To ISAs or not to ISA

What is an ISA?
The dictionary term is: – “an Individual Savings Account (ISA) allows individuals to hold cash, shares and/or unit trusts tax-free on dividends, interest and capital gains.
What does this mean?
Each
tax year the Government ‘generously’ gives us a tax-free allowance on savings
held within an ISA.
In
July 2014, the Government increased this allowance to £15,000.  The Government has already announced the new
ISA allowance the coming 2015/16-tax year of
£15,240.
Growth
or income from ISAs is tax-free.  You
don’t even need to declare the income you receive on your tax return.
provided
you have not exceeded your allowance for the tax year.
What’s the difference between the different
types of ISAs?
There
are two types:
CASH ISA
A
Cash ISA works pretty much the same as any other savings accounts except the
interest earnt is tax-free.
This
type of ISA is great for someone that wants to be tax efficient, but may need
access to the cash to cover unexpected bills.
Within a Cash ISA your cash remains as cash and can therefore be removed
at any time.  You can add to your ISA but
only up to the £15,000 withdrawn
The
downside to Cash ISAs is that interest rates are still very low.  Cash is an inefficient way to save for long
term goals.
STOCKS & SHARES ISA
A
Stocks and Shares ISA invests your money in other equities such as Gilts and
Bonds to Unit Trusts and Investment Trusts and OEICS a range of stocks and
shares from government stocks and bonds to unit trust and holdings in blue-chip
companies.  It can also hold cash much
the same as a Cash ISA.
Compared
to a Cash ISA, a Stocks and Shares ISA has a higher potential return but with
it comes a greater risk and cash may not be instantly available.  The value may experience fluctuations in
accordance with the market.
A Equity
ISA should be considered as a long-term investment (3-5 years) rather than a
short-term cash holding.  Most often,
this suites people with a little more cash spare or people looking at longer
term savings or goals, as their ISA allows them to invest tax-free in the
long-term, but still leaves them with liquid assets available in case of an
emergency.
Who can open an ISA?
ISAs
are open to UK residents only (Crown Employees).  Cash ISAs can be opened from the age of 16
with Stocks and Shares ISAs from 18.
There
are special Junior ISAs available with some extra rules, if you would like more
information about Junior ISAs, please contact us.
It’s
important to note that ISAs can only be opened in an individual’s name.  They cannot be opened jointly which means
that a couple can have two ISA allowances each year.
ISA Golden Rules
1.
You can only open one ‘new’ ISA of each type
each year.
2.
You have one allowance per tax year, per person.  You can choose to place this all in a Cash
ISA or all in a Stocks and Shares ISA or you can opt to mix and match and spilt
your allowance between a Cash ISA or a Stocks and Shares ISA.
3.
If you fail to use your ISA allowance before the
end of the tax year it cannot be rolled over so once it’s gone it’s gone.
4.
If you want to switch providers for any reason,
no problem, just remember do not remove or disinvest yourself.  Once it has been removed from it’s ISA ‘wrapping’
anything that was within it looses its tax-free status.  Your new provider will do the transfer for
you, which retains the ISA status and does not effect this years’ allowance.
Should
you wish to discuss ISAs or any other element of your financial planning needs,
please call us on 01636 870 069.

Inflation: Good Times?

