Bounce back quarter

The second quarter of 2020 saw a substantial switch back from the falls of the first quarter.

2020 so far has been a rollercoaster ride for investors. It started off well enough, but in the middle of February, Covid-19 prompted a rout that took markets deeply into the red by the end of the first quarter. Although it was not obvious at the time, by then the world’s central banks had in fact taken enough action to encourage a market recovery in the second quarter of the year.

There is a point to watch when looking at these quarterly numbers: contrary to what we might think, the rules of mathematics mean that a fall of 20% is not cancelled out by a subsequent rise of 20%. In fact, what is needed is a 25% rise (100 x 80% x 125% = 100). So the momentum of the second quarter has left even the best performers, such as the US S&P 500 index, marginally below where they began 2020.

The UK’s second quarter recovery was not as strong as many other major markets. That could reflect the relatively poor performance in dealing with the pandemic, the UK indices heavy weighting to banks and oil majors (neither popular) and their lack of technology companies. Across the Atlantic, it is the technology shares which have been the biggest drivers of market performance – Microsoft, Apple, Amazon, Facebook and Alphabet (Google’s parent company) are now the five largest companies in the S&P 500.

The bounce back in the second quarter is a reminder that trying to time investment can be a futile exercise. With hindsight – but only with hindsight – it is easy to spot that selling in early January and buying towards the end of March was the way to a fortune. If you lack such perfect vision, then the lesson so far in 2020 has been that volatility works in both directions. In such circumstances, it pays to take advice before taking an action.

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.




Keep going well…? Shell’s historic dividend cut

When a 75-year run is broken, something significant has probably happened.

If you are of a certain age, ‘Keep going well…’ could have you instantly remembering the rhyming counterpart; ‘Keep going Shell’. At the end of April 2020 that 1960s advertising slogan suddenly looked particularly jarring to many investors.

Royal Dutch Shell, to give the company its proper title, announced on 30 April that it would be cutting its quarterly dividend and it was not just any cut: the payment was to fall from $0.47 to $0.16 per share. The near two thirds reduction shocked the market. It was the first time the company had lowered its dividend since 1945. In recent times it had seemed that Shell would do anything – sell assets or even borrow – to make sure the money was there for the quarterly payment.

Shell has regularly been the biggest payer in terms of the total amount of cash it handed out – for each of the last five years it topped Link Asset’s list of dividend payers. It has been a core holding of many income funds and individual investors’ portfolios for that very reason.

Shell pointed to “…the pace and scale of the societal impact of Covid-19 and the resulting deterioration in the macroeconomic and commodity price outlook” to justify its axe-wielding.  However, it also said that it was resetting the dividend, which is corporate-speak for saying 16c a share will be the new base level, not just a temporary adjustment.

The oil sector has been falling out of favour with some institutional investors who see it as increasingly problematic on both ethical and financial grounds. Goals for global carbon reduction are difficult to square with the way in which big oil majors make their money. There is a growing concern that the companies could find themselves holding “stranded assets” – oil reserves that are just not worth extracting.

The Shell story is a good example of the growing relevance of ethical considerations in investment decisions. There is now over £25bn invested in ethical funds according to the Investment Association. To discuss your options, please contact us, as another slogan that has better stood the test of time reminds us: ‘it’s good to talk’.

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.

Should you review your pension fund withdrawals?

The fall in world stock markets has cut the value of many pension pots.

Which would you choose as investment performance, assuming a £10,000 investment that would be untouched for 10 years?

  1. A steady return of 5% a year throughout the period; or
  1. Two years of 20% annual losses followed by eight years of 12.39% a year growth.

The outcome in both instances would be the same: both would produce an overall gain of £6,289. Compound interest can produce many surprises if you are not accustomed to its effects.

Now, try something a little more difficult. Use the same two sets of investment return, but now assume you withdraw 5% of your original investment (£500) at the end of each year. Which would you choose?

  1. A 5% return on £10,000 is £500, meaning the growth will be removed at the end of each year, so after ten years there will be £10,000 remaining.
  1. With a varying growth pattern, you need a spreadsheet to give a quick answer (or a calculator and paper for the slower version). Either way, at the end of ten years, £7,761 is left.

The £2,239 difference is an illustration of an effect known as ‘sequencing risk’. At first sight the gap between the two results appears too large – after all there is no difference when there have been no withdrawals.

