Achieving Your Financial Goals

 

Among the announcements that followed the recent General Election, the Coalition Government confirmed that it intended to end compulsory annuitisation at age 75.

 

Interim measures were introduced at the Emergency Budget to ensure that anyone reaching age 75 from the 22 June 2010 was not forced to choose between Alternatively Secured Pension (ASP) and Buying an annuity. The Government has now confirmed its longer term plans in an HM Treasury consultation.  The intention is to introduce the changes from 6 April 2011.

 

The key proposals are:

 

There will not be a formal requirement to take benefits from a pension scheme at any age; although lump sum death benefits paid from any funds where benefits have not been taken by age 75 will be subject to tax charges.

 

ASP will be abolished and individuals currently in ASP will fall into the new regime, but only from 6 April 2011.    Unsecured Pension (USP) will be split into:

 

• ‘Capped drawdown’ – this will be broadly similar to USP as it stands but will not necessarily have the same maximum income limit, and
• ‘Flexible drawdown’ – individuals will be able to draw unlimited amounts from their pension scheme subject to being able to demonstrate that they have satisfied the Minimum Income Requirement (MIR). Lump sums taken under flexible drawdown will be taxable at the individual’s marginal rate of income tax.

 

A uniform tax charge of 55% will be applied to lump sum death benefits paid from pensions in drawdown, and also to benefits that have not been put into drawdown where an individual is over the age of 75.  This will replace the 35% tax charge currently applied to USP lump sum death benefits, and the (up to) 82% tax charge applied to ASP.

 

There are no plans to make any further changes that will apply before 6 April 2011 for those currently in USP or ASP. This means lump sum death benefits will be taxed at 35% in respect of a client who dies in USP before 6 April 2011, but if they die after 5 April 2011 the tax charge will be 55%. In ASP the same principle applies, except that the tax charge can currently be up to 82%, whereas lump sum death benefits would only face a tax charge of 55% on death after 5 April 2011.

 

Both the capped and flexible drawdown options will be available before and after age 75 and clients will be able to take pension commencement lump sums after age 75. The MIR will involve an individual demonstrating a sufficient level of secure income. 

 

This secure income must:

 

• Be in payment – i.e. it is not an entitlement to future benefits
• Be guaranteed for life
• Take into consideration expectations of future cost of living

It is anticipated that an individual’s state pension and state second pension will count towards the MIR. It has also been suggested that scheme pensions in payment from occupational schemes and lifetime annuities that are increasing by at least Limited Price Indexation will qualify as MIR. There is no suggestion that income from sources other than pension schemes will count towards the MIR. The exact level of MIR is not set out in the consultation although will be set at a level to protect the Government from the risk of an individual falling back on the state. This will no doubt be one of the main points of debate.

Richard :: Jul.22.2010 :: Annuities, General, Income, Uncategorized, asp, drawdown, pensions, retirement, usp :: No Comments »

This summary details some of the main points of the recent Emergency Budget of 23rd June this year.

 

1. INCOME TAX

(i) Personal allowance reduced by £1 for every £2 of adjusted net income above
£100,000. This means:

• the allowance is fully removed at £112,950
• income between £100,000-£112,950 suffers an effective rate of 60%
• taxable income in excess of £150,000 bears tax at the additional rate of 50%

(ii) Budget proposals:

For 2011/12 the personal allowance will be increased by £1,000 to £7,475 for basic rate taxpayers aged under age 65.

 

2. CAPITAL GAINS TAX

Budget proposals:

• 28% rate for disposals made by higher rate and additional rate taxpayers in excess of the annual exemption after midnight 22 June 2010
• 18% rate for gains made by non, lower, and basic rate taxpayers
• Annual exemption retained at £10,100 – and usable in 2010/11 in a way that minimises tax
• Entrepreneur’s relief at a flat 10% rate, with the cumulative lifetime limit increased to £5million for disposals on or after 23 June 2010

 

3. PENSIONS

(i) 2010/11 will be the last year for the anti-forestalling rules and therefore protected pension input and the Special Annual Allowance (SAA)

(ii) Budget proposals:

• It is intended to repeal the “high income excess relief tax charge” that was due to limit pensions tax relief for high income individuals from 6th April 2011
• However, the Government still need the £3.5 billion tax take it would have given and will be consulting on new measures, to be effective from 2011/12, that will restrict relief
• The restriction is expected to be made by severely reducing the annual allowance from £255,000 at present to between £30,000 and £45,000

