Ovation Finance

This time last year, some commentators (well, at least me) were predicting the third quarter of 2009 would see the problems caused by the credit crunch easing off, and the fourth quarter maybe even seeing some positive news.  Touching wood, cloth, and anything else that comes to hand, this prediction seems to be bearing out.

The vast majority of Ovation SME (small to medium enterprise) clients have made it through.  Many were telling us that things were a bit hairy late 2008/early 2009, but now things are starting to perk up.  So, how did they make it?  Here are a few stories, and some examples of the resilience of the Great British Business!

Clive Richardson, of Total Print Finishing Services (www.totalpfs.co.uk) , puts their survival down to a change in sales strategy, away from large printing machines, to smaller units, such as binding machines.  This has made sales less dependant on a few big deals, and given consistency to the income streams.  They also tied up particular distribution deals which has given them solidity of income

Finding new ways of marketing is always a challenge, but Dave Thomas of media consultants Medavia (www.medavia.co.uk) used his company’s own specialist knowledge and contacts, with the result that Channel 4 are making a documentary about them!  The stories that Dave could tell following his years at the sharp end of news reporting would make a fascinating (if somewhat libellous) book on its own.

Of course, I’m sure we all have banking stories, as they have come under the spotlight over the last 18 months.  Although there are plenty of stories of how bank funding has been forthcoming, and has made a huge difference to some companies, there are also stories of reduced funding and changing attitudes causing difficulties. 

An ironic story about banks comes from John Moore, a freelance MD and turnaround specialist.  Seeking a detailed transaction history from the bank of the company he was working for, he was told by the bank that he would have to get one himself from the paper statements.  Aghast, he queried this, asking that surely there must be an electronic transaction history, only to be informed that the "No, it's all deleted after the paper statements are issued".  Wow.

I suspect that this could open the floodgates for banking stories, but please, don’t send them all to me!  There are also a few good bank stories, where bank support has helped some clients make it through.  But, continue to be diligent – finance expert Alan Cottle (www.stonehousebusiness.co.uk) tells of banks charging a far higher interest rate than at first appears, as they were using LIBOR and not the Bank of England rate.

Managing staff is a major part of getting through difficult times.  Ian Pearce, MD of Brinsea Products met his recession sooner than most, as the birdflu issue in 2006 hit sales of his incubator business.  Ian says “When a firm needs to react to a downturn in business it's the delay and inertia which is most dangerous and the need to quickly and dramatically costs is essential. With staff being the biggest cost in most businesses, the usual response is to start thinking about redundancies, which are major decisions and often taken too late in the hope that they are unnecessary. Much better if staff could be put on short time working or their employment is temporarily suspended - allowing the Company breathing space to get itself on a better footing. These options are legally available but only if they are expressly mentioned in your contract of employment.

“Fortunately our Contract of Employment had been reviewed by lawyers recently and all existing staff had signed up to it. This allowed us to suspend a high proportion of our production staff without pay or notice for 6 weeks or so and meant we could improve our cashflow by letting our stocks reduce before taking them back on again. It's not a nice thing to have to do but there was a very high level of understanding and an appreciation that the jobs were more likely to be sustained long term if staff were temporarily laid off.  It almost certainly saved my Company.”

The recruitment industry has been particularly hard hit, and Lindsey Newman tells a similar story of staff being a major problem – and solution.  A long term view was taken by her and her partner in Purple House PR (www.purplehousehr.com/) .  Recognising that staff costs were the bulk of overheads, they sat down with staff and explained the position, and, between them, came up with a sensible mix of reduced hours, pay cut, a sabbatical, and so on.  Even the landlord was willing to listen!  Goes to show that a mature attitude, and communicating with each other, can work wonders in difficult times.

I’m sure there are many more stories and tips that people can share, so please feel free to contact me with any, and we’ll publish them (along with the name of the contributor and their business web site) in future newsletters.

