April News Round Up
11th April 2019
Pension fund fee caps
A growing number of advisers and financial planners are introducing self-imposed fee caps as regulatory pressure forces a sharper focus on portfolio costs. Research published at the end of 2017 found controlling investment fees is one simple way investors can improve their net returns; the simple theory being that paying less for funds leaves a bigger net return. It said that while no quantitative factor alone can ensure outperformance, low cost continues to be the most effective quantitative filter that has been shown, with some consistency, to improve performance. The introduction of Mifid II last year has forced asset managers to be more transparent on fees. Asset managers have been reducing fund costs, while wealth managers, IFAs and financial planners have made strides to lower the cost of portfolios to end clients. Passive strategies have subsequently started to become the core of some portfolios to lower headline costs, but some advisers are going further and implementing self-imposed investment fee caps. However, The Association of Investment Companies has recently said pension rules designed to bear down on workplace pension investment costs discriminated against investment companies that can produce higher returns but come with higher charges or performance-related fees.
Question marks over the sustainability of dividends on UK stocks
For dividend investors with exposure to the UK stock market, the first quarter proved yet another bountiful period as recent data from Link Asset Services showed. Shareholder rewards in that period hit fresh record highs of £19.7bn, but the financial services firm’s UK Dividend Monitor report showed not all London-quoted shares are equal. In particular, the survey showed that stocks from the FTSE 100 embarrassingly outshone the mid-caps during quarter one as, after excluding the effect of exchange rates and supplementary dividends, payouts from the Footsie rose 2.6% in the three months to March. Mid-cap payouts, by comparison, fell by 2.5%. There’s plenty of reason to expect some of the FTSE 100’s big hitters to continue impressing as 2019 progresses and probably beyond too. However, some commentators warn that dividend growth is slowing and company profits may peak this year.
Home insurance and the cost of loyalty
Loyal home insurance customers who stick with the same provider for six years or more are driving the profits in the sector, analysis from Citizens Advice suggests. The charity said loyal customers are paying an average annual premium of £325 for their sixth year of insurance – nearly double that of new customers (£172). The latest research suggests that home insurance providers tend to make their profits from those customers who remain loyal for six years or more. But the Association of British Insurers (ABI) said that whether or not a firm makes a profit depends on “many factors” and companies have committed to review premiums charged to customers who have been with them for more than five years. It said after six years, a loyal customer could typically expect to have paid a total of £1,596 – £500 more than someone who spends every year as a new customer with their insurer, paying £1,032 on average.
HMRC questioned over IR35
MPs have warned the UK government to pay close attention to the effect IR35 tax reforms will have on the private sector and questioned the efficacy of HMRC's status-checking tool. Amid much controversy, the government rolled out changes to IR35 – or off-payroll working – rules in the public sector in 2017 and plans to do the same for the private sector in 2020. It shifts responsibility for determining tax status from the contractor to the business that hired them. The aim is to close loopholes that allow people working through personal service companies to avoid tax contributions, which the government says will cost some £1.3bn by 2023-24. However, the regulations has been widely criticised for being confusing, hard to implement effectively and linked to people leaving contracting jobs in the public sector. And in a debate in Parliament late last week, MPs said the government didn't appear to have learnt lessons ahead of the private sector rollout and had failed to incorporate them into an ongoing consultation. MPs warned that people were unlikely to go to HMRC for extra guidance, that poor application of the rules could damage contractors and the UK economy, and that it placed an extra burden on businesses recovering from the credit crunch and racing to prepare for Brexit.
As reported in the wider press, the Ministry of Justice has announced ground-breaking changes to our current 50 year old divorce laws. Proposals for changes to the law are intended to reduce hostility for the family involved. They will include:
- Retaining the irretrievable breakdown of a marriage as the sole ground for divorce
- Replacing the requirement to provide evidence of a ‘fact’ around behaviour or separation with a requirement to provide a statement of irretrievable breakdown
- Retaining the two-stage legal process currently referred to as decree nisi and decree absolute
- Creating the option of a joint application for divorce, alongside retaining the option for one party to initiate the process
- Removing the ability to contest a divorce
- Introducing a minimum timeframe of 6 months, from petition stage to final divorce (20 weeks from petition stage to decree nisi; 6 weeks from decree nisi to decree absolute).
