Now that September is upon us, it is back to business as usual which means spending plenty of my time attending events in the professional and business community. I am fortunate enough to be invited to a wide array of different events hosted by businesses within our professional community.

Last Thursday, I attended the North West Leaders Dinner hosted by Insider at The Lowry Hotel. This was an invite only audience of regional business leaders and Xentum was delighted to be a co-sponsor of this prestigious event. Over two hundred guests had the pleasure of listening to guest speaker, Dave Whelan, founder of JJB Sports and Chairman of Wigan Athletic. His warm northern charm filled the room as he told his personal tale of rags to riches. Very few figures in business and sport have achieved his success and to have remained so grounded having done so is testament to his humilty and, I suspect, his northern roots. He displayed a great combination – he was evidently proud of his achievements yet he told his success story without a hint of arrogance. It is always inspiring to hear a rags to riches story and never more so when it is told with such candour.

One theme he touched on was the austerity of the war time generation. He recalled the weekly ration of 2oz of meat per person. This single fact alone served as a poignant reminder of the plentiful times that we now live in. My little boy, Jensen, who is three, probably eats that in a single meal. The austerity faced by the wartime generation coupled with the personal hardships many endured clearly built incredibly strong and resilient characters, of which Dave Whelan was a fine example.

Dave Whelan also shared a valuable lesson with us which he had learnt early on. His entrepreneurial career began with a stall on Wigan market that amongst other things sold pharmaceutical products which had previously been the preserve of a large chemist. After a few years of a flourishing trade, he was taken to court by the chemist on the basis that certain products were only permitted to be sold from ‘shop’ premises and not a market stall. After an initial victory at the county court, he found himself summoned to the High Court in London where he represented himself. He managed to win the right to continue to trade from his stall. The lesson that the experience taught him, which he shared with us, was that when you think you’re right, you should believe in yourself and not be afraid to fight your corner. It clearly paid dividends for him over the years.

When I reflected on this, it struck me that whilst Xentum is only a minnow in comparison to the business empires created by Mr Whelan, the idea of being determined to fight your corner is not unfamiliar to us. A large part of our role is to ensure that our clients receive the best possible solutions for their circumstances on the most favourable terms. This involves a fair amount of determination and focus, not least to convince clients at times that our advice really is genuine and worth taking. Whilst a far cry from being challenged in the High Court, I can certainly relate to the idea of not giving in and sticking to what you believe in.

I have been involved in financial services for 21 years now and 20 of them working for well respected high street names here in the UK and Switzerland. So what is different here at Xentum?

Advice

My roles over the years have always involved advising clients, be it on wills, trusts, estates or financial planning. In light of the advice being provided I spent many hours/days/weeks on technical training courses and seminars, one theme always appeared on such training courses; sales techniques. I have been shown how to read body language, facial observation (interesting when you can tell from a person’s eye movements if they are being honest), how people understand things (be it in pictures or words) and how to follow a process to close a sale.

The above is all well and good but I always thought if the advice you give is technically correct and appropriate then why do you need to be taught how to sell? That is key here at Xentum, we do not have any products to sell in order to meet sales targets for line managers, area directors or shareholders. We do what our clients and professional connections ask of us, that is provide the appropriate advice and source the solutions if required.

Independence

I have never been a tied adviser, the investments and other areas of financial planning I have been able to offer have always been what is called “open architecture” or “whole of market”. A majority of the investment strategies I have been involved in for clients have included discretionary portfolio management, i.e. clients trust the institution to manage their long term money within an agreed timescale, risk tolerance and objective. Recently, I have been reviewing such portfolios and what has become apparent is how much independence really takes place in such portfolios. A majority of the portfolios I have looked at have highlighted that over 75% of the value are invested into “in house” funds or investments. Now unless these funds can demonstrate they are “best of breed” over a reasonable timescale, then the discretionary managers should be proactive in reviewing and replacing if appropriate. I wonder how often this happens?

Xentum has no such offering, we deal with a number of high quality discretionary managers who have no in house funds - they research the whole of market and buy/hold/sell such investments if their research suggests action. Xentum’s role is to monitor the discretionary managers and compare their performance and service for our clients, if we feel the client is not getting what they are paying for then we will move the portfolio to another provider, no biased advice here.

