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  1. June Interest Rate Decision

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    An increase in interest rates could be nearer than anyone thought!

    Thursday’s meeting of the Monetary Policy Committee (MPC) of the Bank of England was expected to be a non-event. A Reuters poll of economists revealed that not one expected a move in base rates from the 0.25% set in the wake of the Brexit vote last year. They were all proved right, but…

    Of the eight MPC members, three external members voted for a rate increase. It was the first time since 2011 that there had been three votes for a rate rise – and that was when the MPC had nine members. The 3-5 vote was a shock to the market and gave a brief boost to sterling.

    The Bank’s statement noted that “CPI inflation has been pushed above the 2% target by the impact of last year’s sterling depreciation.  It reached 2.9% in May, above the MPC’s expectation.  Inflation could rise above 3% by the autumn, and is likely to remain above the target for an extended period as sterling’s depreciation continues to feed through into the prices of consumer goods and services.  The 2½% fall in the exchange rate since the May Inflation Report, if sustained, will add to that imported inflationary impetus.” That concern about over-target inflation seems to have been the reason why the trio voted for a 0.25% rate increase, despite recent evidence that growth is slowing.

    One of those voting for the increase, Kristin Forbes, was attending her last MPC meeting. The election hiatus means that her replacement has not yet been chosen. Neither has a replacement been named for Charlotte Hogg, the deputy governor who resigned in the wake of a grilling from the Treasury Select Committee. In theory Mr Hammond could name two new members in time for 3 August’s MPC meeting, changing the voting mix significantly. Even so, yesterday’s general assumption among commentators that rates would not rise until 2019 is now probably consigned to history.

    Across the pond, the US Federal Reserve increased its main short term rate by another 0.25% on Wednesday, taking it to a 1.00%-1.25% range. The Fed also set out the first steps to unwinding its bloated $4.2trn balance sheet, the result of its quantitative easing programme. The Bank of England still looks a long way behind…

  2. Marriage Tax Allowance – What Is It?

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    As you may be aware the Government has introduced a tax break called the Marriage Tax Allowance.

    The allowance, which came into effect from 6 April 2015, is available to couples who are married or in a civil partnership and enables a transfer of a proportion of their tax free personal allowance between them.

    The transferable amount for 2016/17 is set at £1,100 (10% of the personal allowance) and will change each year as the personal allowance increases.

    To be eligible to claim you must:

    • Be married or in a civil partnership,
    • One of you needs to be a non-taxpayer (which usually means earning less than the personal allowance),
    • The other person needs to be a basic rate (20%) taxpayer, and
    • You must both have been born after 6 April 1935 as there is a different tax allowance for couples where one partner is born before this date

    HMRC have stated, however, that to date fewer than 1 in 10 eligible couples have applied for the tax break. It is thought that this might be because many people simply aren’t aware of the new allowance or that it can be quite time consuming to claim for the tax break, which is worth £220.

    An application for the Marriage Tax Allowance is a straightforward process and once in place the election will remain until one of you cancels the election or your circumstances change e.g. because of divorce or you become a higher rate taxpayer.

    Where both partners have already filed a self assessment tax return, the claim to transfer can be made when completing their self assessment tax returns.

    Alternatively the non-taxpayer can apply online to transfer their allowance and HMRC will include the additional personal allowance in the partner’s tax code. Where the partner does not have a tax code, i.e. where they are self employed, the additional personal allowance can be included in their self assessment tax return for the year to reduce their tax liability.

    Should you wish to take advantage of this tax break go to https://www.gov.uk/marriage-allowance

  3. The FTSE 100

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    The FTSE 100 – the “Footsie” – is the UK stock market index which garners most of the headlines. It was launched on 31 December 1983 with a base value of 1,000. Today it is about 7,550, which equates to an average annual return (excluding dividends) of 6.2%.  RPI inflation over the same period averaged 3.5% a year.

    Two years after the FTSE 100 was launched, the FTSE 250 came on the scene to cover the 250 UK listed shares below the Footsie’s 100 large cap constituents. The FTSE 250’s base figure was 1,412.60, a number chosen to match the level of the FTSE 100 at the end of 1985. Last week the FTSE 250 broke through the 20,000 level for the first time.

    What looks like a massive outperformance, is not quite so great when subjected to the power of compound interest. The average annual return (again excluding dividends) comes to 8.8% whereas the Footsie over the same period achieved 5.5% (those first two pre-FTSE 250 years were good ones). Inflation from the end of 1985 comes in virtually unchanged at an average of 3.4%.

