Friday 22 June 2012

Big Bank Downgrades

I am not sure that the 'average person on the omnibus' would have paid attention to the work of credit ratings agencies some ten years ago, or little understood the integral part that they play in steering financial processes, decisions and opinions over time. Names from the US, such as Moody's and Standard and Poors would rarely hit the headlines (either in the press or over household suppers) before the chill winds of change hit global economics in 2008 and thereafter. Over recent years this has changed.

Some of the economic crisis that has unfurled has been partly fuelled by the insatiable global appetite for debt. The 'pass-the-parcel' (of bundled and re-sold debt, buying and selling debt with an appropriate profit margin) approach to banking finance worked well as long as the music kept playing and all the participants were joining in. We have subsequently seen the effects of what happens when the music stops and some players fail (Lehman Brothers as an example). The debt that could always be bundled and passed/sold on leaving bank balance sheets looking healthy could not continue and the system and its effective cash flow collapsed.

The way banks borrow money and its cost to them is usually based on opinions and analysis of their credit-worthiness. In the same way that if you approach a bank for a loan, they will usually 'credit score' your financial circumstances to determine if you are a good risk and what interest rate (based on your risk) they will apply to the cost of the borrowing you want to take on. One way to determine the credit-worthiness of a bank is to look at the rating provided by a ratings agency, such as Moody's or Standard & Poors. This is a little simplistic in its analogy, but the principle is fair, based on the individual banks ability to meet their financial obligations, or an opinion on the credit quality of a debt or bond being issued and its likelihood of default.

On the 21st June 2012, we saw Moody's downgrade 15 Global Banks, including RBS, HSBC and Barclays in the UK and Credit Suisse and Morgan Stanley globally, to reflect the risk they are likely to encounter from volatile capital market activities. The grading system works on a 'Notch' system and one institution saw their rating fall by 3 'notches' in the announcement, after 4 months review analysis. (Notch range from AAA+ to BBB- then 'Junk' status).

What does this mean for the average 'person on the omnibus' we mentioned at the start of this blog? This may mean that the cost of borrowing to the various banks downgraded may well increase. It is unlikely they will suffer this additional cost (they were never charities), preferring to pass it on to their customers in the form of increased mortgage costs, business loan costs and other private lending. It will be interesting to see if the recent announcement by the Bank of England to release to the banks significant capital (£80 Billion) for low(er) cost lending to SME's will be realised. More details on this initiative can be found here: http://www.thefinancepages.co.uk/economics/bank-of-england-lending-scheme/01269/

We do not believe that this is the last set of downgrades to be seen and I am sure we all agree that we are not out of the woods yet when it comes to the end of the recession. Diversifying your assets and capital across more than one institution may be a sensible and prudent measure to protect your holdings from unforeseen future problems in the banking system.

No individual advice has been provided in this blog and if you looking at planning your personal or business finances then please talk to the team at Chapters Financial Limited.

Keith Churchouse FPFS, Chartered Financial Planner

Director, Chapters Financial Limited 

Chapters Financial Limited is authorised and regulated by the Financial Services Authority, Number 402899.  Chapters Financial Limited is not responsible for the content of external web links.

Thursday 14 June 2012

Greater tax take on Estates in 2010/11 / Inheritance Tax Planning

Here's an interesting statistic for you. I was hoping that I could explain why it has happened and what it means. I might be able to make a suggestion on the latter of these points, but possibly not the former.

HMRC released the details of the levels of Inheritance Tax (IHT) receipts received on estates across the UK in the tax year 2010/2011 (in it’s Inheritance Tax Statistics 2008-2009 document/page 4). This notes that Inheritance tax receipts have risen by 14% in this tax year. Admittedly, the amount collected is still below the past peak year of 2007/2008 by some margin (29%), but still interesting to see the amount rising at a time of austerity.

A full link to detail can be found here: http://www.hmrc.gov.uk/stats/inheritance_tax/commentary.pdf

At a time of economic woe, with savings being used to subsidise falling incomes, market volatility and the costs of Long Term Care increasing, some would have that quite the reverse would be the case. Indeed, with pressure on capital seeming to mount, you would have thought that the tax take on estate values would also be in decline.

I am not sure that the statistic can be explained away, however, making a will (a cornerstone of any good financial planning) is a good way of starting your inheritance tax planning.

Some would argue that you can gather whatever information you want from statistics.

Each individual will normally enjoy a nil rate inheritance tax band of (currently) £325,000 in this tax year, 2012/2013. On death an individual can pass this nil rate band to their spouse/ civil partner, allowing the total amount of the nil rate charge inheritance tax band to double to £650,000. Without any additional planning, the balance of any estate above this level will be subject to a tax charge of 40%.