This raises a number of issues

• it could result in many more individuals paying tax on their pension savings, including many with incomes well below the current £130,000 threshold
• “Compulsory annuitisation” at age 75 is to be abolished. The Government will be consulting on the changes which will be implemented from 2011/12
• In the meantime special transitional rules will apply until the new legislation is introduced for those individuals who reach age 75 on or after 22 June 2010 with either uncrystallised benefits or benefits already in drawdown
• where such an individual has uncrystallised benefits he/she will be able to take a Pensions Commencement Lump Sum (PCLS) and then effectively provide an income under the current secured pension rules
• on death on or after age 75 any lump sum paid will be subject to a 35% tax charge rather than the 82% aggregate charge applicable under Alternatively Secured Pension (ASP)
• It should, however, be noted that until the changes are introduced in 2011/12, those members who reached age 75 prior to 22 June 2010 and who are in ASP will continue to be subject to the existing legislation (including the 82% tax charge on lump sum death benefits)

 

4. INHERITANCE TAX

(i) The nil rate band of £325,000 will remain frozen at this level until 5 April 2015. The increase in the nil rate band to £1m proposed by the Conservatives in opposition will not be introduced in the foreseeable future

 

5. NATIONAL INSURANCE

(i) 2010/11:
• Employees’ primary class 1 NIC rate is 11%
• Employers’ secondary class 1 NIC rate is 12.8%

(ii) 2011/12:
• Employees’ primary class 1 NIC rate up 1% to 12%
• Employers’ secondary class 1 NIC rate up 1% to 13.8%

(iii) Budget proposals:
• In order to offset the increase to employers’ NICs the secondary threshold (the point at which employers start to pay class 1 NICs) will increase by an additional £21 per week over inflation

 

6. CORPORATION TAX

(i) Budget proposals:

No changes for the current financial year but from 1 April 2011:

• the main rate of corporation tax reduces from 28% to 27%
• the small companies’ rate reduces from 21% to 20%
• the effective marginal rate will 28.75%

The main rate of corporation tax will then reduce by 1% pa until a rate of 24% is reached in 2014/15.

This Budget summary covers some (but not all) of the current and proposed provisions and as such it is by no means exhaustive.

 

 

Richard :: Jul.08.2010 :: Budget, General, ISAs, Personal Allowance, Uncategorized, capital gains tax, income tax, inheritance tax, pensions :: No Comments »

May 2010

The new Coalition government plans to double capital gains tax (CGT) – possibly including Lib Dem proposals to cut the threshold from £10,100 to £1,000 – have thrown many investors’, landlords’ and employee share scheme members’ plans into disarray.

Investors with substantial portfolios of property and/or shares who have not protected them in tax shelters – such as trusts, individual savings accounts (ISAs) or pensions – face the daunting possibility that HM Revenue (HMRC) may grab half their gains.

This could destroy many people’s plans to use buy-to-let portfolios or shares accumulated over long periods of time to fund retirement.

When are the changes likely to take effect?

In law the Government could choose to impose the increase in CGT retrospectively to April 6 this year or even from May 11 when the Coalition proposals were announced.

However, this would be inequitable and unpopular so it is more likely that the proposed changes will take effect either from the date of the Emergency Budget, June 22, or from the start of the next tax year; April 6, 2011. There is a strong case to be made for this later date.

Having two rates of CGT in one tax year would be unusual and provides taxpayers little opportunity to arrange a disposal of certain assets such as property particularly when the housing market is still depressed and stock market conditions are volatile.  However, an immediate change cannot be ruled out. 

If nobody knows “the rules”, what should I be doing?

The golden rule, as always, is don’t let the tax tail wag the commercial dog. If you were going to take a profit anyway, it’s probably best to do it before Budget Day.

Thus, if you no longer want your second home, now may be the time to sell it. The key day is the date of the exchange not completion, so you may have more chance than you think.

 I have a second property which I am considering selling, what would be the tax implications?

 Any gain made on the disposal of a property which is not your principal private residence will be subject to CGT.  If you were to sell the property now, the gain would be subject to CGT at the rate of 18 per cent but, if you sell the house once the proposals take effect, it seems likely that this rate will be closer to the higher rates of income tax. 

Furnished holiday lettings currently benefit from more favourable business asset tax status although uncertainty remains as to whether or not this will continue to apply.   

 

 

Will I benefit from the more generous relief for business assets?

We have no detail on the new rules – so nobody knows what type of asset will qualify for what the Coalition has described as “generous exemptions”. One would expect the favourable treatment to apply to shares in unquoted trading companies, sole traders and partnerships and assets used in such businesses. But will there be other conditions – for example, length or size of ownership?

At present, the first £2m of gains are taxed at 10 per cent where entrepreneur’s relief applies. Those holding assets which might qualify for the relief are perhaps in the worst position of all – it may be possible they could sell now, at 18 per cent, and find their tax rate would have been lower if they had delayed.

What else should I be doing?

Everybody needs to proceed with caution, and look at their own position.

(i)   It is probably a good idea to use your annual exemption now by selling investments just in case it is lowered.

