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Archive: 2020

  1. Minimum Pension Age Changes

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    The many changes to the state pension age has caused confusion and anger among thousands of people approaching retirement over the years.  Since 1948 the state pension age for women was 60, whilst for men it was 65, then in the 1993 budget the then Chancellor Kenneth Clarke argued that it made sense for these ages to be equalised, given a women’s higher life expectance.  The Pensions Act of 1995 was born, which would increase a women’s state pension age gradually from 60 to 65 between April 2010 and April 2020, but then in the Pensions Act 2011 this was accelerated meaning women would retire at 65 in 2018, two years earlier than originally planned.

    These changes have caused great anger and disappointment for many women who were affected, because of the way that the state pension equalisation had been communicated.  Women born in 1956, previously expected to retire in 2016 at the age of 60, now must wait until they’re 66, I’m not surprised they’re angry!

    Many women who are affected say that they were not given adequate notice and time to rethink their retirement planning. A campaign group, Women Against State Pension Inequality (WASPI), has been petitioning the government to compensate them for what they argue is lost state pension payments.  Their latest appeal to the High Court in September 2020 was rejected, but they fight on for their justice.

    From December 2018 both men and women for the first time, have a state pension age of 65, and now both men and women’s state pension ages will increase together.  In October 2020 the state pension increases to 66 and will gradually rise to age 67 between 2026 and 2028.  In July 2017 the government announced further intentions to increase the state pension age from 67 to 68 between 2037 to 2039, seven years earlier than previously planned.

    It’s disappointing, I am affected just like you, but it’s no surprise.  When the State Pension was introduced in 1948, a 65-year-old could expect to spend 13.5 years in receipt of it. This has been increasing ever since. In 2017, a 65-year-old could expect to live for almost another 23 years, and in 2037 it is expected to be 25 years.

    It’s important to ensure you are aware of this so there are no surprises when your retirement day comes.  I encourage you to obtain a state pension forecast, to show you how much you’ll receive and when.  You can check your state retirement age using the government’s own site www.gov.uk/state-pension-age.

    What’s spoken about less, is the increase in the minimum age to access your own pension arrangements.  When I started as a financial planner, you could take benefits from your personal pension from age 50, then the Finance Act 2004 introduced a change to increase the minimum age to 55 starting from April 2010.

    The government has stated that the minimum pension age will increase to 57 in 2028, when the state retirement age increases to 67.  The minimum pension age will increase as the state pension age increases, always maintaining a 10-year differential between minimum pension age and state pension age in future years.

    These increases reflect trends in longevity and encouraging individuals to remain in work while also helping to ensure their pension savings provide for later life.

    If you were born before April 1971, the earliest you can access your pensions is age 55, born after April 1971 then this increases to age 57, and if you were born after 1981 it will be from age 58.

    The reality is that very few people can afford to retire at age 55 or 60 for that matter, but the point is knowledge is power, let’s make sure you’re aware of what you can do!

  2. Government debt crosses the £2,000,000,000,000 barrier

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    Yes, you did count correctly – there are twelve zeroes after the two. Another month of Government borrowing above £20bn has pushed total Government debt over the £2tn level for the first time.

    The Public Sector Finances data released by the Office for National Statistics (ONS) on Friday were notable mainly for that £2tn figure. It is no surprise, given that the June figure for public sector net debt (PSND) was £1.983.8tn, but moving from £1. something to £2. something makes good headlines. In reality, the July numbers were slightly better – or perhaps that should be not as bad – as had been expected:

