THE SOVEREIGN NEWSLETTER

We are facing a time of changes with the Spending Review and its effects. While allowing for what might happen, it is equally important to focus on the financial fundamentals, which remain fundamentals regardless of which party is in Government.

Here is a checklist that you can use to see how well you are doing with your fundamentals.

A. You need to arrange your income and expenditure to ensure you have more coming in than going out.

This is what the Government has been trying to do for decades and failing. You simply need to list out all your expenditures on a monthly basis and then compare it to the monthly take-home income you have received in the recent past – not what you are hoping you will make in the future.  This will tell you whether you need to have your own “Spending Review”. Dickens had his character, Mister Micawber define the money “happiness” zone as having a few pennies more coming in than are going out. This is quite true.

This same exercise can be done if you have your own business. This will also help you review the charges you make for your service or product to ensure you are making sufficient profit.

B. Those with children, a business or other responsibilities should arrange an appropriate amount of life assurance.

Insurance is a fairly modern development but it allows one to avoid a disaster for a relatively small regular payment – whether the disaster is a car wreck, the house burning down, or the death of the sole income-earner in a family with young children. Usually it is easy to work out how much insurance is required. In the case of life assurance it is usually approached as to what amount would be needed to replace the income of the deceased person, or, in the event of a house-person, what it would cost to cover all of the work that person does. This can be surprisingly large, with some research putting the equivalent cost for a house-person with children at as much as £25,000 to £30,000 a year, not including love and affection!

Life assurance is now available to many people who might have been turned down in the past because of some medical situation. It may cost more but it is worth checking it out. For example, we were surprised to learn recently that life and travel cover is available for those who have had breast cancer – on a case by case basis.

If you have a business, you do need to have a plan “just in case”. The loss of the business owner or a key person could be disastrous. Life cover could keep the business afloat while it is sorted out. A common calculation for this type of cover is five times the owner’s or the keyman’s earnings.

C. Virtually everyone should make a will.

Some 30 million UK adults have not made a will. In worse case scenarios this can mean children or a partner receiving nothing, the State getting everything, or just a very unpleasant argument amongst those who feel all or some should be coming to them. If you are well organised, you can do the will yourself. A safer option would be to get it done professionally – something that is likely to cost about £120 for a single person and £200 for a couple. We can recommend professionals who can assist.

D. A house is a good investment if you intend to live in it for 5 years plus, regardless of the ups and downs of the property market.

The property market generally looks to be pretty stagnant, but that should not affect the decision whether or not to buy a place to live in. In general, our view is that the market is not likely to move dramatically up or down in the next few years.

E. Save for a “rainy day”.

This is probably an unworkable motto for England given the number of rainy days we have, but the underlying principle is sound. It is wise to have accessible cash set-aside for an emergency. A rule of thumb target would be at least 3 times your monthly net earnings. An instant access ISA is a good way to achieve this level of savings. The good news is that from April 2011 the amount you can put into an ISA is expected to go up to £10,700, of which you can put 50% into a Cash ISA.

F. Be willing to take a risk with some of your savings.

Cash savings are very useful as a ready reserve. However, the interest earned, particularly in today’s financial environment, will not generally protect your money from the effects of inflation. Historically investment in the Stock Market has provided a good return on savings. Most people would be well advised to put at least a percentage of their savings into stocks and shares.

G. Regularly review your financial arrangements.

It is estimated that the UK public are losing £12 billion simply by failing to keep an eye on their cash savings and failing to switch them over to an account paying a better rate of interest. This does not have to be difficult as it may mean just changing the account over with your existing Building Society or Bank who may have “forgotten” to tell you there was a better interest rate available. You can go on line to various comparison websites to see what your savings should be earning you. We recommend www.moneyfacts.com .

H. This principle of a regular review also includes your mortgage, if you have one.

Lenders are struggling to meet their lending targets so they are bringing out more and more competitive deals which includes covering the costs of switching over to them. A large amount of people are on their lender’s Standard Variable Rate (SVR) when they could save quite a bit by changing lenders or taking a new product with their present lender. One lender seeking to attract business is cheekily advertising this as “The Great Escape” from the SVR. We will be happy to assist you to research your options. Just give us a ring.

This “free fees” remortgage option is even appearing in the Buy to Let market. So, if you have an investment property with a mortgage, find out what your present interest rate is and then look to see what is available in the open market. If nothing else, you can go back and negotiate with your present lender once you know the deal you could get. Here, too, we would be pleased to assist.

I. You Do Get Older – Long Term Savings and Pensions are Important.

Yes, you might go under the Number 9 bus next week, but the odds are that you will not and that you will live longer than your parents did. And at some future point you will either not want to, or not be able to, work in the same way you do now. At that point you will need additional income. You should put some money aside now for that eventuality. Ideally you are one of the lucky ones who can still look forward to a substantial pension from their employers. The problem is that this will not be the case for most people. So you will need to set up your own pension, or some workable alternative investment.

A pension is a useful means of long term savings because it benefits from tax relief from the Government (a taxpayer’s £1.00 put into a pension gets 25p added immediately by the Government – and a higher rate taxpayer benefits even more). Since you cannot access the benefit until you are at least 55 years of age, it also means that you cannot go out and spend it before then.

We would be happy to review any existing pensions you have and look at what income you might receive from these in the future.

Note: If you are a high-earner, we recommend you take advice immediately as the pension rules for those earning over £100,000 are about to change again.

J. Coming to Retirement – Take Advice.

There are an increasing number of options for taking your retirement benefits. You could lose out on a significantly larger pension income if you make the wrong decisions. Contact us for advice.

K. In Retirement – Needing Income or a Lump Sum?

Equity Release is a tool that is growing in popularity. It allows those who have built up value in their home to turn it into an income or use it to raise a lump sum. We would be happy to explain your options to you.

How did you do?

If you ticked the majority of the above points regarding your finances, you have a strong financial base to work from and are very likely to qualify for Micawber’s Happiness Zone (more money coming in than going out).

Other Financial News

Equitable Life compensation is due to start being paid out next year. Those who will benefit the most, and fastest, will be those who had “with profit” annuities with the company. Their income will be enhanced.

The Government is planning to launch a Children’s ISA. This sounds helpful but as the Government will not be putting anything into it, it sounds like it will be of very little real use.

The limit on pension contributions is to be set at £50,000 per year from next April. The Government also proposed to lower the Lifetime Limit on total pension contributions.

Doing Business Together

We appreciate your coming to us to assist you with your financial planning and arrangements. Our purpose is to help you achieve your objectives through good financial planning and assist you to have financial security.

Here are some recent comments about our service:

“Thank you so much. You have been so helpful with this and our mortgage. I cannot thank you enough.”  JW

“We just wanted to say thank you for all your help and advice with our mortgage, etc. Don’t think we could have done it without you.” KM

“Thank you very much for your support and help.”  JH

“I would like to thank you all at Sovereign for the professional and friendly way in which you’ve helped me.” BD

“Your service is superb – nothing else I can say.” Mr TP

We look forward to helping you again in the near future.

Yours sincerely

Tom Shuster and Trevor Tupholme

P.S. It may be a bit early, but in case we do not see or talk to you before then, please accept our wishes for a happy Christmas Season.