Changing Market Conditions & Corporate Bonds

In this modern age of information, it is easy to become ambivalent of the ever growing numbers of financial headlines and articles that skip across your computer and iPod every day. As an example, we have all lived and breathed the recession and financial crisis’s that have affected the very core of our financial understanding and acumen over the last 5 years. It is this last point that made me stop and think. The BBC headlined ‘Reflecting on the credit crunch five years on’ on the 09th August 2012, confirming the start of the Credit Crunch on the same day in summer 2007 and some were advising that ‘a correction in the markets was expected, not “a total meltdown”’.
Was this a correct statement to make? Looking back over what has been a highly turbulent economic period, and reading some of the headlines from the media, you would think it was wrong. However, to challenge this, I would ask the following question:
Is the world and its economic areas/opportunities better or worse for this 5 year crisis/recession?
I think the answer is neither. It is just different.
Most individual investment areas have seen significant changes in fortune over the last 5 years. Examples could range from deposit/cash fund returns seeing now increasing returns against a backdrop of falling Bank of England Base Rates. The Commercial Property sector seeing a negative (and very rapid) capital value correction at the end of 2008 and recently, questions in the press over the continued liquidity in the Corporate Bond market.
Looking at the Corporate Bond market further, I am not overly concerned about increased liquidity problems in the corporate bond market. That is because I am conscious that liquidity comes and goes – it is a feature of the capital markets and it is especially a feature of the corporate bond market – and I factor these roving liquidity conditions into my expectations.
Of course there are debt instruments that are associated with high levels of liquidity, even in the very worst of financial markets. Those are the sovereign bonds of the major nations, including gilts. If you’ve reduced your exposure heavily here in favour of corporate bonds then, in these circumstances, I would have some concerns. I must stress though, I am not forecasting any imminent problems with the corporate bond market in isolation.
When reviewing an individual’s asset allocation of their investments and pensions, it is important to understand that Investors should hold risky assets only in the proportions that they would be comfortable to hold for the duration of a significant downturn. We can help you understand this process to allow you to invest to a risk level that suits you. Clients should not be holding risky assets in the hope that they’re not going to be risky while they hold them. If the aggregated risk and return characteristics of an investor’s portfolio are suitable for the individual investor, then Corporate Bonds could continue to remain a suitable investment vehicle.
Past performance is not a guarantee of future performance
At Chapters Financial, we have been successfully offering a fee-based model for over 5 years now and plan to continue to offer high quality independent financial advice into the future for both our existing clients and our new enquirers. Because each consumer is different, as is their financial planning needs, no individual advice has been provided in 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

The Cobblers Shoes/ Making or updating your Will

I understand that the saying of the ‘Cobblers shoes’ refers to a Cobbler who turned out fantastic shoes for his customers, but always forgot to shod himself and his family well. There are many ‘life issues’ that come along which some apply the ‘Cobblers shoes’ to. Making or reviewing an existing Will is usually a good example.

I always maintain that there are a few basic financial planning cornerstones that need to be addressed before making use of various planning techniques. Maintaining an emergency deposit fund of 3-6 months’ income to meet any unforeseen demands is one and making (and keeping up to date) a will is another good example, along with trying to enter retirement debt free/mortgage free/repaid.

Referring again to the ‘Cobblers Shoes’ analogy, it has been some years since I reviewed my old will and it is amazing how time flies and both legislation and circumstances change. The original document certainly did not reflect the life changes that had occurred since the original document was finalised and witnessed. A good quality solicitor was employed and a new document, now reflecting my requirements, has been established. I would recommend that you consider the same action if you have not done so for a few years. You might want to make changes to reflect changes in your circumstances, such as the addition of grandchildren or, sadly, the loss of a family member.

If you die without a will in place, you die ‘intestate’. As you can see from the following link, this may not be something you want to happen: http://www.direct.gov.uk/en/Governmentcitizensandrights/Death/Preparation/DG_10029802

Dying intestate may also have negative inheritance tax consequences and you may want to bear this in mind when planning for your future and for that of your beneficiaries. As we have noted in previous Blogs, 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 solicitor to help you with your needs.

Whilst looking at the issue of wills, I am sure your legal adviser will also raise the subject of achieving a Lasting Power of Attorney at the same time. For information, a Lasting Power of Attorney appoints someone (usually someone you know and trust) to make decisions on your behalf when unable to do so for yourself. It should be noted that it can take up to nine weeks to register a Lasting Power of Attorney. More details of the process can be found at the following link: http://www.direct.gov.uk/en/Governmentcitizensandrights/Mentalcapacityandthelaw/Mentalcapacityandplanningahead/DG_186373

The team at Chapters Financial can help you with your Financial Planning and Inheritance Tax Planning and we look forward to working with you. No individual advice has been provided in the content of this blog.

Keith Churchouse, Chartered Financial Planner, Certified Financial Planner
Director, Chapters Financial Limited, High Street, Guildford, Surrey.
Chapters Financial Limited s authorised and regulated by the Financial Services Authority. Number 402899

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

Do you know that the provision of financial advice is changing soon??

The Financial Services Authority's (FSA) Retail Distribution Review (or RDR for Short) has been many months and years in the planning and will be implemented at the very end of 2012. 

Consumers need to be aware that these regulation changes and their effects on the delivery of UK retail financial services to the public will be significant. The FSA has started a process of raising the profile of the changes and we have also started to see the press joining in the process. I have no doubt that there will be much page space allocated to the topic over the autumn and winter months of 2012. It is important that those seeking financial advice know what these changes mean for them and the choices they will be provided into the future. 