    • The public sector net borrowing requirement (PSNBR) in July 2020 is estimated to have been £26.7bn, against a £1.6bn surplus a year ago (July tax receipts are usually boosted by payments on account). Although the monthly borrowing was the fourth highest on record since records started in 1993, there is some solace that it was slightly less than the Office for Budget Responsibility (OBR)’s central scenario projection of £28.4bn and the market’s average estimate of £28.6bn.
    • For the first four months of this financial year, total borrowing amounted to £150.5bn. The ONS has reworked last month’s statement to say that this cumulative figure is ‘£128.4bn more than in the same period last year and the highest borrowing in any April to July period on record (records began in 1993), with each of the months from April to July being records’. However, there is an element of good news from the OBR: as the graph above shows, the £150.5bn figure is £28.7bn below the OBR’s central scenario projection. Unfortunately, about £13bn of that difference is attributable to a difference in accounting approaches to the various Government-backed loan schemes. The OBR allows for projected write-offs – hence increase debt – while the ONS is still in the process of incorporating these in its data.
    • The uncertainty of the initial estimates for monthly borrowing figures was again underlined, with the April-June figures revised downby a cumulative £4.1bn. The ONS attributes the drop largely to “stronger than previously estimated tax receipts and National Insurance contributions”.
    • Overall Government debt rose to £2,004.0bn, £227.6bn (12.8%) higher than a year ago. As a percentage of UK GDP debt rose to 100.5% in July: a year ago it was 80.1%. Revisions to earlier data in 2020 mean that the ONS now says July 2020 marks “the first time [the ratio] has been above 100% since the financial year ending (FYE) March 1961’.
    • Self-assessed income tax receipts were £4.8bn in July 2020, £4.5bn (48%) less than in July 2019, because of the option given to defer payments on account until 31 January.

    In the circumstances it is surprising that the reduction was not greater. The OBR had reckoned that 90% of tax due would not be paid. As the OBR hints, those constructively ambiguous words on the HMRC website telling taxpayers “you can still make the payment by 31 July 2020 as normal if you’re able to do so” clearly worked…

    Summary

    Well Apple (The US Tech giant) hit a market cap of $2 trn last week, doubling in valuation in just over two years.  It’s the first publicly traded U.S. company to reach a $2 trillion market cap and Apple was also the first publicly traded U.S. company to reach a $1 trillion market cap….. Maybe a Trillion is the new Million?

  3. S&P 500 at a record high – so should we party like it’s 1999?

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    Where were you at the turn of the millennium? When the dot-com bubble burst?

    Well on Tuesday 18 August, the S&P 500 crept up by 0.23%. It was enough to bring the reading on the index to just above the previous high that it had hit nearly six months previously, on 19 February. In between those two peaks there was a fall of 33.9% to 23 March followed by a rally of 51.5%.

    The obvious question is why? The USA economy today is much less healthy – in all senses – than it was in February. In the second quarter of 2020 US GDP contracted by 9.5%, while the latest unemployment reading is 10.2%. Covid-19 cases are flatlining at around 50,000 per day and there is a Congressional logjam preventing the introduction of a second economic stimulative package to replace the $2.2trn one that expired at the end of July. Throw in for good measure a looming presidential election which the (nominally) Republican incumbent is currently on course to lose and the conditions for a raging bull market appear distinctly absent. So once again, why?

    Here are some plausible answers:

    • Tomorrow, not today – Markets are expressing a view about the future, not the present. Look, say, 18 months out and there could be a Covid-19 vaccine that has allowed ‘normal’ life to resume. En route there will be a jump in economic output, even if it is only to return to 2019 levels.
    • Technology – Comparing the performance of the Dow Jones Index and the S&P 500, the major technology companies have been the driving force of the US market indices since March. Technology has been a major beneficiary of the pandemic as the world has moved online. Five technology stocks – Apple, Microsoft, Amazon, Facebook and Alphabet (aka Google) – top the S&P 500’s constituent list and now represent 21% of the index by value. The FT estimates that this quintet accounts for a quarter of the rally in the index since 23 March.

    Technology’s impact also shows through in the NASDAQ Composite Index, as the above graph illustrates. This has traditionally been heavily weighted to technology shares and is up 25% this year (against 5% for the S&P 500).

    • Interest rates and money – At the start of this year, the 10-year US Treasury Bond offered a yield of 1.92% while the Federal Funds Rate was 1.50%-1.75%. Today the corresponding figures are 0.67% and 0%-0.25%.

    The Federal Reserve, in common with other central banks, has not only made money cheap to borrow, but has also thrown vast quantities of cash into the markets to prevent them locking up. The Fed’s balance sheet has expanded from $4.2trn at the start of the year to just shy of $7trn now.

    The UK for that matter has just exceeded $2trn!

    All other things being equal – a dangerous proviso at the best of times – lower interest rates increase the value of shares because the income they produce is discounted at a lower interest rate. The historic earnings yield on the S&P 500 is now 3.43% against 4.32% at the start of the year.

