July 2013 - Financial Planning in Wimbledon

Facing the questions

It occurs to me that as a nation, we are avoiding many rather important questions. I love Britain and the freedoms we enjoy. I want a fair welfare system. However, until politicians, economists, financial advisers and the public at large face a few important questions, we seem destined (in the main) for more people reliant upon State support. In essence we collectively seem to agree that it is better for each of us to gain financial independence from the State or any other source of funds. There are variety of questions that come to mind, which challenge this assertion.

Why is it easier to get into debt than to save?
Why is it easier to borrow money at 100%+ interest than 4%?
Why is it easier to open an online gambling account than an ISA?
Why do more people play bingo than save for their pension?
Why do more people spend more money on a mobile phone than invest into their pension?
Why do so few people write a Will?
Why do more people take out travel insurance than suitable financial protection?
Why has betting become so popular and investing so problematic?
Why have we become such a litigious society, yet unwilling to take personal responsibility?
Why do so many people complain about low interest rates, yet do not invest?
Why is the financial community obsessed with the risks of investing but not the purpose?
Why do so few people take action?
Why do so many fail to review their arrangements?
Why do so many pay for a gym that they don’t attend?

To my mind, it seems that financial planning is rather like a diet. I accept that this is a contentious statement. Most people do not like dieting (by which I mean observing, controlling and restricting what is consumed). A “healthy” diet is only one part of the equation, we all know that regular exercise when combined with a good diet will yield results. I am someone that wrestles with this very issue. The problem most of us have is that we want quick results, we are generally unable to take a long-term perspective. Little wonder, given a culture obsessed by image and reaction. It doesn’t really matter how much you spend on a gym, how many books you read, how many videos/DVDs you watch, how much kit you buy… it all boils down to what’s going on in your head. Despite many motivational guru’s that have some considerable results for a few people, we all know that there are very few short-cuts and its all about a long-term perspective and a change in lifestyle. A key question is really are we prepared, willing and able to change? I don’t subscribe to the belief that this is a simple “change of attitude” but it certainly requires change.

I am open to thoughts, insights, suggestions and answers..

Dominic Thomas: Solomons IFA

Facing the questionsDominic2023-12-01T12:23:49+00:00

Glass Half Full

I imagine that almost everyone has heard of the “glass half full or half empty” metaphor. However, as with most metaphors, I find myself rather conflicted. Sometimes it is half empty, sometimes half full, but frankly of late I’ve been wanting to say “of what?”… as in full/empty of what? what are the contents? because frankly if they aren’t good for me, then I don’t want to drink from the glass…and don’t really care how much is in it.

I relay this tale at the end of July, one of the hottest for… well it hardly matters does it? The sunshine has reminded us that we do have four seasons, not just two, or three at a stretch. So in the context of a joyful summer, and a month in which many British sporting interests have found the heights of success, I find myself also frustrated by various administrative blunders that have met with my ire. I risk sounding like Victor Meldrew, but frankly you wouldn’t (believe it) if I relayed some of the problems that we have experienced this month, which were entirely due to Product Providers. I could not even say that these were lesser organisations, but are in fact some of those that I respect enormously. What made me both chuckle and tut at the same time was one email that contained the phrase “…. does not guarantee that the information shown is free from any errors, omissions or inaccuracies”. Well yes and no. Yes I accept that we all make mistakes, but no, I don’t think its quite ok to cover this with a phrase that seems to indicate a lack of responsibility.