(ii)  It might be prudent – but take investment advice first - to sell any shares standing at a gain. You cannot buy them back within 30 days, since the ‘bed and breakfast rules’ then apply – but you could ‘bed and spouse’ – that is, you sell to your spouse.

(iii) If you are considering disposing of an asset, consider splitting between husband and wife by a transfer before sale to maximise reliefs.   

(iv) ISAs are an option where gains are free of CGT. The annual ISA allowance is now £10,200 per person per tax year and the opportunity to shelter gains by investing through ISAs has just become significantly more valuable.    

(v)   Pensions are another major tax shelter. The amount that may be contributed to a self invested personal pension (SIPP) has been restricted and from next year higher rate tax relief will be gradually phased out for higher earners. This year, however, people who are to pay the new top rate of income tax at 50 per cent are able to benefit from full tax relief on their contributions.   So, for example, a contribution of £16,000 will be grossed up to £20,000 inside the SIPP and £6,000 can then reclaimed through the tax return. That means a top rate taxpayer’s net contribution of £10,000 is grossed up to £20,000 in the SIPP and CGT does not apply to capital gains arising in pensions.

What does the future look like?

Many assets will attract a larger tax bill on sale. So we may see investors moving more into CGT favoured assets – for example, we are likely to see stock market investors “wrapping” their investments – for example, in an offshore bond or a private trust, so they don’t pay CGT every time a stock is sold.  Venture Capital Trusts are potentially going to be more popular as well.

 

Jennifer :: May.27.2010 :: Budget, General, Investment, Personal Allowance, Savings, Tax Saving, capital gains tax :: No Comments »

 

We were recently approached to contribute to an article to be published in Moneywise magazine in May. Below are our thoughts:

 

Is there a bubble in China? Is it about to burst? Are fears that China is overheating exaggerated?

 

Below is a list of questions we want to answer for our readers:

 

With regard general thoughts on China there have been periods of speculation that China is forming a ‘bubble’; unfortunately only time will tell. There are certain country specific factors that make forecasting along the usual lines very difficult; perhaps most notably the level of Government intervention and control on matters such as the currency. Emerging Markets in general tend to be a relatively volatile area and will most likely continue to have periodic setbacks. However, just as characteristic at present are periods of significant growth. The long term story of development, consumerism, and growth remains convincing in my view. The key point here is that this is a long term view over 10, 20 years and beyond, I have no doubt that the short term picture will continue to be relatively turbulent at times.

 

Just as you have to be careful not to get too carried away with some of the more spectacular statistics claimed in respect of China’s future growth, it is also important in my view not to lose sight of the long term potential of the area.

 

Global markets seem more correlated than ever with the growth in international trade, and this was certainly the case to a great extent with the recent global recession. For example many multinational companies in the UK are now dependant to a greater or lesser extent upon profits from abroad, including Emerging Markets. 

 

1.    If you want to invest in China where should you start?

 

With developed markets and economies likely to be feeling the effects of the ‘credit crunch’ for some time to come, Emerging Markets are seen by many as the main source of growth for the future. This applies in particular to the UK which has been particularly affected by the global recession. Emerging Markets in general were seen as the long term providers of global GDP growth prior to the credit crunch – and this has only been exacerbated by the events of the past couple of years.

 

At the centre of this theme is the development of China which has experienced huge economic growth and development in recent years and continues to do so. Many people want to invest in this potential and benefit from this growth. In recent years much of China’s growth has been attributed to providing consumer goods to the West and developed economies. However, it is also worth bearing in mind its own internal development which has seen huge investment in infrastructure (roads, railways, airports etc…) and significant growth in consumerism.

 

It is worth taking financial advice upon the most suitable route to invest in China as Emerging Markets in general are a traditionally volatile & complex area. This may be directly or indirectly via Chinese companies, or via multinational companies who are partaking in the growth story. 

 

 2.   What are the various ways you can invest in China?

 

As touched upon above you could consider direct investment into the area via company shares, although this would only really be recommended for highly experienced investors due to the specific risks of holding individual shares (i.e.: a lack of diversity). The most suitable route for most is via some sort of ‘collective’ investment such as a Unit Trust or OIEC. There is now a huge variety of choice from very specialist funds to more general global funds with exposure to the area.

 

3.    What are the benefits/disadvantages of different ways of accessing China: (single country funds vs. regional funds, investment trust vs. unit trust vs. tracker fund?)

 

For most people these are decisions that should be made with an investment professional after assessment of your attitude to risk and objectives and taken in the context with the rest of your portfolio.

 

However, generally speaking, a single country fund will carry more risk and volatility as it is more sensitive to changes in that single economy. Factors such as political risk and even natural disasters then come more into focus. This is not a suitable risk for everyone.   By investing in a well managed regional fund you are then accessing the fund manager’s expertise, the hope being that they will use their specialist knowledge of the area to manage the fund according to the prevailing conditions of that time. Likewise, many of the more successful global actively managed funds will carry a reasonably high exposure to the area.

