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The Chancellor’s Autumn Budget 2017

The Rt Hon Philip Hammond MP

Following a turbulent few months across The Palace of Westminster, with a call for more spending and a more aggressive approach to growing the economy, the Chancellor’s budget was largely seen as a business as usual approach, albeit within the ever-present shadow of Brexit.

So now that Philip Hammond has had his day in Parliament, let’s see what kind of impact it’s going to have on yours.

Well firstly, there were no significant announcements regarding tax or pension changes. Nor was there anything that set the markets alight, or sent them into free-fall. In fact this market apathy was manifested in the non-movement of the FTSE 100, Benchmark 10 year Government bond or guilt and with the pound largely static during the Chancellors hour-long delivery.

What the Budget might mean for you

INCOME TAX

Your personal income tax allowance is set to rise to £11,850 for the fiscal year 2018-19 throughout the UK apart from Scotland. As Scotland will set its own personal tax threshold, should it choose to, in the Scottish budget due on 14 December.

The higher rate of income tax in the UK will rise to £46,350 for the fiscal year of 2018-19. Again with the exception of Scotland, who may address this in their impending budget.

STAMP DUTY

First time buys will not have to pay Stamp Duty on properties up to a value of £300,000, which would also see those buying properties up to £500,000 paying no stamp duty on the first £300,000. A move that should benefit 95% of first time buyers

PENSIONS

The pensions lifetime allowance will rise in line with the consumer price index to £1.03Million. One highlight for pensions is that there will be no changes in the pensions funding limits, with the annual allowance remaining at £40,000 and not tapered until adjusted income exceeds £150,000.

ISA’s

The Junior ISA limit is set to rise to £4,260. Whilst the overall ISA limit will stay at £20,000 of which £4,000 can be paid into a LISA (for those eligible).

CAPITAL GAINS TAX

There will be a £400 increase in the capital gains tax allowance, seeing the threshold rise to £11,700.

INHERITANCE TAX

The nil band rate for inheritance tax will remain at £325,000 until April 2021, with the residence nil rate band increasing from £100,000 to £125,000. Which means that, in the future, couples can leave assets up to £900,000 to future generations free of inheritance tax liability.

TRUST

Although no specific details were announced, there is a planned consultation, to be published in 2018, which will consider the simplification and fairness of trust taxation.

STOCKS

The UK Stock Market was largely indifferent to the Chancellors speech. In fact, when he stood up to speak the FTSE100 was trading at 7,448 and when he sat down an hour later, it was largely unchanged.

The real movement in the market came about through the changes in Stamp Duty. With large house builders witnessing their shares drop between 1% and 3%. Possibly reflecting some disappointment in the detail of the chancellors £44 Billion Housing Package, along with the lack of an extension to the popular Help to Buy scheme, compounded with an investigation into the speed at which permitted land banks see the building of new homes taking place.

In true Stock Market traditions, where the tide goes out for one group, in it comes for another.
With the increase in the Stamp Duty it is widely believed that we will see a reinvigoration of the housing market, as well as the driving up of house prices. All this leads to higher profits for Estate Agents and, as a consequence of that, national chains saw an increase in the value of their share price.

CURRENCY MARKETS

The downgrade in the UK’s GDP growth forecast for the next three to four years, along with the rest of the budget, went through without any real reaction from the currency markets. With Sterling ending the budget in much the same place as it started against the Euro and Dollar.

2017 BUDGET SUMMARY

All in all, the Chancellor delivered a steady budget, without any radical changes to the landscape. As always, if you have any questions regarding a specific area of the budget, or your own personal circumstances, then please don’t hesitate to get in touch, where we will be happy to help you in any way.

Making sense of Capital Gains Tax and your Property 2017 – 2018

Capital Gains Tax (CGT) is a complex area to dip into, so here I’ve tried to give a brief
explanation for the normal situations that many of us face, broken down into the following
sections:

When you don’t have to pay Capital Gains Tax
When you are eligible to pay Capital Gains Tax
How much you will have to pay?
What if you have a second residential property?
Letting relief and Capital Gains Tax
Capital Gains Tax on inherited homes
Capital Gains Tax on gifted homes
Capital Gains Tax Liabilities for UK Non-Residents
Capital Gains Tax on investments
Claiming Entrepreneurs’ Relief against Capital Gains Tax

As always, our advice is to seek clarification on any issues from your Financial Adviser.

When you don’t have to pay Capital Gains Tax.