    The outperformance of the FTSE 250 is not quite as great as it seems because the constituents of the FTSE 100 have generally delivered a higher dividend yield (the FTSE 100 currently yields 3.66% whereas the FTSE 250 offers 2.64%). However, overall there is no denying that the FTSE 250 has trounced its larger counterpart. Look at the long-term graphs and the outperformance turns out to be something of a roller coaster:

    • The two indices performed quite similarly until 2003: on 7 March of that year the FTSE 100 hit a low of around 3,492 while the FTSE fell to 3,890 (11.4% higher).
    • By June 2007, just as the financial crisis was about to hit, the FTSE 250 peaked at 12,197, 81% higher than the FTSE 100’s 6,732.
    • The FTSE 250 took a big dive in 2007/08, bottoming out at 5,492 in November 2008, a decline of 55%. The FTSE 100 took longer to find its low of 3,531 in March 2009, down 48% from its peak. That low coincided with a figure of 5,831 for the FTSE 250, 65% higher than the FTSE 100.
    • Since that 2009 nadir the FTSE 100 has risen by 114%, whereas the FTSE 250 is up 243%.

    Some of the difference in performance is down to the different companies in the two indices. For example, the FTSE 100 has suffered from its exposure to commodities and energy (18.1% against 6.8% currently). A sector breakdown of the industrial sectors of the two indices can be found here. There may also be an effect that, as the top index, the Footsie’s constituents can look like companies that have reached the end of the small/medium company growth stages.

    Comment

    The graphs can be rather misleading. Unless they are log-scale, a jump from 10,000 to 20,000 looks much more impressive than 3,500 to 7,000, even though both represent a doubling. On a price/earnings ratio basis the FTSE 100 is more expensive (30.04 v 22.46), but that is largely because the figures are historic, capturing the miserable performance of that all-important commodity sector in the last financial year. In terms of five-year volatility, the two indices were identical to the end of April according to FTSE Russell.

    Whether or not you view the FTSE 250 to be in bubble territory, its progress since 2009 is a useful reminder that there has been plenty of scope to outperform the main market index.

  4. Personal Allowance – Do I lose it if I earn over £100k?

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    The Personal Allowance is the amount of income an individual can earn before they start to pay Income Tax but it will be reduced and potentially lost altogether for those whose total income exceeds £100,000. The Personal Allowance (under age 65) is currently £11,000 but you will lose £1 of Personal Allowance for every £2 of Income over £100,000. Anyone with income over the £122,000 (£11,000 x 2) will lose their entire allowance.

    As a consequence the Marginal Rate of Tax for someone with income between £100,000 and £122,000 will be 60% (Tax at 40% on income over £100,000 up to £122,000 PLUS Tax at 40% on the loss of Personal Allowance up to £11,000). You can recover the Personal Allowance by reducing your income below the £100,000 limit. Apart from asking your employer to pay you less (not a sensible or popular decision, it may save Tax at 60% but you still lose out on the remaining 40%) the only viable option to consider is a Pension Contribution. Your Total Income is expected to be £112,000 i.e. you have £12,000 of income over the £100,000 and in effect you are losing £6,000 of your Personal Allowance.

    If however you invested a gross amount of £12,000 into a pension it would reduce your income to £100,000, thus restoring your Personal Allowance. The pension investment will qualify for Basic Rate Relief at source and so to invest a gross amount of £12,000 a pension would only cost you £9,600. You would then be eligible for a further 20% Tax Relief (representing the Higher Rate Tax Relief). This is claimed via your Self-Assessment Tax Return and you would end up with a Tax Rebate of £2,400. Overall it has cost you £7,200 to invest £12,000 into the pension. But in addition you will regain the lost £6,000 of Personal Allowance which gives you a further Tax Saving of £2,400 (£6,000 x 40%). It could therefore be argued that the cost of the £12,000 gross pension contribution is £4,800 (£7,200 – £2,400).

    Please contact us if you would like further information regarding the above.

  5. The New £1 Coin

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    With the excitement surrounding the issue of the new one pound coin, I wondered how much I would have today, if I had invested 10,000 of them into the FTSE All Share index when the pound coin was first launched.

    The one pound was introduced on 23 April 1983, when Lady Thatcher was Prime Minister, seat belts became mandatory for drivers and front seat passengers and the first episode of Blackadder was broadcast on BBC One.

