Monthly Updates

May 2017

State pensions: not quite what was advertised

Most people reaching state pension age today are receiving less than the new state pension.  

A Freedom of Information (FoI) request from the Sunday Times revealed an interesting fact about the new state pension, which started life just over a year ago on 6 April 2016. The newspaper asked how many people who had reached state pension age (SPA) since that date had received at least the new state pension (originally £155.65 a week, now £159.55).

The response from the Department for Work and Pensions (DWP) was that between 6 April 2016 and 31 August 2016 – so roughly in the first five months – 41% of people reaching their SPA (65 for men, about 62 and a half for women) had pensions at least equal to the new state pension. Or, to put it another way, 59% got less than the headline 'single-tier' amount which the government so heavily promoted.

It was always the case that what was promoted as a 'flat rate' pension was going to produce anything but that for many people, with the numbers receiving less than the full amount gradually declining as the new scheme matured. According to the DWP's own calculations, by 2020 slightly under half of new state pensioners will receive less than the full rate, while by 2030 that proportion shrinks to just under 20%.

This was well-known to pension experts, but not made clear in much of the information supplied to the public. The House of Commons Work and Pensions Select Committee, in its report on "Communication of the new state pension" said that the potential shortfalls had "…not been made sufficiently clear in government communications that…focused on the full flat rate of £155.65".

If you want to see what you are currently projected to receive when you reach state pension age (which, don't forget, may be changing again from 2027), then the starting point is the government website https://www.gov.uk/check-state-pension. Even if you are entitled to the full amount (or more), it is worth putting that figure into context: for a 35-hour week, the newly increased National Living Wage provides £262.50, almost two thirds more than the full flat rate state pension. Which means you may want to review your non-state private pension provision…

The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.

Probate fees changes – an election casualty few will mourn

The election has put a stop to planned increases in probate fees for England and Wales.

Once a general election is called, there is usually a period known in parliamentary jargon as a 'wash up', during which outstanding legislation is passed, modified and passed or simply killed off, all in a matter of days. Unsurprisingly it is the more controversial proposals which generally get buried, as the timescale requires cooperation from the opposition to rush law onto the statute book.

Theresa May's decision to call an election at seven weeks' notice meant that all the outstanding legislation – including a 762-page Finance Bill – had to be dealt with in the space of a fortnight. One of the pieces of legislation which was dropped was "The Non-Contentious Probate Fees Order 2017". It had reached the draft regulation stage, at which point it was proving to be anything but non-contentious.

The order would have restructured probate fees in England and Wales, moving them from a flat fee of up to £215 to a variable fee that started at £300 for estates valued at between £50,000 and £300,000 to a £20,000 fee for estates worth over £2,000,000.

The higher fees prompted the inevitable 'new death tax' headlines and one committee of MPs questioned their legality, arguing that the revised charges "appear…to have the hallmarks of taxes rather than fees". Rather than face a battle for which it did not have time (nor probably the political appetite), the Ministry of Justice abandoned the legislation. It is unclear whether it will return after the election.

While the probate fee increase has disappeared, at least for the time being, the legislation introducing the new residence nil rate band came into force from April. If you have not yet reviewed your estate planning in the light of its introduction, now is the time to do so.

The value of tax reliefs depends on your individual circumstances. Tax laws can change. The Financial Conduct Authority does not regulate tax advice.

China: fourth time lucky?

One of the major index providers is reviewing the constituents of its important global market indices.

Which country can boast the world's second largest stock market and third largest fixed interest market?

You might be tempted to say Japan, but while you would be in the right part of the world, you would have chosen the wrong country. The second biggest share market and third biggest bond market both belong to China. However, to date, China's internal markets have not figured in the main investment indices. There have been various reasons for these exclusions, but the main one has been capital controls. China still restricts flow of its currency and has recently tightened its rules to limit back door export of its currency, the Renminbi.

Now, for the fourth time in as many years, MSCI, the leading emerging markets index provider, is consulting on whether and how to include mainland Chinese shares in its emerging markets indices. Chinese shares listed away from the mainland, e.g. in Hong Kong, already account for 27% of the MSCI Emerging Market Index. MSCI's latest proposal is to include only mainland Chinese shares accessible from Hong Kong, initially with a very small weighting. Ultimately, China could account for around 40% of the MSCI Emerging Market Index – hence the decision to start slowly.

Press reports suggest that this time around China will be added to the MSCI indices when the decision is made in June. The world's largest investment manager, BlackRock, is in favour of China's inclusion, which adds to the likelihood it will happen.

If you want to increase your exposure to the world's second largest stock market, there are a variety of options available which we would be happy to discuss.

The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Investing in shares should be regarded as a long-term investment and should fit in with your overall attitude to risk and financial circumstance.

A round-up of Budget non-starters

The Spring Budget has become a victim of the snap election.

Philip Hammond has not had much luck with what he said would be his first and last Spring Budget. His proposal to increase Class 4 national insurance contributions from April 2018 survived only a week before being dropped. Then when the Finance Bill was published in March, he won the dubious accolade of producing the longest ever Bill, at 722 pages. Just over a month later, the early election forced him to cull over half the Bill's contents so that he could push a slim-line consensus version through before Parliament shut up shop.

As a result, several important changes that were pending have now disappeared. For example:

  • The reduction in the money purchase annual allowance from £10,000 to £4,000 from 6 April 2017. This could have created problems for people who phase their retirement, both drawing pension benefits and contributing to a pension.
  • The cut in the dividend allowance from £5,000 to £2,000 from 6 April 2018.
  • The introduction of making tax digital. This was due to begin for traders with income above the VAT threshold level from 6 April 2018, with others starting one year later.
  • The pension advice allowance. There was to have been a new tax exemption from 6 April 2017 for up to £500 per tax year for employee pension advice, paid for by an employer. The old, more restricted £150 allowance now remains in place.
  • The property and trading allowance of £1,000 each from 2017/18. These new allowances were aimed at keeping small amounts of trading income and property income out of tax.

It seems likely that most of the "lost" legislation will re-emerge in a summer Finance Bill after the election, if the pollsters are right and the Conservatives are returned to power. However, the start date for some measures, such as the money purchase annual allowance cut, may be pushed back to 2018/19 because of the delay in reaching the statute book. Others may be overtaken by fresh proposals, as a new May government would not be constrained by pledges in the 2015 manifesto.

The value of tax reliefs depends on your individual circumstances. Tax laws can change. The Financial Conduct Authority does not regulate tax advice.

The NASDAQ hits 6,000

The market most associated with US technology shares reached a new high in April.

You may be old enough to remember that the end of the 20th century was marked by a surge in the value of technology shares in the United States. Many of these were traded on the NASDAQ market, which became synonymous with the "tech boom". The main NASDAQ Composite Index peaked on 10 March 2000 at 5,132.52, having been a little under 1,500 in October 1998.

As the graph shows, that meteoric rise was followed by an equally dramatic reversal: the "tech boom" turned into a "tech bust". The experience was traumatic for those investors who joined the ride late in 1999 and reinforced the NASDAQ's reputation as being not a place for widows and orphans to invest their money. The March 2000 peak survived as an all-time high for over 15 years, before being overtaken in summer 2015. By early 2016, the NASDAQ had fallen back below 4,500, driven by fears about China. These proved short-lived and last month, the index breached the 6,000 level for the first time.

Inevitably, the arrival of a new round-number all-time high – at a time when other US stock markets are generally reaching new peaks – has brought back memories of what happened in 2000. However, the NASDAQ of 2017 is very different to its 2000 version. At the turn of the century, the NASDAQ market was dominated by technology and software companies. Now, the NASDAQ constituents are much more broadly spread with, for example, media and retail playing a significant role. The market is also much cheaper than it was 17 years ago in terms of the common yardstick of the ratio of price to earnings (P/E ratio). At its peak, the NASDAQ was trading on a P/E of over 70, whereas now it is less than half that level.

While the difference between 2000 and 2017 are no guarantee that the NASDAQ will not head back down to 1,500, they are a reminder that looking at the index number alone, especially over an extended period, can be misleading.

The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. The value of tax reliefs depends on your individual circumstances. Tax laws can change. The Financial Conduct Authority does not regulate tax advice.

April 2017

The dividend allowance cut – what's the damage?

One of the few surprises in the March Budget was a cut to the dividend allowance to come in 2018/19.  

The dividend allowance first saw the light of day in the post-election Budget of July 2015. It was designed primarily to discourage self-employed business owners from using incorporation as a way of avoiding national insurance contributions (NICs). Ironically one of the first effects it had was to dramatically increase the government tax take on dividends.
HM Revenue & Customs has provisionally estimated that £10.7 billion of dividend income was brought forward into 2015/16 to avoid the higher rates of tax that were to apply to dividends from 2016/17 onwards.

The Chancellor's announcement of a cut in the dividend allowance from the current £5,000 to £2,000 from 2018/19 will not result in any such pre-preemptive surge in dividend payments, but it will add to the Exchequer's income.

While Mr Hammond justified the move on the same incorporation-deterring grounds as his predecessor, the collateral damage to ordinary investors is much greater than was Mr Osborne's announcement. The table below shows the crossover dividend levels at which investors will pay more tax in 2018/19 than they did under the old rules in 2015/16.

Taxpayer

(Dividend Tax Rate)

More tax paid than in 2015/16 if dividends exceed Maximum tax increase between 2016/17 and 2018/19
2016/17 2018/19
Basic (7.5%) £5,000 £2,000 £225
Higher (32.5%) £21,667 £8,667 £975
Additional (38.1%) £25,250 £10,100 £1,143

As the dividend allowance cut is a year away, there is time to plan ways to reduce its impact.  To learn more about your options, talk to us now.

The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Investing in shares should be regarded as a long-term investment and should fit in with your overall attitude to risk and financial circumstances. The value of tax reliefs depends on your individual circumstances. Tax laws can change. The Financial Conduct Authority does not regulate tax advice.

Time to review your salary sacrifice arrangements?

New rules for taxing many salary sacrifice arrangements come into force from 6 April.

