Rishi Sunak’s pensions tax traps: what to expect
With the Government in need of a way to pay for the enormous cost of the pandemic, pensions are perhaps an easy target for the Chancellor.
The Treasury is reportedly formulating plans for a pensions tax raid in a bid to rescue public finances. According to the Telegraph, Chancellor Rishi Sunak and his team are considering three different reforms to pensions tax relief to help balance the books.
Slashing the lifetime allowance
The first of the reforms being considered is a reduction in the pensions lifetime allowance from £1.073m to £900,000 or £800,000. At the moment, savers who have pots in excess of the £1.073m are hit with a hefty tax charge of up to 55% when they draw down any amounts above the threshold. If this plan goes ahead, it means thousands of extra savers would be forced to pay steep taxes when they withdraw their pension as their pots would exceed the new lifetime allowance.
Scrapping higher-rate tax relief
This has been under discussion for some time and could see the Treasury introduce a flat pensions tax relief rate of 30% or even lower at 20%. Pensions tax relief is where the Government tops up your pension pot to encourage you to keep saving for your future. With pension tax relief, a portion of the money you would have paid in income tax goes into your pension instead. How much depends on whether you’re a basic or higher rate taxpayer. At the moment, basic rate taxpayers get 20% tax relief, whereas higher rate taxpayers get 40%. That means a £100 pension contribution would cost them just £80 and £60, respectively.
If the Treasury presses ahead with this plan, basic rate taxpayers will benefit but higher rate taxpayers will miss out.
Tax employer contributions
The final measure under consideration is a potential new tax on employer contributions. While the details of this plan are thin on the ground, forcing employers to pay tax on employee pensions contributions would heap costs on firms at a time when the economy is still in recovery mode.
What should I do?
In short, nothing at the moment. At present, we do not know if these plans being kicked around in Whitehall will come to fruition. According to reports, it’s unlikely that we will see any movement until the Autumn Budget in November – if at all. However, if you are already sailing close to the £1.073m lifetime allowance cap, it’s worth speaking with your financial adviser to assess your options. While everybody is different, if this is you then you may be better off diverting your pensions contributions into an ISA instead.
However, it’s always best to speak with a professional before taking such a huge decision which could have major consequences.
Extra savings stashed away during lockdown? Here are some ideas for what to do with it
Brits have stashed away an extra £180 billion in savings during the pandemic. If you built up some extra cash in the last year, here are some ideas for what to do with it.
Brits have stashed away a mountain of cash during the pandemic. It makes sense – people have had to stay home and thus saved money on eating out, going to the pub and big holidays abroad. If you were one of those lucky enough to build up some extra cash during the past 15 months, chances are you’ve asked yourself what you should be doing with it.
Here are four sensible things you can do with your lockdown savings.
Pay down debts
This might be an obvious one, but it’s worth mentioning. While it’s important to have an emergency supply of money, just in case the boiler breaks, it might be worth using some of your excess cash to pay down your debts, particularly if you are being charged lots of interest. If you don’t have any credit card debt or personal loans, it might be worth paying off your mortgage. By doing so, you may be able to reduce your term and therefore the overall level of interest you’ll pay. That might be a sounder idea than leaving it in a savings account earning less than 1%. However, before you do that, check your deal’s terms and conditions to make sure you don’t have to pay any fees for overpaying your mortgage.
Make a rainy-day fund
Once you’ve covered high-interest debts, the next thing to do is build up your ‘rainy-day’ fund. This fund is essential whether you’re working or retired. If you’re working, loss of income from redundancy can have a fast and unanticipated impact on your finances. Saving between three and six months’ worth of your salary is ideal to cover your costs while you look for a new job. If you’re retired, having a rainy-day cash fund can be vital if you’re drawing an income from your pension or ISAs and the markets take a dip. Selling investments to fund your lifestyle in a bad market crystallises losses and will leave your portfolio permanently worse off. Instead, a cash buffer will tide you over while markets recover.
Put it in your ISA or pension
If you have the first two ideas covered already, the next thing to think about is whether that cash can be sheltered tax-efficiently. Make the most of your annual ISA allowance, or even contribute more to your pension. That cash can be put towards investments to grow and bolster your long-term wealth. Saving in cash is only really a good idea if you need the money in the short-term (I.e. for a rainy-day fund). Anything else that is earmarked for long-term wealth growth should be working harder as an investment.