During the year there have been some significant changes to pensions and Individual Savings Accounts (ISAs); both popular retirement planning vehicles.  The ISA contribution allowance increased from £7,200 to £10,200. This new limit comes into force from 6th October 2009 for investors who have reached their 50th birthday ahead of 6th April 2010. For the rest of us the ISA allowance goes up to £10,200 from the start of the 2010/11 tax year.

Pensions and ISAs have some different features, particularly when it comes to the tax treatment of contributions and eventual benefits. Deciding on what works best as a tool for your retirement planning depends on your personal circumstances, goals and objectives.

Pensions and ISAs are two very different tax-wrappers used for retirement planning, but they do share some similarities. It is rarely a case of one being 'better' than the other.

Often people planning for their income requirements in retirement will use a combination of pensions and ISAs to create a total retirement fund that can provide them with the right balance of tax breaks and access to funds.

View our comparison table which details the main features of these tax wrapper

Changing Rules On Borrowing For SIPPs and SSASs

In a demonstration of how HMRC are aware of the commercial world, several changes have been made to legislation to help businesses who have purchased commercial property in a SIPP or SSAS, which was then leased back to the employer.

For example, following the reduction in borrowing limits to 50% of the fund value (previously 75% of purchase price), many SIPPs and SSASs found themselves stuck in uncommercial mortgage deals which they could not get out of, as the lending was above the new limits.  HMRC have recently eased this restriction, and will allow restructuring of existing mortgage arrangements. 

Going further than this, they will also allow a SIPP or SSAS to enter into re-negotiation on rent.  In practice, many companies, particularly retailers, have been re-negotiating their leases in a bid to continue through the recession, and HMRC understand that, as long it remains commercial, the sponsor employer and pension scheme can undertake a similar exercise.

The key here is commercial – any abuse of such a situation would undoubtedly give rise to a tax penalty, and it must therefore be possible to demonstrate that the two parties dealt with each other in a way that could be replicated in a commercial world.

If It Seems Too Good To Be True, It Probably Isn’t

We have come across a number of stories recently of SSASs that have been advised that it would be appropriate for them to make loans, with a first charge based upon what we believe to be, questionable assets.

A good example is intellectual property rights (IPR).  We have come across instances where a company has been struggling to make it through the recession, and been on the edge of liquidation.  Their pensions advisor recommended that their pension scheme (a SSAS) purchase the company’s IPR.  This would give the company a timely cash injection, and, if the company were to go bust, then the IPR would be held outside of the company.

This seems like a wonderful rescue deal for a company in trouble, but is it?

What would the IPR be worth should the company go bust?  Would the value of the IPR at the time of the purchase i.e. when the company was trading, be the same if the company went into liquidation.

In our opinion (and the opinion of many pension trustees),  this would not be a sensible investment for a pension fund.  There is every chance that the pension fund money could go down with the company, leaving the pension scheme with IPR of reduced or potentially no value.

A major problem here is that HMRC do not state whether they believe this to be a sensible investment or not.  They simply expect the SSAS to act in a prudent fashion.  If HMRC were to review the scheme in a few years time and come to the conclusion that this was not a sensible investment, then they would deem this an unauthorised payment, and levy a tax charge – possibly on a fund which no longer has the cash to be able to pay it.

Please, therefore, if you are tempted by any method of using a pension fund which seems too good to be true, remember the old adage, and seek at least more than one opinion.

How much do you pay for your pension or ISA to be managed?

In practice, it is very difficult to actually answer this question.  It depends on a number of factors including whether you have gone direct, whether you have gone through an advisor (which can actually often make it cheaper), whether you are using a platform, and so on.

To give an example, virtually all ISAs pay a management fee of 0.5% commission.  If the underlying charge is 1.5% per annum, therefore, 0.5% per annum of this would be paid to the advisor.  If you buy your ISA direct, the charges are not reduced, the commission is just kept by the investment company.

Most investments will also have a set up charge, however the bulk of this will be used to pay the advisor commission.  Again, if you go direct, the charges are not reduced, and therefore you are often far better to negotiate a discount with an IFA, or even use a discount house if you do not require any advice.