One of the employment trends of recent years has been to make employee remuneration more flexible. Instead of pay and, if you were lucky, a company car and healthcare, 'cafeteria remuneration' has become common, giving employees the choice of sacrificing pay for a wide range of benefits from extra holiday to gym membership and mobile phones.

Employers and employees have both gained from these arrangements:

  • The employer saved on national insurance contributions (NICs) at a rate of 13.8% of pay, although some – or even all – of that reduced bill may have been passed on to the employee.
  • The employee also saved NICs, generally at 12% if they were basic rate taxpayers and 2% if they paid higher or additional rates.
  • Crucially, the taxable value of the benefit was less than the pay forgone. In some instances, such as the mobile phone or gym membership, the tax liability was nil.

The main loser from salary sacrifice arrangements has been HM Treasury, so it was little surprise when George Osborne signalled a review in last year's Budget. This produced a consultative document that has now been transformed into draft legislation.

The changes, which took effect from the start of the 2017/18 tax year, remove most of the advantages of salary sacrifice, with a few important exceptions. For new schemes, income tax and employer's NICs will be based on the greater of:

  • The salary forgone; or
  • The taxable value of the benefit received (which will be less, as otherwise the arrangement would normally not make sense).

There are some inevitable transitional measures for arrangements in force before 6 April 2017, but apart from cars, employer-provided accommodation and school fees funding, the new rules will bite in no more than 12 months' time.

There is also a handful of specific exemptions, one of the most important of which is salary sacrifice arrangements for pension contributions. These continue to provide major benefits, as the example shows:

Frank is a higher rate taxpayer who normally contributes £5,000 a year (before tax relief) to a self-invested personal pension. Instead, he could sacrifice £4,394 of his salary to achieve the same result via an employer pension contribution and save £778 in salary (an extra £451 net, after tax and NICs), assuming his employer rebates their full NIC saving:

Personal Payment

£

Salary sacrifice

£

Salary 5,172 4,394
Employer's NIC Saving @ 13.8% -   606
Employee's NIC @ 2% -103
Tax @ 40% -2,069
Net income 3,000
Pension Contribution net of tax reliefs 3,000
Tax relief £5,000 @ 40% 2,000
Gross Pension Contribution 5,000 5,000

For a personalised illustration of how salary sacrifice could boost your pension contributions, please talk to us. It could make up for the extra tax you will end up paying on other sacrifice arrangements…

The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. The value of tax reliefs depends on your individual circumstances. Tax laws can change. The Financial Conduct Authority does not regulate tax advice.

US interest rates go up, but the UK bides its time

The US central bank, the Federal Reserve, has increased interest rates for a third time.

This might look like a piece of modern art, but it's not. The illustration above is what has become known as the "dot plot". Each dot represents where a member of the US Federal Reserve's rate-setting committee expects short term interest rates to be at the end of the year.  For example, the longest line of dots in 2017 shows that nine members expect an end of year rate of around 1.35%, while the most popular 'longer run' estimate is 3.0%.

In March the Federal Reserve raised its main interest rate by a well-publicised 0.25% to a band between 0.75% and 1.00%. The general view now is that 2017 will see two more increases – hence the 1.35% (actually 1.375%) line on the dot plot.

The day after the US central bank raised its rates, the Bank of England's Monetary Policy Committee (MPC) voted 8-1 in favour on holding base rate at 0.25%. The sole dissenter, Kristin Forbes, wanted a 0.25% rate rise, but her voice will soon disappear as she leaves the MPC in June. According to the Financial Times, traders do not see the first UK rate rise happening until early 2019. The Bank is expected to 'look through' (that is, ignore) the rise in inflation that will occur in 2017 as the weak pound works its way through to retail prices. The latest inflation data, showing a 0.5% jump in the CPI annual rate to 2.3% for February, underlines the point.

It is now over eight years since the Bank cut rates to a fraction of 1%. The impact of such a long period of ultra-low rates has been controversial, particularly its effect on savers with cash deposits and final salary pension schemes with burgeoning liabilities.

If you need income from your capital, there are plenty of options to consider that offer more than deposit rates. For example, the average dividend yield on UK shares is around 3.5%. For more details on the income options available, do talk to us.

The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Investing in shares should be regarded as a long-term investment and should fit in with your overall attitude to risk and financial circumstances.

Introducing the new NS&I bond – is that it?

The Budget confirmed the rate on the new National Savings & Investments Bond.

2.2%

That is the fixed rate on the "welcome break for hard-pressed savers" which Mr Hammond confirmed in last month's Budget. The new NS&I three year fixed rate bond will be available from April for a period of 12 months. The maximum investment will be £3,000, although unlike its widely popular pre-election predecessor, it will be available to anyone aged 16 or over.

2.2% is a 'market-leading' rate, as the Chancellor promised in his Autumn Statement. At the time of writing, the best three year fixed rate on offer elsewhere was 1.9%. In the government's accounts, the new bond is shown as a 'spend' item, with a total cost of £290 million. That sum reflects the fact that the Treasury could borrow money at a much lower interest rate and administrative cost from institutional investors.

It could be argued that those taxpayers who don't invest in the new bond are subsiding those who do. However, if you do invest, you may find that the return does not keep pace with inflation over the next three years – it is already below February's 2.3% inflation rate. Your return could be even further below inflation if you have to pay tax on the interest because you have exhausted your personal savings allowance.

With hindsight, the new bond could prove to be one government gift horse whose mouth is worth a careful examination. There could be better options.

The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.

Another notch up in State Pension Age

An independent review has recommended bringing forward the move to a state pension age of 68.

There was a time when men received their state pension from age 65 and women from age 60. Those numbers may still be locked in your memory, but they are heading towards their own retirement.

Currently a woman's state pension age (SPA) is about 63, on its way to 65 by November 2018. A month later both sexes will see their (equalised) SPA gradually rise to 66 by October 2020. The following increase, to an SPA of 67, takes place between April 2026 and April 2028.

In March an independent report prepared for the government made proposals about the next step up, to an SPA of age 68. The report, by John Cridland, proposed that the change should occur between 2037 and 2039, seven years earlier than provided for in the existing legislation. If the government accepts the suggestion, then you will be affected if you have not yet reached your 47th birthday.

There were no dates mentioned for further SPA increases, although Mr Cridland did say he felt SPA should not increase more than one year in any ten-year period, assuming there are no exceptional changes to mortality. In theory that could mean an SPA of age 70 arrives by 2059, which would catch the younger half of the Millennial Generation (often called Generation Y), born between 1980 and 2000.

In early May 2017, the government will publish its own report, drawing on Mr Cridland's work and number-crunching undertaken by the boffins in the Government Actuary's Department. Not only is it likely to adopt something very close to the 2037−2039 window, but it may also follow another recommendation of Mr Cridland: the abolition of the triple lock increases to state pensions from 2020.

Unless you are relaxed about an ever-receding state pension, now is the time to review your private pension planning arrangements.

The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. The value of tax reliefs depends on your individual circumstances. Tax laws can change. The Financial Conduct Authority does not regulate tax advice.

March 2017

National Savings lose lustre with interest rates cut

National Savings & Investments are cutting interest rates from 1 May.

National Savings and Investments (NS&I) has announced that it will be cutting interest on four of its variable rate products from 1 May. It says the cuts follow on from the Bank of England's base rate cut to 0.25%, a reduction which occurred last August. Clearly NS&I has been in no rush to react.

The changes will leave Income Bonds and the Direct ISA both paying just 0.75% interest, well below the latest (January) 2.6% rate of RPI inflation. The cuts will once again remove NS&I from the top rungs of the league tables where, unusually, they have been for some months. By shaving 0.25% off its current rates on these two products, NS&I will be cutting the income payable by a quarter – one of the curious knock-on effects of a world of ultra-low interest rates.

Premium Bonds will suffer a smaller cut, with the annual prize fund rate dropping from 1.25% to 1.15%. To deal with this – which equates to an 8% drop in total prize money payments – the distribution of prizes will be altered once more. The share of the prize fund going to large (£5,000 and over) payouts will be unchanged at 5% of the total jackpot. NS&I estimates that the number of large prizes will drop from 111 in February 2017 to 89 in May 2017. The total number of prizes in both months will be over 2,200,000 and the odds on winning, 1 in 30,000.

There are still plenty of opportunities to earn an income well in excess of NS&I rates, but, as ever, advice is vital to balance income and risk. As a general rule, the higher the income on offer, the more risk needs to be considered, whether in terms of being locked in for a long period or losing capital security.

The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Investing in shares should be regarded as a long-term investment and should fit in with your overall attitude to risk and financial circumstances.

The rising dividend and the falling pound

Recently released figures show that UK dividends grew faster than inflation in 2016.

The number crunchers at Capita Asset Services, one of the UK's main share registrars, have been working out how much was paid out in dividends by UK listed companies in 2016. The number they have come up with is £84.7bn, an increase of 6.6% (£5.2bn) on the 2015 figure and well ahead of the rate of inflation.

Dig down into the data and some interesting facts emerge:

  • Capita reckons that £4.8bn of that £5.2bn rise is due to the impact of the weaker pound.
  • Special dividends – one-off payments often associated with mergers or asset sales – more than doubled in 2016 to £6.1bn.
  • The top five dividend payers accounted for nearly £4 out of every £10 of dividends paid, with Royal Dutch Shell alone paying more than £1 out of every £8.
  • Dividends from the Top 100 companies grew at only 2.2%, while the next group of companies, the Mid 250, achieved a 5% increase.
  • Dividend growth was by no means universal: 13 of the 39 industry sectors recorded a reduced or unchanged dividend over the year, a higher than normal number.

If you are looking for income, the Capita figures should remind you that UK shares are a good place to start. As Capita says "Equities therefore show no sign of losing their top spot as the best yielding option among the key asset classes." However, the difference between sectors and the heavy bias to just a few big payers means that advice is important in selecting income funds.

The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Investing in shares should be regarded as a long-term investment and should fit in with your overall attitude to risk and financial circumstances.

Time to welcome the Lifetime ISA

6 April marks the launch of a new ISA variant, the Lifetime ISA (LISA). 

One of the last surprises produced by George Osborne in his final Budget was the announcement of the Lifetime ISA. Shortly after Mr Osborne was replaced it began to look as if the LISA, as it inevitably became known, would suffer the same fate. However, in September the idea re-emerged from the Treasury, with an unchanged launch date of
6 April 2017.

