Month: November 2016

Autumn Statement 2016: Things to Know

Chancellor Philip Hammond has delivered his first Autumn Statement. Unlike most of his predecessor’s Budgets and Autumn Statements, it didn’t contain major pension or tax surprises and mostly confirmed the policies and trends previously announced by George Osborne, although there are a few new things worth knowing. The following are the key points with respect to your pension, investments and taxes.

Money Purchase Annual Allowance Down to £4,000

The most significant change concerning pensions is the Money Purchase Annual Allowance (MPAA) going down from the current £10,000 to £4,000, effective from April 2017.

The MPAA applies only to those who are over 55, have already taken cash from their pension using the new pension freedoms and are still contributing to their pension. For instance, when approaching retirement, you may decide to reduce working hours and start drawing from your pension to supplement your income, but keep contributing and benefit from employer’s contributions at the same time. Or you may return to work after a few years in retirement. Currently, you can contribute up to £10,000 per year under these circumstances and get a tax relief at your highest rate.

The intention behind the cut (same as the intention behind the very introduction of the MPAA in April 2015) is to prevent abuse of the new pension freedoms for “aggressive tax planning” or “pension recycling”, where taxpayers would withdraw cash from their pension and contribute it back, effectively enjoying an “inappropriate double tax relief” on the same amount. This, unlike the legitimate examples above, would be against the spirit of the pensions legislation.

Luckily, there are still ways to access your pension without triggering the MPAA in the first place. For example, you can take a tax-free lump sum without drawing income, buy a lifetime (non-flexible) annuity, or take up to three “small pots” capped at £10,000. Any of these will enable you to keep the standard Annual Allowance of £40,000.

The takeaway is: Before taking any cash from your pension, make sure you understand the consequences. Contact us for more details.

Salary Sacrifice Rules to Tighten, But Pensions Exempt

Salary sacrifice schemes allow employees to give up part of their salary in exchange for non-cash compensation, such as mobile phone subscriptions, gym memberships or health checks, provided by the employer and effectively paid for with the employee’s pre-tax income. Chancellor Hammond considers these tax perks “unfair” and has announced tightening of the rules. As a result, most will be taxed as standard cash income and no longer provide any tax or National Insurance savings.

Fortunately, pensions and pension advice won’t be affected, as well as childcare, the Cycle to Work scheme and ultra-low emission cars.

Unchanged or Previously Known Things

Besides the MPAA, the Autumn Statement does not change other pension allowances. The Annual Allowance remains at £40,000 and the Lifetime Allowance at £1m.

Income tax allowances and rate thresholds will grow as previously planned. The Personal Allowance, currently at £11,000, will increase to £11,500 in 2017-18. The Higher Rate Threshold will increase from the current £43,000 to £45,000 in 2017-18. Philip Hammond has reiterated the Government’s intention to increase these to £12,500 and £50,000, respectively, by 2020-21.

The Personal Savings Allowance remains at £1,000 for basic rate taxpayers, £500 for higher rate taxpayers.

The annual ISA Allowance will increase to £20,000 in 2017-18 as planned. The Chancellor did not mention Lifetime ISAs, which were first announced in the 2016 Budget and should be launched in April.

The triple lock will continue to apply to State Pension at least until 2020. Introduced in 2010, the triple lock guarantees State Pension to grow by the highest of inflation, average earnings growth and 2.5% per year.

Corporation Tax will decrease to 19% in April as previously announced. The Government still intends to cut it to 17% in 2020.

Autumn Statement 2016 in Full

The above are just the most significant points with respect to pensions, investments and taxes. You can find Philip Hammond’s full speech here.

Trump’s Presidency and Your Portfolio

The unthinkable has (again) become reality: Donald Trump will be the 45th president of the USA, contrary to forecasts by vast majority of pollsters, big media outlets and experts.

After an unusually emotional and hostile campaign, with numerous strong statements from both Mr. Trump and his critics, many investors are worried that Trump’s presidency could bring radical changes which would negatively affect the economy and their investments. Are the worries justified? Should you expect losses in the months and years ahead? Are there any actions you can take to minimise them, or even profit from Trump’s policies?

Market’s Reaction to Election Result

Many of the same experts who got their election forecasts all wrong were also predicting a potential Trump’s victory would cause a stock market sell-off, weaken the dollar and boost gold price. This is in fact exactly what happened in the first hours, as more key states like Florida and Ohio started to turn red. The US stock market was closed at night, but the Dow and S&P500 index futures, which trade round the clock, were down more than 5% at one point. However, the panic quickly turned to optimism and the major indices were actually up at the end of Wednesday’s trading session. The Dow Jones closed at a new all-time high the next day and finished the best week since 2011 on Friday. So is Trump good or bad for the stock market?

Key Points Many People Forget

Due to the sheer intensity of the election campaign and its coverage in the media, many people have become overly emotional about the outcome – not only in the US, but also in the UK and elsewhere. Whether you personally supported Trump or Clinton, it was easy to feel like the world would be coming to an end if your candidate lost. Because strong emotions are rarely useful when making investment decisions, let’s remind ourselves of several key points.

Firstly, things said during an election campaign do not always translate into actions (this is not specific to Donald Trump). In the first days after the election, we have already seen Trump becoming softer on some of his plans, like repealing Obamacare.

Secondly, while having undeniably an enormous power, a US president cannot and does not govern alone. As one of the strongest, most established democracies in the world, the US political system has a number of measures and institutions in place to insure against a president going mad.

Thirdly, Trump’s surprise win has overshadowed another very important outcome of the election night: the Republican Party’s success in retaining its majorities in the House and Senate. The Republicans are traditionally considered the more pro-business party and therefore their victory may justify careful optimism in the financial markets. That said, we can hardly consider Trump a typical Republican president. Many of his plans will face tough opposition from “his own” party and the future outcomes are very uncertain.

Trump’s Economic Program and the Markets

Trump’s plans are a mixed bag with respect to the economy, corporate profits and share prices.

Making the US more protectionist would certainly hurt the stock market. Punitive measures against corporations outsourcing production to China or Mexico would not only harm these particular companies, but might also cause inflationary pressures and thereby pressures for interest rates to go up, with further negative effects on both stock and bond prices. That said, it is unlikely that Trump will find sufficient support for taking these plans very far.

A wider Republican support is more likely for tax cuts, another key point of Trump’s economic program. While clearly positive for company profits, lower taxes could also further stretch public finances, possibly repeating the fiscal cliff and debt ceiling crises of 2011-2013. Trump’s promised infrastructure investments (those “bridges, tunnels, airports, schools and hospitals” from his victory speech) would have a similar combination of effects.

In today’s complex and interconnected world, individual economic policy measures often have a mix of both positive and negative consequences, as you can see from the examples above. Therefore, it is very hard to predict the aggregate effects on the markets, even if we knew how exactly the new laws and policies will look (even Mr. Trump himself doesn’t know that yet).

What to Do with Your Portfolio

Luckily, sound long-term investing is not about making predictions. With the risk of repeating ourselves, it is “time in the markets, not timing the markets” that builds wealth in the long run. This is easy to forget when a strong story like the recent US election occupies our minds.

To conclude, the appropriate action to take right now is stick with your long-term plan and avoid making impulsive, emotional decisions. That said, we will continue to carefully monitor the developments in the US and the global economy and may review our recommendations going forward.