Professional Referrals

My final comment on working at Xentum is my surprise at the quality of introductions from high end professional companies who actually refer their clients to us for holistic financial advice. I have observed in my short time here referrals from PwC, Pannone , Addleshaw Goddard and Grant Thornton. Such referrals at my previous companies were as frequent as a good performance from England at a major football tournament.

It seems that every newspaper these days has a finance section that offers tips and advice. Although these sections are helpful, it pays to know about your subject as the journalists are often more interested in a story than displaying the facts.

I thought I would therefore become a journalist for an afternoon and after a fair bit of research, I have written my own list of common financial hazards to watch out for:

• Free Banking is never free. Free banking is a gimmick used by banks to market their services. Every banking customer pays for banking whether it is through low interest rates, overdraft charges, monthly fees or even investments that you have to buy to receive a free banking account, there is always a price to pay. Obviously some are more competitive than others so make sure you shop around.

• Watch out for underlying charges on funds. The AMC (annual management charge) is often the published figure for a fund, however this only represents the charge for managing the investments. This charge often does not include the charges for the underlying holdings and dealing fees and details of these can be found in the TER (Total Expense Ratio) which represents the true cost of holding a fund.

• Where is your investment based and who is it regulated by? This is vitally important as there seem to be more and more funds that are based offshore these days, however this has serious implications on investor protection and tax treatment.

• The “vogue” investment at the moment is an ETF (Exchange Traded fund). Primarily based offshore, watch out for the distributor status of these funds as if they are non-distributor funds then any gains could be taxed as income possibly up to 50% dependent on your tax situation. Blackrock recently published research suggesting that up to 25% of ETF’s could be non distributor status.

• Watch out for structured products marketed as fixed term deposit accounts. The banks will often market attractive headline rates (e.g. 8%pa) that are really stock market linked products. The word “guaranteed” and “capital protected” will often be used but structured products carry significantly more risk than a deposit account therefore make sure you check exactly what your investing in.

• Headline rates offered by banks on fixed term deposits will often be rolled over into poor rates. It is important to continually shop around for the best deals for your cash and avoid the poor rates on offer in the majority of deposit accounts.

These are just some of the more common problems that I have come across recently. Of course I could be much more detailed than this, but I didn’t want to get too technical in this article. I would, however, be delighted to answer any questions you may have if you want to email me or leave a comment.

The Fryer case involved an individual who had a pension with a retirement age of 60.  The pension provider issued a retirement pack to the individual before their 60th birthday but the individual did not respond to say whether they wanted to take benefits.

The individual died less than two years later (having still not taken benefits from their pension) and HM Revenue & Customs successfully argued that inheritance tax should apply to the lump sum death benefits, as in their opinion the individual had deliberately intended to convey a death benefit to someone else.

The lump sum death benefit from an uncrystallised pension arrangement is normally paid free of inheritance tax, and it is for this reason why the Fryer case has caused such a stir.

Does the Fryer case mean that HM Revenue & Customs has adopted a new approach to pensions?  The simple answer to this question is no.  HM Revenue & Customs has long held the belief that the main aim of a pension scheme is to provide a replacement income in retirement and not to provide a vehicle for the accumulation of capital sums for the purposes of passing on wealth.  This is especially relevant when you consider that tax relief is granted on contributions made by an individual during the accumulation stage.

Most pension schemes allow an individual to dispose of the death benefits and to make changes to the benefits that they are entitled to.  Usually, an individual can nominate, appoint or assign the death benefits to another individual/trust and/or make changes to the pension benefits they intend to take and when they intend to take them.

HM Revenue & Customs has confirmed that if an individual made a nomination, appointment or assignment, or made any changes to their pension benefits in the two years before they died, then there may be a liability to inheritance tax depending on the individual’s circumstances (including state of health).

