Explaining how pension withdrawals are taxed
The Government says that ‘tax doesn’t have to be taxing’ but when it comes to making an income withdrawal from your pension, HMRC shoots first and asks questions later. Because you get tax relief when you put money in, you usually have to pay income tax when you take it back out. After all, it’s an income – just like anything else you’ve earned during your life.
The way tax is applied from private pensions is similar to the way in which wages and salaries are paid by an employer. This means it is taxed under the Pay as You Earn (PAYE) system before it is paid to you.
If you are requesting an income payment from your pension for the first time, this is where you could be heavily taxed at the start, requiring a reclamation of the tax via your local HMRC tax office.
Unless your pension provider already has a tax code for you (unlikely for the first income payment request), then it will use an emergency tax code. The tax problem is exacerbated if you are taking, say, a larger lump sum. The Revenue, in their wisdom, will think that your one-off withdrawal is going to happen every month with the result that in their eyes, your ‘annual income’ is propelled to an inflated sum with the consequential punitive tax. You can get the over-payment back of course but it requires jumping through a few hoops and may take a couple of months for the refund to arrive in your bank account.
One way around this is to let your pension provider have your latest P45 if your employment ended in the current tax year.
Tax rules in the UK are probably unnecessarily complex. With pensions you usually have to pay tax on income you receive that is above any tax-free cash you’re entitled to (usually 25%); how much you have to pay depends on your total income, personal allowance, and the tax rate that applies to you. The good news is that you do not have to pay National Insurance on income from a pension.
If you are thinking of starting withdrawals from your pension, it’s worth planning ahead, talk to your adviser or a tax expert to determine the most tax efficient way of doing it before making any decisions.
Earlier in the month, there was delight in Downing Street that they had overcome expectations and agreed a deal with the EU. But that euphoria soon fell away when MPs booted out the timetable to debate and pass all the new laws that would actually make Brexit happen. So, as we approach yet another ‘deadline’ (October 31st), it would appear that the only thing happening on that day will be Halloween. The political nightmare for the British public trundles on.
The stock markets and currency markets continue to be spooked by global trade conditions, sentiment, and of course, political uncertainty. This month they have had ‘good days’ and ‘bad days’ and the overall position still appears to be ‘let’s wait and see’ – unsurprising really. Apart from a deal, there are a number of scenarios that could play out, such as another vote on a revised deal, no deal, an extension, a second referendum, and/or a General Election.
In optimistic mood, Sajid Javid, The Chancellor, announced that his first budget “after leaving the EU” will be on 6 November, this has since been pulled on the expectation that there will be a General Election on December 12th. At the time of writing, confirmation is still awaited. It is evidence though, that the Treasury will need to turn its focus to giving immediate support to the economy, businesses and households. Whatever the outcome, the effect on the markets is likely to be bumpy.
Whilst Brexit is a relatively recent phenomena, there have always been times when the markets get rattled. These will continue to test investors’ nerves and you may be tempted to sell out of the market. However, ditching investments during turbulent times may only serve to crystallise any losses and means investors could miss out on any subsequent recovery.
We advocate focusing on the long-term and the reasons you invested in the first place is one way to prevent knee-jerk reactions when markets are choppy. Of course, there are no guarantees that you’ll be rewarded for sitting tight, so you must be prepared to accept dips in the short term. On the plus side, there will be winners and losers from the Brexit fall-out.
Sterling has been on a roller-coaster ride since the Brexit vote in 2016, swinging in value depending on the mood of markets over the prospect of an exit deal between the UK and EU. Yet, a weaker pound doesn’t have to be bad for the UK stock market.
Many of the UK’s large, multinational companies listed on the FTSE 100, gain a large part of their revenue and profit from overseas. A weaker exchange rate is of benefit to these companies, and their investors, boosting their profits when they are moved back into sterling.
Conversely, a strengthening pound may result in profits made overseas by UK companies are reduced when shifted into sterling. Portfolios continue to hold both international and domestic assets as a hedge against all possible outcomes and we continue to think the best defence against future uncertainty remains diversification of assets and selecting funds from the top fund managers.
Perhaps we’ll all know more by Christmas (I’m not saying which Christmas).
Q3 2019 Market update provided by Nic Spicer of PortfolioMetrix
In addition to our regular market commentaries, here is a short video showing the highlights of the last quarter. The material has been kindly supplied by our strategic partners and friends at PortfolioMetrix.
Free Wills Month – are your affairs in order?
For the month of October, a group of well-respected charities offer members of the public aged 55 and over, the opportunity to have their simple Wills written or updated free of charge by using participating solicitors in selected locations across England, Wales and Northern Ireland.
If you’re aged 55 or over, you can make, or update your will with a local solicitor for free.
Simply visit https://freewillsmonth.org.uk/ and enter the postcode to view details of participating solicitors. Appointments can be booked directly with the chosen solicitor, mentioning ‘Free Wills Month’.
Appointments may be limited, so book early to avoid missing out. A discretionary gift to a participating charity is normally required (by immediate donation or bequest) but this can be cheaper than the usual cost of a will.
If you die without having made a will you could be leaving behind significant financial problems for the people you care about. Worryingly, research suggests that half of adults don't have a will.
A will can be an important way to protect your family and loved ones. It can save on inheritance tax and head off family disputes about how your possessions should be divided. Crucially, no will means you have no say over what happens to your money and worldly goods (known as your ‘estate’). It is a legally-binding document which makes it much easier for your family or friends to sort out everything when you are gone. As well as naming your beneficiaries (the people who benefit from your will), a will appoints executors - the people who look after the financial process after your death (who 'execute' your will). If you don’t leave a will, your estate is shared out in a standard way defined by law (the 'law of intestacy') - which might not be in line with what you would have wanted.
In particular, if you're not married to your partner (or in a civil partnership) they would have no right to anything. If you are married, your spouse would get most or all of your estate - but this could mean your children getting nothing. And then what about your favourite charity, grand children or your friends?
Even if you are under 55, making a will is a sensible piece of financial planning to consider. A couple of other tips – some trade unions offer a free will making service so if you are a union member it’s worth checking with them. Secondly, if you have a pension, have you checked that your pension provider has an up to date ‘Expression of Wish’ – the form that outlines your instructions as to whom will benefit from your pension in the event of your demise. This could be significant if you are say, in a new relationship.
For further guidance, and full terms and conditions, please refer to the (participating) solicitor.
Annuities remain out of favour
In the year between April 2018 and March 2019 the number of annuities purchased with pension funds continued to decline. During this period, some 645,000 pension plans were accessed to buy an annuity, move into drawdown or take a first cash withdrawal. Of those, 350,000 pension pots were fully withdrawn at the first time of access - 90% of which were less than £30,000 in value.
The number of individuals fully withdrawing their pension decreased as the size of their pension increased. Some 316,605 individuals with pots valued below £30,000 fully withdrew their pension, compared with just 355 individuals with a pot valued at £250,000 and above. This further demonstrates that most retirees take a sensible approach to their retirement savings and don’t blow it all on something frivolous like a Lamborghini.
Meanwhile the share of those using plans to buy an annuity has continued to decline. In 2016/17 the number of annuities purchased was more than 76,000, while the latest data from the regulator has shown that figure has dropped to less than 74,000.
Across various age groups, drawdown proved to be a more popular option than purchasing an annuity. Those aged between 65 and 74 appeared to find purchasing an annuity the most appealing, with 38,157 individuals choosing to do so. No surprise here as annuity rates go up the older one gets. However, drawdown (42,308) and fully withdrawing their pot (77,245), were still more popular options.
These figures show the ongoing popularity of the 2015 pension freedoms, with almost three people taking a regular income through drawdown for every one person buying an annuity. This represents a monumental shift in retirement behaviour, the impact of which will be felt across the UK economy.
Source of statistics: FCA
September market commentary
Welcome to September’s market commentary which is sent to you amid untold levels of turmoil in the world around us and especially closer to home in Westminster. Politics, more politics, the economy, oil supplies, Marks and Spencer – all uncertainties which create an interesting dilemma for the markets and investors. The only certainty is that Christmas is coming, I know that’s true because my local DIY store has started putting out their yuletide merchandise.
Before then though, we may, or we may not, get some sort of Brexit. We all wait with bated breath!
On the high street, the turmoil is best illustrated by the news that M&S, once Britain’s top retailer, has fallen from grace and is about to drop out of the FTSE 100 index of top UK companies.
If no-one really knows what’s going on politically, then the markets have been just as contrary in their performance. Last week saw a rise in equities all over the world, despite no clear improvement in the underlying economic data. Even though we have not seen improvement yet, however, the rally suggests that capital markets see light at the end of the tunnel.
Certainly, the modest uptick in equities cannot have been due to company earnings. We saw an ever-so-slight pickup in earnings expectations for this year and the next – mainly for US businesses – but you would have to squint hard to see this as a trend. Rather, investors seem to have decided that equity markets have been right and bond markets wrong over the summer and now is the time to put their money to work – before the actual economic data improves and they miss the boat.
Whilst many areas are displaying peculiar characteristics, the US-China trade war – one of the biggest concerns for investors for nearly three years – looks as though it may be cooling down. Equities reacted positively to the improved tone of discussions between the world’s two largest economies. In particular, Trump’s removal of former US National Security Advisor John Bolton – an unapologetic war hawk and China hardliner – was taken well. And sure enough, shortly after his departure from the White House, the Trump administration announced delays to scheduled tariffs on China.
Politically, the timing is looking better for a trade deal. Trump is desperate for good news to bring to the American people (his approval ratings are as low as they have ever been); and the continued weakness of the Chinese economy means Beijing will be eager to join the negotiating table.
For the time being, we are pleased that 2019 investment portfolios have delivered positive returns for our clients. We continue to manage portfolios carefully with quality fund choices and diligent platform recommendations.
As the market sentiment roller-coaster over the summer months has shown, the returns picture will remain volatile until it becomes more evident that improvements in risk asset valuations are founded on actual earnings improvements through economic growth, rather than on hopes and dreams that politics will finally end its sabotaging of the economy. It remains to be seen if the ongoing slowdown is just that, another mid-cycle slowdown and not the beginning of the end of this long-in-the-tooth cycle.
Pension Drawdown Company news:
We are delighted to welcome Steve Stobie to our advice team. Steve is a fully qualified financial adviser and pension transfer specialist and joins us from a firm of IFAs based in the south of England.
Following on from last year’s success at the South Devon Business Awards (Gold award for Business Growth), we are very pleased to have been short-listed again this year, for an award at next month’s gala event.
Asia packs a punch
Despite its growing economic and political influence, Asia as a region still remains generally under-represented in both market indices and overall portfolios. So, is now the time to review, rethink and reallocate to the world’s most compelling long-term structural growth story?
With over half of the world’s population, ongoing urbanisation and a rapidly growing middle class, Asia already powers around 46% of the global economy at purchasing power parity. The facts, stats and numbers below highlight the sheer scale of the Asia’s growing influence and its long runway of growth.
The main countries making up the Asia Pacific region are typically regarded as China, India, Korea, Hong Kong, Philippines, Thailand, Malaysia, Singapore, Taiwan and Indonesia.
Source: Fidelity – Revisiting the case for Asia
Here at Pension Drawdown, we acknowledge the potential of investing in Asia but are also aware that this can sometimes mean a bumpy ride. We therefore have various tactical allocations to funds in Asia and other emerging markets as we search for opportunities for growth to enhance returns. Some of the exposure to Asia is from funds that focus directly on a specific country such as China or India; other exposure is derived from broader based funds such as a global multi-asset fund. This adds diversification in geographies and themes which we feel represents better value than traditional equity holdings (i.e. UK).
Investing in Asia is not necessarily for the faint-hearted but certainly worth considering for the benefits of the long-term growth prospects.
We like to build client relationships for the long term and Asian exposure is often an important part of our Bespoke financial planning.
Markets can fall as well as rise...
Never was that statement truer than in August, when virtually all the major world markets headed down, led by the plunging stock market in the USA.
It is, however, important to keep the dramatic rises and falls in some sort of perspective. If August emphasised anything though, it is that investing is a long-term commitment – not a short-term gamble.