    • FOMO Fear-of-missing-out (FOMO) is playing its part in the rally. The USA has seen a jump in interest from retail investors, helped by a move to zero commission rates late last year. According to one report, retail investors now account for about 20% of market activity – and nearly 25% on peak days – against an average of 10% in 2019.

    Summary

    Tuesday’s peaks for the S&P 500 and NASDAQ prompted a number of comments from those who remember the technology boom of 1999. However, this time around the technology companies in focus are making money, not burning it.

  4. LISA exit penalty temporarily cut

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    At the end of last year, as the Help-to-Buy ISA were withdrawn, and Lifetime ISAs (LISAs) continued as the successor to support first-time buyers house purchase, £9m of income was generated for the Treasury from the early withdrawal penalty. As a reminder, the penalty generally applies if the LISA is cashed in before age 60 and the proceeds are not used in a first home purchase. At 25% of value withdrawn, the penalty more than claws back the Government’s contribution bonus. Do the maths and in effect the penalty removes 6.25% of the personal contribution, plus any growth.

    On Friday 1 May, the Treasury announced that it would legislate to reduce the penalty to 20% between 6 March 2020 and 5 April 2021 (inclusive). The timing means that anyone who has cashed in since 6 March 2020 is due a refund. The reduction to 20% means the penalty will now only remove the Government bonus and any growth thereon, as the example shows:

    5% makes a positive difference

    Sandra saved £200 a month in a cash LISA for 12 months from March 2019, receiving a £50 Government bonus on each contribution. In March 2020, she stopped contributions when she was put on furlough and two months later, short of money, she cashed in her LISA. The pre-penalty value of her LISA was £3,056. The temporarily reduced 20% withdrawal penalty amounted to £611.20, meaning she received £2,444.80, a sum that was the equivalent of her total personal contributions plus growth.

    If the old 25% penalty had applied, she would have received £2,292, £108 less than her personal contributions.

    It is interesting to note that the Treasury publication on the change explains the 25% charge as designed “…to disincentivise people from using LISA funds, including the generous government bonus, for a purpose other than buying a first home or for later life as intended”. In other words, like many other Covid-19 temporary measures, the 20% penalty will not endure.

  5. Portfolio Rebalancing

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    The asset allocation or the investment mix of a portfolio is designed to meet an appropriate risk profile of an investor and typically consists of Global Equities and Global Bonds.

    Rebalancing a portfolio is the process of bringing the current asset allocation back into line with the original or intended asset allocation.

    Over time, asset prices move at different rates and these changes cause the portfolio to naturally come out of allocation and we want to try to maintain the intended, or as reasonably close to, the intended allocation to maintain the desired risk profile.

    During bull markets Global Equities increase their value and become a higher allocation, relative to the Global Bonds. During bear markets, Global Equities may fall and become a smaller allocation relative to the Global Bonds.

    A 60/40 Global Equities/Global Bonds allocation is only 60/40 on day one after which is changes occur, small changes are tolerable, but larger changes could cause the portfolio to become a 70/30 portfolio, and therefore carry an unexpected or desired increased risk.

    We rebalance clients’ portfolios periodically, this typically is annually, or occasionally during market extremes interim rebalances are carried out.

    In the current market conditions, arguably market prices of one asset class, Global Equities, have become depressed, relative to Global Bonds. Prices are discounted because of the uncertainty of future company profits.

    At the same time, the Global Bond (fixed interest securities – basically loans that can be traded) have risen as money ‘flies to safety’.

  6. Market Volatility and Covid-19

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    Most likely you would have heard in the news that the world stock markets have retraced some of their growth, that’s the same, non-emotional way as the news headlines saying ‘trillions of dollars has been wiped off the value of the world’s companies’.

    What they did not tell you is that in the preceding months, trillions of dollars were added, unfortunately the media tends to spread fear, but you don’t need to accept it.

    The MSCI World Index had fallen from a high on 20th February to Friday’s close down 9.94%, the index is now back to mid-October 2019’s prices.  This is a significant retracement, but not unique.

    I use the MSCI World Index, which reflects a market cap weighted global portfolio, similar to what you invest in at Lexington, and not the FTSE (UK index) or S&P (US index), because it’s more relevant.

