e-Update January 2011
Seek independent advice Securing your financial future is now more important than ever. We are continually being told about the pressures on state benefits, particularly pensions, as the welfare state has to adapt to an expanding and ageing population. As a result, more
Welcome to the latest edition of our newsletter, our update on developments in the world of financial services.
responsibility is being placed on us, as individuals, to make the most of our own savings and investments and prepare for our own futures. At the same time, however, making these decisions is becoming ever more complicated. There are hundreds of providers offering thousands of products, all with
If you have any questions about the issues raised in this issue, please do not hesitate to contact us.
different benefits for different needs at different prices.
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As independent financial advisers, we look at the whole market to find out who is
Lofthouse Gate Limited, 9/11 Potovens Lane, Lofthouse Gate, Wakefield, West Yorkshire, WF3 3JE. Tel: 01924 821111
offering what products and how the different options can meet different individual circumstances. We are registered with the Financial Services Authority who monitor the way in which we give advice and, being independent, we are not limited to just one or small handful of providers. We can therefore seek out the most suitable products to match your particular circumstances and thereby help you meet your goals. If you have any questions about your financial situation, would like a review of your options or would simply like a review of your options so you can consider what to do next, please do not hesitate to contact us for an initial consultation.
The axeman cometh The Comprehensive Spending Review was always likely to attract controversy. Chancellor of the Exchequer George Osborne presented a fouryear package of public spending cuts aimed at restoring “sanity to our public finances and stability to our economy”. He warned of “a hard road” ahead, and the cuts outlined in the Treasury’s statement did little to challenge that warning. Nevertheless, spending in government departments will be reduced by an average of 19%, rather than the 25% originally estimated. Most departments were hit, most significantly perhaps, the Department of Work & Pensions. The public sector pension system is set to undergo reform and households with one or more higher-rate taxpayer will no longer receive child benefit. A new permanent levy on banks will be launched in January 2011, applying to the global balance sheets of UK banks and overseas banks’ UK operations. The Treasury hopes that, as well as making a “fair contribution”, this will deter financial operations from taking excessive risks. Universal benefits for pensioners, however – free bus passes, TV licences and winter fuel allowances – have been retained. The Confederation of British Industry commented that “the spending cuts, though painful, are essential to balance the UK’s books and build its future prosperity”. However, the review has triggered some fears it will stifle the UK’s economic recovery. Word is that around 490,000 public sector workers will lose their jobs. The squeeze on spending, combined with this risk of unemployment, could renew pessimism, perhaps risking the UK’s fragile recovery.
Time for your own review As you can probably guess from the many contradictory reactions to the spending cuts, no one can really tell which way the economy will go in the short term. As an investor, therefore, you could be forgiven for not knowing how to position your portfolio whilst we find out. However, some rules never change and the first, making sure your holdings are well diversified, is exactly for times like this. Over expose yourself to a single asset class – say, equities – and its performance will mirror only the fortunes of the equity market. However, if you choose a range of asset classes from across different countries, the different elements will all perform differently. If one does badly, the chances are another will do better and compensate for some of that downside.
Use your allowance People often leave any thoughts of Individual Savings Accounts (ISAs) until the last minute, driven by the 5th April deadline. This date focuses the mind on taking advantage of one of the few tax breaks investors get. However, you do need to take some time to consider whether the tax benefits are appropriate and how you can use your allowance to meet your objectives most appropriately. Your allowance for 2010/11 has been increased for everyone to £10,200 and this can be invested either as a single lump sum, a series of smaller amounts or even via regular monthly savings. Although the tax year has only just got underway, now is the time to start planning where that might go.
