THE ADVISER.Summer 2008

Welcome to the latest edition of The Adviser, an update on developments in the world of financial services. This issue covers a variety of topics ranging from the recent events at Northern Rock and Portfolio Building through to the taxation on Buy to Let Properties.

Some say Northern Rock was an accident waiting to happen. The mortgage lender was using short-term borrowing in the credit markets to fund its long-term retail lending and when the credit markets came to a standstill, Northern Rock was hit very hard. However, even the most hardened pessimists didn’t really expect events to be quite so dramatic.

Part of the reason for the crunch was the way sub-prime exposure had been sold on from institution to institution. Good and bad debt was bundled together and noone could easily assess any individual exposure. Banks therefore became unwilling to lend to anyone just in case. For Northern Rock, as liquidity dried up and existing arrangements ended, the pressure to renew at any cost intensified.

However, with the market effectively closed for business, the bank was unable to obtain the credit it needed from other institutions and was consequently forced to appeal to the Bank of England – the lender of last resort – for backing. The move made headline news and Northern Rock savers rushed to withdraw their savings, just in case.

It took Government reassurance for the frenzy to abate. However, even now, the uncertainty for share holders continues. With nationalisation now a reality, they have paid the highest price for a once very promising business.

Northern Rock

Common mistakes

We are all human and we

all make mistakes. But for

investors those mistakes

cost money. Knowing the

most common pitfalls can

help you learn from the

mistakes of others and

avoid losing out. For

example, following the herd

can be a recipe for disaster:

Remember when people

piled into dotcoms in the

late 1990s? Also, don't

panic on a downturn.

Selling out without serious

reason will crystallise a

loss and you may miss out

on a rebound. Finally,

never chase a quick profit,

thinking you can time the

market – this is no different

to gambling on horses.

Investment is a long-term

game and requires

planning. Any other

approach makes it a highly

risky business.

Contact Us: Autumn , Financial Management , 2 Plan Ltd , 4th Floor , 150 Minories , London , EC3N 1LS , , T:0207 193 6710 , F:07092 252 390 , E:advice@autumnfm.com

Income if you can't workRegardless of whether you are single or you have a small army of dependants, if you are suddenly unable to work, your income disappears. Yet, while many of us cover our lives to protect our families, very few take the time to protect our health.

Permanent Health Insurance (PHI) is less well known than life insurance but potentially has many more applications. It will pay up to a maximum of 60% of your salary (depending on the insurer) if you are unable to work, minus any sick pay that you may be entitled to. Although it can appear to be expensive, it is available with a choice of deferment periods and extending this can reduce the cost of cover. The more savings you have, the longer you can fund yourself before a claim needs to start paying out and therefore the cheaper the policy will be.

Income under a claim will be paid until retirement age, until you are able to return to work or until the end of the policy term whichever is the earlier*. Therefore, while you are rehabilitating or coming to terms with changes in your life, it stabilises your financial position, ensuring you can pay your bills. Such cover can be of particular benefit to single people and for the self-employed as a lack of sick pay or financial support from a partner makes you even more vulnerable to a break in your income. It can also reduce the need for payment cover which might be offered when you take out mortgages or loans. (*Note: payment would also cease on death of the claimant, if applicable).

The new ISA limits

In the last Budget, the Chancellor announced changes to ISAs which became effective at the start of this new tax year. The highest profile has been the change to investment limits as the Government eliminated the mini and maxi components. Now, there are just two types of ISA - the Cash ISA and the Stocks and Shares ISA - and your overall allowance for both in 2008/09 is £7,200. Within this, for limit for Cash ISAs - or for the cash element within a Stocks and Shares ISA - is £3,600.

Within the limits, there is flexibility. You can, for example, now put the maximum £3,600 in a cash account and £3,600 in a stocks and shares account. Alternatively, if you place just £2,000 in cash, you can use the entire remaining balance – £5,200 - to invest in stocks and shares. If you don’t need cash at all, you can put the full £7,200 into stocks and shares. You can also transfer existing Cash ISA holdings to a Stocks and Shares ISA without impacting on your current tax year allowance. So, if you have £10,000 already sitting in existing ISA plans then this amount can be moved to a Stocks and Shares ISA, yet leave your allowance of £7,200 still available.

The only other change is we have finally seen the back of PEPs. Although no new money has been invested in PEPs since 1999, the distinction remained. PEPs are now part of the ISA regime and the plans can be consolidated under one product wrapper. Existing PEP holders should see little difference, but do check with your adviser if you are unsure.

How to build a portfolio

A investor's portfolio is simply shorthand for the collection of investments they own. Ideally this will be spread across a variety of assets - equities, bonds, property and cash - in a mix that has been determined by that investor's specific objectives. The process of deciding how much to invest in each asset class is known as asset allocation. For example, equities have traditionally offered higher returns over the long term but at the price of increased risk, while at the other end of the scale, cash has offered both security of capital and stability but with a fluctuating income and no chance of capital growth.

Actual returns are dependent on many variables, such as the health of the economy in which you are invested, inflation, interest rates and market sentiment. The elements that impact each asset class vary and one asset could provide you with good returns whilst another may be doing badly.

