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Slowing down our old age

A paper published in August by the Office for National Statistics (ONS) casts new light on life expectancies in the UK.

Life expectancy has been increasing in the UK for a long time, as the graph shows. In 1980, the average life expectancy at birth was 70.6 years for a man and 76.6 years for a woman. In 2016 this had increased to 79.2 years for a man and 82.9 years for a woman.

What the graph also reveals is that the rate of improvement in life expectancy has been slowing down. The ONS data shows a marked deceleration in the 21st century.

Between 2011 to 2016, women’s life expectancy at birth increased by 0.2 years compared with an increase of 1.2 years over the period from 2006 to 2011. For men, the corresponding increases were 0.4 years and 1.6 years. There was a similar effect for life expectancy at age 65, which rose by only 0.1 years for women and 0.3 years for men between 2011 and 2016, against 1 year and 1.1 years in the previous five years.

For the layman, this welter of data can be confusing, especially as the press coverage is not always well informed. A few important things to understand are:

The ONS life expectancy data imply that, on average, a man who was 65 years old in 2012 will live until 83.7, while a woman who was 65 years old in 2012 will survive until 86. The expected age at death also rises with age attained.

The data represents the entire UK, but past research has revealed significant differences between regions and even within the areas of single cities.

As well as regional variation, different sections of the population experience different mortality. For example, those with private pensions tend to live longer, probably because they are wealthier.

Crucially, the life expectancies are averages, so 50% of people will outlive the central figure. The spread around the widely-quoted average is significant and often overlooked. The ONS’s own ‘How long will my pension last’ website (which has not been updated with the new data yet) shows that a 65-year-old man has a one-in-four chance of living until 94, and a woman of the same age a one-in-four chance of living to 96.

The data suggests your retirement may not be quite as long as previously thought, but there is still a good chance you will be living into your 90s. If your pension planning does not reflect that, the sooner you review it, the better.

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.

The record S&P 500 bull run

The US stock market set a new record for the longest-ever bull market in August.

S&P 500 Index Performance

Wednesday 22 August 2019 saw the S&P 500 drop – by less than 0.1% – after 3,453 days, making it the longest-ever bull run (a period of rising share prices) for the index, which is used by professional investors’ as a yardstick for the US stock market.

The previous record was set between 1990 and 2000, a period that saw the dot-com boom, followed shortly after the start of the new millennium by the tech bust.

The current rally has been helped by a strong performance from technology stocks, notably the ‘FAANGs’ (Facebook, Apple, Amazon, Netflix and Google (now called Alphabet)). It has also been aided by a period of ultra-low interest – the US Federal Reserve’s main rate was set to a historic low in December 2008 and did not rise above 1% until June 2017. In the last year US companies have also benefitted from Donald Trump’s corporate tax cuts, which have boosted earnings figures.

Despite the record performance, this bull market has been labelled as “the most hated of all time”. Throughout, sceptics have viewed the market as trading on borrowed time and reliant on the easy-money policy of the US central bank. How much longer the rally can last remains a hot topic.

While interest rates are now rising the US economy is growing strongly, and that is working its way through to the bottom line of the now more lightly-taxed US companies. Similarly, while the S&P 500 index is regularly reaching new peaks, other measures of valuation show US shares much less highly valued compared to previous market peaks.

Whatever the future holds, the past near nine and a half years have provided a reminder of the wisdom of international diversification of 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.

 

Student loan interest rates increase

The rates charged on student loans rose at the start of September.

The revised terms for interest on, and repayment of, student loans were published in August, along with the A level results for the year. From 1 September, the main interest rates for Plan 2 loans, taken out by students and recent graduates in England and Wales, are:

Period Interest Rate
During study and until the April after leaving the course. 6.3%
From the April after leaving the course (maximum 30 years). On a sliding scale, rising from:

3.3%, where income is £25,725 or less; up to

6.3%, where income is £46,305 or more.

Plan 1 student loans, taken out by students in Scotland and Northern Ireland (and students in England and Wales whose course started before 1 September 2012), carry a 1.75% interest rate.

