Introduction

The following article is designed to give individuals an insight into the different ways we can invest in property. Whether it’s a direct investment into residential or commercial property or putting your faith in one of the many retail funds out there, there are many routes you can choose if you want to get access to this particular asset class. As well as focussing on the various methods of investing, we shall also look at the benefits and drawbacks of putting your money into property, as opposed to different asset classes such as gilts, fixed interest, cash or equities. As this article was written specifically for your accountant’s publication, we shall also have a comprehensive look at the various tax implications of investing in property.

The article will also partly focus on the type of returns that property has provided in the past, so that by the end of this article you should have a much clearer understanding of the nature of investing in property and will be a much better position to decide if this type of investing is for you.

Overview of Property Investing
Investing in property is nothing new to UK investors. The notion of property as an investment really started to take off during the Thatcher years as the Right to Buy scheme encouraged many millions to purchase instead of renting. The new expanding middle class saw the potential for long term growth in rising property prices as opposed to “wasting” money on rent. However it was the Housing Act of 1988 that really provided the background for small investors to plug the housing gap created by the sale of council housing and it afforded tenants a level of protection into the bargain. However, the boom of the years from 1996 to 2007 where house prices rose a staggering 219% (according to Halifax), are a distant memory and common sense has been brought back into the marketplace. The rampant profiteering has given way to a much more cautious approach. There is still good money to be made in investing in property but only if you’re sensible and take good advice.

In the past it almost seemed as if one could not fail to make money out of property. However the reality is, as with all investments, that there are of course risks and in some instances people have lost a lot of money. The last few years have been a large wake up call for those that thought investing in property was an easy ride to fame and fortune. Both Commercial and Private Property have both found the going tough in recent times but investing in these assets is still vital for the diversification and long term growth potential that it brings to a portfolio.

Many of you will think of investing in property simply in terms of buying a property cheap, doing it up and selling it on for a profit, or in terms of Buy-to-let, which is where you buy a property and rent it out as a private landlord. Whilst these are two of the most common ways to invest in property they are by no means the only methods available. In this article we shall take a close look at the many ways we can get exposure to property and also try to analyse the pros and cons of each method we cover. New regulation has made investing in property funds more accessible in recent times and we shall look at the various investment vehicles such as ISAs and pensions and their tax advantages.

We will also look at the potential for growth, income streams, yields and cover the risks associated with property such as defaults and liquidity.

RESIDENTIAL PROPERTY
In this section we will take a look at the various ways of making an asset backed investment in residential property.

Buy To Let
Residential buy-to-let really came to prominence in the1990s and this was due to a number of factors:-

• Buy-to-let mortgages became more obtainable as you could get a loan with as little as a 15% deposit on a property.

• The yields on bonds and equities fell in relative terms making the rental income from property more attractive proposition.

• Strong capital performance during this period also main residential property more appealing.

When entering the buy-to-let market it is very important to do your research and make yourself aware of the potential pitfalls. The popularity of this type of investment meant that many areas of the country (such as parts of London, Manchester and Leeds) led to an over supply of rented properties. This was a big contribution to the price falls of 2008 when the housing market also started to cool. Prices are very heavily affected by supply and demand and economic factors can easily change the demand in different areas. The relative prosperity of an area will go a large way to determining the attractiveness of property investment, as demand will be higher in areas where business is flourishing, local amenities are good and the general demographics mean that people wish to live there.

One of the most important aspects of buying a property to rent out is of course getting tenants in. It is vital to give thought to this when sourcing a property i.e. is this the type of property in the kind of area that will attract tenants paying a decent rate for the rent? Most buy-to-let investors will still have mortgages on the property or properties and these mortgages still have to be paid, even if there is no tenant in the property. When a property is suffering loss of rent this is often referred to as a void period. A void period could also occur when a tenant fails to pay the rent and removing those tenants can prove to be difficult as well as costly. Investors who have borrowed more are most at risk from void periods.

