Real interest rates on bonds have been negative for some time. Are low gilt yields telling us that the bond markets are relaxed about the inflation numbers? Or is it rather that the same target-busting Bank of England has been the most enormous buyer of gilts and has successfully subverted all price signals?”

Bill Mott has avoided investing in bank shares through the portfolio he manages, Psigma Income Fund. This has caused poor returns (short-term) against his peers. Time will tell if his decision is correct, as there has been a recent period of price rallying in this sector but is this a “true” rally or rather a “relief” rally. The latter will see the prices collapse, or could the pricing be sustainable?

Personally, I have concerns over the banking sector as there are several unknowns which carry a huge risk and could derail the recent optimism, One major issue with this sector is the lack of clarity of information and the continual fiascos constantly being unearthed. I see the comments about RBS and Libor, where the fines could be significantly worse than those suffered by Barclays (but expected not to be as large as those suffered by UBS). This is just an example and who knows what next?

Investment Bulletin – My Views For 2013

7 Jan
Fireworks explode over Times Square as the crystal ball is hoisted before New Year celebrations in New York December 31, 2012. REUTERS-Joshua Lott
What a year 2012 has been. It has not been an easy year and with the Christmas & New Year break, life has been put back into perspective and some sanity has returned. 2012 has ultimately been a good year for my clients and despite the challenges, we have made good gains. The challenges that faced the markets have been considerable:-

  • Disappointing economic growth and corporate earnings
  • US Presidential Election won comfortably by Barak Obama
  • Worrying geo-political developments, such as, in the Middle East and China
  • The ongoing debt crisis in the Eurozone (at times threatening the very existence of the Eurozone)
  • Easing political risk in Europe but still minimal Eurozone growth
  • Consumer confidence growing in the US
  • Relatively successful Chinese growth expected in 2013

Looking ahead, we’re beginning to see signs that a more positive outlook is developing. In the US, in particular, the recovery we see in the housing market could have a meaningful impact on growth prospects. Does this mean that the 30-year bull market in bonds is coming to an end? And should we be braced for an imminent increase in interest rates, reminiscent of the US Federal Reserve’s 2.5% worth of hikes that clobbered bond markets in 1994? I don’t think so. The Fed has said that it won’t raise rates until 2015 and while it could do so earlier, I think that next year would almost certainly be far too soon.

The outlook for returns in 2013 will depend on where you invest, I am confident that there are still attractive investment opportunities in several areas of the investment universe. In these conditions, a flexible approach and experienced active management can really prove their worth.

Markets will worry about the Italian elections in 2013 (likely to be brought forward thanks to PM Monti’s resignation) and in Germany (likely in September 2013) and even about the stability of the coalition government in the UK.

Currently, the most likely outcomes seem to be a strong vote for Merkel and her CDU/CSU grouping in Germany and the election in Italy of a coalition with a strong commitment to the Euro but a rather weaker commitment to structural reform of the economy. 

Worries about the possibility of a hard economic landing in China in 2012 abated with a soft landing and expected growth should be robust in 2013. Although Obama’s re-election does not solve the issue of political gridlock within the polarised system in Washington, growing consumer confidence underpins hopes that the US economy is on the mend.

Above all, markets still take heart from the extraordinary support offered by central banks across the developed world, with ultra-loose policy keeping interest rates and bond yields low, providing liquidity for the financial system and helping governments finance budget deficits cheaply. There may yet be worrying consequences from this grand monetary experiment, but for now investors should think twice about betting against the tide of central bank Dollars, Pounds, and perhaps increasingly Euros and Yen that are expected to keep flooding the world economy.

Will 2013 be the year in which the world really starts to emerge from the shadow of the global financial crisis? Perhaps that is too much to hope for, but there are good signs that the healing process in the global economy and markets can continue. Growth in the major developed economies is likely to remain quite subdued – slightly more robust in the USA, but still close to zero in the Eurozone.


The Economy 

Economic developments around the world now range from tangibly-improved in the United States, through apparently-improved in China and India, to less-bad in Europe. A return to financial markets driven by fundamentals is long overdue but first we need to consider the political ramifications of 2012 and prospects for 2013 :-

  • Risks from the Middle East are higher
    • displacement of US influence in Egypt by the Muslim Brotherhood
    • civil war in Syria
    • this clearly fragile balance of power leaves the region less stable than a year ago
  • Elections were a feature of 2012
    • two in Greece
    • France (with the arrival of a wave of socialism, which already appears to be on the wane)
    • Barrack Obama’s re-election in the US
    • Re-election of Shinzo Abe in Japan.
  • Risks from the Eurozone are lower and falling
    • It appears very likely that Angela Merkel will be re-elected in Germany
    • The Italian election, which must be held by April 2013, will determine whether the reform process Mario Monti was able to begin during his tenure continues or whether it reverses
  • The time for forgiveness is late 2013
    • The German election will likely coincide with Greece’s return to primary surplus. 
    • This could mean that Greece’s debt could only be forgiven if it defaults, and thereafter no more fiscal transfers would be possible. The appeal for the creditor countries is that it reduces the risk of political extremists gaining power and forcing the long-feared Grexit – an event which carries unquantifiable risk to the broader financial system.
  • Will profits matter more than politics?
    • The chances of markets being driven by fundamentals, rather than politics, are clearly higher for 2013 than they were for 2012.
    • I expect equities to trade according to their earnings growth.
  • In the UK, general share capital growth is expected to be positive, combined with attractive potential dividends
  • In the US, stronger earnings growth but a lower yield and a slight softening of the dollar will mean a more sedate return in sterling terms.
  • European companies seem well placed to capitalise on the region’s export performance. The modest valuation of European shares offers an attractive yield, and positive trade dynamics are supportive of further gains.
  • Japanese equities are currently heavily overbought and I expect profit taking might be in order. With the country back in recession, I expect modest total return from Japanese shares.
  • The rest of Asia, however, looks set to enjoy robust earnings growth which encourages me to think positively about the potential for strong equity returns.

Investors must clearly treat these opinions with caution, as equities are volatile. I am an advocate of asset combining to take advantage of the differing asset performance related correlations, helping to manage both risk and volatility. I believe, however, that the potential for markets to reflect fundamentally attractive valuations should give investors optimism about the prospects for 2013.