Wise Wordsthe latest financial news from Aaron Tawny

Spring 2009

A timely investmentreminder

Wise Words: Spring 2009

With the dramatic falls in global stockmarkets in2008, an accompanying ‘credit crunch’ that led to alending problem for the Banks, which in turnhelped cause a major slump in economic activityworldwide from September, you could be forgivenfor thinking that investing in shares was moretrouble than it’s worth.

But while understandable, this view may be adangerous one when considering long termfinancial planning – shares have tended tooutperform other asset classes over the long term.And, typically, the best time to buy them is whenfew other people want to own them.

As James Caan, serial entrepreneur, panellist onBBC2’s Dragons’ Den and Chairman of INSYNERGYInvestment Management says,

“The time to invest is when everyoneelse is leaving the room”

It’s fair to say that we are at such a point now –with world markets falling by around a third sincetheir peak** and investor sentiment remainingextremely poor. There are, however, increasingsigns that expert opinion can see past the currentuncertainty. If you were to examine the recentviews of four of the most respected and successfullong term fund managers in the business: WarrenBuffet, Crispin Odey, Neil Woodford and AnthonyBolton, you may reconsider that now could be agood time to invest in equity markets:

“A simple rule dictates my buying: Be fearful when others are greedy, andbe greedy when others are fearful.”

Warren Buffet, arguably the world’s best knowninvestor, writing in the New York Times in October2008, explains why he has moved a large part ofhis personal portfolio into US equities. Hecontinues...

“And most certainly, fear is nowwidespread, gripping even seasonedinvestors. To be sure, investors are rightto be wary of highly leveraged entitiesor businesses in weak competitivepositions. But fears regarding the long-term prosperity of the nation’s manysound companies make no sense. Thesebusinesses will indeed suffer earningshiccups, as they always have. But mostmajor companies will be setting newprofit records 5, 10 and 20 years fromnow.”

“We are facing the worst recession inliving memory but, as an investor, I ammore optimistic today than at any timefor 10 years.”

Crispin Odey, in a communication to investors on 31January 2009. Odey established his own company,Odey Asset Management, in 1991. Seventeen yearson, OAM is one of Europe’s most respectedinvestment houses. Crispin’s expertise is nowavailable to the UK adviser market on an exclusivebasis via the INSYNERGY Odey Fund.

We were sent this article, which I hope you will find interesting reading!

Wise Words: Spring 2009

A timely investment reminder: continued

A turnaround in 2009? In an article for FT Money on 2nd January 2009,Anthony Bolton, long time manager of Fidelity’shugely successful Special Situations Fund and oneof the most respected commentators in thefinancial services industry, compares the historicalpattern of bull and bear markets to the currentsituation, considers the indicators of investmentsentiment and behaviour, and sets them againstthe long term (30-40 year) market valuations.Having done so he concludes...

“In my experience, when all threefactors confirm each other, the odds arethat you are near a turning point. Itwon’t predict the right day, the rightweek or even the right month, but itmight give you the right quarter. Allthree factors were aligned in the lastquarter of 2008, making me optimisticthat 2009 will be a better year forequities.”

“Good grounds for thinking the stockmarket has bottomed”

Neil Woodford: Writing in the Telegraph.co.uk 8Jan 2009, Neil Woodford, one of Britain’s leadingfund managers who has run arguably the mostpopular funds in the UK fund industry for the pastten years, is quoted as suggesting that the stockmarket may have bottomed. He said:

“With the sharp falls in the UK andglobal stock markets in late 2008, theUK market seems to be discounting anoutlook which is at least as bad as thatwhich I foresee. Overall UK equitymarket indices are now lower than 10years ago and I think there are nowgood grounds for thinking the overallmarket has bottomed.”

On potential recoverySo called ‘timing markets’ where investors try tomove large parts of a portfolio in or out ofinvestments to take advantages of price falls orrises is notoriously difficult and very few can claimto do it consistently well.

A natural tendency is to invest when all seems tobe going well and news is good. This does,however, tend to be accompanied by rising shareprices so share valuations will become relativelyhigh. It’s less appealing to buy when all the news isbad, even if prices are lower, but once any recoveryarrives, the benefits are clear.

Although history is not a guide to future returns,it’s interesting to look at how market falls in thepast have typically been followed by relativelydramatic recoveries. Those long term investors whoare brave enough to invest when the outlook isgloomy can benefit.

For example, overleaf we show four of the dramaticfalls in global markets, with prices falling between20% and 50%, and the performance over the firstyear after the ‘trough’. As the charts indicate, oncethe recovery arrives, it can be significant:

Those long terminvestors who arebrave enough toinvest when theoutlook isgloomy canbenefit.

Waiting until the news begins to improve can riskmissing out on the early recovery. As Warren Buffetsaid in October 2008:

“Let me be clear on one point: I can’tpredict the short-term movements of thestock market. I haven’t the faintest idea asto whether stocks will be higher or lowera month – or a year – from now. What islikely, however, is that the market willmove higher, perhaps substantially so,well before either sentiment or theeconomy turns up...