    The FTSE All Share has returned a whopping 3000 per cent over this period, averaging 11 per cent a year, now considering this period covered the ‘dot-com bubble’ in 2000 and the Financial Crisis in 2007/8, it’s been a roller coaster of a ride for most investors, but a return you would ultimately be pleased with.

    Not all years have been great during this period, although the average return was 11 per cent, the worst one year return was almost minus 33 percent in February 2009 and the best was 47 percent in February 2010.

    After all the ups and downs in the market, how much would my £10,000 would be worth today?  £340,000 a very nice return for those who remained invested.

    What investor lessons can we take away from this?  Markets rise and markets fall, they repeat this again and again.  Investors are rewarded for their participation in the markets and the wise investor buckles up and sits tight.

  6. How much can I pay into my pension?

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    The maximum you can personally invest into a pension and receive Tax Relief on, is 100% of your salary subject to an Annual Allowance limit which is currently £40,000. Please note dividends are not classed as salary. If, as an example, you have a salary of £8,000 and dividends of £45,000 the maximum you can personally Invest is £8,000.

                 

    However, contributions that are made by your company into a pension for you are NOT restricted by your salary; your company can Invest the full Annual Allowance maximum of £40,000 and potentially more than this using Carry Forward (more on this later). Please note, you will need to satisfy what is called a ‘Wholly & Exclusively’ requirement, but as a Shareholding Director this should not be a problem.                                                                                                                                                                                 

    From a tax perspective, personal contributions into a pension (ignoring the contribution limits) would be made from your after tax income. The contribution would then qualify for Basic Rate Tax Relief at source and Higher Rate Tax Relief, if applicable, could be claimed via your Self-Assessment Tax Form. The deadline for a personal investment tax-wise is the end of the tax year.  Company contributions into a pension will be a tax deductible business expense and so reduce the amount of Corporation Tax your company pays. Such a contribution is also NOT subject to National Insurance. The deadline for a company investment tax-wise is your Company’s Year End which is likely to be different to the tax year. As mentioned earlier, your company can possibly invest more than £40,000 as you can Carry Forward any unused Annual Allowances from the three previous tax years. To be eligible for Carry Forward you must have been a member of a Pension Scheme during the Carry Forward years, although you do not actually need to have been making contributions. Before making any investment I would suggest that you get specific advice.

  7. State Pension top up – Six Months Left to Apply

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    The Department of Work and Pensions (DWP) has recently issued a reminder to all those who have expressed an interest in topping up their Additional State Pension by up to £25 per week. The option to make Class 3A Voluntary Contributions applies to individuals who attained their State Pension Age (SPA) on or before 5th April 2016, i.e. individuals who receive, or will receive, their State Pension under the old rules.

    Why It Might Be Worth Considering

    It has been possible to make the Class 3A Voluntary National Insurance Contribution (NIC) payment since October last year. When the Government announced the details of these earlier, they stated that the rate offered would be in line with the market. However, even when they became available it was not possible for a healthy individual to secure a pension annuity paying the same level of income as achieved from paying Class 3A NICs. However, since then, annuity rates have been falling and then, post BREXIT, nose-dived.

    So, for an individual aged 66, to secure an income of £1,300 p.a. with a 50% spouse’s pension that is index-linked would cost over £46,900, according to the MAS site on 28th October 2016.

    To obtain the same level of income a Class 3 would cost £21,775 based upon the DWP calculator run on the same date.

    In simple terms, the Government offer, which was generous when it was launched has, due to the changes in the annuity market, become very attractive.

    It should be noted that securing a taxable pension of £1,300pa or £1,040 after 20% income tax would take almost 21 years to break even, taking the 66 year old to 87 – this exclude the indexation of the pension income and also the loss of growth on the £21,775 investment.  This represents an annuity income of almost 4.8%.

    However, it’s worthy of consideration!

  8. Donald Trump and the market reaction

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    In one of the biggest surprises in modern election history, Donald Trump has emerged as the President-elect and will take office in January. While some are overjoyed and some are dismayed, the markets are decidedly unhappy.

    As of this writing, the markets are reacting negatively to a new president that ran on a pro-business, low regulation platform (among many other things). The reason is quite simple. The market first and foremost wants a stable environment and greatly dislikes uncertainty. Love him or hate him, Trump is bringing considerable uncertainly to the table.

