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Start of A Stock Market Rally Into Spring 2013?

26 Nov

Up until the end of last week, the market had given up a little more than 8.0% since the September peak (an 8% pullback is about the average size of a normal bull market correction), and while that could imply a reversal of fortune may be due, more downside may be in store before a good technical floor is found.

This is a tricky situation. On the one hand, stocks are oversold and due for a bounce.  On the other hand, the momentum is still pessimistic, and we have to assume that trend will remain in motion until we clearly see it isn’t.

The bullish case is bolstered by this weeks positive results, which stopped the previous declines.  The market’s previous fall of 8.8% from the September high is right around the normal bull market correction.  So, the reversal clue materialized right where it theoretically should have.

The bearish case:  There’s still no assurance that the bullish days will continue. In fact, the stockmarkets could carry on gaining  and still not snap the losing streak ( as compared to September’s highs).

Any additional clues from the CBOE Volatility Index?  No, not really.

Just for some perspective, there’s still plenty of room and reason for the stockmarkets to keep tumbling.  Point being, if the bulls are serious here, there’s not much of a foundation they can use as a push-off point.  Then again, the VIX is clearly hitting a ceiling at its 52-week moving average.  Until and unless it can be hurdled, the bulls don’t have an enormous amount to worry about (they just have a little to worry about).

So could the recent corrections and this weeks swing be the formation of a swing low of an intermediate market-bottom being formed? 

Typically the stock market will rally fairly aggressively out of one of these major intermediate bottoms, often gaining 6%-8% in the initial phase. At that point the market will dip down into a half cycle low that will establish the trend line for this particular cycle.

The Dollar (USD) is now, based on its daily cycle, overdue for a move down into a short-term low . This, I would expect, should help drive the first half of that 6%-8% move, followed by a short corrective move (as the dollar bounces) and then rolls over quickly into a another phase down.

If this is the case, I believe the cycle would be due to bottom around the first of the year and should drive the stock market generally higher into early January 2013.

We could continue to see the dollar generally heading lower with intermittent bear market rallies until it puts in a final three year cycle low in mid-2014. This should keep the stockmarket generally moving higher at least until the point where commodity inflation collapses Consumer Spending. Once that occurs the stock market will stagnate. The fear is that the US Federal Reserve may continue to print money, and this may cause the environment of artificially high money supply, which could lead to creating the conditions for the next recession.

As has been the case in the 1970s and also during the last cyclical bull market in 2007, I think we will probably see the stockmarket at least test the all-time highs, if not a marginal break above them, before rolling over into what I expect will be a very complex bear market bottoming sometime in 2015.

As with all predictions. They are dependent on sentiment, market forces and behavioural economics and as such I reserve the right to change my views and expectations, based on information as and when it arises in the future. The scenarios suggested and dates predicted are based on current information. The future is unknown and will change the potential outcome as estimates become actuals.

This is why we carry out sensitivity analysis, stress-test portfolios and incorporate diversified portfolios because the one fact we can be sure of is everything will change.

ECJ Judgement and the effect on Discounted Gift Trusts

26 Nov

This article summaries the judgement provided by the Court of Justice of the European Union (ECJ) regarding gender discrimination in relation to insurance premiums and its effect on Discounted Gift Trusts (DGT).

The Decision

On 1 March 2011 the ECJ issued a judgement that stated that the insurance services sector will no longer be able to offer gender specific premiums or benefits from 21 December 2012.

How does this impact Pensions, Annuities and Insurance?

This ruling is expected to affect these areas of financial services and following the 21 December 2012, we will see how this will be embedded into our existing legal framework and processes.

How does this impact DGT valuations?

When calculating the open market value of an income stream to arrive at a discount, HMRC guidance provides the use of certain gender specific mortality tables. HMRC have indicated they will review their guidance to take account of the judgement. However, it is likely that any change would not happen until late 2012. For DGTs declared before any change to the HMRC guidance on valuations, this judgement should have no impact, as the basis of the discount calculated will be relevant as at the date the trust is declared not the date of death of the settlor(s).
 
It should be remembered that the discount is just one factor in deciding whether a DGT is a suitable arrangement as part of your Inheritance Tax planning strategy.

The Rationale for the Judgement


Directive 2004/113/EC prohibits all discrimination based on gender in the access to and supply of goods and services. 

This means that from 21 December 2007 the Directive prohibited the use of gender in the calculation of insurance premiums and benefits. However, the Directive allowed exemptions to Member States regarding the use of gender specific premiums and benefits so long as the Member State ensured that the underlying actuarial and statistical data of which the calculations are based are reliable, regularly updated and available to the public.

The judgement considered if the intention of this exemption was to allow gender specific premiums and benefits to continue indefinitely. The Court concluded this was not the case and that gender specific premiums and benefits works against the achievement of the objective of equal treatment between men and women and therefore it was appropriate to bring this practice to an end.

Concluding that gender specific premiums and benefits would be regarded as invalid with effect from 21 December 2012.

 

Passive vs Active Fund Management Argument Rages On

15 Nov

It has been the argument for many years – Does active fund management generate better investment returns? The general accepted conclusion has been yes but only for the best managers whereas the rest under-perform. So the question as an investor is it worth the additional cost?

Personally, I agree with the above points and  believe a combination of strategies is best – the point is, if active fund management generate above sector average returns on a consistent basis then by selecting, monitoring and reviewing we will achieve the best risk adjusted returns. The question is which sectors to combine and this is where my expertise adds value and my expectation of betters risk-adjusted returns.

