May News Round Up
16th May 2019
Beware of crypto-fraudsters
Potential victims have been warned over bogus online 'get rich quick' schemes as it emerged people lost more than £27million to cryptocurrency and foreign exchange scams last year.
Fraudsters promise high returns to those who invest, according to Action Fraud and the Financial Conduct Authority. Victims lost an average of £14,600 in 2018-19 and stand little chance of getting their money back. Reports of cryptocurrency and forex investment scams increased nearly 250% in 2017-18, from 530 to nearly 1,850. The scams work by criminals promoting get-rich-quick online trading platforms through social media. Posts often use fake celebrity endorsements and images of luxury items like expensive watches and cars. These then link to professional-looking websites where consumers are persuaded to invest. Often investors are led to believe their first investment has successfully returned a profit, and are then enticed to invest more money or introduce friends in return for greater profits. But the returns stop, the customer account is closed and the scammer disappears with no further contact.
MPs move to protect pension scheme members
The Work and Pensions select committee has reiterated that a ban on contingent charging would be the best way to protect customers after it completed its inquiry into the practice. The committee had launched an inquiry into charging structures for financial advice on defined benefit transfers earlier this year. In a letter to the Financial Conduct Authority, Labour MP Frank Field wrote the committee had found no evidence that contingent charging does not result in some advisers being incentivised to give bad advice. There were also no suitable checks and balances in place to prevent this, he added. Contingent charging means a client only pays for the advice if they go ahead with the recommended course of action. In the case of pension transfers the adviser won't get paid unless the pension is transferred, which is usually irreversible and likely to mean the client has given up valuable benefits which may not be in their best interest. The FCA had already consulted the industry in 2018 on how these structures for pension transfer advice may cause consumer harm and had decided against a ban in October despite finding widespread problems in the suitability of pension transfers.
Grandparents miss out on pensions credits
Just 10,084 grandparents are currently claiming national insurance credits through a little-known scheme according to a new Freedom of Information request by mutual insurer Royal London.
While this is an increase from the roughly 1,000 doing do in 2015/16, it is still way below the number entitled. According to analysts this is a tiny proportion of those potentially eligible for the benefit. Analysts estimate that there are roughly one million eligible, meaning less than 1% of those who could claim the credits are doing so. Under rules launched in 2011, grandparents or other family members that provide childcare can claim national insurance credits, boosting their state pension. So long as the child in question is under the age of 12 and the parent has returned to work, national insurance credits can be transferred to an out-of-work family member looking after the child. These credits, assuming the intended recipient is still under state pension age, help to increase their state pension entitlement, helping them to build up a full state pension. The additional national insurance credits can be of considerable value to someone who would not otherwise build up a full state pension. Each annual credit missed could cost someone 1/35 of the value of the state pension — around £250 a year or £5,000 over the course of a typical 20-year retirement.
Mixed age couples suffer from state pension benefit changes
Changes to the way a crucial state pension benefit is paid could see couples losing £7,000 a year since a new act of parliament was introduced in on 15 May. Previously, couples of mixed ages were able to claim pension age benefits, such as pension credit, as soon as the eldest partner reaches state pension age. Since the changes, however, couples are only able to claim pension age benefits once the youngest partner reaches state pension age. The change is predicted to hit the UK’s poorest pensioners who have a partner that is of working age. Pension experts warn that the change could leave some couples more than £7,000 worse off a year. These changes to benefits may create a real cliff edge between those under the old and new rules. If you are fortunate enough to come under the previous rules then you will be treated as a pensioner couple even if one of you is under pension age. But after May, you will be treated as a working age couple even if one of you is retired and drawing a state pension. The difference could run into many thousands of pounds. This issue highlights the gulf in the generosity of the system between pensioners and people of working age. We have now reached a situation where a single pensioner on pension credit gets more to live on than a working age couple on Universal Credit.
Markets waiting out Trump's trade war
The period of January through April marked the best four-month start a year for stocks in more than 30 years, but markets have hit a rough patch in May on fears that a U.S -China trade conflagration could morph into a full-blown war. Investors and strategists believe that heightened uncertainty over trade relations will continue to be a significant headwind for equity benchmarks, but that the extent of the damage could be limited by both the Trump administration and the Federal Reserve’s sensitivity to a market sell-off. Before last week many wealth managers were pro-risk: overweight stocks, emerging markets and small caps within our stock portfolios. Now, some have been in the process of scaling back on those bets and going to neutral or cutting those positions in half. The strategy shift for wealth managers and investors follows a May 5 tweet from President Trump, who first raised the prospect allowing annual tariffs on more than $200 billion of China goods to be lifted to 25% from 10%, charging that Chinese officials reneged on commitments they had made during negotiations. The tweet sparked a cavalcade of selling of assets perceived as risky, like stocks and crude-oil futures, sending markets mostly reeling over the following six-session span. The most important aspect is the impact tariffs have on business confidence, consumer confidence and financial conditions. Rising tensions make it difficult for businesses to plan investment, which will lead to lower profits down the road. Meanwhile, a falling stock market will hurt consumer confidence and spending, further eroding profits and business confidence.
US/China stand-off doesn't bode well for investors
European shares slid on Thursday, with investors exiting positions in favour of safer assets as they waited to see if U.S.-China talks will yield tangible results and help avert worsening trade ties which threaten to slow global growth. An increase in U.S. tariff on imports from China is set to be triggered on Friday, while Chinese Vice Premier Liu He starts two days of talks in Washington on Thursday. His country has asked the United States to meet it halfway to salvage a deal.
