Measured progress

There is much to be gleaned from the performance of markets over the first quarter of 2011. Ever since equity markets hit their most recent low point in March 2009 many have questioned the rationale for and the resilience of the rises in global share prices, arguing that markets were in denial about the continued parlous state of Western economies and their financial systems. Over the early stages of this year however, markets have withstood the very considerable headwinds of high inflation in both developed and developing economies, tightening monetary policy across most of the world, an oil price at near record levels, widespread civil unrest across much of North Africa and the Middle East, plus the Japanese tsunami and associated radiation leaks. A mere twelve months ago it would have been inconceivable that markets could have absorbed all of these with barely a wobble; but despite the Japanese Nikkei Dow Index registering its worst two-day fall since the crash of 1987 in the immediate aftermath of the Fukushimanuclear incident, that is what we have seen. This shows a large and significant increase in confidence.

In many ways this has been a very old fashioned start to the year. America has taken up the running in terms of both equity market performance and economic growth. With the notable and considerable exception of the housing market, the world’s largest economy is in robust health. The two key monthly indicators of economic activity that we use, the Institute of Supply Management surveys for both Manufacturing and Services, have been showing impressive growth for many months. Importantly the most
widely used measure of employment, non-farm payrolls, are at long last registering steady if unspectacular job creation and the rate of unemployment has fallen below 9% (source Bloomberg). The one remaining cold spot is the housing market. Sales of both new and existing homes are at rock bottom levels and, although the magnitude is still small, average house prices have fallen for the past seven consecutive months (source Bloomberg). It may be that housing will be the last domino to rise in this economic cycle; affordability is the best for a decade and employment is rising, but neither will drag prices upwards until the overhang of oversupply is dealt with.

You can download this Market Commentary as a PDF file by clicking here or continue reading online

It is also traditional that rises in equities should be viewed with a strong scepticism. We should draw comfort that so many commentators believe markets are ‘defying gravity’ or ‘ignoring the real world’. These are the bricks that make up the ‘wall of worry’ markets are said to climb, and so long as these concerns remain we should be confident that we are still in the relatively early stages of the cycle. The time for
investors to fret is when everyone believes that markets are going to rise and that they understand the reasons why. We are nowhere near this attitude yet and the broadly sideways move in the major equity indices over the course of the first quarter this year, after such a strong end to 2010, is a healthy consolidation in a long bull market.

In contrast, the bond markets are looking considerably more nervous. Prices have fallen and yields risen in response to the nagging increases in global inflation. The UK may be the starkest example, where the February measure of the Consumer Price Index (CPI) showed an annual increase of 4.4%, more than double the 2% target. The Monetary Policy Committee has also let it be known that CPI is likely to hit 5%, sooner rather than later, and it is now a matter of how quickly and how aggressively monetary policy is tightened in the UK, Europe and the United States rather than there being any lingering hopes of extensions to the quantitative easing programmes. Bond yields in general, and especially gilts, have been artificially low since the beginning of the quantitative easing programmes; the rises that we have seen in the year so far should be taken as an overdue dose of normality, a rational reaction to the heightened inflationary risks. We are however more sanguine than many about prospects for interest rates, believing that many of the factors driving inflation up, especially energy and commodity prices, will naturally work their way out of the inflation calculations towards the end of this year and into 2012. On this basis any further significant falls in bond prices would present an opportunity to lock into potentially attractive yields. Even if we are wrong in our assumption that the UK bank rate will not be raised this year, this should not be a cause of great concern. Equity performance is typically very strong during the early stages of a tightening interest rate cycle, with this coinciding with the fastest corporate profits growth, while bond markets should eventually react positively to the anti-inflationary strategy.

Both debates – on equity performance and bond yields – highlight the difference between the domestic economy in the UK and the stock market. The former is still struggling. The public sector job cuts, tax rises, persistent inflation andtight credit markets have contributed to a scenario whereby the February level of the Nationwide Consumer Confidence Survey was lower even than at the worst of the 2008/09
banking crisis (source Nationwide). This has been echoed by many retailers, where company after company has reported that trading conditions, which were already poor by the turn of the year, have worsened even further in the early spring. Nothing though is ever black and white and it is very interesting that the house builders have been surprisingly optimistic about their crucial spring selling season. The performance of the equity market however has precious little to do with our economy. Instead it is international markets, and especially emerging economies, that drive equity prices. The market is dominated by global businesses; as an example the mining and oil sectors alone account for more than 30% of the FTSE 350 Index of our 350 largest companies (source Reuters).