Spend some of it
Finally, it is okay to actually spend some of the money you’ve saved. Of course, do that in a responsible way. Does the dining room need redecorating? Maybe you want to take a quick holiday somewhere warm? Spending money shouldn’t be taboo when it is well-spent (and sometimes going for a slap-up dinner comes under that too!). Just make sure you’ve got your debt under control and your emergency cash pile in place first.
There are of course other tax-efficient considerations to make in this circumstance, such as gifting to loved ones if you are in a position to do so. If you’d like to discuss the ideas mentioned in this article more, don’t hesitate to get in touch with your adviser.
Looking for love? Then watch out for romance scams
Romance scams have boomed over the past year as fraudsters switched their attention to those searching for companionship during lockdown.
Figures from UK Finance, the trade body, reveal a 20% increase in the number of bank transfer romance frauds in 2020. Overall, victims lost £68m – or more than £7,800 each – last year to this type of fraud, according to the trade body.
Romance fraud is a particularly vile type of scam where fraudsters will pose as a potential love interest on a dating website who is looking for a long-term relationship. Usually over many weeks or even months, the fraudster will try to gain the trust of an unsuspecting victim by trying to convince them that they want a genuine relationship. Once that trust has been built, the criminal will typically ask for cash to help pay for bogus medical bills, to fly over to be with the victim or for some other fictional emergency. However, once the victim sends the money, the fraudster typically flees and is never heard from again.
Katy Worobec, managing director of economic crime at UK Finance, says: “With the rising use of online dating services during lockdown, criminals are using clever tactics to exploit people who think they’ve met their perfect partner online. “Romance scams can leave customers out of love and out of pocket, but there are steps people can take to keep themselves or their family and friends safe – both online and offline.” Romance scams can be highly sophisticated, and therefore spotting them is not always easy.
However, below are some tips you can use to make sure you stay safe online.
- Be suspicious: If you are asked for money by someone you haven’t been speaking to for that long, or by someone you have never met, you should assume it’s a scam.
- Check their profile photo: Typically, scammers will steal the profile picture of someone else and pass it off as their own. However, you can tell if someone has done this by saving the photo and conducting a reverse image search on Google. If the name they gave you doesn’t match the one on your image search, the chances are you’re talking to a scammer.
- Ask friends and family: If you have any doubts that the person you are talking to is not real, talk to friends and family to see what they think.
- Guard your personal information: It’s not only money a fraudster may be after, so do not share personal documents such as your driver’s license or passport.
- Other tell-tale signs: Instead of asking you for money, they may instead ask you to take out a loan for them, or to transfer money to someone on their behalf. You shouldn’t do either of these things, regardless of what reason they give you.
- Tell the authorities: If you think you’re speaking to a scammer, or you think you may have been the victim of romance fraud, report it to Action Fraud on 0300 123 2040 or via actionfraud.police.uk.
The World In A Week - It’s the Hope (and maybe the Earnings Expectations?) that Kills You
While the European Football Champions have now been comprehensively determined, albeit not in England’s favour, we had another week of seemingly placid market returns as they remain decidedly undecided about economic events and potential future outcomes. The MSCI All Country World Index was down -0.5% in GBP terms, while leading markets included the UK and the US. Chinese equities continued to sell off heavily, with MSCI China returning -4.7% for the week, dragging the wider Emerging Market index lower.
China has been giving investors cause for concern for some weeks now. Economic activity in the Middle Kingdom has been slowing, as illustrated by the closely watched “credit impulse” which peaked last year and has been declining for the year to date. This measures public and private credit creation and tends to foreshadow economic activity. As a response to this, last week the People’s Bank of China cut interest rates in order to inject more stimulus into the economy. China’s economic health is very important to the global reflation narrative, and the YOU Investment team together with other investors will be monitoring developments here closely.
Another key focus for markets has been the start of Q2 earnings season in the US, that kicks off this week as the large US banks have announced. The largest US companies are expected to reveal year-on-year earnings per share growth of +63%, which is the largest jump since the emergence from the depths of the 2008 crisis. What is different this time is that the S&P index of large US stocks is at an all-time-high and is trading on a very expensive multiple of 31x earnings. Should these lofty earnings expectations disappoint, there is potential for a market upset.
