: Winter 2015/16
China replaces Greece as key market concern European equity markets experienced another difficult month during August although Greece – the focus for so much concern of late – was shifted to the periphery of many investors’ vision. Instead, the outlook for China’s economy garnered a large proportion of the limelight during the month, amid fears over the impact of a slowdown there on the wider global economy.
Wells Financial is an independent financial advisor specialising in mortgage, insurance, pension and investment advice for individuals and small businesses.
In common with other major markets around the world, European markets experienced high levels of daily volatility during August. In Germany, the Dax index fell 9.3% over the month, while France’s main CAC 40 index declined 8.5%. Greece’s stock exchange finally reopened at the start of August, having remained shut since the end of June. Over August as a whole, the benchmark Athens Composite index plunged 21.7%, dragged down both by wider fears over China’s predicament and political and economic concerns closer to home. In particular, political turmoil was renewed by the shock resignation of prime minister Alexis Tsipras. The eurozone’s finance ministers did manage to reach agreement on Greece’s latest bailout package. Although the International Monetary Fund (IMF) welcomed the deal as an “important step forward”, however, managing director Christine Lagarde warned that Greece’s debt remained “unsustainable” and urged eurozone members to consider providing Greece with debt relief. The IMF is postponing any commitment of additional financing to Greece until October, when its European Stability Mechanism programme is scheduled for its first review. The eurozone’s annualised rate of inflation remained stable at 0.2% during July, and the region’s labour market showed signs of strengthening. The rate of unemployment in the euro area dropped from 11.1% in June to 10.9% in July, reaching its lowest level since February 2012. Germany had the lowest unemployment rate at 4.7%, while Greece and Spain had the highest at 25% and 22.2% respectively. The region’s economy expanded at an annualised rate of 1.2% during the second quarter, compared with growth of 1% during the first quarter. Spain’s economy expanded by 3.1%; in comparison, France’s economy grew at an annualised rate of 1%, but stagnated on a quarterly basis. Germany’s economy registered growth of 1.6% during the period. Looking ahead, the Bundesbank expects “solid” economic growth in Germany during the second half of 2015, supported by external and domestic demand. Elsewhere, instead of an expected contraction, Greece’s economy notched up surprise quarterly growth of 0.8% between April and June.
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What is an ISA? An Individual Savings Account (ISA) is a taxefficient 'wrapper' that provides a home for a number of different types of investment. The ISA wrapper ensures investors pay no tax on income or capital gains generated from the investments it contains. The ISA allowance for the 2015/16 tax year was raised last July to £15,240 and, following a change to the rules, savers can choose to invest in cash, stocks and shares, or a combination of the two. ‘Junior ISAs’, with a current annual allowance of £4,080 are also available for children. A cash ISA can be used to access your choice of a range of deposit accounts, National Savings investments and/or certain qualifying cash funds. A stocks & shares ISA can be used to access a whole range of stockmarket and fixed income investments, including units or shares in collective funds. The kind of investments that are eligible for inclusion in a stocks and shares ISA are numerous and include authorised unit trusts, investment trusts, openended investment companies (Oeicss), and individual shares listed on recognised stock exchanges. They also encompass qualifying fixed income investments, which have been expanded under the new regime to include corporate bonds with less than five years until maturity. Moreover, you can maintain a cash balance within a stocks and shares ISA without incurring a tax charge, although you are likely to receive a more competitive rate of interest within a specific cash ISA.
The impact of rising interest rates Rising interest rates do not just affect individuals – they also have an impact on companies, which will, for example, need to generate more profit to pay higher debt charges. Corporate bond prices are also affected. As rates rise, the price of bonds will fall – because bonds’ interest payments are usually fixed, an increase in rates will reduce the attraction of a fixed payment compared with other bonds or cash. All these issues can affect your portfolio’s performance. Still, if you take a longterm view and your objectives remain unchanged, the shortterm ups and downs should not create much cause for concern.
Q: What if I open two ISAs... ...in the same tax year? A: Unfortunately HM Revenue & Customs makes no allowance for human error – a second ISA opened during the same tax year as an earlier application will become fully taxable. You cannot nominate the second ISA as your preferred account for the year under any circumstances. This is particularly relevant for regular savers as the first payment after 6 April automatically opens a new ISA for the new tax year. If you wish to stop and/or move your investment before the new tax year starts, ensure you provide instructions well in advance or you might find yourself stuck for another year.
