Global market update

July saw a huge re-embracing of risk assets after the weakness in June. This was prompted at first by better economic news – though this had started to wane by the end of the month – and there were also some high-profile corporate earnings announcements, which gave equity markets a boost.

Equities were the top-performing asset class in July, with the UK the place to be. US equities also did well, while European equities performed roughly in line and Japanese equities saw weaker performance. Corporate bonds were largely flat and government bonds fell slightly on the month.

Equities were initially given a boost by an International Monetary Fund report that raised global growth forecasts from 4.2% to 4.6%. The UK was one of the few countries where growth prospects were downgraded, but the change had been largely expected on the back of the ‘austerity’ Budget in June. There was also better news from Europe where PMI data showed improved confidence in the manufacturing sector while the weaker euro finally seemed to be feeding into positive growth for companies in the region.

But the good economic news did not hold up. Mid-month, Federal Reserve chairman Ben Bernanke said economic conditions were “unusually uncertain” and the struggling banking sector and near-collapse in the Greek economy were delaying a US recovery. And so it proved at the end of the month when US GDP growth figures came in behind expectations – the economy grew at an annualised pace of 2.4%, compared to expectations of 2.7%.

There was also bad news from China as the announcement the country’s growth had slowed to “just” 10.3% – from its previous level of 11.9% – spooked economists. The more optimistic pointed out this was a natural consequence of Beijing’s strategy of withdrawing its stimulus packages and tightening monetary policy, but it still raised fears of a double-dip.

Back in Europe, the much-anticipated banking stress tests proved something of a damp squib. There were few surprises and most analysts thought them insufficiently rigorous, which means they essentially failed in their primary aim – of restoring confidence in the sector.

So why did equities hold up? Principally, the strength of corporate profits continued to support prices. July saw the start of the second-quarter reporting season and early signs were promising. Shell and Exxon, for example, saw a near-doubling of profits, which helped ride out the worsening economic news.

Emergency Budget Snapshot 2010

The Chancellor has announced today the Coalition Government’s first Budget.
This is not intended as an in-depth analysis of the Budget speech (we will leave that to the real experts) but we hope this quick snapshot helps you gain a quick grasp on the key points:

Tax
VAT to increase to 20% from 4 January. Current zero-rated items to remain exempt for whole of current Parliament.
CGT to increase for higher-rate taxpayers to 28% from 23 June 2010. CGT to remain 18% for basic-rate taxpayers and the CGT tax-free allowance to remain £10,100 this year.
The CGT entrepreneurs rate of 10% to be extended to the first £5 million of lifetime gains.
Personal income tax allowance to be increased by £1,000 in April 2011 to £7,475. Higher rate threshold to remain frozen until 2013.
The April 2011 introduction of taper on higher rate tax relief on pension contributions by high earners to be reviewed.
Insurance premium tax to be increased from 2011. Higher rate to be 20%, standard rate 6%.
Councils that propose low council tax increases to be offered additional funds to allow them to freeze the tax for one year from April 2011.

State benefits and pensions
Benefits, tax credits and public service pensions to be increased in line with CPI rather than RPI from 2011.
Basic state pension to be linked to earnings from April 2011.
Pensions guaranteed to rise in line with earnings, prices or 2.5%, whichever is greatest.
The increase in the state pension age to 66 to be accelerated.
Child benefit to be frozen over the next three years.
Tax credits to be reduced for families earning over £40,000 from 2011.
Child element of the child tax credit to be increased by £150 above indexation in 2011.
Sure start maternity grant to go to the first child only.
Cap on housing benefit to be introduced - from £280 a week for a one-bedroom property to £400 a week for four bedrooms or larger.
Medical assessment for Disability Living Allowance to be introduced from 2013 for new and existing claimants.

Businesses
Corporation tax to be cut to 27% in 2011 and by 1% a year over the following three years to 24%.
Small companies rate to be cut to 20% in 2011.
Employer’s NI threshold to increase by £21 a week above indexation in April 2011.
Tax relief for video games industry to be scrapped.
Bank levy to be introduced in January 2011 to apply to balance sheets of UK banks and building societies and UK operations of foreign banks.

