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Should you be worried during significant market falls?

Archive for September, 2015

Should you be worried during significant market falls?

Wednesday, September 30th, 2015

A recent Standard Life article suggests that in simple terms, you probably shouldn’t be worried about recent market falls. Most of us are investing over the long term, and significant market falls happen periodically. Generally, the wrong thing to do when markets fall by a reasonable margin is to panic and sell out of the market – this just locks in a loss. The right thing to do is remember why you’re invested in the first place and make sure that rationale hasn’t changed.

Although the FTSE fell below 6,000 on 22 September, the falls need to be looked at in context of the overall picture, however. For instance, the FTSE 100 Index had broken its all-time high earlier this year. Professional investors aren’t filled with panic at the moment, regardless of the situation the media is portraying. Most of them are viewing this as a ‘market correction’ – just bringing things that have got a little inflated back down to earth.

Recently the Chinese government has attempted to stimulate the economy by devaluing its currency and suspending trading on many stocks. All this has done is to spook markets, both in China and globally, with significant falls in global stock markets, including the S&P in the US and the FTSE. How negatively? Well, on 24 August, the day many in the media are calling ‘Black Monday’, the Chinese market was down by 8%, UK markets fell by over 4.5% and the US by over 3.5%*.

Standard Life Investment’s Head of Global Equities, Mikael Zhavrev, has also called this, “a buying opportunity, not a market inflection.” In other words, this reduction in the value of some investments is an opportunity to pick up a bargain and benefit when the value rises again.

So what should you do?

According to the Standard Life article, that depends on your investments. If you’ve picked a ‘hands off’ investment where someone is making all the decisions for you, then you should be fine. Just make sure they can invest in lots of different types of investments across different countries, ensuring that you are well-diversified.

If, however, you’ve selected your own funds or investments, you’ll probably want to make sure your choices still meet your needs. Again, revisit your original investment rationale. Why did you pick the various countries or asset classes in the first place? Are you invested in a diversified portfolio, or did you deliberately take a riskier single asset class or geographical approach? You might want to get some commentary from fund managers who are significant in the markets you invest in, and balance those against the outlooks of fund managers who manage significant multi-asset funds.

If you do decide to make changes to your investments, make sure they’re for the right reasons. Don’t react out of panic. And, if possible, take a long-term view! Always consider consulting an independent financial adviser when making any sort of decision regarding your future and the financial investments that are there to prepare you for it.

The value of your investment can go down as well as up and you may not get back the full amount you invested. The value of tax reliefs depends on your individual circumstances. Tax laws can change.

Devon tops the table for pensioner well-being

Thursday, September 24th, 2015

The South West of England appears to be the place to live if you want a long, healthy and safe retirement, according to a new league table of pensioner well-being developed by Prudential. The league table, which uses a combination of census data and results from the insurer’s own retirement research, ranks the top 20 counties in England and Wales according to several measures of the wellbeing of their pensioner populations.

According to the league table, six of the top 20 counties for pensioner well-being are in the South West of England, with Devon coming out on top of the rankings, Dorset in second place, Gloucestershire seventh, Wiltshire 12th, Somerset 13th and Cornwall 19th . In another boost for pensioners in the region, Prudential’s own retirement research also recently found that the South West saw one of the largest year-on-year jumps in expected retirement incomes among this year’s retirees – with new pensioners expecting to live on 19 per cent a year more than those who retired in 2014.

The pensioner well-being league table rates each county against a number of indicators including the ratio of healthcare workers per head of population, the length of time a pensioner can expect to live once they’ve retired, and the annual incidences of crime per thousand members of the county’s population. Outside of the West Country, Norfolk and Powys also rank highly in the league table. Six counties in the South East of England make the top 20, which overall is made up of 17 English counties and three Welsh.

Topping the pensioner well-being league table, Devon’s largely rural make-up results in a relatively low 50.1 crimes annually per thousand people – well below the national average of 56.7. The county’s pensioner life expectancy is in the national top 10 for both men and women – the average 65 year old Devonian man can expect to live for another 19 years while a woman can expect to live for another 22 years. Devon also has an above average number of healthcare workers per thousand people at 65.6 compared with the 60.9 national average. The Prudential also states that according to their research, of those retiring in 2015 more than a third (36%) of those in the South West of England say they will be able to afford to leave an inheritance to their families – well above the UK average of 29% .

