News Updates - May
16th May 2019
High dividend yielding trusts
Investment trusts in the equity sectors are offering higher yields, in much part reflecting investor appetite. But investors should look beyond the yield alone. There has been an increase in equity investment trusts offering higher yields, i.e. dividend yields of 4% or higher in the last three months. There are currently 31 trusts such trusts up from 28 in February and 21 in August 2018, according to research analysts. Analyst believe the increase reflects falling share prices, dividend growth and some trusts putting greater emphasis on dividend returns. For those investors prepared to take equity risk, the yields on these funds may be attractive in the current low interest rate environment. Many of these trusts also have meaningful revenue reserves that can be useful as and when there are dividend cuts at the portfolio companies in which they invest. These reserves can be used to smooth out dividends if necessary, by using revenue reserves, these investment trusts should be able to deliver a more robust level of dividend than similar unit trusts and open-ended funds, which do not maintain reserves.
The City watchdog is being urged to contact thousands of customers who may have been given poor pension transfer advice, as concerns grow that cases of mis-selling are going unchecked. Since 2015, 19 firms operating in the booming pension transfer market in the UK have had their activities halted by the Financial Conduct Authority. Together these advisers had processed about 5,000 pension transfers, worth billions of pounds, for customers since 2015. New evidence has emerged that customers of these firms have not been contacted and alerted to issues uncovered by the FCA, in spite of the concerns resulting in the firms giving up their authorisation to give pensions transfer advice. The calls follow the regulator’s action, earlier this year, when it issued a warning to the industry after finding less than half of the pension transfer advice it had reviewed from a sample of 18 firms, who had processed nearly 25,0000 transfers, was suitable, or right for the customer. Since 2015, it has reviewed more than 160 pension transfer firms. In recent years, the number of savers opting to trade a secure future pension income for an immediate cash lump sum and transfer to a riskier personal pension where it is invested, has soared, even though the regulator believes most are better off holding on to traditional retirement benefits.
Locating the £19bn lost pension pots
Is there an old pension plan out there with your name on it? Studies have estimated there are more than £19bn of lost and forgotten pension pots waiting to be reunited with their owners, many of them worth thousands of pounds. This is typically money that people paid into a former employer’s pension scheme and then forgot about, or lost track of. The good news is, locating it is often a lot easier than you might think. Losing track of retirement cash typically occurs when changing jobs or moving home – for example, you forget to tell the company you used to work for that you have moved to a new address. In the meantime, the firm that managed your money may have been taken over, changed names or largely shut down. The average person will have around 11 different jobs (which potentially means 11 pension pots) over their lifetime, and move home eight times. Many workers in their 20s and 30s have already worked for half a dozen or more employers. So it’s probably no wonder there are potentially about 1.6m pots worth £19.4bn lying unclaimed. That estimate comes from a study published by the Association of British Insurers, which calls it a “lost pensions mountain”. The Pension Tracing Service and TPAS can both be used to try to locate lost or forgotten workplace or personal pensions. The PTS is a free service which searches a database of schemes to try to find the contact details you need. However, you will need the name of an employer or pension provider, and the service will not tell you whether you have a pension, or what its value is.
Landlords respond to buy-to-let crackdown
Landlords’ costs are likely to increase after some of the largest letting agents announced plans to raise their charges in response to a Government ban on tenant fees that comes into force next month. Agents typically charge property owners 10% of their rental income to find occupants and deal with any problems. Tenants can often be charged £100 to £200 to cover administrative costs, but the Government said in January that these fees would be banned from June 1. Experts have warned that agents will find ways to make up the shortfall, resulting in higher costs for landlords and potentially rent rises. And Landlords are turning their backs on their traditional ally, the Conservative Party, to punish it for a series of policy changes that have squeezed property investors like never before. Almost 70% of National Landlords Association (NLA) members voted Conservative in the 2017 general election. But only 16% would vote Tory if another election were called today, according to a new poll.
Avoiding the final salary trap
If you are on course to pick up a retirement income of £50,000 a year or more from a final salary pension then you may face the prospect of seeing a slice disappear because of daunting taxes.
That’s because a legal cap on pension savings means a fund of more than £1 million means pension savings lose their tax-free protection when they pass through that ceiling. The government has imposed a lifetime allowance on pension funds of £1 million and a final salary retirement income of £50,000 a year is deemed as the maximum even though the fund has no real cash value.
Doctors, head teachers and public servants with middle or senior officer grades are all at risk and probably do not realise they will have to pay a 55% on any pension that tops the lifetime allowance. It’s easier to keep tabs on a defined contribution pension because the fund is assigned to the saver and the trustees must report the cash value to the saver with a statement each year. But as final salary or direct benefit schemes report likely annual pension income rather than cash values, if you do not realise the £50,000 equals £1 million rule applies to you, it’s more difficult to see when the tax penalty starts to bite. The main point to think about is the net outcome rather than having sleepless nights about the amount of tax due. The question is will you end up with more cash in the hand from overpaying into a pension rather than investing the same amount of money elsewhere?
House prices up or just erratic?
House prices are up 5% over the past year, according to Halifax, which recorded a dramatic jump in property inflation last month. But the lender lender said the property market remained 'subdued', as experts cautioned that Halifax's house price index was continuing its erratic 2019. Annual house price growth leapt from 2.6% in March, with Halifax reporting that the average UK home cost £236,619 in April - some £16,195 more than a year earlier. April also marked the 10-year anniversary of the house price low following the financial crisis. Property prices have risen £81,956, since April 2009 when the average price was £154,663. Halifax said the sharp 5% annual rise recorded in April was down to a comparison with 'particularly low' growth in house prices last year. The lender's figures found prices also grew 1.1 % last month, reversing a fall of 1.6% in March, which was later revised down to 1.25%. Highlighting the index's volatility, that in turn followed a record 5.9% house price bounce in February. The index has seen a weaker pace of growth over the last three years, which is consistent with the easing of transactions volumes and housing market activity reflected in RICS, Bank of England and HMRC figures. Estate agents have said that the property market has picked up since the gloomy end of 2018, with buyers attracted by the more keenly priced properties that have been put up for sale as the Brexit saga rumbles on. Experts were quick to blame a lack of supply and low mortgage rates for supporting prices, however, rather than any underlying strength in the property market.
The buy-to-let tax squeeze
Landlords of UK buy-to-let property have responded to the government squeezing their returns by selling assets, triggering a bumper 18.6% rise in capital gains tax payments. Data released by HM Revenue & Customs this week revealed the CGT tax take hit a record £9.2bn in the 2018-19 financial year, up from £7.8bn in the previous 12 months. CGT applies to gains made from the sale of assets such as second properties and stocks and shares. All taxpayers have an annual CGT exemption of £12,000. Above this amount, lower-rate taxpayers pay 10% on capital gains and higher and additional rate taxpayers pay 20%. However, people selling second properties pay CGT at 18% if they are a basic rate taxpayer or 28% if a higher or additional rate taxpayer. Analysts attributed the hefty rise in CGT receipts to property taxes changes in the past two years that have led buy-to-let landlords to sell assets. Landlords are, in effect, being caught in a very effective pincer movement from the taxman. From one side the higher rate tax relief on mortgage interest is gradually being phased out and making letting out properties less profitable. From the other side, landlords looking to sell buy-to-let properties are being squeezed with an extra 8% capital gains tax.