There are ways of mitigating an Inheritance Tax liability, such as using the annual gift allowance or using surplus income as a means of making efficient gifts away from your estate, documenting these where appropriate. We would recommend that you take individual advice on this subject if it affects you and would certainly recommend that you seek independent legal advice when drawing up a will for your circumstances. Speak to our own legal adviser/ Solicitor or, if you have not sought advice before, we can refer you to a local professional to help you with your needs. 

The team at Chapters Financial can help you with your Inheritance Tax Planning and we look forward to looking at your circumstances and the outcomes that you would want to achieve. No individual advice has been provided in the content of this Blog. 

Keith Churchouse, Chartered Financial Planner, Certified Financial Planner
Director, Chapters Financial Limited, Guildford, Surrey.
Chapters Financial Limited s authorised and regulated by the Financial Services Authority.

Chapters Financial Limited is not responsible for the content of external web pages.

Friday 1 June 2012

The Queens Jubilees/ An economic comparison

First of all, may I wish Her Majesty the Queen many congratulations on her Diamond Jubilee of her ascension to the throne in 1952. I am one of many who admire her courage and energy in fulfilling her many duties and we are honoured to have her as our Queen.

The preparations for the Diamond Jubilee across the UK are gaining pace with Bunting, flags and homemade crown posters appearing in many villages and street corners. It certainly brightens many communities at a time of austerity and with many families, companies and individuals working hard to make ends meet.

It makes me feel rather nostalgic, as I reminisce about what for me was the last big Jubilee of 1977. To age me, I was 10 at the time and the prospect of a street party was very exciting indeed. With Union Jack hat made, I remember (in true British style) that it poured with rain that afternoon and we moved the party indoors. It did not dampen any spirits and much merriment was had by all. The children filled to the brim with tartrazine (a now well-known orange squash colour additive of the time), they played for hours. All great fun!

Obviously, at the age of 10, it was not my time to understand the detail of what was happening to the economy at that time and have referred back to the history books to investigate this further. We all know that the past is not a guide to the future, however, it nevertheless offers some interesting insight into the time then, and possibly a few comparable’s with what is happening now.

From an economic point of view, the 70's were in general a difficult economic period. With the price of oil reaching (at the time) a peak in 1973, Industrial disruptions and high unemployment to name but a few issues, the background to Her Majesty's Silver Jubilee was not that pretty. Sound familiar? As other points of reference, Labour was in power (with James Callaghan), Jimmy Carter became the 39th President of the United States of America in January, Punks and the Sex Pistols were rebelling at every opportunity and we endured the 'long hot summer of '76' the year before. We had only been in the European Economic Community (as it was known then/Now European Union) at that time in 1973 (Joining in 1973 with the agreement signed by Edward Heath).

But what was happening in the economy in June 1977? I have detailed some of the economic headlines/indices below:

  • (RPI) Inflation Rate: 17.7%
  • Bank Base Rate (04th May 1977): 8.50%
  • UK Unemployment Level: 5.6%
  • Dow Jones Index (01 June): Open 898.66,
  • Litre of Petrol: 18p a litre (as was Diesel!)
  • Gold Price 08/06/1977 per ounce: $142.30
  • Average House Price 1977: £13,600
  • Price of a Pint of Lager Beer (Probably from a Party 7 tin if you remember those!): 20p
  • Price of a loaf of bread: 9p

Sources: Wikipedia, Yahoo, Guardian, AOL, Others

I am sure that these facts and figures will make interesting reading. It is ironic that the gathering of this information was achieved via the internet at the touch of some buttons. You could not have done that in 1977!

And what of the future? Many pundits have suggested that we live in unchartered waters, and I am sure that this will prove (in many quarters) to be true. What we can be certain of is that change will occur, both in personal circumstances/life phases and the economic environment which we live, work and retire in. Seeking independent financial advice on (and reviewing) your financial planning on a regular basis is important in ensuring that you get the best from your finances as times change.

I hope you enjoy the long weekend of the Diamond Jubilee and if you are looking at your financial situation over the summer, then come and speak to Chapters Financial Limited and see how we can help you with your future planning.

Past performance is not a guide to future performance and no individual financial advice has been provided in the content of this blog.

Keith G Churchouse, Chartered Financial Planner
Director, Chapters Financial Limited

Chapters Financial Limited is Authorised and Regulated by the Financial Services Authority. Number 402899