Inflation: Are we looking at goods times or more bad times?
With
inflation sitting at it’s lowest in a decade and half (1.5% below the Bank of
England’s target of 2%) and now finally below wage increases; are we set to see
an end to the longest economic squeeze since Victorian times?  Lets examine the evidence:
We
are already seeing a significant fall in oil prices, now approaching their lowest
since records began in 1989, and in all likelihood inflation will probably
follow.  Capital Economics have suggested
that the average household is set to benefit around £455 per year just in the
fall of oil prices alone.
We
are also likely to see a “tax cut” in other areas over the next coming months
and with low inflation and rises in wages this means our pockets are going to
be a little fuller than they have been over the last couple of years.
But
low inflation and falling prices are only good in the short term.  Over the long term, Economists have concerns
that we may see ‘bad inflation’ similar to that witnessed in the US in the
1930s when inflation continued to fall with wages following shortly
afterwards.  This kind of ‘bad inflation’
last longer, has weaker growth and therefore takes longer for the economy to
recover.
There
are already concerns that this is already starting to evidence itself in Europe
(not including the fall in oil prices), particularly in Greece.  In an attempt to prevent this, European
Central Bank is set to begin quantitative easing in the coming months and with
this carries risk and unpredictability.
So whilst
in the short term we are expecting to see cheaper prices, increases to wages
and an overall improvement in the standard of living, in the long term,
however, things are still uncertain for the time being.

The Real Cost of Cash

Why do we use cash so much for our investments? I think the main
reasons centre on the fact that it’s a safe investment.

But that’s not entirely the full picture….
Inflation is eating away at your savings or cash investments
every single day, inflation can wipe out its value just because its sitting in
a bank account.
Why: The Technical bit
The Consumer Prices Index (CPI) is 2.9% the very best Fixed
rate Cash ISA is 2.75% (Virgin Money 2.75% for five years fixed). Even with the
best Cash ISA you’re losing 0.15% each year. It gets worse if your money isn’t
in ISA’s as you’ll pay tax on the interest. The best non ISA savings bond is
3.5% (Skipton 3.5% fixed 7 years) take off tax (20%) you’re down to 2.8%, then
inflation and you are down to a loss of 0.1%.
All the above assumes you are using CPI index not the more
well known RPI which is higher at 3.3%, use this and the figures look somewhat
worse, add in that you could be a higher rate tax payer and the loss per year
is quite startling.
From 2002 to 2012 the total rate of inflation has been
37.80%, between 1992 & 2002 its been 27.22% and between 1982 and 1992,
70.74%.
If you invested £50,000 in tax-free cash savings in 2002 and
spent the interest (a common situation for older people who need to top up
their pensions) in 2012 you would have a sum worth £34,011 in real terms.
Interestingly the average interest rates over the same period
(source-Association of Building Society’s) is 3.91% so taking into account
inflation & interest you would have a miserable £650 extra in real terms,
if you hadn’t spent the interest.
Therefore Are Cash Investments & Cash ISA’s. SAFE?
Not against inflation that’s for sure, this demonstrates that
we should not use CASH for long-term investments. Short-term cash is ok; foregoing
growth or income because we intend to spend the money. But, for longer-term,
losing money each year against the costs of those items that you intend to buy
seems a little foolhardy to me.
What about for those topping up pension income? There are
two major problems facing people at present, inflation we have already
discussed, ignore inflation the interest rates themselves are insufficient to
maintain the income requirement for most and their lump sum is being eaten away
in real and actual terms. The current rates of return on cash investments are
simply insufficient.
Is there a solution?
Yes: The facts are longer term investments, such as fixed
interests, bonds, gilts and equities and there are more such as property, art,
fine wine, cars and antiques, which usually outperform cash. What’s the price of
a better return? RISK. I have always felt that it is a simple truism of life: That
the more risk one takes, the higher the potential for rewards, but like
Newton’s 3rd Law. With the higher potential for reward comes the
higher potential for loss. So like many other things in life, Investment Risk
is a balance. 
Look at these examples:
A house purchased at £50,000 in 2002 would have been valued
at £85,000 in 2012 – above inflation growth and it appears a fairly low risk
investment. Bricks and Mortar investments & Buy to lets are increasingly common,
but there are more risks associated with property than many realise – we can
offer buy to let advance and help in setting up your investment portfolio,
letting you understand the risks. (Source Nationwide house price index)
A Medium/ cautious risk fund such as the Invesco Perpetual
Monthly Income Plus – £50,000 invested in 2002 would now be worth around
£120,990. This is the gross amount, but there are many straightforward ways to
minimise the affect of tax on your investments, ISA’s for example are not
limited to just over £5000 per year currently in equity ISA’s you can invest
£12,520. Add this to a capital gains tax allowance each year and there is every
chance that the impact of tax would be significantly less than a
straightforward savings account. This fund mainly invests in Gilts, fixed
interests and bonds with currently 20% invested in equities, the fund is
available in a number of formats such as ISA’s and through many platforms.
(Source – Morningstar Fund Data)
A Higher risk fund (keeping with the same brand) is the
Invesco Perpetual High Income fund managed by the very highly regarded Neil
Woodford. If you had invested £50,000 in this fund 10 years ago, this would now
be worth – £168,475. With regard to tax and availability the same is true about
this fund as above. (Source – Morningstar Fund Data)
I have not taken inflation into account with the above
examples of the house, and the two funds for the simple reason that there is no
need its fairly clear that the effects of inflation will have some impact, but
all three examples out perform either the CPI or the RPI, and therefore you
would have kept your money or increased it.
Conclusions – Moderation in all things.
Is cash “A bit rubbish really” well yes it is if your
investing for the long term, don’t have any specific goals in mind or just need
an income, but cash investments do have a role to play within any portfolio of
investments. They give us a safety buffer, they are a safe place for money
that’s going to be needed, but for anything else investments of a different
type are necessary, investment advice is really worth seeking out to see how
you can reduce the impact of inflation on your savings and investments.  
Philip Dales Dip PFS Certs CII (MP&ER)
Director
For more information or advice on Investments contact Philip
Dales at DALES Independent Financial Advisers: advice@pndales.co.uk or go to our web
site www.pndales.co.uk or call our West
Bridgford office: 0115 832 0265 or Newark Office: 01636 870 069
Important information.
The investment returns and any income can fluctuate, and
investors may not get back the full amount invested. Past performance is not a
guide to future returns. Where Philip Dales has expressed views and opinions
these may change and do not constitute a recommendation. For individually
tailored advice please contact either our West Bridgford (Nottingham) office
0115 832 0265 or our Newark office on 01636 870 069
Sources: All CPI and RPI data – Office of National
Statistics, Fund information – Morningstar, Savings & ISA rates– Moneyfacts.
Historical Average Savings rates – Association of Building Societies. House
price growth – Nationwide Building Society’s House price Index.
P N DALES LTD are regulated by the Financial Conduct
Authority: 496107.

