The past few years have seen HMRC strengthen its powers to challenge tax avoidance schemes. Last month’s win over the Bristol & West shows how the teeth of the taxman are growing stronger by the day.

The strategy that Bristol & West employed was to try and transfer a gain from one company to another internally to avoid a £30m tax on a £91m gain. They were looking to try and use a loophole that was in the 2002 Finance Act concerning the taxation of so-called “swaps”.

In the Budget this year, a section entitled “Levelling the tax playing field” covered how HMRC will be more aggressive in making sure that people and companies pay what is due.

With so much focus on tax avoidance, it is increasingly important only to use techniques that are approved by HMRC. For those tax planning strategies that we have seen, there has been a significant increase in the revenue’s activity around them, and whilst many have remained successful, we believe that the days of aggressivetax planning are certainly on the decline except for the very wealthy that can afford the bill to challenge.

Need a pension? – go to Tesco

Last month saw Tesco announced that it will provide an annuity comparison service. The service, if approved by the FCA, will be an online comparison service.

Annuities are created as a means to take the benefits from a pension. Instead of using a drawdown arrangement, where income is drawn from the investment in the pension, the annuity provides a guaranteed income for life. For many people this can be an excellent way to produce a guaranteed income in retirement. For others it can be a bad experience if they are locked into low rates of return, or if they die early and the money disappears.

Comparing the companies that provide annuities is a sensible thing to do, because the rates vary considerably from one company to another. Nevertheless, there are many such comparison services, and virtually all IFAs provide the service through their own internal research systems, so there is little to see that Tesco can offer other than visibility.

If the entry of Tesco to the market means that more people do the required comparison, our only concern is that there will be no advice ensuring they get the right type of annuity.

Thinking about buying abroad? – be very, very careful

You will all be aware of the massive property devaluations of Spanish property. Despite this, a recent report from Goldman Sachs states that the market needs to fall at least another 10% to hit the bottom of the curve. With the market already down 30%, this will come as a huge blow to British people who have purchased Spanish property.

The problems with the Spanish market go to show one of the dangers of investing in property internationally.

When you invest abroad you are not only subject to interest rate risk, but you are also exposed to a foreign market which will be totally unlike what we are used to in the UK. The UK is unique in that we have relatively little land, and that most of this land is farm land which can’t be built on. We tend to assume that property price movements in other countries are similar to our own, but this is rarely the case. There is of course the other issue, of law. In the UK we have a very well-established rule of law and property ownership. This is not the case in many countries.

If you are buying abroad it should never be as an investment. It is fine to buy a holiday home if you want to visit the same place year after year, but you should never consider this to be an investment. To do so is to fool yourself. A property abroad will always be a drain on resources. Even if rented out, it rarely makes money, especially if there is debt involved. But when you add foreign tax laws to the equation, you are asking for trouble.

We have rarely found a client that has made money on a property purchased abroad, but we have seen hundreds lose money. We are not saying don’t buy abroad, but what we are saying is go into it with open eyes, and don’t have unrealistic expectations.

Financial Conduct Authority (FCA – formerly the FSA) fudges the rules

You will all know that the payment of commissions on investments was banned as from January. This was excellent news, and meant that at last people would know what they are paying for. That is except for existing products, of course, where commission continues to be paid (this still seems wrong to us!).

But in a strange addition to the rules, the FCA has allowed “marketing payments” to be made to advisers. This will allow fund providers to contribute to payments made for advertising, but without this being advised to clients. This really does seem like a fudge of the rules. We believe that if there was meant to be clarity, there should be clarity.

High charges on company pension schemes

The consumer watchdog Which? has found that businesses are willing to tolerate very high consultancy fees that would in effect see employees losing up to 50% of their pension contributions in the first year. Pension consultants, because they are giving no advice and are just setting up the scheme and the administration, do not have to be regulated by the Financial Conduct Authority. For example, an employee saving £100 a month could see an initial fee of £450 and 5% ongoing fees. In January, the Office of Fair Trading announced an investigation into pension charging, and the largest pension providers have promised to disclose the full costs to employees by 2016. But this is a little too late. Over the next three years employers will have to set up pension schemes for their employees under the “automatic enrolment” rules, putting more pressure on businesses to set up provision for pensions but with little opportunity to consider the whole picture or to take into consideration the costs to employees.

FTSE rallies

The end of April saw Britain’s top 100 blue chips close 0.3% up for the month, despite the last day of April seeing a drop of 27.90 points. This marked an 11-month record winning streak not seen since the FTSE 100 was created in 1984.

The closest we have seen to such a long stretch of positive returns were 10-month runs in 1987,1996 and 1997.

The biggest reason behind this growth seems to be investors’ appetite for the chance of greater returns on their capital. We remain in a period of historically low interest rates with seemingly no light at the end of that particular tunnel. With the problems across Europe likely to result in further interest rate cuts throughout Central Europe, together with the impact of recent quantitative easing in Japan, it looks as if this record breaking winning streak is set to continue.

It’s not just the UK markets that are seeing record breaking figures. Better than expected economic data coming out of the US saw the S&P 500 surge to its highest levels in history.

This is great news for those who are already investing, in that this would have resulted in some positive returns over the first quarter of 2013. Given the reasons behind such positive performance, we still feel there are opportunities for further returns throughout 2013 in the equity market, and certainly better than what seem to be increasingly poor returns from banks and building societies.

Is Japan ready for our investment?

Earlier this month, the Bank of Japan unveiled plans to almost double its government bond buying programme over the next two years from ¥4trn to ¥7trn (£46bn) in a bid to stave off deflation and kick-start the stagnant economy.

This followed an announcement in January from the new Japanese government, led by Shinzo Abe, that it has approved a fresh ¥10.3trn (£72bn) stimulus package in an attempt to spur a revival in its economy.

The package includes infrastructure spending, as well as incentives for businesses to boost investment. The new government has said that reviving the country’s economy is its top priority. Tokyo estimates that the stimulus will boost Japan’s economy by 2% and create 600,000 jobs.

Japan has been stuck in deflation for much of the past 20 years, with prices and wages falling, yet despite this it’s still the world’s third largest economy. Can you imagine its size and power if it had been growing for 20 years?

When you add to this the weakening of the yen, we must start to ask, is Japan ripe for us to invest in again, because as you know we have recommended against Japan as an investment area for the past three years.

The “massive” outperformance of emerging markets is slowly coming to an end, we believe, and within the next five years may begin to settle to Western levels of growth.

When we think about this, is Japan ready?

Well, as we have said before, the economy is not the investment: it is the businesses making up the economy that are the investment. But if the economy can turn, then it is easier for businesses to flourish. And so, while it may not be the right time now, watch this space; it could be very close.

Apples make money

When you invest in corporate bonds, as all our clients do, you invest in the loan notes that companies sell. If a company needs or wants to raise cash, then instead of going to the bank, they sell loan notes, or corporate bonds as they are collectively called, to the market. The company then agrees to pay the set interest until maturity. Investors can make money from earning an interest, and also from selling the loan note if its value increases.

On 30th April, Apple launched the world’s largest selection of bonds. On one day it sold $17bn, which beat the previous largest issue by $500m. This is a staggeringly large amount of money. It is being used to buy back shares from the market, the idea being that if they buy back shares, the supply reduces and then the price goes up. As Apple’s shares have nearly halved in value since their peak, this will please investors. Even so, the timing is still strange because Apple has over $40bn sitting in the bank. But with interest rates so low, and the desire for its bonds so high, it is cheaper for them to issue bonds rather than use their own money.