The key points about the LISA are:

  • It will only be available to you if you are aged between 18 and 39.
  • The maximum contribution will be £4,000, which will count towards your £20,000 ISA contribution limit for 2017/18.
  • Contributions made before age 50 will receive a 25% "government bonus", so if you contribute the maximum, there will be a £1,000 government top-up.
  • Investment rules are broadly the same as a normal ISA, meaning no UK income tax or capital gains tax.
  • Withdrawals are subject to a charge of 25% of the amount taken unless:
  • You are aged at least 60; or
  • The funds are being used to buy your first home (maximum value £450,000); or
  • You are terminally ill and have less than 12 months to live.

Initially you are likely to have only a limited choice of LISAs – most providers have not had enough time to develop their offerings because of the legislative delays. However, if you are tempted by a LISA, do talk to us before taking any action. While a LISA might look like an attractive alternative to traditional pension arrangements, it will not always be the case.

The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Investing in shares should be regarded as a long-term investment and should fit in with your overall attitude to risk and financial circumstances. The value of tax reliefs depends on your individual circumstances. Tax laws can change. The Financial Conduct Authority does not regulate tax advice.

6 April reminders

Tax year beginning planning can be just as valuable as its more familiar year end counterpart.

The run up to 5 April, with the Budget (and often Easter) intervening, can be a frenetic time for personal financial planning. All tends to go quiet once the new tax year begins, but the reality is that there are many planning points that are worth considering at the start of the tax year rather than leaving it until the end.

  • ISA contributions (£20,000 maximum in 2017/18) are best made at the start of the year rather than the end, as it means the tax benefits are enjoyed for nearly a year longer.
  • A similar argument applies to pension contributions, although if your income for the year ahead is uncertain, the case for delay is stronger.
  • The dividend allowance is £5,000 per tax year, so it is worth checking early on how much dividend income you are likely to receive and whether that prompts any investment changes. If you are married or in a civil partnership, that might mean transferring assets between the two of you.
  • Similar considerations of who holds what apply to deposit accounts and the personal savings allowance of up to £1,000 a year each.
  • The many thresholds built into the income tax system are a driver to working out what might be your total income in the tax year as soon as possible. If you know in April you are likely to be near a threshold by next March, you have that much more time to plan accordingly.

If you would like a tax year beginning review of your financial planning, please talk to us now – don't wait until next March.

The value of tax reliefs depends on your individual circumstances. Tax laws can change. The Financial Conduct Authority does not regulate tax advice.

A boost to ISAs on the horizon

New regulations promise another improvement to ISAs soon.

Recent statistics issued by the Investment Association (IA) point to a declining interest in individual savings accounts (ISAs). In 2016 the IA recorded only two months in which new money flowing into ISAs exceeded existing money flowing out. Not surprisingly, the two months of net inflow were March and April, with the traditional end of tax year rush.

The tax advantages of ISAs remain unchanged, but for some investors the arrival of the dividend allowance and personal savings allowance last April mean that an ISA offers no immediate tax benefit over direct investment. As a reminder, under an ISA:

  • Interest and dividends are free of UK income tax;
  • There is no tax on capital gains;
  • Withdrawals can be made of any amount at any time, with no tax charge;
  • Unlike pensions, the contribution limit is straightforward (£15,240 in 2016/17, £20,000 in 2017/18 in total to all ISAs) and there is no equivalent of the lifetime allowance limiting the tax-efficient size of the fund. Indeed, some long term savers already have ISAs valued at more than the current pension lifetime allowance of
    £1 million.
  • There is nothing to report personally to HM Revenue & Customs.

Just over two years ago regulations were introduced to make ISAs effectively inheritable between spouses and civil partners. These regulations proved overly complex and in his 2015 Autumn Statement George Osborne promised to introduce some simplifying amendments. Last month, a draft of these finally arrived. Once put into force, they will mean that in nearly every instance you will be able to inherit the full value of a spouse's / partner's ISA and the tax benefits will not be lost during the estate administration period.

If you were wondering about whether to make your end of tax year (or even start of tax year) ISA contribution, the regulations are another reminder of the ISA's benefits.

The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Investing in shares should be regarded as a long-term investment and should fit in with your overall attitude to risk and financial circumstances.

 

February 2017

Is a return to inflation on the cards?

December's inflation figure was the highest since July 2015.

For much of 2015, inflation barely existed. On the government's chosen measure, the Consumer Prices Index (CPI), annual inflation oscillated between 0.3% and -0.1%. 2016 was a rather different story: the starting point was 0.3%, but by December prices were rising by 1.6% a year.

The sharp rise over the year is mainly the result of the weakness of the pound since the Brexit vote and rising oil prices – it is easy to forget that we started 2016 with supermarkets selling petrol at 99.9p a litre and diesel at 99.8p. Looking ahead, there is general agreement that inflation will continue on an upward path. The Bank of England's most recent inflation report estimated 2017 would end with inflation at 2.7% and not return to its 2% target until 2020. Some commentators are more pessimistic.

While the latest figures show that food prices are still falling year-on-year, the other eleven categories making up the CPI are all now in positive territory, as they have been since October. One indicator of what is coming down the line is that prices for materials and fuels paid by UK manufacturers for processing (so-called input prices) rose 15.8% in 2016.

The re-emergence of inflation is unlikely to mean any immediate rise in short term interest rates. The Bank of England has so far expressed the view that it will "look through" an increase stemming from external factors beyond its control, such as oil and currency volatility. For investors, the message is one that should never have been forgotten: when considering investment returns, strip out the effects of inflation. A 2% interest rate represents a loss if inflation is running at 2.5%.

The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Investing in shares should be regarded as a long-term investment and should fit in with your overall attitude to risk and financial circumstances.

The rising cost of age and health

The government's financial watchdog, the Office for Budget Responsibility (OBR), has been mulling over future healthcare and pension costs.

In January, as is often the case, the media was headlining stories about delays in A&E, cancelled operations and bed-blocking caused by lack of long-term care facilities. Coincidentally, in the middle of the month the OBR published its Fiscal Sustainability Report. This had originally been due in June last year, but its publication was put on hold after the Brexit vote.

The report is a long term look at future government cash flow and the consequences for public sector debt, starting at the point five years out where normal Budget projections end. It does not make attractive reading for the next generations of Chancellor. The first sentence of the press release accompanying the report says "Rising health care costs could make it harder for the Chancellor to balance the budget in the next Parliament and put the public finances on a sustainable path over the longer term in the absence of further tax increases or cuts in other public spending."

The cuts and/or tax increases the OBR reckons could be necessary are more than mere Budget tweaks. To get government debt back to a sustainable level (40% of Gross Domestic Product) by 2066/67 would require additional tax increases and/or spending cuts of either:

  • A permanent one-off £75bn (in today's terms) in 2021/22; or
  • £27bn (again in today's terms) in the early 2020s and in each successive decade.

To put those numbers in context, adding 1p to the basic rate of tax raises about £4.5bn, according to HM Revenue & Customs' ready reckoner.

The OBR numbers are projections and 50 years out the one certainty is that they will be wrong. However, the direction of travel is unlikely to change as the new state pensioners of 2067 (aged 69) have already left school. If you needed a reminder about reviewing whether your retirement provision is adequate, the OBR has supplied it.

The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.

Pension transfer values up 15%

It was not only UK share values that rose during 2016.

Note: the Xafinity Transfer Value Index tracks the transfer value that would be provided by an example defined benefit pension scheme to a member aged 64 who is currently entitled to a pension of £10,000 each year starting at age 65 (and which increases each year in line with inflation). Different schemes calculate transfer values in different ways. A given individual may therefore receive a transfer value from their scheme that is significantly different from that shown.

Transfer values from final salary pension schemes ended 2016 15% higher than where they started, according to Xafinity Consulting, a pension and employee benefit consultant. The increase was largely due to changes in long-term interest rates: as rates fall, so transfer values increase (and vice versa). Long-term rates dropped sharply in the wake of the Brexit vote, but then marginally backtracked in the final quarter – hence the slight decline in transfer values recorded by the Index.

However, as pension schemes often review their transfer value calculation basis on a regular cycle rather than reacting to every market move, some schemes have yet to take account fully of the most recent rate changes.

If you have final salary benefits from a previous employment, you might be lucky and find that your scheme is quoting transfer values still at or close to the peak levels of last October.

Even if the scheme's calculation basis is more up to date, it could still be worth asking for a transfer value quotation. We can then use that figure, alongside a raft of other data, to assess whether the value is worth taking in your circumstances.

The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.

The end of the tax year: 5 April reminders

As the end of the tax year nears, remember the 5 April is a multi-faceted deadline.   

In 2017, the tax year ends on Wednesday 5 April, over a week before Easter. The Budget is almost a month earlier (8 March), but that should not affect most tax year end actions. As a reminder, here are some of this year's points to consider – and act on, if necessary – by 5 April:

  • If your pension benefits were worth over £1.25m in total on 5 April 2014, you have until 5 April 2017 to claim individual protection.
  • If you reached state pension age before 6 April 2016, 5 April is the deadline for making Class 3A voluntary contributions to top up your state pension.

  • 5 April is the last day for making pension contributions to exploit up to £50,000 of unused annual allowance from 2013/14.

  • If your employer offers salary sacrifice arrangements, the new, harsher, tax rules will apply immediately for any starting after 5 April. Arrangements which begin before 6 April 2017 will enjoy the old tax rules for another year (another four years for sacrifice involving cars, accommodation and school fees).

  • Any of the £3,000 annual exemption for inheritance tax that was unused in 2015/16 will be lost unless you make gifts covering both this tax year's exemption in full and the unused balance from the previous year.

  • If you have started to draw a flexible income from your pension arrangements, the maximum further tax-efficient pension contribution you can make will fall from £10,000 to £4,000 on 6 April.

  • Your annual capital gains tax exemption of £11,100 will disappear on 5 April.

