BpH

‘Give yourself a D-minus for behaviour’

Simon — Mon, 19 Sep 2011 14:37:19 +0000

“There is one principle a man must follow if he wishes to succeed, and that is to understand human nature”

Henry Ford, founder Ford Motor Co

This educational article explores a whole range of behavioural traits and biases that can trip investors up and promotes the value of an unemotional, disciplined and systematic approach to investing.

Key messages:

Human nature is a big impediment to successful investing as well as success in other areas of our lives
Deep-seated evolutionary traits and behaviours leave us prone to making emotionally driven decisions, often using short-cut approximations for reality
Our emotional selves tend to overpower logical selves
Recognising a number of critical blind-spots and blinkers provides a mirror to reflect on our behavioural weaknesses as investors
The consequence of our bad behaviour can be considerable and there is plenty of historical evidence to demonstrate it
Do not despair, a discipline and systematic investment process can help to trump evolution and to take much of the emotion out of investing, thereby improving the chances of a successful investment experience.

Produced in conjunction with Albion Strategic Consulting, September 2011.

“Structured”, “secure”, “protected”, now “absolute” and “all-weather”. Descriptions of investment products designed to catch your attention

Simon — Tue, 07 Jun 2011 13:39:07 +0000

Beware the way financial industry marketing works. New products, new names, same old risk and hidden agendas, names invented to resonate with investor’s emotions and more proof that you should not over react to the latest financial industry PR exercise.

This is exactly what Simon Brown’s co-authored book, “The 7 Secrets of Money” is about – the secrets kept from us by the financial establishment and the secrets needed to achieve long term investing success.

For too long the financial establishment has put its own interests above yours, resulting in a consistent failure to meet the returns you need and expect. Members of this establishment will try to persuade you to purchase the products that make them the most money and serve you poorly.

The smart way to look after your money? Focus your energies on the things you can control such as saving, spending, costs, taxes and sound financial planning.

NS&I Index-linked savings certificates

Simon — Tue, 07 Jun 2011 13:38:38 +0000

The new 5-year bonds from National Savings & Investments (NS&I) have caused a stir with the banks and are a good place to put a maximum of £15,000 for 5 years if you can afford to.

The new 5-year savings bonds were reported in Guardian Money to pay interest based on the retail prices’ index – currently 5.3% – plus an average of 0.5%. Interest paid will be tax free.

Check them out

Partner, Adam Bell, prepares for cycling challenge. Durness to Dover, 800 miles in 8 days

Simon — Tue, 07 Jun 2011 13:37:42 +0000

On 18 June 2011, BpH Wealth Partner, Adam Bell and his good friend, Mike Smith, will be embarking on a great cycling challenge. This is to mark Mike’s 40th birthday (Adam already being a few years past that), and to raise money for the East of England Air Ambulance charity.

The departure point is Durness, the most north westerly populated point on the UK mainland. The arrival point is Dover, 821 miles and 8 days later. The total amount of climbing is 35,000 feet, taller than Mount Everest.

Check it out and please sponsor Adam and Mike if you feel able.

Improving your financial health

Simon — Mon, 28 Feb 2011 11:47:58 +0000

Just as bad habits can endanger your physical health, bad habits can affect your long term wealth as well.

It’s not easy to change behaviour

Our commitment to change is under constant test as examples of doing precisely the opposite are thrown in front of us to make us question whether we have made the right choice.

Relatives who smoke or drink heavily can live into their 90s. Those that live apparently fitter, healthier lives don’t. Shares soar while other more prudent investments seem to lose money.

Hold your nerve, stick to a proven set of prescriptions

Here are some guiding principles to help preserve your financial health and wealth:

Stop reading the financial pages. Sensational headlines sell papers and magazines
Don’t search for that super star fund. Invest in the whole market
Pay no attention to forecasts. They aren’t possible
Keep a long term perspective, it’s time in the market, not market timing that counts
Invest new capital and work to your plan
Re-balance. Buy more of what hasn’t done well recently and not what’s hot. The latter may cause you to unbalance
Manage your emotions. This takes us back to number 1. Swap the financial news for something more interesting.

If you do find stock picking good entertainment, don’t do it with your investment capital.

Stay on track. It will pay in the long term.

Tax year changes + proposed alterations

Simon — Mon, 28 Feb 2011 11:47:31 +0000

ISA limits

On 6 April these increased to £10,680 and up to £5,340 can be in a cash ISA.

Financial Services Compensation Scheme (FSCS)

From 1^st January 2011, in respect of savings in a UK bank or building society, the compensation limit increased from £50,000 to £85,000 meaning that if the savings institution were unable to repay funds due to fraud or liquidation, you would be compensated by the FSCS.

