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When it comes to funds, the best advice is personal

The recent problems with the suspension of dealings in a heavily promoted UK equity income fund have exposed the blurred line between advice and guidance.

According to the Investment Association (IA), there are around 3,500 funds on sale in the UK. The IA sorts these into over 30 individual investment sectors, although about 10% are listed as being in the unclassified sector. Faced with such a large choice, understandably many private investors want some help in making their fund selections. The assistance they receive has come under the spotlight following the recent suspension of trading in the Woodford Equity Income Fund (WEIF).

WEIF’s manager, Neil Woodford, established a strong track record with Invesco Perpetual before leaving the group in 2014 to set up his own fund management business. Unsurprisingly, a large amount of money followed him to his new company. He was helped by a common feature of today’s fund marketplace: favoured fund lists. These typically consist of 50 –100 funds, spread across those 30+ IA sectors, chosen by firms whose main business is marketing funds to the public. The criteria for selection are not always specified, but there is often a heavy reliance on past performance. However, there is one aspect that is clear: if you pick a fund from the list, then it is you who are making the choice.

Favoured fund lists do not constitute personal financial advice, even if may investors think that is what they are receiving. At best they are a form of general guidance, attempting to sort some of the wheat from a large volume of chaff. A select list only supplies the selector’s opinion at the time. It does not offer you a recommendation based on your personal circumstances, including consideration of the other investments you hold, whether held directly or indirectly, e.g. via pensions. Nor does the provider of the list offer any ongoing support, an important factor in current market conditions.

There is a role for recommended fund lists, but there is no substitute for personal, regularly reviewed advice on your investments.

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.  

2019 defies analysts’ predictions

The world’s share markets had a buoyant first six months.

Index 2019 H1 Change
FTSE 100 +10.4%
FTSE All-Share +10.4%
Dow Jones Industrial +14.0%
Standard & Poor’s 500 +17.3%
Nikkei 225 +6.3%
Euro Stoxx 50 (€) +15.7%
Shanghai Composite +19.4%
MSCI Emerging Markets (£)  +9.3%

The final few months of 2018 were a dark time for the world’s stock markets, with concerns about US trade policies and the backwash from the Brexit uncertainty leaving many markets posting an overall loss for the year. The prospects for 2019 did not look bright, with the spectre of the US Federal Reserve continuing to raise interest rates after its fourth rate increase in December.

Six months on, and the doomsayers appear to have been on the wrong track. Reuters, not known for its investment hyperbole, ran a story suggesting that it was “The best first half for financial markets ever”.  As the table above shows, major markets all produced solid returns, despite the continued headwinds from the same sources that produced negative results in 2018.

It helps that the interest rate picture has now altered significantly around the globe. Current expectations are now that the Federal Reserve could cut interest rates as early as July and keep cutting thereafter. Yields on US government bonds dropped over the first half – and hence their prices rose – in anticipation of the reversal. The benchmark 10-year US Treasury bond, which began the year yielding nearly 2.75% accompanied by predictions that 3% would soon be breached, ended the first half at 1.99%. On this side of the Atlantic the yield on 10-year UK gilts dropped from 1.26% to just 0.79%.

These last six months have once again reinforced a lesson about investing in shares: timing investment is all too often a fool’s game. There were few people shouting ‘invest now’ at the end of last year, even though it would have been a rewarding call.

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.

Another take on long-term care costs

A new set of proposals for funding long-term care has emerged from a significant source.  

The funding of long-term care is an issue that beats even Brexit in terms of protracted political procrastination. A Royal Commission on the subject was established in 1997 and reported in 1999. Its proposals were rejected by the then Labour government as too costly.

Since then there has been a steady flow of reports, reviews and even another Commission report (although not royal this time around). Over the last 20 years the system become fragmented, with Scotland providing free personal and nursing care which the rest of the UK does not. The last attempt to introduce a new system in England did manage to reach the statute book, but its start date was deferred. The scheme was then abandoned entirely, shortly after the 2017 general election.