Premier Fund Management has challenged the  opinion that average fund managers always tend to under-perform the associated indices.

Conventional measures of the “average” fund manager’s performance – the use of fund sector averages based on the mean performance of all funds in the sector – have long appeared to support this view. Many experts have tended to attribute the under-performance to the effects of active fund management fees on the funds’ performance.

However, research by Premier Asset Management based on ‘weighted averages’, which give bigger funds a greater influence on sector average calculations to reflect the true average return in the sector, shows that in most cases this is not the case.

In the IMA Asia Pacific excluding Japan sector the conventional sector average return of funds in the past five years was 27% – far lower than the FTSE World Asia ex-Japan index gain of 34.8%. However, when the amount of assets in each fund is taken into account, the actual weighted average performance experienced by investors was 37.4% – better than the index, the research shows.

In the IMA Global Emerging Markets sector the conventional average performance was a 23.9% gain, compared with an MSCI Emerging Markets gain of 27.4 per cent. However, the weighted sector average gain from funds was actually 32.2%, the research shows.

It also shows that, while the weighted average fund performance was not necessarily better than stockmarket indices in all sectors, it was better than the conventional sector average in seven out of the eight sectors that were examined. This suggests that the existing reported sector averages published to investors understate the returns enjoyed by most clients of actively managed funds.

The one sector where the conventional sector average was higher than the weighted average was IMA North America – suggesting that the biggest funds in that sector actually under-perform the smaller funds on average.

Simon Evan-Cook, investment manager on Premier’s multi-asset team and author of the research, said the weighted average calculations were a better method of judging funds because more investors were affected by the performance of larger funds. “As a whole, the industry is understating the performance and value of active management,” he said.

Ed Moisson, head of UK research at Lipper, said Premier’s method was “logical” and demonstrated the strength of larger funds’ track records, but added it did not tell the whole story.

The US Election Is Over, Now What Happens?

12 Nov

After months of waiting, investors now have one less uncertainty to deal with. The election is over, and voters decided to give President Obama another four years to lead the country.

In addition to winning, the Democratic Party retained a majority in the Senate, picking up 2 seats. However, the Republican Party also maintained its majority in the House of Representatives. This means that the political leadership will not change significantly. That doesn’t mean everything will stay the same. Voters decided to retain many of the same leaders, but recent polls suggest many people want to see different legislative results.

Looking ahead, the new Congress and President Obama must now find a way to boost economic growth and create jobs. Along the way they need to avoid the fiscal cliff, foster trade with other countries and maintain the security of the United States in an increasingly threatening world. Unfortunately, avoiding the fiscal cliff and promoting economic growth are immediate problems. If Congress fails to take action, the Bush-era tax cuts and the Obama payroll tax cuts will expire at the end of this year. At the same time, mandatory federal spending cuts are scheduled to begin (as lawmakers could not agree on a compromise to reduce the deficit during last-years’ debt-ceiling negotiations). The Congressional Budget Office estimates that the economy could go into recession and contract 0.5% next year if all the tax hikes and spending cuts take place as scheduled.

We believe there are several scenarios that could unfold around the fiscal cliff. The most likely outcome would be that lawmakers would find acceptable middle ground including some tax increases and spending cuts but not the full measure scheduled to occur at the end of the year. Modest tax hikes and federal spending cuts would not severely hurt the economy but would be a drag on economic activity next year.

Recent economic news shows that the U.S. economy is slowly recovering from the 2008-2009 recession. Fortunately, the housing market has finally turned up after six years of subtracting from economic growth. The country will face some fiscal drag if Congress allows some tax increases and spending cuts to reduce the deficit next year. This fiscal drag will most likely be offset by the recovery in housing and continued increases in consumer and business spending. As a result, we believe that the economy is likely to grow in 2013.

Many investors may be concerned that the election outcome will lead to continued political gridlock that has existed during the past two years. However, both parties recognize the risk to the economy if lawmakers do not address the fiscal cliff. Therefore, during the next few weeks we are likely to see both parties talk about a willingness to work together, but start the process by stating the pre-conditions for cooperation. We believe this would just be the first step toward addressing policy differences. Obviously, the process will not be quick and easy.

Some strategists are suggesting that Congressional Leaders could allow the country to go over the fiscal cliff as a way to force a compromise. If this happened we would expect any compromise after the first of the year would be retroactive to the start of the year and the economic impact would not necessarily be that severe. The outcome would be volatile financial markets.

So what do the elections mean for investors? We believe that the underlying U.S. economic fundamentals remain favorable. The economy is growing, and the uncertainty of the election is behind us. If Congress and the President can find some middle ground and compromise over tax hikes and spending cuts, the outlook for the economy would be better than the worst-case scenario of allowing all the tax hikes and spending cuts to be implemented as scheduled.

The economy is expected to start the year on a weak note until the fiscal cliff issue is addressed, but we expect economic momentum to build as the year progresses. In this environment, the stock market would be volatile during the next few months. The positive seasonality during November and December could support stocks if investors see Congressional Leaders trying to work together. Longer-term, we look for the stock market to have modest gains next year.

