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FTSE at 20,000

No, it’s not a mistake, but it is not the FTSE 100, either.

The most frequently quoted index of UK share prices is the FTSE 100 index, or the “Footsie” as it is frequently described. The FTSE 100 index was launched at the end of 1983, with the aim of giving a yardstick to the value of the largest 100 companies listed on the London Stock Exchange. It started life with an initial value of 1,000 and is now about 7,500, equivalent to an average annual return of about 6.2% excluding dividends.

Two years after the FTSE 100 came into being, the FTSE 250 appeared. This captured the performance of the 250 UK listed companied that ranked below the Footsie’s larger constituents. The FTSE 250 was launched with an initial value of 1,412.6, an odd-looking number which becomes more understandable when you know that was the reading on the FTSE at the FTSE 250’s birth.

In May, the FTSE 250 hit one of those round numbers which cause a brief flurry of comment: 20,000. That is equivalent to an average annual return of 8.8%, again excluding dividends.

The difference in performance between the two can largely be explained by the difference in the industry concentrations in the two indices, as illustrated in the chart below.

Source: FTSE Russell 28/4/2017

The industry concentration is partly driven by the nature of the companies. The FTSE 100 contains many large multinational companies, including mining groups (e.g. Rio Tinto), with little more than a share listing in the UK. On the other hand, the FTSE 250 is more domestically oriented.

The gap between the two indices’ performance is a reminder that the numbers that make the press headlines do not always tell the full story and that relying on a fund tracking the Footsie may mean missing out on some of the better performing UK companies. A review of your portfolio can be a useful exercise.

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 Bank of England has a slight change of heart

The latest Quarterly Inflation Report (QIR) from the Bank of England has been published and shows that ‘the Old Lady’ has changed her mind a little. But the market projections for short-term interest rates don’t make for helpful reading for those with cash deposits.

The QIR was published in May, yesterday the Office for National Statistics revealed that in May, CPI inflation was running at 2.9%, 0.9% above the Bank’s target. The Bank shouldn’t have been surprised to see the higher inflation number. It’s QIR projected a short-term increase, with inflation reaching 2.8% in the final quarter of this year. Thereafter the Bank’s central projection is in for a gentle decline in the pace of price increases that will still leave inflation above target in the early part of 2020.

Why isn’t the Bank raising interest rates?

In his opening remarks when presenting the QIR, Mark Carney, the Bank’s Governor, said “The projected inflation overshoot entirely reflects the effects on import prices of the fall in sterling since late November 2015 – a depreciation caused by market expectations of a material adjustment to the UK’s medium term prospects as it leaves the EU.” This explains why the Bank is not raising interest rates, which would be its usual response to above-target inflation.

There is a highlighted page of the QIR devoted solely to explaining why global interest rates are so low and likely to continue to be. For the UK, the Bank notes that the money markets are currently projecting that short-term real (inflation-adjusted) rates will still be around 0.25% in ten years’ time, compared with an average of 2.75% between 1993 and 2007. Demographics and “heightened risk aversion” are to blame in the Bank’s view.

The current combination of sub-1% short term rates and 2%+ inflation is unwelcome news if you hold much cash on deposit: the longer your money is in the bank, the less it will buy. That may be a price worth paying if you are convinced that investment markets worldwide are headed for a fall in the near term. If you are not, or are just feeling uncertain where your money should be placed, do talk to us about the many options available. 

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.

And after the election…

There is unfinished business for the new government to deal with.

Past performance is not a reliable indicator of future performance. However, when it comes to general elections, there is plenty of history to suggest that tax increases are more likely in the first Budget to occur after the polls have closed. From a politician’s viewpoint, it makes sense to deliver the medicine immediately, as that leaves the longest gap before the next election. For example, it was in the summer Budget after the May 2015 election that the new dividend tax rules, reduced tax relief on buy-to-let properties and 3.5% increase in insurance premium tax were announced.

In the post-election environment, whoever ends up as Chancellor will be presenting a new Finance Bill, probably in July. There is a raft of measures to reinstate because so many were dropped from the March Finance Bill in the rush to get it passed before parliament shut down. When reviving the spring Budget, the Chancellor will almost inevitably wish to add some new tax legislation based on what was (or, as important, was not) stated in their party’s manifesto.

Changes which were not originally in March’s Finance Bill are unlikely to take full effect before the start of the next tax year (2018/19), but even so there may be some “anti-forestalling” measures that bite immediately. One area which looks ripe for a further attack is tax relief on pension contributions. You may recall that the tapering of the annual allowance for high earners was announced in the July 2015 post-election Budget.

If you are contemplating large pension contributions in this tax year, it could be a wise precaution to make them before the new government’s first Budget.

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

2017 election: income tax revisited

The 2017 election manifestos offered little good news on the future of income tax.  

