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The triple lock marches on…

The main state pensions will rise by 2.5% in April.

The absence of an autumn Budget in 2020 meant that there was no formal announcement of the level of state pensions from April 2021. The numbers eventually emerged on 8 December  in a press release from the Department for Work and Pensions:

  • The new state pension, which applies if you reach(ed) state pension age (SPA) after 5 April 2016 rises to £179.60 a week, an increase of 2.5%. If you are nearing your SPA (now 66, do not forget) you are most unlikely to receive that figure as your state pension will be subject to transitional rules introduced in 2016, when the old state pension was replaced by the current variant.
  • The old state pension, which applies if you reached SPA before 6 April 2016, also rises by 2.5% to £137.60 a week.
  • Payments under other state pensions, such the state second pension (S2P), will increase by 0.5%.

The minimal increases outside the two main state pensions are because only the new and old state pensions benefit from the ‘triple lock’, which raises payment each year by the greater of CPI inflation (0.5% on this occasion), earnings growth (a 1% fall) and 2.5%. Where the triple lock does not apply, CPI inflation is used. As the graph shows, the triple lock has delivered above inflation increases in seven of the last ten years. Over that period the gap between a CPI-linked pension and a triple locked pension has grown to nearly 11%.

Both the cost and intergenerational fairness of providing the triple lock have regularly been called into question. Although the Conservatives’ 2019 manifesto promised to protect the lock, the pandemic expenditure and this year’s inflation-busting increase have once again brought a spotlight on the triple lock’s affordability.

Whether or not the triple lock survives, UK state pensions remain among the least generous in the developed world. The latest survey from the OECD showed the UK at the bottom of the organisation’s league table for replacement income, providing less than half the OECD average.

Thus, while the state pension has been outpacing inflation, it is still far from being sufficient to fund a comfortable retirement. For that, additional private pension provision is necessary.

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

The tax year end approaches as filing deadline eased

The tax year end approaches as filing deadline eased.

2020/2021 is drawing to a close, with a Budget now slated for early March. Ahead of that, HMRC is easing some of its traditional deadlines in the light of the ongoing pandemic.

If you’re struggling to prepare your self-assessment tax return due to the effects of the pandemic, you may get some relief. It has been reported that HMRC will consider being affected by Covid-19 as a reasonable excuse for anyone filing late returns or making late payments this year. Any fines may be waived if you explain how you were affected in your appeal. You must still make the return or payment as soon as you can. The Chancellor is also apparently considering extending the filing deadline for everybody, moving it from 31 January to 31 March, but this has yet to be announced.

The timing of the tax year end, however, is fixed. Immune to weekends and holidays, it always falls on 5 April, which will coincide with Easter Monday in 2021. The odd date stems from the combination of the ancient British tradition that New Year’s Day coincided with Lady Day (25 March) and the introduction of the Gregorian calendar across the British Empire in 1752.

The timing of the Budget is considerably more variable. Currently scheduled for every autumn, it is, however, subject to other forces. In 2019, the election got in the way and pushed the Budget to March 2020. A similar time lapse has occurred again, because in autumn 2020 the Chancellor chose to wait until the economic fallout from the pandemic was clearer. Shortly before Christmas he confirmed the Budget would be on 3 March.

This year’s Budget could mark the start of measures to restore the public finances, adding to the importance of sorting out your year end tax planning before the Chancellor rises to his feet. Among the areas to consider are:

  • Top up your pension contributions. For many years there have been rumours that tax relief on contributions could move to a fixed rate, disadvantaging higher and additional rate taxpayers. The pandemic might be the reason the change finally happens in 2021.
  • Use your inheritance tax exemptions. The Chancellor has a pair of reports on his desk from the Office of Tax Simplification (OTS) about inheritance tax reform.
  • Use your capital gains tax annual exemption. The Chancellor also has a paper from the OTS on capital gains tax (CGT) reform which included suggestions such as reducing the annual exemption from £12,300 to £4,000 and aligning CGT rates with income tax rates.
  • Top up your ISAs. With possible CGT increases on the way, the tax shelter offered by ISAs should not be forgotten.

For more information on any of the above and for other year end planning opportunities, please contact us as soon as possible.

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 and the income from it 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 2020 investment year – a ride to remember

The world’s share markets had a rollercoaster ride in 2020.

Index 2020 Change
FTSE 100 -14.3%
FTSE All-Share -12.5%
Dow Jones Industrial +7.25%
Standard & Poor’s 500 +16.3%
Nikkei 225 +16.0%
Euro Stoxx 50 (€) -5.1%
Shanghai Composite +13.9%
MSCI Emerging Markets (£) +12.3%

Investors had to hold on tight as 2020 turned into a white-knuckle experience.

