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Cash ISAs losing favour

New statistics from HM Revenue & Customs (HMRC) show that cash withdrawals from individual savings accounts (ISAs) are probably more than matching fresh contributions.

In the world of ISAs, cash ISAs have long attracted more contributions than their stocks and shares counterpart. However, the pattern has started to change, as the graph below shows.

Source: HMRC

In the last tax year, contributions to cash ISAs fell by a third according to the latest HMRC data. They still amounted to over £39 billion, but the total held in cash ISAs increased by just £1.26 billion between April 2016 and April 2017. Once a year’s interest is allowed for, even at current miniscule rates, that suggests more money was withdrawn from existing ISAs than flowed in through new contributions.

There are some good reasons why cash ISAs are going out of favour:

  • ISA interest rates have been low for some years. The top rates for instant access are just over 1.0%, while the best five year fixed term rate is 2.15%. Neither compares well with inflation, currently at 2.9% on the CPI yardstick and 3.9%, as measured by the RPI.
  • The introduction of the personal savings allowance (PSA) in 2016/17 has meant that many people have no tax to pay on the interest they earn from non-ISA accounts. If you are a basic rate taxpayer, £1,000 of interest is tax free, while if you pay tax at 40%, £500 of interest suffers no tax. If you are an additional rate taxpayer, you do not receive a PSA.
  • For wealthier investors, the reforms to dividend taxation – and the likely reduction in the dividend allowance from £5,000 to £2,000 next April – has made the tax shelter offered for dividends by stocks and shares ISAs relatively more attractive.

If you hold money in cash ISAs, it may make sense to review whether you should continue to do so. You could find yourself earning more interest outside an ISA or gaining more tax benefits from a stocks and shares ISA. For a discussion on your options, please talk to us.

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

The ascendancy of Equity Release continues

Please find below a link to an article in the autumn edition of the Surrey Lawyer
Equity Release by HFS Milbourne Financial Services

Self-employed struggle to save

Self-employment is the dream of many, especially as the goal of retirement seems to creep further out of reach. Being your own boss sounds great. But there are drawbacks. Around two million of the country’s self-employed workers are unable to save any money each month, leaving them vulnerable to financial shocks.

The same body of workers spend more on bills than the UK average and only 4% enjoy the benefit of income protection insurance cover which would kick in if they were unable to work.

These worrying findings about the self-employed sector were revealed in insurer LV=’s second instalment of its Income Roulette report, a study of debt, savings and protection among 9,000 people.

The results show that four-in-ten (41%) self-employed people can’t afford to save any money each month and a further one-in-ten (11%) saves less than £50. A third of respondents said they could not survive for more than three months if they lost their income. This means they fall short of the Money Advice Service’s recommended amount of savings that should to be kept in reserve to maintain a level of financial resilience if an emergency strikes.

Looking at the barriers to saving, LV=’s figures show that monthly bills eat up the wages of nearly two-thirds (62%) of self-employed people; this compares with a national average of 56% taking employed workers into account.

Aware of the risks

Despite the lack of savings and insurance, the research confirmed that the self-employed were aware of the financial risks attached to this method of working with nearly three-in-ten (28%) respondents citing worries about having an accident and not being able to work as a result. A similar proportion (29%) said they were concerned about falling sick and being put out of commission.

There are around five million self-employed workers in the UK who made a contribution of about £250 billion to the economy last year. If you’re one of them, we may be able to help.

August share falls – a cautionary tale

August provided a reminder that even in seemingly quiet times, the value of individual shares can be volatile. 

Source: LSE

August is traditionally a month when the turnover on stock exchanges slows down because many people are on holiday. In the jargon, trading can be “thin”. That doesn’t mean, however, that nothing much happens, as the graph above shows. While the FTSE 100 (top line in blue) merely wobbled, there were some major movements going on for individual companies, both within and outside the index.

The bottom line in red on the graph shows the dramatic fall of one FTSE 100 constituent, Provident Financial Group, best known for its doorstep lending business. Provident released its second profit warning in August and scrapped its dividend payment which, as the graph indicates, had not been widely expected. This month the company will be ejected from the FTSE 100 because its value has fallen so much.

The story behind the middle black line is similar. It shows the fate of Dixons Carphone, which was a member of the FTSE 100 until demotion in March of this year. Dixons Carphone, the High Street electronics retailer, revised down its profit forecast, bemoaning the reluctance of smartphone owners to update their handsets as regularly as they once did. The announcement was again off the radar, with the inevitable result on the share price.

Broaden the spread

The performance of these two well-known companies serves as a useful reminder of the potential dangers in holding a handful of shares, perhaps acquired via an inheritance or employer share schemes. Whereas a broad holding of shares (the FTSE 100 being a useful example here) spreads your risk, concentrated holdings can have the opposite effect. You may be happy to accept the potential rollercoaster ride, but if you are not or are just unsure about the risks in your current holdings, talk to us about bringing diversification into your investment portfolio.