“Sell in May and go away,” as the old-time investors used to say – although that mantra had more to do with spending the summer at Lords, Ascot and Henley than it did with investment. Nevertheless, it would have been sound advice in July. Over the last decade, it has become clear that needs to be updated with falls in every one of the last 10 Augusts. This one was triggered, some might argue, again by Donald Trump, after he announced a fresh round of tariffs on China. Screens soon started to flash red after as it looked like there would be a permanent trade war between the world’s two largest economies, with all the damage to supply chains and company profits that would imply. The UK market followed the rest of the world, with the FTSE 100 falling by 7.5% at its low point in the month, to hover at around 7100 having come close to dropping below 7,000.
Nervousness is growing about a hard, no-deal Brexit and the prospect of Britain falling back into recession.
The second part of the old mantra is “Don’t come back until St. Leger day”, which this year is on September 14th. Well, I’m not so sure about that, no-one knows what September will bring. We can only assume the ‘trampoline effect’ will continue as the markets bounce up and down. We do know that there are significant headwinds to face and if it hadn’t been Mr Trump’s deranged late-night tweets, it would have been something else. August is renowned for this. (The really good months, historically, just in case you are wondering, are March and July) Source: Daily Telegraph.
Bouts of volatility are nothing new and they provide buying and selling opportunities. It is interesting to note that nearly 20 years ago, in December 1999, the FTSE 100 was at 6930, very similar to today’s levels. Clients that have been with us during these years will know that we typically deliver returns of 5% net of charges, (give or take), year on year. We have added resource, improved our systems and negotiated special terms with our providers. The fund managers that we rely on are selected because of their skills in picking profitable companies to invest in. Utilising our expertise and guidance, together with good fund managers, means that we remain confident that our proactive approach to fund choices can add value over time.
The global economy has now entered the longest expansionary phase on record and yet some analysts believe that there is still further to go. A global recession is unlikely although some individual countries (Germany?) will inevitably fall into recession at some point. Markets are likely over-reacting to recent news and over-estimating the chances of an imminent global recession. While economies are still growing, they are doing so at a slowing rate. Source: BMO Global Asset Management.
5 million pension savers could put their retirement savings at risk to scammers
I have written may times before to warn readers about potential pension scammers. Unfortunately the practice is still rife and people are readily being taken in by offers of exotic, high-performing investments and promises of early access to cash.
New figures show that the fraudsters are regularly cold-calling (despite this being banned in the UK) and they are using very persuasive tactics to make you part with your money.
The Financial Conduct Authority (FCA) and The Pensions Regulator (TPR) are joining forces again this summer to warn the public about fraudsters targeting people’s retirement savings. This warning comes as new research suggests that 42% of pension savers, which would equate over 5 million people across the UK, could be at risk of falling for at least one of six common tactics used by pension scammers.
The research also found that those who consider themselves smart or financially savvy are just as likely to be persuaded by these tactics as anyone else.
Alarmingly, 23% of all those surveyed said they’d talk with a cold caller that wanted to discuss their pension plans, despite the government’s ban on pension cold-calls this January. Nearly a quarter said they would ask for website details, request further information or find out what they’re offering, even if the call came out of the blue.
Just to be clear, unless you are in serious ill health, then you cannot usually access your pension until you are 55. Even then, it may not be in your best interests to do so and you should seek advice from an independent professional. Ideally this should be someone you know and trust, or who has been recommended to you by a trusted friend or relative.
Victims of pension fraud reported in 2018 that they had lost an average of £82,000. Pension fraud can be devastating, as victims can lose their life savings and be left facing retirement with limited income. As a result, the regulators are joining forces to urge pension savers to be ScamSmart and to check who they are dealing with before making any decision on their pension. Last year’s ScamSmart campaign resulted in more than 370 people being warned about unauthorised firms. This year’s campaign is currently running on TV, radio and online.
Q2 2019 Market update provided by the multi-award winning PortfolioMetrix
In addition to our regular market commentaries, we are delighted to present a short video showing the highlights of the last quarter. The material has been kindly supplied by our strategic partners and friends at PortfolioMetrix.
Can investors learn from England’s World Cup victory?
Cricket is one of the most loved sports in the world and is often referred to as the perfect metaphor for life. Cricket reflects that life is unfair (ask a New Zealander), that there are ups and downs, it teaches us to never judge a book by its cover, and it shows us the importance of innovation. It involves the physical and mental resilience of a boxing match, coupled with the psychology, patience and tactical skills of a game of chess.
England started the Cricket World Cup as clear favourites to win the tournament and they were playing on home soil. In the end, of course, it was a mightily close-run thing. After a couple of disappointing results against supposedly lesser teams and a spanking from Australia, England spent the latter half of the tournament having to win every match or face elimination. They duly did so, heading into Sunday's final on a high after turning the tables on Australia with a defeat as similarly one-sided as the one they had earlier suffered.
The outcome of the final swung from one side to the other - especially towards the nail-biting end.
Those narrow margins also emphasise the role luck can play - again, in investment as much as in sport or anything else. In investment, when we buy a fund and it goes up, that could well be down to luck or to good judgement or to a bit of both.
Of course, the inverse is also true. Maybe the fund we bought went down because we made a mistake - or maybe we were the victims of an extremely unlikely yet extremely unfortunate outcome. Typically, it may be a global event beyond our control that influences market prices – just like a rain-interrupted cricket match. What matters is having a consistent, objective and repeatable process so we can be confident that, if we took the same course of action say a 100 times, things would have worked out better, more often. Preparation and research are key along with diversification. After all, there’s no point in having a team full of fast bowlers, if none of them can bat.
When these things come together, and there is reasonable opportunity, then there is a good chance of a successful performance as England so magnificently demonstrated.
Should I consolidate my pensions?
If you have several pensions, consolidating them can be a good way to get on top of your retirement saving.
Back in the 1970s and earlier, jobs were considered ‘for life’ which meant you typically only had one pension scheme to worry about. People now have an average of 11 different jobs in the course of their careers, and it’s common to start a new pension at each workplace. This means that you may end up with pensions scattered around with different providers, and it’s difficult to get an overall picture of your retirement savings, including how your funds are performing and what fees you’re paying.
Consolidating your pensions means bringing them together into a new plan, so you can manage your retirement saving in one place. This may or may not be the right thing for you to do, we will try to help you decide.
Check for hidden exit fees, especially on older pensions started before 2001, and pension plans called ‘with-profits’. Even if you’re going to pay exit penalties, it may still be a good idea to consolidate your pensions. If your new plan is cheaper to run, this may offset the amount you lose, particularly if you still have a long time until retirement.
Before you decide to consolidate your pensions, you should also consider whether you’ll lose any benefits tied to your old pensions. This is particularly the case with final salary schemes, often called defined benefit pensions, where valuable guarantees are often a feature.
A financial adviser can help with this. Once transfer values are obtained, together with details of your pensions, they will make an assessment as to whether it is in your interests to transfer and consolidate. They will ask you about your objectives and goals. As part of their advice, you should receive a written report pointing out all the advantages and disadvantages of the transfer. The report will put you in an informed position and will also outline the charges and fees involved. If you decide to proceed, the new pension provider will contact the old provider to facilitate the transfer of funds into your new pension plan for you.
Market commentary June 2019
After a good start, June has carried on in a positive way for investors. Over the past week stock markets consolidated their gains, while bond yields stopped falling. Following the rapid deterioration of US manufacturing data, some positive data releases confirmed the ongoing optimistic disposition of consumers and the upbeat sentiment of smaller businesses and the services sector. Bad economic news the week before did little to dampen spirits and it even led to an overwhelming belief that this would force central banks to cut rates, or at least ease monetary conditions and thereby revive the effect of central bank’s stimulus for stock markets.
This stabilisation of market sentiment is perhaps evidence that we are experiencing a period of fine balance. A balance between the fear that the global manufacturing slowdown will worsen through a proliferation of Trump’s trade wars, and the hope that the resilience of consumer sentiment and service sector momentum will carry the economy over this precarious period of potential instability.
In the UK, economic news was not so encouraging. GDP growth came in negative for the month of April and growth in industrial production was not only negative for the month, but also year on year. UK stocks took it in their stride, because a setback after the ‘March 2019 Brexit’ stockpiling frenzy had been widely expected – although proved to have been underestimated.
The coming weeks will be of crucial importance to the future course of financial markets in 2019. Markets are still uncomfortably exposed to political derailments and who knows where Brexit will end up, and when. I have a friend who has placed a wager on Nigel Farage becoming Prime Minister within the next 10 years – we’ll see!
As ever, you can expect us to keep a very close eye on developments and carefully manage our clients’ portfolios accordingly.
Finally, you may be aware of the financial headlines on TV and radio about the Woodford Equity Income Fund which was suspended to all trading on 3 June. Mr Woodford has long been one of UK’s best-known and successful stock pickers and whilst the City watchdog and various other advisers ‘missed Neil Woodford fund warning signs’ (Source BBC), I am pleased to report that here at Pension Drawdown, we did not. Since late 2017, we have been actively switching out of Woodford funds for the benefit of our clients. We do wonder how some of the larger companies over-looked this development.
Setting the Standard
In line with the Financial Conduct Authority’s (FCA) recently published conclusions about a new duty of care for financial services professionals, I am pleased to announce that our two pension transfer specialists, Suzanne Walker and Roger Easterbrook have both been awarded the Pension Transfer Gold Standard.
These awards further help to develop a healthy culture, assisting firms in their understanding of what 'good looks like'.
The award also recognises the underlying principles in providing quality advice when helping members with defined benefit pension schemes and where clients can go to get such advice. By choosing a firm with the Gold Standard award, clients can be confident that their adviser has their best interests at heart.
Happy 75th birthday from the taxman
Over the next three years, peaking in 2022, around 1.8m people will reach the age of 75. Why is this age significant? If you hold a pension plan and have yet to dip into it, then you could be in for a tax shock.
If you are coming up to age 75, then we recommend that you check your pension policies. It may be that you have worked on because you have been in good health and have simply not got around to claiming off some of your pensions. Others may be receiving a decent income from a generous final salary scheme.
Several punitive tax charges and other restrictions impact upon pensions at age 75 – particularly penalising those who have yet to take benefits from them. The 25% tax free lump sum could be lost if not already taken. You may also be obliged to pay an emergency 25% tax charge on your pot or be forced into buying a mediocre annuity. The requirement to buy an annuity was scrapped in 2011, however, that change does not apply to certain policies, with particular terms, on retirement at 75. The way round this, is that savers must move their pension money to another provider if they do not wish to be forced into their pension firm’s 'default' annuity.
To be fair, pension firms are doing their bit by contacting consumers and it is imperative that you respond. These letters can be confusing so take advice if you are not sure what to do. It is important that, you declare that your retirement funds total less than the Lifetime Allowance (LTA) of £1,055,000, assuming that is the case. If you don’t, then you could be levied as much as 55% in tax.
For anyone born after the Second World War, it is worth reviewing your paperwork to make sure you don’t have an unwelcome tax charge looming. You should ensure that you take action in plenty of time before your 75th birthday so that you don’t end up marooned in a poor-value annuity for the rest of your life.
Cash or Stock Markets?
Which one gives the best return – which one is right for you? The answer could be either or both as there are many reasons why each could be suitable depending upon circumstances and crucially, investment time horizons.
History though, favours stock market investments which have consistently out-performed cash in the bank since 1899 (Source, Barclays Equity Gilt Study 2019). Unfortunately, the majority of savers don’t necessarily see it this way and are keeping their money in places where it is not doing them much good. In 2017-18 nearly 3 times as many Cash ISAs were set up than Stock and Share ISAs.
Cash deposits are great for ‘short term’ savings purposes such as that new car, holiday or deposit on a house. The key feature here is accessibility – being able to withdraw your cash at very short notice. The trade-off is low returns and the possible effect of inflation which will impact the ultimate purchasing power. To illustrate this, in 1970, homebuyers could expect to pay £4,975 for a house. Today, their children would not get much change from £228,000. A loaf of bread cost 9p and the average weekly wage was around £32. Today, a loaf costs £1.06 and weekly wages are about £550.
Money held on deposit at a bank or building society won’t earn you much, the market average on ordinary savings accounts is a meagre 0.63% (Source, Which).
So why are stock and share investments less popular? Most people don’t fully understand how to cope with stock market shocks and also have no idea just how good the odds are on shares and share-based funds performing better than might be expected. At school you get taught a lot of stuff that you will never need – like algebra and the poems of Ted Hughes, but virtually nothing about the financial facts of life. This is a shame because financial matters touch all of us at some point throughout our lives – it should be compulsory, like reading and writing. More important, the amount of wealth that you have (or don’t have), will shape your lifestyle and probably your partner’s and children’s too. It will more than likely determine where you live, and how much you can afford to enjoy yourself. Financial ignorance is rarely bliss.