This last point goes to the heart of the argument put forward by HM Revenue & Customs in the Fryer case, as the individual in question was in poor health at the time that they did not take benefits from their pension.  Furthermore, the deceased’s legal personal representatives could not demonstrate why the individual had decided to defer taking benefits, or why that decision was not a deliberate attempt to preserve a lump sum death benefit.

What can be learnt from the Fryer case?  The first lesson is that greater care must be taken when selecting the retirement date on a pension.  For example, when given the choice, a lot of clients will automatically select the earliest retirement date possible but will then work beyond that date for one reason or another.  Clearly some pension schemes (e.g. defined benefit) do not offer a choice as the retirement date is determined by the employer.

The second lesson is that if an individual’s circumstances change and it becomes clear that the retirement date will need to be altered, then independent financial advice should be sought and the reason for changing the retirement date should be recorded.

Reflecting back on the first half of the year, it certainly feels like some confidence has returned to the markets.  We continually monitor the performance of our clients’ portfolios and notwithstanding the volatility in the stock market, almost without exception, they have outperformed their benchmarks.  This is promising to see and extremely important to us and to our clients.  From our perspective, however, we are not judged solely on performance.  The private office service that we provide goes wider and deeper than that.   As a business, we pride ourselves on providing continuity of service with a genuinely personal touch.  It is clear from speaking to clients and the other professionals with whom we work, this is equally valued.

Inevitably, continuity means that we look after our clients in good times and in bad and that we are trusted to do so.  There are obvious comparisons in this respect with the job of being a parent – it can’t all be good and at times, it can be challenging.  As co-founders of Xentum, Dominic and I share both responsibilities between us – running the business and being parents.  Both can be causes of great satisfaction and the odd sleepless night.  Reflecting on this, what strikes me the most is that the same thing is at the heart of both - having a shared set of core values that will weather the storms.

Even when the UK was in the grip of an economic mire and the FTSE 100 had tumbled to one of its all time lows my positive comments on how a volatile market can bring great gains would have irked those who had taken a painful hit on their investments. But I still stood by it and indeed it was a time when canny investors made great gains.

I have to say, I’ve been reluctant to place such a positive spin on the ensuing BP crisis; yesterday’s announcement that chief executive Tony Hayward is to step down combined with the monopoly money figures of losses and recouping of costs and the fact the oil disaster is being used as a political football, Stateside, means for the first time I’m questioning if every cloud does have a silver lining.

Peter Botham who is chief investment officer of private bank Brown Shipley offered me his thoughts on the BP issue: If investors should learn any lessons from the BP debacle it is that just because a company is big doesn’t mean that it’s safe. Nobody could have foreseen the oil well tragedy (let’s not forget 11 people lost their lives) that would spark the dramatic demise of BP – made so alarming by the fact it’s the biggest company in the market and perceived to be very safe.

Sadly, the same message reverberated after individuals lost 90% and in some cases 100% of their investments when RBS and Lloyds imploded through high level recklessness. Just because a company is big doesn’t mean it is safe.

Peter is keen to push the message of diversification. It’s simply far too high a risk to place your nest egg in one basket. A spread of investments across the spectrum of risk will put your finances in far better position in the long run.

So, is it the time right to invest in BP shares? Peter’s succinct initial response doesn’t indicate a firm no, but a cautionary approach. After all, this is a company which has cancelled dividend payments for the last six months, potentially for another year and as November elections loom in the USA, the political mud slinging will continue which will unsettle the market.

Though in conclusion Peter is more upbeat. We now know the extent of the problem and he believes the recovery will be gradual with the share price appreciating over a year or two, although it is unlikely to reach the previous 650 high for a very long time. He is optimistic dividends will also be restored in a year’s time. BP is a diverse company and it will still generate plenty of cash to recoup costs over the next two years further bolstered by the selling of £10 billion in non core assets. Fast returns are not on the cards but for those taking a long term view the share price will recover.

Please note these are the views of the author and Peter Botham and the material is for general information only and does not constitute investment, tax, legal or other form of advice. You should not rely on this information to make (or refrain from making) any decisions. Always obtain independent, professional advice for your own particular situation.

The Coalition Government is entering a consultation period and after looking through the proposals I am inclined to agree with them.