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

A Junior ISA with a minor interest rate

National Savings & Investments (NS&I) have launched their first Junior ISA.

The Junior ISA (JISA) was introduced in 2011 as a replacement for the Child Trust Fund. It had a slow start, but momentum has built and, according to the latest figures from HM Revenue & Customs (HMRC), JISAs now hold over £2,750 million of investments for children under age 18.

While long a player in the main cash ISA market, NS&I never offered a junior version until last month, with its new launch. The plan’s main features are:

  • A variable interest rate of 2% (against 0.75% for NS&I’s Direct ISA);
  • Transfers in (from JISAs and Child Trust Funds) are allowed (again a difference from the new contributions-only Direct ISA);
  • No penalties on transfer out (although access to cash is normally not possible before age 18); and
  • Online operation only.

NS&I sometimes top the ISA tables with their interest rates, but the new JISA runs no risk of doing so, as the top variable rates currently are around 3%.

According to the latest HMRC statistics, as at April 2016 almost two thirds of JISA money is invested in cash accounts, with stocks and shares accounts making up the remainder. This is a higher proportion than for adult ISAs, where stocks and shares are just in the majority. The logic behind this difference is puzzling: many JISA owners are young enough to have an investment horizon that makes stock and shares look a more sensible option than cash. For more details on stocks and shares JISAs, please talk to us.

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

Stocks and shares ISAs invest in corporate bonds; stocks and shares and other assets that fluctuate in value. Investors do not pay any personal tax on income or gains, but ISAs do pay unrecoverable tax on income from stocks and shares received by the ISA managers.

What’s your inflation yardstick?

Inflation was in the news last month in various guises.

August was a month when inflation hit the headlines several times trailing a cloud of acronyms:

  • The Bank of England Quarterly Inflation Report (QIR) revealed that the Bank now expects inflation (as measured by the Consumer Prices Index – CPI) “to peak around 3% in October”. The Bank expects inflation will still be above its 2% central target by the end of the first quarter of 2020. This forecast assumes that interest rates will rise by 0.5% over the period, in line with market expectations. The Bank is relatively unconcerned about missing its target, saying that the overshoot “reflects entirely the effects of the referendum-related fall in sterling”.
  • Shortly before the QIR was published, news emerged that CPIH, the inflation measure favoured by the Office for National Statistics (ONS), had been approved as a National Statistic by the Office for Statistics Regulation. CPIH is a variant of the more widely quoted CPI, the “H” being shorthand for the addition of owner occupiers’ housing costs (including council tax). CPIH could ultimately replace both the CPI and the now discredited RPI. The ONS view of the RPI is that it “is a flawed measure of inflation with serious shortcomings and we do not recommend its use.”

 

  • In mid-August, the ONS issued inflation statistics for July, showing CPI and CPIH both running at an annual 2.6%, but RPI 1% higher. The July RPI is an important number, because it sets the basis for next year’s rail fare increases (although the government could change its mind and choose something below 3.6%).

 

  • The government’s use of RPI to ratchet up revenue was also in evidence on the day the inflation data was published. Almost simultaneously the Student Loans Company confirmed that from 1 September the minimum interest rate for English and Welsh student loans started within the last five years will be based on the March 2017 RPI (3.1%), with a maximum addition of up to 3% taking the overall interest rate up to a ceiling of 6.1%.

 

Whatever your chosen yardstick for inflation, it is important not to forget its impact on your financial planning. At the current 2.6% CPI/CPIH rate, the buying power of £1 will be little more than 75p in 12 years’ time. Use today’s RPI and the same result arrives after just eight years.

When I’m 68…: state pension age rising again

The government has announced plans for a further increase in state pension age.

On the day before parliament shut up shop for its summer holidays, David Gauke, the Secretary of State for Work and Pensions, announced that the government had decided state pension age (SPA) should be increased to 68 between April 2037 and April 2039. The timing is seven years earlier than currently legislated for in the Pensions Act 2007. As a result, if you were born between 6 April 1970 and 5 April 1978, the age at which you can draw your state pension is set to rise.

Despite some of the newspaper headlines, the announcement came as no real surprise. Earlier this year John Cridland had published a final report, commissioned by the Department for Work and Pensions (DWP), which recommended just such a move in the state pension age. The DWP had been statutorily due to reveal its decision on raising the SPA by 7 May, but wriggled out of the obligation, claiming it was hidebound by pre-election purdah rules.

Delayed legislation

Ironically, that election had a knock-on effect on the Mr Gauke’s announcement. Although he gave notice of the change, there will be no legislation to put it into effect until after the next review of SPA, which is due in six years’ time. This delay is “…to enable consideration of the latest life expectancy projections and to allow us to evaluate the effects of rises in state pension age already under way,” according to the minister. It may also be related to the government’s thin majority, the controversy still waging around the ongoing increases to women’s SPA and the Labour’s Party manifesto commitment not to increase SPA beyond 66 without first undertaking (another) review.