If you are selling your own home (main place of residence) then the good news is, that it’s
very unlikely that you will need to pay CGT as you will benefit from 'Private Residence Relief'.
If however you are selling a home that you currently rent out, or you are selling a second
home, then CGT may become applicable. That said, there are a number of ways you may be
able to reduce your CGT bill through letting relief or by nominating which of your homes you
wish to be viewed as tax-free.

When you are eligible to pay Capital Gains Tax.

Although not an exclusive list, below are the most common scenarios that activate CGT on a
property sale:

• It is not your main place of residence
• You have developed your home. For example you may have converted part of it into flats
• You have sold part of your garden, where your total plot, including the area you are selling,
is more than half a hectare (1.2 acres)
• You exclusively make use of part of your home for business
• You let out all or part of your home. This doesn’t include having a lodger. To count someone
as a lodger you need to be living in the property too, or they are classed as a tenant
• You moved out of your property 18 months ago
• You bought the property for the purpose of renovating it and selling it on

How much you will have to pay?

The CGT rates for 2017 – 2018 state that when you sell a property, you are allowed to keep a
proportion of the profits tax-free. This is called your Capital Gains Tax Allowance.
In the 2017 – 2018 tax year, you can make a profit of £11,300 before you have to pay CGT.

With basic rate taxpayers paying 18% CGT on property sales over this profit allowance.
Whilst higher-rate and additional-rate taxpayers will have to pay 28%.

What if you have a second residential property?

As long as you haven’t bought your second home with the sole intention of selling it in order
to make a profit, and you use it, then you can nominate which of your two homes will be tax-
free. Just make sure you make the nomination before the two-year deadline from the time you
acquire your new home.

It’s worth noting that the property you nominate doesn’t have to be the one where you live
most of the time. So it makes sense to pick the one you expect to make the largest gain on
when you come to sell.

Civil partners and married couples can only nominate one main home between them, but
unmarried couples can each nominate different homes.

Letting relief and Capital Gains Tax.

Providing the property has been your main home at some point, and you have let out either
all or a part of your home, then you can claim tax relief in the form of Private Residence Relief
for the time it was your main residence, along with the last 18 months of ownership. You can
even claim if you weren't living in the property during those 18 months.

You may also be able to further reduce your capital gains tax bill by claiming Letting Relief.
However, you can't claim Private Residence Relief and Letting Relief for the same period.
The amount of letting relief you can claim will be the lowest of these three:

• £40,000
• The total you receive from the letting proportion of the home
• The total Private Residence Relief you get

Capital Gains Tax on inherited homes.

When someone leaves you their home in their will, you inherit the property at the market
value at the time of their death.

As there is no CGT payable on death, the value of the home is included in the estate and
inheritance tax may be payable instead.

If you sell the property without nominating it as your own home, you won’t be able to claim
Private Residence Relief, so there will be CGT to pay if the value has increase between the
date of death and the date of the sale.

Capital Gains Tax on gifted homes.

If the property is gifted to you during the owner’s lifetime (while they are still living there), this
is termed as a ‘gift with reservation’ and essentially means it still counts for inheritance tax
when the gift giver passes away.

So there will be CGT to pay when you sell the home if the value has increase between the
date of the gift and the date of the sale.

Capital Gains Tax Liabilities for UK Non-Residents.

Unfortunately, being an expat or non-resident in the UK no longer avoids CGT duties. Since
April 2015 British expats and non-residents are required to report the sale or disposal of
properties to HMRC. With the CGT being payable on gains made after 5 April 2015.

Please be aware that you must inform HMRC within 30 days after the ownership transfer
date, even if there is zero tax to pay.

Capital Gains Tax on investments.

Making regular investments is often seen as the smartest way to get into the stock market.
However it can present some challenges if you decide to partially sell your investments. If you
are completely liquidating your portfolio, then the CGT is straightforward – being the total
amount paid into the fund deducted from the proceeds of the final sale gives you the size of
your capital gain. With anything exceeding the £11,100 CGT limit becoming liable at your tax
rate.

It’s when you only liquidate part of your investments that things can become complicated. As
a rule of thumb, if you have bought units at a variety of prices over a period of time, then you
will need to work out the average price per share. You can then calculate your investment
against your gain. Again your financial adviser can help you with this.

Liquidating funds often allows investors to ‘Bed and ISA’. Where investments that are held
outside an ISA are sold and then the same investments are bought back within an ISA
avoiding CGT in the future.

Claiming Entrepreneurs’ Relief against Capital Gains Tax.