Fortunately, the Federal Reserve’s easy money policies will partially offset the fiscal drag of reducing the deficit. The government may borrow and spend a little less next year if a compromise is reached but net lending in other sectors of the economy has increased, and this increase in credit in the private sector is likely to support economic growth. In addition, the credit markets are likely to benefit if the Fed continues to provide liquidity to the economy by buying bonds until the unemployment rate declines.

My clients have been positioned with asset preservation and potential of positive returns in mind during the past year. This was in order to deal with the uncertainty of the global environment, the Eurozone debt Crisis, slowdown in China’s GDP, the US election outcome and the pending fiscal cliff (to name just a few). Finally, businesses appear to have delayed capital spending and hiring until the direction of governments policies becomes clearer. After waiting much of this year, next year could potentially be a year of action and less worsening situations (possibly even improving situations). Investors may take a less defensive position, assuming investor sentiment improves (on a relative basis, this is anticipated) and this could lead to stocks outperforming bonds in 2013. If this scenario ends out being true then cyclical sectors of the stock market are likely to perform better than defensive sectors. Although this is only an “if”.

Protect Your Portfolio From Inflation

29 Oct

Why invest? Market volatility means there is an inherent risk that capital value may drop and the returns achieved may not match our expectations. The answer is INFLATION. How else can we inflation proof the value of our money?

I have no other answer to this life-long question – so the question becomes, how do we protect against dire volatility while maintaining the true value of money?

Many great statistical minds have tried and all have failed to effectively predict volatility and inflation with any consistency. I believe that it is easier and more appropriate to weatherproof a portfolio against the potential situations.

The case for high inflation goes something along these lines: paper money, not backed by any physical store of value, effectively only derives its worth from the goods and services you are able to exchange it for. By printing lots of it, as we have (such as, through quantitative easing [QE]), without a corresponding increase in the number of things you are able to spend it on – its value decreases.

So, if twice as much money can only be used to buy the same amount of stuff, then it must be worth half as much. It is debatable how much money has to be printed before there is any noticeable drop in value; especially since the extra currency gets recycled many times through the banking system, where its impact could be multiplied massively. The worst-case scenario is that there has already been too much extra cash printed and the effects are slowly gathering momentum.

Additionally, there is the fear that by becoming the lender of last resort to governments, notably in the US and UK and more recently the ECB, central banks will be unable to take corrective action without effectively bankrupting their home nations.

High inflation erodes the real value of your portfolio, and this needs to be protected against. One obvious starting point is inflation-linked bonds. The income on these bonds is indexed to the rate of inflation. While this will prevent a fall in the real value of income received, it could still leave you exposed to falling real capital values. A fairly consistent defence against moderately high inflation has been equities. It makes sense to match up markets to currencies; if you are concerned about UK inflation then UK equities are a good choice. They protect both income levels and capital value. Shareholders will always demand a real return, forcing businesses to pay out higher dividend rates to attract investors. At the same time, the higher rates will attract investors seeking income protection who would otherwise be in low -yielding assets such as cash.

If you are a bit more extreme in outlook, with a sizeable number of people predicting the end of the fiat money system altogether, then it is best to hold physical assets. Gold is the favourite of inflation conspiracy theorists and its record price shows the extent of the fear of high inflation. As a homogenous, globally traded commodity, its value tends to increase any time the threat of inflation rises anywhere in the world. The difficulty with investing in gold is that unless you physically have it in your hand, you are just as exposed to the system of interconnected promissory notes as you are with equities or any other paper asset.

Raw materials such as oil, food and other industrial metals and minerals are likewise relatively good bets in a high-inflation environment. These physical assets can not be debased by simply conjuring more up and as they will always be in demand, their value is reasonably assured. Again, it is quite hard to stockpile barrels of crude oil or frozen orange juice concentrate, but if you are looking for security you want as little separation from the physical items as possible. A focused fund can also be a useful addition to a portfolio. It is important to remember that inflation is a risk that is actively managed by most fund managers as part of their standard investment process.

A well-diversified portfolio, not just across asset classes but taking in a good spread of strategies and outlooks will likely cover you from the most likely inflation scenarios.

Good financial health – The WelshMoneyWiz

Personalised Portfolio Bond – Be Aware Of The Issues

18 Oct

Investment Bonds have formed part of many investment strategies and the tax wrapper purchased by many – care is needed. In recent years there has been an explosion in the number of off-shore bonds and based on assets owned or the contract terms these may be defined as a Personalised Portfolio Bond (PPB), which is taxed differently.

Beware – for a UK resident – taxed in the UK individuals the tax is payable each year based on yearly deemed gain and the cumulative gains – so not just the yearly actual gains – assessed and taxed at your personal rate of income tax.

Personal Portfolio Bond Legislation
The PPB legislation is an anti-avoidance measure which imposes a yearly deemed gain on life assurance and capital redemption policies where the property that determines the benefits is able to be selected by the policyholder.

The deemed gain is subject to income tax where the policyholder is UK tax resident. The legislation can be found in Income Tax, Trading and other Income Act (ITTOIA) 2005 Sections 515 to 526. The PPB legislation applies for policy years ending on or after 6 April 2000 and the tax year 2000-2001 is the first for which a PPB gain can arise.

Personal Portfolio Bond Tax Charge
Where a policy is regarded as a PPB then the PPB legislation imposes a tax charge on an artificial deemed gain on the policy for policyholders who are UK resident individuals, UK resident settlors or UK resident trustees (where the settlor is not UK resident or has died).

