Contact us: 01799 543222

Kids off to Uni? Congratulations – but have you been saving enough?

Archive for the ‘Commentary’ Category

Kids off to Uni? Congratulations – but have you been saving enough?

Wednesday, October 10th, 2018

The Institute of Fiscal Studies suggests that the average total debt incurred by today’s university students over the duration of their studies will amount to £51,000. This figure comes as those in higher education saw the interest rate on student loans rise to 6.3% in September. Total student debt in the UK has now risen to £105 billion as of March 2018, a figure £30 billion higher than the nation’s total credit card debt.

The rising cost of higher education perhaps makes it unsurprising that 40% of parents are now beginning to save towards future university costs before their children have even been born, with one in five hoping to have saved £2,000 by the time the baby arrives. Frustratingly, however, around two thirds of those who are saving are doing so by simply placing the funds in an ordinary savings account, meaning their money is earning them very little in interest.

An alternative option to consider is a Junior ISA (JISA) in the child’s name, which they can then access when they turn 18. The account currently allows £4,128 to be saved every year, and the best rate market rate for a cash JISA offers 3.25%. Saving the maximum amount at that rate for ten years would result in a nest egg of £49,427 tax free to cover university fees with plenty left over for other expenses.

Whilst a cash JISA offers dependability, a stocks and shares JISA is also worth considering as the potential reward on your investment can be higher. Both types of JISA can be opened at the same time with the allowance shared between them, so spreading your savings between the two can pay off in the long run.

Using your pension to save towards your child’s university education is also an option, thanks to the pension freedoms of recent years. With the ability to take a lump sum to put towards fees and other costs when you turn 55, pensions offer a tax-efficient way of putting away for both your child’s future and your own. This is an option which needs careful planning, however, as you’ll need to make sure you have enough for your retirement before paying for your child’s education.

For those able to do so, it may also be worth speaking to your own parents about helping towards their grandchildren’s university costs. Rather than leaving money to a grandchild in their will, a grandparent might consider gifting towards fees and other expenses or placing the money in a trust, reducing their inheritance tax liability and allowing their grandchild to benefit from their legacy when they really need it.

October market commentary

Thursday, October 4th, 2018

Introduction

On Tuesday, 3rd November 2020 the United States will go to the polls to elect its next President. All the indications are that Donald Trump will stand for a second term and if the words of Bill Clinton – “It’s the economy, stupid” – are to be believed, he will win.

While not wanting to make a political comment or endorse his policies in any way that be welcome to some extent – he does provide plenty of news and entertainment for these commentaries, after all. September was no exception, as he ramped up the trade war with China, ordering tariffs on a further $200bn (£154bn) of Chinese imports, which will include electronic products and consumer goods such as handbags.

These tariffs will see the cost of the Chinese imports rise by as much as 25% and – not surprisingly – Beijing was quick to respond, slapping tariffs of between 5% and 10% on a range of US products. Especially targeted were agricultural products, which largely come from states which have strong Republican majorities – a point which the President duly made on Twitter.

It is interesting to look at the relative stock market performance in the two countries. Despite the trade war, the US stock market is up by 7% this year. Although tech stocks were hit by the latest round of tariffs, the US stock market loves Donald Trump. The Dow was below 20,000 on his Inauguration Day in January 2017: it closed September above 26,000.

What happened in the rest of the world? There was the usual mixed news in the UK and – as we shall see – absolutely no progress on Brexit. In the US, Amazon became the second company to be valued at a trillion dollars – roughly £770bn. The country was hit by Hurricane Florence, but far more damage was done in the Far East by Typhoon Mangkhut, which hit the Philippines, Hong Kong and Southern China.

On the world’s stock markets it was generally a good month: India was the only major economy on which we report to see a significant fall during September. More worryingly, however, the oil price hit a four year high of around $81 a barrel, as both Saudi Arabia and Russia rejected President Trump’s calls to increase production.

UK

As with every month this year, September brought more gloom for the beleaguered UK high street, as Debenhams called in advisers from KPMG amid suggestions that it may close up to 80 stores. There were no ‘suggestions’ from RBS, who announced that it would be closing a further 54 branches and John Lewis – long held out as the one bright spot among department stores – saw its profits crash by 99% when the latest results were announced.

Tesco, though, was in a more buoyant mood as it launched Jack’s, the ‘pile it high, sell it cheap’ arm of the company we wrote about recently. The aim is to wrest market share back from Aldi and Lidl: we shall see whether it succeeds or whether Tesco simply ends up competing with itself.

In the wider economy, there was some good news, as the UK benefitted from the warm weather and the World Cup. Figures for July showed that the UK economy had grown at its fastest pace for a year, and the Office for National Statistics announced that the economy had grown by 0.5% in the last three months of 2017, compared to the previously announced 0.4%.

Unemployment came down by a further 3,000 to 1.44m: that means that the UK has an unemployment rate of 4.3% – the lowest for more than 40 years. However, inflation did edge back up to 2.7%, the highest level for six months.

…But no doubt, Chancellor Philip Hammond, will soon have that under control. Having given every indication that he would deliver his Budget speech in November, he has brought it forward to 29th October. He had apparently intended to deliver the speech on 31st October until it was pointed out to him that the Budget would coincide with Hallowe’en and that the headline writers would have a field day with ‘Hammond’s House of Horrors.’ So Monday 29th it is…

In construction news, it was announced that London’s Crossrail project will open nine months behind schedule and HS2 – latest projected cost £56bn – promised to deliver between 15,000 and 30,000 new jobs.