However, it is difficult to predict which will do well - or badly - at any particular time, so mixing asset classes together and having exposure to a little bit of each can help balance out the individual peaks and troughs.

Your age, your financial position and your attitude to risk are all crucial considerations to get the proportions right and to build the most appropriate portfolio for you. It is therefore recommended that you speak to an expert to help

you get the right mix.

Start early for a greater reward

Advances in medicine and in living standards mean we are now living longer than ever before. Two-thirds of the people who have ever reached the age of 65 - in the entire history of mankind - are alive today. Now, estimates of life expectancy suggest that the average female born today will live to 91.

All of this is great news for us as individuals. However, before you start dreaming of your long and happy retirement, involving endless games of golf, decades of holidays and extended time with the grandchildren, its worth considering how this is going to be paid for.

Such expectations mean saving for our retirement is now more important than ever before – and the earlier you start, the easier it is to build up a decent sum. This gains extra impetus when you consider that the money saved between the ages of 20 and 30 could account for half of your overall amount when you reach 65. The reason for this is compound interest – that is, the way in which interest you earn on your money begins to earn interest on itself.

For example, if you invest £5,000 for five years at an interest rate of 5% pa then, at the end of 5 years, you will have £6,381. 5% of this initial £5,000 is £250 a year – a total of £1,250. But actually the money earns £1,381. This additional £131 is the amount earned by the interest itself – ie: for no additional outlay whatsoever. Simply by leaving this interest invested, you have earned even more money - effectively for free.

The best thing about compound interest though is the longer it is left to work, the more impressive the figures become. If you left that £5,000 invested for 10 years, your total return would be £8,144 - £644 of which would be entirely down to the interest earning interest. Turn the calculation around and you find that if you want to achieve a pension fund value of £100,000, it would cost £50 a month from age 25, but doubles to £100 a month if you delay the decision to age 35, just 10 years later (assuming interest in this case of 6% per year, after any charges).

Of course, your contribution rate is not the only factor in achieving a decent pension. The assets you choose, the charges and the underlying performance, plus the level of inflation, interest rates and hence annuity rates on the day you retire are all important. Many of these can be planned for - but like anything, the earlier you start to think about it, the easier it will be.

Forced to change your lifestyleAs our lives get longer, the chance that we will contract major illnesses increases. The good news is that medical advances mean more of us are now surviving and living on. However, in the meantime, we might need lots of care and support, which may also mean changing things in our lives to cope with new challenges.

Critical illness cover pays out a lump sum on diagnosis of a specified illness. Like life cover it pays out a lump sum – and this can be used to help fund any changes which may be needed to maintain your lifestyle as a result. For example, you may need to move house to be nearer relatives or friends. You may need to make changes to your existing house to meet new mobility requirements. You may also need to take a pay cut to return to work or need to pay off a mortgage to cope with a lower income. Alternatively, you may simply want to give up worrying about money and make the most of your travel opportunities while you can.

Critical illness can be just as beneficial for single people with no dependents as it is for those married with children or other financial dependents. Knowing you have some financial back up to help you through difficult times can help you stay focused on what really matters, ie: getting your life back to normal as far as you can.

Investing for the futureSovereign wealth funds have been in the news recently amid rising concern about their activities. But what are they, who is behind them and why are people worried about them?

Sovereign wealth funds are government-controlled investment funds, created by countries with surplus cash for investment. They first hit the headlines initially when middle eastern funds helped out the investment banks, then more recently following the news that a Chinese fund had accrued almost 1% of UK oil giant BP. Some market watchers have become particularly concerned about the motives behind these purchases; China needs oil in order to fuel its ongoing expansion, and some think these stakes might be an attempt to gain influence within the sector.

Most sovereign wealth funds also tend to be secretive, which has further fuelled questions about their motivations. In addition, accusations of speculative activity have been levelled against some of their managers, although their defenders argue the managers are simply looking for long-term, returns, just like any other investor.

Looking ahead, there are moves afoot to persuade sovereign wealth funds to sign up to a code of conduct that would ensure greater disclosure about their assets and investment strategy. It is unlikely that every government involved would be willing to accede to such an agreement; however, until they become more open about their activities, their detractors are likely to remain.

Taxing times

The taxation of rental properties can be complicated. Landlords are liable for income tax on rental income, at their marginal rate though it is possible to offset mortgage interest payments against this to reduce the liability.They can also offset cleaning charges and the cost of ground rent, service charges, buildings and insurance cover (including for white goods, plumbing and advertising) and the depreciation of furniture inside. Any letting agents’ and accountants’ fees can also be discounted. When they finally sell the property, Capital Gains Tax becomes due on the profits made, but again, there are charges and depreciations which can offset here as well.

Issued by 2Plan Ltd which is authorised and regulated by the Financial Services Authority. The contents of this newsletter do not constitute advice and should not be taken as a recommendation to purchase or invest in any of the products mentioned. Before taking any decisions, we suggest you seek advice from a professional financial adviser. All figures and data contained within this document were correct at time of writing. The FSA do not regulate tax planning.