It has been widely documented that humans (i.e. investors) are more psychologically averse to dashed expectations and losses than they are to upside news, a feeling readers will no doubt be all too familiar with this morning.
Any opinions stated are honestly held but are not guaranteed and should not be relied upon.
The information contained in this document is not to be regarded as an offer to buy or sell, or the solicitation of any offer to buy or sell, any investments or products.
The content of this document is for information only. It is advisable that you discuss your personal financial circumstances with a financial adviser before undertaking any investments.
All the data contained in the communication is believed to be reliable but may be inaccurate or incomplete. Unless otherwise specified all information is produced as of 12th July 2021.
© 2021 YOU Asset Management. All rights reserved.
The World In A Week - US Dependence Day
Last week the US market closed at all-time highs and this could not have come at a better time, heading into the 4th of July weekend marking the 245th Independence Day. Last Friday saw US Payroll data beating analyst expectations significantly, as the US added 850,000 new positions in June, demonstrating a strong bounce back in the world’s largest economy. Compelling economic data resulted in the seventh straight day of trading that saw the S&P 500 close at a record, which is the longest streak since 1997.
The US accounts for 25% of global GDP, and this has risen from 21% over the last 10 years, becoming a more dominant market leader. Developments in technology integration and the semi-permanent shift to a digital age have underpinned this with the emergence of leading cloud-computing, e-commerce, and software companies. The MSCI World Index is also largely tilted towards the US and represents approximately 54% of the index. Easy access to capital has fuelled increased levels of borrowing which has produced numerous new zombie companies which only generate enough income to payback the interest on their borrowings. The number of zombie companies in the US has increased from 6% to 20% over the last 10 years. Ahead, there are numerous headwinds for the US which include the growing levels of debt the Federal Reserve is willing to take up, the emergence of China / emerging nations and, as we have seen of late, that markets are becoming more disciplined towards relative valuations. These all amount to numerous hurdles for the US to overcome.
Elsewhere, the UK reclaimed its status as Europe’s largest share-trading centre, reclaiming the title back from Amsterdam. This change in status is largely derived from the resumption of the UK trading in Swiss stocks which was reintroduced as the UK left the EU. According to CBOE Global Markets, London experienced an average of €8.9bn of share deals in June, compared to €8.8bn on Dutch exchanges, and has emerged as the dominant trading centre in Europe once again.
Any opinions stated are honestly held but are not guaranteed and should not be relied upon.
The information contained in this document is not to be regarded as an offer to buy or sell, or the solicitation of any offer to buy or sell, any investments or products.
The content of this document is for information only. It is advisable that you discuss your personal financial circumstances with a financial adviser before undertaking any investments.
All the data contained in the communication is believed to be reliable but may be inaccurate or incomplete. Unless otherwise specified all information is produced as of 5th July 2021.
© 2021 YOU Asset Management. All rights reserved.
The World In A Week - Building Bridges
Although considerably paired down from President Biden’s initial spending plan of $2.3 trillion, a proposed infrastructure deal of $579 billion was agreed with senators. It will focus on improving and building roads, bridges, railways, public transport, and broadband networks. This is all new spending and, when combined with the renewal of existing annual funding for infrastructure, the total commitment over the next eight years is $1.2 trillion.
This pushed US stocks to another record high by the end of last week with the strongest weekly performance since February. This was despite consumer inflation in the US hitting 3.4% for the past 12 months to the end of May. The rise in inflation was slightly below expectations and does marginally ease the pressure on the Federal Reserve’s outlook for interest rates, having surprised investors with their slightly more aggressive tone two weeks ago.
Unlike their counterparts across the Atlantic, the Bank of England delivered a modestly subdued report for their Monetary Policy Committee meeting last week. Commenting on the recent measures of inflation being stronger than expected, the Committee anticipates this to be transitory in nature and not develop into a factor that will cause a tightening in their monetary policy.
The balancing act for all policymakers around the world is to build a bridge, from the emergency conditions that were put in place last year, to more normalised conditions, without triggering a repeat of 2013’s taper tantrum.