The income (or yield) you can expect to get from a rented property does vary from area to area. Generally though, you will find the more expensive the property, the lower the yield. Rising property prices in the years up to 2007 tended to push down yields. Although property prices have fallen in recent years this has not always meant that yields have increased because rents have also come down in many areas. One feature which has been to the advantage of buy-to-let investors though has been the low interest rates, which in turn have led to lower mortgage rates. This has widened the gap between income and outgoings for many investors resulting in greater yields.

An example of the potential yield on a property can be illustrated as follows:-

A property is advertised at £185,000, with a potential rental income of £850 a month. This means the gross yield would be.

Gross rent = £850 x 12 = 5.51%

Market price £185,000

In reality though, you would incur many costs in purchasing, such as stamp duty, legal fees, survey costs and perhaps the cost of basic furnishings. For the sake of this example let’s say this all comes to £4000. Added to this you will have general management expenses of let’s say around 20%. This will change the above formula to the following:-

Gross rent – expenses = (£850 – £170) x 12 = 4.32%

Market price + cost of buying £185000 + £4000

The above figures do not take into account any void periods which would reduce your yield even further. I have also left out any mortgage expenses which would obviously reduce returns. For example if your mortgage rate on an interest only basis was 4% on borrowings of £138750 (80% of £185000) then you would be paying £462.50 a month which would reduce your yield down to 1.15%. If you were in this situation you really would be relying on capital appreciation to gain out of buy-to-let. If property prices were to fall then you could easily find yourself in a situation of negative equity and struggle to pay off your loan(s).

The reality of the situation just now would tend to suggest that with first time buyers still finding it very difficult to get on the property ladder, demand for rental property still remains high and according to FT.com there are now more than 49 postcodes in the UK achieving more than 6 per cent yield-12 of them in London.

Investing In Your Own Home
Many clients often say to me words to this effect: ‘My house is my pension’. By this, what they really mean is: ‘I’m going to pay off my mortgage as soon as I can and watch my property value grow. Then when I need money when I’m older I’ll just sell my property and move into a smaller home and live off the profits’. Whilst there is nothing inherently wrong with this in theory putting all your eggs in one basket aside), in practice it is often a completely different story. One of the main drawbacks is that when it comes to down sizing, it may not be so easy to give up a family home where there may have been so much emotional investment over many years. Your own property is not just an investment it is also a home and not so easy to dispose of as a result. The introduction of flexible mortgages has made it much easier for people to pay off their debts much quicker by over paying their regular mortgage payments. With many people now paying very low historic rates it should be a very attractive proposition to make over payments. However the other side of the argument might be that if you are paying off debt at rates as low as 2% for example, then that is the return you are getting for your money if property prices are not appreciating. In most parts of the country property prices have in fact been falling. So perhaps just now is not the time to take a short term view on your own property.

In general though, people are attracted to property investment because they see it as a good bet for long term growth. The owner-occupier market has tended to drive forward property prices in the UK and prices have tended to follow the growth in average earnings. However as always past performance is not necessarily a guide to future performance and the sharp fall in house prices in 2008 was a reminder to us all that property is the same as any other asset i.e. it can go down as well as up. Probably the most well known housing bubble of recent times occurred in Japan where house prices tumbled throughout the 90s and have only recently started to move in a positive direction again.

Overall forecasts for the UK housing markets make gloomy reading. According to the National Institute of Economic and Social Research NIESR house prices will fall 4.5 per cent I real terms and an average of 1.5 per cent per annum in the subsequent 4 years.

Land Registry: House prices have been trending down for the past 12 months

This pessimistic forecast tends to be backed up by others such as estate agent Right Move who have predicted a 5 per cent fall this year and Royal Institute of Chartered Surveyors (RICS) predict that prices will fall a minimum of 2% but no more than 5 %.

Rent a Room
Another way to make money from your own property is to let out rooms to lodgers. The main advantage of this is that you will pay no tax as long as you will pay no income tax as long as the rent does not exceed £4250 a year. You will need to live in the property at the same time as your tenant and the property will continue to be exempt from capital gains tax as your principle residence. However if the letting extends beyond the limits set, the part of the gain that is attributable to the part of the property that is let is chargeable to capital gains tax. However there is an exemption of the lesser of:

• £40,000; and

• An amount equal to the exempt gain on the part of he property occupied by the owner

COMMERCIAL PROPERTY INVESTMENT
Investing in commercial property is in many ways just like investing in buy-to-let in so much that you finance the purchase of a building in an area you have researched and put a tenant in to pay you rent. In a market where we have falling house prices it may make sense to go down the commercial route simply to spread your investment risk.