Business owners who are selling all or part of their business can claim Entrepreneurs’ Relief
(ER) on the sale and reduce their tax liability to 10% on all qualifying gains.

The main qualifications for ER, are if you dispose of any of the following:

• All or part of your business, including the business’s assets, once it has been closed
– either as a sole trader or business partner
• Shares or securities in a company where you have at least 5% of shares and voting
rights
• Shares you got through an Enterprise Management Incentive (EMI) scheme after 5
April 2013
• Assets you lent to your business or personal company
Once again, this is not an exclusive list and further information can be found here

If you have any questions regarding Capital Gains Tax

As always, if you are in any doubts as to your current situation, or potential CGT obligations,
then you should consult a financial adviser. You are welcome to contact us where we
will be happy to help answer any questions you may have.

The Rate Rise is here – but what does it mean?

Well we all new it was coming, but what now? What does the first interest rate rise for more than a decade mean for you?

Despite the fact that it’s a small increase from 0.25% to 0.5% it will have an immediate impact on UK households and businesses. On one hand it means higher costs for those with mortgages and other borrowings but on the other it’s better news for all those with savings.

Is it misery for Mortgages?

Mortgage rates will inevitably rise following the increase in base rate. The main group affected in the short term are those on a standard variable rate (currently average 4.6%), along with those who are on tracker mortgages, where rates are likely to raise this side of Christmas.
Although the scale of the rise is unlikely to push many people into hardship, as a 0.25% rise on a 25 year mortgage of £200,000 at a standard variable rate of 4.5 per cent means an extra payment of about £300 a year.

Is a Fixed-rate fantastic?

With The Bank of England announcing that further rate rises can be expected, brokers are anticipating a rush on fixed-rate deals of five years and over. Although over the last few months there have been a lot of fixed-rate product withdrawals and rate increases, as the banks anticipate the rush to a fixed-rate product.

Is it the right time to Remortgage?

Anyone looking to remortgage or move to a fixed rate can still access the historically low rates available in the market, with two year fixed-rate deals available at 1.09% or fixed for five years at 1.68% for those with a 40% deposit.
It is generally thought that borrowers should be encouraged by the comment accompanying the announcement by The Bank of England “The expectation at the moment is that the speed of future increase in rates is going to be relatively slower than we thought.”

Is it super for Savers?

For those living with near non-existent returns over the last few years, it would seem like welcome news. Although that depends upon whether the banks choose to pass this increase onto their customers. A move looking increasingly unlikely, as the link between base rate and savings rate appears to have been severed sometime ago. Following the announcement, the Nationwide says the “majority” of its savers will benefit from a rise, while Newcastle Building Society and Yorkshire Building Society pledged to pass on the full rate rise to all savers. So it’s not a clear rate rise for every saver in the UK. One to watch carefully!

Is it perfect for Pensions?

With annuity rates closely linked to movements in interest rates, according to experts, the rate rise is likely to be fed through resulting in higher income for pensioners.
Richard Eagling of Moneyfacts suggests “The interest rate rise is good news for those on the verge of retirement who may be looking to secure an income through an annuity, as it is likely to boost gilt yields, which underpin annuity rates.”

Is it time up for Transfer Offers?

The rise in the interest rate is more than likely to end the record high transfer offers currently available to members of defined benefit pension schemes. Head of Royal London, Sir Steve Webb says “The one group who may be concerned by today’s news are those planning to take a transfer from a final salary pension. Transfer values are likely to track down as interest rates rise. Anyone considering a transfer may wish to take impartial advice on the pros and cons of a transfer as a matter of urgency, as transfer values are unlikely to remain at today’s very high levels.”
So if you’ve been considering your potential transfer value now is the time to look at what the opportunity might be, before the rate rise causes an end to the current offers, that can be 30 or 40 times projected pension income.

Is it interesting for Investments?

The markets have already priced in the rate rise decision, so it is predicted that there will be little impact on stock prices in the short-term. With political uncertainties like Brexit still having an affect on company’s ability to make investment decisions.

Is the Rise repeatable?

It’s because the Bank of England is forecasting inflation falling below 3%, that many believe that further rate rises in 2018 are unlikely. On-going increases risk slowing or halting an already weak economy, currently experiencing the uncertainty of Brexit. So the feeling is that this rate rise is probably going to be an isolated incident, until Brexit is behind us and the economy is more stable.

Record High Transfer Values

Final Salary Pensions, Hurry Whilst Shocks Last!