  • 5 April is the final day to make ISA contributions of up to £15,240 for the current tax year.
  • If any of these strike a chord, do please talk to us: just because there is a deadline, does not mean you have to act.

    The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. The value of tax reliefs depends on your individual circumstances. Tax laws can change. The Financial Conduct Authority does not regulate tax advice.

    HMRC, the ultra-rich and the not-so-rich

    Parliament's Public Accounts Committee thinks that the "government must take a tougher stance on taxing the very wealthy."

    In 2009, HM Revenue & Customs (HMRC) set a specialist team to focus on the tax affairs of high net worth individuals (HNWIs is the jargon). At the time, HNWIs were defined as people with net assets exceeding £20m, although in 2016 the threshold was cut to £10m. The latest figures (for 2014/15) shows that this select group of around 6,500 individuals paid £3.5bn in income and capital gains tax – over £535,000 a head.

    That might sound like a healthy contribution to government finances, but a report from the House of Commons Public Accounts Committee (PAC) issued in January was highly critical of HMRC's efforts in handling their richest clients, each of which is allocated a dedicated "customer relationship manager". The PAC felt that HMRC was not tough enough in dealing with tax evasion and avoidance by HNWIs, even though at any one time a third of the group were subject to open enquiries into their tax affairs. There was a call for more prosecutions: in the five years to 31 March 2016, HMRC completed investigations into 72 HNWIs for potential tax fraud, but only two of these were criminal cases, of which one was successfully prosecuted.

    One worrying suggestion from the PAC was that HNWIs should be required to provide details of their assets on their tax returns, a feature of some other countries' tax systems. The PAC notes that "HMRC has been looking at what further information HNWIs could be required to report to help improve its understanding of their wealth. The Department told us the issue is currently being considered by ministers."

    If you are thinking that you don't count as a HNWI, do not imagine that HMRC is neglecting you. Two years after the HNWI Unit was set up, the Affluent Unit was established, which now covers people with income of over £150,000 and/or net assets of £1m or more. The latter criterion is significant: rising house prices and strong investment markets have swollen the potential members of this second tier.

    As we near the tax year end, make sure that you talk to us about any tax planning before taking action – or hearing from a unit of HMRC…

    The value of your tax reliefs depends on your individual circumstances. Tax laws can change. The Financial Conduct Authority does not regulate tax advice.

    January 2017

    Auto-enrolment: seven million and counting

    Automatic enrolment has reached a new landmark, but the path from 2017 onwards could be challenging.

    When automatic enrolment (AE) into workplace pensions started in October 2012, there were some doubts about how successful it would be. A little over four years later, few would argue that AE has not been a success, at least so far.

    The latest data from The Pensions Regulator (TPR) shows that more than seven million people have now been put into a pension by their employer because of AE. More than 340,000 employers have so far complied with the AE responsibilities. The earliest were the largest employers and the stage has now been reached where AE is focussed on small and micro employers (sub-30 employees).

    Such is the skew towards small employer sizes in the UK, that 2017 will see over 700,000 employers embark on their AE responsibilities, double the number so far. There are already signs that compliance among smaller employers is becoming an issue. In the third quarter of 2016 TPR issued over 15,000 compliance notices, against the 11,000 it had issued in total over the previous 15 quarters.  It was a similar story on the imposition of penalties, with the number in the most serious category − escalating penalty notices of up to £10,000 a day − three and a half times the previous 15 quarters' total.

    In 2017 the Department for Work and Pensions will be undertaking a review of the AE process, which could eventually see new measures to extend AE to the self-employed and those with multiple low-paid jobs. The review will not explicitly propose increased levels of contributions, although most pension experts think that the current ceiling of 8%, due to be reached in April 2019, is too low. At present the total contribution is just 2%, split equally between employer and employee, which may explain why few people have opted out. Next year, when employees' contributions treble and employers' double, could see a reaction against AE.

    AE is a step on the road to adequate pension provision, but on its own will not be adequate for many people, particularly those who have only a limited time remaining in which to contribute.
    The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.  Investing in shares should be regarded as a long-term investment and should fit in with your overall attitude to risk and financial circumstances.

    Tight turnaround for year end tax planning before Spring Budget

    The Treasury has announced the date of the next Budget.

    On 15 December, the US Federal Reserve (Fed) raised its key short term interest rate by 0.25%, to a range between 0.5% and 0.75%. It had made the same increase 12 months previously. When the Christmas 2015 rate rise occurred, the central bank was implicitly expecting to raise rates four times during 2016. However, a collection of events from wobbles in China to the uncertainties caused by the Brexit vote put paid the rate rise every quarter that had been pencilled in.

    Last month when the Fed repeated its end-of-year increase, it suggested that there would be three further increases in 2017, taking the target rate to 1.25%-1.50% by the end of the year – the same range it had originally struck for the end of 2016. A trio of rate rises would represent a dramatic acceleration in activity by the Fed – December's rate rise was only the second in the last ten years, as the graph shows.

    Whether the Fed's predictions prove any more accurate this year is a matter of some debate. One problem the bank faces in looking at 2017 is the economic impact of President Trump's actions, as opposed to candidate Trump's campaign rhetoric. If he succeeds in giving the US economy a boost through tax-cutting measures, the Fed is likely to raise rates steadily, as unemployment is already at low levels.

    On this side of the Atlantic the Bank of England will probably not raise rates in 2017. The uncertainties surrounding Brexit will stay the Bank's hands, even though inflation is on the rise – the November 2016 the CPI annual rate of 1.2% was 1.1% higher than 12 months' previous.

    As the year turns, the US interest rate outlook means that a review of your investments could be a wise move.

    The value of your investment can go down as well as up and you may not get back the full amount you invested.

    The last Spring Budget date has been set

    The Treasury has announced the date of the next Budget.  

    It may feel like Mr Hammond's Autumn Statement was only a few days ago, but shortly before Christmas the Treasury announced that the Spring Budget will be on Wednesday
    8 March.

    In theory, this will be the last Budget to take place in spring, as in November Mr Hammond announced he would be reverting to Autumn Budgets, last seen when Ken Clarke was Chancellor. That means 2017 will have two Budgets, but no Autumn Statement and 2018 will witness the first Spring Statement.

    The tax year dates will not be changing, so the 2016/17 tax year will end on 5 April – exactly four weeks after the Budget. Your tax year end planning therefore needs to start as soon as possible. On this occasion, there are two areas which warrant especially prompt action:

    Pensions

    This is the last chance to carry forward unused annual allowance of up to £50,000 from 2013/14. The calculations for maximising contributions and picking up unused allowances can be complex and have become more so with the introduction of a tapered annual allowance this year. Assembling all the necessary data can be a slow process, hence the need to start discussion early.

    Venture Capital Trusts 

    The changes introduced to venture capital trusts (VCTs) last year have slowed down the investment process according to many VCT managers. As a result, some managers have decided not to raise any fresh funds this year, while others are making limited new share issues, primarily to existing investors. The potential reduction in supply comes at a time when the 30% income tax relief offered by VCTs is attracting increased interest from those affected by the latest reductions in the pension annual and lifetime allowances. Good offers could sell out quickly, so do let us know if you wish to invest in VCTs this year and be prepared to act promptly.

    The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.  Investing in shares should be regarded as a long-term investment and should fit in with your overall attitude to risk and financial circumstances.  The value of tax reliefs depends on your individual circumstances. Tax laws can change. The Financial Conduct Authority does not regulate tax advice.

    The residence nil rate band – not so simple

    From April, the residence nil rate band comes into being.  

    It was nearly two years ago that the Conservatives' manifesto for the 2015 election promised to "take the family home out of tax by increasing the effective Inheritance Tax threshold for married couples and civil partners to £1 million." The legislation which starts the first stage of this process comes into effect on 6 April 2017. It will not be quite as simple as the manifesto sounded:

    • Initially the £1 million – actually £500,000 per spouse/civil partner – will be £850,000 consisting of the existing nil rate band of £325,000 plus the new residence nil rate band (RNRB) of £100,000 for each spouse/partner.
    • The RNRB will then increase by £25,000 in each of the following two tax years, so that it reaches £175,000 by 2020/21. During that time, the nil rate band will remain frozen (it is not due to increase until at least April 2021).
    • The RNRB is subject to a tapering reduction of £1 for each £2 by which your estate exceeds £2 million, so large estates will often see no benefit.
    • The RNRB only applies to gifts of residential property made on death (not during lifetime) to the deceased's direct descendants. It is therefore of no use if you do not have any children/grandchildren or you wish to leave your home to someone who is not a direct descendant.
    • There are rules to cover downsizing or moving into residential care, but these are highly complex.

    With the introduction of the RNRB imminent, it makes sense to review your estate planning now to see what impact, if any, it may have. For example, it may require you to revise your will or consider lifetime gifts to limit the impact of tapering. As the tax year end is approaching, why not add estate planning to your year-end review list?

    The value of tax reliefs depends on your individual circumstances. Tax laws can change. The Financial Conduct Authority does not regulate tax advice.

    Another good year for sterling investors in the world stock markets

    At first sight, the results from the world's main share markets in 2016 appear mixed, but that's before currency effects are considered.

    Index 2016 Change
    FTSE 100 +14.4
    FTSE All-Share +12.5%
    Dow Jones Industrial +13.4%
    Standard & Poor's 500  +9.5%
    Nikkei 225 + 0.4%
    Euro Stoxx 50 (€) + 0.7%
    Shanghai Composite -  12.3%
    MSCI Emerging Markets (£) +29.5%

     

    Drilling into the raw numbers reveals a few interesting insights:

    • The FTSE 100 rise was the first for three years and was mainly due to the dominance of the index by multinational companies whose overseas earnings became more valuable as Sterling declined after the Brexit vote on 23 June. The FTSE 250, which has a greater exposure to UK focussed (medium sized) companies, rose by just 3.7%.
    • Sterling had a bad year, which significantly boosted the returns for UK investors in foreign markets. The pound was down 19.4% against the Japanese Yen, 13.8% against the Euro and 16.7% against the dollar. Thus investments in European and Japanese markets were more profitable than an investment in the FTSE 100, despite what the (local currency-based) index numbers suggest. Once again, the wisdom of investment diversification has been illustrated.
    • Emerging markets turned in widely different returns, a reminder that looking at just one global emerging markets index (or, indeed, choosing a fund which tracks one overall index) can be misleading. Brazil, which performed badly in 2015 as the markets and its currency weakened in the wake of political scandals, was a star performer in 2016, returning over 90% to sterling based investors.

