Yellowtail Blog

I was having lunch with Nick the Stick, so called on account the walking stick he uses to get around. Nick has a wicked sense of humour and refers to himself as a Raspberry Ripple, (if you understand cockney rhyming slang you’ll know why) recently he has taken to using the term impaired life after I mentioned it in a letter about annuity rates.

It was our regular half yearly visit to Lemonia in Primrose Hill, a family run Greek Cypriot restaurant: it’s Nick’s favourite, he celebrates everything with lunch at Lemonia. Last year was his 65th birthday; to commemorate I gave him a gold watch for his retirement. It was symbolic really as Nick hasn’t worked since breaking his neck some twenty years ago.

The unsung hero is the accountant who pushed Nick into making substantial pension contributions when he was working. The accountant has long since retired so for the past few years I have been advising Nick about his pension. I became involved following the collapse of the dotcom boom; with retirement looming large Nick was worried, and so was I.

His pension was invested in the With Profits fund, a misnomer if ever there was because despite the preceding dotcom boom the fund had hardly grown. Things didn’t look good for the With Profits fund so I set about restructuring his portfolio to provide some diversity. I wanted to capture growth but also introduce some security.

A reasonable chunk of the fund went into shares and property, and the fund grew significantly from 2003 onwards. But with retirement looming, and an eye on the bubble that was beginning to form, we gradually took profits and moved more into cash and government bonds. Nick said I was being too cautious; after the euphoria of annual double digit growth the investments looked boring.  “Don’t be greedy Nick” I said, “the fund is now large enough to give you the income you want, let’s not push our luck”.

Back to the Lemonia, we were well into our second bottle of wine, and Nick was looking back at the decisions we had taken. “Do you know” said Nick, “I think boring is the new exciting – Cheers!”

Speaking on the BBCs 5Live radio programme this morning, (“Wake up to Money” – there are better things to wake up to I’m sure) I was asked to talk about Individual Savings Accounts. Are they a good idea? The short answer is yes.

Try not to categorise ISAs as merely a financial product like a unit trust or a particular bank account; instead an ISA is merely a tax wrapper that can be applied to either cash, stocks and shares, or a combination of the two. If you have cash, stocks or shares that are not sitting inside an ISA tax wrapper, then what are you waiting for?

Chatting generally to other guests on the show I discovered that even higher earners with cash in the bank were not making use of the annual ISA allowance. OK, it might not rock their boat to chase around for a £7,200 deal, but ISAs are now 10 year old, and over that time it would have been possible to shelter up to £70,200 from the tax man. Half of which could have been in cash.

The problem that many of clients are facing right now is how to secure a good rate on existing ISA cash. Whilst it is possible to get several reasonably good interest rate deals, it is usually only for new money and not for existing ISA cash, so you cannot transfer ISA money from one provider into a new account. Seems to me that if you have no new money to commit to ISAs this year, but your existing ISAs are only earning 0.1% or similar, then why not simply cash in £3,600 of existing ISA money and then treat this as new money into a new ISA. If you are not going to fully use this year’s allowance then why not recycle previous allowances?

But perhaps the time has come to think about the longer term. Too much ISA money held as cash isn’t going to do you too many favours in the long run, especially if inflation does take a hold next year or the year after. You could consider switching ISA cash into other eligible investments. Corporate Bonds (especially AAA rated) are looking attractive at the moment, and within an ISA the income is entirely tax free. With income yields of around 8% and depressed capital values these might be a good medium term play.

Finally, if you have existing shares or unit trusts and are currently sitting on capital losses, why not crystalise the loss to use against future gains, and then re-invest within an ISA, the future gains on this portion of your money will be Capital Gains Tax free in the future – until the government change the rules that is.

Hurry through, there’s very little time left.

Dennis Hall appeared on Strictly Money on CNBC today.

Dennis answered viewers’ questions on the sustainability of the high level of dividends in the UK, and whether there is value in corporate bonds.  Dennis was giving his opinion along with Amanda Davidson from Baigrie Davies.

You can see the video on the CNBC website.

First a confession, I’m not an avid garden, but I found a segment on Radio 4’s farming today relevant to the financial advice industry.

Pauline Pears from Garden Organic, the UK’s leading organic growing charity, was talking about a piece of research on a simple solution to a gardener’s pest control problem.

Research by the National Vegetable Research Station showed surrounding cabbage plants with a square of carpet underlay about 5×5 cm is as effective as any pesticide in controlling cabbage root fly, a common pest that eats (as the name suggests) cabbage roots. 

Pauline goes on to say, “I think one of the main problems for gardeners is their main source of advice is the garden centre, and garden centres sell products, they don’t sell ideas.”

I would lump a majority of advisers in the ‘garden centre’ category.  As our clients know one thing that makes Yellowtail’s approach unique is that we are paid a fee for the advice we provide, not the products we sell. 