Things we don’t want to talk about 101 – Savings Plans


Thinks we don’t want to talk about 101 – Savings Plans

I had an interesting conversation yesterday with an unhappy Saver, not mine I hasten to add.

The gent in question had been saving regularly for 15 years. He was justifiably upset that after 15 years he was about to get less back at maturity than he had put into his savings plan over the whole term. It raises two questions:

  1. Our understanding of the risks we are taking
  2. The purpose of savings
  3. What if you had not started the plan in the first place?

I know that’s 3, but I’ve always been a fan of the Spanish Inquisition

Dealing with each point in turn.

1. What did you understand of the risks when you took out the plan? Did you expect any risks, did you understand the relationship between risk and reward.

Most of us take risks everyday and most are calculated risks based on our experiences. Usually we know, that generally the higher the risk the greater potential for reward but also at the same time we know the greater danger of failure or loss. We learn this as children whether it be stealing sweets from the pantry or showing off a new trick on your bike, before you’ve really nailed it.

2. The purpose of savings.

I know this sounds like a silly question, but I’m not sure if we really take much time to think about it when we set out to save. I wonder if sometimes we save just because we know we should. I think at present there are a lot of people saving because the media keeps telling us we’re all in trouble now, and that its all our fault for not saving enough.

3. Where would we have been if we didn’t save?

Now this requires a little latitude: forget for a minute that the Savings plan gave us less than we had put in, we’ll come back to it later.