The FT-SE 100 index of leading shares had a quiet month in September but at least it moved in the right direction, rising by 1% to 7,510. The pound was more or less unchanged against the dollar and ended the month at $1.3031.

Brexit

So here we are: less than six months to go until 29th March 2019 when the UK will – in theory – exit the EU. The countdown has begun – although the word ‘countdown’ rather implies that something definite is going to happen. Right now any option still appears to be possible: in fact, a new option seems to crop up every day.

We left this section last month with Prime Minister Theresa May having presented her ‘Chequers’ plan for Brexit. September started with Tory MPs from all sides of the party rubbishing the plan and the EU’s chief negotiator Michel Barnier dismissing it as unworkable. ‘Barnier Rubble’ was the neat summary in one newspaper’s headline.

Throughout the month there were increasingly dire warnings of the consequences of a ‘no deal’ Brexit. Both BMW and Jaguar warned of factory closures and Bank of England Governor Mark Carney said that house prices could fall by 35% over 3 years in the event of ‘no deal’ – although if you, or your children, are struggling to get on the housing ladder you may regard that as no bad thing.

Theresa May duly trooped off to Salzburg to meet the other European leaders and according to your viewpoint, was either ‘ambushed’ or got exactly what the UK’s negotiating position deserved. ‘EU Dirty Rats’ proclaimed the pro-Brexit Sun.

So another month has passed and once again we are no further forward. The Prime Minister danced on to the stage at the Conservative party conference and in her speech dismissed calls for a second referendum – defending her plan for a free trade deal that would provide ‘frictionless trade in goods’.

Meanwhile, there will be calls for a ‘Canada-style’ deal, Boris Johnson will continue to promote ‘Super Canada’ and pro-Remain MPs will still call for a People’s vote.

Europe

Perhaps the big story in Europe came in Sweden, where both main parties saw a sharp decline in their votes as the nationalist, anti-immigration Swedish Democrats won nearly 18% of the vote. The country’s Prime Minister Stefan Lofven was ousted after losing a no-confidence motion and the country now faces a period of uncertainty as the politicians try to form a workable coalition.

The politics of Naples have, traditionally, been rather simpler. It has a tradition for pizza and the Mafia. But now the city – like so many in Europe – is seeking to re-invent itself as a tech capital, with both Apple and Cisco setting up academies in the Southern Italian city. Hopefully, this will reverse the brain-drain which has seem so many of Southern Italy’s young graduates leave for jobs abroad, or in the north of the country.

On Europe’s stock markets the two major indices went in opposite directions in September. The French index was up by 2% to end the month at 5,493 but the German DAX index slipped back by 1% to close at 12,247.

US

In September, Donald Trump tied up a US/South Korea trade deal and has just negotiated a ‘modernised’ trade deal with Canada to replace the North America Free Trade Agreement.

Away from the Oval Office, it was generally a good month for the US economy, which added 201,000 jobs in August as unemployment remained low at 3.9% and wage growth rose by its fastest pace for nine years, reaching an annualised rate of 2.9%.

However, this did prompt the Federal Reserve to raise interest rates by a further 0.25% taking them to a range of 2% to 2.25%. This was the eighth rate increase since 2015 – with another one expected later this year – as the Fed maintains its policy of gradual rate rises.

As we noted in the introduction, Amazon followed Apple in being valued at more than a trillion dollars as its share price reached $2,050 (£1,577). Not to be outdone Apple unveiled a raft of new products including yet another version of the iPhone: it’s called the XS if you want to upgrade.

There was less good news at Tesla as Elon Musk’s behaviour became increasingly erratic and the month ended with him being accused of fraud and removed as the company’s chair, after he reached a deal with US regulatory authorities over a tweet saying he planned to take the company private. Quite what the future now holds for him and the loss-making company is anyone’s guess.

It was another good month on Wall Street: as we mentioned in the introduction, the threat of a trade war has seen the Chinese stock market fall 14% this year. In contrast the Dow Jones index is up by 7% for the year-to-date, and rose by 2% in September to end the month at 26,458.

Far East

Donald Trump was not the only one shaking hands and smiling for the cameras after making a deal. Also getting in on the act were Kim Jong-un and Moon Jae-in, the respective leaders of North and South Korea. President Moon made a historic trip to North Korea, and the meeting moved the de-nuclearisation of the Korean peninsula significantly closer, as Kim promised to close one of his country’s main missile testing and launch sites.

Sadly, it wasn’t just Florida that was hit by hurricane season, as Typhoon Mangkhut, which killed dozens of people in the Philippines, moved on to batter Hong Kong and Southern China. The bill for the clean up is already estimated at $120bn (£92bn) and is likely to rise further.

We have commented below on the expected rise of the Indian economy over the next ten years: HSBC’s report also forecast that growth in China will continue to outstrip the West. A further report – from London based think tank Z/Yen – suggested that the growth in the Far East is going to put increasing pressure on London and New York as financial centres. Far Eastern cities such as Shanghai, Shenzhen and Beijing are surging and Hong Kong, Singapore and Tokyo have been long established among the world’s leading financial centres.

In company news, founder and CEO Jack Ma announced that he would step down from his position at e-commerce giant Alibaba next year, to let ‘younger, more talented people’ take on the leadership roles. Mr Ma has a net worth of around £28bn, so goodness knows what ‘more talented’ people will achieve.

September was a good month for Far Eastern stock markets. The Chinese Shanghai Composite index shrugged off the worries about a trade war with the US, rising 4% to 2,821 (although it remains down for the year as a whole). Pride of place went to Japan where the Nikkei Dow was up 6% to 24,142. The South Korean market was up 1% to 2,343 while the market in Hong Kong was virtually unchanged, closing September at 27,789.

