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the barrister

Personal Finance & Wealth Management 42680 WDB Barrister Magazine Ad_Layout 1 06/08/2010 10:46 Page 1

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19/08/2010 09:59

integrity

Smith & Williamson has been looking after the financial affairs of private clients, their families and business interests for over a century. Services include:

Towry is a fast growing wealth advice business, with Chartered Financial Planner status, employing over 700 people in 22 offices across the United Kingdom.

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Towry offers fee based, independent financial advice and independent investment mangement services to private individuals and small and medium sized enterprises.

Our investment managers have found themselves doing some strange things for their clients over the years. They’ve turned out for local cricket teams, fed fish, even looked after pet dogs. Unusual, but with such a willingness to go beyond the call of duty it’s no surprise that clients tend to stay with us a long time. But neither is it unusual for relationships to last beyond a lifetime. Some of our investment managers have helped several generations of the same family. So, as well as all the other things we do, you could say we look after people’s kids too. Perfect testimony to the simple philosophy that guides everything we do: that the first thing we earn is your trust.

MEDIUM SIZED FIRM OF THE YEAR

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trust &

Honesty, integrity and independence SOME OF OUR RELATIONSHIPS GO BACK FOUR GENERATIONS.

We work alongside a number of legal and accountancy firms, seeing our services as enhancing those of our professional partners.

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Our vision is to become the UK’s leading provider of wealth advice. About us: Highly qualified team Strong investment perfomance Independent fee based advice

• • • • • •

About our services: Pension and tax planning advice Investment mangement services Corporate pension and employee benefits advice

Smith & Williamson Limited Regulated by the Institute of Chartered Accountants in England and Wales for a range of investment business activities. A member of Nexia International. Smith & Williamson Investment Management a trading name of NCL Investments Limited (member of the London Stock Exchange) and Smith & Williamson Investment Management Limited. Both companies are authorised and regulated by the Financial Services Authority. Smith & Williamson Financial Services Limited Authorised and regulated by the Financial Services Authority.

For an initial discussion with a Wealth Adviser, which is free of both charge and obligation, please contact us on 0845 788 9933 or visit www.towry.com/contact.

accountancy

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Our offices: Aberdeen Belfast Birmingham Bournemouth Bracknell

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Oxford Worcester

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Towry Limited Barrister Magazine_210x297.indd 1

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23/08/2010 15:34:36

The lawyer Awards.indd 1

28/05/2010 13:24:35

CD Barrister Magazine A4 ad

23/8/10

12:01

Page 1

The changing world of investing Specialised business advisors to Chambers, Tenants and Pupils.

15 years ago we thought about drinking… Now we think about how to better invest for the future.

Our team of experienced tax specialists and accountants understands the challenges that the sector faces and can help to optimise the tax reliefs available and to mitigate the tax that you pay.

With annual returns exceeding 12%† since the early 1980s, Bordeaux fine wine has become one of the best performing asset classes.

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few worlds have changed as much as that of investment in the past half century. With the market now dominated by institutional investors and information flowing swiftly around the globe, the task of choosing someone to help you look after your investments is challenging.

It is difficult to evaluate what will happen next but in today’s challenging environment, Bordeaux fine wine provides a secure shelter for investors. But it is not all about preservation of capital and diversification. It is also about making better profit returns in a tax efficient environment*.

n VAT

Call Nigel Armstrong on 020 7240 9971 or email nigel.armstrong@alliotts.com to arrange a free initial consultation, at your offices or ours. Alliotts Chartered Accountants, Imperial House, 15 Kingsway, London WC2B 6UN

Independence, professIonalIsm and approachabIlITy at Jm finn & co we recognise our clients’ need for the reassurance of having professional expertise at their side at a time of volatile markets and uncertain outcomes. many of our client relationships have endured for three generations. We truly believe in maintaining strong personal links, so changing the person with whom our clients deal happens seldom and only when required. moreover we are an independent firm, owned by our directors and staff, with our principal business dedicated to advising private investors on their investments and managing their investment portfolios.

Operating in international markets, Boltons Wine Investment is the leading brokerage offering a one stop solution for investment, market analysis and broking services. So whether you want to set up a discretionary account or use our expertise in broking your fine wines, we do as you like – we do more. If you want to experience a better way of achieving your goals then try Boltons Wine Investment first.

our head office in the heart of the city not only has the largest grouping of experienced investment managers within the firm, but also includes our own administration department – our back office. With many firms locating their back office in cheaper, out-of-town premises, or even subcontracting the functions to a third party administrator, we believe our approach delivers an edge in providing efficient support to our managers and their clients.

Contact us by phone or email to arrange a personal meeting with our investment brokers in our City of London office.

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but we also have four other offices outside london, staffed by experienced and dedicated professionals who have access to all the resources available in london. With our staff of 280, of which nearly 100 are qualified, client-facing investment managers and/or advisers, we know we are able to cope with the many challenges that face the investment industry, while still maintaining a level of personal service that is so often lacking in the larger, more broadly based financial businesses.

The ‘arT’ of managIng InvesTmenTs managing private client portfolios can be considered part science, part art. Understanding the client’s desired investment requirements and ensuring that attitude to risk is properly addressed is crucial. an experienced investment manager can make educated judgments and assemble assets to meet client needs. of course, it must be understood that the value of investments, and the income they generate, can fall as well as rise. The range of options today is as wide as it has ever been. Until the early 1980s it was not easy to invest abroad. Today

an investment portfolio that is purely domestically focussed is more likely to be the exception than the rule. property was once considered only the province of the very rich. now a variety of funds provide access to all types of commercial property. and the range and type of investment product is now more extensive – and arguably more confusing – than ever.

WhaT yoU can expecT here at Jm finn & co we are committed to providing tailored services that can ensure needs are properly met. meetings can easily, and conveniently, be arranged. our broad services include: discretionary investment management Individual savings accounts (Isas) private pensions, including sIpps portfolio advisory services Trust investment management charity investment management cash management online access to view portfolios

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With the shift in economic power from West to east gaining momentum and concerns over growth sustainability remaining, it makes sense to take good investment advice and to plan well. at Jm finn & co we believe we have the skills and the approachability to make sense of complex investment issues to private investors. We can offer a truly personal and bespoke service. Talk to us. We are but a short journey from the Inns of court.

† based on in-house indices including mainly first and second growth Bordeaux fine wines. *In the UK, wine investment is exempt of Capital Gains Tax if certain requirements are met. Investors resident abroad may need to consult an independent tax advisor.

contact: camilla stone, 4 coleman street, london ec2r 5Ta T 020 7600 1660 e camilla.stone@jmfinn.com www.jmfinn.com

This advertisement is not intended as investment advice. The value of wine investments and profit returns from them are not guaranteed and can go up as well as down. Boltons Wine Investment is a brand and legal property of Boltons Investments. Issued by Boltons Investments Limited, 4th Floor, 1 Liverpool Street, London EC2M 7QD, United Kingdom. Registered in England and Wales No. 5934744. Boltons Investments Limited is not regulated by Financial Services Authority. If unsure about services in relation to this investment product please do contact an independent financial advisor.

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02/09/2010 16:27

Barrister magazine article 3_Layout 1 27/08/2010 12:09 Page 1

Get the most from your retirement After a life of working, you’ll no doubt want to take it easy and enjoy life when you retire. Making that a reality takes a lot of preparation though. So here are a few pieces of advice to consider if you want to get the best from your retirement.

Start saving as soon as possible If you’re young, you may think this doesn’t include you. But while it feels strange to be saving for retirement when it’s so far off, it’s that long space of time between now and then that gives you the chance to build a retirement fund that meets your expectations. And now the retirement age has changed from 50 to 55, there’s an opportunity to give your retirement fund an extra boost. So start climbing the retirement savings ladder sooner rather than later.

Save what you can afford In terms of the amount you should be saving towards retirement, the short answer is as much as you can afford without overstretching yourself. The more you can save now, the better. Even modest amounts can make a difference.

Claim your tax relief If you’re a higher-rate tax payer - earning more than £37,401 in 2010-11 - you may be able to claim higher-rate tax relief on your pension. The Government adds basic rate tax relief of 20% to all your personal contributions. Then, depending on how much you earn over the higher-rate tax band, there’s an additional tax relief of up to 20%. So saving every £100 into your pension could actually cost you just £60. Naturally, it’s worth noting that the value of any tax advantages will depend on your personal circumstances, which may change. And bear in mind that tax rules can change too.

Keep an eye on your pension Retirement income can come from many sources, including pensions, ISAs, property and unit trusts. So it’s worth checking all of your investments every year to be sure everything’s going to plan. A financial adviser will be able to help with this, and give you some idea of your estimated income when you retire. You can also use online calculators from the Scottish Widows website to help you check on the pension figure you’re heading for, based on your contributions.

The Scottish Widows UK Pension Report 2010 states that for the average person to reach their target retirement income, they need to save at least 12% of their salary from age 30 to their retirement age. However, everyone is different, so for an illustrative outline of how much you should be saving, take a look at the Scottish Widows pension calculator at www.scottishwidows.co.uk/calculators

Take the initiative If you’re self-employed, or you don’t have the option of a company pension where you work, it’s worth considering a personal pension. Or if you’ve already built up a large pension pot and you’d like a wider range of investments to choose from, you could consider a self-invested personal pension (SIPP). Your financial adviser will be able to help you pick the right option for you and your circumstances.

Three ways to give your pension a boost 1. Additional voluntary contributions The newspapers are full of statistics about people not putting enough money into their pensions. So if you’re in a scheme set up by your employer but still feel you haven’t provided sufficiently for your retirement, consider additional voluntary contributions (AVCs). You can invest up to your annual salary every year, and receive tax relief on your payments. 2. Salary exchange As the name implies, salary exchange (also known as salary sacrifice) involves exchanging part of your salary for a pension contribution which your employer can pay into your pension. This means that both you and your employer pay lower National Insurance contributions, so there’s more to go in your pension. And anything you give up entitles you to tax relief too. 3. Buy back time To receive your full, basic state pension, you need to have built up sufficient entitlement over your lifetime of paying National Insurance. If you haven’t, you can still buy back extra years – up to 12 as of 2010, if you retire before 5 April 2015.

Planning for your retirement can be a complicated process. So to consider what your options are and to choose the right one for you, speak to your financial adviser.

For more information speak to your financial adviser, call us on 0845 845 6789, or visit us at www.scottishwidows.co.uk

We are an independent investment company whose key investment objective is to deliver long term real returns for our clients.

Do your research Like anything else you’d spend money on, it pays to shop around for your pension. You’re not limited to companies you have existing accounts or products with, so you should go for the plan that best suits you. But bear in mind that, while doing your own research is important, you should always speak to a financial expert before making your final decision.

Calls may be monitored and recorded. For examples of how tax relief works in practice, visit www.scottishwidows.co.uk/taxrelief

UK Veritas Asset Management (UK) Limited Elizabeth House, 39 York Road London SE1 7NQ Tel: 020 7961 1600 Fax: 020 7961 1602 Email: investorservices@veritas-asset.com Web: www.veritas-asset.com

Switzerland Veritas Asset Management AG Genferstrasse 21 8002 Zurich Tel: 0041 44 206 2660 Fax: 0041 44 206 2661 Email: info@veritas-asset.com Web: www.veritas-asset.com

Authorised and regulated by the Financial Services Authority

Member Swiss Association of Asset Managers (SAAM)

Supplement 2010

If your relevant income in the current tax year, or in either of the previous two tax years, is £130,000 or more, you may be subject to the Government’s Special Annual Allowance. In these circumstances, you may be required to pay a tax charge if the total payments to your pension plan during the current tax year exceed your Special Annual Allowance limit. Please speak to your financial advisers for further details. Scottish Widows is authorised and regulated by the Financial Services Authority (FSA Reg. No. 191517). Contact us on 0131 655 6000. As part of the Lloyds Banking Group, Scottish Widows is proud to be an Official Provider of the London 2012 Olympic and Paralympic Games.

VERITAS A4_AD_00048.indd 1

26/8/10 14:53:10

tax


Bespoke by Nature At Williams de Broë there is no “one size fits all” approach. We work closely with you and your trusted advisers to create a highly individual investment strategy tailored to your precise needs. Williams de Broë provides investment management services for individuals, trusts, charities and companies. Personal investments for the life ahead.

London Office: 020 7072 7500 london.office@wdebroe.com www.wdebroe.com 100 Wood Street, London, EC2V 7AN LONDON | BATH | BIRMINGHAM | BOURNEMOUTH | EDINBURGH | EXETER | GUILDFORD

Williams de Broë Limited. Registered office: 100 Wood Street, London, EC2V 7AN. Registered in England and Wales under Company Number: 2485266. A wholly owned subsidiary of the Evolution Group plc. personal finance & wealth management supplement the barrister 2010 Authorised and regulated by the Financial Services Authority. Registered office: 25 The North Colonnade, Canary Wharf, London, E14 5HS. A member of the London Stock Exchange.


4

Contents: HMRC Information gathering powers By Andrew Watt, Managing Director,Tax Disputes & Investigations Alvarez & Marsal Taxand UK LLP

8

Why Goal Based Benchmarks make sense for Private Clients By Trevor Forbes, Head of Investment, Standard Life Wealth

10

2010 Tax Changes Following the success of the amnesty with the medical profession, HMRC intend to pursue other professions with the same type of targeted approach. Barristers are rumoured to be high on the list. By Anne Gregory-Jones, Partner, Haysmacintyre

Investing in Wine for Profit and Pleasure By Stephen Williams, Managing Director, The Antique Wine Company

14

Pensions: how recent and proposed changes to pension legislation will impact on barristers By Neill Millard, Co-Founder, Cavanagh Financial Management Ltd

Finding your way out of a taxing problem Andrew Tully, Senior Pensions Policy Manager, Standard Life

18 22

Woodland: Where money really does grow on trees

16

By Crispin Golding MICFor UPM Tilhill, Woodland Investment Advisor Central & Southern England

Financial Implications of Divorce Andrew Yonge and Angela Kellock of Smith & Williamson, the accountancy and financial services group, highlight key issues to consider when dividing assets on divorce

All change

20

The coalition government’s first Budget confirmed changes to capital gains tax, national insurance, to corporation tax and children’s tax credits. Danny Cox, Head of Advice at Hargreaves Lansdown looks at the recent rule changes.

The Real Value of your Family By Justin Urquhart Stewart, Seven Investment Management

30

12

26

The Right Time for Multi Asset Investing By Trevor Greetham, Asset Allocation Director and portfolio manager of Fidelity’s Multi Asset Strategic Fund.

Who are you? Jason Butler explains why knowing your financial personality is the key to making good financial decisions.

