Higher state pension increases on the cards

Recently released economic data suggest a relatively large increase in the main state pensions for the next tax year, but it’s still inadequate for a happy retirement.

The new levels of state pension for the coming financial year (2020/21) are usually revealed in or alongside the Autumn Budget statement. But as 2019 has been a strange year – in particular with no Budget – there has been no official announcement yet on what state pensions will be from April 2020.

However, it is possible to work out fairly accurately what the new rates may be because the basis of increase is fixed.

New state pension, old basic state pension

These are both subject to the so-called ‘triple lock’, which means the annual increase is the greatest of:

  1. The annual increase in the CPI to September (1.7% in 2019);
  2. 2.5%; and
  3. The 3-month average earnings increase to July (3.99% in 2019).

In this instance average earnings are the clear winner. The precise (rounded) figures must await the Department for Work and Pensions’ formal announcement, but it looks like the new state pension (for anyone reaching state pension age (SPA) after 5 April 2016) will rise from £168.60 to £175.30 a week, while the basic state pension will rise from £129.20 to £134.35 a week.

Other state pensions (including SERPS and S2P)

The triple lock is limited to the new state pension and the basic state pension. Other state pension entitlements, such the old additional pension elements for those who reached SPA before 6 April 2016 will increase in line with the CPI, i.e. by 1.7%.

While the increases are to be welcomed, the new state pension is still far from being enough for a comfortable retirement. At just over £9,100 a year from April, it will be more than £3,300 less than the income tax personal allowance in 2020/21. The current national living wage for a 35-hour week works out as more than 60% higher.  

If you want a retirement that you can enjoy, you need to make sure you have adequate private pension provision on top of what the state provides.

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.  

Probate fee increases abandoned

The planned reform of probate fees in England and Wales has been scrapped.

A year ago, the government tabled proposals to increase the level of probate fees in England and Wales. The idea was to move from the current single fee approach (£155 via a solicitor, £215 otherwise) to a sliding scale, based on estate value. For estates valued at over £2 million, the fee would have escalated to £6,000.

The proposals met with predictably heavy criticism, winning the distinction of being labelled a ‘new death tax’ in some parts of the press. Nevertheless, the government pushed ahead with draft legislation, aiming to launch the new fees from April 2019. One consequence was that solicitors, and others acting as executors, rushed to submit probate documentation ahead of the anticipated fee increase.

As a backlog built up at probate offices and HMRC, everything went strangely quiet at the Ministry of Justice (MoJ). For reasons which are not entirely clear, April passed without the final stage of the legislative process being triggered. This only encouraged more rushed submissions as the new deadline was unknown. The Law Society noted that many solicitors and their clients were reporting a wait of much longer than the six to eight weeks timescale claimed by the MoJ for probate grants. It did not help that, coincidentally, a new administrative system for probate was being rolled out in the first half of 2019.

What finally put an end to the proposals was the (second) prorogation of parliament, which meant that the legislation automatically lapsed. While it could have been reintroduced, Brexit and an impending election both provided reasons not to do so. Instead the MoJ will now undertake a wider review of court fees which will involve “small adjustments to cover costs”.

If you think that the whole saga sounds eerily like something that has happened before, you are right. In 2016 even higher increases in probate fees were proposed (up to £20,000), only to be abandoned in May 2017, just as the following month’s general election loomed into view.

Helpfully, the MoJ’s announcement has indirectly highlighted the importance of having a Will and the time it can take to transform its contents into reality. If you don’t have a Will – and over half of the adult population does not – your estate will be subject to a process very similar to probate, but with the added disadvantage that the laws of intestacy, rather than your intentions, determine its distribution. Creating a Will, and regularly reviewing it, is a bedrock of good financial planning.

The Financial Conduct Authority does not regulate Will or trust advice. 

Starting early for tax year end investments

Venture Capital Trusts have started their fundraising for 2019/20. 

There was a time when tax year end planning didn’t begin until well after the New Year festivities were over and a March Budget was nearing. This rhythm has now shifted. The last months of the tax year are still important, as they are the point at which you should have a reasonable idea of your total income in the year. But Philip Hammond’s move to an Autumn Budget from 2017 means that there is now more focus around this time of year, rather than post-Christmas. Although 2019 has become an aberrant year in many ways, including the postponement of Chancellor Sajid Javid’s planned Budget in November, business as usual on year end planning continues.

The seasonal switch is particularly noticeable in terms of Venture Capital Trust (VCT) offerings. VCTs allow you to invest in a basket of small, unquoted companies with the aim of helping them grow and develop. The high-risk nature of fledgling companies means VCTs come with significant incentives and have grown in popularity in recent years. In 2018/19 the highest amount ever was raised at the current level of tax relief.