Well here’s something that doesn’t happen that often. The turmoil in the financial markets is actually presenting an interesting opportunity – and even Brexit may have had a hand in generating this particular happy shock!

I’m talking about Final Salary Pension Schemes here. In a world of future uncertainties and undetermined risk, a final salary pension can be seen as something to hold onto at all cost. But just consider the following for a second. They are often inflexible and are not usually targeted to accurately meet individual members’ needs. Which can cause members to transfer out to access things like greater flexibility under the new freedoms to pensions introduced last year. Or they might want to access a cash lump sum, to reduce debt or to ensure their families benefit more greatly from the fund in the event of their death.

Recently we’ve seen more and more people transferring values, by which I mean the capital value of the benefits promised by a scheme (sometimes called the CETV or Cash Equivalent Transfer Value) at unusually high rates. By high rates, I’m mean as much as 40 times the annual pension income!

So why are values so high and will it last?

The conventional wisdom here is that values have been driven up significantly by recent reductions in the returns one can achieve with government bonds, brought about by the result of the Brexit vote, combined with The Bank of England’s attempt to prop up the economy. Which is great for anyone looking to take advantage of the CETV on their final salary pension. But like all good things, it is likely that it will be coming to an end soon, because when the bonds return to their normal range, we can expect to see transfer values to reduce too.

So if you’ve been thinking, it might be time to start doing!

Right now there is an unusual opportunity to extract some significant value from your pension. However the situation is predicted to return to normality soon, so now is the time to act.

Working out your transfer value

It’s important to understand that there are a variety of factors that different pension schemes use to calculate transfer values. These usually revolve around your age now and what your age will be when you are entitled to start drawing the benefit. They may also include the specifics of the escalation of benefits before and after retirement as well as any benefits your spouse or dependents are entitled to.

As a rule of thumb, the closer you are to your retirement, the higher the CETV multiple will be. Oddly, the further away you are, with more time for the assets to grow, the lower the present value is. The state of your schemes funding and security of your benefits will also have an impact on final figures, as will the scheme being underfunded in any way.

The best way to know exactly what your potential opportunity might be, is to request a CETV quotation from your pension provider.

You can look before you leap

The main advantage with a defined benefits scheme is the guaranteed income. As you lose these guarantees when you transfer, your future pension income will depend upon the returns you earn on the invested assets. That’s why, once you’ve received your CETV quotation, it’s vital to calculate the exact rate of return you need to ensure you would exceed the income you were set to receive on your final salary scheme. But right now, the high rate of the current CETV multiples mean that these required return rates can be as low as just one percentage point above inflation to make the move a sound choice.

You should also consider that when you transfer out of a final salary scheme, the investment risk moves from the pension provider over to you. So you must consider your attitude toward risk. This will be influenced by factors such as your financial situation, other assets and income sources you might have that you could fall back on if you need to, should returns be weaker than predicted.

Apart from the questions of risk and return, there maybe other things to consider. Your existing plan may have other non-financial benefits attached to it, which you may not wish to give up.

Having said all that, final salary schemes are well known for their restrictions and inflexibility. So transferring out may open up some new ways to access your pension pot and therefore open some new options for your retirement and inheritance tax planning too.

So what does everyone else do?

Generally we find that individuals with more wealth and other assets beside just their pensions, who are looking for greater flexibility and control over their retirement savings; or are planning to pass a substantial portion of their wealth to their children are more likely to opt to transfer out of a final salary scheme.

Whilst those with more limited assets, who prefer the security of the guaranteed income, tend keep to their final salary scheme.
Like everything in financial services, it’s your individual circumstances and aspirations along with where you are in terms of your timeline that will help determine what’s right for you.

One thing’s almost certain – this opportunity won’t last

If you are considering requesting a CETV quotation, I’d do it sooner rather than later. As the current high transfer values have been caused by the short-term market developments I covered earlier – and the situation is unlikely to last much longer. As when we see the increase in bond rates, we will most likely see the decrease in the multiples you can currently secure with your CETV.

If you would like some help deciding what’s best for you, then call us now for a free initial consultation. We would be delighted to go through your individual circumstances with you and help you decide on the best option for you.

For more information of our pension transfer advisory process, you can visit our sections on UK Pension Transfers and Expat Pension Transfers.

Do you know the current position of your Defined Benefit Pension?

I only ask because things have changed quite dramatically recently. In fact, according to PwC, the combined deficit of defined benefit pension funds in the UK is currently standing at a whopping £460bn.

