In the news

The Clerical Medical brand is to be dropped in favour of Scottish Widows. One of the lesser known facts arising from the Lloyds TSB/HBOS merger was that need for the coming together of the countries leading investment houses Scottish Widows (part of Lloyds TSB) and Clerical Medical (part of HBOS).

A single product range will be created with Scottish Widows pension plans sitting alongside the investments and offshore products of Clerical Medical. There will be no change for existing policyholders but new business will fall under the Widows brand from July. More on this story can be found here: http://www.citywire.co.uk/adviser/-/news/other/content.aspx?ID=339144&Page=1

With Swine Flu ever present in the news here is a video presented by Sky news setting out in their opinion the economic consequences of a swine fever pandemic. Scary stuff and not to be sneezed at: http://www.citywire.co.uk/personal/-/video/market-and-shares/content.aspx?ID=338809

The mortgage market is heating up with some vary strange going on's. Taxpayers will be horrified to discover that Halifax Bank, now in government control, is offering mortgages to first-time buyers in the Irish Republic at half the rate at which they are available in the UK.

Halifax, part of the Lloyds Banking Group, is charging 2.74% for a two-year fixed-rate deal to first-time buyers in Dublin. A two year fixed rate first time buyer loan for an English borrower would cost 4.19% at a 60% loan to value up to 6.4% for an 85% LTV.

Meanwhile over at the Nationwide they have moved to improve its profit margins by introducing a new ‘standard mortgage rate’ at a higher rate than its existing ‘base mortgage rate’ – otherwise known as the Standard Variable Rate by other lenders.

Customers taking out a mortgage after April 30th with Nationwide will no longer revert to its base mortgage rate when their deal expires, but will instead go on to the society’s new 3.99% standard mortgage rate. This compares with its current base mortgage rate of 2.5% - an increase of 1.49% for all new borrowers.

The society says it will maintain its base mortgage rate, currently 2.5% for existing customers, but any new customers whose mortgages come to an end will revert to its new rate – which it can vary at will. It does not track Bank Base Rate. This is a retrograde step as Nationwide has always promised that customers on its base mortgage rate would pay no more than 2% above BBR.

On the savings front with money coming off fixed term deposits needing to be reinvested, an increasing number of savers are looking at easy access accounts as a short-term home for their money while they decide whether the high yields available now on some good quality shares are a better long term bet. They are likely to want to wait a while to see if the old adage ‘sell in May and go away’ holds true this year.

Savers have to be very picky as the highest rates paid on instant access accounts all have bonuses which are generally not paid unless you leave your money in the account for at least a year – which won’t suit everybody. Ing Direct, for example, is paying 2.75% for money on instant access. But 2.2% of it is a bonus only payable after one year - although it does have the advantage that the bonus is fixed.

Probably the best no-frills instant access account is Nationwide’s ESaver Plus which is paying 2% gross for sums of £1 or more with no penalties for withdrawal. Sainsbury’s Internet Saver is paying the same 2% but minimum investment is £5,000.

Budget Brief

In the gloomiest Budget on record there was little or nothing to cheer cash strapped families while higher earners face swingeing increases in income tax for those earning £150,000 or more.

Labour has reneged on it manifesto pledge not to increase the top rate of tax and in a speech reminiscent of Labour Chancellor Dennis Healey’s threat to squeeze the rich ‘until the pips squeak’ Alistair Darling increased the top rate of income tax from the proposed 45% to 50% and brought it forward to 2010-11.

From April 2010, an additional rate of income tax of 50% will apply to income over £150,000, and the income tax personal allowance will be restricted and clawed back down to zero for those with incomes over £100,000. These changes replace the 45% income tax rate and the two-stage taper of the personal allowance announced in the 2008 Pre-Budget Report. Tax on dividends will also be increased to 42.5% rather than the 37.5% announced in the pre-Budget speech in November 2008 for those with incomes above £150,000.

And there is more pain for high earners. As widely predicted, tax relief on pension contributions will be restricted for those with incomes of £150,000 and over, and tapered down until it is the basic rate of 20% for those with incomes of £180,000 a year. The Chancellor justified this by pointing out that a quarter of all tax relief for pension contributions goes to just 1.5% of the top earners.

To prevent high earners from making massive pension contributions to take advantage of the existing 40% tax relief on contributions, the Government is also introducing legislation to prevent individuals cashing in on this window of opportunity. Those who have never earned in excess of £150,000 are unaffected, as are those who continue with their regular pattern of contributions. This could be hard to enforce however as many self employed and high earners make irregular pension contributions.