That election featured a rapidly withdrawn proposal from the Prime Minister – dubbed a ‘dementia tax’ by opposition parties – that would have allowed everyone to retain £100,000 of assets, regardless of their total care costs. After the election a green paper on care funding was promised, but it too has suffered frequent deferrals and, after several missed deadlines, is now only due to be published “at the earliest opportunity”.

Total spend by type of care
Care type Average weekly cost
Domiciliary £252
Residential £617
Nursing £856

Source: Fixing the Care Crisis CPS April 2019

Into this limbo land another paper has now emerged. This one came from a think tank, the Centre for Policy Studies, which is closely linked to the Conservative Party. The paper’s author, Damian Green, is a former Secretary of State for Work and Pensions and Chair of the All Party Parliamentary Group on Longevity. His ideas include scrapping the current means test and, in its place, providing a Universal Care Entitlement (UCE) paid by the state, which individuals could top up from their own resources and private insurance.

The main way of funding would be by an extra 1% on National Insurance Contributions for those aged over 50. However, some experts have questioned whether this would produce enough revenue, given the existing funding shortfalls.

For the foreseeable future – although surely not another 20 years – the key remains to continue making sure your retirement provisions are sufficient to cover the quality of care you require.

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.

Pension flexibility: too taxing for many

Recent HMRC statistics highlight the over-taxation of some pension benefits.

More than one million people have received flexible pension payments thanks to the rules introduced just over four years ago. HMRC’s most recent statistics, to the end of March 2019, show that 1,113,000 people have withdrawn over £25,600m from their pensions, across 6,136,000 payments. The amounts withdrawn and the number of payments have both increased each tax year – in 2018/19 there were over 2,400,000 payments totalling £8,180m.

However, the system is causing some problems for HMRC. In the first quarter of 2019 HMRC refunded £31.1m of overpaid tax to over 12,500 people who had used pension flexibility. The over-collection is a result of HMRC’s insistence on using emergency tax codes where a pension provider does not have a current tax code for the individual, which is usually the case on a first withdrawal. More often than not, emergency tax codes create too high a tax deduction, as the example shows.

Emergency, Emergency!

Graham, who lives in England, expects to have an income of about £28,000 in 2019/20. He decided to draw £24,000 from his pension plan as an uncrystallised funds pension lump sum (UFPLS). He knew that a quarter of this would be tax free, with the £18,000 balance taxable. As that would still leave him comfortably below the £50,000 higher rate threshold, he expected to receive £20,400 as a net lump sum (£24,000 – £18,000 @20%).

In fact, he received £17,619 because an emergency tax code was applied to the taxable element of his UFPLS.

The excess tax can be reclaimed and HMRC has created dedicated forms to speed up the repayment process. In theory if no reclaim is made, the tax should eventually be refunded once HMRC undertakes its end of year reconciliation – but that could mean waiting over 12 months if the payment is taken early in the tax year.

If you are thinking about using pension flexibility, it pays to take advice before asking for the payment. In some circumstances the emergency code issue can be sidestepped, but if it cannot, then you need to be aware of what you will receive initially and the process of tax reclaim.

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

Brave new world of UBI?

If those three letters mean nothing to you now, they may do soon.

Universal Basic Income (UBI) has become a topic attracting attention among some think-tanks and political parties, both in the UK and overseas. The idea behind UBI is simple and has an obvious electoral appeal.

In its most basic form, UBI would give every citizen a government paid regular cash income, subject to the most minimal of qualifications, e.g 18 or over and not imprisoned. Millionaires and paupers, students, full time employees and pensioners would all receive the same amount. In theory, UBI offers the opportunity to revise radically – or even abandon completely– the existing support systems of means-tested social security benefits and tax credits. In practice many UBI proposals recognise that that there would probably need to be some additional benefits for people with disabilities.

