Issue 178 August 2012ISSN 1461-3158

The key monthly digest of information and analysis for busy financial advisers

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In this issue...

Income tax relief cap – theGovernment’s new proposalsJohn Housden 1

New code on pension transfersIan Naismith 2

HMRC and adviser chargesJohn Housden 3

Dilnot – the Government responseAndy Couchman 3

UK equity markets – The Kay ReportJohn Housden 4

Pension charges controversyIan Naismith 5

Feature

Suitability of replacement business andCIPsDavid Smith 6

New Government initiatives against taxavoidanceDavid Harrowven 8

In brief

You may have missed… 9

Markets

Cormorant Capital Strategies 10

Test

Self-test questions 11

Income tax relief cap – theGovernment’s new proposalsHMRC and the Treasury have published a jointconsultation on capping income tax relief followingthe contentious 2012 Budget proposal.

One of the most controversial aspects of Mr Osborne’s March Budget wasthe proposal to cap income available for tax relief from 2013/14 at thegreater of £50,000 and 25% of income. A wave of protests from charitiesappeared almost instantly and by the end of May the Chancellor hadexcluded gift aid and associated charitable reliefs from the cap. However,the Treasury stood by the principle of capping income tax relief. How thiscan be achieved has now been set out in a joint HMRC/Treasuryconsultation paper.

The paper lists ten income tax reliefs which will be within the cap, the mainones being trade loss relief against general income, early trade losses reliefand qualifying loan interest. Income tax reliefs that are already capped areexcluded, such as VCT and EIS new share purchase.

The income on which the 25% will be calculated is an adjusted version ofthe normal ‘total income’ figure (s23 ITA 2007). The adjustment is areductionby the gross amount of any personally made pension contributionwhere relief is given either at source or through self assessment. Pensioncontributions made under the ‘net pay’ system are already excluded fromthe total income figure. If a taxpayer makes payroll gifts, the adjustment isan increase in the total income figure equal to the gross gift. Other charityreliefs do not affect the ‘total income’ number.

The cap will apply to the tax year of the claim and any other earlier or latertax year in which the relief claimed is allocated. Thus relief for a loss claimedin 2013/14 will still suffer a cap if part of it is carried back to the current taxyear.

The limit on qualifying loan interest could create problems for self-employed farmers and unincorporated owners of large buy-to-letportfolios.

John Housden

©ur

ban

cow

2 Issue 178 August 2012

For the notes see:bit.ly/TS178-2

“This processlargely reflectsmany advisers’existing good

practice...”

With the retail distribution review (RDR) less than five months away,the tax issues around adviser charging ought to have been settled,but that is not the case. The financial services industry had two homewins over HMRC in July and one away defeat in Europe.

HMRC and adviser charges

REGULATION

Adviser charging and at retirementbenefits The issue of how to allow foradviser charging when calculating the pensioncommencement lump sum (PCLS) has beenimmersed in HMRC/industry consultation forsome time. In J anuary 2012, HMRC proposedthat the PCLS should be calculated on the

fund net of adviser charges. Thus a £100,000fund with £2,000 advice charges would yield aPCLS of £24,500, i.e. less than a quarter of thefund. After cries of anguish, HMRC thensuggested that for annuity purchase, the costof advice on annuities alone would be ignoredin PCLS calculations. Any non-annuity advice

New code on pension transfersThe new Code of Good Practice for Incentive Exercises on Pensions(Financial timesaver issue 177), includes transfers from defined benefitschemes.

PENSIONS

The practitioners’ notes accompanying theCode include an illustrative advisory processfor ‘Member Advisers’ who are appointed toprovide recommendations to individuals. Theadvisory process has four main stages:

1. The benefits given up must beinvestigated. The adviser should studythe scheme rules and member booklets,clarifying any unclear aspects andconsulting the employer and/or trustees onthe likelihood of future discretionaryincreases or changes to member optionssuch as early retirement terms. It issuggested that the Member Adviser mightagree a written summary of all aspects ofbenefits with the employer and/or trusteesbefore circulation to members.