Emerging Markets

As far as newspaper headlines went, the big story in September was Venezuelan President Nicolas Maduro being photographed eating steak cooked by Turkish celebrity chef Salt Bae – while at home millions are starving and the country sees the biggest mass migration of people in South America’s history.

In rather ‘harder’ news, economists at HSBC have forecast that India will overtake the UK, Germany, France and Japan to become the third largest economy in the world. The forecasters are expecting growth of 6% in India, with China’s growth slowing to 5% per annum. India will, however, lag a long way behind the world’s two biggest economies, with HSBC forecasting that by 2030 China’s GDP will be £26tn, ahead of the US on £25.2tn and India on £5.9tn.

So good news for India but there was far less good news for Argentina, which is fast becoming South America’s equivalent of Greece. The country’s GDP has fallen sharply, the government is implementing widespread austerity measures and the International Monetary Fund has had to increase its three year bailout programme to $57bn (£43bn) from the $50bn previously announced.

Despite the optimistic forecasts, the Indian stock market had a disappointing month, falling by 6% to end September at 36,227. In contrast, the other two major emerging markets we cover were both up, with Brazil rising 3% to 79,342 and the Russian market rising an impressive 5% to 2,475.

And finally…

At the beginning of this month, it was reported that the Coca Cola Company was buying Costa, the coffee chain which dominates the UK high street. It seems a ‘trip’ to town may be about to take on another meaning.

According to Canada’s BNN Bloomberg, Coke is in talks with a local producer – Aurora Cannabis – about developing marijuana-infused drinks. Before you dig out your flares and queue outside Costa, we should stress that the aim of the drinks is to relieve pain: Coke describes them as ‘functional wellness beverages.’ But who knows? A mix up in the bottling plant and suddenly your local high street might look a rather different place…

Already apparently ‘under the influence’ are the customers of Derby ice cream maker Gavin Murray, who faces a bill of £1,000 from his local council after not quite getting the balance right in his ‘rum n’ raisin’ flavour. Mr Murray started his business four months ago, but the killjoys at the council have decreed his ‘rum n’ raisin’ to be ‘too alcoholic.’ He now faces paying the council the money for the correct paperwork – or modifying his ice cream making to burn off the alcohol. And presumably disappointing a large queue…

Finally, this month there will be people – especially with the Christmas party season on the horizon – who find that their clothes have mysteriously shrunk. The traditional answer was to nip down to Weight Watchers – but not any more. The company has jumped on the re-branding wagon by shedding the ‘weight’ and will henceforth be known simply as ‘WW,’ which, the company says, reflects its focus on ‘overall health and wellness.’

There’s that ‘wellness’ word again. Perhaps WW could link up with Coke. And if that doesn’t work there’s always Mr Murray’s rum n’ raisin…

10 years on from Lehman: what have we learned?

Wednesday, October 3rd, 2018

The financial crash after the Lehman Brothers collapse saw the biggest global monetary crisis since the end of WW2. It led to a lost economic decade for many – average incomes in the UK still languish far behind their 2008 peak.

15 September 2008, the fall of Lehman sent shockwaves around the world. It was (and still is) the largest bankruptcy of all time. The colossal investment bank fell with $639 billion in assets and $619 billion in debt.

Founded in Montgomery, Alabama by German immigrants in 1850, the firm grew towards the end of the 19th century as America became an economic powerhouse. For an investment bank that survived the railroad bankruptcies of the 1800s, the Great Depression of the 1930s and two World Wars, it was a reckless rush into the doomed subprime mortgage market that proved a fatal error.

What happened?

In the early 2000s, the US housing boom (read, bubble) was well underway. After the dotcom bubble burst around the year 2000, investors began to put their money in real estate, causing its value to rise. In addition to this, in order to widen their customer base, mortgage lenders began to offer riskier mortgages.

Interest rates plummeted and strict lending requirements were abandoned, meaning many Americans were buying homes they otherwise wouldn’t be able to afford under normal circumstances. There was a home-buying frenzy that drove prices up between 50 and 100 per cent, depending on the part of the country.

US bankers had developed the lucrative business of buying up subprime mortgages (high-risk mortgages offered to borrowers with low credit ratings), packaging them together with other mortgages using vastly complicated equations to create derivatives which obscured the actual level of risk present in the security.

It was in this environment that Lehman Brothers acquired five mortgage lenders in 2003 and 2004, including a lender that offered subprime mortgages. At first, Lehman reaped significant rewards from its foray into the mortgages market. Its mortgages business drove record growth – Lehman reported record profits every year from 2005 to 2007.

However, things were about to take a turn for the worse for this finance giant. In the first quarter of 2007, cracks in the housing market were becoming clear. Investors were quickly withdrawing and prices began to fall fast. It was clear that the high house prices were supported by speculators, rather than home-buyers themselves.

When prices started to decline, there was a mass sell-off of mortgage-backed securities. Concerns that problems in the mortgage arm of the business would spread through the rest of the firm caused its stock to suffer the largest one-day drop in five years on 14 March 2007.

Over the next year, the firm remained on the rocks. Hedge fund managers began questioning the valuation of Lehman’s mortgage portfolio and Bear Stearns – the second-largest underwriter of mortgage-backed securities – nearly collapsed. By June 2008, the bank was reporting large losses. Over the summer, Lehman attempted negotiations to a number of potential partners, with the hope of attracting investments. All were unsuccessful.

