Child Trust Fund – investing for the future

FEBRUARY 3RD, 2010 By DAVID
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We are often asked by clients to recommend investments for children and grandchildren.  The starting point when considering investments for children is the Child Trust Fund (CTF), which is a tax efficient long term savings plan.

CTFs have been available since 6 April 2005 and apply to all children resident in the UK born from 1 September 2002.  The main features of CTFs are:

• Normally opened by a parent or guardian who will be responsible for managing the plan until the child is age 16

• The Government contributes £250 to each CTF at birth and a further £250 at age seven (children in low income families may receive a further £250)

• The maximum that can be contributed to a CFT each year (between a child’s birthday) is £1,200 from all contributors e.g. parents, grandparents etc 

• Unused allowances cannot be carried forward

• No UK tax on income and capitals gains

• Parental settlement rules do not apply

• Cannot be accessed until the child reaches age 18, although the child can make investment decisions from age 16 and the provider can be changed at anytime

• On the child’s 18th birthday, the CTF will cease and the child will be able to access the money.  If the money is not taken then it can be rolled over into an Individual Savings Account (ISA)

There are three types of CFT available:

• A savings account CTF which is essentially a deposit account

• A stakeholder CTF which invests in shares and must meet certain Government standards on charges, payment options and minimum contributions.  Once a child reaches age 13, a stakeholder CTF will gradually switch into less risky investments

• A non-stakeholder CTF which invests in shares.  Non-stakeholder CTFs generally have greater investment choice and are not subject to the Government standards on charges, payment options and minimum contributions.

As well as providing a lump sum at age 18, which can be used to pay for higher education costs, CTFs should hopefully introduce children to the concept of saving and the benefits associated with it.

Whilst CTFs should form the foundation of any investment planning, there will be some children who are not eligible for a CTF (because they were born prior to 1 September 2002) or whose parents already contribute the maximum each year to a CTF.  For these children, there are a number of alternative plans such as regular saver bank/building society savings accounts and lump sum/regular saver investment plans.

A day in the life of a financial planner

JANUARY 20TH, 2010 By ADAM
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As my role as financial planner within Xentum I thought it would be interesting to give you a brief insight into some of my current projects:

Researching existing investments

One of the first jobs we do for new clients is to analyse their existing investments (or pensions).  It has not been unknown to spend a day simply trawling through what we call ‘a box of tricks’, in other words, a box full of financial paperwork.  Now this may seem an unenviable task to most, but I actually quite enjoy it.  The investments that have been collected over the years often tell a story of their own. 

I am currently working on a ‘box of tricks’ for a married couple who hold a number of investment bonds and unit trusts with various investment companies. In the past week I have been contacting these companies (a laborious but necessary part of my job).  Once I have all the required information I will start to research these investments and then provide the clients with a concise analysis of their overall portfolio.  This document provides a good starting point for any advice we give and is the first step to taking on any new client with existing investments.

Arranging life cover

One client currently has a significant IHT (inheritance tax) liability and along with their solicitor, we have been instructed to look at potential options to cover this liability.  One of the simplest and most cost efficient ways of doing this is through life protection.  I am therefore currently researching the different types of life cover available and the best premiums on the market for these options.  Once I have collated all this research, we will then sit down with the client and advise on the most sensible option going forward.

Finding a solution for a client’s windfall

One of our longstanding clients recently received a windfall.  The shares that had been passed on by the client’s deceased husband had suddenly become worth a considerable amount.  This is because the company with which she held a large number of shares became subject to a management buy out (MBO).  David, our head of technical is currently working on the tax implications of this windfall.  Once we have these, we will then sit down as a team and talk about suitable strategies for the client before agreeing a course of action.  The solution that we decide on in this case will need to balance a number of factors including; income, security, tax implications (particularly IHT) and capital growth. For a complex issue such as this it’s important we work in collaboration with the client’s solicitor and accountant to create the best outcome.

Xentum website

Finally, I’m in the process of overseeing changes to the website making it more interactive and educational for everybody.  So please keep an eye out over the next couple of weeks for any changes and feel free to make any comments or suggestions as to how we can improve the website for you.

The importance of reviewing with-profits investments

DECEMBER 1ST, 2009 By DAVID
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What are with-profits investments?

With-profits investments have been central to the long term savings plans of millions of individuals and it is estimated that £39bn is currently held in with-profits mainly through pensions, endowments and bonds.

A with-profits investment is a long term investment which aims to provide a lump sum at a date in the future or in the case of a with-profits annuity, a yearly income with the possibility of investment growth over time.

The premiums paid by policyholders are pooled into a fund, which is used by an insurance company to invest in different types of assets e.g. equities, commercial property, corporate bonds, gilts and cash deposits. 