Economic growth in China, India, Brazil and in developing economies in general has continued almost unabated by their tighter monetary policies and, despite the strong US economy that we mentioned earlier, is the primary driver of global equity markets. This has also been seen in the performances of individual stocks over the first three months of 2011. Marks & Spencer (which after John Lewis is still the bell-wether of the UK consumer) has seen its share price drop near 10% since the start of the year, whereas BG Group, as an example of an international resource stock, has risen by over 15% (source Reuters). We suspect that this stark divergence will muddy as the year progresses; markets are paying a rich premium for growth, a trend that is likely to result in buyers being attracted towards the value being uncovered in the morelowly rated domestic stocks. It is highly likely that we will see the already high pace of corporate activity accelerate further, part of which will
entail the re-emergence of private equity buyers seeking bargains amongst the underperforming and cash generative domestic industries.

Our strategy remains that of diversification and moderation. Our hopes for returns from our equity holdings may have risen slightly during the year so far, but not with sufficient confidence to wish to raise our allocations. We are looking for 2011 to be a third year of good returns, again led by growth in the developing economies, but volatility will remain high as sentiment oscillates. As with last year, the greatest risk will be in trying to follow the short term swings of outrageous fortune that always characterize investment markets; the greater and less volatile returns will come to the patient.

Jim Wood-Smith

Head of Research

The speed at which markets can shift direction is a constant source of amazement. It was only last autumn that the great fear was that the western world was following Japan into a multi-decade period of low growth and persistent deflation. Debts had to be repaid, it was argued, and the only way for this to be done was slowly and steadily. And until this was done there was no basis for a resumption sustainable growth in the UK, United States or Europe. But now this is all forgotten. Markets are instead abuzz with inflation, food prices, commodities and the timing of interest rate rises. There are no guarantees that this phase will last any longer than the previous Japanese obsession and we expect that these sudden and severe changes in sentiment will characterize the year ahead. We thus retain our diversified strategy, leaning towards a cyclical recovery but not to the exclusion of any other potential eventuality.

The trends in markets we are seeing in the early stages of 2011 can be traced back to the announcement of the restarting of quantitative easing in the United States last autumn. Since that time we have seen investors globally rebuilding their protection against inflation; prior to then the relative valuations of equities and bonds showed that deflation was seen as the greatest threat facing markets. UK equities yielded more than gilts for the first time since the 1950s, other than at the bottom of the market crashes in 2003 and 2009. This time it was not the result of the text book irrational selling at the bottom of a crash, but came instead from the lowering of bond yields. The Federal Reserve Bank’s insistence however that it will add up to $1 trillion to its purchases of treasury bills has shaken investors’ confidence in these extreme valuations. Almost to the day of the announcement we have since seen equities given renewed life, commodities surging, bond yields rising and gold underperforming.

You can download this Market Commentary as a PDF file by clicking here  or continue reading online 

 Other economic indicators are remarkably benign. Manufacturing data from around the world, and in the United States in particular, is very strong. One credible explanation for this is that the economy has completed a phase of restocking, after inventories were cut to the bone in the aftermath of the 2007-09 crisis, and is now instead reacting to genuinely better end user demand. Though much of this demand is coming from emerging markets there are also good reasons to believe that western economies are also strengthening. The US Services ISM for example recorded its 14th consecutive month of growth in January and is growing at the fastest rate since this particular data series was started in 2008 (source Institute of Supply Management February 2011). The picture is complex though and is still not backed up by either the labour or the residential housing markets, both of which remain stubbornly resistant to all attempts to help. 

Increases in food prices and soft commodities are happening also because of poor climatic conditions around the world. Shortages in a number of key foods can be traced back to the Russian heat wave and fires last summer, through to the current flooding in Australia and drought in large areas of South America. Most recently the United States has indicated that its stocks of wheat and soybeans are at their lowest for 15 and 40 years respectively (source ReutersJanuary 2011). There is no doubt that these price rises will result in the reported rates of inflation increasing around the world very rapidly throughout the first half of the year. Additionally the price of oil has been rising steadily, recently exacerbated by the unrest in North Africa; here in the UK increases in duties are making the problem worse. Mervyn King, the Governor of the Bank of England, has warned that the consumer price index is likely to reach 5% in early 2011, more than twice the level that the Monetary Policy Committee (MPC) is mandated to achieve. Unfortunately the MPC has only one weapon at its disposal, interest rates. It may argue that the factors driving inflation higher are food and energy, both of which are outside of its control, and the planned public expenditure cuts and tax rises this year are already imperilling the fragile recovery. The pressure on the Committee to raise interest rates will only intensify as the year progresses, but its potential use of higher interest rates is akin to attempting crowd control with a nuclear bomb.

