http://www.brandft.co.uk/

We’ve all heard of it – but how many can remember how it works?

In very simple terms:

Make a PET, live 7 years and it’s exempt for IHT purposes.
Make a PET, die within 7 years and it’s in your estate for IHT purposes and will use up part of the NRB (or all if it’s big enough). (Remember to deduct annual exemptions if available).
But, if someone has made a series of gifts, then each gift is looked at and assessed against its own 7-year period to work out how much NRB is available to offset against it.

So if a chargeable lifetime transfer has been made up to 14 years before a settlor’s death (it’s usually as a result of making a transfer into a discretionary trust) this could have an impact on the IHT liability of a PET that later fails.

Year 1 = Chargeable transfer is made
Year 6 = PET is made
Year 12 – Death occurs

The chargeable transfer made in year 1 is made more than 7 years prior to death so isn’t subject to IHT in itself. However when working out the tax due on the PET, which has become chargeable due to being made 6 years before death, the CLT made in the 7 years prior to it has to be taken into account and so does affect the amount of IHT payable.
(The estate is calculated ignoring the CLT, just taking into account the PET as normal).

In summary, a chargeable transfer will impact the NRB available to subsequent PETs if death occurs within seven years of the PET and 14 years of the chargeable transfer so if there’s any possibility of clients making both CLTs and PETs, it’s important to be aware of the 14-year rule and if they can, it’s often better to make the PET before the CLT in particular if they can leave a good gap between them.

For resources to help you pass your AF1, AF5 or R03 exam, visit: http://www.brandft.co.uk/

Written by Tina Winter

A fund manager needs to know how to reduce the overall risk of their portfolio, even though they are purchasing risky assets. There are two main ways to do this – hedging and diversification.

Hedging means protecting an existing position by taking another position which will increase in value if the existing position decreases in value – effectively hedging your bet. We’ll look at this again but this article concentrates on diversification.

If you were to ask your grandmother, she would no doubt advise you not to put all of your eggs in one basket. It’s obvious that it’s going to be less risky holding a number of shareholdings rather than just one. Diversification reduces risk because combining different asset classes or securities reduces the overall risk to less than the average risk of the individual securities – the downside risk of one investment could be offset by the upside risk of another. However, if all the investments held were to move in the same direction at the same time this would not work – for diversification to be effective you need investments that move in opposite directions to each other.

The degree of diversification depends on a statistical concept called correlation:

Positive correlation – two shares are positively correlated when they broadly move up and down together – they will be affected by similar factors, such as interest rates or consumer demand, and may well be in the same sector,

Negative correlation – two shares are negatively correlated when they tend to move in opposite directions from each other – an umbrella retailer and a sun tan lotion manufacturer perhaps?

No correlation – the returns of some companies or asset classes are not connected in any way to each other.

Correlation is measured by the correlation co-efficient – perfect positive correlation has a value of + 1, perfect negative correlation has a value of – 1 and no correlation has a value of zero.

Theoretically, the most effective diversification of risk comes from combining investments that are negatively correlated – one goes up when the other goes down – but this is not always easy to find in practice. Choosing companies in different sectors can help to achieve diversification. Adding companies from overseas markets can also add diversification – however global equity markets tend to have a moderate to strong positive correlation with each other. Investing in different asset classes, including alternative investments such as property, commodities and hedge funds can also assist in overall diversification of a portfolio and hence overall risk reduction.

Written by Lysette Offley, Genius Material

You do remember the Generation Game, don’t you? Started in the early ‘70s… and as kids we loved it, especially the last game where the two families tried to copy an expert in a skill, needing the ability to pay close attention and copy accurately.

One week there’d be an origami napkin folder; another, a pizza dough spinner; another time, a glass-blower; next a plasterer etc etc.

They were all activities that look easy enough – until you try doing them yourself!!!

I guess that’s why it made such good entertainment. There’s something funny about utter chaos and incompetence in close proximity to the effortless actions of an expert!