Prior to 2006 every member of a defined contribution pension scheme that reached age 75, and had not purchased an annuity, had to purchase an annuity (after taking a tax-free pension commencement lump sum). An annuity is a life policy that converts money from a pension fund into a secure pension income for life.

Annuities are not perfect and the main criticisms of them are that the annuity features have to be selected at outset and cannot be altered, and the death benefits are usually limited to a dependant’s pension and/or a guarantee period/value protection. Another problem is that some individuals have had to buy an annuity at 75 when annuity rates have been low and/or after the stock market has fallen.

The previous Conservative Government tried to address some of these issues in 1995 by introducing unsecured pension (USP), which allows an individual to draw an income from the residual pension fund (after taking the pension commencement lump sum) and thus defer the purchase of an annuity to age 75.

The main attraction of USP is the ability to vary the income taken and the fact that the pension fund can
potentially benefit from future investment growth. In the event of death prior to age 75 the residual fund can usually be paid as a lump sum death benefit less a 35% tax charge.

However, in reality USP only provides temporary relief, as the vast majority of individuals in USP currently live beyond 75 and are thus caught by the age 75 rule.

In 2006 the Labour Government introduced alternatively secured pension (ASP) so that individuals who have principled objections to annuitisation did not have to purchase an annuity at age 75.

Although ASP is based on the USP model, the income limits are more restrictive. It was not intended to be a mainstream alternative to an annuity and the tax rules (including tax charges on the residual fund which can be as high as 82%) mean that most people continue to purchase an annuity at age 75.

It is intended that the new rules will come into force on 6 April 2011. The key proposals are:

• No requirement to take benefits from a pension scheme at any age
• ASP will be abolished and USP will be available beyond age 75
• USP will be available in two formats: capped and flexible
• A 55% tax charge will apply to lump sum death benefits paid from pensions in USP and to pensions where benefits have not been taken by age 75

The Coalition Government has reiterated that the main aim of a pension scheme is to provide a replacement income in retirement and not to provide a vehicle for the accumulation of capital sums for the purposes of avoiding inheritance tax.

To that end, the Coalition Government has said that inheritance tax will not ordinarily apply to unused pension funds, but it will monitor the situation to ensure that the system is not abused.

The Coalition Government’s proposals are designed to give individuals more choice which is clearly a good thing. It should be borne in mind that the increase in the tax charge applied to the USP lump sum death benefit prior to age 75 has to be balanced against the reduction in the tax charge applied after age 75.

It is also true that annuities will continue to meet the requirements of most individuals e.g. those with small
pension funds/individuals who require the certainty of a defined income stream. This is because annuities provide a guaranteed income and ensure that an annuitant will not run out of money during their retirement.

Simple family tax planning exercises involving the transfer of assets between spouses or civil partners can be a simple way of ensuring that the various tax exemptions available to each individual are fully utilised. If one spouse owns all the family assets this would not be possible.

Each spouse should ideally own assets amounting to at least the value of the inheritance tax (IHT) nil rate band (£325,000 for the tax year 2010/11); own assets which, on sale enables full use of the capital gains tax (CGT) annual exemption (£10,100 for tax year 2010/11) and own assets generating income so as to mitigate any exposure to the higher rates of income tax.

Transfers for IHT purposes are exempt transfers so long as the spouses remain married at the time of transfer, although they do not necessarily need to be living together. It should be mentioned that transfers from a UK-domiciled spouse to a non-UK domiciled spouse are only exempt up to the first £55,000. Despite this risk, such transfers enable overseas property such as holiday homes overseas that would otherwise be subject to IHT, to then qualify as ‘excluded property’ and therefore not be subject to IHT.
Transfers between spouses are not technically exempt from CGT. The way it works is that there is a CGT computation such that neither a gain nor a loss arises.