2. The Member Adviser shouldconduct a similar investigatoryexercise for the replacementbenefits being offered, includingcharges and investment options. Thereshould be a suitable range of investmentfunds available to provide defaults forseveral different categories of member riskattitude. Default investments should not

require future member involvement and so,for example, they might well include‘lifestyle’ switching before retirement.

3. The Member Adviser must considerthe employer covenant, and whetherthe employer’s financial strength andscheme funding level are relevant to theiradvice. Again, a written summary of theposition might help, but the MemberAdviser could simply say to members thatthe issue has been ignored and explain therole of the Pension Protection Fund.

4. The Member Adviser must have arobust process for assessingsuitability, in line with FSA’s COBS rules.This includes Know Your Client, dealingwith vulnerable clients and maintainingevidence that the Member Adviser hasconsidered the client’s capacity for loss,attitude to risk and ability to manage risk.

This process largely reflects many advisers’existing good practice, but it highlights thesensitivity of incentive exercises and theimportance of any transfer being in themember’s best interests.

Ian Naismith

3Issue 178 August 2012

“Notsurprisingly,the proposalto apportion

fees met withsome

derision.”

For more see:bit.ly/TS178-3a andbit.ly/TS178-3b

PROTECTION

The Government’s long awaited response to last July’s DilnotCommission on long-term care funding is finally here with publicationof its White Paper Caring for our future: reforming care and support.

Dilnot – the Government response

A key element of the July’s Paper was a broadacceptance of the Dilnot proposals, whichsupport a greater partnership between theindividual and the State. How much theindividual should pay and how much theGovernment should is not finalised, butindividuals may end up having to pay morethan the economist and academic AndrewDilnot would ideally like.

The White Paper also included many new andrevamped initiatives and a draft Care andSupport Bill. Media headlines focused on theproposed wider availability of secured loansfrom local authorities. Overall, the focus is onbetter information for those needing care andfor their families and carers, together with

improved quality of care and regulation andalso more local initiatives.

But what is lacking is any commitment to findnew money. Given the country’s (world’s?)financial situation, that is hardly surprising,but it is disappointing nevertheless that thevital funding issue has been put off until atleast the next spending review in 2013/14.

One potential solution for ‘middle England’ isinsurance. Pre-funded long-term careinsurance was heavily promoted in the mid 90sbut the market never really took off and therewere ultimately few winners across the wholeexperience. To change that, the insuranceindustry needs certainty of policy going

fees (e.g. reviewing other income options)would have to be separated out and allowedfor. For drawdown, HMRC said that allpension advice charges could be ignored, butonly if fees were deducted after designating thedrawdown funds.

Not surprisingly, the proposal to apportionfees met with some derision. It would havemeant that all advice cost would have beenpushed onto the annuity element. In July,HMRC gave in to the inevitable and agreedthat for annuity purchase, the PCLS would be25% of fund with fees ignored unless they didnot relate to at-retirement pension incomeadvice. On drawdown, HMRC maintainedtheir stance that fees deducted after drawdowndesignation should not affect the PCLScalculation. However, fees deducted before orat the same time as designation would need tobe taken into account. The new HMRCposition is reflected in a revisedRPSM09106040.

Advice and VATHMRC issued its final RDRVAT guidance in March, but in July it lost along running battle with Bloomsbury WealthManagement in the First Tier Tribunal on theissue of VAT exemption. Bloomsbury hadclaimed repayment for VAT levied in error on

advice fees between 2005 and 2009. HMRCargued that Bloomsbury’s services wereVATable because they were predominantly theintroduction of clients to fund managers, witha view to the clients receiving fundmanagement services. The Tribunal disagreed,saying that although Bloomsbury introducedclients to fund managers, it primarily acted asan intermediary between the two parties withthe purpose of acquiring and maintaininginvestment portfolios on behalf of the clients.

