A Fair Taxation System

With the emergency budget due later this month ensuring a lengthy period of austerity, it is natural for people to become selfish and worry about what it will mean to them.

Recent leaking of proposed CGT changes has not gone down well with many well off people. I describe them as well off because paying CGT obviously means you must have assets that have grown. Not bad really after a decade of economic difficulties. So if you have made gains (in excess of your annual CGT allowance of £10,100 each, £20,200 for married couples) you are fortunate?

Many of my clients I would describe as being financially comfortable. Yes they have suffered from set backs in their investments and a shrinking of income. However, with inflation low this has not been an issue. Returns in excess of 5%pa at the moment comfortably counters inflation thus giving Investors a real return.

Sovereign and personal debt has grown almost out of control, encouraged by the banks, and increased further because of Quantative Easing. We can now look forward to higher taxes whilst at the same time public sector cuts will mean higher unemployment.

The question is who should carry the burden of higher taxes? After all we want to encourage businesses to grow to ensure our economy does not fall into a double dip recession. So an understandable argument is that we must create an environment where individuals and businesses will spend their money which in turn will help the economy grow.

If you’ve ever had plenty of money and what I mean by that is you are well off enough not to worry so much about your spending, you will know that it is a nice feeling. Especially so if you’ve known accute financial hardship in the past. So should these very people carry the main burden of taxation?

Lower income earners of course, by their very nature, have very little excess income or capital to spend. They are often accused of being pariahs feeding off the rest of us. Some would say they don’t deserve assistance. They need to get off their backsides, find a job, and try to better themselves and be less reliant on the state.

The problem the government has is to try and increase revenues without hurting the economy, or at least try and hurt it as little as possible. This means taxing money that is not directly linked to the economy. Will lower income earners save their money if they had more, or will they spend more? Will the comfortably well off save their money if they had more, or will they spend more?

I don’t know the answer but it is key to solving the predicament the coalition has in terms of balancing the books. I know what is fair. What is fair is for the comfortably well off to carry a larger part of the tax burden.

Will the lower earners tend to spend rather than save if they had extra money in their pocket? There is a view that they will.

If I was Chancellor I would tax the comfortably well off more, but not on their income. I personally think that increasing income tax is pure folly. I also think the same with regards to increasing employer NIC – both are a tax on jobs.

We need to encourage people to earn more. It creates jobs. Jobs keep our economy growing.

So, the obvious target has to be CGT and IHT. CGT is a tax on gains not losses. IHT is a tax on inheritance windfalls or losses. Both these are a bonus and both should be aligned with income tax.

My logic is that if people have capital accruing in the above environment they are more likely to spend their money rather than save it. Yes, I know that saving is important but right now we have greater priorities. We need to get our economy growing. Inflation is much healthier than deflation. Inflation spurs us to spend rather than save.

So, I suggest we tax CGT at the same rates as income tax. Whatever the income tax allowance is so should be the CGT allowance. Then if we have 20% basic rate income tax level then so we should have  a 20% basic rate CGT and so on.

With IHT we should also have an identical allowance to Income Tax. This will encourage the well off to spend their spare money now or give it away which will put much needed capital into the economy at a time when it is needed. It’s radical I know but it will also be taxing those that can afford it. It will bring fairness to our taxation system.

Jeremy Newbegin

Beware of Wolves in Sheep’s Clothing

Last week, Money Marketing revealed a total of 1,500 people, mostly Sipp investors, are facing losses of up to £32m after Sustainable Agroenergy, Sustainable Wealth Investments and Sustainable Growth Group entered administration on March 15.

For a long time now I have been concerned about unscrupulous businesses jumping on the bandwagon which is the Sustainable and Green economy. Exciting though it is to see the green economy growing (albeit much more slowly in recent years because of the credit crunch and government austerity measures) there are always business people who see the opportunity to make a quick buck. I am not suggesting necessarily that Sustainable Agroenergy, Sustainable Wealth Investments, or Sustainable Growth Group, are unscrupulous. It maybe that they just have not managed their businesses very well and/or succumbed to difficult economic conditions.

