In it for the long haul – no short-term miracles in wealth creation

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I have just read a great post over at Plonkee. Plonkee talks about the need to effectively put your investment strategy on “auto-pilot” – with money being dripped into stakeholder pensions and Stocks and Shares ISA’s on a regular basis.

They key with any long-term investment strategy is to start as soon as possible – tomorrow is too late!

This reminded me of an article I wrote on the Rule of 72 and the Time Value of Money. The rule of 72 simply states that whatever rate of interest your money is enjoying, divide that rate into the number 72 and that is the number of years it will take your money to double in value.

For example, at 6% per annum, your money invested today will double in value after (the maths bit! – 72/6) 12 years.

So the sooner you start investing the more of these “12 year bits” you can accumulate in your lifetime.

The other benefit of starting as soon as possible is the benefit of “compound interest” – this effectively is where “money makes money”. If I invest £100 today, at a rate of interest of 5% I will have £105 at the end of the current tax year – in year 2 my amount invested is now £105 – I will earn 5% on this total amount – so in effect my £5 interest received in year 1 is now earning interest in its own right – “money making money”.

Present day investment environment

Most of you will be aware of the recent falls in world stock markets – it would be strange if you hadn’t heard about them!

Well it’s not all bad news – the only people who lose money in a falling stockmarket are those who need or have to cash in their investments. Everyone else has simply made what is known as a “paper loss” – in reality you haven’t lost anything – it’s just on paper – the only time you have made a real loss is when you cash it in.

Why is this of interest to the shrewd investor?

The shrewd investor will be the one who has continued to invest over the last year or so – on a regular basis to benefit from “pound cost averaging” – as they have been able to buy more and more shares at a lower price.

Any investment in the stock market should be viewed as a long-term strategy and I personal am looking at a minimum 10 year timeframe for each investment I make – I only invest the money if I am willing to hold that investment for 10 years.

Confused about the new ISA allowances and ISA limits?

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I have been reading many articles recently about the changes in the ISA allowance and ISA limits coming about over the next 6-7 months so I thought I would summarise them in a nutshell and answer a few of the more common questions and enquiries we are receiving about the ISA limits increase in the 2009/2010 tax year.

What are the current ISA limits / ISA allowances in the 2009/2010 tax year?

In the current tax year anyone over age 18 can invest up to £7,200 in a Stocks and Shares ISA.

Of this £7,200 ISA limit, up to £3,600 can be invested in a Cash ISA, any of the remaining £7,200 allowance which remains unused can be invested in a Stocks and Shares ISA.

What is changing on 6th October in relation to ISA allowances?

From 6th October, anyone who will be aged 50 or over, before the end of the current tax year on 5th April 2010, can invest up to £10,200 into a Stocks and Shares ISA.

Of this £10,200, up to £5,100 can be invested in a Cash ISA, with any remaining unused ISA allowance being available for investing in a Stocks and Shares ISA. For example – if you invested £2,000 in a Cash ISA you could still invest £8,200 in a Stocks and Shares ISA.

What about if you will be aged under 50 by the end of the tax year on 5th April 2010?

In these circumstances, your ISA allowance will remain at £7,200 until 5th April next year,  with you being able to invest the full £10,200 from 6th April 2010 for the 2010/2011 tax year.

I have already paid some money into my ISA (up to £7,200) – can I top it up after 6th October?

This will depend on the institution you are invested with – we suggest you ask them whether they will allow you to invest the additional amount up to £10,200 (or £5,100 in the case of Cash ISA’s) after 6th October.

Under current rules you cannot contribute to an ISA of the same type with more than one provider. Therefore, if your bank/building society etc is not willing to allow the additional investment you may have the option to transfer to another provider and make the additional investment.

You need to confirm with your current ISA provider whether they will allow the top up – if not, you need to find a provider who will accept a transfer in from the current provider as well as allowing you  to top up.

Warning!