Checking up on your retirement plans The coalition government has committed to addressing around 80% of the structural deficit through spending cuts rather than tax increases. However, the recent Comprehensive Spending Review will still have tax planning implications for many investors. The most obvious change is for pensions, with the Government equalising the State retirement age for men and women from 2018. It will then rise to 66 by 2020, four years ahead of previous plans. The age for private pensions remains 55 – up from 50 earlier this year – but any private pension will have to supplement the State pension for longer. Chancellor George Osborne confirmed the National Employment Savings Trust (NEST) will proceed so autoenrolment for workplace pension schemes starts as planned in 2012. For public sector schemes, the government is to raise the amount payable by employees by around 3%. This all comes on top of changes to the pension rules announced prior to the spending review, which include the annual contribution limit falling from £255,000 to £50,000 next April. The lifetime annual limit on money that can be built up in a pension fund has also been cut from £1.8m to £1.5m and the penalties for exceeding the limit remain onerous, so investors will need to monitor contributions closely to ensure investment growth does not push them towards the maximum. For the time being, high earners will continue to be paid tax relief on pension savings at their highest marginal income tax rate. The Government is still consulting on plans by the previous administration to reduce the tax relief available on pension contributions for people earning more than £150,000. However, the Chancellor made it clear that business tax rates would remain low, meaning the marked differential with income tax remains and tax-planning opportunities exist for entrepreneurs. This is unlikely to change as Osborne is looking to the private sector to make up the short-fall in employment created by public sector job cuts. However, the January 2011 VAT rise is still on. The majority of tax incentives for saving all remain – for now at least. The Government has said that ISAs are safe – with contribution limits rising £480 to £10,680 for the 2011/12 tax year – and indeed is considering a form of ‘Junior ISAs’ to replace the Child Trust Fund. Entrepreneurial incentives such as VCTs are untouched too but the Chancellor stressed he would be tightening up on tax evasion of all kinds. More than ever, investors need to ensure their financial affairs are in order.
Earthly
What if my bank goes bust?
As a sector, The Financial Services Compensation Scheme (FSCS) is an independent body that was commodities encompasses founded in the UK in 2001 by the Financial Services Authority (FSA). It covers all many different materials, companies regulated by the FSA, and is funded by levies charged to all companies from agricultural authorised by the FSA Under the FSCS, customers' deposit account savings are guaranteed products and energy to up to a maximum of £85,000 per customer per institution - or £170,000 for a joint naturally resourced account. If a customer has more than £85,000 with a bank that collapses, they will only precious metals and receive the maximum amount of £85,000 per person per institution. However, they might minerals. During the mid eventually receive additional funds following the distribution of any assets as part of the nineties, prices were very strong, boosted by insolvency process. Interest owed to customers up to the date that the bank is found to growing demand from be "in default" will be treated as part of the compensation. The FSCS does not always the likes of India and cover 100% of a customer’s losses. If the customer owes money to the failed firm, for China as they built up example, (such as mortgages or loans), these will be taken into account when their their infrastructure and compensation is being calculated. The FSCS aims to pay out within six months, but has worries that supply never actually had to pay out for the failure of a major UK bank. However, as would not keep up. As demonstrated recently, it is likely that the UK government would do everything it possibly the recession hit, could to avoid the collapse of a British retail bank before this became an issue. demand fell off a little, as did prices, but it is widely agreed that the long term trend will continue and investors continue to be excited by the growth prospects. Investment, however, has to be considered as a higher risk option as the sector can be volatile. A diversified, pooled fund might therefore be most appropriate if you are looking at this area for the first time.
Issued by Lofthouse Gate Limited which is authorised and regulated by the Financial Services Authority. The contents of this newsletter do not constitute advice and should not be taken as a recommendation to purchase or invest in any of the products mentioned. Before taking any decisions, we suggest you seek advice from a professional financial adviser.
Taking the first steps Most investors start small, with a regular savings account, building a nest egg slowly. However, that nest egg might do better if some were invested in the stockmarket, which has historically outperformed all other asset classes over the long term. If companies perform well, they can grow your investment more quickly than a savings account. However, the downside is that if they do badly, your investment can fall in value. This can seem scary, but there are ways to reduce the risks. Take a long-term view and consider pooled funds to gain diversification across many different companies. You do not have to put all your nest egg in just the one basket.