Book of the month

This month’s book recommendation is The Chimp Paradox by Dr Steve Peters, the psychiatrist behind the winning Olympic GB cycling team.

The Chimp Paradox is an incredibly powerful mind management model that can help you become a happy, confident, healthier and more successful person. Dr Steve Peters explains the struggle that takes place within your mind and then shows how to apply this understanding to every area of your life so you can:

- Recognise how your mind is working

- Understand and manage your emotions and thoughts

- Manage yourself and become the person you would like to be

The Chimp Mind Management Model is based on scientific facts and principles, which have been simplified into a workable model for easy use. It will help you to develop yourself and give you the skills, for example, to remove anxiety, have confidence and choose your emotions. The book will do this by giving you an understanding of the way in which your mind works and how you can manage it. It will also help you to identify what is holding you back or preventing you from having a happier and more successful life.

So read it, and put your own chimp back in his box!

Office News

We will soon be joined by 2 new additions to the team; Carol starts as our new administrator on Monday and Emma as an additional paraplanner on the 10^th June. I am sure you will all make them feel very welcome, and that they will enhance the work we do at Efficient Portfolio.

When it comes to planning for Inheritance Tax, there is one general rule that usually applies. You cannot have your cake and eat it. In other words, you cannot give away assets to save Inheritance Tax whilst still benefiting from them. We have written about this before (see http://www.efficientportfolio.co.uk/blog/inheritance-tax-planning-cake-eat/ for more details).

Of course this leaves a common series of problems. Typically;

• People don’t give away assets early enough in their life, because they are sure they can afford to
• You can only put £325,000 each into a trust (where you can retain some control) every 7 years before you create an immediate tax charge
• You have to live for 7 years for the planning to save you the Inheritance Tax
• You often cannot draw an income from it, or take the capital back if you needed to.

So are Trust and Gift based solutions the only option? What if you have already given away as much as you are sure you can afford to, you do not expect to live for another 7 years? Or what if you have already maxed out placing money into trusts? Where then do you turn?

Business Property Relief to the rescue?

Business Property Relief (BPR) is a tax relief provided by the UK Government as an incentive for investing in specific types of trading companies. It was introduced by the Government in the Inheritance Tax Act of 1984, and has since been extended to investments in certain types of unquoted companies (not listed on the main stock market) to encourage investment into this area.

Once assets qualifying for Business Property Relief are held for two years, they are exempt from IHT (providing they are still held at the time of death). Additionally, BPR solutions allow you to retain control of and access to your investment, meaning that you have flexibility should your circumstances change.

What actual investment qualify for Business Property Relief?

There are a number of assets that qualify for Business Property Relief, so let us look from a straight forward Inheritance Tax  planning point of view;

• Agricultural Land; As the old saying goes “they aren’t making any more of it!” That said, it is not a practical investment for many people, but it does attract 100% Inheritance Tax relief (known in this instance as Agricultural Property Relief)
• Shares in Private Limited Companies; This needs to be a trading business (i.e. not just a property owning business) so it is not realistically something you are going to set up just to save Inheritance Tax. There are however ways to invest in them, as this area includes things like Enterprise Investment Schemes (EIS) and other investments that attract BPR that we can look at further.

How can I invest to attract Business Property Relief and save Inheritance Tax?

There are realistically two options available to you. The first is a portfolio of Alternative Investment Market (AIM) shares. The AIM market is a sub-market of the London Stock Exchange, allowing smaller companies to floatshares with a more flexible regulatory system than is applicable to the main market. As an investor, that does mean you are exposed to much higher risk than traditional equity investments, so you do need to be careful here. A diverse portfolio would be the second option to consider, however that will be ‘too punchy’ for most people investing to save Inheritance Tax.

The low risk solution

There are a number of investments out there that have the sole aim of delivering Business Property Relief to the investor for Inheritance Tax planning reasons whilst taking the minimum risk possible. They achieve this in a number of ways, for example  investing in areas that are backed by the government (such as the Feed In Tariff for solar panels) or by providing short term finance to companies that have already secured more long term funding, meaning they can also buy credit insurance for the funds.

This area is fairly complicated, and there are certainly some products to avoid in this part of the industry, but with careful research you can invest successfully to attract Business Property Relief and attract some of the following benefits;

• The investment becomes zero rated for Inheritance Tax after just 2 years.
• You can often be provided with a set level of return (often 3% per annum) and some providers will only take their fees once you have received this level of return.
• The money is still yours, so if you need to encash some or all of it you can do.
• You can draw an income from the money if you want to.

It really is worth seeking independent advice if you are interested in exploring any of these areas in more detail. At Efficient Portfolio we understand the benefits of the different Inheritance Planning solutions out there, and are happy to build clients a bespoke plan that will best fit their goals, and also those of their loved ones. If you would like to discuss this with us, please email or call us to arrange a chat with one of our financial planners. We have offices in Rutland and in London, but where necessary we can travel further afield and manage most of our process over the phone and through conference calls.

2008- That fateful year when the economy came crashing down around us. We see the effects of this downturn every day in nearly all aspects of our life. I do not wish to labour this point, as after all it is becoming rather old hat in financial articles! However, I would just like you to focus on how the financial crisis has effected your investments. Low interest rates and high inflation have led to some dramatic volatility in the Stock Market, with some equally deplorable falls in growth and income from many types of investments.

Unfortunately, we mere mortal Financial Planners cannot change the performance of the market, but we can still strive to improve your investments. But how?

The problem that many investors face is that the markets are changing at a mercurial rate. As a Financial Planner, when I notice these changes I will always recommend that my clients move funds, in order to improve performance. The difficulty is, that in order for me to do this, I firstly need to obtain their authority. By the time this has been done, the markets could have significantly shifted once again. A vicious cycle, I am sure you will agree.

At Efficient Portfolio client care is our top priority. With the current mayhem in the markets, and the rather archaic system deployed in order to obtain client’s consent, I felt that this was not being delivered. I want to ensure that my clients are receiving exceptional service and at the same time seeing success in the performance of their funds.

At present there are three types of Fund Management systems:

Advisory management

This is generally how most IFAs that manage the money do it. They have to get the clients permission (usually in writing) before any investment changes are made.

The main problem with thissystem, is that clients respond at different times to fund switch requests, if they reply at all. By having to ask the client each time whether or not they would like to switch fund, vast administration is created for the IFA. This removes the incentive for the IFA  to make switches in the future, as well as meaning that whilst managing a number of portfolios with a centralised aim, some clients who do not respond end up in an out of date portfolio. Also, many IFAs are not competent at building their own portfolios, so clients often end up in managed solutions which generally produce lower returns.

There are of course some benefits to using Advisory Management. The most evident reason is that, if the IFA is of a high calibre, they will fully understand theirclient’s needs and circumstances better than other advisers. If this is the case, the IFA is in a position where they can tailor the investment solution to the client.  At Efficient Portfolio, this is the system we have used up until now.

Discretionary management

Discretionary investment management means the investment management is usually outsourced to a 3^rd party discretionary manager (DFM). They design the investment strategy and control the investments instead of the IFA. These professionals are granted the power to make swift decisions on your behalf. This is their sole job, so your investments are given the time, care and attention that they deserve. A DFM can make switches when they think it is right. They spend more time on the investment management so have the opportunity to generate better returns, although of course this does not always happen.

In reality, most people that invest through a DFM end up in a Model Portfolio solution. The client ends up with a very similar portfolio to lots of other clients. This is because the DFM rarely knows the client as well as the adviser. Also, there is an extra layer of cost to pay the DFM as well as the IFA. It is a large admin exercise to move lots of clients away from a DFM that is not performing well, and this again discourages IFAs from recommending  a move to a different DFM in the future.

