P/E ratio

A common metric for valuing shares is the PE ratio, this compares a company’s share price with its earnings. And in this case, taking an average for the whole stockmarket.

The FTSE 100 PE ratio presently stands at 14, and the FTSE 350 (an aggregation of the FTSE 100 & FTSE 250) trades on 15 times earnings, below its long-term average. To put this in perspective, the UK stockmarket traded at more than 25 times earnings during the dotcom bubble.

Source: ftse.co.uk

A more refined version of the PE ratio is the cyclically adjusted price to earnings ratio (CAPE), which smoothes earnings over ten years, placing the FTSE 100 on 13.5. This is again below its long-term average of 16.

However as Reuters journalist Anatole Kaletsky highlights, the cyclical adjusted price-earnings ratio (also known as Shiller price-earnings ratio) is by no means perfect. He correctly states that “Any comparison of valuations covering long periods is meaningless if it fails to take into account vast changes in technology, economic policies, interest rates, social and political structures, and taxes”. Therefore I would take this statistic with a pinch of salt.

Monetary Policy and Relative valuation

Monetary Policy remains very accommodative, both in Europe and across the Atlantic.

The Bank of England base rate is 0.5% and the European Central bank base rate stands at 0.150%. The Bank of England governor Mark Carney has suggested that a return of rates to the normal 5% remains unlikely in the medium term. In addition, he said that rate rises would be more limited and gradual than in the past and expects them to reach a new normal of 2.5%.

This translates into negative real interest on cash (where inflation exceeds nominal interest rates) and meagre gains on government and corporate bonds. Therefore on a relative basis, equities look attractive.

Elsewhere, inflation remains subdued and economic growth continues to pick up speed – this is good news for corporate profits. Earnings is one of two key drivers of share prices over the long-term, the other being the attractiveness of alterative asset classes.

Yield Gap

The yield gap is a common yardstick to assess whether a market is over or under valued. It is the average dividend yield in a market compared with the yield of a long-term government bond.

In this case, the FTSE 100 yields 3.4% and the FTSE 350 (aggregation of FTSE 100 and FTSE 200) yields 3.3%. By comparison the 10 year gilt year is 2.64%, this would imply that shares are undervalued. However critics would rightly point out that this method is distorted by quantitative easing and low interest rates.

Market sentiment

Finally, there is the ‘sentiment indicator’. FT investment writer John Auther’s rightly stated, “Bears need to capitulate, journalists need to stop writing articles about corrections and sentiment surveys need to grow unequivocally bullish. This is not happening yet, as this column indicates. This rally continues to be hated and distrusted, and retail investors continue to be heavily in cash”.

It reminds me of the old stockmarket maxim, ‘stockmarkets climb a wall of worry’.

This leads me to the conclusion that while the UK and developed markets are richly valued, they are not a bubble. If anything, I believe there’s a ‘bubble in the prediction of bubbles’ and many journalists make a comfortable living out of it!.

Interesting reads

Anatole Kaletsky - ‘Here’s what it will take to trigger the next stock market correction’ August 21, 2014

Anatole Kaletsky - ‘Exuberance is not always irrational July 25, 2014

The business media is awash with financial jargon, perpetuating the myth that the stockmarket is hideously complex and therefore best left to the professionals.

Instead, successful investing requires a basic understanding of the financial markets and the application of core investment principles.

Stock Market Terminology

What is a Share? Also known as ‘Equities’ or ‘Stocks’, they represent part-ownership of a company. As a shareholder, you have a right to say in the decision making (through annual meetings) and are entitled to a share of the profits through the payments of dividends.

Board of Directors – A group of elected or appointed members who run the day-to-day affairs of that company. They are elected by the shareholders to represent their interest.

Initial Public Offering – When a company raises money by issuing shares to the public for the first time. Also referred to as ‘Flotation’ or ‘coming to the market’.

Rights Issue – When a company issues new shares to existing shareholders in order to raise money.

Market Makers – Individuals or stock brokers who guarantee to buy and sell shares in a particular company, in order to maintain liquidity. They create markets in illiquid shares, ensuring there’s always a buyer and seller.

Bid-ask spread – This is the difference between the purchase price and the sales price, it is maintained by the market maker.

