Search

New state pension rates keep UK last in the league tables

The government has published the revised level of state pensions and other benefits for 2020/21. But Britain remains last in the state pension league table.

In April 2020, the new state pension will increase by 3.9% to £175.20 a week – £9,110 a year. The old state pension, which is payable to anyone who reached state pension age before 6 April 2016, also increases by 3.9% to £134.25 a week. Other state pension benefits, such as additional state pension, will rise by 1.7%, in line with Consumer Price Index (CPI) inflation to last September. The higher increase for the two main pension benefits is the result of the ‘triple lock’, which means that both increase in 2020/21 in line with earnings rather than prices or a 2.5% floor.

At £9,110 a year, the new state pension is nearly £3,400 below the personal allowance and even below the newly increased level at which individuals start to pay national insurance contributions. The latest global annual survey by the Organisation for Economic Development (OECD), published in November 2019, showed that in terms of mandatory pensions for those on average earnings, the UK was at the bottom of the pile. The OECD average for state pensions is 49.0% for men and 48.2% for women of average earnings. The figure for the UK state pension represented only 21.7% of average earnings. At the top of the OECD league, Austria, Italy and Luxembourg all offer pensions that exceed 75% of average earnings.

The UK has regularly appeared at or very near the bottom of the OECD pension league table, often swapping the wooden spoon ranking with Mexico. It seems unlikely that this situation is going to change any time soon. The last major change to UK state pensions took effect four years ago, when the single tier new state pension replaced the combination of the basic state pensions and, for employees, state second pension scheme (formerly the State Earnings Related Pension Scheme). The underlying aims of the reform were to raise retirement income for low earners while simultaneously reducing the long-term cost to the Treasury.

The October 2012 introduction of pension automatic enrolment added a second tier of private pension provision, but minimum contributions are at modest levels and the self-employed are not included. If you want to enjoy your retirement, the message from the latest state pension increases is to make sure your plans are not relying on state provision.

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

Past performance is not a reliable indicator of future performance.

National Savings takes the axe to interest rates

National Savings & Investments (NS&I) has announced interest rate cuts to most of its products.

If NS&I did not exist, it is hard to imagine that it would be invented now. Once upon a time it was a useful way for the government to raise cheap money from the general public, whereas today it is exactly the opposite.

If HM Treasury needs to borrow – as it always does – it can raise billions by selling government bonds (gilts) to institutional investors at an interest rate of under 1%. For example, at the time of writing, the yield on ten-year gilts was just 0.47% – less than one third of January’s 1.8% inflation rate.

With such low-cost money available in wholesale amounts, it was not surprising that in February NS&I announced a raft of interest rate cuts, all to take effect from 1 May 2020:

Product Current rate New rate from 1/5/2020
Direct Saver 1.00% gross/AER 0.70% gross/AER
Income Bonds 1.15% gross/1.16% AER 0.70% gross/AER
Investment A/C 0.80% gross/AER 0.60% gross/AER
Premium Bonds 1.40%

24,500:1 monthly odds of winning

1.30%

26,000:1 monthly odds of winning

The premium bond changes mean that from May, 98.95% of all winning draws will be for the minimum prize of £25. However, as the table shows, the underlying prize interest rate for premium bonds is markedly better than what NS&I is offering on its other variable rate products. Indeed, if your interest income exceeds your available personal savings allowance (£1,000 for basic rate taxpayers, £500 for higher rate taxpayers) and you have used your £20,000 ISA allowance, the likely meagre returns on premiums bonds are relatively attractive.

NS&I also lowered the rates on their fixed rate products – Guaranteed Growth Bonds, Guaranteed Income Bonds and Fixed Interest Savings Certificates. These are not on general sale and are only available for reinvestment of maturing plans.

NS&I’s move can be expected to encourage another round of cuts among deposit-taking institutions, even though the Bank of England rate has remained unchanged since July 2018. If you need income from your savings, then you must either resign yourself to these ultra-low rates or accept some risk to capital. For example, the average yield on UK shares is now about 4.3%.

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.

NICs – a tax by any other name?

The new National Insurance Contributions (NICs) scales for 2020/21 were announced ahead of today’s Budget, with one slight surprise hidden in the numbers.

Are NICs a tax?

Over many years, Chancellors have tried to convince the public that they are not. It has always seemed easier to say that NICs are going up by 1% than to announce the same increase in income tax rates, even if the net effect for the working population is virtually the same. NICs are still vaguely associated with the NHS and social security benefits in the public’s mind, partly because qualification for some benefit entitlements depends upon NIC payments. However, from the Treasury’s viewpoint, NICs are just another source of revenue.

This year the Treasury seems to have decided – at least temporarily – that NICs are a tax. At the end of January, it ran a news story with the headline ‘31 million taxpayers to get April tax cut’. It sounded like an official Budget leak, but it wasn’t.