Our solution

At Efficient Portfolio, we employ a blended strategy, which takes the positive elements of both Advisory Management and Discretionary Management .We use a DFM at fund level but control the strategy in line with their financial planning needs.

There are many benefits to this including;

• The investments are changed immediately once they are needed.
• The total cost is in line with advisory management.
• The adviser controls the risk and timeframe strategy, which can be altered in light of changes in the clients life or needs that are highlighted in their annual review.
• The investments are on a platform, so if the DFM fails to perform, the clients can be switched away and into another fund or strategy very easily.
• We sit on the investment committee with the DFM to give our guidance in investment decisions whilst also playing devil’s advocate to their decisions.

As a Financial Planner, I will sit down with each of my clients individually before any new Investment Management Strategy is employed. Together, we will analyse your current appetite towards risk and review your individual goals. We will then set out some ‘rules’ for the Fund Manager, making them as flexible or as rigid as you choose. After this rigorous, due diligence assessment, we will then discuss the most suitable and appropriate portfolios applicable to you. From this information, a bespoke Fund Management Strategy will be created for you; this is as unique as you are. The Fund Manager will have a set of rules and will have to operate with your goals central to their work. As I will oversee their performance, I will also ensure that these rules are being adhered to.

The rest of your finances will also benefit from this switch. Undertaking the research and conducting the management of investment portfolios is an incredibly time consuming job. By enabling a Fund Manager to oversee your investments, Financial Planners are able to focus on their core competencies such as Tax and Retirement Planning. For Efficient Portfolio, this will also give us more flexibility and time to see our clients on a personal level to discuss their wider investment needs, rather than spending time on compliance reporting. This blend of Advisory Management and Discretionary Management will enable us to build stronger relationships with the people most important to us; our clients.

This Fund Management system is not mandatory; in fact it is quite the opposite. We will not recommend it to any of our clients until a full review has been conducted to ascertain suitability and the gain the full consent of the client. Whilst we feel that this type of Fund Management holds many benefits for our clients, it is not for everyone.

If you would like to discuss this service in more depth, we would be delighted to talk to you.

Please call 01572 898060 or email charlie@efficientportfolio to arrange a convenient time to go through this subject.

Be warned about fakes
The Financial Services Authority authorises and regulates firms which deal with financial services in the UK. As such they keep a register of all those companies that are authorised. However, last month, fake websites came to the FSA’s attention.
The fake sites were made to look like the FSA’s, even displaying its logos, and listed fake companies as authorised. The scam was intended to drive people to fake advisers, and advisers and companies that were not authorised.
If you are looking to check something out with the FSA, the only website that you should look at is FSA.gov.uk.
Inflation rises (or does it?)
Last month, inflation rose to 2.8%. This is based upon CPI. If you measure it by the old-fashioned method of RPI, it fell to 3.2%. So if one rises and one falls, which is right? They both can’t be, can they?
As we’ve explained before, CPI and RPI are calculated slightly differently (CPI excludes mortgages) and so they will give different figures. But if that’s the case, what did happen to inflation?
This little conundrum shows the basic problem, that we really don’t know what inflation is. All we do know is the result of a measurement of certain different products and services. These products and services do not actually represent inflation, they just represent the price movements of those items.
Inflation is actually different for everyone depending upon what you spend your money on. It really is not the same for everyone.

Budget 2013

Chancellor George Osborne submitted his fourth Budget to the House of Commons this month and declared it would be a Budget “for people who work hard and aspire to get on”. Mr Osborne also predicted that the UK would not fall into a triple-dip recession.

This Budget, as with many we’ve seen with this coalition, held no major surprises, mainly due to media leaks but also due to the government’s “pre-Budget” Autumn statement.

The Budget turned out to be very passive, with many changes only coming into place in the next couple of years, just in time for the next election!

So what was announced?

Income tax
The personal allowance will rise again, to £10,000, from the 2014-15 tax year. This is another step in the chancellor’s plan to bring personal allowances to one level for everyone. Unfortunately, in real terms this means that the personal allowance for those over 65 will effectively be frozen.

This allowance will rise anyway on 5th April this year, as previously announced – for those aged under 65 – from £8,105 to £9,440.

Homebuyers
One of the biggest headaches for the government over recent years has been the UK property market. With banks restricting their lending criteria following the global financial crisis, the property market had fallen and then come to a standstill. The government has attempted to stimulate the markets by trying to encourage banks to lend, and providing benefits such as the NewBuy scheme to stimulate activity, specifically at the lower end of the property market.

Previously this stimulus focused on first-time buyers and included a reduction in Stamp Duty Land Tax. The chancellor has taken this a step further in this Budget, announcing that £3.5 billion will be made available for the Help to Buy scheme. The funds will be made available over the next three years, and will be provided to those who have a 5% deposit, for new-build properties. It will be available for homes up to the value of £600,000 and involves the government providing 20% of the home’s value by way of a loan which will be interest free for five years and is repayable when the property is sold.

Further help will be made available to this market in 2014 with the government underpinning £130 billion of mortgage lending with a new mortgage guarantee scheme.

Childcare subsidy
There will be a new system of taxpayer subsidy for childcare, with parents earning up to £150,000 being able to claim back up to £1,200 of childcare costs a year. The system will be in the form of vouchers from 2015 and will be tax free.

Tax cut for employers
The complicated system of National Insurance will be made less onerous for employers. For the many small employers who employ just a few staff, this will be a big deal and will see a new Employment Allowance knock the first £2,000 off the NI bill for every business and charity.

Drivers and drinkers
The very unpopular 3p fuel duty due to be implemented in autumn this year has now been scrapped.

There was also a planned 3p rise for beer duty which, like the fuel duty, has also been scrapped. George Osborne went one step further with the beer duty and has actually reduced the duty on a pint of beer by 1p!

As we mentioned earlier, there wasn’t much in the Budget that hadn’t been expected or we didn’t already know, so what was announced previously?

At the moment, those between age 65-74 get a more generous tax-free allowance – £10,500, and £10,660 for those aged 75 and over. These benefits taper off and the additional benefit is lost if earnings reach £29,000. From 6th April this year those allowances for anyone already aged 65 will be frozen, and the extra personal allowance will be scrapped for anyone who turns 65 after 5th April.

Also from 6th April, the highest earners – those with income of more than £150,000 – will face a 45%, rather than 50% tax rate.

There were also a number of changes announced regarding benefits, including Jobseeker’s Allowance, Employment and Support Allowance, Income Support and maternity, paternity and adoption pay. The basic state pension will be increasing to £110.15 guaranteed per week, a rise of 2.5%.

Savings
From 6th April, the annual limit for Individual Savings Accounts will increase from £11,280 to £11,520, a rise of 2.1%. The change is announced in an attempt to try and help savers who have been hit in recent years by low interest rates. As in previous years, half the allowance can be held in cash ISAs.

Longer-term changes
In 2014-15 and 2015-16 the higher rate income tax threshold will increase by 1% a year.

The Capital Gains Tax allowance will also increase by 1% a year to £11,000 in April 2014 and £11,100 from 6th April 2015.

Finally, the inheritance tax threshold was supposed to rise to £329,000 from April 2015, the first increase under the current chancellor. However, this has now been frozen until 2019. As mentioned earlier, though, between now and then there will be an election, and as with elections in the past, inheritance tax has been seen as a vote winner, and this next one will surely be no different.