Commercial property is split into three separate sectors;

• Office buildings;

• Industrial properties(factories and warehouses); and

• Retail (shops).

The commercial property element does tend to be more specialised than other areas of the sector. You will find that a very significant proportion is owned by insurance companies and pension funds.

As with residential property selecting the right tenant and the right area are very central to your success. The quality of tenant and their ability to pay is obviously going to play a big part in how successful you become. Remember that you are going to be renting to businesses rather than individuals which can mean that your tenant is more reliable. Commercial property leases are generally longer as this added security does add value to the property (traditionally commercial properties are valued as a multiple of the rent they produce). The average lease term has come down in recent times. Where once it was not uncommon to see 25 year leases the average term has now reduced to less than 10 years. Rent reviews usually take place around every 3-5 years depending on the length of the lease and are designed to allow the landlord and tenant to adjust the rent to an ‘open market value’. Traditionally rent reviews were on an ‘upward only’ basis meaning that they could never come down but this has proved to be contentious in recent times because of the low inflationary environment we find ourselves in just now. There has been political pressure to change to a system where rents are linked to inflation or turnover.

Using a Pension to Invest in Property
In recent times using a pension vehicle such as SIPP (Self Invested Pension Plan) or SSAS (Small Self Administered Scheme) has proven to be a very popular way to invest in commercial property. By far the most common use of a SIPP has been through small businesses using their pension funds to buy their own business premises. Changes to the pension rules in 2006, means that it is now possible to do this, even if the property is already owned by them or someone connected to them. However it should be noted that these types of arrangements are subject to strict criteria must be done on a commercial basis. That is rent paid to a SIPP must be a market rent.

Buying your pension within a SIPP has several tax advantages. The rent you pay to the pension fund can be paid free of tax because it is a deductable business expense. If you sell your property when it is contained within the pension fund then there is no capital gains tax payable. Also, if you die before age 75 and haven’t started taking your pension yet then your property can be paid into your estate free of inheritance tax.

Past performance of Commercial Property
The values of this sector tend to be cyclical in nature. They have often moved in the opposite direction to the residential sector and equities. An example of this is when commercial property showed very little growth from1982 and 1986 when the stock market was booming, but rose sharply in 1987and 88, remaining virtually unscathed by the crash in October 1987. This led to a property bubble, especially in London. However the bubble popped and from 1989 to 1992 the market experienced a major crash. Since then it’s been a bit of a roller coaster ride with good followed by bad spells. The next major crash happened in 2008 when values fell by an average of 26.3% (source: IPD UK Annual Index). The commercial property market has steadily recovered from it’s bottom in 2009 and from June 2010 to June 2011 the FTSE UK all Property Total Return Index (NAV) returned 10.22 % (source: www.ftse.com).

INDIRECT INVESTMENT IN PROPERTY
So we’ve covered investing directly into property but what about an alternative way? Over the last couple of decades investing into funds dealing in property has become a really popular place to put your money. One advantage of investing in this way is it allows you to diversify your portfolio by getting exposure to property, without the expense associated with the previously discussed methods. Here are some of the ways it is possible to invest indirectly into property:

• Property unit trust/OEICS and investment trusts;

• Shares in listed property companies ;

• Real Estate Investment Trusts;

• Student Accommodation Funds

Property Unit trusts and Investment Trusts
This is a convenient way to invest as little as a few hundred or thousand pounds into one of the many regulated property funds out there. They give the investor a wide exposure to property and usually have sufficient liquidity to allow investors to realise their holding when required. Authorised unit trusts are those that are allowed to the general public. They can invest up to 100% directly in property and the fund manager has the power to defer redemption requests by up to 6 months. There are now about 20 UK based unit trusts specializing in property. Performance over the last 12 months has ranged from +6.2 (Close Freehold) to -6.23 (Aviva). Source: www.morningstar.co.uk

The main differences between Unit and Investment Trusts are:

• Unlike Investment Trusts a Unit Trust cannot borrow money to invest.

