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A hint of rising interest rates? 

The Bank of England has suggested that interest rates may rise sooner than expected.

After its August meeting, the Bank of England (BoE) was never expected to announce any change in base rate from the 0.1% set in response to the pandemic. The BoE, like its counterparts in the US, Eurozone and Japan, wants to be convinced of the strength of the economic recovery before moving rates off the floor. However, the August meeting was not as much of a steady-as-she-goes affair as had been predicted.

For a start, the BoE revised its estimate for the peak of inflation to 4% around the end of the year. It had previously pencilled in 2.5%, but that rate was reached in June (July’s figure dropped to 2.0%, widely seen as a statistical blip). As the graph shows, the BoE expects a decline from its new peak to be almost as sharp as the inflationary rise beforehand. Cynics may note that such a trajectory is necessary to bring inflation back to its 2% target within the BoE’s forecast period.

The BoE also announced a change to its £895 billion quantitative easing policy, which has resulted in the BoE owning a significant slice of government debt (gilts). Just over three years ago, the BoE said it would start to unwind quantitative easing by not reinvesting the proceeds of its maturing gilts once the base rate had reached 1.5%. At the time, the base rate was 0.5% and heading up to 0.75% in July 2018. With a 1.5% base rate now a distant prospect, the BoE has reduced the trigger level for starting the run down of its gilt stockpile to 0.5%.

Finally, the BoE gave its first real acknowledgement that rates would rise if the economy grew in line with its central forecast: “some modest tightening of monetary policy over the forecast period is likely to be necessary”. Translated from bank-speak, that was taken to mean a 0.5% base rate by 2024.

The conclusion to draw is that inflation will continue to outpace interest rates over the next three years, eroding the value of cash deposits. If you are holding more in banks and building societies than you need as a reserve, an alternative home for the excess could make a lot of financial sense.

The value of your investment and 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.  

National Savings goes green

National Savings & Investments has announced details of a new green savings product.

One of the small surprises in March’s Budget was the announcement that National Savings & Investments (NS&I) would be launching “a new, retail savings product to give all United Kingdom savers the chance to support green projects”. No further information was given at the time and little attention shown from the media. In part, that was because NS&I was under a cloud following the administration problems stemming from its action late last year in slashing Income Bond interest rates from 1.15% to just 0.01%.

More details of the new bond, to be called the Green Savings Bond, have now emerged. NS&I have listed its key features as:

  • A three-year fixed term, with no encashment during the term, beyond a 30-day cooling-off period.
  • Available to anyone aged 16 and over.
  • Purchase and management online only.
  • The investment per person will be a minimum of £100 and a maximum of £100,000. Investments can be made jointly.
  • Investors must have a UK bank account capable of receiving BACS payments.
  • The Bond will be fixed rate, with interest earned daily and added once a year on its anniversary. The Bond is therefore unsuitable if you want a regular income.
  • Interest is accumulated without deduction of tax at source. However, the interest is taxable each tax year an addition is made, not just at maturity.

The one key feature that NS&I did not reveal was the one of most interest: what return would the bond offer? NS&I unhelpfully said that this “will be available later in the year”. The rate is likely to be short of market leading. NS&I’s target for money raising in 2021/22 is £6 billion, about a quarter of what it collected in 2020/21, so it is not after massive sales. For investors reinvesting the maturity proceeds of three-year Guaranteed Growth Bonds, NS&I are currently offering a fixed rate of just 0.4%.

NS&I will be late to the green investment scene when the Green Savings Bond eventually arrives. To learn about the extensive range of green investments available today, please talk to us.

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.

HMRC loses on child benefit tax

A recent Upper Tribunal case has raised questions about HMRC’s approach to collecting tax on child benefit.

Child benefit tax, or the High-Income Child Benefit Charge (HICBC) to use its legal name, has a chequered history. The HICBC was introduced in January 2013 as a mechanism for clawing back child benefit from high-income couples, whether married or not. From 2013, the definition of ‘high income’ has been that one (or both) of the couple has adjusted total income of over £50,000. If both cross the threshold, then the person with the highest income pays the tax.

When the HICBC was introduced, it only affected higher-rate taxpayers, but now that £50,000 threshold can also catch basic-rate taxpayers. The highest income approach means that a couple who have an evenly split income of £100,000 pay no HICBC, but their neighbours, with £60,000 of income all in one partner’s name, face the full force of the charge.

The way that HICBC is levied is unusual. The charge is calculated as 1% of the child benefit received for each £100 of income above £50,000 as the example below shows.

HICBCExample

Tom has adjusted net income of £56,000 in 2021/22 and his partner Anne has income of £25,000. They have two children for whom Anne receives Child Benefit of £35.15 per week (£1,828 a year). As Tom’s income exceeds the £50,000 threshold by £6,000, he is subject to an HICBC of 60% of what Anne receives, i.e. £1,828 x 60% = £1,097.

