News Updates - November
21st November 2019
A matter of trusts
The investment trust sector may be more than 150 years old, but it has not stood still. The types of trusts available to private investors have changed markedly over the years, and in particular, during the past decade. Perhaps the most striking development has been the huge increase in trusts that hold alternative assets — covering a vast range of non-equity based investments such as infrastructure, renewable energy, property and debt. By July this year, total assets under management in this area exceeded £80bn, according to the Association of Investment Companies (AIC) — an increase of over 150% since 2009. Trusts focused on alternatives comprise around 40% of assets under management across the entire investment trust universe. The growth of this sector has been fuelled by investors seeking higher income investments. But some of these trusts are higher risk as well as higher yielding, so investors must weigh these risks carefully when deciding how much to allocate to them — if at all — and which trusts to pick. While it is good that there is an increasing range of options on offer, as well as being higher risk than traditional trusts focused on mainstream equities, alternatives trusts invest in assets that are hard to understand so thorough due diligence is called for.
Labour's manifesto threatens marriage tax allowance
More than 3million couples earning less than £50,000 could have an up to £250 a year tax break snatched away from them if Jeremy Corbyn's Labour party get into power. Hidden in the small print of the Labour leader's manifesto is a hint that the party will scrap the so-called "marriage tax allowance" in a bid to save £535million. But this will see the millions currently benefiting from the scheme lose out - despite Mr Corbyn's promise not to raise taxes for those earning more than £80,000. The perk currently applies to married couples and those in a civil partnership where one is a non-taxpayer and the other is a basic-rate tax payer, meaning they earn £50,000 or less. Under the system, couples can transfer 10 per cent of their personal allowance - the amount you can earn tax-free each tax year - between them in order to reduce their annual tax bill. As the personal allowance is now £12,500, it means the non-tax paying spouse can transfer £1,250 to their spouse who can add this to their tax-free income. This means a tax saving of £250. Back in February, the government said the perk was available to 4.2million couples across the UK, but only 3.5million couples had applied for it. It was first introduced back in 2015 and has risen each tax year since then. Personal finance expert Laura Suter, from financial firm AJ Bell, says the move by Mr Corbyn seems to be more of a personal decision than one that will boost Treasury coffers.
Financial education fails to cut through to young adults
Five years after its introduction onto the national curriculum, students still say they are not getting enough access to a comprehensive financial education and that they worry about money. They want to learn more about the practicalities of managing money – budgeting, debt management, tax and how products work. And well over half (60%) would like this to be a separate subject.
The findings are from the latest Young Persons’ Money Index, an annual research tracker run by The London Institute of Banking & Finance to assess the take-up and impact of financial education in schools. The research found:
- Today, 64% of students say they have access to financial education compared to only 29% in 2015. That’s a big difference.
- However, most are taught financial education as part of other subjects and the majority don’t receive financial education regularly.
- Only 18% had access within the last month
- 16% only in the last term
- 17% only in the last year
- 15% more than a year ago
- The numbers who say they get most of their financial knowledge and understanding outside of school – from their parents and/or self-learned online – remain high (86%).
- It is significant therefore that the majority also say they would like to learn more in school (82%) and regularly worry about money and their personal finances (69%).
- When asked how they would like to learn more about money, 60% would prefer to learn this as a separate subject.
- Learning more about financial products such as mortgages and credit cards, tax, budgeting and debt management are their top priorities.
70 is the new 65
Viewing 65 as the marker for old age is an outdated notion, a report from the Office for National Statistics (ONS) has said, as new data suggests the health of a 70-year-old today is comparable to that of someone five years their junior a decade ago. The report has renewed calls from experts for employers to reconsider their attitudes towards older workers and those who choose to work beyond the traditional retirement age. The analysis of health data and life expectancy by the ONS found that men in England and Wales aged 70 in 2017 had the same remaining life expectancy – 15 years – as a 65-year-old did in 1997. Similarly, women aged 70 had the same remaining life expectancy as a 65-year-old in 1981. The report also found that men and women were now comparably healthier in their older age. In 1981, 45% of people aged 65 to 85 had poor general health, compared to 39% today. Levels of poor health for women aged 70 in 2017 were the same as those aged 60 in 1981, while men the same age had comparable health to those who were 65 in 1997. While highlighting the limitations of its own analysis, the report said the age of 70 now “appears to be the new 65 (or even younger) in terms of health”. The ONS predicted that, by 2050, those over the age of 65 will make up almost a quarter of the population, while the number of people aged 85 and over is growing faster than any other age group.
Boris Johnson softens on proposed tax cuts
Boris Johnson has told high earners they will have to wait for his promised tax breaks if he wins the election, vowing instead to focus on cuts to national insurance payments to help those on lower incomes struggling with the cost of living. Mr Johnson set out the “ultimate ambition” to raise the threshold for national insurance payments to £12,500, a move that would cost the exchequer at least £11bn, but would be spread over an unspecified number of years. An initial commitment to raise the NI threshold to £9,500 next April would put an extra £104 into the pockets of 31m workers at a cost of £2.8bn a year. Mr Johnson said his plan would give a “tax cut for everyone”. The first step in the plan would be eliminating a tax of 12 per cent on income above £8,632 up to the new starting point, according to the Institute for Fiscal Studies. If the threshold was ultimately raised to £12,500, the gains for low income workers would rise to £464 a year. The prime minister had previously promised big income tax cuts for those earning more than £50,000, and cuts to stamp duty, while chancellor Sajid Javid had said he was interested in cutting inheritance tax.
