A technical recession is triggered after two quarters of negative GDP (Gross Domestic Product) within our economy.

Stock Markets haven’t fallen today. Why not?
The economy is one thing but the stock market is another altogether. As I write this, the FTSE-100 Index is up by nearly 17 points to 5726.26 and the Dow Jones is up by over 90 points to 13092.60.

So why aren’t stock markets’ reacting negatively to today’s news? The answer is that stock markets’ look forward, while economic data looks backward. Markets aren’t a vote on the economy today, but where investors expect it to be in the next 12 to 18 months.

However, markets are not an infallible guide to the future. A weak economy isn’t necessarily bad news for shares, but a strong economy isn’t always good news. If the economy grows too rapidly, central bankers may be forced to raise interest rates to head off the threat of inflation. The higher cost of borrowing hits corporate profitability and consumer spending, and ultimately hurts the stock market.

So what does this mean for Investors?
The normal assumptions about investing in share (equity) and bond (fixed interest security) markets have been turned upside down by the developing debt crisis in Europe. As a result, making investment decisions is more difficult than ever.

It’s tempting to wait until times are more certain. But when have we ever lived in certain times?

On the one side, there is the gloomy outlook for the world economy and on the other you could argue that some asset classes look attractively valued. Markets have swung like a pendulum as investors respond to these opposing pressures. Inaction within developed economies has maintained choppy seas for investors and the volatility within markets has continued.

So it’s Europe’s Fault?
As European politicians have effectively increased their countries’ overdraft facilities, the crisis rumbles on and predicting the final outcome is likely to be very difficult. The pain is not yet over.

European politicians have treated this as a crisis of liquidity – a temporary shortage of cash – rather than one of solvency, where countries’ finances are unsustainable.

As a consequence, the woes of the single currency zone could take a heavy toll on world growth. If there is a recession in Europe, the UK will not be impervious from the knock-on effects.

What’s the Risk?
The economic crisis has resulted in a re-establishment of the different scales of risk. Cash and government bonds were typically seen as low risk and shares were considered higher risk.

However, in a world in which sovereign debt and the banking system are under such strain, cash and government bonds may not offer the comfort investors usually expect. Even supposed ‘safe havens’ may not be as safe or as low risk as they appear.

Bonds issued by the UK and the US governments, for example, are currently in heavy demand as investors see them as a harbour from Europe’s woes. However, current low yields on gilts give no protection against higher inflation and they don’t provide dividends.

It could be argued that shares of healthy multinational companies with strong balance sheets, good propositions and capable management that can maintain good dividends look more attractive.

However, shares are more volatile in the short term and quality is the key here. Using Fund Managers with a proven track record, a robust process for determining the investments that they hold within their funds, that can seek out high quality dividend paying stocks with attractive valuations and healthy dividend yields are the lifeblood of the equity component of efficient portfolios. Can you identify these managers? Dividend income is often seen as the compensation that investors receive for any short-term ups and downs in price.

Time is of the Essence
This is not a short-term play. Investment over the medium to long term (5 – 10 years) backed up with regular reviews of the underlying investment funds is key in helping investors achieve their objectives.

As ever, investors need to remain patient and invest their time as well as their funds. This is an essential prerequisite for investors looking to build their wealth over the long-term.

Big crises have a habit of creating big investment opportunities therefore, over time, we can expect to see some wonderful opportunities unfolding.

The Stock Market is not Your Financial Plan
One thing is certain. There has never been a more appropriate time to take professional financial advice in helping you formulate your financial plan.

There is no time to lose and to wait for a full economic recovery could have a negative effect on your long-term goals and objectives.

If you would like to understand how economic events impact upon your own circumstances and planning, please contact us with no obligation on 01626 833225.

The above comments do not constitute financial advice and you are advised to obtain appropriate professional advice before proceeding further.

The value of your investment and the income from it can go up and down and you may get back less than you invested. Past Performance is not a guarantee of future returns.

PENSIONS

Pension Funding
Pension funding remained relatively untouched by this budget. The annual allowance remains £50,000 and rules around the carrying forward of contributions are untouched.

