Late last year, the standard rate of Value Added Tax (VAT) was temporarily cut from 17.5% to 15% in an attempt to support Britain's flagging economy
UK consumers have now become accustomed to the current rate of 15%. However, on 1 January 2010, it is scheduled to return to its former level. The British Retail Consortium (BRC) believes that VAT's planned reversion in the new year will take place at the "worst possible time." The BRC estimates that the temporary cut in VAT cost the struggling retail sector around £90 million to implement at short notice and that the reintroduction will come at an exceptionally busy time for most retailers, ie: when post-Christmas sales are in full swing. But did the cut work?
Just a few months after it was implemented, the Centre for Economics & Business Research (CEBR) estimated the reduction had helped boost retail sales by £2.1 billion in its first three months. However, a poll undertaken by the Federation of Small Businesses in February 09 suggested that 97% of companies believed the VAT reduction had actually had "no impact at all".
Some analysts are now predicting a rise in demand for bigger ticket items as January approaches and consumers seek to beat the deadline. However, whatever the rate, an ongoing lack of credit, combined with the prospect of higher taxes and cuts in public spending, is likely to hold back consumer confidence anyway, longer term.
Tuesday, 15 December 2009
The Importantance of regular savings
In the world of investment, timing is everything. But, despite claims to the contrary, no one can predict what the market will do and when. This makes it difficult to decide, not only when to invest, but also when to pull out. However, by saving regularly, investors can benefit from what is known as 'pound cost averaging'.
Compared with putting a large lump sum in the market at a single price - which may or may not be the top of the market - regular saving mitigates the risk by putting in smaller sums at a variety of prices.
In a rising market, regular savings would underperform the growth of a single lump sum as the later investments would miss out on the early growth. However, in a volatile or falling market, the opposite is true. Later investments buy in at lower or alternating prices and therefore gain more when the market finally rises.
Regular saving can also be a deceptively easy way to build up a lump sum. Putting aside £50 or £100 a month can be achieved with a minimum of sacrifice – and will quickly grow as the months pass without you even noticing what is going on. With only smaller amounts going in each month, the short-term ups and downs of markets will have less impact on your portfolio overall and will have massive benefits, over the long term.
Compared with putting a large lump sum in the market at a single price - which may or may not be the top of the market - regular saving mitigates the risk by putting in smaller sums at a variety of prices.
In a rising market, regular savings would underperform the growth of a single lump sum as the later investments would miss out on the early growth. However, in a volatile or falling market, the opposite is true. Later investments buy in at lower or alternating prices and therefore gain more when the market finally rises.
Regular saving can also be a deceptively easy way to build up a lump sum. Putting aside £50 or £100 a month can be achieved with a minimum of sacrifice – and will quickly grow as the months pass without you even noticing what is going on. With only smaller amounts going in each month, the short-term ups and downs of markets will have less impact on your portfolio overall and will have massive benefits, over the long term.
Friday, 11 December 2009
Can US Equities continue to rally?
US equity markets recorded strong gains in November although share prices wobbled during the month amid concerns that economic recovery is likely to be bumpy. The S&P 500 index rose by 5.7% during the month.
The Organisation for Economic Co-operation & Development now expects the US economy to grow by 2.5% in 2010, up from previous forecasts of 0.9%. 83% of companies in the S&P 500 index that have reported results exceeded consensus estimates for third-quarter earnings, according to data compiled by Bloomberg. Third-quarter profits trebled at Berkshire Hathaway, and the company voiced its belief that "the credit crisis has abated". Nevertheless, Berkshire's chief executive, legendary investor Warren Buffett, called for greater sacrifices from leaders of companies that have been rescued by the US government.
General Motors reported it generated $2bn in cash during the third quarter, and intends to repay government loans earlier than expected. Kraft maintained its hostile bid for UK confectioner Cadbury during the month, without changing the offer that was first made in early September. Meanwhile, Hewlett Packard, the world's largest PC manufacturer, made an offer worth $2.7bn for 2Com Corp.
Third-quarter profits at Wal-Mart, the biggest retailer in the world, rose by 3.2%, boosted by aggressive inventory management, but the company warned its expectations for fourth-quarter sales remained largely unchanged. Home Depot, the US's biggest home-improvement retailer, reported third-quarter profits that were boosted by cost-cutting measures. The company increased its full-year profits forecast.
The US's biggest department-store company, Sears Holdings, reported smaller-than-expected losses following a programme of inventory cuts and discount reductions. More US consumers hit the shops than last year during the post-Thanksgiving weekend; however, shoppers spent less this year than in 2008, according to the National Retail Federation.
The Federal Open Market Committee reiterated its undertaking to maintain US interest rates at their current "exceptionally low" level of zero to 0.25% for an "extended period". The committee warned that the US's return to economic expansion is not sufficient to justify higher interest rates, and an increase in rates will depend on inflation and employment. US consumer prices have fallen year on year for the past seven months, posting their longest continuous decline since 1955.
US unemployment reached a 26-year high of 10.2% during October, according to the Labor Department. Federal Reserve chairman Ben Bernanke warned that "significant economic challenges remain" and that employment remains "an area of great concern."
The Organisation for Economic Co-operation & Development now expects the US economy to grow by 2.5% in 2010, up from previous forecasts of 0.9%. 83% of companies in the S&P 500 index that have reported results exceeded consensus estimates for third-quarter earnings, according to data compiled by Bloomberg. Third-quarter profits trebled at Berkshire Hathaway, and the company voiced its belief that "the credit crisis has abated". Nevertheless, Berkshire's chief executive, legendary investor Warren Buffett, called for greater sacrifices from leaders of companies that have been rescued by the US government.
General Motors reported it generated $2bn in cash during the third quarter, and intends to repay government loans earlier than expected. Kraft maintained its hostile bid for UK confectioner Cadbury during the month, without changing the offer that was first made in early September. Meanwhile, Hewlett Packard, the world's largest PC manufacturer, made an offer worth $2.7bn for 2Com Corp.
Third-quarter profits at Wal-Mart, the biggest retailer in the world, rose by 3.2%, boosted by aggressive inventory management, but the company warned its expectations for fourth-quarter sales remained largely unchanged. Home Depot, the US's biggest home-improvement retailer, reported third-quarter profits that were boosted by cost-cutting measures. The company increased its full-year profits forecast.
The US's biggest department-store company, Sears Holdings, reported smaller-than-expected losses following a programme of inventory cuts and discount reductions. More US consumers hit the shops than last year during the post-Thanksgiving weekend; however, shoppers spent less this year than in 2008, according to the National Retail Federation.
The Federal Open Market Committee reiterated its undertaking to maintain US interest rates at their current "exceptionally low" level of zero to 0.25% for an "extended period". The committee warned that the US's return to economic expansion is not sufficient to justify higher interest rates, and an increase in rates will depend on inflation and employment. US consumer prices have fallen year on year for the past seven months, posting their longest continuous decline since 1955.
US unemployment reached a 26-year high of 10.2% during October, according to the Labor Department. Federal Reserve chairman Ben Bernanke warned that "significant economic challenges remain" and that employment remains "an area of great concern."
Is there still growth potential for UK Equities?
UK share prices reached a 14-month high during November, but investor sentiment was knocked towards the end of the month by the news of Dubai's effort to delay its debt payments.