Judging by the manifestos of the three main political parties, the days of appealing to voters by cutting income tax (and its alter ego, national insurance) are over:

  • The Conservatives repeated their 2015 manifesto promise of a personal allowance of £12,500 and a higher rate threshold of £50,000 (outside Scotland) by 2020. The way inflation is picking up, that pledge means little more than keeping pace with prices, which is already built into the legislation. Although there were references to “low taxes”, the previous manifesto’s promises to freeze rates for income tax and national insurance had disappeared. Given the problems Mr Hammond encountered with his March Budget, the silence is unsurprising.
  • The Labour Party manifesto promised no personal national insurance increases and no income tax increases for those with income of up to £80,000. Beyond that point, Labour wanted to apply a 45% rate (which currently starts at £150,000). There would also be the return of a 50% top rate, beginning at £123,000. The odd-looking starting point is driven by the fact that this is the income level at which all the personal allowance is lost.
  • The Liberal Democrats adopted a simple approach in their manifesto: an immediate 1% increase in basic, higher and additional rates of tax. However, the party suggested that in the longer term this would be replaced by “a dedicated health and care tax…possibly based on a reform of national insurance contributions”.

Income tax and national insurance will account for about 44% of all tax revenue in 2017/18, according to the Office for Budget Responsibility’s March 2017 estimates. This makes reductions expensive and increases valuable – the Liberal Democrats’ 1% would yield £6 billion a year. With even the Conservatives talking about not eliminating the Budget deficit until 2025, the hard truth is that, regardless of political hue, no government can afford income tax giveaways.

All of which means that if you want to see your income tax bill reduce, you need to elect for more financial planning rather than any particular political party.

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

China: fourth time lucky?

One of the major index providers is reviewing the constituents of its important global market indices.

Which country can boast the world’s second largest stock market and third largest fixed interest market?

You might be tempted to say Japan, but while you would be in the right part of the world, you would have chosen the wrong country. The second biggest share market and third biggest bond market both belong to China. However, to date, China’s internal markets have not figured in the main investment indices. There have been various reasons for these exclusions, but the main one has been capital controls. China still restricts flow of its currency and has recently tightened its rules to limit back door export of its currency, the Renminbi.

Now, for the fourth time in as many years, MSCI, the leading emerging markets index provider, is consulting on whether and how to include mainland Chinese shares in its emerging markets indices. Chinese shares listed away from the mainland, e.g. in Hong Kong, already account for 27% of the MSCI Emerging Market Index. MSCI’s latest proposal is to include only mainland Chinese shares accessible from Hong Kong, initially with a very small weighting. Ultimately, China could account for around 40% of the MSCI Emerging Market Index – hence the decision to start slowly.

Press reports suggest that this time around China will be added to the MSCI indices when the decision is made in June. The world’s largest investment manager, BlackRock, is in favour of China’s inclusion, which adds to the likelihood it will happen.

If you want to increase your exposure to the world’s second largest stock market, there are a variety of options available which we would be happy to discuss.

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

The NASDAQ hits 6,000

The market most associated with US technology shares reached a new high in April.

You may be old enough to remember that the end of the 20th century was marked by a surge in the value of technology shares in the United States. Many of these were traded on the NASDAQ market, which became synonymous with the “tech boom”. The main NASDAQ Composite Index peaked on 10 March 2000 at 5,132.52, having been a little under 1,500 in October 1998.

As the graph shows, that meteoric rise was followed by an equally dramatic reversal: the “tech boom” turned into a “tech bust”. The experience was traumatic for those investors who joined the ride late in 1999 and reinforced the NASDAQ’s reputation as being not a place for widows and orphans to invest their money. The March 2000 peak survived as an all-time high for over 15 years, before being overtaken in summer 2015. By early 2016, the NASDAQ had fallen back below 4,500, driven by fears about China. These proved short-lived and last month, the index breached the 6,000 level for the first time.

Inevitably, the arrival of a new round-number all-time high – at a time when other US stock markets are generally reaching new peaks – has brought back memories of what happened in 2000. However, the NASDAQ of 2017 is very different to its 2000 version. At the turn of the century, the NASDAQ market was dominated by technology and software companies. Now, the NASDAQ constituents are much more broadly spread with, for example, media and retail playing a significant role. The market is also much cheaper than it was 17 years ago in terms of the common yardstick of the ratio of price to earnings (P/E ratio). At its peak, the NASDAQ was trading on a P/E of over 70, whereas now it is less than half that level.

While the difference between 2000 and 2017 are no guarantee that the NASDAQ will not head back down to 1,500, they are a reminder that looking at the index number alone, especially over an extended period, can be misleading.

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

Probate fees changes – an election casualty few will mourn

The election has put a stop to planned increases in probate fees for England and Wales.  

Once a general election is called, there is usually a period known in parliamentary jargon as a ‘wash up’, during which outstanding legislation is passed, modified and passed or simply killed off, all in a matter of days. Unsurprisingly it is the more controversial proposals which generally get buried, as the timescale requires cooperation from the opposition to rush law onto the statute book.

Theresa May’s decision to call an election at seven weeks’ notice meant that all the outstanding legislation – including a 762-page Finance Bill – had to be dealt with in the space of a fortnight. One of the pieces of legislation which was dropped was “The Non-Contentious Probate Fees Order 2017”. It had reached the draft regulation stage, at which point it was proving to be anything but non-contentious.

