Now for the real work!

The night of 07 May 2015 was a long one. Waiting for the results of a General Election can be a fascinating time, with a few high profile MPs and candidates falling at the declarations across the UK. As the morning of 08 May broke, the clear outcome of the General Election was a surprise to many, especially the various pre-Poll providers whose predictions were well wide of the final result.

With the press suggesting it was neck and neck to the wire, many, including me, were surprised by the initial exit poll which provided a clear outcome. As the investigations begin as to how the real result was not closely hinted at, many are questioning the motives behind the voting pattern, with thoughts of loyalty to a political party, desire for the economy to stay on track and, conversely fear of an alternative route. Fear, along with other basic emotions, such as love and greed are powerful motives.

With the dust settling and the new cabinet posts being allocated as I type this blog, the real work for the new Government begins. I wish them every success, as it is clear the majority of the UK does, in moving the country forward.

With this in mind, what does this change mean to you, if anything at all? Will it make a change to the way you work or manage your money and financial planning? Some issues are not affected by who governs the country, such as the population naturally living longer. More time to work, possibly, but also more time in retirement. Indeed, the new 'pensions freedoms' which were a legislative change, may help manage this issue. Longer working may give more time to save, but it might also mean that as a bread-winner, you may need to protect the family for longer.

Whatever your individual circumstances, and we are all individuals, now may well be a good time as we head towards the summer to take stock of your financial planning, to review this and to make changes to meet with your plans, whether they have been changed by the General Election results or not.

The team at Chapters Financial can help you with your financial planning and any review that may well now be due. Talk to us at our Guildford or Woking offices or contact us, via our link here

Because each person is an individual, no individual advice is provided during the course of this blog.

Keith Churchouse FPFS
Director
Chartered Financial Planner
Certified Financial Planner
ISO22222 Personal Financial Planner 

Chapters Financial Limited is authorised and regulated by the Financial Conduct Authority, number 402899.

Inflation is good...the alternatives are not!

The UK has seen inflation rates gradually falling in recent times, with recent falls appearing to accelerate. There is no guarantee that this trend will continue, but with current inflation rates standing at 2.3% RPI (Retail Prices Index) and 1.2% CPI (Consumer Prices Index) in the year to September 2014 (source: Office for National Statistics), the possibility of stagflation, and even deflation, and their consequences, need to be revisited. 

As you will see, inflation, believe it or not, can have its benefits.

Stagflation

The term 'stagflation' refers to a combination of ‘stagnation’ and ‘inflation’. Stagflation is an economic phenomenon characterised by slow economic growth and rising prices. The term was first coined in the 1960s in the UK to describe the combination of a stagnant economy, increasing unemployment and rapidly rising inflation owing to dramatic upward movements in world oil prices. Stagflation hit the UK hard in the 1970s, as rising inflation and lack of employment opportunities stifled economic growth. 

There are a range of theories about why stagflation occurs. Keynesian economists cite supply shocks as the cause, for example rapidly rising oil or food costs. Others blame excessive growth in the supply of money – as Milton Friedman described, “too much money chasing too few goods”. It has also been argued that stagflation is just a natural part of the modern economic cycle or that political and social structures are responsible for the phenomenon.

Whatever the cause, stagflation raises serious dilemmas for economic policy because actions designed to reduce unemployment may exacerbate inflation, and vice versa.

Deflation

Deflation is the opposite of inflation - a general decline in the price of goods and services. It occurs when the inflation rate becomes negative, i.e. when the inflation rate falls below 0%. Deflation is often caused by a reduction in the money or credit supply, although it can also be caused by a decrease in spending by the state, the consumer or the financial community. Deflation increases the real value of money over time. This is because consumers will hold back on purchases of goods and services with the expectation that the price of these will fall over time. This fall in demand, combined with an increase in the real value of debt, leads to increased unemployment, which in turn can lead to economic depression, as seen in the US between 1930 and 1933 when the rate of deflation was rapid, banks failed and unemployment peaked at 25% of the population. 