Although an income tax charge, technically the HICBC is not a tax on income. This distinction may seem to be arcane, but in a recent case heard by the Upper Tribunal, it meant that HMRC lost its appeal. The tribunal found that a ‘discovery assessment’, one of HMRC’s common methods of collecting HICBC from those who have not completed a self-assessment return, was invalid because it could only be used for tax due on income. There is now a major question mark over HICBC already paid by taxpayers caught by discovery assessments.

If you are within the scope of HICBC, the latest case is very unlikely to affect your future liability. For that, there are some limited mitigation opportunities we would be happy to discuss with you.

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

Pension lifetime allowance cuts on the horizon

New HMRC statistics show the lifetime allowance continues to be a useful revenue earner for HM Treasury, but rumoured cuts at the next Budget could be a concern for soon-to-be retirees.

Source: HMRC.

In the March Budget, the Chancellor announced that he would be freezing the pension lifetime allowance (LTA) at its 2020/21 level of £1.0731 million until the end of 2025/26. The LTA started life at £1.5 million in 2006/07 and peaked at £1.8 million in 2010/11. Since then, it has been cut three times and regularly frozen. Had the LTA merely been increased in line with the CPI since 2006, it would by now be close to £2.1 million, nearly double its current level.

The reason why the LTA has been steadily devalued is to some extent explained by the graph above, which is based on revised and updated data recently issued by HMRC. This data shows that in 2018/19 over 7,000 LTA charges on pension scheme members were reported, with total tax payments of £283 million – an average of almost £40,000 per head.

The LTA benefits the Treasury in another, more subtle way. It presents a stark disincentive to make pension contributions for anyone with retirement funds that could reach – or have already reached – the LTA. This is especially true if you have any of the various LTA transitional protections that have been introduced over the years. The rules for some types of protection are such that any fresh contribution revokes the protection. For example, if you have Fixed Protection 2012, £1 of pension contribution would mean you lose a protected LTA of £1.8 million, potentially leading to a six-figure tax bill when benefits are drawn.

In practice, it may not be possible to avoid an LTA charge. Some employers will not offer a salary alternative to a pension contribution and, in those circumstances, suffering the maximum 55% LTA charge is better than foregoing 100%. Higher than projected investment performance can also land you with an LTA charge.

There have been renewed rumours that Chancellor Rishi Sunak will cut the LTA in the next Budget, with threshold figures between £800,000 and £900,000 popular guesstimates. If that or any other aspect of the LTA concerns you, do seek professional advice on your options before taking action. The LTA is only one of many tax traps surrounding pensions.

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.

 

The £9 billion Child Trust Funds backwater

Over £9 billion was invested in Child Trust Funds (CTFs) as of April 2020, according to new HMRC data.

If you have a child or grandchild born between 1 September 2002 and 2 January 2011, they were almost certainly the beneficiary of a government payment – either £250 or £500 – into a CTF. The theory behind the CTF scheme was to ensure every child had some savings as they entered adulthood.

In practice, the scheme was not a great success. Nearly a third of parents ignored the CTF vouchers they received, leaving HMRC to open default CTFs from accredited providers chosen at random. The scheme survived until 2010, when the new coalition government cut payments dramatically and subsequently closed it entirely from the start of the following year. By then, there were over six million CTFs in existence.

HMRC recently published some limited data on CTFs, which revealed:

  • In April 2020, shortly before the first CTFs started to mature, there was nearly £9.2 billion invested in CTFs, with the average CTF having a value of £1,500.
  • Over 85% of CTFs had a value of less than £2,500. Strangely, HMRC did not give any more detailed breakdown of these sub-£2,500 CTFs, but some detective work suggests that their average value is below £1,000.
  • CTFs were not limited to receiving government payments and the option for top-ups remains to this day, with a current maximum of £9,000 in a tax year. However, in 2019/20, fewer than one in six plans were topped up, with the average addition being £430.

The data paints a picture of most CTFs as small, receiving no new monies and being potentially forgotten. The government tacitly acknowledges this. As part of its package for dealing with the steady flow of maturing CTFs, it launched a find-a-CTF website (https://www.gov.uk/child-trust-funds/find-a-child-trust-fund).

If your child or grandchild has a CTF, it makes sense to review it now to ensure they don’t miss out. Since April 2015, it has been possible to transfer a CTF to a Junior ISA (JISA) but not vice versa – a child can only have the one or the other. Often, a new JISA will offer much wider investment choice than the old CTF and may have lower charges.

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.

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

The wrong type of ISA?

New statistics from HMRC show over £300bn invested in cash ISAs.