Liquidity – The number of buyers and sellers in a particular market. It impacts the degree to which an asset can be sold quickly and easily, with little or no change in asset value. Property is an example of an illiquid asset.

The Big Bang (October 27, 1986) - The day in which the London Stock Market was deregulated. Changes included a shift from open outcry to an electronic system and the abolition of fixed commissions.

Short-Selling – The practise of betting that a share price will decrease. It is the act of selling a borrowed asset with the intention of buying it back at a lower price and returning it back to the owner, pocketing the difference.

Moral Hazard – The incentive to take greater risks, because someone else will bear the costs if things turn badly.

Securities – The general name given to shares, bonds and similar investments that are often traded on the stock exchange

Blue chips – These are large, nationally recognized and well-established businesses. Examples include Royal Dutch Shell and Vodafone Group.

FTSE 100 – An index composed of the 100 largest companies listed on the LSE (London Stock Exchange). It measures the value of the top 100 companies and acts as a barometer of the British economy. Although most of the FTSE 100’s revenue are now derived internationally (more than 70%).

AIM (Alternative Investment Market) - It’s the London Stock Exchange’s market for small, high-growth companies wishing to raise finance without the onerous regulations of the main market.

S & P 500 - The Standard and Poor 500 is a stockmarket index made up of 500 of the largest and most widely held companies on the NYSE (New York Stock Exchange).

Both the FTSE 100 and S & P 500 are weighted by the market capitalization of each stock, meaning larger companies account for a greater portion of the index.

Bear Market – A prolonged period of declining asset prices, fuelled by investor pessimism and lack of confidence. It is characterised by stockmarket declines of 20% or more. By contrast, bull markets occur when financial markets have appreciated by at least 20%.

J.P. Morgan table of Bear and Bull markets.

Beta - This measures the sensitivity of a stock’s price relative to the overall market. If a stock has a beta of 1, it indicates a level of volatility equal to the stock market.

Volatility - Indicates the speed and amount by which an investment changes in value. For example established blue-chip stocks tend to have a stable prices, making them less volatility.

Core Tier 1 capital - A measure of a bank’s financial strength. This consists of shareholder equity (capital directly invested by shareholders) and retained earnings (profits not paid out as dividends).

Financial Conduct Authority (FCA)

The UK body which regulates the financial services industry. Their aim is to protect consumers, ensure the industry remains stable and promote healthy competition.

Financial Services Compensation Scheme (FSCS)

The FSCS is the UK’s compensation fund of last resort for customers of authorised financial services firms. They pay compensation if a firm has stopped trading or being declared default.

The scheme protect depositors up to £85,000 per person, per firm and awards up to £50,000 for customers of investment businesses.

About FSCS: http://www.fscs.org.uk/protected

Peer-To-Peer Lending (also known as Crowd-Funding)

It is the practise of financing a business venture, by raising small amounts of money from a large number of people. This is done through internet platforms such as Zopa, Ratesetter and Funding Circle, which bring together borrowers and lenders. As a caveat, Peer-to-peer lending is not covered by the financial services compensation scheme.

What is Bitcoin?

Bitcoin is a digital currency which allows individuals to buy goods and services, without the need of third parties (i.e. banks). The users can store and send bitcoins via a ‘bitcoin wallet’, which is stored on your mobile or computer device. And details of every single transaction are stored on a ‘block chain’, a public record of all financial transactions.

Drawbacks -

Each transaction is completely anonymous, there are fears this will fuel illegal operations (drugs and firearms).

In addition, the supposedly clever design feature means there will only ever be 21 million bitcoins in circulation. This finite supply has turned bitcoin into a speculative investment, rather than a means of payment.

Ben Dyson from Positive Money on the ‘Three Fatal Flaws of Bitcoin’.

A short Bitcoin video: All the Facts

Financial Statements

Income Statement

Also known as the ‘Profit and Loss’ account, it shows the revenues less expenses over a given period.

Balance Sheet

This summarises the assets and liabilities of a business at a particular point in time – financial year end. Assets could include cash, property or machinery. And liabilities include everything the company owes.

Cash flow

This records the cash entering and leaving the company. A key difference between the income and balance sheet is that it doesn’t include the amount of future incoming and outgoing cash that has been recorded on credit (arrangement to pay later).

Investment Management Terminology

Actively Managed Funds – The investment manager will actively try to beat the market by using his judgement, experience and forecasts in making investment decisions.