The Institute for Fiscal Studies has already warned that income tax at 45% which hits the richest 1% of top earners will raise little extra revenue because the rich will simply take avoiding action by turning capital gains taxed at only 18% into income, or leave the country – or worse, work less. At a top rate of tax of 50% the incentive to leave the country or avoid income tax will be even greater. But the Chancellor reckons to raise an extra £1 billion by closing any tax loopholes which the rich might choose to use.

Holders of offshore accounts are being offered a ‘new disclosure opportunity’ which will run until March 2010. This will give holders of these accounts the opportunity to disclose, of their own accord, if they have unpaid tax or duties and to settle debts. The tax man will also be issuing more notices requiring financial institutions to provide information about offshore account holders.

And in an attempt to round up more tax revenue Her Majesty’s Revenue & Customers will be publishing names of serious tax defaulters – both corporate and individuals who have incurred a penalty because they have deliberately understated over £25,000 of tax.

On a brighter note, there is marginal help for savers and some pensioners. The limit on ISA savings at £7,200 for the 2008-09 tax year will be raised to £10,200 – for the over 50s – in the current 2009-10 tax year and for the rest of the saving population in 2010-11. The first higher contributions won’t be available until October 6th for the over 50s. As now, half this allowance can be invested in cash or the whole amount in an equity based ISA.

There is also some relief for pensioners with small savings. The disregard for qualifying for Pension Credit, Housing Benefit and Council Tax Benefit will be raised from its current level of £6,000 to £10,000. The Treasury estimates that this will increase the income of around 540,000 Pension Credit claimants who have savings above the current disregard level of £6000 by around £4 per week.

In addition, Pension Credit recipients who may have overpaid tax on their savings income in the past six years will be contacted as part of a taxback campaign. This will encourage people to claim back overpaid tax on savings income and, where possible, register to avoid overpaying tax in future. Those who claim are expected to receive around £200 on average. This is in response to the fact that millions of elderly taxpayers are paying too much tax but have not been notified of this in recent years by the tax man.

The Chancellor confirmed that if inflation remains in negative territory by September as expected, State pensions will increase by a minimum of 2.5% - but this is simply confirming the existing situation. There will however be an additional payment of £100 to households with someone aged 80 or over and £50 to households with someone aged 60 or over, to be paid alongside the existing Winter Fuel Payment in 2009-10.

Families with children will see Child Tax Credit go up by an extra £20 a year above indexation from April 2010 and there is an extra £100 a year which will be added to the existing £250 Child Tax Credit vouchers – for disabled children - and an extra £200 a year for severely disabled children. The CTF increase will be implemented in April 2010.

For those facing redundancy the maximum income on which redundancy payments are based will be raised from £350 a week to £380 a week. This is still well below average full time earnings of around £24,000 a year.

The concession on Stamp Duty exempting properties purchased for £175,000 or less is to be extended until December 31st of this year which will benefit many first time buyers. The Treasury estimates that around 60% of purchases are currently exempt from paying Stamp Duty as a result of the tax holiday.

The most controversial aspects of the Budget are the tax changes raising the top rate to 50%. Higher taxes for the rich also threaten to raise a major political problem for David Cameron, who has pledged to retain the higher rate, in defiance of many Conservative members.

Cameron last month confirmed that a Tory Government will not repeal higher income tax rates, saying that the richest in society ‘must bear a fair share of the burden’ of paying off Labour's debts.

But the IFS calculates that the current 40% is the optimum rate to maximise Treasury revenues from income tax on the rich. The Treasury disputes the IFS calculations, arguing that rich people are less responsive to higher tax rates than the institute's economists believe.

Has the market turned ?

In recent days we have witnessed a number of bullish statements from fund managers. Here is one that arrived this morning from Ian McVeigh, Manager of the Jupiter UK Growth Fund: -

"The valuations I see now offer a great opportunity for long-term investors. I think when a rally comes, it is likely to be a sharp one." Ian McVeigh

Optimistic or wrong again, only time will tell but with numerous similar comments appearing of late maybe, just maybe we are starting to see markets turn.....