Pension tax relief on contributions still applies at up to 50%. The announcement of the cutting of the upper rate of income tax to 45% from April 2013 gives a window of opportunity for those people paying 50% tax, to obtain relief at the higher rate on contributions before April 2013.

With careful planning those who have not made any recent pension provision could make contributions of up to £200,000 before April 2013 by using carry forward, although professional advice should be sought in these circumstances.

Employers looking to fund pension shortfalls might want to do so before Corporation Tax drops any further.

State Pension Reforms
The Chancellor reaffirmed plans its plans for state pension reform, giving a strong indication of the need for people to save privately to retire earlier or enjoy higher retirement income. 

Steps towards a flat-rate £140 a week state pension will be released in the spring. In the summer, proposals will be put forward for automatic reviews of state pension age to reflect increasing longevity. Ultimately, this could mean younger people waiting until they are 75 or more before they can draw their state pension

Income Drawdown Limits
Despite heavy lobbying from pension groups and the pensions industry for a review of income drawdown limits the Chancellor made no concessions on this in his statement.

INCOME TAX

Reduction in top rate of tax from 2013
The additional rate of income tax will remain at 50% for 2012/13, and be cut to 45% from 6 April 2013. At the same time, the personal allowance will be increased to £9,205.

For 2012/13, the £630 increase in the personal allowance to £8,105 is matched by a corresponding drop in the basic rate limit. Higher rate tax will be paid once income reaches £42,475.

From April 2013, the reduction in the basic rate limit to £32,245 is greater than the increase in personal allowance, and the higher rate tax will start once income reaches £41,450.

Child Benefit
As expected, changes were announced to soften the impact of the child benefit changes for higher rate tax payers. Claimants will only lose child benefit if they or their partners have income over £50,000. Those with income between £50,000 and £60,000 will see a gradual reduction in child benefit. The tax charge will equal all of the child benefit payment where they or their partner earn more than £60,000. These changes will be introduced from 7 January 2013. It will be possible to either make a pension contribution or a gift aid donation to reduce the level of income.

CAPITAL TAXES

Inheritance Tax (IHT) savings for Non-UK domiciled spouses
The amount that a UK domiciled spouse can transfer free of IHT to their spouse domiciled in another country is to be increased. It means that these married couples and civil partners will pay less IHT on their combined estate. The changes will be included in the 2013 Finance Bill after consultation in 2012.

Trust Inheritance Tax (IHT) Charges to be made easier
There will be a consultation on the IHT charges paid by flexible and discretionary trusts. The aim is to simplify the calculation of the 10 yearly anniversary and exit charges. It is hoped that these changes will help clients making gifts into trusts to understand the ongoing costs of the trust. The Government will issue a consultation document outlining their ideas and we hope this will be in 2012.

Knowledge of budget changes is no substitute for structured planning of your own affairs. Changes in legislation are interpreted and taken into consideration by your adviser at Loughtons as part of our Ongoing Review Service.

If you would like to understand how the budget changes impact upon your own circumstances, please contact us with no obligation on 01626 833225.

The above comments do not constitute financial advice and you are advised to obtain appropriate professional advice before proceeding further.

What is Contracting Out?
It is where you opt out of the State Second Pension (S2P) previously known as State Earnings Related Pension Scheme (SERPS) and instead divert some of your National Insurance Contributions into an ‘Appropriate Pension Plan’. These ‘rebated’ payments are known as ‘Protected Rights’ and have the potential to grow in your personal pension similar to any regular contributions you or your employer may make (Non Protected Rights). Consequently you do not build up any ‘state second pension benefits’ (an addition to your ‘Basic State Pension’).

Why is Contracting Out being abolished?
Benefits from your ‘rebated’ National Insurance contributions into a personal pension can vary depending on investment returns and annuity rates. It is therefore difficult to predict if an individual would be better off in the State Second Pension or Contracted Out. To help simplify the system and decisions about retirement savings the government is deciding to abolish Contracting Out.