HMRC had tried and failed to have theTribunal hearing deferred until a judgementfrom the European Court of Justice (ECJ) onthe VAT treatment of discretionary fundmanagement (DFM) fees was given. That case,involving Deutsche Bank, addressed the issueof whether the various fees associated withDFM could be individually treated for VATpurposes. The ECJ decision, which emergedshortly after the Bloomsbury hearing, was(against expectations) that all DFM fees areVATable. HMRC will now review its guidancein this area.

For IFAs hitherto untouched by VAT, theTribunal and European judgements are areminder of the complexities of financialadvice and indirect tax.

John Housden

For the full reportsee: bit.ly/TS178-3c

Issue 178 August 20124

See the full reportat: bit.ly/TS178-4

“The classicrole of equitymarkets – to

providecompanies

with fundingfor new

investment –is no longer areality in the

UK.”

UK equity markets – The Kay ReportProfessor John Kay issued his main report on ‘UK equity markets andlong-term decision making’ in July.

INVESTMENT

The report was commissioned last year by Vince Cable, in his role of Secretary of State forBusiness, Innovation and Skills. Kay is highly regarded on all sides and his main findings were:

� Short-term behaviour is prevalent. Kay says that this is not just a “superficial” level ofalgorithm-based computerised high frequency trading, but is also inherent in the approachtaken by listed companies generally. Under-investment in physical assets, productdevelopment, employee skills and reputation with customers are a result of the focus onshort-term results over long-term business development.

� The equity market currently encourages exit (investors selling their shares) rather thandialogue with companies in which they have invested, thereby “replacing the concernedinvestor with the anonymous trader”.

� The classic role of equity markets – to provide companies with funding for new investment– is no longer a reality in the UK. Most listed UK companies generate sufficient cashinternally to fund their corporate projects. Kay concludes that as a consequence “theprincipal role of equity markets in the allocation of capital relates to the oversight ofcapital allocation within companies rather than the allocation of capital betweencompanies”.

� Foreign shareholdings in UK companies have increased as a result of the run-down of theirequity holdings by large UK insurance companies and pension funds, combined with theimpact of globalisation. Share ownership has thus fragmented, reducing the incentives forinvestor engagement and the amount of control that each shareholder enjoys.

� “There has been an explosion of intermediation in equity investment, driven both by adesire for greater professionalism and efficiency and by a decline in trust and confidence inthe investment chain”. This has increased costs for investors, heightened the “potential formisaligned incentives” and created “a tendency to view market effectiveness through theeyes of intermediaries rather than companies or end investors”.

� “Regulatory philosophy influenced by the efficient market hypothesis has placed unduereliance on information disclosure”. Kay says this has led to the “provision of largequantities of data, much of which is of little value to users”, and could encourage investorsto take excessively short-term decisions.

� Asset managers have become “the dominant players in the investment chain”, but theappointment and monitoring of active managers is “too often based on short-term relativeperformance”.

� “Regulatory policy has given little attention to issues of market structure and the natureand effectiveness of competition, instead developing detailed and often prescriptive rulesgoverning market conduct, with substantial cost and limited success”.

The report puts forward 17 recommendations to improve matters, ranging from new governanceapproaches to a review of the concept of fiduciary duty by the Law Commission.

Initial reactions to the report have been mixed, with some commentators saying Professor Kayis trying return to a bygone era.

John Housden

forward, regardless of the flavour of theGovernment of the day.

As the Daily Telegraph put it on 12 July: “…thecore of a workable social care system must be

personal insurance cover”. It looks probablewe may have to wait a little longer for thatthough.

Andy Couchman

Issue 178 August 2012 5

For more see:bit.ly/TS178-5a andbit.ly/TS178-5b

PENSIONS

Pension charges hit have the headlines recently, with Labour leader EdMiliband saying they could be the next scandal after banking, andPensions Minister Steve Webb suggesting that the industry shouldseek to enhance its “battered reputation” by improving terms forexpensive back-books of pensions and by reducing exit charges.

Pension charges controversy

Three highly critical papers highlighting the lack of transparency of pension charges have beenpublished this summer.

