Archive for August, 2014

The Real Cost Of Smoking

Friday, August 29th, 2014


Smoking Blog ImageImagine the scene in an alternate reality; a nervous entrepreneur climbs the stairs in Dragons Den and timidly approaches the seated investors, and explains his product to them.

It’s a herbal preparation that, when burning, will poison the user with hundreds of toxic chemicals, it will taste disgusting, make their clothes smell, yellow their teeth and fingers, make them short of breath, and foul tempered when they don’t have one.

The Dragons already look baffled. Go on, they say.

It will lead to heart disease, lung cancer, emphysema, pleurisy, strokes, macular degeneration, and impotency; contribute to Alzheimer’s and infertility.

The business opportunity, the entrepreneur tells them, is that these revolting things are addictive and once a person starts to use them, they find it almost impossible to stop.

Mercifully sanity prevails and the Dragons declare themselves out, the new invention called the ‘cigarette’ never makes it on to the market and the world is fitter, happier and healthier.

In our reality (where, it must be stated, Dragon’s Den star Duncan Bannatyne is a tireless anti tobacco campaigner), people are aware of the dangers of smoking and whilst there appears to be a slow decline in new smokers, the numbers of existing nicotine addicts is still huge.

It would be comforting to think that if cigarettes were invented now, they would never make it to market; the recent seventh anniversary of the smoking ban in pubs and restaurants has made life far more pleasant for non smokers enjoying a drink or a meal.

What could a smoker have saved in that time however? The one piece of arithmetic that every nicotine addict dreads is calculating the opportunity cost of their addiction, which in recent years has become a truly expensive vice.

According to The Guardian, the average price of a packet of cigarettes is £7.46 and assuming that the average smoker lights up twenty times a day, the cost over a year will be £2,723, but a heavy smoker on 30 a day will be incinerating £4084 each year.

Not only are most heavy smokers ensuring that they won’t make it to retirement, the £2 – 4,000 a year that they are handing over to tobacco companies could have made that retirement very comfortable.

Assuming that on cash invested a meager 2 percent interest is available; two decades of smoking 30 a day at today’s prices will deprive a smoker of a potential £100,230.92.

For a smoker with 20 years of working life left (which is always a big if) the benefit of giving up today could be a lump sum large enough to pay off an existing mortgage or buy a second holiday property.

The figures quoted above would be enough to pay for a top of the range Jaguar XKRS, a car almost exclusively driven by people having some fun with their nest eggs, or it would fund as much luxury travel as you can imagine.

Of course none of us can put a price on good health, this is something that is absolutely invaluable and it is always the best reason to stop smoking.

Insurers will always try to place a monetary value on good health and non smokers will attract lower health insurance and life insurance costs compared to their wheezy counterparts.

Finally, if you are an employer, it’s worth considering helping your staff to quit smoking, as recent research shows that the addiction costs the economy billions in lost productivity every year.


Patient Capital

Friday, August 22nd, 2014

Patient Capital ImageWhat do the Clifton Suspension Bridge, Cardiffs Docks and the Suez Canal all have in common? 

Other than the massive utility and the long term value they have brought to local, national, and global economies, the one feature they all share is that in the short term, they were enormous money pits.

Isambard Kingdom Brunel, the builder of the Clifton suspension bridge across Clifton Gorge near Bristol died before the bridge was completed, but it was decades before it paid for itself. 

The Marquis of Bute poured millions into creating the biggest coal port in the world, and like Brunel, was long dead before it made its money back.

In many instances, the spirit of these Victorian gentlemen capitalists also appears to have expired, or so says entrepreneur Luke Johnson, who recently argued at a Quoted Companies Alliance gathering for more ‘patient’ capital.

Johnson, whose successes include Pizza Express and Patisserie Valerie, has said that hedge funds that invest in businesses and then divest within a matter of months should not be classed as investments at all.

Patient investors, Johnson believes, invest in businesses for the long term; experiencing losses or low returns in the interim while the business grows. 

