Category: Altrincham

Who would predict the price of oil?

The price of crude oil has fallen around 40 per cent since a recent peak in June this year. This has a profound effect on economies and markets around the world as the cost of manufacturing and transporting goods falls along with oil producers’ income and the currencies of oil-rich countries.
The theory goes that consumer spending will rise because people have more disposable income; that inflation will fall as the price of goods eases; and that companies with high energy bills will become more profitable. If lower prices hold, the effect might become political and environmental as the balance of world power shifts from oil exporters to oil importers, and the impetus to develop cheaper clean energy wanes. Oil seeps so deep into the global economy you might think that to be a successful investor you need to have an accurate view on its price and its impact on asset prices. But you would be wrong.

No-one with an opinion about oil knows whether their view is right or wrong, and only the changing price will confirm which they are. Market prices are a fair reflection of the balance of opinion because they are created by many buyers and sellers agreeing on individual transactions. As an investor you can take a view of whether that balance – that price – is right but, like all other people with an opinion, you have no way of knowing whether you are right or wrong until the price moves.

Knowing this, it seems irrational to take a view (or a risk) on something so random as the direction of the oil price. In fact, why would one take a view on anything related to the changing price of oil; the US economy, for example; or the price of Shell; or Deutsche Post; or anything else?
The rational approach is to let capital markets run their course and to have a sufficiently diversified portfolio that allows you to relax in the knowledge that, over time, you will benefit from the wealth-generating power of your investments as a whole; without risking your wealth on a prediction that might go one way or the other.

The press was full of ‘pension bank account’ stories in October. Will it be that simple?

The Taxation of Pensions Bill, which will put most of the Budget 2014 pension changes into law, was published in mid-October. It contained few surprises, not least because it had been issued in draft in August, along with detailed explanatory notes. Nevertheless, the Treasury pumped out a press release and the media duly splashed the (old) news.

The emphasis in the press coverage was, to quote the Treasury release “Under the new tax rules, individuals will have the flexibility of taking a series of lump sums from their pension fund, with 25% of each payment tax free and 75% taxed at their marginal rate, without having to enter into a drawdown policy.” It was this reform which prompted the talk of using pensions as bank accounts. However, things may not be quite that simple in practice:

• The new rules do not apply to final salary pension schemes, which may only provide a scheme pension and a pension commencement lump sum.

• It is already possible to make this type of 25% tax free/75% taxable withdrawal under the flexible drawdown provisions introduced in 2011. This has not proved very popular.

• The new rules are meant to come into effect on 6 April 2015, but they are not mandatory, so some pension providers may choose not to offer them. It seems likely that many occupational money purchase schemes will avoid any changes, as they were never designed to make payments out – that was the job of the annuity provider. Similarly many insurance companies may not be willing to offer flexibility on older generations of pension plan – just as some do not currently offer drawdown.

• The short timescale has been criticised by the pensions industry. Systems and administrative changes can only be finalised once the Bill has become law and that will be perilously close to April, making it difficult for providers to bring in the changes from day one.

• If you are able to take a large lump from your pension, the tax consequences could be most unwelcome. For example, drawing out £100,000 would mean adding £75,000 to your taxable income – enough to guarantee you pay at least some higher rate tax, regardless of your income, and quite possibly sufficient to mean the loss of all or part of your personal allowance. No wonder the Treasury expects to increase tax revenue as a result of the reforms.

• Ironically another of the pension reforms, reducing the tax on lump sum death benefits, could mean you are best advised to leave your pension untouched and draw monies from elsewhere.

The new pension tax regime will present many opportunities and pitfalls, not all of which are immediately apparent. Do make sure you ask for our advice before taking any action.

The value of tax reliefs depends on your individual circumstances. Tax laws can change. The Financial Conduct Authority does not regulate tax advice. The value of investments can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.

A step by step approach to producing a financial plan

Financial planning is the process of meeting your life goals through the proper management of your finances. Life goals can include buying a home, saving for your child’s education, planning for retirement or estate planning. The financial planning process consists of six steps that help you take a “big picture” look at where you are financially. Using these six steps, you can work out where you are now, what you may need in the future and what you must do to reach your goals.

The Benefits of Financial Planning

Financial planning provides direction and meaning to your financial decisions. It allows you to understand how each financial decision you make affects other areas of your finances. For example, buying a particular investment product might help you pay off your mortgage faster or it might delay your retirement significantly. By viewing each financial decision as part of a whole, you can consider its short and long -term effects on your life goals. You can also adapt more easily to life changes and feel more secure that your goals are on track.

Can You Do Your Own Financial Planning?

The simple answer is yes. Some personal finance software packages, magazines or self-help books can help you do your own financial planning. However, you may decide to seek help from a professional financial planner if:

• you need expertise you don’t possess in certain areas of your finances. For example, a planner can help you evaluate the level of risk in your investment portfolio, adjust your retirement plan due to changing family circumstances or provide tax advice that will contribute to the planning process.

• You want to get a professional opinion about the financial plan you developed for yourself

• You don’t feel you have the time to spare to do your own financial planning.

• You have an immediate need or unexpected life event such as a birth, inheritance or major illness.

• You feel that a professional adviser could help you improve on how you are currently managing your finances.

• You know that you need to improve your current financial situation but don’t know where to start.

How To Make Financial Planning Work For You

You are the focus of the financial planning process. As such, the results you get from working with a financial planner are as much your responsibility as they are those of the planner. To achieve the best results from your financial planning arrangement, you will need to be prepared to avoid some of the common mistakes by considering the following advice:

Set measurable goals.

Set specific targets of what you want to achieve and when you want to achieve results. For example, instead of saying you want to be “comfortable” when you retire or that you want your children to attend “good” schools, you need to quantify what “comfortable” and “good” mean so that you’ll know when you’ve reached your goals.

Understand the effect of each financial decision.

Each financial decision you make can affect several other areas of your life. For example, an investment decision may have tax consequences that are harmful to your estate plans. A decision about your child’s education may affect when and how you meet your retirement goals. Remember that all of your financial decisions are interrelated.

Re-evaluate your financial situation periodically.

Financial planning is a dynamic process. Your financial goals may change over the years due to changes in your lifestyle or circumstances, such as an inheritance, marriage, birth, house purchase or change of job status. Revisit and revise your financial plan as time goes by to reflect these changes so that you stay on track with your short and long-term goals.

Start planning as soon as you can.

Don’t delay your financial planning. People who save or invest small amounts of money early and often, tend to do better than those who wait until later in life. Similarly, by developing good financial planning habits such as saving, budgeting, investing and regularly reviewing our finances early in life, you will be better prepared to meet life changes and handle emergencies.

Be realistic in your expectations.

Financial planning is a common sense approach to managing your finances to reach your life goals. It cannot change your situation overnight; it is a lifelong process. Remember that events beyond your control such as inflation or changes in the stock market or interest rates will affect your financial planning results.

Realise that you are in charge.

If you’re working with a financial planner, be sure you understand the financial planning process and what the planner should be doing. Provide the planner with all of the relevant information on your financial situation. Ask questions about the recommendations offered to you and play an active role in decision-making.

Chris Wicks CFP
I help you achieve your lifetime goals for reasons that are important to you