Passive Funds - A fund which mimics the market index, rather than trying to beat it.

Closet-Index funds – An investment fund which more or less tracks a benchmark, although it claims to be actively managed. Closet indexing exists because fund managers believe it is safer to track benchmark indices.

Hedge Fund – A pooled investment vehicle available to wealthy and sophisticated investors. They are aggressively managed, and use leverage (borrowed money), derivatives, longs and shorts to generate superior returns.

Exchange Traded Funds – Investment funds traded on stock exchanges, which track the performance of a particular market or index such as the FTSE 100.

Options - A contract which gives the buyer the right, but not the obligation to buy or sell the underlying asset, at a specified price on or before a certain date. This is a type of derivative, and they are used to speculate and hedge risk.

Financial Instability Hypothesis - American economist Hyman Minksy believed that ‘Stability begets instability’. This is because long periods of economic stability encourages financial institutions and firms to become complacent. As a result they take on greater risks and more leverage – sowing the seeds of the next crisis.

Minksy Moment - The moment when the financial system moves from stability to instability. Over-indebted borrowers begin to sell assets in order to meet debt repayments, triggering sharp falls in asset values and a loss of confidence. At this point, the whole house of cards falls down.

Most of these terms are articulated through Investopedia’s short animated videos – http://www.investopedia.com/video/

- Former chief executive of Tullet Prebon, one of the world’s largest interdealer brokers (a financial intermediary that facilitate transactions between dealers).

- Founder and CEO of the fund management business ‘Fundsmith’. At present ‘Fundsmith Equity Fund’ is its principal and sole investment vehicle. At launch he invested a whopping £25m of his own money, it is currently worth over £42m today – He eats his own cooking.

- He also runs a blog called ‘Terry Smith straight talking’ and is a frequent media contributor.

The New Warren Buffet

He established Fundsmith in response to the excessive fees and poor performance within the fund management industry. In his own words, he wanted to give “fat and complacent” fund managers a bloody noise. Today, the performance of Fundsmith has been exemplary; appreciating by more than 60% since inception (November 2010).

Terry’s investment style:

He’s a buy-and-hold investor. He laments fund managers for being too active, because unnecessary trading reduces performance and raises management fees. Renowned investor Warren Buffet eloquently said that “Sir Isaac might well have gone on to discover the Fourth Law of Motion: For investors as a whole, returns decrease as motion increases”.

Avoids over diversification, they highlight research which shows that around 20 to 30 stocks are required for optimal diversification. The more stocks you own, the less you know about each one – its called ‘diworsification’. As Warren Buffett said: ‘Wide diversification is only required when investors do not understand what they are doing’.

Invests in resilient businesses; they avoid industries that are subject to technological innovation. New technologies create value for some investors while destroying value for many others. Example: internet destroying the media industry. Moreover he will invest in good quality business only when the valuation is attractive.

Invests in businesses with a sustainable high returns on capital employed (this measures the efficiency and profitability of a company’s invested capital). Companies that typically fit this bill are consumer businesses with repeat purchases.

Buys companies with ‘intangible assets’ that are difficult to replicate. By this he’s referring to brands, licenses, patents, dominant market shares etc.

Avoids market timing, studies show that the most successful fund managers avoid market timing. Stocks are a ‘giffen good’, this means that demand paradoxially rises as prices increase. Driven by greed and fear, most investors end up buying high and selling low.

Terry and his investment team are ‘global investors’. They believe the proliferation of ‘national’ and ‘regional’ funds are anachronisms, this approach leads managers to being overweight in a one market and underweight in another, damaging performance.

Fundsmith Emerging Equities Trust (FEET)

On the back of a successful global equity fund, he is planning to launch an emerging market fund later this year. The trust is expected to start trading on 25 June and they are seeking to raise up to £250m. He is commited to applying the same strategy used within his existing fund, but in companies listed on the emerging markets.

Terry Smith is an investment manager of exceptional calibre. He’s a plain-speaking, outspoken maverick. And as one of the few managers I hold in high esteem; I shall be closely monitoring his next fund launch.