...so if you wait for the robins, spring willbe over.”

Wise Words: Spring 2009

1000

1100

1200

1300

1400

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2000

MSCI WORLD INDEX

Jan09

Dec08

Nov08

Oct08

Sep08

Aug08

Jul08

Jun08

May08

Apr08

Mar08

Feb08

Jan08

Dec07

Nov07

Oct07

Sep07

Aug07

-35.04%

?

‘Credit crunch’

Source Financial Express, data shown taken from peak to trough and thenmeasuring performance over the subsequent 12 months. Percentagechange, total return, gross income reinvested.

-41.07%

40

50

60

70

80

90

MSCI WORLD INDEX

May 76Dec 75Jun 75Dec 74Jun 74Dec73Jun 73Dec72

+28.17%

1 year

-38.62%

300

350

400

450

500

550

600

650

MSCI WORLD INDEX

Feb92

Nov91

Aug91

May91

Feb91

Nov90

Aug90

May90

Feb90

Nov89

Aug89

May89

1 year

+43.00%

-20.47%

300

350

400

450

500

550

600

MSCI WORLD INDEX

Jun89Mar 89Dec 88Sep 88Jun88Mar 88Dec 87Sep 87Jun87

+21.73%

1 year

1970s

1990s

1980s

-53.70%

MSCI WORLD INDEX

Jan 06Jan05Jan04Jan03Jan02Jan01Jan00

+32.19%

1 year

2000

1750

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1250

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2000s

A timely investment reminder: continued

**Chart source Financial Express, using the MSCI World Index, gross total return. When reviewing these charts please remember that the pastperformance is not a guide to future returns and investors may not get back the full amount invested.

Note: For further informationplease call us on 01536512724.

Wise Words: Spring 2009

Now is the time to consider maximising your ISA (Individual Savings Account) & Pension Allowances,before the cut-off date of 5th April. There are further opportunities to take advantage of the fiscal yearallowances involving Inheritance Tax, Capital Gains Allowances etc. and some of these items can be verybeneficial to those who may be caught in the ‘’age allowance trap’s.

End of Tax Year:

Tax Allowances - Use them or lose them

Currently, a gift of up to £3,000 per annum can bemade, without any liability to Inheritance Tax and ifno gifts have been made in the previous year, it ispossible to bring the unused allowance forward foruse in the current tax year, giving a total exemptionof £6,000. The current year’s allowance is offsetagainst the gift initially, with the previous year’sallowance used to mop-up any excess.

£7,200 ISA AllowancesEach tax year, individuals are able to invest £7,200into a stocks and shares ISA or alternatively up to£3,600 in a Cash ISA and up to £3,600 into a Stocksand Shares ISA, therefore fully utilising theseallowances. These can be invested with separateproviders and any cash ISA’s can subsequently betransferred into Stocks and Shares, but not vice versa.

Pension ContributionsWhilst most people won’t be able to contributethe maximum annual allowance of 100% oftheir salary or £245,000, it should beremembered that if contributions, no matterwhat level, are not made before 5th April, 2009,then that tax year’s allowance is lost!

Capital Gains & Inheritance TaxOpportunities exist to take advantage of the fiscal year allowances for theseand some could prove beneficial for those who may be caught in the “AgeAllowance Trap”. The current individual exemption from Capital Gains is £9,600per annum, before any liability to tax.

A gift of upto £3,000per annumcan bemade

Individuals can invest upto £3,600 in a Cash ISA

Contributions must bemade before 5th April

Income Tax:

Allowances & RatesIncome Tax Allowances 2008-09 2009-10

Personal Allowance £6,035 £6,475

Personal Allowance for people aged 65-74 (i) £9,030 £9,490

Personal Allowance for people aged 75 & over (i) £9,180 £9,640

Married Couple’s Allowance (born before 6th April 1935 but aged under 75 (i) (ii) (iii) £6,535 £N/A

Married Couple’s Allowance aged 75 & over (i) (ii) £6,625 £6,965

Income Limit for Age Related Allowances £21,800 £22,900

Minimum amount of Married Couple’s Allowance £2,540 £2,670

Blind Person’s Allowance £1,800 £1,890

(i) These allowances reduce where income isabove the income limit - by £1 for every £2 ofincome above the limit. However, they willnever be less than the basic PersonalAllowance, or minimum amount of MarriedCouple’s Allowance.

(ii) Tax Relief for the Married Couple’s Allowance isgiven at the rate of 10%.

(iii) In the 2009-2010 tax year, all Married Couple’sallowance claimants in this category, willbecome 75 at some point during the year andwill, therefore, be entitled to the higheramount of the allowance - for those aged 75and over.

Note: Please contact us if you feelwe might be able to helpwith regard to any of thisinformation.

