Topical Updates

A pensioners’ bonanza?

State pensions will rise by 3% next April, but it’s not all strictly good news.

On the day that a CPI inflation rate of 3% was announced, the BBC website covering the rise had a picture of pensioners “dancing for joy”.  The supposed reason for their jollity was that the 3% September inflation figure was the one that would be used to fix state pension increases from April 2018.

The BBC’s response was understandable, but simplistic.  Pensioners will be no better off because their increased income is, in theory, matched by increased prices.  In practice they may be marginally better or worse off, depending upon how their spending pattern compares with the “shopping basket” used to calculate the CPI.  The twelve components of that index showed annual inflation ranging from 4.3% (alcoholic drinks and tobacco) to 1.4% (miscellaneous goods and services).

…and on private pensions?

At least state pensions have inflation linking.  Such protection is by no means certain among private pensions.  Most large occupational final salary schemes offer inflation-proofing to their pensioners, although outside the public sector schemes increases may be capped.  In the past, many people drawing benefits from personal pensions and similar arrangements have chosen to buy an annuity with no inflation protection.  While the initial (level) income was much higher, its real value was steadily eroded by inflation.  For example, £1 in September 2007 now has a buying power of 78.7p, based on CPI inflation.

Have your retirement plans allowed for retirement inflation?  In today’s annuity market, an inflation linked annuity for a 65-year old costs about 60% more than its non-increasing counterpart.  You may well choose not to buy any form of annuity at retirement, but the costs of providing enough to be ‘dancing for joy’ will still be substantial.

Occupational pensions are regulated by The Pensions Regulator.  The value of your investment can go down as well as up and you may not get back the full amount you invested.  Past performance is not a reliable indicator of future performance.   Investing in shares should be regarded as a long-term investment and should fit in with your overall attitude to risk and financial circumstances.

August share falls – a cautionary tale
October 2017

August provided a reminder that even in seemingly quiet times, the value of individual shares can be volatile.

Source: LSE

August is traditionally a month when the turnover on stock exchanges slows down because many people are on holiday.  In the jargon, trading can be “thin”. That doesn’t mean, however, that nothing much happens, as the graph above shows.  While the FTSE 100 (top line in blue) merely wobbled, there were some major movements going on for individual companies, both within and outside the index.

The bottom line in red on the graph above shows the dramatic fall of one FTSE 100 constituent, Provident Financial Group, best known for its doorstep lending business.  Provident released its second profit warning in August and scrapped its dividend payment which, as the graph indicates, had not been widely expected.  The company were ejected from the FTSE 100 in September because its value had fallen so much.

The story behind the middle black line is similar.  It shows the fate of Dixons Carphone, which was a member of the FTSE 100 until demotion in March of this year.  Dixons Carphone, the High Street electronics retailer, revised down its profit forecast, bemoaning the reluctance of smartphone owners to update their handsets as regularly as they once did.  The announcement was again off the radar, with the inevitable result on the share price.

Broaden the spread

The performance of these two well-known companies serves as a useful reminder of the potential dangers in holding a handful of shares, perhaps acquired via an inheritance or employer share schemes.  Whereas a broad holding of shares spreads your risk, concentrated holdings can have the opposite effect.  You may be happy to accept the potential rollercoaster ride, but if you are not or are just unsure about the risks in your current holdings, talk to us about bringing diversification into your investment portfolio.

The value of your investment can go down as well as up and you may not get back the full amount you invested.  Past performance is not a reliable indicator of future performance.  Investing in shares should be regarded as a long-term investment and should fit in with your overall attitude to risk and financial circumstances.


Self-employed struggle to save
October 2017

Self-employment is the dream of many, especially as the goal of retirement seems to creep further out of reach.  Being your own boss sounds great.  But there are drawbacks.  Around two million of the country’s self-employed workers are unable to save any money each month, leaving them vulnerable to financial shocks.