The civil unrest seen initially in Tunisia and latterly in Egypt has reminded the investment world of some of the risks associated with investment in developing countries. ‘Emerging markets’ have been viewed as the financial equivalent of a free lunch and have attracted vast investment inflows. Experience teaches that at times like this something unforeseen is inevitable; this time around it is political risk. The reaction thus far however has been remarkably measured and we are not seeing a wholesale flight to safety, despite a small dip in global equities and an accompanying rise in the price of gold. We were rather  more concerned by the response to China’s announcement that its GDP grew by 10.3% in 2010. This is slightly higher than had been expected, but is nonetheless within a few percentage points of its long term average. That equity markets fell on this news suggests to us that fears of overheating and inflation in emerging markets are growing and are likely to become more prominent over the first half of this year, especially as food prices continue to rise. Food typically plays a much more important part in the calculations of inflation in emerging rather than developing markets and it is most unlikely that we have seen the last of either the market’s concerns or public demonstrations as a result of unaffordable basic foodstuffs.

Corporate profitability has remained impressive. Companies the world over are reporting steady growth not just of post tax earnings but also increasingly of revenues. The challenge as 2011 progresses is whether or not companies will be able to pass on rises in input costs (from more expensive raw materials) or whether they will have to absorb all or part of these in their margins. Perversely the latter scenario is probably the healthier for markets in the long run; a softer labour market means less upwards pressure on wages and thus less need to raise interest rates. We expect that acquisition activity will be high this year and we are especially encouraged by prospects for dividend growth. A number of companies, most notably BP, have resumed payments to shareholders after hoarding cash throughout last year. The aggregate levels of cash on company balance sheets is extraordinarily high (source Evolution Securities January 2011), suggesting that in these days of negative real interest rates, this will either be returned to shareholders via a variety of means or else used to fund expansion. Both of these should be very positive for equities

We continue to tread warily, preferring to add money to the markets on weak days, or weeks, or months, rather than chasing prices upwards. But the odds are shifting in favour of a third consecutive profitable year rather than a return to ‘double dip’ and recession.

The January Financial Market Commentary is now available to read and download as a PDF.

Global Economy and the financial market are some of the topics discussed.

The Sirens
Of the many challenges posed during 2010 the greatest was to ignore the background noise. Experience has taught us that the short term distractions in the markets are the financial equivalent of the Sirens singing to lure ancient sailors onto the rocks. The lesson of Odysseus is to withstand the temptations by stuffing your ears with wax or being strapped to the mast. 2010 was a year that ultimately rewarded inactivity, though we readily admit that our convictions were severely tested on several occasions, most of all during the Greek debt crisis in April. But it is now time to look forwards to 2011 and 2012 rather than over-analysing what has already passed. We are again optimistic that this will ultimately be a productive and profitable year for investors, though with the caveat that the FTSE 100 is necessarily less attractive at or near 6,000 than it was at 5,500 or thereabouts this time twelve months ago and even less so than the 4,800 seen at the beginning of July.

There are a number of global economic themes that developed over the latter stages of 2010 that will dominate markets in the early stages of this year. Most importantly the US authorities have loosened monetary policy even further. The Federal Reserve will use up to $1 trillion of additional quantitative easing while President Obama has extended and even enhanced a number of supposedly temporary tax breaks originally granted by his predecessor. This has seen a change in the pattern of the protection sought by investors, whereby inflation has become a threat to equal deflation. We have therefore seen a rise in bond yields and increases in the prices of equities and commodities. Deflation is still a distinct possibility, indeed it is this very fear that has prompted the co-ordinated actions of the Federal Reserve Bank and the American government. Chairman Ben Bernanke has explained at length and on several occasions that he is failing on both of his allotted mandates, for inflation and employment. Both are too low and will not be changed by the current levels of growth being seen in the American economy, meaning that extra measures must be used to raise this rate of growth and the accompanying employment levels. US interest rates will stay at these rock bottom levels for a very considerable time to come.