Overall, the FTSE 100 index rose by 2.9% during November, bringing the UK stockmarket's rally from its 3 March lows to 48%.Merger and acquisition activity continued to court publicity during the month. Kraft maintained its hostile bid for confectioner Cadbury, amid speculation that Nestle, Ferrero and Hershey might enter the fray. Meanwhile, British Airways announced an agreed merger with Spanish airline Iberia. According to a survey conducted by Ernst & Young, more than one-third of global businesses will actively seek merger or acquisition targets over the next 12 months.
UK retailers experienced their strongest sales growth for October since 2002, according to the British Retail Consortium (BRC). Sales were driven by demand for Halloween costumes, clothing and furniture. The BRC hailed the figures, but warned that higher VAT and increasing unemployment could dampen sales growth in 2010.
Nevertheless, amid signs of rising consumer confidence, UK retailers appear less inclined to offer major discounts before Christmas. Marks & Spencer reported a "good start" to the third quarter, while Next increased its forecast for the Christmas trading period. Sainsbury, the UK's third-largest supermarket, announced stronger-than-expected growth in first-half profits, boosted by savings generated from self-service checkouts and a larger range of own-brand food.
Consumer electronics retailer DSG International, which owns PC World and Curry's, announced first-half losses that were less severe than those sustained during the same period in 2008. Sales growth was lifted by improving consumer confidence and refurbished stores. Elsewhere increased first-half profits and sales prompted Carphone Warehouse Group to raise its full-year earnings forecast.
Within the financial sector, hedge-fund manager Man Group announced stronger-than-expected first-half profits, boosted by revenue from performance and management charges. HSBC reported "significantly" higher third-quarter profits compared with the same period a year ago. ICAP, the world's leading broker of deals between banks, reported a drop in first-half net income as investment in new ventures affected profits. Meanwhile, asset manager Gartmore announced plans to raise more than £400m through an IPO.
BT Group raised its target for full-year cashflow and announced plans to increase its dividend by approximately 5%. However, the company's chief financial officer cautioned that the UK economy is not "over the worst" of the recession, warning that "there's still more to come".
Overall, the FTSE 100 index rose by 2.9% during November, bringing the UK stockmarket's rally from its 3 March lows to 48%.Merger and acquisition activity continued to court publicity during the month. Kraft maintained its hostile bid for confectioner Cadbury, amid speculation that Nestle, Ferrero and Hershey might enter the fray. Meanwhile, British Airways announced an agreed merger with Spanish airline Iberia. According to a survey conducted by Ernst & Young, more than one-third of global businesses will actively seek merger or acquisition targets over the next 12 months.
UK retailers experienced their strongest sales growth for October since 2002, according to the British Retail Consortium (BRC). Sales were driven by demand for Halloween costumes, clothing and furniture. The BRC hailed the figures, but warned that higher VAT and increasing unemployment could dampen sales growth in 2010.
Nevertheless, amid signs of rising consumer confidence, UK retailers appear less inclined to offer major discounts before Christmas. Marks & Spencer reported a "good start" to the third quarter, while Next increased its forecast for the Christmas trading period. Sainsbury, the UK's third-largest supermarket, announced stronger-than-expected growth in first-half profits, boosted by savings generated from self-service checkouts and a larger range of own-brand food.
Consumer electronics retailer DSG International, which owns PC World and Curry's, announced first-half losses that were less severe than those sustained during the same period in 2008. Sales growth was lifted by improving consumer confidence and refurbished stores. Elsewhere increased first-half profits and sales prompted Carphone Warehouse Group to raise its full-year earnings forecast.
Within the financial sector, hedge-fund manager Man Group announced stronger-than-expected first-half profits, boosted by revenue from performance and management charges. HSBC reported "significantly" higher third-quarter profits compared with the same period a year ago. ICAP, the world's leading broker of deals between banks, reported a drop in first-half net income as investment in new ventures affected profits. Meanwhile, asset manager Gartmore announced plans to raise more than £400m through an IPO.
BT Group raised its target for full-year cashflow and announced plans to increase its dividend by approximately 5%. However, the company's chief financial officer cautioned that the UK economy is not "over the worst" of the recession, warning that "there's still more to come".
Wednesday, 9 December 2009
Can UK Equities funds provide a suitable income?
Scanning the predictions for next year, plenty of fund managers are forecasting the market will revisit high-yielding stocks in 2010. The theory goes that with the "relief rally" now over, earnings have to catch up with expectations.
Economic growth is likely to remain weak, so the market will favour those companies that can deliver "all-weather" earnings and this type of company is usually at the heart of an equity income portfolio.
However, this was little evidence of this in November with the FTSE 350 Lower Yield returning more than double that of its high yield equivalent. The Lower Yield index delivered 3.6%, while the Higher Yield index could only manage 1.4%. The overall yield on the FTSE 100 slipped slightly from 3.51% to 3.45% over the month.
Even so, the scene is being set for a better performance by high-yielding shares, as fewer and fewer companies are cutting dividends. 2009's series of savage dividend cuts seems to be drawing to a close - in fact, during November, several companies increased their dividends suggesting they are more optimistic about the future. Aberdeen, May Gurney and Sage all increased their payouts while United Utilities and Severn Trent, two "bankers" of the equity income sector both saw rises. Even battered Thomas Cook upped its dividend.
The main threat for the sector is that the UK equity income is increasingly derived from a few companies and sectors - research from Standard & Poor's shows approximately two-thirds of dividends now come from just 15 companies. This situation may ease as companies return to paying dividends over the next couple of years, but asset allocators are, in some cases, beginning to look globally for their dividends. Asia, for example, offers a seductive blend of high growth potential and reasonable dividend payouts.
The UK Equity Income sector is still lagging the UK All Companies grouping over the past 12 months, with the latter up 35.3%, compared with 27.9% for equity income. However, both sectors remain well ahead of the newly created UK Income & Growth sector, which is up just 23.5%.
The returns from the UK Equity Income sector remain disparate, with the top fund up 59.2% and the bottom fund up 14.9%, and this has largely depended on the extent to which the manager has believed in the rally. A number of managers have remained very sceptical over the rally and have stuck to the quality end of the market, which has hurt relative performance in the short term.
Economic growth is likely to remain weak, so the market will favour those companies that can deliver "all-weather" earnings and this type of company is usually at the heart of an equity income portfolio.
However, this was little evidence of this in November with the FTSE 350 Lower Yield returning more than double that of its high yield equivalent. The Lower Yield index delivered 3.6%, while the Higher Yield index could only manage 1.4%. The overall yield on the FTSE 100 slipped slightly from 3.51% to 3.45% over the month.
Even so, the scene is being set for a better performance by high-yielding shares, as fewer and fewer companies are cutting dividends. 2009's series of savage dividend cuts seems to be drawing to a close - in fact, during November, several companies increased their dividends suggesting they are more optimistic about the future. Aberdeen, May Gurney and Sage all increased their payouts while United Utilities and Severn Trent, two "bankers" of the equity income sector both saw rises. Even battered Thomas Cook upped its dividend.
The main threat for the sector is that the UK equity income is increasingly derived from a few companies and sectors - research from Standard & Poor's shows approximately two-thirds of dividends now come from just 15 companies. This situation may ease as companies return to paying dividends over the next couple of years, but asset allocators are, in some cases, beginning to look globally for their dividends. Asia, for example, offers a seductive blend of high growth potential and reasonable dividend payouts.