Japan: 20 years of deflation

Japan has experienced deflation and its effects since the mid-1990s. The initial shock came in the early 1990s with the bursting of the economic ‘bubble’ of super-inflated property and stock market prices. The subsequent collapse lasted for more than a decade, as the slump in demand caused by the bursting of the asset bubble resulted in Japanese firms being unable to raise sales prices and cutting wages and employment as a consequence. From the late 1990s onwards, wages began to fall faster than prices and deflation became entrenched. With no incentive for firms to invest, the economy became trapped in deflation, with falling prices, falling wages and falling investment combining to maintain the downward pressure.

Is there a lesson here for Europe and the UK?

Firms in the Eurozone are responding to the lack of demand and their inability to impose price rises with a conviction that cutting labour costs is the route back to competitiveness. This is worryingly reminiscent of the vicious circle in which Japan became trapped in the 1990s and the threat of deflation is therefore of real concern to Eurozone leaders.

Summary

It will be interesting to see how the next few months pan out for the UK economy and the way that the Bank of England uses its financial tools to control, where possible, the outcomes. Inflation, against its alternatives noted above, can have its ‘benefits’. With many now suggesting that Bank Base Rates (currently 0.5% pa) will stay at this level until summer 2015, the effect of inflation or stagflation….or worse, could have a real effect on the value of the money we have to spend over time.

No individual pension/ financial advice is provided during the course of this blog.

If you would like guidance and advice on your income planning for the future then please contact the team at Chapters Financial at either our Guildford (01483 578800) or Woking (01483 330800) offices.

Keith Churchouse BA Hons FPFS
Director, Chapters Financial Limited
Chartered Financial Planner
Certified Financial Planner
ISO22222 Personal Financial Planner

Chapters Financial Limited is authorised and regulated by the Financial Conduct Authority, number 402899.

Top up & take? / More State Pension changes

Top up & take? / More State Pension changes

We all know that as a demographic, we are living longer. To maintain our standards of living, many of us are also working longer, past the current State Pension age of 65 and beyond.

Whilst taxable earnings are available, some chose to defer their State Pension Benefits until they are needed. This in the past has been advantageous for most with an uplift in deferment of 10.4% pa for each full year deferred. The current standard full State Pension (in the tax year 2014/2015 is £113.10 per week (£5,881.20 pa gross) and you may also be entitled to additional State Pension benefits, such as State Earnings Related Pension (SERPS), Second State Pension (S2P) or a Graduated Pension).  

You may want check your State Pension to ensure you are up to date you can use the State Pension Forecast service here:  https://www.gov.uk/state-pension-statement

The Government has recently announced that this deferral uplift in their State Pension will be cut by almost half. These changes are being brought in because we are all living longer, as noted, and the comparatively generous rate of increase to date will not be sustainable into the future.

The Pensions Minister, Steve Webb, stated that when the new, single-tier State Pension system is introduced in April 2016, people who choose to defer their State Pension beyond state pension age will only receive a 5.8% increase in their pension if they delay payments for a year. Just over half the current increase of 10.4%.

Under the current rules, someone choosing to defer for one year would need to live for around another ten years to make the decision financially worthwhile. When the reduced rate of increase is introduced, you would have to live for about 19 years to benefit from their choice. If we knew how long we would live, this would make the financial planning a lot easier, although I am sure it would have many other undesired effects!

In monetary terms under the new regime for State Pensions to be introduced in just over 18 months’ time, an individual receiving the full flat-rate State Pension of approximately £155 a week (£8,060 a year) would see an increase in their total annual benefits of only £467.48 if they defer for a year. If you look at this over the course of retirement, say 25 years, someone deferring at the old 10.4% pa rate of increase would receive over £17,000 more from a State Pension of £155 a week than an individual under the new rules.

