UK Plc out of Recession?

UK Plc out of Recession?

Today the Office for National Statistics produced information that suggests, albeit rather lightly, that Britain is finally coming out of recession. The economy grew by 0.1% in the final quarter of 2009. Invariably published statistics get revised as more accurate data is fed into the equation. One has to wonder though whether there is any real point in providing information that tells us what happened, but doesn’t really as it gets altered. It would be rather like me telling you that your investment has risen by 10%, but then a few months later explaining that in fact I was wrong, it rose by 15%. The bottom line is “so what?” and therein lies the problem.

Whatever the official statistics show, they are little more than window dressing, however impartial. They are used to provide ammunition to support argument on both sides of a debate and have little to do with reality, let alone the present tense or how we create a better future. The financial services industry is rife with statistical manipulation and is often an unhelpful way to assess investments.

All in all, I have to agree with one of my colleagues who likes to use the phrase, “there are lies, damned lies and then statistics”. I tend to take the view that the quality of questions is more valuable than any statistic. Take pretty much any example – say, swine flu. The WHO (World Health Organization) has been under criticism of its handling of the swine flu pandemic. Over 12,700 people died from it (12,700 too many) but this is actually less than the amount that die each year from “normal seasonal flu”. A huge cost to all and perhaps some deaths were avoided, but again statistics only tell part of the story. Perhaps better questions could and should have been asked. I know many of you are ‘top drawer’ medical professionals and you will have your own view on this, but one has to ask, was this the proverbial storm in a tea-cup? I have to admit though that on this occasion it was probably a case of lose-lose for the Government had the pandemic materialised into anything approaching the worst projected scenarios. A case of damned if you do and damned if you don’t.

So I confess to being generally sceptical of most statistics… don’t get me started on surveys!

Mad Money?

I couldn't resist the temptation to put this one here.... it is reported that Sir Thomas Legg was paid £142,000 to audit MP's expenses. How much was repaid? its not quite clear yet, but last week according to The Telegraph, MPs were allowed to repay expenses on the quiet as the process was pushed through. 80 MPs have challenged the auditors ruling.

INVESCO Perpetual - Fund Manager Interview

One of the most popular funds that we have used over the last 10 years or so has been two INVESCO Perpetual funds the Income and High Income funds. These are both run by Neil Woodford, arguably one of the very best Fund Managers around.

Unfortunately he had a poor 2009 - by his very high standards, in essence he missed the "recovery" that happened rather rapidly by positioning the funds in a very conservative (negative/cautious) manner. Here is an interview that INVESCO have kindly made available to you to hear his thoughts and get a sense of the common sense that he applies. I might add that I continue to use this fund for clients.

There is an online video link which lasts about 25 minutes - you probably need reasonable internet connection speed. So if you are interested, have a look and listen to what he has to say.

see: http://investor.invescoperpetual.co.uk/landing/webcast/8jan10-neilwoodford-consumer.html?tid=investorHomepage

An Almost Virgin Bank

I meet very few people that are happy with their Bank. I remember once being told that people are more likely to get divorced than change their bank. Many of us apparently still have our current account based where we were at University. Banks have had a little flack of late and of one thing, I can be sure – whether it’s the taxpayer or the customer, one or other (probably both) is going to pay to get the UK’s retail Banks back into shape with a good dose of smoke and mirrors.

There are few highly successful entrepreneurs that would have missed a basic flaw in our capitalist system when it comes to Banks. Apparently, they get bailed out. As yet, no real change has been made to law, rules, guidance or practice when it comes to how a Bank should operate. In business terms that seems to suggest a new equation from RISK/REWARD to GUARANTEE/REWARD. Sense the opportunity?

Enter maestro entrepreneur Mr Branson with Virgin Money. Having finally secured a Banking License, following the purchase of minnow-sized bank Church House Trust based in Somerset for a mere £12.3m, (Mr Branson tends to favour the paint go-faster stripes on the side of it approach… nothing is actually virgin) we have the highly welcome arrival of Virgin Money Bank. I for one, am delighted that we now may see something dynamic , involving great marketing and some actual thought. I will be personally checking out the Virgin offering. Frankly it would not take much to beat the current boring bank services and it would be great to see Virgin providing IFAs with the ability to include bank balances in our reporting to clients, provide a real “whole picture” approach. It goes without saying that we are all looking for better deposit rates of interest.

Mr Branson is clearly well furnished with talent and bright ideas and the ability to get something approaching the very best out of others to “make it happen”. I wish him and the new Virgin Bank every success. The king is dead, long live the king.