If Mr A had not started two £25 pm savings plans, 15 years ago, would he now have £8,000? In my experience the simple answer is NO, and a resounding no at that. Therefore, from this sense it could be suggested that the savings plan has worked. Indeed if Mr A had placed £25 each into a Mr & Mrs A’s bank account each month would they have more? Theoretically yes, but this assumes he continues to pay the same money each month, and that he bit his lip every time he thought about how much it was worth, and every time he walked into a shop and saw a new shiny thing or needed a new car etc. etc.

The thing is Saving Plans have a place; they are fire and forget you start them well within your means, and they run for a specified time. You get a statement once a year, which you soon forget because to start with they are going to be worth very little. Then all of a sudden the years tick by and “Thump” a cheque lands on your door step. “Here is that money you forgot about”.

You see, the thing is, you don’t start saving because you can’t afford to and if you don’t start saving you don’t have any savings.

When you start to think about it most of us, yes I really mean most of us, can afford £25pm. Even those with low incomes will soon grow accustomed to £25 less each month. £25 soon disappears, its less than the average take out, or a few drinks on a Friday at the village pub.

One last thought:

Savings Plans don’t have to be endowments, or have life cover within them; they can be tax efficient savings such as ISA’s. However, think about this: If your goal is to have some money to help your children out when they need to buy their own place or maybe get married, or even getting political, pay off their student debts. What happens if you die half way along?

The old style savings plan, the terrible much maligned endowments of the last millennium made sure the money was there whether you reached maturity or not.

The unscrupulous mis-sold them, manipulating the rules, growth rates and such, earning big money but there are many people out there that did very well from them.

Notwithstanding this: The message is clear, start saving, small amounts soon rack up, and 15 years is not that far away.

The only thing we spend but can never get back is TIME!


Philip Dales Cert PFS
Director.

For more information or advice on Savings Plans, ISA’s and other investments contact Philip Dales at DALES Independent Financial Advisers: Advice@pndales.co.uk, or go to our web site www.pndales.co.uk. Nottingham office: 0115 832 0265 or Newark Office: 01636 87 00 69

DALES Independent Financial Advisers, Nottingham & Newark. Authorised and regulated by the Financial Services Authority: 496107.