Both rates represent an increase – 0.2% for Plan 2 and 0.25% for Plan 1. The first was driven by an increase in the RPI for March 2018 against March 2017, and the second by last month’s base rate rise.

The income threshold at which loan repayments start to be made will also rise from 6 April 2019, to £25,725 for Plan 2 RPI-linked loans and £18,935 for the older Plan 1 loans. The repayment level will be held at 9% of the excess income, meaning the cheaper loans will require higher repayments.

Tax implications

The 9% repayment rate has the same effect as an increased tax rate above the threshold. An employed basic rate taxpaying graduate therefore could suffer a marginal ‘tax’ rate of 41% in 2019/20 – 20% income tax + 12% national insurance contributions (NICs) + 9% loan repayment.

Including auto enrolment, the same graduate could also be required to make pension contributions of 4%, net of tax relief, making for total deductions of 45%. As auto enrolment contributions disappear above the upper earnings limit and NICs drop to 2% above the higher rate threshold, the maximum overall rate facing a higher rate taxpaying graduate is 51% (40% income tax + 2% NICs + 9% loan repayment).

The Institute for Fiscal Studies believes that in practice 80% of graduates will never fully repay their loans, as they will have the outstanding amount written off after 30 years (or an earlier death). That makes planning to provide funds for your student child/grandchild to help them avoid having to borrow a potentially unrewarding idea.

A more effective strategy could be to make sure that they have adequate financial resources when they graduate to help them cope with those high effective rates of tax. For help with how that can be arranged, please talk to us now – even if the graduate is still only at primary school, it is never too early to start planning.

Interest rates creeping up after nine years

The Bank of England increased the base interest rate in August to 0.75% – the second increase in 12 months.

Source: Bank of England August 2018

The Bank’s decision to raise the rate to its highest level in nearly nine and a half years was no great surprise to the investment community. Of more interest to the experts were the comments the Bank offered on the long-term trend of base rates relative to inflation. The Bank gave a theoretical estimate of the base rate needed to maintain inflation and economic growth in a fully functioning economy, rather than another forecast of where rates might be in a year’s time.

The Bank said an interest rate of 0%–1% above the rate of inflation, with a ‘modal rate’ of 0.25%, would achieve this equilibrium. In today’s economic environment, with an inflation target of 2%, this would mean a base rate of around 2.25%. That implies:

The equilibrium rate will be a long time coming – several 0.25% increases would be required and the Bank has repeatedly said any changes will be gradual.

Returns on savings accounts will continue to be poor and often below the rate of inflation, even before the impact of taxes are allowed for.

Persistently low interest rates mean that holding too much money on deposit could damage your long-term financial health. Whilst we all need to put aside reserves for the proverbial rainy day, the UK has moved on from an era when base rates were expected to be a useful margin above inflation.

For an assessment of how much your ready cash reserve should be, and the options for investing any excess, please talk to us.

The value of your investments, and the income from them, 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.

Is the LISA’s short life about to end?

The Lifetime ISA (LISA) may not survive after low uptake by providers and fresh criticisms from parliament.

The LISA has been reviewed by the Treasury Select Committee, which was critical of, “its complexity, its perverse incentives, its lack of complementarity with the pension saving landscape and its apparent lack of popularity with the industry and pension savers”. The Committee concluded by recommending “The Government should abolish it.”

The LISA was announced by the previous Chancellor, George Osborne, in his final Budget in Spring 2016. It was intended to appeal to savers under 40 by combining a first-time buyer’s deposit saving scheme and a pension arrangement, stretching the ISA idea into a very new shape.

Despite reservations from the Financial Conduct Authority about the regulatory implications, and reluctance from the savings industry, Philip Hammond launched the LISA in April 2017. Progress has been limited since then as there is still only one provider of cash LISAs. There is a wider choice of stocks and shares LISAs, but these are generally not suitable as deposit saving arrangements.

