January 2008

Welcome to the January 2008 edition of our Corporate Connection e-bulletin.

We hope that you enjoy these e-bulletins. If you have any queries, or would like to discuss any of the issues raised with one of our advisers, please call us on 0845 050 0112.

We would like to take this opportunity to wish you a belated Happy New Year. 2007 was certainly eventful for Towry Law as we made new acquisitions, moved into new and larger offices around the UK, recruited key individuals, continued to develop relationships with pre-eminent professional advisers, significantly increased both turnover and profit and worked to further enhance our proposition to clients.

Likewise 2008 promises exciting times ahead. However, we will remain committed to putting our clients' interests at the heart of everything we do.

We are continually reviewing the services that we offer, and one such area is these email bulletins. We want to ensure that our communications are as relevant and interesting as possible to our target audience. That being the case, we have made the decision to revert from monthly to quarterly email bulletins.

We believe this change will mean we are able to focus on providing more in-depth information to those that receive these bulletins and can focus on those areas which they are most likely to find of interest.

Therefore, following this communication, you should not expect to receive your next email bulletin until April.

Change to income tax relief from 6th April 2008

Background

From 6th April 2008 basic rate income tax is being reduced from 22% to 20%. Amongst other things, this change will impact personal contributions paid by individuals to certain types of pension arrangement.

What types of registered pension plan could be affected?

• Individual Personal Pension Plans
• Group Personal Pension Plans
• Self Invested Personal Pension Plans
• Individual Stakeholder Pension Plans
• Group Stakeholder Pension Plans

Which individuals could be affected?

• Employed Basic Rate Income Tax payers who pay contributions personally or via their employer's payroll system
• Employed Higher Rate Income Tax payers who pay contributions personally or via their employer's payroll system

Which individuals are not affected?

• Individuals paying personal contributions into Occupational Defined Benefit (sometimes called Final Salary or Career Average) Pension Schemes, and Occupational Defined Contribution (sometimes called Money Purchase) Pension Schemes. Members of these types of pension scheme should not incur any additional cost in order to maintain the same level of member pension contribution after 6th April 2008 as they are investing before that date. In addition, there should be no impact on the eventual level of benefits from these schemes as a direct result of the tax rate change
• Individuals paying pension contributions via a Salary Exchange (sometimes called Salary Sacrifice) method of payment to any type of pension plan

What will the change mean for basic rate income tax payers making personal contributions into any type of personal pension plan?

This is best explained by using a simple example. Let's assume that an individual wishes to make a gross personal contribution of £100.00 per month into one of the types of pension plan affected by the tax rate change:

In this example, the individual would need to pay £2.00 per month more from 6th April 2008 in order to maintain the same level of gross pension investment as now. So the individual in this example can either pay the extra £2.00 per month from April 2008, or they would incur a reduction in the amount of pension investment made (and ultimately incur a reduction in the amount of pension benefit available).

What will the change mean for higher rate income tax payers?

Higher Rate Income Tax payers who make contributions to the types of plan affected by the change, as mentioned above, receive tax relief at the basic rate at the time they make their personal contribution. They then make an election to receive further tax relief up to the highest level of personal income tax paid, which remains unchanged at 40%.

Elections made prior to 6th April 2008 would be for a further tax relief amount of 18%, i.e. 40% (the current Higher Rate) minus 22% (the current Basic Rate). After 6th April 2008 the further amount of tax relief claimable will be 20%, i.e. 40% (the Higher Rate) minus 20% (the new Basic Rate from next April).

So, Higher Rate Income Tax payers will be affected, as only the new basic rate relief will be applied to the pension plan. Although the overall tax relief situation will remain unaffected by the change scheduled for April 2008.

Issues for consideration by employees:

• Higher Rate Tax payers - No further action necessary in terms of the tax rate change other than that detailed above
• Basic Rate Tax payers - If they are a member of one of the types of pension plan impacted, employees will need to decide whether to make the additional contribution (equivalent to 2% of the current gross contribution) to their plan, or alternatively accept a reduction in the overall level of pension contribution invested (probably not a beneficial option for most employees when, in general, most pension scheme members need to save more, and not less)

Issues for consideration by employers:

• Employers should review their administration procedures for pension contributions to ensure that any personal member contributions deducted from pay prior to 6th April 2008 are paid over before 6th April 2008 in order for their employees to receive 22% Basic Rate Income Tax relief
• Employers should send a communication to pension scheme members to remind them about the Government change to the level of the Basic Rate of Income Tax and the impact that this will have on their pension scheme membership. Members need to be made aware of the implications and any choices available to them. If members will be impacted then they will need to decide if they should take any action
• If member pension contributions are not currently paid via a 'salary exchange' method, then it may be worthwhile revisiting the design of the current pension plan to decide if this could be a beneficial option from 6th April 2008

Examples of how tax or tax relief may apply are based on our understanding of current tax legislation. Whether any tax will be payable, at what level it is charged and whether you qualify for tax relief (if applicable) will depend upon individual circumstances and may be subject to change in the future.