Take retirement saving for example, whenever sceptics tell me that that they think pensions are boring or that they cannot afford to save for the future, I ask them how exciting they think poverty in their old age will be.
A few lucky people will make it in the ‘big time’ or will inherit a fortune but for most of us we will have to build our wealth the hard way – steadily and slowly.
So, why do shares out-perform deposits in the long run? One explanation is that shareholders own most of the companies from which we buy our everyday goods and services. Shareholders are likely to benefit from improvements in efficiency and technological enhancements that occur over time. By contrast, depositors do not buy a stake in their bank but instead have to settle for the guarantee of interest payments and the fact that they will get their money back. Unfortunately, those guarantees can prove illusory, for when inflation is running at a higher level than interest rates (as it generally is now), the only real certainty that cash provides is the certainty of getting poorer. A well-managed and diversified share or fund portfolio can ride out stock market shocks and build real wealth over decades. Time spent in the markets is key – to use a food storage analogy – we don’t keep all our food in the fridge – some is set aside for later by storing it in the freezer. The same principle could apply to your money – don’t keep everything on deposit, think about setting some aside for the longer term and invested in a different asset class. Of course both have their own individual risks which is why you should seek financial advice from an appropriately qualified and experienced person before investing as capital values will fluctuate and you may get back less than you originally invested.
In life one has choices, you can either work for money, or you can make money work for you. Despite all the recent political noise and uncertainty, the past strongly suggests that share-based funds are the way to buy a better future.
Market commentary April 2019
For those of you that have ever frequented a football match, the Brexit saga is turning out to be the most boring of 0-0 draws – like two defensive teams slugging it out, but without much progress being made by either side. We are already well into added time but there is still a sense across the nation that people are anxiously looking at their watches and praying that the referee will blow his whistle to bring proceedings to a close. The bad news is that the stoppage time could last for months to come!
As widely expected, given all the ongoing uncertainty, the Bank of England kept interest rates on hold, they also downgraded their forecast for UK growth over 2019 from 1.7% to 1.2%. On a brighter note, UK unemployment has fallen to 3.9%, its lowest level since 1974/75 with wages rising by 3.4% year on year for January.
The US Federal Reserve (Fed) also kept rates on hold, as anticipated, and cut its outlook for US interest rate rises this year. A majority of bank officials now expect no rate rises in 2019 and only one in 2020. The Fed also updated its economic projections to forecast slower growth in the US economy this year and 2020. Bizarrely though, US jobless claims fell to their lowest since December 1969, a 49-year low. Mr Trump immediately tweeted that ‘the US economy is looking very strong and USA optimism is very high’, well I suppose he would say that wouldn’t he?
European data continued to be poor, but labour markets also held up well with unemployment declining to 7.8% in the Eurozone.
The International Monetary Fund’s (IMF) chief economist, Gita Gopinath has described the global economy as being at a ‘delicate moment, with many downside risks’ although she does not predict a global recession.
Despite the apparent gloom and uncertainty, global stock markets continued their strong Q1 performance and the predominantly international FTSE 100 benefitted from this, rising from its low point of 6747 on January 28 to over 7400 this month. We are now at the ten year anniversary of a bull run that started back in 2009. History rhymes but does not necessarily repeat. It is interesting to note that more and more market commentators are suggesting that various feeble signs of not-so-bad economic data are actually the green shoots of the next mini upswing in this drawn out cycle. However, the longer the cycle lasts, the higher the nervousness that the end is near and the more pronounced the sell-off episodes become.
MSCI Europe ex UK
S+P 500 (USA)
MSCI All countries
MSCI Emerging mkts
|Bonds||FTSE Gilts all stocks
£ Corporate bonds
|Commodities||Brent Crude Oil
LBMA Spot Gold
|Cash||LIBOR 3 month £||0.2||2.9|
|Property||UK Commercial Prop||0.3||2.9|
Data sourced from Morningstar correct as at 31/3/19
For the coming months, however, there are many indications that the economy and markets are likely to follow a similar path to the various previous episodes and trade in calmer and more positive terms than what we experienced over the second half of 2018.
When managing your portfolio, Brexit isn’t a catalyst for our discipline, we’ve always been diligent. Clients who have followed our investment strategies over time have been compensated for short-term discomfort during periods of volatility, by positive returns over the long-term. Active tactical asset allocation and sensible diversification remains one of our best tools against uncertainty so we will continue to blend portfolios accordingly.
Economic data source – PortfolioMetrix
Happy Mother's Day!
Across the country, sons and daughters will be avidly arranging that special present and card for mums, ahead of Mothering Sunday this weekend. Having a baby and bringing up children is a major event in anyone’s life and is a responsibility that requires love, devotion, patience and great deal of financial resource to name but a few!
As well as the emotional and pastoral support, a detailed financial plan for their child’s future is an important tool for any mother or parent. This is not just for the child’s future, but also to mitigate any negative financial impacts that having a child can have on their own personal finances. Rightly or wrongly, social norms continue to dictate that women often become the primary carer when a couple has children. One of the ramifications of this is that women can suffer a ‘motherhood penalty', which can result in them having less money than their male counterparts.
Here are a few financial planning ideas that may help to ease the financial burden. They can apply to any parent, regardless of gender, but they might be particularly pertinent to a mother looking to plan her own finances and those of her family.
If a mum decides to take a career break to look after her children, she needs to be aware that, unless she claims child benefit, she could end up missing out on National Insurance (NI) credits. Failing to register for NI credits could mean they do not qualify for a full state pension, which requires 35 years of NI credits. Similarly, women's pension savings can end up being smaller than their male counterparts due to a career break, so it is important to start as early as possible and try to continue to contribute to a pension even if they do not have a regular income.
Career breaks can also make mothers more likely to find themselves without a protection product in place, such as life assurance, critical illness or income protection, as these benefits are often included as part of a workplace package. If a mother is fully engaged in bringing up young children and the father is working full time to provide for the family (a little stereotypical admittedly), and she is struck down by a serious illness, or sadly passes away, it can be very difficult and financially disastrous for the working partner to juggle both their career and family duties. For single parents, whose children are totally dependent on their income, having protection in place is even more crucial.
UK families are becoming increasingly complex and this can result in it becoming harder to ensure that wealth is passed down to the intended beneficiaries. As an example, if a mother has young children and has money that she would like specifically to earmark for her children's education, it might be worth considering placing the money in trust. Doing so can help to shield the funds from misuse if she were to die or divorce, and ensure that the money is used as she originally intended. If she were to die without leaving a will, the money would go directly to her husband who might then decide to use the money differently.
Common sense if you want your children to have the best start in life. There are a range of tax efficient savings products available such as Junior ISAs and pensions. Alternatively, a parent could simply maximise their own ISA allowance (£20,000) before they invest in a Junior ISA. Contributions made to an ISA in a parent's name can still be used to fund the child's future, but the parent would retain control over when and how the money is spent.
It may seem strange to mention pensions for children but starting up a pension for your child will help set them up for a wealthier retirement, is very tax efficient and helps introduce them to the concept of long-term saving. You can save from £20 per month up to £2,880 per year into a pension for someone under 18, and it is estimated that over 60,000 children now have one, according to figures from HMRC. Of course it’s worth bearing in mind that under current legislation, the money cannot be accessed until age 55.
In summary, where mums are the main carer, they are just as important as the main earner!
Market commentary and other news March 2019
Equity markets have generally continued to push higher this month as comments from Federal Reserve Chair Jerome Powell, that US interest rates were around neutral, helped sentiment. More importantly, there has been no news to disrupt expectations that the US and China are edging slowly to a resolution of their trade war. Last week China passed a new foreign investment law in a move widely seen as an effort to facilitate US trade talks. The measure is seen as a possible olive branch to the US as negotiators from both countries work to resolve their bruising trade dispute. We hope this general optimism will continue to be reflected in the markets.
Brexit has, unsurprisingly, completely dominated the headlines lately resulting in a fair bit of volatility in sterling. My favourite analogy of the week came from Martyn Boyers the Chief Executive of Grimsby Fish Market who, on the BBC news, described the current political scene as ‘constitutional constipation’ - will a release come any time soon I wonder?
The Chancellor’s Spring Statement was completely overshadowed by other events, but we did learn about continued improvements to the public finances such that borrowing is likely to be only 1.1% of GDP in this financial year. The Office for Budget Responsibility cut their growth forecast for 2019 from 1.6% to 1.2% - this level assumes a “non-disruptive Brexit”. They expect the economy to grow by 1.4% in 2020; this would leave the economy 2.7% smaller than expected back in 2016 before the referendum. Inflation is ‘stable’ at 1.9% with rising food and alcohol prices offset by slower price rises in clothing and footwear (source ONS).
In summary, commentators remain relatively cautious and of the view that market levels are ahead of the economic fundamentals. Worries over Brexit appear not to be having too much of an impact on markets, whilst the soothing words from the central banks continue to underpin sentiment, despite the economic data showing signs of weakness. As we wait in suspense for the outcome of Brexit, the phrase ‘a week is a long time in politics’ has never been more significant.
Money and Pensions Service named as the new, single, financial guidance body
This comes after Pension Wise, The Money Advice Service and the Pensions Advisory Service were merged into a single financial guidance body, without a name, at the start of this year under the leadership of chief executive John Govett.
With the new name for the body, industry experts have been quick to point out that the government has avoided its repeated past mistake of labelling a guidance service as ‘advice’.
This was the case with The Pensions Advisory Service (TPAS) and the Money Advice Service (MAS).
The aim is to end the irritation around false expectations due to the powerful word ‘ advice’ being present, yet not available. I welcome these changes and hope that there are early engagements with the industry. Of course, if you require personal financial advice then you should seek the services of a qualified independent financial advisor.
Minimum auto-enrolment contributions will rise to a total of 8%
Auto enrolment is giving more savers the chance of a decent retirement as the latest stage of the planned increases to monthly contributions comes into force on 6 April 2019.
This will typically be made up of 3% from employers and 5% from employees. Current minimum contributions are 5% (2% from employers and 3% from employees).
Auto-enrolment has been incredibly successful since it launched in 2012, introducing almost 10 million more people to pension saving.
Regretfully, some parts of the media have put a negative spin on this citing ‘lower take-home pay’ in wage packets, or an ‘extra cost’. What nonsense! This is another step in the right direction and a smart time to introduce the increase as it will coincide with increases in the minimum wage, higher income tax allowances and a common time for pay rises.
Nobody is losing out, your money hasn’t disappeared, it’s just been set aside in a different jam-jar for the future.
With the country’s population living longer, retirement for many is likely to last for 20-30 years. For decades, Governments have worked on the assumption that there are more under 50s than over 50s and it is the ‘younger’ working population that pay the taxes and National Insurance to fund the health services and pensions for today’s ‘elderly’. However, that pendulum is about to swing the other way which is going to make the challenge of funding retirement and the NHS in older age even more immense. This funding responsibility is going to start shifting to those who are older. Saving and investment decisions for retirement are going to be crucial and people in their 30s, 40s and 50s must expect to save more for their own retirement and for it to be the everyday norm.
Market commentary February 2019
And a good January doesn't yet make a good year. However, the recent market recovery has been welcomed by investors and institutions alike. After one of the worst Decembers for global investors since the Great Depression, followed by the best January since 1987, the first part of February has started not too badly for investors. While up overall, there has been a little bit of stuttering on some days which was quickly blamed on Trump and Brexit, which admittedly are easy targets – but they have been all along.
In the UK, GDP growth slowed to 1.4% between 2017 and 2018, the weakest it has been since 2009, according to the latest ONS statistics.
The 0.2% growth recorded in Q4 is a significant drop from the 0.6% seen in Q3 and is also below the latest forecasts produced by the Bank of England.
Construction, production and services output fell in December, the first time that there has been such a broad-based fall in monthly output since September 2012.
The slowdown had been widely expected, and the magnitude was in line with economists' forecasts. But the economy actually contracted by 0.4% in December, against expectations of little or no growth. The services sector, so long the mainstay of the UK economy, grew 0.4% in the quarter, providing almost all the growth. By contrast manufacturing output fell 0.9%. But even the services sector fell in December, though the monthly data is notoriously volatile and it's usually unwise to read too much into one month's figures.
