The FTSE 100 ended 2011 in negative territory after two years of rises following the traumas of 2008. It could have been much worse – in early October the FTSE was over 600 points lower than its eventual closing level of 5572.3. But then again it was nearly 600 points higher in early July before the latest round of euro troubles got under way.

The FTSE, with its increasingly foreign mix, is only part of the story, even though it represents 81% of UK market capitalisation.

Index                                                               2011 Change         Comment

FTSE 100                                                                 -5.5%                     The big caps headline number

FTSE 250                                                                12.6%                     Mid-caps underperformed the big caps

FTSE Small Cap                                                    -14.9%                    Small caps lost out to the big caps and mid-caps

FTSE 350 High Yield                                           +0.7%                     Value-investing had a better year than last

FTSE 350 Low Yield                                             -14.2%                    Growth-investing was the wrong style for 2011

FTSE All-Share                                                       -6.7%                      Underperformed Footsie due to mid/small caps

FTSE Tobacco                                                        -23.9%                   A win for sin (and Neil Woodford – fund manager)!

FTSE Industrial Metals and Mining                 -52.6%                    Iron ore gets rusty

Over the year the dividend yield on the FTSE All-Share rose from 2.89% to 3.52%, partly due to the fall in values. Total dividend income from the UK equity market was up 13% from 2010. The return to dividend payments for BP, albeit at half their previous level, was an obvious contributor to this solid performance. It is a reminder that, for all the gloom, companies are still generating and paying out large amounts of real cash. Indeed, if you add back in the income over the year, the total return on the FTSE All-Share was only about 3% the wrong side of break even.

The overall drop in the UK equity market paralleled performance in most other stock markets. For example, the Euro Stoxx 50 fell by 17.1% amidst the euro troubles and the Nikkei 225 dropped by 17.3%. Emerging markets were also weak, with the FTSE All Emerging All-Cap down by 22.1% in US $ terms (21.5% in sterling terms). The best performer among major stock markets was the USA, where the S&P 500 moved from 1257.64 at the start of the year to 1257.60 at the end, albeit with more than a few exciting swings en route. So much for the loss of an AAA rating!

The place to be in 2011 was not equities, but government bonds. The benchmark ten year gilt yield started 2011 at 3.40% and ended it at just 1.98%, while the real yield on the FTSE Over 15 year Index-linked yardstick shrunk from 0.56% to -0.16% (i.e. negative real returns). The FTSE 10-15 year gilt index climbed by 15.1% in 2011 while the FTSE Over 15 years Index-linked index rose by 24.6%. It was a similar story around the world, with the obvious exception of the Eurozone problem countries. For example, the US 10 year+ Treasury bonds returned an impressive 26.5%.

COMMENT A year of poor equity performance and strong bond performance will have been bad news for defined benefit pension schemes. With 10 year gilt yields now little more than half UK equity yields, these are challenging times for all types of pension arrangement.

Protected rights, (the payments you receive from the NICO if you are contracted out) will become ordinary benefits and you will no longer have to provide a pension for their spouse/civil partner when they retire – although they can if they still want to.

This means the build-up of significant benefits in ‘personal’ pension pots of protected rights benefits will cease. Anyone relying on this should contact their Independent Financial Advisor if they are concerned and review their retirement planning.

The latest Issues of Savings Certificates have been on sale for almost four months (since 12 May 2011) and have been very popular during this time. At the outset NS&I assumed that the sums invested would be very substantial, and the original expectations have now been met.

They said, “Due to our unique position in the UK savings sector, we always follow a policy of balancing the interest of savers and the taxpayer with the stability of the financial services market as a whole. While doing this, we must also meet the government’s financing objective – called our Net Financing target – which HM Treasury set at £2 billion (for the 2011/12 financial year) within a range of £2 billion either side of this.

By taking the action to withdraw the current Issue, NS&I will ensure that the Net Financing target set for 2011/12 should be met.”

Changes implemented with immediate effect

NS&I’s website and call centres stopped taking new sales of Savings Certificates at close of business on 6 September 2011. Postal applications received on 7 September 2011 will be honoured, but all postal applications received after that date will be returned.

Reinvestment on maturity

On maturity, anyone who has existing Savings Certificate customers can rollover their investment into an Issue of the same length. Alternatively they can reinvest into another type of Savings Certificate or term on offer at the time – regardless of the Savings Certificate they currently hold.

However, as Savings Certificates have been withdrawn from general sale, any clients who have invested in other NS&I products will not be able to reinvest their money into Savings Certificates.

If you would like any information on these products or alternatives then please do not hesitate to call Templegate on 0845 833 8837
(local call rate).