But do you remember a time when watching and copying were the only way we learnt anything?

Of course! We were expert copiers in our formative years. Watch any toddler with a toy ‘phone or a teddy bear. How did you learn to tie your shoe-laces? By watching and copying and trying over and over again, until you got the hang of it.

In some circumstances we still use this innate skill. Ever been to the golfing range with a golf coach? Watching, copying and trying time and time again…

So why is it that oftentimes, instead of using our natural ability to physically move as we learn, we metaphorically sit on our hands and still expect to retain what we’re learning?

Unfortunately, while school starts off with plenty of opportunities to do stuff, to physically play with things to discover how they work (remember the sand pit and the water tray?), it soon becomes the norm to sit in rows and watch and listen to the teacher doing all the fun stuff instead.

Things are much better in schools these days, but when I was at school, history lessons consisted of taking dictation at top speed and trying to learn what I’d written for a test the following week.

I wasn’t very good at that. None of it meant anything to me. Same for you?

It wasn’t because I was stupid. I never had to ‘learn’ physics and maths equations and formulae. They made sense and I ‘got it’. But history? Dictation? Nah!

These days, in history lessons the pupils are given artifacts to handle. They’re given separate accounts of what happens, as told by, for example, a local farm girl, a soldier from the invading army and a noble landowner whose land is being laid to waste. Pupils are given the much more exciting (and realistic) task of trying to fathom out what really happened and how it affected the folk at the time.

It’s more interesting. It’s more relevant. They’re ‘doing stuff’ and learning as they go. And they’ll find it much easier to remember what they’ve learned when the exams come along.

So what can we glean from this as we undertake revision for professional exams?

Well, if you’re the sort of person who hasn’t lost the practical knack of copying; if you’re good at physical movement of any sort, from dancing to sport, from painting to cookery – you might find it useful to see how you can bring to life the revision you’re doing right now.

For example, once you’ve made your revision notes, trace the keywords in the air with your finger. It might feel a bit daft at first, but if it works for you it could make a huge difference.

Take lots of notes as you revise. Doodle! Do something as you learn. Fiddle with something. It all helps.

Imagine role-playing, miming and imitating or acting-out the content of your notes.

Move around. Try revising in different positions. Maybe sitting at the desk isn’t the best place for you after all. Experiment by lying down or propping yourself up on a cushion and see what keeps you the most comfortable the longest.

Take frequent study breaks. That’s important for everyone, but especially for the movers and shakers among us! Take steps to avoid getting bored or distracted. Keep your revision purposeful by doing it in short bursts.

There are loads of things you could be doing to help the information you’re learning go into and then stay in your head. To decide what’s going to work well for you, do what you do best and try out some ideas for yourself.

http://www.brandft.co.uk/

10 year qualifying policies – fondly known as MIPs – Maximum Investment Plans – I always had a soft spot for them as a useful savings plans back in the late 80’s.  It seems that more recently others did too; using them as tax free shelters once they’d used up pension and ISA allowances as there was no upper limit on how much could be invested and the fund was free of higher and additional rates of tax,  just suffering a deemed basic rate in the life fund itself.  So, as widely anticipated, new legislation put a stop to it.

Since the 6 April 2013 the maximum premium an individual can pay into qualifying policies (to remain fully qualifying) is £3,600 a year.

Rules have been in place for policies taken out from 21 March last year to 5^th April this year – transitional rules that say that any premiums paid on policies issued during this time will count towards the new cap.  (Qualifying policies in force before 21 March 2012 which are not changed after 20 March 2012 are known as ‘protected policies’ and are not affected.

So if all the premiums on the new policy are more than £3,600 a year, the treatment for qualifying policies will be restricted; to the gains applied to premiums paid up to 5^th April this year and to the first £3,600 paid from 6^th April.

Premiums paid to qualifying policies under the new rules that are in excess of the premium cap of £3,600 will be subject to the chargeable event rules and taxed as if it were a non-qualifying policy meaning any gains will be taxable.