Although the Committee’s criticisms are hard to dispute, there are some situations where the LISA can be the best option. If you, your children or your grandchildren are aged between 18 and 39, make sure you check with us whether you should consider investing in a LISA before the Treasury Select Committee gets its way.

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.

OBR forecasts present need for tax increases in the Budget

The long-term outlook for government finances suggests tax increases are inevitable.

The Office for Budget Responsibility (OBR) produces medium-term financial forecasts alongside the Budget and Spring Statement, but that is not its only task. It is also required to take a longer-term view of the public finances, producing a Fiscal Sustainability Report every two years.

The latest version of the report was published in mid-July and did not make for comforting reading. The graph is a good summary of the bad news:

  • The black lines show the projected government borrowing as a percentage of the size of the UK economy. In 2017/18 annual borrowing was 1.9% of Gross Domestic Product (GDP). By 2067/68 it becomes 85.6%.
  • The red line shows the total amount of government debt, also as a proportion of the UK economy. As at May 2018, total borrowing was 85.0% of Gross Domestic Product (GDP). By 2067/68 it becomes 282.8%.

In the report, the OBR says, “Needless to say, in practice policy would need to change long before [2067/68] to prevent this outcome.” That means reduce expenditure and/or increased taxation.

Reductions in expenditure are unlikely, as much of the rise is driven by the costs of caring for an ageing population. In the short term increasing taxes is also hard to imagine, given the current political climate. In the longer term tax rises appear unavoidable, based on the OBR’s calculations. The first indications of what form tax rises might take could emerge when the Chancellor gives his response to the OBR in the Autumn Budget.

If you are looking for any solace, it is best sought in mathematics: these types of long-term projections are highly sensitive to relatively small changes in the underlying assumptions. If the UK economy were to grow faster than the 2.2% the OBR has assumed, the situation improves significantly. Alas, the opposite is also true.

With the UK’s growth rates remaining low, however, it seems likely the government will need to take some kind of action soon.

The value of tax reliefs depends on your individual circumstances.

Tax laws can change.

The Financial Conduct Authority does not regulate tax advice.

 

Residential letting to get more difficult

Draft legislation released in July contains more bad news for those renting out residential property.

The Finance Bill 2018/19 draft legislation published just before the summer holidays has confirmed the following measures:

  • From 6 April 2019, the rules for rent-a-room relief (which exempts up to £7,500 a year of income from tax) will be revised. A new ‘shared occupancy test’ means the relief will no longer apply if the entire property is rented out for the tenancy period. This will mean an end to going on holiday and letting out your home tax-free during sporting events, such as Wimbledon.
  • From 1 March 2019, the window for filing and paying stamp duty in England will shrink to just 14 days from the date of sale. Past experience suggests Scotland and Wales will follow suit.
  • From 6 April 2020, for residential property sales giving rise to taxable gains, a tax return must be made and the capital gains tax (CGT) paid within 30 days of the sale. Any adjustments would then need to be made via a self-assessment return.

Over the past few years, the Treasury has turned its attention to the private rented sector. As such, landlords must already comply with several new rules, including: the wear-and-tear allowance for furnished lettings being replaced with a tighter expenditure-based regime; the phased replacement of full income tax relief on finance interest costs with a basic rate tax credit; a 3% stamp duty surcharge for second residential properties; and an 8% capital gains tax surcharge on residential property.

The number of new buy-to-let sales is dropping, and some landlords are looking to sell following the changes. A consultation paper published by the government in July proposes minimum tenancy agreement terms of three years which may stimulate fresh landlord sales before the new CGT rule bites.

If you are thinking of moving in or out of this investment area, do talk to us about your options before taking any action.

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

Past performance is not a reliable indicator of future performance.

The value of tax reliefs depends on your individual circumstances.

Tax laws can change.

The Financial Conduct Authority does not regulate tax advice.

2018 proves volatile after the smooth sailing of 2017

The first six months of 2018 were unpredictable times for investors as global stock markets suffered a sudden bout of volatility.