• In a Unit trust the price of units is directly linked to the value of the investments held by the fund, whilst in an Investment Trust the share price will move independently of the net asset value, depending on level of demand.

The fact that Investment Trusts are permitted to borrow money makes them more risky. Also, it is important to check on the status of investment trusts, as many of them are in fact offshore companies.

UK Property Companies
This is another way to invest in property with much more liquidity, although there can be a lot more leakage in terms of tax. With this you are simply buying shares in one of the 60 or so companies listed on the London Stock Exchange. Different property companies do different things as some can hold property as an investment whilst other are more concerned with development and can be more like construction companies. Many do both. With this comes varying degrees of risk as the development based companies can have erratic sales whilst those who hold on to the property have a secure income form rent. Most of the property companies that could convert to REITs have done so in recent years have done so (more than 80% according to www.bpf.org).

Real Estate Investment Trusts (REITS)
Most of the larger stock-market property investment companies have converted to the REIT format after they were introduced to the UK market in 2007. A REIT has more tax breaks than a normal property company and it must be a closed ended company and listed on a recognised stock exchange and widely available for private investors. REITs are also a good way to get exposure to global property shares which helps with diversification. As far as performance is concerned there are so many REITs out there and they vary so much it is difficult to give a figure for the whole sector, however one of the most popular in the UK is the Skandia Global Securities Fund run by LaSalle, which is down 12.83 per cent this year and that is after a 2 year rally on the back of a 51.46 loss in 2008 (source www.trustnetoffshore.com). This goes some way to exemplifying how volatile certain types of property funds can be.

Student Accommodation Funds
Still a relatively niche sector Student Accommodation has never-the-less been attracting a lot of attention over the last few years so I though it was worth a mention in this article. The main reason for their recent surge in popularity has been some of the performances. The Brandeaux Student Accommodation Fund for example has consistently returned around 10% p.a. since launch in 2007. It should be noted though that there are problems with liquidity as shown by the fund suspension in 2009 for 3 months. It does however seem to be pretty resilient to downturns perhaps due to successive Governments promotion of further education.

TAXATION
This is obviously a vast subject and worthy of whole books on its own given the nature and diversity of property investing, but I’ll touch on what I think are some of the main points of interest on this subject.

Buy To Let
All expenses must be incurred ‘wholly and exclusively’ for business purposes and must also be incurred on an ongoing basis in order to earn income. Non-revenue expenses are regarded as capital expenses and will be deducted from the capital gain when the property is sold.

The following is a list of allowable expenses:-

• Interest and finance payments

• Motor and travel

• Accountancy and legal fees

• Repairs and renewals

• Insurance and service charges

• Training costs

• Advertising and marketing costs

• Office costs

The main difference between the taxation of your own property and any commercial venture, such as buy-to-let, is that you will pay capital gains tax on disposal of any property that is not your main residence.

Commercial Property
As we’ve mentioned above capital gains tax can be a big liability for property investors but there are a few reliefs available:

• Indexation relief (for properties bought before April 1998)

• Taper relief, and

• The annual exemption (currently £7900)

There are other ways to use commercial property as a tax efficient investment such as investing in funds through an ISA. The current limit for individuals is £10680 in any tax year. As we’ve mentioned putting your property within a SIPP has tax advantages such as freeing it up from inheritance tax, it grows free from CGT and the rent you pay to the pension fund is an allowable expense.

As we know tax can be a very complex issue and that is why it’s important that you take professional advice in relation to any aspect of property investment you plan on undertaking.

CONCLUSION
In conclusion we have seen that there are many ways to get exposure to property as an investment and the biggest problem with this asset i.e. liquidity is not as relevant to indirect investment as it is to direct investment. Property can be a very expensive asset to invest in and it is clear that your initial research will be vital in the process. However the attraction of long term growth still exists and I still think that property has a role to play in any properly diversified portfolio.

In contrast to bonds or equities property is a physical asset…you can touch it, feel it, walk around it and that has to be worth something. Just be prepared for a few headaches along the way and remember property is not something simply to be dabbled in.