My trade press, the financial media, are ready to dress up any old topic to create a punchy headline that creates a stir. Yet invariably, the headline is rather disappointing and as ever the detail is not terribly contentious. Perhaps more column inches (remember those?) will be dedicated to whether Gareth Bale will/won’t/will/won’t/definitively won’t, certainly won’t/probably… move to Real Madrid for the “right money”. Its all a game designed for amusement. The financial press is often gets caught up in the same game. What is more amusing and concerning frankly, is the comments by other advisers, invariably hiding behind anonymous/fictional names who pounce on any opportunity to unleash vitriol against the regulator. Now, I’m not suggesting that the regulator is right all or even much of the time, but many “advisers” are tempted to comment without thought or indeed research (by which I mean reading FCA papers)… which surely are two rather vital ingredients in the skill set of any adviser in 2013. Regulation is no easy task and we need good regulation. Why? well I’m fed up of rising compensation costs, which I have to stump up in order to pay for the bad work of “bad” advisers… nothing to do with me, other than the same “profession”. Good regulation will hopefully see this trend reversed. When I read some of the comments and blogs, I am tempted to say “methinks he doth pretest too much” (and yes invariably it is a he).

None of us want to be ripped off, but many of us pay more in order to get a better service or higher quality. Just think of the car you drive or the suit you wear or the perfume/aftershave etc etc. Price is not simply a sum of parts. Value is not easy to define. I may pay a very different price for a bottle or wine or even a pint of beer, but if I am being served the same thing, in the same place and charged very differently, then that is decidedly unfair, which is essentially all the regulator is saying. Treating customers fairly is not an optional extra.

Dominic Thomas Solomons IFA

Glass Half FullDominic2023-12-01T12:23:49+00:00

Royal Baby worth £243m to UK economy… come again?

Well you certainly did not hear it here first. The Royal family has an new heir. The media coverage was and presumably continues to be… well, rather daft. Our “news” channels seem unable to deliver much to us these days other than speculation and anecdotal opinion from.. well pretty much anyone that wants to be on the airwaves.

So I was intrigued to see an estimate from the Centre for Retail Research based in Nottingham that suggested the new baby would generate “around” (seems like a fairly precise number to me) £243m for the UK economy. This is money spent on “stuff” that ultimately gets counted. Now, perhaps I’m out of touch on this, but I hadn’t noticed a whole lot of “festivities” which account for £87m. This is on extra food, drink and parties to celebrate the birth…I think I must be short of an invite or two, but really? An estimated 3m bottles of sparkling wine or champagne opened to celebrate this specific event…(where?) I suppose I’m not disputing the numbers, perhaps they are right, but 3m of a 60m population about 5% of people will actually go and buy an extra bottle of bubbly to celebrate, that’s one in twenty (aged 0 to 100+). Sound right to you? This is not bubbly that they already bought, or due to an anniversary (quite a lot of people marry in the summer)..or finish school or Uni…this is extra bubbly.

The CRR also allocate £80m for souvenirs and toys. Well this is plausible, have you seen the price of London trinkets lately? Add to this a further £76m for books, DVDs and “other media”. They even suggest that pram sales will rise 13%, which I find rather incredulous, do people really decide to have children as a result of a member of the Royal family having a baby? well apparently so.

As you may have gathered, I have some reservations about the accuracy of such forecasts and predictions. If they are correct, then perhaps we should request that the Royals reproduce every year! We would soon be out of our economic doldrums…or at least somewhat overcome by the festive hats and DVDs.

I’m not in anyway knocking the Royal family. Of course the birth of a baby is, in this instance, delightful news to his parents. What I get rather concerned about is the way our national governance and economic well-being is reduced to unproven figures, be it inflation, royal birth, benefit cheats, illegal immigration, crime, cost of the Olympic games or a BBC inquiry. I am of course mindful that the figures may well be right, but they certainly don’t sound remotely accurate.

Dominic Thomas: Solomons IFA

Royal Baby worth £243m to UK economy… come again?Dominic2023-12-01T12:23:48+00:00

Cash Deposits – in defence of Premium Bonds

We all know that interest rates are depressingly low for savers (though good news for borrowers). There has been some coverage of National Savings Premium Bonds which has been rather unfavourable, so I thought that I would provide my thoughts on this.

As with all cash deposits, cash as a long-term investment strategy is not a good idea. Why? simply because of inflation. If interest rates are 2% and inflation is 3% then in real terms you are losing money each year, by losing I mean your £1 has less purchase power. So can we agree that cash holdings are for emergency funds, for people that are very anxious about other forms of investing and for planned major expenses. There are no rules or rights or wrongs, but holding cash is sensible for anyone, as it provides liquidity (rather than having to borrow or sell assets).