Under no circumstances should you “cash in” an ISA if your current provider won’t allow the top up, as you will not be able to reinvest this amount in the current tax year – to move money from one ISA provider to another you need to complete an “ISA Transfer form” from your new ISA provider.

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Related Posts

Changes in ISA Allowances – Budget 2009/2010

New Tax Year – New ISA Allowance – 2009/2010

Reminder – Cash ISA Allowance is Increasing!

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Just a quick reminder that, as of 6th October 2009, the maximum which someone aged over 50 can pay into a Cash ISA in the current tax year is increasing from £3,600 to £5,100.

(The increase comes into effect for those aged under 50 from the start of the next tax year on 6th April 2010!)

In the last Budget, the Chancellor of the Exchequer increased the Stocks and Shares ISA allowance from £7,200 to £10,200 for those aged over 50 (before 5th April 2010) with the increase coming into effect on 6th October 2009.

Many will have already made their maximum contribution of £3,600 for the current tax year with the intention of topping it up to the £5,100 limit on 6th October 2009. There have been rumours that some organisations are not allowing the top-up to the new limit to be added to the existing ISA.

As you can only have one ISA with one provider in the current tax year it will be necessary to transfer the cash ISA to a new provider who will allow the top up.

Very Important – If you wish to transfer to another ISA provider then you must approach them first – they will provide you with a “transfer application” – once completed the new Cash ISA provider will approach your current provider for the transfer amount.

You CANNOT transfer to another ISA provider by “cashing in” your current ISA – if you have already invested money in an ISA, once you take it out you cannot put it back in!

And finally……

Be sure to subscribe to our newsletter – it’s free and you can cancel it at any time.

Also – did you know you can receive our blog posts via RSS.

Related Posts

Changes in ISA Allowances – Budget 2009/2010

New Tax Year – New ISA Allowance – 2009/2010

Secure Savings

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This is a guest post from Iain over at moneysupermarket.com.

Secure Savings 

During these bleak times of economic downturn and insecurity saving is possibly more important than ever. However, with the collapse of so many seemingly ‘secure’ banks across the globe many potential savers find themselves asking where exactly is the best place for their funds, with some contemplating whether or not the best place for their money is under their mattress!

When considering whether or not to invest funds into a bank or building society there a number of factors to consider that can help determine the strength and security of said bank or building society. Ratings known as “Fitch ratings” are attributed to each bank and building society, primarily for the use of professional investors but if you can get your hands on the rating of your bank it will give you a good idea of its strength and security. This ratings system offers a rating based on the banks available funds and ability to repay any outstanding debts, with ratings ranging from AAA (the best) through to BBB.

Once a safe house for your funds has been established it is then essential to select a savings product that offers consistent and profitable returns. Considering the current economic climate the best option may be to invest funds into fixed rate savings bonds or similar products that offers guaranteed returns. Such savings products are always a safe bet as the investor is safe in the knowledge that as long as the terms and conditions of the account are adhered to they will benefit from guaranteed returns of a fixed amount.

Savers will tend to lean towards fixed return products in times of economic downturn as opposed to investing in funds where returns are based on the performance of certain stocks and shares. It goes without saying that in the current economic climate the risk level of investing in such products is extremely high and potentially disastrous. However, this is not to say that for the more daring and speculative investor there is not a lot of money to be made. The potential returns of investing in stocks and shares are much higher than the returns gained from fixed rate products as long as the investor is willing to take a massive risk!

The ideas and opinions expressed in this article are those of the original author and may not be those of shrewdcookie.com

With-Profits Bonds – Avoiding a Market Value Reduction?

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Many people have historically invested money in a “with-profits” bond – they were popular amongst investors as they were viewed as a “lower risk” investment.

By managing the underlying “with-profits” fund the fund manager could “smooth” the returns enjoyed by investors by keeping back some of the profits in the good times, to allow them to continue paying bonuses in the bad times.

How do Investors benefit from a With-Profits Investment?

An investor would typically benefit from investing in a With-Profits bond in two ways.