Even the charges of the discount houses can be a little opaque, however, one well known national IFA and discount house offers a ‘recommended list’ of funds. In order to get on that recommended list, however, the fund is ‘encouraged’ to offer enhanced commission payments.

So what are the charges?  A typical actively managed unit trust (i.e. a UK Equity fund), accessed through an ISA, will have charges as follows:

Set up charge (bid/offer spread): 5.3%
Annual Management charge: 1.5%

Any advisory commissions will be paid out of these charges.  Any ongoing commission payments are paid out of the annual management fee (whether or not you actually receive any on going advice from your advisor).  Accessing a discount house can reduce these charges, and typical discount house charges would be:

Set up charge --- %
Annual Management charge: 1.5%

This is considerably cheaper, however, there is a catch.  The annual management fee will include trail commission – this is bulk discount negotiated by the discount house, and part of the annual payment will be redirected to the discount house. In some instances the discount house will negotiate a higher level of trail commission the region of 0.75%. They will usually retain at least 0.5% and rebate the additional amounts back to their investors on an annual basis.

This can create millions of pounds of income each year for the discount house, deducted from your funds.  And remember – you are not receiving any advice on your investments.

It should be noted that the rebate is not always guaranteed in fact most discount houses are unable to offer the rebate (due to HMRC rules) on pension monies and in this instance retain a higher level of renewal commission.

So is there an alternative?  At Ovation we give advice on managing client’s funds, and yet can do so in a way which is competitive with the discount houses.

More information on how the Ovation Investment Service works can be found in our brochure

The charges of a typical Ovation Investment Service portfolio would be as follows:

Set up charge Nil
Ovation annual charge: 1.0%
Platform (Ascentric) charge: 0.25%
Annual Fund Manager charge: 0.25 – 0.75%

These discounted annual fund manager charges which usually provide IFA’s/ Discount Houses trail commission as mentioned above is actually paid back into your client account. This means that when you go on line through the member log in section of our website, and look at the transaction history of your cash account, you will see the trail commission being added back in, and used to pay the charges. 

We can therefore see that the annual charge can be between 1.5% to 2% (possibly more for some of the more esoteric funds), but this includes paying for all advice relating to running the portfolio, including an annual review meeting, valuation and summary pack, enacting all changes to the portfolio etc.

In addition to the stated annual charges all funds incur additional costs for other services paid for by the fund, such as the fees paid to the trustee (or depositary), custodian, auditors and registrar. Collectively, these fees are know as the "additional costs". Therefore these should also be considered in addition to the annual charge to give investors a clearer picture of the total annual costs involved in running an investment fund. The total cost including these “additional costs” is known as the Total Expense Ratio (TER).

So far we have been discussing charges relating to a typical active managed fund whereas there are also passive funds (also known as tracker funds) available to the investor. These funds typically have much lower annual fund charges since there is no “active” fund management involved. Interestingly these types of funds do not usually pay renewal commissions to the advisers/ discount house and some well known discount houses charge you a platform fee of 0.5% to cover the commission they are not receiving from the fund manager. In these instances investors can end up paying more through a discount house than if they went direct.   As you can see there are a number of factors to consider when trying to access the charges you are paying for your investments.

View a table that compares the typical charges that you’d pay if you followed the 3 routes to investment for 2 popular funds. (1 passive fund and 1 active fund)

As discussed earlier discount fund houses ado not generally rebate any of the AMC due to HMRC rules and therefore under a SIPP the TER on the active fund would be 1.68%.

Under the Ovation Investment Service we believe the core driver to a portfolio’s performance is asset allocation and we utilise a core/satellite approach to investment. This strategy uses low costs funds such as tracker and Exchange Traded Funds (ETFs) for our core exposure to main markets, and satellite funds for specific, added value investment. We therefore can create a highly effective but low cost to investments. Typically our investment portfolios under this approach have a TER of between 1.7% and 1.8% inclusive of all charges including advice costs.

And don’t forget this covers all advice relating to running the portfolio, including an annual review meeting, valuation and summary pack, enacting all changes to the portfolio etc.