Last month I used 'Spaghetti Junction' as my analogy about what happens next. This time I would say that we, the UK, are still at the proverbial 'cross-roads', on a foggy day, and this is largely because of Brexit and the never-ending litany of highly depressing political squabbling.
That said, the stance adopted by the central banks in the US, the UK and Europe since the beginning of the year, together with more positive business and consumer sentiment levels than backward looking economic report news flow would suggest, has increased some commentators' conviction that the direction of stock markets over the coming months is far more likely to be up rather than down as in 2018 – notwithstanding the odd downward draft of volatility that will intersperse that general trend.
We mustn't get carried away though, we are still in Brexit limbo-land and it's hardly surprising that the economy isn't firing on all cylinders. Whichever way you look at it, it's clear this detriment reaches right across the UK economy.
For those of you that subscribe to the Times or Sunday Times newspapers, look out for Jonathan's entry in the 2019 Guide to the UK's Top-Rated Financial Advisers which is due to appear this weekend on 23 and 24 February. This is an independent survey run by VouchedFor which invites consumer reviews and testimonials in order to rate financial advice firms and advisers. We are delighted with our score of 4.9 out of 5 and would like to thank clients that have posted a comment.
Disclaimer: As ever, please do not take this as specific advice to buy or sell into any particular fund or market theme. The value of investments will fluctuate up and down and you may not get back all that has been invested.
Well done Bank staff
Bank staff across all Britain's main banks have been active in saving vulnerable elderly customers from scams.
An average of nearly £9,000 per case was prevented from being stolen owing to a rapid response scheme.
Bank staff have been trained to spot when customers appear to have been targeted by fraudsters pushing scams such as unnecessary home improvements.
Scams totalling an estimated £38m were prevented last year, according to trade body UK Finance.
But consumer groups say risks of complex scams remain.
Cases include that of a customer at a branch of TSB in Stowmarket, Suffolk, who tried to withdraw £19,000.
Observant staff noticed the customer was agitated and quietly asked some more questions in a private room. It emerged that the potential victim had believed they needed to pay an urgent tax bill or be fined £50,000 or sent to jail.
The fraudster had called claiming to be an "agent" from HM Revenue and Customs (HMRC) and even suggested the victim make deposits to Bitcoin machines located in newsagents as a way of paying the outstanding bill.
No money was lost, owing to the bank staff stepping in.
Under the protocol, introduced in October 2016, staff are trained to spot the signs of a scam and can request an immediate police response. A total of 231 arrests and 4,240 emergency calls were made through the industry-wide initiative last year.
The average age of banks' customers helped by the scheme was 71. The scheme has prevented £48m of fraud and led to 408 arrests since it was introduced.
Unfortunately the fraudsters continue to exploit the vulnerable and look for ever-increasing and sophisticated ways to catch out the unsuspecting. Cold-calling about pensions is now banned in the UK, but our advice, as ever, is to be very careful who you give financial information to; don't accept unexpected random phone calls without challenging their authenticity. If you are not sure, refer to a trusted friend or relative or verify the caller's number independently. Beware, fraudsters can be very persuasive and some fake websites may appear to be legitimate.
The curse of the mother in law, or 'the dog ate my homework'
We've all been there. Having missed an important deadline, what plausible excuse can I come with which will be believed? Those of you who are burning the midnight oil in an attempt to submit your tax return before HMRC's deadline on January 31st may already be thinking along these lines.
Unfortunately this probably won't wash with the Revenue and it doesn't pay to be late.
HMRC has just released some of the lamest excuses it has received over recent years from late and over ambitious filers:
You have been warned!
Market commentary January 2019
The tide well and truly went out in December for the markets and there was no Santa rally, topping off what turned out to be a challenging 2018. Statistics demonstrate that 90% of asset classes had lost money; even in the Financial Crisis of 2008, only about 68% of assets showed negative returns.
The extent of the negative returns across the majority of asset classes is illustrated in the chart below.
Sources: Deutsche Bank; Bloomberg Finance LP; GFD. Note: Returns are in US dollars. Data for 2018 are as of mid-November.
January though, has started with a fragile recovery with the FTSE 100 for example returning to levels last seen at the end of November. Amongst all the on-going political noise, trade relations between the US and China were still firmly in focus after the Chinese Commerce Industry issued a statement saying that the "extensive, deep and detailed" three-day talks between the two countries had "laid the foundations" for their dispute to be resolved. This seems to have impacted positively on global markets. There is still some way to go but China has agreed to purchase more US goods and progress has been made in relation to intellectual property rights, but the full picture has yet to be revealed.
Closer to home, growth in the UK's economy slowed in the 3 months to November, held back by the manufacturing sector, pharmaceuticals and retail sales in the high street. Inflation has fallen to 2.1% in December, pushed down by falling fuel prices. The figure is close to the Bank of England's target of 2% meaning that it is looking less likely that interest rates will rise in the near future.
Significant Brexit headwinds and all the associated heightened uncertainties are putting businesses off investing and is damaging consumer confidence. Some analysts are of the opinion that overseas demand is faltering, from Apple to Jaguar Land Rover, they may have a point. It's a timely reminder that whatever arrangements, if any, are in place by the end of March, we may not be able to rely on our economic allies overseas to keep our factories and workshops thriving. On a more positive note, housebuilding activity grew again and the ONS said the UK economy was returning to moderate growth rates after some volatility earlier last year, in part due to the inclement weather.
After the parliamentary vote on Brexit, the country is in the middle of 'spaghetti junction' and the markets are waiting to see what happens next and in which direction we go. Over the next few months, as the Brexit story unfolds and uncertainty reaches a crescendo, we expect further bouts of volatility. In Europe, the cooling economic conditions seem to be driven by the decline in global demand, the car industry's woes and social unrest in France. To some degree, what happens after that depends on Brexit. Observers note that the consensus against a 'no deal crash Brexit' appears to be the only one enjoying a stable and growing majority in Britain's parliament. We do envisage that at some point the pent-up investment and consumer demand will be released.
Our portfolios remain well diversified, spreading investment risk in line with our clients' attitude to risk in consideration of Brexit uncertainties. We have commented before about the importance of sitting tight in these challenging times. Volatility can be a powerful force for good because these wild swings work both ways. For example, being out of the market for only the best 5 days during the past 20 years would have led to a 23% lower return. Missing the best 10 days would have reduced returns by a staggering 40%. So, while volatility may be stressful, experience shows it is better to stay invested in bumpy times. Timing the market with such precision is impossible.
Sources: Brewin Dolphin, BBC, ONS
The tax trap that's catching out thousands of new mums
I see that the Sunday Times is reporting that "tens of thousands" of women are losing years of National Insurance credits by not registering for child benefit - even if they do not need it - when they have a child. The reason for this is that some people may have to pay a tax charge if their (or their partner's) income is over £50,000 per annum so they don't bother to even register. However, this could be a costly mistake leading to the loss of national insurance credits that would otherwise have gone towards the State Pension. This is turn affects an individual's eligibility to the full State Pension because it will take longer to build up the National Insurance record to the required 35 years.
Far more women are affected than men because they make up the majority of stay-at-home parents. Once parents realise they should be registered, they can claim just three months of backdated credits. Mumsnet founder Justine Roberts said: "Unless you have the natural inclinations of a tax lawyer, it is all too easy to miss. Women already face a pensions gender gap - making the rules around child benefit clearer would help to redress the balance."
Child benefit is available if you're responsible for one or more children under 16 (or under 20 if they stay in approved education or training).
Pensioner numbers double during Her Majesty's 60 year reign
The number of pensioners has doubled in the 60 years since the Queen took the throne and 44 times as many people reach age 100.
Figures from the Department for Work and Pensions also showed people, on average, are living nearly a decade longer. There are 5.6 million more pensioners today than in 1952, rising from 6.8 million to 12.4 million.
The number of those reaching the grand old age of 100, our centenarians, has increased by 13,120, since 1952. The Queen has sent about 110,000 telegrams and messages to centenarians during her reign.
Pensions minister Steve Webb said: "In the past 60 years we have seen man land on the moon, the fall of the Berlin Wall and the rise of the Internet and digital technology. Pensioners now make up 20% of the population and make a huge contribution to society." However, Mr Webb said the state pension age had not kept up with the changes and the current pension has trapped millions of people in "means-testing maw" for decades.
The government is set to bring forward the state pension age to 67 by 2028 and create a single-tier pension, estimated to be about £140 per week.
The DWP said a boy born in 1952 was expected to live to 78 and a girl to 83. A boy born in 2012 is expected to live to 91 and a girl to 94.
And while the Queen and the Duke of Edinburgh continue their busy schedule of Royal engagements, very few people are reported as employed at aged 86 or over.
About 350,000 women aged 65 or over are in work today and some 540,000 men aged 65 or over
Should you delay taking your state pension?
This year, 330,000 people are projected by the Department of Work and Pensions (DWP) to qualify for their state pension in the UK. For many, particularly women, it cannot come soon enough. The equalisation of the state pension age (age 65 for men and women by November 2018) means that many women in their 60s are waiting years for their pensions. Only 80,000 women will get their pension this year compared to 250,000 men. However, there are surprisingly large numbers of people of pension age who choose not to claim their state pension when it becomes due, so that they can draw a bigger pension later.
If you are in good health and expect to live for long enough to recoup the difference, then this is a piece of retirement planning that may be of interest to you. Those of you who reached retirement age before April 2016 are the big winners.
The state pension increases by 1 per cent for every five weeks the pension is deferred. This works out at 10.4 per cent for a full year. By doing so, someone entitled to the full basic state pension before April 2016 of £125.95 per week (or £6,549.40 per year) can increase their pension by £681 per year. Alternatively, they could get a one-off lump sum payment by deferring for at least 12 months in a row. This will include interest of 2 per cent above the Bank of England base rate — currently 0.75 per cent. Even if the pension is deferred for several years, the lump sum, which is taxable as income, will not push the pensioner into a higher rate of tax. A basic rate taxpayer will pay this rate even if the lump sum takes their income into the higher rate tax bracket. People qualifying for the state pension after April 2016 get a lower rate of annual increase for deferment of 5.8 per cent, but this is on a larger state pension.
Newly qualifying pensioners can get up to £164.35 a week — up to £8,546 per year — depending upon their history of national insurance contributions. Those qualifying for the full amount who defer for one year will see their annual state pension increase to £173.89 per week, or £9,041.88 per year — an extra £493.
What is the payback period? If you reached state pension age before April 6th 2016, deferring your state pension for a year only really pays off after around nine or 10 years of receiving your pension. If you reached state pension age after April 6th 2016, the payback period is around 17 years. This is a significant risk. The DWP says that the calculations are made more complex because the extra pension you earn from deferring is uprated each April in a different way from the rest of the state pension. Statistically speaking, the risk of not getting your money back and more, is lowest for those living in London and the Southeast, and the highest in some areas of Scotland such as Glasgow. The DWP says about 1.1m people are getting extra state pension as a result of having deferred their entitlement — about 8 per cent of state pensioners. This is not surprising as 1.5m people work beyond state pension age.
Who should consider deferring? You should only consider deferring the state pension if you are in good health, and do not need the money from the state pension now. It is most attractive for people who are still working or who have retirement income from a company or private pension which means the state pension would take them into a higher tax band. If your pension is in flexi-access you can turn the income off or on accordingly. The 21 per cent growth in self-employment since 2000 has been fuelled by the over-50s, who account for 43 per cent of the people who start their own businesses, according to the Office for National Statistics. By the age of 70, almost 60 per cent of those still in work are self-employed.
You should think carefully before deferring if you are receiving benefits, such as carer's allowance, income support or widow's allowance as you can't get extra state pension if you received these benefits. Deferring can also affect how much you can get in benefits.
What else do I need to do? Four months before you reach state pension age, you should receive a letter and a booklet from the DWP telling you how to claim. That is the time to do the maths and seek advice about whether deferment is worth considering for your own personal circumstances. Speak to an independent pension adviser. The over-50s can also make use of the government's free Pension Wise service although this is guidance rather than advice and can be somewhat generic. If you want to defer, you don't have to do anything. Your pension will automatically be deferred until you claim it.
Worried? You should meet Fred.