Book of the month
I know many of the readers of this newsletter have children, and this month’s book recommendation is for them. ‘Children are from heaven’ by John Gray (also the author of ‘Men are from Mars, Women are from Venus’) set out how to bring up your children through positive parenting.
As I (Charlie) have 2 young girls, I understand the challenges of bringing up children, and I am sure there will be many more to come. Whilst I don’t think any book can have all the answers, using positive techniques (as opposed to punishing/negative ones), using the right language, and having a process in your mind for dealing with those challenging situations make for a much happier house. This is also available as an audio book, for the multi-tasking Mums. I hope you enjoy.

Last month, the Monetary Policy Committee at the Bank of England announced that it was keeping interest rates unchanged. No surprises there. However, what they did do differently was to make an accompanying statement, something quite unusual for the MPC.

The accompanying statement discussed inflation and future expectations. In the statement the MPC said it expected inflation not to fall below 2% for the next two years. CPI has fallen from a 5% high in 2011 to 2.7% this January. However, the 5% figure was not a true reflection of conditions because it included the 2% VAT jump, and so the real figure when you take this out was probably closer to 3.2%.

The Committee stated that to try and bring inflation down sooner would damage the fiscal stimulation.

Use them or lose them!

As the tax year end approaches, remember that this is your last chance to use your pension and ISA allowances for this year. You can put up to £11,280 into an ISA this year, and £50,000 into a pension. These genuinely are some of the best tax breaks you get as a UK tax payer, so it really does make sense to use them up.

Tax education

While there are many extracurricular activities taught at schools, one topic that has not appeared on the curriculum is personal taxation. I was therefore delighted to read recently that as of next September, all 11 to 14 year-olds will be taught about how money works and how to budget their income. Pupils older than this will study tax, how credit works and possibly even the concept of financial risk. One can therefore hope that our future generations will be sufficiently educated to understand how the economy runs from a practical level, and not just from a business studies perspective. Our current “Generation Y” adults are perceived to be questioning of professionals, choosing instead to do their own thorough research before taking the plunge with appointing a financial adviser (for those of you not familiar with the Generation Y concept, these are people who are currently in their 20s-40s). I wonder if the next generation, having been taught how things run, will be more trusting and accepting of professional advice.

Will the bad press ever stop for the banks?

In a recent FSA mystery shopper survey of six major banks and building societies between March and September 2012, it has been shown that 11% of bank advisers gave unsuitable advice, and in a further 15% of cases the adviser did not gather enough information to show whether their advice was suitable or not.

The FSA confirmed that the main reasons for the advice being poor were that the advisers’ recommendations were not suitable for: the risk level that customers wanted to take; customers’ financial circumstances and needs; and the length of time that a customer wanted to hold the investment.

An example of an adviser failing to take into account all of the customer’s financial circumstances was for a person who had between £30,000 and £40,000 to invest but also had £9,000 of credit card debts accruing where they only made the minimum payments. The adviser did not suggest that the customer paid off the debt, but did recommend an investment into a collective investment scheme. The FSA saw this as poor advice, finding that the adviser’s recommendations were not in the best interests of the customer as the interest accrued on the credit card debt would likely be higher than the potential investment returns, and also overlooked that there was no investment risk in paying off the debt.

This was the first mystery shopper exercise where the FSA had published the results since September 2008 where that exercise was about payment protection insurance (PPI). We know what a bad press the banks got with PPI mis-selling, and findings such as this recent report by the FSA will only degrade the high street banks’ reputations even more.

In their report the FSA were encouraged by the changes being made in the majority of firms. However, there was ongoing concern that a number of advisers were still making basic financial planning errors, and as long as this prevails then the bad press probably won’t disappear any time soon.

The most interesting area not covered yet on this subject is whether it will be for the teachers to deliver the information to pupils, or if financial professionals will be appointed. I wonder just how accurate and realistic a teacher’s training will be, given that they probably don’t fully understand our complex taxation system and don’t have to worry about their retirement in quite the same way as most other individuals!

Inheritance Nil Rate Band

Do you remember the Conservative manifesto? In it there was a commitment to increase the Nil Rate Band (NRB) to £1m. Following the election the NRB stayed at £325,000, and the manifesto commitment was not kept. Perhaps understandable, since the Conservatives do not fully control the government.

Then there was the announcement that the NRB would increase with RPI from the new tax year.

Then there was the Dilnot report and the recommendations that long-term care should be paid for differently, and any hopes that the politicians would actually do what they promised fizzled into the night.

The present situation is that the NRB will increase in the 2018/19 tax year. Apparently, if you look out of your window, you can see a herd of pigs flying past.

Long-term care changes

Following the Dilnot report, the government has listed a set of changes that it will implement following the next election. If you believe that their plans will be implemented, then you probably did see those pigs flying past your window. And so, we suggest that you pretty much ignore what has been said about what they intend to do, and wait until something is actually done. But for those of you who want to understand what the plans are, here they are, without the spin.

• The first £123,000 of your estate will be protected. Well, that’s what was said in Parliament. However, the detail is a little different. Under the proposals, the first £17,000 is actually protected. However, if your estate exceeds £17,000 then there will be a “sharing of payment” arrangement between you and the local authority up to the level of £123,000.
• The maximum spend that you will ever make in your lifetime will be £75,000. The “spend” is only on “care costs”, not accommodation costs. When you need care, around 40% of the cost is for the care and 60% is accommodation costs (assuming you are in a residential or nursing home). You will be responsible for all accommodation costs, without limit.
• Assets over the £75,000 capped limit are protected. Well, they are protected from care costs, but not residential costs. As noted above, there is no cap on the accommodation costs.

With an election due before these changes are scheduled to be brought in, the chances of them being implemented intact are very low, so please don’t make any plans based on what the government has said they will do.

Book of the Month

This month’s book of the month is ‘The Richest Man in Babylon’ by George Clason. The Babylonians are the people who invented the concept of “money” more than 5,000 years ago. The same principles that applied to earning and accumulating wealth then still very much work today. This little book of parables about ancient Babylon provides a fresh point of view to modern readers that has worked to inspire millions of readers since the book was first published in the 1930′s. It provides excellent and practical advice for readers of all ages, and should be required reading for school and university students before they start their first real job.

From January 7th 2013, HMRC are introducing a new system for Child Benefits. Currently, all parents and guardians, irrespective of income, receive a Child Benefit of £20.30 a week for the first child and £13.40 for each child after that. As an example, a family that has two children currently receives £1,752.00 per year. However, this year (2013) will see these rules change. If you, or your partner, earn more than £50,000, you will be ‘means-tested’ to see how much you could stand to receive. If you are in this situation, you could see your Child Benefit stopped or clawed back through extra tax payments.It is important to note here that your incomes are not combined, so if you both earn £49,000 you will still continue to receive Child Benefit in full. As you can imagine, this has caused a huge amount of controversy.

So what about if you earn between £50,000 and £60,000? Well, in this instance, the means testing, as mentioned before, comes into play. In families where one parent earns between these figures, the Child Benefit will be reduced on a sliding scale, so that 1% of the benefit is lost for every £100 above £50,000 that is earned. If you, or your partner, fall into this category, you are under obligation fill in a Self-Assessment Tax Return. Through the results of this, if you have received any Child Benefit that you are no longer entitled to, it will be clawed back through the medium of extra tax payments.But what about if you earn more than £60,000? To put it simply, your Child Benefit will be lost, however it is not quite as black and white as that, as I will discuss shortly.

Before I move on to the ways in which you can make these changes work for you, I want to emphasise that your income is regarded as your ‘adjusted net income’, rather than your gross salary. So before you begin to worry, ensure that your ‘take home’ salary is equal or greater than £50,000.