Beware 70% pension tax charge

Monday, September 21st, 2015

Thousands of people aged over 55 who take money from their pension funds face possible 70% tax charges, says the Mail. This is because if you take a tax-free cash sum of over £7,500 from a pension fund, and then add to your regular pension contributions, HMRC can claim that you are abusing the tax relief system and impose a 40% tax charge on the tax-free cash withdrawal plus 30% in other charges and penalties. The issue arises because many people are taking cash from old pension pots, typically worth less than £50,000, while remaining in their employer pension scheme to which they make contributions. It’s open to HMRC to say that if the tax-free cash was used to, say, pay off debt, that was what enabled someone to pay more into their pension – and this is defined as abuse.

This is yet another example of why you really do need to take care – and advice – on pensions to avoid the tax traps.

The value of your investment can go down as well as up and you may not get back the full amount you invested. The value of tax reliefs depends on your individual circumstances. Tax laws can change.

Our latest newsletter

Wednesday, September 16th, 2015

Our latest newsletter has been published and can be found by clicking here.

Please don’t hesitate to contact us if you want further information on any of the topics covered.

Will dividend tax keep rising?

Wednesday, September 16th, 2015

The Treasury revealed in July that the dividend tax credit would be replaced with a new tax-free allowance of £5,000 of dividend income for all taxpayers, which takes effect from April 2016. The Chancellor said at the time that the move would “simplify the taxation of dividends”. But is this just the start of increased dividend taxation? Smaller firms will already probably need to review how they pay directors, but will the need for these reviews increase in the future?

Accounting giant Baker Tilley analysed any potential forthcoming changes and said that there could be ‘unpleasant knock-on effects – especially for high-earners’ caused by these changes. They went on to say that:

“The Chancellor clearly wants to remove the tax advantages currently enjoyed by those operating their small businesses through a company – these changes won’t completely remove those advantages, but I would expect that over the next few years the dividend tax will be increased until it starts to be more expensive to operate through a company. The dividend changes will have an adverse effect on those family companies who have hitherto extracted profits by way of dividends. Next year they will almost certainly face a tax hike. This is no accident.”

The Government has set the dividend tax rates at 7.5% for basic rate taxpayers, 32.5% for higher rate taxpayers and 38.1% for additional rate taxpayers but there will be no tax credit. There will be an increase of 7.5% where dividend income exceeds £5,000.

Previously, individuals in receipt of dividends benefited from a 10% tax credit which for basic rate taxpayers meant they could enjoy their dividend tax free. Higher rate taxpayers paid an effective 25% tax rate.

Officials at HMRC said in an update that the £5,000 tax-free allowance would still be taken into account when assessing someone’s overall income for tax purposes.
The report said:

“The dividend allowance will not reduce your total income for tax purposes. However, it will mean that you don’t have any tax to pay on the first £5,000 of dividend income you receive. Dividends within your allowance will still count towards your basic or higher rate bands, and may therefore affect the rate of tax that you pay on dividends you receive in excess of the £5,000.”

The value of your investment can go down as well as up and you may not get back the full amount you invested. The value of tax reliefs depends on your individual circumstances. Tax laws can change.

Should we scrap tax reliefs on pensions?

Wednesday, September 16th, 2015

A single Lifetime ISA for everyone should be created with all tax reliefs on pension contributions being scrapped, a leading figure at the Centre for Policy Studies (CPS) has proposed, according to an article published by the CPS. Research Fellow Michael Johnson said the opportunity has come for a radical overhaul of savings after the Chancellor launched a consultation into the future of the pensions tax regime in July.

Mr Johnson believes all tax reliefs on pensions contributions should be scrapped, along with the Lifetime Allowance, as a simplification measure. Here’s the majority of his idea:

“What should replace private and occupational pensions? We now have an opportunity to replace a ludicrously complex retirement savings vehicle with a fairer, more cost effective, simpler and transparent arrangement. Last year, I proposed a single Lifetime ISA for everyone, to be included in the auto-enrolment legislation. Allocated at birth, it would serve from cradle to grave, signalling the emergence of a lifetime savings agenda.”

Each post-tax £1 saved (irrespective of source, that is, including employers’ contributions) would attract 50p from the Treasury, up to an annual limit of, say, £4,000. This is double the rate of incentive that basic rate taxpayers currently receive via tax relief, and a total of £12,000 is more than adequate savings capacity for almost everyone. Treasury and post-tax employer contributions should be locked in until retirement (perhaps with income and capital growth); thereafter they could be accessed in the form of a tax-exempt ISA Pension.

An annuity, perhaps for a minimum of ten years, fuelled by the 50p incentive which, being flat rate, would address today’s fundamental conundrum that because Income Tax is progressive, tax relief is regressive, is grossly unfair. And it is patently failing the next generation.”

Last year the Centre for Policy Studies published proposals to abolish all Income Tax and employer NICs relief on pension contributions, to be replaced by a redistributive 50p incentive per £1 saved, paid irrespective of tax-paying status.

