ISAs are for life – not just for when the sun shines
make compound interest work for you
The benefits of
saving or investing within an ISA
can – and should – be enjoyed all
year round. There is so much ‘use
it or lose it’ advice from providers
anxious that we maximize our
annual ISA allowances as the
tax year-end looms, that ISA
‘warnings’ have become as much
of a feature of the run-up to summer as bbq's and strawberrys and cream.
Anyone aware of the magical
power of compound interest
might be puzzled by the wisdom
of depositing most, if not all, of an
annual ISA allowance so late in the
day. Why not 12 months earlier?
Or, if the full amount is not readily
available to invest on April 6th, why
not make regular contributions to
your cash or equity ISA throughout
the year? Here’s why it could
make an important difference to
potential returns:
If the full ISA allowance of £10,680
(2011/2012) is invested on the
first day of the new tax year in an
account attracting 4% interest,
investors would find themselves
£427.20 better off after 12 months,
simply by virtue of investing sooner
rather than later. Even if the full
allowance were contributed over
12 consecutive months (assuming
the same 4% interest rate) a
healthy £230.01 interest would be
earned.
Just one problem – a quick glance
at today’s ‘best buy’ ISA tables
reveals that an interest rate of
4% is not currently available
for cash ISA s (although some
providers come close if you tie up
your money for at least a couple
of years). This may explain why
so many more of us are looking
for more attractive returns from
stocks and shares – because the
interest offered on our savings
remains pitifully low – which is
where an equity ISA comes in.
For those seeking enhanced
returns via stocks and shares, the
well-worn mantra bears repeating
– the value of your investment
can go down as well as up. This
is not the same as having to take
an unacceptable amount of risk –
some assets are very much more
conservative than others and as your financial advisers we are here to ensure that you are invested
appropriately according to your
appetite for risk (or lack of it).
Just don’t wait for the leaves to fall.
All that glistens… Commodities and the ‘mini-crash’
It’s been hard to miss the runaway
success of gold, which recently
topped $1500 per ounce for the
first time. Inflationary threats,
together with the uncertainty
in global financial markets, has
increased demand for the precious
metal in recent years and the
growing numbers of middle-class
consumers in China and India are
helping to underpin prices.
It might seem logical to assume
that other physical assets – or
commodities as they are known
in market-speak – would also
benefit from the growing demand
from ‘emerging’ economies. The
markets for everything from oil
to cocoa, silver, copper, sugar
and coffee are growing – making
it even more difficult to produce
enough of these finite resources
to satisfy demand. Does this
make investing in commodities a
‘no-brainer”? Not quite.
Commodities may have proved
a stellar asset in performance
terms recently but May’s ‘flash
crash’ was instructive in terms
of highlighting the volatility of
individual commodities. For
example, silver, which had climbed
to almost $45 per ounce at the
end of April, plunged to below
$35 dollars per ounce only days
later. The price of Brent Crude, the
oil benchmark, also plummeted
and many other commodities,
including copper, sugar, cotton
and cocoa, were dragged down in
their wake.
While oil and gold swiftly regained
some strength following the
‘mini-crash’, other commodity
prices remain subdued at the
time of writing. The reasons for
this difference in performance are
many and various. Moreover, the
outlook for individual commodities
varies greatly. For example,
continuing unrest in Libya could
mean continued volatility for
oil, although gold’s stability
may continue to be supported
by investors keen to buy in the
‘dips’.
This highlights the importance of
understanding the volatility and
risk of the underlying assets held
within your funds, to ensure they
still match your attitude to risk.
A glance at Trustnet’s analysis of
unit trusts which are listed within the ‘commodities’
sector reveals huge differences
in areas of investment. Some
are made up almost exclusively
of gold, mining and precious
metal-related shares. Others may
include anything from agricultural
chemicals to meat, fish, dairy and
palm oil – with each commodity
displaying varying characteristics
in terms of volatility and predicted
demand.
You should not use past performance
as a suggestion of future performance.
The value of investments can fall as well
as rise.
New protection for business owners
Providing lump sum ‘death in
service’ benefits to employees
is commonplace, but ‘Relevant
Life Policies’, a new life
protection product aimed at
business owners, provides
an attractive alternative,
especially in the following
circumstances:
Where some employees are
high earners
Since pensions ‘A day’, lump
sum payments on death have
formed part of the individual’s
lifetime pension allowance
(currently £1.8 million). If a
payment takes an individual’s
pension savings over this limit,
the excess will be taxed at a
punitive 55%. However, the
proceeds from relevant life
policies do not form part of an
individual’s annual or lifetime
allowance – nor should they
attract income tax or IH T, since
policies are usually written
in trust for the benefit of the
employee and their family*.
Furthermore, premiums are
not normally taxed as a benefit
in kind – which can mean
significant savings for higher
earners.
Where a group life policy is
unavailable due to company
size
Small businesses frequently
do not have enough eligible
employees to warrant a
group risk scheme, as many
providers require five or more
members. However, relevant
life policies are single life,
stand-alone death-in-service
plans providing benefits on
an individual basis and may
be cheaper than a personal
policy. As with ‘normal’ group
schemes, the premiums
paid by the company are tax
deductible from profits.
Contractors or freelancers
running their own limited
company can also take out a
relevant life policy to provide
life cover on the life of the
contractor/director and any
other employee working for the
company, rather than paying
premiums out of taxed income.
Where scheme top-ups are required
Relevant life policies can
run alongside a group risk
scheme, tailored to meet the
needs of individual employees.
Sometimes the existing
scheme is too restrictive: it
may not include bonuses and
commission as part of earnings
or dictate an upper cap on
benefits.
Unlike group schemes,
protection need not end
once the employee leaves
the company. The benefits of
relevant life policies can be
appointed to the departing
employee as a personal
scheme and even moved
to their next place of work
(if the new employer is
happy to accept the plan).
Companies that plan to merge
or re-structure may find this a
particularly useful feature.
*Some trust arrangements may carry
potential periodic or exit charges.
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