FTSE 100 Winners

Change as at 12 noon Fri. 17/04/09

Lloyds TSB Group PLC
10.03%
BT Group PLC
9.44%
Aviva PLC
6.37%
Barclays PLC
6.01%
British Airways PLC
5.72%
Man Group PLC USD0.03428571
4.97%
INVENSYS ORD 10P
4.90%
ICAP PLC Ord 10p
4.82%
Royal Bank of Scotland Group (
4.20%
Lonmin PLC
3.9

Market Thoughts

We are often asked what sector should I invest in to catch a rising market as, when or if markets start to pull out of recession. Simple enough question but a tough one to answer.

If we based our answer on tradition then the poorest performing sectors during the recession would most likely be the strongest out of recession. Accordingly we would be driven towards UK Smaller Companies, Global Emerging Markets, UK All Companies & UK Equity Income.

On the other hand many commentators favour North America given that America was first into recession and could reasonably be expected to be first out. With dividends being maintained at reasonable levels UK Equity Income is often a favoured section as any company that can manage to maintain a strong dividend policy through the troubled times should be in a stronger position as the economy pulls out of recession.

Then we have the advocates of corporate bonds believing they will offer attractive returns more akin to the cautious investor looking for a higher return on their deposit based investments.

You can start to see the dilemma we as advisers face when challenged with the opening question. However it is our job to try and make some sense of everything that is going on and perhaps for the first time in months we have been given the briefest of indicators where to turn.

The month of March was a welcome respite from the continual downward spiral of falling prices. Many sectors produced positive results during a time when the news was still full of gloom and doom.

If we analyse the figures we can see that the six top performing sectors during this positive month were Asia Pacific Ex Japan, Global Emerging Markets, Asia Pacific Inc Japan, Technology & Telecoms, Europe Excl’d UK and the Specialist sector which includes commodities and financials. Source: Citywire April 2009

Perhaps surprisingly at the bottom of the table with negative returns are GBP Corporate Bonds, GBP High Yield, GBP Strategic Bond, UK Equity & Bond, UK Equity & Growth and UK Equity Income. I believe these figures are the most relative and should set certain alarm bells ringing. Many investors have been encouraged towards Corporate Bonds on the strength of their conceived low risk nature. However low risk is not no risk and with defaults a realistic threat I believe investors should be cautious when committing significant portions of their portfolios towards Corporate Bonds for the short term at least.

If the month of March is anything to go on for those investors willing to accept risk in the search for greater reward Global Emerging Markets, Asia Pacific or indeed Specialist funds would appear to offer the greatest opportunity albeit it must be appreciated that investment in these sectors are normally deemed as higher risk. That said whether we are in “normal” territory is questionable and risk must be quantified against market positions. With fund prices near to all time lows it could be argued that risk has been reduced due to the cheaper buying price.

With many investors seeking to recoup positions in investment and pension funds I am certain this question will arise again and again. We will continue to monitor the situation and keep you informed as events progress. If you would like to speak with an adviser to discuss all the options open to you please do not hesitate to get in touch.



M.S. Ferguson
Managing Director

Into Retirement

Effectively, retirement for most people involves using the pension fund accumulated over many years into an income (usually plus a tax free lump sum). The problem is that many people think that they have to use the same company that they have invested with all along, to provide their pension income. And the companies do not appear too keen to tell them that they do not have to, largely because it is good business for them, to hang on to the money, rather than letting it go to another provider.

But in fact almost everyone has the right to exercise that the financial services industry calls and ‘open market option’. In plain English, this means take your money and buy a better pension elsewhere.

In almost all cases, specialist annuity providers can offer a better income than the company with which you built up your retirement fund. The exception to this is where you have a guaranteed annuity rate. But beware; this normally only applies at a set age and on a level, single life basis. So if you want to retire earlier – or later – and to provide an income for your spouse as well &/or to have an increasing income, then the guarantee is lost.

There is another consideration that you need to look at. If you are a smoker, or have a severe medical condition – or these days, even if you just live in certain parts of the country, you cold also secure a better income, by picking the right type of annuity. For example the best income for a 65-year-old non smoker wanting to use £100,000 to buy a level income for himself would have been £6,406 a year (late March 2009). A smoker in the same position could have boosted his income by £20 a week to £7,452 a year. So shopping around is well worthwhile.

With annuity rates currently so low, although there is no guarantee that they will not fall further, many people are considering delaying buying one by taking their tax free cash and then leaving their pension fund to grow, possibly (but not necessarily) drawing an income directly from the fund. The hope is that fund values and interest rates rise, producing a better return as you get older when annuity rates tend to rise anyway. But beware, you are still running an investment risk and this is not suitable for everyone.

Once again, this reinforces the importance of each one of us taking personal responsibility for our retirement planning.