The good news is that anyone who reaches State Pension Age before 6 April 2016 can still get the 10.4% rate of increase if they choose to defer taking benefits. It’s disappointing news, though, for anyone who will retire after that date and had planned to delay their State Pension.

Deferral may still be a sensible move for someone in very good health who intends to carry on working, or who has substantial pension income from other sources. However, for the majority of retirees after April 2016, it may well be a case of ‘top-up and take’ – checking that you have accrued the number of years required to qualify for the full basic State Pension and, if you haven’t, make a lump-sum payment to rectify the situation – and then start taking benefits.

The ability to top-up the State Pension (voluntary Class 3A National Insurance Contributions) will currently become available (from October 2015) to those close to and over state pension age and full details can be found here: https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/300007/wms-state-pension-top-up.pdf

Chapters Financial is not responsible for the content of external webpages.

It would be worthwhile checking that any voluntary contribution offers the potential for value before proceeding to join in the new initiative.

The Chapters teams in Guildford and Woking are well placed to advise you on the impact of current and future changes to pension’s legislation on your finances. No individual advice is provided during the course of this blog. If you would like to receive further information regarding your own individual situation and circumstances, please contact the Chapters Financial team in either Guildford or Woking.

Keith Churchouse BA Hons FPFS   

Director, Chapters Financial Limited 

Chartered Financial Planner
Certified Financial Planner 

ISO22222 Personal Financial Planner 

  Chapters Financial Limited is authorised and regulated by the Financial Conduct Authority, number 402899.

USA Leading or UK Lagging?

We have all witnessed a degree of increased globalisation over the last 20 years as a result of the information age.  Many large corporations have expanded their global presence and ventured more into overseas markets than ever before. This in turn has led to the major stock markets, and correspondingly the indices, being more closely correlated over time. 

We are all very aware of the Credit Crunch and the following aftermath in the markets, in currencies, cash-flow and economies around the world. However, we are now starting to witness much more positive data regarding the recovery of the UK economy as well as that of the USA. 

Obviously past performance is not a guarantee of future performance. 

This raises the question, are they recovering at the same rate?

USA Leading?

The Dow Jones Industrial Average (DJIA) closed above 16,000 for the first time on Thursday 21 November 2013, finishing at 16,009.99. This has seen the index growing over 22% from 02 January 2013, when the index opened at 13,104.30.

Even looking at the S&P 500 Index, which some believe to be a better ‘yardstick’ of the US stock market than the DJIA, this has risen 25% from opening at 1,426.19 on 02 January 2013 to close at 1,795.85 on 21 November 2013.

UK Lagging?

In comparison, the rise in the FTSE100 (as an example) is somewhat short of this increase, showing a growth of just 13% from an opening of 5,897.19 on 02 January 2013 to close at 6,681.33 on 21 November 2013. Therefore, if we are using the FTSE100 as the measurement of the recovery of the UK equity market, the UK is only recovering at approximately half the rate of the USA. This is an interesting observation, rather than a direct comparison. 

Some might argue that the difference could be due to the Sterling to Dollar exchange rate at these dates, which is an important consideration. However, the currency exchange rates on these dates were £1 = $1.6249 (02 January 2013) and £1 = $1.6199 (21 November 2013), therefore the impact of the exchange rate is less than 0.5% between these dates.

Which market / economy will correct and when?

The soon to retire Mr Bernanke, Chairman of the Federal Reserve, has already indicated that he may taper or slow down the fiscal stimulus into the US economy. Many economists believe that the markets have already factored in his statement in this regard, but if they have not, the impact may not occur until March 2014. 

The Bank of England has provided its own stimulus to the economy in the form of Quantitative Easing (QE) to the tune of £375BN. In comparison with the USA, it has not increased this QE programme since July 2012.

