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How to make the most of a Junior ISA nest egg

Archive for April, 2020

How to make the most of a Junior ISA nest egg

Wednesday, April 22nd, 2020

As of 6 April, the amount you can put into a Junior ISA (JISA) per annum has increased to £9,000 – quite a jump from the previous allowance of £4,368.

The tax saving this provides makes it an effective way of building up a nest egg for your children if you want to help with a gap year, university fees, or to enable them to get a foot on the property ladder.  

Which type of JISA?

You can choose to put the money into either a cash JISA or a stocks and shares one. Even in these low-interest rate days, the cash ones can attract quite generous rates with some as high as 3.6%. Another advantage is that they don’t have the volatility associated with the stock market, a particular issue at the current time.          

Yet while the majority of JISAs tend to be in cash, experts state that this can be a wasted opportunity. Despite the recent turmoil, the stock market will usually outperform cash savings over the long term. Wealth manager, Jason Hollands, calculates that if you achieved a 6 per cent annual return – which he describes as ‘quite modest’ – a JISA that had £9,000 invested in it each year would be worth more than £290,000 after 18 years. As you can see, once compound interest kicks in, it can have a considerable effect. He estimates that even JISAs that had smaller sums of £50 or £100 a month invested into them would accumulate pots of £19,367 or £38,735 respectively.

So if you’re wanting to use the JISA as a vehicle for a long-term investment to get your child through a degree course or to help them to buy a property, cash is not the most effective way to do so. 

It’s also advisable to invest a regular amount on a monthly basis amount rather than just put in lump sums at specific times. This avoids the worry of knowing whether it’s the right time to invest and also has the benefit of smoothing out the peaks and troughs in share prices.  

Inheritance Tax Implications

Parents or guardians are the only ones who can actually open a JISA but grandparents can pay money into the account. This can be a productive way of using up their annual gift allowance. They do just need to bear in mind the Inheritance Tax rules, though, especially now the JISA allowance has increased. The annual gift allowance on an Inheritance Tax free basis is £3,000 per donor (with one year’s allowance carried forward). Inheritance Tax would be charged on anything over this limit in the seven years before their death. Gifts of up to £250 per person can be given during the tax year as long as another exemption has not been used on the same person.

Once your child turns 18, the JISA becomes theirs. They can either access it directly or transfer it into an adult ISA. This encourages them to develop a lifelong interest in money and helps build up a great investment discipline. In fact, the Government’s decision to increase the JISA allowance was all part of its aim to create a generation of savers.    

The new JISA allowance could mean that your child comes of age on a much sounder financial footing.  

Technology bringing the generations together

Wednesday, April 8th, 2020

One positive outcome of the crisis has been the way technology is helping us to stay in touch  with each other, especially across the generations. Various apps are playing a vital role in keeping us entertained in lieu of all the social events and sporting activities being cancelled.   

As staying in becomes the new going out, we’ve highlighted a few ways to keep you connected. .   

Video conferencing – not just for work!         

Zoom, Microsoft Teams and Google Hangouts may be effective for those working from home but it’s the video chat app, Houseparty, that has soared in popularity in recent months. 

It’s thought to be more spontaneous than the other apps as it allows you to mimic an actual house party, with friends chatting in different rooms. Previously popular with millennials and Generation Z teeenagers, adults now want to make use of Houseparty for their own connections.    

It’s getting to the point where people are attending more events in the virtual world than they were in the real one. You know you’ve really made it when you’re double booked for two online drinks parties or AperiTVs!

Inspirational ideas on Instagram 

You’ll find many celebrity chefs have taken to Instagram to offer free cookery classes during lockdown. There are lessons on everything from how to cook the perfect curry to how to bake your own bread.

Likewise, famous musicians are giving free ‘virtual’ concerts or even guitar lessons. And, of course, you can recommend your ‘favourite finds’ to friends and family. Why not challenge each other to mini contests, such as who can decorate the best cupcakes?             

Family time  

Regular video calls over FaceTime or Skype are a great way for all the family to keep in touch. Think of novel ways to make this inclusive. We heard of one family, for example, who deliberately arranged the call for lunchtime, propping the tablet up at the table so that it felt like they were all still sharing the meal together.     

Encourage grandchildren to show their grandparents what they’ve been up to. Get them to share stories, music or their artistic creations. Set up a board game challenge. You’ll no doubt find the youngsters can sort out any technical difficulties!   