Cat on a Hot Tin Roof

I was fortunate enough to be at the West End performance of the Tennessee Williams play currently showing in London last night. It is remarkable in that it is an all black cast and a very powerful reworking of this classic play. It was fabulous (if you get the chance do go – James Earl Jones plays the part of Big Daddy and it is a wonderful opportunity to hear such an amazing voice. The rest of the cast, full of familiar faces, are also very impressive with very Adrian Lester playing a very troubled Brick). Anyway, I had forgotten how littered the play is with timeless wisdom.

If you recall, the basic plot is a dysfunctional family coming to terms with their inability to communicate with one another successfully and living with family lies or “mendacity”. The family are home for Big Daddy’s (James Earl Jones) 65th birthday, who has cancer and little time to live, but has been told that he merely has a spastic colon. The adult children, who have their own problems, find one moment of agreement and determine to tell their parents the truth about Big Daddy’s health. The question of inheritance is swiftly on the lips with open season on an $80m estate.

It is a fabulous play, and whilst written in 1939 and set in the mid 1950’s provides a timeless insight into the human condition. The play reminds us of how important it is to always have the right perspective on family, life and wealth. Big Daddy reminds us “I’ve got the guts to die. What I want to know is have you got the guts to live?”.

“Time goes by so fast. Nothin’ can outrun it. Death commences too early – almost before you’re half acquainted with life - you meet the other..”

Cat on a Hot Tin Roof is currently showing at the Novello Theatre until 10th April 2010.

(see www.catwestend.com)

Empty NEST Syndrome

The current Government introduced stakeholder pensions in the Welfare Reform and Pensions Act 1999. The main purpose of this was to encourage everyone to contribute towards a low cost pension. Employers with 5 or more employees have to offer a scheme for their staff, with significant fines imposed if they fail to do so. Many pension companies rushed in to provide these “inexpensive” personal pensions. Charges were originally capped at a maximum of 1% but have increased to 1.5%.

Unfortunately the good intentions of the Government have been met by disaster after disaster with pensions. Without any real need to contribute towards a scheme, employers have had little incentive to contribute to a pension, particularly in light of rising National Insurance costs. Stakeholder pensions have been a complete flop. To my mind, the main reason for this has been that the immediate interests of the pension industry at large were not served. Traditional personal pensions (many of which are rubbish) pay commission to advisers, which in practice is often the reason why most people even have a pension. Few of us wake up and think – “I must sort out a pension today” or at least, very few people under the age of 45 think this way (from my 20 years of experience advising clients).

I remember one of the largest pension companies telling me in early 2000, that their stakeholder would not break even for 14 years. When they were beset with administration errors (the main cost) this projection was revised upwards significantly. Essentially, a stakeholder pension pays little or no commission - a fundamental stumbling block for commission-based advisers, but not for those of us that are fee-based. However, that said, stakeholder pensions are generally aimed at those on relatively low incomes. If any sense of a “good job” can be done from an advice perspective, this requires advice time and often research and obvious compliance due diligence.

Aware of the problem, the Government set up Personal Accounts – or at least planned to - as well as introducing “Pensions Simplification” (A-Day) in April 2006. This was meant to make pension rules clearer and simple to follow. Regrettably, the constant moving of the goalposts has provided exactly the opposite effect. “The Plan” then switched to “auto-enrolment” and a mandatory pension for all from 2012 (- it’s not just the Olympics that is happening in London). However, due to the complex nature of “is this right for me?” there are now fears that perhaps auto-enrolment could become a problem – after all, a pension is not right for everyone all of the time.

So with the usual flurry of political feathers, and an expensive recession, we have now had a re-branding of a pension that has not even been launched, equivalent to naming your children before being pregnant. Personal Accounts will now be called the National Employment Savings Trust (NEST). Auto-enrolment is still planned – but will now be gradually wound out from 2012 until 2017. Employers will have to make contributions, as will the individual. As yet though, nothing is actually finalised. It is not as though pension companies are queuing up to offer a NEST having been badly burned on stakeholder. There’s also the matter of the large UK plc national debt to repay, a recession and election in 2010.

So whilst Britons clearly need to be encouraged to save for their future, the incentives provided to aid them have offered little temptation to the masses – who are the real concern as they have very little saved in anything, let alone a pension. I remain hopeful that this will be resolved before I retire and would suggest a few possible options;
1. Redirect something like half of National Insurance contributions into a stakeholder/personal pension/ personal/ NEST type account for both employers and employees, the remaining 50% would be used to continue to build social security benefits.
2. Means-test the State Pension (Harsh, I know, but what is £5,000 to someone that is taxed at 40-50% in retirement with a very good pension already?)
3. Provide tax relief at highest rate, to encourage saving, but restricted to 100% of tax year earning (resulting in abolition of the lifetime allowance and the nonsense of a £20,000 pension restriction if you earn over £150,000).
4. As contributions will be part of National Insurance, this would be mandatory for anyone that is employed or self-employed.