Reversionary or Annual Bonuses

The fund manager would typically declare an annual bonus rate applicable to their with-profits fund – this would be a reversionary bonus as a percentage of the initial amount invested as well as a percentage bonus based on previous bonuses already received (a kind of “compounded return” if you like.)

The second way to benefit from investing in a with-profits fund was through the potential payment of a terminal bonus.

In recent years, with UK and world stock markets falling, the bonus rates payable have been very low; in many cases no bonus has been paid.

As a result of the size of the fall in stock markets many life companies are applying “market value reductions” to any surrender from their with-profits fund.

These Market Value Reductions can see the final surrender value cut by anything between 10% and 20% – every plan is different.

The reason for this is to protect remaining investors and to ensure that those people surrendering their with-profits investment are paid a fair amount based on their participation within the fund.

With-Profits Investments – any real future?

With-Profits funds have fallen out of favour with many professionals and investors over recent years. By their very construction they are not “open” in terms of the internal costs and charges involved in running the underlying fund – especially when compared to a “unit-linked” fund where the charges and costs involved are explicit – the investor can see exactly what the costs incurred in running the fund have been.

Another area of concern for many investors is the underlying asset allocation within the with-profits funds. Many funds have reduced their equity content substantially, taking cash and fixed interest positions. This overly-cautious approach to fund management could be to the detriment of future returns within the fund, and hence, lower bonuses.

I Want to Cash In My Investment – Can I Avoid this Market Value Reduction?

There may be a possibility to avoid this MVR on exiting the with-profits fund you are invested in. Many policies were issued with a “MVR Free” guarantee – typically this would be the 10th anniversary of the investment. Many policies offered this guarantee – it was in fact one of the main selling points which many investors may have forgotten about or were not aware of.

Every company is different – some offer the MVR free option on day of the 10th anniversary – some offer it for up to 28 days following the anniversary.

In all cases we strongly suggest that you check the policy document and other papers provided at the time you took out the investment to see what, if any, MVR free guarantees apply to your with-profits plan.

Should I cash in my with-profits investment?

Shrewdcookie does NOT give financial advice – you must take professional independent financial advice before surrendering any investment as there may be tax and charge implications of which you are not aware. The purpose of this article is to bring to your attention the possibility that you may be able to exit your with-profits investment avoiding an unnecessary penalty!

Please tell us your experiences!

We are keen to hear from people who have avoided MVR on surrendering their with-profits investment – please tell us your story below.

What is a Company Share?

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What is a Company Share?

A share in a company is just that – you own part of the company. If it is a publicly quoted company, then yes, admittedly, your share in that company may not carry much control but you do own a share in the company with a right to attend and vote at the company’s Annual General Meeting, as well as the possibility to receive any dividend payable the company and the opportunity to make a “capital gain” is the share price increases.

When we talk about shares we are generally considering those shares in Public Limited Companies (PLC’s) which are quoted on the stock exchange or AIM (Alternative Investment Market – a market for shares in smaller companies).

How are Shares Valued?

A share is a tradable investment in a company and, as such, its price is not fixed but determined by the power of supply and demand within the marketplace.

If more people want to buy shares in Company A than sell shares in Company A, the price of the share will increase, until the number of people who are willing to sell their shares in the company matches the number of people wishing to buy shares in the company.

Conversely, if a lot of people wish to sell shares in a company, and there are too few buyers, the share price will fall – typically demand for any share will increase as the price falls as more and more people can afford to buy that share.

Why own a Share in A Company?

There are basically two ways in which a normal investor can benefit from owning a share in a company – capital growth and dividend income.

Capital growth occurs when the value of the share increases over time – many investors will review the stock market on the lookout for shares which they feel are currently undervalued, based on what they feel will be the future trading outlook for the company, and hence profitability, of the company in which they wish to invest.

For example, company X has a current share price of 90 pence – you have done your research and have concluded that company X has product Y at the research stage and when launched next year, product Y will increase the amount of money flowing into the company, with a corresponding increase in profits.