Two years ago I decided to have a 4kw Solar PhotoVoltaic system installed on our bungalow. With a south facing roof,  being situated on the edge of the New Forest which is renowned for being one of the warmest parts of Britain, and being passionate about our planet, it seemed a “no-brainer” to take advantage of the generous FITS incentive offered by our government. It was early days then, Spring 2010, so the choice of SV Installers was small. It became obvious very quickly that there were quite a few “cowboy” marketing companies looking for big profits in this sector. We very nearly succumbed to such an organisation, and it confirmed to me that the Green Economy was being targeted by the “Get Rich Quick” brigade.

The Ethical Partnership Ltd (I am Director responsible for  SRI Research), made a very wise decision just over three years ago to not get involved in unregulated investments. We made this decision simply because we could never have much confidence in these types of investments. Not that regulated investments are guaranteed not to have problems but it is much rarer. With due diligence such a rightly important part of what we do as independent financial advisers, any doubts and it is best to not get involved at all. The other worrying nature of unregulated investments is that they can claim what can only be described as outrageous growth projections, hoping to attract the greed instincts that always hover in the back of our minds. It’s difficult not to be enticed into such investments offering such claims as a yield of over 20%pa. That well known warning “if it sounds too good to be true, then it normally is” is very sound advice.

There are too many wolves in sheep’s clothing out there waiting to take advantage of inexperienced and naive people.

Avalon Calling – Thirteen Years On

It was 2000 when I started looking at wrap providers and fund platforms. I had been using Skandia for a few years because of their fairly wide fund choice but as ethical investment increasingly became my focus, it was clear that Skandia’s limited ethical fund choice was too restrictive. I started researching other options and ended up with a short list of Transact and Avalon. Which one of these was to be my final choice would depend on the following factors in order of importance:

• Open architecture of open-ended investment companies (OEICs), unit trusts, investment trusts, off-shore funds, and exchange traded funds (ETF’s).
• Quality of administration support, which must include a human point of contact for when something goes wrong.
• Totally flexible remuneration options.
• Online valuations (remember this was 2000).
• Flexibility on product design and services.
• The availability of a discretionary portfolio management service from a discretionary fund manager of our choice (not just a panel).
• A competitive charging structure.

I decided on Avalon because, as well as being independently owned, they best met my above requirements. Very importantly I also felt confident they would be flexible to my needs. My main concern in the early years was that Avalon was small and perhaps not financially secure. I therefore initially spread my business between Skandia and Avalon as a precaution.

Today, my concerns about their financial stability has evaporated and I use Avalon heavily for ISA’s, Investment Portfolios and Self-invested Personal Pension business.

Charges are always a factor but quite frankly fund performance is more important and so open architecture would be crucial – how can you call yourself independent if you do not offer whole-of-market fund choice? In fact, Avalon has a very reasonable charging structure which, as a small wrap/fund platform, may be surprising to some readers.

Treating customers fairly is at the core of everything that Avalon does (yes, I know they all say that but it is really true in their case) and a useful feature is that direct shareholdings can be re-registered. Also, Avalon have a good relationship with a firm of stockbrokers (Quilters).

Online facilities are crucial these days and Avalon’s website is easy to move around and very secure. Valuations can be obtained easily and efficiently.

Research facilities are not directly available but there are links with various marketrelated data, including Trustnet, the Financial Times and Morningstar. We use an independent research service anyway (Synaptics). The beauty of course, of using a discretionary fund manager, is that fund research and asset allocation is left to an expert, leaving the IFA to concentrate on what we do best – client relationships and financial planning.

Over the years, I have developed a really good relationship with all the team at Avalon and I am confident that my clients’ investments are in good hands. Technology is improving at a great rate but I know that Avalon will be there or thereabouts – independent ownership will guarantee that.

2012 Budget and “Granny Tax”

This years budget was at first glance pretty innocuous. Well perhaps that is untrue if you already feel aggrieved that the highest rate of tax has been reduced from 50% to 45%. Cameron has been keen to tell us that “we are all in this together”. So Osborne’s decision to reduce the highest rate of tax contradicts that statement.