32


HMRC Information gathering powers By Andrew Watt, Managing Director,Tax Disputes & Investigations Alvarez & Marsal Taxand UK LLP

I

nformation is the oxygen which fuels

Where HMRC issues a taxpayer notice without

However, safeguards (c) and (d) do not apply

every investigation. Professional advisers

involving the Tribunal, the decision to issue

to the extent that the Tribunal is satisfied that

and their clients need to be aware that HM

the notice has to be approved by an authorised

forewarning the taxpayer might prejudice

Revenue and Customs’ (HMRC) investigators

officer of HMRC who has been suitably trained.

the assessment or collection of tax [para.3

have a wealth of information at their finger tips.

But to protect the taxpayer’s rights when that

(4)] whether as result of documents being

And where there are gaps in their knowledge

happens, there is a right of appeal unless the

destroyed or, in extreme cases, the taxpayer

they have powerful tools at their disposal to

information or documents requested form part

fleeing the jurisdiction

help make good these deficiencies.

Even

of the records which the taxpayer is statutorily

before a matter is taken up for investigation,

obliged to keep [para.29]. In general, every

It should be noted that it is a criminal offence

a comprehensive risk assessment exercise

taxpayer is required to keep such records

to conceal, destroy or otherwise dispose of

will have been conducted and a competent

as enable him to make and deliver a correct

documents which a person has been informed

investigator may already have been making

and complete tax return. Specifically, anyone

are, or are likely to be, the subject of an

third party enquiries without the target even

carrying on a trade profession or business and

information notice, for the issue of which the

being aware of the suspicion surrounding his

companies, are required to keep records of all

investigator intends to seek the Tribunal’s

or her tax affairs.

receipts and expenses in the course of the trade,

approval. The maximum penalty to which

profession or business, or company activities;

such a person would be liable on conviction on

Since 1st April 2009, Sch.36 FA 2008 has

records of the matters in respect of which

indictment is a fine or two years’ imprisonment

been the investigator’s principal means of

those receipts and expenditure take place; and

or both [paras.54/55].

obtaining information or documents which

records of all sales and purchases made in the

are ‘reasonably required’ [para.1] for the

course of any trade involving dealing in goods.

Third parties such as banks and customers

purposes of checking a person’s ‘past, present

Almost inevitably there will be disputes as to

and suppliers of a business can be crucial

and future liability to pay any tax’ [para.64] by

whether or not certain documents form part of

sources of information in any investigation.

means of a notice served on the person and/

the statutory records such as a hairdresser’s

And HMRC may serve a notice on them

or on a third party. The documents must be in

or dentist’s appointments diary.

without the Tribunal’s approval if the taxpayer

the person’s ‘possession or power’ [para.18].

agrees to the issue of the notice. If, however,

This concept was challenged in Meditor

There is no right of appeal where the Tribunal

the taxpayer refuses his consent, HMRC will

Capital Management Ltd v Feighan [2004]

has approved the giving of the notice. It is likely

seek the approval of the Tribunal which,

STC273 in which it was held that documents

therefore that HMRC will adopt this approach

as with taxpayer notices, may only grant its

in the possession of an offshore subsidiary had

where

approval subject to certain conditions-

to be produced in response to an information

proceedings, of sensitive information in the

notice served on the parent company in the

investigator’s possession might prejudice the

(a) the application is made with the agreement

UK.

investigation. The Tribunal will only grant its

of an authorised officer of HMRC.

approval subject to certain conditions which

(b) the Tribunal is satisfied that the officer

are that –

giving the notice is justified in doing so.

Clearly it would be excessively cumbersome if

premature

exposure,

in

appeal

HMRC had to seek the approval of the Tribunal in every instance where a notice was to be served on a taxpayer, for example, in a routine self-assessment enquiry. The investigator will normally ask for the information informally and will only resort to time-consuming, formal action if resistance is met. Even then, the investigator is unlikely to seek Tribunal approval for the issue of the notice. But in

(c) the third party has been told what (a) the application is made with the agreement of an authorised officer of HMRC. (b) the Tribunal is satisfied that the officer giving the notice is justified in doing so. (c) the taxpayer has been told that the information or documents are required and been given a reasonable opportunity to make

information or documents are required and been given a reasonable opportunity to make representations. (d) the Tribunal has been given a summary of any representations made. Neither the third party nor the taxpayer are permitted to attend the hearing. (e) the taxpayer has given a summary of the

the most serious cases, such as enquiries into

representations

reasons why the documents and information

complex avoidance arrangements, it is likely

(d) the Tribunal has been given a summary of

are required.

that the formal procedures will be triggered at

any representations made. The taxpayer is not

the outset.

permitted to attend the hearing

4

personal finance & wealth management supplement the barrister 2010

Conditions (c) to (e) will not apply if the


No ordinary home. No ordinary Insurance Broker. Life is better when your assets and services are tailored to your tastes and requirements. Insurance is no exception. As a discerning individual you want a professional solution to your insurance needs. JLT Personal Insurance Providers offer a personalised service to protect your possessions and lifestyle. Our bespoke policies are flexible enough to accommodate your UK residences, holiday homes, cars, yachts, motorboats and travel insurance - all within one policy for complete peace of mind.

Insurance as individual as you.

0800 093 9745 www.dentonspensions.co.uk

Jardine Lloyd Thompson Personal Insurance Providers. A division of Thistle Insurance Services Limited. Lloyd’s Broker. Authorised and Regulated by the Financial Services Authority. A part of the Jardine Lloyd Thompson Group. Registered Office: 6 Crutched Friars, London EC3N 2PH. Registered in England No 00338645. VAT No. 244 2321 96.

5287_08/10

For a quote or more information


Tribunal is satisfied that they might prejudice

the material they acquire or create. Records

authorities offshore under Tax Information

the assessment or collection of tax [paras.3

concerning any individual’s physical, mental,

Exchange Agreements of which the UK

(4)].

spiritual or personal welfare are likewise not

already has 8 signed and in force and a

liable to be produced to HMRC [para.19] but

further 13 awaiting ratification. The UK also

A third party notice must name the taxpayer

this is more likely to be a problem for doctors

has an extensive network of Double Tax

to whom it relates [para.2(2)] unless the Notice

who fail to keep patients’ and financial records

agreements many of which incorporate the

has been approved by the Tribunal and has

separate.

OECD model exchange of information Article

waived that requirement on the grounds

26. Discussions are under way with several

that the officer has reasonable grounds for

One of the most important and contentious

other fiscal authorities, including Switzerland,

believing that it might seriously prejudice the

protections applies to documents to which a

aimed at amending existing agreements to

assessment or collection of tax [para.3(5)]

claim to legal professional privilege could be

incorporate that Article. HMRC also receives

Similarly the Tribunal can, on the grounds

maintained in legal proceedings [para.23]. It

substantial amounts of information under

of prejudice to the assessment or collection

has always been understood that this applied

various EU Mutual Assistance Directives and

of tax, set aside the requirement that the

to documents in the hands of a solicitor or

through its active participation in the Joint

taxpayer must be given a copy of a third party

barrister. However, after long drawn-out

International Tax Shelter Information Centre.

notice [para.4].

proceedings in Morgan Grenfell & Co Ltd v

Hopefully this overview of the information

Special Commissioners [2002] STC 786, the

gathering process as it relates to direct taxes

an

House of Lords ruled that the same documents

may help advisers and their clients make

application to waive taxpayers’ protections

in the client’s hands were also protected.

sensible judgements not least on matters such

in circumstances where serious tax fraud

HMRC is more and more showing itself

as voluntary disclosures. For instance it is a

was suspected, possibly leading to a criminal

unwilling to accept that the legal professional

matter of public knowledge that HSBC Bank in

investigation.

privilege defence is valid in every circumstance

Geneva has recently suffered a significant data

in which it is claimed.

theft and that sensitive information relating

Clearly

HMRC

would

only

make

HMRC can also serve a notice on a third

to UK customers has almost certainly already

party requiring information or documents

There is a limited protection for tax advice

reasonably required for the purpose of

papers in the hands of a tax adviser [para.25]

checking the UK tax position of a person whose

but an attempt, reported in the case of

identity is not known, or a class of persons

Prudential plc v Special Commissioners [2010]

Andrew Watt

whose individual identities are not known

STC 161, to use the Morgan Grenfell decision to

Managing Director,

[para.5]. This power, and its equivalent in

extend this protection to the same documents

Tax Disputes & Investigations

Section 20 TMA 1970, have been extensively

in the hands of the adviser’s clients, and in so

Alvarez & Marsal Taxand UK LLP

used in recent years by HMRC in connection

doing to help level out a highly uneven playing–

One Finsbury Circus (1st Floor)

with its drive against perceived evasion by

field as between lawyers and accountants, has

London

holders of offshore bank accounts.

so far failed but the appeal process has not yet

EC2M 7EB

been exhausted. An auditor’s working papers

Direct: +44 207 715 5214

In addition to those mentioned already,

are protected from disclosure [para.24] but

awatt@alvarezandmarsal.com

there are a number of protections built

documents which explain entries in accounts

into the legislation. Some of these are more

or tax returns are vulnerable [paras. 25/26]

stringent than others. For instance documents

It should be noted in passing that, somewhat

originating more that 6 years before the date

facetiously

of the notice are exempt from disclosure but

sought to use the legal professional privilege

this can be over-ridden by an authorised

argument to prevent their own records from

officer whose approval is highly unlikely to

having to be produced in the course of an

be withheld. A taxpayer can appeal against

enquiry into their own affairs. These attempts,

a notice unless it relates to information or

perhaps unsurprisingly, failed. R v CIR ex

documents which are part of the statutory

parte Lorimer [2000] STC 751.

perhaps,

some

lawyers

have

records or the Tribunal has approved the notice. A third party may appeal against

As if the intrusive powers described above

a notice if it would be ‘unduly onerous’ to

were insufficient, HMRC can actively pursue

comply [para. 30]

information by visiting business premises, not necessarily with the agreement of the

Information relating to the conduct of a

occupier, in order to inspect (not search) the

pending appeal is, as one would expect,

premises, business assets on the premises and

protected and investigative journalists are

the statutory records [para.10].

also given favourable treatment in respect of

HMRC can also seek information from tax

6

personal finance & wealth management supplement the barrister 2010

found its way into the hands of HMRC.


‘‘the only problem In my relatIonshIp wIth saunderson house Is that It should have started sooner’’. Partner - City law firm

Our clients speak for us. Contact us on 020 7315 6504 or at nick.fletcher@saunderson-house.co.uk

Saunderson House Ltd, 1 Long Lane, London EC1A 9HF Authorised and Regulated by the Financial Services Authority.

personal finance & wealth management supplement the barrister 2010


Why Goal Based Benchmarks make sense for Private Clients By Trevor Forbes, Head of Investment, Standard Life Wealth Historical Perspective

Private client benchmarking becomes institutionalised

B

enchmarking has been one of the hottest debating topics in the fund management industry for nearly forty

years. The initial assumption was that clients needed something in order to measure the performance of their investment manager. The reasoning was “what could I reasonably expect my investment manager to produce for me in the prevailing market conditions?” This was borne out of the institutional pension fund industry and the result of the comparison allowed trustees and their advisers to be seen to be carrying out their duties effectively. An underperforming manager would be removed and a comparison of performance versus a benchmark allowed trustees to select a new and hopefully better performing fund manager. The interesting aspect of this was that these performance manager

characteristics,

consistently

even

on

outperforming

a the

benchmark index, may bear no comparison to the performance needs of the underlying pension fund. As a result, and as many schemes soon found to their sponsoring company’s cost, during periods when capital markets languished

with

negative

returns

many

pension schemes reported sizeable funding deficits despite employing an investment manager who was out performing an index and assumed that they were doing a good job. By one measure, relative performance, they were doing what they were mandated to do but on the measure of protecting the scheme’s solvency they clearly were falling short. Over time, the institutional industry evolved ever

more

that

were

complex supposed

benchmark to

overcome

indices these

achieve. When we consider a client’s goals it becomes clear that market-based benchmarks are not sufficient. For example, as the credit

Private clients had tended to be measured on a rather different basis. Often the requirement would be to achieve the highest return possible from a combination of different assets with the tacit expectation that the fund manager would be able to switch to cash before equities or bonds fell. Here we had the nub of the problem. Fund managers often found it difficult to sell because if they got it wrong, which they invariably did, and equities / bonds continued to rise then they would underperform and ultimately lose their client.

crisis of 2007/2008 began to unfold we saw a high degree of correlation of the assets used in traditional market benchmark portfolios. Quite simply the assets used all lost value and so did client portfolios measured against these benchmarks. You are paying your investment manager to outperform your benchmark. Consider a manager benchmarking the APCIMS Balanced Index between October 2007 and March 2009. The Index dropped almost 30%. Therefore, a

As a result, the private client investment management industry became more institutionalised in the final decade of the last century. The drive of these larger managers was to adopt a similar benchmarking system to the pension fund industry. Out of this quest, the Association of Private Client Investment Managers and Stockbrokers (APCIMS) was established in the 1990s. Fairly soon benchmark indices were constructed to provide a measure of the typical performance of how a cautious (income) and balanced and more aggressive (growth) portfolio should be. These quickly became the templates for many private client fund managers allowing them to claim relative performance success (or not) compared to these indices. In order for these investment managers to protect their reputations it became the industry standard to take the proportions of the APCIMS indices and, for example, for a client deemed to have a balanced requirement to deviate only slightly from the implied asset allocation of the index. In a sense, the investment manager has now abdicated the responsibility for asset allocation to APCIMS in order to concentrate on achieving positive stock selection for their clients.

fund manager whose balanced portfolios fell

Why Goal Setting is important for Private Clients

Interestingly, these different goals that they

by 28% would be able to claim a successful outcome. Few clients are likely to agree; after all the things they want to achieve with their wealth will still cost the same. When you examine these statements it is, perhaps, not surprising that the wealth management industry is beset by a client base that feels regularly disappointed by the investment performance of their fund manager. Let’s consider the situation of a fairly typical private client. They will have worked hard to build their savings over a number of years. They may be considering tax planning for the benefit of their children, looking to achieve a regular income from a SIPP portfolio when they retire or they may even be seeking to acquire an aspirational asset, such as a second home or yacht at some time in the future. Here is the problem. The client does not expect the value of their wealth to decline-ever. They expect steady returns over time; their expectations are both linear and rising.

shortcomings. In practice they rarely achieved what the trustees and the pension fund sponsors were looking for because all these

may have set for their wealth to achieve may have very different return requirements and,

indices had one fatal flaw. All of the indices were based on market indices with their

Goal setting is important as it provides a clear

importantly, volatility tolerances. For example,

attendant volatility characteristics.

focus on what the investment is trying to

a client wishing to maintain a real income

8

personal finance & wealth management supplement the barrister 2010


stream from a SIPP may accept a lower long

exceptional volatility in the financial system

the benchmark for the fund manager.

over the last three years it may be some time

term return for a higher level of certainty of maintaining a capital ‘pot’ to keep paying an

The final challenge for the fund manager is to

before the industry has sufficient confidence to

acceptable level of income into retirement.

devise a way of investing in order to achieve

make the significant investment that this will

This will require managing the volatility of

these twin aims. To succeed in meeting this

entail.

the portfolio in order to achieve the client’s

challenging objective a fund manager will need

In the meantime, goal setting benchmarks

objective. For a client looking to acquire an

to have a sufficiently wide enough range of

and the ability to invest to achieve these

asset such as a yacht, the desire may be to

investment opportunities to get the benefit of

effectively will be confined to a small coterie

put as little initial capital into the portfolio

real diversification. The investment manager

of investment organisations who have made

as possible and they may have much more

will need the appropriate resources to secure

such an investment in skills and systems.

flexibility in the time period before they sail

access to strategies that may not be dependant

around the world! In other words, they will

on movements in the underlying traditional

be looking for a higher return and also be

asset classes for their success.

prepared to weather a higher level of periodic volatility.