It began quietly enough and then in the second half of February global stock markets took on the concern at the spread of Covid-19. As infection rates increased and the economic outlook darkened, there were precipitous falls in all the major markets. A sense of panic was in the air, not helped in the UK by two base rate cuts within the space of a fortnight. Then, just about the time the UK formally went into lockdown on 23 March, around the world market sentiment turned sharply. After something of a sideways drift during the summer, November saw a further boost to confidence from the news on the Pfizer/BioNTech vaccine.

By the end of the year, the US, Japanese and Chinese stock markets were all recording overall gains – a far cry from the picture in March. As the table above shows, the UK market was a laggard in 2020. There have been many explanations for that – the FTSE 100’s heavy weighting in banks (which stopped paying dividends) and oil majors (which slashed their payouts) are obvious culprits. So too were the uncertainties of the Brexit finale and the government’s handling of the pandemic.

On the opposite side of the Atlantic, the US government Covid-19 response was hardly any more impressive, but the US markets benefited from their exposure to technology companies: we were all Zooming, Googling and buying from Amazon.

There are a few useful lessons to draw from 2020:

  • It is all but impossible to achieve perfect timing for making an investment. That March sentiment flip seemingly came from nowhere.
  • Those who cashed in at the peak of the panic chose the worse time to sell up. Once again, the advice to sit tight proved correct.
  • International diversification is important for UK-based investors. The UK may host many large multinational companies but, like Europe, it lacks exposure to technology giants.

The value of your investment and the income from it 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.

When I’m 66 – SPA’s latest milestone

The latest phasing of State Pension Age (SPA) increase is now finished.

On 6 October 2020, the SPA reached 66. Unless current legislation is changed, it will remain there until 6 April 2026, at which point the next increase, to age 67, starts to be phased in over the following two years. Thereafter the move to 68 is less certain.

Over two years ago the Department for Work and Pensions (DWP) announced that the phasing to 68 would start in April 2037 and again run for two years. However, at the time the DWP avoided introducing any legislation, saying that it would undertake a review of the latest life expectancy projections before acting. Since then the Secretary of State at the DWP has changed three times, but there has been no news of a review. Meanwhile the rise in life expectancy has slowed dramatically, suggesting that the step up to 68 may be delayed.

The arrival of an SPA of 66 prompted the Institute for Fiscal Studies (IFS) to publish a briefing note examining the impact of the SPA changes to date. These started with the controversial stepped increase in women’s SPA from 60 to 65 between April 2010 and November 2018. With the help of DWP data, the IFS showed that each year’s increase in women’s SPA produced a corresponding increase in the proportion of women remaining in work.

For example, the employment rate of 65-year-old women jumped from 21% in the third quarter of 2018 to 35% in the second quarter of 2020 as they were no longer able to claim a state pension. For 65-year-old men, there was also a sharp rise over the same period, from 34% in the third quarter of 2018 to reach 45% in the second quarter of 2020.

As the IFS says, “With the new state pension worth £175 per week, having to wait longer to claim a new state pension significantly reduces the incomes of most people affected by this reform.” Food for thought (and reason for reviewing your private pension provision) if your retirement planning still revolves around age 65…

The value of your investment and income from it 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.  

Capital gains tax: increases on the way?

A recent report could herald changes to capital gains tax.

Last July the Chancellor asked the Office of Tax Simplification (OTS) to undertake a review of capital gains tax (CGT) “in relation to individuals and smaller companies”. The request was something of a surprise for two reasons. Firstly, there had been no suggestion that Mr Sunak wanted to reform CGT. Secondly, two earlier reports on another capital tax, inheritance tax (IHT), had been sitting in the Treasury’s in-tray for over a year, awaiting attention.

Cynics pointed out that while the Conservatives’ 2019 manifesto promised no increases to the rates of income tax, VAT and national insurance, there was no such protection for CGT. Certainly, the ideas put forward by the OTS would raise extra revenue for the Treasury’s depleted coffers, but probably not the £14bn seen in some of the November headlines.

The OTS made eleven proposals for the government to consider. The more significant were:

  • CGT rates should be more closely aligned with income tax rates, implying the maximum tax rate on most gains could rise from 20% to 45%.
  • The annual exempt amount, currently £12,300 of gains, should be reduced to a “true de minimis level” of between £2,000 and £4,000.

When IHT relief applies to an asset, there should be no automatic resetting of CGT base values at death, as currently occurs. The OTS also suggested that the government should consider whether to end all rebasing at death, meaning that the person inheriting an asset would be treated as acquiring it at the base cost of the person who has died.

The £1m Business Asset Disposal Relief, which only replaced the £10m Entrepreneurs’ Relief in March 2020, should itself be replaced with a new relief more focused on retirement.