When you then add on the fact that Age Allowance is to be frozen as Personal Allowances rise and you begin to think that there is something fundamentally unfair about this budget. This conclusion is made all the clearer when you consider what the “third age” have had to put up with in recent years:

1. The lowest interest rates since the setting up of the Bank of England over three hundred years ago – meaning poor value annuity rates and low interest rates from banks, building societies, and national savings.
2. High inflation further eroding point one above.
3. Higher than inflation rises in essential things like petrol, electricity, and gas prices.
4. Poor stock market performance over the last decade or more.

Yes the fourth point is arguably not the fault of politicians but it is still an ingredient that has helped erode the savings of the retired. So it can be confidently argued that the third age movement has already contributed heavily towards trying to solve our massive debt problems.

That’s why this years budget is so unfair. Those earning over £150,000 can afford to contribute more to the budget deficit. Why are they allowed higher rate tax relief on pensions? Do they need greater incentive to save? Are they likely to be a burden on the State? Obviously not!

This years budget should have kept the 50% tax band and abolished higher rate tax relief on pensions. With this money they could’ve then kept the Age Allowance thus helping many pensioners counter the poor returns they currently receive on their savings. To date those in debt have been given a lifeline through The Bank of England base rate being at 0.5% for over three years. It’s time to help pensioners much more than they have been.

Listen Slowly

The following is by Bob Gass who sends me e-mails every day based on Gods Word, that are thought provoking. I repeat it here because for every parent this is essential reading.

Being a parent is a privilege, so you must convince your children that they’re more important to you than career success or acquiring material things. Never miss a chance to tell them you love them. Be there! Being a parent is a responsibility. God doesn’t hold the government or the school system responsible for your children, He holds you responsible! ‘Do not forget the things your eyes have seen…Teach them to your children and to their children after them.’ Being a parent is a limited opportunity. If you neglect them long enough, your children will conclude they’re not as important to you as the things you keep sacrificing them for. When that happens you’ve effectively lost them. Is that a price you’re prepared to pay? If not, rearrange your priorities. In his book Stress Fractures, Charles Swindoll writes, ‘I vividly remember some time back being caught in the undertow of too many commitments and too few days. It wasn’t long before I was snapping at my wife and our children, choking down my food at mealtimes, and feeling irritated at those unexpected interruptions through the day. Before long, things around our house started reflecting the pattern of my hurry-up style. It was becoming unbearable. I distinctly recall after supper one evening the words of our younger daughter, Colleen. She wanted to tell me about something important that had happened to her at school that day. She hurriedly began, “Daddy-I-want-to-tell-you-something-and-I’ll-tell-you-really-fast.” Suddenly, realising her frustration, I answered, “‘Honey, you can tell me… and you don’t have to tell me really fast. Say it slowly.” I’ll never forget her answer: “Then listen slowly.”

An Update on our SRI and Ethical Discretionary Portfolio Management Service

Clarification of Discretionary Fund Management

We use Minerva Fund Management Ltd for this service, which includes the following:

• Avalon SRI Conservative Portfolio
• Avalon SRI Balanced Income Portfolio
• Avalon SRI Balanced Growth Portfolio
• Avalon SRI Adventurous Portfolio
• Avalon Ethical Balanced Income Portfolio
• Avalon Ethical Balanced Growth Portfolio

The SRI Portfolios are dominated by positive criteria, whereas the Ethical Portfolios are dominated by avoidance criteria. An example of positive criteria is investing in clean/renewable energy funds, and having more of a bias towards environmental, climate change, and sustainable themes. An example of avoidance criteria is where we choose funds that avoid investing in companies that trade with oppressive regimes, use child labour, abuse human rights, or manufacture tobacco, or armaments.

What are the benefits of the above Portfolios?

1. Discretionary Management allows all clients to have their portfolios adjusted at the same time without first having to obtain clients’ agreement for any investment decisions made.
2. Minerva’s main expertise is in its analysis of collective investments. This includes the Minerva Ratings System.
3. The DM provides built-in due diligence – ensuring as best as one can, that funds included in the portfolios are regulated and demonstrate quality performance potential, adhere to the SRI and Ethical Criteria established, and continue to match the risk profile of the relevant portfolio.
4. Asset allocation is managed on a “day-to-day” basis by professional Discretionary Managers.