Source: National Savings email sent to Independent Financial Advisors 07 September 2011.

With investor confidence non-existent, the credit agency S&P chose the weekend to announce a downgrading of US debt from the maximum AAA rating for the first time in its history. The effect of this move prompted commentators to predict that this may lead to a further crash when markets opened this week, but early signs are that an element of calm has been restored.

Despite the downgrade of US Government bonds, their prices rose this Monday morning! In Europe, the intervention by the European Central Bank, (ECB) to allay concerns over Italian and Spanish debts appears to be working, with these Countries bond yields falling sharply.

The on-going concerns over debts in the peripheral European economies and the continuing weak US consumer led economy undoubtedly provide causes for concern – but these are not new issues. In fact little has fundamentally changed to the economic environment over the past week. The one thing that has changed dramatically is confidence. The magnitude of market falls
in recent days appear to be a fine example of herd driven panic selling rather than prices providing a true reflection of the medium term risk /reward profile of different markets and asset classes.

There is no doubt that fear of the global financial crisis remains in the forefront of investors mind and areas of the media have pounced on the opportunity to spread the gloom and doom. Robert Peston is enjoying being back in the limelight and scaring people with big numbers (although I don’t remember ‘ billions added to share prices’ making the headlines after a good day
on the market). A sustained lack of confidence can prove dangerous and it is vital that politicians and central banks act quickly to restore confidence in global markets and economies at this point. The ECB have already taken some action and it is very realistic that a third program of quantitative easing will be implemented in the US which would act as an adrenaline shot for markets
and the US and global economy.

I do not believe that the past week has been a game changer that means we should be running for cover and hoarding all money in Krugerrands and Government bonds. I am not going to second guess short-term market movements and although sentiment could remain gloomy in the short-term and markets could fall further, I believe “crisis hardened” authorities will move to avert the worst case scenarios. I believe that for those prepared to take a medium-term view or longer current market levels could provide some compelling investment opportunities.

I remain of the belief that the economic climate in Western developed countries is going to be tough, but it is also belief that there are several areas that provide good opportunities for investors at the current time. For my investment client’s, the focus should still be the core investment philosophy of diversification, with possibly emphasis on the following key points:-

- A bias towards income producing assets that I believe will remain sought after, as interest rates are going to remain rooted at emergency levels for some time.

- Dividend producing shares in less cyclical areas of the market appear to offer compelling value, and these will be at the core of our income and growth equity portfolios.

- A focus towards exploiting the shift in global economic power away from the US led Western economy towards Asia and Emerging Markets.

Trying to time these volatile markets by running for cover in cash is a dangerous strategy that could just result in crystallising losses. I remain focused on advising clients to invest in areas that I believe are well placed for the medium to long-term. I believe that my portfolios are well positioned, with a diversified range of funds being managed by highly experienced and capable fund managers.

My stance is to Keep Calm and Carry on!

SOCIAL SECURITY BENEFITS/PENSIONS – STATE BENEFITS

Synopsis: The DWP’S latest statistics
show that Employment Support Allowance (ESA) has few successful claimants.

Employment Support Allowance (ESA) was introduced by the previous government as yet another attempt to reduce the cost to the Exchequer of long term sickness benefits. It replaced Incapacity Benefit (IB) for all new claimants from 27 October 2008. The introduction of ESA was accompanied by a new assessment, the Work Capability Assessment (WCA), which replaced the former Personal Capability Assessment (PCA). The WCA is undertaken over a period of 13 weeks, during which the claimant is categorised. Broadly speaking, WCA is a measure of what work a claimant can do, whereas the PCA was a measure of their disability.

The introduction of WCA was controversial and it was viewed by many claimant groups as being too tough. The WCA was subject
to an independent review in 2010 which said that ‘the WCA is not working as well as it should’ and made 25 recommendations for change, 21 of which the government accepted. Another review is now underway.

The impact of the WCA is now clear to see from figures released by the DWP covering claims started between 27 October 2008 and 30 November 2010:

• 7% of claimants were placed in the ‘Support Group’, which meant that they were found to have ‘a limited capability
  for work-related activity’, and did not have to undertake any work-related activities.
• 17% of claimants were placed in the ‘Work Related Activity Group’, which meant they had to comply with ESA
  work-related conditions in order to continue receiving full benefit, eg attending regular work-focused interviews with a personal adviser. A change to be introduced from April 2012 will mean all contributory ESA claimants placed
  in this group will only receive benefits for a total of 12 months.
• 39% of claimants were deemed fit for work and ineligible for further ESA payments.
• 36% of claims were closed before the assessment was completed.
• 1% of claims are still in assessment.