The UK Equity Income sector is still lagging the UK All Companies grouping over the past 12 months, with the latter up 35.3%, compared with 27.9% for equity income. However, both sectors remain well ahead of the newly created UK Income & Growth sector, which is up just 23.5%.
The returns from the UK Equity Income sector remain disparate, with the top fund up 59.2% and the bottom fund up 14.9%, and this has largely depended on the extent to which the manager has believed in the rally. A number of managers have remained very sceptical over the rally and have stuck to the quality end of the market, which has hurt relative performance in the short term.
Tuesday, 8 December 2009
What is an ISA?
ISA stands for Individual Savings Account, a tax-efficient wrapper offered under Government legislation as a way of encouraging you to save. An ISA sits over your choice of a number of different investments to shelter them from further tax on any income or gains earned.
There are just two types of ISA - the Cash ISA and the Stocks and Shares ISA. The standard allowance for both in 2009/10 is £7,200 or, if you are over 50, higher, at £10,200. Within this, the limit for Cash ISAs - or for the cash element within a Stocks and Shares ISA - is £3,600 (or £5,100 if you are over 50). However, there is flexibility over how these limits can be used - you can, for example, put the maximum £3,600 (£5,100) in a cash account and £3,600 (£5,100) in a stocks and shares account. Alternatively, though, if you place just £2,000 in cash, you can use the entire remaining balance - £5,200 (or £8,200) in this case - to invest in stocks and shares.
If you don't need cash at all, you can put the full £7,200 (£10,200) into stocks and shares.In addition, you can transfer existing Cash ISA holdings to a Stocks and Shares ISA without impacting on your current tax year allowance. So, if you have £10,000 already sitting in existing cash ISA plans then this amount can be moved to a Stocks and Shares ISA, yet leave your entire current allowance still available for new investment.
We have been extremely disappointed in the way bank and building societies have treated investors within cash ISA's. The tax free status has benefited the provider significantly more than the individual.
There are just two types of ISA - the Cash ISA and the Stocks and Shares ISA. The standard allowance for both in 2009/10 is £7,200 or, if you are over 50, higher, at £10,200. Within this, the limit for Cash ISAs - or for the cash element within a Stocks and Shares ISA - is £3,600 (or £5,100 if you are over 50). However, there is flexibility over how these limits can be used - you can, for example, put the maximum £3,600 (£5,100) in a cash account and £3,600 (£5,100) in a stocks and shares account. Alternatively, though, if you place just £2,000 in cash, you can use the entire remaining balance - £5,200 (or £8,200) in this case - to invest in stocks and shares.
If you don't need cash at all, you can put the full £7,200 (£10,200) into stocks and shares.In addition, you can transfer existing Cash ISA holdings to a Stocks and Shares ISA without impacting on your current tax year allowance. So, if you have £10,000 already sitting in existing cash ISA plans then this amount can be moved to a Stocks and Shares ISA, yet leave your entire current allowance still available for new investment.
We have been extremely disappointed in the way bank and building societies have treated investors within cash ISA's. The tax free status has benefited the provider significantly more than the individual.
Is the European Market Starting to lag?
With the exception of the German Dax, European indices lagged those of other major markets in November. The Dax rose 3.9% over the month, which put it ahead of the FTSE 100 (2.9%) and the Nikkei (-6.3%), but well behind the S&P (5.7%).
The FTSE Eurofirst index could only manage a lacklustre 0.9%, although the French CAC and the Spanish IBEX both delivered around 2%.The weakness in the indices did not seem to be a reflection of any weakness in the economic data. Industrial production showed an increase for the fifth consecutive month, rising 0.3% in September over August. It remains 12.9% below last year and was slightly below expectations, but still showed the economy was heading in the right direction.
GDP figures for the third quarter showed the eurozone finally out of recession. As a whole, the region rose 0.4% for the three months to the end of September, bringing five quarters of negative growth to a close. The region was carried by Germany, which saw an impressive 0.7% rise in GDP, having also grown in the second quarter. Italy also fared well, rising 0.6%. The German move partly explains the relative outperformance of the Dax over other European markets.
France, having been one of the first to emerge from recession, reported significantly weaker data than expected. Its GDP rose just 0.3% - well below analysts' forecasts. Meanwhile Spain is still suffering from its slumping property market and growing unemployment.
A second lurch down for the region remains a possibility. The European Commission warned that the banking system was still in need of repair - otherwise credit availability will weaken and threaten the nascent economic recovery. The strong euro continues to remain a significant headwind, though data from eurozone manufacturers during the month suggested it might not be having as significant an impact as had first been feared.
There are some signs the recovery may still only be a function of the region's stimulus packages and has yet to generate sustainable economic momentum. Certainly the eurozone has seen little recovery in consumer spending - France saw flat consumer spending in the third quarter, while Germany's spending figures actually fell. The purchasing managers' index rose at its fastest rate in two years, but there was some loss of momentum, which spooked analysts.
Over one year, the Europe excluding UK sector has delivered 31.3% growth, marginally behind the UK All Companies sector, which has returned an average of 35.3% to investors. European Smaller Companies has returned an average of 50%, but it is still just behind the UK Smaller Companies sector.
The FTSE Eurofirst index could only manage a lacklustre 0.9%, although the French CAC and the Spanish IBEX both delivered around 2%.The weakness in the indices did not seem to be a reflection of any weakness in the economic data. Industrial production showed an increase for the fifth consecutive month, rising 0.3% in September over August. It remains 12.9% below last year and was slightly below expectations, but still showed the economy was heading in the right direction.
GDP figures for the third quarter showed the eurozone finally out of recession. As a whole, the region rose 0.4% for the three months to the end of September, bringing five quarters of negative growth to a close. The region was carried by Germany, which saw an impressive 0.7% rise in GDP, having also grown in the second quarter. Italy also fared well, rising 0.6%. The German move partly explains the relative outperformance of the Dax over other European markets.
France, having been one of the first to emerge from recession, reported significantly weaker data than expected. Its GDP rose just 0.3% - well below analysts' forecasts. Meanwhile Spain is still suffering from its slumping property market and growing unemployment.
A second lurch down for the region remains a possibility. The European Commission warned that the banking system was still in need of repair - otherwise credit availability will weaken and threaten the nascent economic recovery. The strong euro continues to remain a significant headwind, though data from eurozone manufacturers during the month suggested it might not be having as significant an impact as had first been feared.
There are some signs the recovery may still only be a function of the region's stimulus packages and has yet to generate sustainable economic momentum. Certainly the eurozone has seen little recovery in consumer spending - France saw flat consumer spending in the third quarter, while Germany's spending figures actually fell. The purchasing managers' index rose at its fastest rate in two years, but there was some loss of momentum, which spooked analysts.
Over one year, the Europe excluding UK sector has delivered 31.3% growth, marginally behind the UK All Companies sector, which has returned an average of 35.3% to investors. European Smaller Companies has returned an average of 50%, but it is still just behind the UK Smaller Companies sector.
Have Corporate Bonds Peaked?
UK and European companies have issued a record amount of bonds during 2009, but issuance has begun to decelerate since October and returns have fallen from their highs amid signs investors are looking for opportunities among other asset classes.