Be careful of innovative finance ISAs
Savers considering an innovative finance Isa should carefully consider where their money is invested before buying one, the City regulator has warned. The Financial Conduct Authority (FCA) said it has seen evidence that the products are being promoted alongside cash Isas. Innovative finance Isas allow people to save with peer-to-peer lenders in a tax-efficient Isa. Peer-to-peer lenders match up people who have money they want to invest with borrowers. While the potential returns may be higher than with a cash Isa, innovative finance Isas are generally seen as riskier.
In a statement on its website, the FCA said investments held in innovative finance Isas are “high risk”. It said: “These types of investments may not be protected by the Financial Service Compensation Scheme so customers may lose the money invested or find it hard to get back.” Innovative finance Isas work differently to cash Isas but experts still believe they are still a sensible option as a small part of a wider portfolio for some investors – as long as they understand the risks and are comfortable with them.
The United States and China risk plunging the global economy into a recession if the nations cannot agree a trade deal with three months, according to a senior analyst at Moody’s. Mr Zandi described current business sentiment across the globe as “extraordinarily fragile” as he described a global recession as “highly likely” should the trade war continue to escalate. Speaking this week, he said that businesses are really on edge due, in no small part, to this trade war. He believes that if it’s not settled in the next couple (to) three months, that a global recession is highly likely. The warning from Mr Zandi comes after the World Trade Organisation (WTO) said world trade shrank by 0.3% in the fourth quarter of 2018 and is likely to grow by 2.6% this year. This is slower than 3.0% growth in 2018 and below a previous forecast of 3.7%. In its annual forecast, the WTO said trade had been weighed down by new tariffs and retaliatory measures, weaker economic growth, volatility in financial markets and tighter monetary conditions in developed countries.
New tax year changes
The new tax year brings a number of changes for pensions including the long-awaited name change for the Single Financial Guidance Body (SFGB). Alongside this, minimum auto-enrolment (AE) contribution rates have increased and the lifetime allowance has also risen. Additionally, there are changes in take-home pay and there is growth in the state pension. The headlines are:
- AE contribution rates: Saturday (6 April) marked the second increase in AE contribution rates, with the total minimum contribution rate rising from 5% to 8%. Employers are now responsible for paying a minimum of 3%, while employees are responsible for paying the remaining 5% into their pension pot. The range of qualifying earnings has moved at the same time, with the lower earnings threshold rising from £6,032 to £6,136 annually and the upper earnings threshold rising from £46,350 to £50,000. The earnings trigger for AE remains at £10,000.
- Take-home pay: The increases in AE payments will be slightly mitigated, but not entirely, by the changes to the personal tax allowance and the National Insurance (NI) primary threshold, which are both increasing. The annual personal tax allowance has risen from £11,850 to £12,000, while the weekly NI primary threshold has grown from £162 to £166.
- The lifetime allowance limit on the amount of pension benefit that can be drawn from pension schemes has risen in line with Consumer Prices Index (CPI) inflation this year and is expected to increase again at the end of this tax year.
- State pension allowances have also increased by 2.6% this year as the triple lock system continues to apply for both the basic state pension and the new state pension. This means the basic state pension has grown from £125.95 to £129.20 a week
Equity release surge
There has been a double digit rise in the number of people releasing cash from their property through equity release, new figures have shown. According to the Equity Release Council's spring 2019 market report, demand for equity release continued to grow across all UK regions and lifetime mortgages in particular saw a rise of 25% from 2017 to 2018. Lifetime mortgages are now estimated to account for about a third of all mortgages taken out by homeowners from their mid-50s onward compared to less than a fifth ten years ago, according to the ERC, which based its analysis on FCA product sales data. Product innovation continued to broaden the appeal of equity release and the range of options to those wishing to unlock cash from their property doubled to 221 in the space of the past year, according to the ERC.
8% pensions snafu
A rule change brought in with the new tax year means that millions of people will start to save more into their pensions – but thanks to a quirk of the system, an average worker will miss out on £40,000 over their career. Under the final phase of the Government's flagship savings policy, "automatic enrolment", the amount put into your pot each month will rise to 8% of earnings.
Except it won't. The rules state that contributions need to be taken only on a portion or "band" of salary. Both low and high earners are affected. The first £6,136 of income is excluded. And any salary over £50,000 – the new threshold for higher-rate tax – is likewise left out of the calculations. Meanwhile, just days ahead of the changes, more than one in four workers had no idea that their automatic work pension contributions were going to increase.