� Michael Johnston’s ‘Put the Saver First’ for the Centre for Policy Studies contains 104wide-ranging recommendations for pensions reform, including a proposal to replace theTotal Expense Ratio (TER) with a Total Cost of Investment (TCI). This would cover all thecosts, including bid-offer spreads and stamp duty.

� David Pitt-Watson picks up this theme in ‘Seeing Through British Pensions’ for the RoyalSociety for the Arts, suggesting that providers are deliberately hiding the true cost andshould adopt standards of transparency such as those shown in Danish pension schemes.

� A survey of defined contribution pension schemes by consultants Lane Clark & Peacockfound that the true costs for diversified growth funds, which are often used as defaultinvestments, can be 50% above the headline annual management charge. Interestingly, itrevealed higher average charges for stakeholder pensions than for group personal pensions.

Criticism of charges has often been sensationalist and sometimes misleading, and could do somedamage to automatic enrolment. However, it raises important issues. Charges for pre-stakeholder pensions were higher overall than those in recent years, reflecting an era of largelymanual servicing when costs were typically swamped by high investment returns. These chargesare now largely historic, but Steve Webb’s comments will make insurers review their back-books.

Value for money?

A second issue is whether higher-charging investment funds offer value for money. Defaultinvestments for automatic enrolment, including the National Employment and Savings Trust(NEST), are likely to feature active asset class allocation overlaid onto index-tracking investmentsto minimise costs. That will be the benchmark and more expensive managers will need to justifytheir charges through performance. As the particular fund highlighted by Labour demonstrates,high fees can be justified by stellar performance. However, there might be increasing pressureto adopt a system proposed by Michael Johnson, where basic fund manager fees are modest andadditional payments must be justified by outperformance.

Finally, there will be increasing focus on transparency of charges. Dealing costs, which havetraditionally been incorporated into investment returns, will have to be publicly available. Yearlystatements of charges may also become common, and the National Association of Pension Fundsinitiative on presenting charges to employers may well be adapted for individual pensions.

Advisers will be well aware that choices on contribution levels and investments are generallymuch more significant than charges in determining retirement outcomes. However, it isincreasingly important that they understand all the costs involved, and can put them intocontext for clients. This may involve becoming more demanding of pension providers andinvestment managers. Demonstrating good value is essential.

Ian Naismith

“As theparticular

fundhighlighted by

Labourdemonstrates,high fees canbe justified by

stellarperformance.”

FEA

TUR

E In response to changes firms are making to their business models and advice processes, theFSA undertook a thematic review in 2011. The results raised concerns about the suitabilityof replacement business and CIPs, although the FSA acknowledged that this reflectedfirms’ reviewing and changing their service propositions before implementation of theretail distribution review (RDR). Some of the key findings about adviser behaviour were:

� Firms failing to consider the effects of charges when recommending replacement business.� Insufficient evidence to support recommendations to switch investments where the

objective is to generate improved performance.� Inadequate information being gathered about existing arrangements, and advisers not

properly assessing the features and benefits of financial products and services.� File reviewers failing to challenge advisers about various suitability issues.� Firms using CIPs as the automatic solutions for all clients.� Lack of adviser competency in identifying when a CIP may be unsuitable for a client.

The FSA define replacement business as a switch or transfer of client assets from oneinvestment solution to another. The regulator defines a CIP as a standardised approach toproviding investment advice, using model portfolios, discretionary management services,or distributor influenced funds.

This new guidance reinforces the FSA’s view that firms should take ‘reasonable steps’ toensure that recommendations to switch existing investments are suitable for clients, andmeet their specific needs and objectives. They expect firms to consider charges,performance, and tax treatment, and clearly explain to clients the benefits anddisadvantages of any new proposition. Advisers should also take into account theflexibility of existing investments and any guarantees associated with them. The FSA willchallenge firms that recommend replacing clients’ existing investments in order to access awider investment choice, if the changes involve additional costs and firms fail todemonstrate that the client will actually make use of the wider choice.