The problem here is that the investment processes that support many fund managers

The first challenge for the investment manager

are linked to attempting to produce a

is to identify the characteristics of these

relative return based on indices. In order

different aspirations or goals. Once identified,

to change this approach the fund manager

these then become the client’s benchmark.

will need to alter their investment process

This can then be measured in terms of both

and invest in the necessary personnel and

the expected annual average return and

systems that will allow them to construct

the volatility of the portfolio constructed to

portfolios

achieve this. Notice that there is not a single

return based on their clients’ goals.

market index implied by this statement. The

investment management profitability often

goal set by the client is the objective and hence

under considerable pressure following the

benchmarked

to

an

If you would like more information on Standard Life Wealth you can: Call us on Call us on 0845 279 8880 Email us at Standard_life_wealth@standardlife.com

absolute With

MEDIUM SIZED FIRM OF THE YEAR

personal finance & wealth management supplement the barrister 2010

9


2010 Tax Changes Following the success of the amnesty with the medical profession, HMRC intend to pursue other professions with the same type of targeted approach. Barristers are rumoured to be high on the list. By Anne Gregory-Jones, Partner, Haysmacintyre

W

e have already had two budgets

difficult circumstances given the state of the

this

economy.

year

with

two

resulting

Finance Acts. A further Finance

Act is expected in the autumn, draft legislation

Travel

The headline change, which had

been widely expected, was the increase in VAT

The costs incurred for travel between home

to 20% from January 2011.

and place of work are not allowable for tax

for which has already been published, a

purposes.

Such costs are incurred for the

Spending Review and the Pre Budget Report

In addition, an increase in the capital gains tax

purposes of living at home and not for the

in the Autumn. A busy year in the tax area!

rate was made to 28%. Whilst an increase had

purposes of your profession and do not fulfil

been widely anticipated, the 28% was less than

the ‘wholly and exclusively’ for business

So what changes have been made and how

forecast and its introduction from Budget Day

purposes rule.

does this affect you? This article highlights the

will cause a number of technical difficulties,

main changes and the possible effects.

with the original 18% still applicable to pre-

Even if some work is undertaken at home this

Budget Day gains.

does not mean that the home is the base for

March Budget

tax purposes. Generally barristers are based One contentious issue during the election

at their Chambers, so travel from home to

The March Budget was made with an election

campaign was National Insurance.

Chambers is not allowable.

imminent and was clearly designed to avoid

June Budget George Osborne took measures

scaring the electorate and calming the markets.

to reduce the impact on employers, but did

Travel from Chambers to court or to visit

There were no changes to the main rates of tax

nothing about the planned increased for the

solicitors and/or clients is however allowable,

but there were a number of interesting items.

self-employed. As a result the 1% increase will

so it is recommended that you maintain a

Resisting the impulse to change the rate of

go ahead with effect from April 2011, meaning

diary of all business travel to support all travel

capital gains tax, the Chancellor, in an effort

that for high earners their marginal rate of tax

claims in the event of a HMRC enquiry.

to encourage the business sector doubled

will be 52%.

In his

Use of Home as Office

the entrepreneur lifetime limit, providing a 10% capital gains tax rate on the first £2m of

The bulk of the measures to strengthen

such qualifying gains. Rather than make any

the economy will come from spending cuts

As you know, the cost involved in using your

changes to increase the take from inheritance

and further tax measures will be limited.

home as an office can be legitimately claimed

tax, the Chancellor chose to freeze the nil rate

Having said that, HMRC are already making

as an expense in your trading accounts.

band at £325,000 for five years.

a concerted effort to maximise revenues with their targeted investigations into certain

However,

Having previously announced most of the

categories of tax payer. The most recent attack

household expenses has always been a

income tax changes in the PBR in December

has been on the medical profession.

contentious matter.

2009, there were no further surprises. The

calculating

the

proportion

of

Many barristers will

of course spend much of their working day

new 50% tax rate on income over £150,000

Following the success of the amnesty with the

in Chambers or in court.

took effect from 6 April 2010. In addition for

medical profession, HMRC intend to pursue

household expenditure that can be claimed as

those whose income exceeds £100,000 the

other professions with the same type of

a business expense will therefore depend on

tax free personal allowance is abated and

targeted approach. Barristers are rumoured

how many hours are actually spent working

fully withdrawn for income over £112,950.

to be high on the list.

from home.

These changes have all survived the change in

clear from the from the health professionals

Government.

initiative is that there are two areas (travel

Business expenses can be a proportion of

and use of home as office) which are of most

both the fixed and variable costs of running

What has become

June Budget

interest to HMRC.

The second ‘Emergency Budget’ was held in

Whilst preparing your accounts information

June, following the election. This was George

you would be advised to look at these areas

Osborne’s first Budget and was made in

in particular.

10

personal finance & wealth management supplement the barrister 2010

The amount of

The articles in this supplement are intended for general information only and should not be construed as advice under the Financial Services and Markets Act


your home. The fixed costs include mortgage

residential. A small income tax benefit may

Anne Gregory-Jones

interest (but not the capital element), rent (if

thus have an unexpected CGT bill attached, so

Partner, Haysmacintyre

the property is rented rather than owned),

it is important to ensure that any business use

DDI :020 7969 5520

council tax and household insurance.

e-mail:agregory-jones@haysmacintyre.com

The

is not exclusive; even a very modest amount

variable costs will cover areas such as

of non-business use is sufficient to ensure

electricity, gas and telephone (both line rental

that the exemption is not lost because this will

and call charges).

negate the “exclusively” character.

Other expenses can be

deducted providing they can be justified as legitimate business expenses.

Pensions The cost of domestic repairs and redecoration can be deducted providing they relate to

The new Chancellor also announced in his

the area used for business purposes.

June Budget that there would be a review of

It is

important to remember that the normal rules

pensions.

for business expenditure still apply.

to increase the age at which individuals must

An immediate change was made

purchase an annuity to 77. This initial change One of the potential dangers of using your

was introduced as a precursor to the eventual

home as an office is the threat of losing its

abolition of the requirement to purchase

exempt status for capital gains tax (CGT)

an annuity.

purposes. A property used exclusively as your

and it appears likely that tax relief will only

main residence throughout your period of

be available on contributions up to a limit of

ownership will be exempt. However any part/

£30,000 to £45,000.

room that is used solely for business purposes

currently consulting on these and other areas

will not qualify because it is not exclusively

of pension taxation.

Further changes are expected

The government are

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personal finance & wealth management supplement the barrister 2010

11


Investing in Wine for Profit and Pleasure By Stephen Williams, Managing Director, The Antique Wine Company

T

here’s little doubt that these are

In 2010 the market is on the move again

investment

interesting times for wine investors

largely thanks to the growing passion for fine

production – by law. In fact, in recent years,

grade

wine)

cannot

increase

and collectors. Not least because

wine in Asia and other emerging markets.

they have actually cut production in order to

the 2009 Bordeaux en primeur campaign

Prices have firmed up and bid-offer spreads

increase quality. Then on the demand side you

is the strongest for decades, due to both the

have narrowed considerably. At the same

have new markets such as Brazil, India and,

outstanding quality of the wines and the

time, the Liv-ex 100 Index has risen 18.6%

of course, Asia where increasing numbers of

increased

this year to date, with Chateau Lafite 1982

wealthy buyers continue to drive up prices

having gained 22% over 6 months.

over the medium to long term.

portfolios are steadily rising and, whilst wine

In the midst of the downturn fine wine prices

Arguably the biggest growth market will

has not proved itself to be an entirely recession

didn’t fall anything like as far as equities

be China, where we have hardly scratched

proof investment class, it is on a bull run when

- wine was one of the last asset classes to

the surface. What’s particularly interesting

compared to more traditional investments.

fall and was certainly one of the first to rise,

about many of the tycoon collectors in Asia

continuing to show less volatility and making

is that they don’t follow a western model of

it a much safer bet for investors.

connoisseurship. Rather than taking years

demand

for

investment

grade

wines from Asian investors. Following the financial crisis of 2008/9 the value of fine wine

For the first half of 2009, the fine wine market

to build up a fine wine cellar, these budding

remained static, only cranking into life in the summer, with the Livex 100 Index gaining

I believe there are two primary reasons for

aficionados simply go out and buy the very

10% between July and December 2009. This

this impressive performance and its perennial

best of Lafite, Petrus and Domaine de la

paints a prettier picture than the previous year

lack of volatility. The first is that, in good

Romanee-Conti to create an instant collection,

when restaurants selling stock to keep afloat

times people will buy fine wine to drink. The

all of which makes the Asian market incredibly

and fine wine funds de-leveraging became

fact that people are pulling corks means that

dynamic. Further encouraged by Hong Kong’s

an unusual feature of the market leading to a

the supply side reduces even more, thereby

abolition of all tax and duty on wine in 2008,

sharp correction in the autumn of 2008.

pushing up prices.

this tendency is certain to continue and gather

If you got in on the game at the end of 2008,

Secondly, in tough and challenging economic

there were some great deals to be had on a

times, money flows into wine because unlike

With Hong Kong now the global hub of fine

number of blue chip investment grade wines.

paper assets, investors regard it as safe haven.

wine auctions, 2010 could see sales topping

Anyone brave enough to buy would have

Rather like gold, wine is a tangible commodity

$100m in the territory, overtaking the USA

picked up some great fine wine parcels at very

which has historically shown good solid

for the first time. At 2010 VINEXPO, I saw

advantageous prices.

returns through thick and thin. Because of

the Christies Liquid Gold Chateau d’Yquem

this, demand remains solid and cushions the

Collection go for HK$8m, many of these

effect of reduced consumption.

wines having been originally supplied by The

pace and good news for investors.

However, for new investors looking to make a

Antique Wine Company.

move, the last few months have been a golden opportunity. But the good news is that it’s not

The result is that, even in the severest of

over yet. I believe that the next six months to

downturns, wine doesn’t crash in the way that

Buy One Get one Free

a year could continue to provide one of the

stocks and shares do. Fine wine prices may

Like many of our international customers,

biggest investment opportunities that we have

plateau and even dip occasionally, but it is not

almost all of our Asian clients are generally

seen in recent times – possibly since the Asian

very long before they come back up again.

buying to drink as well as speculate. Buying more immature blue chip wines than you will

currency crisis of 1998. This is because the strong 2009 Bordeaux en primeur campaign

Steady and impressive returns

require for your own consumption means

will encourage the price of back vintages to

What all this points to is that the fundamental

you can trade an excess of mature wines

rise and the strategic purchasing of maturing

economics of wine investment remain rock

for a handsome return and then re-invest in

investment grade wines should ensure solid

solid. On the supply side, the great Bordeaux

younger wines for profit and pleasure. The net

returns.

chateaux (which produce over 75% of all

result is that you can not only make money but

12

personal finance & wealth management supplement the barrister 2010


also drink the greatest wines in the world at

And if you combine a top Chateau with a top

Time Frame

zero cost. Immensely more fun than trading

vintage then the investment potential can be

Investors should be looking to reap the

esoteric financial derivatives or commodities

huge. On The Antique Wine Company blog

maximum returns over a period of 10-

like pork bellies, wine trading is quite an

at www.antique-wine.com/blog, in “Massive

15 years and avoid day trading with wine

intoxicating concept which many wealthy

Lafite shipments to China rock global wine

because the frictional costs are so high. Often

collectors appear to like!

business,” I recently reported that three years

the cost differential between buyer and seller

ago we were selling Chateau Lafite 1982 for

is 15% or more so you need to keep the wine

Fine wine tends to inspire passion: people love

£10k per case. We now sell this for £40k

for a certain period to overcome that initial

to own it, consume it, share it and voice their

and, as Chateau Lafite’s winemaker Charles

threshold. Returns can be interesting over a

opinions about it; it’s rarely just about making

Chevalier explains, there are two reasons

shorter (5-8 years) period by identifying and

money.

for its success – firstly, they make the best

investing in wines which are a few years in

wine in Bordeaux and, secondly, Lafite is

advance of their optimum maturity.

Which wines to buy?

easy to pronounce in Mandarin. The first of

Our advice is to stick to wines that you will

those two points would be acclaimed by most

My view is that a well managed portfolio

personally want to keep and drink but are also

winemakers commenting upon their own

should certainly provide returns of 15% per

of such premium quality that they will provide

wine, but perhaps the second has more merit

annum – and possibly even more. That should

a healthy return on investment.

than one might think.

provide some very tidy profits and some very pleasurable drinking.

Nevertheless, there are certain investment parameters which you must stick to if you want to generate healthy returns. Bordeaux should represent a minimum of 75% of your portfolio/collection and investors and collectors should focus on its iconic ‘trophy wines’. These include the First Growths, such as Lafite, Latour, Margaux and Haut-Brion as well as a number of ‘Super Seconds,’ such as Palmer, Leoville-Las-Cases and LeovilleBarton. Merlot lovers should concentrate on chateaux, such as Petrus from Pomerol and Cheval Blanc and Ausone from St Emilion. These

particular

chateaux

tick

all

Stick to the classics In the past, more speculative investors have been tempted to follow short-lived trends by picking a number of up and coming ‘garagiste’ chateaux,

which

were

favoured

by

the

American Uber-critic, Robert Parker. However, in hindsight, as we predicted, many of these wines such as Valandraud haven’t gone the distance. In the last few years, they simply haven’t kept pace with the powerhouse brands like Latour and Lafite, which of course have the added advantages of global recognition

the

and two centuries of tradition behind them.

boxes because they possess the requisite characteristics for investment grade status:

Beyond Bordeaux, a mere handful of exquisite

history, track record, global demand, quality,

Burgundies qualify but the market for great

longevity

Burgundy is much less liquid than claret,

and

consistent

upward

price

movement.

largely because the wines are produced in thimble-like quantities. However, look out for

Vintage is also vital. You should restrict your

Domaine Romanee-Conti, Coche-Dury, Comtes

purchasing to the best vintages which, in

Lafon, De Vogue and Armand Rousseau.