There are three main reasons for the increased interest:

  • Tax reliefs VCTs offer 30% up-front income tax relief, tax-free dividends and freedom from capital gains tax.
  • Pension allowances Although the lifetime allowance is now index linked, it and the unchanged rules on the annual allowance act as increasing constraints on pension contributions. The highest earners cannot now contribute more than £10,000 a year to their pension with full tax relief.
  • Aversion to avoidance HMRC’s anti-avoidance armoury has been much strengthened in recent years, witness the problems faced by some tax-avoiding celebrities. The public attitude has also moved to the point that being associated with aggressive tax avoidance is bad PR.

There was an initial autumnal rush for VCTs in 2017 at the first of the current crop of Autumn Budgets, ahead of widely anticipated reform of the VCT rules. This year many VCTs have already started their fund-raising for 2019/20 or announced the intention to do so shortly. Some of this may have been in anticipation of the 2019 Budget, although there were no significant changes expected. The spectre of an imminent general election, now confirmed for 12 December, may also have encouraged an early start.

If you are considering VCT investment in this tax year, please do not wait until February. By then you may not have very much choice left.

Venture Capital Trusts (VCTs) invest in assets that are high risk and can be difficult to sell.

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

One step at a time – investing slowly

Are you reluctant to make a lump sum investment in case the timing is wrong?

 FTSE 100: 1 January 2017 – 31 October 2019

Source: London Stock Exchange

It’s been both a rollercoaster and a trip to nowhere for the FTSE 100 index in recent years. The fluctuations can be seen in the graph above showing the performance of the top 100 companies listed on the London Stock Exchange since 2017.

From 1 January 2017 to date, the index has moved in a band of about 1,300 points, but by 23 October 2019 it was at virtually the same level as it started. Busy going nowhere might be one description, although, importantly, that ignores the dividend income which the companies in the Index would have generated over the period. This boosted investors’ total returns over the period from 1.7% to 14.7%.

The combination of the market’s movements and political uncertainties have made some people reluctant to invest lump sums. “Now is not the time to buy,” has been an understandably tempting thought. However, to paraphrase one of America’s most famous fund managers Peter Lynch, more money has been lost by investors waiting for market falls than has been lost in the falls themselves. The hard truth is that anticipating market timing is virtually impossible.

Phased investing

One halfway house that is worth considering if you have a lump sum to invest, but still cannot bring yourself to commit it all at once, is phased investment. This involves investing capital systematically over a relatively short period. A typical approach might be to spread investment over 12 months, with equal amounts invested each month. Because you buy more when the price is low and vice versa, the mathematical result is that the average price of your investment is lower than the simple average of the prices at your 12 investment dates. The effect is known as pound-cost averaging and is mostly thought of in terms of regular savings plans rather than phased lump sum investments.

Many investment platforms will run the process automatically, transferring money from a cash account or cash funds to your chosen investment funds every month. However, the various platforms have differing rules, with some being more flexible than others. The easiest way to find the one most suited to your goals is to seek independent advice. No less than Warren Buffet has said “The stock market is a device to transfer money from the impatient to the patient.”  If you’re prepared to be patient, you can harness your hesitancy to your advantage.

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.

UK dividend growth continues, but for how long?

Recent data show that dividends from UK shares rose by nearly 7% year-on-year in the third quarter.

Source: Link Asset Services

The latest Dividend Monitor from Link Asset Services, the share registrars, shows that dividends from UK shares continued to grow faster than inflation in the third quarter of 2019, despite all the political turmoil the UK experienced over those three months.

Compared with the same quarter in 2018, total UK dividend payments rose by 6.9% to a new third quarter record of £35.5bn. Link attributed the increase to a variety of factors, including:

  • A near 300% increase in special (one-off) dividend payments. These included a £1.1bn special dividend payment from the Royal Bank of Scotland to its major shareholder, the UK government.
  • A 29% increase in payments from companies in the mining sector, which is now second only to the banking sector in terms of the value of dividends paid.
  • Foreign exchange gains on dividends declared in US dollars and euros added 2.6% to the overall dividend growth figure, the flip side of adverse impact of political uncertainty on the pound.

As the graph shows, Link estimates that total dividend payments in 2019 will exceed £100bn for the first time, rising 10.4% above last year’s outturn. The importance of special dividends to achieving that growth is highlighted in the different heights of the red columns in 2018 and 2019.

Two of those driving factors for 2019 dividend growth – exchange rate movements and one-off payments – could reverse direction in the coming year. Link suggests that if these two elements were removed from the calculations, the trend for dividend growth would be ‘flat or low single-digit increases’.