Charges Firms should consider the costs of their replacement solutions and justify anyincrease. The FSA expects firms to undertake a cost comparison exercise whenrecommending a switch or transfer of existing investments. This should include all costsand account for the effects of any trading charges. Additional costs may be justified if theyrelate to a benefit that has value for the client and meets their needs and objectives.

Performance Firms that recommend switching existing investments to increase thepotential for improved performance should provide specific justification. Any additionalswitching costs for the client must also be taken into account when quantifying the overallpotential for improved returns.

Tax treatment Advisers should review clients’ existing investments to establish whetherthey are more tax-efficient than the recommended solution, taking into account theclients’ financial circumstances, needs and objectives. The tax implications of theswitching itself should also be analysed, e.g. CGT on a disposal.

Know your client Firms should gather all necessary information to assess the suitabilityof existing investments and demonstrate how they meet the clients’ specific needs andobjectives. They should provide personalised recommendations.

Suitability of replacementbusiness and CIPsThe FSA have published guidance on assessing the suitability ofreplacement business and centralised investment propositions (CIPs).

6 Issue 178 August 2012

“Clients’needs should

be offoremost

concern tofirms offeringCIP solutions.”

Risk profile If the justification for switching an existing investment is to manage assetsin line with the client’s risk profile, the firm should consider whether it is possible toreorganise the existing portfolio to achieve a similar outcome in a more cost-effective way.

Controls and oversight Firms should continue to operate suitable risk managementsystems and controls to mitigate the risks of unsuitable advice when recommending thereplacement of existing business. The FSA consider that the “effectiveness of any control isdown to its robust operation rather than the nature of the control itself”.

The guidance also identified a number of key questions that firms should consider whendesigning or adopting a CIP:

� Have we thought about the specific needs and objectives of the target clients for whom thisproposition is being designed?

� Is the CIP suitable for each client on an individual basis?� Do we have robust controls to mitigate the risks of using CIPs?

CIP design and diligence Clients’ needs should be of foremost concern to firmsoffering CIP solutions. They should consider the clients’ knowledge and experience,financial position, investment objectives and required level of service.

Segmenting clients Firms with diverse client banks may decide to segment their clientsand offer a range of CIP solutions to the different segments. It is important to explain thedifferences between types of service and the associated costs to clients.

Choosing a CIP Firms should use the following main criteria when carrying out duediligence on third party CIP providers: terms and conditions of use; charges; provider’sreputation and financial position; range of tax wrappers that can use the CIP; type ofunderlying assets the CIP invests in; flexibility to adapt to changes in clients’ requirements;provider’s approach to due diligence when selecting underlying investments.

Where investment management is outsourced to a discretionary manager, both firms havean obligation to ensure that the investment decisions meet clients’ needs. Clients shouldunderstand each firm’s roles and responsibilities, which need to be carefully defined toensure that clients receive appropriate advice and their portfolios are correctly managed.

Portfolio construction Firms that choose to use a range of risk-rated portfolios fordifferent risk categories must ensure that the portfolios align accurately with the riskprofile description agreed with the client. If advisers use asset allocation models, theyshould also ensure that they can ensure that clients’ portfolios remain aligned to theagreed allocation through a process of regular reviews.

Suitability As CIPs may not be suitable for all clients, firms should offer an alternative.The guidance states that it would not be acceptable to transfer all client investmentssystematically into a CIP without assessing each individual’s needs and objectives.

Controls and oversight Firms must ensure their advisers are competent, understandthe CIP proposition and able to identify circumstances where it might not be suitable.They should also identify and manage any potential conflicts of interest. File reviewersshould be trained to identify when a CIP is unsuitable and to challenge advisersaccordingly.

The guidance warns that the FSA will continue to take tough action where it identifies poorpractice. Firms therefore need to remain vigilant when assessing the suitability ofreplacement business.