click here to download the full financial advice and commentary article in PDF format

The spend-at-all-costs approach of the Americans is at odds with Europe. Both here in the UK and on the Continent the buzzword for 2011 is ‘austerity’. Public expenditure is being cut. No-one can agree how deep the cuts have to be in the UK, or in Greece, or Ireland, or Spain, or France; but cuts there must be because these are demanded by the credit rating agencies and the bond markets. No matter that these are the same agencies that saw nothing wrong in the first place and the same bond investors who were happy to buy government debt at yields of close to zero a little over a year ago. For the economies that were founded on property booms – especially Ireland and Spain – it will be a long and painful road back to health. For those able to manufacture and export, the process may be very considerably quicker. We have no love or hatred of the euro, but we do not think that its continuation is in doubt. Its break up would lead to unimaginable losses for all European banks – especially those in Germany, France and the UK – suggesting to us that we will see more local ‘crises’ and disorganized rescue packages rather than the end of the single currency.

The term ‘emerging’ is becoming less and less appropriate when applied to many of the more dynamic economies of the world. Measurement of the size of Gross Domestic Product is always highly subjective, but on one widely used measure China has overtaken Japan as the second largest economy in the world. We see no reason why it will not continue to grow at a long term average of 10% per annum. There will be years when it exceeds this and the rest of the world worries about overheating, and years when it undershoots, when we all believe that the miracle has come to an end. But as we write inflation in these fast growing economies is rising steadily and monetary policy is being tightened in response. That food prices account for much of these higher inflation rates is a two-edged sword. Higher interest rates and curbs on bank lending are unlikely to have an impact over the short or medium term, but an alleviation of the extreme weather being experienced in a number of key growing regions would quickly reverse the upwards pressure. From a contrarian perspective, we find it difficult to see how investors can become any more bullish about emerging markets; the economic logic is sound, as it has been for a very long time, but the existing levels of extreme optimism suggest to us that the performance of the equity markets may not match the underlying economic growth. We like to buy good value, not the last turkey in the shop.

The surprise of 2010 was the robustness of corporate profits. No matter what the ups and downs of the markets companies, especially in the United States, are consistently surpassing analysts’ expectations. Margins are expanding despite rising input prices, but volumes are also increasing. Much of this is attributable to emerging economies but we are starting to see signs that a normal economic cycle is evolving. Capital investment is increasing and we have seen a notable pick up in mergers and acquisitions. The one area of stubborn stagnation is residential housing, both here in the UK and in the United States. We do not see this changing. Mortgage supply will stay very tight and the US in particular has a large inventory overhang that needs to be cleared (or demolished) before prices can rise sustainably. This is likely to keep a tight lid on consumer expenditure, though we expect that this will improve modestly in America over the year as unemployment slowly falls. At home the probable public sector job cuts and unwillingness of the banks to make credit available to all except the least needy will mean that the retail environment will remain tricky. Our strategy for the year ahead mirrors the twelve months gone by. We have modestly positive expectations but lack the confidence in either the economic outlook or the valuation available across asset classes to set our sights any higher. Although the odds of a return to recession, or ‘double dip’ have lengthened considerably we are not prepared to rule it out altogether. The likelihood of stronger growth accompanied by higher inflation has increased, but there is no sense of inevitability about this. Indeed we think it is highly likely that at some stage in 2011 markets will become very worried by the possibility that higher inflation will not be matched by economic growth and that the world is moving towards stagflation. We are therefore maintaining what we believe to be a diversified and balanced approach to the coming year. As we argued earlier it is our style to try to seek value and to act patiently, rather than chasing too many trends. In the words of the great JP Morgan, markets will fluctuate. The skill again will be to try to ignore these gyrations as best as possible and we remain proud tortoises in an ever more frantic world.
Jim Wood-Smith
Director, Head of Research

Pension Tax Relief Changes Post 2011

Regulation & legislation focus

The Treasury and HMRC recently announced their future plans for the restriction of pension tax relief. In this article I provide a summary of the Government’s draft regulations. 

Annual Allowance and Tax Relief

The annual allowance determines what level of pension contribution can be paid by an individual for tax relief purposes. The changes specific to the annual allowance are as follows:

> Annual allowance will be reduced to £50,000 (from £255,000) for the tax year 2011-12. The Government plans to review the rules and consider options for indexation and apply to both Defined Benefit(DB) and Defined Contributions (DC) pensions. Tax relief will continue to be available at the individual’s highest marginal rate of tax.