    2017 is likely to throw up some further surprises.

    The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Investing in shares should be regarded as a long-term investment and should fit in with your overall attitude to risk and financial circumstances.

    December 2016

    The Trump card has been dealt

    What are the investment consequences of the surprise US election result?

    The arrival of Donald Trump marks a change of direction for the US government from the near status quo that Hillary Clinton was offering. Quite what the new direction is remains unclear.

    On the one hand, the president-elect has said he will cut taxes for both individuals and companies. US corporation tax could fall from 35% to 15%, with a special 10% rate to encourage the likes of Apple and Microsoft to repatriate profits currently stockpiled overseas. Mr Trump has also spoken about boosting investment in infrastructure, by way of tax credits rather than direct government investment. The consensus is that both measures would be good for growth, which helps explain why the US stock markets rallied after the election result.

    On the other hand, the cuts to tax and infrastructure boost appear to be relying upon increased government borrowing for finance rather than reductions in other government expenditure. That has already pushed up yields on US government bonds sharply, helped by an expectation of growth-induced higher inflation. An increase in short term rates from the Federal Reserve at its mid-December meeting now looks very likely.

    For investors, there are big question marks about what Trump will do on trade and regulation. Nobody knows how much of the campaign rhetoric will be translated into reality once President Trump enters the White House in mid-January – the famous wall has already acquired sections of pure fence in post-election interviews.

    In such difficult circumstances, there is a case to be made for choosing actively managed funds rather than their index-tracking counterparts, whether focused on the US or elsewhere. Skilled managers can react as evidence emerges of the new US environment, whereas adjustments to index funds are only made when the index constituents themselves change.

    The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Investing in shares should be regarded as a long-term investment and should fit in with your overall attitude to risk and financial circumstances.

    Putting a price on unpaid work

    The Office for National Statistics has been examining the value of unpaid work.

    Every three months the news headlines draw attention to how much UK gross domestic product (GDP) has changed over the past quarter – the last reading was +0.5%, better than many experts had predicted in the wake of the Brexit vote. However, GDP is a slippery concept and some activity is deliberately excluded from the measure.

    In November the Office for National Statistics (ONS) looked at one of those excluded areas – the unpaid work which households carry out for themselves or other households. Such work covers a range of activities, from housework and cooking through to driving 'mum's/dad's taxi' and volunteering. The ONS puts the value of all such unpaid work at just over £1,000bn in 2014, which is more than half of the GDP for the year of £1.8 bn.

    ONS says that on average men do 16 hours of unpaid work each week, worth about £166, whereas women do 26 hours, worth about £260. If you want to see how much your (or your partner's) unpaid work is worth, the ONS has developed a simple calculator available at https://www.ons.gov.uk/visualisations/dvc376/index.html.

    Discovering what you are not earning (or paying for!) is an interesting exercise, but there is a serious aspect to consider. Who would do that unpaid work if you or your partner were unable to so, for example because of illness? The cost would be considerably more than the ONS website numbers because their calculator works from what the notional employee would be paid for the service concerned, not what their employer would charge to provide it.

    When you next review your income protection and life assurance cover – January would be a good time – it's worth remembering the cost of those unpaid services.

    Deposit protection limits to rise next year

    It looks likely that the deposit protection limit will rise at the end of January.  

    At the start of 2016, the maximum amount of a bank or building society deposit covered by the Financial Services Compensation Scheme (FSCS) was cut from £85,000 to £75,000. The reduction was a consequence of the review rules in the European Deposit Guarantee Schemes Directive (EDGSD). That Directive placed a minimum level of €100,000 (or the local currency equivalent) on deposit protection and requires non-Eurozone member states like the UK to reassess their cover level every five years in the light of prevailing exchange rates.

    When the last review took place in summer 2015, the pound was trading around €1.40, so the Prudential Regulation Authority (PRA) had little choice but to lower the ceiling, although it did introduce transitional measures deferring the main impact until the end of the year.

    In winter 2016, following the Brexit vote, the pound has fallen about a sixth and is trading at around €1.17. Although the next EDGSD review is not due until mid-2020, the PRA has taken advantage of a clause in the Directive to re-review the protection level. The Directive says that non-euro limits are to be adjusted "following unforeseen events such as currency fluctuations".

    The PRA has issued a consultation on plans to return the deposit protection ceiling to £85,000 from 30 January 2017. In practice the process is something of a formality – administrative details may change slightly, but the number and timing are very unlikely to alter.

    The revision will make it marginally easier to protect large deposits. For example, to be fully covered at present, £165,000 needs to be spread across three separate deposit takers, whereas the new limit will cut the number required to two. However, if you are holding high levels of cash, now could be a good time to review with us whether you need to keep so much money on deposit. After all, the best instant access accounts now offer just 1% and many are paying less.

    The value of your investment can go down as well as up and you may not get back the full amount you invested.

    Attention staff: the cafeteria is closing

    The Autumn Statement confirmed plans to limit the scope for salary sacrifice arrangements.

    In recent years, the number of employers offering 'cafeteria' remuneration has steadily increased. Under the system, employees can swap pay for benefits, which can range from anything from mobile phones through to company cars or gym membership.

    The advantage of visiting the cafeteria depends on what is chosen from the menu. In some instances – mobile phones for example – pay that is subject to income tax and employees' and employer's national insurance contributions (NICs) becomes a benefit free of both tax and NICs.

    The party on the other side of this disappearing trick, HM Treasury, has now decided enough is enough. Over the summer, HM Revenue & Customs issued a consultation paper on countering the effects of salary sacrifice and the Autumn Statement confirmed that most of the proposals in the document will take effect from 6 April 2017. Broadly speaking, if you give up salary for a benefit, then from 2017/18 you will be taxed on the greater of:

    • the salary foregone; and
    • the statutory value of the benefits

    Your employer will also be subject to NICs on the same basis, so the only saving remaining will be employee NICs, which for higher rate taxpayers is generally 2% of the earnings sacrificed.

    There will be a range of transitional protection for arrangements in place before April 2017 and a limited number of total exemptions. The most important of these is for pensions, where the gain from using salary sacrifice can be as much as 33.9%. If you would like to learn more about the continuing advantages of this type of salary sacrifice arrangement, please talk to us.

    The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. The value of tax reliefs depends on your individual circumstances. Tax laws can change. The Financial Conduct Authority does not regulate tax advice.

    Another pension annual allowance cut

    The Autumn Statement revealed plans for another annual allowance cut.

    When pensions flexibility was announced in March 2014, it did not take long for tax planners to realise that it offered an interesting opportunity to "pay" the over-55s. The idea was that, instead of pay which is subject to national insurance contributions (NICs) and full income tax, contributions to a pension could be made from which the employee immediately drew benefits. As a result, NICs would disappear and income tax would be reduced by a quarter because of the tax-free lump sum.

    Before pension flexibility became reality, the Treasury acted to limit the scope for such creative remuneration by introducing a £10,000 money purchase annual allowance (MPAA) to apply in such cases. In the Autumn Statement, the Chancellor announced another turn of the MPAA screw: from 2017/18 it will be reduced to just £4,000, saving the government an estimated £70m a year.

    The rules for triggering the MPAA mean that once you become subject to it, there is no escape. However, it is possible to extract money from your pension in a way that does not bring the MPAA into play. This can be particularly useful if you are a private company shareholder planning a gradual retirement. Please talk to us for more details.

    The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. The value of tax reliefs depends on your individual circumstances. Tax laws can change. The Financial Conduct Authority does not regulate tax advice.

    November 2016

    State Pension Age: getting older?

    The government has published an independent review on the state pension system.

    There was a time when it was all so simple: men drew their state pension from age 65 and women from age 60. That all started to change in the mid-1990s, when the Pensions Act 1995 set in train a phased increase in women's state pension age (SPA) to 65 from April 2010.

    Twelve years on, the Pensions Act 2007 took the next step of increasing the equalised SPA to 66 between April 2024 and April 2026, with another nudge up of one year per decade thereafter, so that by April 2046 the SPA would be 68. In 2011 another Pensions Act brought forward to October 2020 the increase in the SPA to 66.  To smooth the transition, the Act also controversially shortened the phasing period for equalisation, so that womens' SPA became 65 from November 2018 rather than April 2020.

    In 2014 yet another Pensions Act moved the goalposts for the SPA of 67, which will now be phased in between April 2026 and April 2028, eight years earlier than the 2007 Act had envisaged.

    Confused? Cynics might suggest that was the plan. However, if you want to know what your SPA is under current law, then the easiest way is to visit www.gov.uk/state-pension-age. The answer might surprise you, but it is not necessarily what your eventual SPA will be.

    Under review again

    The uncertainty stems from an independent review on the future of state pensions, commissioned by the government, the first stage of which was published for consultation last month. The review was carried out to meet a legislative requirement for periodic assessments of SPA and related matters. As such it raises a variety of issues, such as the differences in life expectancy between regions, localities and socio-economic groups and the practicalities of early or differential SPAs. There are no specific recommendations, but instead a list of 26 consultation questions. The nearest the review comes to suggesting when SPA should move to age 68 is to refer to the Office for Budgetary Responsibility's estimate that this should be "by 2041", seven years earlier than currently legislated for.

    Of course, you do not have to wait until your SPA to retire, but if you want to stop work earlier – or just have the option to do so – you'll need to have adequate private pension or other investments in place.

    The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.

    Radical reform for pension contribution tax relief?

    The pre-Autumn Statement rumour mill is suggesting a radical reform of pension contribution tax relief.

    Could tax relief for pension contributions be based on your age rather than the rate of income tax you pay?