The tax charge based on the PPB deemed gain is payable yearly for UK resident policyholders. The PPB deemed gain is calculated at the end of each policy year while the policy is in force. It does not apply on surrender, death or maturity, but previous amounts are taken into consideration as shown in the example below.

How is it Calculated and Applied?
The PPB deemed gain is not based on actual gains. The PPB deemed gain assumes a gain of 15% of the premium and the cumulative gains for each year the policy has been in force. The tax charge on the PPB deemed gain will be the highest rate of tax paid by the investor. Top slicing relief is not available.

What Policy Assets Are Permitted Under the Personal Portfolio Bond Rules?

  • property appropriated by the insurer to an internal linked fund
  • units in an authorised unit trust
  • shares in an approved investment trust
  • shares in an open-ended investment company
  • cash*
  • life policy, life annuity or capital redemption policy, unless excluded (see below1)
  • an interest in non-UK collective investment schemes (not closed-ended funds)
  • Cash includes sums in bank or building society accounts, but not cash that is acquired in order to realise a gain on its disposal.

A life policy, life annuity or capital redemption policy is ‘excluded’ if:

  • the policy or contract is itself a personal portfolio bond; or
  • the value of any benefits under the policy or contract is determinable

directly or indirectly by reference to a personal portfolio bond;

or

  • a personal portfolio bond is property related to the policy or contract.

Some examples of policy assets which are not permitted under the PPB rules :-

  • Any stocks and shares not listed on a recognised stock exchange,
  • Loan Notes linked to the value of an index or a security which are not themselves collective investment schemes,
  • Private company shares,
  • Non UK closed ended funds,
  • Cash held with the intention of currency speculation.

Returning to the UK with a Personal Portfolio Bond
The test of whether a policy is a PPB is an ongoing test. If a policy was originally a PPB but its terms were varied so that it ceased to be a PPB then the PPB tax charge will not arise.

The yearly PPB deemed gain only arises if a policy or contract is a PPB on the last day of the related policy year.

The following options are available:

  1. Do nothing. In which case the tax charge for a PPB deemed gain will apply.
  2. Request the product provider to endorse the policy and therefore restricting the assets to permissible assets only.

Will there be any changes to the assets that are allowed?
Since the PPB rules have been in force, the only changes to the investments have been an extension to the list of assets which are not permitted assets. Once the policy is endorsed, should any assets at a future date cease to be permitted they will have to be disposed of at the first reasonable opportunity.

Cash Holdings – must not be for the purpose of currency speculation. Any cash held in the policy which arises as a result of buying and selling investments (essentially a transaction account), and which is in the currency of the policy is permitted. In addition a bank or building society deposit account in the currency of the policy is permitted as well as a number of others.

Closed Ended Funds
With closed-ended funds, only shares in UK FSA authorised investment trusts are permitted. The Financial Services and Markets Act 2000 states that closed-ended vehicles are not collective investment schemes. Therefore non-UK closed-ended funds cannot fall within the permitted assets. Shares in a non-UK company may not be classed as an OEIC under the Financial Services and Markets Act 2000 and therefore may not be permitted assets. Clarification should be sought on each asset.

It is essential that policyholders inform their fund adviser of their decision regarding endorsing their policy, and restricting what assets they can invest in. It is the policyholders responsibility, along with the fund adviser to monitor your investment selection. The product provider/insurance company are not responsible for this, nor are they obliged to pass on to the policyholder or fund adviser information relating to your selected funds.

What happens if a fund adviser accidentally acquires non permitted assets for a client’s policy?
This is a risk, which is why it is important that a fund adviser knows about the restrictions. It would clearly be an action which would breach the terms of the endorsed policy and that breach must be remedied. It is probable that it would be necessary to discuss the matter in full with HM Revenue & Customs.

Points to consider if assets need to be sold
If assets have to be disposed of to allow a policy to be endorsed, policyholders need to consider the cost of the PPB tax charge against the current market value of the assets and possible future growth.

Consideration also needs to be given to assets with restricted dealing days, ensuring there is sufficient time for receipt of the endorsement request and time to sell the assets and endorse the policy before expiry of
the time limit.

What happens if a policy is not endorsed before the time limit expires?
The tax charge for the PPB deemed gain will apply. The charge is assessed on the day before the policy anniversary each year. The charge will cease to apply for the policy year ending after the policy has been endorsed.

Action checklist

  1. The policyholder should discuss their options with their financial adviser or fund adviser.
  2. Decide whether or not to endorse the policies to avoid the tax charge or continue with it unchanged.

Assessing The S&P 500 Performance – The Highs & The Lows

12 Oct

What a Difference Five Years Makes – 10 Years Makes – 15 Years Makes

With this week marking the five-year anniversary of the stock market’s record high, much of the attention will and has been devoted to the market’s steep drop and sharp rebound. The chart below shows, the S&P 500 has been swinging in a wide range for the last 15 years. The pattern has been quite extreme – doubling and then falling by half over and over again.

Five years ago, the S&P 500 closed at a peak of 1,565.15.  Since then the index has seen a huge decline followed by a huge rally.  After all those swings, the S&P 500 has declined 7.9% over the last five years (annualized the decline works out to a loss of 1.63% per year). If we extend the period to the last 10 years, the S & P 500 has increased by 85.6% (6.38% per year).