Bordeaux, over the last fifty years would

Elsewhere, the Rhone Valley also offers

include: 1959, 1961, 1982, 1986, 1989,

potential, Guigal’s trio of single vineyard

1990, 1996, 2000, 2005 and 2009. I would

Cote Roties (La Landonne, La Mouline and

recommend a good mix of vintages including

La Turque) can deliver some stellar returns.

a number of great older wines. 59 Latour or

However, we would regard New World wines

61 Palmer are so rare and in such demand,

as a passion purchase, rather than financial

they will continue to be as precious and sought

investments. Few, if any, have the track record

after as the crown jewels.

and credentials of the greatest French wines.

personal finance & wealth management supplement the barrister 2010

13


Pensions: how recent and proposed changes to pension legislation will impact on barristers By Neill Millard, Co-Founder, Cavanagh Financial Management Ltd

D

o you remember “A”- day? This

– surely not “simplification” by even the widest

was meant to be a landmark day for

definition of the word.

relief at the highest marginal rate on personal

pensions’ legislation, sweeping away

the previously complicated and fragmented

Returning to the principle of tax

contributions i.e. 50% tax relief for those

Emergency Budget 22nd June 2010:

pensions regime. 6th April 2006 was the day,

barristers paying that level of income tax •

Keeping to the original “pension

just over four years ago, and this followed the

High earner pension tax rules under

simplification”

publication of a Treasury paper in December

review

straightforward and clear yearly pension

2003 which was titled “Simplifying the

principles

by

providing

a

allowance for savers to utilise

taxation of pensions; increasing choice and

Before the General Election we had several

flexibility for all”.

parties with their own views on pensions, but

However, for those members of the employed

we then moved into the era of “Coalition”, and

bar, who may benefit from a defined benefit

Fast forward to 15th July 2010, at the start of

we did not know what their pension policies

Public Sector pension, and if say the annual

an eight-week long consultation process that

would look like. Prior to this Budget, there

allowance is set at £30,000 this could impact

is due to conclude on 10th September, and

was a fair degree of trepidation that higher

on these pension scheme members with

the Financial Secretary to the Treasury Mark

rate tax relief on pensions may be completely

pensionable salary as low as £40,000 to

Hoban says “This consultation puts forward

abolished, as the Liberal Democrats had made

£50,000 where they have significant accrued

reforms that will replace outdated and overly

this a manifesto commitment. So far, this

pensionable

complex pension tax rules with a new system

has not proved to be the case, and it appears

members of the Bar will need to be aware of

that gives individuals greater freedom and

that there is going to be a repeal of the “high

the review of public sector pension provision

choice”. Hold on a moment, wasn’t that the

income excess relief charge” that would have

which is being undertaken by the Public

aim of the “A” day changes!

taken effect from 6th April 2011.

Service Pensions Commission, and is due

In my opinion, “pension simplification” was

However, even with the repeal of the complex

never going to be “simple”, and so this has

tax rules for high earners, any replacement

proved to be the case. For example, initially,

rules must deliver the same potential tax

It is has been made clear though that the

there was much excitement that “residential

return to the Treasury of some £3.5 billion. If

interim pension anti-forestalling regime for

property” could be held via the tax shelter

this is the case, I think it is clear that some

the current tax year will remain in place, and

of a “SIPP”, but to the angst of many “buy-

people will be “winners” and others “losers”.

the impact of this will be discussed later in the

service.

In

addition,

these

to produce an interim report by the end of

to-let” investors (a not unusual investment

September 2010.

article

strategy for many barristers), this option was

More details will emerge as consultation

effectively removed via very penal tax charges

progresses, but there have already been

if this route was pursued.

indications that the main feature of changes

Review of the age 75 rule

from 6th April 2011 will be the reduction of The final nail in the “simplification” coffin was

the Annual Allowance from £255,000 to a

Until now a member of a money purchase

driven in on the 22nd April 2009 when the

figure in the region of between £30,000 and

pension scheme (i.e. all private pension

Government announced its intention to limit

£45,000.

savings

tax relief for High Income Individuals, and

outside

final

or

average

salary

schemes) effectively had to “annuitise” their

with this came the “Finance Act 2009 Anti-

A reduced annual allowance may not be

benefits at age 75. Those members who at

Forestalling Measures” which has meant the

exactly what was hoped for, but this would

75 did not purchase an annuity could take

introduction of a “Special Annual Allowance”,

potentially have the following benefits:

an “alternatively secured pension” where

and the production of 113 (yes, one hundred

pension savings would remain invested, but

and thirteen) technical pages from H.M.R.C.

on how this “allowance” is to be implemented

field for all pension savers

14

The reinstatement of a level playing

personal finance & wealth management supplement the barrister 2010

to prevent pension monies being passed down the generations, a tax charge on death of


up to 82% can be applied in certain defined

£130,000 or more in any of tax years 2008/09

the anti-forestalling measure will not apply

circumstances.

to 2010/11 will be subject to a special annual

to him. William can make further pension

allowance tax charge on any pension savings

contributions to maximise 40% tax relief, as

The government is now proposing to launch

in 2010/11 that exceed the greater of their

far as his available funds will allow him.

both capped and flexible drawdown options.

special annual allowance and any protected

The

pension

“alternatively

secured

pension”

will

input.

Consideration

should

be

Summary

be abolished and replaced with capped

given to taking full advantage of their special

drawdown, under the proposals, while the

annual allowance (i.e. normally £20,000 but

The future of pensions is uncertain at present,

government plans to introduce a 55% death

potentially up to £30,000 where sufficient

until the results of government consultations

charge on unused pension funds, down from

“infrequent money purchase contributions”

are known. We do know “anti-forestalling”

a maximum of 82%. Initially, there was hope

have been paid in tax years 2006/07 to

remains in place for the 2010/11 tax year, and

that the tax charge may be as low as 35%; the

2008/09) and protected pension input.

although I hope there will be more flexibility

level that currently applies to death benefits whilst in “Unsecured Pension (USP)”, but this

for pensions in the years ahead, I am sceptical

“Relevant Income”

if any government will ever make the pensions

now seems unlikely.

regime, truly “simplified”. It will be very It is very important for individuals to correctly

important for individuals to keep abreast of

Capped drawdown will carry an annual limit

calculate

level.

proposed pension changes over the months

on what can be drawn each year, while flexible

Technically, there is a 6 step process to go

ahead, and to take professional advice as

drawdown will allow access to unlimited sums

through, although for many self-employed

required.

subject to a minimum income requirement.

barristers, not all steps will be relevant to

Deciding this level of income would appear

them. However, let us consider an example:

their

“relevant

income”

to form one of the main outcomes of the consultation process.

Neill Millard Co-founder,

William is a self-employed barrister, and

Cavanagh Financial Management Ltd

“relevant income” for 2008/09 and 2009/10

Anti-Forestalling Measures

was

around

£100,000

according

to

his

accountant’s calculations, and he made no

Tel: 0844 264 0329 barcouncil@cavanagh.co.uk

The purpose of these interim measures which

pension

have applied since 22nd April 2009 was to

2010/11 tax year, William has a spike in his

The value of investments and the income

prevent those potentially affected by the 6th

earnings and his “net profit” from his practice

from them can fall as well as rise and is not

April 2011 changes from seeking to forestall

is going to be £149,000. In addition, he has

guaranteed. You may not get back the amount

this by increasing their pension savings in

£2,000 investment income, leading to a total

originally invested.

excess of their normal regular pattern.

income of £151,000. William was keen to

contributions.

However,

for

the

make pension contributions for the 2010/11

Levels and bases of and reliefs from taxation

There is now a certain irony that these

tax year as he has neglected making provision

are subject to change and their value depends

measures are to remain in place, although

for a few years now. He has made gross gift

on the individual circumstances of the investor.

the 6th April 2011 legislation proposed by the

aid payments to charity totalling £1,200 in the

previous government is likely to be repealed.

tax year. However, as his income is in excess of £130,000 he expects that he would be

The proposed changes announced in the

subject to a pension special annual allowance

Budget mean that individuals will need to

of £20,000.

consider the following: There is good news for William, who can •

Individuals with “relevant income”

make a pension contribution of £20,000

of less than £130,000 in tax year 2010/11

gross, which is the maximum amount of

(and in the two immediately preceding tax

pension contribution that can be deducted

years) should consider maximising their

to calculate “relevant income”. This means if

pension savings in tax year 2010/11, paying

William makes this pension payment and as

particular attention to maximise earnings that

he is also allowed to deduct the grossed up

are subject to 40% income tax.

amount of any gift that qualifies for gift aid, his actual “relevant income” will be £129,800,

Individuals with “relevant income” of

which is within the £130,000 threshold, so

personal finance & wealth management supplement the barrister 2010

15


Finding your way out of a taxing problem Andrew Tully, Senior Pensions Policy Manager, Standard Life

U

K tax and pension rules are complex

the previous Government’s complex rules

to be paid to your husband or wife (or civil

and this system has been tinkered

will never see the light of day. The annual

partner) after you die.

with almost continuously over the

allowance is the maximum payment people

last ten years or so.

The

speed

of

change

has

can make to their pension in a tax efficient

As an interim measure the Government

way each year. The Government has said the

has increased the cut-off age to 77, and is

increased

reduced figure will be in the range of £30,000

proposing to abolish the rules which require

dramatically over the last 12 to 18 months

to £45,000 each year, with initial views

annuity purchase from April 2011 onwards.

with changes introduced by the previous

suggesting it will be £40,000.

This means you can continue to take an

Government being superseded before they

income from your pension fund as long as

have even come into force. The latest changes

If this is taken forward, from April 2011 you

you wish, with no need to buy an annuity.

– being brought forward by the new coalition

would be able to pay up to £40,000 each year

There is an upper limit on the income you can

Government - will affect how you save for your

into your pension and receive tax relief. It’s

withdraw, which is broadly equivalent to the

retirement in future, and how and when you

not yet clear if very high earners would get

annuity you could buy. While annuities will

take your retirement benefits.

50% tax relief (since April 2010 people pay

still be popular with many people, as they

50% income tax on the slice of income above

provide a guaranteed income for life, others

For private pension provision, the previous

£150,000), or whether this will be restricted

prefer to keep control of their own pension pot

Government had decided that high earners -

to 40% tax relief. Even in the latter scenario, a

and these new rules will allow people to do

broadly speaking those with taxable income

£40,000 pension contribution would effectively

that much more effectively.

of £150,000 or more – would only receive tax

cost you £24,000, meaning pensions continue

relief on pension contributions at the basic

to be the most efficient tax regime up to this

The Government is also proposing a new

rate of 20% from April 2011 onwards. In other

level of payment. If 50% tax relief is given, it

option which may give you even more

words to get £100 in your pension would cost

would only cost you £20,000 to get £40,000

flexibility to take your pension benefits when

you £80, with the Government adding an extra

into your pension pot.

it suits you. This suggestion would allow you

£20. This was a fundamental change to the

to take an income above the current maximum

traditional position where people got tax relief

If you have previously paid higher one-off

limit, as long as you have a certain level of

at their highest marginal rate (previously a

amounts

occasionally,

‘secure’ income in your retirement. This would

higher rate taxpayer had to pay £60 to get £100

rather than making regular payments, these

potentially allow you to withdraw all of your

in their pot). While these changes would have

proposals mean you may need to change

fund in one go, or withdraw a large amount

raised additional tax revenue for Government,

your behaviour by making smaller pension

at a time of your choosing. While you will pay

they were exceptionally complex to explain to

payments on a more regular basis.

income tax on the withdrawals, you may value

into

your

pension

customers and imposed onerous and costly

this flexibility which could, for example, help

administration duties on pension schemes

The new Government is also suggesting some

you buy a new property, pay for long-term

and providers. This led to pension providers,

significant changes to how pension benefits are

care, pass onto children or grandchildren or

politicians, employers and pensioner groups

taken when people reach later life. Currently

fund other tax-efficient investments.

arguing strongly in favour of more simplistic

people are pushed towards buying an annuity

changes.

by age 75, as the tax charges for those who die

The level of ‘secure’ income you would need

after 75 without buying an annuity can reach

before you can take advantage of this flexibility

Following the Emergency Budget at the end of

a staggering 82%. An annuity is where you

is likely to be around £12,000 to £15,000 per

June, the new coalition Government is going

give your pension fund to a provider who in

year. This can include state pension benefits,

to replace these provisions, instead reducing

return pays you a certain level of income for

income from defined benefit pension schemes

what is known as the ‘annual allowance’. This

the rest of your life. This income may be level

and annuities, but not other sources of income

will be introduced from April 2011, meaning

or increases each year, and it may continue

such as dividends which the Government

16

personal finance & wealth management supplement the barrister 2010


don’t believe are ‘secure’ – in other words

were going to be introduced from April

this income stream could disappear. The

2011 is a positive step. And an ability to pay

Government will only offer flexibility to people

£40,000 into your pension each year in a tax-

Tax and legislation are liable to change.

who have a secure income stream so it is

efficient way is a simple measure that allows

This information is based on Standard Life’s

confident that people won’t squander their

most people to save at a reasonable level.

current understanding of law and HM Revenue

pension pot, then fall back on state means-

Removing the need to buy an annuity will also

& Customs practice.

tested benefits.

be welcomed by many people. While annuities

Tax rates and reliefs may be altered. The

are a valuable solution, especially for lower

value of tax reliefs to the investor depends on

The Government is also suggesting that the

earners, other people want the ability to retain

their financial circumstances. No guarantees

tax charge on death once you have taken your

control of their own pension pot, increasing

are given regarding the effectiveness of any

pension benefits, or once you are past age 75,

and reducing income to fit their needs, and

arrangements entered into on the basis of

will be 55%. While this is significantly lower

leaving any remaining pot to family (less a

these comments.

than the current 82% charge that is levied if

reasonable level of tax charge).

you die after age 75, I believe it is still too high.

retirement savings when it suits you to do so.

For further information, please contact:

The Government is currently asking for views

Both the change to a £40,000 payment and

Andrew Tully

on these proposals and this is one aspect that

the removal of the age 75 annuity requirement

Direct: 0131 245 4051

Standard Life will ask the Government to

are the subject of a consultation process, but

Mobile: 0773 497 4095

change.

I’m encouraged by this ambitious pension

Email: andrew_j_tully@standardlife.com

reform agenda. With some further refinement But, overall, I believe the new coalition

it will hopefully help break down barriers to

Government is suggesting positive changes.

long-term saving, and make it easier for you

Scrapping the horribly complex rules which

to save in a tax efficient way, and access your

Specialised business advisors to Chambers, Tenants and Pupils. Our team of experienced tax specialists and accountants understands the challenges that the sector faces and can help to optimise the tax reliefs available and to mitigate the tax that you pay. Our range of services includes:

n Personal Tax

n IHT Planning

n Accounting Services

n Strategic Tax Planning

n Capital Gains Tax

n Trust and Estate Planning

n Tax Efficient Investments

n VAT

Call Nigel Armstrong on 020 7240 9971 or email nigel.armstrong@alliotts.com to arrange a free initial consultation, at your offices or ours. Alliotts Chartered Accountants, Imperial House, 15 Kingsway, London WC2B 6UN

www.alliotts.com

personal finance & wealth management supplement the barrister 2010

17


Woodland: Where money really does grow on trees By Crispin Golding MICFor UPM Tilhill, Woodland Investment Advisor Central & Southern England

The UK woodland market

from the forestry and processing sector

planned.