According to a survey by Bank of America-Merrill Lynch, investors reduced their investment-grade bond holdings during October.However, sales of high-yield bonds have soared with demand for riskier assets rising as investors have become more confident borrowers will honour their obligations. According to Moody's Investors Service, the global speculative-grade default rate increased to 12.4% during October, the largest proportion of defaults since the Great Depression.
The ratings agency believes default rates are near their peak and are likely to decline. So far this year, €19bn-worth of high-yield bonds have been sold on a pan-European basis - almost quadruple the amount sold during the same period in 2008.
The rate of UK inflation climbed more quickly than expected during October, rising by 1.5% year on year. The consumer price index increased month on month for the first time in eight months, boosted by rising prices for fuel and airfares. Retail sales reached their highest level for two years during November, fuelling speculation the UK economy has returned to growth.
The Bank of England (BoE) extended its asset-purchasing scheme by £25bn to £200bn, with the smaller-than-expected increase boosting optimism the economy is on the mend. Nevertheless, the BoE remains concerned about the lack of availability of credit.
BoE governor Mervyn King believes the UK economy will have to tread a "hard path" and also warned that he retains an "open mind" over the possibility of further asset purchases. Meanwhile, the deputy governor, Charles Bean, cautioned that credit remains tight and that some companies are being forced to refuse orders because they do not have sufficient capital. According to the BoE, the UK economy is set to grow by 2.2% during 2010 and by 4.1% during 2011.
The UK's budget deficit during October was the worst since records began, fuelled by lower tax revenue and higher social security costs. The Organisation for Economic Co-operation & Development has warned the deficit will continue to deteriorate during 2010. Meanwhile, the Confederation of British Industry urged the UK government to pursue "ambitious" cuts in Britain's budget deficit in order to help interest rates to remain at their current exceptionally low levels.
One of the best funds to capture the corporate bond market is the M&G Strategic Corporate bond. This fund has performed expectionally well and is a corner-stone of our Diversified Portfolios
According to a survey by Bank of America-Merrill Lynch, investors reduced their investment-grade bond holdings during October.However, sales of high-yield bonds have soared with demand for riskier assets rising as investors have become more confident borrowers will honour their obligations. According to Moody's Investors Service, the global speculative-grade default rate increased to 12.4% during October, the largest proportion of defaults since the Great Depression.
The ratings agency believes default rates are near their peak and are likely to decline. So far this year, €19bn-worth of high-yield bonds have been sold on a pan-European basis - almost quadruple the amount sold during the same period in 2008.
The rate of UK inflation climbed more quickly than expected during October, rising by 1.5% year on year. The consumer price index increased month on month for the first time in eight months, boosted by rising prices for fuel and airfares. Retail sales reached their highest level for two years during November, fuelling speculation the UK economy has returned to growth.
The Bank of England (BoE) extended its asset-purchasing scheme by £25bn to £200bn, with the smaller-than-expected increase boosting optimism the economy is on the mend. Nevertheless, the BoE remains concerned about the lack of availability of credit.
BoE governor Mervyn King believes the UK economy will have to tread a "hard path" and also warned that he retains an "open mind" over the possibility of further asset purchases. Meanwhile, the deputy governor, Charles Bean, cautioned that credit remains tight and that some companies are being forced to refuse orders because they do not have sufficient capital. According to the BoE, the UK economy is set to grow by 2.2% during 2010 and by 4.1% during 2011.
The UK's budget deficit during October was the worst since records began, fuelled by lower tax revenue and higher social security costs. The Organisation for Economic Co-operation & Development has warned the deficit will continue to deteriorate during 2010. Meanwhile, the Confederation of British Industry urged the UK government to pursue "ambitious" cuts in Britain's budget deficit in order to help interest rates to remain at their current exceptionally low levels.
One of the best funds to capture the corporate bond market is the M&G Strategic Corporate bond. This fund has performed expectionally well and is a corner-stone of our Diversified Portfolios
Monday, 7 December 2009
Does the US still offer investment Opportunities?
Does the US still offer investment Opportunities?
It is easy to dismiss the US as a busted flush. Much like the UK, the country is indebted, its housing market is weak and its currency is sliding. It is embroiled in expensive wars that it shows little sign of winning. And even its key strength - its propensity to consume -is failing.
Equally, from an investment perspective, active managers have traditionally struggled to beat the index consistently in a super-efficient market. Does the US still merit a significant chunk of an investor's portfolio?
The US saw a return to growth in the third quarter of this year, with GDP rising 3.5%, but the economy is still facing significant structural problems. Government, corporate and consumer debt is huge, which will constrain growth for the foreseeable future. Furthermore, the country is losing its dominant economic position to Asia, which faces few of these problems.
As such, it would be easy to dismiss the US and plough money into the Asian growth story instead. However, the US has a number of things in its favour. First, it has some of the best companies in the world - Microsoft, Apple, Amazon, Coca-Cola and Colgate Palmolive, to name but a few - and, far from these companies being damaged by the growth of Asia, many may be front-line beneficiaries. To date, Asian consumers have shown a propensity for Western brands over domestic ones.
The US still holds a significant amount of global intellectual property too. Asian companies are building proprietary technology, but the US is developing all the time. It is difficult to imagine a rival emerging to lead technology forward in the same way that, say, Apple has done over the past few years.
The US is undoubtedly indebted, but it has paid down debt before and there is no reason to think it cannot do so again. It will just take some time. US citizens are suffering and need to deleverage, but they have shown themselves to be resilient and enthusiastic consumers over the years. A lot is resting on the emergence of the Asian consumer, which is not yet a proven force. Emerging Asia will have to make a success of its welfare plans before this is likely to happen.
The US is still the largest economy in the world. Its business and economic practices are the most sophisticated and, no matter how it may have seemed recently, the world still dances to its tune. It is certainly more vulnerable than it has been, but its economy has proved extremely adaptable in the past and there is no reason to think that it will not prove so again. It is not the time for investors to turn their backs.
It is easy to dismiss the US as a busted flush. Much like the UK, the country is indebted, its housing market is weak and its currency is sliding. It is embroiled in expensive wars that it shows little sign of winning. And even its key strength - its propensity to consume -is failing.
Equally, from an investment perspective, active managers have traditionally struggled to beat the index consistently in a super-efficient market. Does the US still merit a significant chunk of an investor's portfolio?
The US saw a return to growth in the third quarter of this year, with GDP rising 3.5%, but the economy is still facing significant structural problems. Government, corporate and consumer debt is huge, which will constrain growth for the foreseeable future. Furthermore, the country is losing its dominant economic position to Asia, which faces few of these problems.
As such, it would be easy to dismiss the US and plough money into the Asian growth story instead. However, the US has a number of things in its favour. First, it has some of the best companies in the world - Microsoft, Apple, Amazon, Coca-Cola and Colgate Palmolive, to name but a few - and, far from these companies being damaged by the growth of Asia, many may be front-line beneficiaries. To date, Asian consumers have shown a propensity for Western brands over domestic ones.
The US still holds a significant amount of global intellectual property too. Asian companies are building proprietary technology, but the US is developing all the time. It is difficult to imagine a rival emerging to lead technology forward in the same way that, say, Apple has done over the past few years.
The US is undoubtedly indebted, but it has paid down debt before and there is no reason to think it cannot do so again. It will just take some time. US citizens are suffering and need to deleverage, but they have shown themselves to be resilient and enthusiastic consumers over the years. A lot is resting on the emergence of the Asian consumer, which is not yet a proven force. Emerging Asia will have to make a success of its welfare plans before this is likely to happen.