OK, so I don’t have the Government’s books to run their numbers (probably just a well) but surely it is not beyond the wit of man to provide a sensible working solution rather than a constant rehashing of a bad job? Something we learn in childhood is that we have to take the medicine we need. Unfortunately our politicians seem to believe that as adults we have forgotten this truth or are merely incapable of understanding it. It is time for the UK to become rather more adult in its thinking.

Numbers

It’s Friday and I thought you may find some of these numbers “amusing” – perhaps not. I cannot verify the accuracy, but these are reported by Money Week which provides a weekly column including this sort of information.

£124,000 the amount a council electrician earned in pay and bonuses in one year after he claimed £90,000 in overtime, back-dated pay and “stand by” allowances.

£20,000 the price of the four Christmas trees at the Houses of Parliament.

£220,000,000 the “estimated” annual cost of the Government’s 4,000 communication experts. That’s an average of £55,000 each.

£840bn the UK’s national debt. The Bank of England took some 300 years to get the national debt to £350bn, but the last 10 years alone saw this double (and some).

For the record, in the UK a billion is not the same as in the North America. In the UK and most other countries we use the term bi (meaning two) to demonstrate that is has twice as many zeros as a million.

A billion in the UK is therefore

1,000,000,000,000 = 1bn

In the US this would be a trillion, as with many things in the US, calling something big is half the fun of being an American. For example, their million is the same as ours 1,000,000.

Now, how many of you think the UK Government know the difference? After all our own politicians seem happy to throw around large statements about some fairly large numbers, one wonders which side of six digits they are often on. No matter, we will simply have to adjust our tax system – oh, that’s you and me.

2010 Living Deliberately

How was your first day back a work? Mine was pretty busy, catching up with emails from the Christmas break. I was reminded that many businesses did not survive 2009 and am thankful that we have some great clients and that I enjoy working for them.

We have made lots of improvements to our services for 2010, which I hope you will notice and find beneficial. 2010 looks as though it will have plenty of opportunities for those that have eyes to see. Like any other year, it will be filled with bad news whilst much of the good news remains unreported in most media. An act of will is required to prepare for the New Year and to live deliberately, rather than merely drifting from month to month as one year rolls into the next.

Soon we will be issuing our clients with some documentation to help make 2010 a year for progress. If you are able to return this to us promptly we can then provide you with your 2010 Financial Position Statement – something that will act as a discussion and planning starter and benchmark for the year end.

A New Year, A New Venture

I am writing to report to our clients that Mark Hall left the firm in December. Many of you may have spoken with Mark who primarily took responsibility for arranging mortgages for our clients. Mark joined the company 10 years ago and has always been a highly valued member of the team. He has been a great friend and colleague.

Mark is forming a new firm Kemia Finance Ltd in Bristol. He will not be an IFA but an independent mortgage broker. He has a passion for mortgages (which I lack). Our separation has been entirely amicable and we shall refer our mortgage work to Mark as he is very gifted in this arena. The new venture will free him to manage time in a way that suits his lifestyle and enable him to attract other mortgage work from other financial advisers. I wish him every success and thank him very deeply for his enthusiasm, faithfulness and support over the last 10 years. We remain very good friends.

If you require assistance with a mortgage – or know someone that does, please call him on 01179 624600 or email him.

Tax Trick

So we have had the Budget. I am a little surprised that so few of the editorials that I have read have been quite as mild as they have. So let me outline a key point for those with incomes over £100,000. Remember that this is taxable income, not simply earned income – so includes taxable savings income and dividend income.

The personal allowance will reduce by £1 for every £2 over £100,000. The allowance has been frozen at £6,475. In other words with an income of £112,950 the personal allowance is lost entirely. So although the tax rate of 50% does not come into effect until 2011. The new tax year will see the following effective rates of tax.

Taxable Income	Effective Rate of income tax paid on income above £100,000
£112,950	60.00%
£120,000	52.95%
£130,000	48.63%
£140,000	46.67%

By constantly representing the figures, politicians often end up covering up the real facts of what they propose. The tax position for anyone with an income over £100,000 will mean more tax is paid, significantly more. This excludes other indirect tax increases – such as VAT and Stamp Duty.