THE ADVISER.Summer 2009

Welcome to the Summer edition of The Adviser. A mix of articles ranging from Annuity issues, why you should have a Will through to the problems of the protection gap. Should you require any assistance with any aspect of your finances, please do not hesitate to contact me.

Oh well, didn’t quite make it did he?... One thing’s certain though, I bet that Andy Murray is already planning his strategy over the coming year, in order to improve on his latest performance or maybe he's thinking enough has been done... I doubt it! He is probably analysing every aspect for areas of improvement? Does he need to better his returns? Is he taking too many risks or not enough? What’s the overall objective?... Hang on a minute, analysis; returns; risk; overall objective? This sounds like financial planning? After all, you cannot expect things to roll through the years, steadily improving your financial standing without work can you? Achievement over the long-term, requires review and analysis in the short term. A review and analysis of your investments; their allocation as well as whether they are still in line with your attitude to risk? Your attitude to risk may not have changed, but the weighting of the portfolio could have? It's not just investments either. A protection policy you may have (not) taken out all those years ago? What’s changed since then? A career move? Employed or Self Employed? Your marital status? Any Children? An inheritance perhaps? Still, if you have arranged your Pensions; Investments; Protection and your financial standing in general… you could say “oh well, I gave it a shot, no need to review things now… ” Yes, I am sure that is exactly what Roger said, after his defeat in last year's Wimbledon final didn’t he?...

Lessons from SW19?

Beware of inflation

When buying an annuity,

one issue you should

always consider is the

long-term effect of

inflation. If the rate of

inflation increases, the

value of your income will

fall because, as prices rise

your money is able to buy

less. One way to safeguard

against this is to buy an

index-linked annuity,

which is linked to the

Retail Price Index. By

doing so, you ensure that,

as inflation rises, so does

your income. Similarly,

escalating annuities, where

your income increases

each year at a rate set by

you, also help combat the

effects of inflation.

However, do be aware

these annuities start at a

lower income level to

balance out the expected

growth in the future.

Contact Us: Kieron Robertson , T: 01892 570 675 , M: 07711 329 256 , E: kieron@wealthifa.com , www.wealthifa.com , Head Office , Bridgewater Place , Water Lane , Leeds , LS11 5BZ

Changing landscapesThanks to the credit crunch, the landscape for annuity products has changed. Market volatility, low interest rates and changing investor demand have combined to bring new products onto market while others have fallen by the wayside.

Annuity rates are dependant on interest rates, so recent base rate cuts have hit prospective payouts quite hard. As a result, as investors have looked to tease out additional income, impaired life annuities and so called 'postcode annuities' have become more popular. Other potential retirees have simply decided to defer buying an annuity for as long as possible.

Market volatility has also affected the so-called 'third way' annuity products, originally designed to fill the gap between annuities and unsecured pensions, allowing exposure to the stockmarket, but with capital and income guarantees. They have had a difficult time as the cost of maintaining the guarantees has soared with the increased market volatility.

However, the market is also opening up to new ideas – for example, one new (fixed term) product is offering a secure rate of income for a pre-agreed term and then returning a guaranteed amount to the investor on maturity, which can then be rolled over into another annuity or income producing product. This ensures investors are not locked into what are currently considered very low rates for the long term and instead allows them a 'second chance' to get what might be better rates in a more favourable future environment.

Equity release schemes

Higher house prices and smaller pension funds have meant equity release schemes have become more popular. These schemes work by loaning you back some of the value you have accumulated in your house as a cash lump sum, a monthly income, or a combination of both. The idea is that the value of your house will cover the loan plus all the interest payments due over its lifetime and the debt will be paid off when the house is sold - either on death or if you move house.

The risk for the product provider is that income will have to be paid for a long time so, to be eligible for most schemes, you will need to be 55+, own the freehold of your property and have no or only a small existing mortage. If there is a small mortgage, this would likely need to be repaid by the equity released, so that the provider can take first charge over the property. The downside is that a scheme will reduce a property's value for your beneficiaries - however, if you have an inheritance tax liability this could actually help your plans. Equity release can also be used to pay care home fees - although this also could impact on means-tested benefits and income tax so take qualified advice to weigh up the options.

Also, ask an adviser detailed questions about the terms of a plan as some old schemes lacked some of the safeguards you might expect, eg: a limit to stop any loan exceeding the value of your house which might lead to your income stopping without warning. Standards have improved since the FSA took over the remit but there are still risks.

Your choices at retirement

When you reach retirement age, with interest rates - and therefore annuity rates - at historic lows, your most important choice will probably be between taking an annuity or using an unsecured pension product. The former will lock in a guaranteed income for you, but the latter option would allow you to stay invested, at least partly, for an interim period whilst you decide whether markets will get better - or worse before taking the plunge.

An annuity is specifically designed to provide an income stream for life. This provides security and stability but does also mean you basically give up all right to the original capital. Without any guarantees in place, your descendants could be left with nothing should you die earlier than expected. With an unsecured pension (also known as income drawdown) you can retain your entitlement to the capital but still draw an income. This might be less than you would receive from an annuity - and you are also leaving the capital value invested in markets, meaning its value could fall - however, you also preserve some of your pension fund value.