You feel that based on the information you have that the shares in Company X will be worth 130 pence in the next 12 months. You therefore buy the shares in company X today at 90 pence and hope that they will increase in value to 130 pence, at which point you plan to sell and make 40 pence profit (less any dealing costs and taxation which you might incur along the way).

Profiting through Dividends

The second way to benefit from investing in a company share is through receipt of a “dividend”. When a company makes a profit, the board of Directors will meet to discuss what proportion of the profits will be retained to help fund and grow the company, and what proportion of profits will be distributed to shareholders, in the form of a dividend, to provide the shareholder with a return on their investment.

Are there risks involved?

Yes – the price of the share is determined by the market (supply and demand) for the shares – if more people want to buy the shares than sell them the price will rise, and conversely, if more people wish to sell than buy the price will fall.

Firstly, if you buy a share in a company today for say 120 pence, there is no guarantee that that share price will be maintained at 120 pence – it could go down as well as up. All investors need to be aware of this before making an investment in a single company share – the investor needs to ask themselves “what effect on my wealth will it have if the share I am buying falls considerably in value?”.

Secondly, there is also the possibility that the company could “go bust” or cease trading. In this scenario, liquidators would be appointed to realise whatever they can from the assets of the company and to repay any debts the company owes, tax outstanding etc. Ordinarily shareholders in this respect fall way down the pecking order – it is not uncommon in the case of insolvency for the ordinary shareholders to receive just 1 penny in the pound on their investment, if anything.

Can I reduce the Risk?

Yes – if you have sufficient funds to invest you could buy a “portfolio” of shares in more than one company – by investing in a range of shares you are hedging your bets by not having “all your eggs in one basket” – some shares may rise in value, some may fall in value, some may go bust – your hope is that more of the shares will make you a profit than ones that make you a loss.

If the amount you have available to invest is rather modest then you could consider investing in a “mutual fund”. A fund manager runs the fund and takes money in from a large number of investors – the fund invests in a diversified portfolio of shares or assets in line with the investment objectives of the fund.

The investor in this scenario benefits from the active management of the fund by a professional management team as well as the ability to invest in a wide range of different companies thereby reducing the risk of their investment.

Learn more About Company Shares

“Investing in Shares for Dummies” is a great introduction to this fascinating topic. Buy now from Amazon.

Saving Money on Your ISA Charges

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In the current investment climate it is more important than ever to ensure that you have an ISA wrapper which is providing value for money. Current low returns in both UK and world equity markets, as well as other asset classes, such as commercial property, mean that and charges you incur in your ISA can have a dramatic effect on the overall performance of your investment.

Take for example a typical UK equity fund in which many people invest. There are typically two sets of charges which will be incurred in investing in such as fund:

Initial Charge

The Initial Charge is the charge applied to money at the point it is invested into the fund, sometimes also known as the “bid-offer” spread. This can range from 0% to 6% with a typical value of 5%. So for every £100 entered, you only really have £95 being invested – the effect of this is that the fund has to provide growth of 5.26% just to get you back to your original investment of £100.

Annual Management Charge

These vary depending on the nature of the investment portfolio which the investment manager is looking after. Typical values here can range from 0.5% to 2.0%. It is the annual management charge in our opinion which has the most detrimental effect on the performance of an ISA or other investment.

Consider this hypothetical scenario – you are invested in a managed fund with an annual management charge of 1.5%. Each and every year, the fund manager deducts 1.5% from the effective value of your fund. This is OK in the good years when the stock market could be showing returns of 5%, 7% etc. But in recent years with low or even negative growth, this fixed cost on your investments is even worse.

Is there a Solution?

Yes there is. By investing through a discount broker or fund supermarket not only are you opening yourself up to a very large fund choice from which to invest, you may also benefit from discounts on both “initial” and “annual management” charges.

Can these Savings be Made Just on New Money Invested?

No, many of the fund supermarkets offer the option to transfer in ISA’s and other investments from other providers to benefits from these discounts.

Naturally it would be wise to take independent financial advice before making any investment you are unsure of.