Turning to Premium Bonds. These are very basic, you buy each bond for £1. You can hold up to 30,000 so £30,000. You are not guaranteed any interest – indeed there is no interest at all. However, your £1 bond with its unique number is automatically entered into a draw. Each month someone wins £1m. Most don’t win at all, but in general those with the full £30,000 allowance tend to win small prizes, which over the year amount to about £450 (1.50% of £30,000). This money is tax free. So for a 20% taxpayer is equivalent to 1.875% gross and a 40% taxpayer equivalent to 2.50% gross. These rates are best compared against monthly interest paying accounts with 30 day notice. You will find very few accounts paying these sorts of rates. Sure a little bit more in a few instances, but not much. Given that we are talking about £30,000 an extra 0.5% is worth £150 over a year… not a significant sum when you consider that it would be taxable, involve the hassle of opening a new account and removes you from the possibility of winning £1m. I might add, that it is also a bit of fun, opening an envelope to discover your winnings. More fun than opening a bank statement, or indeed one of our portfolio valuations (unless you find particular joy in this exercise). Last month someone won £1m, 5 people won £100,000, 9 won £50,000, 18 won £25,000, 48 won £10,000 and 93 won £5,000. The smallest prize (£25) was paid out to nearly1.8m people in June alone.

The news is that the chances of “winning” (from £25) will reduce from 24,000:1 to 26,000:1 on August 1st 2013. As a result the current appropriate 1.5% rate is now more like 1.30%. So on £30,000 you might expect £390 of tax free winnings over a year. To a basic rate (20%) taxpayer this is equivalent to 1.625% and a 40% taxpayer equivalent to 2.16%. These are still decent rates. Sure nothing to write home about, but pretty competitive never-the-less.

Yes the rates are poor, but then that’s true of all similar types of accounts. As I have said cash is not a long-term investment strategy, it is a helpful emergency reserve and buffer. Whatever the economic climate, holding some cash would be entirely sensible. The question is really about having a properly thought through investment strategy that enables you to achieve your goals.

So please remember, this is not advice to rush out and buy premium bonds. This is my opinion in response to some negative coverage about them.Unlike the lottery you get your money back, the same money is re-entered into the draw each month. For the record, none of our clients have yet won the £1m jackpot and I would not advise anyone to rely on winning a jackpot as an appropriate form of providing for your future…that’s just wishful thinking.

Dominic Thomas: Solomons IFA

Cash Deposits – in defence of Premium BondsDominic2023-12-01T12:23:47+00:00

Straining Gnats Test

There are times when I feel quite despairing. The regulator has had an initial go at reviewing the effectiveness of RDR, the new world that was meant to result in better advice, greater clarity and fewer problems. It would be fair to say that there is a wide range of views on the wisdom and merit of RDR as is has been “delivered”. My own opinions aside, the regulator is concerned that investors (that’s you) do not understand percentages. Now call me whatever you like, but if an investor does not understand basic maths, then they really have no place investing their hard earned money. I’m not talking about complex percentages, such as how to put in plain English the interest charged by payday loan companies that the new Archbishop of Canterbury is attempting to address, nothing as complex as that. I’m talking about working out what 1% is. Yes calculating what 1% (one per cent) is. The regulator does not believe that investors can do this simple sum of moving decimal points two to the left. One per cent of £100,000 is £1,000 (just to be clear).

Now, if things are really as bad as this, then surely the entire education and financial system has failed miserably. Little wonder that politicians do not understand the difference between deficit and debt or how to spot a rip off and how to work out the budget for their own department, rather making the expenses scandal look more like a haphazard attempt at a maths problem. Surely we are all rather brighter than the regulator seems to be suggesting.

So here’s a test, which is bigger?