When markets are misbehaving, as they currently are, it can be a useful exercise to take a step back and remind ourselves of the bigger picture. While the headlines will always focus on the issue of the moment; what matters more to us than the exact outcome of Brexit or Donald Trump's next tweet is the quality of the assets we own and how we deal with the inevitable tough periods. To illustrate how we think about this, let's meet Fred.
(For those readers just looking for the conclusions, you can jump ahead to our checklist)
Fred retired in October 2017 after 50 years of working. A decade before his retirement, he had £100,000 in savings and after much deliberation with his adviser, he decided to invest into the stock market. Unfortunately for Fred, his timing was not the best as he chose to invest his money on 12th October 2007. This was the day global markets began falling, and the start of what would become the global financial crisis; and thus, one of the worst days to have bought shares in living memory!
A year later, the papers were declaring “Market crash shakes world” and Fred's portfolio was down a third to just under £67,000. Understandably, Fred was worried and rang up his adviser to ask what to do. Fortunately, for Fred, he had a good adviser who reassured him that he owned good quality stocks and that he should stick to his original plan of investing for the long term and his retirement. Fred agreed to leave his portfolio invested and the adviser promised to keep a close eye on his holdings.
So how did Fred do in end? Well when Fred liquidated his portfolio as planned in October 2017, he was very glad that he hadn't sold nine years previous crystallising that loss of £33,000. When he came to sell his shares, they returned approximately 144% equivalent to an annual growth rate of 9.3%. Not bad for an unfortunate piece of timing. Even after Fred had paid his fees, he would have walked away with comfortably more than £200,000.
So did Fred get lucky or was his patience prudent? Let's look at how Fred would have fared with his strategy in the other big stock market declines of the last 50 years:
Now Fred's strategy of patience isn't perfect by itself. The strategy only broke even, for example, when investors were hit twice within a decade - with the Dot Com bubble bursting and the global financial crisis unfolding some seven years later. It does, however, have a fairly impressive track record when you think that these were the four worst points to have invested in stock markets over the last 50 years. If you then supplement Fred's patience with a level headed investment manager who avoids pockets of extreme overvaluation, as we saw in technology stocks in 1999, then you have an investment strategy that has a fighting chance in all four of these scenarios of producing good returns.
Well, we know that patient investors who own sensible, diverse assets and who have managers they trust, have come through thick and thin before. What we don't know (and we'll let you in on an industry secret, nobody really does for sure) is whether the current turmoil will turn out to be another 2008 or just a natural correction in this bull market.
So if you are concerned then go through our checklist below:
Are you comfortable that you own a diverse set of quality assets?
Do you trust your investment adviser or manager and understand the advice they are giving you?
Do you have time to wait through a possible downturn?*
*How long do I need?
All investments that experience capital value volatility need investors to have enough time to allow the highs and the lows to average out and so have a good chance of achieving a positive return. While there are no hard and fast rules for how long is enough for traditional portfolios of shares and bonds, below are the minimum holding periods we recommend for clients. It is of course important to remember that nothing that hinges on the future as much as investing does, can ever be guaranteed and so is just one aspect of the process of working out whether an investment is right for you.
If the answer to each of the three questions is yes, then you can follow Fred's lead and look past whatever the current noise is.
If you are not sure then perhaps you should speak to your adviser...
RISK WARNING: The value of investments and the income derived from them may go down as well as up and you may not receive back all the money which you invested. Any information relating to past performance of an investment service is not a guide to future performance. Fluctuations in the rate of exchange may have an adverse effect on the value, price or income of non-sterling denominated investments.
Source: Robert Tannahill, Ravenscroft Group
Budget 2018 statement, Monday 29 October
The Chancellor has laid out details signalling the end to austerity in a statement delivered between key meetings in the Brexit negotiations. There's also good news if you have an unmaintained pot-hole in your road.
Despite many rumours surrounding pensions before the budget, mercifully, there were no changes materially impacting individual pension planning. There were however several items affecting the overall pensions and investment landscape, summarised below.
Reassuringly, there are no changes to pension annual allowances (AA). The standard AA remains at £40,000, the money purchase AA stays at £4,000 (with no carry forward) and there are no changes to the high income AA taper rules.
Other main points for pensions and savings:
Stay vigilant but calm
Global equity markets had a meaningful wobble last week. At Friday's close, the FTSE 100 was down 6.7% and the MSCI All Country World Index was down 6.4% (it was down 7.8% on Thursday's close). But we're reluctant to read too much into this particular bout of volatility as it didn't obviously result from either economic or geopolitical news. We have had several pullbacks in the past 10 years since the financial crisis - all have been in some way justifiable and have left investors feeling bruised and nervous. But markets by their nature settle down to find an equilibrium where the positive and negative forces are back in balance, and this normally happens quite quickly. Therefore, it is important not to lose the medium-term perspective.
Most commentators remained somewhat baffled that this time it had been positively surprising US economic data that appeared to have caused the trend reversal. In quarter two, the US economy grew strongly at an annualised rate of 4.2%. Consequentially, the search for other culprits was in full swing all week. Slowing demand from China, Trump's path towards an exploding US budget deficit – which makes even Italy look fiscally responsible – as well as the looming trade wars with China were all put forward as reasons why the 2018 US equity market rally had suddenly hit the buffers.
Unfortunately, as is usually the case, the stock market downdraft is highly contagious and so stock markets around the world were caught in the spiral. Given the other industrialised regions around the world are still operating far earlier in the economic cycle with still far lower rates of interest, bond yields and equity valuations, the $1million question is whether this sell-off will herald a change in market leadership away from the US, where growth may still be strong but also turning over.
Although unusual, falls like this do happen from time to time. In fact, this risk is largely the reason that clients are rewarded over the long-term for holding equities and investing in markets more generally. We're keeping a close eye on markets and, although we don't have a crystal ball, we don't believe this is the start of a wider market sell-off. After all, the initial reason for the sell-off was actually good economic news, not bad (it's true the US/China trade dispute rumbles on in the background, but there has been no specific new news this month).
Whilst we can't control what markets do in the short-term, we can control what makes it into client portfolios, and in this respect, we are satisfied with what clients are invested in, both from an asset class and from a fund manager perspective. Pension planning, by its very nature is long term and our aim is to promote growth to support an income. Our portfolios are not completely immune from market falls, but they are very diversified which has certainly helped.
Sources: Fidelity, Brewin Dolphin, J P Morgan, PortfolioMetrix
The South Coast of England dominates the top places to live in.
West Sussex is still the best place to retire offering pensioners the highest quality of life, reveals Prudential's 2018 Retirement Quality of Life Index. For a second year running the county has been awarded the top spot of any in England and Wales, beating Dorset which came in second position, East Sussex in third, the Isle of Wight in fourth with Norfolk in fifth.
My personal favourite, Devon, comes only sixth which I find hard to believe – we have two fantastic coastlines to choose from, two moorland National Parks, Plymouth and Exeter - two of Britain's most historic and vibrant cities, stunning rural scenery, pasties, cider, cream teas, what's not to like?
Actually, the analysis is based upon other key indicators of happiness and comfort such as access to healthcare, crime levels, pensioner migrants, pension income levels and how proactive the population is in pursuing a healthy lifestyle. The pasties and cream teas will be a negative factor then!
The West Midlands was ranked as one of the safer counties for retirees boasting the lowest crime rate per 1000 people, followed by North Yorkshire and Dyfed.
Retirees in Bedfordshire are now the wealthiest, with the best score for pensioner income, knocking Surrey off the top spot and followed by Essex and Hertfordshire.
If nice weather makes you happy, then Essex for the second year running, is the county boasting the best weather considering the annual hours of sunshine, days of rainfall and days of frost, followed by Dorset and Kent.
Over 65's in Herefordshire can look forward to their retirement in the knowledge that they were the best performing county for disability-free life expectancy with people aged 65 years old in the county expected to live 13 years on average, followed by Rutland (12.6 years) and Worcestershire (12.4 years). Those in Gwynedd, on the other hand, enjoy the best score for the number of healthcare workers per 1,000 people, followed by Shropshire and Bristol.
Dorset, for the second year running, was the county with the highest proportion of population over 65 years - accounting for over a quarter (28%) of the county's residents. In terms of the net flow (those moving in and out of a county) of over 65-year olds, Devon has the highest retention rate. Well I suppose it is a long way to go to get to anywhere else.
There are 12 million over 65s in England and Wales up by 1.4 million in 2017. Choosing where to live in retirement is an important decision and one that is often made many years beforehand as an aspiration or goal. To get the most choice when the time comes to give up work, people will benefit from saving as much as they can into pension, as early as they can in their working lives. Before taking any decisions on how to turn pension savings into an income, retirees should consider having a conversation with a professional financial adviser.
Budget day brought forward
This year's Budget is to be earlier than usual to avoid clashing with the final stage of Brexit negotiations in November.
The date of the Budget, Monday 29 October, also fits in with ministers' availability and official data releases, a Treasury spokesman said.
The Budget will also be a week after a high profile Brussels Brexit summit. Mr Hammond gave the date in a tweet, saying the government's approach to the economy was "getting debt falling".
The event will be three weeks earlier than last year and will come after a meeting of EU leaders on 18 October in Brussels, described by European Council President Donald Tusk as the "moment of truth" for reaching a deal.
Mr Tusk has also said that "if the conditions are there" an additional summit would be held in November to "formalise" a Brexit deal.
Source: BBC News
The French flag and why you should save for your retirement
Throughout our working lives, most people are typically involved in 3 basic activities. We are either working, enjoying leisure time, or are simply asleep (this includes time spent sat in a traffic jam, which could be all three!)
If life was represented by the French tricolour, the blue segment, work, generates the income for the other two sectors, white and red.
Leisure time and sleep time needs to be financed. Even during the hours of slumber, most of us are still consuming by using electricity and all the other household running costs etc. We all understand the importance of 'earning a living' which determines our 'standard of living'.
At retirement, work stops and is replaced by more leisure time (and perhaps some more sleeping), and therefore more even more opportunity to spend and consume. Retirees tell me that every day is like the weekend!
In tricolour terms the impact of the change is very apparent:
As you can see, retirement is a drain on personal resources, especially if you want to make the most of your new found free time.
If you have aspirations to retire at say, age 60, and don't have a personal pension or source of retirement income, then you will have a long wait until your state pension kicks in to replenish your work place income.
The alternative, of course, is to make sure you have stashed away enough of your hard earned income throughout your working life, by way of savings in a pension for example – this is a sensible way to plan to maintain your lifestyle in your twilight years.
Research the Office for National Statistics (ONS) suggests that there are still lessons to be learned about pensions. Auto enrolment has been hailed a success with over nine million people now enrolled in a workplace pension scheme. However, insights from the recently published ONS Wealth and Assets survey show much more needs to be done if we're to crack the retirement saving challenge, with figures pointing to a huge lack of awareness around auto enrolment and pension saving in general.
According to the survey, only 63% of eligible employees were aware they had been auto enrolled into a workplace pension; of those employees who said they had not been auto enrolled, 91% of them actually had been! Not surprisingly, only 42% of non-retired respondents said they knew enough about pensions to make decisions around saving for retirement. The research showed that people had different views on what they thought was the safest way to save for retirement. Almost one third would choose property investments as their preferred 'safe' way to plan for their future.
At a basic level many people don't understand how pension schemes work. For instance, they don't know how pension tax relief, employer contributions and appropriate investment strategies can boost the amount being saved into a pension over time. Addressing these issues could help people get over much of their mistrust about pensions.
In addition, as auto enrolment minimum contribution levels go up over time, people will still need to save much more than these minimum levels if they want to generate a big enough pension to give them a decent income in retirement.
On a more individual level, financial advisers can also help people get past the barriers to starting pension saving. The ONS statistics show the reasons people give for not contributing to a pension scheme. These include: a lack of trust around pension schemes, affordability, a lack of knowledge.
Financial advisers can help challenge many of the myths around these areas and help people feel more comfortable making retirement decisions. Where people prefer to use different savings vehicles – for instance property or ISAs - advisers can play an important role in making sure people understand how these work to see if that product truly meets their needs.
Statistics like these highlight the many challenges people face when it comes to dealing with pensions and also show the importance of how a good financial adviser can really make a difference and help people plan for their retirement.
