The stock market crash of 1987:

Transcription

1 Your financial planning service Newsletter - Jan 2013 Auto Enrolement - How it works Your Investments The stock market crash of 1987: What have we learned? Contact us now for a free Financial Review Your Pensions AIC Financial Limited Suite 15, The North Colchester Business Centre, 340 The Crescent, Colchester, Essex CO4 9AD E: info@aicfinancial.co.uk w: AIC Financial is an appointed representative of Intrinsic Financial Planning Limited which is authorised and regulated by the Financial Services Authority Tel:

2 03 Your Protection 04 Your Retirement Relevant Life The benefits really do stack up! Auto Enrolement - How it works 05 Your Investments The stock market crash of 1987: What have we learned? Interest only mortgages - becoming niche 06 WANT TO MAKE MORE OF YOUR MONEY IN 2013? FOR MORE INFORMATION PLEASE TICK THE APPROPRIATE BOX BELOW, CUT OUT, AND SEND TO US. PLEASE ENSURE YOU INCLUDE YOUR PERSONAL DETAILS. Arranging a financial wealth check Building an investment portfolio Generating a bigger retirement income Off-shore investments Tax-efficient investments Family protection in the event of premature death Protection against the loss of regular income Providing a capital sum if diagnosed with a Critical Illness Provision for long term healthcare School fees/further education funding Inheritance Tax/Wills & estate planning Capital Gains tax planning Corporation tax/income planning Director & employee benefit schemes Other ( please specify ) Your Mortgages You voluntary choose to provide your personal details. Personal information will be treated as confidential by us ad held in Accordance with the Data Protection Act. You agree that such personal information may be used to provide you with details and Products or services in writing, by telephone or by .

3 03 - Your Protection With a relevant life policy the Benefits really do stack up. If you re a company director and you have life cover to protect your family, you could be paying more tax than you need to. But with a relevant life policy Although the company makes the payments, they re not Treated as a benefit in kind, and so would not be included In your income tax assessments. This can be a significant Saving, particularly for a higher or additional rate taxpayer Unlike a registered group life scheme, the benefit will not Form part of your lifetime pension allowance, and premiums Won t full part of your annual pension allowance. The payments may be an allowable expense for the Company in calculating their tax liability, as long as the Local inspector of taxes is satisfied they qualify under The wholly and exclusively rules. Who is a relevant life policy suitable for? High-earning directors and employees who don t want their death-in-service benefits to count towards their lifetime pension allowance. Small companies with too few members for a group life scheme that want to provide employees and directors with tax efficient death-in-service benefits. What next? Talk to us, we will help you identify your individual protection needs and guide you through the various types of cover available to make sure you get the right cover at the right price.

4 04 - Your Retirement Pension Automatic Enrolement Contact us for more information Millions of workers in the UK will gradually see a slice of their pay packet being automatically diverted to a savings pot for their pension. Employers are obliged to pay in as well, with the government adding a little extra through tax relief. The system - called Automatic Enrolement - started at the beginning of October 2012 with staff who work for the biggest businesses, with others being signed up over next 6 years. Those who already save in a workplace pension scheme or are self-employed will not be signed up. It is worth remembering that by opting out, workers will miss Experts and ministers say it is vital people make a start at an out on the contribution their employer puts into the pension. In early stage in their working lives, to eventually have savings that the majority of cases, they simply will not get these payments in will top up the state pension. any other way, such as in their regular pay. So who will automatically be enrolled into a workplace pension scheme? Under the new system, those who work in the UK, are aged 22 and under the state pension age, are not already in a scheme that qualifies, and earn more than 8,105 a year will automatically be enrolled. The first wave has already started with the largest businesses - with more than 120,000 staff- starting first. As time goes on, Part-time workers who earn less than that can ask to take part ifsmaller firms will start enrolling staff. they want to and, if they earn more than 5,564, their employer will be obliged to make a contribution too. Those aged under 22, or over state pension age and still working, can also opt-in in the same way. Do I have to take part? No. You may decide that you need all of your monthly pay to make ends meet or you have a private pension policy you feel is sufficient. What it means to your pay packet A worker who earns 20,000 a year initially will see leave their take-home pay over a year ( 9.62 a month ) an annuity. Staff will be given a letter about the scheme when it starts at their workplace. This will explain who the pension provider is. Workers can ask this provider for an opt-out form. If they fill it in within a month, then their involvement will be cancelled. If they take longer, then they will start to build up a very small pension pot. This will still exist when the opt-out is processed, but it will just sit there untouched until retirement. Those who opt out will also be enrolled again every three years by an employer, or after three months at a new job, at which point they will need to complete the opt-out process again. When will this system start? The Department for Work & Pensions ( DWP ) estimates that 380,000 workers will be signed up already in October gone, and a further 420,000 at the end of November 2012, 600,000 by the end of Firms with fewer than 50 workers will not start enrolling their staff until June 2015 at the earliest. But even the smallest employer - such as a plumber employing a full-time assistantwill eventually be obliged by law to enrol staff. The Pensions Regulator will be policing the system to ensure workers are enrolled at the correct time. Has this automatic enrolment system been used in other countries? Along with a contribution from their employer and tax relief, this will result in a year ( a month ) going into their pension pot. A number of countries have implemented schemes aimed at encouraging saving for a pension - many of which have mandatory participation. From October 2018, when the scheme is in full swing, this person will see a year leave their take-home pay over a year ( a month ), with their pension pot growing by 1, a year ( a month ) This money will be invested. When this person retires, they can use this money to buy an annual pension income called The KiwiSaver in New Zealand is the closest relation to the new UK scheme. A large number of people remain in the system, owing in part to government incentives, clear communication when it was launched and beneficial tax rules, according to a report for the DWP.