£2,000
1% of £200,000
£20,000
£20.00

However, the truth is not that this is really about your ability to do sums, but about the framing of information. In fairness to the regulator, this is actually about fees that advisers charge. Its will cost you £2000 sounds different from saying it will cost you 1% of your £200,000. A cynic might suggest that there is an agenda here, but given that many things in life work on a percentage, income tax, capital gains tax, inheritance tax, annual management charges, dividend tax, bonuses, stamp duty, tips, inflation, gdp, interest rates, loan-to-value, electoral majority, and a gazillion other examples one wonders why this really is made into such a “big deal”. This in the context of an investment world that seems obsessed with stochastic modelling and probability… which are far more complex terms to grapple with, let alone the mathematics of standard deviation and the normal distribution curve. I wonder what percentage will be used to assess whether RDR has been a good thing, in terms of how many more people seek advice and how many are removed from reliance upon the State….

Dominic Thomas: Solomons IFA

Straining Gnats TestDominic2023-12-01T12:23:46+00:00

Ancient History Lessons – Pompeii: Life and Death

I wonder if you have managed to get tickets for the Pompeii exhibition at the British Museum. Its a good exhibition, though much will be very familiar. It seemed to me that one of the main themes of the exhibition was that life has not really changed that much from AD79. Life for those living in Pompeii at the time had many similarities to our own, indeed one might say, that barring the evolved communication systems and utilities, daily life was more or less the same.

Certainly we don’t have slavery in the same way, though we are all aware of the human traffic around the world. One might also argue that many are enslaved to their mortgages and debts and unfulfilled jobs. Women have the vote yet we are aware of the many inequalities in our own rather advanced society, let alone those in cultures where difference is less tolerated.

Why do I bring this to your attention? well, apart from the fact that you really should try to get over to the British Museum (become a member for free access to the exhibition and a very good lunch) the point I am trying to make rather laboriously, is that life doesn’t change as much as we think it does, indeed change is slow. Not technological change, but social change. Business is about providing services and goods that people want. Investing is about participating in those enterprises. So when a business fails to provide what people want or need, its outlook is fairly bleak. This may be due to a change in technology (Polaroid) or it may be simply failing to realise what you “do”. Again Polaroid.

Back to Pompeii, as a financial planner, my job is not about predicting the next eruption (ok the link is tenuous). My job is to help you prepare for the future. If you decide to live at the foot of a volcano, then this carries additional risk, you may or may not experience an eruption, but are you prepared if there is one? Selecting investments from a sea of options that can blow up and go horribly wrong, should not be taken lightly. Sure you may get lucky, the San Andreas fault has not yet swallowed the West coast of the US and yes there is a good chance you will inherit money, or win the lottery, or come up with the next brilliant idea for an app on itunes. However, it would be wise to have a more prudent plan as well. There are really two costs to taking good advice – the cost of taking it, and the cost of not taking it.

Dominic Thomas – Solomons IFA

Ancient History Lessons – Pompeii: Life and DeathDominic2023-12-01T12:23:46+00:00

What Tennis Can Teach Investors

Success is contagious, but sadly less contagious than pessimism. As we digest the weekend that has happened, with a new British Wimbledon men’s singles champion the media is flooded with soothsayers. It has been a good 12 months for British sporting interests. Congratulations to Andy Murray for a spectacular victory at Centre Court, very well deserved and reminds me of a post on my old blog site from 2 years ago. Also Mr Froome collected the Tour de France yellow jersey and is leading after 9/21 stages, the Lions also thrashed Australia. There are of course many more sporting events to come this summer and British interests are very much alive.

It has been suggested that Andy Murray’s life will now change considerably. Well, he probably will now be regarded with legendary status in British sport, but winners tend to win a lot and hopefully Andy will continue to have success in Grand Slams, with two to his name now. However being number 1 is not an easy feat. Success longevity requires a huge a mount of perseverance and frankly quite a bit of luck. Luck – for keeping fit and not having significant injuries. There are very few that reach the pinnacle of their sport, by becoming a champion. Take tennis as an obvious example, dominated by just a few players.