For most investors into MIPs a restriction of £300 per month is probably not going to make much difference – a lot of policyholders would have been paying much less than this – and they can carry on as if nothing had happened.

The problem now could be actually finding a provider who is still offering these products as many of the old favourites have now pulled out of the market.  And for any still in? They are going to have fun dealing with this…

For more information on exams you’re taking go to http://www.brandft.co.uk

http://www.brandft.co.uk/

Today is the 1st May.  The sky out of the office window is the same colour as the Simpson’s sky (with the same clouds) and the flowers are blooming.  All is good.

What is not so good is if you’ve still not filed your 2011/12 self- assessment tax return.  From the optimism of Spring to taxation in less than a few words.  Sorry about that…

Anyway if you missed the 31^st January deadline, then you will already have been stung with a £100 penalty – this is even if you don’t owe them anything or you’ve actually paid the money on time.

Three months late,  more penalties start to kick in – from today, the 1^st May, at £10 for each day your online return is late!  (Late paper returns have started the £10 per day clock ticking already).  Although the fine is capped up to a maximum of £900 (ie 90 days) it’s quite a bitter pill to swallow if you get caught with that plus the £100 you’ve already incurred.

More penalties follow after 6 months – 5% of the tax due or £300 (whichever is most) and after 12 months – another 5% or £300 charge (whichever is most).

Extra penalties also apply for paying late – 5% of the tax unpaid at 30 days, 6 months and 12 months.

It is worth knowing that last year HMRC took 160,000 people out of self-assessment  once they’d been contacted by the taxpayer and it had been agreed they don’t need to self-assess.  So if you think that applies to a client or someone you know, it’s worth making the call to avoid these penalties building up.

And the amount of people that haven’t filed yet?  According to figures in the press over the weekend, 730,000 taxpayers.  Now that’s a lot of fines…

http://www.brandft.co.uk/

Written by Jane Alford
http://www.brandft.co.uk/

I met someone recently who had (reluctantly) had to leave the comfort blanket of working for a large organisation because his job had been made redundant. Along with the loss of a job also came the loss of one of those rare things called final salary pension schemes plus company PHI and death in service benefits. All these employee benefits that were taken for granted at the time now have to be replaced as this person is going to try his luck with setting up his own business (like a lot of people being forced into redundancy).

Anyway the pension was dealt with first (PHI not yet) and death in service benefits have now been replaced with a life policy. As we were chatting, I asked if he had been advised to write the policy in trust. He does, after all, have a young child and a partner who he is not married to. He said no, he got the life policy off the internet and he didn’t actually speak to anyone. It struck me that unless you read the small print of all the documentation you receive you’re not going to realise the benefits of having a trust or more importantly the effects of not having written it under trust.

IHT is not going to be this couple’s problem at the moment but might well be one day. So it’s not primarily for that reason I suggested he ring up and ask for a trust document from the life office he’s bought this policy from. The reason I was overly keen to get him to do this was because of probate. If he dies then the life office will not pay out the death benefit until his executors or administrators produce a grant of probate or letters of administration. If his estate is relatively simple then this might take a few months – if it’s more complicated then it could take a year. If the life policy is written under a trust then the life office don’t need a grant of probate because the legal owners of that policy are now the trustees and they should get the pay out within 10/14 days.

I reckon the partner of this chap will have enough on her plate should the worse happen to him without having to worry about financial difficulties too.

So back to basics – there is no reason why life cover designed to protect your family should not be written under a trust. No reason at all.

Your comments are as ever welcome.

For more help with your exams please go to http://www.brandft.co.uk/

Written by Jane Alford
http://www.brandft.co.uk/

The price/earnings ratio is apparently a quick way to see if a share you’re interested in is cheap or not.

A share’s current p/e ratio is found by dividing the latest share price by the earnings per share (EPS – which has to be published in all listed companies accounts so easy to find).