As previously planned, existing IB claimants are now being moved across to ESA. By March 2014 all existing IB claimants (on incapacity benefit, severe disablement allowance and income support on disability grounds) will have been reassessed using the WCA test. On the evidence of these latest results, it seems likely that many IB claimants will not become ESA claimants. Instead they will have to rely on other means-tested benefits, such as Income Support.

COMMENT

These results are a stark reminder for advisors why recommending income protection via Permanent Health Insurance should always be discussed.

• the fact that both cash and stocks and shares Junior ISA could be held with up to one cash and on stocks and shares ISA (ie two accounts in total) being   capable of being held in the name of a child.
• no transfer from a CTF will be possible
• those with a CTF will not qualify to have a junior ISA

It has been predicted that if a junior ISA were commenced at birth and the full investment permitted were made each year
then at an assumed rate of growth of 5% and the maximum contribution adjusted upwards by 5% pa a fund of around £100,000 could result at age 18.

With the burgeoning costs of higher education all of this is likely to be needed to fund a full time degree course.

The treasury press release announcing the regulations stated the following summary:

Junior ISAs will ensure that all parents have a clear and simple way to save for their child’s future, following the end of
Child Trust Fund (CTF) eligibility from January 2011. Junior ISAs will be available from 1 November 2011.

On 31 March the Government published draft Junior ISA Regulations for comment which set out proposals on how the accounts
should operate. The consultation closed on 31 May and the Government received over 60 written responses from a range of interested parties, including potential Junior ISA providers, trade bodies, consumer groups and members of the public.

On 27 July 2011 the Government laid detailed Regulations, amending the existing ISA (Individual Savings Account)
Regulations, to provide for the establishment of Junior ISAs.

Responses received informed the Government’s thinking on final design of Junior ISAs, and the Government confirms that
Junior ISAs will have the follow key features:

• All UK resident children under the age of 18 who do not have a CTF will be eligible for Junior ISAs.
• Any income or gains will be tax-free.
• Both cash and stocks and shares Junior ISAs will be available. Children will be able to hold up to one cash and one stocks
  and shares Junior ISA at a time (two accounts in total).
• There will be an overarching contribution limit of £3,600 per year which will be indexed by CPI from 6 April 2013
  onwards.
• Accounts will be owned by the child and funds will be locked in until the child turns 18.
• Children will have the right to manage their accounts from age 16. Junior ISA accounts will by default become adult ISAs on
  maturity.

Tax Free Premium Bonds – quoted return  from the NS&I: -

Rate for prize fund, 1.50% (variable). The odds of each £1 unit winning a prize are 24,000 to 1 each month.

For an alternative, speak to and Independent Financial Advisor.

Whether or not your client currently has life assurance now is the perfect time to review their situation and see if they would be better off with a Relevant Life Policy.

What is a Relevant Life Policy?

A Relevant Life Policy is a single life plan, taken out on the life of an employee by an employer to provide death in service benefits. They are designed for individual members who may require life cover over and above that of the main company scheme already available to them or, where the number of employees is too low for a company group scheme.

These plans are restricted to providing life cover only and can not contain any waiver, critical illness or income protection benefits and must cease before the client’s 75th birthday. The payments are paid in a more tax efficient way by the employer compared to employees paying for their life cover benefits personally. The good news is, directors working day to day in a business are likely to qualify as employees so they can benefit from this possible cheaper way of providing life cover.

Why take out a Relevant Life Policy?

The company can make the payments, usually as an allowable deduction without them being treated as a benefit in kind, which means:

• Payments are treated as a business expense and are likely to be an allowable deduction against Corporation Tax for the employer.

• No liability for the employee to Income Tax.

• Benefits paid tax free to the nominated beneficiaries.

• These payments do not form part

Let’s now look at this in practice

Ivar Company is a shareholding director of LBD Ltd. He currently pays for his life assurance personally at a cost of £200 per month out of his post tax salary. As Ivar is also a business owner, we will look at both his personal and business costs and the taxation of providing this cover. Ivar is a higher rate taxpayer; he pays 40% Income Tax on the higher part of his salary. He also pays the additional 1% rate above the upper earnings limit for National Insurance. We have assumed the payments for this plan are taken from this top end of his salary and have used these rates in our calculation. LBD Ltd pays employer’s National Insurance contributions at the “contracted in” rate of 12.8%. In this example salary, National Insurance contributions and Relevant Life Policy payments are all treated as allowable deductions for the purposes of Corporation Tax.