Yet another pension revolution? For anyone who has spent the past 12 months getting to grips with the new pension rules, the news that another ‘revolution’ may be round the corner will not necessarily be welcome. However, this now looks likely following Chancellor of the Exchequer George Osborne’s announcement of a new consultation on the UK’s pension regime. There are no firm details as yet, but the Chancellor expressed a wish to simplify the pension system, observing: “Pensions could be taxed like ISAs – you pay in from taxed income and it is taxfree when you take it out. In between it receives a topup from the Government.” The Chancellor’s move to taper tax relief on pensions for highearners had been wellflagged. From April 2016, for every £2 of adjusted income over £150,000, an individual’s annual allowance will be reduced by £1, down to a minimum of £10,000. Wealth planners have urged higherearners to take advantage of the reliefs where possible up to the end of this tax year. Osborne did not, however, make changes to the salary sacrifice regime, meaning higherearners on the margin can still use this to bring them below the threshold. The Chancellor chose not to provide greater clarity on the resale of annuities, deferring further details until the autumn. In the meantime, prospective retirees must continue to digest the new rules. The Chancellor may have ambitions to make the pension regime simpler but, for the time being, complexity reigns.
Life assurance Most of us recognise the need to protect our dependents and understand how life assurance can help. The most common reason for investing in life cover will be to protect against the financial burden of mortgage payments but it is also part of the review we undertake perhaps after getting married or, more likely, when we have children. For a single person with no dependents, life assurance may not be necessary. However, if you have debts and no savings, then a small amount might be necessary to pay expenses and prevent someone else being landed with that problem after you've gone. There is also an argument that you should cover a mortgage but in this case, if you are happy to pass the property back to the bank, or if your beneficiaries are more than able to cover the mortgage payments while a house is being sold, then you may not feel the need. If you have dependents, however, you need to look at the consequences for them if your income were removed suddenly. How much do you earn? Do you have debts? How much is your mortgage or rent? Do you pay school or university fees? How long before your children will be working? Does your partner work? Could they continue to work without your support? Even for those people who don’t work, there can be a considerable cost involved in getting help with children or around the house if the partner needs to keep working and that support is removed. Life assurance may be a small price to pay to put your mind at rest.
Considering buytolet Buytolet property has become one of the investment stories of the past decade. At its peak, a rush of new lenders entered the buytolet marketplace, leading to better products, higher standards and greater choice for prospective buyers. The credit crunch however, coupled with recession, has led to a sharp decline in demand; nevertheless, buytolet remains an option for longterm investors, despite prospective landlords now finding it harder to obtain a mortgage. Before you enter the buytolet market, you will generally need a deposit of at least 25% of the property’s value. Lenders will want to know the property’s rental potential, details of your salary and of any other properties owned. The rates charged on buytolet mortgages are also higher than on mainstream loans, so careful selection is essential. Many landlords opt for an interestonly mortgage but capital repayment is also an option. Some might even combine capital and interest elements. Like any flexible mortgage, however, this approach can be more expensive than standard interestonly or full repayment deals, and therefore needs consideration. One of the problems of recent times has been that the rental market has become overcrowded and levels of rental income do not always meet expectations. Consequently, some landlords have struggle to meet mortgage payments, an issue which can be exacerbated if a property is empty for any period with no rental income at all. You therefore need to be sure you can cover such eventualities before you get involved with this aspect of property investment.
2015/16 limits for ISAs Individual Savings Accounts (ISAs) are taxefficient vehicles that allow individuals to save without paying tax on income or capital gains. The introduction of the ‘New ISA’ (NISA) from July 2014 substantially reformed the ISA system, boosting flexibility and choice for investors. Under the new system, savers can invest their entire £15,240 allowance for the 2015/16 tax year into cash, stocks and shares, or any combination of the two. Moreover, investors can transfer their ISAs between providers freely (subject to their providers’ rules). Please note levels and bases of, and reliefs from, taxation are subject to change.