The US is still the largest economy in the world. Its business and economic practices are the most sophisticated and, no matter how it may have seemed recently, the world still dances to its tune. It is certainly more vulnerable than it has been, but its economy has proved extremely adaptable in the past and there is no reason to think that it will not prove so again. It is not the time for investors to turn their backs.
Japanese Market Continues to Underperform
A last minute rally couldn't save Japan from being the worst performing of all the major markets in November as worries over the government's financial position increased, and asset allocators and fund managers across the globe began to wonder whether they should be in Japan at all.
The Nikkei dipped 6.3% to 9,282, compared with monthly rises of 2.9% in the FTSE 100, 5.7% in the S&P 500 and 0.9% in the FTSE Eurofirst index. Much of the fall was based on worries over the strength of the yen, which threatens to derail the country's fragile recovery. Japan's government has said it will extend the country's stimulus package to break the yen's strength, but the coffers are already at breaking point – the government debt to GDP ratio is expected to hit 200% in 2010. The likelihood of default is increasingly being factored into bond markets.
Deflation is expected to persist into 2011 and the central bank is now under significant pressure to do more to combat the problem. This may take the form of quantitative easing, though the government has been publically sceptical about its value in the past. That said, it has already used up many of its chips to fight persistent economic weakness and international investors are now wondering what it has left.
Earlier in the month, the country's economic figures seemed encouraging. Third-quarter GDP growth figures were strong at an annualised 4.8%, with expansion split evenly between private consumption growth, increased inventories and an improvement in net exports. Exports fell 23.2% in October compared with a year ago. This may not sound that impressive but it represented an improvement on September's 30.6% fall, while exports to other Asian countries were particularly strong.
But a raft of poor data followed at the end of the month. In particular, industrial output numbers released at the end of the month were weak. They grew by an anaemic 0.5% in October over November, well below expectations. Analysts are still worried there is little organic growth in the economy and the removal of the stimulus packages next year will see another lurch downwards.
Japanese funds fared little better and look like being crowned the worst-performing equity sector of 2009. They have returned just 5.1% over the past 12 months, ahead of only the UK gilts and money market sectors. North America is the next closest equity sector and that has returned 21.4%
The Nikkei dipped 6.3% to 9,282, compared with monthly rises of 2.9% in the FTSE 100, 5.7% in the S&P 500 and 0.9% in the FTSE Eurofirst index. Much of the fall was based on worries over the strength of the yen, which threatens to derail the country's fragile recovery. Japan's government has said it will extend the country's stimulus package to break the yen's strength, but the coffers are already at breaking point – the government debt to GDP ratio is expected to hit 200% in 2010. The likelihood of default is increasingly being factored into bond markets.
Deflation is expected to persist into 2011 and the central bank is now under significant pressure to do more to combat the problem. This may take the form of quantitative easing, though the government has been publically sceptical about its value in the past. That said, it has already used up many of its chips to fight persistent economic weakness and international investors are now wondering what it has left.
Earlier in the month, the country's economic figures seemed encouraging. Third-quarter GDP growth figures were strong at an annualised 4.8%, with expansion split evenly between private consumption growth, increased inventories and an improvement in net exports. Exports fell 23.2% in October compared with a year ago. This may not sound that impressive but it represented an improvement on September's 30.6% fall, while exports to other Asian countries were particularly strong.
But a raft of poor data followed at the end of the month. In particular, industrial output numbers released at the end of the month were weak. They grew by an anaemic 0.5% in October over November, well below expectations. Analysts are still worried there is little organic growth in the economy and the removal of the stimulus packages next year will see another lurch downwards.
Japanese funds fared little better and look like being crowned the worst-performing equity sector of 2009. They have returned just 5.1% over the past 12 months, ahead of only the UK gilts and money market sectors. North America is the next closest equity sector and that has returned 21.4%
Emerging Markets Contiune To Rally Throughout November
Emerging markets look set to be the top-performing asset class of 2009. Over 12 months, the Global Emerging Markets sector remains the best performer, with an average return of 67.9%. The Asia Pacific ex Japan sector is just behind, having delivered 66.4%.
November was another buoyant month for most emerging markets. Brazil's Bovespa index climbed an impressive 8.9% as President Lula said the country would show "Chinese style" growth in the third quarter and estimated GDP would climb 9%. With international reserves still at $233bn (£142bn), the government has plenty more in its arsenal if the global economy takes another lurch down. Industrial production picked up by 0.75%, which was slightly behind expectations while interest rates remained at 8.75%.
Elsewhere in Latin America, the Mexican market also did well, with the MSCI Mexico up 8.87%, while the MSCI Peru rose 11.97% as buoyant economic news from India looked set to create greater demand for commodities. Chile was the only laggard, in spite of 1.1% GDP growth in the third quarter. The MSCI Chile index dipped 1.51% over the month.
India was also strong. The S&P CNX 500 index rose 7.6%, driven by stronger than expected growth. GDP rose 7.9% in the third quarter, compared to an expected rise of 6.3%. A survey from the Warwick Business School also said India was likely to remain a dominant force in information technology and outsourcing.
The Indian Government said this economic strength had been driven by the fiscal stimulus packages, leading analysts to begin to contemplate a potential interest rate rise. However, the monsoon should affect agricultural growth in the next quarter and bring down the statistics. There are also worries remittances and exports will be affected by the uncertain situation in Dubai.
In China, stockmarket performance was slowed by whisperings about bubbles. The chief executive of Soho China, a leader property developer in China, talked of "rampant wasteful investment" driven by excess capacity in the system. This was one of the causes of the 1997 Asian crisis - too much money being spent on unnecessary investment - and any hint of a repetition understandably set nerves jangling. Nevertheless, the FTSE Xinhua index managed a 6.3% rise over the month.
Russia's GDP grew 13.9% on an annualised basis over the second quarter, though it was still 8.9% down on last year. Equity market performance was dampened by unsupportive comments from the Russian deputy prime minister, who said the equity market was "over-heated". The benchmark RTS index rose just 2.2% over the month.
November was another buoyant month for most emerging markets. Brazil's Bovespa index climbed an impressive 8.9% as President Lula said the country would show "Chinese style" growth in the third quarter and estimated GDP would climb 9%. With international reserves still at $233bn (£142bn), the government has plenty more in its arsenal if the global economy takes another lurch down. Industrial production picked up by 0.75%, which was slightly behind expectations while interest rates remained at 8.75%.
Elsewhere in Latin America, the Mexican market also did well, with the MSCI Mexico up 8.87%, while the MSCI Peru rose 11.97% as buoyant economic news from India looked set to create greater demand for commodities. Chile was the only laggard, in spite of 1.1% GDP growth in the third quarter. The MSCI Chile index dipped 1.51% over the month.
India was also strong. The S&P CNX 500 index rose 7.6%, driven by stronger than expected growth. GDP rose 7.9% in the third quarter, compared to an expected rise of 6.3%. A survey from the Warwick Business School also said India was likely to remain a dominant force in information technology and outsourcing.
The Indian Government said this economic strength had been driven by the fiscal stimulus packages, leading analysts to begin to contemplate a potential interest rate rise. However, the monsoon should affect agricultural growth in the next quarter and bring down the statistics. There are also worries remittances and exports will be affected by the uncertain situation in Dubai.