The announcement referred to an increase in the level at which employees and the self-employed start to pay NICs. As trailed in the Conservative party election manifesto, this trigger point will rise from £8,632 in 2019/20 to £9,500 in 2020/21. In practice the limit would have risen to £8,788 anyway, as it is automatically inflation-proofed unless the Chancellor decides otherwise.

The net result is a maximum saving of around £104 a year if you are employed and pay class 1 NICs and £78 if you are self-employed paying class 4 NICs. The Treasury’s new release says that “…the government has set out an ambition to raise the National Insurance thresholds to £12,500”, but that aspiration – worth up to another £360 a year – has no timescale attached to it.

If you are an employer, you may be surprised to learn that the threshold at which employer class 1 NICs for an employee start to be charged in 2020/21 will not rise to £9,500 but benefits only from the inflationary uplift to £8,788.

The maximum combined employer/employee rate of NICs is 25.8% (13.8% + 12%), so NIC planning can be as important as other tax planning. For the options available to you – as an employer, employee or self-employed – you need expert advice.

Tax laws can change. The Financial Conduct Authority does not regulate tax advice

National Living Wage set to outpace new state pension

The National Living Wage (NLW) rises by over 6% in April.

The 6.2% increase to £8.72 an hour equates to £15,870 a year based on a 35-hour week. The substantial rise is not down to inflation – which ended 2019 at only 1.3% – but due to a policy of George Osborne’s. When he made the surprise announcement of the NLW in his 2015 Summer Budget, Osborne set a goal for it to match 60% of median earnings by 2020. The new Chancellor, has set a revised target of the NLW reaching two thirds of median earnings by 2024.

Pushing up minimum earnings is a double-edged sword for the Treasury. It ought to mean a reduced government outlay on in-work benefits and increased tax and NICs income, but it also adds to the government’s costs as an employer, placing pressure on all wages, not just those at the minimum level. What it has not done so far is impact on the cost of state pensions.

State pension equivalence?

As a result of the Conservative party election win, we know that the ‘Triple Lock’ will continue to apply to the new state pension, with annual increases which are the greatest of:

  • Consumer Price Index (CPI) price inflation;
  • average earnings growth; or
  • 5%.

The NLW will have to rise faster than earnings to move from 60% to 662/3% of median earnings over the next four years. It’s therefore quite likely that, as in the past four years, the NLW’s growth will outpace earnings.

A corollary is that the new state pension looks set to continue shrinking as a proportion of the weekly equivalent of the NLW. From April, the new state pension will be only about 57% of the NLW (and thus little more than one third of median earnings). When the NLW and new state pension first came into being in 2016, the pension was nearly 62% of the NLW.

Those numbers are a reminder that the new state pension is far from generous, even for those with minimum earnings. If you want a comfortable retirement, then the new state pension needs topping up.

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.

 

Look back in curiosity: what can we learn from the 2010s?

What do you remember about the 2010s?

A decade is a long time and a lot happens, but important details can be lost in the big headline moments. The one that has just ended makes the point. The 2010s started with Gordon Brown as prime minister and, four elections and two referendums later, closed with Boris Johnson in 10 Downing Street and the UK out of the EU. Over the entire period, the Bank of England’s base rate deviated no more than 0.25% either side of the 0.50% at which it began the decade.

Inflation, as measured by the CPI, rose from 0.7% in January 2010 to peak at 5.1% in September 2011, but from 2012 onwards never breached 4%. It ended the decade at 1.3%. Across the decade, CPI inflation averaged 2.1%, just 0.1% above the Bank of England’s central target.

House prices, as measured by the Nationwide House Price Index (NHPI), beat inflation across the decade, but not significantly. As the graph shows, for most of the first five years house price rises underperformed, then took the lead as inflation subdued. Over the entire decade, the NHPI rose by 32.8%, equivalent to an annual increase of 2.9%. It may come as a surprise that the NHPI fell short of inflation, as measured by the Retail Price Index (RPI), which rose by 33.9% over the 2010s (3.0% annually).

The UK stock market, as measured by the FTSE All-Share Index, produced capital growth of over 50% in the 2010s, despite all the political traumas. That is equivalent to 4.3% annually, more than double the inflation rate. The progress was not smooth – the grey line on the graph does gyrate about somewhat – but neither was it an unnerving roller coaster.

Unfortunately, we can’t project a similar graph for the 2020s. The new decade has started with falling inflation, interest rates set to stay at ultra-low levels, and both housing and share markets that appear to be experiencing a post-election bounce. In the absence of a decade-deep crystal ball, the wisest investment advice for the 2020s will be, as for every other decade, not to put all your eggs in one basket.