With-profits investments grow through the addition of bonuses to the policy, which take the form of regular (annual/daily) bonuses and a terminal (final) bonus.  The amount of bonus, and whether a bonus is added at all, depends on how the underlying investments in the fund perform and how the insurance company expects them to perform in the future.

Insurance companies use a process called smoothing to hold back profits in years of good investment growth to top up bonuses in years of poor investment growth.  With-profits investments have traditionally been marketed as a cautious investment to investors looking for higher returns than a bank or building society savings account but without the risks associated with investing in the stock market.

Why is there a need to review with-profits investments?

The recent performance of with-profits investments has been poor.  Many with-profits funds are suffering the effects of declaring bonuses in the 1990s which in hindsight could not be justified, and the fact that when stock markets fell between 2000 and 2003 many with-profits funds were too heavily invested in equities. 

The weaker life companies became during this period, the less able they were to hold equities, which in turn forced them to sell equities and to switch to less risky investments.

The adoption of more cautious investment strategies, partly as a response to regulatory concerns that some life companies did not have sufficient solvency capital, meant that many with-profits funds did not benefit from the stock market rally between 2003 and 2007.  The upshot of which has been that most with-profits funds are now offering very low regular/terminal bonuses or worse still no bonuses at all.

In addition to offering poor returns, many life companies have chosen to apply market value reduction penalties to ensure that policyholders do not leave the with-profits fund with more than their fair share of its assets.  This is to protect policyholders who remain in the fund, but it also means that policyholders who decide to surrender their investment or switch out of the fund will receive less than they had expected.

What can be done to improve the situation?

Depending on the type of policy you have, you may be able to switch to another fund, sell the policy, transfer to another provider or surrender the policy altogether.  Whether this is the right thing to do will depend on a number of factors and you should always seek independent financial advice before making a decision.  The main factors to consider, in addition to the current bonus rates, include:

• The financial strength of the life company managing the with-profits fund.

• The asset allocation and investment strategy of the with-profits fund.

• The remaining term to maturity.

• Are there any benefits or guarantees that will be lost if the investment is transferred, surrendered or switched into another fund?  Some pension policies have a guaranteed annuity rate, which means that the policy may provide a higher pension income at retirement than the annuity rates available in the market.

• Are there any charges or market value reduction penalties that will be levied if the investment is transferred, surrendered or switched into another fund? 

• What is the possible cost of replacing any life cover that will be lost by stopping a policy?

• Does the investment have spot guarantees?  Many with-profits investments have spot guarantees, which offer the opportunity to exit a policy early on certain dates without incurring a market value reduction penalty. Although they often apply on the tenth policy anniversary, they must be exercised within a limited time period, otherwise the opportunity is lost. 

Clearly the changing nature of with-profits funds means that with-profits investments should be regularly reviewed to ensure that they continue to meet expectations.  This is especially relevant, as huge volumes of with-profits bonds were sold between 1999 and 2001, and these policies are now approaching their spot guarantees. 

At Xentum we have been proactively reviewing the legacy with-profits investments that our clients hold, and recommending alternative investments where appropriate.

Be a step ahead with your savings

NOVEMBER 23RD, 2009 By ADAM
5 RESPONSES

You cannot pick up a weekend paper at the moment without a headline about the current dilemma for savers.  The Daily Telegraph recently stated that 9 out of 10 savers fail to make any money on their investments and many even lose money after inflation.  The primary reason for this shocking statistic is that the vast majority of savers are not making their cash work hard enough.

Banks are constantly attracting new customers with headline rates and special deals.  Once your term is up, however, it’s time to get a new special deal or get left behind in some bank default account often earning next to zero interest.  The difference between obtaining a rate of 4% in comparison to a rate of 0.2% can often run into the hundreds, if not thousands, making it vital to search for the best deals on offer.  Assuming that the bank will treat you fairly and place you on their best deal automatically will lose you money.  After all, banks make a margin on your savings so the less interest they can get away with paying you, the more money they make!!

When you are deciding on a new account, it is also important to read the small print.  Here are a couple of things to look out for which crop up all the time.  Is the headline rate offered on the full amount or is that rate tiered?  With a headline rate that sticks out from the competition, there is usually a catch, ie. must be balances over a certain amount or tiered rates on certain amounts.  These types of accounts are becoming more common within the marketplace so watch out – simple can sometimes be best.

Are you being offered a savings account or an investment?  This is very important.  We often come across clients that have been led to believe that they have a fixed term deposit account with a bank, when in fact they have invested in a structured product (which is a completely different beast altogether) and of course the banks will earn a commission from selling you one of these.