What do you think of the CPS’ ideas? Is this the way forwards for our pensions and savings?

The value of your investment can go down as well as up and you may not get back the full amount you invested. The value of tax reliefs depends on your individual circumstances. Tax laws can change.

Holiday home rule changes

Wednesday, September 9th, 2015

New EU rules about succession came into force on 17 August. 

If you own a holiday home on the continent, new EU regulations on cross-border succession could be important to you, even though the UK has opted out of the legislation. The new regulations will allow you to choose for your overseas property to be inherited under the laws applying in your country of ‘habitual residence’ or nationality. As a result, for example, in theory the English owner of a French villa can avoid the forced heirship rules that would otherwise apply to French assets.

The regulations only affect the succession rules, not estate taxes. Thus the executors of the French villa owner will still have to deal with the interaction between the French ‘droits de succession’ (at up to 60% for unrelated beneficiaries) and UK inheritance tax (at up to 40%). However, double taxation agreements will mean that, in effect, only the higher of the two tax charges is paid.

As is often the case with new EU regulations, the machinery may not run like clockwork to begin with. There is scope for confusion given that the UK has opted out, but the regulations can still apply to UK nationals by virtue of their ownership of foreign property.

If you have property in the EU, you should contact your legal advisers to discuss what action you should take. It may also be sensible at the same time to review your UK will and talk to us about your estate planning, given the latest freeze in the nil rate band (to April 2021) and reforms to trust taxation.

More detail on dividend changes

Tuesday, September 8th, 2015

HMRC has issued a factsheet about next year’s dividend tax changes.

The Summer Budget announcement of a change to the rules on dividend taxation from next April caused many furrowed brows. The situation was not helped by the very limited detail available from HMRC on the new regime and no legislation in the Finance Bill published in July.

Last month things became a little clearer when HMRC published a “Dividend Allowance Factsheet” which it developed in conjunction with the Tax Faculty of the Institute of Chartered Accountants of England and Wales. This revealed that the new £5,000 Dividend Allowance will not be a true allowance, but rather (yet another) 0% tax band. The difference may sound academic, but it is significant. It will mean, to quote the factsheet, “The Dividend Allowance will not reduce your total income for tax purposes”.

To see the effect, suppose someone had income before dividends in 2016/17 of £2,000 below the starting point for higher rate tax. If they receive dividends of no more than £5,000, there will be no tax to pay on those dividends. Any dividends above £5,000 will attract 32.5% tax – the new dividend higher rate – not the new 7.5% dividend basic rate. Had the Dividend Allowance been a true allowance, then the £2,000 of unused basic rate band would have been available to use first before higher rate applied.

The news that the Dividend Allowance is not an allowance has sent some tax experts back to their spreadsheets to re-crunch their numbers. Sometimes the recalculations have resulted in higher projected tax bills, particularly for shareholder directors who use dividends to extract income from their companies, rather than drawing salary and/or bonus. If you fall into that category, you need to start thinking about your 2016/17 currency options now – and maybe planning a special dividend before 6 April 2016.

If you are an individual investor in funds or shares, you should still be reviewing your strategy for next tax year, so why not give us a call now the dust is beginning to settle?

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.

Good deal from state pension top-up

Thursday, September 3rd, 2015

The government is about to offer an attractive deal to top up the state pension. From October, those who have reached retirement age before April 2016 can buy extra state pension on attractive terms by paying lump sum ‘3a’ National Insurance contributions. A 65 year old could get £572 a year from a £10,000 investment, more than three times what they would currently be getting in interest on a typical savings account. Like the state pension, the income will be index-linked, and half the income will be paid to a widow or widower. The deal will be especially attractive to women and the self-employed who have not accumulated rights to a full state pension.

Our comment: Some people will benefit hugely from this scheme, but for those without a partner who will inherit their pension, or who are in poor health, the deal may not be worthwhile.

Police step up anti-scammer campaign

Thursday, September 3rd, 2015

City of London and Metropolitan police have joined forces in a campaign to shut down investment scams, says the Financial Times. Alarmed by a rise in the use of prestigious City offices as a base by scammers, the City authorities have also joined in. Landlords are being targeted – they should investigate the bona fides of tenants and several have been fined for not doing so. Official data show that £1.7 billion was lost to fraud in 2014 but everyone agrees this is a substantial under-estimate. The proactive approach is clearly having some effect: when the police booked their own stand at an alternative investment exhibition, several exhibitors pulled out at the last minute. 

Our comment: There have been many fraudulent schemes investing in wine and diamonds and the whole alternative investment sector requires a high degree of scepticism.