Source: LSE

The unpredictability came as a major surprise after the general stability of 2017. Once the dust had settled there was a mixture of good and bad news.

The UK markets were inevitably led by Brexit, with negotiations mainly at the intra- rather than inter-government level. The other perennial British topic, the weather, produced the Beast from the East, depressing economic activity in the first quarter.

US short term interest rates continued to rise under the new chairperson of the Federal Reserve, with more increases promised for the second half of the year. Meanwhile, the tension between America and North Korea turned into a denuclearisation agreement and the Trump tax cuts were followed by the start of Trump trade wars, hitting long-term allies as well as the supposed target of China.

For all that, an investor who opened their first newspaper of the year on 1 July 2018 would have thought nothing much had happened. The FTSE 100 index fell by less than 1% in the first six months of 2018. Across the Atlantic, the S&P 500 rose in the same period, but only by 1.7%.

The small overall changes are a reminder that daily market movements often turn out to be self-cancelling noise, best ignored by the long-term investor.

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.

 

National Savings & Investments focusing on smaller investors

National Savings & Investments (NS&I) has introduced limits on its offerings for wealthier savers.

In mid-June NS&I announced a revision to the terms of its popular Guaranteed Growth and Guaranteed Income Bonds. The interest rates were left unchanged, but the maximum investment per person, per issue was cut by 99%, from £1 million to £10,000.

NS&I ostensibly exists to help small savers, but in recent years it has raised investment limits – for example to £50,000 on premiums bonds – to meet the funding levels set by the government. In the past NS&I has also emphasised tax-free savings certificates, which were of most appeal to top rate taxpayers.

Fortunately for existing investors, their former investment limits will continue to apply if they reinvest. The dramatic reduction means that NS&I will no longer offer an easy solution for anyone seeking fixed rates on large sums of capital without having to worry about the £85,000 FSCS deposit protection ceiling.

National Savings and Investments has long been something of oddity in the world of government finance. For example:

  • As a means of raising money for the Treasury, it makes little sense. NS&I collects small sums from retail investors, usually for terms of no more than five years. In contrast, the Debt Management Office (DMO) is well practiced at raising billions for the government from institutional investors, some of it borrowed for terms of over 50 years, and pays lower interest rates for its gilts.
  • NS&I has a value-for-money target for the cost of its capital raising, but the Treasury can override this. The classic example was the 65+ bond promising 4% return, issued shortly before the 2015 election.

It could be argued NS&I is right to discourage large fixed terms deposits that, even before tax, pay less than the going rate of inflation (2.4% CPI, 3.3% RPI in May). There are plenty of alternatives available, many of which offer a higher income. If you would like to discuss these options with us, please get in touch.

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.

Understanding what goes in to the FTSE100

The latest quarterly review of the FTSE 100 revealed common misunderstandings about how the index is drawn up.

Every quarter FTSE Russell, which operates all the FTSE indices, decides which companies are promoted or demoted from the FTSE 100 index.

There had been speculation that the June review would see Marks & Spencer (M&S) replaced by Ocado. The high street chain has been a member of the FTSE since the index first appeared in 1984, so for the bricks and mortar shopping experience to be supplanted by an online-only retailer that did not arrive on the stock market until 2010 made for a good headline.

However, M&S did not check out of the FTSE100 and survives until the next quarterly review. What the journalists missed is that a company listed in the FTSE 100 is only ejected if its ranking drops below 110. Similarly, promotion into the FTSE100 requires a ranking of 90 or higher.

These rules are designed to avoid a large quarterly churn at the bottom tier of the index, and it works – only one other company, GVC Holdings, entered the index in June.

GVC is gaming company, based in the Isle of Man and listed in London. The main reason it entered the FTSE100 was that it took over a more familiar betting name, Ladbrokes Coral. To do so, GVC issued more shares and thus increased its all-important market capitalisation.

June’s changes to the FTSE100 remind us that the construction and operation of stock market indices are not as simple as might be imagined. Whether you are considering investing in an index tracker fund or comparing fund performance against an index, it is a point to remember.

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.