SPX 5 & 10 Year Return Table

Some people may not remember, is that five years prior to the S&P 500’s all-time high made on October 9th, 2007,  the index bottomed out from the 2000-2002 bear market at a level of 776.76.  Following the post-Internet bubble low on 10/9/02, the index rallied more than a 100% before dropping more than 50% from 2007 to 2009.  After bottoming out in March 2009, the index has since rallied more than 100% once again. 

S&P 500 15 Year Performance Chart

With the S&P 500 about 7% away from its all-time high of 1565.15, I am skeptical the market is poised for another multi-year decline. The stronger earnings, higher dividends, reasonable valuations and an improving US economy are four main catalysts why I currently doubt the rally won’t fall off the edge of a cliff.

Conversely, I  don’t expect double-digit returns in the coming years.

I believe that stocks may produce below historic average returns in the years ahead and in the near-term the market and associated economies face daunting challenges in the coming months. This includes – a sluggish global economy, European financial stress, U.S. budget battles and the looming fiscal cliff. However, with better fundamental drivers of value than at similar points in the past 15 years, stocks are likely to weather most potential outcomes better than they have in the past, making a return trip to the lows of the 15-year range unlikely, at least for now. Plus, if history is to repeat itself we are three years into the five-year cycle – but that is a very big “if”.

Global Economic Recovery – Weakening ?

9 Oct
IMF managing director Christine Lagarde. (KEITH BEDFORD /REUTERS)

The IMF (International Monetary Fund) have reassessed their forecasts lower and have stated “the global economic recovery is weakening as government policies have failed to restore confidence….the risk of further deterioration in the economic outlook was considerable and had increased”.

The IMF downgraded its estimate for global growth in 2013 to 3.6% from the 3.9% it forecast in July. One of the biggest downgrades was to the UK economy, which is now expected to shrink by 0.4% rather than grow by 0.2% this year. (Change in the forecast since the figures produced in July 2012.)

In response to the downgrade, the UK Treasury highlighted the fact that the IMF had “repeated its advice that the first line of defence against slowing growth should be to allow the automatic stabilisers to operate, monetary policy easing and measures to ease the flow of credit – all of which the UK is doing”.

The overall forecasts are now approaching, in my opinion, more realistic estimates for the current cycle. I suggest that the original forecasts were high and the reality is growth but weaker and more muted growth.

IMF’s General Outlook

The overall economic view from te IMF – “output is expected to remain sluggish in advanced economies but still relatively solid in many emerging markets and developing economies”…but “much would depend on action taken by policymakers in Europe and the US”.

IMF annual growth forecasts (% change)

  Latest forecasts Previous forecasts (July)
  2012 2013 2012 2013
SOURCE: IMF WORLD ECONOMIC OUTLOOK
World output 3.3 3.6 3.5 3.9
Euro area -0.4 0.2 -0.3 0.7
US 2.2 2.1 2.0 2.3
Japan 2.2 1.2 2.4 1.5
UK -0.4 1.1 0.2 1.4
China 7.8 8.2 8.0 8.5
Brazil 1.5 4.0 2.5 4.6
India 4.9 6.0 6.1 6.5
Russia 3.7 3.8 4.0 3.9

It highlighted the importance of the European Stability Mechanism (ESM), the eurozone’s new permanent fund to bail out struggling economies and banks launched earlier on Monday. The fund added that greater integration of taxation and spending policies across the eurozone was needed, as well as measures to begin the process of banking union.

The ESM, hailed on Monday by Jean-Claude Juncker, Prime Minister of Luxembourg and chair of the fund, as “an historic milestone in shaping the future of monetary union”, will have a lending capacity of 500bn euros (£400bn; $650bn) by 2014. It will be able to lend directly to governments, but it will also be able to buy their sovereign debts, which could help reduce the borrowing costs of highly-indebted countries such as Italy and Spain.

The IMF’s view of the US, “growth depended on a deal to avoid the so-called fiscal cliff, when automatic spending cuts and tax increases will kick in at the beginning of next year”. If policymakers fail to agree to delay these measures and increase America’s debt ceiling, “the US economy could fall back into recession”, with serious knock-on effects for the rest of the world”….”assuming agreement is reached, the US economy will grow by 2.1% next year”. This year, the US economy will actually grow by more than previously forecast – by 2.2% rather than 2%.

In Asia, “the near and medium-term outlooks are less buoyant compared with the region’s growth performance in recent years”. It highlighted weaker exports as a result of lower demand for goods in the West.

China, the world’s second-largest economy, would grow by 7.8% this year (down from its previous forecast of 8%), and by 8.2% in 2013 (down from 8.5% forecast in July 2012).

It also revised its growth forecasts for India, which would grow by 4.9% this year and 6.1% in 2013. 

Weaker demand for exports would also impact on Latin American economies, as would lower domestic demand due to government policy tightening. As a result, Brazil’s economy would grow by 1.5% this year and 4.0% in 2013.

Retirement Planning and Retirement Income Options

1 Oct

This article focuses on Money Purchase Schemes – so, schemes where you save up a fund to buy your retirement income e.g. Personal Pensions, SIPPs, SSASs, Stakeholder Pensions, Defined Contribution Workplace Schemes

Key Points

  • You do not have to accept the pension income offered by your pension scheme. You have the right to take your retirement income from a different provider – this is called the open-market option (OMO).
  • Your scheme may not offer the best deal for your money when you retire, so check whether you can get more for your money by using the open-market option.
  • In difficult economic times, your pension fund may be worth less than you expected, so getting the best deal is even more important.
  • Choosing how to take your retirement income can be a complicated decision. I always recommend that you take professional advice from a suitably qualified Independent Financial Adviser authorised by the Financial Services Authority (FSA).