Unsurprisingly, the question of whether UBI is affordable is a contentious one. The corollary is whether what is affordable could be classed as a meaningful UBI. A good example of the affordability question emerged in a structure recently put forward by the New Economic Foundation (NEF). This think tank suggested for the UK excluding Scotland:

  • Scrapping the income tax personal allowance;
  • Replacing it with a UBI of £48 a week for everyone aged 18 or over with a National Insurance Number and income of up to £100,000 a year;
  • Adjusting means-testing to allow for UBI; and
  • Restoring the real value of Child Benefit to its 2010/11 value, before benefit freezes started to erode its purchasing power.

The NEF calculates that such reform would generate a net saving of £2.9bn for the Exchequer. If that seems surprising, it is because of the subtle impact of replacing the personal allowance (worth £2,500 a year to a basic rate taxpayer) with a UBI of about the same amount. The reform would mean that the higher rate tax threshold dropping to £37,500 (from the current £50,000), leaving most people with income above that level worse off. As the NEF said, the effect is their proposals would be “highly redistributive”.

John McDonnell, the Shadow Chancellor, has said that he would trial UBI if Labour were elected. It is not inconceivable that a future Conservative chancellor might ‘borrow’ some UBI ideas, given the long running problems surrounding Universal Credit. Pre-election tax planning may have already begun.

The value of tax reliefs depends on your individual circumstances.

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

How well do you understand inheritance tax?

A survey by HMRC published in May concluded that the public have a relatively poor knowledge of inheritance tax (IHT) rules and lack of confidence in what they do know.

HMRC recently commissioned a survey of 947 people who had made gifts in the last two years. To assess knowledge of the IHT system among these donors, they were asked eight questions, which are shown below. Now it is your turn to try:

 

58% answered five or more questions correctly, while just 37% gave themselves a confidence rating of over 6 out of 10 on answering the questions. After adjusting for confidence levels,the survey concluded that the proportion with a “high knowledge” – as opposed to simply lucky with their answers – was just one in four.

The correct answers are shown below. Whatever your score, it is worth considering why HMRC should have undertaken such a survey at this time. It may be no coincidence that the Office of Tax Simplification is due to publish its second report on IHT simplification soon. Rationalising the rules on lifetime gifts is an obvious target, but as ever with simplification, there would be some losers. We can help you consider where you might stand on the wining and losing scale.

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

Answers: True: 1, 2, 3, 4, 5, 8 False: 6, 7

A popular peak for venture capital trusts

Figures recently released for last tax year show the highest level of VCT investment since 2005/06.

The Association of Investment Companies was quick off the mark after 5 April in announcing a near record level of fund raising for venture capital trusts (VCTs) in 2018/19. At £731m, 2018/19 VCT investment just beat the 2017/18 figure by £3m. The improvement is more impressive than it sounds because in 2017/18 there was a surge of interest ahead of widely anticipated changes to the VCT rules, which subsequently emerged in the autumn 2017 Budget. The best year for VCT capital raising – the sharp spike on the graph – was 2005/06, which was the last year in which income tax relief for investment was at 40%.

The 2018/19 inflow to VCTs is somewhat surprising as those 2017 Budget changes have made fresh investment by VCT managers higher risk than it used to be. The focus is now firmly on young growth companies, which may need a series of capital injections as they expand, rather than a one-off investment. For now, the impact on returns have benefited from established VCTs raising funds for some years and thus have portfolios built up under past, less restrictive VCT investment rules.

These VCTs may still hold investments in management buyouts and long-established companies that required capital for expansion. As those old holdings are liquidated, performance could become more volatile, reflecting the higher risk nature of the more recent acquisitions.

The attraction of VCTs, which must be set against those risks, is tax relief:

  • 30% income tax relief (given as a credit) is available on up to £200,000 of investment per tax year;
  • dividends are free of income tax; and
  • any gains are free of tax, although income tax is clawed back on disposals within the first five years.