    As the numbers came in and it appeared Trump may win, the DOW futures, which provide an indication of where the market may open, were down over 800 points. As of this writing, the pull back was paired to approximately 400 points, indicating a more than 2% drop at the market open. In the short run, we expect the futures to pull back to more modest losses as reason sets in. A market drop of a few percentage points is likely. We expect volatility will rule the day and likely go on for a few weeks as President-elect Trump begins to articulate his priorities, build and announce his team, and set an agenda for his first hundred days.  Should the market drop more than a few percentage points, we expect to be aggressive buyers and will be looking for opportunities across all markets.

    Over the long run, we expect the markets to become indifferent to a Trump presidency. History has made it clear that market performance is not correlated to which party is in power.

     

    The bottom line is that the markets care about only one thing, and that is earnings. Every stock is priced to reflect its potential future earnings. If a company has a good earnings outlook, its stock will reflect the earnings potential. If a company’s earnings are expected to decline, the stock price will adjust downward. Now, many things impact future earnings. Let’s take McDonald’s as an example. If McDonald’s sets the expectation that same-store sales and profits will rise because of a popular new menu being tested in small markets, the stock price will likely increase to reflect the expectation of higher future profits. If, instead, McDonald’s looks like it may lose sales because consumers trend towards other new fast food and fast casual restaurant concepts, then we would expect its stock price to decline to reflect the new outlook.

    Many other things impact earnings. If interest rates are higher, then the borrowing costs of corporations are higher, cutting into their profits. High energy prices can be bad news for some companies like the airlines, and good for others like drillers. And on and on and on.

    Presidents exert far less influence over markets than most believe. Yes, things like unemployment, tax policy and regulations can impact corporate earnings and therefore stock prices, but they are pieces to a much bigger puzzle. In the end, they are greatly outweighed by the success of the company itself and by far bigger issues such as interest rates.

    The most important takeaway is that over the long run the stock market cares about only one thing — expected earnings. And the good news is, we all happen to be living in a time where our global markets are made up of the greatest companies to ever exist. There is more innovation and technological advancement taking shape now than at any time in our history, and that has a positive impact on earnings. As a group, over time, these great companies have really only done one thing — go up. Some presidents give it a nudge up, others a nudge down, but at the end of the day, earnings prevail and the world’s greatest companies have found a way to persistently earn larger profits. That leads us to the most important chart of all. The market doesn’t really see blue or red, only green. Regardless of your political persuasion, corporate earnings have only gone up over time, and the market has followed.

  9. Conservative Party Conference what’s the plan?

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    The, just passed, Conservative Party Conference may lead some to conclude that the new government is quite different to the immediate past one. Fundamentally different.

    The world it is operating is different. Thanks to the vote for Brexit, it’s an even more uncertain one, despite what some may strive to tell you based on economic performance since the vote.

    On the big questions, like “what sort of Brexit will we get?” there is uncertainty and on the questions that the financial planning and financial services will have a direct interest in …there is uncertainty.

    Most will accept, as pretty much ever was the case, that fiscal (broadly, tax) policy will be influenced if not heavily determined by (self -evidently) the political views of the ruling party and also the performance and predicted future performance of the economy.

    Politically the Prime Minister has made a big play for the centre ground. This was clear before the party conference, actually from her first day in office when she made her maiden speech as PM outside Downing Street. At the conference she put her position beyond doubt.

    Here are some extracts from her Conference speech:

    “Our economy should work for everyone, but if your pay has stagnated for several years in a row and fixed items of spending keep going up, it doesn’t feel like it’s working for you.

    “Our democracy should work for everyone, but if you’ve been trying to say things need to change for years and your complaints fall on deaf ears, it doesn’t feel like it’s working for you.

    “And the roots of the revolution run deep because it wasn’t the wealthy who made the biggest sacrifices after the financial crash, but ordinary, working class families.”

    “If you’re well off and comfortable, Britain is a different country and these concerns are not your concerns. It’s easy to dismiss them – easy to say that all you want from government is for it to get out of the way but a change has got to come.

    “It’s time to remember the good that government can do. Time for a new approach that says while government does not have all the answers, government can and should be a force for good; that the state exists to provide what individual people, communities and markets cannot.”

    “People with assets have got richer,” Mrs May said. “People without them have suffered. People with mortgages have found their debts cheaper. People with savings have found themselves poorer. A change has got to come. And we are going to deliver it.”