In September 2008, worldwide equity markets began to plummet and Lehman’s stock plunged to new lows. The firm reported huge losses during the third quarter and Moody’s announced that Lehman Brothers would have to sell a majority stake to a strategic partner in order to avoid a ratings downgrade. These proved a fatal blow, on 11 September stock fell by 42% on a single day. Last ditch efforts to save the bank were unsuccessful and on 15 September the investment bank finally declared bankruptcy.

The financial crisis

Lehman Brothers’ collapse wasn’t the start of the financial crisis. Rather, the fall of the fourth largest US investment bank signalled just how bad things had become and caused US and international markets to roil for weeks afterwards.

For previous years, bank executives had been over-investing their profits (and bonuses) by running down their protective capital, making them increasingly vulnerable to deteriorating market conditions. They had a relatively low amount of stable assets or cash available to sustain them during difficult times. Lehman Brothers, for instance, was incredibly over-leveraged. Its ratio of total assets to shareholders equity was 31 in 2007.

As a whole, the global financial system had been under severe stress for over a year. While Lehman Brothers were allowed to fall, many others were bailed out. JPMorgan Chase & Co, Citigroup and Wells Fargo & Co were bailed out to the tune of $25 billion by the US treasury and this side of the pond RBS received £45.5 billion from the British government. Money that Sir Howard Davies, Chairman of the bank, admits is “unlikely” the government will ever see again.

In the UK, every man, woman and child effectively underwrote the country’s financial sector by £19,271 each. While income inequality has decreased since the 2008 crash in the UK, in America things are worse than ever. In 2016, the median net worth of black families was 30% below pre-crisis levels, at $17,150. The financial crisis ushered in a legacy of poverty for the poorest American families. This begs the question: ten years on, what has the financial world done to prevent it happening again?

How much has global finance changed since 2008?

It is difficult to say…

On the whole, global financial markets haven’t changed greatly since the crash. But, some of the standout practices that caused the financial crash are prohibited or strictly regulated and banks are probably slightly safer than they once were.

Many critics cited a ‘greed is good’ culture, driven by a thirst for bonuses as integral to the financial crash. Bosses and traders were rewarded with cash bonuses for achieving short term goals. Bonuses in the UK have fallen year on year since they peaked at 34% of average total pay for finance workers in 2008. In 2016, they amounted to 22.7% – still a sizable sum – but a smaller sum nonetheless.

After the financial crash, in 2014 the EU introduced a cap on bankers’ bonuses at 100% fixed pay or 200% if they are agreed by shareholders. However, Bank of England Governor Mark Carney indicated in November 2017 that the UK will review a cap on banker bonuses after Britain leaves the EU. Just ten years after the financial crisis, we look set to return to a landscape of unrestricted bonuses.

Contrary to the expectations of many, McKinsey report that global debt has grown by $72 trillion since 2007. Many saw the crisis as a direct consequence of unrestricted borrowing and hoped that the pace of borrowing would decrease. However, much of this debt is from developing countries or corporations within them. Maybe, then, the West at least has begun to see that the pitfalls of unrestricted borrowing potentially outweigh the benefits.

Nowadays, banks may be more resilient to financial crises. International liquidity standards mean that banks must have a higher ratio of equity to debt. This has meant that banks have more capital to absorb temporary losses. As of 2017, US and European banks had on average a Tier 1 capital ratio of 15%, compared to 4% in 2007. Now, it is less likely that an economic downturn would result in widespread government bailouts for banks, as happened in 2008.

However, the financial sector is still voracious for high returns, delivered fast. Many of the senior bankers and bosses responsible for the crash faced little sanction. Most are either retired or in other senior roles. Despite his catastrophic mismanagement, Lehman Brothers’ final CEO Richard Fuld recently made a Wall Street comeback. He is now running a fund manager, Matrix Private Capital. Perhaps he has been forgiven and his past forgotten slightly too quickly. As for the rest of the financial sector, although it may be more resistant to financial crises of the future, there is little to suggest that the culture which caused the financial crisis has greatly changed.

September market briefing

Wednesday, October 3rd, 2018

September has a reputation for being the worst month for investing, something the figures confirm. Since 1950, the Dow Jones has declined by an average of 0.8% in September and similar results can be seen across a range of stock indexes. There are many theories to why this is the case, none of which offer much in the way of a concrete explanation. Thankfully, this year stock markets bucked the trend and, generally speaking, September saw the global markets perform strongly.

In London, the FTSE 100 had an unremarkable month, seeing a rise of 1% to 7,510. Ultimately, a rise is still a rise so this should be welcome. Elsewhere in the British economy, the news is a mixed bag. The high street had a ghastly month; Debenhams suggested that they may close up to 80 stores and RBS announced the closure of 55 branches. Even John Lewis, the ‘golden boy’ of British department stores, saw its profits crash by 99% this month.

Unemployment – at just 4.3% – is at its lowest for over 40 years. However, the threat of a ‘no deal’ Brexit would mean that unemployment will rise substantially. During the month, both Jaguar and BMW warned of factory closures in the event of ‘no deal’. What’s more, Mark Carney, Governor of the Bank of England, said that house prices could fall by 35% over 3 years if the government and the EU can’t come to an agreement. So as well as the high mobile phone roaming charges which are thought to return after Brexit, you might also find yourself in negative equity.

Whatever you think of Donald Trump, the US stock markets love him. September was another good month on Wall Street. The Dow Jones rose by 2% during the month to end up at 26,458, a 7% total rise since the start of the year.