    Is this the bottom?  Who knows however you should expect these falls in your portfolio, that’s why I always speak about the historical maximum drawdown of a portfolio.

    Fundamentally the economy is strong, the market volatility is based on the uncertainty surrounding what impact the Convid-19 virus will have economically.

    We don’t know how severe it will be, some reports are worrying, others are less so, even those in charge don’t really know.  I read in the Spectator that there are strong signs that the virus has peaked.

    The virus is causing a supply issue not a demand issue.  Most central bank financial stimulus work on consumer spending by using quantitative easing and reducing interest rates.  If there is no product to sell, because of the lack of goods being manufactured, this will have little immediate benefit and earnings/share prices could be affected until supply recovers.

    If you are able, use this as a buying opportunity to invest more, or if you are fully invested, look through the headlines to the next 10 or 20 years, there will always be headlines to worry you.  If you are drawing an income from your portfolios, we have already planned for scenarios like this and you will hold cash and low risk bonds which will cover your income needs.

    The recovery may not be immediate because it will take a little time for the factories in the Far East to reopen and get back up to speed.  Weak companies with poor cashflow may not be able to survive a shortage of business so expect some corporate failures but overall fundamentally most companies and the economy are strong.

    Here is a recent interview on CNBC with Warren Buffett one of the world’s most successful investors, it’s 5 minutes, but it’s really the first 30 seconds you should watch.

    Warren Buffett CNBC Interview.

    After 25 years as a Financial Planner, I feel more experienced and prepared than ever in my career, you are in safe hands and if you are concerned, please get in touch.

  7. Inheritance tax planning ahead of the Budget

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    There is a real concern that the inheritance tax rules may be due for a change. A couple of recent reports give an outline of the areas that may receive attention. One of these is the exemption for “normal expenditure out of income” and clients who can use this exemption may like to take early action.

    Despite a recent little dip because of the impact of the residence nil rate band, inheritance tax (IHT) receipts are on the rise again and are comfortably over £5 billion per tax year. The tax was payable on 4.6% of estates of those who died in 2016/17 – up from 2.6% in 2009.

    One of the most effective ways of combating IHT is to make lifetime gifts. There are potentially four drawbacks to this:

    1. To be fully effective for IHT purposes the donor needs to survive seven years.
    2. If the donor wants access to the property gifted, the gift with reservation of benefit rules will neutralise any potential IHT savings.
    3. Will any capital gains tax arise on the gift?
    4. The donor may be concerned over the loss of control over the asset gifted.

    All four of these drawbacks can be overcome if proper planning is undertaken. For example, if gifts are made regularly out of the donor’s surplus income, and those gifts do not affect the donor’s standard of living, they will be exempt when made – no need to live for a further seven years for IHT effectiveness.

    Because those gifts are of cash, no CGT issues arise. Further, because they are made out of surplus income, there is probably no requirement for the donor to have future access to the gifts and control can be exercised over the gifts by making the gifts into a trust.

    And remember, all income can be taken into account for these purposes – earned income, investment income and tax-free income, such as that from ISAs and flexi-access drawdown income from an income drawdown account where the pension scheme member died under age 75.

    Example

    George is aged 57 and enjoys income of £150,000 per annum (£110,000 net) from his job as an architect. He and his wife, Samantha, have combined taxable estates of £3m and so face a hefty IHT charge of more than £900,000 on the second death. His sons, Robert (14) and Richard (12), are showing academic promise and are likely to go to university. He would like to put in place some funding to help them.

    George has surplus income of about £20,000 per annum. He thinks it would be good to use £10,000 of this to make a regular annual gift to a trust fund for the benefit of Robert and Richard. As each gift would be exempt under the normal expenditure exemption, there are no tax consequences on the gift and no requirement to live seven years for it to be IHT effective. The trustees invest in funds which are appropriate to the need to be drawn down over the next four to eight years.

    So, this all works very well for George. But he needs to bear in mind two important facts about the normal expenditure exemption:

    1. Because the donor’s personal representatives (PRs) will probably need to claim the exemption on those gifts made within seven years of the donor’s death, it is best if the donor can leave full details of the circumstances of each gift when made, in particular, that it is made out of income and does not affect his standard of living. In this respect it is worth the donor completing the form IHT 403 (Return of gifts and other transfers of value) to give his PRs guidance.
    2. The Office of Tax Simplification recently produced a report on the simplification of IHT in which they proposed that the annual exemption, the marriage exemption(s) and the normal expenditure out of income exemption should be bundled together as one exemption of about £25,000 per annum. More recently a cross party committee of MPs have suggested the Government make more radical changes to IHT. One of these would be to remove the normal expenditure out of income exemption.