]]> http://www.williamgeorgeifa.co.uk/2011/11/15/a-guide-to-investing-in-property/feed/ 0 http://www.williamgeorgeifa.co.uk/2011/10/28/europe-the-final-frontier/ http://www.williamgeorgeifa.co.uk/2011/10/28/europe-the-final-frontier/#comments Fri, 28 Oct 2011 08:00:12 +0000 William http://www.williamgeorgeifa.co.uk/?p=708

All investors are taught early in their careers that the two dominant emotions in financial markets are fear and greed.
Cold rational analysis of facts is all well and good but when emotion takes hold it over-rides everything else; to paraphrase one of the most important adages, JM Keynes preached that the markets can remain irrational longer than anyone can remain solvent.

It is also a truism though that every scare story that has ever spooked markets has been highly credible at the time.
Whatever story it is that is driving sentiment has to be based in reality. Like a good horror film, the greatest terror comes from what is unseen, unsaid and implied. The markets have not recovered from the trauma of the 2007-2009 crisis and still carry the baggage of that great banking disaster. This has become their Achilles Heel and any mention or suggestion that we are heading to another banking meltdown triggers hyperventilation and a panic attack.

The summer months have seen global markets of all descriptions running scared by Europe. The argument is terribly and deceptively simple: the debt can has been kicked down the street for too long and a number of European countries can no longer meet their obligations.
Defaults on sovereign debts, it is argued, are inevitable and will lead to losses on these bonds, the majority of which are held by European financial institutions. These losses in turn will lead to bank insolvencies as national governments can no longer afford to fund further bail outs, the banking and insurance system will collapse and the world will again run out of money. This, so the theory runs, will result ultimately
in the breakdown of civil order.

If we ignore for a moment the more extreme elements of this, the early stages of the argument are highly credible and soundly based on facts. The extraordinary additional factor is that although there are any number of potential solutions to the problem, all these seem to be excluded by the inability of European politicians and bureaucrats to agree on which day of the week it is, let alone a restructuring of Greece’s debts. We have already seen one bank, Dexia, requiring State support from France and Belgium as a result of the protracted political machinations but even the writing of another cheque for hundreds of billions of euros does not appear to be sufficient incentive to come to any conclusions.

It would be wrong to chide only Europe for a lack of leadership. In the UK the Coalition government is riddled with contradictions and internal dissent. In the United States the unseemly squabble in the summer over the raising of the debt ceiling highlighted not only the parlous state of the finances of the world’s largest economy but also that Obama is a lame duck president limping towards election
year in 2012. Japan has had yet another change of Prime Minister with Yoshihiko Noda taking over from Naoto Kan after the latter’s 15 months in office. Noda is Japan’s ninth Prime Minister since 2000 and the third this decade. It is another investment adage that markets hate uncertainty; regrettably this uncertainty has become institutionalized across the developed world.

The cloudy environment is not without a silver lining. In the first instance there is no need for the worries about the development of Europe to turn into reality. The issues are solvable. Second, it is only times of market distress that uncover irrational value. Calm markets tend to value assets highly efficiently; when emotion takes over assets become mispriced. It is now commonplace to see the equity dividend yield of good companies being higher than the yields available on its bonds. This implies that the market is expecting global dividend growth to be zero and possibly negative over a period of many years, a scenario that is massively too pessimistic in anything other than Armageddon. For the long term investor prepared to be both sensible and patient, the returns offered by a good number of quality equities have rarely been better.

Markets have also tended to forget that there is a world outside Europe. Economic data is indicating that the United States has suffered another lull, albeit one rather sharper than in 2010, and that it is now starting to recover. The widely derided state of the housing market is at least stable and is even starting to show some tentative signs of improvement. We should also bear in mind that affordability is high and mortgage rates at record lows. Unemployment remains very high at around 9% but also has a silver lining as it acts as a dampener of wage pressures and therefore core inflation. Confidence surveys are very low, but these are affected both by the stock market and by the persistent
over-reporting of bad news by a media industry plagued by overcapacity. Activity levels, in contrast, especially the much analysed monthly surveys of Manufacturing and Services by the Institute of Supply Management, paint a much healthier picture.