If a share I fancy has a current share price of £5 and the EPS is £1, then the p/e ratio is 5.  All I’ve done here is compare the current price to one year’s earnings – usually the previous years so it’s always going to be a historic measure  but what does that figure of 5 mean?  Basically it means that as an investor I’m willing (or not) to pay 5 times one year’s earnings for that particular share.  It tells me that if that company keeps making the same level of earnings then it will take 5 years for me to get my initial investment back.  There is never any guarantee that a company will continue making the same amount of money so often forward p/e ratios are used instead using a prediction of company earnings for the next 12 months.

We all know that ratios should always be used with caution.  We’re often told to compare p/e ratios with other companies in the same sector for meaningful comparisons.  If we look at oil companies then comparing BP with Shell could tell us if one is looking cheaper than the other or comparing one company with the sector as a whole could tell us something about that company share price.   But a low p/e might just mean that it’s a company in trouble rather than a bargain and a high p/e ratio could just mean that the share is priced too high.

Many people think that p/e ratios are not useful at all to tell us the real value of a company in isolation or when comparing to similar companies.  I’d be interested to know what you think and if you use them or not when deciding which companies you’re going to buy into.

For further help with your investments exams go to:

http://www.brandft.co.uk/df/j10.asp for J10
http://www.brandft.co.uk/advdf/af4.asp for AF4
http://www.brandft.co.uk/drfp/r02.asp for R02
http://www.brandft.co.uk/cf/cf2.asp for CF2

Written by Jane Alford
http://www.brandft.co.uk/

I was talking to an IFA recently about the impact of divorce on pensions.  He had a client facing a potential pension sharing order and wanted to know how pension credits (the amount of benefit paid to the ex-spouse) and pension debits (the amount of benefit deducted from the member) affected annual and lifetime allowances.

It appears that since the order is made after A-day the following would apply:

1. A pension credit received from a registered pension scheme won’t count against the annual allowance of the ex-spouse.  The member whose fund has been reduced by the pension debit will be able to re-build those lost benefits (subject to the annual allowance).
2. A pension credit effectively becomes an asset of the ex-spouse and so is added to their overall pension entitlement and will count towards their lifetime allowance. (This is different if the credit is from a pension already in payment).
3. A pension debit does not count towards the lifetime allowance of the spouse who has shared their pension.  Only the benefits they actually get will count towards their lifetime allowance.

Pensions are never straightforward so it would be interesting to hear your comments on this and hear about any experience you have had with your own clients or if you’re sitting one of the J0 or AF pensions exams this week.

Written by Lysette Offley, Genius Material

Would it surprise you to know that there is only one difference between people who pass professional exams easily and people who struggle?

And don’t you go thinking that it’s all about intelligence! It’s not.

It’s all about having an effective revision strategy. People who pass Financial Services exams easily have a good revision strategy that works for them. So perhaps it wouldn’t come as a great surprise then to know that you could also pass your exams easily if you also had a good revision strategy that works for you.

If you are having trouble remembering the information you’ve studied then maybe you are falling into some of the traps mentioned below.

Biggest Mistakes Students Make When Revising

• Expecting to find a short cut
  Learning new material is hard work. And you’re the one who’s got to do it. You can be efficient and cut down the amount of time you spend, but there’s no cheating on actually doing the work.

• Leaving your revision until the last minute
  Part of the memory consolidation process means you’re highly unlikely to retain much, if anything, if you leave it all to the last minute. You might even scrape a pass, but the information will be lost – to you, and to your clients. Why waste your time and energy then?

• Taking the same exam over and over, and failing each time
  I know of a chap who failed the same exam 9 times! 9 times! Imagine the cost – of the exam fees, travel, time lost at work, to his stress levels… Why put yourself through that, when there’s an easier and extremely reliable way to pass exams easily?