Stock Picking Funds V’s Other Funds

Stock Picking Funds V’s Other funds Ok so we hear about how a fund is a stock picking fund, and that this is somehow better than other “non” stock picking funds, whatever they are. So what is a stock picking fund and why is it better? The answer is both straightforward and complex: A stock-picking fund is where the fund manager is allowed to choose which stocks he wants to hold, usually he has a broad remit and can therefore be relatively free to choose what he wants. Conversely a “non” stock picking fund is usually tied to some index, the managers job is to out perform the index that he is tied to, however, he will have to hold a large amount of that index, often this can be as much as 75% of the index itself. With this type of fund the manager will be rewarded for having outperformed the index. This is particularly important when you consider the resent market turmoil, if the index is down by say 30% and the mangers fund is only down by 28% – he has still achieved his goal, as he has still outperformed the index. With a stock picking fund there is no tie to an index, therefore the fund manager is targeted on pure performance, if his fund is down against an index it is of no relevance, if he does not perform he will not receive his bonus. Most stock picking funds have a theme, and most of them are in fact very similar “value”. There are often stock picking funds within special sectors with specific sector driven themes, such as the Jupiter ecology fund, which searches for value, but within an ethical setting. I feel the best way to explain this is to give an example. We might see in the news that a company has done something wrong and will be heavily fined (BA for example) and that this will affect its year end profits, their shares fall in value overnight, and then to compound the issue, some other bad news about the company is published, sending the shares even further down. Now due to the resources available to the fund managers, they carry out a great deal of research on the company in the back ground and establish that the company is fundamentally sound, pays a good dividend and will still report good profits, although maybe a little later than planned or often in a couple of years. With this in mind the fund manager buys into the company heavily, while the share price is depressed, feeling confident that some time later these shares will be back in vogue. He keeps them within the portfolio until they increase again in value, and then sells them. This is in a nutshell what all good stock picking funds do. A real example of this is the M&G recovery fund, some time ago Rolls Royce, were laying off large numbers of their work force, they had been struggling for some time and the news of the lay offs heavily affected their share value. However, Tom Dobell decided that there was something about RR and got involved with them, he established that they had a super new aero engine that should take the company forward, the new engine was suited to the new super airbus the A380. At that time there was one other competitor, but it looked more and more likely that RR would power the aircraft. As is often the case with Tom Dobell, he got his hands dirty and became closely involved with the management team and the restructuring of the company to help maximise the companies potential, during this time RR’s competitor dropped out of the running, which left RR with the only engine capable of powering the A380. A little later the A380 was launched with RR’s new engine, the shares in RR inevitably went up, and M&G recovery made a tidy profit for its investors. (While this synopsis lacks detail, and does not give any real sense of the work involved it gives a general overview of the situation) Even now if you look at the holdings of M&G recovery fund you will still find RR as a holding, Tom Dobell particularly is a long term investor, usually shares or prospects are considered as a 3 or 5 years holding. This in essence is what stock picking is all about; the general idea is to pick good stocks that are currently under valued. Sometimes the funds are referred to as “value” funds, in the case of M&G they refer to them as Recovery funds, in others they could be special situations or any number of designations, but each one is designed to wheedle out the good quality stocks that are undervalued. The market as it stands today, is a place full of value with large companies who’s shares are very undervalued, but how on earth would we pick which company is undervalued and which is valued correctly. Take the banks; we all have heard, all to often over the last 12 months how terrible they are, and that they won’t make any money. However, there is value in this market, but which banks are overburdened with toxic debt or massive debts to the government with repayments that will eat into the companies profits and ability to pay dividends for years? Which share prices have been pushed down not because that bank is in trouble, but because the sector is so depressed? If you asked the average man on the street if he would buy banking shares he’d probably laugh at you. If we look at Barclays, who have had no intervention from the UK government (no matter how often they were mentioned on the News as being in trouble), on March the 6th their share price was 61.4 pence, now 5 months on their share price is 344.6 pence (17/08/09 at 11:00) this represents an increase of 461%. What this means is that if you had invested £10,000 in Barclays shares on the 6th March and sold them at 11:00 today you would now have £56,100. I am not for a moment suggesting that you have £10,000 or that you ever consider direct investment in a single companies’ shares or indeed that you consider investing in Barclays, I am only aiming to highlight that there is value in a market that has fallen so significantly even in the “toxic” area of Banks. Now is the time to review your portfolio with an Independent Financial Advisor, to maximise your opportunities and ensure that you have the right balance of investments within your portfolio, and make sure that you benefit from what value there is. To arrange an appointment or for more information on these or other types of investment please contact Philip P Dales – ppd@pndales.co.uk or tel: 01636 706171. Or view our website, www.pndales.co.uk . IMPORTANT NOTE: The views expressed are the authors own and reflect the authors experience and the research undertaken in this area. Your own decisions should take into consideration your attitude to risk, the time span you are investing for and your personal objectives. PNDales Ltd recommends that you should always seek advice from a suitably qualified individual, such as an Independent Financial Adviser (IFA) before making any decision regarding investments’. PNDales Ltd is a firm of Independent Financial Advisors and would be happy to provide tailored advice in this area. All Information Correct as at the 26th August 2009. Warning: Investments may fall as well as rise, and past performance is no guarantee of future returns. This article does not represent advice, each persons circumstance are different and the funds mentioned may not be suited to your circumstance. PNDales Ltd will not advise direct investment in shares. PNDales Ltd is authorised and regulated by the Financial Services Authority 496107.