 

In terms of tracker funds, these can be a very good route for people looking to benefit from the areas growth in general terms over the long term. They tend to offer reasonably low charges and can give a portfolio exposure to the region. The key questions here are:

 

• Which index is tracked?
• What is the tracking method?
• What is the tracking error?
• What are the costs charges?

 

With regard the Investment Trust vs Unit Trust question, there are certain features of investment trusts that make them a higher risk investment, relatively speaking. These include the fact that they can trade at a discount or a premium to net asset value (NAV) and also ‘gear’ (or borrow) – both of these factors can exaggerate gains or losses. Therefore, in what is already a relatively high risk area, Unit Trusts may be a more suitable route for many.

   

4. What percentage of someone’s portfolio should be invested in China depending on their risk profile? (low, medium, high)

 

Again, this question depends largely upon an individual’s existing portfolio and attitude to risk, and opinion will vary. The area may not be suitable for a low risk investor at all, or perhaps only via some managed exposure in a global fund. In terms of a medium and higher risk investor I would perhaps be looking at a maximum of 5% and 10% respectively. However, this should be combined with investment across other Emerging Markets and blended with the rest of their portfolio.

 

5.    What three funds would you recommend to your clients (one for each risk category)?

 

For a low risk investor, if suitable at all (dependent upon the factors listed above), I would perhaps consider a holding in a global fund with a reasonable weighting in the area such as Neptune Global Equity. This fund holds around 45% in Emerging Markets in general, with a reasonable proportion of that in China.

 

For a medium risk investor, a look at a regional fund such as First State Asia Pacific Leaders. This fund features around 35% investment in China, together with investment in other countries in the area, including Australasia.

 

A higher risk investor may wish to take a more country specific approach and for this I would perhaps look at First State Greater China which is more concentrated in the area, investing up to 50% in China itself and the rest mainly across Hong Kong, Taiwan, and Singapore. 

 

Richard :: Apr.27.2010 :: Banking crisis, China, Credit crunch, Emerging Markets, General, Investment, Uncategorized, asset allocation, attitude to risk, correlation, objectives, risk :: No Comments »

 

 

General

 

Change to Personal Allowance for high earners

 

• In the Pre Budget Report the Government announced that with effect from 6th April 2010 individuals receiving an income of more than £100,000 per year would face a cut in their Personal Allowance. This would reduce by £1 for every £2 of income above £100,000.
• This was confirmed in the March 2010 Budget.

 

New ‘additional rate’ band of tax

 

• The 50% rate announced in the Pre-Budget Report will become effective from 6th April 2010 – this is on income above £150,000 per annum.

 

Inheritance Tax

 

• The nil rate band of Inheritance Tax will be frozen at £325,000 until 2014/2015.

 

Stamp Duty Allowance

 

• For first time buyers ONLY Stamp Duty Allowance will double from £125,000 to £250,000 (from midnight on 24th March).
• This is anticipated to be funded by a new 5% band of tax being introduced in the 2011/12 tax year on properties sold for £1,000,000 +.

 

Capital Gains Tax

 

• The current CGT rate remains unchanged. However, Entrepreneurs’ Relief for CGT will be extended from £1m to the first £2m of qualifying gains made over a lifetime. This takes effect from April 2010.

 

Income Tax

 

• No changes to the previously announced basic and higher rates.  No increases. 

 

Annual ISA limit

 

• As announced earlier, for savers, from 6th April the annual ISA limit will rise from £7,200 to £10,200.  ISA limits from 2011/2012 will be indexed by RPI.

 

Winter Fuel Payments

 

• The Government will guarantee payments for another year – this will be at least £250 for pensioners (£400 for those over-80’s).

 

Business Rates

 

• Business rates will be cut for one year from October for SMEs (Small and Medium Enterprises).

 

Tax Credit

 

• Individuals over the age of 60 will now be eligible for Working Tax Credit provided they work for at least 16 hours a week.

 

National Insurance

 

• Employee, employer and self-employed rates of National Insurance contributions (NICs) will increase by 0.5% from April 2011 in addition to the 0.5% increase announced in 2008.
• However the level at which people start to pay NICs will increase in April 2011 by £570 above the level previously announced.

 

Pensions and Retirement Planning

 

Implementing the restriction of pensions tax relief (BN33)

 

• Legislation will be introduced in Finance Bill 2010 to recover tax relief above the basic rate on pension contributions made by or on behalf of individuals with high income. For people with annual income of between £150,000 (inclusive of employer contribution for those with incomes of £130,000 or more) and £180,000, tax relief on pension contributions (including the value of employer contributions for those in employment) will reduce gradually from the individual’s marginal rate to the basic rate as income increases. Where income is £180,000 or over the measure restricts tax relief on pension contributions to the basic rate i.e. 20%.
• The restriction of pensions tax relief will have effect on and after 6 April 2011.