A long term approach where investors are involved for years instead of hoping for a short term share price hike before exiting with a profit is essential for the development of business and the growth of the economy in general.

Johnson argued that businesses stand a better chance of survival when accessing capital if they become PLC’s and sell shares to the general public, than if they accept the private equity deals they are often presented with.

From the point of view of the economy at large, there is much to be said for Johnsons views, and investors dont have to be quite as patient as the Victorian gentlemen capitalists in order to see a return on their investments.

In his final point, Johnson encouraged the public to buy shares in up and coming companies; most of the main share offers that small investors participate in are giant flotation’s like the Royal Mail or the AA.

From the perspective of the small investor, buying shares in a small but growing business might seem more risky and difficult, but with some independent help it could prove to be a valuable part of an investment portfolio.

Finding a fund that invests in a range of new and growing businesses may help to spread the risk, as well as putting some of your investment capital into more established fields.

As with all investing, there is inherent risk, no business, great or small is guaranteed to be successful; but a business with the capacity for growth in the long term is certainly worth owning even a small share of.

Whilst investment is all about self interest and the balance between risk and reward, there is something to be said for the greater social goodthat long termism engenders. 

Some funds are simply interested in riding the short term wave of share prices, and this prevents the kind of growth that boosts employment, contributes to the tax base and makes society function.

There is, therefore, another kind of investment that all share buyers can engage in; a long term investment in the society around them, and its an investment that will almost certainly pay dividends in the long run.


House Prices, Pensions and the Recovery

Friday, August 15th, 2014

Aug Economic Review ImageIn the past few months the clouds have parted, the gloom has lifted, and Britain is booming. Unemployment is down, investment over the past three years is up, and all is well. The recession is over and as a result there is a plausible feeling in the air that no one needs to worry about anything.

The relentless upbeat forecasts, and the fact that a general election is now ten months away, are in no way connected and merely coincidental; after all, with things being so positive, why wouldnt the government want people to know the economic bad times are behind us?

Of course there are hidden dangers in our currently bullish outlook on the state of the country, the main one being our collective temptation to go back to the good old days of 2007.

Much of the rhetoric coming from the media in the past few months has been based around the notion that the tough times are over and that we will be able to enjoy life the way we did before the crisis. 

This, as many of us know, is a fantasy, which isnt to say that we must exist in penury for ever more, but the patterns of spending and borrowing that developed between 1997 and 2007 are a luxury that none of us can afford.

If the country really has economically recovered (something that none of us can really take for granted), and if it is a recovery that can sustain itself in the long term (again, questionable), we must still accept the extent to which our individual and national circumstances have changed.

Housing, pensions, and savings are key areas where it is essential to be vigilant; economic confidence should not translate into complacency.


Britain is experiencing a housing boom not dissimilar to the one that reached its peak ten years ago. 

At about the time Sarah Beeny and Laurence Llewelyn-Bowen dominated the TV schedules with property makeover TV, the rest of the country was obsessed, Dutch tulips style, with their ever increasing property prices.

A few savvy investors saw the housing boom for what it was; an opportunity to buy cheap, sell high and get out of the market as quickly as possible before it imploded.

Many others, less experienced and more trusting, who borrowed their way into negative equity,  (when the value of their new home nose-dived) were stuck with huge repayments and a property that had been over valued.

George Osborne, in need of something to kick start the economy after the effects of his post recession austerity hit home, chose the property market.

The Help To Buy scheme, originally intended to assist first time buyers get a foot on the property ladder, offered them a loan, in addition to a minimum 5% deposit, of up to twenty percent of the value of a new home up to the price of £600,000.

Previously, getting together a 25 per cent deposit on a home had been challenging for most medium income families, but finding 5 per cent was much more realistic. The scheme began to overheat the housing market, particularly in the South East, once it was rolled out to home movers as well as first time buyers.

The possibility of purchasing properties well beyond ones’ means quickly developed; which was exciting news for the impulsive and naive, but now presents the rest of Britains home owners with something of a quandary.