    It couldn’t be much clearer could it?

    Inclusiveness. And this, over the course of the parliament, to the extent that it doesn’t damage the economy, you could expect to see some redistributive tax measures.

    So what of the economy? Well, most seem to accept that after a pretty stellar post Brexit vote performance, the forecast going forward are pretty much uniformly pessimistic. There are exceptions – and given the inherent uncertainties …no one can truly know.

    We do know that even before officially becoming Prime Minister, Theresa May had said that the government would no longer seek to reach a surplus by 2020. This was, as you will recall, a key target of the previous Chancellor.

    The current Chancellor is accepted as being less “showy” than the last and his policies, aligned to the general overriding narrative are likely to reflect that. As for the Bank of England, the Chancellor seems committed to “doing whatever is necessary to keep growth from suffering too much”.

    Monetary and fiscal policy have both been considered. The former in the shape of QE and low interest rates. Detail on the latter will be clearer on 23rd November – the date of the Autumn Statement.

    Early in his time as Chancellor Mister Hammond said the following,

    “Over the medium term we will have the opportunity with our Autumn Statement, our regular late year fiscal event, to reset fiscal policy if we deem it necessary to do so in the light of the data that will emerge over the coming months.”

  10. Wants, Needs and Happiness

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    We live in a culture of wants and needs and we’ve been conditioned from an early age to place enormous value on material items — the fancy car, the big house, the designer clothing. It’s the brass ring many of us are constantly striving to attain and we often convince ourselves that once we get these things we will be happy.

    Short Term Satisfaction

    Think of the last exciting purchase you made, how long did that excitement last? A day, a week, a month? Odds are your zeal faded relatively quickly because the pleasure we get from most of our purchases is only temporary. When it goes away it is eventually replaced with a new want or need, which kickstarts the cycle back up again.

    This is the very reason you hear people say, “How come I have everything I ever wanted and I’m miserable?” It all comes down to one very simple fact: getting what you want may give you pleasure, but it doesn’t make you happy.

    Now this doesn’t mean you shouldn’t spend your money. Living a life of deprivation or becoming stingy with your finances is not the answer but you should be conscious and careful about where your pounds go.

    Building Blocks

    Every pound that you spend can be seen one of two ways. You can see it as just a small portion of your income that you are spending today or you can see it as a small step towards building something great for tomorrow. Just one pound a day saved in only 50 years will grow to be £500,000 at a 10% average return!

    The Little Things Add Up

    Consider how you spend your money on a daily basis. Do you make a routine trip to your local coffee shop? How often are you going out to lunch? Do you make a habit out after work?

    What value are these spending patterns bringing to your life? Odds are, not a lot, but by trimming wasteful spending you will find that you are in a position to make a significant shift in your financial health. The value derived from a more secure future can be substantially more rewarding.

    Big-Ticket Items

    Now consider the types of purchases you make on luxury items. How often do you shop online? Are you always after the latest and greatest piece of technology? What about the amount you are spending on clothes?

    To make these types of cuts, it’s imperative to be aware of why you are making any given purchase. Understanding where your needs and wants come from will allow you to exert more control over your emotions, and will ultimately help you make more conscious decisions of where to spend your money.

    Where’s the Value?

    When we make these kinds of decisions unconsciously we end up with lives, like the majority of people, who try to find fulfillment in all the wrong places while neglecting what really matters — your relationships, your health and your emotions. Not to mention, we often end up financially stressed, continually pouring money into items that add no real value to our lives.

    Before you make a purchase, it’s important to check in with yourself to see what you are truly after — a sense of joy, freedom, security or love — or to assess whether you have simply developed a habit of frivolous spending that needs to be scaled back.

    Measuring True Wealth

    Each of us finds a pathway we believe will lead to happiness, fulfillment or meaning and there are countless paths you can go down, but true wealth cannot be measured by how much money you have or the number of things you own, it comes from creating an extraordinary quality of life and only you can determine how much and what type of value a purchase will add to your life.

    So start to get smart about how you are spending your money, realign your habits with the goal of creating real value in your life. You may just be surprised by what happens.

With investment, your capital is at risk. The value of your portfolio with Lexo can go down as well as up and you may get back less than you invest. It is important that you understand the risks. Lexo aims to provide information to help you make your own informed decision. It does not provide personal advice based on your circumstances. If you are unsure, please seek personal advice from Lexington Wealth.

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