Keeping fit – online

If you’re worried about what all those baking tutorials might do to your waistline, there are plenty of online exercise classes to sign up for. Joe Wicks has taken the nation by storm with his  YouTube daily P.E.classes. Originally aimed at children, these have proven equally popular with parents and grandparents. Enterprising local gyms and fitness instructors are also offering their usual classes in strength training, pilates and yoga online, so you can stay fit but keep in touch with fellow members at the same time.  

Technology is helping us to keep in touch in new ways with our friends and family through these strange times. Will the tools, which we are embracing now, represent a lasting shift in how we communicate in the future? 

April Market Commentary

Wednesday, April 8th, 2020

In March, the coronavirus outbreak seemed to steal all the headlines, giving us almost hourly updates as it transformed our lives, and made the word ‘unprecedented’ feel like an understatement. Inevitably, there has been a serious impact on world stock markets, which have suffered their worst quarter since 1987.

The figures that follow will not make for pleasant reading: it is scant consolation that they would have looked much worse in the middle of the month, before governments around the word rushed to put stimulus packages in place to protect their economies and businesses. To give just one example, the US government passed a near $2tn (£1.62tn) aid package, described by one US Senator as a “wartime level of investment in the economy.”

It is worth noting that markets have always recovered over time. They recovered from the crash in 1987 and they recovered from the 2008 financial crisis.

Inevitably, the impact of the pandemic overshadows this Commentary. We have, therefore, added an extra section. Optimistically titled ‘Coronavirus: Fighting Back’, it details the economic and fiscal efforts governments are making in the face of the virus.

Coronavirus: Fighting Back

As we mentioned above, governments around the world have been launching stimulus packages to help their economies withstand the shock of the Covid-19 epidemic.

In the US, the Federal Reserve initially announced a $700bn (£565bn) package of aid, which was subsequently dwarfed by a near $2tn (£1.62tn) intervention. President Trump declared the pandemic a national emergency, opening the way to yet more state aid and direct intervention in the economy. By the end of the month, he was talking of a $2tn programme of infrastructure investment to boost the US economy.

UK Chancellor Rishi Sunak delivered his Budget speech on 11th March – which now feels like several months ago – and initially announced a £30bn package of aid for business. “We will do whatever it takes,” he declared. A week later he was back, announcing a much larger package of aid which now covers small business grants, business interruption loans, help with wages, business rate reliefs and help for the self-employed.

The EU announced a €750bn (£700bn) aid package in the middle of the month and both the World Bank and the IMF pledged money to fight the outbreak and its economic impact.

Will all this be enough? The simple answer is that no one knows: as we have commented below, even with all this intervention some household names will be out of business by the time the dust finally settles. Hopefully the picture will look brighter by the end of April, otherwise we may see another raft of central bankers standing sombrely at lecterns while they deliver another round of aid packages.

UK

In any normal month, Rishi Sunak’s first Budget – and his promise of massive investment in the UK’s infrastructure – would have taken up the bulk of this section of the Commentary. As we have seen, anything the Chancellor announced on 11th March was almost immediately superseded by events and – when this is finally over – another Budget seems inevitable. Like other countries, the UK will, one day, have to pay for the rescue package and the unprecedented increase in Government borrowing.

Whether there will be a UK high street to play its part in that recovery is currently looking questionable. There are always winners and losers from crises: currently the supermarkets (reportedly busier in March than at Christmas) and Amazon are the winners, while ‘ordinary’ shops are very much the losers. Pubs and restaurants up and down the land are going to close, irrespective of how much help the Chancellor gives them with business rates. The closure of the Carluccio’s chain – putting 2,000 jobs at risk – will not be the last by any means.

John Lewis has warned that stores could close, shopping centre operator Intu has said it could go bust and even before lockdown was introduced in the UK high street, footfall was down by 8%. Goodness only knows what the figure will be now.

Marks and Spencer, and several other household names in the fashion and retail sector, are warning of closures. As one analyst put it, “You do not buy a new outfit to stay at home”.

The rest of the UK news is, inevitably, dwarfed by the impact of the crisis. You won’t be surprised to hear that both consumer and business confidence fell during March, or that the UK’s credit rating was downgraded as a result of the pandemic. Credit rating agency Fitch dropped the UK from AA to AA- as it said that the country’s economic output would fall by almost 4% this year.

Was there any good news? At the beginning of the month, Nissan announced that it was investing £400m in its Sunderland plant to build the new Qashqai – and two days later the Chinese firm Jingye completed the takeover of British Steel, safeguarding 3,000 jobs. Then, on the morning of the Budget, the Bank of England cut base rates from 0.75% to 0.25%.