In China, stockmarket performance was slowed by whisperings about bubbles. The chief executive of Soho China, a leader property developer in China, talked of "rampant wasteful investment" driven by excess capacity in the system. This was one of the causes of the 1997 Asian crisis - too much money being spent on unnecessary investment - and any hint of a repetition understandably set nerves jangling. Nevertheless, the FTSE Xinhua index managed a 6.3% rise over the month.
Russia's GDP grew 13.9% on an annualised basis over the second quarter, though it was still 8.9% down on last year. Equity market performance was dampened by unsupportive comments from the Russian deputy prime minister, who said the equity market was "over-heated". The benchmark RTS index rose just 2.2% over the month.
Wednesday, 2 December 2009
What is a Wrap Solution
A Wrap Solution provides the investor with the opportunity to access a significant range of investment, whilst retaining access to the account through one source, these are normally access through an ISA or a SIPP.
Wraps are a relatively new concept, but have proved extremely popular amongst investors in recent years. The aim of the service is to offer you easy access to the country's leading fund managers and a variety of other investments through one access point. A Wrap allows you to hold you shares, pensions, investment bonds, structured products, ISA's and Unit Trusts all in one place, whilst still allowing the desired spread of investments.
Consolidating and managing investments through one account is efficient and cost effective.
This type of account allows you to switch between different fund managers within the same arrangement at a low cost, which will make it highly unlikely that you will need to transfer to an alternative provider at a later stage.
Broadly speaking, the traditional use of Insurance Company "packaged" products has not served our clients very well. The lack of transparency and the emergence of hidden penalty clauses have often led to our clients being unable to predict or control their financial plans. Insurance companies have often sought to treat clients as a collective group, rather than as individuals, imposing financial penalties to protect their own interests, regardless of their effect on clients. Additionally, the remuneration process for IFAs was determined by the Insurance industry and was biased towards the sales process. IFAs have had little opportunity or incentive to be involved with the progress of clients investments and we felt that it would be very desirable to increase our involvement with our clients achievement of their investment goals.
The introduction of a Wrap Solution has allowed us to address many of these issues and to give clients a clear understanding of the process involved in saving money for a future event such as retirement.
By investing in this manner we are able to select almost any unit trust manager operating in the UK. Using a strict investment selection process we feel confident that using this method of investment will produce superior returns to those associated to both your existing arrangements and those of Stakeholder. The slightly higher charging structure also allows for the underlying investment selection to be reviewed annually ensuring it continues to meet with your risk profile and performance expectations.
I would point out however, that there is no guarantee that this method of investment will produce superior results to those of a conventional insurance based investment or pension product.But historically, the types of investments selected have outperformed those associated to insurance companies.
The additional performance can be significant, the charges are generally a little higher, but I would like to point out that Sterling Financial Services do not receive any additional commission or any other incentive for recommending this course of action. The charges are higher, because they are justified through historically producing higher investment performance.
Wraps are a relatively new concept, but have proved extremely popular amongst investors in recent years. The aim of the service is to offer you easy access to the country's leading fund managers and a variety of other investments through one access point. A Wrap allows you to hold you shares, pensions, investment bonds, structured products, ISA's and Unit Trusts all in one place, whilst still allowing the desired spread of investments.
Consolidating and managing investments through one account is efficient and cost effective.
This type of account allows you to switch between different fund managers within the same arrangement at a low cost, which will make it highly unlikely that you will need to transfer to an alternative provider at a later stage.
Broadly speaking, the traditional use of Insurance Company "packaged" products has not served our clients very well. The lack of transparency and the emergence of hidden penalty clauses have often led to our clients being unable to predict or control their financial plans. Insurance companies have often sought to treat clients as a collective group, rather than as individuals, imposing financial penalties to protect their own interests, regardless of their effect on clients. Additionally, the remuneration process for IFAs was determined by the Insurance industry and was biased towards the sales process. IFAs have had little opportunity or incentive to be involved with the progress of clients investments and we felt that it would be very desirable to increase our involvement with our clients achievement of their investment goals.
The introduction of a Wrap Solution has allowed us to address many of these issues and to give clients a clear understanding of the process involved in saving money for a future event such as retirement.
By investing in this manner we are able to select almost any unit trust manager operating in the UK. Using a strict investment selection process we feel confident that using this method of investment will produce superior returns to those associated to both your existing arrangements and those of Stakeholder. The slightly higher charging structure also allows for the underlying investment selection to be reviewed annually ensuring it continues to meet with your risk profile and performance expectations.
I would point out however, that there is no guarantee that this method of investment will produce superior results to those of a conventional insurance based investment or pension product.But historically, the types of investments selected have outperformed those associated to insurance companies.
The additional performance can be significant, the charges are generally a little higher, but I would like to point out that Sterling Financial Services do not receive any additional commission or any other incentive for recommending this course of action. The charges are higher, because they are justified through historically producing higher investment performance.
Investment Monitoring Service
Investment Management Service
This service follows on from the advisory service and is designed to keep you more informed of the progress of the investments. If you feel that an annual review of your investments is insufficient and that you would like a more proactive approach, you can use our investment monitoring service to alert you to changes as and when we feel they are necessary.
The basis of the service is that we would notify you immediately if any of the investments that you hold are under performing and if we feel a switch to an alternative manager would be in your best interests. Sterling only become concerned about an investment manager following three months of underperformance, at which point we would look to discuss the position with the management group concerned. Usually we would give the manager an opportunity to put things right. However, where we feel a change is necessary we would write to you asking for your express consent to switch investments.
We would also write if we felt that investment results could be improved if the strategy was altered - a reduction in UK Equities in favour of US Equities for example, again asking for your consent to make an alteration. Finally, you would also be notified if the fund manager left the services of the management group and if we were unhappy with the replacement manager.
Investors also enjoy a monthly update, confirming the investment performance, market updates, research and the results of our investment committee meeting.
This service follows on from the advisory service and is designed to keep you more informed of the progress of the investments. If you feel that an annual review of your investments is insufficient and that you would like a more proactive approach, you can use our investment monitoring service to alert you to changes as and when we feel they are necessary.
The basis of the service is that we would notify you immediately if any of the investments that you hold are under performing and if we feel a switch to an alternative manager would be in your best interests. Sterling only become concerned about an investment manager following three months of underperformance, at which point we would look to discuss the position with the management group concerned. Usually we would give the manager an opportunity to put things right. However, where we feel a change is necessary we would write to you asking for your express consent to switch investments.
We would also write if we felt that investment results could be improved if the strategy was altered - a reduction in UK Equities in favour of US Equities for example, again asking for your consent to make an alteration. Finally, you would also be notified if the fund manager left the services of the management group and if we were unhappy with the replacement manager.
Investors also enjoy a monthly update, confirming the investment performance, market updates, research and the results of our investment committee meeting.
What services are provided when using Sterling Financial Services?
When appointing a financial organisation to help with your finances, you need to know exactly what you are getting and at what price. The objective of this section is to give you an idea of what to expect from Sterling Financial Services, but bear in mind that everyone is different and more specific or specialist advice may be charged differently. We will always tell you how much you will be charged before we undertake any work and we will take necessary steps to minimise charges where we can.
Financial organisations operate in a variety of ways and we are paid differently depending on the type of product or service that it is ultimately purchased.