Utilising Cash

Within the Conservative and Balanced Income Portfolios we always keep 10% in cash, from which regular monthly withdrawals may be made by investors needing “income”. These withdrawals are fixed to aid budgeting. When dividends are received from Fund Managers they are used to replenish the cash account.

The Balanced Growth and Adventurous Portfolios will have between 2% and 20% in cash, depending on market conditions. Therefore if we are concerned that markets are susceptible to downward pressure we may increase cash. On the other hand if we are fairly confident that markets are on an upward trend then we will reduce cash to 2%.

Investment Performance               One Year #      Two Years *

Avalon SRI Adventurous                             +0.18%              +1.52%

Avalon SRI Adventurous Saver                   +5.23%              +3.41%

Avalon SRI Balanced Growth                      +2.08%              +3.79%

Avalon Ethical Balanced Growth                +5.15%               +7.55%

Avalon SRI Balanced Income                     +4.46%               +8.99%

Avalon Ethical Balanced Income               +5.17%             +10.34%

Avalon SRI Conservative                            +2.57%              +7.84%

# One Year: 31/08/2010 to 31/08/2011

* Two Years: 31-08/2009 to 31/08/2011

Planning a Successful Investment and Savings Strategy: Stage Three

In stages one and two I explained the importance of setting up investment and savings for the short (stage one) and medium (stage two) term.

It will not surprise you then when I tell you that stage three is for long term savings i.e. fifteen years plus, and longer if possible.

When investing or saving for more than fifteen years it does make sense to be more adventurous. The following chart will explain much better than I can why I say that the importance of giving Investment and Saving is “time”:

You will see that this graph has monitored the FTSE-100 Index since 1996. As I write this blog the FTSE-100 is hovering just above 5100. Despite going through a particularly tough time since the credit crunch peaked in late 2008, the FTSE-100 Index is still up 27.5%, and that does not include dividends!

With this in mind it makes sense to invest in a portfolio predominantly equities, and if risk is still a worry then concentrate on equity income funds rather then equity growth funds, and even consider including some fixed interest instruments. However, in my opinion, to invest in a low risk portfolio consisting mainly of fixed interest funds is to dangerously expose your portfolio to the vagaries of inflation.

As I explained in stage one, the secret of successful investment is “Time and Timing”. As long as you have implemented stages one and two you can afford to be more adventurous with long term money (stage three). In fact I would go as far to say you cannot afford to be cautious! For those investing fro growth then investment risk can be reduced further by saving on a regular basis, and thus benefit from “pound-cost-averaging”.

Taking Advantage of “Pound-Cost-Averaging”

Investing regular amounts on say a monthly basis can have the advantage of averaging out the cost of your total investment over time. This is called ‘Pound Cost Averaging’. When the share price is down you obviously get more for your money than when the share price is up. This technique smooths out. to a degree anyway, the ups and downs of a share or fund price over time, giving you a number of shares bought at an overall average price. This takes away the worry of timing your purchases correctly.

Regular investing is ideal for people starting out or who want to take their first steps towards building a portfolio of funds for their long-term future.

Pound Cost Averaging Example

Month	Share Price			Regular Investment	Shares Purchased		One off Investment	Shares Purchased
1	£5.00			£100	20		£500	100
2	£4.50			£100	22
3	£3.50			£100	29
4	£4.00			£100	25
5	£5.00			£100	20
Average	£4.40	Totals		£500	116		£500	100
				Value at month 5	£580		Value at month 5	£500

Please note, this is for guidance only. Movements in the share price may mean you acquire less shares in the period resulting in a lower valuation.

The value of your investments can go down as well as up. You may not get back all the funds you invest.

Planning A Successful Investment & Savings Strategy: Stage Two

Having set up Stage One: Short-Term Savings, you are then able to start stage two of planning a successful investment and savings strategy.

Stage Two is for medium term money i.e. five to fifteen years. Typical financial objectives for this stage would be children’s education, weddings, early retirement, significant wedding anniversaries, etc.

Unless you are a money worrier then it is my opinion that you should invest in real assets for the medium term. Real Assets are typically stocks and shares. As I have mentioned before, the key to successful investment and saving is time and timing. It therefore makes sense to build a mix of fixed interest instruments and equity shares. This ensures that you don’t have all your eggs in one basket.