It is believed that Mr Bernanke will continue to signal the reduction in the stimulus as the US data on production, employment and other economic factors improve. This could mean that the indices in the US stock markets (DJIA / S&P 500) will not rise when compared with the UK index (FTSE 100) as the fiscal stimulus package in the USA is reduced and eventually stopped. How long will this take? I believe it will be at least 12 months before we see a significant correction between the correlation of the USA and UK equity markets, possibly even longer.

No individual advice has been given in the course of this blog. Past performance is no guarantee of future performance. Investment values can fall as well as rise and are not guaranteed.

If you would like to discuss the investment opportunities with regards to your own individual situation and circumstances or any aspects of financial planning, both personal and business (SME), then please contact the team, either in Guildford or Woking.

Simon Hewitt BSc (Hons) DipPFS

Financial Planner

Chapters Financial Limited

Chapters Financial Limited is authorised and regulated by the Financial Conduct Authority, number 402899.

The continuing conundrum for savers / 'Forward Guidance'

The new economic tool deployed by the new Governor of the Bank of England, Mr Mark Carney, in August 2013 was heralded as the opportunity to manage economic, and to some extent financial, expectations into the future. 'Forward Guidance' as it is known, provides all those affected by the economy with the opportunity to know how the Bank of England predicts the future, and more importantly, what they plan to do if these expectations are met.

As we have seen, Forward Guidance has linked the Bank Base Rate (currently 0.5%) to UK unemployment levels (currently 7.8%) with the plan that Base Rates will remain at their current level until the unemployment level falls below 7.0% (Subject to anything unexpected happening, which it can). With this plan in mind, the Governor does not expect the target of 7.00% being reached for around 3 years, and therefore does not expect Bank Base Rates to move either in this time.

This new direction provides the benefit of certainty for some (such as businesses and mortgage borrowers as examples), but also provides the negative certainty of continuing low returns for savers.

Many savers have seen returns falling in recent times, with Premium Bond returns also falling from August 2013 onwards. Many are resigned to this situation, sensibly using their tax efficient ISA allowances where possible to reduce the tax take on any gross savings earned.

Against this backdrop, some clients and enquirers are reviewing their attitude to investment risk, where appropriate, and applying this review to their future investment decisions. As an example, UK Dividend returns have remained relatively firm over the last year and these have typically been between 3.00-4.00% gross pa (Not guaranteed, past performance is not a guarantee of future performance). Obviously, by moving into this investment area, the risk to the capital invested increases significantly, with the value of funds varying daily. This volatility (and overall investment risk) is detailed on our Investment Risk Scale further here (Link). However, if an investor is prepared and able to accept this level of investment risk, this investment alternative may be suitable in some investment cases. It should be noted that diversifying any investment is usually worthwhile and we have noted that committing smaller sums initially may be worthwhile to get used to the chosen investment medium before committing larger sums.

Each investment plan and recommendation is different and individual to the Client. To consider your circumstances with regard to savings and investments, you should take individual financial advice. No individual advice is provided in the content of this Blog. The team at Chapters Financial can help you with your planning and look forward to working with you.

Keith Churchouse FPFS
Director
ISO22222 Certified Financial Planner
Chartered Financial Planner
Chapters Financial Limited

Chapters Financial Limited is authorised and regulated by the Financial Conduct Authority, number 402899.

Why we add value

The new world of UK retail Financial Services commenced on 31^st December 2012. If you haven’t heard of these new initiatives and changes, they are called the Retail Distribution Review (or RDR for short) introduced by the professions regulator, the Financial Services Authority (FSA). We have posted other informative blogs on this website relating to RDR changes that will affect clients and advisers alike.

Change always brings challenges and the RDR is no exception.

From a client’s perspective, what should they now be looking for when seeking financial advice and help?

From Chapters Financial Limited’s point of view, how we help you add value to your personal financial planning?

Transparency

Chapters Financial has continued to operate a transparent Client Agreed Remuneration (CAR) model for the past 6 years. This is the model which the FSA has closely adopted for its new advice regime. We are proud to continue to offer independent advice based on enquirers needs and requirements.