However, drill down and what is happening becomes apparent. At the end of two years, taking £500 a year out from a fund that has been falling by 20% a year, leaves you with just £5,500. Suddenly a withdrawal that was 5% of your original investment has become 9.1% of the remaining capital. Even a growth of 12.39% a year thereafter cannot rescue the situation.

These calculations make a point which you should consider if you are taking regular withdrawals from your pension or are planning to do so soon. The recent declines in investment values make it important that you review your level of withdrawals and consider other income options. This is an area that needs expert advice: the wrong decision can leave you with an empty pension pot, but still plenty of life left to live.

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.

Missing in inaction: calculating inflation under lockdown

The Covid-19 pandemic has created problems for the statisticians who calculate the rate of inflation.

Inflation, as measured by the Consumer Prices Index (CPI), fell sharply in April to just 0.9% against 1.5% in the previous month. The main reason for the drop was energy costs:

  • Ofgem’s new price caps for gas and electricity standard variable rate took effect in April and these were about 10% lower than the rates from April 2019. Even so, the bills set by the caps are generally much higher than those that can be found on any comparison website.
  • Petrol and diesel prices were also much reduced year on year – by 15.1p a litre for petrol and 17.0p a litre for diesel.

The sharp moves in energy costs were not the only unusual features of April’s inflation statistics. There was also a serious problem with gathering the data. The Office for National Statistics (ONS) has an annually reviewed ‘shopping basket’ of goods and services which it uses to calculate the various inflation indices. However, for the latest numbers, the ONS discovered about 90 of the items in its basket – about one sixth of the total value – “were unavailable to consumers in the UK”. Haircuts, cinema tickets and a pint in a pub are just some of the many examples. Other items were theoretically available, but in such short supply that the ONS’s price-tracking task more difficult – self-raising flour being a typical problem item. Ultimately the ONS was forced to “impute” (i.e. estimate) some prices.

There is another twist to the price calculation which you may have noticed personally: the pattern of purchases has changed. The ONS basket contains items which can be bought but are just being ignored in lockdown – many travel services fall into this category. For now, at least, the basket is not representative of spending patterns. We may find that creates problems in the long term-, as inflation indices are widely used by government to adjust benefits, prices and tax allowances.

Inflation may be under 1% and somewhat distorted at present, but it has not gone away. Some economists fear that it could roar back because of all the borrowed money being pumped into the economy by the government. Others think a recession/depression will keep inflation in check. Either way, it still needs to be part of your financial planning: £1 in April 2015 has only 92p of buying power today.

Deferring July’s income tax payment

The imminent payment on account does not have to be paid.

The last Friday in July is the due date for the second 2019/20 self assessment payment on account. At least, in theory it is…

One of the many measures introduced by the government as part of its Covid-19 programme was the option to defer that second payment. In mid-May HMRC issued guidance on how deferral would operate:

  • To be eligible, you need to be registered in the UK for self assessment and “finding it difficult to make your second payment on account by 31 July 2020 due to the impact of coronavirus”.
  • There is no requirement to be self-employed, although the measure was launched as targeting that sector. For example, you could be a landlord whose cashflow is reduced by tenants withholding rent.
  • There is no need to contact HMRC.
  • The deferred payment must be settled by 31 January 2021. That is also when any 2019/20 balancing payment and the first payment on account for 2020/21 fall due.
  • Provided you pay by 31 January 2021, HMRC will not levy any penalties or interest.

HMRC’s guidance says: “You can still make the payment by 31 July 2020 as normal if you’re able to do so”, which hardly sounds like compulsion for those unaffected by Covid-19.

Reductions to income caused by Covid-19 could also affect your tax bill in other ways:

  • It could mean that it now makes sense to restart child benefit payments because your drop in income means they will not be taxed away to zero.
  • You may find that you have regained some or all of your personal allowance for 2020/21.
  • You might become eligible for a higher personal savings allowance.
  • That first payment on account for 2020/21 due next January may be too high, as it will be based on your (pre Covid-19) 2019/20 tax return.

If you have suffered a drop in income, it is worth checking with your financial adviser on which actions to take now and which can be left to come out in the final HMRC tax calculation.

The value of tax reliefs depends on your individual circumstances.

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

Don’t be so negative…

Could UK interest rates head into negative figures?

Source: Bank of England

The Bank of England’s chief economist, Andy Haldane, suggested in mid-May that negative interest rates were one possible response to the economic fallout from Covid-19. The comment was surprising because in the past the Bank has been opposed to the idea that its base rate could fall below zero. However, shortly after Mr Haldane’s comment, the Bank’s Governor, Andrew Bailey, said when asked about negative rates “we do not rule things out as a matter of principle”.  