In a bid to slow down the housing market, in April this year the government imposed strict new lending regulations on banks and building societies, ensuring that borrowers would have to prove they had a saintly credit history and minimal debt commitments, as well as assessing overall affordability including a “stress test” in the event of interest rate rises.

Strict limits on the amounts that could be borrowed were imposed as the government struggled to rein in the housing market that looked in imminent danger of spiraling out of control.

Perhaps the biggest challenge to home owners, however, is yet to come. The Monetary Policy Committee of the Bank Of England, led by Governor Mark Carney, have been debating the issue of a rise in the base rate of interest for the last twelve months.

As the economy improves, the historically unprecedented 0.5 percent base rate of interest that has kept the country from collapse for the past half decade looks set to be increased. Carney, is his recent annual Mansion House speech, strongly hinted at a forthcoming rate rise.

This might be bad news for home owners as more of their available income is sucked up into mortgage repayments, but it also means that the urgent task for most people is to renew or to move onto a fixed rate mortgage deal.

The banks, predictably, have started to put the costs of their fixed rate mortgage deals up, knowing that there will shortly be a surge in demand for such products.

The combined effect of potential rate rises and new restrictions seems to have temporarily taken the heat out of the housing market, but how long this will last for us uncertain.

Pensions and Savings.

For some, Mark Carneys words will be gratefully received; an interest rate rise for savers will be not dissimilar to the first drops of rain after a long drought.

Since 2008, savers have seen precious little return from their nest eggs and, not unreasonably, have felt that the low interest rates have penalised them unfairly. 

Savers, after all, have been prudent with their money and much of the reason for the nations current straightened circumstances is down to excessive and imprudent spending and borrowing.

Pensioners and older people who have used the interest on savings to pay for day to day expenses have experienced a significant shortfall in their financial wellbeing in the past half decade.

Interest rate increases in the coming year might only be marginal but for savers they will be a step in the right direction.

Throughout the recession, pensioners have seen their primary source of income, their pension, affected by the crises in the annuities market.

The slump in annuities meant that low returns on pensions became widespread, which in part explained the widespread jubilation when the Chancellor of the Exchequer made annuity policies non-mandatory for a range of pension types.

The Daily Mail recently reported that pensioner’s incomes have only just started to rise above the rate of inflation for the first time since 2011. 

On average, pensioner households were receiving £503 a week in 2009; an amount that had decreased to £477 a week by last year. The figures, compiled by the Office Of National Statistics are a retrospective analysis of income so 2014 figures have yet to be calculated.

The Future

The brief boom that the government unleashed in the housing market will probably taper off in the next two years. 

Strict lending limits and a rising cost of borrowing will allow a degree of sanity to re-establish itself; though this will mean that prices will probably remain both high and stable as fewer people are able to borrow beyond their means.

Savings will also become better rewarded as interest rates rise, but much of this rests on the future performance of the economy. 

The fall in unemployment is in large part due to an increase in zero hours contracts, freelance work, part time hours, and low wage jobs; the government describe this as workforce flexibility but for many it is a precarious existence.

A low wage economy with high property prices and an ever shrinking welfare safety net tends to lead to an increase in consumer borrowing to make ends meet, and inevitably to defaults and a credit crisis somewhere down the line.

The impact of a departure from the union of Scotland, which may still happen in September, might also cause major disruptions to the economy, as would the possible departure of Britain from the European Union.

These wild card factors, along with our current hyper-flexible and insecure working population, make it too soon to say whether or not we have got a lasting and robust recovery.

If that recovery is derailed, the Bank Of England will very quickly retreat from plans to put the rate of interest up.

In the long run an interest rate rise is probably the healthiest thing for the economy, incentivising saving and cooling a super hot housing market are both worthwhile objectives.

House Prices, Pensions and the Recovery


What will Scottish Independence mean financially for Scotland and the rest of the UK?

Friday, August 8th, 2014

Scottish Independance BlogOn 18 September the shape of the United Kingdom, will, one way or another, be altered forever. When Scotland votes whether or not to become an independent nation there will inevitably be profound economic consequences to their choices on either side of the border.