But Mr Johnson, speaking on a campaign visit in the north-east, declared: “The priority must be to help those who need help with the cost of living.” The policy will be confirmed in the Tory manifesto to be published on Sunday.
Tax system too hard says the Office of Tax Simplification
There is no shortage of commentary on the increasing complexity of our tax system. While some of that complexity is undoubtedly inevitable, there are some matters which would benefit from a fresh look with a blank piece of paper. These are mostly where multiple changes have been implemented to existing legislation or certain rules are used to serve more than one purpose. Add to this certain key life events, such as starting a new job or retiring and taxpayers can find themselves very confused or even unknowingly disadvantaged. With changes mounting, will it get any easier? This is a trend not lost on the Office of Tax Simplification (OTS) which on 11 October 2019 issued a report considering whether the tax system adds unnecessary complexity when taxpayers are tackling certain key life events. For example, new parents have an array of new responsibilities to get their heads around when a baby arrives (mostly not tax-related). They may decide, quite reasonably, to not add ‘Complete Child benefit application’ to their to-do list – perhaps even more so if their earnings are above the threshold so they would ultimately have to repay it all anyway. However, are they aware that by not applying for this (even if they later choose not to receive payment), this means that they can lose out on national insurance credits towards the state pension? The OTS report does set out recommendations to improve the position and even if taken, the Government needs to keep this principle in mind when implementing new changes.
China stockmarket the world's best performing
China is on pace to be the world’s best-performing major stock market in 2019, with the benchmark CSI 300 index up by a third this year as investors shrug off the country’s slowing economy and bruising trade war with the US. Bourses in Shanghai and Shenzhen have added $1.4tn in market capitalisation so far, taking the total value of onshore equities to about $6.8tn this year, buoyed by a revival of domestic investor confidence and continuing international inflows. The 31% advance by the index of major Shanghai and Shenzhen-listed stocks outpaces the 8.5% rise by the UK’s FTSE 100, the climb of 11.5% by Japan’s Topix and the gain of 22.3% by the US S&P 500. Even after accounting for weakness in China’s renminbi, the country’s stock benchmark is up more than 28% this year in dollar terms. The resurgence follows a dismal 2018, when the CSI 300 fell 25%. That made China the worst-performing major stock market as equities were battered by the intensifying trade war and a deleveraging campaign by Beijing that tightened domestic liquidity. However, Caroline Yu Maurer, head of greater China equities at BNP Paribas Asset Management, said further upside for stocks was probably limited this year, thanks partly to the smaller scope of stimulus planned for the economy.
Is a million pounds enough to retire on?
In the past few weeks, there has been a confluence of gloomy surveys warning British workers about the inadequacy of their pensions savings. While final salary or defined benefit pensions provide a steady income throughout later life, workers saving into defined contribution (DC) pension plans should by now be painfully aware that the risk of saving enough for their future retirement rests on them. In short, we need to to be realistic about money milestones. Will we really need to hit that £1m target? Since 2015, pension freedoms have allowed more income flexibility in retirement and there is growing evidence that this has changed our attitudes towards when we stop work — or if we will at all. Now the answer to whether £1 million is enough depends on your retirement aspirations. The FT paints some scenarios. For example:
The Pensions and Lifetime Savings Association this month put together a set of three retirement living standards — basic, moderate and comfortable — based on research by Loughborough University. It hopes these will resonate with pension savers in the same way that being told to eat “five a day” encouraged fruit and vegetable consumption. If you want a “comfortable lifestyle” that allows you to be spontaneous with your money and have two foreign holidays a year, as a single person you’ll need to generate an income of £33,000 a year. The lump sum needed for that?...£1.1m.
What the general election could mean for your finances
After numerous failed votes, weeks of political posturing and frayed tempers in parliament and the country, Britain is finally heading for a general election. The manifestos haven’t been published, but commentators have scoured past announcements and proclamations to put together a guide to what we might reasonably expect.
The FT covers a broad range but let’s focus here on tax.
While the parties offer competing visions on the UK’s relationship with the EU, a stark difference also exists on attitudes towards taxation where there is clear blue water between the parties. Since Boris Johnson secured the leadership of the Conservative Party this summer, and appointed Sajid Javid as Chancellor, there has been a clear shift in rhetoric within the Conservative Party towards a renewed tax cutting agenda. However, the postponement of the Budget planned for 6 November has delayed the chance for voters to assess how quickly cuts to tax might be delivered against a competing backdrop of large spending commitments covering policing, schools and building new hospitals. Will the Conservative manifesto set out some measurable commitments to reduce tax? We will have to wait and see. In contrast, the current Labour leadership are firm advocates of higher taxes for business and individuals. On personal taxation, Labour policy is to aggressively slash the threshold at which the 45% income tax rate begins to £80,000 (just above the current salary of an MP at £79,468) down from £150,000. Additionally, the party proposes reintroducing a 50% income tax rate for earnings in excess of £123,000. The Institute for Fiscal Studies estimate that such measures would hit 1.3 million individuals. This would have a knock-on impact for the economy and affluent families, especially when combined with other measures such as slapping VAT on independent school fees. Labour also want to take business tax policy in a different direction, reversing the trend towards reductions in corporation taxes. Instead Labour is to committed to raise the main rate of corporation tax from the current rate of 19% (which is currently scheduled to reduce to 17% in 2020/21), to 26% over three years. This would see the UK make an abrupt about turn from being on target to become one of the countries with one of the lowest tax rates in Western Europe, to one of the highest.