The order would have restructured probate fees in England and Wales, moving them from a flat fee of up to £215 to a variable fee that started at £300 for estates valued at between £50,000 and £300,000 to a £20,000 fee for estates worth over £2,000,000.

The higher fees prompted the inevitable ‘new death tax’ headlines and one committee of MPs questioned their legality, arguing that the revised charges “appear…to have the hallmarks of taxes rather than fees”. Rather than face a battle for which it did not have time (nor probably the political appetite), the Ministry of Justice abandoned the legislation. It is unclear whether it will return after the election.

While the probate fee increase has disappeared, at least for the time being, the legislation introducing the new residence nil rate band came into force from April. If you have not yet reviewed your estate planning in the light of its introduction, now is the time to do so. 

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

A round-up of Budget non-starters

The Spring Budget has become a victim of the snap election.

Philip Hammond has not had much luck with what he said would be his first and last Spring Budget. His proposal to increase Class 4 national insurance contributions from April 2018 survived only a week before being dropped. Then when the Finance Bill was published in March, he won the dubious accolade of producing the longest ever Bill, at 722 pages. Just over a month later, the early election forced him to cull over half the Bill’s contents so that he could push a slim-line consensus version through before Parliament shut up shop.

As a result, several important changes that were pending have now disappeared. For example:

  • The reduction in the money purchase annual allowance from £10,000 to £4,000 from 6 April 2017. This could have created problems for people who phase their retirement, both drawing pension benefits and contributing to a pension.
  • The cut in the dividend allowance from £5,000 to £2,000 from 6 April 2018.
  • The introduction of making tax digital. This was due to begin for traders with income above the VAT threshold level from 6 April 2018, with others starting one year later.
  • The pension advice allowance. There was to have been a new tax exemption from 6 April 2017 for up to £500 per tax year for employee pension advice, paid for by an employer. The old, more restricted £150 allowance now remains in place.
  • The property and trading allowance of £1,000 each from 2017/18. These new allowances were aimed at keeping small amounts of trading income and property income out of tax.

It seems likely that most of the “lost” legislation will re-emerge in a summer Finance Bill after the election, if the pollsters are right and the Conservatives are returned to power. However, the start date for some measures, such as the money purchase annual allowance cut, may be pushed back to 2018/19 because of the delay in reaching the statute book. Others may be overtaken by fresh proposals, as a new May government would not be constrained by pledges in the 2015 manifesto.

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

Another notch up in State Pension Age

An independent review has recommended bringing forward the move to a state pension age of 68.

There was a time when men received their state pension from age 65 and women from age 60. Those numbers may still be locked in your memory, but they are heading towards their own retirement.

Currently a woman’s state pension age (SPA) is about 63, on its way to 65 by November 2018. A month later both sexes will see their (equalised) SPA gradually rise to 66 by October 2020. The following increase, to an SPA of 67, takes place between April 2026 and April 2028.

In March an independent report prepared for the government made proposals about the next step up, to an SPA of age 68. The report, by John Cridland, proposed that the change should occur between 2037 and 2039, seven years earlier than provided for in the existing legislation. If the government accepts the suggestion, then you will be affected if you have not yet reached your 47th birthday.

There were no dates mentioned for further SPA increases, although Mr Cridland did say he felt SPA should not increase more than one year in any ten-year period, assuming there are no exceptional changes to mortality. In theory that could mean an SPA of age 70 arrives by 2059, which would catch the younger half of the Millennial Generation (often called Generation Y), born between 1980 and 2000.

In early May 2017, the government will publish its own report, drawing on Mr Cridland’s work and number-crunching undertaken by the boffins in the Government Actuary’s Department. Not only is it likely to adopt something very close to the 2037−2039 window, but it may also follow another recommendation of Mr Cridland: the abolition of the triple lock increases to state pensions from 2020.

Unless you are relaxed about an ever-receding state pension, now is the time to review your private pension planning arrangements.

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

Introducing the new NS&I bond – is that it?

The Budget confirmed the rate on the new National Savings & Investments Bond.

2.2%

That is the fixed rate on the “welcome break for hard-pressed savers” which Mr Hammond confirmed in last month’s Budget. The new NS&I three year fixed rate bond will be available from April for a period of 12 months. The maximum investment will be £3,000, although unlike its widely popular pre-election predecessor, it will be available to anyone aged 16 or over.

2.2% is a ‘market-leading’ rate, as the Chancellor promised in his Autumn Statement. At the time of writing, the best three year fixed rate on offer elsewhere was 1.9%. In the government’s accounts, the new bond is shown as a ‘spend’ item, with a total cost of £290 million. That sum reflects the fact that the Treasury could borrow money at a much lower interest rate and administrative cost from institutional investors.

It could be argued that those taxpayers who don’t invest in the new bond are subsiding those who do. However, if you do invest, you may find that the return does not keep pace with inflation over the next three years – it is already below February’s 2.3% inflation rate. Your return could be even further below inflation if you have to pay tax on the interest because you have exhausted your personal savings allowance.

With hindsight, the new bond could prove to be one government gift horse whose mouth is worth a careful examination. There could be better options.

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.