Fundsmith Emerging Equities Trust (‘FEET’) website –  http://www.feetplc.co.uk/

And the Fundsmith Emerging Market Equities Trust PLC – Owner’s Manual

Emerging markets have been out of fashion of late, driven largely by current account deficits, capital outflows and a credit squeeze in China.emerging-markets-BRIC-MINT

This brief post will highlight and reinforce the fundamentals which make the emerging markets a compelling long-term investment.

1. They are home to 85% of world’s population
2. They constitute 50% of world GDP and contribute to 75% of worlds GDP growth.
3. Comprise of mainly a young and dynamic population – between 29 and 59.
4. Has a natural resource advantage, for example its home to 90% of the world’s proven oil reserves.
5. Rise of a consumer society, fueled by the expanding middle class and higher incomes.

However, these countries only account for 15% of the world’s stock market. Roger Bootle, economist and author believes that sophisticated investors will gain exposure to the emerging markets through good-quality western companies with large operations in the developing economies.

This strategy allows you to advantages of western standards of corporate governance, attitudes to dividends and political stability – combined with a share of the emerging market growth prospects.

Source: Fidelity Worldwide Investment

Valuation: Based on forward times earnings they currently trade at a weighty 30% discount relative to developed markets. Every veteran will be aware of the fact that the lower the initial valuation, the greater the long-run returns – this is called the value effect. And, its worth remembering that Emerging economies grow at twice the rate of developed countries, which should translate into better investor returns.

Why select investment funds over shares?

Diversification – By diversifying your investments, you are reducing your risk. An investor spreads risk across asset classes (property, shares, cash and bonds), sectors and countries.

Lower cost – Buy a diversified portfolio without incurring numerous commission charges.

Professional management – fund managers possess specialise expertise, each stock can be carefully researched.

Convenience – Researching individual shares and constantly eying the stock market is time consuming.

This is why I believe investment funds should form the majority equity portion of a portfolio.

Investment Funds worth considering

City of London Investment Trust

Objective: provide long-term growth in income and capital.

Conservatively managed, it invests principally in large blue-chip and medium companies listed on London Stock Exchange. Its biased towards large-caps.

Record: Longest record of raising dividends among investment trusts, increased for 47 consecutive years since 1966. Achieved unbroken dividend growth by retaining income from good years in revenue reserve to bolster dividends during difficult years.

Appreciated over 140% since 2009 and yields just under 4%.

Fee: 0.44%, no performance fee

Market Cap: £1 Billion, 76% invested in UK blue chip companies.

Net Gearing: 8%

Portfolio Manager: Job Curtis managed the trust since 1991.

Incorporated in 1891, the company is a constituent of the FTSE 250 Index. Managed by Henderson Global Investors.

This fund is included as one of Investor Chronicles top 100 investment funds and ‘whichinvestmenttrusts’ buy list.

The City of London Investment Trust (CTY:LSE) website.

Bankers investment Trust

Objective: generate maximum returns through a global, well-diversified portfolio.

Aims to also deliver divided growth in excess of Retail Price Index.

Record: Increased dividends for 47 consecutive years. It possesses ample revenue reserves to support dividend growth when required during difficult years.

Dividend yield presently 2.5%. Revenues Reserves: 32m as of October 2013. Dividends paid were 15.1m, therefore 2x dividend cover.

Capital appreciation of 120% over five years.

Manager: Alex Crooke, managed Bankers Investment Trust since 2003. Worked at Henderson since 1994. He’s a value based investor.

Has degree in astrophysics from Manchester University.

He uses shares in London to play international themes, as most of their revenue derives from abroad. Nearly 45% of portfolio is focused on UK shares.

Fee: 0.45% year, again one of the lowest in the industry

Market Cap: 632 million.

Incorporated in 1888, its constituent of FTSE 250 index.

The Bankers Investment Trust website.

Lowland Investment Trust

Objective: Achieve higher-than-average return through both capital growth and income over long-term.  They have up to 50% invested in FTSE 100 companies for stability and income, with a greater bias towards small and medium UK companies for their greater growth potential.

Gearing: Presently 13%. This fund is slightly more aggressively geared than its counterparts. Gearing is capped at 30% of fund.

Revenue reserves were £8.5 million as of 30 September 2013.

Fund launched in 1963, managed by James Henderson since 1990.

Fee: 0.59%. There is a performance fee, capped at 0.75%.