Otherwise, Trump continued his assault on Chinese trade. He announced during the month a that a further $200 billion worth of tariffs would come into effect later this year. China seems to be fairing much worse than the US in their ‘trade war’; its stock markets have fallen by 14% since January, though the Chinese Shanghai Composite index did rise by 4% during September.

Over the summer, the Japanese economy returned to growth after shrinking in Q1 of 2018. The Nikkei 225 index in Tokyo was up 6% to 24,142 at the end of the month. Elsewhere in the Far East, the South Korean market rose 1% to 2,343 and Hong Kong ended the month virtually unchanged at 27,789.

The big news in emerging markets was that HSBC economists have forecast that India will soon become the third largest economy, leaving the UK, Germany, France and Japan by the wayside. Following this good news… the Indian stock market had an awful month, falling by 6% to end September at 36,227.

October will be an interesting month. Chancellor Philip Hammond will announce the final budget before Brexit on 29 October, which should outline his answers to the following questions: a) What is the best way to bring down the country’s 2.7% inflation rate? b) How to fund £20bn extra for the NHS by 2023? c) Is raising taxes or borrowing the best way to fund public services? There have even been rumours of a new form of tax, although the details of this are unknown…

3 out of 4 UK businesses are burdened by compliance

Wednesday, September 19th, 2018

According to recent figures, 75% of British businesses feel weighed down by the burden of tax administration and compliance. It is believed that this has increased considerably in recent years, with some people describing the tax system as positively Byzantine.

While the introduction of new tax reliefs and tax breaks has been welcome, the amount of paperwork required to access these reliefs has increased. As a result, businesses are faced with a complex and bureaucratic landscape.

Of course some due diligence is seen as necessary but as things now stand, many companies are saying it is just too much of an administrative hassle.

HMRC have made attempts to make things simple, even launching a service on Amazon’s Alexa where you can ask about tax credits but this is just a small step. In recognition of the problem, the Office of Tax Simplification has instigated a review of how compliance-related practical difficulties and penalties are contributing to the tax gap.

To muddy the waters still further, the Making Tax Digital (MTD) initiative is due to come into force on 1st April 2019. This is designed to make the tax system more efficient for HMRC and more straightforward for taxpayers. It will be a completely digitalised system with three key criteria regarding the submission of returns:

  • digital record keeping, with all VAT registered companies having to store transactions electronically,
  • a digital link between the final numbers and their source data,
  • the use of approved software through HMRC’s new gateway.

Given all the uncertainty around Brexit and the 29th March deadline, this seems particularly bad timing. It is felt, in some quarters, that HMRC’s focus should be on helping businesses through that instead.

Many smaller businesses in the UK are not thought to be ready for MTD. According to the British Chambers of Commerce (BCC), 24% of firms had never heard of it and only 10% of firms knew ‘a lot of details’ about it which has led to calls for a delay.

Although MTD is only applicable if you are VAT registered, with the threshold being relatively low at £85,000 turnover, there are still many smaller businesses who won’t have the necessary IT system set up. Nevertheless, although it is thought there will be some leeway, an outright postponement is unlikely.

On the plus side, the UK has been ranked as having the lowest burden of regulation in the G7. The government has also made a commitment to save businesses £9bn on red tape during the course of this parliament. Whether that will be achieved is, of course, another matter.

Funding care home costs with a care home ISA

Wednesday, September 19th, 2018

If you’re under 60, funding your future care might not be top of your agenda. Garden improvements, good restaurants and holidays probably rank slightly higher, as well as saving for your pension if you’ve not yet retired.

However, the government could be proposing a new ISA in order to encourage people to start saving for their later life care. Recent leaked government documents suggest that the government is considering a Care ISA as part of its forthcoming green paper on social care.

The Care ISA would have a tax free allowance of its own that reflects the cost of care. Any leftover savings from this ring-fenced amount would be safe from inheritance tax when you die.

The high cost of later life care is something that looms for many of us.

Currently, those in England and Northern Ireland who have assets of more than £23,250 will be expected to self-fund their care completely. This can mean selling the family home and spending a chunk of your savings on funding care.

Councils are becoming increasingly ruthless in cracking down on people who deliberately deprive themselves of assets by giving them away. There is no time limit on how far a council can go back when claiming deliberate deprivation.

A Care ISA would mean that, if a saver comes to need later life care, more of their assets would be protected.

However, the Care ISA has been widely criticised by both providers and financial commentators.

At the moment, people can leave £325,000 and, from April 2020, couples with children and property will be able to leave £1 million jointly. Much of the population dies with less assets than these. So, for many people, an inheritance tax break isn’t relevant, which could limit the Care ISA’s uptake, making it unattractive for providers to offer it. They may prefer to take advantage of other products, such as a pension, because they offer immediate tax relief.

Additionally, financial services firm Hargreaves Lansdown suggest that only one in four people ends up paying for long term care costs, making the Care ISA even more unattractive.

This means that providers are unlikely to see the Care ISA as a significant business opportunity. The upfront costs of implementing the niche ISA could make it unprofitable.

What’s more, it is unclear how the government would clamp down on the tax loophole that will emerge if savers pay for their care from funds outside of the Care ISA and use the ISA as an inheritance tax exempt savings fund.

The abundance of negative feedback means that the Care ISA may well remain the stuff of fantasy for the treasury.

How to stop children derailing your retirement plans

Wednesday, September 5th, 2018

The Bank of Mum and Dad is a well-known concept and we all hate to see our children struggle financially, which is why many parents continue to support their children well into adulthood. Instead of being ‘empty nesters’, many parents discover that their offspring return to the family home straight after university (that is if they ever left in the first place!) due to the problems of getting a foot on the property ladder.