> The annual allowance tax charge to recover any undeserved tax will be tailored according to the amount of tax relief the individual has received.

> A flat factor will continue to be used to value Defined Benefit pension accrual, although this will being increased to £16 for every £1 of additional pension (an increase from 10:1).

> Unused annual allowance for up to 3 years may be carried forward where pension contributions/savings for the current year exceed the annual allowance. This will include being able to carry forward from the tax years 2008/09,2009/10 and 2010/11 using an assumed annual allowance of £50,000 for each of those years.

> The new ‘carry forward’ facility will be available to members of both DB and DC schemes.

> The Government will consult on possible options, for those who see a very significant increase in pension savings in a year, for the annual allowance tax charge to be paid out of their pension entitlement rather than their current income. This could include the scheme paying the tax charge on the individual’s behalf(commonly known as ‘scheme pays’) or the liability being rolled forward and paid out of pension benefits once they are taken at retirement.

> Increases in deferred benefits under DB schemes will not be tested against the annual allowance.

> For active members of DB schemes, the previous year’s benefits will be re-valued with the aim of ensuring that only pension benefits arising from salary increases and additional years’ service are tested against the annual allowance (the rate of revaluation has not been confirmed).

> No annual allowance test will take place in the year of a member’s death or where serious ill-health benefits are paid.

> In addition, exemption may be given in certain circumstances where ordinary ill-health benefits are taken(details on how this additional exemption will operate will be published later in 2010).

> Measures will also be taken to include unreasonable increases in pensions in payment to the annual allowance assessment (further details are awaited). However, there will be no other exemptions from the annual allowance test – this means the current exemption for the tax year in which benefits are taken will no longer apply and there will be no exemption for redundancy situations.

Pension Input Periods

The pension input period determines the timescales for an individual’s annual allowance. The changes specific to the pension input period are as follows:

> The existing rules regarding setting:- Pension Input Periods will not change – i.e. pension schemes will generally continue to determine the period and it does not need to be aligned with the tax year. For money purchase arrangements, members will still continue to be able to determine their pension input periods.

> Transitional rules will be put in place for those schemes where the period started prior to 14 October 2010 and will end in the 2011/12 tax year, to reflect the reduced annual allowance for the period from 14 October 2010.

> Those whose pension input period starts on or after 14 October 2010 will be subject to the reduced annual allowance of £50,000 for the whole of the input period.

Lifetime Allowance (LTA)

The lifetime allowance is the maximum pension accrual that can be accumulated without additional tax charges ordinarily applying. The changes specific to the lifetime allowance are:

> It will be reduced from £1.8m to £1.5m, intended to be effective from April 2012.

> The valuation factor for DB accrual will remain at 20:1 (25:1 for pre A-Day benefits in payment).

> The LTA tax charges will remain unchanged – i.e. 55% where the excess is taken as a lump sum and 25% where it is taken as an income (with the income subject to tax at the individual’s own rate of tax).

> Maximum tax-free cash (pension commencement lump sum) will remain at 25% of the member’s available standard lifetime allowance.

> The link between the LTA and trivial commutation will be removed from April 2012 – instead of the limit being 1% of the LTA, it will instead remain at £18,000.

> Protection will be given to those who have ‘already made pension savings decisions based on the current level of the LTA’.

> Government will consult on the detail of the protection regime, but proposes that:

>Those with pension benefits in excess of £1.5m receive protection (subject to a cap on protection of £1.8m).

>>

Anti-Avoidance

The Government are keen that alternative pension arrangements are not used by higher earners to avoid paying tax where appropriate. In this regard legislation will be published,later in 2010, to ensure that Employer Benefits Trusts (EBTs) and Employer Financed Retirement Benefit Schemes (EFRBS) are ‘less attractive than other forms of remuneration.

In summary

In general these rules are more straightforward than the previous method of restricting tax relief, and the annual allowance is more generous than w perhaps thought it woud be. The reintroduction of ‘carry forward’ to pension legislation will please many but will help both DC and DB members to avoid tax charges when there is a spike in contributions/accrual.

>Individuals who currently have Enhanced Protection or Primary Protection (or both) should continue to benefit from that protection.

>It is not currently clear as to how protected tax-free cash will operate post 2011.

>Those with primary protection, and thus who have higher personal lifetime allowance will not lose out as a result of the reduction in the standard lifetime allowance.