David Smith

7Issue 178 August 2012

For the FSA reportsee: bit.ly/TS178-7

Issue 178 August 20128

For more see:bit.ly/TS178-8

Where there are several legitimate ways of arranging a transaction it is acceptable for a taxpayerto choose the one that results in the least amount of tax being payable. But if avoidance is takentoo far then HMRC will respond by pursuing the matter through the Courts or by introducinglegislative changes.

There has therefore been something of an arms race, with the emergence of ever more complextax-saving schemes, and targeted anti-avoidance legislation, invariably failing to plug everyloophole. One example is the IR35 legislation, which was introduced to counter the widespreaduse of personal service companies.

A key element of HMRC’s anti-avoidance strategy is the disclosure of tax avoidance schemes(DOTAS) legislation, introduced in 2004. Disclosure allows HMRC to keep up-to-date with thetax schemes in circulation, and to take action against the ones it considers particularly aggressiveor unfair. Promoters must register their schemes with HMRC, which then issues a referencenumber. Anyone using a scheme must then provide the reference number on their tax return.and promoters have to provide HMRC with quarterly client lists.

In July HMRC issued a consultation document aimed at enhancing the DOTAS regime, andimproving the information to the public about the risks associated with using tax avoidancearrangements. The proposals are wide ranging, and require promoters to provide more detailedinformation about how schemes work. HMRC proposes asking for more information on clientlists, imposing a reporting requirement on clients as well as the one that applies to promoters,and extending the circumstances in which disclosure is needed.

HMRC has said that it wants to work cooperatively with representative bodies and reputable taxagents. In line with this, the latest guidance from the Institute of Chartered Accountants inEngland and Wales (ICAEW) says that its members could be subject to disciplinary proceedingsif they become involved in aggressive tax avoidance schemes. The ICAEW guidance explains thatalthough tax avoidance may be legal, this is not the only consideration. Members should considerthe public interest, uphold the reputation of the accountancy profession and do nothing to bringit into disrepute. The other accountancy bodies have so far not followed suit.

Given the limitations of targeted anti-avoidance legislation, HMRC is also consulting on theintroduction of a general anti-abuse rule (GAAR) from 1 April 2013 (‘Tax, politics, morality andconfusion’ issue 177). HMRC hopes that this will act as a deterrent, as well as being an additionaltool that can be used where it needs to mount a challenge. The aim is to counteract certainabusive tax advantages – such as increasing a deduction or loss, decreasing income, or exploitinga timing advantage. The aim will be to exclude arrangements that taxpayers enter into withoutintending to avoid tax.

Although a GAAR should not affect ‘the centre ground of tax planning’, there is concern thatit could catch more targets than intended, and will bring uncertainty into the tax system.

David Harrowven

The Government has started several important initiatives this year inits continuing war against tax avoidance.

New Government initiatives against taxavoidance

TAX

“There hastherefore

beensomething ofan arms race,

with theemergence of

ever morecomplex tax-

savingschemes…”

IN B

RIE

F

You may have missed...

Answers: 1A, 2A, 3C, 4D, 5B, 6D, 7B, 8C, 9D, 10B

More RPSM revisionsHMRC has issued a raft of revisions to the Registered Pensions Schemes Manual (RPSM).These cover their new stance on adviser charging (see ‘HMRC and Adviser Charges’) and arange of other topics, including the knock-on effects from the new £2,000 rule on smallmoney purchase pots commutation.www.hmrc.gov.uk/manuals/rpsmmanual/updates/rpsmupdate250712.htm

£8,385 average university feeThe Office for Fair Access (OFFA) has published its final data on 2012/13 university fee inEngland. These show that the average is £8,385 – £615 off the maximum – before feewaivers and other financial support. For the Russell Group of 16 leading Englishuniversities, the average fee is £8,975. Earlier UCAS had reported a fall of 1% in theapplication rate to universities of 18 year olds from England, reversing a previous trend of1% annual increases. For older age groups in England, UCAS said demand was down 15%to 20%.www.offa.org.uk/press-releases/offa-announces-decisions-on-2013-14-access-agreements/