Inter spouse transfers can generally be carried out tax effectively. However, the transfer of an interest in, for example, the holiday home can be problematic as seen in the following example:
Mr A owns the holiday home. The family are selling the main residence and plan to move in to the holiday home and for it to become the main residence. Therefore Mr A gives 50% of the holiday home to Mrs A. If this transfer is made just before moving in, then the whole of the gain attributable to Mrs A on a future sale is to be free of CGT. If the transfer is made after moving in then she is assumed to have acquired her interest at the same time it was originally purchased by Mr A. The result of this is that on future sale of the property, her capital gain will not benefit entirely from main residence relief as her period of ownership includes the first ten years when the holiday home was not her main residence.

What this example highlights is the need for care on making inter spouse transfers as, if not properly undertaken, they can worsen the overall CGT position.

Make sure you take professional advice before any such transactions!

Xentum’s guest blogger is Richard Cunningham BA (Hons) ACA CTA of Wellington Guscott.

For more information please contact 0845 4751017 or visit www.wellingtonguscott.com/

Previously CGT was a flat rate of 18% and was charged on any capital gains above the annual exempt amount (£10,100 for 2010/11) after deducting allowable expenses and losses. The main concern prior to the Budget was that the annual exempt amount would be reduced and CGT increased to 40% or 50%.

The announcement by the Chancellor that the annual exempt amount will remain at £10,100 (and continue to be indexed), and that basic rate taxpayers will continue to pay CGT at 18% seemed at first to be perfectly reasonable, as it implied that only higher and additional rate taxpayers would be subject to the new top rate of CGT.

However, on closer inspection it is clear that this is not strictly the case as you have to take into account an individual’s total taxable income and gains to establish the rate of CGT to apply against the net capital gain.

If an individual’s total taxable income and gains after all allowable deductions (including losses, the income tax personal allowance and the CGT annual exempt amount) are less than the upper limit of the basic rate income tax band (£37,400 for 2010/11), then the rate of CGT will be 18%. For gains (and any parts of gains) above that limit the rate will be 28%.

This means that basic rate taxpayers (who are close to the upper limit of the basic rate income tax band) will need to be careful when they make any future disposals, as they may subject the net gains to the top rate of CGT. Similarly it also means that landlords sitting on large buy-to-let capital gains face the prospect of paying 28% CGT on part or all of a gain when they make a future disposal.

All is not lost though, as the last time that income and capital gains were linked together for CGT purposes, it was possible to pay a single contribution into a pension and/or to make a charitable donation and thus increase the upper limit of the basic rate income tax band. The effect of which was to reduce the amount of a gain subject to tax at the higher rate and hence the CGT liability. We have not read anything in the small print of the Budget or in any technical journals so far to contradict this planning opportunity.

Please note that the chargeable gains of spouses/civil partners are taxed separately and transfers between spouses/civil partners do not give rise to a charge to tax. It is still possible to set registered losses against future gains.

It’s monolithic office in Spinningfields is a statement of indestructible corporate power completely at odds with its shaky foundations and it really serves as a reminder that not one organisation is immune to the economic tidal wave.

Whether you’re managing a business or your own finances, diversification is key or to put it quite simply – ‘don’t put all your eggs in one basket’. I’ve encountered several potential clients who have lost considerable chunks of their wealth by insisting they don’t diversify their share portfolio. Whether it’s been shares in RBS or Marks & Spencer sums as much as two million have been lost through loyalty to the brand and reluctance to change.

By creating a varied portfolio made up of cash, equities, gilts, property with a balance of high and low risk
you’re not totally reliant on one aspect ‘coming good’ – if one component falls the whole thing won’t collapse. The same principle applies to business.

Today’s Private Client Discussion Group presentation was popular for that very reason. Christopher Taylor from Blue Sky Asset Management gave an enlightened presentation on structured products. Investors and wealth managers alike are getting excited by some of the products out there as they give attractive returns but with an element of protection.

Just one last word to drive the message hard on diversification – who would have thought oil giant BP’s shares would have plummeted to a 14 year low to below £3 and that the international business would be in freefall? The Gulf of Mexico disaster wasn’t on anybody’s radar and the financial repercussions for millions is extremely unpalatable.

If you haven’t already done so, start thinking about the worse case scenario in terms of your investments it could be the most priceless thing you’ve done all day.

There’s a more detailed piece on structured products in the news section. Feel free to call us with any questions.