None of this, of course, could do anything to stop the stock market’s slide in March. The FTSE 100 index of leading shares fell 14% in the month to close at 5,672 and is down by 25% for the year as a whole. The pound fell 3% in the month to end March at $1.2415, down 6% against the dollar for the year to date.

Brexit Negotiations

March began with the UK saying it would take a ‘hard line’ in trade talks with the US as the Government pursued trade deals around the world in the wake of leaving the EU. The first round of trade talks with the EU was held at the beginning of the month, with the intention of reaching an agreement by the end of the year. That first round of trade talks threw up ‘clear differences’ – but that was always going to be the case.

Then, in the middle of the month, came the news that the EU chief negotiator Michel Barnier had tested positive for the Covid-19 virus. A week later it was Boris Johnson’s turn, swiftly followed by Health Secretary Matt Hancock and the UK’s Chief Medical Officer.

Predictably, talks with the EU are now on hold. Equally predictably, reactions to that news depend on your original viewpoint. The two sides are either saying that a deal by 31st December is now impossible or muttering, “Have they never heard of Zoom?”

Hopefully, the situation will be clearer by the end of April. We will, as always, report back…

Europe

March was the month that Europe went into lockdown. It had started with the normal corporate news we have come to expect, with the IFO Business Climate survey saying that the German car industry ‘would face significant challenges’ over the months ahead.

A week later the whole of Europe was facing a very different challenge as Italy went into lockdown and Angela Merkel predicted that up to 70% of Germans could be infected by Covid-19.

Factories rapidly started closing all over Europe, free movement was forgotten as individual countries closed their borders and the ECB raced to implement a rescue package, scrapping its budget rules to fight the virus.  

The impact of Covid-19 on Europe could be severe and long lasting. The blow to Italy’s economy – to take just one country – could be catastrophic, especially with several Italian banks long having been widely seen as vulnerable. If the outbreak is prolonged then the fragile economies of Spain, Greece and Portugal are going to compound the problem. The German taxpayer may ultimately decide that their own country is the only priority.

In keeping with the rest of the world, March was not a happy month for European stock markets. The German DAX index fell 16% to 9,936 while the French market fell 17% to 4,396. For the year as a whole, the two markets are respectively down by 25% and 26%.

Illustrating how vulnerable some of the smaller markets might be, the Greek stock market fell 22% to 558 in March, and is down by 39% since the start of the year.

US

Total ‘non-farm payroll employment’ in the US rose by 273,000 in February, with the US Bureau of Labor Statistics reporting that the unemployment rate was unchanged at 3.5%.

The difference in March was that the figures were out of date almost as soon as they were announced. As the figures came out, the US Federal Reserve was implementing the first emergency cut to interest rates since the collapse of Lehman Brothers in 2008. As one report put it, ‘the world’s biggest economy is running scared’. Chairman of the Federal Reserve, Jerome Powell, said that the cut would be a ‘meaningful boost’ to the US economy.

A fortnight later, the Fed had to act again – effectively cutting US rates to zero and announcing a stimulus package worth $700bn (£565bn). This was subsequently dwarfed by the near $2tn package which the US administration approved by the end of the month.

But, as the old saying goes, ‘it’s an ill wind that blows no good’. No one will be surprised to hear that Amazon has gone on a hiring spree as the demand for home deliveries rockets.

Away from the economy, it is looking almost certain that the US Presidential Election in November will be between Donald Trump and Joe Biden – formerly Barack Obama’s Vice President. March saw Biden defeat Bernie Sanders in a string of primaries and go a long way to clinching the nomination.

When Donald Trump was inaugurated in January 2017, the Dow Jones index stood at 19,732. To the President’s horror, the Dow slipped below that level at one point in March, falling to 18,917. By the end of the month, it had recovered to 21,917 where it was down 14% for the month and 23% for the year as a whole.

Meanwhile, the economic news continued to worsen, with 3.28m Americans – an unprecedented number – seeking jobless benefits and American Airlines saying that it will need $12bn (£9.7bn) in state aid. The remark of UK Chancellor, Rishi Sunak – “we will not be able to protect every business and every job” – will apply just as much in the US as it will in the UK. By the end of this crisis, it may well be that many household names have ceased to exist.

Far East

The newspapers are already full of demands for there to be ‘a reckoning’ with China when the Coronavirus is over. Everyone reading this will have their own views on whether the Chinese Communist Party lied about and/or covered up the true extent of Covid-19 in the early days of the outbreak.