The OTS paper underlines just how favourably capital gains are currently treated relative to income. As the tax year end approaches, the report is also a reminder to examine your use-it-or-lose-it options for the 2020/21 annual exemption and to top up your CGT-free ISA.

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 and income from it 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.

Fireworks in November

November was an exciting month for the world’s stock markets.

Source: Investing.com

November was an exhilarating month on the world’s stock markets, as the graph above illustrates. It cannot be said that many experts – bar room or otherwise – expected it to look like this.

Cast your mind back to Halloween and, apart from trick or treat, there was plenty to be concerned about. For a start the US presidential election was imminent. While it was widely forecast that Joe Biden would win, there was much less certainty that Donald Trump would recognise he had lost. One layer down, serious worries were voiced about a gridlocked US government with a Democratic president unable to pass legislation through a Republican controlled Senate.

On a global scale, the primary concern was the second or, in some cases, third wave of the Covid-19 pandemic, prompting a new round of lockdowns with their inevitable impact on economic growth.

All that October gloom evaporated quickly in November. For example, the FTSE100 had its best month since January 1989, rising by 12.4%. It had even been on course to set a new record before a sharp fall on 30 November, possibly from profit-takers. Across on Wall Street, the Dow Jones Index had its best month since January 1987. At one point in November the Dow hit a new all-time record of over 30,000 – a “sacred number”, according to the outgoing president, who had pinned his re-election hopes on a strong economy.

So, what happened to make the world’s markets move from depression to euphoria? With hindsight two likely causes stand out:

  • The US election was not the disaster that had been feared. Mr Trump has gradually, if indirectly, indicated that he will be moving out of 1600 Pennsylvania Avenue in January, despite ongoing lawsuits and social media outbursts. At the same time, markets seem to have concluded that, Georgia Senate run-offs notwithstanding, a gridlocked administration may not be such as bad idea if it means the status quo is maintained.
  • The news of three successful vaccine trials suddenly allowed investors to see a way out of the pandemic in 2021.

November was once again a reminder of the potential danger of trying to time investing in markets: it was not a month to miss while sitting on the sidelines holding cash.

The value of your investment and the income from it 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.

Can you afford to retire if you are self-employed?

New research shows the majority of the self-employed are not saving for retirement.

Source: IFS

Here’s a quick quiz:

  • Are you self-employed?
  • If so, have you contributed to a private pension in the last year?

The Institute for Fiscal Studies (IFS) examined the answers to these two questions and found the probability of answering yes to both is much the same. Drawing on government data, the IFS calculated that in 2018:

  • 15.1% of the UK workforce – some 4.8 million people – were self-employed.
  • Just 16% of the self-employed contributed to a private pension.

As the graph shows, the proportion of pension contributors among the employed and self-employed workforce was on a steady decline from 1998 until 2012. In October 2012, pension automatic enrolment was launched, and by March 2019, over 10 million workers had joined a workplace pension arrangement. The self-employed were left out of auto-enrolment, hence the sharp divergence of the employee and self-employed lines from 2012 onwards.

The IFS research struggled to establish why only one in six of the self-employed were saving in a private pension, two thirds less than 20 years ago. It found that the characteristics of the self-employed workforce have changed over that period – it now consists of more females, an older demographic and an increase in part-time workers – but none of these factors were enough to account for the fall in pension contributions. Given the tax relief which pension contributions attract, one surprising discovery was that the largest decline in self-employed contributions came from the higher-income bracket and the long-term self-employed.

If you answered yes to the first question and no to the second, then you may be expecting the state pension to make up the largest slice of your retirement income, a view shared by more than a quarter of the self-employed. At present, the state pension amounts to £175.20 a week. If that sounds like a less than comfortable retirement plan, perhaps you need to rethink the answer to that second question…

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 and the income from it 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.

China: ever larger, ever changing

The Chinese stock market broke the $10 trillion barrier in October.

Source: Investing.com

The total value of China’s stock markets in Shanghai and Shenzhen surpassed $10 trillion in October. For comparison, the UK market was worth about $4 trillion at the end of September 2020. However, this was not the first time that Chinese markets had reached the $10 trillion level. In mid-2015, the two markets peaked at $10.05 trillion before dropping precipitously to under $5 trillion in a matter of months as the authorities took action against traders – often individuals – investing with borrowed money.

Much has happened since that whiplash period. The Chinese markets have become less of a gambling for retail players and more like other global markets, with institutional investors taking a leading role. At the same time, a variety of initiatives by the Chinese Government and changes by international index providers, such as FTSE Russell and MSCI, have encouraged investment from outside the Middle Kingdom. Foreign (i.e. non-Chinese) investors now own about 5% of Chinese shares, up from virtually nothing in 2015. Consequently, the weight of foreign and institutional investors has reduced volatility.