(Forestry Commission 2009). By comparison

in Scottish timber processing capacity alone

n a world of ever increasing awareness

the woodland property market is quite small at

from 1980 to 2000 (Scottish Industries Cluster

about

around £50 million per annum.

2004). Without a domestic supply of round

I

the

environment,

consumption,

weakness

in

climate

traditional

carbon

change asset

timber the industry would simply grind to a

and classes

There has been £1.2bn invested

Market Drivers

woodland stands out on its own as a valuable investment. This is a point well understood by

underpinned by its timber value, by this

an increasing number of investors looking to

we mean the price paid to owners for their

Timber prices are tracked by the Forestry

get asset backed investments with long term

standing timber crop either now or at some

Commission (FC) who report their own average

stability and green credentials.

point in the future.

Once sold, the timber

timber sale value (http://www.forestry.gov.

ends up at UK timber processing plants

uk/statistics). As the biggest single player in

The IPD

for conversion to higher value products.

the UK timber market this tracks the trend in

UK Forestry Index (www.ipd.com) tracks the

Properties are therefore typically valued by a

timber prices. In real terms the timber price

returns from privately owned UK coniferous

cash flow derived from projected timber sales

now is ¼ of its historical high in 1987, see

woodland.

combined with management costs, grants and

graph below. There is clearly a lot of upside

other income.

potential.

In comparison, equities showed

Timber values are in turn driven largely by the

Demand for Timber

-1.3% and 1.6% respectively, bonds were

cost of import substitutions, when the pound

Demand for timber is increasing along with

marginally better at 6.9% and 6.0% but both

is weak imports of ready sawn timber are

the range of interests satisfied by woodlands.

significantly lag the Forestry Index.

expensive and the markets look for UK timber

In particular, wood for energy is a massively

products. As the pound strengthens imported

emerging market with demand predicted to

Further evidence of market strength can be

products gets cheaper and the UK timber price

far outstrip supply. In Scotland in 2009 an

seen in the 2009 UPM Tilhill & Savills Forest

falls in an attempt to compete.

additional annual requirement of 850,000

The figures speak for themselves.

By the end of 2009 it reported

annualised total returns of 16.1% over the

value

of

halt, this supports optimism on future timber

The

commercial

woodlands

is

prices and supports current property values.

previous 3 years and 8.1% over the previous 10 years.

tonnes came on stream, this is about 10% of

Market Report (www.upm-tilhill.com) which analyses the trading market for the year. In

In a simple market, a property’s value would

the UK’s total annual cut. More is planned and

a turbulent year woodland property values

rise and fall in line with timber prices.

In

the demand for wood fibre is predicted to rise

dropped slightly but held up remarkably well

reality other interests add value to a property

significantly to 2025, principally due to the use

despite falling timber prices. The long term

as does an investor’s view on future timber

of wood for renewable energy

picture is still showing growth with property

prices.

(Wood Fibre Availability and Demand in

values rising 126% from 2002, an average of

value on the future value of timber to predict a

15% per annum and average values of £3,300/

higher return on his investment which enables

hectare (£1,335/acre). Values over the UK are

him to pay more to purchase the property in

All this is along side the existing demand

variable by country, size of property and crop

today’s market.

for timber: to feed into sawmills to make

A bullish investor will place a high

Britain 2007 to 2025: ConFor 2010).

high value sawn products, to be chipped for

type; as can be seen from the report.

Timber Prices

making MDF and other board materials, to

The forest industry relies on commercial

The UK timber processing industry is well

make fencing products, pallets and other small

woodlands and employed 42,000 people in

established

with

uses. It’s no wonder that many processors are

2007 producing over £2bn of added value

billions of pounds invested already and more

considering vertical integration by entering

18

and

personal finance & wealth management supplement the barrister 2010

capitally

intensive


the woodland market to purchase growing

to the underlying land.

In many cases the

include insurance (covering property owner’s

stock for their own future use.

underlying land is only a minor part of the

liability and crop damage) at perhaps £500

value at purchase and does not increase

to £1,500 per annum with management and

Other Interests

because timber values go up so CGT liabilities

routine maintenance adding a few thousand

Demand is also increasing for timber as a

can be very minimal. CGT liabilities can be

pounds per annum.

means of carbon storage. Woodlands provide

rolled over into land purchased then planted

an excellent mechanism for individuals and

with trees, this can absorb quite large CGT

In many cases a management plan is required

companies wanting to reduce their carbon

liabilities that then diminish as the property

to obtain felling permission from the FC and

footprint woodlands.

value transfers to the trees.

to claim the necessary grants. Preparation of

Many people also want woodland for far

Obviously tax issues need specialist advice

more indulgent purposes, perhaps as part

and

of a private shooting estate or for informal

circumstances.

The UPM Tilhill Woodland

Professional management of your property

recreation and an escape from the busy world.

Taxation Guide 2010 describes the regulations

is a good way to demonstrate and ensure its

These investors are typically more attracted

more fully and provides details of advisors

commercial status. Forest managers like UPM

to smaller properties especially in central and

who may be able to help further (www.upm-

Tilhill would be happy to quote for this service

southern England where upwards of £10,000/

tilhill.com).

as would other reputable companies and

the plan is not too onerous but does require

acre is often paid for a couple of acres.

These

small

time

investors

have

are

dependent

on

an

individual’s

Owning Commercial Woodland a

disproportionately big impact on the property market below £200,000. Investors buy larger properties and resell them in smaller parts at inflated prices which pushes prices beyond commercial investors who want to keep the property as a whole and operate it on more

Buying woodlands is much like buying houses.

but are usually unremarkable and are more likely to be for amenity than commercial purposes; below £50,000 and its hard to justify a commercial status. Once values get beyond £100,000 and head for £500,000 options are

million (to £3 million maximum) there are far

Taxation Taxation on woodlands is very favourable and encourages investment into commercial

fewer properties to choose from but they can be of significant size and interest.

A commercial woodland owned

for two years will be 100% exempt from Now that

the threshold has been frozen at £325,000 until 2015 commercial woodlands are more attractive than ever as a means of passing on

charteredforesters.org).

Income from timber depends on sales going ahead as planned.

The nice thing about

woodland is that if the market is down an owner can delay sales for a year meanwhile his trees are getting bigger and more valuable.

Conclusion Woodland is an asset class with a good deal going for it. It has significant tax benefits and it can provide long term security with an asset backed investment as well as enjoyment and

Unsurprisingly the commercial centre of the

green credentials. Does it get better than that?

UK forest industry is in south west Scotland where growing conditions are excellent and land is available. This is also the focal point for the processing industry.

North England

Crispin Golding MICFor Woodland Investment Advisor Central & Southern England

and the Scottish borders are also important

wealth.

as is the west coast of Scotland and the Timber sales are exempt from income tax. If an owner harvests £100,000 of timber from a property he pays no income tax on that

uplands of Wales. If you are looking for purely commercial woodland these are the areas to focus on.

Other income, e.g. from sporting

rents, is taxable.

UPM Tilhill The Barn Hitchcocks Farm Uffculme

income, to a 40% or 50% tax payer this is quite a bonus.

Institute of Chartered Foresters (ICF) (www.

At below £100,000 properties are available

are within reach. Between £500,000 and £1

Inheritance Tax (IHT) at 40%.

individuals who can be identified through the

much wider and some excellent properties

traditional lines.

forestry.

professional guidance and a one off cost.

Cullompton, Devon EX15 3BZ

The Cost of Ownership

Tel: 01884 840160

Purchase costs include Stamp Duty Land Tax

Fax: 01884 851506

(stepped, up to 4%), legal fees for conveyancing

Mobile: +44 (0)7920 592 973

Captial Gains Tax (CGT) is not charged on the

and agents fees (typically up to 2% of the

crispin.golding@upm-kymmene.com

increase in value of the trees, it only applies

agreed price).

visit our website www.upm-tilhill.com

Once under ownership costs

personal finance & wealth management supplement the barrister 2010

19


Financial Implications of Divorce Andrew Yonge and Angela Kellock of Smith & Williamson, the accountancy and financial services group, highlight key issues to consider when dividing assets on divorce

U

in divorce is rarely straightforward.

The private residence exemption can be

Dividing chattels and uncomplicated

preserved on divorce if a Mesher order is

financial assets such as cash and share

made. A Mesher order allows the family to

portfolios may be relatively easy once the

remain in occupation postponing the sale until

Pensions are not liquid assets and benefits can

emotional obstacles have been overcome.

a specified event such as the children reaching

only be taken in a prescribed way. The option

a certain age or ceasing full time education.

to Earmark pension benefits and the more

However, dividing what would usually be the

Such an arrangement is treated as a trust and

flexible and more widely used Pension Sharing

two most valuable assets a couple accumulate

it should be possible to avoid capital gains tax

Orders are well known.

during a marriage, i.e. the equity in the former

on the subsequent sale so long as that sale

marital home and the parties’ pensions, can

is not delayed. With regard to Inheritance

Some pensions may be relatively simple

be more difficult and requires more detailed

Tax no charge should arise on the creation

to divide with a Pension Sharing Order or

analysis. This article takes a brief look at the

of the Mesher arrangement as transfers for

Earmarking Order however, the following

key areas to consider and outlines some of the

family maintenance are exempt, but exit and

discusses some of the main issues that need to

pitfalls.

decennial charges would apply.

be considered when trying to divide pensions.

The Family Home

Where property of any type is transferred

Higher net worth individuals are increasingly

ntangling a marriage that is ending

right.

Pensions

from one party to the other on separation,

making use of Self Invested Personal Pensions

Under normal circumstances the disposal of

neither stamp duty nor stamp duty land tax is

(SIPPs) which offer a wider range of investment

one’s main residence is generally exempt from

payable, even where the acquiring spouse or

options including commercial property. Some

capital gains tax. However, the family home

civil partner takes over a mortgage.

(such as partners in law firms or members of

will cease to be the main residence of the

barristers’ chambers) club their SIPPs together

spouse or partner who leaves.

Transfers of Other Assets

If the property is subsequently disposed of

The capital gains tax exemption for assets

invest in commercial property. Although this

more than three years after one party leaves,

transferred between married couples or civil

strategy has advantages, it can be difficult to

part of the gain will be assessable for capital

partners is available only in the year where

untangle when one of the parties involved

gains tax. That gain is time apportioned by

the couple are still living together at some time

is getting a divorce and the pension needs

reference to the period which exceeds the

during the year. This means that that transfers

to be shared.

three years mentioned, over the entire period

of assets pursuant to divorce may give rise to a

of all the pension scheme assets, and the

of ownership. For example, Jack and his wife

capital gains tax liability.

share of the ownership between the parties,

to purchase their business premises.

Many

Small Self Administered Schemes (SSAS) also

Jill jointly buy the family home in 2000 for

In this scenario an analysis

is vital to identify if a Pension Sharing Order

£100,000. On separation in 2005 Jack leaves.

If the assets are qualifying business assets, for

is possible without the need for a forced sale

The property is sold in 2010 for £250,000,

example private company shares, the business

of the property. Sharing other pension assets

Jack will be assessable on: (£150,000 / 2) x

gifts relief exemption is preserved, provided

or using an offset strategy may be favourable

2/10 = £15,000

the transfer is effected before the divorce is

to avoid causing serious implications for the

finalised.

other investors.

one party leaves the shared home but only

Care must be taken with second homes and

The Lifetime Allowance also has to be

where the property is transferred to the

other significant assets that may not be

considered for both parties where there

occupying spouse or civil partner as part of a

considered high on the list of priorities during

are high pension fund values. The Lifetime

financial settlement. The concession cannot

the divorce process. If such assets are disposed

Allowance is currently £1.8m. The value of

be used where an election has been made

of some time after the divorce this delay could

money purchase arrangements is simple to

by the spouse who moved out, to have a new

give rise to a significant tax liability if the

calculate, however defined benefit pensions

property treated as their main residence.

parties and their advisers fail to get the timing

are valued according to the value of the pension

A tax concession covers such periods when

20

personal finance & wealth management supplement the barrister 2010


income benefits accrued. This is often an issue

have temporarily suspended the quotation

Other issues need to be considered such as the

for senior and or long-serving individuals who

of CETVs and some have suspended the

impact of the Lifetime Allowance.

are members of defined benefit occupational

implementation of pension sharing orders.

- Consider what is an equal transfer of pension

pension schemes including public sector

This may temporarily delay proceedings,

assets, the cash equivalent transfer value or

pensions.

since, at the time of writing, guidance has not

pension income.

been issued by HMRC. Secondly, CETVs are The issue here is not just for the member

likely to drop for members of public sector

- Cash equivalent transfer values may be

but also for the soon to be ex-spouse. The

schemes as a consequence of the switch to

affected by the switch to CPI from RPI.

ex-spouse may be caught by the Lifetime

CPI from RPI. There may also be a knock-on

Allowance Charge simply by receiving a

effect for some private sector defined benefit

For further information:

Pension Credit. Whether the individual has

occupational pension schemes.

Andrew Yonge, senior consultant,

Transitional Protection (Primary or Enhanced) is also important.

Smith & Williamson, 01483 407162 So in summary, the financial implications

Andrew.yonge@smith.williamson.co.uk

of a divorce are far reaching and detailed Different pension trustees will have different

technical knowledge is required in the various

Angela Kellock, tax director,

rules as to how they deal with Pension Credits.

specialist areas.

Smith & Williamson, 01483 407121

Some will demand an External Transfer while

advice should be sought early in the process to

others will require the ex-spouse to become a

minimise the otherwise unforeseen financial

Pension Credit Member. The Armed Forces

implications of divorce.

Planning is important and

Angela.kellock@smith.williamson.co.uk www.smith.williamson.co.uk

Pension Scheme has very specific rules and particular care is needed when advising

Further details can be found at the following

members of this scheme.

websites:

The divorcing couple often want to share

http://blogs.ft.com/money-

Regulated by the Institute of Chartered

the marital assets equally, but what is equal

matters/2010/01/11/new-years-resolution-

Accountants in England and Wales for a range

when talking about pensions? Is it the Cash

file-for-divorce

of investment business activities. A member of

Smith & Williamson Limited

Equivalent Transfer Value (CETV) or is it the

Nexia International

pension income that each will receive when the

http://www.smith.williamson.co.uk/pensions-

parties each reach their retirement age? Both

financial-planning/pensions-and-divorce

approaches have merit. However, equality of

Authorised and regulated by the Financial

CETV is unlikely to provide equality of pension income. Women need a larger pension pot to

Smith & Williamson Financial Services Limited Services Authority

Dividing assets on divorce: key facts

produce the same income as statistically they live longer. The health of the parties is also a

- Obtain independent valuations of a couple’s

Disclaimer

factor that should be considered as this could

assets, even if these are likely to be sold some

By necessity, this briefing can only provide

influence income levels.

time after divorce.

a short overview and it is essential to seek

Is the CETV a fair value of the benefits

- Instruct independent experts to write pension

contents of this article. No responsibility can

accrued? We still come across CETVs that are

and taxation reports if the financial affairs are

be taken for any loss arising from action

not a true reflection of the value of the pension

more complicated.

taken or refrained from on the basis of this

professional

benefits accrued. It may be sensible to obtain

advice

before

applying

the

publication. Details correct at time of writing.

an independent assessment of the true value.