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. Investing in shares should be regarded as a long-term investment and should fit in with your overall attitude to risk and financial circumstances.

Last call for 2016/17 on your annual allowance…

The clock is ticking on using up your pension annual allowance

The allowance effectively sets the maximum pension contributions from all sources (including your employer) on which you may be able to claim income tax relief. In recent times it has been the subject of much controversy because of the way the allowance is tapered from the ‘standard’ £40,000 to as little as £10,000 for high earners.

One reason why the taper rules have come to the fore is another aspect of the annual allowance which has received far less press coverage: the carry forward rules. These allow you to mop up unused annual allowance from up to three tax years ago – i.e. from 2016/17 onwards during the 2019/20 tax year. In theory this could mean that, before 6 April 2020, tax-relievable pension contributions of up to £160,000 could be made (£40,000 a year for 2016/17 – 2019/20 inclusive).

As you might expect, there is some complex legislation setting out how carry forward operates. For example:

  • You must have been a member of a registered pension scheme in the tax year from which any unused annual allowance is carried forward. However, you (or your employer) do not have to have paid any contributions or accrued any benefit during those years, nor do any carried forward contributions have to be made to that scheme.
  • You must have covered an effective ‘entry fee’ of contributions equalling your annual allowance for the current year, i.e. £40,000, if you are not caught by the taper regime.
  • The carry back goes to the oldest tax year first and then works forward.
  • All tax relief is given in the current tax year, not the year to which the unused allowance relates.
  • Carry forward is not available if, at any time, you have taken advantage of the 2015 pension flexibilities to draw from any pension arrangement.

Calculating how much can be carried forward is sometimes a difficult exercise, requiring detailed contribution records, so if you want to beat the deadline for using up your remaining allowance from 2016/17, start seeking advice now.

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.

A Budget Day… at last

In early January Chancellor announced a new Budget date: 11 March 2020.

This could be a significant Budget. Traditionally, the first Budget of a new Parliament is when the Chancellor delivers the medicine of tax increases and/or unpopular reforms. To borrow from Macbeth: ‘If it were done when ‘tis done, then ‘twere well it were done quickly’…that way the electorate has over four years to forget.

If you’re struggling to remember what happened in Budget 2019, you haven’t forgotten. Unusually, in 2019 there was no Budget. There was a Spring Statement in March 2019 from Philip Hammond, but the general election call forced his successor, Sajid Javid, to abandon the planned Autumn Budget set for 6 November. During the election campaign the Conservative party said that the Budget would be revealed in February, but this date shifted again in the new year when the Chancellor announced a date of 11 March.

We already know a good proportion of what the Chancellor will announce, as draft legislation was published eight months ago in anticipation of the cancelled Autumn 2019 Budget. The contents will almost certainly include controversial legislation to strengthen the operation of off-payroll working rules (IR35) in the private sector, possibly with some amendments following the government’s last minute review,  as well as  tighter rules on the capital gains tax treatment of main residences. Both are due to take- effect from 6 April 2020.

Ahead of the Budget, the government confirmed at the end of January a ‘tax cut’ mentioned in the Conservative party manifesto, of an increase in the starting point for national insurance contributions (NICs) from the current £8,632 to £9,500 a year – a maximum saving of £2 a week.

The Budget unknowns include what the Chancellor might do about pensions tax relief. He already faces a growing problem with the impact of the annual allowance on NHS senior staff, which has been fixed temporarily, but only until April. There are already calls for the Chancellor to overhaul the system, something he could do while simultaneously raising more revenue.

One consequence of the Budget date is that any year end tax planning – especially on the pension front – now potentially has a deadline date of 10 March.

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

Life expectancy shortens…or does it?

New calculations from the Office for National Statistics have lowered life expectancies.

 

Source: ONS

Every two years, the Office for National Statistics (ONS) recalculates its national population projections (NPP). As part of the exercise, the ONS reviews and updates its assumptions about future mortality, which in turn will have an impact on population size.

The latest figures, released in early December, show a fall in life expectancies from those calculated in 2016, as the graph above demonstrates. As a headline, ‘Fall in Life Expectancy’ can be confusing. What it does not mean is that future generations will not live as long as the current generation. What it does mean is that future generations will live longer than the current generation, but not live quite as long as previously predicted.

You can see this in the graph. The projection made in 2016 was that a man who reached age 65 in 2040 would live, on average, another 23.0 years, whereas the latest projection (based on 2018 figures) brings that number down to 21.9 years. In 2014 the figure was projected to be 24.1 years. For women the figure has gone down from another 25 years in 2016 to 23.9 years in 2018.