Making your retirement choices and always think before you choose 

Things you should know :-

  • Your pension scheme should send you, no later than 6 months before you are due to retire, details of the choices you have.
  • This information will discuss buying an annuity (an arrangement which provides you with a pension income for the rest of your life).
  • Your pension scheme must tell you that you have the right to shop around and about the different types of annuity that are available.
  • You do not have to accept the annuity quoted by your pension scheme and you can shop around to find the best deal – this is called the open-market option.

Your income in retirement will depend on 4 main things:

  • how much money you and your employer have paid into your scheme;
  • how this money has been invested;
  • how much of this money has been used to pay any charges; and
  • the decision you make now on how you take your retirement income.

If your pension fund rises and drops in value (for example, all or some of it is linked to stocks and shares), you may want to consider switching your fund into a lower risk investment to reduce uncertainty in the run up to retirement. Check with your scheme whether this option is available and whether there is a charge for switching your money.

Making your retirement choices
You may get better value for your money if you shop around using your open-market option.

Before you make any decision, you need to consider:-

  • your overall financial situation;
  • what you might need financially in the future; and
  • how much tax-free cash you want to take (i.e. a pension commencement lump sum).

There are limits on the amount of cash you can have as a lump sum – typically, up to 25% of your fund. The cash you take will affect how much money is left over to buy your pension income.

I would recommend that you take qualified financial advice

What is an annuity?
An annuity converts your pension savings into a series of payments – the pension scheme pays your pension savings to an insurance company who, in return, agrees to pay you a regular income for the rest of your life. This is often called a lifetime annuity.

What affects the cost of an annuity?

  • Type of annuity
  • Age – annuity rates tend to get higher the older you are
  • Sex – annuities for women currently cost more. This is due to a change which will apply from December 2012.
  • Health and lifestyle
  • Prices vary from provider to provider just like any other goods or services you buy, which is why it is so important to consider shopping around.

How does the open-market option work?

You have a choice of who provides your retirement income when you retire. Your pension scheme will normally offer you an annuity but you can also shop around so you can choose the annuity that best suits your needs. Shopping around using your open-market option helps you to:

  • find out how the cost might vary between providers;
  • identify different features which may help you find the annuity which best suits your circumstances and how these features can affect the cost of the annuity or how much pension you get; and
  • decide if you want to choose another option instead of buying an annuity if your scheme allows this.
  • to find out if the annuity offered by your scheme is competitive;
  • if you are in poor health as this may mean you can get a higher annuity; and
  • if your lifestyle may qualify you for a higher annuity, for example, if you smoke or do a particular type of job.

Even if you have been very happy with your pension scheme up to now, consider the open-market option to check that it is offering the best deal for you when you come to retire.

What types of annuity are there?
There are 2 basic types of annuity – a single-life annuity and a joint-life annuity. There are other features that you could choose to include in the basic types, to suit your needs and circumstances. Check which features are included in the annuity offered by your scheme.

Single life – This pays an income to you for the rest of your life.
Joint life – This pays an income to you for the rest of your life. And then, when you die, it continues to be paid (possibly at a reduced rate) to your spouse or partner until they die.

Options you may be able to include:

Level – the pension income you receive stays the same throughout your life.

Yearly increases (escalation) – the pension income you receive increases each year, in line with inflation (the Retail Prices Index (RPI) or the Consumer Prices Index (CPI)), or at a fixed rate, for example, 3% or 5% each year.

Guarantee period – your pension income can be guaranteed for a set period, usually 5 or 10 years, so that it continues to be paid (usually to your widow, widower, civil partner, or to your estate) for the rest of the guarantee period if you die before the period ends. If you include a guarantee period, it may involve a small reduction in the amount of your annuity.

Lump sum on death – if you die, the annuity will pay out a taxable lump sum, equal to the cost of your annuity less any income you have already been paid.

Investment-linked annuities (including with-profit annuities) – these annuities offer the potential for you to receive a higher income but rely on stock-market performance. As a result, your income could go down as well as up.

Impaired life annuities – these annuities can pay a significantly higher income if you have a health problem that threatens to shorten your life. In cases of serious ill-health, where a registered medical practitioner confirms that your life expectancy is less than a year, the law may allow you to take the whole of your pension fund as a lump sum.

Enhanced life annuities – these annuities can pay a significantly higher income if your lifestyle may shorten your life.

What alternatives are there to an annuity?
When you retire, you may decide you do not want to buy an annuity.

Some of the alternatives we describe below may only be suitable if you have a large amount in pension savings or other sources of income and are comfortable taking some risk with your pension. Not every pension scheme offers all or any of these alternatives.

Again, before making a decision you should take qualified financial advice.

Make sure you are comfortable with the risks of choosing one of the alternatives to an annuity.

Cash lump sum – for smaller funds (this is sometimes called trivial commutation). 
If you are at least 60, you may be able to take all your pension savings as a lump sum. You can usually only do this if the total value of all your savings in all pension schemes is less than £18,000. If your fund value in an occupational fund is less than £2,000 then you can take it as a cash lump sum if your scheme rules allow, even if all your pension savings are more than the minimum amount of £18,000.

You usually pay tax on part of these lump sums.

Phased retirement – you can use your pension savings to buy annuities at different ages in the future.