As the graph above shows, that does not mean 2020 has been a smooth ride for the Chinese markets. With the Covid-19 pandemic originating in China, it was inevitable that Chinese share prices would suffer. However, their fall in the first three months of 2020 was less than most other large stock markets. That has meant that, perhaps surprisingly, for the year to date, the Chinese market has performed much the same as the US market.

The latest economic figures out of China show economic growth of 4.9% in the third quarter, after 3.2% in the previous three months, suggesting that China could be the only major economy to grow in 2020.

The $10 trillion value of China’s markets and the resilience of its economy mean the country cannot be ignored by investors. For now, it is still classed as an ‘emerging market’, although its size almost makes it the emerging market. To find more information on the choice of China-focused funds available for UK investors, get in touch with us.

The value of your investment and income from it. 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.

Some light in the dividend tunnel

A recent report on UK dividend payments suggests the worst of the cuts may be over.

Source: Link Asset Services

First, the bad news:

  • In the third quarter of 2020, total (regular and special) dividend payments from UK companies were 49.1% lower than in the corresponding quarter in 2019.
  • Two thirds of UK companies either cut or cancelled their dividends in the quarter.
  • One-off special dividends fell by no less than 90% year-on-year in Q3.
  • Across 2020 as a whole, the fall in total dividends will be around 45%, according to an estimate from Link Asset Services, a leading company registrar.

If you hold UK equity funds – particularly UK equity income funds – or own shares directly, you will be lucky not to have felt the impact of such unprecedented dividend cuts. As the graph shows, the fall in payouts has been much greater than in the wake of the 2008 global financial crisis.

Now, a little good news:

  • The fall in the third quarter was less than the second quarter, when the overall drop was 57.2%.
  • Similarly, the proportion of companies cutting or cancelling dividends was also higher in Q2, at three quarters.
  • Special dividends were unusually high in the third quarter of 2019 – nearly quadruple the amount of Q3 2018 – which distorts the latest comparison.

The pandemic has been going on long enough for any company that needed (or, in some cases, wanted) to cut or cull its dividends to have done so. Some companies, such as BP and Shell, have taken the opportunity to ‘rebase’ their dividends, a subtle way of saying that the new, lower level is the base for future payments. A growing number of companies that suspended dividends have resumed payments or promised to do so.

Then there are the big banks, which were told by the Bank of England to stop payouts, just before their final dividends for 2019 became payable. According to Link, almost 40% of the fall in Q3 regular dividends was accounted for by the banks’ dividend curfew. If – and it is a big if at this stage in the pandemic – the Bank of England allows the banks to restart paying dividends in 2021, there could be a significant jump in regular dividends across the year.

Link estimates that UK regular dividends could increase in 2021 by between 6% in its worst-case scenario, and 15% in the best case. If you are looking for income in a world of near-zero interest rates, both projections are attractive.

The value of your investment and the income from it 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.

Triple lock survives – for now

The government has acted to ensure state pension increases can happen next April.

The Basic State Pension (BSP) and the New State Pension (NSP) – for anyone who reached State Pension Age after 5 April 2016 – are both subject to the ‘Triple Lock’ measure. This means that every April these two pensions increase by the greater of:

  • 2.5%;
  • Consumer price index (CPI) inflation to September of the previous year; and
  • Average earnings growth based on the annual change in earnings in the period May–July of the previous year.

The Triple Lock is a feature that the main political parties pledged to maintain in their 2019 election manifestos, but despite political promises, the Triple Lock has no legal standing. The law governing increases to the BSP and NSP is based on earnings growth. Earnings growth applies to the April 2020 increases (of 3.9%), but in years when it does not take the top slot, the government overrides the statutory rules.

In September, the Office for National Statistics (ONS) published the Triple Lock earnings growth data, showing that year on year, earnings had fallen by 1%. The drop presented a problem for the Department for Work and Pensions (DWP), as it viewed the legislation as saying that if earnings growth was below 0%, pension payments must be frozen, with no scope for discretion. In response, the DWP rapidly put a Bill into Parliament to amend the law and allow the Triple Lock measure to continue.

Curiously, the Bill only applies for 2021 and does no more than allow the Secretary of State to choose the increase level – there is no reference to the Triple Lock. In practice, the BSP and NSP should rise by 2.5%, as CPI inflation to September will be lower.

The 2021/22 NSP will therefore be £179.60 a week (£9,339 a year), a timely reminder that for all the legislative gaming of the numbers, state provision is far from adequate for a comfortable retirement.

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.