The ONS reductions in life expectancy were unsurprising to the experts, as a near stalling in UK life expectancy improvements had already been noticed by health think tanks and pension funds, among others. The causes are the subject of some debate. As the Health Foundation remarked on its research, “These causes are multiple and complex – working across all age-groups, seasons and both sexes…some of the simplified explanations that have been advanced are clearly inadequate.”

One consequence of these new projections is that the ONS has had to update its life expectancy calculator (see the link below). It is worth looking at this, not only for the average life expectancy number, but also for the graph and other data which accompany the results. For example, a man aged 65 today (which is no longer State Pension Age, don’t forget – it’s about 65 and two-thirds), is expected on average to live until age 85, but has a 1 in 4 chance of reaching 92 and a 1 in 10 chance of achieving age 96. For a woman of the same age, the corresponding figures are all two years higher.

Those odds of reaching into the 90s are worth remembering next time you review your retirement planning.

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.

ONS Life Expectancy Calculator: https://www.ons.gov.uk/peoplepopulationandcommunity/healthandsocialcare/healthandlifeexpectancies/articles/lifeexpectancycalculator/2019-06-07

Venture Capital Trusts continue to attract investors.

The latest statistics from HMRC show the inflows to venture capital trusts (VCTs) have more than doubled since 2009/10.

Source: HMRC

At the end of last year, HMRC published details of how much money was raised by VCTs in 2018/19. At £716m, the figure was the highest since 2005/06, when a temporarily higher rate of tax relief was on offer.

The increased popularity of VCTs in recent years is at least partly due to the restrictions on pensions, such as the tapered annual allowance rules. The tightened pension limits have made pension contributions tax in-efficient for some high (and not so high) earners.

In contrast, VCTs offer:

  • A 30% tax credit on investments of up to £200,000 per tax year. This is clawed back if the VCT shares are sold within five years;
  • All dividends are free of personal tax, provided the original investment was made within the £200,000 per tax year limit; and
  • No capital gains tax on any gains (but no relief for losses, either).

While VCTs are being used as a pension alternative to obtain tax relief, in investment terms VCTs are very different. Your choice of pension investments is almost limitless and can be as high risk or secure as you wish. In contrast, a narrow investment choice and high risk are both inbuilt to VCTs.

At least 80% of the investments underlying VCTs must be in relatively young, small companies that are not listed (other than on the AIM market). Over the years, successive Chancellors have ratcheted up the risk element by excluding a wide variety of businesses, from market gardens to wind farms.

The latest change to VCT investment rules took effect in April 2018 and introduced a specific ‘risk to capital’ requirement to prevent ‘safe’ investments being made. That high risk focus makes it all the more important to take advice when investing in VCTs.

With the Budget now in March, the year end season for VCT capital raising is well underway. Some VCTs have already closed their issues for the year, so if you wish to invest in VCTs to cut your 2019/20 tax bill, the sooner you act, the better.

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. 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 2019 investment year

The world’s share markets enjoyed strong rises in 2019.

2019 was a very different year for investors from 2018. Whereas 2018 saw a pattern of losses across all major markets, 2019 was the exact opposite: the red numbers that marked a year of negative performance in 2018 were replaced by black. A good global example of this was the MSCI ACWI, a broad global index covering both developed and emerging stock markets. In sterling terms, this index fell by 5.66% in 2018, but rose by 19.26% in 2019.

Despite all the trauma of Brexit politics during the year, the UK stock market posted double digit returns, as the table shows. Along with other major markets, the UK benefitted from starting at a relatively low level, following a sharp fall in the final quarter of 2018.

A point hidden in the index numbers is the performance of mid-sized UK companies – those in the FTSE 250, which sit below the top tier of FTSE 100. The strength of sterling during the year (up 4% against the US dollar and nearly 6% against the euro) had a greater impact on the multinational members of the FTSE 100 than the more domestically focused FTSE 250 constituents. The end result was that the FTSE 250 rose by 25%, more than double the increase in the FTSE 100.

The good performance of the pound – the opposite of 2018 – also took a slight edge off the returns from overseas markets for sterling-based investors. However, as the performance of the MSCI ACWI shows, in overall terms 2019 still offered greater profits for those who invested overseas.

2020 starts off with a reasonable investment outlook. The UK is now past its era of Brexit wrangles – at least until the EU trade negotiations begin in earnest. Meanwhile the US and China have just about agreed the first stage of a trade deal and interest rates remain at rock bottom levels, with few pundits expecting any move upwards in the year.

Against that backdrop, it may seem odd to suggest investors should consider selling, but as the tax year end nears, it could be worth realising some of those 2019 gains to take advantage of your £12,000 capital gains tax (CGT) exemption and reinvesting the proceeds – even perhaps in the same funds – via an ISA or a pension.

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.  Investing in shares should be regarded as a long-term investment and should fit in with your overall attitude to risk and financial circumstances.