The FSA has produced a consumer information document as a guide to the changes and to start the process of educating those seeking financial advice of what to expect in the future. This can be found at the following web-link here:  http://www.fsa.gov.uk/static/pubs/consumer_info/rdr-consumer-guide.pdf

Previously, I have noted these changes in my Blog in April 2012. Entitled 'All change in the delivery of UK financial services' further information can be found at the following Chapters Financial Blog-link: http://www.chaptersfinancial.com/30042012.php

The main headlines of these changes are:

• Two main definitions of financial advice provision. An adviser will either be independent or restricted.
• Financial Advice will be charged for on a fee basis bringing to an end the use of commission.
• A higher level of industry qualification (Level 4 as it is known) will be required from advisers and they will need a Statement of Professional Standing Certificate to provide financial advice.

At Chapters Financial, we have been successfully offering a fee-based model for over 5 years now and plan to continue to offer high quality independent financial advice into the future for both our existing clients and our new enquirers. For information, Keith Churchouse achieved Level 6 qualification in December 2007.

Because each consumer is different, as is their financial planning needs, no individual device has been provided in 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

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

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.

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.

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

£1,000 a week? How much is the cost of Long Term Care?

The number of Long Term Care enquiries has been climbing significantly over the last few years. We are all living longer and the strains/demands of modern day life certainly seem to be taking its toll on the quality of life that many have in their later years. 

Many enquiries we receive come from those who have received Power of Attorney (or Court of Protection Appointed Deputy) to care for someone’s affairs, either financial or health related, at a time of need. There are two types of Lasting Power of Attorney, namely: 

•         Property and financial affairs

•         Health and welfare

A good example of when advice is needed is when someone enters a care home because they are struggling to look after themselves through failing health. Of course there are other reasons to enter a care home, such as the social aspects of maintaining regular contact in a community. It is at this time that the issue of money and meeting the cost of care becomes very important. 

Attendance Allowance?

The greatest concern (and responsibility) is obviously to meet the costs of any care provided to the person in your care to ensure they are comfortable. You may get some assistance towards costs, such as the Attendance Allowance. There are two levels of tax-free Attendance Allowance (Higher rate currently £77.45 p.w and Lower Rate, currently £51.85 p.w /tax year 2012/2013) and these are detailed further here: http://www.direct.gov.uk/en/MoneyTaxAndBenefits/BenefitsTaxCreditsAndOtherSupport/Disabledpeople/DG_10018710

Financial Assistance?

If the total assets available (including the value of the home) fall below £23,250 (tax year 2012/2013), your local authority may help with care costs, however the cover they provide may not be to the standard or in the location you would prefer. More details can be found here: http://www.moneyadviceservice.org.uk/yourmoney/life_work_and_study/guides/caring_for_someone.aspx

What can it cost?

In my recent experience, many are paying around £1,000 per week for their long term care requirements. It is this somewhat daunting requirement which places much pressure on those appointed as Attorneys to balance the budget in ensuring that any capital available, such as that released from a house sale, is planned carefully to ensure that care is provided both now and into the future. With inflation expected to remain higher than anticipated (see Bank of England May 2012 statement http://www.bankofengland.co.uk/publications/Pages/inflationreport/ir1202.aspx) ,it is also important to build increases in care costs into the financial planning undertaken. 

Variations and the quality of a care facility

I am aware that care cost can vary significantly dependent on where in the UK the care is provided, and you might want to investigate this carefully. Others prefer alternative solutions, such as remaining in their own home, with care being provided there. Whilst assessing the facilities available in your area, you can also look on a provider’s website to see the details of their last Care Quality Commission assessment and its outcome. More details of the work of the Care Quality Commission can be found here: http://www.cqc.org.uk/

Existing Income

Existing income will need to be taken into account, such as that received from (as examples) State pension, private/occupational pension arrangements or investment income. The income tax charge made on this income will also need to be calculated to identify the net income available for care.

The nil rate income tax band increases with age (subject to limits) and again this needs to be taken into account when planning for the provision of care fees.

Providing additional income from capital

One possibly simple way of achieving protection for someone who has recently entered care without any pre-existing protection, is to use an annuity to purchase income. This option has its security, but many find that the initial capital cost can be concerning. Each situation is different and the health of the Attorneys charge may well have a bearing on this decision. Another alternative is to generate additional investment income to help towards costs. This is likely to be subject to the Attorney’s views on investment risk. There are many combinations of plans that can be used to create a suitable solution and the main key is to take independent financial advice as soon as possible to create a plan that can be implemented in a timely fashion to get care costs in check. 

The Standard Financial Planning Rules apply

Emergency Deposit Funds

As with most types of financial planning (and planning for the provision of long term care costs is no different) I would recommend that you maintain an emergency deposit fund for the person in care. This should be a readily accessible cash/deposit type fund to meet any unforeseen costs that may occur. You can still use ISA allowances to enjoy tax efficient returns on cash funds, as an example. 

Will

Make sure there is a Will in place and that it is held securely for future reference.

Record Keeping

I would recommend that records of costs, expenses and income are maintained and that any advice received is maintained and reviewed to ensure that the responsibilities of the Attorney are being met.

Summary

Many new Attorneys and Deputies find the prospect of financial planning to meet care costs a daunting task, usually because of the capital involved and the high income that this needs to be generated to meet on-going care costs. Good quality advice is important in this instance, to ensure that income, and any shortfalls, can be understood and balanced and that this advice should be reviewed regularly. Chapters Financial can help you with this financial planning.

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

No individual financial planning advice has been provided in the content of this blog. You should speak to your own independent financial adviser (IFA) or please contact 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.