Depending on the last opinion poll you’ve read, Scotland is either ready to vote for or reject independence by narrow margins either way. The economic argument in favour of independence as far as the Scots go is as follows.

Scotland’s resources, oil, fisheries, tourism and a whisky industry, if spent exclusively on Scotland, would result in the highest per capita standard of living anywhere in Europe and possibly the world, according to a Scottish Government Report. Scots would be £5bn better off by 2030, though this has been disputed by the Institute for Fiscal Studies.

The benefits for England, argued Alex Salmond, in a recent speech, would also be considerable. An independent Edinburgh would act as a counterweight to the power of London and the South East of England; areas that inexorably suck up the nation’s resources, talent, jobs and inflate house prices endlessly.

Following that, he stated in his St Georges Day Speech the cause of further English regional devolution in deeply depressed areas like Cornwall and Tyneside would be enhanced; regional autonomy for the North East would result in investment and spending decisions that would directly benefit local people and not be guided by London-centric priorities.

The de-centralization of the British economy might possibly result in such things, but then again there’s just as much chance they won’t.

A recent article in the Guardian rather punctured this utopian view and cast a long shadow over Salmond’s economic plans for Scotland. It pointed out that nearly all of the biggest generators of GDP in Scotland are owned by foreign concerns.

Scottish salmon, for example, is almost exclusively owned by Norway and the only Scottish whisky business left in Scottish ownership is Grants; The Glenmorangie, Glenfiddich, Talisker brands etc are all owned by global food and drink brands. Scottish oil is almost exclusively extracted by foreign companies; of the million barrels per day only 6,000 are pumped by First Oil, Scotland’s only domestic oil firm.

This means that while the oil companies will have to pay to drill in Scottish oil fields and will continue to use Aberdeen as a base of their operations, there will be a net flow of oil wealth out of Scotland.

There are major questions hanging over the future revenues generated by the sale of oil and gas and its end products – everything from bitumen and kerosene to petrol and aviation fuel, will be banked in a centre of global finance, most likely the City of London (where it currently resides), where it will be taxed and spent – in England. that have been predicted by the Scottish Government. A recent Financial Times report suggested that projections made by Hollyrood may well have been too optimistic.

Unless Scotland can quickly set up a financial sector the size of London’s, with an attractive taxation and regulatory environment that is attractive to investors but polices their activities to prevent financial catastrophe, it is unlikely that their decisions about where to do their banking will change.

George Osborne has made it quite clear in recent months that there will be no shared currency between Scotland and the rest of the UK.

One only has to cast one’s mind back two or three years ago to recall the Euro crisis for an example of what happens when two or more very different economies, growing at different rates, requiring different rates of interest share a currency that has a uniform value.

There would be nothing to stop Scotland from using the pound or indeed buying and selling goods and services in dollars, euros or yen, but Scotland would have no control over the value of the currency.

On the subject of the Euro, despite Salmond’s statements to the contrary, it seems that Scotland’s entry into the EU as an independent member state would be a very long winded affair, with Jose Manuel Barrosso, the president of the European Commission describing it as ‘almost impossible’.

In the business of speculation all must be taken with a reasonable sized pinch of salt; events may unfold otherwise and Scotland may experience an economic and social renaissance if she becomes independent.

Scottish voters who believe they get precious little from Westminster may look at the potential pitfalls ahead and think that the risks are worth it; they may even think that potential short to medium and even long term economic pain is a price worth paying for self determination.

There is a final question mark hanging over the idea of independence, however, and it is one that is faced not just by Scotland, but by every sovereign state in the world. A country can only be as independent as the business and finance institutions that choose to operate within its borders feel comfortable with.

In the 21st Century, with the globalisation of labour markets and information technologies enabling firms to operate anywhere in the world, the perennial problem that any state, old or new faces is that of capital flight.

If an independent Scotland cannot convince the large multinationals who operate there currently that it offers a clement business environment, they will leave and relocate elsewhere. JK Rowling, the author of the Harry Potter books has staked £1 million on the No campaign citing this very reason as one of her prime concerns.