These are the facts, but now for the part that you should really listen to! There are certain opportunities that can take the full force out of this blow. Firstly, let us look at those of you who earn between £50,000 and £60,000 (adjusted net income). The obvious solution here is to reduce your income, but no one really wants to do that. So what are the options? The first thing to look at here is an additional pension contribution. Any contributions that you make through a pension scheme are deducted from your income.

Say for example you are earning £60,000, so you are £10,000 over the limit for receiving full Child Benefit; if you were to ask you boss to pay you £50,000 instead, plus pay £10,000 into your pension, things look a little different. Firstly your you would automatically be eligible for full Child Benefit. Secondly, this £10,000 only cost you £5,800 out of your pocket, because the rest would have gone in income tax. Finally, your employer has just saved a whopping £1380 in Employer National Insurance. Many companies are willing to give this saving to you as a further pension contribution. So instead of have £5,800 in your pocket, you now have £11340 in your pension and £1753 child benefit in your pocket. As a return on your investment, that is 225% immediate growth. This is what is known as salary sacrifice, or salary exchange, and is perfectly legitimate tax planning. You can read more about this here; http://www.efficientportfolio.co.uk/blog/sacrificing-salary-valuable/

A similar exercise can be done by making a pension contribution yourself, but the savings are much greater if it is done through salary exchange. By contributing more to your pension you are also making sure that your money is being put away for your future and growing virtually tax free.

Now moving on to those of you who earn more than £60,000 per year after tax. As I previously mentioned, if you, or your partner, fall into this category, you will lose your Child Benefit. You could of course try to ‘reduce’ your take home pay using the methods above, but your pension contributions are capped at £50,000, and putting large sums into the pension to get below £50,000 may not be realistic. If there is an opportunity to split your income between you and a spouse, because you run your own business, this is also sensible planning, subject to advice from your accountant.

Realistically, if you earn significantly more than £60,000 you will no longer receive these benefits, but you should still claim them.

This may sound a little a strange. After all, if you are not entitled to something, why claim it? Basically, claiming Child Benefit can help to build up National Insurance Credits for a non-working spouse, which in turn can help to protect your future State Pension. Furthermore, if you opt out, you cannot opt back in, so if your circumstances were to change in the future, you have lost them forever. What I would recommend doing in most circumstances is to claim for Child Benefits and then pay them back. This way you are hedging your bets for the future as well as protecting your state pension entitlements.

Rules will change as this process transcends, for example there is talk already that HMRC will still honour you National Insurance Credits even if you stop receiving benefits. The key message to take from this is to keep your finger on the pulse and check the news regularly.

In order not to lose out with Child Benefits you need to increase your pension contributions, opt in for Salary Sacrifice in the work place and think about retaining your National Insurance Credits. This may seem a little confusing, so it is important to talk to the person responsible for your company’s pension and benefits schemes. Alternatively you can always talk to us at Efficient Portfolio.

1^st January 2013 marks the start of a new regime in financial services in the UK. The change in regulations also sets in place changes for the next three years.

For several years it has been known that there are many shortfalls in the regulatory regime under which financial salespeople operate in the UK. Following an extensive review it was deemed that there are three areas that may affect the levels of advice that consumers receive from financial advisers. These are:

1. Commission bias
2. Lack of knowledge/ability
3. Insufficient reserves to deal with problems

When you look back at the various problems that have been associated with financial advice you can see that these three issues have either caused the problems in the first place, or have exacerbated the situation. Pensions mis-selling, endowment mis-selling, precipice bond mis-selling, are just a few examples where high levels of commission may have caused the wrong product to be sold to the wrong person at the wrong time. Lack of knowledge and ability may also have contributed to poor advice, and of course, when complaints are made, companies often close down or collapse because they don’t hold sufficient reserves to meet the costs of fixing their errors.

And so the Retail Distribution Review was put in place. RDR, as it has become known, is an attempt to put things right. In our opinion it doesn’t go far enough, and there are plenty of holes in the regulations that some companies have already discovered and will no doubt use going forward. Nevertheless, the new regulations are a good start.

So how will they affect you, and is there anything you should do?

Commissions

From this month, commission payable on investment-related products will become banned. This means that if an investment is made or a pension contribution made which is not part of an existing agreement, commission is banned, which means that fees must be paid instead of commissions.

This will be difficult for many advisers simply because the level of fees that people are willing to pay is generally significantly less than the commissions that previously were paid. For example, most advisers selling a Prudential Bond could have earned 7% commission. This means that for a £100,000 investment, £7,000 would have been paid in commission. It is unlikely, however, that many people would pay a £7,000 fee for setting up a Prudential Bond. And so, in our view, many advisers are likely to see a significant fall in their income.

For you as the client, the main impact is on old investments. For an investment established before 1^st January 2013, the adviser can still receive commission on that contract, even though commissions are banned. Therefore, if you have a pension, for example, and you pay into it monthly or annually, the adviser that sold it to you would still be receiving commission. As pensions no longer can include commission, it makes sense to change the pension to a new “commission-free” arrangement, and save yourself thousands in the process.

If you have any old investment, saving plan or pension, please let us know as soon as possible and we will advise you on the best action to take.

Knowledge

From this month, financial advisers must be qualified to what is known as Level-4 Qualification to continue to practise. In its most simple terms, this is about twice the level that was formerly required. At the time of writing only 66% of advisers had this qualification (source: Aviva education review September 2012), which may mean that many will be leaving their business or simply selling out.

If you have any products put in place by advisers who are no longer practising, then we recommend these be reviewed immediately. If the adviser is no longer practising because they have insufficient qualifications, is what they arranged for you the right thing?

Reserves

The problems following the Arch Cru fund collapse demonstrate how important it is to use an adviser with sufficient reserves if things go wrong. The collapse of Arch Cru caused a large number of financial advisers to go out of business, and as a consequence their clients are now reliant on the Financial Services Compensation Scheme for reimbursement. Fortunately the scheme is excellent and well funded (from the levies that advisers pay into it), which means that most people will get most of their money back, but that process may take several years.

The new rules mean that IFAs need to significantly increase their reserves over the next two years to ensure that they are sufficiently robust to withstand bad times.

Loopholes

Unfortunately, there are a number of what we consider to be loopholes in the new regulations. For example, payments known as bundled payments will be permitted until the “platform review” is completed, which will take at least another 12-18 months. Bundled payments are what you may have called “kick-backs” in the old days, and are payments made to advisers from the fees that an investment company charges. As these strictly speaking are not commissions, they will still be allowed. Also, if someone is contracted to a single company, that company can make a payment to the salesperson without you knowing what that payment is!

Inflation as predicted

Inflation remained at 2.7% for October as measured by CPI, while RPI fell from 3.2% to 3% for the same period.

Interestingly, fuel prices had the largest downward effect on inflation over the period, while food increases had the biggest impact.

The incoming governor of the Bank of England, Mark Carney, said that it would be better to focus on nominal GDP, which is a mixture of GDP and inflation, rather than focusing simply on inflation.

Changes in pension rules (again)

Do you ever feel that it would be nice if things just stopped changing? Certainly for pensions this would be a good idea.

The problem is that a pension is a long-term arrangement, and people spend a great deal of time and effort planning what needs to be done so that they have sufficient money in retirement. If the rules keep changing, those plans get messed up. The real issue is that the rules change because of temporary short-term issues that politicians think are important. The politicians know they won’t be around in power in 10-15 years’ time, so whatever impact there is will not be their problem.