Ivar paying personally for life assurance

Monthly premium paid from his post tax income. = £200pm

Pre-tax income needed to fund £200 at Income Tax rate of 40% and National Insurance at 1%. =£338.98

Employer’s National Insurance contributions at 12.8% on this amount of salary paid by LDB Ltd. = £43.39

Total cost to LBD Ltd and Ali = £382.37

Less Corporation Tax at 21% as an allowable deduction. Salary, Income Tax and National Insurance are allowable expenses against

Corporation Tax.

Total cost to Ivar and LBD Ltd = £302.07

LBD Ltd paying for a Relevant Life Policy

Monthly premium paid by LBD Ltd. = £200pm

No Income Tax, employee’s or employer’s National Insurance payable. = £200

No employer’s National Insurance contribution.

Less Corporation Tax at 21% as the plan is an allowable deduction.

Total cost to LBD Ltd = £158.00

Ivar paying personally costs him and the business £302.07pm

LBD Ltd paying through a Relevant Life Policy costs £158.00pm

A saving of £144.07pm or a saving of over 47%.

What prompted the ruling? The ECJ’s decision follows action bought by a Belgian consumer group. Test Achats argued that, previous exemption from the directive prohibiting the use of gender as a factor in the calculation of insurance premiums and benefits in relation to insurance contracts entered into after 21 December 2007 was discriminatory, in light of the higher principle of equality for men and women as enshrined in European Union law.

What are the likely outcomes? All other things being equal, once implemented the ruling is likely to result in better annuity rates for women, whilst men are likely to face lower rates. However, the ECJ ruling will be only one of a range of factors, such as gilt yields and interest rates, which will affect the pricing of an annuity when we get to 2012.

Source: www.justretirement.com

What is happening and why?

This principle of equality between men and women can be traced back to the French revolution at the end of the 18th century, according to Robert Morfee an experienced litigation solicitor specialising in pensions. Equality has underpinned EU legal principles from the outset and was most recently expressed in Directive 2004/113 which directs member states to ensure that there “shall be no direct discrimination based on sex including less favourable treatment for women for reasons of pregnancy and maternity”.

However there was an exception inserted into this directive at the very last minute allowed proportionate differences in insurance premiums and benefits if based on accurate actuarial and statistical data. The UK took advantage of this exception and continued to take into consideration the different life expectancies of men and women.

The Treaty of Lisbon which came into force on 1st December introduced the Charter for Fundamental Rights which included a principle of non-discrimination “on any ground such as sex, race, colour, ethnic or social origin, genetic features, language, religion or belief, political or any other opinion, membership of a national minority, property, birth, disability, age or sexual orientation”.

Then a few years ago a Belgian consumer group took legal proceedings to outlaw what it saw as gender discrimination in the pricing of insurance policies and the matter was referred to European Court of Justice.

In September 2010 Dr Juliane Kokott, an advocate general in the European Court of Justice (ECJ) delivered a powerful opinion in which she expressed an opinion that sex discrimination in underwriting insurance policies is incompatible with the Charter of Fundamental Rights and therefore illegal under EU law. If this opinion is accepted by European Court of Justice one of the effects of this is will be to equalise annuity rates for men and women.

The European Court of Justice is not bound by the opinion of the Advocate General. Although the court appears to agree in the majority of cases, this is not always the case. So we currently await the court’s ruling, which may come as early as March 2011.

What effect will this have on annuity rates?
For over 200 years the UK insurance industry has calculated the price of annuities with reference to different life expectancy tables for both and men and women but this may be about to end and actuaries will not be able to allow for the fact that on average women live longer than men.

Whilst this may seem to benefit women the reality is that most people buying annuities in the future may end up worse off for the following reasons:

The annuity income for men will reduce as rates will be equalised towards the rates for women Joint life annuities will also reduce so women who are beneficiaries of joint life annuities will end up with lower income. It is estimated that cost of introducing gender equal annuities will reduce income by about 5%.

Source: The Retirement Partnership

You will not be caught by this if your total incomes are within the basic rate tax band in the 2012/13 tax year, as well as 2013/14 and beyond.

Templegate Financial Planning Ltd were considered the best of the financial advisors contacted in the June 2010 edition of Financial Advisor.

Each week the mystery shopper seeks advice from the independent and tied advisers in the UK. The aim is to find out whether advisers are delivering the goods when it comes to the all important initial telephone contact between client and adviser.

This weeks shopper visited Andover where she was looking for advice on investment. The shopper was 24 and has a large sum of money from savings and inheritance. She was confused at which investment routes to follow.

Templegate Financial Planning Ltd was the ‘Shoppers Choice’ having come out top on Speed of Response, Telephone Manner, Qualifications, Guidance Given, and Knowledge.

Score: 30 out of 35