Finally, last week marked the fifth anniversary of the Brexit referendum. Having only just left the trading agreement with the European Union at the end of January this year, and with the muddling effects of the pandemic, it is still too early to judge whether the UK is in a better or worse position. Public opinion has remained constant, with very few Britons having changed their view of Brexit over the past half decade, leaving the pro- and anti- Brexit camps closely matched. What is clearer though is the need for the Government to rebuild relationships with our trading partners around the globe, as well as with the UK electorate.
Any opinions stated are honestly held but are not guaranteed and should not be relied upon.
The information contained in this document is not to be regarded as an offer to buy or sell, or the solicitation of any offer to buy or sell, any investments or products.
The content of this document is for information only. It is advisable that you discuss your personal financial circumstances with a financial adviser before undertaking any investments.
All the data contained in the communication is believed to be reliable but may be inaccurate or incomplete. Unless otherwise specified all information is produced as of 28th June 2021.
© 2021 YOU Asset Management. All rights reserved.
The World In A Week - It’s the Hope that Kills You!
Last week was a tough week for equity markets, the S&P 500 Index in the US fell -1.9% while the FTSE 100 in the UK fell -1.6%. All of this stemmed from a change of tone from the Federal Reserve, with Chairman Jerome Powell coming out with a statement which was far more hawkish than the market anticipated. Stating that inflationary fears may require an increase in interest rates far sooner than had previously been indicated sent markets into a downward spiral. In the currency markets this had the unsurprising effect of driving the dollar higher, and sterling retraced over -2%.
However, other reactions in the market might not seem so intuitive. Within the bond market, looking at the yield on the US 10 Year treasuries, they contracted from around the 1.6% to 1.4% level. The bond market telling us that it does not believe that inflation will be a problem, or that what we are experiencing is transitory as we move out of the COVID-19 crisis.
Within equity markets there did not appear to be outright selling taking place, (according to analysis conducted by Morgan Stanley), but rather more sectorial and style rotation. Over the week growth and technology outperformed cyclicals. One explanation for this is that a Fed with a tightening bias – as the rate of change in economic growth decelerates – results in an environment in which the yield curve flattens, the dollar strengthens, and the equity risk outlook is mixed, leading to the market looking for companies with more growth characteristics. It remains to be seen whether this holds true.
On the virus front there was some bad news in the UK. The week saw the most coronavirus cases since February, with over 11,000 new cases reported affecting all age groups. This is the Indian or Delta variant, which appears to be far more infectious and twice as likely to send victims to hospital relative to the Alpha variant. This latest mutation has spread to South America, while COVID-19 continues to kill thousands daily on a global basis. Therefore, the need to vaccinate globally remains a top priority.
Finally, I feel it would be remiss not to mention the England vs Scotland European Championship game. It was the first time in 25 years that the two countries had met in a major competition. England on home turf were the hot favourites, it was going to be a walk in the park accordingly but clearly Scotland had not read the script. The match, if you do not know, ended in a 0-0 draw. No disaster but as usual, against all the hype and expectation, England failed to deliver. As is often said… it’s the hope that kills you!
Any opinions stated are honestly held but are not guaranteed and should not be relied upon.
The information contained in this document is not to be regarded as an offer to buy or sell, or the solicitation of any offer to buy or sell, any investments or products.
The content of this document is for information only. It is advisable that you discuss your personal financial circumstances with a financial adviser before undertaking any investments.
All the data contained in the communication is believed to be reliable but may be inaccurate or incomplete. Unless otherwise specified all information is produced as of 21st June 2021.
© 2021 Beaufort Investment. All rights reserved.
Is it time you ditched your High Street bank and went digital?
With a slew of digital-only options, is it time to ditch your old bank? We look at how Monzo, Starling and Revolut are challenging the old guard.
Digital-only banks have become more established in the past few years, with a multitude of options. But is it time to ditch your High Street bank for one of them? In the past decade since the financial crisis a multitude of digital-only banks have emerged as banking customers look for new and innovative ways to handle their finances.
Digital-only financial options are now really varied, and consumer choice has never been better, with plenty to pick from via your smartphone. The range of services from digital-only providers now matches those provided by the high street. However, for the purposes of this article we’re going to focus on current accounts. Big banks such as HSBC, Lloyds and NatWest have come under increasing pressure in recent times from so-called challenger banks in the current accounts market. But what do these challengers actually offer to customers?
Here are some top picks, their best features and drawbacks.