Whatever the truth, countries will continue to trade with China and so, for the purpose of this Commentary, the country’s economic performance remains important to both the Far East and wider world trade.

The beginning of March brought confirmation that Chinese manufacturing had fallen to a record low in February, with the Purchasing Managers’ Index down to 35.7 from the 50 it had recorded in January. At one point, exports were down by 17% as the virus had a bigger impact on Chinese manufacturing than the economic crisis of 2008.

Fast forward to the end of the month and those figures had been turned on their head, with the PMI soaring to 52 by the end of the month.

Despite this, the World Bank is predicting a year of ‘pain’ for Far Eastern economies. The Bank is now predicting that growth in China this year will be just 2.3% compared to a prediction of 6.1% made last year. This lower growth rate will inevitably impact the smaller Far Eastern economies, with the World Bank now projecting a best case scenario of 2.3% growth for the region this year, and a worst case of just 0.5%. This compares to the 5.8% growth forecast before the Covid-19 outbreak.

In the current circumstances, it is somewhat ironic that China’s Shanghai Composite Index delivered the ‘best’ monthly performance of those markets on which we report. It closed March at 2,750 from an opening level of 2,880, meaning that it was down just 5% in the month and 10% for the year as a whole.

The Hong Kong market fell 10% in the month to 23,603 (down by 16% since 1st January). The Japanese stock market fell 11% in March to close at 18,917 while the South Korean index fell 12% to 1,755. Both those markets are down by 20% for the year as a whole.

Emerging Markets

Back in 2018, Vladimir Putin won another six year term as Russian President and promptly laughed off suggestions that he would run again in 2024, when he will be 72.

But now it appears that Vladimir Vladimirovich has had second thoughts and – like his friend Xi Jinping – rather fancies being President for life. Before Covid-19 brought normal politics to an end, a Russian MP had proposed ‘resetting to zero’ the number of Presidential terms Mr Putin has served. In theory, the move will require the approval of the Russian Constitutional Court: you shouldn’t expect that to be a problem when normal service is resumed.

The Indian Premier, Narendra Modi, appears to be in rather more immediate need of reassurance. He has made a public appeal for forgiveness after making a very rapid decision to put 1.3bn people into lockdown. The situation is fast turning into a human tragedy as millions of the poorest migrant workers face walking hundreds of miles to get home, facing both rising temperatures and closed state borders.

Modi’s finance minister was also under attack after announcing an £18.8bn stimulus package for the economy: critics derided it as ‘not nearly enough.’

The Indian stock market ended the month down 23% (and 29% for the year as a whole) at 29,468. It was not, though, the worst performer in this section, as the Brazilian market fell to 73,020 – down 30% in the month and 37% for the first quarter. In relative terms, the Russian market did ‘well:’ it was down by just 10% in the month and, at 2,509, is down 18% for the year as a whole.

And finally…

We debated long and hard as to whether to include the ‘And finally’ section in the Commentary this month. In the end we decided to keep it for two reasons. First, we’ve long suspected that it is the most widely read section of the Commentary. Secondly, it’s a symbol of normal life – and a reminder, despite the fact that amusing stories were hard to find in March 2020, that we will get back to normal life one day.

And what could be more normal than the British Wife Carrying Championship? Technically we should have reported on it last month as it was held on 29th February, but sometimes even the most interesting stories take a while to make the papers.

We must add our congratulations to David Threlfall and Cassie Yates, the winners of this year’s race. Should you wish to see it, a quick search on Google or YouTube will help your self-isolation or working from home.

The event’s website certainly pulled no punches: wife carrying can be a dangerous activity, which can lead to slipped discs, broken legs and arms, limb dislocation, spinal injuries and hernias.

Nevertheless the event appears to be gaining in popularity. For any clients who may feel like participating next year, please note that ‘wives’ (not necessarily your own) must weigh at least 50kg. There are also generous prizes for anyone who might see wife-carrying as a route to the professional sports career they have long wished for.

The winner this year received a barrel of ale, the oldest ‘carrier’ won a pot of Bovril and a tin of pilchards, while the carrier of the heaviest ‘wife’ was rightly rewarded with a pound of sausages.

On that upbeat note, we’ll leave this month’s Commentary. Let’s hope the world is a more positive place when we report again in May. Until then, take care, stay safe and remember that if you need to contact us we are never more than a phone call or an email away.