Market Cap: £391 Million

Record: 2.5% dividend yield and revenue reserves are £8.5 million.

Dividends: Grown its dividend for 19 of 20 years.

Grew by 300% over five years. Because capital growth has outstripped income growth in other portfolio, the dividend yield has fallen to 2.5%. They believe investing in high quality blue-chip stocks is an crowded trade, preferring instead to funds focus on smaller companies to yield better value.

Manager – James Henderson from Henderson Global Investors.. His is very much a pragmatic bottom-up style investor, focusing on individual companies rather than sectors, countries or the macroeconomic outlook. He’s run the fund for over 20 years and managed investment trusts for over 25 years.

Portfolio turnover – A turnover of 20% turnover per years, and on average he holds stocks for five years.

This fund is included as one of Investor Chronicles top 100 investment funds and ‘whichinvestmenttrusts’ buy list.

Lowland is also highly commended in the Moneywise magazine UK growth and income category. And Moneywise also awarded ‘Henderson Global Investors‘, which manages the above three trusts as the ‘Investment Trust Group of the Year in the 2014′.

Finsbury growth and income trust

Objective: Invest in predominantly UK quoted shares to achieve income and capital growth. Up to 20% of portfolio can be invested in overseas stocks.

They run a very concentrated portfolio, comprising of around 30 stocks.

Manager: Portfolio run by Nick Train of Lindsell train investment management since 2000.

From their website his approach is ‘based on that of Warren Buffett’s and involves building a concentrated portfolio of “quality” companies that have strong brands and/or powerful market franchises’

Their ‘portfolio has a heavy emphasis on branded consumer goods and services (Diageo, Unilever, Kraft, AG Barr), media (Pearson, Sage) and financial services (Fidessa, Schroders, Rathbones, Hargreaves Lansdown’.

Its therefore biased towards consumer goods, consumer services and financials.

Record: Dividend yield 2%. Capita growth of above 200% over 10 years and 160% dividend growth over same period (although there was 7% cut in 2010).

Fee: 0.85%, total expense ratio capped at 1.25%.

Market Cap: £450 million

This fund is included as one of Investor Chronicles top 100 investment funds and ‘whichinvestmenttrusts‘ buy list.

MFM Slater income fund

Objective: From their website: ‘To produce an attractive and increasing level of income in addition to seeking long term capital growth. The Fund will invest in shares of high yielding companies with growing profits and strong cash flows across the market capitalization spectrum’

This is an open ended investment company. They run a relatively concentrated portfolio of between 50 and 70 stocks.

He holds a balanced mix of small, medium and large companies to avoid

Record: Yields over 3.6%. Outperformed IMA UK Equity Income benchmark last year. Funds 33.6% over benchmarks 23%. Since inception the fund is up 58%.

Manager: Mark Slater, he co-founded Slater investments in 1994. He previously worked as a journalist at analyst PLC and Investor Chronicles.

Skin in the game: Like Terry Smith (investment manager), he’s one of the largest investors in all three of his funds.

Fee: 1.5% annual charge

Fund size: £42million

Launched in the second half of 2011.

Fund smith Equity Fund

Objective: to achieve long-term capital growth via a portfolio of global shares. Invests in a concentrated portfolio of between 20 and 30 stocks globally.

The fund does not adopt short-term trading strategies and does not invest in derivatives.

Manager: Terry Smith, he launched the fund in November 2010. In his plain speaking style he said he would give “fat and complacent” fund management industry a bloody nose”.

He said up the fund because he believed Investors “continued to suffer from punitive fee structures, over-complexity, over-trading, fund proliferation, closet indexing and over-diversification.”

In his no nonsense style, he says ‘buy companies that can be run like an idiot, because in the end most are’

Furthermore he puts his money where his mouth is, he’s invested £25 million of his own money in the fund – he eats his cooking so to speak.

Regarding investors who wish to time the market, he says there are two types: ‘those who can’t do it and those who don’t know they can’t do it’

Fee: no performance fees, just annual cost of 1.1%

His secret ingredients: run a concentrated portfolio in well established companies and hold them indefinitely while minimizing trading. His fund has one of the lowest turnovers in the industry.

This fund is included as one of Investor Chronicles top 100 investment funds.

Fund manager Terry Smith presentation.

Royal London UK Equity Income

Objective: To achieve a combination of income and some capital growth.