Not only do we believe that the United States economy is none too shabby but we also see healthy signs from China, the world’s second largest economy. The official data indicates a soft landing (meaning a slowing of growth rather than anything worse); manufacturing is holding steady, the services sector is still growing rapidly and inflation looks to be peaking. More importantly to us we are neither seeing, nor hearing, companies trading with China describing anything other than very healthy growth.

This peaking of inflation is very important. Both hard and soft commodity prices have been falling over the summer in response to tight credit markets, slower global growth and improved agricultural conditions. This is reducing pressure on non-core inflation across the world, meaning that we expect the tightening monetary conditions in a number of emerging economies to come to an end, and that we believe interest rates across the developed world will stay at exceptionally low levels for a very long time.

In turn this means that although yields on bonds, especially gilts, have hit record lows this year, we are dubious that we shall see meaningful rises in the near or medium term. Inflation should fall quickly in early 2012, while the pressures on public finances that we discussed earlier mean that an increase in government borrowing costs is highly undesirable. The expected drop in inflation however does not mean that we have revised our long standing positive view on index-linked gilts which should continue to provide attractive and stable returns. Nor do we see gold falling out of favour for anything other than the short term; gold is the archetypal investment in fear, this being one commodity for which we see persistent strong demand.

Europe is the conundrum that must be resolved. If the politicians and central bankers can agree on one of the many possible solutions to the debt issues the markets will very quickly stabilize. But for as long as they continue to prevaricate, greater grows the danger of precipitating
another banking crisis. More than ever, investment portfolios need to be diversified and of the highest possible quality

October Market Commentary
Williams de Broe

As time rolls on and the date for the beginning of the possibly the biggest ever changes to our pensions system, I thought it was a good time to speak out to all you employers and employees out there who will be effected by this.

Make no mistake about it, employers are going to face additional cost and administration burdens under this new pension regime. However, the good news is that there is time to plan and prepare, but time is running out.

There are four basic steps that can help employers plan.

1. Find out when the staging date is

This will give employers a deadline for implementation and a point to work back from. The staging date will be based on how many workers an employer has or, if there are less than 50 workers, the last two characters of the employer’s ‘Pay As You Earn’ reference.

There are more than 40 staging dates spread over four years from 2012. Larger employers will go first, smaller employers last.

You can find out your corporate client’s staging date by using this handy staging date calculator from Scottish Life.

2. Find out the duties that are likely to apply

Every employer will have some duties to perform but the duties will be different depending on the types of worker they employ. As a rule of thumb, any worker over age 22 and under state pension age, and who earns more than around £7,500 a year, will be treated as an ‘eligible jobholder’.

These workers will need to be automatically enrolled into a pension scheme by their employer. As long as these workers stay in the pension scheme, the employer will have to pay contributions. Those workers who don’t fall within this category will still have to be offered a pension scheme by the employer, and in some cases the employer will have to pay into it.

3. Review pension provision

Employers who already offer some form of pension provision will need to make sure that their existing scheme meets a minimum standard. This generally means that there must be a minimum contribution rate, made up of both employer and employee contributions.

If the scheme isn’t up to scratch contributions will have to increase. Building up these contributions to the minimum standard slowly could be preferable to employers rather than waiting until the last minute and facing a high up-front bill.

Employers who don’t have a pension scheme will have to set one up sooner or later. Again, starting to do this as early as possible would help employers to build the scheme up at their own pace.

4. Consider the impact on the business

There is no doubt that automatic enrolment will have cost implications for every employer, large or small. Employers will need to consider how they will meet these costs.

• Can they simply absorb the costs, potentially reducing profits?

• Will the costs of their goods or services need to increase?

• Will staff remuneration structures have to change?

• Will HR processes and systems need to change?

• Will business plans need to be adjusted to reflect the increase in costs?

These are just some of the questions that finance directors and business owners will need to address. Planning ahead, well before the staging date, could help smooth any cost increases, avoiding last minute shocks.

It’s clear that employers will face a major challenge when their employer duties start. With the economic climate as it is, it is probably even more important to plan as early as possible. It won’t be easy but help is out there. If you wish to have a free initial consultation with us please just get in touch and we’ll be more than happy to have a chat about your situation.