Duties
No increases in fuel, alcohol and tobacco duties.
Planned increase to duty on cider by 10% above inflation reversed.

Public sector pay
Two year public sector pay freeze to be introduced on staff earning more than £21,000.
People earning less than £21,000 to receive a flat pay rise worth £250 in each of the two years.

Internet
Planned landline tax to be scrapped.

Planning for a market downturn

As an investor, you understand that different asset classes and industry sectors are liable to turn against you from time to time. Despite equities' long-term potential, both the meltdown of the 'dot.com' boom and, more recently, the credit crunch fallout demonstrate things are much less certain in the short term. Similarly, bonds are viewed as medium to lower-risk investments, particularly when economic growth is on the wane. However, holders of some bonds over the period since the crunch first hit would have suffered. Many investors, faced with such downturns, tend to panic. They see only the shortterm loss on their portfolio balance sheet and forget their reasons for investing. Sadly, this is the worst thing they can do – and it is why planning at the outset of any investment is worth every minute spent. If you know why you are investing and understand fully the risks involved, market downturns should never have such an impact. If you are far-sighted and have a degree of nerve, they can even be an opportunity. Such downturns can be wide-ranging and indiscriminate, meaning the share prices of high-quality companies can suffer alongside lower-quality peers. This gives canny investors the opportunity to add to their portfolio at bargain prices. However, for most, the best strategy is simply to protect yourself while the market settles down. Nothing in a portfolio is more valuable than the time you spend achieving balance, diversification and cementing that long-term objective.

How to build your portfolio

The word 'portfolio' is simply a shorthand term for the collection of investments you own across all your accounts. Ideally this will be spread across a variety of assets - equities, bonds, property and cash - in a mix that has been determined by that your 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 dependant 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 as a result, one asset might be doing very well at the exact same time another is doing badly. However, it is difficult to predict which one will be doing well - or badly - at any one time. Hence, if you mix the asset classes together and have a little bit of exposure to each, this can help balance out the peaks and troughs of the individuals. Your age, your financial position and your attitude to risk are all crucial considerations to make sure you get the proportions right and build the most appropriate portfolio. It is therefore helpful to speak to an expert who can more easily help you achieve the right mix.

A new political dawn

After a couple of nail-chewing weeks, the UK finally has a new government. It may not be quite what markets would have wished for - equally it is not as bad as they might have feared. But this is unchartered territory with the UK coping with an economic crisis and a political set-up not seen for a generation. Do investors need to prepare themselves for a bumpy ride? Or are the new government’s policies likely to bring stability? First, it must be said that some measure of certainty is welcome. Markets hate uncertainty and the mere fact that a government has been formed has allowed them to concentrate on other areas (like the crisis in the Eurozone). The pound has seen a small rally against the Euro since the election, though this may be more a function of the potential weakness across Continental Europe than a vote of confidence in the new government. More certainty of government is good for gilts, as is the fact that all the major rating agencies said that the outcome of the election had not changed their view on the outlook for the UK. That said, many other problems remain: Over-supply continues to be an issue and the rating agencies may not look so favourably if credible steps are not taking relatively quickly to deal with the deficit. All eyes will be on the new budget on 22nd June. Coalition is not a disaster. Markets had expected a hung parliament and the current compromise is probably as good as they could have hoped for. The true extent of the compromise is unlikely to be seen until the first budget. Watch this space.

What does it mean?

What does our new coalition Government mean for your financial plans? The UK economy is running an unprecedented deficit so we can be sure that somewhere, one or two taxes will rise. In the spirit of compromise, there will be no imminent rise in the Inheritance Tax threshold and the priority is instead a rise personal income tax allowances. Alongside, however, the Prime Minister has given indications that there maybe changes to Capital Gains Tax coming. Rumour also has it there will be rises in VAT. Until we see the Budget Statement on the 22 June, we will not know anything for sure. However, now may be a good time to start a review of your own plans so you are ready to make a change should that be required.