C'est la vie
Source: ONS Wealth and Assets Survey August 2018; DWP Auto Enrolment Review 2017
Lifetime allowance: Three types of at-risk employee and how to help
LTA tax collected in 2016/17 hit £110m
Vicky McKeever of Professional Adviser writes:
Pension savers breaching the lifetime allowance (LTA) today are shelling out 10 times as much tax as they did in 2006 when the policy was first introduced. Here, Wealth at Work outlines three types of employee at risk of breaking the rules...
The latest figures found that some £110m in tax was collected from individuals exceeding the allowance in 2016/17, up from less than £10m in 2006. Wealth at Work, a provider of financial education and guidance in the workplace, said taxpayers breaching the LTA typically fell into one of three categories.
In the first instance, the business said many employees may be "blissfully unaware" their pension pot is valued at or above the current LTA limit of £1.03m. It said this could particularly affect those who never check their pension value, or have not done so for some time. In fact, it pointed out many employees in defined benefit (DB) pension schemes are unaware their pot is valued at 20 times their annual pension for LTA purposes. An annual pension of £30,000 would, therefore, have a value of £600,000.
If they then decided to take advantage of pension freedoms and transfer said DB scheme, the transfer value could be as high as 40 times the annual pension. In this example, an annual pension of £30,000 could have a transfer value of £1.2m and therefore exceed the LTA, it explained.
Those who mistakenly think they are a long way off from breaching the LTA was a second scenario put forward by the firm. It said this was a danger, in particular, for employees making healthy contributions into their scheme and perhaps receiving matching contributions. Positive pension fund growth, as well as a pay rise may easily push them over the LTA before they knew it, the business warned.
For example, someone aged 45 could have a pension fund of £400,000 and a salary of £50,000, saving 5% of their salary into their pension, rising by 3% per annum. If they then received employer contributions of 10%, rising by 3% per annum, it is possible for their pension fund to reach £1,670,000 by the time they retire at 65.
Thirdly, employees who have taken protection measures and opted out of their workplace pension scheme to safeguard their savings from an LTA charge could still be at risk due to auto-enrolment regulations stipulating workers must be re-enrolled every three years.
One month's contributions could invalidate a previously applied for protection without employees realising, Wealth at Work said.
To avoid or reduce the impact of the LTA, the adviser suggested employees should reassess their current situation, including their pension pot valuation and how much has been accumulated via multiple pots. Employees could also consider alternative tax-efficient savings vehicles, it said, such as an ISA or workplace share schemes.
Director Jonathan Watts-Lay said: "Reaching the LTA could be closer than many employees think. For example, they may have a number of pension schemes that when combined with their current pension provision, could exceed the allowance. The tax implications could be drastic and could lead to potentially many being hit with unexpected and sometimes unnecessary tax bills."
Source: Article written by Vicky McKeever of Professional Adviser and reproduced here by their kind permission.
Don't Be Scammed!
Very pleased to see that the Financial Conduct authority (FCA), has launched a new Scamsmart campaign with The Pensions Regulator (TPR) to raise awareness of pension scams and urging the public to be cautious when approached about their pension. Scams are increasingly sophisticated and pension savers can be targeted by highly sophisticated scammers who steal on average, £91,000 per scam. Victims can lose their life savings and be left with limited income when nearing retirement.
The group most at risk is pension holders aged 45-65. New research shows that a third do not know how to check whether they are speaking with a legitimate pensions provider or adviser. Research has also revealed that 1 in 8 pension holders aged 45-65 are likely to trust an offer of a 'free pension review' – a tactic frequently used by scammers to lure pension savers into a scam.
The FCA reviews and assesses all reports received about unauthorised pension activities which are very often linked to these types of pension scams. This year the Unauthorised Business Department commenced proceedings against 2 unregulated pension introducers involved in the transfer of at least £86 million in pension assets from over 2000 consumers. The FCA is seeking injunctions, declarations and restitution orders to prevent further breaches in schemes which were unlawfully promoted to the public using false, misleading and deceptive statements.
The new campaign urges consumers to be ScamSmart and to check they are dealing with an authorised firm if they are considering changing their pension arrangements.
The campaign launched on 14 August 2018 with TV, radio and online advertising. See https://www.fca.org.uk/scamsmart/how-avoid-investment-scams for further help and guidance.
Our message: Fraudsters can be articulate and financially knowledgeable so make sure you know who you are dealing with. Never give out your bank details, PIN or password to anyone that you don't know. If the deal sounds too good to be true, it probably is! Take time out to refer to a trusted friend or relative before making important financial decisions. If you are suspicious, please report it. You can check the credentials of an individual adviser or adviser firm on the FCA's register - https://register.fca.org.uk/
The silly season is in full swing and is commonly referred to as the slow news season. This is when news stories slow down and many news editors take their annual holidays. Journalists are looking around for newsworthy stories and trivial events that wouldn't normally attract any coverage at all, but they suddenly become hot topics, even front-page news, for want of an alternative.
Now however, one of Britain's great institutions seems to be under threat. Thanks to the seemingly endless machinations of Brexit, politicians, and the efforts of President Trump to offend everyone except a small group of former steel workers in Ohio, the silly season has come under intense pressure from actual news. With the notable exception of a story about the possibility of Great White Sharks patrolling the waters off Cornwall “in the next 30 years” the press has been parched of genuinely silly stories in recent weeks.
The financial press is no different and I see that rumours are circulating ahead of the autumn budget that flat rate tax-relief on pensions may be back on the agenda. It is probably more than two years since the subject of flat-rate tax relief on pension contributions seriously reared its head, but the Treasury Select Committee has put the topic very much back on the table in its report on Household Finances published on 26 July.
A change to tax relief is portrayed as a means of incentivising the majority to save for retirement, rather than just higher and additional rate taxpayers. With 52% of all relief paid going to individuals earning more than £50,000, it is difficult to challenge the thinking behind a fairer distribution. From the Government's point of view, a change to say, a flat rate of 25% for all, would raise another £4bn a year in revenue for the Treasury. The practicalities of delivering any changes may cause headaches for pension scheme administrators especially where employers make contributions, however I do not believe that they are insurmountable.
With the rumoured flat-rate relief back on the radar, any higher or additional rate tax-payers who are contemplating making further ad-hoc contributions to their pension pots, may wish to think about the possibility of missing out on higher rate tax relief if they delay their decision to post-budget.
Why are so many of us not saving for a rainy day?
As a City regulator starts an inquiry into ultra-low savings rates, concern grows that Britain is losing the "savings culture". Can the regulator really protect us from our own folly? The Financial Conduct Authority (FCA) is suggesting a basic savings rate (BSR) and under its proposals banks and building societies would have to set a basic minimum interest rate across all their accounts. The intervention is about limiting the worst deals, not about getting the best from your savings.
A 2015 study by the FCA found that there was £108bn held in easy access cash ISAs, one in five of which had been opened more than five years ago. These loyal customers were getting 0.87% of a percentage point lower than the most recent customers. The same report found £354bn in easy access savings accounts and again long-standing customers are getting a poor deal when compared with new customers. With many of us saving with the same organisation that holds our current account, are we too loyal to them or just too lazy to shop around and transfer? With rates so miserly is there any point anyway?
The problem with savings is more deep-rooted though.
After 10 years of low interest rates (which has been welcomed by borrowers), is it any wonder that people have fallen out of love with the idea of putting something aside each month? Savings aren't just about the interest rates though. It is prudent to build a cash reserve to cover those unexpected emergencies such as a large car repair bill. However, I also think that several decades of poor, or non-existent financial education in schools for young people, coupled with a general lack of parental guidance and ignorance has added to the malaise. After years of pressure on wage rises, many families are struggling to make ends meet and will cite this as a reason not to save.
I do believe that more of us could get by just fine, even during so called austerity - trouble is we have unlearnt the art of making good choices and prioritising. Funny how so many seem to be able to afford tattoos, piercings, take-aways, pets, Sky TV, smoking, drinking, all the essentials, yet still plead poverty! Frivolous or just enjoying life? Each to their own I suppose.
Fortunately, the workplace pension (auto-enrolment) has proved far more popular than the Government first envisaged, with more than 8m people signed up (July 2017) for a workplace pension since it was launched in 2012. This means that millions more will be able to look forward to a more financially secure retirement. We mustn't get carried away though, auto-enrolment has got off to a great start but contributions are for low amounts, it is not the panacea and there is still more to be done. It probably won't be enough to live on comfortably and neither will the State pension.
Commentators estimate that BSR could be worth a total of £300m a year in extra interest paid to savers. However, some are fearful of the so-called water-bed effect where pushing up interest rates for some accounts causes them to be cut elsewhere in order for the banks to balance their costs. We will have to wait and see how this pans out. As ever, anyone who wants to grow their hard-earned cash must stay vigilant, study best buy tables and be willing to switch regularly.
The Bank of England interest rate decision will be revealed this Thursday on 2 August, with a rate rise from current 0.5% to 0.75% expected. Maybe this will be the start of a longer-term trend and be a welcome tonic for savers regardless of what the FCA do.
Not married but in a relationship? Good news if your partner has a pension
A heterosexual couple have won their legal bid for the right to have a civil partnership instead of a marriage. In a civil partnership, a couple is entitled to the same legal treatment in terms of inheritance, tax, pensions and next-of-kin arrangements just like in marriage; in other words, legal and financial protection for both parties in the event of the relationship ending - as in marriage.
There has been pressure building for the Government to review the law that currently only applies to homosexual couples and thus end the discrimination for lack of formal recognition of their relationship. It is an irony that the way in which relationship equality for same sex couples came about in the 21st century had the effect of creating inequality between them and different sex couples. Was it ever fair that same-sex couples had two options, civil partnerships and civil marriages, whereas opposite-sex partners had only one option, marriage?
The ruling will be important for male and female couples who do not want to get married, but who opt for a civil partnership instead. Both partners should now benefit from the same rights as if they were married. In practice this means that the death benefits from a final salary pension for example can now pass to the other partner, whereas under current 'co-habiting' rules, often the surviving partner would not be entitled to this. If they were legally married, or in a same-sex civil partnership though, then they would be. Other advantages of this ruling will be the resolving of issues regarding lack of certainty around next of kin and inheritance. Couples also stand to gain from things like tax allowances.
The judgement does not oblige the Government to change the law, although it does make it more likely that it will act upon it according to the BBC.
There are 3.3m co-habiting couples in the UK and maybe the law is finally catching up with the reality of family life in Britain in 2018.
Time to simplify ISAs
I wrote back in April about the demise of the traditional Individual Savings Account (ISA) season in the lead up to the new tax year. Is it because ISAs have become over-complicated – like pensions? This has become an emerging theme over the last few years. Cash ISAs have fallen out of favour as interest rates have remained low and banks and building societies have trimmed back their competitiveness that they once offered on ISAs. Add to this the tax rule changes in April 2016 where basic rate tax payers are able to earn up to £1,000 in savings income tax-free, and higher rate tax payers £500, the tax efficient status of a Cash ISA is less appealing. Stock and Share ISAs remain a useful vehicle for longer term savings as there is no capital gains tax to pay, returns and any income taken is tax free and they have the potential for greater growth than ordinary deposits.
ISAs were once a very simple concept to grasp and served not only as a tax efficient way in which to save but they actually encouraged personal savings – just as they were designed to do. New rules have brought in unconventional new forms such as the Innovative Finance ISA, Help to Buy ISA and Lifetime ISA. Whilst these new ISA types mean more options for investors, as we've seen with pensions, an increasing 'complexification' could lead to fewer people saving and investing tax-free for their future. This is not in the interest of Government if it ends up footing the retirement funding bill, nor is it in the interest of individuals if they suffer a lower quality in later years as a result. Take up for the new 'house-purchase' related ISAs is low and they are not exactly catching the public's imagination just yet.
We need to get ISAs back on a simpler footing, not least in respect of the Lifetime ISA. The Lifetime ISA is a peculiar hybrid cross between an ISA, a pension and a home savings product. Up until 2017, when the Lifetime ISA was introduced, there was a simple choice between saving in an ISA and saving in a pension. When it comes to financial advice and planning, it is never a good idea to try to merge two (or even three) products with the aim of meeting one objective. Older readers will remember how back in the 1980s, pension mortgages were all the rage for a few years. Hindsight has shown that it was a struggle for some investment vehicles to grow enough to repay the mortgage, let alone have anything left in the coffers to provide for a pension as well.
For younger savers, their future planning priorities can be a complex decision making process and this is a concern because it increases the danger of them making a choice they might later come to regret. The help of a trusted independent Financial Adviser is recommended.