The type of financial assistance given can take various forms, such as money towards a house deposit or a loan for a car or ongoing support towards rent or bills. While it’s natural to want to help, though, the hard truth is that it’s important not to put your child’s finances before your own retirement savings. Otherwise, in the long run, no one wins. We look at four key ways to help retain a sensible outlook.

Make sure you understand your own financial situation and your retirement goals

Before you leap in and promise to help your son or daughter, make sure you’re clear about your monthly budget. What are your regular commitments and your personal retirement goals? Will you still be able to lead the lifestyle you’re envisaging if you’re supporting your children financially too? As a general rule, you need to be able to replace at least 70% of your pre-retirement income once you stop work. You may also have plans to travel more or have a particular home renovation project in mind. It’s important that you remember to factor in any potential health costs as well.

Sit down with your child and have a frank discussion

If you’re open and honest about your own commitments and the level of your support, this actually sets a good example to your children at a time when they’ll just be learning to manage their own finances. It also gives you an opportunity to set boundaries, clarify expectations and fix timescales. Be specific: is the money to help with a student loan, rent, a mobile phone contract or food bills? The concept of an ‘independence fund’ can sometimes work well – a one-off payment to help an adult child as they enter the ‘grown-up world’.

An external perspective

Sometimes, it helps to involve a third party, such as a professional financial adviser who can offer some valuable objectivity in what can be an emotionally-charged situation. If you all sit down and review your financial plan together, it makes it easier for everyone concerned to see the impact giving a loan to your children would have on your own finances. Bear in mind that if you did overstretch yourself, you could end up having to turn to your offspring for financial support and the last thing anyone wants is to become a burden in later life.

Put it in writing

If you do decide to give your children some money, it does no harm to make the arrangement formal. This means they will take the loan seriously and it gives both you and them something to refer back to in the future. It also sets expectations in terms of any repayments and timeframes. Make sure you review the document regularly and that it is still appropriate. For example, circumstances will change – your child may get a promotion or you may have incurred some medical expenses.

The bottom line is you need to look after your own finances now to be able to look after theirs in the long run.

September market commentary

Wednesday, September 5th, 2018

Introduction

August used to be known as the ‘silly season’. Everyone who made the news was away on holiday, nothing happened and newspapers were desperate to fill their pages. So rather more obscure stories made it into print…

That, of course, was before Donald Trump. And Brexit. And Venezuela, Argentina and Greece. And…

In short, August is now just another month and this year it saw the world’s two most powerful economies, the USA and China, continuing their trade war as the US imposed an additional round of tariffs on Chinese imports and Beijing inevitably retaliated. Domestically, there were more woes for Donald Trump as more members of his former inner-circle decided they would rather do a deal with the prosecutors than the President. Could he be impeached? At this stage it would seem unlikely but the net is tightening.

At home, the Chancellor – as Chancellors do – floated the idea of a new tax. Abroad, two South American countries found themselves in deep trouble and Greece emerged from its bailout programme. For now, anyway…

UK

The month in the UK got off to a bad start for borrowers and – hopefully – a good start for savers as interest rates finally rose. The move – from a base rate of 0.5% to 0.75% – had been long expected, with the economy strengthening, consumer spending gradually rising and the Bank of England seeking to get inflation closer to its target rate of 2%.

He may be one of the least charismatic holders of his office, but Chancellor Philip Hammond was at the centre of one of the more interesting stories in August. The month started with news that Amazon’s UK profits had jumped from £24.3m to £72.3m. At this point the Chancellor must have been rubbing his hands in the expectation of some juicy tax receipts but no – Amazon’s tax bill came in at just £4.6m and it was able to defer £2.9m of that, meaning that the Chancellor could expect a cheque for just £1.7m.

As we will report below, August was a month which saw the familiar tale of gloom for UK retail and the Chancellor has often spoken of ‘levelling the playing field’ between online retailers and the traditional high street.

So August saw him float the idea of an ‘Amazon Tax’ – a specific tax on online sales platforms to help traditional retailers. “We want to ensure the high street remains resilient,” he said, “And make sure taxation is fair between businesses doing business the traditional way and those doing business online”.

Will it work? It seems doubtful. Rewind the clock to the beginning of the last century and Hammond would have slapped a special tax on cars to protect the horse and buggy economy. But France and Germany have already introduced their own version of the tax: do not be surprised to see it included when ‘Spreadsheet Phil’ delivers his Autumn Budget speech.

As we mentioned above, August was another poor month for the retail sector in the UK. House of Fraser went into administration and was bought by Sports Direct for £90m – around a tenth of the previous valuation. Marks and Spencer’s mooted more store closures and the month ended with the future of Homebase looking uncertain as 42 stores were closed. However, Coca Cola did give the high street – and the coffee business – a double espresso vote of confidence by agreeing to buy the Costa Coffee chain for £3.9bn.

The sun continued to shine in August and the Office for National Statistics reported the good weather had helped boost the UK’s Gross Domestic Product by 0.4% in the second quarter of the year. There was gloom for the housing market though, with August seeing house prices suffer their biggest month-on-month fall since July 2012. UK car manufacturing was also down in July and profitability in the service sector was at its lowest level for four years. But for those who like their glass half full there was yet another drop in unemployment, as it came down by 63,000 to 1.36m – the lowest level since 1975. The UK also recorded its biggest July surplus of income over expenditure for 18 years – so finally the Chancellor could get excited…

Sadly, the FTSE index of leading shares took its cue from the bad news rather than the good, finishing the month down 4% at 7,432. The pound was also down slightly against the dollar, closing down 1% at $1.3016.