 

Current law and proposed revisions

 

• The Government announced in Budget 2009 its intention to restrict tax relief on pensions savings with effect from 6 April 2011 for high income individuals.
• These rules will affect individuals with income of £150,000 or over. For the purposes of this measure, income is calculated before deduction or relief for pension contributions and charitable donations. For those in employment it includes the value of any pension benefit funded (or eventually funded) by their employer where the individual’s income is £130,000 or more.
• A taper will apply for those on incomes between £150,000 and £180,000, gradually reducing tax relief on pension contributions until it is restricted to the basic rate. This restriction will apply to the individual’s contributions and to any pension benefit funded (or eventually funded) by their employer. The rate of tax relief on pension contributions will be determined by where individuals lie on the taper.
• To prevent bringing forward pension contributions that would otherwise have been paid after April 2011, a special annual allowance applies for the 2009/10 and 2010/11 tax years for individuals with income of £130,000 or over. Tax relief above the basic rate is recovered from pension savings above an individual’s special annual allowance by the application of the special annual allowance charge. An individual’s special annual allowance is the higher of their regular pension savings and £20,000 (or in certain circumstances where contributions have been less regular than quarterly, £30,000).

 

Lifetime Allowance and Annual Allowance (BN34)

 

• As announced in the 2008 Pre-Budget Report, the 2010/11 Lifetime Allowance of £1.8 million and  Annual Allowance of £255,000 will continue to apply, with their rates held constant for a further five tax years, i.e. up to and including the tax year 2015/16. A Treasury Order has been laid before Parliament today to put this into effect.

 

Pensions Act 2008: employer duties

 

• The Pensions Act 2008 places a duty on employers to ensure that their jobholders are active members of a pension scheme. The introduction of this ‘automatic enrolment’ duty is planned for 2012.
• The Pensions Act 2008 also obliges the employer of a jobholder to make pension contributions to qualifying pension schemes. When the contributions are paid late the employer may, at the Pensions Regulator’s discretion, be asked to pay interest to their jobholder’s pension account.
• Under section 369 of the Income Tax (Trading and Other Income) Act 2005, the jobholder would be taxed on any interest paid by employers to a jobholder’s pension account. This tax charge on the jobholder will be removed.

 

The next article will feature a more in depth look at pension changes over the next three tax years.

Richard :: Mar.26.2010 :: Budget, General, Personal Allowance, Tax Saving, Uncategorized, pensions :: No Comments »

‘NEST’ is the new brand name for the recent Government pension reforms, previously/generically known as Personal Accounts. Much of the detail remains subject to change and is yet to become legislation; below is what we know so far*.

Background to pension reform:

• Population projections suggest that the number of people aged 65 and over will almost double by 2055. The Department for Work and Pensions (DWP) estimates that around seven million people are not saving enough to deliver the pension income they are likely to want, or expect, in retirement.
• In its 2005 report to government, the Pensions Commission called for wider and fairer pension coverage. It also identified automatic enrolment into a workplace pension scheme and employer contributions as key factors in effectively tackling under-saving. In response to the Pensions Commission’s recommendations, the Government is implementing an integrated package of reforms from 2012.
• Whether you are an adviser, employer, or employee, the reforms are likely to affect you.

The Personal Accounts Delivery Authority (PADA), who is responsible for the development and delivery of personal accounts, has produced the following ‘15 Key Facts about Workplace Pension Reform’:

1. The Pensions Act 2007 reformed state pensions and introduced arrangements to increase the state pension age. The Pensions Act 2008 reforms workplace pension provision.
2. The reforms aim to make saving for retirement the norm.
3. The workplace pension reforms mean that from 2012, employers will have to put eligible workers into a scheme which meets certain criteria and make minimum contributions. This is called auto-enrolment.
4. Auto-enrolment is being designed to overcome the inertia which currently prevents many people from saving and to make it easy for individuals to save in pensions.
5. Workers will be able to choose to opt out of their employer’s scheme if they believe pension saving is not appropriate for them.
6. Employers will have to contribute a minimum of 3 per cent on a band of earnings, although they can contribute more than this. The total minimum contribution for eligible workers must be 8 per cent of the band of earnings. This is made up of employer contributions, worker contributions and tax relief.
7. Contributions will be phased in, starting at 1 per cent and increasing gradually to the minimum level to help employers and employees adjust to costs.
8. The employer duties and how they will be implemented will be specified by secondary legislation. The reforms will be introduced in stages from 2012, with some employers affected before others.
9. Three parties will work together to implement the new reforms: DWP, The Pensions Regulator and PADA.
10. DWP is responsible for co-ordinating activity for the reform programme, including agreeing policy with ministers and overseeing delivery.
11. The Pensions Regulator is the UK regulator of work-based pension schemes and is an existing non-departmental public body (NDPB).
12. The Pensions Regulator’s role in the reforms is to maximise compliance with the employer duties set out in the Pensions Act 2008 and to ensure certain safeguards protecting employees are adhered to. It will provide information to employers on how to fulfill their duties and guidance on good standards of pension scheme administration.
13. PADA is a new public body specifically established under the Pensions Act 2007 to help implement the reforms. PADA is designing and introducing the infrastructure for the personal accounts pension scheme.
14. The personal accounts scheme will be a national low-charge independent workplace pension scheme that any employer can use for auto-enrolment. It aims to provide access to workplace saving to millions of people who currently don’t have access to a workplace pension – typically those on low-to-moderate incomes.
15. Employers can choose the personal accounts scheme or another qualifying workplace pension to meet their 2012 auto-enrolment duties.