Self-employed? Will you fall through the cracks?

Wednesday, April 1st, 2020

The Chancellor’s coronavirus support package for the self-employed and freelancers has been   welcomed. Many in that category were worried that they had been forgotten.

Rishi Sunak reassured them, however, that this was not the case and outlined the details of the new scheme that would treat them in a similar way to employees who had been furloughed and were receiving 80% of their salaries through PAYE under the Job Retention Scheme.    

Under the new scheme, the self-employed will be eligible to receive 80% of their average monthly profits for the last three years up to a maximum of £2,500 per month. This is subject to them having an overall trading profit of less than £50,000. Initially, the scheme will last for three months but this may be extended. 

Although the scheme is thought to cover 95% of those who make their income from self- employment, it is feared there will be a few people who could fall through the gaps.     

Who won’t qualify? 

The first issue is that the support won’t be available until June. Individuals will need to apply through an online portal which has not yet been launched although they have been assured that payments will be backdated to 1 March.    

Secondly, in order to qualify for the scheme, a self employed person has to have submitted a 2018/19 self assessment tax return. This condition has been included to mitigate against fraud but it means that if someone has been freelance for less than a complete tax year, they will not be eligible.

The Chancellor indicated that anyone who only started trading in 2019/20 would need to look to the welfare system for extra support by applying for a business interruption loan or for universal credit.    

This would also apply to those who have dissolved a limited company recently and become a sole trader in response to the impending changes to the IR35 rules.    

Where one-director companies sit 

It’s believed that people who are self-employed but who provide their services through a limited company are likely to fall through the cracks. The HMRC self-employed guidance does say that, “If you’re a director of your own company and paid through PAYE you may be able to get support using the Job Retention Scheme (JRS).” 

It’s unlikely, however, that people with personal services companies (PSCs) will be able to benefit from the self-employed package. Directors often pay themselves a low salary but top up their income with dividends. So even if they qualified under the Coronavirus Job Retention Scheme, they would be unlikely to receive a significant payment as they would be eligible for up to 80% of their salary and dividends would not count for support.

As Heather Self from the accountancy firm Blick Rothenberg explained, “If you’re an employee of your PSC, it’s going to be difficult (impossible?) to be furloughed and qualify for the Jobs Retention Scheme.” 

Mr Sunak has admitted the rules have had to be devised in haste and will not be perfect for everyone straightaway. On the positive side, a group of fintech entrepreneurs are developing a prototype to help self-employed workers use historic banking information to prove previous income and predict any future loss of income.   

If you have any queries about where you stand, do not hesitate to get in touch with us.

How long does it take to beat a bear market?

Wednesday, April 1st, 2020

The current COVID-19 crisis has wiped billions from the world’s financial markets. In the world of investing, such markets where share prices are falling are known as bear markets. 

Beating a bear isn’t easy, but you’ll be pleased to read that in all 10 prior occasions, the FTSE All-Share has completely made up the ground in the next bull market, a market where share prices are rising. Unfortunately, it usually takes longer for markets to rise than it does for them to fall. 

Bear markets are typically nasty, brutish and short, like recessions rather than economic upturns. Again using the All-Share as a guide, the average time it has taken to recover a bear market loss is 648 days, compared to the 385-day average market downturn.

Staying invested even when markets are falling can be wise because if you sell, you own less shares that can potentially gain value when the market starts to rise again. Stock market investing is best conceived as a long term game played over years rather than months.

Watch out for the bear traps

Bear markets are littered with sharp advances which often turn out to be nothing more than small peaks before the downward turn resumes. These are perilous to investors who opt for a ‘buy on the dip’ investment strategy.

For example, during the 2000-03 bear market that followed the dot-com bubble, there were six major rallies in the All-Share that generated a combined gain of 2,030 points, even as the index actually declined by 1,649 points overall during this period. Those who piled into these market rallies would have lost out in the long run.

Nine of the ten largest single day surges on America’s S&P 500 index have been during bear markets. Beating a bear is a slow game, and those who are over-eager can suffer larger losses. 

Trying to see the bottom

Bear markets are like a murky pond – it’s impossible to see the bottom or the trough until after it has passed.

For those of us who don’t have a crystal ball, it’s impossible to foresee exactly how low markets will fall. Taking a slow and steady approach is probably your best bet to conserve your portfolio’s value. This might mean a lower return than a brash approach, but you’re not putting too much money at risk. Additional pain is suffered by those who plough lots of capital into ‘bear trap’ short term rallies.