Whilst corporate balance sheets are stronger than they were in 2008/09, at the time of the last financial crisis, the reluctance of companies to spend their cash is holding back global economic recovery.

The survey of Fidelity Worldwide Investment’s research analysts found that the CEOs of large companies have plenty to worry about.

They are particularly concerned about government intervention and intrusive regulation. CEOs are less concerned about inflation, rising wages, pricing or their own balance sheets, although these factors will always weigh on the minds of company bosses.

Only concerns about the sales volumes are causing more anxiety to big business in Europe and Asia than the fear of governments changing the rules.

For Europe and the rest of the world to fully recover from recession, money needs to be spent. Companies can make an important contribution to this economic recovery by spending some of the surplus cash on their balance sheets.

Along with government and consumer spending, both of which appear to be in short supply, big businesses spending cash will be one of the key contributors to a solid economic recovery. High levels of corporate anxiety over the issues described in this blog are likely to hamper rather than help economic recovery.

Photo credit: Flickr/s_falkow

The note from Fidelity fund manager Michael Clark explains that recent stock market falls are creating a good opportunity to invest in income producing shares, assuming investors are willing and able to take a longer term view.

Whilst valuations are becoming attractive in some cases, the lack of dividends in the banking sector is a concern.

These shares have been hit particularly hard as investors worry about the eurozone sovereign debt crisis and possible contagion. However, shares in the banking sector remain potentially unviable for income investors as many of the banks are not currently paying a dividend.

With these banks unlikely to start offering a dividend any time soon, attractive valuations are likely to be missed by income investors who need to focus on dividend paying stocks.

Clark continues to have a very negative view of the banking sector, feeling it is too early to make a serious investment in the broader European banking sector at this time. He believes that many banks will take a long time to return to a decent level of profitability, enabling them to restore dividend payments.

For income investors, this is a challenging time from an investment market and economic perspective.

Historically low interest rates here in the UK are reducing the potential yield available from every asset class. The yield from gilts has been pushed down to very low levels and these are likely to remain low as the Bank of England starts buying up more as part of their asset purchase programme.

Whilst some decent yields are available from UK equities, the inherent volatility associated with this asset class will mean many income investors are unable or unwilling to expose much of their portfolios to company shares.

Certainly we have witnessed high levels of market volatility on global stock markets in recent weeks.

When measured over the course of a day, or even a week, gains or losses of 5-10% have been typical.

Two major concerns seem to be driving this volatility; fears that the global economic recovery has lost its momentum and worries that Greece will finally default, with spectacular consequences for the rest of Europe, and possibly the world.

The New York Times article contains the results of their analysis of the S&P 500 index of leading US company shares, in which they concluded big price swings in the order of 3-4% are more likely now than at any other time in recent stock market history.

Uncertainty tends to drive short-term investment market volatility. When the markets are swinging between sizeable gains and losses, it tends to be a sign that investors are unclear about where markets and the global economy are heading next.

Short-term market volatility can cause anxiety, particularly for more cautious investors who are less prepared to experience volatility.

The goal for investors in times of higher than usual levels of market volatility should be to remain focused on the long-term.

Relating the composition of your investment portfolio (what we refer to as asset allocation) to your longer term financial planning goals is the single most effective way to become insulated from the anxiety of short-term volatility.

Photo credit: Flickr/Kekka

If you are inclined to follow this view, I thought it might be useful to offer some suggestions of alternatives strategies for providing an income in retirement.

(a) Sell your home and live in a tent. (Risk warning – you may be asked to move on, frequently, especially if you decide to live in the middle of a roundabout on the A3).

(b) Die before you retire. (Risk warning – this impacts somewhat on the ability to enjoy a long and happy retirement, although it may secure the future for your dependants, especially if you have substantial life assurance cover).

(c) Place your life savings on number 27 on the roulette wheel (Risk warning – this number does not come up every time).

(d) As (c), but on Pigalle Lady, in the greyhound meeting at Wimbledon in November, currently offering odds of 100/1. (Risk warning – I am reliably informed that this puppy may not be blessed with a full complement of legs).

All joking apart, there is no realistic alternative to saving for retirement (unless you are a long-term member of a ‘gold-plated’ final salary pension scheme), and the recent Budget confirmed the continuation of generous tax relief for pension contributions.

In a time of fiscal austerity, this opportunity should not be wasted, and you should seek independent advice, in order to help you plan ahead for what could be the longest holiday of your life!

It is fair to say, however, that some products, such as Investment Bonds, are still being designed and marketed on the basis that high levels of initial commission can be taken by the advisory firm.

The cost of this commission (as always!) is being paid for by the client in the form of higher charges and withdrawal penalties.

This continues despite the fact that by 2012 such products will no longer be appropriate, or indeed allowable as a result of regulatory changes to the way in which remuneration is structured in retail financial services.

So, with the caveat that anyone considering an Investment Bond should be wary of high commissions and opaque charging structures, there are some other advantages that could prove attractive.

This is particularly relevant with the recent increase in Capital Gains Tax (CGT) in the Emergency Budget, from 18% to 28% for higher rate taxpayers.

In particular, the ability to withdraw up to 5% of the initial investment in an Investment Bond as a tax-deferred ‘income’ might appeal to someone who could be paying CGT at 28% and/or Income Tax at 50%.