    It may sound strange, but one idea doing the rounds is that tax relief on pension contributions should become a government bonus based on (100 - your age) %. For example, if you are a 45 year-old higher rate taxpayer:

    • At present a gross pension contribution of £100 will normally mean that you receive £40 tax relief, so your net outlay is £60.
    • Under the proposed new rules, you would pay £60 into your pension and the government would provide a top up of 55% (100% - 45%), leaving you with a total in your pension pot of £93 (£60 + £60 x 55%).

    The logic behind the proposal is that it would encourage contributions to be made to pensions at a younger age, meaning that the pension fund has more time to grow before it is drawn upon. The same goal of stimulating retirement saving at a young age is behind the upper age limit of 39 for next year's Lifetime ISA. The Chancellor's parliamentary private secretary has said that a reform of pensions tax relief would fit in with the new Prime Minister's plans.

    It would probably also appeal to the Treasury, because it's estimated that higher rate taxpayers account for half of all pension contributions, but nearly three quarters of all tax relief. A higher rate taxpayer aged over 33 would be worse off under the suggested age-related system as their bonus would be no more than 66% against the equivalent 66.67% provided by higher rate relief. That age threshold means most higher rate taxpayers would lose out.

    There is no certainty that any change will be announced in the Autumn Statement on
    23 November, nor even if it is, that it will take immediate effect. However, if you are contemplating a pension contribution in the near future, the possibility is worth bearing in mind.

    The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. The value of tax reliefs depends on your individual circumstances. Tax laws can change. The Financial Conduct Authority does not regulate tax advice.

    Marmite pricing: the bad news

    Inflation rose to 1% in September, but that will not be the end of the story.

    Last month a spat between Tesco and Unilever over the pricing of products under a new contract saw Marmite temporarily removed from the shelves of Tesco's internet shopping website. The two parties resolved the issue quickly once it hit the headlines, but it was a reminder that the plight of the pound since the Brexit vote will inevitably translate into price increases.

    The latest inflation data from National Statistics (NS) also showed a rise in inflation, up from 0.6% in August to 1.0% in September. As the graph shows, there has been a marked rise in the Consumer Prices Index (CPI) since the negative numbers recorded in 2015.

    cpi-inflation-the-last-five-years-to-september-2016

    NS says that September's inflation spike was not a reflection of sterling's recent weakness, pointing out that "there are reports of businesses having measures in place to protect against exchange rate changes in the short-term." The NS view is supported by the fact that the price of goods (largely imported) is still showing a year-on-year drop, while it is services (mainly UK supplied) where inflation is visible.  However, it seems certain – as the Marmite issue showed – that goods inflation will start to emerge soon. Some economists are suggesting we could see 3% inflation in 2017, well above the Bank of England's central 2% target.

    The likely return of inflation is a reminder of an investment risk which had seemingly disappeared in recent years. Even though interest rates have been extremely low (and moving lower), while inflation was quiescent, the purchasing power of deposits was hardly being eroded. That is now starting to change, with little likelihood that the Bank of England will push up interest rates amidst the current Brexit-driven economic uncertainties.

    If you have cash on deposit beyond your rainy-day needs, the return of the oft-slayed, never-killed inflationary dragon should make you consider other options for your money.

    The value of your investment can do down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.

    Marmite pricing: the good news

    Sterling's fall is boosting dividend payments.
    the-pound-falls-against-the-dollar
    On the day of the referendum, a pound would buy you nearly $1.50. It dropped sharply in the wake of the vote and then spent about three months churning between roughly $1.35 and $1.30. October produced another leg down to the $1.22 area as a 'hard' Brexit began to seem more likely.

    An 18%+ fall in sterling is normally not going to be considered good news, but there is a silver lining for investors – dividends. According to the latest quarterly Dividend Monitor from Capita, one of the UK's largest share registrars: "Large dollar- and euro-denominated dividends from multinationals like Shell, HSBC and Unilever were translated at a much more favourable rate to sterling" boosting total dividends paid during the July-September quarter to £24.9bn.  That sum was over £1bn more than Capita had initially estimated for the quarter.

    Capita now forecasts total dividend payments in 2016 will be over 6% higher than in 2015, despite large dividend cuts from the mining sector. With inflation on the increase, but still well below the Bank of England's 2% target, dividends are thus showing a substantial real terms increase. Capita estimates the yield for UK shares over the next 12 months will be 3.6%. If you are looking for income as savings rates fall further, UK shares are certainly worth considering.

    The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Investing in shares should be regarded as a long-term investment and should fit in with your overall attitude to risk and financial circumstances.

    Second-hand annuities: not for sale

    The Treasury has changed its mind about allowing the sale of pension annuities.

    When pensions flexibility was announced in March 2014, one of the inevitable criticisms was that the reform came too late for those who had already turned their pension pot into an annuity. A year later the then Chancellor attempted to respond to this complaint by proposing the creation of a secondary annuity market. The idea behind this was that pension annuity owners would be able to sell their annuities for cash and then either reinvest within the pension framework or draw out a lump sum, subject to income tax.

    Mr Osborne's proposals met with some scepticism about their viability and in the July 2015 post-election Budget the planned start date was pushed out a year to April 2017. In mid-October 2016, the Treasury announced that "after an extensive programme of engagement with industry, financial regulators and consumer groups," it had decided to abandon the idea. The main reason given was that "the steps that the government would need to take to create purchasing demand … would undermine other consumer protections."

    Turning your pension fund into an annuity will therefore remain an irrevocable choice. Coincidentally, a few days before the Treasury's change of mind the Financial Conduct Authority had issued the results of a review of annuity sales practices by pension providers to unadvised clients. The regulator found failings "at a small number of firms" and highlighted four areas where all providers should review their processes.

    If you are at the point where you need to start drawing income from your pension fund, there are plenty of other options than an annuity. The best way to understand these and to decide whether an annuity is right for you – and if so, which one – is to seek expert advice before taking any action. Afterwards could be too late…

    The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Investing in shares should be regarded as a long-term investment and should fit in with your overall attitude to risk and financial circumstances.

     

    October 2016

    Chancellor aims to launch LISA next April

    The previous Chancellor's plans to launch a Lifetime ISA (LISA) have been given a fresh breath of life.

    In his final Budget last March, one of the surprises George Osborne produced was the Lifetime ISA, known as the LISA to everyone except HM Treasury. As a reminder, LISA's main features were to be:

    • It would only be available for those aged between 18 and 39;
    • The maximum contribution would be £4,000 a year;
    • Contributions made before 50 would attract a 25% government bonus;
    • Returns would be free of UK income and capital gains tax, as with a normal ISA; and
    • Funds could be withdrawn penalty-free for either the purchase of a first home or from age 60 onwards. Otherwise a penalty would normally apply, equal to a 5% charge plus the government bonus.

    LISA was meant to start life in April 2017, but potential providers quickly criticised its complexity and the lack of firm detail. Some said they would not make the April 2017 start date. Everything then went very quiet.

    LISA revival

    It was therefore a surprise when in early September the government published a Bill to legislate for LISA bonuses and then a few days later issued an "updated design note" setting out a number of technical changes to Mr Osborne's original idea. The aim remains to launch LISA next April, although how many financial services companies will have something on their shelves is a moot point.

    The LISA has been seen as a stalking horse for pension reform as the government bonus is akin to flat rate contribution relief. The Bill before parliament creates a very broad framework – it does not impose any age or contribution limits. It's an interesting question as to whether the lack of detail has something to do with plans that Mr Osborne's successor has for the Autumn Statement.

    The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Investing in shares should be regarded as a long-term investment and should fit in with your overall attitude to risk and financial circumstances.

    The Autumn Statement: the date's been set

    The Treasury has confirmed that the Autumn Statement will be on 23 November.  

    When George Osborne was replaced as Chancellor in July, his successor, Philip Hammond, deliberately avoided taking any action. He left the immediate economic response to Mark Carney and the Monetary Policy Committee at the Bank of England, which duly cut interest rates to 0.25% and announced £70bn more quantitative easing (QE) in early August.

    Mr Hammond did say that he would consider a "fiscal reset" in the Autumn Statement if data available by then suggested it was necessary. We already know that the new Chancellor has abandoned his predecessor's goal of a budget surplus by 2019/20, but beyond that what form a 'reset' could take is unclear.

    Shifting the target

    The latest UK public finance figures show that government borrowing in the first five months of the year was £4.9bn below the level in 2015/16. Given that Mr Osborne's spring Budget forecast represented a cut of £21bn from last year, it looks most unlikely his successor will reach next April on target. It is arguable that the higher than planned borrowing is effectively a "reset" in itself, leaving Mr Hammond little additional room for manoeuvre.

    However, that might not prove to be the case. The "not just the privileged few" rhetoric of Theresa May has prompted some suggestions that her new Chancellor may take a different line on tax. For example, a more egalitarian approach to pensions could be to introduce the flat rate of contribution tax relief which Mr Osborne shied away from in March. Depending upon the rate chosen, such a move could also generate additional funds for the Treasury to use in boosting the economy, e.g. via spending on infrastructure and housing.

    The Autumn Statement looks set to be the most important for some time and we'll be covering the key outcomes.

    The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. The value of tax reliefs depends on your individual circumstances. Tax laws can change. The Financial Conduct Authority does not regulate tax advice.

    What role does property play in retirement planning?

    There has been a difference of opinion on the role of property in retirement planning between the Bank of England's Chief Economist and a former Deputy Governor.

    Andy Haldane, Chief Economist at the Bank of England, caused a few raised eyebrows recently when in a Sunday Times interview he suggested that "property is a better bet for retirement than a pension". His argument was largely based on the notion that if demand for housing continues to outstrip supply, as it has done for many years, then house prices are "relentlessly heading north".

    By coincidence, not long after Mr Haldane's comments were published the new Chief Executive of the Financial Conduct Authority, Andrew Bailey, gave a speech which covered the same topic. Mr Bailey was previously a Deputy Governor at the Bank of England, but he disagreed with the Bank's Chief Economist: "There is an argument that pension saving would be assisted by people holding more housing in their stock of pension assets, based on the real appreciation in the value of housing. I don't subscribe to this argument."

    One of the reasons he gave was that "…given the scale of uncertainty over long-run real [inflation-adjusted] returns on assets, I would not favour over-weighing to any one asset class, while recognising that a balanced investment portfolio can be exposed to property." In other words, do not put all, or most, of your eggs in one basket. You probably already have considerable exposure to the residential property market through the ownership of your home.