Brexit

There were – inevitably – any number of stories about Brexit during August, the vast majority of them centring on the consequences of a ‘no deal’ Brexit, a fantastic opportunity for the UK or a potential disaster depending on your existing viewpoint. What did gradually emerge through the month was the realisation that ‘no deal’ holds as many terrors for the EU as it does for the UK. Perhaps the most relevant story came on the last day of the month, with City AM suggesting that leaders of the EU27 were preparing a ‘fudge’ agreement, allowing both sides to claim victory.

That would be entirely in line with the way the negotiations have preceded so far, and there is still plenty of scope for a last minute decision to extend the UK’s two year notice period beyond 29th March next year. There is a French saying which roughly translates as ‘only the temporary endures’. You would not bet against reading our monthly market commentary in August 2028 and seeing a comment on the UK’s ‘temporary agreement’ with the EU…

There have also been attacks on the Prime Minister’s Chequers proposals both from within her own party and from the EU’s chief negotiator, Michel Barnier. The Conservative Party Conference takes place at the end of this month, but the PM’s speech will not be until 3rd October. So it looks like we are in for another month of uncertainty. Keeping with French phrases, ‘Plus ça change…’

Europe

In Europe, the Greek bailout finally ended. On the surface this is good news: Greece is no longer borrowing from the EU, and the government is finally running a surplus. Dig a little deeper though and it is much less cheery – Greece has been left with severe debts which will take generations to repay. A fifth of the population – and a quarter of Greek children – live in severe material deprivation. The unemployment rate remains around 20% with youth unemployment twice that: half a million Greeks have left the country and the financial crisis has wiped out a fifth of the economy. As the old saying goes, only death and taxes are certain, but we can be fairly sure that sooner or later the headlines will be saying ‘Greek Crisis’ again.

Italy, one of the other teetering European economies, set itself on collision course with the EU by announcing a massive €80bn investment in the nation’s infrastructure. The populist government seized on the collapse of the Genoa bridge to announce the plan, hoping that the financial stimulus can boost Italy’s flagging economy. It is a high risk gamble, but Italy’s economy has been virtually stagnant for two decades: the only surprise is that it has taken this long…

Like so many other leading indices, both the major European stock markets were down in August, with the German DAX index dropping 3% to 12,364 and the French stock market falling back by 2% 5,407. At the other end of the stability league table the Greek stock market was down 4% at 730.

US

Let us start off the US section with a success story. At the beginning of the month Apple won the race to become the first trillion dollar company. Better than expected figures, confirming strong sales growth for the more expensive iPhone models, sent the shares to a new high of $207, enough to see Apple beat Microsoft, Amazon and Alphabet (the parent company of Google) to the trillion dollar valuation.

There was, though, some gloomy news for the wider economy at the start of the month as US jobs growth slowed in July. Just 157,000 new jobs were created in the month, 33,000 below expectations and well down on the 248,000 created in June. Figures also confirmed that the US service sector had expanded at its slowest rate for 11 months.

As the month progressed, the President continued his high-profile initiatives and interventions, doubling the tariffs on Turkish steel and aluminium – and sending the Turkish lira plummeting as a result – and doing what he described as an ‘incredible’ trade deal with Mexico and threatening to pull the US out of the World Trade Organisation.

Whatever you think of the President’s actions, by the end of the month the US was awash with good economic news, as figures released for the second quarter showed the US economy had grown at an annualised rate of 4.2%.

Not surprisingly Wall Street liked what it saw, and the Dow Jones index ended August up 2% at 25,965.

Far East

We have covered the China/US trade war above and there was little good news to report for China in August as the stock market fell and there were worrying signs for the Hong Kong property market as monetary tightening by the US federal Reserve forced Hong Kong’s authorities to restrict credit.

There was better news on the other side of the Sea of Japan, with figures for the second quarter showing the Japanese economy returning to growth, as it increased at an annualised rate of 1.9%. Car giant Toyota added to the good news as it posted a 7.2% rise in quarterly net profits, beating expectations and surprising analysts.

On the region’s stock markets, China’s Shanghai Composite index was down 5% on the continuing worries about a trade war with the US, ending the month at 2,725. Hong Kong did only marginally better, falling 2% to 27,889. The other major Far Eastern markets were both up by 1% with the Japanese market closing the month at 22,856 and the South Korean index ending august at 2,323.

Emerging Markets

August was a busy month for the Emerging Markets section of the commentary, beginning with two tales of woe from South America.

Venezuela is in crisis: the country with the highest oil reserves in the world has been brought to its knees by the current government and is now seeing the largest exodus of people in South American history. Meanwhile, Argentina has once again had to go to the International Monetary Fund with the begging bowl and, as we write, interest rates have increased to an eye-watering 60% as the Government attempts to prop up the peso.

India was hit by the floods in Kerala, but the country has seen its fastest quarterly growth in two years as the rupee falls, with the country’s GDP expanding by 8.2% in the second quarter of the year, compared to 7.7% in the first quarter and 5.5% in the same period last year. Unsurprisingly, the stock market was up by 3% in August to close the month at 38,645.

The Russian currency was also hit as the US imposed sanctions in the wake of the Skripal affair, but the stock market still managed a 1% rise to 2,346. No such joy for the other major emerging market we cover, as the Brazilian index declined 3% in August to 76,678.

And finally

Or ‘rather more obscure stories’ as we should perhaps call them this month.