• Writing too much information in your revision notes
  No one’s brain is built to cope with more than up to 7 bits of information in one go. So don’t make it difficult for yourself by designing revision notes that cram too much information on the page. Better you spread that information across multiple sheets. Really! Try it and see!

• Not scheduling study time
  Come on! You know what happens to good intentions when you don’t make space for them in your diary. Do I need to say any more?

• Spending too long revising
  We’re all much better at learning small chunks of information in short bursts of time, so take lots of short breaks, and check you still know what you’ve learned before going on to the next bit.

• Not focusing on what’s important to you
  You need to be really clear and to remind yourself regularly why passing these exams is important to you, to stay motivated, focused and on task. What will passing them mean to you? Your business? Your family?

• Having a disorganised environment and mind
  Numerous studies have shown that a well-organised, clean, bright and tidy environment produces the best results in people who work there. Make life easy for yourself and avoid creating stress. The better organised you are, the more you’ll be able to find what you need in your office, and the more you’ll be able to retrieve what you’ve stored in your mind! You know what they say: Tidy space, tidy mind!

• Being thirsty
  Stay well-hydrated. Only 3% dehydration makes your brain 20% less efficient. When you start feeling thirsty, you’ve already become dehydrated, so keep taking sips of water, thirsty or not.

• Being sedentary
  10-40 minute bursts of activity immediately boosts concentration and focus – probably because of increased blood flow in the brain. Who could blame us for racing round the block for 20 minutes before an exam?

• Eating junk food
  Rubbish in, rubbish out. Few people would say no to improving their brain function. Especially in light of the degrading effects that ageing can have on our brains, many of us would like to improve and sustain our memory, comprehension and our ability to solve problems.

• Believing you can’t do any better
  If you believe you can or you can’t – you’re right! Seriously! It’s not you, it’s what you do that gets you the results you’re getting. Change what you do and you’ll change your results.

If you recognise yourself in this list at least you will realise that it’s your revision strategy that’s at fault, and not something wrong with you. Change your strategy and your results will change too.

Many people look for additional learning resources, only when they’ve failed the same exam 5 times and more. You can probably imagine their relief when they begin passing their exams with pass marks of 80% and more. Same people – new revision strategy.

If they can do it, so can you.

Interested? Take a look at Pass Exams Easily by Genius Material, written and recorded especially for Brand Financial Training customers.

Written by Tina Winter

Examiners over the years have loved the “compare and contrast” type questions and students sitting the investment-based exams will sooner or later come across the thorny question of active versus passive investment management.

The main passive techniques are:

Buy and hold – what it says on the tin – relevant when a client has a specific liability to meet

Indexation – aiming to replicate an index, with no attempt to outperform it

The four main types of indexation are:

• Full replication – buying every stock in the index
• Stratified sampling – buying a representative sample of the stocks in the index
• Optimisation – using a statistical model of the market to make buying and selling decisions
• Futures, forwards and swaps – synthesising the performance of the market using derivatives

Most managers will use a combination of these four techniques.

The arguments in favour of index tracking are:

• The efficient market theory holds that all relevant information is available to investors at any given time and from US experience covering more than 20 years, most active managers don’t outperform their benchmark index on a consistent basis – how do you pick the ones that will?
• The costs of running index tracking funds are generally much less than for active funds

And against:

• Guaranteed mediocrity – not possible to outperform by any degree, and likely to underperform after taking into account charges
• Actively managed funds can provide for a wide variety of different requirements that index tracking can’t
• Tracker funds can’t help but follow the index down
• Tracking concentrates the portfolio when constituent companies in the index merge

Active management introduces the human factor – the manager aims to use their skill to outperform the market. The main approaches are:

• Top down – asset allocation is considered first before sector and stock selection
• Bottom up – securities are selected on their own merits – stock-picking

The best – and worst – performing investment managers will be active managers. Many portfolio managers now use a mix of underlying actively and passively managed funds – a core portfolio that is indexed with actively managed funds around this, particularly in specialist areas – normally termed a core-satellite approach.