It doesn’t seem to be calming down either, with PwC chief actuary Steven Dicker stating:
“The deficit calculation is based on a ‘gilts+’ approach and is sensitive to even modest market movements. Compounding with the uncertain economic and political climate, the deficits calculated on this basis are likely to remain volatile.”

According to their firm’s Skyval index (which tracks 5,800 DB pension funds), in July and August this year we saw a continued increase in the deficits by a further £40bn.

As always, politics has a role to play

Skyval also tracked the impact of political events and policy decisions on DB deficits in 2016. Unsurprisingly the Brexit vote had the biggest short-term impact on DB pension deficits in 2016 and has an £80bn increase from 23 June to 24 June attributed to it.

PwC’s global pensions head Raj Mody predicts that 2017 will see pension fund trustees and sponsors having to reach much more informed conclusions about how to tackle their pension deficit and to put robust strategies in place.

Mody goes onto suggest “Those involved are increasingly realising the importance of transparency in order to decide appropriate strategy. DB pensions are long-term commitments stretching out over several decades and so there is limited value in pension funds making decisions based on simplified information.”

Time for a plan!

Schemes affected by the deficit have to have a recovery plan in action. So it might be worth looking into what your scheme has mapped out in terms of a action.

What if your sponsoring employer goes bust?

If the sponsoring employer goes bust, the scheme will automatically go into the Pension Protection Fund (PPF).

Unfortunately the likelihood of a sponsoring employer going bust is on the increase, with big names like BHS famously included on the growing list.

Not only that, but with Brexit just around the corner, you can pretty much guarantee that economic uncertainty is here for a while longer.

So what will the PPF do to protect your current pension?

If you’ve already retired, the good news is that things shouldn’t change much at all. If you were over the scheme’s normal retirement age when your employer went bust, the PPF usually pays the full 100% level of compensation.
If you retired early, and you did so before you reached your scheme’s normal pension age (before your employer went bust), then the PPF usually pays up to a 90% level of compensation. However the compensation is capped. The cap at age 65 is, from 1 April 2017, £38,505.61 (this equates to £34,655.05 when the 90 per cent level is applied) per year. With this cap being set by DWP.
There is also a Long Service Cap for members who have 21 or more years’ service in their scheme. Which increases the cap by 3% for each full year of pensionable service above 20 years, up to a maximum of double the standard cap.
If you haven’t retired just yet, when you do reach your scheme’s normal retirement age, the PPF should pay compensation based on a 90% level subject to a cap, as described above.

So who’s most affected by this?

The very simple answer is, that this immediately affects people on high salaries who are approaching retirement.
Which is why it’s important that you have a good understanding of what the impact of this deficit might have on your retirement. That way you will be aware of any difference to what you expected to receive from your pension and can plan accordingly.

Finally, the most important question… what can YOU do about this today?

If your scheme is showing increased deficits, combined with higher transfer values, then now is an opportune time to carry out a full review. Especially as things may have dramatically changed since you started on the scheme and your expectations may no longer be on course to be achieved and delivered.

The MPAA (Money Purchase Annual Allowance) and what it means for you

One pre-election promise that’s here to stay

Despite dropping the clause reducing the MPAA from £10,000 to £4,000 on 25 April 2017, in order to help get the Finance Bill 2017 to come into force before Parliament dissolves on 3 May, the Government did promise that it would re-introduce the dropped clauses after the general election (assuming they got re-elected). Although it may not have made campaign headlines at the time, it’s certainly worth looking at now.

As we stand right now, the clause has been re-introduced with retrospective effect back to 6 April 2017. With a reduction in the MPAA from £10,000 to £4,000. Although the current Annual Allowance rules are not replaced by the MPAA, nor does it reduce the normal annual allowance.

So what do the changes mean?

Ever since 6th April 2015, it has been possible to access all of your Money Purchase Pension Savings, following the reforms known as ‘Freedom & Choice’.

However there is a catch, as accessing your entire fund will result in those monies (with the exception of the tax-free cash) becoming subject to income tax; with this possibly being charged at a rate that could be higher than you usually pay.

What triggers the changes to the MPAA?

The MPAA applies when your pensions flexibility has been accessed. However this will only be significant where there is £4,000 or more total contributions to a money purchase arrangement in a Pension Input Period.

This accessing flexibility is referred to as a ‘Trigger Event’ and can be defined in the following examples:

  • Uncrystallised Fund Pension Lump Sum (UFPLS)

    This occurs when you access your pension fund via an UFPLS.