How will I know if I am Contracted Out?
Any statements received from your pension provider will show any National Insurance contribution rebates you are currently receiving as a result of contracting out.

So what is happening?
From 6th April 2012 you will automatically be contracted back into the Second State Pension. The money already paid in from Contracting Out will remain in your pension plan as ‘Retirement Fund’ which is all contributions and transfers paid into your plan which consisted previously of ‘Protected Rights’ and ‘Non Protected Rights’ (yours or your employer’s contributions).

What about accrued Protected Rights?
There are currently certain restrictions on the benefits that can be provided from these rights. If you use the pension plan to provide an annuity in retirement and are married or in a civil partnership, you must also provide an annuity to your spouse / civil partner payable on your death of at least half of your pension. Also if you die before buying an annuity your spouse / civil partner is obliged to use any remaining fund to provide a pension as opposed to receiving a lump sum.

From 6th April 2012 these Protected Rights will convert to ‘Non Protected Rights’ and collectively be known as your ‘Retirement Fund’. The restrictions noted above for Protected Rights will be removed and all treated as the same.

If you are in any doubt or have any specific questions regarding the above legislation changes or indeed any aspect of your retirement planning please contact us with no obligation on 01626 833225.

The above comments do not constitute financial advice and you are advised to obtain appropriate professional advice before proceeding further.

There is no minimum amount of income that must be drawn, irrespective of age. This means that you may be able to leave your pension fund untouched for as long as you like, without the necessity to drawing any income.

Changes from April 2011 meant that:

• The maximum amount of income that may be drawn was reduced from 120% to 100% of the single life annuity that somebody of the same sex and age could purchase based on Government Actuary’s Department (GAD) rates.

• The period over which the maximum income will generally be reviewed was reduced from 5 years to every 3 years until age 75 and annually thereafter, based on the GAD rates for an individual of the same age at the time of each review.

• Tax-free cash lump sums may now be paid after age 75 where an individual has elected to set aside or ‘designate’ funds for income drawdown at the same time, even if they decide to take no income.

Therefore, previously as a drawdown investor you could draw approximately 20% more income than an annuity will pay. Whilst this higher income was advantageous at the outset, it was unlikely to be sustainable unless investment returns exceeded the drawdown rate.

Example: Previously the maximum drawdown for a man aged 60 with a £100,000 fund was £7,200 gross per annum. After April 2011 the maximum income reduced to £6,000 gross per annum. Today, these rates show that the maximum income limit for a man aged 60 with a £100,000 fund has now reduced to £4,900 gross per annum. Or to obtain the £6,000 gross per annum as detailed above he would now need to be aged 67.

Therefore if you were previously receiving an income through drawdown for the past 5 years and have received your review documents they are likely to show a reduction in your maximum annual income.

Why: Unfortunately, a few factors have worked against you since you started drawdown. Notwithstanding the changes detailed above that came into force in 2011, the GAD tables for calculating income drawdown rates which reflect the above changes and are based on medium-term gilt yields and reflect changes to the GAD’s assumptions on longevity. Consequently, GAD rates themselves have reduced and are continuing to reduce on an almost monthly basis at present.

As GAD rates change in line with other factors (specifically gilt yields), it could be that they will increase again in the future. If your drawdown policy is one that allows member-nominated reviews, it might be possible for you to request another review as/when the rates improve, which would increase your maximum income although probably not to the levels you have enjoyed previously.

Another option would be to take your remaining pension fund and buy an annuity. This would provide you with a guaranteed income for the rest of your life. However, annuity rates are also very low at present and the reasons you chose the drawdown route over annuity purchase previously may still stand.

All of these points and more are covered as part of our Ongoing Review Service. If you would like to know more, please contact us with no obligation on 01626 833225.

The above comments do not constitute financial advice and you are advised to obtain appropriate professional advice before proceeding further.

However, the chances are if you are reading this blog that you are already on the right road to financial independence.

As the end of the tax year approaches it’s sensible to undertake a last minute check to ensure we haven’t been influenced by our own ostrich and not taken action that would act in our best interests. The good news is that 5 April 2012 falls immediately before the Easter bank holidays, maximising the time available to cater for these planning opportunities.