The same body of workers spend more on bills than the UK average and only 4% enjoy the benefit of income protection insurance cover which would kick in if they were unable to work.

These worrying findings about the self-employed sector were revealed in insurer LV=’s second instalment of its Income Roulette report, a study of debt, savings and protection among 9,000 people.

The results show that four-in-ten (41%) self-employed people can’t afford to save any money each month and a further one-in-ten (11%) saves less than £50.  A third of respondents said they could not survive for more than three months if they lost their income.  This means they fall short of the Money Advice Service’s recommended amount of savings that should to be kept in reserve to maintain a level of financial resilience if an emergency strikes.

Looking at the barriers to saving, LV=’s figures show that monthly bills eat up the wages of nearly two-thirds (62%) of self-employed people; this compares with a national average of 56% taking employed workers into account.

Aware of the risks

Despite the lack of savings and insurance, the research confirmed that the self-employed were aware of the financial risks attached to this method of working with nearly three-in-ten (28%) respondents citing worries about having an accident and not being able to work as a result.  A similar proportion (29%) said they were concerned about falling sick and being put out of commission.

There are around five million self-employed workers in the UK who made a contribution of about £250 billion to the economy last year. If you’re one of them, we may be able to help.  Get in touch with us if you’d like to chat through your options.


A Junior ISA with a minor interest rate
October 2017

National Savings & Investments (NS&I) have launched their first Junior ISA.

The Junior ISA (JISA) was introduced in 2011 as a replacement for the Child Trust Fund.  It had a slow start, but momentum has built and, according to the latest figures from HM Revenue & Customs (HMRC), JISAs now hold over £2,750 million of investments for children under age 18.

While long a player in the main cash ISA market, NS&I never offered a junior version until last month, with its new launch.  The plan’s main features are:

  • A variable interest rate of 2% (against 0.75% for NS&I’s Direct ISA)
  • Transfers in (from JISAs and Child Trust Funds) are allowed (again a difference from the new contributions-only Direct ISA)
  • No penalties on transfer out (although access to cash is normally not possible before age 18)
  • Online operation only

NS&I sometimes top the ISA tables with their interest rates, but the new JISA runs no risk of doing so, as the top variable rates currently are around 3%.

According to the latest HMRC statistics, as at April 2016 almost two thirds of JISA money is invested in cash accounts, with stocks and shares accounts making up the remainder.  This is a higher proportion than for adult ISAs, where stocks and shares are just in the majority.  The logic behind this difference is puzzling: many JISA owners are young enough to have an investment horizon that makes stock and shares look a more sensible option than cash.  For more details on stocks and shares JISAs, please talk to us.


The value of your investment can go down as well as up and you may not get back the full amount you invested.  Past performance is not a reliable indicator of future performance.  Investing in shares should be regarded as a long-term investment and should fit in with your overall attitude to risk and financial circumstances.  The value of tax reliefs depends on your individual circumstances.  Tax laws can change. The Financial Conduct Authority does not regulate tax advice.

Stocks and shares ISAs invest in corporate bonds; stocks and shares and other assets that fluctuate in value.  Investors do not pay any personal tax on income or gains, but ISAs do pay unrecoverable tax on income from stocks and shares received by the ISA managers.


A sleeping dragon wakes on tax avoidance
September 2017

HM Revenue & Customs (HMRC) has come closer to using its weapon of last resort against tax avoidance schemes.

“Whack a mole” used to be a good summary of the battle between the extreme end of the tax avoidance industry and HMRC (together with its predecessor, the Inland Revenue).  First, some ‘creative’ minds would dream up a scheme that weaved through the labyrinthine tax legislation to make a tax liability disappear.  When the tax authorities became aware of the situation, more legislation would be produced to close the loopholes being exploited.  The ‘creatives’ would then move on to another tax-evaporating idea, sometimes even exploiting the anti-avoidance laws used to block a previous scheme.