Towry Law can help employers and employees to consider the potential impact of the tax rate change in April 2008 and provide professional and impartial advice on the most appropriate course of action to take, if any.

If you would like assistance regarding any of the issues above, please contact your usual Towry Law Employee Benefits Consultant, or one of the Practice Managers shown below:

Continued growth at Towry Law

As we strive to become recognised as the leading firm of Private and Corporate Wealth Advisers in the UK, I am delighted to announce further expansions to our business in both Northern Ireland and London.

London

Towry Law has acquired Hazlems Financial Limited, a London-based employee benefits and financial advisory firm.

Hazlems has 1,200 clients and specialise in Employee Benefits Consultancy and financial planning services to sports, entertainment and medical professionals.

Nick Jones, previously managing director at Hazlems, has been appointed as an Employee Benefits Practice Principal and will be based at our new London offices in New Street Square, together with Alistair Urquhart and Jessica Kimberly, who join as Private Client Wealth Advisers.

Nick Jones said: "We are delighted to be joining Towry Law. We considered that it was the right time and in the best interests of our clients to merge into Towry Law, given the changes taking place in the industry. Towry Law has the talent and capital to deliver an outstanding proposition to our clients."

Northern Ireland

Towry Law has acquired Analysis, a financial advisory firm based in L'Derry, Northern Ireland. This acquisition marks a significant expansion of our Northern Ireland business.

Analysis, which was owned and run by Tom Leonard, first started trading in 1994 and has over 2,500 clients. Tom and his team have been joined by Kieron May, a Chartered Financial Planner from the Portrush area, who has clients throughout Northern Ireland.

Tom Leonard has been appointed as a Senior Client Partner, one of only nine such positions across Towry Law.

Tom Leonard said, "We believe that joining Towry Law is entirely in the interests of our clients. The financial advisory industry is, at last, starting to adopt a professional, service-orientated ethos, and Towry Law has the investment proposition, technical expertise and capital to deliver an outstanding proposition to our clients."

These acquisitions are a further demonstration of the calibre of individuals who are being attracted to Towry Law. We believe that a fee-based wealth advice service is the only way that corporate and individual clients can ensure they are receiving truly independent advice and we aim to attract further talented individuals and teams who believe that the future of our industry should be focused on a professional and service-orientated proposition.

Pan Andreas
Head of Employee Benefits

The Credit Crunch - where are we now?

The origins of the 'Credit Crunch' date back to the US Federal Reserve's loose monetary policy starting at the time of Y2K and resulting in 1% interest rates as the technology bubble burst and financial markets, and the economy, needed support.

It wasn't just in the US that money was cheap. The Japanese have adopted an even more accommodating approach since the early 1990s. The Bank of Japan interest rate has been below 1% and this begat the yen carry trade, which allowed institutions to borrow at very low rates in yen and invest into higher yielding currencies and investments. At first it was as simple as borrowing in yen at sub 1% and reinvesting into US Treasuries at 5%. When the US reduced rates to 1% the investment banks came up with more complex ways of keeping their gravy train going.

Sub prime debt was one of these vehicles. The mechanics are quite simple but rely on some dubious financial 'engineering' to keep the whole process afloat. Mortgages, many of which were to borrowers who were ill equipped to repay them, were packaged up and sold to institutions looking for a 'decent yield'.

Through the derivatives market, investors could gear up (increase) their holdings. There was, however, no liquid market in these instruments, the investment banks simply created a computer model, using their own assumptions, to value the paper they had issued; so investors were left holding paper that they couldn't accurately value or sell.

With investment banks no longer finding a market for sub prime debt, in fact pretty much any debt, market liquidity dried up and this is where the credit 'crunch' gets going.

Once bankers see queues forming outside Northern Rock branches, or similarly Countrywide in the US, they stop lending while they sort out where the problems lie. This filters down from large institutions to the retail borrower who will now find it much harder to get a mortgage or any other loan unless they have the right credentials; the policy any prudent bank should have been following all along.

This means that the glut of newly built residential properties in the US, Florida alone has some 50,000 dwellings at different stages of construction against a normal annual uptake of only 10,000, gets harder to sell and prices on existing homes can only go one way.

The good news is that the central banks are now making a concerted effort to get things moving again. Interest rates have been lowered in the US and the UK and a full 1% reduction on both sides of the Atlantic is possible in 2008.