Some pointers might include:

Inheritance Tax (IHT)

Roy Jenkins MP famously quipped in 1986 “Inheritance Tax is broadly speaking a voluntary levy paid by those who distrust their heirs more than they dislike the Inland Revenue”.

For those that do trust their heirs, inheritance tax planning centres on gifting or spending capital in order to reduce the value of one’s estate. There are many exemptions available such as the annual allowance, the small gifts exemption and normal expenditure out of income, which are often widely overlooked as effective ways to reduce the burden of inheritance tax for our heirs.

Other exemptions include making gifts out of capital to an individual or create a suitable trust to house the capital.

If you are a business owner, it’s prudent to review succession planning to consider whether you are likely to benefit from business and agricultural property relief on your death, or on a lifetime gift of your business. Where this is not the case, how will IHT bills be paid and could they be mitigated?

These reliefs can have a major impact on the amount of IHT payable.

For your information, the nil-rate band is frozen at £325,000 until the 2014/2015 tax year and will then increase in line with CPI inflation. Provided the full nil-rate band is available to the estate, assets in an estate up to this amount will not normally currently incur an IHT charge.

It would be prudent to check that, if property prices recover and stock markets continue to improve, it would be worth considering the impact that this could have in relation to the frozen nil-rate band, which won’t increase until after the 2015/2016 tax year.

Income Tax

As Jean Baptiste Colbert once observed “The art of taxation consists in so plucking the goose as to obtain the largest possible amount of feathers with the smallest possible amount of hissing”.

It seems that we could end up hissing if we don’t help ourselves to the available exemptions.

The Personal Allowance and the Basic Rate of Income Tax

As everyone is entitled to a standard income tax personal allowance and a basic rate income tax band, making use of these can save a considerable amount of tax. The standard personal allowance for 2012/2013 is £8,105 (increasing from £7,475 in 2011/2012), while the basic rate band reduces to £34,370 from £35,000. A high-earning spouse or civil partner holding investments in their own name should take advice on whether it is appropriate to consider holding these in their spouse/civil partner’s name before 6 April 2012.

Pensions

Pension contributions can be a valuable and tax-efficient way to reduce the income tax liability of a higher or additional rate taxpayer. Appropriate advice should be sought before the end of the tax year, to ensure that this year’s allowance has been fully used.

The timing of pension contributions is also important.

Investments

Switching income producing investments into a non-income producing form may enable you to preserve your personal allowance and advice should be sought before the end of the tax year to establish if this could apply to you.

Individual Savings Accounts (ISAs)

An ISA does not result in any taxable income or capital gains and should, therefore, be the first step when considering investing tax efficiently. All too often it is overlooked. The current ISA limit of £10,680 (of which up to £5,340 can be invested into a Cash ISA) will increase to £11,280 and £5,640 respectively from 6 April 2012. Has your ISA allowance been fully used? What about your partners?

Up to £3,600 can also now be paid into a junior ISA (JISA) opened by a parent or guardian on behalf of a minor (or by the minor if they are aged 16 plus) who is not already eligible for a child trust fund (CTF). The CTF subscription limit has also been increased to £3,600 a year.

This is another opportunity for parents and other relatives to invest tax free for their children.

Capital Gains Tax (CGT)

Every individual, including a child, is entitled to an annual CGT exemption. This is £10,600 for tax years 2011/2012 and is frozen at this level for 2012/2013. It is worth up to £1,908 (at 18%) or £2,968 (at 28%). Has your CGT allowance been fully used? What about your partners?

….

All of these points and more are covered as part of our Ongoing Review Service. If you would like to know more, please contact us with no obligation on 01626 833225.

The above comments do not constitute financial advice and you are advised to obtain appropriate professional advice before proceeding further.

This sounds very familiar, was it only last autumn that I wrote the article on ‘Tulipmania’. Can it be that tulips have morphed into snowdrops?