    Mr Haldane's view will certainly be shared by many people, but Mr Bailey's reservations make sound investment sense. It is easy to forget after the past few years of rising house prices that property values do not always rise. Nationwide's figures show that for the UK as a whole, it was not until the second quarter of 2014 that the average house price overhauled the peak set in the third quarter of 2007. Adjust for inflation and the date moves out even further.

    nationwide-uk-house-prices-over-the-last-10-years

    The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Investing in shares should be regarded as a long-term investment and should fit in with your overall attitude to risk and financial circumstances.

    Cash defies low interest rates

    New statistics from HMRC show that cash is still a popular ISA investment, despite ultra-low interest rates.

    In early summer, the Financial Conduct Authority published a report looking at easy access cash interest rates for savings account and cash ISAs. The regulator surveyed the lowest rates on offer from 32 major providers and summarised its findings in the following table:

    Range of lowest interest rates available on easy access cash ISAs at 1 April 2016
     

      Branch access No branch access
      Open accounts Closed accounts Open accounts Closed accounts
    Maximum 1.40 1.50 1.40 1.50
    Minimum 0.10 0.05 0.50 0.25
    Median 0.70 0.50 1.00 0.75
         

    As these figures are now six months and one base rate cut out of date, the current numbers are likely to be even lower.

    In spite of these low rates, recently released statistics from HMRC show that in the last tax year nearly £3 out of every £4 of ISA subscriptions were placed in the cash component. Overall, total investment in ISAs is about 50/50 between the cash component and the stocks and shares component, but that reflects the fact that until July 2014 there were lower limits for cash investment.

    If you hold cash ISAs, ask yourself:

    • What interest rate am I currently earning? Be warned this might be going down soon because of the August base rate cut.
    • Do I need an ISA to get tax-free interest on my cash? The personal savings allowance, introduced in this tax year, allows you to receive £1,000 of tax-free interest if you are a basic rate taxpayer (£500 if you are a higher rate taxpayer). At current interest rates, that represents a substantial deposit.
    • You can switch from a cash ISA to a stocks and shares ISA (and vice versa) and making the move now could significantly increase the income your ISA produces.

      The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Investing in shares should be regarded as a long-term investment and should fit in with your overall attitude to risk and financial circumstances. The value of tax reliefs depends on your individual circumstances. Tax laws can change. The Financial Conduct Authority does not regulate tax advice.

      A better quarter

      The third quarter of 2016 was not the meltdown it threatened to be after the referendum.

      The final days of the second quarter of 2016 were dominated by the fall-out from the outcome of the referendum on 23 June.  It was, to put it mildly, a volatile time for investment markets.

      However, for all the gloom and uncertainty around at the end of June, the third quarter of 2016 has treated investors kindly, as the table below shows:

      Index Q3 2016 Change
      FTSE 100 +6.1%
      FTSE All-Share +6.8%
      Dow Jones Industrial +2.1%
      Standard & Poor's 500 +3.3%
      Nikkei 225 +5.6%
      Euro Stoxx 50 (€) +4.8%
      Shanghai Composite +2.6%
      MSCI Emerging Markets (£) +11.5%

       
      The FTSE 100 ended the September over 10% above its starting level for the year, an outturn few would have predicted on the back of a Brexit vote. The performance reflects the international nature of its constituents and the continued weakening pound. After reaching nearly $1.50 on 23 June, the pound was worth about 20c less by the end of the third quarter. As you may know from a recent holiday, it has been a similar story for the pound against the euro. The corollary of the weak pound has been that it has boosted returns from overseas markets for sterling based investors.

      The third quarter of 2016 once more proved how difficult it is to predict short-term market movements with any accuracy. The panicked investor who sold out when pessimism was at its worst on 24 June will have paid a high price for their attempt at market timing. On the other hand, the long-term investor will have been satisfied by the returns from their inaction.

      The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Investing in shares should be regarded as a long-term investment and should fit in with your overall attitude to risk and financial circumstances.

    September 2016

    Interest rates now at 0.25%...

    The Bank of England halved its base rate in August. By the end of the year, it could be lower still.

    At its first formal meeting after the Brexit vote, in early July the Bank of England's interest rate setters (the Monetary Policy Committee) surprised some economists by not cutting rates. The (non-) move resurrected criticism of Mark Carney, the Bank's Governor, as "an unreliable boyfriend".

    In August, the surprise came from the opposite direction. Not only did the Bank cut interest rates, but it also announced more quantitative easing (QE – buying of government and corporate bonds) and new low rate loans of up to £100bn to banks and building societies to encourage lending. As if that were not enough, the bank also said, "If the incoming data proves broadly consistent with the August Inflation Report forecast, a majority of members expect to support a further cut in Bank Rate…during the course of the year". Fortunately, Mr Carney has made clear he does not favour negative interest rates, but another cut will take him very close to what used to be called the 'zero bound'.

    Savings rates have been dropping for some time, but this has not stopped deposit-taking institutions from cutting further, in some cases by more than the 0.25% reduction made by the Bank of England. One of the most attractive interest-paying current accounts has announced a 1.5% reduction in interest payable.

    The extra £70bn of QE has pushed down government bond yields: lend money to the government for a decade and you will be paid only less than 0.7% a year. Once again, this has pushed down annuity rates and exacerbated the problems of funding final salary pension schemes. Lower interest rates also drove down the value of the pound, which could ultimately mean higher inflation.

    For investors, as opposed to depositors, the Bank's moves were beneficial, giving a lift to the value of UK shares and bonds, and, by dint of sterling's fall, foreign assets.

    Despite the rate cut and its aftermath, there are still opportunities to invest for income. However, advice is more vital than ever now, as the pool of remaining income investments is becoming potentially riskier.

    The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Investing in shares should be regarded as a long-term investment and should fit in with your overall attitude to risk and financial circumstances.  

    The six figure pension fund

    The fall in interest rates is boosting some pension transfer values.

    Pension scheme deficits have been hitting the headlines again, and not just those of BHS. The Bank of England's efforts to bolster the post-referendum economy have been to blame. On one widely quoted measure – the Pension Protection Fund's PPF7800 Index – the overall deficit for private sector benefit schemes covered by the PPF was £408bn in July 2016, an increase of over £170bn in the space of just 12 months.

    The reason is the fall in long term interest rates, which are the basis for valuing final salary pension scheme liabilities: as rates fall, the value put on the liabilities rises. Unfortunately for many schemes, the other side of the balance sheet – the investments assets – do not rise in value as rapidly, hence the deficit (liabilities – assets) widens.

    There is one piece of potentially good news that stems from this situation: many schemes are increasing the transfer values they offer. This is due both to increases in asset values and to schemes' desire to reduce their liabilities by cutting membership. In some cases, transfer values have been equal to over 30 times the prospective pension, meaning a £3,500 future pension could provide a six-figure transfer value.

    If you have final salary benefits from previous employment, it could be worth seeing whether a transfer now makes sense, even if it did not a couple of years ago. To begin the process, please contact us.

    The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Investing in shares should be regarded as a long-term investment and should fit in with your overall attitude to risk and financial circumstances. 

    Pensions freedom: taking too much or too little

    New statistics have been published showing just how much has been withdrawn in the first year of pensions freedom.

    In August, the Association of British Insurers (ABI) published data showing how much had been withdrawn from pension arrangements in the 12 months to April 2016, the first year in which the pension flexibility reforms introduced by George Osborne had full effect. In total:

    • £4.3bn was paid out in 300,000 lump sum payments, with an average payment of £14,500; and
    • £3.9bn was extracted via 1.03m drawdown payments, with an average payment of £3,800.

    The headline of the press release from the ABI said "Majority take sensible approach, but signs some withdrawing too much too soon". Indeed, the ABI statistics showed that in the first quarter of 2016, over half of all withdrawal rates were less than 1%, whereas less than 1 in 23 had withdrawal rates of 10% or more.

    Perhaps unsurprisingly, the media took a rather different approach, with headlines such as "Insurers warn that some people may be plundering pension pots too soon, raising concern money will run out"

    There is no doubt that for some people, the money will run out, but that is not necessarily a disaster. What is forgotten in this welter of numbers is that pension flexibility means just that and it can be used in a variety of ways. For example, if you have final salary pension which starts to pay out at age 65, but you choose to retire at 60, you could bridge the five-year income gap by running down your other pension savings over that period.

    One point is crucial however, and that is expert advice. The level of withdrawals needs to be tailored to your personal circumstances and its appropriateness reviewed regularly. Although the possibility is not often considered, those who take too cautious an approach to withdrawals can end up suffering a lower living standard than they could have enjoyed. Their heirs may benefit, but is that what they wanted? Advice can help mitigate such situations.

    The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Investing in shares should be regarded as a long-term investment and should fit in with your overall attitude to risk and financial circumstances.

    HMRC plans another turn of the anti-avoidance screw

    In August, HMRC published a consultation document on adding a new weapon to its anti-avoidance armoury: penalties on 'enablers'.

    While many were enjoying their holidays, HM Revenue & Customs (HMRC) released yet another paper examining ways of "strengthening tax avoidance sanctions and deterrents".

    Over recent years, HMRC has been gaining the upper hand in its unending battle with promoters of aggressive tax avoidance schemes:

    • There is now a broad requirement on promoters to provide details of schemes to HMRC under the disclosure of tax avoidance scheme (DOTAS) rules.
    • A General Anti-Abuse Rule (GAAR) was introduced in 2013. The latest Finance Bill, still stuck in the parliamentary process, contains measures creating tax-geared penalties for cases caught by the GAAR.
    • The 2014 introduction of accelerated payment notice legislation, effectively removing the cash flow advantage of many schemes, has raised over £2.5bn, with more than 50,000 notices issued.
    • Only last month HMRC won two major tax avoidance cases involving in excess of £820m in tax and outstanding interest.
    • The current Finance Bill also contains measures to attack certain "disguised remuneration" schemes set up in the Noughties, which HMRC had failed to defeat in the courts. Those affected will have to clear loans they had thought were never going to be repaid or face a large tax bill.