- Where one party moves out of the family

If the pension scheme is in deficit, this will also

home, this ceases to be that person’s main

need to be addressed.

residence for tax purposes.

The Chancellor has recently announced that

- The CGT exemption for assets transferred

benefits from public sector pension schemes

between couples is available only in the year

will in future increase in line with CPI rather

where the couple is still living together at some

than RPI. The impact of this announcement

time during that year.

for couples who are divorcing is twofold. Firstly, many public sector pension schemes

- Pension Sharing Orders are widely used.

personal finance & wealth management supplement the barrister 2010

21


All change The coalition government’s first Budget confirmed changes to capital gains tax, national insurance, to corporation tax and children’s tax credits. We have also learned of radical changes to pensions. Alongside rule changes there is opportunity. Danny Cox, Head of Advice at Hargreaves Lansdown looks at the recent rule changes and how investor’s can take advantage. What changes have been announced?

Pensions

of your estate which passes tax-free – will remain at £325,000.

Income tax

The restrictions placed on the very highest

N

ISAs

o changes have been announced

earners were already complex, and set to

to income tax rates.

The personal

become even more complicated on 6 April

allowance – the amount of income

2011. The Chancellor is proposing to sweep

The ISA contribution limit is £10,200. From

you can receive before you start to pay tax –

away these restrictions and replace them with

April 2011 this will increase each year by the

increases for non-taxpayers and basic rate

a new regime allowing everyone to contribute

rate of the RPI (Retail Price Index).

taxpayers from £6,475 to £7,475 from April

as much as they earn into a pension each

2011, with the aim of moving to £10,000 over

tax year, up to a cap of somewhere between

time.

£30,000 and £45,000 a year, and receive tax

What you can do to save tax

The higher rate threshold will fall next year

stage these are proposals, nothing is set in

1 Make the most of personal allowance and tax bands

to ensure that higher rate taxpayers do not

stone.

The increase in personal allowance from next

relief at their highest marginal rate. At this

year provides an even greater opportunity for

benefit from this.

Capital gains tax The annual capital gains tax (CGT) allowance has remained the same (£10,100 for 2010/11) and for higher rate taxpayers the rate at which CGT is charged has risen from 18% to 28%. CGT is charged on any profits (the ‘gains’) made when you sell (or transfer) shares and unit trusts or other assets such as second homes. If the total of any gains realised in the year, minus any losses, exceeds your annual allowance the excess is liable to CGT. Chargeable gains made prior to the 23 June 2010 will be charged at 18%. From 23 June 2010, any chargeable gains will be added to your other taxable income and tax will then be

The rules requiring you to convert your

tax-free income. If you are married (or in a

pension at age 75 to a secure income (annuity)

registered civil partnership) and your spouse

have been reviewed and will change from 6

pays less tax than you, move income-yielding

April 2011.

savings and investments into their name and make full use of their personal allowances and

At the time of writing the details have not yet

basic rate tax bands, where applicable. This

been finalised. However the headlines will be:

could save as much as 50% tax on interest and 32.5% tax on dividends.

• No requirement to buy an annuity – ever.

2

Maximise ISA allowances

• Once you have secured a minimum level

Within an ISA you pay no capital gains tax and

of income (likely to be around £10,000 per

no further tax on the income. You can invest

annum) there will be considerable flexibility

up to £10,200 per tax year of which £5,100

on how you draw your pension benefits. The

can be in cash.

minimum level of income would be secured by state pensions, final salary benefits and

Where possible, hold all income bearing

annuities.

funds/shares in an ISA to save income tax. It is important to note the top rate of CGT is

•On your death the remainder of your pension

28% yet the top rate of income tax is 50%.

fund passes to your beneficiaries, subject to a

Therefore it makes sense to drive tax free

tax charge.

investment returns toward income not gain.

generously through Entrepreneurs’ Relief.

These changes to pensions will significantly

3

Business assets are generally a share (or

boost their appeal to investors.

Making full use of your pension allowance is

charged at either 18% or 28%. Business

assets

will

be

treated

more

interest) in the company or firm you work for. You have to hold at least 5% of the shares

Make full use of pension

still one of the most tax-efficient ways to save.

Inheritance tax (IHT)

to qualify. Entrepreneurs’ Relief reduces the

Anyone under 75 can still invest £2,880 in a pension, even if they have no earnings or they

capital gains tax rate to 10% for the first £5m

There have been no changes to inheritance

don’t pay tax, and the taxman will top-up their

of lifetime profit.

tax. The inheritance tax threshold – the value

contribution to £3,600. Building up income

22

personal finance & wealth management supplement the barrister 2010


We are an independent investment company whose key investment objective is to deliver long term real returns for our clients.

UK Veritas Asset Management (UK) Limited Elizabeth House, 39 York Road London SE1 7NQ Tel: 020 7961 1600 Fax: 020 7961 1602 Email: investorservices@veritas-asset.com Web: www.veritas-asset.com

Switzerland Veritas Asset Management AG Genferstrasse 21 8002 Zurich Tel: 0041 44 206 2660 Fax: 0041 44 206 2661 Email: info@veritas-asset.com Web: www.veritas-asset.com

Authorised and regulated by the Financial Services Authority

Member Swiss Association of Asset Managers (SAAM) personal finance & wealth management supplement the barrister 2010

3


in both names is one of the most tax-efficient

allowance. For every £2 of taxable income

STEP 5: Reduce your taxable income

ways of generating income in retirement.

or gain over £100,000, you lose £1 of your

Now capital gains tax is linked to the rate of

personal allowance. Once your taxable income

income tax you pay, reducing your taxable

It makes sense to maximise higher rate relief

or gain is above £112,950, your personal

income could reduce the amount of capital

where you can.

allowance is lost.

gains tax you pay. The easiest ways to do this

The amount you can contribute to pensions

If you want to ensure that you retain your

transferring income-bearing assets to your

this tax year depends on your earned

personal allowances, one way to reduce your

spouse.

income. If your total annual income has

taxable income to £100,000 is by making a

reached £130,000 since April 2008 there are

pension contribution.

is to fully use tax shelters such an ISA or by

restrictions.

STEP 6: Use a pension to reduce capital gains tax

For example, if your income is £106,000 the

Non-earner / earning less than £3,600

loss of personal allowance will cost you an

Anyone paying higher rate tax will now pay

extra £1,200 in tax. This is because you lose

CGT at 28%. However, pension contributions

• You can contribute up to £3,600 at a net cost

£3,000 of your personal allowances.

can, in effect, increase the threshold at which

of £2,880

To solve this problem, you could make a

higher rate tax becomes payable. So, for

pension contribution of £6,000 gross. This

example, if you start paying higher rate tax

saves you £1,200 in tax allowances and with

at £43,875 and you make a £10,000 pension

tax relief on your pension contribution, the

contribution, the income threshold at which

total tax saving is £3,600.

you start paying higher rate tax and CGT at

Earnings £3,600 - £129,999 • You can contribute up to 100% of your earnings and automatically receive 20% tax relief • If you pay higher rate tax, you can claim back up to an extra 20% through your tax return.

Earnings of £130,000+ • You can contribute up to 100% of your earnings, capped at £255,000. • The first £20,000 of your contribution will receive full tax relief. You will be able to claim full tax relief on more if: • any lump sums paid by you and your employer between 6 April 2006 and 5 April 2009 divided by three are greater than £20,000. You can contribute up to this amount capped at £30,000 and receive full tax relief. • you are making regular monthly or quarterly contributions over £20,000 a year started prior to 9 December 2009 (or prior to 22nd April 2009 where total income has exceeded £150,000 since April 2008), you can continue to pay this amount and receive full tax relief.

28% effectively rises to £53,875.

5. Six ways to save CGT Capital gains tax has risen for high earners. Here are six ways to reduce capital gains tax:

Hargreaves Lansdown

STEP 1: Use your annual capital gains tax

Direct: 0117 317 1638

allowance each year. One way to do this is to sell your shares or funds and buy them back in an ISA or SIPP. This is known as Bed & ISA or Bed & SIPP. The added advantage is that because you’re buying back the shares in an ISA or SIPP, any future gains are completely tax-free. STEP 2: Offset losses against gains If you cash in an investment and make a loss, the loss can be offset against any gains you have made in the same tax year. Alternatively you can register these on your tax return and carry them forward to offset against future gains. STEP 3: Cash in when you pay tax at a lower rate If you know your taxable income will fall in the future consider delaying cashing in until then.

• Contributions above your allowance will still receive basic rate (20%) tax relief.

STEP 4: Cash in when your spouse pays tax at a lower rate

4. Protect your personal allowances

If you are married (or in a registered civil partnership) and your spouse pays less tax

From April 2010 taxable income or gains of

than you, transfer the investments into their

more than £100,000 reduces your personal

name before cashing in.

24

Danny Cox CFP

personal finance & wealth management supplement the barrister 2010

Mobile: 07989 672 071 Office: 0117 317 1615


The changing world of investing few worlds have changed as much as that of investment in the past half century. With the market now dominated by institutional investors and information flowing swiftly around the globe, the task of choosing someone to help you look after your investments is challenging. Independence, professIonalIsm and approachabIlITy at Jm finn & co we recognise our clients’ need for the reassurance of having professional expertise at their side at a time of volatile markets and uncertain outcomes. many of our client relationships have endured for three generations. We truly believe in maintaining strong personal links, so changing the person with whom our clients deal happens seldom and only when required. moreover we are an independent firm, owned by our directors and staff, with our principal business dedicated to advising private investors on their investments and managing their investment portfolios. our head office in the heart of the city not only has the largest grouping of experienced investment managers within the firm, but also includes our own administration department – our back office. With many firms locating their back office in cheaper, out-of-town premises, or even subcontracting the functions to a third party administrator, we believe our approach delivers an edge in providing efficient support to our managers and their clients.

but we also have four other offices outside london, staffed by experienced and dedicated professionals who have access to all the resources available in london. With our staff of 280, of which nearly 100 are qualified, client-facing investment managers and/or advisers, we know we are able to cope with the many challenges that face the investment industry, while still maintaining a level of personal service that is so often lacking in the larger, more broadly based financial businesses.

The ‘arT’ of managIng InvesTmenTs managing private client portfolios can be considered part science, part art. Understanding the client’s desired investment requirements and ensuring that attitude to risk is properly addressed is crucial. an experienced investment manager can make educated judgments and assemble assets to meet client needs. of course, it must be understood that the value of investments, and the income they generate, can fall as well as rise. The range of options today is as wide as it has ever been. Until the early 1980s it was not easy to invest abroad. Today

an investment portfolio that is purely domestically focussed is more likely to be the exception than the rule. property was once considered only the province of the very rich. now a variety of funds provide access to all types of commercial property. and the range and type of investment product is now more extensive – and arguably more confusing – than ever.

WhaT yoU can expecT here at Jm finn & co we are committed to providing tailored services that can ensure needs are properly met. meetings can easily, and conveniently, be arranged. our broad services include: discretionary investment management Individual savings accounts (Isas) private pensions, including sIpps portfolio advisory services Trust investment management charity investment management cash management online access to view portfolios

•• •• •• ••

With the shift in economic power from West to east gaining momentum and concerns over growth sustainability remaining, it makes sense to take good investment advice and to plan well. at Jm finn & co we believe we have the skills and the approachability to make sense of complex investment issues to private investors. We can offer a truly personal and bespoke service. Talk to us. We are but a short journey from the Inns of court.

contact: camilla stone, 4 coleman street, london ec2r 5Ta T 020 7600 1660 e camilla.stone@jmfinn.com www.jmfinn.com LONDON BRISTOL LEEDS BURY ST EDMUNDS IPSWICH JM Finn & Co is a trading name of JM Finn & Co Ltd, which is authorised and regulated by the Financial Services Authority.

JMF007_JMFinn_BarristerMagAdvertorial_AW.indd 1

02/09/2010 16:27


The Real Value of your Family By Justin Urquhart Stewart, Seven Investment Management

N

ot all bad things come out of a

the UK are changing and we are all going to

In reality of course, very few of us are a

decade of austerity. After some

be living for a longer period in retirement than

“customer of one” as we belong to some

tough talking and a tough budget

ever before. Even though many of us will be

strange shape of family or other. However

we have been suitably softened up by the new

extending our working lives, we are still quite

even here things are not so straightforward.

coalition government to expect some harsh

likely to be spending more of our life retired

Again the normal view of the family in the UK

times, and of course we are not alone as one by

than we may have actually been working.

is that of the “nuclear family” of two parents

one other nations with equally poor financial

In effect then whatever we manage to save

and a rather unlikely 2.4 children. Here again

disciplines slowly come forward to admit their

is going to have to spread over a far longer

the reality is often far from the given and

sins and start their painful process of financial

period than previously expected, and hence

accepted normal perception. In fact in these

pruning and moving toward some eventual

the troubles for many corporate pension

days of “partnerships”, both same sex and not,

recovery. However it is one thing for countries

schemes whose actuarial calculations were for

family life has become a lot more complicated.

to try and sort out their disastrous finances,

a retirement period for many of less than ten

So instead of the Nuclear Family, perhaps

but there are far more important issues for us

years – not forty!

we should introduce another alternative; the

individually to address much closer to home.

great British Dysfunctional Family? The trite answer thus often given by the banks

Like our previous governments, many citizens have over spent and over borrowed. In addition, just to compound this many of us also have not only given up saving but also given up on our pensions and other longer term investments.

Of course for some you

and others is that we must just be saving

This family now takes account of what has

more and therefore for us to handover even

now been regarded as being if not usual, then

more our money to them. However given the

in some parts quite commonplace. Second

track record of banks and investment houses

marriages and subsequent partnerships are

over the past few years, a level of significant

not unusual within a greater family, leading to

reluctance is quite understandable.

various combinations of step parents as well

can quite understand their cynicism and even anger when you look at the paltry returns that many have suffered from apparently professional investment advice.

What of course has been more scandalous has been the treatment meted out even to those that have tried to do the right thing and saved all their lives. They have now been penalised with rotten rates and, for investors, often

as a plethora of progeny consisting of multiple Perhaps therefore we could suggest another way. For many years we have had to suffer the tiresome mantra form the banks and financial institutions that “we treat you as an individual and a special customer”. One bank even had a campaign for a “customer of one” which is what they might end up with if they carry on in the current manner.

levels of siblings and half, as well as step, brothers and sisters.