It appears that snowdrops have a very dedicated following (so did tulips!) Record prices are now being paid for single bulbs (sounds like tulips all over again) as a growing profitable business has developed in order to meet the demand of the growing number of snowdrop collectors. Some of these collectors are becoming increasingly competitive when it comes to obtaining what type of species or variety they would like (No deaths yet! But there have been recorded incidents of thefts).

So in these last few years we have seen a mania starting to grow revolving around snowdrops. It appears that there has been a big increase in interest in all things snowdrop.

Apparently the £360 price tag was a new record price for the most expensive snowdrop bulb ever sold. Some people think they can make quick money (definitely tulipmania all over again). Yes, it may be collectors who are fuelling this frenzy, but wait until the speculators arrive.

Tulips were first imported to Holland in 1593. So what do we have in common? Tulips were not native to Holland, The snowdrop is not native to the U K.

The tulip, being a unique flower made it widely sought after in Holland. Apparently the snopdrop, also unique, is now being widely sought after in the U K.

Tulip bulbs, due to a mutation, came in a different variety of colours.

With snowdrops apparently there are 20 different species of wild snowdrop in the world with up to 2,000 cultivated varieties.

The different variations of the mutation with the tulip made them very attractive in Holland in the 17^th century. This led to dealers in the 1630’s to start dealing in these bulbs in a big way, speculation on the tulip bulbs took off. ‘Tulipmania’ had arrived in Holland.

Due to the distinctiveness of the tulip bulbs the Dutch were willing to pay more and more for these bulbs, utilising their entire savings and selling other assets such as property, animals and even dowries in order to get more tulip bulbs.

Are we about to see ‘Snowdropamania’?

Good financial planning advice has always been in fashion, so if you would prefer a prudent approach to planning a healthy financial future, please contact us on 01626 833225 to find out more.

Please note that the above article does not constitute financial advice.

Sadly, this assumption could lead to a lack in planning a better future for themselves under the supposition that only wealthy people need a financial planner.

Financial planning is about helping people achieve their short, medium and long-term financial goals. Many individuals incorrectly assume that they need to be wealthy to obtain professional advice.

The reality is that a simple meeting can turn your relationship with your own finances around, giving you perspective and helping you to direct your energies to achieve your aims.

Unfortunately, some people don’t take advice and this inaction could have a significant detrimental impact on their financial future.

The important thing is that you take the first step towards helping yourself.

As modern financial planners we operate with a different approach and focus our attention on what is important to you about your money.

We will help you to explore your goals in life and formulate a financial plan, so that your finances fully support those goals.

Subject to your agreement we will then meet with you on a regular basis in the future to review your plan and ensure that you are on track, with strategic and tactical advice to help you adjust your plan where this is necessary. This process need not take a long time, once the financial plan is in place, but is essential in taking account of a change in your plans, circumstances or views and changes in legislation and the economic climate.

Planning in this way isn’t the preserve of the very wealthy and is relevant to everybody.

For impartial advice on your own personal circumstances please contact us on 01626 833225 to make an appointment.

Please note that the above article does not constitute financial advice.

Typically they are referring to their money purchase pensions, where contributions are invested into one or more investment funds. These funds will fall and rise in line with investment market conditions and the returns paid from the underlying holdings held within investment funds.

Their response can often be for one or more reasons:

• They have invested and not seen a return or even lost money, typically looking at their plan’s performance over the short term.
• They have invested a small amount of money and then realise that they are not going to have the income they were expecting at retirement.
• They are unrealistic about the level of investment returns that their pension fund has the potential to provide.
• They have invested without diversity, often relying on one fund manager or sector (e.g. property) to deliver returns. No one sector or fund manager is always going to be the best performing all of the time.
• They have invested over a short period of time.
• They have not been able to access their pension fund in its entirety.
• They have seen one of their other investments (e.g. an ISA) perform better than their pension fund.
• They know of someone who has had one or more of the above happen to them.

So what are pensions?

Well, they are nothing more than a tax efficient ‘container’ for your investment funds. Poor investment performance has nothing to do with the pension ‘container’ and everything to do with the investment funds that your contributions are invested into.