In July 2013 the then Chancellor, George Osborne, took what was seen as a controversial step to end this merry-go-round by introducing the general anti-abuse rule (GAAR).  As its name suggests, the aim of the GAAR was to prevent the letter of the law being manipulated to prevent the spirit of the law applying.

The GAAR incorporates a “double reasonableness” test which basically required HMRC to show that the arrangement undertaken could not be “reasonably regarded as a reasonable course of action”.  The question of what represented a ‘reasonable course of action’ is determined by the GAAR Advisory Panel, which consists of three tax experts.

A dormant threat?

Once the GAAR was introduced, it seemed almost to disappear, as HMRC did not refer any cases to the panel.  This was thought to be because the mere existence of the GAAR meant that there was the Sword of Damocles hanging over any scheme that might be considered “abusive”.  There was certainly a noticeable drop off in new schemes being reported under the disclosure of tax avoidance scheme (DOTAS) rules.

In 2016 a GAAR penalty was introduce for newly caught schemes of 60% of the tax avoided, adding further power to HMRC’s armoury.  Then finally, last month, over four years after GAAR came into being, a first decision emerged from the GAAR Advisory Panel.  The case involved a convoluted payment-by-gold-bullion scheme which some experts thought would anyway have been defeated in the Courts, given their current stance on artificial avoidance arrangements.  In the event the Panel decided the arrangement was not reasonable.

Rather than a necessity, HMRC’s use of the GAAR may have been a warning that they are prepared to use the GAAR weapon, particularly now it has a large penalty attached to it.  The HMRC move is another reminder that, while there are plenty of legitimate ways to reduce your tax bill, something that looks too good (and/or convoluted) to be true is best avoided.  To discuss the many GAAR-free tax planning opportunities, please talk to us.

The value of tax reliefs depends on your individual circumstances.  Tax laws can change. The Financial Conduct Authority does not regulate tax advice.

What’s your inflation yardstick?
September 2017

Inflation was in the news last month in various guises.

August was a month when inflation hit the headlines several times trailing a cloud of acronyms:

The Bank of England Quarterly Inflation Report (QIR) revealed that the Bank now expects inflation (as measured by the Consumer Prices Index – CPI) “to peak around 3% in October”.  The Bank expects inflation will still be above its 2% central target by the end of the first quarter of 2020.  This forecast assumes that interest rates will rise by 0.5% over the period, in line with market expectations.  The Bank is relatively unconcerned about missing its target, saying that the overshoot “reflects entirely the effects of the referendum-related fall in sterling”.

Shortly before the QIR was published, news emerged that CPIH, the inflation measure favoured by the Office for National Statistics (ONS), had been approved as a National Statistic by the Office for Statistics Regulation.  CPIH is a variant of the more widely quoted CPI, the “H” being shorthand for the addition of owner occupiers’ housing costs (including council tax).  CPIH could ultimately replace both the CPI and the now discredited RPI.  The ONS view of the RPI is that it “is a flawed measure of inflation with serious shortcomings and we do not recommend its use.”

In mid-August, the ONS issued inflation statistics for July, showing CPI and CPIH both running at an annual 2.6%, but RPI 1% higher.  The July RPI is an important number, because it sets the basis for next year’s rail fare increases (although the government could change its mind and choose something below 3.6%).

The government’s use of RPI to ratchet up revenue was also in evidence on the day the inflation data was published.  Almost simultaneously the Student Loans Company confirmed that, from 1 September, the minimum interest rate for English and Welsh student loans started within the last five years will be based on the March 2017 RPI (3.1%), with a maximum addition of up to 3% taking the overall interest rate up to a ceiling of 6.1%.

Whatever your chosen yardstick for inflation, it is important not to forget its impact on your financial planning.  At the current 2.6% CPI/CPIH rate, the buying power of £1 will be little more than 75p in 12 years’ time.  Use today’s RPI and the same result arrives after just eight years.