However, U.S. President Donald Trump’s insistence that China “broke the deal” and Beijing’s response that it would retaliate against a planned U.S. tariff increase dampened the prospect of a trade agreement which would calm investors’ nerves. The pan-European STOXX 600 index fell 1.7% to clock a 1-1/2 month closing low as almost all sectors declined, while the volatility gauge on euro zone blue-chips hit its highest in more than four months during the day. The consensus is that European equity markets are in somewhat of turmoil. Europe is getting hit in the cross-fire because when the two largest economies in the world engage in a trade war, it bodes badly for everyone.
Custom Union to make Britain poorer
Britain’s economy will be around 3% poorer over the long term if it leaves the European Union and retains a customs union with the bloc, the option favoured by the opposition Labour Party, academic forecasters predicted this week. The National Institute of Economic and Social Research (NIESR) said the long-run loss after 10 years, compared to staying in the EU, would be equivalent to around 800 pounds per person per year. The main driver is that leaving the EU for a customs union will make it more costly for the UK to trade with a large market on our doorstep, particularly in services which make up 80% of our economy. A customs union would allow goods to flow across the border more easily than if Britain left the EU with no deal at all, but it would not guarantee frictionless trade and would limit Britain’s capacity to strike its own free trade deals.
NIESR’s report did not look at the option favoured by Prime Minister Theresa May, which would see a looser EU trading relationship than a customs union.
Tax implications of an ageing population
Taxes will keep rising for years to come to cover the cost of caring for Britain's ageing population, Philip Hammond has warned. Despite success in the long battle to defeat the budget deficit, the Chancellor said the tax burden - already its highest in more than 30 years - will rise further. Higher earners in particular should brace for a bigger bill to HM Revenue and Customs as Mr Hammond said “grumbling” from the rich should be taken as a sign of success. “The trick in any tax system is to get the balance right. If taxpayers who are paying large amount of tax weren’t grumbling, we wouldn’t have got it right,” he told MPs on the Treasury Committee. The tax-take last year hit 34.6% of national income, or gross domestic product, the Office for Budget Responsibility said. That was the highest level since Harold Wilson was Prime Minister in 1970 reflecting the inescapable reality that as the population ages, the pressure on public services and spending increases.
Outflows continue from UK funds
Outflows from UK open-ended funds continued in March, with investors pulling out £5 billion continuing the negative trend seen over the last 12 months. The total outflow for these UK-domiciled funds is now set at nearly £30 billion since April 2018. According to research by Morningstar, Brexit is causing noise in flow data as investors move assets from UK-domiciled funds to Luxembourg – or Ireland – domiciled equivalents. UK and European equity markets are also particularly out of favour with investors, who withdrew £1.3 billion from these in March. As the previous Brexit deadline loomed, March did see money market funds preferred by investors over other asset classes, as they bucked the trend of outflows for the month. Given the uncertainty about Brexit, it is no surprise that investors have chosen to move assets into lower-risk funds. More positively, money market funds saw inflows of £555 million throughout the month. Fixed income also had inflows of £337 million, offering the only ray of light at an otherwise gloomy time for long-term investment funds.
Equity Release reaches record numbers
Last year, a record £3.94bn was raised by 83,000 homeowners over the age of 55. Yet the figure could surpass £5bn in 2019 after figures released this week by the Equity Release Council showed the strongest start to any year on record. Harnessing the huge appreciation in property prices might be filling the pensions gap for older generations, but it can also dash the inheritance hopes of the next — and politicians are also eyeing housing equity as a means of funding social care. Although Equity Release rates are coming down, experts point out that it’s important to be aware that these rates are still very high compared to both traditional mortgages, and also the Bank of England base rate (the rate at which it charges lenders when they borrow money). Along with high interest rates, some products have high arrangement or exit fees, and generally offer a bad deal.
A lifetime mortgage can end up costing more than three times what you borrow after 20 years, according to calculations from consumer group Which? In the worst-case scenario, you could even end up owing more than the value of your house, though reputable providers have a “no negative equity” guarantee. Home reversion schemes can also be terrible value, with some demanding more than 70% of your home’s value for just a 20% advance. It’s also worth being aware that if you release equity from your home, you may not be able to rely on your property wealth later in life to fund long-term care or pass on an inheritance. As ever, If you are considering equity release, make sure you seek independent financial advice.
The loan charge problem
In a report recently released by ContractorUK, it was revealed that 69% of UK contractors have admitted that HMRC’s retrospective loan charge is having a detrimental effect on their mental health. The loan charge relates to disguised remuneration schemes, whereby workers were paid via loans rather than salary, and, as a result, did not pay income tax on their earnings. From Friday 5 April, the 50,000 contractors who previously avoided NI and income tax using schemes that paid them largely in loans now face charges. A matter of contention is that while contractors are expected to pay the full amount, the companies that advertised these loans will receive no penalty. Over half (56%) feel that these companies should, at least in part, pay the charges contractors have been faced with. Many commentators believe the current plan will potentially put people out of their homes and, worse than that, the loan charge has been allegedly linked to a number of reported suicides. While the suggestion of an increase in the number of suicides is purely alleged, it is undeniable that pressure from HMRC is causing significant strain for a sector already struggling in this current climate. In fact one watchdog probing HM Revenue & Customs over the suicide of a person facing the controversial loan charge has recommended the tax authority carry out further investigation.