Source: HMRC.

One of the many knock-on effects of the pandemic has been that HMRC’s annual updating of statistics has suffered delays. As a result, details of ISA subscriptions and holdings for 2019/20 have only just emerged. Among many interesting facts, the data shows:

  • Despite ultra-low interest rates, the amount of money invested in cash ISAs has continued to grow. In 2019/20, £48.75 billion of subscriptions were received, more than twice as much as was invested in stocks and shares ISAs.
  • The increase in the maximum overall ISA contribution to £20,000 in 2017/18 (from £15,240) has still not driven total annual subscriptions above their 2014/15 peak.
  • Lifetime ISAs (LISAs), launched in 2017/18 to no great fanfare, have since grown in popularity, with 2019/20 subscriptions more than double those of the previous year. This jump may have been helped by the closure to new investors of the Help to Buy ISA in December 2019.
  • For the first time, over one million subscriptions were made to Junior ISAs (JISAs) in 2019/20, with total investment of £974 million.
  • The total amount invested in ISAs (excluding JISAs) in April 2020 was just under £620 billion, of which just over half was held in cash ISAs. The cash proportion would likely be substantially smaller today, as the value of stocks and shares ISAs were depressed in April 2020 when the first lockdowns got underway.

The continued dominance of cash ISAs is, at least in part, a reflection of the lack of financial planning advice received by many ISA investors. The personal savings allowance, introduced in 2016/17, means that basic rate taxpayers (calculated using UK-wide rates) pay no tax on their first £1,000 of interest and, similarly, £500 of interest is tax free for higher rate taxpayers.

At current interest rates, it takes a considerable amount of capital to exceed even the lower threshold so taking out a cash ISA could be of questionable value compared with an ordinary deposit, which might pay a higher interest rate. However, the ISA framework could be useful to you in other ways, so advice is essential before taking any action on a cash ISA.

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.

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

What is an adequate retirement income? 

A leading pension think tank has examined this question – but the findings aren’t straightforward.

Over the years, there has been much focus on the tax treatment of pensions and ways to encourage greater saving for retirement. Arguably, there has been less attention paid to the question of how much income you will need once work ceases.

The Pension Policy Institute (PPI) recently published a paper examining what an adequate retirement income means today in dollar terms. The paper notes that the last serious effort to address the issue was undertaken by the Pensions Commission nearly two decades ago, leading eventually to the introduction of automatic enrolment. The PPI makes the following points:

  • Individuals, employers, the state and society generally all have differing views on what constitutes adequacy. For example, the state view is set by the Guarantee Credit element of Pension Credit (£177.10 a week for a single person and £270.30 for a couple).
  • Changes to the pensions landscape since 2000 have altered the retirement picture both positively and negatively. For example, the new state pension is higher than its basic state pension predecessor, but state pension age has increased (to 66 for men and women) and will continue to increase.
  • The demands made on assets originally saved to provide a retirement income have increased, for example:
    • For some people, there is a widening gap between leaving work and receiving their state pension, a situation exacerbated by pandemic-prompted early retirements;
    • More often now debts, including mortgages, will be carried over into retirement;
    • The shrinking of home ownership will see more retirees having to pay rent; and
    • There may be a need to support other family members – the Bank of Mum and Dad may not be able to close at retirement.
  • The traditional emphasis on retirement income ignores the need to deal with ‘personal financial shocks’, which are better addressed by considering retirement capital.

The PPI says that many people make their retirement planning decisions ‘without support’. It goes on to warn that “As a result, many people struggle to make pensions and savings decisions which offer them the best chance of both achieving their aspirations for retirement and protecting themselves against future risk.” Don’t let that be you – talk to us about assessing what an adequate retirement income means for you and how it can be achieved.

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.  

Unhappy families – challenging inheritance issues

The outcome of a recent High Court case is a warning for anyone challenging a will. 

As inheritances become more valuable, the number of disputes about wills have increased. Court cases rose by almost 50% to 188 in 2019 compared to the previous year according to the latest Ministry of Justice figures.  Many more are settled or abandoned along the way. The cases which do reach the High Court tend to be those involving the ‘right’ mix of large sums and elevated emotions. An example that appeared in April 2021 is Miles v Shearer.

Tony Shearer died in October 2017, leaving nearly all of an estate worth about £2.2m to his second wife, Pamela. His two daughters, Juliet and Lauretta, born in the early 1980s to his first wife, received nothing. This prompted them to make a claim under the Inheritance (Provision for Family and Dependants) Act 1975.

Lauretta wanted a payment from her father’s estate to cover:

  • The cost of a home, so that she could move out of her mother’s property;
  • Fees for training as a dog behaviourist, to enable her to support herself; and
  • The expenses of caring for her autistic daughter.