The reduction in contribution allowances from £50,000 to £40,000 may not sound to be a big deal, but in the world of the media a £50,000 pensions contribution is a big contribution and so is easily attacked. However, such contributions are often made in the last year or so of work by ordinary people who need to boost their pension income. If you were planning to do this, and then the rules suddenly changed, it really doesn’t help those who are trying to take responsibility for their own lives.

The change to the lifetime allowance cap to £1.25m is crazy, when it should be increasing with inflation. In a world where we need people to save for their future, it makes no sense to reduce the amounts that they can save!

If you have a pension fund of over £1m, are in a final salary pension scheme, or have been in one where the amount of annual income totals £40,000 or more, we should review it immediately to establish if “fixed protection” or “personal protection” should be put in place.

More pension changes (again)

Do you ever get the impression that politicians and the Treasury have no idea what they are doing?

You may recall that the present government changed the rules of pension fund withdrawal and created “drawdown” pensions, which were nearly the same thing as what was in place before pension fund withdrawal! In making these changes they also reduced the amount that can be withdrawn from the pension from 120% of the GAD allowance (this is an arbitrary amount set by the Government Actuary’s Department, and is designed to make the pension last for a lifetime) to 100%. At the time we said this was nuts, and would cause nothing but problems.

In the Autumn Statement the chancellor advised that it was now increasing the allowance to 120%, i.e. back to what it was.

The move is a good thing and was well received, but I get the feeling that it would help so much if the people running things perhaps asked real advisers working every day with real people with real money, what the implications of a change would be, before they did it.

IHT forms change

If you are in the middle of dealing with probate, or will be dealing with probate in the next few months, be aware that the IHT400, IHT 401 and IHT 404 forms have changed to take into account the recent changes in IHT announced in the Autumn Statement.

Misery Index improving

The Misery Index is a measure of unemployment levels and inflation, and the index is dubbed a misery because since September 2009 both have been on the increase. This is not a good sign for businesses which are having to lay off staff, or a morale booster for us, the consumer. At the time the level of unemployment was 2.59 million people and the Consumer Price Index (the figure now used by the government to measure inflation) was at 2.6%. Previously, the rate used to calculate inflation was the Retail Prices Index. The main difference between the two is that RPI includes the cost of mortgage interest and council tax, whereas CPI does not.

For the Misery Index to improve, we want the unemployment rate to fall, and/or inflation to fall. I am pleased to report that at the end of November, we had an improvement. November figures show a fall in unemployment to 2.51 million, which is a reduction since July of 3.3%. In addition, the number of people claiming Jobseeker’s Allowance has fallen to 1.58 million.

So what does this mean? Unemployment figures are improving, and given October’s news that the UK economy grew by 1%, it seems that businesses are recovering and looking now to take on the staff that were let go over the previous four years. This can only be good news. Consumers are still spending as interest rates are so low, and businesses are responding to this demand. Looking forward through 2013, we obviously hope that the economic growth continues, although this will increase the chance of interest rates going up, which will affect investments in gilts, property and bonds. For those of you who have your investments actively managed by Efficient Portfolio, this is the area where you may see the most changes in the coming year. But of course we don’t have that crystal ball; only time will tell!

Sugar-coated bad news

If you had a little time on your hands on the 5^th December you may have chosen to sit down with a cuppa and a biscuit and listen to the dulcet tones of Chancellor George Osborne as he delivered his Autumn Statement.

On the face of it, looking at some of the key points, there were certainly some seemingly positive statements. The threepence increase in fuel tax due in January has been cancelled; the personal allowance has risen by £235 to £9,440; basic state pension benefit will increase by 2.5% this year; and the ISA allowance will also increase by 2.1% to £11,250.

So what about the flip side: who will miss out to make way for these increases? Well, the increase in the personal allowance is heading in the right direction for the coalition’s aim of a £10,000 allowance and the chancellor’s target of bringing the allowance in line with the age-related allowance which has been frozen as a consequence. High rate tax payers will see the HRT threshold rise by just 1% to £41,865 in 2014 and then to £42,285 in 2015. This leads us on to a common thread throughout the Autumn Statement of “1%”. Other 1% increases include the Nil Rate Band allowance, which will increase from £325,000 to £329,000 in 2015/16, and whilst the new Capital Gains Tax allowance is yet to be confirmed for 2013/14, we have been told that it will increase in future years by … yep, you’ve guessed it, 1%. Certainly as regards the HRT threshold, this seems to be linked to the previous imposed limit of 1% on benefit increases.

So what does this mean? By his own admission the chancellor acknowledged that this 1% is likely to be lower than inflation, so in real terms these increased allowances effectively mean that we’ll end up paying more tax! So, a good or a bad Autumn Statement? Well, I guess that depends on your personal circumstances, but it does highlight the importance of digging a little deeper behind the rather more attractive headlines.

A positive light for Greece?

In the middle of December, S&P upgraded Greece’s credit rating by six notches from selective default to B-. S&P has praised fellow Eurozone countries for their “strong determination” in their efforts to keep Greece as a member state of the Eurozone. They have also praised the Greek government for their efforts in continuing to make spending cuts. Does this mean that Greece and the Eurozone are emerging from the trouble?

What it tells us is that S&P is confident that a Greek default and leaving the Eurozone is very unlikely. It also tells us that they have more confidence in Greece to maintain its end of the bailout deal and that they will continue to do so.

The underlying feeling, though, is that confidence in both the Eurozone and Greece is increasing. However, that is not to say that Greece is out of economic trouble. Official figures released for the third quarter of 2012 show an increase in unemployment to 24.8%, up from 23.6% in the previous three months. The figure for young people is 56.6%. Over half of all young people are out of work, and it doesn’t take a genius to work out that that is not sustainable long term, so there are many things the Greeks need to improve economically.

However, the main result as discussed above is that Greece is extremely unlikely now to be leaving the Eurozone, thereby giving the global economy more confidence in the Eurozone as a whole.

Book of the month

This month’s book is The Invasion Game, by Stephen Newton. Stephen has worked as a business coach and consultant since 2001, and is an expert in business development and marketing. His work also often entails leadership and operational management development for the client firm’s senior team in order that they are able to implement their firm’s strategy or adjust it so that it can be implemented.

This book adopts many of the business growth principals that Charlie has learnt over the years and many more new ones, but with specific focus on lawyers and their practices. If you are a lawyer, you should certainly read it, as it will help you transform your business.

As an alternative to the book, he is also speaking at an event at The Rural Business Community in Seaton for us on Thursday 24^th January at 8am. If you are an accountant, solicitor, or other business adviser and you would like to attend, please do get in contact. If we have any space available, we would be more than happy for you to join us. If you do, please email charlotte@theruralbiz.com to book a place. Breakfast is also included.

You may have read in the media about the new clampdown by HMRC on offshore accounts. In October 2011 theUKandSwitzerlandcame to an agreement on tackling tax evasion, which comes into effect in 2013. The agreement was designed to raise £1bn in revenue for the government from an expected around 2,000 registrations, where those who have an offshore account on which no tax is being paid were given the opportunity to register it for future taxation with an amnesty on past tax due. However, since the scheme came into effect there have been over 3,000 registrations, which have generated over £3bn in income. People who fail to register, if caught will be liable to a fine of 200% of the tax owed as well as having to pay the tax.

Those of you who have offshore accounts that we have put in place have nothing to worry about as they are all registered accounts and bonds, and so are totally legitimate.

