September News Round Up
12th September 2019
Low fees not the be all and end all for pensions savers
In recent years, the fees charged by pension schemes has come under much closer scrutiny. However, argues a new study by the Pensions Policy Institute (PPI), low fees are not necessarily the most important factor in determining the size of someone’s final pension pot. According to the study, charging structures play an important role in determining the size of a pension pot. But, it says: “In order to secure improved outcomes, charges need to be considered alongside other factors such as contribution levels, investment strategies, member communications and experience, the strength of governance oversight and the impact of having multiple pots.” Perhaps expectedly, the most important factor identified by the PPI report was the contribution levels of members. The study found that someone contributing an extra 2% of their salary on top of the legal minimum contribution would achieve a 25% increase in their retirement income, regardless of the charging structure of their pension scheme. Another big risk to pensioners identified in the report is instances of multiple changes for those who have several pots. With the introduction of auto-enrolment, a growing number of savers are now likely to have multiple pension pots with the various employers they have had over their working life. This, the report says, can work against people achieving better results, as they can lose out by paying multiple charges across the accumulation period. Multiple pots can also mean that people are at risk from losing track of their pensions.
A re-think on how property is taxed?
Tax on property transactions is a contentious issue, and the government is again being urged to rethink the way it taxes property investors to spark the housing market. In a plea to the government to reduce stamp duty charges to ease pressure on the UK property market, Mortgages.online, an online mortgage broker, believes the buy-to-let market should be a major focus. Stamp duty was last increased for all property purchases in 2014, while April 2016 saw the second home surcharge introduced, meaning that a 3% additional charge was payable for any buy-to-let or additional properties bought. This came in alongside the announcement of progressive tax relief cuts for landlords – Section 24 – which is currently in phase three and will mean that landlords will only be able to claim income tax relief on residential finance costs at the basic rate of tax by April 2020. But commentators have been quick to point out that the increased stamp duty payable on buy-to-let purchases, and the removal of the ability to offset mortgage costs has put many investors off the property market, with a knock on effect of reducing the stock of rental properties. The rallying cry from the industry is clear - relief for buy-to-let investors and measures to stabilise the economy with clarity once and for all on Brexit, are both needed urgently.
IR35 tribunal implications for freelancers
HMRC has won an IR35 tribunal case at the High Court against three BBC presenters who will now have to pay back tens of thousands in taxes. The High Court ruled that they had effectively been forced into contracting through personal service companies by the BBC, arguing that there was an “imbalance of bargaining power”. The judges said: “The BBC were in a unique position and used it to force the presenters into contracting through personal service companies and to accept reductions in pay.” The presenters argued that they were self-employed but the court ruled that because they were told how, where and when to work, that the “assumed relationships were ones of employment”. HMRC published draft legislation in July that, from April next year, places the onus on private sector firms to check whether contractors need to pay tax and national insurance contributions, shifting responsibility from the contractor to the employer using their services. But commentators have emphasised how vital it is that HMRC now provides the greater clarity which is still needed to avoid others having to go through this ordeal.
Impact of Brexit no-deal on savings
The Bank of England held interest rates at 0.75% last time around, mentioning ‘Brexit uncertainties’ frequently in its decision. So, once Brexit comes, are we likely to see an interest rate hike or fall? Changes to interest rates can have far-reaching consequences, on everything from your personal finances to the wider economy. The Bank of England sets interest rates, also known as the base rate, in response to current events and expected economic performance, with the aim of keeping inflation around its 2% target. At its latest meeting on 19 September, the Bank’s monetary policy committee (MPC) voted unanimously to keep interest rates at 0.75%. In the past, the Bank has described holding rates as a ‘wait-and-see’ approach to Brexit. But with the deadline looming ever-closer, the Bank might soon have to be more decisive. After August’s growth figures revealed the UK economy shrank by 0.2% – the first contraction since 2012 – many in the City are called for a rates cut to increase spending and stimulate growth. The MPC did not bow to this pressure, and the base rate was kept the same in September. The MPC tends to let is decisions do the talking, rarely revealing what those might be ahead of time. So far, it has taken a ‘wait and see’ approach to Brexit, meaning we might not see any base rate changes until after we leave the EU. Still, key decision-makers have hinted at what form post-Brexit monetary policy could take:
- Since the referendum, Carney has been adamant that interest rates could go up or down after Brexit, depending on the circumstances.
- Speaking to the Treasury Select Committee late in February, Dr Gertjan Vlieghe went slightly further than Carney, saying ‘just because [interest rates] could go in either direction, doesn’t mean that each one is equally likely’. Despite this, Vlieghe did outline how a likely fall in the pound’s value could lead to higher inflation, which would require the MPC to take action.
- In the event of a no-deal Brexit, most commentators expect that the most likely response is for rates to fall in order to stimulate a weakened economy. But, as the Bank says, that is by no means certain. A fall in the value of the pound will undoubtedly lead to higher prices and the Bank may find itself in a difficult position, balancing economic stimulus with tackling inflation.’
Pensions compensation pay-outs cause taxing times
The tax rules for compensation payments are inconsistent and, in the context of pensions, fundamentally flawed, commentators believe. Without change, there is a risk they will be exploited by claims management companies, and ordinary taxpayers may be left to pick up the tab. For Isas, a compensation payment for an investment can be made to the account as a “defaulted investment subscription”. Money can be paid back into the Isa and not use any of the investor’s annual subscription limit. However, compensation in relation to a service or advice provided to a member of a pension is – in the eyes of HM Revenue & Customs – personally due to that member. This means if compensation in relation to advice upon or investments held within a Sipp is made back to a Sipp – for example, to put the fund back in the position it should be – HMRC says we must treat it as a tax-relievable contribution. This can cause problems for successful complainants, as the payment counts towards their annual allowance (or the tapered or money purchase allowances, where applicable). It will also cause the loss of any enhanced or fixed lifetime allowance protection that might be held.