The newly published seventh report on the state of retirement savings from Scottish Widows has just been released and it doesn’t make particularly pleasant reading. Whilst there does seem to be a slight increase in consumer understanding of pension provision, particularly in the public sector, the sad fact is that we are still a nation where around half the population still does not contribute adequately to a pension and around one-in-five is actually doing nothing at all.

Here are some of the main findings:-

• Only 51% are making enough provision for their retirement. This is up from 48% in 2010, but below the 54% in 2011.

• 20% are saving nothing in 2011, compared with 21% in 2010

• The gender gap between men and women has fallen to the lowest on record. 53% of men compared to 50% are preparing adequately.

• The age gap has widened, with 59% of over-50s preparing adequately for their retirement, compared with 47% of those between 30 and 50.

• The income group which currently appears to be preparing best for retirement is those earning between £30,000 and £50,000. It appears that high-income groups are not as focussed on retirement provision.

• London is the region currently preparing worst for retirement, while Wales and the West Midlands are best-placed this year.

Characteristics of different savings groups

• Most people who are saving adequately are typically, male, married and in the latter part of their career. They are also relatively modest earners. They are likely to expect a decent company pension but may also have significant savings of their own.

• Those who are somewhat under-saving (6-12% of income) are often younger than adequate savers. Generally they work in the private sector and have more than one pension arrangement.

• Those who are seriously under-saving (up to 6% of income) are largely mid-career and may well earn a relatively decent income. They may well have high levels of debt and are self-employed or work for a small company.

• Common characteristics from the non-savers include having relatively low income, being single or divorced and are likely to change job frequently.

These type of reports may well be packed full of statistics and mumbo jumbo, but I do think they perform a vital role in helping us understand how we can begin to implement change in a nation that appears to be largely indifferent to the concept of planning for a financially secure retirement.

The report goes onto look at the likely impact of automatic enrolment and NEST which will begin to get rolled out in October 2012. Support for automatic enrolment does appear quite strong with only 11% expected to opt out.

This is a subject I will be covering a lot in the coming months, primarily because it is such big news in the pension world. However if any employer or individual needs any more info at this stage please don’t hesitate to drop me a line.

I am increasingly talking to clients who have pensions, but who aren’t being given regular financial reviews or who aren’t having their attitude to risk assessed regularly. It is absolutely vital that you receive regular financial reviews on you pension and that you have your attitude to risk assessed at least annually to ensure your pension is performing in a way you want it to and that when you get to retirement you receive the amount of income you want and need to live a comfortable lifestyle.

How much investment risk is right for you?

Every investment involves risk and, generally speaking, the greater the return (or growth) being sought, the greater the risk that needs to be taken. The problem is that while it is easy to measure return, it has been very difficult to accurately measure the amount of risk being taken. We’ve seen many examples in recent years of investors not fully understanding the level of risk they were taking until it was too late -  gold, commercial property and residential buy-to-lets spring to mind. On the other hand, there are many investors who are so risk averse that they fail to meet their long-term goals. Understanding the right amount of risk to take is possibly the most important aspect of any financial plan.

Matching your attitude to risk to your investments

The good news is that it’s now possible to accurately assess not only the level of risk of an investment, but also your individual attitude to risk. By matching the two, we are now able to give you the peace of mind of knowing that you are neither taking more risk than is comfortable for you, nor too little risk and so reducing the chance of meeting your goals. Financial markets are becoming ever more volatile, the array of investment products is becoming more and more complex and, over time, your own personal circumstances will change so it’s more important than ever to correctly understand the amount of risk you are taking. What’s more, the sophisticated tools now available not only allow us to assess your attitude to risk and recommend the right initial mix of products, but mean we can keep your investments on track over time.

What could the consequences of not having regular financial reviews be?

Black Monday – October 1987.