Warning – if it looks too good to be true, it probablyis

Last month a client received a mailer purporting to be from Investec Asset Management offering a bond which guaranteed an 8.1% return for the year. It looked too good to be true. A great, guaranteed rate from a well respected investment house, and so he called the direct line to arrange the investment. While he was waiting for the company to call him back he called his adviser, who was surprised to hear of the investment as it had not been notified to IFAs. The adviser called Investec directly, only to find out that there was no such bond on offer. The client then received a call supposedly from Investec saying that the offer was ready to close and that he had to transfer the money into the investment soon. Fortunately the client spoke to his adviser before making the transfer, and in the nick of time halted the transaction.

It turns out that there was no such offer and that someone had simply falsified Investec’s details, logo and paperwork, etc, in an effort to defraud the client. The telephone number for the fraudulent company has now gone dead and the whole matter is being investigated.

Beware of offers that seem too good, because they always are. And if in any doubt, please call us immediately.

Rate cuts

Last month, inflation as measured by the CPI fell to 2.2% – great news for all of us; although for savers who put their money in savings accounts – ultimately bad news.

As inflation fell, interest rates across account providers fell making it almost impossible to protect the value of capital in savings accounts.

A non-tax payer will need to earn more than 2.2% to keep the value of their capital;a basic rate tax payer needs to earn 2.75% gross and a higher rate tax payer needs to earn 3.67%. If you look around at the rates available, this is virtually impossible to achieve as providers reduce their rates.

Russia

Russia finally gained membership of the World Trade Organisation in August this year; after 19 years of trying it finally became official on the 23rd August.

It is suggested that this accession might increase its GDP by 3.3% and consumption by 7.8% in the medium term. In addition to this membership, the enhanced appeal ofRussia is that the government is slowly making moves to sell parts of state-owned companies. This will broaden and deepen the Russian stock market’s international appeal.

Investing inRussiacan be tricky; it’s still a hive of corruption, and so when investing it is important to use Russian investments that are registered inEurope. When choosing a fund that invests in Russia, it is important you look very closely at the holdings within the fund to ensure the integrity to protect investors from problems of a type we are just not used to in the West.

Bank of England appoints new governor

This month we have seen the Chancellor George Osborne appoint a new governor for the Bank of England. Mark Carney will replace Sir Mervyn King when he steps down in June 2013.

By many this is seen as a radical appointment, not least because Carney is a Canadian and is the first foreign appointment in the bank’s 318-year history. However, this could turn out to be a smart move by the Chancellor as Carney comes with a pretty impressive CV that includes playing an integral role in steering the Canadian economy through the global financial crisis in his role as chief at the Canadian central bank.

The former Goldman Sachs manager, who will serve five years in the post, is considered to be more “hawkish” than Sir Mervyn. He moved to raise interest rates inCanadato offset a housing bubble and it is possible that he may act to raise rates more quickly here, as well as look to start unwinding quantitative easing.

The 47-year-old will be partly responsible for regulation of the banks, setting interest rates and heading up a new committee designed to identify and ward off future potential crises in the financial sector.

So what impact will this have on the portfolio? Well, the markets were certainly surprised at the appointment and are bracing themselves for potential radical changes to help stimulate growth within theUKeconomy. However, some of these changes, such as a rise in interest rates, are probably already being factored into market values. As many of you know, we are already preparing for the impact of a potential rise by making changes to the low risk portfolio which will help counteract any negative response to a rise in interest rates over the coming year.

Autumn Statement 2012 summary

Further restrictions for pension savers
After much rumour and speculation in the build up to the Autumn Statement, the Chancellor has announced further cuts to the amount individuals may put aside in their pension pots and still receive tax relief.

It has been confirmed that the Government will reduce the annual allowance (the amount that can be saved ‘tax free’ each year) from £50,000 to £40,000. Furthermore, the overriding lifetime allowance for pension contributions will also reduce, from £1.5 million to £1.25 million.

While the measures will undoubtedly be unpopular, and follow significant changes to the pensions regime in  last year’s Finance Act, the reduction to the annual allowance at least, was less than many were expecting. In addition, these changes will not come into effect until April 2014, so there are still two tax years to go to maximise contributions using the current levels.

The Government’s figures suggest that the measures are likely to only affect the wealthiest pension savers, as only one per cent of the population currently make pension contributions in excess of the reduced £40,000 limit each year. However, those with a defined benefit scheme may need to take extra care as will many of those in the public sector who may find themselves caught up in these changes.

Personal tax bonuses
The Coalition Government has long been committed to increasing the personal allowance to £10,000. In his 2012 Autumn Statement, Chancellor George Osborne announced a further increase to the allowance for the 2013-14 tax year, setting it at £9,440 from April next year.

This represents a further £235 increase on the planned rise (a total increase of £1,335), from £8,105 in the current tax year.

As expected, higher rate taxpayers will not benefit from the full amount of the increased allowance as the higher rate threshold will again be lowered. From April 2013, the amount above which an individual will be subject to the higher, 40%, rate will reduce from £42,475 to £41,450. However, the Chancellor has confirmed subsequent one per cent increases to the threshold in 2014-15 and 2015-16.

Corporate taxes
As part of the Government’s effort to support business and enterprise, the Chancellor has announced another cut in the main rate of corporation tax. The main rate will now reduce by a further one per cent over planned reductions, to 21% from April 2014.

The main rate will fall from 24% to 23% from 1 April 2013, as announced at Budget 2012.

Clampdown on tax avoidance
As expected, given the current media focus, tax avoidance featured heavily in the Autumn Statement, with the Chancellor reiterating the Government’s commitment to tackling tax evasion and aggressive avoidance to ensure that ‘everyone pays their fair share’.

The Chancellor confirmed the introduction of a general anti-abuse rule, to provide a new deterrent to abusive avoidance schemes. Guidance and the draft legislation will be published later in December 2012.

Book of the month

This month’s book of the month is The Chimp Paradox;The Mind Management Programme to Help You Achieve Success, Confidence and Happiness by Dr Steve Peters. Dr Steve Peters was a massive influence on the Team GB Cycling Team, and this book clearly demonstrates why. It will make you look at the way your brain works in the way it does, and why you do and react in some of the ways you do. It also gives you some excellent insights into how you ‘can manage your chimp’. Don’t let your chimp stop you buying this book!

The media, the shops and especially our children are all telling us that it’s that time of year again – Christmas is nearly upon us. Of course, for most of us, this is a joyful time where we can spend quality moments with our loved ones, indulge in our favourite foods and treat those closest to us with the gifts that they desire. But none of this magically happens. The reason that all of this ‘festive spirit’ comes to fruition is down to one factor- planning.

Over the years we all become expert Christmas planners; whether it’s buying the toys for the kids, ordering the turkey from the butchers, writing the cards or decorating the tree- we have perfected the art of planning for the ‘big day’. But what about the rest of our lives? Why is it that we plan for Christmas with gusto, but shy away from planning our lives?

Alan Lakein once said that ‘planning is bringing the future into the present, so that you can do something about it now’. I fully agree with Lakein; in order to live the future that you want, you need to plant the seeds for it now. That way, you can see your future growing the way that you intended it to, pruning and weeding as you go along if goals change. But there is more to it than that. To truly begin your life planning strategy you need to think back to your childhood.

For me, and I’m sure most of you will empathise with this, my dreams and hopes had no restrictions. As Walt Disney said ‘if you can dream it, you can do it’ and this certainly was my motto as a child. My desires weren’t tainted by ‘grown-up’ barriers like mortgage payments, council tax bills and school fees for my offspring. My rawest dreams were my goals.