>Some form of protection (referred to as ‘pension growth protection’) might be afforded to those who have planned on the basis of their pension fund growing to £1.8m (the current LTA) between now and retirement.

>‘Pension growth protection’ could take the form of a personalised LTA set at £1.8m, in exchange for no further pension savings being made.

If you’re concerned about how these changes might affect you please just get in touch by e-mail or phone and we will try and make sense of it all.

For further information consult the following:- HM Treasury press release – www.hm-treasury.gov.uk/press_52_10.htm

The Chancellor introduced the Budget as an emergency Budget intended to deal with the national deficit, seen by the Coalition Government as an unavoidable legacy of the previous government. Although the deficit will be reduced primarily through a reduction in public spending, the increase to the main rate of capital gains tax (CGT) for higher rate income tax payers could have implications for the financial services industry especially when considering the most suitable tax wrapper for their clients.

This article sets out the main changes to tax rates for individuals and trustees. I will be covering pensions and CGT in more details over the next few days.

Hang on to your hats folks because it’s going to be a rough ride!

Income Tax

Few changes were announced to the income tax regime, with the previously announced  changes (the 50% income tax rate and the withdrawal of the personal allowance for high earners) remaining untouched.

• The main personal allowance will remain at £6,475 for 2010/11. However, from 6 April 2011, the personal allowance will increase to £7,475. Over the longer term, the intention is to gradually increase the personal allowance to £10,000.
• The basic rate limit (currently £37,400) will be reduced so that higher rate taxpayers do not benefit from the increase in the personal allowance. The exact figure will be confirmed when September’s Retail Prices Index is known.

Capital Gains Tax

The most widely anticipated change was an increase to the rate of CGT, which could have resulted in a maximum CGT rate of 40% or possibly 50%. To the relief of many, this change did not materialise, the Chancellor instead opting for a 10% increase in the rate of CGT for higher rate income taxpayers.

From 23 June 2010:

• the main rate of CGT for those who pay income tax at the basic rate or below will remain at 18%. For those individuals whose income and gains exceed the higher rate tax threshold, the main rate of CGT will be increased to 28%; and
• the lifetime limit on gains that qualify for entrepreneurs’ relief will be increased by £3 million to £5 million.

In addition:

• the annual CGT exemption for individuals will remain at £10,100; and neither indexation allowance nor taper relief will be available to reduce chargeable gains.

Corporation Tax

In an emergency Budget we would expect to see spending cuts and tax increases. Contrary to this expectation and the repeated warnings issued by the Government and the press, companies seem to have come out of this Budget relatively unscathed, perhaps even better off.

• The main rate of corporation tax will be reduced by 1% to 27% from 6 April 2011. It will then be gradually reduced to 24% by 1 April 2014.
• The small companies rate will also be reduced by 1% to 20% from 6 April 2011.
• However, companies didn’t have it all their own way, due to the announcement that the amount of capital allowances that they are able to claim each year will be reduced:
• The annual investment allowance will be reduced to £25,000.
• Writing down allowances will be reduced from 20% to 18% (the main pool) and 10% to 8% (the special rate pool).

Inheritance Tax

• No changes to inheritance tax were announced in the Budget speech.

VAT

• The main rate of VAT will increase to 20% from 4 January 2011.
• Items such as basic foodstuffs and children’s clothing (which are zero-rated) are not affected by this change.

Pensions

Restrictions on pensions tax relief:

• There is still to be reform of higher rate tax relief on pensions. However, the complexhigh income excess relief charge scheduled for 6 April 2011 may be replaced by a significantly reduced annual allowance. It is currently set at £255,000 in tax year 2010/11. The Government will discuss the changes with interested parties but provisional analysis has suggested that the level of a reduced annual allowance may be in the region of £30,000 to £45,000.
• The pensions anti-forestalling provisions currently in place which affect high income individuals (broadly those with relevant income of £130,000 or more) remain the same for the current tax year.

Changes to pension requirements affecting those reaching age 75 on or after 22 June 2010:

• The Government intends to end the effective requirement for pension scheme members to purchase an annuity by age 75.
• The intention is to introduce this change in tax year 2011/12 and a consultation on this will be published shortly.
• In the meantime the requirement to buy an annuity will be put back to age 77, but it appears that individuals will still have to take a pension commencement lump sum before reaching age 75.

Basic State Pension:

• From 6 April 2011 the basic state pension will be increased by the higher of prices, inflation and 2.5%.