For joint accounts, the limit is £85,000 per person. Please bear in mind that the limit is based on FSA licences, and some banking groups may own a wide range of individual companies which may use just 1 banking licence, and so even though accounts might be spread across different companies, just 1 limit of £85,000 could apply. If you wanted to find out if a subsidiary holds its own licence, you can find out from the Financial Services Authority Consumer Contact Centre on 0845 606 1234 or speak to your BpH adviser on 01582 461122.

Early access to Pensions Savings

On 13 December 2010 HM Treasury launched a consultation on whether allowing access to pension savings before normal pension age might encourage more pension saving, as they are concerned that with increased longevity, people are not saving enough. Recent surveys carried out have indicated that people might be inclined to save more for retirement, if there was the possibility of being allowed access to the funds earlier for specific reasons. They have put forward 4 possible routes:

Option 1 – Loan

Savers are able to borrow a lump sum from their pension plan, with a requirement to repay with interest. This would be potentially easier and cheaper than a bank loan due to the lack of security requirements and lower interest rates. This model is currently used in the United States.

Option 2 – Permanent withdrawal

Savers are able to withdraw a lump sum without any obligation to repay it. This will almost certainly be limited to cases of financial hardship. This model is currently used in New Zealand.

Option 3 – Access to standard tax free cash sum only

Savers are able to withdraw a lump sum up to the value of 25% of the fund. There is no requirement to repay however further lump sums will not be possible without further saving.

Option 4 – Feeder-fund

This model offers a combination of ISA (or other savings vehicle) and pensions within a single product wrapper. Contributions up to a pre-determined level would be placed in the ISA fund. Once the level of the ISA savings reaches the trigger point, contributions would then be switched into the pension fund.

The Government intends to confirm later on this year whether or not it will proceed with allowing any form of early access to pension funds.

Changes to maximum pension contributions

Yet again, the rules on the maximum amounts that can be paid into a pension scheme have been altered.

This follows on from the 2009 clampdown on contributions allowed to be paid by anyone earning £130,000 or more which meant anyone in that situation could only pay £20,000 or possibly a maximum £30,000 pa paid as a pension premium, whilst someone on £129,999 could in theory have £255,000 paid in for them.

From 6 April 2011, the rules will alter so that there will be a flat annual allowance of £50,000 for everyone, with scope for carrying forward a notional unused allowance from 6 April 2008.

However, there is still the likelihood that high earners will only receive basic rate tax relief and a consultation document from the Treasury has indicated that individuals will also have to pay a personal tax charge based on any excessive employer contributions.

The small print won’t be known until closer to the start of the new tax year.

Alterations to income draw down

Since its introduction in 1995, income draw down has provided considerable flexibility for anyone who didn’t want to lock in their fund and purchase an annuity.

Under current rules, once you’ve taken any tax free cash, the fund can remain invested, and you are allowed to take out a variable amount of income which can be up to 120% of a fixed limit roughly equivalent to the maximum amount an annuity would pay (based on a table produced by the Government’s Actuary Department, referred to as the GAD limit), with a lower limit of nothing.

At the moment, at age 75, the rules force you to either purchase an annuity or go into a form of capped draw down whereby the income must be between 55% and 90% of the GAD limit. From last year, the age 75 limit was temporarily raised to 77, and now from 6 April 2011 that age limit is going completely, along with other important changes.

This now means that no-one will be forced to take any form of pension savings at any age – they can continue to defer them indefinitely if they want to/can afford to, or they can use the new rates applicable for income draw down.

In the majority of cases the maximum income will now be limited to 100% of the GAD limit, which is less than currently, although the same nil lower amount still applies, which clearly is an improvement for those over 75. The limits must be recalculated every 3 years up to age 75 and then annually thereafter.

The current rules are for a 5 yearly calculation, meaning that anyone taking maximum benefits could see a reduction in their income at the next review date after 6 April 2011.

For anyone who has sufficient other pension income to meet a minimum income requirement of at least £20,000 per annum including State benefits, then under a new arrangement called flexible draw down, they will be allowed to take out higher levels of income, up to the full value of the fund which could be withdrawn in one go if desired.

The standard 25% of the fund can be taken as tax free cash, with the balance subject to normal rates of income tax.

Anyone who takes advantage of this will not be allowed to pay any new pension contributions or else they will be subject to further tax charges. In addition, if someone is non UK resident and moves back to the UK within 5 years of taking any amounts under flexible draw down, they will also be subject to further tax.

However, clearly for anyone who has sufficient income to meet the required levels, the ability to surrender potentially the full fund is a very considerable benefit.

Other changes taking place from 6 April 2011 include what gets paid out after death.