You wouldn’t complain that a glass of wine tasted badly because of the shape of the bottle that the wine came in would you?

So, often when working with clients, we turn our attention to the following things:

• What investment funds is their money invested into?
• How well are the investment funds run? Who manages them?
• How well diversified are their investments?
• How does the combination of investment funds meet their attitude to investment returns / risk and their expectation of future returns?
• What are the costs for the pension ‘container’?
• What are the costs for the individual funds run by the fund managers?
• What access will they need from their fund and when?

Typically with today’s open investment architecture you could hold the same investment fund within many different ‘containers’, such as an ISA, a pension, an investment or insurance bond or collective investments such as unit trusts.

Of course, pensions have a big advantage over many other types of ‘container’ in that contributions can benefit from tax relief of up to 50%, meaning that extra contributions are paid by the Government on top of any other contributions that are made. There are limits to the level of tax relief, however, this acts as an incentive to save and can give a significant boost to the investment fund.

What else do I need to know?

Over the long-term (10 or more years) a key element is the quality of the fund management.

Poor fund management will in time deliver poor results. Good fund management has the potential to deliver good results.

Using our robust investment process, we can identify those fund managers that deliver good quality fund management within their fund. This will take account of their track record but also how returns are sought by the fund manager i.e. the process involved.

We identify Fund Managers that:

• Stick to what they say they are going to do – i.e. the remit of their fund.
• Within equity based funds, they identify companies that have strong balance sheets with well-contained liabilities, good managers and a proposition that works with a clear desire for the company’s services.

The importance of reviewing your portfolio

You wouldn’t go to the Gym once to remain fit for life would you? Everyone who is interested in maintaining a healthy lifestyle knows that they must make a regular effort to do so. So, if you want to maintain a healthy investment portfolio, you need to regularly review it to ensure that it is on course help you meet your goals and objectives.

A regular review of your portfolio with Loughtons can take into account many factors and ensure that your portfolio is optimised. Fund managers may leave, the market, economic and political environment will certainly change and your original objectives may alter. Different asset classes (cash, property, equities and fixed interest securities) will rise and fall within your portfolio at different rates, requiring them to be re-balanced to your attitude to investment returns / risk.

So the next time you hear someone bemoaning their pension scheme it could just be that they don’t understand what they really have and you may suggest they take a closer look at the fund managers they are using, in conjunction with an Independent Financial Adviser.

For impartial advice on your own personal circumstances please contact us on 01626 833225 to make an appointment.

Please note that the above article does not constitute financial advice.

In recent years I have developed what my wife calls a very disturbing habit. Every time I make the regular shop with her I have this habit of looking at prices and converting them back to the old £sd. How much is that loaf of bread?? I recall being able to buy a loaf of bread for 1/11, the chocolate bar was 5d and as for petrol, at 5/- a gallon I could buy 4 gallons for the pound. The surprising and pleasant result of this habit is that I rarely get taken shopping any more.

But it does raise the issue of how much more interesting the old currency was and the various names the coins had. For example we had 960 farthings to the pound, 8 half crowns in my pocket also made a pound, not forgetting the florin, the tanner, the joey, the shilling (bob) – after all two shillings known as two bob made one florin and that took ten of those to make a pound. Lost yet? Now isn’t that much more interesting than a straight 100 pennies to the pound or dare I say it 100 cents to the Euro.

Of course these nicknames for our coins delve way back into our history. I will let you look further into this. But somehow being paid 2/6 for a Saturday mornings work sounded a lot richer that 12.5 new pence, which became new pence and then just pence.

I recall visiting the post office on the 15^th February 1971 to convert some of my hard earned pocket money for the new coins. The new half penny was certainly very small compared to the old ship half penny. It was obviously a sign of the things to come, as indeed the new coins did not quite buy as much as the old coinage and the fate of the new half penny was short lived as inflation started to take it’s toll during the seventies. As most of us were still coming to terms what this new coinage would buy for us inflation crept up on the blind side and before you knew it four gallons of petrol for a pound was history, made in a blink of an eye!