When purchasing an investment or SIPP through us, or using a similar service from an alternative provider, you will find that charges can be broken up into three categories, namely the fund manager, the administrator and the broker (Sterling). The charges associated to the fund manager normally remain the same, but the administrator and the broker will vary their charges to reflect the level of service required of them.
Sometimes additional services will be bought in – these are normally discretionary or pension trustee services. They will increase the cost of the transaction, but can also increase performance or flexibility.
In terms of life assurance products, we are often remunerated by way of a commission, which is fully disclosed to you. The amount paid depends on the premium and the period of assurance (the term). Discounts are available if life assurance is purchased online without advice.
You need to decide what level of service you require, which will depend on how financially aware you are and the level of work that you are prepared to undertake yourself.
Please bear in mind that charges are typical and in broad terms. Sometimes the charges will be slightly higher or lower depending on the exact nature of your requirements. The objective of these pages is to give you a good idea of what to expect. A full and accurate quote will be provided before you proceed.
Services available through Sterling Financial Services, in terms of investments and pensions, are split into three main categories: click on the links to the left for further information.
A1 Web Links -
http://www.feeds4all.nl
Financial organisations operate in a variety of ways and we are paid differently depending on the type of product or service that it is ultimately purchased.
When purchasing an investment or SIPP through us, or using a similar service from an alternative provider, you will find that charges can be broken up into three categories, namely the fund manager, the administrator and the broker (Sterling). The charges associated to the fund manager normally remain the same, but the administrator and the broker will vary their charges to reflect the level of service required of them.
Sometimes additional services will be bought in – these are normally discretionary or pension trustee services. They will increase the cost of the transaction, but can also increase performance or flexibility.
In terms of life assurance products, we are often remunerated by way of a commission, which is fully disclosed to you. The amount paid depends on the premium and the period of assurance (the term). Discounts are available if life assurance is purchased online without advice.
You need to decide what level of service you require, which will depend on how financially aware you are and the level of work that you are prepared to undertake yourself.
Please bear in mind that charges are typical and in broad terms. Sometimes the charges will be slightly higher or lower depending on the exact nature of your requirements. The objective of these pages is to give you a good idea of what to expect. A full and accurate quote will be provided before you proceed.
Services available through Sterling Financial Services, in terms of investments and pensions, are split into three main categories: click on the links to the left for further information.
A1 Web Links -
http://www.feeds4all.nl
Directors and Partnership Share Protection Assurance.
In the event of the death or serious illness of a shareholder within any organisation, the business needs to be prepared. Ideally the business will be in a position to buy back the shares from the retiring shareholder in the event of ill health, or from the deceased's beneficiary in the event of death.
But what if it cannot afford such a transaction? The problem is that the value of the business could be significant and it would be unfair to expect any business to be in a position to buy back shares at a moment's notice.
Quite clearly, no one knows just what is around the corner and putting a simple life assurance scheme in place can help alleviate inevitable problems that would arise in the event of such an event. The objective of the scheme would be to insure each shareholder to the value of their shareholding. In the event of death or illness the scheme would produce a lump sum, which the surviving (or healthy) shareholders would use to buy back the shares. This is organised within a legal agreement to ensure the transaction takes place as was intended.
In the event of a claim the sum assured is normally paid free from tax: however, the arrangement is paid for by the shareholder not the company and is paid from net earnings.
Life assurance is just one method of ensuring the smooth transition of shares in the event of death, and some of our clients have favoured alternative methods, especially for high value organisations, where premiums are expensive. Alternative options involve placing the deceased shares into trust and allowing dividends from the shares to be paid to the deceased's beneficiaries until the company is in a position to buy back the shares, or on the ultimate sale of the business.
We can help you find the most appropriate solution and ensure that the business is well placed to deal with problems arising from the death of a shareholder.
But what if it cannot afford such a transaction? The problem is that the value of the business could be significant and it would be unfair to expect any business to be in a position to buy back shares at a moment's notice.
Quite clearly, no one knows just what is around the corner and putting a simple life assurance scheme in place can help alleviate inevitable problems that would arise in the event of such an event. The objective of the scheme would be to insure each shareholder to the value of their shareholding. In the event of death or illness the scheme would produce a lump sum, which the surviving (or healthy) shareholders would use to buy back the shares. This is organised within a legal agreement to ensure the transaction takes place as was intended.
In the event of a claim the sum assured is normally paid free from tax: however, the arrangement is paid for by the shareholder not the company and is paid from net earnings.
Life assurance is just one method of ensuring the smooth transition of shares in the event of death, and some of our clients have favoured alternative methods, especially for high value organisations, where premiums are expensive. Alternative options involve placing the deceased shares into trust and allowing dividends from the shares to be paid to the deceased's beneficiaries until the company is in a position to buy back the shares, or on the ultimate sale of the business.
We can help you find the most appropriate solution and ensure that the business is well placed to deal with problems arising from the death of a shareholder.
Pension Scheme Property Acquisition - Commercial Premises Only
Purchasing property through a pension scheme has been popular amongst our corporate clients and we are here to ensure that this potentially problematic, but lucrative, option is transacted smoothly.
In principal acquiring property within a pension arrangement is simple. The value of your pension can be combined with a loan to purchase a property. The property is then an asset of the pension scheme and any rent received will be used to repay the loan with any excess rent being retained by the scheme. At retirement, you have the option to retain the property within the pension scheme and use the rent (subject to certain limits) as an income.
With careful planning you would prudently ensure that the loan was repaid prior to drawing an income in retirement and the value of liquid assets being held in the scheme would represent 33% of the property value - which ensures that you can draw the maximum 25% tax free cash associated to all post April 2006 pension arrangements.
The tax advantages associated to this option are vast. Firstly, you have received tax relief on the contributions that you have already contributed or plan to contribute to the pension scheme. Pension contributions are treated as a tax-deductible business expense when a company contributes and you receive tax relief at your highest marginal rate if you contribute personally.
Additionally, if your company were to buy the property for its own occupation, loan repayments would only attract tax relief on the interest element of the loan - not the capital repayment. Using the pension scheme option to purchase the property allows the company to enter into a lease with the pension scheme and the rent that is paid is fully tax deductible. The property, on disposal, is done so within the pension scheme free from capital gains tax but the proceeds of the sale will remain within the pension scheme.
You can draw a payment of 25% of the accumulated vale of the pension arrangement completely free from tax at retirement.
On death prior to drawing benefits the property would be sold and the proceeds paid to your nominated beneficiaries inheritance tax free.
From April 2006 purchasing a property through a pension scheme has been less favourable as the amount that can be borrowed has reduced dramatically. As a broad rule of thumb you are able to borrow 33% of the property value - requiring a deposit of 67%. A benefit of the post April 2006 rules is that you can split the ownership of the property - perhaps purchasing the property jointly between your company and your pension scheme.
All costs associated to the acquisition can be funded from the pension scheme. You should bear in mind that if the property you are considering is VAT elected, you are unable to bridge the VAT. The scheme is able to claim the VAT back, but it would remain within the scheme. This has an effect of reducing the amount that can be borrowed to 28%.
As you would expect there are some disadvantages. The property is an asset of the pension scheme, not the company or you personally. You cannot use the property therefore as security for further borrowing unless it is for an investment within the pension scheme. Additionally, you can only access 25% of your fund as a lump sum and realistically, you would need to dispose of the property by the age of 75, at which point the accumulated fund would be traded for an income for the remainder of your life (and your spouse if desired). The remaining fund on death after
the age of 75 would not be available to pass to your estate.