On the other hand, the upward trajectory is not expected to last. Link expects shares to yield 4.4% over the next 12 months, excluding any special dividends. But as it notes, ‘By comparison, the yield on UK government bonds dropped to just 0.49% in Q3, while residential property and savings rates were flat. Equities, once again, continue to deliver far more income for every £1 invested than any other asset class’.

As ever, a balanced portfolio and regular advised reviews should keep your investments on track.

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.


Autumn Economic & Investment Seminar

We are pleased to report that our Autumn Economic & Investment Seminar held this morning at the Harbour Hotel in Guildford seemed to go down very well with our guests!

We had a total attendance of 74 guests plus our team, and we were fortunate to have two excellent guest speakers, Rory McPherson, Head of Investment Strategy at Psigma Investment Management (who sits on our Investment Committee), and Karen Ward, Chief Market Strategist at J P Morgan Asset Management. The guests included our professional connections, mostly from the legal & accounting fields, plus existing and some new clients.

We set out in detail how we manage our client’s money, and what our views are of World Markets from an investment & economic viewpoint, taking Brexit into account of course (we fear Brexit may feature in many of our future seminars!). Our Portfolios have given some very good returns over the last 12 months and year to date, despite the challenges out there. It’s all about getting the asset allocation right and making sure you use the right fund managers. Our mid-range risk graded portfolios have posted a return of +6.83% over the last 12 months and +11.02% YTD.

Feedback has been very good, and we will post further blogs when we announce the next Seminar

Could your protected pension allowance tip over the edge?

An obscure adjustment to old pension benefits, mandated by the courts, might cost some pension owners many thousands in additional tax.  

The problems caused by the tapering of the annual allowance have been making the pension headlines for some time. Whereas the original focus was on NHS consultants and doctors, the issue is now rippling through other higher paid parts of the public sector, such as the senior levels of the armed forces and civil service. The government has started to suggest reforms, but these have concentrated on tweaking membership of the pension schemes involved rather than reforming the pension tax legislation.

Another pension allowance conundrum is now looming, this time involving the lifetime allowance, which effectively sets the maximum tax-efficient value of all your pension benefits. The lifetime allowance has been reduced on three occasions, bringing it down from £1.8m in 2011/12 to £1.0m in 2016/17.

On each occasion the cut was accompanied by the launch of a ‘fixed protection’ option, allowing those affected to retain the existing allowance. So, for example, the 2012 version of fixed protection allowed the £1.8m lifetime allowance to be retained.

However, there was an important condition attached to all these fixed protections: they are lost if any additional contributions are made or any benefits are increased beyond the pension scheme’s normal indexation rules. At worst, an extra £1 of pension could see a fixed protected lifetime allowance of £1.8m reduced to the current standard lifetime allowance of £1.055m. In an extreme case, that could create an extra tax liability of over £400,000.

In theory the restriction means anyone with fixed protection should studiously avoid any risk of falling into that extra pension trap. In practice, some people – particularly the non-advised – forget or are unaware of the pitfall.

Now there is another potential danger, even for the diligent. An arcane 2018 High Court ruling on how to deal with equalisation of certain state-related pension benefits from the 1990s threatens to make automatic small increases to the benefits of some members of final salary pension schemes. Potentially enough to tip some over the threshold.

The situation now is that:

  • The law, as interpreted by the High Court, says these ‘GMP equalisation’ adjustments must be made.
  • Many pensions schemes have been, or are in the process of, calculating what those payments should be; but
  • Everything has gone on hold for fear of the tax consequences. HMRC has not issued any guidance on the matter and is still ‘carefully considering’ what to do.

If nothing else, the problem is a reminder that if you have any form of pension protection, it can be highly valuable and advice should always be sought before any changes are made.

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

New thinking for Labour on taxes?

New proposals for reforming capital gains and income tax have been published by an influential think tank which could make their way into an election manifesto.

The Institute for Public Policy Research (IPPR) is “the UK’s pre-eminent progressive think tank”, according to its website. This may sound like boasting, but it is probably a fair description of the IPPR’s position in the nerdy world of political think tanks.

Unsurprisingly, its thoughts regularly work through to become Labour Party policy and, less frequently, are also ‘borrowed’ by other political parties. It is therefore worth taking note when the IPPR publishes proposals on personal tax reform, which it did in September. With an election apparently drawing ever closer, the IPPR’s ideas assume even greater relevance.

Its latest proposals, in a paper entitled, “Just tax: Reforming the taxation of income from wealth and work” focus on two areas.

Taxing capital gains

The IPPR starts from the premise that “that income from wealth should be taxed the same as income from work”. This translates into a plan to:

  • tax capital gains as income;
  • scrap the capital gains tax (CGT) annual exemption of £12,000 and replace it with a minimal allowance of perhaps £1,000;
  • remove the CGT exemption which currently applies on death; and
  • withdraw most CGT reliefs, other than those for an individual’s main residence.