Such schemes are now extremely flexible and offer access to a wide range of underlying investment funds, so you can assess the risk you are prepared to take and allocate your fund accordingly. An adviser can help make sure all the aspects have been covered before you make a decision. Of course, you could also combine the two. Keeping part invested whilst taking an annuity with the rest, may offer the right combination of products for you, so do examine

your options carefully.

Investing for growth

The make-up of your investment portfolio will depend on a number of factors, most importantly your age and attitude to risk. Age, for example, helps to mark out your time horizons, which will indicate whether you can ride through the volatility of equity markets. Your attitude to risk will then decide whether you can deal with that volatility and how much diversification you need to help soften any potential downturns.

If you do not require an income from your investments, then you will be looking to invest in assets that will maximise the capital value of your portfolio. If you have a longer time horizon (for example, during the earlier years of pension planning) then it could actually pay you over the long term not to be too cautious. Equities have traditionally outperformed all other asset classes over the long term. Therefore, despite their tendency for high volatility over shorter periods – you can lose money if markets turn against you – some of that long-term potential could be missed if you do not take a least some of that risk on board.

If you do get nervous when equity markets slump or you have a shorter time horizon, then you could still obtain equity market exposure – you just need to be careful about what sort of equities you choose. Longer term, you could perhaps afford to look at higher-risk areas of the market, such as smaller companies and emerging markets, for a portion of your portfolio (perhaps 10-15%) but over shorter periods – or for more cautious investors – a core holding of larger UK and international equities might be more appropriate.

The balance of your portfolio is then likely to be targeted at fixed interest and cash. The idea here is that first, you have cash on hand to meet any short-term or emergency spending requirements and second, if equity markets do go through a slump, the other assets should shelter at least some of your portfolio from the worst effects. The lion’s share of this portion is likely to be in safer corporate bonds with the remainder in cash or near-cash investments such as UK gilts. However, for the more adventurous, high yield bonds could offer some capital growth potential in the right market conditions.

A well planned growth portfolio can see you through all sorts of market conditions providing you do not need the investment at short notice. Most investors lose out only if they have to – or feel they are forced to – sell assets when a market has slumped. You should always keep an eye on market conditions, but planning at the outset is much more important if your money is going to work as hard as it can until you need it.

Covering your incomeAccording to research examining the country’s protection ‘gap’ suggests, half the UK population would be penniless within a month if their income dried up. The study, conducted by insurance giant AXA, suggests that half of us have very little in savings or investments and would struggle to cope if we were unable to work.

Just 45% of us have any form of protection insurance in place to cover our main income should it be taken away, and only a third of us believe we have enough provision in place to cover our mortgages.

Estimates suggest that the average monthly expenditure per household is around £450 yet 49% of us have less than £1,000 saved up and 72% save less than £100 a month. Despite this, people still expect to have to cover additional expenses in the future such as funeral costs (62%) and children's education (42%) with no extra financial provision over and above this amount.

Insurance products such as income protection and critical illness are designed specifically to provide financial support if illness, injury or, in the case of critical illness, a serious illness stop us from working normally. It comes as no surprise, given the current climate, that people also told the researchers they were reluctant to invest in such products but, as the figures show, not doing so could end up costing far more.

Dont put off the WillIt is understandable that so many of us put off the task of making a will. Afterall, it makes us think about our mortality and consider things which we hope will never happen. However, without one, you might be surprised to find out how easy it is for your assets to be distributed out the wrong way.

The exact rules of distribution depend where in the British Isles you live as some details differ between Scotland, Ireland and England & Wales. However, if you are not married, for example, the law is united in saying your partner may get nothing. Without a marriage certificate, your children and parents will benefit instead.

Even if you are married, there are many good reasons for making a will. First and foremost, it allows you to take postive decisions over who gets what - including friends, friends' children, charities and local societies who are entitled to nothing without your say. You can also decide if ex-partners - or perhaps more importantly, ex-partner's children - should be helped out. And, if your estate is greater than £325,000 (£650,000 for married couples), a will can help you plan to reduce your Inheritance Tax liabilities.

In thinking like this, making a will can actually become a very positive, rather than negative experience. Considering these things in advance can actually help your peace of mind and ensure that all you family and friends will be looked after in exactly the way you want them to be.

What is an MVA?

Market value adjustments (MVAs) are, for many, the devil in the detail of with-profits investing – particularly following their seemingly prolific use in recent years. The reason for their introduction was to help protect existing investors in the fund from shorter-term investors seeking to take advantage of the annual bonus and then selling out - they do not hold their investment long enough to earn the bonuses that are allocated to them. Because the unit price does not move directly with asset prices (as it would in a unitised fund), a specific adjustment needs to be made - or these investors would be walking off with existing holders' profits.

Issued by 2plan Wealth Management 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 advice or Will writing.