JISA take up slow to catch onHMRC have published their latest ISA statistics. These show that only 72,000 Junior ISAswere opened in the period from 1 November 2011 to 5 April 2012, with an averageinvestment of £1,614. In contrast, the JISA’s unloved predecessor, the Child Trust Fund,now has over 6.3 million account holders. www.hmrc.gov.uk/stats/isa/isa-statistics-april-2012.pdf

Finance Act 2012 If you are still in need of holiday reading, then you may be glad to know the Finance Bill2012 received Royal Assent on 17 July. The Finance Act 2012 may have had an inauspiciousstart in the March Budget, but it still runs out at 687 pages.www.legislation.gov.uk/ukpga/2012/14/pdfs/ukpga_20120014_en.pdf

Tax return amnestyHMRC has launched yet another not-quite-amnesty, encouraging higher rate taxpayerswho have not submitted their returns for 2009/10 or earlier years to do so. HMRC saysthat those who voluntarily submit completed returns and pay the tax and NICs due by 2 October 2012 “will receive better terms, and any penalty they pay will be lower than ifHMRC comes to them first”. hmrc.presscentre.com/Press-Releases/Tax-Return-Initiative-offers-chance-to-settle-tax-bills-67c43.aspx

Test-Achats The Treasury has issued a response to its 2011 consultation paper on the impact of theTest Achats ECJ judgement, which banned sex discrimination in the setting of individualinsurance premiums. Unfortunately the Treasury sidestepped the question raised by manyrespondents about whether the ruling extended to annuities arising from workplacemoney purchase schemes.www.hm-treasury.gov.uk/d/condoc_responses_insurance_benefits_and_premiums.pdf

9Issue 178 August 2012

10 Issue 176 July 2012

If the preliminary estimate is accurate – and they are often revised – gross domesticproduct (GDP) declined a further 0.7% in the second quarter this year, according to theOffice for National Statistics (ONS). Three consecutive quarters of contraction havebrought a deepened recession, leaving aggregate output some 4.5% lower than it was in2008.

In the most recent period, the construction sector fared worst, falling 5.1% quarter-on-quarter and almost 10% compared with last year. The months from April to June 2012 sawextraordinary rainfall and the ONS do acknowledge the impact of the bad weather alongwith the additional public holiday in celebration of the Diamond Jubilee. But we also sawfalls in both the production and services sectors (-1.3% and -0.2% respectively).

Some commentators consider the weak outlook described by the GDP figures somewhatat odds with recent trends in employment. From a high of 8.4% unemployment (on theILO definition) at the beginning of the year, we have seen a steady decline to a current rateof 8.1%. Underlying this trend though, is a huge increase in the number of people ingovernment-supported training and employment programmes along with large increasesin part-time, as opposed to full-time, employment. These are not symptoms offundamental improvements in the labour market.

There are good reasons to expect some growth in the remainder of 2012. Beyond apositive, though perhaps muted, boost from the Olympics, falling inflation will ease thepressure on household budgets. Retail sales have stood up well in recent months too. Butwe do face strong headwinds in the form of fiscal austerity and euro-zone contagion.Expect to see further unconventional monetary policy measures in the months ahead.

Cornorant Capital Strategies

The on-going recessionM

AR

KET

S

31 May 2012 Year-on-YearChange %

FTSE All-Share 2927.27 -3.3FTSE 100 5635.28 -3.1Nikkei 225 8695.06 -11.6S&P 500 1379.32 6.7Dow Jones industrials 13008.68 7.1NASDAQ Composite 2939.52 6.6FTSE All-World Asia Pacific (Ex-Japan) 410.97 -8.6FTSE All-Word Europe (Ex-UK) 173.12 -16.8Sterling Trade-Weighted Index 84.1 5.8£/$ Exchange Rate 1.5668 -4.6£/Euro Exchange Rate 1.2722 11.4£/Yen Exchange Rate 122.367 -3.4RPI (07/12) 242.1 3.2CPI (07/12 122.5 2.6Long-Term Gilt Yield 2.88%Unsecured Income Gilt Yield (09/12) 2.00%Base Rate 0.50%Halifax Mortgage Rate 3.99%Best £10,000 Instant Access Rate 3.06%Nationwide Avge House Price (07/12) £164,389 -2.6

Market facts

SELF

-TES

T

August 2012The following self-test questions are intended to help you evaluateyour use of Financial Timesaver for maintaining and developing yourknowledge in line with FSA requirements. Circle the correct answer,add up your score out of ten and file in your knowledge maintenanceand developments records. The answers are shown on page 9.