The BIG mistake today though was looking at the share price of my Lloyds Bank shares, 4/9d. Okay 24p, to you but I still cannot help thinking how much was the Lloyds Bank share price in 1971. Is it just possible the share price then was higher than this?  I know Lloyds Bank have made various changes to their share structure, but the moral of the story to me is if I am looking somewhere to store my wealth, then I think a visit to an Independent Financial Adviser may be just more profitable than a visit to the Bank.

Please note that the above article does not constitute financial advice. For advice on your own personal circumstances please contact us on 01626 833225 to make an appointment.

In response to this, the impatience of stock markets has shown through recently with corrections in the major indices across the globe. This is largely due to the continued problems of high government borrowing and rising debt levels. As you will no doubt be aware, this has resulted in the likes of the USA losing their coveted AAA credit rating. This pushes up the cost of repaying the same borrowing.

This has also impacted upon the sustainability of the eurozone and raises question marks as to how long the lack of growth in developed economies will persist.

Why we need Banks!

Much to the annoyance of some, bank balance sheets across the globe are still being repaired. There are estimates that US banks are two thirds of the way through this process and UK banks are around half way through, although European banks have hardly started!

Unfortunately, if we adopt a capitalist system, we need banks, or something that performs their normal role, that is the supply and control of money within the economy. Banks have not been able to perform their normal role due to the extreme conditions of the credit crisis.

Eurozone-o-phobia

The challenge in the Eurozone is that every country that is a member of the single currency has their currency pegged at the same level – the Euro. This means that Germany, for all her strength has the same currency exchange rate as Greece.

The only way that these economies and all the economies that make up the Eurozone can be distinguished is in the interest that they pay on their debts. Concerns continue to focus on Greece, which has seen the largest widening of the cost of borrowing when compared to Germany. Unfortunately, Greece has had to borrow more money simply to pay the interest on its mounting debts.

Back in Old Blighty

Back at home, the debate about George Osborne’s plans to cut the government deficit continues. Some argue that these cuts are too quick and will push up unemployment and slow economic growth. They also argue that the recovery in the private sector will be impeded by tax increases and will not be able to counterbalance the contracting public sector.

As a contrarian view, some argue that these cuts are needed due to pressure from the bond (UK borrowing) and foreign exchange markets and that without such cuts; the UK may even face the same problems as Greece. In addition they state that public sector finances are still unstable and the cuts made so far may not eliminate the deficit and the level of outstanding debt will consequently continue to rise for several more years.

The Cuts in Context

Let’s look at the public finances in the UK. The figures go something like this:

If we deduct 7 noughts and use the figures to represent a modern UK household, they would look something like this:

Clearly under these circumstances, debts are going to continue to rise.

Debt Exit Strategy

So how do we extract ourselves from these difficult economic conditions? Some possible
options are:

1. Have a credible plan for reducing the debt levels over time.
2. The gap between the growth of the economy and the interest payments made to service debt needs to widen.
3. The longer the term of the loans (debt) that the government owes, puts less pressure on government finances, because less debt needs to be refinanced each year.

So how are we doing against these possible routes in the UK? The UK government debt level is for now considered sustainable by financial markets. The government has a credible plan for debt reduction and although growth is slow the interest payments on the debt is also low.

The UK also has longer term loans than most other developed economies.

Conclusion

The road to recovery is not quick and the options mentioned above are tough and we all have experience of this across the developed economies, i.e. the UK, US and Eurozone.

Many investors have looked for a risk-free investment, however, this may prove elusive as Government bonds (debt), usually considered to be risk free, and are unlikely to provide a return that exceeds inflation, over a reasonable time horizon.

After a sharp increase, Gold has recently fallen in value, however, in these circumstances there are selected opportunities in the bond markets and in global equities providing dividends. However, investors will need to accept capital and income volatility and these markets have the potential to provide a source of real returns.

Please note that the above commentary does not constitute financial advice. For advice on your own personal circumstances please contact us on 01626 833225 to make an appointment.