* = Information provided by the DWP, The Pensions Regulator and the Personal Accounts Delivery Authority. For further information about Government policy, contact the DWP at: www.dwp.gov.uk. For further information about compliance with the employer duties contact the Pensions Regulator at: www.thepensionsregulator.gov.uk

Richard :: Feb.23.2010 :: General, NEST, Personal Accounts, Personal Allowance, RDR, pensions :: No Comments »

 

These funds are perhaps the talking point of 2009. Through the chaos of the sizeable market correction we have experienced over the past 18 months or so has emerged this new type of fund that claims to offer low volatility, and positive growth in any market conditions.

 

So what exactly are absolute return funds? And how are they different from other funds? Are they the next big thing or the next selling scandal in waiting?

 

The premise of the absolute return fund is that they are not benchmarked to any index and seek to measure themselves by their actual returns over a period of time (hence the term ‘absolute return’). In many cases fund managers set themselves a target of cash + 3% (or whatever it may be) on the basis that the incentive for any investor is to achieve a better return than cash, else why take on the risk. In terms of how they go about achieving this absolute return, fund managers employ a number of techniques to achieve this, including:

 

• Using a mix of uncorrelated assets (i.e.: stocks that should not react the same way to different factors)
• Holding cash or derivatives (a collective name for futures, options and warrants)
• Short selling (effectively betting on a stock to go down)
• Traditional long positions (hoping a stock will rise)

 

In many cases a fund manager will offset a long position in one stock in a particular industry with a short position in another, trying to minimise the risks inherent in that industry. For example a manager may take a long position in an oil company and a short position in a different oil company, based on his belief as to which way the relative share prices will move.  By this means he has effectively managed out much of the industry specific risk i.e.: some external factor dramatically affecting the oil price.

 

Some of the criticism of this type of fund has been a lack of transparency for the consumer due to the various techniques that can be employed by the fund manager and their complexity.  Also that they are akin to modern day hedge funds (which have had their own well publicised problems in the past). This is inaccurate in that there has been a subtle change in investment legislation called UCIT3 which has had the net effect of bringing many of the techniques now used in absolute return funds into the mainstream fund management arena. In terms of transparency this is really down to the individual investment house to communicate the message of their absolute return offering to the public and IFA community effectively – something that a number of them have done very well.

 

This type of fund has generally proved to be very successful in a ‘bear’ or falling market and it will be interesting to see how they perform in a ‘bull’ or rising market. In terms of comparison to stockmarket benchmarks they are likely to underperform, although this is to miss the point of investing in them and is quite frankly expecting a bit much! A common theme in this blog is that of diversification, and again this is the principle reason for holding an absolute return fund – as part of a balanced investment portfolio.

Richard :: Feb.06.2010 :: Absolute Return, General, ISAs, Investment, Savings, Uncategorized, asset allocation, attitude to risk, correlation, objectives :: No Comments »

 

We were recently asked the following questions as part of a contribution to a national newspaper article:

• Should parents top up CTFs or instead keep some control over children’s savings?

The obvious question is that of control & access/liquidity. To firstly consider control: Money invested into CTF can only be accessed by the child themselves at age 18. This brings into question what degree of influence you will be able to exert over the child – by then a young adult – at age 18. For example: funds carefully saved from your income for the intention of car purchase or university costs could potentially be frittered away on something else. To this end it is really a case of hoping you maintain a reasonable relationship with your child and they have sufficient maturity to invest the money wisely.

 

Secondly, when investing in a CTF you forgo access to the money until the child is 18. For many this is both a positive and a negative: the positive being that the temptation to plunder their savings when you are short of money is removed, the negative being that you must ensure you maintain sufficient emergency funds/access to other money to meet unexpected short term expenditure. Therefore, for me, wherever possible, the key is to take a balanced approach i.e.: try to maintain some short term liquid savings while at the same time maintaining some contribution to a CTF. This is difficult for many young families, but even a small monthly contribution can make a significant difference over the years.    