Drawdown pension (sometimes also called income withdrawal or drawdown) – you take an income directly from your pension fund.

Short-term annuities – you can buy a series of annuities each lasting for a fixed term (usually up to 5 years). You can then leave the rest of your savings invested or use them to buy a lifetime annuity.

Putting off buying an annuity
Your scheme rules may allow you to put off (postpone) buying an annuity, whether or not you stop working. By postponing buying an annuity (either for a limited time or indefinitely), you may get a higher annuity because your pension savings will have been invested for longer and you will be older. However, annuity rates and investments can go down as well as up. Check whether you may lose any guarantees or have to pay any charges by putting off taking your pension income. It may also be possible for you to be paid your tax-free lump sum but delay taking any income.

Other ways
There are new options now available which pay a regular income and offer protection and/or guarantees of either investment growth or the amount of pension fund you will have left to buy an annuity later on. They vary in:

  • what they’re called;
  • the guarantee/protection they offer; and
  • the charges they make to cover the cost of the guarantee/protection.

You generally have to give up some investment growth potential to pay for the guarantee/protection.

What things should I keep in mind if I shop around?

  • If you use your open-market option and decide to buy your annuity from another insurance company, your pension scheme might take charges from your fund. You need to get an estimate of the value of your fund (less any charges) before you can ask insurance companies for a quote for an annuity.
  • Make sure you compare like with like. For example, don’t compare a level annuity with one that increases.
  • Make sure any annuity you choose fits with your circumstances. (For example, do you need an escalating annuity or do you qualify for an enhanced annuity?)
  • Check whether you will lose any benefits (for example, the option to buy an annuity at a guaranteed rate) or pay any charges if you don’t take up your pension scheme’s offer.
  • Quotes for annuity rates are often available only for a limited time, usually seven to 28 days. Also find out if there is a ‘cooling-off’ period during which time you can cancel any choice you make.
  • You may find it difficult to shop around if you have a small pension fund (less than £30,000) as some firms will not provide an annuity.
  • Not all companies will deal with you direct and only offer products through financial advisers.
  • If you use the open-market option, the adviser can be remunerated through a commission paid by the insurance company (you may prefer to pay via an agreed fee amount).

If you are comparing annuities under the open-market option, remember to compare like with like.

Frequently asked questions
What if I have a defined contribution fund in more than one pension scheme?
You may want to get financial advice. For example, you may be able to combine the money from all your schemes and use it to buy one annuity rather than buy a different annuity for each scheme. This may give you better buying power.

Do I have to pay tax on my pension income?
Yes, your pension income counts as earned income for tax purposes. Remember that most schemes will allow you to take a part of your fund, normally up to 25%, as a tax-free lump sum, as well as receiving an income.

What if I am contracted out of the additional State Pension (the State Second Pension)?
Your employer’s money purchase scheme will be able to tell you if it is contracted out of the State Second Pension (S2P). (This used to be called the State Earnings Related Pension Scheme (SERPS).) If so, you must currently use part of your pension fund to buy a ‘protected rights annuity’.

How will I know how much I have available to buy an annuity?
You can get an estimate of the value of your pension fund (less any charges for using the open-market option) from your pension scheme. Your pension scheme should send this to you before your retirement date, so you can start to shop around. You should then take off any amount you plan to take as a tax-free lump sum when you retire.

Will the stock market affect the value of my pension fund?
If you are invested in a fund which rises and falls in value (for example, it is invested in the stock market), the value can change. You may want to investigate whether you have the option to switch into a lower risk fund to reduce uncertainty in the run-up to retirement.

Who regulates annuities?
The Pensions Regulator, regulate workplace pension schemes. However, you will usually buy your annuity from an insurance company and these are regulated by the Financial Services Authority (FSA).

If an insurance company cannot pay all amounts due, the Financial Services Compensation Scheme (FSCS) may be able to help you.

Important Points to Consider

  • Once you have bought an annuity, you cannot normally change your mind. So, it’s worth making sure you get the right one.
  • In difficult economic times, your pension fund may be worth less than you expected.
  • Take qualified advice as the implications can last a lifetime.
  • If you want to delay taking your pension income, check for charges or penalties which might apply.
  • Do you want to change funds before you retire?
  • Do you want to take tax-free cash from your fund before you take an income? (Remember the Pension Commencement Lump Sum is only available at the date you take pension benefits and not afterwards – “a use it or lose it” benefit)
  • What annuity options are available from your scheme?
  • Compare what your scheme offers with the open-market option.
  • Do you qualify for an impaired life or enhanced annuity?
  • Would one of the alternatives to an annuity be suitable for you?

Where to get more information
You can get more information from the following organisations.

The Money Advice Service – also produce a range of free guides, available from its website.
Helpline: 0300 500 5000
Typetalk line: 18001 0300 500 5000
Website: http://www.moneyadviceservice.org.uk

Department for Work and Pensions (DWP)
Phone: 0845 606 0265
Textphone: 0800 731 7339
Website: http://www.direct.gov.uk

Financial Services Compensation Scheme (FSCS)
The FSCS helps protect consumers against financial loss when firms authorised by the FSA cannot or are unlikely to pay claims against them.
Phone: 0207 741 4100 or 0800 678 1100
Website: http://www.fscs.org.uk

The Pensions Advisory Service (TPAS)
TPAS is an independent organisation which can help with questions about your pension and annuities. You should also consider using the annuity planner on the TPAS website homepage.
Phone: 0845 601 2923
Email: enquiries@pensionsadvisoryservice.org.uk
Website: http://www.pensionsadvisoryservice.org.uk

The Pension Tracing Service
The Pension Tracing Service can help you track down pension schemes you have been a member of in the past. Their tracing service is free – you can either phone them and ask them for a tracing request form or you can use their online form.
Phone: 0845 600 2537
Textphone: 0845 300 0169
Website: http://www.direct.gov.uk

Your trustees or your scheme administrator
You’ll find their contact details in your scheme literature.