The Coalition Government making its presence felt

An increase in capital gains tax (CGT) will be at the heart of any package of reforms. Currently, at a rate of 18% on "non-business assets", this is likely to increase to close to 40%.

The income tax threshold is likely to rise to £10,000 from April 2011, with plans to ditch the employee part of the proposed National Insurance increases.

The £1 million threshold on inheritance tax was always unlikely, while the Lib Dems have had to give up on their "mansion tax" on properties worth more than £2 million.

Public sector pensions are to come under scrutiny, with a commission to assess their sustainability.

Victims of the Equitable Life scandal in 2000 will benefit from a new compensation scheme that goes beyond that devised by the Labour government.

Save thousands with salary sacrifice

High earners should exploit salary sacrifice rules when planning their pension saving, allowing them to avoid some of the tax rises imposed by the Budget and pre-Budget report.

In brief, from 6th April a 50% upper rate of tax has been introduced for income over £150,000, and the personal allowance (the first slice of income on which no income tax is due) is also to be gradually removed. Currently staning at £6,475, this allowance will reduce and completely disappears for those earning approximately £113,000 or more. From 6th April 2011, National Insurance contributions will also increase by 1%, both for employees and employers.

These rises coincide with a wider range of changes that will make pension saving less tax efficient for those with high incomes. For the moment, those with incomes of more than £130,000 are to be hit, but are the government just lining up for further changes?

These changes make the option of salary sacrifice, where people give up some of their salary in return for an employer pension contribution, more attractive.

Abolishment of Contracting Out

On 16 March 2010, the government confirmed that contracting-out under defined contribution pension schemes will be abolished from 6 April 2012.

Angela Eagle, minister for pensions and the ageing society, said abolition was a simplification measure as contracting-out for defined contribution schemes was a complex issue. She said: "It has become increasingly difficult to determine that a scheme member would be better off by contracting-out of the additional state pension."

The announcement means after the 2011/12 tax year people in defined contribution schemes will no longer be able to contract-out of the second state pension (S2P). For those who are contracted-out through a personal or stakeholder pension, no further national insurance rebates will be paid to their scheme after the one for the 2011/12, which is likely to be paid by the Department for Work and Pensions around October 2012.

Those in contracted-out money purchase schemes will start to pay higher national insurance contributions from April 2012 onwards.

People who have been contracted out will start to build up entitlement to S2P from 6 April 2012 onwards.
Benefits built up by being contracted-out will remain in the pension scheme until the individual transfers these to an alternative arrangement or benefits are paid.

Any other contributions being paid to the pension scheme will not be affected.

What can parents do to save enough for their children's higher education?

Universities are expected to cut their budgets. There are also calls to stop subsidised tuition fees for higher earning families. Experts predict the change will be aimed at households with annual incomes of more than £25,000, so the middle classes will be hardest hit by any possible changes. With fees likely to rise, and the lack of likely financial support, the rising costs of living, and so on, is it surprising that so many students graduate with debts in excess of £20,000? The debate for many parents is whether or not they should be supporting their children.

When considering university education, as a parent you should be asking:
1. What will it cost to send my child to university for a year? As a rough guide you might consider:
Tuition fees £3,000
Accommodation £5,000
Books, beer and beans on toast £4,000
TOTAL £12,000
2. Can I afford it?
3. Before committing a great deal of hard-earned cash, is your child suited to university and will future employers see the benefit of this huge investment once your child is “released” into the big wide world?

So the question is, how best to provide the right amounts, at the right time in the most tax-efficient, least volatile and secure manner.

Cash provides security, but in today’s low interest rate climate, most deposit accounts offer little potential for growth. You could consider Cash ISAs, where the interest will be payable with no further liability to income tax, but again you need to do your homework to ensure you get a decent rate, and review it regularly.

Investments in equities over the long term might prove to be a more favourable choice. But, that all assumes you have time. Our advice would be to start as early as you can – the longer you have to save the less you need to put aside each month.

Some will favour child trust funds, but I have to say that I am not a fan of giving children control of large sums at a young age. They might prefer the beach in Bali, or might have some awful boy/girlfriend in tow! If the money is in the parent’s name, they retain control. You may agree to fund Bali or the awful boy/girlfriend, but it will be your choice!

