April News Round Up
11th April 2019
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.