Professional Service

The team provides an open, friendly and professional service based on integrity, values and commitment to the financial planning process. The initial meeting is usually provided at our cost. If during this meeting we do not believe we can add real value, then we tell the clients or enquirer accordingly.

Delivery

At the end of our initial meeting, if agreed, we will produce documents which detail our clients’ objectives, how we aim to achieve those objectives and the fee/charges which the client will incur for engaging our service. This relaxed and professional approach means that we meet with the client’s requirements in a timeframe to suit them.

Chapters Financial Limited continues to offer financial planning, advice and service as Chartered Financial Planners.

If you would like to discuss your Financial Planning with one of professional advisers then please contact us on 01483-578800.

We look forward to working with you.

Chapters Financial Limited is authorised and regulated by the Financial Services Authority, number 402899

Long Term Care, Care Costs and Inheritance Tax

I am not sure I have ever seen two high-profile financial planning issues linked so closely by Government before, namely that of Inheritance Tax and care costs for Long Term Care. The recently commissioned Dilnot Report has done much to correctly move the issue of care costs forward.

Both topics are emotive subjects for both families and those in their older ages. They will generate much text over the next few months. The new plans (subject to confirmation and detail) is to cap long term care costs at £75,000 with assessment for this cap starting at a new level of £123,000. With care costs for many running at around £1,000 per week, as an example, you can soon work out that with £52,000 per annum being spent on care costs, it is easy for estate values to fall quickly. Ironically, this has the 'advantage' of reducing future Inheritance Tax liabilities.

The 'generosity' of this change offered by the Government will not be without expense. We are all aware that they have no money and this change will need to be afforded. This is planned to be achieved by freezing Inheritance Tax (IHT) levels until 2019. In George Osborn's Autumn Statement at the end of 2012, the current Inheritance Tax nil rate band allowance for an individual of £325,000 was going to increase to £329,000 from tax year start 2015/2016. This plan has now clearly changed to accommodate this new planning.

The devil may well be in the detail and I am sure there may be a few more changes before these (apparently) now linked allowances are finalised.

No individual advice has been provided during the course of this blog. Both Long Term Care and Inheritance Tax should be planned for carefully and if you would like to receive individual advice for your circumstances, then please contact the team at Chapters Financial Limited on 01483 578800

Keith Churchouse, FPFS
Director, Chapters Financial Limited, Guildford, Surrey

Chapters Financial Limited is authorised and regulated by the Financial Services Authority, number 402899.

The State Pension......and the possible changes ahead?

This week we have seen our coalition Government turn their attention to the State Pension and the way the current benefits are provided. I am sure there will much press coverage, comment and concern about future changes, both for those who may be effected in the shorter term, from 2017, and for those who hope to claim this benefit into the longer term.

I wanted to provide a summary, and for the purposes of this Blog, I have divided this into the following sections:

The Past and Present

Currently, the basic State Pension amounts to £107.45 per week. This income is paid gross, but is taxable and increases with the Consumer Prices Index (CPI) with a minimum guarantee of 2.5% if CPI falls below this rate, which it did in 2012. On top of this, you might also receive additional State Pension income from past accrual of the State Earnings Related Pension (sometimes known as SERPS) or its successor, the Second State Pension (S2P). I have seen this additional pension benefit when added see the overall pension paid double on regular occasions.

My current understanding is that those who have State Pension benefit in payment before 2017 will not be affected by the possible proposals.

You can probably tell that this can be a complicated calculation when taking into account all the varying factors, with a maximum accrual achieved over 30 years (proposed to increase to 35 years). Here lies part of the perceived problem and the target to simplify the process. It is also proposed that no State Pension will be achieved, with a proposed minimum of 10 years National Insurance accrual to qualify for any State Pension.

How do I check my current State Pension benefit?