So what does the budget mean for you?

A VERY brief summary of budgetary announcements made last week, and also a reminder of those already made that will take effect from 6th April:

- income tax personal allowances remain unchanged for 2010/11

- the National Insurance Lower Earnings Limit will be increased from £95 to £97

- a reminder that for those with adjusted net income over £100,000, their personal allowance will be reduced by £1 for every £2 over the limit

- a new tax rate of 50% will be applied on those earnings over £150,000

- for dividend income, the new tax rates will be 10%, 32.5% and 42.5%

- the ISA limit will increase to £10,200 from 6th April 2010, of which a maximum of £5,100 may be invested to a cash account

- from 6th April 2011 the higher rate of tax relief on pension contributions will be restricted for those with gross income over £150,000. Anti-forestalling rules apply in the interim

- consideration is being made for removing the dafault retirement age of 65, although no changes will come into place before April 2011

- inheritance tax thresholds will remain frozen at £325,000 until the end of tax year 2014/15, scrapping previously announced increases to the threshold

- first time buyers will pay no stamp duty on properties worth less than £250,000

- stamp duty on properties over £1,000,000 will increase from 4% to 5%

- to encourage greater financial inclusion, more people are to be given access to setting up bank accounts

- legislation is being introduced to provide for larger penalties for taxpayers failing to provide a full account of their income and capital gains relating to offshore investments

- capital gains tax will remain at 18%, with the annual exemption being frozen at £10,100 for 2010/11

100 families a day helped by CI

More than 100 new families are now claiming each day on their life and critical illness (CI) insurance policies, according to data published recently by the ABI. The average claim was £52,000, double the average UK annual salary.

Where to find advice you can trust

Saturday's Telegraph Your Money article was excellent. They focussed on the achievement of the nine regional winners of the New Model Adviser of the Year award.

All nine winners shared some positive characteristics, which might help consumers dtermine whether their IFA is the right one for them:

Genuinely fee based - and so more likely to provide unbiased advice. These advisers all had clear charging structures.

Highly qualified - all were either run by or employed IFAs who have qualified as either certified financial planners (CFP) or chartered financial planners. These are the two highest qualifications IFAs can attain. Don't confuse CFP with the certificate in financial planning, which is the most basic qualification all IFAs must have.

Satisfied customers - all the winners regularly survey their customers to see if they are satisfied. Not only were the results good, the fact they conduct the surveys showed these were well-run firms.

I'm delighted that we at Jane Smith Financial Planning can also offer these same characteristics!!!

Covering childcare costs that never end!

Many parents have bought life policies in the past assuming their children would be independent at 18. New research shows parents are funding their children for much longer, so new protection options are needed.

Gone are the days when your little ones flew the nest at age 18, leaving you to breathe a sigh of relief that your current account might at some point recover. Becase of the difficult economic environment, parents today cannot expect to get their financial freedom back until their children are much older.

Day-to-day living is more expensive, jobs harder to come by, and house prices are high with loans often difficult to obtain without paying a large deposit or a very high rate. According to The Children's Mutual, 93% of parents are still providing towards their childrens' finances until they are 30, and 16% of parents are still supporting their children beyond the age of 30.

This raises the question, do parents have sufficient protection in place? Even if they have sensibly planned ahead to ensure their offspring are financially supported, will that support continue if something should happen to one or other of the parents?

With children being financially dependent for longer, it makes sense to review existing policies to see whether the sums assured allow for the extra money that older children now need from their parents.

It seems that providing a secure financial future for their children is becoming an ever-expanding financial commitment for parents. This makes it vital to keep protection cover up to date with changes in the social and financial landscape.

Property data flawed?

According to Danny Blanchflower, former member of the Bank of England's monetary policy committee, last year's house price rises are unbelievable and point to the fact that property data is unreliable.

He has warned that there was more pain to come for the housing market. His main argument is that, with unemployment rising, incomes stagnating and a massive reduction in the amount of credit available to would-be buyers, there was no justification for the rises in price seen in 2009.