5 05 Your Investments The stock market crash of 1987: What have we learned? The Stock Market fell by 22% over two days in October This sharp correction was outside the experience of most City professionals. It raised fears about this being a repeat of the stock market crash of 1929 and a harbinger of an economic depression to follow. Both fears proved to be unfounded. In fact the 100 share index, the main measure of the stock market value, ended the year higher than it had started. So anyone who had sat on their hands during the crash saw the value of their investments recover swiftly. It was not until early the next decade that we experienced another economic recession. However, the experience of 1987 provided lessons, not all of which have been taken on board even 25 years later. Out of line The events of October 1987 need to be put into perspective. The UK stock market had risen by 47% from the beginning of that year to mid-july, and this strong performance had followed gains in each of the previous five years. There was a strong suspicion that a stock market bubble was appearing, with valuations out of line with the economic reality of time. Investors were carried away with the euphoria that shares would keep rising. This was not to last however. Wall Street had begun to weaken through the summer months and was particularly weak on the Friday before Black Monday. Also, many in the City were unable to get to their trading desks that day because of the disruption caused by storms over the previous night. Circuit breakers Monday morning, 19 October 1987, therefore began with London catching-up with Wall Street s weakness. Renewed selling pressure, particularly after lunchtime when it became clear that Wall Street was again to open well down, caused many to panic. The tide of sell orders turned into a flood as investors tried to cash in on the profits made over the years. The selling continued on the Tuesday and the markets remained weak into November, until the combination of sharp falls in interest rates and more realistic valuations tempted investors to return. As mentioned, the market ended the year higher than it had begun, despite this turmoil, and there were few signs that the real economy had been negatively affected by these stockmarket gyrations. There were, however, lessons to be learned. The authorities introduced circuit breakers to suspend trading in share prices that have become extremely volatile, These had been used several times since and serve to limit any potentially negative secondary affects of excessive stockmarket volatility. Irrational Exuberance However some lessons have not been taken on board, as became even more obvious during the later stock market boom and bust of 1999 to Central bankers still do not seem convinced that asset prices, as well as consumer prices, should be taken into account in setting interest rates and monetary policy during the boom years. We have seen, since 2007, that the fall of the stock market - and house prices - has had a major impact on consumer confidence in the UK and hence spending in the economy. For investors, they have received another reminder that shares are for the long-term and should avoided if you cannot live with short-term volatility. The value of the investment can go down as well as up and you may not get back as much as you put in.

6 06 - Your Mortgage Interest-only mortgages becoming niche With an interest-only mortgage, householders pay off the interest on the loan but not the capital. At the end of the mortgage term, borrowers are expected to repay the capital. The attraction on interest only mortgages was obvious to many young first-time buyers. Many were aged in their early 20s, had just started their first job, and were happy to put off any real consideration of how they would pay the loan back, or to rely solely on the rising value of their home. In addition they were cheaper than the repayment option. But, as they became more popular, this type of mortgage was placed more frequently under the microscope of the City regulator - the Financial Services Authority ( FSA ). There are more snakes and ladder on the board for many first time buyers. In the game of snakes and property ladders, winning now looks a lot more difficult for young buyers. Not that long ago, lenders made it easy for people in their early 20 s to climb onto the nearest ladder by offering interest-only mortgages. As house prices rose year after year, homes looked like a solid investment. There appeared to be little danger of buyers slipping down to where they started. Then the financial crisis hit, the board became a seething mass of Snakes, and the property market did not seem as easy to play after all. So, how has the game changed now, and what is facing those who fell Back to having to start all over again? In 2006, when 24% of all new mortgages were lent on an demonstrate a good payment history and do not want to interest-only basis, the FSA said most people with these increase the loan, to be able to shift onto a new deal. mortgages did not have robust plans to repay them. In the last week or so, RBS, NatWest and the Coventry Building Society have pulled out of the market altogether. They followed a withdrawal in October by the UK s biggest building society, the Nationwide. Niche product The FSA would be pleased to see interest-only disappearing for good as mainstream product, but that is not the view shared by everyone. Some people, who are successful in business choose to use investment vehicles to repay the mortgage and have never missed their interest repayments. Increasingly, these types of borrowers are having to grovel to a lender. Affordability test Under FSA regulations, which will come into force in April 2014, lenders will have to put this repayment plan under greater scrutiny with a full affordability assessment. To help these mortgage prisoners, the FSA has suggested that a new or existing lender can waive the rules for borrowers, who In contrast, first-time buyers will be given the third degree. The effect of this, according to estate agents, is that most are seeking the financial help of family and friends, and ensure they have their mortgage agreed before they even start searching for a home. The only lender to ease its stance is Santander which, after cutting back sharply on interest-only, is now allowing a mix of interest-only and repayment under a new deal. This may place more snakes on the property board, but they should be easier to avoid for those seeking to climb onto the nearest ladder. Your home may be repossessed if you do not keep up repayments on your mortgage.