Juliet sought funds to:

  • Reduce her mortgage by about £245,000, so that it would become affordable for her on a repayment basis: and
  • Buy out her ex-husband’s share of a flat in which she was living – about another £100,000.

In 2008, shortly after his divorce, Tony gave £177,000 to Juliet and £185,000 to Lauretta. At the time he made clear there would be no further financial support to his daughters. This was an important factor in the case as it reinforced the decisions Tony made in the creation of his will.

The judge rejected the claims of both daughters, stating that neither had established a need for maintenance to be funded from their father’s estate.

Two lessons can be drawn from the case:

  • Make your intentions clear in advance to try to reduce potential disappointment and the likelihood of legal action when a will is finally read.
  • Tony’s will achieved what he wanted to happen. Had he left matters to English intestacy laws, Pamela would have received only £125,000 and personal chattels outright, with Juliet and Lauretta immediately jointly receiving half the residue (less about £285,000 of inheritance tax).

The Financial Conduct Authority does not regulate estate planning and will advice.

Is inflation creeping up?

A global jump in inflation in 2021 is raising the prospect of a broader upward trend beyond a short-term pandemic reaction.

Source: Various including fred.stlouisfed.org, www.euro-area-statistics.org and Office for National Statistics   

The risk of the return of inflation has become a focus of attention in investment circles. As the graph shows, 2021 has seen a jump in the inflation rate in the US, UK and Eurozone. Inflation matters to investment markets because the standard central bank response is to raise short-term interest rates, which are currently around zero in all three areas. While an increase is inevitable from such a lowly base, the markets have not been assuming one anytime soon.

What is not clear yet is whether the 2021 rise in inflation is a temporary one in response to the vaccine-driven economic recovery or something longer term and more serious. At present there are some distortions in the annual figures which complicate matters. For example, in April 2020, the slumping oil price had driven petrol down to 109.0p a litre, whereas a year later it was 125.5p a litre – a 15.1% increase.  

Across the Atlantic, where inflation shot up to 4.2% in April, used car prices climbed 10% in one month between March 2021 and April 2021. That was attributed to computer chip shortages which hit new car production and forced buyers to visit the used car lots. Distortions appear in the other direction, too. For instance, the UK hospitality industry VAT rate was cut to 5% in July 2020, although the saving was often not passed on in full (or, sometimes, at all) to the customer. The VAT rate is due to go back up to 12.5% in October and revert to 20% next April, both moves which could increase inflation.

For the time being, the heads of the US, UK and Eurozone central banks are not concerned about the worsening inflation data. Their economists had forecast an increase as recovery took hold and expect that, as the bounce-back in the economy fades, so too will inflation.

Meanwhile these patterns remind us that inflation remains a risk and that any financial planning needs to take it into account. Over the last 10 years, the buying power of £1 has shrunk to 84.7p.

The value of your investment and 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.  

Lessons from London Capital & Finance

One of the last decade’s more infamous financial scandals has finally reached a conclusion.

The name of London Capital & Finance Plc (LCF) sounds impressive, but the business behind it was anything but. In the late 2010s, LCF issued ‘mini-bonds’, raising capital from individual investors to lend on to small businesses. LCF offered rates of up to 8%, tax-free via ISAs, which unsurprisingly attracted a large inflow of cash. Then, in mid-December 2018, the Financial Conduct Authority (FCA) ordered LCF to withdraw its marketing material with immediate effect.

LCF’s investors had a worrying Christmas followed by a grim new year in which the company went into administration before January had ended. Almost 12 months later, the Financial Services Compensation Scheme (FSCS) declared that LCF had failed. However, that did not mean investors received any immediate compensation. To add insult to injury, in March 2019, HMRC wrote to LCF’s ISA holders saying that their plans did not satisfy the ISA regulations and therefore any income from them was taxable.

A raft of legal arguments followed involving both the FCA and FSCS about the nature of LCF’s offerings and whether the company gave ‘advice’ when promoting its products. In mid-April 2021, 28 months after the FCA first blew the whistle, a resolution emerged. The FSCS has since paid full compensation to about 25% of LCF investors while the Treasury will pay the remaining 75% on their investment, capped at £68,000. This will ultimately cost you, the taxpayer, about £120 million.

The Treasury’s payment will not be quick. The government first must pass primary legislation “as soon as parliamentary time allows”, after which cheques will flow within the following six months. While that may seem painfully slow, in truth those 8,800 investors are lucky to receive anything. As the Treasury statement and the need for new legislation both underline, existing law should leave most LCF investors with nothing.

The whole acronym-laden saga is a classic example of the wisdom of the saying: “If it looks too good to be true, it probably is”. Always take advice before parting with your money.

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.