The IPPR floats the possibility of reintroducing some allowance for inflation (remember indexation relief?) or a minimum rate of return linked to 10-year bonds (which currently yield about 0.6%).

Income tax and National Insurance Contributions (NICs)

The IPPR proposal here is more radical and will affect many more taxpayers:

  • Income tax and NIC rates should be merged to produce one rate, which applies to all income, from whatever source;
  • The personal allowance should be reduced to bring it into line with the starting point for NICs (about £8,600); and
  • Tax rates should rise gradually, rather than using the current band approach. For example, the IPPR suggests the rate could start at 2% and rise to 50% on income above £100,000.

If this system were adopted on a tax-neutral basis, that is, producing the same income for the Exchequer as the current structure, the IPPR says that “around 80%” of taxpayers would see a rise in take home pay. The obvious corollary goes unmentioned.

If you needed a reason to revisit your tax planning now rather than later, the IPPR may have just supplied it…

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

Annuity rates hit 25-year record low

Annuity rates hit their lowest level since 1994 in September, with implications for those making retirement decisions.

Since the introduction of pensions flexibility in 2015, annuities have become much less popular as a way of converting a pension fund into income. The most recent figures from the Financial Conduct Authority show that over five times as much money is placed in income drawdown now as goes towards annuity purchase.

Now annuity rates have been back in the news, with several press reports citing calculations from the Moneyfacts comparison website that rates had hit their lowest level in 25 years. According to the data, a 65-year-old purchasing an ordinary pension annuity, with no increases in payment and no minimum payment period, could expect to receive just 4.1% – £410 a year per £10,000 of investment. That was a significant drop from the start of 2019, when an extra £58 a year was on offer.

In the short term, the cause of the annuity rate decline has been the drop in long-term interest rates since January. For example, the yield on a 15-year UK government bond fell from 1.56% at the start of the year to 0.86% by mid-September. This fall in long-term rates has been a global phenomenon, resulting in negative interest rates spreading to many international bond markets.

The longer term fall in annuity rates also reflects declining interest rates, which have been on a multi-decade downward path. In addition, increased life expectancy has put downward pressure on annuity rates, although this effect has receded latterly as recent statistics have suggested life expectancy improvements are flatlining.

The preference for drawdown, however, comes with investment and mortality risks – investment returns may be below expectations and/or you may outlive your pension pot. If nothing else, the annuity rate can provide a benchmark against which to consider the rate of income withdrawals.

If you are approaching retirement, make sure you take advice before dismissing annuities completely, especially if you are risk averse or will have few other sources of retirement income.

If you are some way from retirement, remember that 4.1% figure when you think about how much you want to contribute to your pension. After all, at 4.1% a £25,000 pension annuity – with no inflation protection or spouse’s benefits – will cost about £610,000…

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. The value of tax reliefs depends on your individual circumstances.

Interest rates back on the slopes

In September the US and European central banks cut interest rates, again.

When the US central bank, the Federal Reserve, cut its main interest rate by 0.25% at the end of July, it was the first reduction in over 10 years. Less than two months later, the Fed announced a second cut by another 0.25%.

The Fed’s move followed on from a rate change at the European Central Bank (ECB). Here, the main rate was left unchanged (at 0.0%), but the negative rate applied to deposits made by commercial banks was moved from -0.4% to -0.5%. A bank leaving €1m with the ECB for a year will have to pay €5,000 for the privilege.

The Bank of England kept its interest rate unchanged at 0.75% in September, not least because, like the rest of the UK, it is waiting to see what happens on the Brexit front. Investors in government bonds appear to be expecting further rate cuts as the return available on gilts maturing in six months to 12 years’ time is less than the current base rate.

The central banks are worried about a slowing global economy and the risk of a recession. They are less concerned about their nations’ savers. This stance was highlighted in a headline in Bild, Germany’s best -selling newspaper, which took aim at Mario Draghi, the head of the ECB: “’Count Draghila is sucking our accounts dry’.

Depositors in the UK are not yet facing negative interest rates, although there are plenty of bank and building accounts (including ISAs) closed to new business which pay next to nothing (e.g. 0.1% for the Halifax Bonus Gold account). At the time of writing, the best rate available for instant access was 1.61% from a sharia account, compared with the latest published CPI inflation rate (for August) of 1.7%.

There are still income yields of 4% and more available – for example the average UK share dividend yield at the time of writing was 4.23%. However, the higher income comes with greater risk to capital, making independent investment advice essential. There has been evidence enough just this year, in the problems at London Capital and Finance, that chasing the highest yields without advice can be a dangerous strategy.

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.