In principal acquiring property within a pension arrangement is simple. The value of your pension can be combined with a loan to purchase a property. The property is then an asset of the pension scheme and any rent received will be used to repay the loan with any excess rent being retained by the scheme. At retirement, you have the option to retain the property within the pension scheme and use the rent (subject to certain limits) as an income.
With careful planning you would prudently ensure that the loan was repaid prior to drawing an income in retirement and the value of liquid assets being held in the scheme would represent 33% of the property value - which ensures that you can draw the maximum 25% tax free cash associated to all post April 2006 pension arrangements.
The tax advantages associated to this option are vast. Firstly, you have received tax relief on the contributions that you have already contributed or plan to contribute to the pension scheme. Pension contributions are treated as a tax-deductible business expense when a company contributes and you receive tax relief at your highest marginal rate if you contribute personally.
Additionally, if your company were to buy the property for its own occupation, loan repayments would only attract tax relief on the interest element of the loan - not the capital repayment. Using the pension scheme option to purchase the property allows the company to enter into a lease with the pension scheme and the rent that is paid is fully tax deductible. The property, on disposal, is done so within the pension scheme free from capital gains tax but the proceeds of the sale will remain within the pension scheme.
You can draw a payment of 25% of the accumulated vale of the pension arrangement completely free from tax at retirement.
On death prior to drawing benefits the property would be sold and the proceeds paid to your nominated beneficiaries inheritance tax free.
From April 2006 purchasing a property through a pension scheme has been less favourable as the amount that can be borrowed has reduced dramatically. As a broad rule of thumb you are able to borrow 33% of the property value - requiring a deposit of 67%. A benefit of the post April 2006 rules is that you can split the ownership of the property - perhaps purchasing the property jointly between your company and your pension scheme.
All costs associated to the acquisition can be funded from the pension scheme. You should bear in mind that if the property you are considering is VAT elected, you are unable to bridge the VAT. The scheme is able to claim the VAT back, but it would remain within the scheme. This has an effect of reducing the amount that can be borrowed to 28%.
As you would expect there are some disadvantages. The property is an asset of the pension scheme, not the company or you personally. You cannot use the property therefore as security for further borrowing unless it is for an investment within the pension scheme. Additionally, you can only access 25% of your fund as a lump sum and realistically, you would need to dispose of the property by the age of 75, at which point the accumulated fund would be traded for an income for the remainder of your life (and your spouse if desired). The remaining fund on death after
the age of 75 would not be available to pass to your estate.
Whole Life Assurance
Whole Life Insurance
As the name implies, whole of life assurance policies give you protection for life. Unlike level life assurance that only pays out if you die during the term of the policy, a whole of life assurance policy always pays out eventually. For this reason whole of life assurance can be more expensive than term assurance, although this is not always the case during the initial period of insurance.
The main type of whole of life assurance used these days is unit-linked whole of life, which offers a variable mix between investment content and life cover. The initial premium is usually fixed for 10 years and is generally reviewed at that point to see whether the growth of the investment fund is sufficient to maintain the same premium level. It is possible that the premium may have to increase, or sum assured reduce, at that point.
With this type of policy the 'mix' between life cover and investment is decided at the outset. Each monthly premium is used to buy units in an investment selected fund. Then every month the insurance company calculates the cost of the life assurance for the next month only and deducts this charge by 'cancelling' just enough of the policyholder's accumulated units to pay for the cover.
In this way, the policy grows in value as the number of units held in the policy accumulate and (hopefully) the value of each unit also increases.
The investment growth will depend on fund performance, how much is being deducted to pay for the life cover, and any other optional benefits selected (e.g. critical illness cover).
Initial charges are made to recoup the set-up cost of this type of policy. This is either done by a low allocation to investment units, or special initial units are created
As the name implies, whole of life assurance policies give you protection for life. Unlike level life assurance that only pays out if you die during the term of the policy, a whole of life assurance policy always pays out eventually. For this reason whole of life assurance can be more expensive than term assurance, although this is not always the case during the initial period of insurance.
The main type of whole of life assurance used these days is unit-linked whole of life, which offers a variable mix between investment content and life cover. The initial premium is usually fixed for 10 years and is generally reviewed at that point to see whether the growth of the investment fund is sufficient to maintain the same premium level. It is possible that the premium may have to increase, or sum assured reduce, at that point.
With this type of policy the 'mix' between life cover and investment is decided at the outset. Each monthly premium is used to buy units in an investment selected fund. Then every month the insurance company calculates the cost of the life assurance for the next month only and deducts this charge by 'cancelling' just enough of the policyholder's accumulated units to pay for the cover.
In this way, the policy grows in value as the number of units held in the policy accumulate and (hopefully) the value of each unit also increases.
The investment growth will depend on fund performance, how much is being deducted to pay for the life cover, and any other optional benefits selected (e.g. critical illness cover).
Initial charges are made to recoup the set-up cost of this type of policy. This is either done by a low allocation to investment units, or special initial units are created
Saving for retirement is a necessary evil...
At some point you will need to rely on the wealth that you have created in your lifetime to provide an income in retirement. There are no hard and fast rules, but pension accounts do represent one of the most tax efficient methods of saving for retirement.
Pensions can be a useful tool to plan for something prior to retirement as well. New legislation allows you to draw your tax-free lump at age 55 whilst delaying the income (leaving the remaining fund intact and invested) until you need it.
We are all responsible for ensuring that we have enough in retirement. Not everyone has the benefit of an employer sponsored pension scheme, which makes it even more important to ensure that we save enough for ourselves.
Broadly speaking, the traditional use of Insurance Company "packaged" products has not served individuals very well. The lack of transparency and the emergence of hidden penalty clauses have often led to our clients being unable to predict or control their financial plans. Insurance companies have often sought to treat clients as a collective group, rather than as individuals, imposing financial penalties to protect their own interests, regardless of their affect on clients.
Moving forward individuals, in many cases, should consider a new home for their pension savings where they can access a much wider choice of investments. The emergence of low cost SIPP accounts makes it possible to access up to 2000 different investments. Typically the cost in terms of charges is higher, but the like for like performance when compared to an insurance company plan has historically been much higher, more than making up for the additional costs.
Pensions can be a useful tool to plan for something prior to retirement as well. New legislation allows you to draw your tax-free lump at age 55 whilst delaying the income (leaving the remaining fund intact and invested) until you need it.
We are all responsible for ensuring that we have enough in retirement. Not everyone has the benefit of an employer sponsored pension scheme, which makes it even more important to ensure that we save enough for ourselves.
Broadly speaking, the traditional use of Insurance Company "packaged" products has not served individuals very well. The lack of transparency and the emergence of hidden penalty clauses have often led to our clients being unable to predict or control their financial plans. Insurance companies have often sought to treat clients as a collective group, rather than as individuals, imposing financial penalties to protect their own interests, regardless of their affect on clients.
Moving forward individuals, in many cases, should consider a new home for their pension savings where they can access a much wider choice of investments. The emergence of low cost SIPP accounts makes it possible to access up to 2000 different investments. Typically the cost in terms of charges is higher, but the like for like performance when compared to an insurance company plan has historically been much higher, more than making up for the additional costs.
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