ISAs

• From 6 April 2011, the annual ISA subscription limits will be increased in line with RPI

Like I said earlier I will be adding more meat to the bone over the coming days once all the boffins have scrawled through every minute detail and offered their considered opinions.

William George, Independent Financial Advice on BBC Radio’s Fred MacAulay Show.

Fred MacAulay and Karen McKenzie talk about ISA’s on Wednesday 5th May 2010 with Independent Financial Adviser, William George.

Covering topics such as getting money into your ISA and the recent changes in the rules for Cash and also Investments ISA’s. 

• Limits for Investments ISA
• Limits for Cash ISA
• Married Couple limits for ISA
• Cash ISA
• Investment ISA
• Stocks and Shares ISA
• Benefits for ISA
• Tax benefits
• When can I take money invested in an ISA
• The best deals and best rates for ISA
• New ISA and transferring an ISA

Click below to listen to the radio broadcast.
William George IFA on BBC Radio Scotland Financial Advice

Hi all,

Just a short one today folks, but it’s very important…

I received an enquiry from someone concerned about their pension mortgage having been advised by their bank to take one of these vehicles out some years ago.

It really is two separate products though and therein lies our first problem. A pension is designed to create an income for you when you choose to retire whilst a mortgage is obviously a debt that will need repaid at some point.

Pension mortgages are designed so that the tax free lump sum is supposed to pay off the outstanding debt that has been taken out on an interest only basis. Like endowment mortgages there is an obvious risk with this in that it depends a great deal on your investment performance. If the funds under-perform then it makes it unlikely that you will have enough to pay off your debt at the end of the chosen term.

Not very nice.

However there is also another often unforeseen problem in that many of these may have been written only to age 50 as this was the earliest you could access your pension (except in some rare instances).

Changes to pension law mean that from April this year the earliest you can access any monies from your pension is age 55. In other words if you are not 50 before April this year then you will have to wait five years till you are 55 to access your pension. This would obviously have a serious effect on your financial planning for retirement.

If this relates to you, then you will need some urgent advice. Please just drop me a line and I’ll be only too happy to help guide you through what must be done as soon as possible.

Call me right away on 0800 321 3508

2009 Year of the ‘Baby Gloomers’

So much happened with regards to pensions in 2009 it’s difficult to know where to start. In a year dominated by one financial crisis after another, headlines included:

• Reductions in the size of defined contribution pots due to falling share prices
• More companies looked to reduce their defined benefit liabilities by closing or restructuring their schemes
• High earners were hit with a reduction in the tax relief on their pension contributions
• Bank employees pensions were bailed out by Government using public money
• The gap between private and public sector pension provision became ever wider
• The UK state pension was frequently described as ‘the worst in Europe’ when it was once right up there amongst the best.

The constant stream of bad news meant that the much mentioned Baby boomers became very worried. They worried about how falls in their retirement income will affect their ability to support their elderly parents and their children. So worried are they that a new phrase emerged… ‘baby gloomers’.

But it hasn’t been all doom and gloom…

Pensions reform – now to 2012

Auto-enrolment for millions…

Industry bods like me eagerly awaited the release of draft regulations dealing with the finer details of pensions reform, including the new employer duties due to start from 2012. As mentioned in previous articles these new duties will, for the first time in UK pensions history, require employers to automatically enrol millions of eligible employees in a workplace pension scheme.

However it’s not just about Personal Accounts.

To aid with this reform a new pension scheme, currently known as ‘personal accounts’, is also being created. Almost daily, both the financial and popular press run stories about whether this scheme will go ahead or not in its current form.

One of the unfortunate aspects resulting from such press coverage is that new employer duties are being closely linked with personal accounts, thus giving the false impression that auto-enrolment might not happen. If there’s one lesson to be learned from 2009, it’s that auto-enrolment has support right across all the main political parties. Personal accounts however may not. Consequently auto-enrolment is far more likely to happen.

It should be remembered that this feature is just one part of a pension reform package that includes fundamental changes to the basic and state second pensions.

What the future holds for employers

In the coming year, employers will need to know what auto-enrolment means for them.

They’ll need to…

• Be aware of the impact that their new duties will have on their business.
• Analyse current pension provision to ensure that it at least meets the minimum requirements. If there is no scheme in place, they will still be required to auto-enrol their eligible employees into a suitable plan and in doing so will have to decide if they want to set up their own private workplace pension scheme, or use the basic personal accounts scheme.