However it has not just been the changing nature of our society and its usual family ties, but also the impact of better healthcare and welfare that has meant that the average lifespan has and is continuing to extend significantly further every year.

rotten returns with higher risks. Not a very pretty picture for individuals trying to plan for

For years the banks have relied upon us buying

Thus the shape of our extended family has

their futures and for an even longer retirement

individual products and services from them, in

now changed really quite radically, not just

than ever seen before.

the desperate hope that if we collect enough

horizontally through extended partnerships,

of them, we might just have enough to see us

but also vertically and quite regularly now

The effect of all these issues for many has been

through. The problem has not just been that

includes

anything from frustration and anger through

these have been separate products, but quite

generations.

to a fear of what one has to do to provide for

often they have not even been fit for purpose

one’s family into the future.

to fulfil their basic requirements – just look at

Whilst at one level this may appear somewhat

the scandal around the long term endowment

daunting, it also offers up some interesting

policies and other investment schemes.

opportunities.

As we are all well aware, the demographics in

26

personal finance & wealth management supplement the barrister 2010

four

and

sometimes

even

five


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Families themselves cannot and do not act in

This financial family planning can thus

Seven Investment Management

Western society in a very co-ordinated manner

ensure that families start to plan on a multi

125 Old Broad Street

any more. In fact keeping them in one place for

generational manner covering everything from

London EC2N 1AR

more than three days at Christmas is a major

education through to health and old age care.

Tel: +44 20 7760 8777

social challenge and a triumph of diplomacy

Given that we are now in an environment of

Fax: +44 20 7760 8799

over normal family dissent.

a retreating state being unable to afford the

Email: information@7im.co.uk

provision of such facilities that many had However leaving internal family frictional

come to expect, then we all must be making

behaviour aside, the ability to harness the

our own preparations – unless you trust that

financial strength of the family is potentially

the state will be able to proved you with the

a very valuable opportunity. After all, it is the

effective pension, health and age acre that we

older members of the family that have the

are all striving for.

wealth and those lower down the tree with the greatest need for their support. If therefore you

At a time when “family values” are regarded

could look upon the family as a more valuable

as something from another era, then we

unit, you could even produce a family balance

should take note of the changes in all our

sheet and it would come as a great surprise to

families and perhaps turn it around so that we

the family to find out just how much they as a

start to appreciate the “Value of Families” are

greater whole are really worth.

being more important to many.

Now no family member is going to reveal their finances to another necessarily, and nor should they, but that is no reason to ignore the duplication of risks and costs that the family is running by keeping all their financial affairs in separate silos.

Here then we have seen the rise of the family financial planner. This is an independent professional adviser to the family with the sole task of co-ordinating both the assets and liabilities across the generations. These can include the possibility of negotiating mortgages with the strength of the family behind you,

The key benefit for all of us here is that such an innovation is in effect free as the co-ordination of a family is down to our own will. Once we have considered that, then the services of a professional planner would be necessary, but even after this decision, there are many circumstances when such innovation should reduce costs to the family overall, as well as potentially increasing the quality of investment and discipline of their portfolios. One key area will be that of the reduction of risk by avoiding the duplication of investments often found across a family.

through to cutting out the duplication of investment costs and any unnecessary waste

Taxation is a crucial subject for all families

through poor and inefficient tax structures.

and

often

fractured

families

penalise

themselves through their own inabilities; Of course no one member of the family would

proper co-ordination however can often quite

be trusted by all the others, but a trusted

significantly minimise tax liability for all

independent arbiter probably could be. This

involved.

would allow the individual members to still have their own finances but their structure

So in an era of austerity there can also come

could be within the greater whole of the family

an era of opportunity for families to make the

and benefit from the financial muscle of the

most of their assets and return to another

greater scale rather than just being picked off

world of, if not family harmony, then at least of

as before as a “customer of one”.

valuing their family for the benefit of them all.

28

personal finance & wealth management supplement the barrister 2010


Get the most from your retirement After a life of working, you’ll no doubt want to take it easy and enjoy life when you retire. Making that a reality takes a lot of preparation though. So here are a few pieces of advice to consider if you want to get the best from your retirement.

Start saving as soon as possible If you’re young, you may think this doesn’t include you. But while it feels strange to be saving for retirement when it’s so far off, it’s that long space of time between now and then that gives you the chance to build a retirement fund that meets your expectations. And now the retirement age has changed from 50 to 55, there’s an opportunity to give your retirement fund an extra boost. So start climbing the retirement savings ladder sooner rather than later.

Save what you can afford In terms of the amount you should be saving towards retirement, the short answer is as much as you can afford without overstretching yourself. The more you can save now, the better. Even modest amounts can make a difference.

Claim your tax relief If you’re a higher-rate tax payer - earning more than £37,401 in 2010-11 - you may be able to claim higher-rate tax relief on your pension. The Government adds basic rate tax relief of 20% to all your personal contributions. Then, depending on how much you earn over the higher-rate tax band, there’s an additional tax relief of up to 20%. So saving every £100 into your pension could actually cost you just £60. Naturally, it’s worth noting that the value of any tax advantages will depend on your personal circumstances, which may change. And bear in mind that tax rules can change too.

Keep an eye on your pension Retirement income can come from many sources, including pensions, ISAs, property and unit trusts. So it’s worth checking all of your investments every year to be sure everything’s going to plan. A financial adviser will be able to help with this, and give you some idea of your estimated income when you retire. You can also use online calculators from the Scottish Widows website to help you check on the pension figure you’re heading for, based on your contributions.

The Scottish Widows UK Pension Report 2010 states that for the average person to reach their target retirement income, they need to save at least 12% of their salary from age 30 to their retirement age. However, everyone is different, so for an illustrative outline of how much you should be saving, take a look at the Scottish Widows pension calculator at www.scottishwidows.co.uk/calculators

Take the initiative If you’re self-employed, or you don’t have the option of a company pension where you work, it’s worth considering a personal pension. Or if you’ve already built up a large pension pot and you’d like a wider range of investments to choose from, you could consider a self-invested personal pension (SIPP). Your financial adviser will be able to help you pick the right option for you and your circumstances.

Three ways to give your pension a boost 1. Additional voluntary contributions The newspapers are full of statistics about people not putting enough money into their pensions. So if you’re in a scheme set up by your employer but still feel you haven’t provided sufficiently for your retirement, consider additional voluntary contributions (AVCs). You can invest up to your annual salary every year, and receive tax relief on your payments. 2. Salary exchange As the name implies, salary exchange (also known as salary sacrifice) involves exchanging part of your salary for a pension contribution which your employer can pay into your pension. This means that both you and your employer pay lower National Insurance contributions, so there’s more to go in your pension. And anything you give up entitles you to tax relief too. 3. Buy back time To receive your full, basic state pension, you need to have built up sufficient entitlement over your lifetime of paying National Insurance. If you haven’t, you can still buy back extra years – up to 12 as of 2010, if you retire before 5 April 2015.

Planning for your retirement can be a complicated process. So to consider what your options are and to choose the right one for you, speak to your financial adviser.

For more information speak to your financial adviser, call us on 0845 845 6789, or visit us at www.scottishwidows.co.uk

Do your research Like anything else you’d spend money on, it pays to shop around for your pension. You’re not limited to companies you have existing accounts or products with, so you should go for the plan that best suits you. But bear in mind that, while doing your own research is important, you should always speak to a financial expert before making your final decision.

Calls may be monitored and recorded. For examples of how tax relief works in practice, visit www.scottishwidows.co.uk/taxrelief If your relevant income in the current tax year, or in either of the previous two tax years, is £130,000 or more, you may be subject to the Government’s Special Annual Allowance. In these circumstances, you may be required to pay a tax charge if the total payments to your pension plan during the current tax year exceed your Special Annual Allowance limit. Please speak to your financial advisers for further details. Scottish Widows is authorised and regulated by the Financial Services Authority (FSA Reg. No. 191517). Contact us on 0131 655 6000. As part of the Lloyds Banking Group, Scottish Widows is proud to be an Official Provider of the London 2012 Olympic and Paralympic Games.


The Right Time for Multi Asset Investing By Trevor Greetham, Asset Allocation Director and portfolio manager of Fidelity’s Multi Asset Strategic Fund.

T

he painfully low interest rates and volatile stock markets

was by no means obvious in the initial weeks and months. We have

we have seen in recent years have caused many to question

investigated the link between the world economy and the markets in

the point of investing. For barristers, who face additional

great detail over the years. We find that a particular asset class tends

uncertainty over the incidence of their income relative to those in the

to offer its best performance at a particular stage of the economic cycle,

salaried professions, taking risks with hard-earned savings must seem

defined with reference to the strength of global growth and the direction

particularly unwelcome. Keeping everything in deposit accounts is not

of inflationary pressures. There are also some reasonably consistent

a sensible long term strategy as the purchasing power of money can be

patterns at the equity sector level, as summed up in the Investment

eroded by unanticipated inflation. The problem is the investments most

Clock diagram.

likely to beat inflation by a wide margin over the long run tend to be riskiest in the short run. What then is the solution? I would argue multi

The Investment Clock diagram

asset funds have an important role to play in maintaining exposure to the right asset classes to meet long term objectives while going some way to controlling risk through diversification. These funds are particularly appropriate at a time of short, violent economic cycles such as this as different assets in the mix tend to do best at different times.

Equities can be expected to offer high returns over the long run as compensation for the high level of risk the owners of companies take on. When the economy takes a turn for the worse, however, this risk can manifest itself in the form of capital losses. Stock markets can also move sideways over fairly long periods as the current generation of investors knows only too well. The FTSE100 index of the largest UK companies is not far from the level it first reached when Tony Blair came to power in 1997.

Spreading your investments across a range of asset classes can help. A

Deciding which phase of the cycle we are in at any given time is much

well-diversified portfolio of stocks, bonds, commodities, property and

more difficult than it sounds. Economic data is backward looking and

cash would have offered only a slightly lower return than stocks over

it’s often not possible to be absolutely sure what is happening until

the last thirty years with about half the level of volatility. Moreover, as

long after the event, by which time the markets have already moved.

there are evidently good times and bad times to hold each asset class

We track our own growth and inflation indicators month by month to

a good portfolio manager should be able to boost returns further by

help us understand where we are and, more importantly, where we are

adjusting the asset mix as conditions evolve.

likely to be heading in the next few months. Plotted on the axes of a two dimensional chart, we can see how the economic cycle is evolving.

At Fidelity we use an Investment Clock approach to help us position the multi asset funds we manage. We find that most if not all the major

Where are we in the economic cycle?

turning points in markets coincide with turning points in the world

Right now, the near term economic outlook is not promising. The pace

economy that generally aren’t apparent until much later. Stocks peaked

of the recovery is likely to slow over the next six months and, human

in mid 2007 when the world economy was dragged into a largely

nature being what it is, fears of a relapse are likely to intensify as weaker

unanticipated credit crisis Bank of England governor Mervyn King has

economic data come in. I am optimistic growth will re-accelerate in

called the worst since World War I. The sharp recovery in stocks since

2011 but in the meantime I have shifted some money out of stocks into

March 2009 coincided with a rebound in the world economy which

more defensive government bonds in the expectation that I will be able

30

personal finance & wealth management supplement the barrister 2010


to buy equities back again at what should be attractive valuations later

spare capacity and high unemployment rates in the large developed

this year or early next.

economies are exerting downward pressure on inflation – even in the UK where, if it weren’t for fluctuations in VAT, consumer price inflation would be well below the Bank of England’s two percent target. Against this backdrop and in the face of significant government spending cuts, central banks will be quick to step in with further stimulus as growth forecasts are revised lower. Printing money may be unconventional but it certainly seemed to work in 2009 and I think it will work again. Companies will find themselves having to switch production back on again as final demand recovers, setting the scene for renewed equity market strength in 2011.

Recessions are, thankfully, uncommon events and economic expansions lasting five years or more are the norm. I think we’re still in the early stages of what will be a multi-year bull market in equities but volatility will remain high as economic uncertainty persists. Keeping all of your savings in any one asset class will not feel comfortable as the cycle moves rapidly from one phase to the next. In uncertain times, multi asset investing can offer much needed stability. To understand why growth is likely to slow you need to understand how the industrial inventory cycle works. Business confidence is running high and companies are reporting bumper profits but

For further information, please contact:

industrial production has caught up with and exceeded the growth in

Vivienne Slegg on 020 7074 55 55.

final demand. Factories will soon be forced to reduce their output as stocks of unsold goods accumulate and this will have a knock-on effect on employment and consumer confidence. The ebb and flow of the inventory cycle is relatively predictable but market participants find it impossible to distinguish a harmless cooling off in the pace of growth from the early stages of a double dip. There are always compelling reasons to fear the worst so the markets worry about recessions far more often than they actually occur.

Positioning your portfolio ahead of these swings in sentiment can be very profitable. Global inventory cycles last about two years in total and it is for this reason that even numbered calendar years have been so bad for equity investors over the last decade or so. The pattern is striking. Since January 1998, global equities have returned 60 per cent in US dollar terms. The cumulative return over the even numbered years, coinciding with inventory gluts, was a drop of 35 per cent. Odd numbered calendar years, on the other hand, enjoyed cumulative returns in excess of 140 per cent as factory output rose to replenish inventory levels and corporate profits surged.

It seems 2010 is proving no exception to what you might call the even years curse. Stock prices fell over the first half of the year and UK government bonds are doing well as growth slows once more. I believe fears of a prolonged downturn will prove unfounded. Ample

personal finance & wealth management supplement the barrister 2010

31


Who are you? Jason Butler explains why knowing your financial personality is the key to making good financial decisions.

I

n this internet age, where information is

Knowing your ‘financial personality’ is the

Natural behaviour usually surfaces when a

widely available at the click of a button,

key to living the life you really want and to

person is under pressure - whether positive

one would be forgiven for thinking that

developing and sticking with a financial plan

or negative.

making good financial decisions is easy. It is

that will ensure that money enables you to be

other hand, are those which are shaped by

possible to go online and compare financial

true to that ideal. Your financial personality

an individual’s life experiences, education,

products, buy investment funds or insurance

is your unique combination of natural ‘hard-

environment and previous financial successes

and even apply for a mortgage or a loan.

wired’ and learned behaviours as they relate

and failures and this creates your attitudes,

What is rarely considered is both the context

to money.

beliefs and values.

in which those decisions are made and the

will have a big impact on how you see the

psychology of the person making them. You

world, process information (or block it out)

Because natural behaviour is instinctive, it is

can never have enough information about

and how you react to messages from your

the ingrained response that shapes how you

yourself, your family, friends, colleagues and

family, friends and colleagues.

If you are

respond to external factors and scenarios.

even professional advisers.