11Issue 178 August 2012

1. Member Advisers for pension schemes have to consider a range of factors in advisingclients about incentivised transfer exercises following the new Code of Good Practice.Which factor do they NOT need to take into account under the Code?

a) The size of any cash-in-hand incentive for members b) The strength of the employer covenantc) The likelihood of future discretionary increases to pensionsd) The range of default investment options available

2. What guidance has the Institute of Chartered Accountants in England and Walesissued to its members in 2012 about their involvement in tax-avoidance schemes?

a) Members could be subject to disciplinary action if they are involved in aggressive taxavoidance schemes

b) Members could be subject to disciplinary action if they are involved in tax evasionc) Members should continue to provide their clients with advice on legal arrangements to

save taxd) Members should warn their clients against the possible consequences of undertaking

aggressive tax schemes but become involved if clients ask for help

3. John’s SIPP had a fund of £400,000 at retirement. Fees of £4,000 were deducted fromthe plan to cover advice on retirement income options, including drawdown andannuities. What would be the maximum amount of John’s PCLS?

a) £100,000 in all circumstancesb) £99,000 in all circumstancesc) £100,000 if John chose to take an annuityd) £99,000 if John chose to take drawdown and the fee had been deducted before

designation of the funds

4. What has the European Court of Justice decided about discretionary management feesin the Deutsche Bank case?

a) All fees are VAT exemptb) Fees are VAT exempt in respect of advice onlyc) Fees are VAT exempt provided they are deducted directly from the investmentsd) All fees are subject to VAT

5. What is the proposed new cap on income tax relief expected to cover, according toHMRC and HM Treasury joint consultative document?

a) Pension contributionsb) Qualifying loan interestc) Charitable giftsd) Venture capital trust investment

12 Issue 178 August 2012

©Taxbriefs Limited: All rights reserved. No part of this publication may be reproduced in any formwhatsoever including printed and electronic reproduction without prior written permission of thepublishers. Readers are reminded that Financial Timesaver is copyright and photocopying it is illegal.

6. What does the Kay Review say has influenced regulators to rely excessively ondisclosure of information by companies?

a) The impact of EU legislationb) The influence of US legislationc) The spread of passive investment strategiesd) Belief in the efficient market hypothesis

7. Jeff has £500,000 total income in 2013/14 and makes a contribution to a personalpension with tax relief at source of £40,000 gross. What would be his proposedmaximum relievable income cap?

a) £50,000b) £115,000c) £125,000d) £135,000

8. What should be of foremost concern to firms when offering CIPs to their clients?a) The impact of chargesb) The flexibility of the CIP solutionc) The needs of the target clientsd) The range of underlying investments

9. What did the Pensions Minister Steve Webb suggest could enhance the pensionsindustry’s ‘battered’ reputation?

a) Agreeing a maximum charge for automatic enrolment schemesb) Directing more employers towards NEST as their default investmentc) Replacing contract-based pensions with trust-based schemesd) Reducing charges for legacy pensions business

10.Which costs do pension providers generally excluded from disclosing to pensioninvestors?

a) Investment manager feesb) Dealing costs for investmentsc) Bonuses paid to provider sales staffd) Commission paid to advisers

Financial Timesaver gives you:For IFP members – 1 hour reading = 1 CPD point.For PFS members – Annual subscription = 15 credits.For IFS members – Private study counts for up to 5 hours of theIFS recommended 12 hour annual commitment to acquiring newknowledge.

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