Summer 2014

: Outlook brightens for US and UK Many major equity indices ended April in positive territory, buoyed by an encouraging outlook for economic growth in the US and the UK. In particular, investor sentiment received a welcome boost from the US Federal Reserve as policymakers highlighted evidence of a strengthening economy. This news more than offset the announcement of disappointing US economic growth during the first quarter of 2014, which was largely attributed to one­off factors, including an exceptionally cold winter. Over April as a whole, the Dow Jones Industrial Average in the US rose 0.7% and indeed the index hit a new all­time high as the month ended.

Summer 2014

Wells Financial is an independent financial advisor specialising in mortgage, insurance, pension and investment advice for individuals and small businesses.

In the UK, share prices generally rose during April, boosted by encouraging economic data and resurgent corporate activity, and the FTSE 100 index rose 2.8% over the month. The UK economy expanded by 0.8% during the first three months of 2014, underpinned by stronger activity in the manufacturing and services sectors, and the Confederation of British Industry expects economic growth to be “exceptionally strong and broad­based” over the coming months. The month saw a number of companies, including Saga , Patisserie Valerie , Shoe Zone , FatFace and Card Factory, announce plans to float on the stockmarket.

On the continent, the European Central Bank confirmed it would initiate additional economic stimulus if the eurozone’s inflationary environment remains weak. Although the region’s rate of inflation rose from 0.5% in March to 0.7% in April, this increase was probably partly attributable to a late Easter. Meanwhile, according to a report from the European Commission, beleaguered European governments are making positive – albeit gradual – headway with their budget deficits. Germany’s Dax index edged 0.5% higher over April, while France’s CAC 40 index rose 2.2%.

In Japan, April was marked by the widely flagged increase in consumption tax, which took effect on the first day of the month. The sales tax rose from 5% to 8%, and was likely to have been instrumental in an 11% surge in annualised retail sales during March as shoppers hurried to buy items before the increase was implemented. Consumer prices rose 1.3% in March while the country’s trade deficit soared amid weaker export growth and higher import activity. The country’s deficit climbed to ¥1.45 trillion (£8.4bn) in March – four times as much as in the same month last year. Over April as a whole, Japan’s benchmark Nikkei 225 index fell 3.5%.

Contact Details Wells Financial Ltd 26 High Street Tunbridge Wells Kent TN1 1UX t: 01892 517171 e:info@wellsfinancial.co.uk w: www.wellsfinancial.co.uk

Investment Focus Chancellor of the Exchequer George Osborne's shake­up of the individual savings account (ISA) regime had three main strands – a significant extension to the annual allowance, the introduction of new allowable asset classes and a simplification of the overall structure. The Chancellor has created a ‘New ISA’, which gets rid of the separate allowances for cash ISAs and stocks and shares ISAs, and allows transfers from stocks and shares ISAs to cash ISAs. Transfers had previously only been allowed in the other direction.

This single allowance means conservative, cash­based savers may shelter more within an ISA even if this may not currently be an attractive option for many. However, the move also allows more flexibility for all types of ISA investors, enabling them to change their asset allocation more easily over time. As an example, more cautious investors whose ISA holdings are substantially in stocks and shares could now move to cash should rates improve or they feel the market looks set to weaken.

Rather than seeking to impose a lifetime cap on ISAs, as has been done with pensions, the Chancellor hiked the annual allowance to £15,000 from £11,520. The limits for Junior ISAs were also increased –from £3,720 to £4,000. The Chancellor’s final move was to broaden the range of allowable investments within an ISA to include peer­to­peer lending schemes. The ISA now has real clout as a savings option, enabling investors – if they wish – to build a highly sophisticated portfolio that remains sheltered from tax.

An introduction to gilts Gilt­edged securities or ‘gilts’ are loans issued by the UK government. As the government is considered highly unlikely to default on its loans, gilts are regarded as low­risk and are therefore a popular component of a balanced investment portfolio.

Investors receive a pre­agreed rate of interest – the ‘coupon’ – twice each year. This might be fixed at a certain level or it might begin at a relatively low level and rise in line with inflation. If you buy a gilt at issue and hold it until it is repaid – the ‘redemption date’ – your initial capital will also be repaid in full.

Q: How much tax do I really pay on ISA investments?