The winners of the Financial Planner of the Year awards 2008 were announced at a special gala dinner, held at The Dorchester on Park Lane and hosted by Gyles Brandreth.

Adding to his collection of industry awards, we are delighted to be able to say “congratulations” to our very own Dennis Hall, winner of the Investment Company Planner category.  The award was presented by Annabel Brodie-Smith Communications Director of the Association of Investment Companies.

Organised by Money Management magazine (a Financial Times publication) in association with the Institute of Financial Planning, the awards aim to “showcase excellence within the industry and reward those excelling in their field.”

To get as far as the shortlist is an achievement in itself, as competitors have to submit a case study for review by a panel of judges, followed by an interview to determine the winner in each category.

You can read more about the Financial Planner of the Year awards and Dennis’s case study on the Money Management awards website.

We all know we aren’t supposed to put all our savings eggs in one basket, especially because of the limited protection against losses for savings deposits in the UK.

UK deposits in bank or building society savings products are covered by the Financial Services Compensation Scheme (FSCS).  FSCS is an independent body created by the Government to pay compensation if a financial institution is unable to pay claims against it.  Currently the first £35,000 per financial institution is protected.  So if you have more than £35,000 where should you put your savings?

One solution is to spread your savings around a number of accounts with different financial institutions.  With larger balances this approach becomes a little unwieldy.  For example an investor with £500,000 will need to open 14 different accounts to take full advantage of the protection offered by the FSCS.

An alternative approach may be to invest in a money market fund. A money market fund invests in a large number of short-term debt instruments on an investor’s behalf.  As an investor this allows you to diversify your savings and spread your risk, while offering competitive interest rates.

The money market funds we have researched in depth have all been given the highest triple-A ratings by independent credit ratings agencies.

You can read more about the benefits of these funds and how to invest in our Money Market Funds article written by my colleague Mushtaq.

Samantha Potter, 31, a geophysicist from Warrington, divides her time between her job on board a ship, her partner in China, and her friends and family in the UK. She has no rent or utilities bills to pay, but is concerned about her long term savings. “I don’t know whether I will have enough money to retire on,” Samantha says. “I don’t know what my options are apart from my pension, I also don’t own a property in the UK, and don’t know if I should invest in a buy to let.”

Three independent financial advisers offer Samantha their help this week including Dennis Hall of Yellowtail Financial Planning.

You can read the complete article on the Independent website.

Dennis gives advice to a student trying to cope with debt that must be repaid later.

Helen Stevens, 20, is keen to enjoy her remaining two years of student life before tackling the £30,000 debt she faces on graduation. She estimates she will owe this sum, made up of tuition fees and maintenance loans, on completion of her four-year degree in French and German at University College London (UCL). 

“We’re always hearing about how awful debt issues are, yet in doing a degree you can’t avoid it,” says Helen.

 You can read the complete article on the Independent website.

The changes to inheritance tax rules announced last October in the pre budget speech allowed the transfer of unused allowances between spouses and civil partners following the first death. Yet many people with existing nil rate band discretionary trusts might have considered the change to be largely irrelevant, but it would be a mistake to ignore the potential effects of this change.

Under the new rules, if the first spouse who dies now with a nil rate band of £312,000 gifts this into a nil rate band trust as a result of their will, and then a few years later the surviving spouse dies when the nil rate band has increased to say £400,000, then the total amount of money that is exempt from 40% inheritance tax is £712,000.

Under the new rules however, if the first spouse simply passed their assets to the surviving spouse, then on the second death, the estate has the benefit of two nil rate bands, but at the then current rate. Under the same scenario of using a £400,000 nil rate band, this would equate to a total of £800,000 that would avoid inheritance tax at 40%.

Of course, if the asset was placed in the nil rate band trust and it grew at a greater rate than the rise in the nil rate threshold then it might still offer a better solution. Yet in my experience, nil rate band trusts are for couples who really cannot afford to physically give the money away, and tend to want a very low risk investment within the trust, it is after all there to provide additional income for the surviving spouse. In this regard I would suggest that the nil rate band trust is no longer needed in a number of instances. The legislative changes have brought about a similar end result, and removed the need for an additional layer of complexity that a trust brings.

“Really, if you’re hanging on to your policy you want a degree of predictability… [t]hose who do not feel they have this may want to move on.”

Dennis is quoted in an article in the FT on with-profit policies.   

While the Aviva payouts announced this week are good news for some with-profits investors, those with money in other life offices may be feeling less fortunate.

Stock markets remain volatile and the Financial Services Authority is paying closer attention to the financial strength of life assurers and banks, in the wake of the Equitable Life and Northern Rock scandals.

Financial advisers say policyholders would be wise to do the same.

You can read more of the article, which explains some of the related jargon on the FT website.