    So, what should clients do? Well, it is impossible to predict whether changes to IHT will be made by the Government in the forthcoming Budget or over the next year or two. But, given the healthy majority the current Government enjoys, there must be a chance that the system will, at the very least, be simplified. It also means that clients that can afford to make substantial gifts out of income may like to get that planning up and running before any rule change occurs – in the hope that if a rule change does occur, existing arrangements will be protected.

    If clients implement this planning now, it would make sense:

    • to evidence, in writing, the intention to make regular gifts to show they form a pattern of gifting;
    • to keep records of expenditure so that it can be shown that any payments out of income do not affect their standard of living; and
    • ideally complete form IHT403 which records gifts and expenditure and may help the client’s PRs to deal with any queries that arise from HMRC after the client’s death.
  8. Rumours of pension tax relief cuts are not going away

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    In the run up to most Budgets it is common to hear rumours suggesting some form of cut to pensions tax relief, however, this year it seems more likely than usual. We have a new Government with a significant majority, who have promised large scale spending on public services and they will need to raise some funds from somewhere. Pensions tax relief is expensive and so may be too big a target to resist.

    We also have a brand-new Chancellor who may not have previously been involved in understanding the complexity and potential unintended consequences of cutting pension tax reliefs.

    The strongest rumour to emerge at the time of writing is the cutting of tax relief for higher rate taxpayers. There are several issues with this idea including how it would work with net pay contributions, employer contributions and defined benefit schemes. It also isn’t clear how this would tie in with the Government’s promise to resolve the NHS staffing issues caused by the impact of pension taxation.

    Whether we will see any changes or not, it is often good planning to ensure pension contributions are maximised before the end of the tax year and for this year ensuring contributions are made before 11 March Budget Day may be worthwhile just in case any changes are introduced with immediate effect.

    As well as affordability, the restrictions to pension contributions are the client’s available annual allowance (including any carry forward relief) which applies to all contributions, and, where making personal contributions, their level of earnings.

    The annual allowance can now vary from anywhere between £4,000 for someone who is subject to the Money Purchase Annual allowance, all the way up to £160,000 where the client isn’t subject to tapering and has the maximum carry forward allowance available.

    Personal contributions are also limited to the higher of £3,600 gross and the client’s relevant UK earnings, which primarily means any income earned from employment or trade and doesn’t include investment income such as dividend income or rental income (apart from certain holiday letting income).

    Within these limits, making contributions to maximise contributions that at least receive higher rate tax relief maybe worthwhile. It is worth remembering that whilst investment income doesn’t count as relevant earnings, pension contributions can still be used to obtain higher rate tax relief on that income. For example, if someone has £50,000 of earnings and £10,000 of rental income, a £10,000 gross pension contribution will ensure all the rental income moves from being taxed at 40% down to 20%.

    For tax year 2019/20 any carry forward available from 2016/17 needs to be used or it will be lost. In order to use it contributions need to be made that, firstly, are enough to use up the current year’s annual allowance. Once the current year’s allowance has been used the rules ensure additional contributions then use the earliest carry forward year first.

    As well as receiving tax relief at the client’s highest marginal rate there can be additional tax benefits of pension contributions for some clients as they can be used to reclaim the personal allowance where income exceeds £100,000, and avoid the high income child benefit charge where income exceeds £50,000. The income definition used for both of these is “adjusted net income” and pension contributions will reduce this figure whether they are made by net pay (i.e. a gross contribution deducted from earnings) or by relief at source (i.e. paid net of basic rate tax). Where contributions can restore allowances or avoid charges the effective rates of tax can be 60%, or more, making pension contributions even more attractive.

    There is only a short wait now until we see if there are any significant changes to pension tax relief or if, once again, the rumours are deferred until the next Budget. However, where a client can achieve higher rate tax relief or greater it may be worth maximising contributions while we know it’s still available.