A: Income or capital gains generated by any ISA investment will not incur tax after they have been paid to you. Similarly, no tax is paid on interest earned within your cash ISA or on interest payments from corporate bonds or gilts held within stocks & shares ISAs. You do not even have to declare the existence of your ISA on your tax return. However, tax of 10% will be deducted from all dividends and 20% from any interest earned on uninvested cash within a stocks & shares ISA before either is paid out. This cannot be reclaimed.

Pension Focus Chancellor of the Exchequer George Osborne set about redrawing the retirement landscape in the 2014 Budget, introducing measures to allow retirees to spend their pension pot as they choose, rather than having to buy an annuity. The measures mean retirees will no longer be taxed at an onerous 55% if they look to access the rest of their pension pot after taking their tax­free lump sum.

With effect from 27 March 2014, they will be taxed at their marginal income tax rate although, for now, the portion that can be taken as a tax­free lump sum remains at 25%. Prior to this Budget, however, those with less than £2,000 in a pension pot could take it as cash. This year, this limit will rise to £10,000 for an individual pot and to £30,000 for people who have saved across a number of schemes. From 2015, the limits could disappear altogether.

The Chancellor also announced the introduction of a ‘pensioner bond’. Issued by National Savings & Investments from January 2015 for those aged over 65, this new bond will have an investment limit of £10,000 per individual. Rates have not been set but initial estimates suggest a three­year bond could pay up to 4%. This compares with a rate of some 2.7% from the best fixed rate bond on the market. In a less headline­grabbing move, the Chancellor also announced plans to allow people aged 75 and over to continue to claim tax relief on pension contributions.

Food for thought Ahead of next year’s General Election, Chancellor of the Exchequer George Osborne delivered a Budget that provided considerable food for thought. The UK economy is now predicted to grow more strongly than previously forecast and to expand this year to a level greater than its pre­crisis peak. The UK’s budget deficit during 2014 is likely to be lower than envisaged at 6.6% and is now expected to achieve a surplus by 2018/19.

Business rate discounts and enhanced capital allowances in enterprise zones were extended for another three years. The Annual Investment Allowance was extended to the end of 2015 and doubled to £500,000. Export finance was doubled to £3bn and interest rates on this lending were slashed by one­third.

From 1 July, cash ISAs and stocks & shares ISAs will be merged into a single ISA with an annual tax­free allowance of £15,000.

The Chancellor also announced a new Pensioner Bond that will be available to everyone aged over 65 from January 2015.

Meanwhile, in what was probably the most controversial measure within the Budget, the Chancellor announced plans aimed at removing all tax restrictions on pensioners’ access to their pension pots. In particular, pensioners will no longer be obliged to purchase an annuity to fund their retirement.

Precious assets: 'key man' insurance Insurance is a fundamental part of setting up and running a business. Business owners are likely to ensure that their buildings, stock and equipment are covered by appropriate insurance policies. However, for many companies, their greatest asset will be their people, and key person insurance (also known as “key man” insurance) helps businesses to protect themselves against the loss of their most precious resource.

A key person within a company could be anybody who is regarded as crucial to the business, and whose loss is likely to lead to financial strain. An individual could be “key” to the business because of their role, expertise, knowledge or contacts. They could also be crucial because of their financial importance to the business; for example, if they own a significant proportion of shares in the company.

Put simply, key person insurance is a life insurance policy that is taken out on the “key” person or people within a business. In the event of the key person’s death, serious illness or injury, the company receives a fixed amount of money to buy the business some time to recover. The money might be used to cover the cost of recruiting and training a new employee, to pay for temporary staff, or to compensate the business for lost revenues. Some lenders might stipulate that key person insurance is in place before they are prepared to lend money to a company; in this case, the company will pay the premiums, but the lender would receive any payout.

Considering protection Life assurance can be an important safeguard, but not everyone needs it: it pays out a lump sum on death so if you are a single person with no dependants then it may well be a waste of time. Afterall, unless you are in significant debt, you are leaving no financial burden. For the main breadwinner in a family with small children, however, the need is very obvious.

Take away that main income unexpectedly and the financial stability of the family could be seriously affected, adding to the worries at an already stressful time. It is therefore important to carefully consider your own situation. And not just life cover but also what effect it might have if you were unable to work for a period of time.