It’s a core equity income fund which invests solely in high yielding UK stocks, with a particular emphasis on companies generating significant free cash flow to fund sustainable dividend payments.

The fund manager runs a high conviction stock portfolio and the risk profile reflects this. The fund has a larger than average weighing to mid-cap stocks (more than 40%).

He expects to hold between 40-60 stocks within the fund, although he presently has 72 holdings.

The fund was launched in 1984.

Manager: Martin Cholwill since 2005. Prior to joining RLAM he spent 21 years working for AXA Investment Managers. He has degree in Mathematics from Durham University.

Record: The fund has consistently outperformed its benchmark, growing by more than 160% over 5 years.

Dividend: A 3.36% dividend yield (as of 28 Feb 2014), pays quarterly dividends.

Fund Size: £1.2bn

Trustee: HSBC

Charge: At HL, net annual charge is 0.62%

Citywire awards Martin Cholwill a triple AAA rating.

The Royal London UK Equity Income Fund Factsheet.

Marlborough Multi Cap Income

Aims to generative an attractive and growing level of dividend income and capital growth through investments in chiefly small to medium sized companies.

Dividend yield – 3.7% paid bi-annually

Performance: Appreciated over 60% since inception (July 2011)

Manager: Giles Hargreaves and Siddarth Chand Lall

Size: over £700M

Fee: Annual charge 1.5%.

This fund is included on Hargreaves Lansdown wealth 150, a list of their favourite funds.

Unicorn UK Income

Objective: To provide high and rising income from a portfolio focusing on small UK companies (OEIC).

Dividend Yield: 2.9%, paid bi-annually

Size: £475m, it was launched in May, 2004.

This is an adventurous income fund, 89% of this portfolio is allocated towards smaller companies

Fund process: focus on companies with a competitve advantage and which operate in niche markets. Searches for businesses with high return on capital, strong balance sheets and high cash flows.

Performance: up 200% since Jan 2010.

Manager: John McClure, a Investment Manager at Unicorn Asset Management. He managed smaller companies portfolios at Guinness Flight Global Asset Management Limited (April 1992 – October 1997) before joining Unicorn in 1997. He also managed Acorn Income fund.

This fund is included on Bestinvest premier selection and Investor Chronicle Top 100 Funds. This is their selection of the top best investment funds.

Fixed Income Funds

Royal London Corporate Bond Trust

Objective: To maximize investment return (predominantly income with some capital growth) over the medium to long term from a portfolio comprising mainly of corporate fixed interest securities. This is a conservatively-managed fund, predominantly invested in higher-quality, investment grade corporate bonds

The fund was launched in 1991.

Morningstar allocates this fund a gold star analyst rating and Bestinvest a five star rating.

Manager: Jonathan Platt and Sajiv Vaid both have a mornigstar triple AAA rating.

Managed by Royal London Asset Management.

Performance: Appreciated by 28% over three years.

Income yield (underlying): 4.3%, paid quartely.

Size: £491m

Trustee: HSBC

Its included in HL wealth 150.

New City High Yield Fund (NCYF)

Objective: ‘To provide investors with a high dividend yield and the potential for capital growth by investing mainly in high yielding fixed interest securities’

Managed by Ian Francis since Nov 2007, he’s supported by the New City Investment Management team. NCIM is a trading name of CQS asset management.

Ian Francis holds 99,894 shares, at 64p price is £64,000.

Fund was incorporated in January 2007, Jersey.

Gearing: 107% (100 = no gearing) as of 30 January 2014. As of 2013 annual report, the company had 12m borrowings from HSBC Bank.

Revenue Reserves: as of 30 June 2013 are £12.5m. Revenues reserves are dividend income retained, allowing the company to dip into this pot during less fruitful years.

Size: £169m, trades at plus 4.5% premium.

Yield: Estimated 6.6%, increased on average 2.5% every year since inception (2007)

Total dividend paid: £9.1m as of 30 June 2013

Return: Appreciated by nearly 30% over three years.

Cost: Total Expense Ratio (TER) is 1.25%.

This fund is included as one of Investor Chronicles top 100 investment funds. Also included in John Barons Investment Trust portfolio at investor chronicles magazine.

This Fund won the Money Observer Trust Awards in 2013.