We’ll start ‘and finally’ in the dangerous waters of dating, where a divorcee looking for a wealthy boyfriend won £13,100 in damages from a dating agency after it failed to introduce her to the man of her dreams. Tereza Burki had paid the Seven Thirty agency – based in Knightsbridge – £12,600 but sued for ‘deceit and misrepresentation’. The judge ruled that the dating agency had ‘made promises but failed to produce the goods’.

Not so much ‘plenty of fish in the sea’ as not enough. Poor old Ms Burki spent £12,600 to catch a mackerel but obviously only dated sprats…

Also not having much luck are the UK’s farmers, who are increasingly the victim of rural crime, with villains reportedly enjoying a day out in the countryside and then finishing it by going home on a farmer’s quad bike. Rural crime is now a £44.5m a year problem and while some farmers are fighting back with CCTV and infra-red motion sensors, others are apparently using medieval fortifications, with earth banks, ditches and moats making a comeback.

Farmers, of course, have plenty of land, but the land everyone wants today is in cyberspace, with the BBC reporting that people are spending real money to buy virtual land in a new city called Decentraland. When we say ‘real money’ we obviously mean a virtual currency – Ethereum in this case – but we assume the virtual currency has to be bought with ‘real money’. So you invest money that only exists online buying land in a city that also only exists online. Sometimes, the world seems it’s just getting too complicated…

Financial planning in your forties

Thursday, August 16th, 2018

It’s well known life begins at forty. Doesn’t it?

It should be an exciting decade, full of plans and aspirations. It’s also likely to be a time of optimum earning potential.

What’s more, it’s a crucial decade to take a step back and make sure your finances are on track to meet your goals.

There’ll be some decisions you’ll already have taken in your twenties or thirties, which will have had an impact. You may have bought your own home, for example, or put some savings away in cash, investments or pensions.

If things don’t look quite as rosy as you’d hoped, though, your forties are a good time to take stock, as there’s still time to make adjustments and give your investments time to grow.

Don’t forget, whatever savings you can make now will enable you to pursue your dreams later on.

Here are four key tips for shrewd financial planning at this important time of life.

Budget ruthlessly

Just because life may feel comfortable with regular pay rises and bonuses don’t fall into the temptation of spending more than you need. Do you really need that Costa coffee or M&S lunch every day?

Apps like Money Dashboard or Moneyhub can be helpful in showing you where your money’s going. Simple steps like cancelling subscriptions or switching bill providers can make a significant difference.

Historic studies show that investments usually outperform cash savings so any disposable income you can invest will be beneficial. If you can put money aside in a pension you’ll also be taking advantage of the tax relief available. Make sure you use your ISA allowance too for more accessible funds.

Carry out a protection audit

Think about what if the unexpected happened. Your forties are a time of life where you may find yourself part of what’s known as ‘the sandwich generation’ i.e. caring for elderly parents at the same time as looking after young children. This can put extra pressure on you. Make sure you’re protected should the worst happen by ensuring you have a good emergency fund in place. Also think about critical illness cover and life insurance.

Property plans

Your home will be a fundamental part of your financial planning at this time of life. If you feel you need a larger property, these are likely to be your peak earning years so now is the time to secure the best mortgage you can and find your dream home. On the other hand, if you’re quite happy where you are, it may be a good time to remortgage to get a better deal.

Family spending

Everyone’s situation is different. You may have children at university or you may still be having to pay for nursery fees. Whatever your position, make sure you budget accordingly and allow for inflation, especially if you’re paying private school fees. Work out the priorities for your family – the best education now or a house deposit in the future. It’s important not to derail your own life savings for the sake of your children as no one will benefit in the long run.

By doing some sound financial planning now, you’ll have more hope of continuing in the style you want to live, well beyond your forties.

Interest rate rise: What does this mean?

Thursday, August 9th, 2018

The Bank of England has raised interest rates from 0.5% to 0.75%, only the second rise in a decade. Currently, interest rates stand at their highest since 2009 and reflect what the Bank of England perceive as a general pick-up in the economy.

The Bank said that a rise in household spending has strengthened the British economy. Economic growth for the year is predicted to be 1.4% this year and the unemployment rate is expected to fall further below 4.2%, where it currently stands.

How does the rise affect you?

If you are on a variable rate ‘tracker’ mortgage, your repayments will increase. For example, if you have a £100,000 mortgage, this will add £12 to your monthly repayments.

It’s important to highlight that if you are on a fixed rate mortgage, your payments will stay the same until your base rate comes up for renewal. The Bank of England’s announcement does not mean that your rates immediately rise.

For prospective borrowers, the interest rate rise signals a change in the Bank of England’s tone. Further rate rises are a definite possibility. However, the Bank’s governor took a rather cautious tone which indicates that there are unlikely to be any more rises until 2019.

For the time being, base rates on mortgages are unlikely to rise above 3%. That said, the demand for rate fixes will be higher than usual this year.

Unfortunately for those of you going on holiday, after the announcement the pound fell by 0.9% against the dollar. This is due to the extreme political uncertainty surrounding the sterling with Brexit taking an unchartable track.

Reactions from U.K. businesses have been a mixed bag. The Institute of Directors, which represents about 30,000 members in the U.K., has said, ‘the Bank has jumped the gun’, whilst the British Chamber of Commerce similarly described the decision as ‘ill-judged’ at an uncertain time.

This negative perspective wasn’t unanimous among all lobbying groups. The Confederation of British Industry, the country’s biggest business lobby, welcomed the rise saying the case for higher rates had been building.

A small rise of 0.25% is likely to have a minimal impact on your finances. However, larger hikes down the line could have a substantial effect on the British financial landscape.