Part of the problem with the Lifetime ISA is that that there is a penalty of 25% if you want your money out before age 60 or if you aren't buying your first home. If the Government is serious about encouraging savings then there should be no penalties for tax-incentivised savings. Currently, you can invest £4,000 maximum per annum – but is this enough - perhaps it should be brought into line within the overall £20,000 limit offered on other types of ISAs?
Either way, a thorough overhaul of ISA products is long overdue so that we can get the ISA back to the simple product that made it successful in the first place.
Child Benefit and State Pensions – how are they connected?
Child benefit and the State pension both have to be 'claimed' in order to receive them – neither are paid automatically – and both have eligibility conditions. Eligibility for the State pension depends on having paid, or been credited with, National Insurance contributions – 35 years of contributions for the full rate. And that's another connection. One way to be 'credited' is to be entitled to receive child benefit for a child aged under 12.
Midwives give new parents a form to claim child benefit. So why wouldn't a new parent fill it in – lack of sleep, too many nappies to change – or perhaps because they'll not only have to pay it all back, but also complete a self-assessment tax return.
Since 2013, child benefit has been taxed (the high income child benefit tax charge) where at least one partner's adjusted net income exceeds £50,000. If a partner earns more than £60,000, then the entire benefit has to be repaid as tax. People subject to the high income child benefit tax charge must complete a self-assessment tax return. So wouldn't claiming child benefit just mean lots of hassle for no gain?
Not necessarily, as the House of Commons Treasury Select Committee has pointed out in a letter to the Government. They question whether it is being made clear enough to potential claimants that not claiming child benefit means that they won't be credited with contributions towards their State pension.
The Committee raised this concern over seven years ago when taxing child benefit was first mooted. The Government responded by enabling credits to continue to be provided if a person opted out of receiving child benefit. However, this provision does not extend to people who never claim the benefit in the first place. Although it is possible to both claim and opt-out of child benefit at the same time – perhaps people don't have the perseverance to reach question 68 of the child benefit form to find that out!
But that could be a costly mistake. The new State pension, which is paid to those reaching State pension age after 6 April 2016, has no spouses'/civil partners' element. Furthermore, there were no transitional protections for dependants' pensions already accrued unless the contributor was already in receipt of their State pension – the dependants' pensions just vanished. In the post-2016 world, spouses and civil partners have to make their own provision – and claiming child benefit is a step on that road.
As part of your future retirement planning, it's always worth keeping a check on how much State pension you will be entitled to – you can do this anytime at https://www.gov.uk/check-state-pension
Never mind student debt – what about over 65s debt?
Over 65s debt on track to hit £86bn by the end of 2018
Over 65s will have amassed a record £86bn of debt in 2018, up from £78 billion in 2017, according to research from the Centre for Economics and Business Research commissioned by more 2 life.
The research found that the average total debt held by 65 to 74-year olds in 2017 was also higher than expected, hitting £15,700 instead of the predicted £12,500. This is estimated to increase to £17,100 in 2018.
Worryingly, in 2018, the average mortgage debt of those aged 65 and over is estimated to stand at £86,000, which is 13% higher than in 2013.
Somehow, I don't see that generation throwing caution to the wind and running up debts to fund a lavish and flamboyant lifestyle. So what's going on?
The industry calls it the 'retirement lending market' and it is growing faster than previously expected. This is probably exacerbated by an ageing population who are buying houses at a much later stage and shrinking pension pots resulting in low retirement incomes. A divorce lawyer friend of mine has told me that the fastest growing age group for marriage break ups are for people in their 50s; he suspects that the kindling of old flames via social media such as Facebook could be fuelling this phenomena. This often means that where two people previously lived in one house, after the split, two properties are needed and consequently so is the finance to purchase them.
Of course, longevity means that a growing number of older people are having to make important decisions about how to manage their wealth over a longer period than previous generations, presenting new challenges along the way. As I have previously commented, the Bank of Mum and Dad is a significant lender in the UK and it's not all coming from savings.
Among the growing numbers of older people carrying secured and unsecured debt into retirement, some may be doing so as part of a deliberate asset management strategy, but worryingly, the research indicates that a significant minority are doing so to help manage cash flow problems and make ends meet. Products like equity release have the potential to play a hugely important role, relieving budgetary strain and offering more financial freedom. Equity release loans allow older people to get their hands on tax free cash sums without having to make monthly repayments. Instead, the advance, and the interest accrued is paid off when the homeowner dies and the property is sold. There has been criticism in some quarters about the cost of such loans, sometimes as high as 6%, so they're not for everyone and should be treated with caution. Proper advice should be taken before proceeding.
Inflation measures – Leggings in, pork pies out, as the latest changes to the inflation basket are revealed
The traditional measure of inflation in the UK for many years was the Retail Price Index (RPI), which was first calculated in the early 20th century to evaluate the extent to which workers were affected by price changes during the First World War. It has existed in various forms since then, and more recently, a further measure has been introduced called the Consumer Price Index (CPI). CPI excludes housing costs and mortgage interest payments, and unlike RPI, CPI is calculated on a formula that takes into account that when prices rise, some people will switch to lower priced alternatives.
Whatever its format, the basket of goods and services chosen is intended to reflect changes in society's buying habits and the price movements of 700 goods and services are measured in 20,000 UK outlets to calculate inflation. It is interesting to note what is, and what is not, currently in vogue, it is certainly an eclectic list!.
For example, in 2009, rosè wine and takeaway chicken were added to the basket, whereas volume bottled cider and boxes of wine were removed.
This year, women's leggings and mashed potato will now be used instead of pork pies and lager sold in nightclubs to help calculate the cost of living in the UK.
The changes are part of the Office for National Statistics' (ONS) annual review of the basket of goods used to measure the UK's inflation rate. Quiche, action cameras and soft play sessions have also been added – as have high chairs to represent nursery furniture, which has not been covered in the baskets since the removal of a cot in 1999.
So, this year, the exclusion of the humble pork pie is the result of rethinking the area of "cooked pastry-based savoury snacks", according to the ONS. The aim was to reflect the "widening collection across a range of takeaway outlets", rather than only pasties and pies in traditional fish and chip shops.
So why should we be concerned about inflation?
For your money to have the same spending power year on year, your income, regardless of whether it's from a pension or salary from paid work, needs to be at least the same as inflation. The same principle applies to savings interest if you wish to avoid erosion of the real value of your capital.
Pensions can be affected further depending on which index is used to calculate final payments. While state pensions use the CPI as a measure of inflation as part of the Government's triple lock guarantee that pensions will rise by at least 2.5% each year, many private pensions continue to use the RPI to track pensions.
However, if they were to change to CPI, this could see thousands of pensioners receiving lower pension payments than previously expected as their pension pot increase will be dramatically reduced.
One final thing to say on inflation is how it affects your own personal cost of living depends very much on what you spend your money on. So while inflation as measured by the CPI and RPI are useful indicators of the cost of living, yours may be higher or lower.
JPM Guide to the Markets - more volatility?
One of my colleagues attended JPM's guide to the markets event and here are some notes detailing their thoughts and comments about global markets. We thought it worth sharing their fascinating viewpoint. It appears they are not quite as bullish as they were in January.
Still think USA inflation and subsequent rate hikes could push USA into recession but overall still fairly constructive on equities but they have reduced their overweight
Expect to see more volatility in markets over next few days – Wall Street sold off last night and USA futures market is down this am too.
There is talk of lower than expected corporate earnings from some sectors and this is seen as a possible slowing down of USA economy.
There has been talk about the yield curve flattening or even inverting which is when short term interest rates start to rise.
The USA 10 Year Treasury Yield went up to 3% for the first time in 4 years which is also seen as bearish for equities.
All of these are signals of a potential USA recession but looks like this will be towards the latter end of 2019 and will depend very much on when / how.
The Fed increases base rates.
JPM said they had reduced their exposure to equities from a large overweight to a smaller overweight in favour of cash and structured bond funds.
They are long-term very constructive (which means they think prices will go up) on Emerging Markets and expect good growth to come from both China and India.
Of particular significance is the fact that Chinese A Shares will become part of MSCI World Index.
They expect China to grow to 45-50% of the MSCI World Index.
There was talk about the impact of the trade sanctions. 37.5 billion USD of trade sanctions is a big number but it is small in size compared to USA economy which is 19.7 trillion US$ and China which is 12.8 trillion US$ i.e. it is only 0.2% of Chinese GDP and market is oversold and should correct.
They think the biggest concern is inflationary pressures in USA market and the Fed putting up interest rates too quickly.
There has been some moderation in the Purchasing Managers Index survey figures (PMI) for manufacturing – but no warning of recession yet and numbers globally all above 50
Global unemployment rates all still falling
Markets expect rate hikes in USA throughout 2018 (2 likely in 2018 and 3 in 2019 … when they hit 3% this could cause recession in USA) .
The fiscal stimulus in USA from increased Government spending could stave off recession
In UK probably 50:50 whether they rise in May; Eurozone not expected until 2020
Whilst inflation picked up when sterling weakened post Brexit – it has now started to drop off quite quickly as the price if imported goods is now dropping with the strengthening of sterling
JPM not too bearish on Brexit. Their chief economist Karen Ward, was previously one of chief advisers to Philip Hammond at the Treasury and she is positive on Brexit especially for Financial Markets
She does not think Germany or Frankfurt want to be seen to be benefitting from Brexit as this would harm relations with the rest of Europe if Germany gets even stronger – so she thinks City of London is safe – (Perhaps she is talking her book!) Carney is now trying to back track on May hike but it is still possible. His term is supposed to end in March 2019. Could be replaced by Ben Broadbent ex Goldman man or an Ex Indian Central Banker is also in the running. JPM neutral on UK equities.
Emerging Markets they think China GDP will continue to grow at 6.8% year on year and expect it to drop to 5%
India should continue to grow at 7%
Expect further urbanisation and industrialisation in India especially
Average time spent in education in USA is 13.2 years, whereas it's 7.6 years in China and 6.3 years in India expect this trend to increase which is very positive for growth in both countries
Expect both countries to move up the value chain
China population expected to be 1.4 billion by 2050, India's population still growing rapidly and expected to grow by another 275 million by 2050
Overall they expect recession to come around 13 months after yield curve flattens but the dynamics of QE and QT are unknown and could impact on this as could the fiscal stimulus – Hedging their bets as normal!
Eurozone expect 2% growth in GDP and moderation of pace of growth – signs that unemployment is dropping and consumer confidence is growing which is positive for Eurozone equities
Expect Euro to strengthen – however the strengthening of Euro makes it harder for the manufacturing industries in Europe to continue to perform.
These notes are for information only and should not be construed as advice to invest (or not to invest) in any particular area.
Is there really an ISA season any more?
We had our usual busy end to the tax year with a flurry of last minute pension and ISA top-ups. However, the idea of an ISA season, with most ISA investments being crammed into February and March is probably a bit outdated now.
This is based not just on our own observations, but on what providers themselves tell us. One such survey by Octopus Investments conducted just after Christmas revealed that almost half of advisers - 48% - say they tend to do the bulk of their ISA planning with clients towards the beginning of the tax year. This makes good sense, the sooner one invests, the sooner one can benefit from the ISA tax reliefs.
The maximum investment is £20,000 and investment ISAs put capital at risk meaning investors may not get their full capital back. However, over the medium to long term, Investment ISAs offer the potential for greater returns when compared with ordinary deposits.
Have you reviewed your holdings recently? Don't forget that existing ISA portfolios can be easily consolidated into one simple plan without losing the tax efficient features.
2018 Spring Statement
With the move to one budget in 2018, the Spring Statement merely provided an economic update and saw the release of a number of consultation papers. None of these have had any direct impact on financial products or services. Chancellor Philip Hammond was in an upbeat and jovial mood though and predicted a bright future for the UK. He reported a higher growth forecast for 2018, and a fall in inflation, borrowing and debt.
He told MPs: "We have made solid progress towards building an economy that works for everyone."
Mr Hammond said the economy had grown every year since 2010, adding that the Office for Budget Responsibility had confirmed growth of 1.7% was achieved in 2017, higher than its 1.5% forecast in last autumn's Budget. The OBR also revised its growth forecast for 2018 up to 1.5% from 1.4%. One reason in the short term for the rise in economic growth is a robust global recovery. The stronger expansion in 2017 also meant the economy carried more of that momentum into 2018. While productivity growth over the last two quarters is the strongest since the 2008 recession, this is not expected to translate to higher growth in later years.