A suitably qualified independent financial adviser

So What is Secured Income?

This is the traditional route of Pension Annuities – there are more options available from permanent and temporary annuities but this is fund and age dependent.

Investor Snapshot

29 Sep

We are in a volatile market, the news and information is conflicting (good and bad) and relevant institutions are stepping in to save the day.

Personally, I believe the current climate is the “new normal” and the data will remain weak – requiring brave and effective strategy from the ECB, IMF, US Federal Reserve, etc. I believe and expect this will happen – and my thoughts are the only solution to the debt scenario on a macro scale is time and inflation (eroding the value, if not the size, of the debt). This is not a quick solution but in time I believe will be effective.

chart provided by forextv.com

Ben Bernanke, chairman of the US Federal Reserve has announced on Thursday 13.09.2012 extending the Quantative Easing Programmes and launches QE3 – the buyback of mortgage related securities – a further $40 Billion each month. This is in addition to the $45 Billion Twist Programme already in existence. This is hoped to bolster buying by the American people as they see signs of prosperity through house valuations and a better environment. This coupled with low-interest rates and accepting higher inflation – a loose monetary policy beyond 2014 into 2015 – he plans will lead to improving prospects in 2013 & 2014.

Growth in the US economy between April and June has been revised downwards. Gross domestic product (GDP) in the second quarter grew at an annual rate of 1.3% in the second quarter, down from the previous estimate of 1.7%.

Most of the UK’s major banks sign up to the new Funding for Lending scheme, which aims to stimulate the economy by making cheaper loans available. 

The UK economy shrank by less than thought in the second quarter (0.4% in the April-to-June period), the Office for National Statistics (ONS) said in its  third estimate of gross domestic product (GDP). The ONS had initially estimated a contraction of 0.7%, before revising that to 0.5% last month. 

UK service sector bounced back in July, raising hopes of an economic recovery in the third quarter of this year. The ONS said services output, covering a range of sectors from retail to finance, rose 1.1% on the month. However, this followed a decline of 1.5% in June which was affected by the extra Diamond Jubilee bank holiday. The service sector accounts for about 75% of UK economic output (GDP). Its performance is an important guide to the direction of the overall economy. All the main areas registered increases in activity in July, with the category covering retail, hotels and restaurants showing the biggest rise of 1.8%. Business services and finance output was up 1.2%.

French unemployment has topped three million for first time since June 1999, as the economy continues to struggle. 

France has unveiled its budget for 2013, avoiding big austerity spending cuts in favour of higher taxes on the wealthy and big businesses. French Prime Minister Jean-Marc Ayrault confirmed that there is to be a new 75% tax rate for people earning more than 1m euros (£800,000; $1.3m) a year. But he insisted that nine out of 10 citizens will not see their income taxes rise in the new budget. The government plans to raise 20 Billion Euros in extra revenue. That compares to 10 Billion Euros in spending cuts. The emphasis on tax rises is a policy of the new French President Francois Hollande that is against the prevailing mood of Europe where countries from Ireland to Greece are slashing spending to try to placate investors and lower borrowing costs.

Spain has set out its austerity budget for 2013, with new spending cuts but protection for pensions, amid a shrinking economy and 25% unemployment. There are expectations that the country will soon seek a bailout from its Eurozone partners. 

Spanish police ringing parliament in Madrid fire rubber bullets at protesters taking part in a mass rally against austerity. 

Spain’s banks will need an injection of 59.3bn euros ($76.3bn; £47.3bn) to survive a serious downturn, an independent audit has calculated. The amount is broadly in line with market expectations of 60 Billion Euros, and follows so-called stress tests of 14 Spanish lenders. Much of the money is expected to come from the Eurozone rescue funds, the current EFSF and the future ESM. Spain said in July that it would request Eurozone support for its banks. The Spanish banking sector has been in difficulty since the global financial crisis of 2008, and the subsequent bursting of the country’s property bubble and deep recession.

Greek police fire tear gas to disperse anarchists throwing petrol bombs near Athens’ parliament during a day-long strike against austerity measures. Greek finance minister Yannis Stournaras says the three parties in the country’s governing coalition have reached a “basic agreement” on the austerity package for 2013-14.

International Monetary Fund head Christine Lagarde has warned Argentina it could face sanctions unless it produces reliable growth and inflation data. 

The International Monetary Fund looks likely to cut its forecast for global growth next month when it updates its projections for the world economy.

Japan’s industrial output fell more than expected in August, as cars and electronics suffer from weak global demand. 

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Investment/Pension Portfolios – we are well positioned for this volatility and expect this to lead to profitability. I am in the process of a client by client investment audit and in some cases we are adding additional asset classes to diversify the investment risk. To all my clients, either thank you for your involvement and help; and to all of those I will see shortly – I will explain my thoughts to you in our meeting.