Monzo
Perhaps the most famous one on this list, Monzo is well-known now for its flashy ‘hot coral’ (read: pink) debit cards.
Monzo offers lots of features including budgeting, spending analytics and ‘pots’ which you can create to help manage and apportion your money. You can even set up bill-specific pots to keep cash aside to pay your monthly bills from. You can set yourself monthly spending limits and make payments really easily within the app. It will also give you summaries of spending areas each month, categorised in sections such as eating out, personal care or groceries. This can be especially helpful if you’re struggling to identify areas where you might be overspending regularly.
Like High Street stalwarts such as Lloyds or NatWest, Monzo is a fully licenced UK bank. As such you get £85,000 deposit protection from the Financial Services Compensation Scheme (FSCS). The account also provides other optional services such as overdrafts and loans. It also has a premium service called Monzo Premium, which costs £15 and will give you phone insurance, worldwide travel insurance, 1.5% interest on balances up to £2,000 and other perks – it even comes with a shiny metal bank card. Check if you’re not already receiving some of these services such as phone protection on your home insurance though, as it may not be worth it.
Starling
The other major digital-only bank to choose from is Starling, founded by long-time banker Anne Boden. Boden worked for years at major High Street banking institutions before taking what she’d learned from those places and implementing the best bits into Starling.
Starling has lots of spending analytics, makes payments really easy and has a user-friendly interface for customers who might not be the most tech-savvy. It also has segregated spending pots called ‘spaces’ which can help you manage small savings goals.
One of the standout features on Starling though is zero-cost spending abroad. Starling charges nothing for you to spend abroad, and only changes your money into foreign currency at the interbank rate, meaning you’ll always get the best deal when using your Starling card abroad. It also has the option to add joint accounts for you and your partner, plus euro accounts if you need to keep, send or receive money in euros.
As with Monzo, it is also a fully licenced UK bank offering all the same protections as peers.
Best of the rest
While digital banking apps have proliferated in recent times, most are not really worth considering for one specific reason – they aren’t licenced UK banks and don’t have the same level of deposit protection as Monzo, Starling, or big High Street banks.
There are, however, two names of note in this category: Revolut and Monese.
Revolut has become something of an alternative option. It has many of the features of Monzo and Starling but doesn’t currently have FSCS protection. Rather, money is secured in so-called e-money accounts. The feature that sets Revolut apart is the greater variety of currencies you can maintain balances in. It is, however, an inferior choice if you’re looking for UK-specific current accounts.
Monese gets a mention because it is extremely easy to set up and use. However, like Revolut it doesn’t currently carry any deposit protection.
Whether you decide to drop your old bank or not, there is certainly plenty to choose from now in digital banking. Although the aforementioned apps have done a lot to innovate when it comes to mobile-only banking, many of the bigger banks have now largely caught up in terms of features.
It’s best to consider what you need the account for, and whether it’s suited to you, before moving all your bills and salary into it. Remember though that there’s no limit to how many current accounts you have, so keeping more than one is perfectly possible. Just try not to open them all at once as this may leave an impression on your credit report.
Tips for building a nest egg for your children or grandchildren
Starting early can make an extraordinary difference to long-term wealth. Here are some options to help your children or grandchildren.
Building a nest egg for a child or grandchild needn’t be a difficult process. But the earlier you start, the better the outcome will be for them. Not starting saving earlier in life is a common problem, but it can be difficult in your 20s and 30s to get your savings going with so many costs of living. But once you’re older, with kids or even grandkids, you may start to think about whether you can help them get a financial foothold in life to help them when they’re older. Not only does it make sense from an inheritance perspective – the more you give away while you are younger, the less potential there is for tax liabilities – but the earlier you start building them a nest egg then the bigger that egg will be.
If you’re looking to make a start there are some options which can make It simple and tax-efficient.
Junior ISAs
The Junior ISA or ‘JISA’ should be your first port of call when considering saving for a child or grandchild.
JISAs, like normal ISAs, come in a few forms. You can start with a Stocks and Shares JISA or a cash JISA. Cash JISAs, while offering rates that tend to be better than normal savings accounts, still don’t offer much by way of interest at present. At the time of writing the top cash JISA offers 2.5% interest.