As Benjamin

employing a professional financial adviser it

At its most basic and extreme level, these

Disraeli said, “As a general rule, the most

can mean the difference between a successful

responses are triggered by the amygdala in the

successful man in life is the man who has

long term relationship or not.

back of your brain, which might otherwise be

the best information”.

Your behavioural characteristics

The key is to have

Learned behaviours, on the

described as your ‘fight or flight’ decision box.

the most accurate and relevant information,

Leading the life you really want is achieved

Your natural behaviour is often masked by

particularly about yourself!

by uncovering your

‘financial personality’

learned behaviour and as such it can become

and then aligning it to a unique life plan. The

‘buried’ and less obvious over time. Knowing

Can you predict how you would behave if

starting point is for you to understand the core

your natural behaviour factors and how these

there were to be a negative stockmarket

of who you are and then using that knowledge

surface in a stress or striving scenario is key

event tomorrow? Do you approach financial

to make successful financial decisions. Figure

to sticking with a financial plan and avoiding

decisions in a rational and logical way, or are

1 details a number of key aspects of an

‘noise’ and other bad decisions which divert

you more intuitive and emotional? What were

individual’s ‘financial personality’:

you from leading a full life.

Figure 1 – Financial characteristics

At a less extreme level your instinctive

your best and worst financial decisions and why do you think that was the case? Is money a source of pain or pleasure for you and what impact does that have on your financial

Need for control

personality

Decision-making style

response

relates

information.

to

how

you

process

For example, are you a ‘big

decision making and overall quality of life?

Information requirements Goal orientation

picture’ person or someone who likes lots of

What does the term ‘risk’ mean to you? Does

Management focus

Adviser relationship

detailed information?

it conjure up excitement or trepidation?

Results focus

Communication style

will not want to wade through a long detailed

Investment confidence

Financial motivation

Investment knowledge

Asset allocation

report, whereas a detail person will be anxious

A big picture person

if they don’t have in depth information to

Some people who are high earners spend all

& aptitude

(and sometimes more than) they earn and

Risk

Values

enable them to make key decisions. Someone

Loss tolerance

I n v e s t m e n t

who is fast-paced and likes lots of variety and

propensity

minimal information will not appreciate a

Education motivatio

long, slow and detailed lecture which labours

consequently never build wealth.

On the

other hand there are people who have modest

Advice style

earnings who build serious wealth because

over facts. A reserved, reflective and slower-

they spend very little. A self-made person who has worked hard all their life and amassed a reasonable amount of wealth might find it hard

paced person on the other hand will love this Source: Financial DNA

approach.

to justify spending money. A third generation

Natural behaviour is what we are born with -

Your core communication style also extends to

inheritor of wealth, on the other hand, might

the factory settings – it is very stable and highly

the form that you use to express yourself and

find it easy to blow money on things they don’t

predictable over time and usually shapes how

how you prefer to have others communicate

need or even want.

people respond to the world around them.

with you. Forms of communication include

32

personal finance & wealth management supplement the barrister 2010


numbers, shapes, sounds, written words,

and have more success than if you try to do

upside that you can expect from investing

physical models, pictures and diagrams.

things that are not within your unique ability.

given your goals and resources. In effect ‘risk

you are getting information in the wrong

Over the many years that I have been

capacity’ represents our need to take risks and

‘format’ then you are more likely to make a

consulting with private clients I have observed

to be able to live with the consequences of an

less informed decision or possibly no decision.

that most fulfilled, happy and financially

adverse outcome.

To find out your own preferred communication

successful people share one key characteristic

style visit www.financialdna.com and take the

- they really enjoy their work and hobbies. As

A different, but very important measure of

Communication DNA Profile.

the famous philosopher Confucius said almost

risk is ‘risk tolerance’. This represents your

If

2,500 years ago, ‘Choose a job you love, and

emotional ability to cope with investment

Your natural behaviour also affects your

you will never have to work a day in your life’.

uncertainty or loss and is based on your

core life motivations.

Conation is the term

One of the keys to living the life you really want

personality traits arising from a combination

given to describe one’s natural tendency for

is to know what you are instinctively good at

of both your inherent (core) personality traits

taking action and affects our mental energy,

and to deploy those talents accordingly.

and also those that have evolved from your life experience, education and environment.

instinctive behaviour, natural talents and Katherine Kolbe is a psychologist

We all have a unique risk profile which is

Inherent risk tolerance is very stable and

who has studied conation and the associated

determined by both our core and learned

doesn’t change much over time but will surface

‘hard wired’ personality traits. This led her

personality traits. Knowing who you are in

in times of stress or emotion.

drive.

to identify four universal human instincts used in creative problem solving. These instincts are not measurable but the observable acts derived from them can be identified and quantified.

This led to the development of

the Kolbe A Index. The instinctive behaviour traits are represented by four Kolbe Action

terms of your risk profile is probably one of the most important aspects of making committed life and financial decisions in building your financial plan. The starting point with your financial plan will be to identify and quantify clear goals.

Once you know what you are

Evolved risk

tolerance can and does change over time and can easily be influenced by what is happening around you and the messages you receive. My experience, which is borne out by behavioural finance research, is that an individual usually has higher overall investment risk tolerance when the stock market or property values

Modes which cover the instinctive way that we

trying to achieve you need to determine

are rising strongly, and they feel wealthy and

a) gather and share information; b) arrange

whether your goals are achievable by investing

optimistic. It can also vary depending on the

and design; c) deal with risk and uncertainty

only in risk-free assets. If the plan indicates

type of investment involved.

and d) handle space and tangibles.

that you require a higher return than that available from risk-free assets and you can’t

In each of the action modes, the individual

find more resources or spend less then you

To gain a robust picture of your investment

is scored (there is no good or bad score)

will need to invest some of your wealth into

propensities, both inherent and evolved,

to identify their instinctive propensity for

risky investment assets.

risk tolerance must be measured.

risk, which affects not only the investor’s

different actions as either a) will not do; b) will do if required to or c) will do instinctively.

By ‘risk’ we mean that there is a degree of uncertainty about what the actual return will

Kolbe’s contention is that if someone is required to carry out actions that are in an action mode for which they score ‘won’t do’, then this will cause frustration and stress in

Inherent

be and that the value of the investment will vary up or down, sometimes extremely so. However the payoff for that uncertainty is the

financial decisions but most decisions in life, is largely unchangeable. However an investor’s evolved risk is likely to become higher as they gain education and experience but it does not measure many important areas of investment risk, e.g. how willing an investor

probability that the overall return, particularly

is to take chances, commit to new products

over the longer term, will be higher than that

or venture into areas that are new to them.

provided by the risk-free investment, thus

The behavioural biases which flow from these

allowing you to achieve your desired life goals.

inherent and evolved personality traits have

motivation than an activity which is instinctive.

Generally speaking, the higher the amount of

important implications for investment and

In addition, in a stressful or striving situation,

risk, the higher the expected return.

financial decisions. Thankfully there are ways

that person. Equally the activity might be in the person’s ‘will do if required’ action mode and they can be competent at it but because it isn’t instinctive, it will require more effort and

that investors can control these biases.

it is the instinctive behaviour which will be dominant. Kolbe has developed this concept

The term we give to one’s ability to be able

into what she calls ‘unique ability’. If you only

to withstand, financially, the effect of future

When investment and property markets and

do work or activities which you are passionate

returns being less favourable than were

the economy were booming and before the

about and that play to your unique ability, then

predicted or expected is ‘risk capacity’.

It

global credit crunch hit, it is highly likely

you will be more fulfilled, experience less stress

thus represents a constraint on the maximum

that your inherent risk tolerance traits were

personal finance & wealth management supplement the barrister 2010

33


hidden.

In the good times we are usually

of what investors should do because when

have seen that coming’. We credit success to

overconfident in our expectation of future

markets have risen strongly, the future

self-possessed skills or inherent abilities and

stockmarket returns and even more so about

expected return is lower and their exposure

attribute failures to externalities that we could

the returns we think that our own portfolio

to risky assets should be reduced in favour of

not know or control.

will generate. We tend to think that the good

defensive assets to bring the allocation back

times will continue. This is similar to driving,

into line with their long term plan and vice

Extrapolation

in that we tend to think that we make better

versa.

overconfidence bias discussed earlier, and

investment decisions than the average person. But what happens when the stock market dives or there is some other big negative event (Iraq war, 9/11 etc.) and your investment portfolio shows a large loss?

The decision making

patterns for many of us can change radically when good times turn to bad. Our expectation for the future returns from the stockmarket and from our own portfolios is that they will continue to be poor.

bias

is

closely

linked

to

is the process of assuming that historical Hindsight might be a wonderful thing but not when it comes to investment decisions. We’ve all said to ourselves after a bad call, “How could I have been so stupid?” Past events seem easy to predict after the event and by extension the future seems easy to predict. This is caused by selective memory recall because we forget the thoughts and feelings that we had at the times that we made our ‘bad’ investment decisions.

returns, whether good or bad, will continue. Or put another way we tend to binge on risky investments when we feel optimistic and investments are increasing in value and purge ourselves of risky investments when we feel bad and investments are falling in value. Historical returns are based on old news and future returns are unknown. News is a key factor in inducing detrimental investor behaviour.

More than ever before,

As stated before, this happens because when

Investing in what you know or are familiar with

news is freely and quickly available from the

we are under pressure our natural instinct

is another bias which provides a false sense of

internet, 24-hour news television and daily

instantaneously takes over and for many they

security by giving the impression of control.

email newsletters.

have little control over it. Financial losses are

Examples of this bias include concentrating

financial context, for something to be classed

processed in the same area of the brain that

wealth in a few well-known companies with

as news it must be a report of recent events

responds to mortal danger. This is why you

which you are familiar or holding a ‘legacy’

that was previously unknown information

often see a high degree of emotional decision-

share that you inherited. The problem is that

and has a specified influence or effect on

making which is not rational.

stock markets do not reward investors with

individuals.

risk premia (excess returns) for ‘loyalty’ or

call this news ‘noise’ because of its ability

A survey of 1,000 investors carried out in the

‘familiarity’. The market doesn’t know if your

to influence extremely irrational behaviour

USA some years ago clearly demonstrated this

portfolio is undiversified – and it doesn’t care.

in investors and elicit a range of emotional

point, as seen in Figure 2. In June 1998 and

In the investment and

Professional financial planners

responses including gloom, fear, anxiety, envy

February 2000 the stock market was at a high,

It is natural to want to avoid the source of

having risen strongly. In September 2001 the

pain, particularly if that pain is a large fall in

stockmarket was at an historic low after the

the value of an investment. This is why regret

A point worth making about news is that the

technology boom fallout and the 9/11 terrorist

avoidance causes us to tell ourselves after a

media report what has already happened and

attack.

bad outcome, “I won’t make that mistake

this has, by definition, already been factored

again!” The problem is that while the loss was

into the prices of investments in quoted

a bad outcome it wasn’t necessarily due to a

markets. In addition the media don’t get paid

bad investment decision. Such counterfactual

more if investors make more money; they

thoughts lead to regret avoidance and we

get paid more if they sell more newspapers,

say to ourselves, ‘If only I had not made the

magazines or advertising. If you don’t believe

decision to buy X.’

me then consider the following quote taken

Investors’ future return expectations Market

Own portfolio

June 1998

13.4%

15.2%

February 2000

15.2%

16.7%

September 2001

6.3%

7.9%

You did buy X, so not

buying it in the past is counterfactual.

Figure 2

and greed.

from a presentation given by Steve Forbes, the publisher of Forbes Magazine, to The

Self-attribution bias is another key factor

Anderson School, University of California, Los

Source: Kenneth L. Fisher and Meir Statman

which impacts on our financial decision

Angeles in April 2003:

(2002), “Bubble Expectations,“

making.

Journal of Wealth Management 5, no.2

of mistakes but when things go right we tell

“You make more money selling advice than

(Autumn 2002): 17-22

ourselves, ‘Look how smart I am’. However,

following it. It’s one of the things we count

when things don’t work out we tell ourselves

on in the magazine business – along with the

that we were just unlucky; ‘No one could

short memory of our readers.”

In fact this approach is exactly the opposite

34

We all make an average number

personal finance & wealth management supplement the barrister 2010


15 years ago we thought about drinking… Now we think about how to better invest for the future. With annual returns exceeding 12%† since the early 1980s, Bordeaux fine wine has become one of the best performing asset classes. It is difficult to evaluate what will happen next but in today’s challenging environment, Bordeaux fine wine provides a secure shelter for investors. But it is not all about preservation of capital and diversification. It is also about making better profit returns in a tax efficient environment*.

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Steve Forbes

function of the quality of the advice you got

your financial decisions.

– from one caring, competent adviser and not

So what does this irrational investor mean In 2008,

“How I got here is pretty simple in my case.

the S&P 500 Index returned -37.72% but the

It’s not IQ, I’m sure you’ll be glad to hear.

average US equity investor earned -41.63%.

The big thing is rationality…. It gets into the

Jason

From January 1989 through to December

habits and character and temperament, and

Planner and Investment Manager at City

2008 (20 years) the average US equity investor

behaving in a rational manner.”

based Bloomsbury Financial Planning.

in terms of investment returns?

earned an annual return of 1.87%pa.

This

represented an underperformance of the S&P

from any number of magazines.” Butler

is

a

Chartered

Financial He

has twenty years’ experience in advising Warren Buffet

successful

500 of 6.48%pa and an underperformance of

individuals

and

their

families

on wealth management strategies.

Jason

US inflation of 1.02%pa. There is no reason

At the end of the day you need to accept that

can be contacted on email: jasonbutler@

to suggest that UK investors are any different.

there are some things that you can control

bloomsburyfp.co.uk Tel: 020 7194 7830

and some things that you can’t and to have What these results tell us are that investors

the wisdom to know the difference.

What

buy high and sell low. The returns that they

you can’t control are picking winning shares,

experience are more dependent on investor

picking superior managers, timing investment

behaviour than fund performance. Buy-and-

markets or what the financial press says. What

hold investors typically earn higher returns

you can control are investment expenses,

over time than those who try to time the

diversifying your portfolio, minimising taxes

market.

and staying disciplined.

You are more likely to make rational decisions

knowing your life purpose and financial

if you have a high level of self awareness,

personality is likely to give you the best chance

financial education and experience, a secure

of making good financial decisions.

In that context,

relationship with money and a high level of ‘emotional intelligence’.

Even then the

instinctive aspects of your core personality

But I’ll leave the last word to respected US investment commentator Nick Murray:

will still have an impact on your financial With turbulent financial markets

“At the end of our investing lifetime, it won’t

it is far more likely that your inherent risk

matter what your funds did, it’ll matter what

tolerance will emerge and strongly influence

you did. And what you did will be a pure

decisions.


Honesty, integrity and independence

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For an initial discussion with a Wealth Adviser, which is free of both charge and obligation, please contact us on 0845 788 9933 or visit www.towry.com/contact.

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