Contact us: 01799 543222

Cashing in on ISAs

Archive for May, 2014

Cashing in on ISAs

Friday, May 23rd, 2014

HMRC have recently issued statistics showing the ISA decisions that were being made in recent years.

HMRC take their time to deliver statistics, so it was not until late April 2014 that the details of ISA subscriptions in 2012/13 emerged. They revealed:

  • The total amount invested in ISAs (other than JISAs) was £443bn at 5 April 2013, split almost equally between cash ISAs and stocks and shares ISAs. 
  • In 2012/13, adult ISAs attracted subscriptions of £57.4bn, of which over 70% went into cash ISAs. 
  • The average 2012/13 subscription was £3,501 to a cash ISA and £5,629 to a stocks and shares ISA, against maxima for the year of £5,760 and £11,280. 
  • JISAs, which were launched in November 2011, only attracted £392m in 2012/13.

These statistics show why the Chancellor was able to make the Budget increases to ISA limits. Put simply, most of the money will go into cash deposits where, at current interest rates the tax loss is small, and few investors come near to investing the maximum (in 2011/12 less than 8% did so).

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.

A lesson in gherkins and foreign exchange

Wednesday, May 21st, 2014

How not to fund a property purchase    

GherkinThe Gherkin is one of the iconic images of modern London, as instantly recognisable as almost any piece of modern architecture. And it is up for sale, at price reported to be around £600m. The reason for its sale is a sad story.

The building was bought at close to the last London property market peak in 2006 at a price of £630m by two investors, one of which was a fund managed by a German largest real estate investment trust (REIT). Back then, when UK base rate was around 5%, borrowers could cut their interest bill dramatically by choosing a Swiss Franc loan rather than one denominated in sterling. That is what the joint investors chose to do (to the tune of £400m), without putting any (admittedly costly) currency protection in place.

Roll forward eight years and in the past seven the Swiss Franc has appreciated 63% against the pound, prompting the lending banks to send in the administrators – hence the ‘for sale’ sign on the Gherkin. A better example of the dangers of mismatching assets and liabilities would be hard to find. The loan first went into default in 2009, but the banks adopted the widely used crisis strategy of ‘forbearance’, mainly because pulling the plug then would have crystallised a large loss, while waiting might have produced deliverance.

Coincidentally, another landmark London office building has also been placed on the market. HSBC Tower, in Canary Wharf, may not be as architecturally stunning as the Gherkin (although both are Norman Foster creations), but it is much bigger. That size – and HSBC as a tenant – is reflected in the price tag, reportedly of “offers above £1.1bn.”

The fact that these properties are being put up for sale now is a reflection of the strength of the recovery of the London property market since the dark days of the financial crisis. The property market outside the capital has also been strengthening of since the middle of 2013. Values have now risen by 6.8% over the last 10 months of consecutive growth, according to the IPD UK Monthly Property Index.

Eurozone recovery?

Wednesday, May 21st, 2014

Whatever happened to worries about Eurozone collapse? eurozone-map

Cast your mind back just over a year to March 2013. The Eurozone was going through its fifth bailout, with Cyprus on the brink of meltdown. There was a fear that a major country, like Italy or Spain, might follow, exhausting the Eurozone bailout capacity. A test looked imminent for that famous 2012 pledge made by the European Central Bank’s (ECB) chairman, Mario Draghi, that the Bank would do “whatever it takes” to save the euro.

Fifteen months on and the word Eurozone is no longer automatically twinned with the word ‘crisis’:

  • Ireland officially left its bailout programme at the end of 2013, after three years of treatment. 
  • Greece, which had two bailouts, was able to able to raise €3bn of five year government debt in April at a cost of only 4.95%. The bond issue was eight times oversubscribed, despite Greece having a B- ‘junk’ credit rating. 
  • Portugal followed Greece by raising €750m of 10 year bonds at a rate of just under 3.6% later in April. It was the government’s first bond auction in three years and comes ahead of a likely exit from its bailout programme. 
  • Spain, which did not have a formal bailout, but did receive EU funds to support its banks, is also finding favour in the markets. Its 10 year government bonds are now yielding about 3%, against over 7.5% in 2012.