You have worked hard to save this money, therefore, don’t let the banks take this hard work away.  Take proactive responsibility for your savings and make sure that you get the rewards you deserve.

Written by Adam Carolan

Economic insight from a chief investment officer

NOVEMBER 3RD, 2009 By DOMINIC
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Well, it’s been another busy week of client meetings and I’m pleased to say I gave a well received presentation to the members of the Altrincham Rotary Club last night. I’m frequently asked questions about the state of our economy and how it will impact on investments.  I really felt you’d benefit from some informed comment from Peter Botham, chief investment officer for Brown Shipley. We’ve been using the services of Brown Shipley for a number of years and Peter’s extensive investment experience makes him best place to respond to these commonly asked questions.

Dominic: What kind of recovery do you think we are in for?

Peter: Over zealous enthusiasm of just a few weeks ago has largely disappeared, with economic data from governments as well as companies confirming that we are still in recession and the ‘v’ shaped recovery looks highly unlikely. 

For the UK, in particular, there will be a hard slog, with our own economy being one of the worst hit and slowest to recover anywhere in the world.  Fortunately, the sharp fall in the value of the Pound will assist the export trade but even an influx of tourists, who find that the UK is a cheap place to go shopping, will not be sufficient to off-set rising unemployment and reduced discretionary expenditure resulting from increased taxation.  As investors we should be grateful that over 50% of total earnings for UK companies are derived from outside these shores.

One can see a scenario for the UK where we have a gentle recovery but this then tails off as monetary conditions are tightened in the second half of 2010.  This might well entail the end of quantitative easing and a rise in Gilt yields.  In essence then, the outlook for UK equities is much better than for Gilts.

Dominic: There has currently been a lot of talk about either high inflation or maybe long term deflation.  What is your stance on this issue?

Peter: Whilst there is little inflationary pressure in evidence at the moment, there are several reasons for believing this is only temporary.  The mere fact that inflation is a rolling twelve month figure and we are currently at the low point for many input prices is likely to see the figure nudging upwards, particularly in the UK.  Also, with Sterling having fallen so sharply in the past year, there is a likelihood that the increased price of imported goods will add a little bit more to the under-current.  But, fears of higher inflation around the world are chiefly derived from the possible impact of the vast increase in global liquidity which has occurred in an effort to ensure the continuation of the global banking system.  Whilst the impact is minimal whilst banks hold on to this cash as part of their gradual return to solvency, one has to fear that once this recovery has occurred then banks will begin to release these funds in to the economy, and there have been few occasions in history when rising money supply has not led to rising inflation.  Index linked bonds in the UK and USA have out-performed conventional government bonds by a wide margin this year, and we see no reason why this should not repeat again in 2010.

Dominic: What advice would you give to any first time investors?

Peter: Arguably the biggest lesson that has been re-emphasised is the importance of diversifying one’s investments. 

Investors who relied on equities but believed that having a broad spread of stocks would act as some sort of prop merely discovered that all shares behaved in a similar fashion.  One pities the poor (actual!) investor who bought large holdings in all of the UK banks, thinking this would provide diversified security!  Taking too much risk without sufficient recognition of the downside possibilities is a recipe for disaster; remember that the investor who loses 50% in the market fall but gains 50% in the recovery is still losing 25%.  The risk aware investor who diversified his assets lost 20% in the fall and only gained 20% in the rally – but that means he has only lost 4% at the end of the period.

Dominic: Are emerging markets likely to show more growth than the developed nations over the long term?

Peter: With the balance of economic power set to shift from West to East over the 21st century, one can see that this trend will be reflected in the relative performance of the equity markets.  Current valuations between Emerging Markets and developed economies are broadly level but share prices are a function of earnings growth and cash flow (dividend paying) characteristics.  Therefore one has to conclude that over the next decade we will see the higher rate of economic growth reflected in above average equity returns.  Markets in the Far East, led by China, will continue to prosper but, given the scarcity and dwindling levels of most commodities investors will also see gains from the Latin American and East European nations rich in oil, metals and coal.

Dominic: Finally, the emotive issue of our properties.  Do you think we will see another era of house price booms in the near future?