By the end of October the UK Stock Market had dropped more than 26%, the US Stock Market dropped more than 22%, Hong Kong and Australia both dropped more than 42%. To this day the reason it happened is still argued about.
(Source On this day BBC website)

Between February 2006 and February 2011 the difference in performance in the best and worst funds in the IMA UK All Companies sector was 140% (the equivalent of 28% per year).
(Source: Lipper Hindsight 22nd March 2011. Bid to Bid with income net of UK tax reinvested)

Over the last 5 years, the Canada Life/ Henderson Multi Manager 4 fund has given an annualised return of (– 1.2%) meaning £1,000 invested 5 years ago would be worth £942. This fund had a volatility (a measure of the amount of risk the fund manager has taken) of 4.1

Over the same time period the Phoenix R Sol/ Newton Balanced fund has given an annualised return of 8.5% meaning £1,000 invested 5 years ago would be worth £1,503. This fund had a volatility of 4.2
(Source Money Management May 2011)

If these statistics worry you, if you don’t know how your fund has performed in relation to its benchmark, if you don’t receive regular financial reviews on your pension or if you just want to talk through any concerns you may have please contact me on the number free phone number or drop me an e-mail.

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.

  As promised here is an article on the changes to Unsecured Pensions( also known as drawdown).
 
 Summary of the proposed changes
 
 The age 75 rules on annuitisation, value protection lump sums, pension commencement lump sums (PCLS) and trivial commutation lump sums will be removed.
 
 The age 75 rules on contributions and Lifetime Allowance checks will remain.
 Pension funds will be able to remain in an Unsecured Pension (USP) indefinitely. This is referred to as “capped drawdown”.
 
 Alternatively Secured Pensions (ASPs) will cease to exist.
 
 The USP maximum withdrawal limit may be reviewed. The current limit of 120% of GAD rates is regarded as probably too high at older ages and may have to be less than 100% to avoid the risk of people exhausting their funds.
 
 A USP customer will be able to access additional flexibility through “flexible drawdown” provided they have met a minimum income requirement (MIR). This minimum income will need to be a secure pension income for life and escalate by the lower of 2.5% or inflation. The customer would then be able to withdraw up to 100% of the remainder of their fund. This will be taxed as income.
 
 The minimum income required is not set out in the consultation paper. However, it is expected to take account of not just current means-tested benefits, but also potential health costs and future expenditure needs.
 
 Lump sum death benefits will be taxed at 55% to counteract tax relief given – this includes value-protection payments. The only exception is for pension savings where no part has been used for an income when the saver dies before 75, where the fund will be tax free.
 
 Importantly, the Government has already announced on 22 June 2010 that in
 anticipation of the drawdown rules changing, clients may remain in USP until
 age 77 as an interim measure. At present any Pension Commencement Lump Sum
 (PCLS) must be taken by age 75.
 
 The main things that will cause concern to existing Drawdown customers is the extra 20% charge on lump sum benefits from the scheme. This will automatically change in April so it is vital that you review your situation. The changes to maximum income are not so straightforward because if you are in an existing contract and taking maximum income (120% GAD) then you can continue with this until your first review date which is normally 5 years after the contract was taken out. Again though it is probably wise that you do contact your adviser to discuss these changes.
 
 
 CONCLUSION
 
 As I have already alluded to it is vital that if you are in a drawdown contract that you regularly review your situation because it may not be the contract for you anymore. Decline in health for example means that you may want to purchase an impaired life annuity and the 10 year guarantees offered by annuities may be more appealing, given the 55% tax charge on death in USP. Your attitude to risk may also have changed as there is obviously an investment element to these contracts, so reviewing your options here is vital.
 
 If you require a review of your situation or if you are considering drawdown for the first time please just drop me an e-mail or give me a call on the free

Well probably not but there has been enough changes in the last few months to cause more than a few heated debates amongst the many interested parties. Pensions are headline news and trust me that is not going to change anytime soon!

Over the next week or two I’m going to be putting up a series of articles which will highlight stuff that could well be relevant to you. Changes such as the scrapping of the need to take annuity by age 75, the limits to how much you can put in a pension, proposed auto-enrolment, the big changes to drawdown contracts etc etc etc.

I’ll start tomorrow with the changes to drawdown and this effects those who are currently in an unsecured pension and those considering entering into drawdown.

Maybe not the new rock’n’roll but these changes are going to effect each and everyone of us. Until next time…