  • Flexi-access Drawdown Income

    Any designation of funds for flexi-access drawdown doesn’t necessarily trigger the MPAA, nor does the payment of a PCLS. Having said that, once any income (or any lump sums from the designated pot) is taken from the funds designated to a flexi-access drawdown plan, the MPAA applies.
    It’s important to note that, should the income be taken from assets that can be wholly attributable to a Disqualifying Pension Credit, then the MPAA is not triggered. Just to clarify disqualifying pension credits are pension credits from divorce pension splitting orders.

  • Capped Drawdown Income Above Cap

    If you were in “capped drawdown” on 5 April 2015 you can then continue in capped drawdown. The existing system for reviewing and calculating the cap is expected to remain in place. It is only if you then choose to take an income in excess of your cap that the MPAA will apply.

  • Existing Flexible Drawdown

    If you had flexible drawdown fund before 6 April 2015, then that is treated as having accessed flexibility on 6 April 2015 as your drawdown became flexi-access on this date.

  • Stand-Alone Lump

    In some circumstances where a stand-alone lump sum is paid out from 6 April 2015 the MPAA will also apply.

What happens when the trigger is pulled?

Once the trigger occurs, then the MPAA applies from the day after the trigger event. The only exception to this is any pre-6th April 2015 flexible drawdowns, which invoked the restricted allowance immediately from 6th April 2015.

So What’s The Tax Implication To You?

With the new annual allowance at £4,000 there are bound to be many more scheme members having to pay an excess tax charge. With these extra charges being paid direct to HM Revenue & Customs after the end of the tax year.

Don’t make a Snap Decision as a result of the Snap Election!

number 10 downing street

Have you settled down after the election yet?

I think it’s fair to say that the shock General Election returned a huge shock of a result, no matter what you political affiliations.

The political correspondents are really earning their money at the moment and the TV satirists are having a field day with the fresh new material they’ve all been supplied with.

If your head is still in a spin with regard to the outcome and it’s implications on the economy and Brexit, just imagine how the markets must feel. Not just here in the UK, but in Europe as well as the rest of the world.

I’m not sure uncertainty quite sums it up.

Will Teresa May be able to hang on in a hung parliament?

The implications of a hung parliament are huge. There’s a great deal of horse-trading going on behind the door of Number 10, with alliances being formed in order to ensure that the Queen’s Speech passes smoothly. However all of these deals come with a cost, in both financial and political credibility terms.

On top of all of that are the noises coming from the more vocal dissatisfied conservatives, as well as telling silences from very senior members of the party. So all things point to a leadership challenge looming large on the horizon.

Not the most ideal way to launch into Brexit negotiations. But we are where we are. We live in the greatest democracy on the planet and the British people have spoken to the Mother of Parliaments – and she must listen.

Who would be brave enough to predict the next six months?

Well none of the political or economic experts feel that they are in a position to comfortably give an opinion of what the next six months might look like. To say that we face a period of instability and choppy waters is about the only thing they can say, with a degree of certainly.

So what do the market’s think?

We know that the one thing that the markets love more than anything else is stability. We also know that that is something that will return at some point; but seems to be a little way of at the moment.

With that in mind, from an investment perspective now might be the time to sit tight, ride things out and see how the markets look when things settle down. We are a few days into this period of turmoil and a wise captain never plots a new course from within the eye of the storm. Far better to let the turmoil play out and re-asses things once the maelstrom has dissipated. And dissipate it will. It always does.

Political and economic history shows us that things calm down. Politicians will do deals, or elections will be called. Either way, a new normality returns; and from the new status quo, the markets settle and return to the long-term trends of growth.

So what are the smart investors doing right now?

Well sometimes the best course of action is no action at all. Leaving your investments alone and waiting for the markets to settle back to a steady state is a proven a strategy that has worked in the past when the markets face ‘interesting times’.

Consider the medium to long-term performance of the markets. They are robust and they unrelentingly move forward, despite what the politicians across the world try to do to stop them.

So, unless you need to liquidate your portfolio because your circumstances have changed, the consensus of opinion seems to be to hang on and let things settle.

Elections and Referendums

Just when you think you’ve seen enough of elections and referendums, they’re starting to appear like busses.

Rollercoaster Elections Referendums

Here we all go again!

It seems like only yesterday that David Cameron and Ed Miliband were battling for the keys of Number 10. Then, just as we all got our breath back, we had the EU Referendum.