If your opportunity to invest in pensions is limited by the annual and/or lifetime allowances, that 30% up front tax relief has an obvious attraction.

Although the end of tax year VCT season is over, there are a range of VCTs seeking to raise funds early in the new tax year. Please contact us to discuss your options.

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.

Doctors tapering off as pension tax rules bite

Measures designed to limit the cost of pensions tax relief to the Treasury are having some unwelcome consequences, as some senior doctors have found their incomes disappearing.

Some members of the medical profession have found changes to legislation mean their earnings are getting swallowed up by the tax system. According to a recent Financial Times report some NHS consultants are being landed with tax bills of up to £87,000, prompting them to reduce working hours or even take early retirement.

The doctors’ problems primarily stem from the implementation of the pension annual allowance tapering rules. These have two key trigger points:

  • ‘Threshold income’ (broadly speaking total income from all sources, less personal pension contributions) exceeding £110,000; and
  • ‘Adjusted income’ (broadly total income from all sources plus employer pension contributions) exceeding £150,000.

If both levels are crossed, then the standard annual allowance for pension contributions of £40,000 is reduced by £1 for each £2 by which ‘adjusted income’ exceeds £150,000, subject to a minimum annual allowance of £10,000. The all-or-nothing nature of the triggers can mean that just an extra £1 of earnings brings the taper rules into play. That additional £1 could therefore result in an additional tax bill of much more than £1.

To complicate matters further, £110,000 sits almost in the middle of the band of income between £100,000 and £125,000 at which the personal allowance is tapered away, creating an effective marginal tax rate of up to 60% (61.5% in Scotland). Added to that will usually be 2% national insurance contributions.

The Financial Times article said that many doctors had been ‘surprised’ by their pension tax bills. This implies they had not sought personal financial advice on how the pension taper rules, introduced from April 2016, would affect them.

There are on-going discussions between the Treasury and the Department for Health and Social Care about the issue, but it seems highly unlikely the former will forgo the revenue generated by the annual allowance rules (over £560m in 2016/17). In the meantime, the episode serves as a reminder of the importance of regular financial reviews to avoid – or at least be aware of – the growing range of tax traps in the UK’s labyrinthine tax legislation.

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

Riding out investment bends

Professional investor interest has been focusing on US government bond yields, with potential lessons for long term investment.

Source: US Treasury

On 22 March the US stock market caught a sudden – and brief – chill. One of the main reasons was the red line in the graph shown above.

This shows a yield curve plot, which shows the return an investor would receive from buying US Treasury securities, based on their term to maturity – from one month to 30 years. What happened on 22 March was that the yield on 10-year Treasury bonds fell below that of 3-month Treasury bills.

Usually the longer the term to maturity, the higher the yield, as demonstrated by the black line on the graph, which dates from one year ago. Intuitively that makes sense – the longer the period of time money is lent, the greater the risk that inflation will emerge to erode returns, so the higher the interest rate demanded.

History has shown that when yields fall with lengthening maturities – described as an inverted yield curve – a recession is imminent. The logic is that investors will accept a lower return from longer dated bonds because they anticipate short term rates will be cut to counter the impact of the recession. In the US, the reverse yield curve has a very good track record as a warning flag, which explains the stock market’s reaction to the news.

Whether yield curve movements have retained their predictive capacity is now the subject of some debate. There are those who believe that central bank actions since the 2008 financial crisis have so distorted the bond market that the yield curve can no longer be trusted. On the other hand, there are experts who worry about the credibility of any ‘This time it’s different’ message. The inversion has started to fade, but as ever, time will tell if the message is right or not!

 

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.

HFS Milbourne Team take on the Mundays 5k

A team of 6 runners from HFS Milbourne took on the Mundays LLP 5k charity fun run on 8th May 2019 arranged in aid of the Princes Alice Hospice. For 2019 this was held in the new setting of the picturesque Painshill Park in Cobham.

A great effort by the whole team on a blustery Spring evening with a few rain showers thrown in for good measure!