An Investment Bond could also be beneficial to anyone who is utilising their annual CGT allowance elsewhere, such as a stocks and shares portfolio, or via property dealing.

Investment Bonds are also a useful vehicle for Estate Planning, utilising trusts to reduce potential Inheritance Tax (IHT) liabilities.

If you are already a holder of an Investment Bond, it is also worth considering the pros and cons of cashing this in, (which might be appropriate if you are a basic rate taxpayer, and looking to utilise your annual CGT allowance, perhaps in conjunction with ISA investments):

Advantages

(a) If your Investment Bond has increased in value, you can ‘re-base’ the maximum tax-deferred withdrawals to a higher level.

(b) You can utilise CGT and ISA allowances in future tax years, by re-investing the encashment proceeds.

(c) You can use all or some of the proceeds to make a pension contribution, and benefit from the addition of tax relief.

(d) You can gift the proceeds to children/grandchildren, reducing your taxable estate for IHT.

(e) You can buy a nice car (yes – Financial Planning is also about spending, as well as saving and investing!).

Disadvantages

(a) If you cash in within the first five years, there may be encashment penalties.

(b) If your income is close to the higher rate ‘threshhold’ ( currently around £44,000 p.a.), you may incur additional tax liabilities.

(c) The value of your investment may have fallen, due to stockmarket volatility.

(d) If you are over 65, you could lose some of the benefits of the higher personal allowance for Income Tax.

(e) You may have already paid high commission charges, and face the further costs of re-investment.

Whatever your situation, you should always seek independent advice and, if you don’t fully understand the advice being given, get a second opinion!

Aside from saving re-investment costs, this also means that, in the case of Unit Trusts, there does not need to be a disposal of the asset, before re-investment, thereby avoiding any potential Capital Gains Tax issues.

Whilst this exercise makes for ease of management of the funds in the future, there are one or two possible pitfalls.

Some investments that are already held on another platform may be subject to minimum transaction values, which may prevent the re-registration, or enforce the sale or switching of funds, which could incur further costs, and possible tax charges.

Certain funds that produce regular payments of dividends (e.g.Equity Income funds), could pay a dividend after the fund has been re-registered, leaving a relatively small amount remaining with the original platform/fund manager.

Our advice to clients is generally to elect to receive such dividend as a cash payment, rather than go through the whole re-registration process for a very small amount of money. This helps save time and costs all round, and makes a small contribution towards the preservation of the Rain Forests!

However, despite misgivings in many quarters before the Budget, he avoided any temptation to increase Capital Gains Tax, or to restrict the tax relief available to most individuals in respect of pension contributions.

Aside from restrictions on those earning in excess of £130,000 a year, anyone can achieve income tax relief at their highest marginal rate (up to 40%), by making a pension contribution.

Where this can really be of great benefit is for any member of a final salary pension scheme which offers access to an ‘in-house’ AVC arrangement (otherwise known as ‘Additional Voluntary Contribution), where the scheme rules permit the member to take up to 100% of the AVC ‘pot’ as a tax-free lump sum.

Whilst many final salary schemes have closed in recent times, a large number of employees (particularly those approaching retirement) still enjoy these valuable benefits.

Not all schemes allow the 100% tax-free lump facility, but, for example, the Local Government Pension Scheme (which has over 3 million members) will allow employees to pay up to 50% of their salary (100% in Scotland!) into the AVC arrangement, with the possibility of getting the whole of the AVC fund back (tax-free) at retirement.

Where this really starts to get interesting is when you consider that the AVC contribution benefits from tax relief, as it is deducted from salary before tax is calculated.

This means that, for example, an employee paying £1,000 per month into the AVC scheme, will benefit from a saving in tax of £2,400 over a year (or £4,800, if they are paying higher-rate tax), and will receive the whole of the AVC fund back as a tax-free lump sum (plus any increase in fund value), when they retire.

Perhaps not practical for someone who is a long way from retirement, but could be a very effective way of getting a tax bonus from the Government in the year or two before retirement.

In this example, they would only receive £9,600 per annum, after tax of the income, if taken as salary, but would get the full £12,000 in their AVC pot, if paid as a contribution.

That’s an increase of 25%, and needn’t involve any investment risk! I dare not even quote the benefit to a higher-rate taxpayer, as you may not believe me!

So, if you are one of the lucky ones in a final salary scheme, you could get even luckier, courtesy of that nice Mr Darling! Why not discuss this with your financial adviser?

As the most expensive employees are likely to be the longest serving, these financial settlements can often be substantial.

Care should be taken to maximise the benefits to anyone considering these options.

Whilst a redundancy payment can be attractive, it should be remembered that any payment in excess of £30,000 is liable to tax. The excess over this amount is added to the individual’s income in the tax year in which the payment is made.

Depending on when the payment is made, in relation to the tax-year end, this could create a liability to higher rate tax, on all, or part of the excess over £30,000.

One way to avoid this extra tax hit is to make a payment into an AVC or personal pension, allowing you to benefit from income tax relief on the ‘slice’ of income that would have otherwise been taxed at 40%.

Indeed, a few pension schemes will allow a payment made to an AVC to be taken back as a tax-free lump sum, at retirement, resulting in a rare free handout of tax relief from HM Revenue and Customs!

It is, therefore, imperative that anyone in this position takes advantage of independent financial advice, before making any decisions on such packages, particularly as many pension-based options carry valuable lifetime guarantees.