The Institute of Fiscal Studies is not so bullish and consider the British economy to be sluggish at best and reckon other economies around the world are doing a lot better than we are.
Still, optimism is a positive notion and some growth is better than no growth or recession. The UK economy is progressing and is back on a firmer footing compared with the dark days and chaos of 2008.
From an investment point of view, we remain cautious and advocate a diversified investment strategy until the full outcome of Brexit is known.
Asia – oh to be forever young
The developed world has a well-known ageing population problem.
Dependency ratios (the ratio of the young and very old to the working population) are rising and labour forces are projected to decline sharply across China, Korea and Taiwan (Figure 1, left-hand chart).
However, demographics are more favourable in other parts of Asia – for instance, in Bangladesh, Indonesia and India – and even more so in Africa, where the working age population of Nigeria alone is forecast to increase in size by around two thirds between 2015 and 2050 (Figure 1, right-hand chart).
However, despite these mixed demographic trends, a look under the bonnet suggests an altogether more positive story:
This receptiveness to new ways of doing things, largely a function of the demographic profile of Asia's middle class, will be crucial in shaping the future economic picture of the region.
These pro-youth trends are in stark contrast to the West, where the elderly have the best pensions, the highest disposable incomes and are asset-rich mainly as a result of the soaring value of their homes. In contrast, the young cannot get on the property ladder and are saddled with spiralling levels of university debt. Western youths may wield greater political impact (a notable example is the UK, where over 70% of under 24-year olds voting in the last General Election voted against the Conservatives, whose supporters included more than 60% of over-65-year-old voters) but they perceive themselves as second-class citizens in economic terms compared with their elders.
While youths in Hamburg want to throw rocks at G20 leaders, their Asian equivalents are embracing a world of choice with positivity and enthusiasm.
The Deloitte Millennial Survey 2017 found that emerging millennials (those born from 1982 to 2004) were more confident about their economic prospects and expected to be materially and emotionally better off than their parents.
Millennial wealth is projected to more than double between 2015 and 2020 to somewhere between $19 trillion and $24 trillion. To put this into perspective, US GDP is projected to be only $22 trillion at that date and the Eurozone economy $13 trillion. Chinese millennials are clearly a force to be reckoned with.
While ageing and fabulously wealthy Asian tycoons still feature largely in the popular imagination, the real economic influence in Asia is middle class and, crucially, young.
In many ways it's just a matter of attitude and expectation. These younger consumers today are typically teenagers and people in their early 20s, who have grown up in a period of relative abundance. Their parents, who lived through years of shortage, focused primarily on building economic security. But many young Chinese consumers were born after Deng Xiaoping's visit to the southern region—the beginning of a new era of economic reform and of China's opening up to the world. They are confident, independent minded, and determined to display that independence through their consumption.
Prone to regard expensive products as intrinsically better than less expensive ones, they are happy to try new things, such as personal digital gadgetry. Teenage family members also already have a big influence on decisions about family purchases, according to the research.
The same phenomenon is evident in India where by 2020 the average age of the population is expected to be just 29 (compared with China, 37). Recent survey data show that millennials' gross income is significantly higher on average than that of the older generation, and it is no accident that 57% of all working millennials in India are the chief wage earners in their families
The more obvious effects of this rising wealth is trading up by consumers. Asians have long had a love affair with luxury brands (Burberry, Louis Vuitton, Premier Cru etc) and are prepared to spend vast amounts to get them.
More sustainably, the Chinese are trading up in areas such as home appliances, fitted furniture, kitchen equipment and tourism. Importantly to us as investors, many of the beneficiaries of this trend are domestic brands accessible via A-shares, traded in the local Chinese equity market.
More interestingly, this is a generation which feels completely at home with technology and wants to embrace it. The level of engagement is staggering. It's not just the numbers – 963 million monthly active users on the WeChat/Weixin social media service or 340 million on the Sina Weibo microblogging service – but the breadth and depth of its level of engagement.
Inevitably the here and now is dominated by China. Once the political will was there, the rest followed given the advantages of scale, economic clout and homogeneity that China uniquely possesses. However, do not underestimate the speed of adoption in other Asian markets, where the basic conditions in terms of average wealth, youthful, open-minded populations and weak incumbency co-exist.
This is clear in Asia's adoption of the internet where the potential is still staggeringly large. The situation where Eastern Asia has almost 900 million internet users but only 55% penetration, or Southern Asia which has almost 500 million with under 30% penetration is only going to resolve itself one way.
Indeed, in Indonesia, a classic "difficult" market, it is already happening. The country boasts the third-largest Facebook user base in the world, with 40 million transactions a month going through the GO-JEK app, a transport service akin to Uber, while Alibaba and Tencent are pouring in the money.
So as investors, what are the lessons? Don't write off Asia based on the simple extrapolation of demographic trends. There is a massive shift of wealth going on and the beneficiaries are young, middle class, technologically savvy and open to change. In these circumstances, valuations still matter, while there will be many losers as well as winners from the rapid changes we are witnessing. Unsophisticated investment strategies are unlikely to be able to differentiate between the two.
However, active investment should continue to provide rewards as Asia becomes increasingly a leader rather than a follower in the application of genuine innovation. It's worth keeping an eye on this area.
If you run your own business, how do you take your profits - pension or dividends?
For owners of SME companies, choosing how you take your profits can be a tricky business. The argument in favour of pension contributions has been gaining momentum over the last 2 years.
Whilst taking dividends may still be popular, recent changes to how they are taxed are driving more directors who don't need the income for day to day living to extract profits using employer pension contributions instead. From this April, the annual dividend allowance will reduce from £5,000 to £2,000 meaning that higher rate taxpayers for example, could face a further tax bill of £975, increasing the focus on the pension alternative.
The dividend option still remains a better option than salary for most directors – even with these reductions. For a higher rate taxpayer, the combined effect of corporation tax at 19% and dividend tax of 32.5% will still yield a better outcome than paying it out as salary, which needs to account for income tax at 40% plus employer NI of 13.8% and employee NI of 2%.
However, a pension contribution remains the most tax efficient way of extracting profits from a limited company business. An employer pension contribution means there's no employer or employee NI liability - just like dividends. But as it comes off the bottom line, it means a lower corporation tax bill.
Under current pension legislation, those directors who are over 55 will be able to access it as easily as salary or dividend. With 25% of the pension fund available tax free, it can be very tax efficient. Furthermore, if the income from the balance can be taken within the basic rate tax threshold, this helps even more. Beware though, by doing this, the MPAA will be triggered, restricting future pension contributions to just £4,000pa.
With the tax year end approaching, there are several reasons why you may benefit from making an employer pension contribution now:
In addition to this, there will be many companies with a financial year in line with the tax year e.g. where the company business year ends on 31st March. These companies will not be able to confirm any final dividend until after this date. If these dividends are subsequently paid in 2018/19, they may use up next year's lower dividend allowance before the new company year has even started.
As with all things related to financial planning and tax, we recommend taking professional advice before acting.
Market commentary February 2018
Earlier in the week global markets went into reverse, triggering much speculation as to whether this heralds the end of the current bull run. Many investment experts point out that volatility has been unusually low since mid 2016 and a correction was long overdue. Here at Pension Drawdown, we have long shared the sentiment that some sort of a correction was imminent.
The urge to react to short-term market events can often be tempting to clients. Our key message is one you have heard many times before – volatility is a feature of long-term investing and it's time in the market that counts, not market timing. I suggest that just as was the case during previous market upsets, the best advice for investors is to 'keep calm and carry on'. Unless this current rout morphs into a major and lasting liquidity crunch, for which there is little indication, then the upward direction of travel of the global economy and consequentially corporate earnings and dividends, set the longer-term course of investment returns.
Some commentators see this volatility as the greatest sign of real health in the markets for a long time. The tech-fuelled rally in the US had long lost any sense of reality in its valuations, the prospect of inflation remaining low forever could not last, and we have a new and untested Fed Chair. Furthermore, the correction is needed in order to quell recent US equity investor exuberance for a while longer. A 5-6% global stock market growth in a single month (without being a recovery from a previous fall) has just all the hallmarks of an overheating capital market environment which usually leads to nasty corrections.
After an exceptionally strong January in equity markets, which followed strong 2017 returns, stock markets around the world have now suffered a considerable downward correction without there having been any one particular trigger. Indeed, Monday night's 4.5% fall in the US coincided with macro-economic data releases showing both the US, as well as the European economies are in even better shape than previously anticipated. However, to give perspective, US markets still only fell back to where they were already at the beginning of the year.
Our investment portfolio strategies have, since late 2016, been more conservative than the upward momentum strength may have normally warranted. This means that our clients' portfolios are well diversified and have therefore shown good resilience in the face of these market headwinds. This means that our investors have experienced lower portfolio declines than if they were invested passively or in many instances, elsewhere. Where suitable, we are actively seeking to take advantage of potential buying opportunities as they arise. Our aim is to seek a balance between risk and reward.
What's in store for 2018
A few weeks into the New Year and before you know it you will be thinking about Valentine's Day, pancakes and Easter eggs.
One of the most significant dates in the calendar is 5 April which heralds the end of the tax year. For those of you who wish to make the most of your tax efficient allowances, this is your last chance to use your ISA allowance. You can invest up to £20,000 per person per tax year. Here are some other key dates in 2018 for you to be aware of…
This is more for the accounting side of your personal finances but we would encourage those of you who are self-employed to get organised sooner, rather than later as time is running out. This will mean that you should then avoid more financial stress and potentially a fine from HMRC. Plus the earlier this is out of the way, the more time you will have to focus on other, more interesting things.
A great opportunity for this part of South East Asia to put themselves in the shop window and for TV networks and social media to boost their revenues.
The exact date is yet to be set but draft legislation on banning cold-calling is expected to be published in the next few months. As the pension transfer market continues to grow, this new legislation is designed to protect vulnerable clients from scammers. It is expected that this will be extended to cover savings as well, good news for all but the criminals.
While we're likely to see more talk of Brexit costs in Chancellor Philip Hammond's speech, as negotiations continue to unfold, clients should listen out for changes to personal finance policy. Pension tax relief is always a speculated target, particularly as Mr Hammond resisted the temptation for any changes in the Autumn Budget.
Along with increases to the personal tax allowance, capital gains exemption threshold and Enterprise Investment Scheme allowance, the first bonuses on the Lifetime ISA are also due to be paid. What's more, the new full State pension increases to £164.35, while mandatory pension contributions via auto-enrolment increase to 5%, including the 2% employer minimum.
April 6 is also another opportunity to invest up to £20,000 into an ISA.
The bill calling for transitional arrangements for women born in the 1950s and affected by state pension changes from 1995 and 2011 legislation, is expected to go through its second reading in the House of Commons
Prince Harry is set to marry American actress Meghan Markle on Saturday 19 May.
Disappointingly, the Government has ruled out an extra bank holiday, nonetheless, the weekend wedding will likely mean street parties and a coming together of people. Additionally, the UK could benefit from a much welcome £1bn economic boost courtesy of the big day – according to the Mail Online.
Football fans will rejoice to hear 2018 is a World Cup year. The tournament will be held in Russia this time around. England, the only home nation to qualify are in Group G. Their first match is against Tunisia on 18 June, then Panama on 24 June, then Belgium on 28 June.
Depending on England's further progress, pubs and hostelries are set to benefit from televised matches. Although England have not won the World Cup since 1966, the event promises lots of excitement, passionate cheers, and plenty of pride among fans. Apologies to our Irish, Scots and Welsh clients but, come on England!
In November, the Government pledged it would release a social care green paper by summer 2018. It will set out how it will improve care and support for older people, as well as tackling an ageing population. Clients may be interested in the proposals in terms of how it will affect savings to accommodate for later life care.
Any guesswork on the Autumn Budget will only really loosely take shape following the outcome of the Spring Statement. Depending on what is outlined in the proposed summer green paper, however, care policy could be back on the agenda.
November - State pension age equalises at 65
From November, the state pension age will equalise for men and women at age 65. In the run-up to the changes, we're likely to hear more from the Women Against State Pension Inequality campaign. Again, depending on the outcome of the second reading of the women's transitional arrangements bill, if this does affect you, how financially prepared are you for the changes?
With best wishes for a peaceful and prosperous year.