A stocks and shares JISA, while not offering a guaranteed rate of return, will have the benefit of access to investment markets. Because the time horizon of a child is so long (if you start saving for your kids when you have them you potentially have an 18-year window to amass a pot for them), it suits investing in equity markets which have shown to deliver superior long-term returns.
The Government has increased the limit on annual JISA contributions to £9,000 a year. This can be split between a cash account and an investment one, if you prefer. The child can then access the money in the JISA and have full control of it at age 18.
Children’s savings accounts
There are a variety of children’s savings accounts on offer, some from big High Street banks and some from new challenger banks. While the top-choice products offer similar rates to cash JISAs, they are mainly inferior to JISAs because of their lack of a tax wrapper. In reality then these kinds of accounts should only be turned to if you’ve maxed out the annual contribution for your child’s JISA, but still have further money you want to give them.
There is one consideration to make for children’s savings accounts however, from the perspective of education. Often a children’s savings account will give more responsibility to them than a JISA which parents manage. Giving a child their own account to manage can provide valuable life lessons to them from an early age.
Pensions
Yes, that’s right, a pension. You can open a pension for your child. While the rules governing pensions prevent them from accessing the money before pension freedom age, it could be a valuable alternative or addition to a JISA.
The annual limit you can contribute to a child’s pension is £2,880 per year. This is given 20% tax relief much the same as regular pensions, meaning you can put away up to £3,600 in total. Like a stocks and shares JISA, a pension has the benefit of access to investment markets, which really could help with long-term wealth creation.
The conundrum of picking between a pension or a JISA is that the former can only be accessed at age 55 (which could increase to 57 in 2028), while the latter gives the child full access to the money at age 18.
Unless you’re confident that the child will have a fully responsible mindset with their money at age 18, it may be worth hedging and having a blend of both accounts.
But likewise helping them to understand the importance of what you’ve given them and learning good financial habits as they grow up may put them in a great position to use that money wisely. And with the long-term landscape so uncertain, it may be better to give them something they can access at 18.
The World In A Week - Freedom Day - the drive to move forward
The earnings season is finally upon us, and with it came a rise in volatility. The Vix Index, a measure of market volatility, crossed above 18, still relatively low levels in historic terms, but an increase nonetheless versus the last few weeks. All global indices finished the week in negative territory, with the UK’s FTSE 100 index retracing over -1.5%. In the fixed income market, despite stronger than expected CPI, PPI and retail sales, yields surprisingly contracted, continuing to puzzle both fixed income and equity market participants alike.
Though the earnings season in the US is still in its early stages, those businesses that reported have been reasonably positive. Of those circa 40 companies, 85% have beaten analyst forecasts on both Earnings per Share (EPS) and sales expectations. However, unless the reported numbers are particularly stellar, the market’s reaction becomes rather muted. Therefore, it would appear the market is really looking for knock-out numbers to get excited and had already priced in the expectation for the reporting season.
This is probably not surprising because, despite the slight pullback we have seen, many equity markets are trading at or near their all-time-highs and investors are looking to see whether the marginal demand coming through has been strong enough to offset the marginal costs of re-opening. Economic trends and the consumer do appear to be in good shape. After the last 18 months we have had to endure, it is a fair assumption to say people want to get back to some sort of normality, but we cannot be too blasé about where we are at in the fight against the Coronavirus.
The infection numbers remain high in certain parts of the US, and in the UK we have seen a marked pick up. In other areas such as South Africa, the World Health Organisation (WHO) has warned about a surge of infections after days of riots and looting, sparked by the jailing of former President Jacob Zuma, and in Singapore and Australia stark rises in cases have been reported.
Today is dubbed “Freedom Day” in the UK, when the UK Government seeks to end all legal, social and economic restrictions imposed to mitigate the effects of the COVID-19 pandemic. Let us hope this proves the right move to have taken.
Any opinions stated are honestly held but are not guaranteed and should not be relied upon.
The information contained in this document is not to be regarded as an offer to buy or sell, or the solicitation of any offer to buy or sell, any investments or products.
The content of this document is for information only. It is advisable that you discuss your personal financial circumstances with a financial adviser before undertaking any investments.
All the data contained in the communication is believed to be reliable but may be inaccurate or incomplete. Unless otherwise specified all information is produced as of 19th July 2021.
© 2021 YOU Asset Management. All rights reserved.