Thankfully investing is not about being number 1, it is not about “winning” and beating everyone else. However, most people do not have a “successful” experience of investing. This need not be the case. Most investors behave as though they have to win the game, constantly adjusting positions trying to eek out advantages. The truth is that a successful investment experience does not rely primarily on skill, it relies upon discipline. Even the great tennis players make mistakes as we saw throughout the Wimbledon championship, often players beat themselves rather than get beaten. Investors can learn a lot from tennis and sport. It takes dedication, persistence, a long-term mindset, a thought through strategy and above all discipline to keep at it, keep believing and playing the long game.

Dominic Thomas – Solomons IFA

What Tennis Can Teach InvestorsDominic2023-12-01T12:23:45+00:00

Marriage Tax

You may have picked up from the headlines in various news media, that the Government have once again pushed the notion of married couples being able to share their personal tax allowances. This is a highly inflammatory issue as you may imagine. Those of us that are married probably did not do so in order to enjoy tax breaks. Frankly, I’m not sure why this issue has raised its head again.

In truth married couples already enjoy certain tax advantages. The most obvious being that there is no inheritance tax to pay between them and essentially they enjoy (or rather the wider family does) a doubling of the personal “nil rate band”. This assumes that they have a valid Will in place – not having a Will does rather reduce the impact of this valuable benefit.

In addition, capital gains tax allowances can also be shared across a married couple and of course one could argue that the ISA allowance, whilst being individual, enables a couple (married or not) to invest twice as much between them. So whilst there are reports of “backbenchers” (never named, if indeed they exist) calling for tax advantages for married couples, one might suggest that they already exist. However, this is about the personal allowance and essentially a married couple sharing unused personal allowances between them. According to the BBC website the Government initiative will save some people about £150 a year. Hang on? If the personal allowance is £9,440 in 2013/14 (for those under 65) this is how much each individual can earn tax free. So assuming a basic rate taxpayer (20%) would otherwise not enjoy any of this, then surely the tax advantage is 20% of £9,440 which is £1,888 of tax saved. Certainly this figure reduces if earnings are in excess of £100,000, at which point the effective rate of tax is 60% as the personal allowance is gradually withdrawn.

I know tax is complex – more so the more you earn and the greater your assets, but for those on say £80,000 a year as a single income, then all that is really happening is a doubling of the personal allowance, to £18,880 before any income tax is payable. The next £32,010 will be taxed at 20% and then the remaining £29,110 would be taxed at 40%. The overall tax rate being 22.5% (income tax as % of £80,000). This against the current system of a single personal allowance and relevant tax rate of 27.2% and extra income tax of £3,776. As you will have gathered, the tax saving is on a case by case basis, but I cannot agree with the BBC’s figures of £150 saving – its closer to that each month, not each year. This prompts my often trodden path of “do they understand the figures? ” (both politicians and journalists).*

There can be numerous reasons for a spouse not to be working. This might be voluntarily, or enforced (redundancy of illness). The problem with every rule is that there is always likely to be a good case to be made for an exception and one can only really fall back on the principles of fairness to all. If this were truly any politicians cause, then we would not have such a complex tax system or benefits system. Both need to be simple and ideally with a single rate of tax and benefits across all forms of income, earned or paid as interest or dividends. This is certainly not a simple issue and as a result can only be for perceived political advantage. I don’t know about you, but I am fed up with politicians of any persuasion, trying to buy votes, we deserve better treatment than that surely. We would all like to pay less tax, naturally, but we also know that tax funds our infrastructure, healthcare, welfare, armed forces, governance and the wider economy, the real question is surely is tax fair? and if so, is is being spent wisely?

* It seems that the BBC figures are indeed correct. The current, or rather original proposal was to only allow £750 of the personal allowance to be shared between spouses, amounting to £150 (20% tax). It only applies to couples where the higher income member is a basic rate taxpayer and not available for higher rate taxpayers. So as usual, the devil is in the detail and all that this really suggests is the politicians cannot be trusted to tell a full story and frankly this is a lot of hot air….

Dominic Thomas – Solomons IFA

Marriage TaxDominic2023-12-01T12:23:45+00:00