I recommend investing in “funds” to ensure that an “expert” is managing your money on a daily basis. A “fund” will typically have shares of between thirty or more companies again ensuring all your eggs are not in one basket. I would take this strategy one step further and invest in more than one fund so that you are not relying on one Fund Manager.

We use a very experienced Discretionary Manager to manage a “portfolio” of funds. Typically I encourage investors and savers to choose between a Conservative or Balanced Portfolio for the medium term. Which one will depend on your attitude to investment risk.

Depending on your tax position it may be important to shelter your savings from further taxation by using tax wrappers such as Individual Savings Accounts (ISA), Investment Bonds (On-Shore or Off-Shore), Maximum Investment Plans, a VCT, EIS, etc etc.

Planning A Successful Investment & Savings Strategy: Stage One

Obviously the earlier you invest (lump sums) or save (regular sums) the better, for the secrets to building up financial security are time and timing.

Like building a house, investing or saving must have a solid foundation and this is what Stage One is all about. It is essential that you ensure you have sufficient cash set aside for the short term. Short term means the next five years and should include money set aside for financial projects and an emergency fund. Cash means investing in a building society, Bank or National Savings Deposit Account. Cash is low risk – i.e. on a risk scale out of ten – two out of ten. Even these accounts are not totally risk free!

As a guide I would aim to have between three and six months net salary in a deposit account and I would recommend that you add to that figure any money that may be needed over the next five years for specific financial projects, i.e. deposit for buying a house or buying a car, holidays, new TV, etc etc.

If you are concerned about where your money goes and want to see that money used positively, or want to ensure you avoid areas that concern you then I would recommend Triodos Bank. They are the only specialist socially responsible bank in the UK. Visit Triodos Bank

My concern with our banking system means I would personally not use a mainstream bank, but instead point you towards National Savings

Ten “Must Have” Funds For Responsible Investors

The Daily Telegraph today suggests ten “must have” funds. Well personally I would not give the time of day to any of them. Why I say that is simply because those funds are not based on any “Socially Responsible”, “Ethical” or “Sustainable” remit, and for me that means give them a wide berth.

My ten “must have” funds are as follows:

Aegon Ethical Equity
Cheviot Climate Assets
Ecclesiastical Amity European
Ecclesiastical Amity International
First State Asia Pacific Sustainability
First State Global Emerging Markets Sustainability
Impax Environmental Markets Investment Trust
Standard Life UK Ethical
SVM All Europe SRI
Wheb Sustainability

Clearly this is a portfolio for the adventurous investor (prepared to take a general stance on ethical and environmental issues) as they are all equity funds and it will be essential that it is managed on a discretionary basis to ensure active asset allocation.

This portfolio is not for short or medium term investment. I would recommend it for the long term, i.e. fifteen years plus. Don’t forget that unit prices fall as well as rise as does any income derived, and in the early years you may not get back your original capital if encashed.

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Should Ethical Funds Invest In Banks?

Should Ethical Funds Invest In Banks?

The first thing we have to establish in our minds is why we don’t want to have banks in ethical funds. We have to have a list of objective reasons for this, because if we are going to establish dialogue with fund managers as to why they should not hold banks, we have to have reasons why not. We can’t just say ‘because all they want to do is rip their clients off” and cite the PPI case. That’s a bit like the audience on Question Time who bay for the bankers’ head when any of the panel say how terrible bankers are to get cheap applause. So we have an example, bonuses, if you think that is a problem from your point of view, should bankers have a policy that total salary of the highest paid should not be more than x times the lowest paid? We must remember how many people banks do employ, and at fair salaries. I’m sure also those employees and the banks themselves do good in individual communities.

We want to change things. So we must define what it is that we want to change. Is it far better from everyone’s point of view that Fund Managers hold banks, and they are able to “engage” with banks from the inside, so that banks don’t do what we don’t want them to do, and do what they should do. That would be especially true from most peoples point of view as I would assume that we all have bank accounts, and I suspect that not many readers are with the Co-op or Triodos?