What is an Stocks and Shares ISA

An ‘Individual Savings Account’ is a tax-efficient shelterpiggybank. Savings and investment made into an ISA are completely shielded from the taxman.

The tax-free allowance inside an ISA for the 2013 – 2014 tax year is £11,520. The tax year runs from 6 April to 5 April in the following year.

The cash ISA and the Stocks & Shares ISA will be merged into a new ‘Super ISA’, with a tax free allowance of £15,000 from 1 July.

Advantages: you don’t need to declare these investments on your tax returns and you can make free withdrawals whenever you require.

Capital Gains tax-free allowance

Each tax year, everyone gets a ‘tax-free allowance for capital gains tax’. This ‘annual exempt amount’ allows you to make a certain sum before you pay tax.

The amount from 2014- 2015: £11,000.

Capital Gains Tax

18% for lower rate tax payers and 28% for those in the higher rate tax band.

Dividend income tax

Dividend income at or below £31,865 basic tax rate is taxed at 10%.

Dividend income above £31,865 and below £150,000 is taxed at 32.5%

Dividend income above higher rate limit (£150,000) is taxed at 37.5%.

Income Tax rate

The income tax free allowance for 2013 – 2014: £9,440, rising to £10,000 in the new tax year and £10,500 in 2015.

The basic rate income tax: 20% from £0 to £31,865 (after the tax-free allowance)

Higher rate tax rate: 40% from £31,866 to £150,000

45% after £150,000.

Source: HM Revenue and Customs

Premium Bonds

Premium Bonds are a popular savings product issued by the UK’s ‘National Savings And Investments – NS&I’, a state-owned savings bank.

The government pays interest on the bonds of 1.3% (from October 2013). But instead of the interest being paid into individual accounts, it is paid into a prize fund from which a monthly lottery distributes tax-free prizes.

Prizes can range from £25, up to £1,000,000.

The total cap on premium bonds will rise from the current £30,000 to £40,000 in June 2014. It will then jump again to £50,000 in 2015.

Furthermore the number of £1 million prizes will be doubled from one to two a month. These changes will take place in 2014 August.

As a caveat, the prize fund remains unchanged at £50 million per month. This means that for more people to win the additional 1 million pound prize, thousands of people won’t win the £25 or £50 prizes.

The current interest rate on premium bonds is 1.3%. This means that for every £1000 invested, you would expect to win £13. Because the minimum prize is £25, some people will win larger prizes while others win nothing.

http://www.nsandi.com/savings-premium-bonds

Pensions

What is an Annuity?

Your pension pot can be used to purchase a secure, regular income from your insurance company, this is an annuity. The insurance company are then responsible for paying you an income for the rest of your life.

Once an annuity has been purchased, there is no going back. Following the 2014 budget, there will be no compulsion the buy an annuity.

What is SIPP?

A self-invested personal pension is a tax-efficient personal pension scheme which allows individuals to select and manage their own investments. Its a ‘DIY’ pension scheme that gives you the freedom to determine how your retirement savings are invested.

Investments inside a SIPP are free of capital gains and income tax.

The annual contribution is capped at £40,000 and the lifetime allowance is £1.25m

Personal savings contributions into a SIPP receive tax relief of up to 45%. For example If you invest £8000 in a SIPP, the government automatically adds £2000 basic tax relief, increasing the total contribution to £10,000.

From the age of 55, up to 25% of your pension fund can be withdrawn tax free. The reminder is usually converted into a annuity.

Income drawdown

Income drawdown pension allows you to take income from your pension pot while the funds remains invested.

You can choose how much pension you want to be paid each year within certain limits.

There are two forms of drawdown pension: capped drawdown and flexible drawdown

Workplace Pension

A workplace pension is a method of saving for your retirement that’s arranged by your employer. They are also referred to as ‘occupational’ or ‘work-based pensions’.

Each payday, a portion of your pay is put into the pension scheme automatically. Your employers and government (through tax-relief) will also put money into your pension scheme.

Pension Automatic Enrolment

This new law means that every employer must automatically enrol workers into a workplace pension scheme if they:

- Are aged between 22 and State Pension age

- Earn more than £10,000 a year

- Work in the UK

More information about workplace pensions and specifically ‘automatic enrollment’ introduced in October 2012 – https://www.gov.uk/workplace-pensions

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