As time passes us by, our true passions and dreams become clouded by the hum-drum of adult life. We also become more guarded about expressing our hopes. Why is this? Is it because if we express our true hopes our failures are exposed? Or have we become far too pragmatic for our own good? The truth is, as this transition has happened, our lives are negatively impacted. To break free from this, ask yourself this- if you had all of the time or money you needed, what would you do? Now imagine that you have only got five years to live. From the list you first made, what would change, what would stay and what would go?

What you have just done is pinpointed some of your dreams and identified what you value the most. This is the first step to Life Planning. The Kinder Institute suggests that ‘the Life Planning philosophy is founded on the idea that every human being strives to live a life of meaning and purpose’. So what has this all got to with financial planning?

The answer is a new beginning for the industry; financial planning is evolving and developing into something that is no longer about generic products, common goals or generalised strategies. Financial planning is becoming a profession that discovers your unique aspirations and shows you the ways in which these can be achieved. Of course, this is something new to the world of finance and will not become common practice for years to come.

At Efficient Portfolio we are embracing Life Planning. We believe that the client’s core dreams and desires need to be at the forefront of their financial planning. Every client is unique to us and we work hard to give you a future that is completely centred on you, your dreams and your innermost hopes. We aim to break through any self imposed barriers that are preventing your dreams from coming to light. With this meaningful content we can then build a plan that is as unique as you are.

So don’t hold back on your dreams, contact us today to see how Life Planning can enrich your future.

Call 01572 898060

Email enquiry@efficientportfolio.co.uk

The UK’s main inflation rate fell to 2.2% in September from 2.5% in August, dropping to its lowest level for three years, and has then risen again to 2.7% in October.

Having been as high as 5.2% in September 2011, CPI inflation has been steadily declining over the past year.

Inflation has come down sharply as global growth has slowed and the UK’s economy struggles out of its current low-growth malaise.

In June, CPI inflation came in at 2.4%, the lowest level since 1.9% for November 2009.

The Bank of England’s £375bn quantitative easing programme – and its move to slash the base rate to a record low of 0.5% – has helped to stimulate inflation and stave off a deflationary environment. Many economists expect that the Bank of England will pump more monetary stimulus into the economy in the coming months, expanding its asset purchase target by a further £50bn, to £425bn.

The general fall in inflation we believe is indicative of the continued gradual change in world economics. We believe this level of inflation is likely to continue for the foreseeable future as the world economy slows to what are likely to be more sustainable levels. Of course, this means that from now on we must also come to terms with lower levels of interest rates and investment returns. Too many of us still have the view that double digit returns should be expected in the investment world. This would be understandable if inflation were in the 5, 6 or 7% level, but it is not.

The real measurement of investments is their performance over inflation. While there can never be any guarantees of performance, this should be the goal of any investment over its term.

Mortgage rules to change

You may be aware that from next year the rules on commissions will change (see below), but in April 2014 the rules for mortgages will change, too.

From April 2014 all mortgages sold must be through the provision of advice. The FSA believes that many people have purchased a mortgage without knowing the real impact of the product. Also, they are concerned about those people who sell mortgages but who claim not to give advice. The FSA believes that these people really are giving advice, but not recording it so that they cannot be held liable if an issue of poor advice arises. Therefore, once we reach April 2014, you must be given advice before taking out a mortgage.

This probably is a good thing, but the question arises, who is going to pay for the advice, particularly from the bank that is selling it? At Efficient Portfolio we are delighted to announce we have a new mortgage adviser joining us shortly. As a result, please direct any queries you have on your existing mortgage, or on a new one you need to the office.

RDR (Retail Distribution Review) is close

We have covered this before, and will do so again in January, but it is worth pointing out that from January next year it will be illegal to receive commission for selling an investment product. Commission will be outlawed, and fees will be the only permissible form of remuneration.

This is a great step forward, and we hope it will lead to the abolition of biased sales. However, there are a few points that you should remember:

• Commission is still payable on products with no element of investment (for example, term insurance, income insurance, health cover, etc)
• Mortgages can still pay commission (however, they call it other things such as a marketing allowance or product fee)
• Some large companies will charge a fee for the investment and then pay a portion of the fee to their sales person. This is really commission by another name, and we believe is a little disingenuous
• If people received a commission when the policy or investment was set up, they can still receive commission!

It is this last one that is most important. If you have an investment with a large insurance company, then whoever sold the investment to you is probably still receiving a commission, even if you have never seen them again! This also applies to so-called “discount brokers”. If, for example, you have an investment with companies such as Hargreaves Lansdown or Best Invest, they will be receiving a commission on the investment which they have set up. This commission will continue, even when the law changes next year. This really doesn’t seem very fair to us.

The same applies to existing pension contracts.

These commissions can be stopped, or amended, but you need to take action to do so. Call, or drop any of the team an email, and we will be happy to help.

Out of recession – so what next?

The Office for National Statistics (ONS) announced last month that the UK was out of recession, stating that growth in the third quarter of 2012 was 1%, significantly above the predictions of 0.6%. ONS also stated that 0.2% of this was due to the Olympics, which if excluded gives a figure of 0.8% (we should think of excluding it only because it won’t be repeated).

At the same time, Capital Economics estimated that 0.5% of the growth figure was due to a bounce from the Jubilee effect, bringing the figure down even further to 0.3%, which at the present time is probably a more appropriate reflection of what is happening in the economy.

The problem with these figures is that they are always 4-5 months out of date.

That said, they do serve as a guide to what is happening, which helps to shape investment strategy.

As the economy picks up, the chance increases that interest rates will rise, and which will then impact on gilt, bond and property returns. Knowing this will help you to decide on how investment portfolios should change, in advance of everyone else.

Another tax on investments?

This week has seen the last obstacle removed on the European Commission’s bid to introduce a financial transaction tax to help raise funds to tackle the European debt crisis. Although Britain, Sweden and the Netherlands are against this tax, 10 out of the 27 EU members, including France, Germany, Italy and Spain, have all but agreed to go ahead. A number of states have said that they are not against the tax but would agree to it only if it was accepted globally.

The tax is intended to raise billions of euros for the member states that are experiencing difficulty in these times of austerity, and to ensure that the financial institutions fund the crisis rather than the public directly. The tax would be imposed on transactions of currencies, bonds and shares traded at banks and other financial institutions, and the proposal is to levy 0.1% on shares and bonds, and 0.01% on derivatives. It is estimated that this tax could raise £46bn a year if it was applied across the entire European Union.

Not only would this tax increase costs for financial institutions, it would also fall heavily on to investors, who would see an additional charge applied to their savings and pensions.

At a time when the FSA is trying to make financial services clearer by removing commissions and ensuring all financial advisers and investments are not only fee based but also transparent, an additional tax on investments would only make financial services more expensive for individuals. It will be interesting to see what happens with this tax proposal in the coming months, but I can only hope that the Treasury retains its current stance. Of course the European Debt needs addressing, but it shouldn’t fall on all investors.
Book of the month

Lance Armstrong has certainly had his fair share of press lately, and his first book ‘Its not about the bike’ is one we regularly recommend, particularly to people that have been diagnosed with cancer. With those thoughts in mind, this month’s book recommendation is ‘Every second counts’ by Lance Armstrong.

It was written in 2005, so precedes all the current news, but that certainly makes it even more interesting. Firstly, you cannot believe having read it, that he actually did take drugs whilst cycling, despite the ‘evidence’ (all verbal, no physical evidence) that suggests otherwise. But more importantly, it makes you reappraise what he achieved. Personally, I concluded that what he achieved was absolutely amazing, whether he won the tour (against people we know were taking them) or just finishing it, given what he went through. There is lots to be learned from this book, all woven into a quite unbelievable story.

It really is a fascinating read, particularly if you like your cycling.