Where Independent Financial Advisers (IFAs) fit in

The problem is pensions are complicated and employers will need help. The good news is that there is a group of professional people who have all the knowledge and expertise to help them. They’re known as IFAs. If you want anymore information on any of these topics just drop me a line because I’ve been one for over seventeen years now! You can call me free on 0800 321 3508

Until next time, have a prosperous beginning to 2010.

Hi everyone,

I hope you’re one of the lucky ones to have dodged the snow so far, (friends of mine down South have been snowed in big time!) because I’d like to think this article this will give you a little warm feeling a week before Christmas… or at least warn you about some of the treacherous financial black ice that is very definitely underfoot just now.

First things first, watch out for an increase that’ll quietly catch pretty much all of us with the return of 17.5% VAT rate (yep it’s been a year already since it was dropped to 15%).

To sidestep it is impossible but you can be proactive and still stay standing like this – firstly budget an extra 2p or 3p in each pound you spend to cover the rise. Secondly and quite urgent if you do want to truly ‘beat it’ – if you have a large purchase you wish make, try all you can to order and pay for it before the start of the New Year. Getting to those early “January” Sales running directly after Christmas could be a wise and urgent priority for you depending on what you’ve got your eye on.

Now a little bit of pre-Christmas cheer (or how to get another 2.5% back again)…

The basic state pension goes up by 2.5% in April 2010. This means up £2.40 to £97.40 weekly for a single basic rate pension and up £3.85 to £156.15 a week for a couples’ basic rate pension.

Oops! Now we’re onto the ice again…

National Insurance contributions rise by 1% in April 2011 – for those earning over £20,000 whether employed, employer, or self employed. Next onto aspiring homeowners…

Freedom from having to pay Stamp Duty for those who purchase a property for less than £175,000 will end and the threshold will return to £125,000 after the new year Budget.

Ah, but at least shady bankers will get their come uppance will they not – do I hear you ask? Well, not quite, but Alistair Darling just announced in his Pre Budget Report that there will be a one off tax of 50% applied to all discretionary bank bonuses over £25,000; income tax is applied as normal… the Bankers themselves just squeezed out of that one.

However, if you like a laugh with friends at the bingo – you get 2% back yourself; Bingo duty is down 22% to 20%.

Meanwhile the Chancellor continued with some cold blasts of his own – the Inheritance Tax Threshold will be frozen at £325,000 until at least 2011.

Next here’s a slippery slope for those who earn “too much” – anyone earning £150,000 a year or more including employer pension contributions will find their Pension tax relief slashed from 40% to 20%, but it won’t affect those earning less than £130,000 per annum.

And… because we all love the Internet sooo much – we’ll all be throwing 50p a month into the tin to fund super fast broadband if we have a landline.

On the other hand if you’re worried about keeping a roof over your head in 2010 then hope may be at hand for a little longer – those who are facing repossession can take advantage of The Mortgage Interest Scheme for another six months, which is how long it’s been extended by. Hopefully, by summer it may be a little warmer then.

Keeping warm also gets a boost with an extra £150 million going into the Warm Front scheme for those families on low incomes to make their homes properly habitable with new heating and insulation. Low income families can also look forward to a new boiler when the Government introduce their “Boiler Scrappage Scheme” in April 2010 which gives the neediest £400.00 towards a new, fuel efficient boiler.

At the same time an extra 500,000 children from low income families will get free school meals and the child component of Children’s Tax Credit also goes up by £65.00. Additionally inflation-linked benefits go up by 1.5% in 2010. This includes Child Benefit, Guardian’s Allowance, Working Tax Credit (except things relating to childcare), Working Tax Credit will not be taken into account when calculating Housing Benefit and the disability elements of Child Tax Credit. 

There we have it then – a quick trip out on the ice and back, hopefully you’ll enjoy the skating and remember it’s one way to beat the winter blues. For the eagle eyed among you, today’s picked out some of the key things of note arising out of Alistair Darling’s Pre Budget Report 2009 last week… which reminds me, there’s one last thing for you; consider it an early Christmas present from Mr Darling himself…

The ISA Allowance will go up to £10,200 for all savers (with a £5,100 Cash ISA maximum) from 6th April 2010
but if you are over the age of 50 then you can take advantage of this increased limit right now.

As ever, if you need to talk about anything just give me a call on 0800 321 3508