    HMRC's latest stance is that "The people who introduced users to the avoidance, or facilitated its implementation, bear limited risk or downside when avoidance arrangements are defeated by HMRC." Arguably, this is untrue, as those who devise or promote failed schemes could suffer reputational damage and/or legal action from their disappointed clients. However, that risk is not enough in HMRC's view and it is now proposing that anyone in the "a whole supply chain of advice and intermediation" of tax avoidance should be subject to penalties. At this stage there is no settled basis, but one option the document suggests is to base the penalty for each party involved on the amount of tax supposedly avoided.

    It must be stressed that the HMRC paper is not targeting general tax planning, such as making full use of annual exemptions, allowances and reliefs explicitly provided in legislation. These tactics can still deliver useful tax savings without provoking unwelcome enquiries.

    The value of tax reliefs depends on your individual circumstances. Tax laws can change. The Financial Conduct Authority does not regulate tax advice.

    Another Chinese export

    The next stage of the opening up of the Chinese stock markets has been agreed.

    Many major companies incorporated in China have dual share classes:

    • A Shares, which is the main share category, are denominated in renminbi, the Chinese currency. They are listed on the Chinese stock exchanges, the major ones being Shanghai and Shenzhen, which were established in December 1990. Before 2002, A shares could only be purchased by mainland China investors.
    • H Shares are the Hong Kong listed shares of Chinese incorporated companies. These started to appear in 1993 and are denominated in Hong Kong dollars (which has long been pegged to the US dollar). The more open nature of Hong Kong's markets meant that for a long while H shares were the main way in which foreign investors obtained access to Chinese companies.

    In late 2014, the Shanghai-Hong Kong Stock Connect program ("Stock Connect") was launched, allowing Hong Kong investors to trade in A shares listed in Shanghai (and vice versa with H shares). The programme was subject to quotas, typical of China's cautious approach to liberalising markets.

    Last month another step was taken when the Chinese authorities gave their blessing to the establishment of a Shenzhen-Hong Kong Stock Connect programme. This is likely to go live by the end of 2016 and will give foreign investors access to another 880 Chinese shares, including companies in the technology and healthcare sectors. The quotas limiting overall investment have also been scrapped, with immediate effect.

    This latest change is seen as bringing China further into global equity markets and increasing the likelihood that the country will gain a greater weighting in the leading emerging markets index from MSCI. It is also a reminder to review your investment exposure to China – Shanghai and Shenzhen together rank well ahead of the Tokyo stock market in size, if not investor awareness.

    The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Investing in shares should be regarded as a long-term investment and should fit in with your overall attitude to risk and financial circumstances.

    August 2016

    A new Chancellor takes the reins

    The UK now has a new Prime Minister and a new Chancellor, but will tax policy change?

    If you went on an overseas holiday in the second week of July, you left the UK with David Cameron as Prime Minister and George Osborne as Chancellor, but by your return the country was in the hands of Theresa May and Philip Hammond respectively. A week is truly a long time in politics.

    As with the consequences of Brexit on the economy, it is too early to say what the impact of the new government will have on tax policy. However, a few interesting indicators have already emerged:

    • In her first speech outside Downing Street, Mrs May said "When it comes to taxes, we'll prioritise not the wealthy, but you."
    • The new Chancellor has said that he will not introduce an emergency Budget, but instead wait until the Autumn Statement to review developments and then set out his plans.
    • The Prime Minister and her Chancellor have both ruled out trying to achieve no Budget deficit in 2019/20, a goal which George Osborne had himself abandoned after the Brexit vote. However, cutting the deficit remains firmly on the agenda.
    • Mr Osborne's post-Brexit pledge to cut corporation tax to under 15% has not been endorsed by Mr Hammond.

    The mood music is thus very different from what we have been used to. For example, it is possible to imagine Mr Hammond making the cut to higher rate pension tax relief that Mr Osborne shied away from in March. Such a move would certainly fit in with not prioritising the wealthy…

    The value of reliefs depends on your individual circumstances. Tax laws can change. The Financial Conduct Authority does not regulate tax advice.

    Property fund lock-ins

    July saw several major property funds suspend dealings.

    One of the unexpected outcomes of the UK's vote to leave the European Union on 23 June has been that at least eight property funds have suspended dealings, meaning that investors cannot cash in their holdings. Some other funds have applied large discounts to prices for those wanting to realise their investment immediately.

    Both moves make sense in terms of protecting the interests of all of the funds' investors, not just those who want a swift exit. Commercial property cannot be sold rapidly, unlike the shares and bonds that underlie most collective funds. After an event like the Brexit vote, even knowing what the value of a property is can be difficult. Market circumstances will have changed, but there will be virtually no sales data to show what the effect has been.

    Property fund suspensions also occurred in 2008, in the wake of the financial crisis, so the situation is nothing new. The Financial Conduct Authority rules require suspensions to be reviewed at least every 28 days, but place no limit on how long a suspension can last.

    UK commercial property still looks an attractive long term investment, if only because rental yields compare favourably with income returns available elsewhere. It is interesting to see that some 'predator' private equity funds are already being prepared to search for bargains from forced sellers. If you hold investments in property funds, do talk to us if you have concerns and certainly before taking any action.

    The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.   

    It's not all bad news on the pound

    The Brexit-induced decline in the value of the pound has brought some good news for investors.

    The 23 June Effect

    "The Brexit vote has completely changed the picture for dividends this year and beyond."

    So said Capita, one of the UK's main share registrars in its second quarter Dividend Monitor. In the first quarter edition, Capita had forecast a decline for 2016 of 1.7% in the underlying dividends of UK listed companies, i.e. dividends other than one-off special payments. The drop in the value of the pound has made Capita revise its forecast to a 0.5% increase for the year. In terms of total dividends, it now sees these rising by 3.8%.

    The reversal in fortunes reflects the fact that many of the largest UK-listed companies, such as HSBC, BP and Royal Dutch Shell, report their results in US dollars and set dividends in the same currency. Thus if the dollar rises about 10% against the pound, an unchanged dividend becomes worth 10% more when it's converted into sterling.

    This currency effect also helps to explain why the FTSE 100 has performed reasonably well since the Brexit vote – the index includes many multinationals whose overseas earnings have – almost overnight – become more valuable to a sterling-based investor. The same currency boost to dividends and values also applies to nearly all foreign shares, given that since 23 June sterling has dropped against almost all the world's currencies.

    Thus the Brexit vote has served as a useful reminder of the importance of diversifying investments globally. If your investments are heavily focussed on the UK, the last couple of months should prompt you to review your holdings.

    The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Investing in shares should be regarded as a long-term investment and should fit in with your overall attitude to risk and financial circumstances.

    Just how much interest are(n't) you earning?

    The Bank of England may have finally ended speculation and dropped the interest rate from 0.5% to a new low of 0.25%, but there are plenty of savings accounts already paying less.

    Last month the Financial Conduct Authority (FCA) published "sunlight remedy" data, showing the lowest interest rates (as at 1 April 2016) offered by 32 providers of easy access cash savings accounts and easy access cash ISAs – typical homes for rainy day money. The tables largely tell their own story:

    Range of lowest interest rates (%) available on easy access cash savings accounts
    at 1 April 2016

        Branch access No branch access
    Open accounts Closed accounts Open accounts Closed accounts
    Maximum 1.40 1.40 1.50 1.41
    Minimum 0.00 0.00 0.05 0.00
    Median 0.25 0.10 0.60 0.25

    Range of lowest interest rates (%) available on easy access cash ISAs at 1 April 2016

      Branch access No branch access
    Open accounts Closed accounts Open accounts Closed accounts
    Maximum 1.40 1.50 1.40 1.50
    Minimum 0.10 0.05 0.50 0.25
    Median 0.70 0.50 1.00 0.75

    The regulator noted that at least half of the providers in their sample offered a lowest interest rate of 0.10% or less on branch-based closed easy access cash savings accounts. That means no more than £1 of interest each year (before tax) for every £1,000 invested. For the corresponding ISA accounts, at least half of the providers paid no more than 0.5%.

    The tables are not only a painful reminder of how low savings rates have fallen; they are also a wake-up call if you have money in closed accounts, which with few exceptions pay less than accounts still being marketed – a penalty for loyalty.

    These low rates – many below the current 0.5% CPI inflation – mean that generally you should avoid retaining anything more than an adequate rainy day reserve on deposit. For how much that reserve should be and your options on any excess, please talk to us.

    The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Investing in shares should be regarded as long-term investment and should fit in with your overall attitude to risk and financial circumstances.

    Protecting your pension

    The interim procedure for claiming the 2016 pension protections has come to an end.

    The referendum vote has disrupted many plans and timetables this year. Among them is the passage of the Finance Bill, which in any other year would by now have been given Royal Assent and become a Finance Act. In 2016 it looks as if the transition from Bill to Act may not occur until shortly before the new Chancellor announces his first fiscal measures in the Autumn Statement.

    The delay in passing the Bill has had some curious consequences. One relates to the 20% reduction in the pension lifetime allowance to £1 million and the associated transitional protections. The third cut in the lifetime allowance and the new protections took effect from 6 April 2016, but the legislation underlying them is in that slow-moving Finance Bill.

    Initially, HM Revenue & Customs (HMRC) announced an interim paper-based procedure for claiming the new protections, primarily for anyone starting to draw benefits before the Finance Act 2016 came into being. HMRC promised to set up an on-line application process by the end of July, at which point the interim procedure would end. The timing was taken to be driven by the (then) likely Royal Assent date.

    The online procedure is now in place – you can find out more at https://www.gov.uk/guidance/pension-schemes-protect-your-lifetime-allowance . Unlike earlier versions of transitional protection, there is no deadline for applications. However, this does not mean you can ignore the provisions until you start to draw your benefits, because they revolve around values as at 6 April 2016 and subsequent actions.

    If you think these new protections might be relevant to you, please contact us as soon as possible to discuss your options. Even if you have already started to draw benefits, the new protections could still be worth claiming.

    The value of tax reliefs depends on your individual circumstances. Tax laws can change. The Financial Conduct Authority does not regulate tax advice.