House price fears as Brexit looms
UK house prices could crash by as much as a fifth if Boris Johnson pursues a no-deal Brexit, and the biggest falls would be in London and Northern Ireland, a leading accountancy firm has said. Reflecting the potentially vulnerable state of the property market as Brexit looms, KPMG said house prices would fall by between 5.4% and 7.5% across different regions next year if a new agreement with Brussels was not in place by 31 October. The analysis of average house prices across the country showed no deal could trigger a nationwide decline of about 6% in 2020 and that and a drop of between 10 and 20% was “not out of the question” if the market reacted more strongly than expected. House price growth across Britain has slumped since the EU referendum three years ago, and prices fell across the south of England in August for the first time since the last recession in 2009. Assessing the impact of a no-deal Brexit on local economies, KPMG said house prices in Northern Ireland and London could fall by as much as 7.5% and 7% respectively, because of their greater connectivity with EU trade. Despite the value of the average home in the capital potentially falling to £422,000 next year as a result of no-deal Brexit – down from £453,000 if an agreement is reached – KPMG said it would still have the highest cash prices in the country. Should Johnson strike an agreement to leave the EU with a deal on 31 October, KPMG suggested house prices would continue to rise next year, growing by about 1.3%.
What would an election mean for your finances?
Most people are bored with Brexit but must watch what’s happening because they are concerned about their finances. The big question as the political infighting unwinds at Westminster, almost changing by the hour, is what does the possibility of a General Election mean? That you should diversify your assets most commentators agree. Gold is one area that a fund manager might look at. You should stay invested because if Brexit is resolved, assets can rise. What about Sterling? Now it’s £1.19 or £1.20 against the US dollar. Some experts believe it’s advisable to stick with Sterling, but it’s an opinion and lots of things could happen and your adviser may take a different view. Some think we are close to the bottom and the bad news is already priced in. If we are close to a low, assuming we get some certainty, then we are likely to see a rise in Sterling. It won’t be massive because we have some pain to go through before we see a recovery, so most don’t think the price is going to shoot back up. If the politicians make the right decisions, Sterling will go back up, but I suspect £1.30 or £1.35 to the dollar in the future is probably as high as the price will go.
Bond rally bad news for annuitants
Annuity rates have tanked by 14% so far this year, with a £100,000 pension pot now buying a 65-year-old £4,654, £759 less than at the start of the year, according to research by Hargreaves Lansdown. Rate changes have been even more pronounced for younger retirees. A 60-year-old with a £100,000 pension who bought an annuity at the start of the year would have received an income of £4,776 but the same person retiring today would get just £4,051, a 15% decrease. Over the course of a 20-year retirement, that’s a difference of £14,500. Fears of a no-deal Brexit and a slowdown in the global economy have increased the cost of buying the secure investments that insurers use to underpin annuity pay-outs. It’s currently making keeping your pension invested look more attractive than it probably should do.
Restrictions on high risk investments?
Should investors who buy high-risk bonds be compensated when things go wrong? The obvious answer is no, with the clue in the word “risk”. But what if a bond is marketed to small investors with a “quarterly interest rate”, and is approved for inclusion in an Isa, and is promoted by a financial advice firm authorised and regulated by the Financial Conduct Authority. Would you expect the bond to lose not just the interest, but all the money you deposited? This is the type of scenario in which many investors in so-called “mini-bonds” have found themselves. About 11,000 investors in London Capital & Finance’s mini-bonds could lose a total of up to £236m, in one of the worst financial scandals for a decade. Mini-bonds are just an IOU to a company, are rarely secured on anything, and are usually completely illiquid and cannot be traded. They are simply too risky for the average small investor. Even if the interest rate on the bond is 8%, it’s hardly enough to compensate for the evidently high risk of losing your shirt. Now Charles Randall, chairman of the Financial Conduct Authority (FCA), has conceded that it was “clear that there’s too much confusion” about what investments were covered by the regulator and which were not.
Investors shun UK equities
A plummeting pound, volatile bond and stock markets, a superpower trade war, a looming global recession, and political turmoil over Brexit - it's only human to be rattled in the face of all that. When markets turn rough, conventional advice to savers with cash invested for the long term is always to ensure you are well diversified, and avoid knee-jerk reactions. But even if investing is a long game, and it's unwise to cash out because markets have temporarily gone wild, there are some steps you might consider taking. Reviewing where you are invested and whether to do some rebalancing isn't an over-reaction. Should you reduce your UK equity exposure and look to the US or Japan, or switch to lower-risk assets like bonds, or simply cash? And what about gold, which generally does well in times of global slowdown and uncertainty? Here’s a quick summary:
- Yields on bonds are very low and are sensitive to changes in economic outlook - so if the global outlook picks up bond prices may fall. Holding UK government bonds might not protect investors if a no-deal Brexit leads to a loss of confidence in the British economy and leadership.
- Cutting exposure to UK assets is one option. Emerging markets may have better long-term growth potential and their governments often have less debt than their Western equivalents.
- Stick with the UK: Pound is weak so buying abroad is expensive. Those investing in US and global equity funds could be making a 'grave mistake' by taking their depressed pounds and ploughing them into much more expensive US shares.
- While gold is perceived as a safe haven in times of uncertainty, this 'doesn't mean you can't lose money.