• What are the benefits and things to watch out for when taking out a CTF?

The main benefits common to all CTFs are the fact that savings grow free from Income and Capital Gains Tax subject to the maximum contribution of £1,200/year, and the proceeds are also paid tax free at maturity. There is also the £250 Government voucher at outset with a further £250 at age 7. People have the choice between a Stakeholder account and a non Stakeholder account. Stakeholder CTFs have to meet the following Government criteria:

• Annual charges of less than 1.5%.
• Invested in a range of share based investments. 
• From age 13 money is gradually moved into less risky investments. 
• Has to allow monthly contributions as low as £10.

This is not to say Stakeholder accounts are necessarily any better or worse than non Stakeholder, even that charges will be higher with a non Stakeholder account. Many providers choose to offer non Stakeholder accounts due to the potentially restrictive nature of meeting the criteria.

 

Whilst Stakeholder accounts are invested in shares, non Stakeholder CTFs can be invested in cash or shares. This brings the first major decision: cash or shares? This is a long term investment and, as the literature provided by the Government clearly points out, the stock market has outperformed savings in every 18 year period in the last 40 years. Even allowing for the inevitable crashes along the way shares would seem the better option for all but the most cautious over this timescale. If contributing regularly you can even benefit from stock market falls due to ‘pound cost averaging’ (i.e.: the ability to purchase a lot of cheaply priced units when the price is low which are then worth more when the price recovers).

 

Once you have decided between cash and shares you can then consider the best account for you. If using a cash account the key considerations would be the rate payable, the underlying institution offering the account (not always the sales outlet) and their compensation arrangements.

 

For share accounts the obvious factors are the underlying fund, the range of funds available, and the charges. Standard of administration is also usually a factor for most people in considering any arrangement.

 

People should also be aware that you can transfer your CTF at any time should you become dissatisfied with your provider, or if you wish to move into lower risk assets as the child gets older (if this does not automatically happen on your chosen account) – while stock market dips may be beneficial in the early or middle stages of the account they could do significant damage in the last few years. 

• Which CTFs should I choose? Are there any with excessive charges?

The CTF market seems to me a developing one. There are a range of stakeholder & non stakeholder accounts offering a variety of investment options at varying costs. It is reasonable to say that the greater the complexity of investment and investment choice the higher the cost, and only hindsight will tell whether any higher costs prove value for money.

 

For example it is now possible to invest in CTF offering a full range of shares and exchange traded funds via providers such as Redmayne Bentley Stockbrokers, although they point out themselves that this is really designed for investors utilising the full £1,200/year and prepared to self select their funds (this type of account is non Stakeholder).

 

Other providers offer a wider choice of less mainstream funds for a slightly higher cost, often sitting alongside there other CTF offerings. Most people will not want to have to make investment choices themselves, and for many, I think the most suitable arrangement is one that will provide general exposure to the long term growth of the stock market at as low a cost as possible (higher charges could potentially impact upon long term growth if higher performance is not delivered).    

• If you have children yourself, what strategy have you taken with your children’s CTFs?

As a father of two I have been through this process twice myself in the past four years and at present it is really a case of doing your own research – there is little in the way of comparison available, although the Government information provided is very good. This is firstly because it is difficult to compare ‘like with like’ given the variety of charges, funds, providers, shares, cash, and Stakeholder or non Stakeholder, and also the fact that CTFs are a relatively new phenomenon.

 

Personally I have chosen the Children’s Mutual Baby Bond CTF for my eldest child which is a Stakeholder account invested in the Insight Foundation Growth Fund. This fund is featured in the UK All Companies sector and is a fairly middle of the road UK equity fund. My hope is that it will largely track UK share growth over the long term and the key point is that this is all done within the 1.5% annual charge. So far I have been very pleased with the standard of administration and level of communication from The Children’s Mutual.

 

For my younger I have taken the risky step of selecting something different (although eventual returns will always vary given the time difference). This is the Jump CTF, a non Stakeholder product which invests in the Witan Investment Trust, a global investment trust. The Witan fund is a higher risk fund, although this was acceptable to me given the timescales involved. Despite its non-Stakeholder status the charges are very low with a £10 voucher processing fee, and an annual management charge of 1% + VAT. With no automatic movement into less risky investments on this account I will manage this myself when the time comes. Again I have been very happy so far.

 

Stock market performance has been very up and down (mostly down!) since I started the accounts and as stated above I am quite pleased about this in the short term as it should benefit the accounts over the long term.