Investment Bonds – An Introduction

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What is an investment bond?

An investment bond is, from a technical point of view, a “single premium, non-qualifying, whole of life assurance policy” for which the main principle is one of investment.

They are offered by life insurance companies as a place to invest money over the medium to long term with a view to either providing capital growth, “income” or both.

Non-qualifying relates to the tax treatment of the investment bond – the contract is essentially a life insurance policy which has been designed to be used as an investment vehicle.

Investment Options

The life company offering the investment bond will have a portfolio of funds, possibly both internal and externally managed funds, into which money can be invested. These will cover such asset classes as stocks and shares, commercial property, corporate bonds, fixed interest securities, gilts and government bonds, as well as cash.

Money can normally be invested in more than one fund at a time – typically 10 or more funds at one time is not uncommon.

Taxation of Investment Bonds

Taxation of investment bonds is a little beyond the scope of this article – we strongly recommend that you seek guidance from an accountant or financial adviser before making any amendments to any existing investment bond you may hold.

The investment bond is deemed to have paid basic rate income tax within the fund, however, many funds actually suffer a lower tax charge internally than basic rate income tax as a byproduct of the way the internal returns are broken down between capital appreciation, income in the form of interest and dividends received.

From the public’s point of view, basic rate income tax is deemed to have been paid and the term “non-qualifying” relates to the way any additional taxation may result on taking money out of the plan. A non-taxpayer cannot reclaim any tax paid by the life company within the investment bond.

In what circumstances may a policyholder have to pay additional tax?

The liability to additional taxation comes into play in the event of a “chargeable event”. A chargeable event generally occurs if any, but not limited to, the following happen:

  • Withdrawals in excess of 5% per year – up to 5% of the original amount invested can be withdrawn each year with no immediate additional tax liability – ideal for providing an “income stream” – possibly in retirement.
  • Death of a life assured – if they are the last life assured remaining on the investment bond
  • Partial or full surrender of the bond
  • Assignment of the bond – for money or money’s worth

The calculation of liability to tax is beyond the scope of this article but in brief any additional tax liability is calculated with reference to the individuals own income tax position in the tax year in which the policy year in which surrender takes place ends – phew!!! Ask an accountant or IFA for guidance in this area.

Top Slicing

“Top slicing” of gains on investment bonds generally allows the gain to be divided by the number of complete policy years, after which this “slice” is added to the individuals income for the tax year in question.

If this slice, when added to other income, takes the policyholder into the higher rate tax bracket then some or all of the gain may carry a liability to additional taxation (20% in the current tax year).

Again, seek professional advice before surrendering any investment bond.

Who can benefit from investing in investment bonds?

The ability to take an effective 5% annual withdrawal without any immediate additional higher rate tax liability may be attractive to higher rate taxpayers who may become basic rate taxpayers later in life.

People who have fully utilised their ISA allowances and are actively managing other investments which fully utilise their annual capital gains tax (CGT) allowance.

5% withdrawals are not classed as “income” – this is attractive to individuals over the age of 65 who benefit from higher annual allowances against income tax than under 65’s. For example, in the 2009/2010 tax year, a 66 year old can earn upto £9,490 before paying any income tax. Any income, such as interest or pension annuity, over a set level each year reduces this additional personal allowance,

An additional benefit to retired people is that investment bonds are not normally included in assessing a persons personal finances by a Local Authority in respect of funding long-term care. Care should be taken when considering retirement home planning and investment bonds – any action to move money into investment bonds in the period near to having to go into a retirement home could be deemed “deprivation of assets” by the local authority. More information can be found in the CRAG report.

Investment Bonds are classed as “NIPA’s” – Non-Income Producing Assets which makes them ideal for holding as part of a Discounted Gift Trust (DGT) or Gift and Loan Trust, which are both inheritance tax planning arrangements. Many life offices have their own DGT and Loan Trust packaged schemes with the core investment held in an investment bond due to the favourable tax treatment of investment bonds within a trust arrangement.