The investment banks have had to make some pretty hefty provisions for bad debts and have had to transfer large chunks of highly illiquid bonds from funds and client portfolios onto their own balance sheets, which they have either had to fund themselves or have attracted inward investment from 'sovereign' funds looking to find a home for their excess cash.

The Singaporean government are said to be in talks with Merrill Lynch and UBS and the China Investment Corporation is looking at Morgan Stanley. The Saudis are also planning a $900 billion investment fund. With the prospect of the US taxpayer footing the bill for this particular bail out, these gigantic Arab investment funds may be welcomed with open arms.

So whilst the crunch has yet to fully play out, and there is likely to be more pain for the financial community in 2008, the central banks are at least on the case and the sovereign funds could provide additional liquidity.

Clive Hale
Investment Manager

Market Commentary

The volatility in financial markets at present, resulting from the unwinding of sub prime debt positions, is likely to continue into 2008, but already there are tentative signs that some normality is returning to the banking system. The sub prime debt issue is mainly for the US investment banks and the Federal Reserve to sort out, not unlike the Savings and Loans crisis in the 90s. The major central banks have taken concerted action already to ensure liquidity remains available.

The US is still the most significant driver of the world economy and the latest employment numbers hint at a slowdown, but the Federal Reserve (and the Bank of England) has already started cutting interest rates. Corporate balance sheets excluding the financial sector are strong and price earnings ratios in both the UK and the US are significantly below the long term averages so equity markets are clearly not expensive.

Inflation is seen as an issue in some quarters. Oil recently hit $100 a barrel and this is certainly an additional "tax" on the domestic consumer but, with increasing global competition, manufacturers are going to find it difficult to pass on higher energy prices. Food prices are rising rapidly but mostly as a result of poor harvests in major agricultural producing regions, extreme weather conditions in the UK last summer and outbreaks of disease, notably bird flu as well as "blue tongue" which decimated the Chinese pig population; pork being a major contributor to the Chinese diet. These are hopefully one off events and prices should begin to stabilise in 2008.

As we contemplate what 2008 holds for us it is worth recalling the Towry Law approach to asset allocation. The benefit of a multi-asset portfolio to diversify risk is the first principle. The second is that we do not believe that market timing (tactical asset allocation) can work on a consistent basis. We use a "Strategic" approach that has the advantage of using sophisticated software to provide us with a mathematically optimal asset allocation that will see us through the market cycles without the need to make radical changes to portfolios.

We do rebalance the portfolios annually back to the asset allocation targets, which can also be fine tuned to reflect the changing nature of market correlations, anticipated growth and volatility. At the last rebalancing in June the most significant adjustment was to reduce commercial property exposure and add to fixed interest. In effect we were taking profits in an asset class that had done well and reinvested in one that had under performed; totally against conventional wisdom at the time.

We are often asked whether we should move to cash when the market outlook is uncertain. Apart from the fact that the market outlook is always uncertain, we know from past experience that cash will under perform the markets over 90% of the time if held for a long term, i.e. 10 years. Over shorter time periods this percentage reduces and investors must be prepared for periods when cash may outperform equities. This is not unusual. A second decision then has to be made about when to re-enter, which provides another opportunity to be wrong or, at best, late. Getting in at the bottom is usually a much harder decision to make than getting out at the top. Add on the additional costs involved, significant in the case of commercial property, and the perceived benefits, if any, begin to look marginal for the long term investor.

As ever, multi asset class portfolios using a "Strategic" approach to asset allocation should perform in a steadier and incrementally more accumulative manner than others with less relative risk, and via regular rebalancing will successfully tackle most investment environments.

Andrew Wilson
Head of Investment

This Market Commentary is solely for information purposes and is not intended to be, and should not be construed as investment advice.

Whilst considerable care has been taken to ensure the information contained within this commentary is accurate and up-to-date, no warranty is given as to the accuracy or completeness of any information and no liability is accepted for any errors or omissions in such information or any action taken on the basis of this information.

The opinions expressed are those of Towry Law Investment Management Limited on behalf of Towry Law Financial Services Limited and are made in good faith, but are subject to change without notice.

IMPORTANT NOTICE: Towry Law Financial Services Limited. Registered in England No. 607039. Towry Law Investment Management Limited. Registered in England No.793636. Towry Law Trustee Company Limited. Registered in England No. 1151146. Towry Law Pension Trustees Limited. Registered in England No.781047. All of the above firms are authorised and regulated by the Financial Services Authority. Towry Law Holdings Limited. Registered in England No.4773122. Towry Law Nominees Limited. Registered in England No.2988101. Towry Law Services Limited. Registered in England No. 5169111. The Registered Office of all these companies is Towry Law House, Western Road, Bracknell, Berkshire, RG12 1TL. Telephone 01344 828000.

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