Negative interest rates – where the lender pays the borrower interest – may sound a bizarre concept, but they are nothing new. The eurozone, Switzerland and Japan have been living with sub-zero rates for some while. The aim behind negative rates is not, as many Germans feel, to punish small savers, but rather to encourage commercial banks to lend. For those banks, negative rates means that leaving reserves in the central bank costs them hard cash – 0.5% a year at the European Central Bank – whereas if they put the money to work in loans to businesses and individuals, the banks can earn interest. With rare exceptions borrowers have not been paid for taking on debt once the lender has added their margin on to the loan.

Where central banks have introduced a base rate, the commercial banks have been reluctant to pass the negative element on to all but the largest of their depositors. Usually deposit rates have been set at zero, avoiding the problem of savers watching the bank gradually reduce their savings. Many deposit rates in the UK are virtually at 0% anyway – it can be an exercise to count the trailing zeros before the figure 1 or 5 is reached.

Ironically, the best instant access account at present comes in the form of National Savings & Investments Income Bonds, which pay 1.16% AER. National Savings announced in February that it would be cutting rates on these bonds by 0.45% from 1 May, but then had a change of heart in mid-April. That might be a reflection on the government’s Covid-19 driven borrowing requirement.

If you want an income return of more than 1% from your capital, there are still plenty of options, but your capital will be at risk. For more information, take a positive step and talk to us.

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.

All the zeros: five-fold government borrowing expectations

The government could end up borrowing five times as much as it expected on Budget day.

In the Budget on 11 March, the Office for Budget Responsibility (OBR) estimated that in 2020/21, the government would have to borrow about £55bn to make up the difference between what it spent and what would be raised in taxes and other revenue.

A little over one month later, the OBR issued another, vastly different set of numbers, quoting potential borrowing of £273bn or 14% of GDP. This time the OBR was at pains to emphasise that its figures were not a formal forecast but rather “a scenario … based on the illustrative assumption that people’s movements (and thus economic activity) would be heavily restricted for three months and would get back to normal over the subsequent three months”. The second part of the OBR’s scenario of a V-shaped recovery – a sharp fall followed by an even sharper bounce back – was met with some scepticism from other forecasters. Other letters of the alphabet common to economists have been suggested:

  • U-shape – gently picking up before rising sharply;
  • W-shape – a partial rise followed by another dip from a second wave of infections before a final sharp recovery; and
  • L-shape – the economy stops falling, but then flatlines at its new low level.

Whichever proves correct – and none may do so – one near certainty is that in a year’s time the government’s total debt will be close to equaling the size of the UK economy. The corollary is that the Chancellor is going to be in no position to make tax cuts. It is quite conceivable that the Conservative’s manifesto pledge not to increase the rates of income tax, VAT and national insurance contributions (NICs) will have to be dropped.

Rishi Sunak hinted as much in terms of NICs when he launched the Self-employed Income Support Scheme in late March. He said, “I must be honest and point out that in devising this scheme – in response to many calls for support – it is now much harder to justify the inconsistent contributions between people of different employment statuses. If we all want to benefit equally from state support, we must all pay in equally in future.”

The value of tax reliefs depends on your individual circumstances. Tax laws can change.

The Financial Conduct Authority does not regulate tax advice.

The uses of investment losses…

The Covid-19 pandemic has seen the values of many investments fall. But lower values can have a useful upside.

Source: Data from

‘It’s an ill wind that blows nobody any good.’

So it is with the drop in the value of shares and investment funds that has occurred since the start of 2020. It’s worth remembering, however, that paper losses are just that unless and until you sell or otherwise dispose of the investments concerned. Only then do they become real losses.

One perhaps unexpected opportunity lower values offer is that they make it easier to restructure or rebalance investment holdings. Often long-term employees of listed UK companies build up substantial shareholdings in their employer as a result of share schemes, such as the tax-favoured share incentive plan or SAYE plan. The end product can be a ‘portfolio’ heavily weighted towards just one company’s shares – the same company that is the investor’s salary provider and pension funder.

The averaging of prices that goes into a capital gains tax (CGT) calculation can make it difficult to sell down such an outsized holding without facing a tax charge. Now that the value of those shares might have fallen by 20% or more, there is greater scope to create a more balanced portfolio before tax looms into view.