For all the political manoeuvring, SPA increases look inevitable in the longer term. The new single tier state pension may be under £160 a week, but with an ageing population it is an expensive benefit: the change announced in July would save £74bn by 2045/46 according to Mr Gauke.

If you want to make your own choice of retirement date, rather than be dictated to by successive DWP Secretaries of State, the lesson to be drawn from July’s announcement is that you need to make sure your private pension provision is adequate.

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

Dividends keep growing for 2017

UK companies paid out a record amount in dividends in the second quarter of this year.

At a time when there is much heated debate about whether the Bank of England should double its base rate to 0.5%, it can be easy to forget the much higher income yield available from UK shares. While most interest rates remain at sub-inflation levels, the UK stock market has an average dividend yield of about 3.6% and, as new data recently released show, those dividends are growing strongly.

Research undertaken by Capita, the share registrars, revealed that in the second quarter of 2017:

  • UK companies paid a record £33.3bn in dividends, up 14.5% on the second quarter of 2016.
  • If special (one-off) dividends are excluded, the total falls to £28.6bn, still a record and a year-on-year increase of 12.6%.

Capita attributes the rise in overall pay-outs to “very healthy underlying growth, topped up with a substantial boost from the weak pound, plus a large haul of special dividends”. For the next two quarters, the impact of sterling’s weakness will not be as great because the pre-Brexit numbers will disappear from 12-month comparisons. Nevertheless, Capita expects 2017 to see a dividend increase of 7.0%, comfortably ahead of inflation.

These dividend numbers are a reminder that it is still possible to invest in a way that gives scope for growing income and does not rely on the whims of a central bank. For more information on the wide choice of UK equity income funds, please talk to us.

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

Pension flexibility two years on – the report card

The Financial Conduct Authority (FCA) has examined the impact of pension flexibility and is worried about the lack of advice.

Pension flexibility came into effect in April 2015. In theory, since then it has been possible from age 55 onwards to withdraw your entire money purchase pension fund as a lump sum, albeit generally 75% would be taxable as income. When the proposals first emerged there were concerns expressed that the temptation to take a pot of cash and spend it would be too great for many. The FCA has been examining what has actually happened since 2015 and in July published an interim report on its findings.

The FCA found that over half of the pension pots accessed since April 2015 had been withdrawn in full. While this grabbed the headlines, it does not tell the whole story: 60% of those pots were worth less than £10,000, while another 30% were below £30,000. That does not suggest the worries about people blowing their pension funds on a new Lamborghini have been realised. Indeed, the opposite seems to have happened: over half of those who fully cashed in their pension reinvested the proceeds in other savings or investments. However, as the FCA noted, such a move can “…give rise to direct harm if consumers pay too much tax, or miss out on investment growth or other benefits”.

Bypassing advice

That danger highlights another FCA concern: that many people are failing to take advice about their pension flexibility options. In the FCA’s words, they are choosing “the path of least resistance” and opting for drawdown with their existing pension provider. The regulator says that the lack of shopping around this implies “may result in [the unadvised] achieving poorer deals”.

If you are considering drawing money from any pension arrangement, you should pay heed to the FCA’s emphasis on the benefits of shopping around and taking advice. DIY pension planning can turn out to be an expensive option, even if at first sight it looks the easiest.

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

China becomes an emerging market as MSCI finally opens up

China-listed shares are finally to be included in the leading emerging markets index.

As we highlighted in May, China has the world’s second largest equity market, but at present shares listed on the Chinese stock exchanges don’t figure in the MSCI Emerging Markets Index. The MSCI index is the most important equity index for emerging markets, with an estimated $1,600 billion of funds using it as a benchmark. While the index already has a 28% China weighting, this relates to Chinese companies listed on stock exchanges outside China, notably Hong Kong and in the United States.

For each of the last three years, MSCI has reviewed whether conditions in the Chinese stock markets were appropriate to warrant including shares listed on them in the emerging markets index. In 2014, 2015 and 2016 the answer was no. Various technical reasons were given and each time the Chinese authorities made adjustments in the hope that next year MSCI would change its mind. Last month, the answer finally switched to yes.

Look out for May 2018

The change will not happen overnight: adding such a large market to an index in a single move would be too disruptive. Instead, MSCI has set out a gradual approach. In May next year, MSCI will add shares in the largest 222 listed Chinese companies to its index, with an initial 5% weighting. The weighting is expected to rise over time until it reaches the full 100%, at which point Chinese-listed shares will represent about 15% of the MSCI Emerging Markets Index and total Chinese content, including the existing non-China listings, will approach 45%. Other smaller Chinese listed companies may also be added in the future, further raising the Chinese exposure of the index.

MSCI’s decision has been widely seen as a coming of age for investment in China and, on some estimates, could produce $500 billion of inflows over the next five to ten years. If you want to increase your exposure to China ahead of that predicted rush, there are a variety of options available which we would be happy to discuss.

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