Conclusion

Investment Bonds can be viewed as more than just an investment – invariably they are a retirement and estate planning tool and care should be taken in taking any action in regard of investment bonds.

Concerned about Stock Markets? ISA Cash Park

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How to Park your Money in an ISA

Many people are concerned about the current state of UK and world stock markets, together with other investment asset classes, yet they would still like to utilise their ISA allowance for the future tax-efficient benefits which an ISA investment can provide.

There is a solution.

At present it is possible to invest up to £7,200 into a Stocks and Shares ISA, with up to £3,600 of this limit being allowed to be held in a Cash ISA – with the balance available to be placed into a Stocks and Shares ISA.

For example, if you invested £2,000 into a Cash ISA in the current tax year, you would still be able to invest £5,200 into a Stocks and Shares ISA.

Following the announcement in the Budget today (22nd April 2009) by Chancellor of the Exchequer, Alistair Darling, the ISA limit will increase from £7,200 per year to £10,200 per year total (which can include up to £5,100 in a Cash ISA) for those aged over 50 on 6th October 2009, and with the remainder of the eligible population being able to invest £10,200 from the start of the next tax-year on 6th April 2010.

Many people would like to invest their full allowance within an ISA but are concerned with continuing stock market volatility and econnomic uncertainty over the short to medium-term.

Many ISA providers are acutely aware of the concerns which investors have at present in placing their money into equity and other asset classes. They are therefore offering a “cash holding” or “cash parking” facility whereby an investor can place money into an ISA today, thereby securing their entitlement to their ISA allowance and deferring their investment decision to a later date when they may feel more confident about economic conditions and stock market outlook.

The money held in the “cash park” of a Stocks and Shares ISA may receive interest (see below regarding tax position).

Important Points to Note

Any money held as “cash” within an ISA is a temporary position as the Inland Revenue expect you to ultimately invest these funds into funds. The cash fund may receive interest whilst the funds are held as cash – this interest will be subject to 20% taxation – which is in line with the tax position on interest received from a bank/deposit account.

The main difference here though is that this tax is not reclaimable by a non-taxpayer.

No Cash in a Stocks and Shares ISA

It is also important to remember that regulations do not currently allow a “cash” fund to be held under a Stocks and Shares ISA – therefore any decision to invest cash into this type of ISA must ultimately be made with a view to investing in mutual funds at a later date.

Conclusion

This is a useful facility for those people wishing to invest in an ISA but not wishing to commit their funds to a fund carrying risk in the current economic and investment climate.

Change in ISA Allowances – Budget 2009

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Budget 2009 – ISA Allowance Increased – from 6th October 2009

In his Budget speech on the afternoon of 22nd April 2009, Chancellor of the Exchequer, Alistair Darling, announced that with the maximum amount which can be invested in a tax-efficient ISA will rise from £7,200 to £10,200.

(Ed. – This rise is long over due, with the only previous rise, since ISA’s were introduced in 1999, being  from £7,000 to £7,200. Had the ISA allowance increased in line with average earnings inflation since 1999 then today the ISA allowance should be in the order of £10,500).

New ISA Allowance Limits

Investors will be free to choose whether to invest the full £10,200 into the Stocks and Shares element or to place up to £5,100 into a Cash ISA, with the remainder of the allowance being invested in a Stocks and Shares ISA.

When do the new ISA Allowance Limits Start?

This change in ISA allowance will see the total amount which can be invested in a tax year increase to £10,200 from 6th October 2009 for those aged over 50 with the rest of us being entitled to the additional allowance from 6th April 2010 – effectively 12 months to wait for those under 50.

In reality though the increase in allowance, although welcome, will see only a small increase in the amount of tax saved by UK investors in Cash ISA’s given the very low level of current interest rates.

For example – for a Cash ISA investor this means that an additional £1,500 can now be invested in a Cash ISA.

With the average Cash ISA paying in the region of 2.5% -3.0% gross, the actual tax saved will be between £7.50 and £9.00 per annum under current interest rates.

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