Estate planning is another area to focus on. If you make an outright gift of shares or holdings in funds, then for CGT purposes you are in the same position as if you sold the holding. Here lower values have three benefits:

  • The taxable gain is reduced or even transformed into an allowable loss.
  • Your gift has a lower worth than it would have done at the start of the year, so if it does fall back into the inheritance tax calculation under the seven-year rule, it will have a smaller impact on your estate’s inheritance tax calculation.
  • Any recovery in value occurs outside of your estate.

There are several other ways to utilise market falls in your planning but, as always, make sure you take advice before taking any action.

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

Past performance is not a reliable indicator of future performance.

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

Tax treatment varies according to individual circumstances and is subject to change

The Financial Conduct Authority does not regulate inheritance tax advice.

Rise in lockdown will writing highlights forward planning needs

One perhaps unsurprising side-effect of the Covid-19 pandemic has been an upsurge of interest in wills and estate planning. However, the lockdown is constraining options.

Press reports have suggested that the increased interest in will writing has been particularly high among those in the older age brackets who are more vulnerable if they become infected.

At the best of times, a will is often left on the ‘to do’ list, rather like the tax return or fixing the next dental appointment. That procrastination helps explain why it is reckoned that more than half of adults do not have a will. The tax return and dental appointment have obvious prompters – 31 January and a toothache – but until now writing a will generally has not had the same impetus. Deferral is an obvious reaction to contemplating our own demise, but now Covid-19 has forced that uncomfortable consideration upon many of us.

A period of statutory self-isolation is not the ideal backdrop against which to draw up a will. The Law Society has succeeded in having solicitors “acting in connection with the execution of wills” classed as key workers by the Ministry of Justice, but that still leaves several problems. In England and Wales, the Wills Act of 1837 requires the person making the will (the testator) to sign it and for their signature to be witnessed by at least two individuals. That’s not so easy with the stipulated two metres of social distancing…To complicate matters further, if those witnesses are beneficiaries under the will, the act of witnessing means they forfeit their entitlement.

In Scotland one witness is required and measures have been introduced to allow signing to be witnessed via video calls with solicitors. The Law Commission has accepted that digital signatures for deeds are valid under English law but made a deliberate exception for wills. The Commission’s decision was driven by a concern about the vulnerability of some testators. As it is, there is already a growing number of wills which are being challenged in the courts.

The lesson to be drawn is obvious: just as the roof should be fixed when the sun is shining, so too should a will (and the associated estate planning and lasting powers of attorney) be sorted before their possible immediate need becomes apparent. When we get to the other side of this pandemic – which will happen – make sure that writing or updating your will is on your ‘do’ list, not the ‘to do sometime’ list.

The Financial Conduct Authority does not regulate tax and trust advice, estate planning or will writing.

Crisis lessons – spotlight falls on social security net

The Covid-19 pandemic has highlighted many aspects of life which had previously gone unnoticed or ignored and found the holes.

The full extent to which supply chains are global is an obvious example. Our reliance on internet connections and their surprising robustness when the world turned to Netflix and Zoom is another. Of crucial importance to many people, that governments around the world latched onto quickly, was the need to bolster the poor protection provided by their social security safety nets.

In the UK, measures taken include:

  • Scrapping the four-day waiting period before statutory sick pay (SSP) began to be paid to employees suffering from Covid-19 symptoms – the self-employed do not qualify for SSP. The move sounded more generous than it was, as SSP is £95.85 a week.
  • Adding £1,000 a year to the standard allowance under Universal Credit, to bring it approximately into line with the value of SSP at £410 a month for a single person aged 25 or over (£594 for a couple).
  • Rolling out the Coronavirus Job Retention Scheme and the Self-employed Income Support Scheme (SEISS) to replace the earnings of those put out of work by Covid-19’s impact. The maximum payment under both schemes is £2,500 a month, with the SEISS paying out as a single three-month lump sum capped at £7,500. This compares with a standard Jobseeker’s Allowance of £73.45 a week (£116.80 for a couple).
  • Legislating to prevent evictions for three months and demanding mortgage lenders, credit card companies and others grant three-month payment holidays.

Some of the changes made by the government may endure – it will be hard to reinstate the former Universal Credit standard allowance, for example – but others are too costly or disruptive to maintain.

Whether or not you have benefited from any of the Covid-19 measures, it is worth considering how you and your family finances would have fared if instead of a pandemic, you faced the more common risks of losing your job or even dying. There would be no enhanced state safety net in those circumstances. The lesson, like some of those other Covid-19 insights, is one often ignored: you need to have your own protection in place, be it through insurance and/or a sufficient rainy-day fund.