Hot on Brexit’s heals, we then witnessed President Trump’s march toward The White House. Right now the EU is in the midst of it’s own electoral battles and Turkey is undergoing historic changes that may well bring about fundamental alterations to it’s constitution.

So with all that literally days behind us, Teresa May has now announced a snap General Election for June 8th.

So, what does it all mean for our investments?

Not so steady as we go.

We all know that the markets love stability and that we haven’t had very much of that recently, but things were starting to settling down. Granted there is the sabre rattling regarding Brexit and the UK’s future economic relationship with Europe – but there always has been.

It can’t be good for business though. As we all know that political uncertainty leads to a volatile market. However, we need to remember that political uncertainly doesn’t last, but the markets do!

It’s fair to say that changes in the status quo often disrupt the domestic and international markets, especially if the changes are unexpected or seem to signify a departure from the established order of things. Couple that with the fact that many observers are pointing out that the political and economic landscape of Europe hasn’t changed so much since the end of the Second World War. What is happening in the UK, Europe and America is huge and no one knows exactly where it will all settle. But settle it will. And when it does the markets will adjust themselves, dust themselves down and go about their usual business.

The markets love time more than politics.

Analysts tell us to take great comfort by looking back at long-term market performance. For when we examine how the markets behave historically, the further back we go the more we see steady growth.

In saying that, it doesn’t mean that growth was more assured or stronger years ago. What it means is that if we look at the markets over years rather than months, then the robust nature of investment growth becomes apparent.

It’s by looking back in time that we can clearly see that investments generally return the best options in order to grow a lump sum of cash. This knowledge should arm us with the confidence to look to retaining our market positions in times of uncertainty.

We may not all share the same politics, but we’re all in the same boat.

We are all facing uncertainty. We are all second-guessing the results of the General Election. What that will mean to Brexit? How will the victors navigate the UK on it’s maiden voyage as an Economic power in its own right?

But take comfort in the fact that the markets are used to uncertainty and they can cope with it way better than us mere humans. Just think of the markets as a reflection of life and society. They have their ups and downs and often face periods of calm certainty as well as violent change.

Our approach is evidence-based, long-term buy and hold, concentrating on getting the right mixture of risk and return for our clients. Essentially this is a ‘steady as she goes’ approach which avoids market timing or stock selection as far as possible since these have not been shown to add value. This has generally served them well over time. Unless people’s goals have changed, we do not advocate any changes in the levels of risk taken. We have already made changes to our portfolios to remove the bias to UK equities and these are being rolled out through our regular client review process. So we are not complacent but we do base our approach on our understanding of the long term behaviour of the markets.

Lifetime ISA (LISA)

LISA Lifetime ISA

There’s been a great deal of talk recently about the launch on April 6th this year of the Lifetime ISA (LISA). So, I thought it would be very worth while to provide you with a quick overview of what exactly a LISA is, how they best work and who they work best for.

With property prices increasing and the accompanying problems of getting that all important deposit together for your first home, LISAs are designed to be a vehicle to help overcome this challenge.

Specifically aimed at investors between the ages of 18 and 40, who are saving towards the purchase of their first home. The idea being that savers can put in up to £4,000 a year and receive a bonus of up to £1,000 per year from the Government. So, if you have your LISA between the ages of 18 and 50 that could be as large as £32,000 in bonus payments (based on current bonus payments). Although Mr Osborne stated that the annual bonus would continue to be paid to LISA holders until they reach their 50th birthday, former pensions minister Steve Webb added that the 25% rate could turn out to be a “Teaser LISA” rate that may fall back in the future.

There are also some stipulations that will accompany your LISA. The funds must be used to purchase your first home (wroth up to £450,000). If you don’t use your LISA for the purchase of your
first home, then the funds will be locked away until you are 60 years old.

Just like a standard ISA, you have the choice of holding your investment in cash, or invest it in funds and individual stocks where any growth in your assets will be tax-free. You can use your LISA for the purchase of your first house, or access the funds at 60. However, if you take out any cash before then there is a rather large 5% penalty to pay, as well as losing your government bonus, along with any investment gains you’re made on that bonus!

There has been a great deal of debate as to whether the LISA would make a viable pension vehicle for workers in their 20’s and 30’s, but the fact that a LISA does not attract employer contributions may outweigh its attractive 25% annual bonus.

I suspect the real dilemma, for investors saving for a home, is the choice between the LISA and the Help-to-Buy Isa. Although the latter Help-to-Buy Isa will close to new savers in November 2019 and will only be open to new contributions until 2029. But if you are one of those investors whose timings place you in a position of choice, then there are some important points you should be aware of.