 

In terms of juggling resources I face the usual dilemmas faced by many young families in terms of demands on income, but am committed to making relatively modest contributions to each on a monthly basis until such time as I can afford to contribute more. My hope is that this will then build a nest egg for the children to assist with university fees, car purchase, home deposit or whatever may be required at that time.

 

Finally, many providers actively promote the facility for relatives to contribute to a CTF on a regular or occasional basis. This can prove a very useful & practical solution at birthdays or Christmas. 

 

 

Richard :: Jan.23.2010 :: General, Investment, Savings, Trust Funds, Uncategorized, child trust funds, children's savings :: No Comments »

 

There seem to be a great number of column inches dedicated to this subject at present in the financial press. Many commentators are pronouncing that now is a good time to invest in Commercial Property funds. This is not to be confused with the residential sector; Commercial Property holds such things as warehouses, retail outlets, shopping centres, offices etc…. and Commercial Property funds specialising in ‘bricks and mortar’ (i.e.: holding the actual properties themselves) will go out and buy a portfolio of this sort of building. Therefore, put very simply, capital fluctuations generally come from an increase or decrease in the underlying market value of the buildings, and the income yield comes from rental income.

 

This is influenced not only by supply and demand, but by wider economic factors that can have a knock on effect on the sector. This is very much what has happened in the ‘credit crunch’ and subsequent recession and Commercial Property has seen unprecedented falls in value since late 2007. Previous to this the sector had experienced an extended period of unprecedented growth; often double digit annual returns coupled with a sizeable yield. This can be said to have lasted for around 15 years, which is almost as big an anomaly as the recent dramatic correction.

 

It is reasonable to say that many investors had lost sight of the fundamental reasons for investing in property to some extent – namely diversification and reliable income – and had got too used to equity style capital growth. Genuine ‘bricks and mortar’ funds should, under normal circumstances, behave slightly differently to stockmarkets. Where many property funds come unstuck in terms of this diversification is by holding a larger proportion of shares in property companies, which can behave more like shares. However, this is often a difficult balance to strike with shares offering a degree of liquidity not reflected in bricks and mortar.

 

A number of Commercial Property funds have faced, and continue to face in some cases, liquidity problems. Many funds have experienced sudden and large redemptions, and in some cases they have been unable to meet them. This is primarily down to the logistics of buying and selling property in terms of attracting a buyer, surveys, legal requirements etc… Consequently it is a lot more difficult to raise cash within a property fund than any other type of fund (for example an equity fund can usually just sell some shares to meet redemptions). Furthermore, it is difficult to do quickly and at the same time attract a fair price for the assets in the fund.

 

However, while liquidity remains an issue, commercial property in terms of bricks and mortar continues to show a low correlation with shares, adding diversity, and also offers a good consistent yield from rental income. Commercial Property funds are likely to return to basics over the next few years – single digit annual returns with a good consistent yield. As a diversifier in a balanced portfolio they have a role to play, and valuations at present do look attractive for the long term investor.

 

 

Richard :: Jan.09.2010 :: Commercial Property, Credit crunch, General, Uncategorized, asset allocation, attitude to risk :: No Comments »

 

We were recently asked by a leading industry magazine for a fund recommendation in the ‘income’ and ‘growth’ category for 2010. Here is what we think:

 

Growth

 

First State Global Resources

 

At time of writing the stock market seems to have paused for breath to consider which way it will head next. This makes picking a fund for growth over the next twelve months particularly difficult. If markets continue to progress then I feel the most growth potential is likely to be in the areas of emerging markets and commodities. Having closely considered several emerging markets funds I have opted for a commodities type fund.

 

This fund invests in natural resources such as energy & precious metals on a global basis. First State Global Resources, in common with funds of this nature, can suffer from short term volatility. That said, the spread between the 3 year volatility for this type of fund and more traditional UK growth funds seems to be narrowing a little.
 

Periods of growth often produce impressive returns in the fund and, despite having rebounded dramatically over the past few months, I feel that if the markets continue to rise then this fund should provide good returns over the next year.   

 
Income

 

Henderson Strategic Bond

 

Corporate Bonds and good quality debt have provided virtually unprecedented returns over the past few months. While I do not envisage this continuing over the next year I do see some remaining room for more usual growth given the assumed default rates used in pricing. Furthermore, I have chosen a Strategic Bond specifically so that the manager has the option to move into high yield to a greater or lesser extent.

 

On this basis I have seriously considered a specialist high yield bond fund, although the default risks remain a serious threat, and the mandate does not allow for as much flexibility as a strategic bond type fund. 

 

The historical distribution yield is 6.74% (30th October 2009) and while this is likely to narrow over the year I am confident the level of income will remain very competitive.

Richard :: Dec.26.2009 :: Commodities, Emerging Markets, General, ISAs, Income, Investment, Savings, Uncategorized :: No Comments »