Peter: With the small localised exception of a bonus driven bubble in west London, it is difficult to see how house prices in the UK can do much more than stay level over the next year or so.  Bulls point to a scarcity of supply but even for those who wish to jump on the housing ladder, a shortage of mortgage availability is an even more important issue.  Unemployment is unlikely to fall by much, if at all, over the next year, which has traditionally had a dampening effect on the housing market.  Not only do those without a job stay away from the estate agents but also the many thousands who fear that they could be the next victims of a P45 also do likewise.  Perhaps one of the biggest stimulants to housing markets in the UK has occurred when prices are rising strongly, since a bandwagon develops whereby residents become quasi investors and jump on to the wagon for fear of being left behind.  Without this price momentum, homeowners can afford to sit tight.  For investors, the options in commercial property appear to be much more attractive than in domestic housing.  But……..in 3-4 years time there WILL be another bubble.  We’ll have worked through the credit crisis, banks will be lending again ( not always wisely ) interest rates at 5% will still make a mortgage very affordable, and the world will once again be gripped by an asset price bubble.

Funding higher education the smart way

AUGUST 25TH, 2009 By DOMINIC
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Congratulations to all those who passed their A-levels in the past week and are heading off to the uni of their choice next month. It’s an exciting time for undergraduates as they embark on the next phase of their lives but at the same time it must be marred by the harsh realities of this generation’s student life; heavy debt and a lingering recession.

I read with interest the findings of the Push Student Debt Survey that said students starting university this autumn can expect to graduate owing £23,000. Ouch. It was a gloomy forecast highlighting an average annual debt of £5,000, with the type of degree course and university location influencing this already shocking figure.

In fact my god daughter has just found out she’s been accepted at Worcester to do a teaching degree (well done Katie) and has come to her own conclusion that she’ll stay at home and commute to the university daily. Her parents wouldn’t have denied her the ‘away from home’ experience but are quietly relieved she made this decision (for the sake of theirs and Katie’s future bank balance).

I’ve had a flurry of calls from clients asking about investment surrender and the best way to release funds periodically to help bank roll their kids education over the next few years. This is all fine and can be done but really the best advice is start planning as early as you can.

Take advantage of the Government’s Child Trust Fund initiative (for children born after 1 Sept 2002), the investment version as opposed to the cash saving plan. It’s a no brainer not to utilise it, as it’s a tax free savings plan which doesn’t involve a huge financial outlay. The maximum annual investment is £1,200. Based on an annual premium of £1,200 at a growth rate of 5% (factoring in charges) at the 18th year, if you’d started the year your child was born it would have a cumulative value of £35,446.80. Pretty impressive.  So, if you have a young family and haven’t already started, get your direct debits set up and get the ball rolling. For children born before this date look at tax free ISAs and mentally designate it for your child’s higher education.

 Ask your financial planner about trust funds, again, start early and you’ll reap the financial benefits later.

Taking the long term view, it’s a good time to invest in shares, particularly while the market is relatively low, it’s already climbing, so start now.

Some of my clients have taken advantage of the falling housing market by buying property in the town or city where

their child is studying. The rental income from house shares can cover the mortgage or go towards your child’s allowance if you’re able to buy outright. You can always keep hold of the property after your child has finished their studies and confidently continue to rent it to the student or young professional market.

Whatever your budget there are quite a few options for helping to support your children through higher education but I can’t stress enough the importance of starting in their early years. It’s not about being a pushy parent, it’s about sensible planning. Even if they don’t go to university it will never be a wasted investment.

Buck the trend and invest in land…

JULY 29TH, 2009 By DOMINIC
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The notion of investing in land may sound outlandish in the first instance but it actually makes perfect sense in the current economic climate. 

Research commissioned by Savills Property Group recently revealed that land prices have fallen by an average 57.8 per cent since they peaked in September 2004. I spotted the story in The Times a few weeks ago which went on to say how the decline was most dramatic in northern towns and cities where values had fallen by a staggering 65.8 per cent. 

Link to article: http://business.timesonline.co.uk/tol/business/industry_sectors/construction_and_property/article6567382.ece

One fund we are currently recommending to clients in light of this is the Stirling Mortimer No 8 UK Land Fund. It’s a fund which ticks our buy low philosophy and its sole objective is to take advantage of  ‘distressed” commercial and residential land.  The fund will only buy land that has at least outline planning permission but in reality the fund is providing the cash that developers require to complete their projects.  In many cases there are even buy back guarantees on the table from the developers.

The buying power of the fund means land can be purchased 30%-70% against the current RICS red book value. The aim of the fund is to buy low then re-sell nearer the market value in the short to medium term. The housing market will eventually pick up as the economy recovers.  It has to. For starters, the Government has set ambitious targets to create three million new homes by 2020.

There’s no doubt the economy is in a mess and it has made investors more cautious than ever but equally it does present those who have surplus cash with some really good opportunities which just wouldn’t be around in boom times.

The Times article talks about how the more robust developers are snapping up prime development sites at distressed prices, well this is a great way for individuals (with the cash to invest) to get their slice of the pie without all the hassle. 

As always, I’m happy to answer any questions or queries that people may have.