The new position is that upon death at any time, the unused fund can be paid out subject to a 55% tax charge, compared with 35% that applies if death occurs before 6 April 2011 if the person is aged under 75. Whilst this is worse for anyone under 75, this is an improvement for the above 75’s as currently no lump sum can be paid.

However, it should be borne in mind that currently if someone decides to reduce or not to take any benefits specifically after being diagnosed with a terminal illness, in theory HMRC may make a claim for Inheritance Tax from any funds remaining in draw down for anyone who has not left the funds to a surviving spouse, partner or financial dependent. This is on the grounds that the person has deliberately reduced the value of their Estate by not taking income. However, the Government has indicated that this is an area they will look at in the future, in order not to penalise people.

Clamp down on tax avoidance schemes

At the beginning of the year, the Office of Tax Simplification published a list of 1,042 tax reliefs that were going to be reviewed in the “interests of simplification”. 74 of these are being looked at in depth now, with a further 75 at a later stage, whilst the other 893 are unlikely to be reviewed.

The 74 key reliefs consist of EIS, VCT and film tax reliefs, CGT on private residences, various aspects of life assurance taxation, some parts of Inheritance tax and a whole variety of obscure reliefs.

One of their key criteria is reviewing reliefs which benefit a small number of taxpayers but which may create distortions in the tax system, or which are complex to operate. They’ve said the cost of the tax avoided by the reliefs won’t be the key driver. Bearing in mind the state of the Government finances, this aspect may not necessarily be the case!

Retirement changes

Currently, employers have the right to terminate an individual’s employment for reason of retirement at the age of 65 (or the company’s normal retirement age, whichever is the later) without paying any compensation to them.

This is subject to the employer following a specific process, which includes consulting with the employee in relation to their continued employment. Whilst the employee has a right to request that they work beyond the age of 65 as part of this process, there is no obligation for the employer to allow this.

The Government has confirmed that between 6April 2011 and 1October 2011 it will be phasing out the compulsory retirement age, meaning that forcing someone to retire at any age if they want to carry on working will be age discrimination and not allowed unless the employer can prove there are particular circumstances that can be justified.

The ages at which State Pensions commence are also altering.

Under the previous Government, the intention was that State Pension Age would be equalised at 65 with women’s State Pension Age gradually increasing over 10 years from 6April 2010, and then for both men and women, the Pension Age would rise in stages from 2026 to age 66, then 67 by 6 April 2036 and 68 by 6April 2046.

However, the Coalition are bringing the changes forward and so State Pension will now be equalised at 65 for men & women from November 2018, and then increased to age 66 from 6 April 2020. They haven’t yet published plans yet for bringing forward the changes to 67, 68 or later, but have confirmed it is being looked into.

The biggest losers are women born around 1954. A woman born on 5 April 1953 will still be able to claim her state pension when she is just 62 years, 11 months and one day old. A woman born a year and a day later will have to wait until she is 66.

Bringing forward the change to age 66 by 6 years means that people will have less time to make allowances for the delay in drawing a State pension.

For anyone who hasn’t retired and is not certain how much State pension they will get, perhaps due to a gap in the record for paying National Insurance, a BR19 form is available from us, to enable you to get confirmation from the DWP of the amount of your pension.

One of the steps available for anyone under retirement age to make up any shortfall, as well as obviously paying more towards any private pension provision, is to make voluntary Class 3 NI contributions.

Budget, 23 March 2011

Although some of the changes which take effect from 6 April are already known such as the increases in many benefits, it is usually the case that there will be some alterations which aren’t included in the Chancellor’s speech, but are published afterwards.

If there any aspects which have an effect for our clients, we will of course let you know.

Exam success – BpH staff pass with flying colours

Simon — Mon, 28 Feb 2011 08:52:04 +0000

We’ve been busy studying for industry qualifications over the last few weeks, months and years. Here is how we have done:

For Partner, Michael Freedman

A Fellowship. Michael is now Chartered Financial Planner, FPFS, which stands for Fellow of the Personal Finance Society.

This is the highest level of qualification in financial planning obtainable from the Chartered Insurance Institute.

For Partner, Simon Brown

Certified Financial Planner (CFP), which is an internationally recognised qualification through the Institute of Financial Planning. Simon has also qualified as a Certified Wealth Mentor, the first in the UK.

For Partner, Adam Bell

R06 Financial Planning Practice. This is a holistic type exam requiring advisers to demonstrate their overall capabilities by testing them on a wide range of financial issues.

For Client Service Assistant, Elspeth Bedford

Certificate in Financial Planning – Investment and Risk Module

For Client Service Assistant, Debbie Lake