Firstly, the amount you are allowed to invest annually differs. Both products offer a 25% government bonus for those buying a home, but the allowable investment needs considering. A LISA allows you to invest £4,000 annually and will attract a £1,000 top up. A Help-to-Buy Isa allows you to invest £2,400 annually and attracts a bonus of £600. Plus, when you first open a Help-to-Buy Isa, if you can deposit a lump sum of £1,000 that will generate a bonus of £250 (meaning the bonus in the first year could be £850). So, a Help-to-Buy has a bonus cap of £3,000 whereas a LISA pays a bonus of £1,000 every year, so could climb to £32,000.

There are some differences in the value of the property you can buy too. Help-to-Buy allows you to purchase a property up to £250,000 outside London and £450,000 within London. The LISA puts a straight cap of £450,000 wherever you decide to buy in the UK.

So as with all financial products, careful choices have to be made. As the LISA may be ideal for some of us, but that largely depends upon the life stage we are at and what we are planning for in the future.

Article 50 and Your Finances

Brexit Article 50

After nine months the UK has delivered. These words are what European Council President Donald Tusk posted on Twitter when he received Britain’s article 50 letter on Wednesday. We will not join the media in speculations whether the letter was “aggressive” or “positive”, or what particular UK and EU representatives’ reactions reveal about the upcoming negotiations. Instead we will focus on what we know and what it all means for your finances, now and going forward.

Article 50 Process

What exactly does “article 50” mean? It refers to article 50 of the Treaty on European Union (full text here), which regulates the process of voluntary withdrawal of a member state from the EU. It has been in force only since 2009 and is now being used for the first time in history.

The entire procedure specified (very vaguely) in article 50 is as follows:

  • A member state which has decided to leave the EU (as the UK did last year) must formally notify the European Council of its intention (as the UK did on Wednesday).
  • Following the notification, a withdrawal agreement will be negotiated. It will specify the conditions and exact date of withdrawal, as well as the leaving state’s future relationship with the EU.
  • The withdrawal agreement must be approved by the European Parliament and the European Council. The latter will act by qualified majority.

The Deadline: 29 March 2019

Importantly, article 50 specifies a deadline for the negotiations. If no agreement is reached within two years from the formal notification (i.e. 29 March 2019), the UK will cease to be a member of the EU without any trade and other deals in place. This would be the hardest Brexit possible, with disastrous effects which everyone wants to avoid. It is therefore extremely unlikely.

Article 50 contains a provision to extend the negotiations, subject to unanimous (possibly a very important detail) approval by the European Council.

Things to Watch

It is impossible to predict the outcome of the negotiations and effects on the economy. While the media have been speculating about the main topics and most likely sticking points for long time, new issues will almost certainly arise as the negotiations go forward.

Overall, future trade arrangements and access to the single market (as well as the cost the UK will have to pay for it) are the key questions with the greatest potential effect on the markets. Financial industry regulations and the ability to maintain London’s position as the financial capital of Europe will be another important topic.

Role of Individual Countries

One thing to keep in mind is that the UK won’t really be negotiating with one counterparty. Political situation in individual EU countries will certainly affect the tone and outcome of the negotiations. Therefore, some of the key things to watch are this year’s elections in France (first round 23 April, second round 7 May) and Germany (24 September).

That said, while big countries like Germany and France will definitely act as main drivers, it would be a mistake to underestimate the potential importance of smaller countries and their own particular interests. For instance, most East and South European countries will be concerned about the rights of their citizens living in the UK. Agriculture and fishing, heavily regulated by the EU, will be important topics for some countries; defence or EU budget contributions for others. There is also the very unique role of Ireland with its historical ties to the UK.

Not least, we should not forget those within our borders, particularly Scotland and Northern Ireland.

What It Means for Your Finances

If there is one word to sum up the entire Brexit story, it is uncertainty. There is very little we know. Even the people directly involved in the negotiations are unable to predict the result. Moreover, even if we knew the exact agreement coming out of the negotiations, the effects on the economy and the financial markets are impossible to forecast with any degree of accuracy. Brexit won’t be the only issue affecting the markets in the next months and years. Among other factors, developments in the US, China and other regions will be as important, if not more.

In light of the above, our recommendation is the same as it was immediately after the Brexit referendum: Stick with your strategy and don’t try to bet your savings on things you can’t predict. History has shown that consistent investing beats market timing in the long run.

We will of course continue to monitor the situation and provide updates when necessary.