You can check your current accrual of your State Pension by completing a BR19 State Pension Forecast Form (available here).

State Pension Deferral

It is currently possible to defer the State Pension after your normal State Pension age (which we know as been increasing over recent times and still increasing), seeing the benefit deferred increasing by 1.0% for every 5 week period. This increase amounts to 10.4% over a full year and this option can be beneficial in financial planning for those who, as an example, continue to work and have no immediate need for the income.

For information, this increase can be taken as taxable cash or increased taxable income. It will be interesting to see if this option survives the final ruling on future changes.

The Future?

The new proposals put forward for 2017 suggests a flat rate of State Pension of around £155.00 per week in total (about £144.00 per week in today’s terms). Of course, this figure may change when everything is finalised. Past SERPS and S2P accrual (which might have given a higher income if the rules had not changed) will be gone.

Of course and as usual, there are winners and losers by changes in legislation. Winners are likely to lower earners and some have indicated females who opted out of the State Pension many years ago. Losers are likely to be higher earners or medium earners who did not contract-out of SERP's (option started in 1988 and stopped around 2 years ago).

Summary

It is suggested that the other 'winner' in these proposals will be the Government, with an overall reduction in long term costs. We are all living longer and, understandably, this places greater burden on the pension system, whether that be the State system or private sector schemes. Clearly, planning for your future retirement will become ever more important to secure future benefits.

No individual advice has been provided during the course of this blog. Pension and retirement planning should be planned for carefully and if you would like to receive individual advice on this subject, then please contact the team at Chapters Financial Limited on 01483 578800

Keith G Churchouse FPFS
Director, ISO22222 Certified Financial Planner
Chapters Financial Limited, Guildford, Surrey
Chapters Financial Limited is authorised and regulated by the Financial Services Authority, number 402899.

Half-Time! for the tax year 2012/2013....Using Annual Allowances

The tax year starts on the 06th April each year and this is usually a busy time in UK retail financial services. The last minute pension and Individual Savings Account (ISA/Maximum £11,280 in 2012/2013) deposits are invested in time to use the annual allowance before the opportunity is lost. Many also look at any potential gains that have been made during the year to see if, where applicable, capital gains tax allowances (£10,600) can be used.

As we approach the halfway point of this tax year (2012/2013), we normally suggest that these annual allowances where unused, are visited to see if now is a good time to use them up? The gain for Chapters Financial is that we are spreading the years’ workload, but the gain for our clients to look for opportunities that may or may not be there when that annual tax year end rush occurs.

An example might be the recent rise in equity values/markets (past performance is not a guarantee of future performance and fund values can fall as well as rise and are not guaranteed) where gains on existing Unit Trust/Open Ended Investment Companies (OEICs) may be available and could efficiently be taken to use up the current capital gains tax allowance of £10,600. If you have capital losses available that could be bought forward, these may be used at the same time, however, we would recommend that you check this addition with your Accountant before proceeding. If you have not used your ISA allowance in this tax year and a gain is taken, you may choose to re-invest some of these proceeds into an ISA, up to the maximum of £11,280 in 2012/2013. If your spouse/partner has not used their allowance, this may provide an additional tax efficient opportunity.

Reviewing pension contributions is always worthwhile (standard limit £50,000 gross contribution pa/ total employer/employee) and it is not uncommon for Director/Managers to make single top-up contributions to pensions at this time of year. This timing may also be a reflection of their business year ends. 

As you can see from the notes above, a mid-year review may well be worthwhile in looking at the opportunities that may present themselves as we start the autumn 2012 season.

No individual advice has been provided during the content of this Blog and Chapters Financial Limited can help you with your tax year annual allowance planning both now and throughout the tax year(s).

We look forward to working with you. 

Keith Churchouse, FPFS, Chartered Financial Planner, ISO22222 Personal Financial Planner

Chapters Financial Limited is authorised and regulated by the Financial Services Authority, number 402899.