Does all this mean that the Eurozone is on the road to recovery? The answer is, perhaps inevitably, yes and no. The ‘periphery’ countries are no longer the concern that they were, but serious economic issues remain. Greece still has a mountain of debt that experts expect will require another write down at some point. Spain continues to have an unemployment rate of over 25%, with a youth unemployment of double that level.

Ironically, worries are now moving from the periphery to the core, and in particular France. The Eurozone’s second largest economy is struggling to meet its 3% EU government borrowing target – already twice deferred – has 10%+ unemployment, almost no economic growth and a deeply unpopular President.

In the Eurozone background is the spectre of deflation (falling prices). Inflation in the zone is now 0.5%, a long way below the ECB’s target of slightly under 2%. Mr Draghi could yet end up doing “whatever it takes”…

Student loans: repayment becomes a write off

Monday, May 19th, 2014

New research suggests that it may not make financial sense to pay off student loans early.

The higher education funding system in England for students changed dramatically in 2012/13, with the most notable reform a near tripling of the maximum tuition fee (and corresponding fee loan) from £3,375 to £9,000. The terms for loan repayment were also changed:

  • The rate of interest rose from RPI to between RPI and RPI+3%, depending upon student income. 
  • The threshold income at which repayments start rose from £15,795 (2012 and RPI-linked) to £21,000 (2016 and earnings-linked thereafter). The rate of repayment is unchanged at 9% of the excess. 
  •  Any outstanding debt is written off 30 years after the April following graduation, rather than 25 years.

The Institute for Fiscal Studies (IFS) had undertaken some new number-crunching on student finance to see what the long term effect of higher and more costly borrowing is likely to be. Its conclusions – which inevitably involve many assumptions – show that in many instances the line between a repayable loan and a non-repayable grant has become blurred:

  • On average, students in the new system will graduate with debts of more than £44,000, over £19,000 more than under the old system.  
  • Whereas under the old system nearly half of students would have repaid their debt by age 40, only about 5% will have done so under the new system. 
  • The new system will see nearly three quarters of all graduates being left with outstanding loans to be written off, probably in their early 50s. The IFS thinks the average write off will be around £30,000.

If you have children or grandchildren at, or likely to go to university, the IFS numbers raise an interesting conundrum. Helping to meet fees or other costs covered by borrowing may simply mean that you are saving the government money because of the 30 year write off. On the other hand, the prolonged burden of debt repayment will leave most graduates still making repayments throughout their forties and, if they are higher rate taxpayers by then, facing an effective marginal rate of tax, national insurance and loan repayment of 51% on debt carrying interest at RPI+3%.

Pension tax relief – more changes ahead?

Wednesday, May 14th, 2014

Calls to reform tax relief on pension contributions are coming from across the political spectrum.

You could be forgiven for thinking that the radical changes to pensions announced in the Budget should have put an end to calls for further reform of pension taxation. No such luck. The pension environment tends to be in constant flux and last month saw two ideas to create some more.

Steve Webb, the Pensions Minister, stepping out of his ministerial persona, proposed that tax relief on pension contributions should be at a flat rate of 30%, regardless of the contributor’s personal tax rate. At the same time he suggested the abolition of the lifetime allowance (LTA), which effectively sets the maximum tax-efficient value of your pension benefits. The LTA has just been reduced from £1.5m to £1.25m and Mr Webb’s party, the Liberal Democrats, has a further cut to £1m in its 2015 election manifesto.

The idea of a flat rate relief for pension contributions is nothing new. Last year the Pensions Policy Institute (PPI) proposed the same idea, arguing that at 30%, the overall cost would be the same to the Exchequer and that it would encourage more basic rate taxpayers to save via pensions. The PPI argued that under the current regime low earners pay around 50% of pension contributions but receive just 30% of all tax relief given.

A more radical proposal has re-emerged from the Centre for Policy Studies (CPS), a think tank closely linked to the Conservatives. In a newly published report, it suggests that tax relief on pension contributions should be replaced with a Treasury payment of 50p for £1 saved (33 1/3% effective relief) on pension contributions of up to £8,000 a year. It also suggests combining pensions and ISAs, with a total annual savings limit of £30,000.

None of these re-workings of tax relief may come to pass, but as the author of the CPS report, Michael Johnson, pointed out in a blog “For a cost savings-hungry Chancellor, pensions tax relief is now the lowest-hanging, juiciest fruit in Whitehall.”

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.