Tax relief for the MarriedCouple’s Allowance isgiven at the rate of 10%

Wise Words: Spring 2009

Contracting out of the State Second Pension (S2P):

In or out, that is the question!You will recall that we previously showedfeatures/comparisons of being Contracted-out orContracted-into the State Second Pension anddetail it again below for your information.

The choice will be taken away in 2012, therefore asthis is a very individual decision, please feel free tocall and discuss this.

Contracted OutThe Government pays your rebate into apension scheme and fund/s of your choice.

Your level of pension will depend on a numberof factors, including:1. Amounts of rebates paid in2. Value of fund at retirement3. Annuity rates at retirement4. Scheme charges

Investments can fall as well as rise, so youmay end with a smaller pension than withS2P.

You can take your pension from age 50 years.(55 years from 2010).

A tax-free lump sum is available.

If you die before retirement, your spouse/civilpartner can use your fund to provide benefitsfor them.

If you don’t have a spouse or civil partner,your contracted-out fund can be left as partof your estate.

You have more control over your pension fundchoices.

Contracted Into S2PThe amount you will get from your S2P willdepend upon the amount of NationalInsurance contributions you pay.

Government may change pension policy. Ifthat happens, you may end up with more orless than the calculations, based on whatyour current policy would suggest.

The government will pay your S2P at thesame time as your basic state pension.

No tax-free lump sum is available.

If you die before taking your state pensionyour spouse/civil partner may be eligible fora portion the S2P pension income.

If you don’t have a spouse/civil partner,your S2P benefits are not payable to yourestate.

The above information is based on tax lawat the time of writing and will be subject tochange.

Features/Comparisons

Wise Words: Spring 2009

After 2010 the youngest age people will be able totake the benefits from their pension will increasefrom 50 to 55 years of age. However, as long as youhave reached your 50th birthday, it is still possibleto take your tax-free lump sum, without taking anincome from your pension. You can also continue toinvest in a secondary pension - this may be ofinterest for anyone needing to get their hands onsome cash, especially those who wish to pay off orreduce a debt.

For example, a 51 year old could take the tax-freecash, from their pension fund now, but after 2010they would have to wait until their 55th birthday,before the tax-free cash were to become available.

Currently, unless the benefits from a pension fundare taken on or before a person’s 75th birthday, theoption to take a tax-free lump sum is lost. Recentmarket turmoil may have had a seriously adverseeffect on peoples pension fund values and thusreduced the level of any potential annuity(pension) that they might get. This is furtherexacerbated by the current low annuity ratesoffered.

The answer may very well be to take the tax-freecash at 75 then opt for an Alternatively SecuredPension (ASP), which has only recently becomeavailable, since this allows a person to take theirtax-free lump sum, with the residual fundremaining invested, waiting for markets to recoverand/or annuity rates to increase.

So here goes the good, the badand the ugly of an ASPTHE GOOD:• The flexibility of varying income to meet the

investor’s requirements (although legislationdemands a minimum amount to be paid!)

• The potential to benefit from a higher annuityrate when and if a lifetime annuity is eventuallypurchased

• The potential to benefit from investment growthof the underlying fund.

THE BAD: • Continued investment risk and annuity rate risks

• The need to monitor investment choices and/orpay for advice on a on-going basis

• Paying pension provider fees

• Annual reviews of income limits and planvariations

• The requirement to take a minimum level ofincome when fund levels are low may acceleratea reduction in the value of the fund.

& THE UGLY: When taking into account the good and the bad,the ugly truth is that, on death, if there is nospouse, registered civil partner or other dependent,tax charges, under extreme circumstances, couldreach 82% of the residual fund.

Under the same circumstances, if taking a lifetimeannuity, then on death there is no residual fund.However, if an investor in an ASP wishes to leavetheir fund to a charity, or has a significantlyyounger spouse, or registered civil partner, whocan take advantage of an Unsecured Income on theinvestor’s death, then this is less of an issue.

Changes to Pension legislation

Our View:

It is clear that an ASP will not besuitable for every investor at age 75.However, the current depressed andvolatile market may influence therecommendations, making an ASP asuitable option for some. The case foron-going trusted and capable financialadvice has never been greater.

As long as youhave reached your50th birthday, it isstill possible totake your tax-freelump sum, withouttaking an incomefrom your pension.

Wise Words: Spring 2009

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T: 01536 512724

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E: enquiries@atawny.co.uk

Aaron Tawny Mortgages Ltd is Authorised and Regulated by the Financial Services AuthorityThe Financial Services Authority does not regulate: Deposit Accountants, Will Writing & Finance

For any further information regarding any topicscovered in Wise Words please contact us, andwe will be happy to discuss.

You can call us on: 01536 512724 or email us at: enquiries@atawny.co.uk

We hope you find this a useful and informativeread. With our constant strive for excellence incustomer service we always appreciate to hearyour feedback, whether good or bad.

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