Where might they go? Into the nearest and most attractive member state in the Eurozone, or England, for short. Businesses tend to err on the side of caution and in the run up to September, some may already be calling in the removal men.

Of course if the Scots vote against independence, there will be a number of political and economic sweeteners offered to them by Westminster as well, including the power to vary taxation rates, allowing Hollyrood the opportunity to reduce the tax burden north of the border. Already both Westminster and Hollyrood have pledged to invest £1bn in Glasgow’s infrastructure.

So what might this mean to you, the investor? Firstly it depends what side of the border you live on and the current make up of your portfolio; any investments that you might have in Scotland, land, property staple industries etc. may exist in a very different taxation and regulatory environment after September if Scotland becomes an independent nation.

Any business in Scotland that you have an investment in might not have the luxury of being within the Eurozone after September either. It might pay to look at the actions of major investors and employers who have tens of millions at stake to see what they do.

Once Scotland is independent, it’s a done deal, there’s no going back and there situation will be permanent. If there is an exodus of capital from Scotland, there might well be a welcome investment boom not just in England, but in Northern Ireland and Wales too.

Therefore, if you are planning on making any UK investment or property decisions, it might be worth waiting until October.

How much tax should you pay? Finding the ‘Goldilocks’ rate.

Friday, August 1st, 2014

 How much tax should you pay_Once, long ago, the job of a rock star was to throw TV sets out of windows, drive Rolls Royce’s into swimming pools and shock, outrage and appall polite society.

Back in the 1970s, when the top rates of tax were levied for millionaire entertainers like the Beatles, the Rolling Stones and Eric Clapton, they either moved to LA or they paid their bills.

These days, our highest paid musicians and performers seem to have abandoned their wild man antics to live a quiet, but less financially transparent existence.

The case of Take That recently where three of the group invested £66 million between them in a scheme that acted as a tax shelter (in itself not an illegal act), has raised all sorts of ethical and financial ques-tions among the rest of the tax paying population.

Even though the scheme was legal, the size of the avoidance has left the HMRC hot on Take That’s tails, demanding repayment of the taxable amount.

Many might ask, if the law doesn’t prohibit the avoidance of tax, why should we complain about Barlow and Co? Good question.

It helps to imagine the tax paying population as slaves in a Roman trireme, rowing to the beat of the HMRC drum, and when one particularly wealthy slave decides he wants a break from rowing, the poorer ones all have to row that bit harder.

Taxes have to be paid, it is quite literally the financial price for existing in a civilized society, and for liber-tarians who think the state should levy no taxes on the people, it might be worth taking a trip to a war torn and impoverished part of the world where there is no state, health care or policemen to see how that one really plays out.

Now, this article isn’t simply to make the case for tax-and-spend, it is, after all, in a personal finance blog. If we want to pay a fair amount of tax and contribute to society, but don’t want to be completely impover-ished by HMRC, what is the best thing to do?

Firstly, get some advice. An independent financial advisor will be able to explore your circumstances, your saving and investment goals and your plans for the future. They will also be able to suggest finan-cial products that will help you to become more tax efficient.

An advisor can help you to find what I call the ‘Goldilocks’ solution that’s just right for you, where you don’t pay too much and you don’t avoid too much either.

Again, limiting your tax liability within the law is perfectly ok, but the more ‘adventurous’ the scheme, the higher the chance that the tax man will look at it and decide to act against it.

Most reputable advisors will steer their clients to low risk investments that have no legal or ethical impli-cations, and if you get advice from any source, be telling you about a scheme that sounds too good to be true, then it’s too good to be true.

Consider walking away quickly from such schemes because at best, they will land you with a nasty tax bill, and at worst they are simply scams and you will lose the money you invest.

The kind of dubious wheezes that Take That were involved in ultimately don’t make good financial sense, as we have seen, the greedier the scheme, the higher the certainty that HMRC will claw it back.

It makes sense to try to limit your tax liability but within some kind of reason, but ultimately where you draw the line is your decision.


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