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A winter of discontent for savers

Archive for March, 2016

A winter of discontent for savers

Thursday, March 31st, 2016

According to MoneyFacts, the average one-year fixed bond has fallen from 1.47% one year ago to 1.34% at the beginning of March. There are similar falls reported in alternative terms as well. The average five-year fixed bond is down to 2.46% from 2.56% over the same period. Charlotte Nelson, finance expert at Moneyfacts, said that it’s been “a winter of discontent for savers”, with fixed rate bonds having once again plummeted to record lows – and there are currently no signs of an end to this downward path.

“Fixed rate bonds are often looked to as the best place to get a decent interest rate, and given that rates were starting to creep upwards last year, this new turn of events is extremely disappointing. Moneyfacts recorded a staggering 222 rate cuts to fixed bonds in the first two months of 2016, with the highest reduction being a whopping 0.74%. As a result, it’s unsurprising that many savers are beginning to think that these cuts will never end.”

The fact that last year saw some improvements makes the latest trend even more disappointing, with the newer entrants to the savings market having kick-started some welcome competition as each fought to win pole position in the Best Buy tables. These smaller providers were continually leap-frogging each other to get to the top spot, particularly in the fixed and Notice Account sectors of the market, and savers had the ideal combination of choice and decent rates.

However, as the figures show, this competitive spirit proved to be short-lived, with competition beginning to ebb now that the newcomers have begun to establish themselves. As Charlotte Nelson explains:

“This is, in part, due to over-subscription of these highly attractive deals, which has prompted the new brands to reduce their offers. Besides, with other rates in the market in freefall, the challenger banks need only to offer a reasonable return to ensure they stay in top position. Essentially, this boils down to the failure of the main banks to compete with the new players and boost competition and rates. The challengers make up only a small portion of the market, so their positive impact was always going to be fleeting if the main players didn’t get on board, and unfortunately, given that these providers have little need to compete for savers’ funds, this remains unlikely.”

Given that thoughts of a rise to base rate have been put out to pasture for the time being – and some economists even predict that the rate could be cut further before it rises – savers inevitably feel as though they are caught in a downward spiral of misery. However, there could be some light at the end of the tunnel; with April bringing the new Personal Savings Allowance, there’s the chance that the market could be pushed into action, but either way, now could be a great time for savers to re-evaluate their savings pot to try and get the best returns they can.

Scale tipped in favour of small firms?

Wednesday, March 30th, 2016

Chancellors presenting their Budgets often attempt to redistribute wealth from one group in society to another, stated a recent post-Budget Accountancy Age article, suggesting that this was the implicit rationale behind many of the corporate tax measures announced in the March 2016 Budget.

The business tax roadmap, published on March 16th, provided detail of how current and future business taxes would impact over the remainder of this parliament. Large companies, not necessarily all multinationals, saw an eventual reduction in the headline rate of corporation tax to 17% by 2020. We also saw that a concession to payments of corporation tax on account, for the two thousand or so very largest companies with profits over £20m, is to be deferred.

In addition, the chancellor announced the implementation of Base Erosion and Profit Shifting (BEPS) related actions in the restrictions on royalty payment deductions, and an effective interest relief restriction, to 30% of net interest expense, albeit with some exceptions and concessions. These moves to curb tax planning strategies that exploit gaps and mismatches in tax rules to artificially shift profits to low or no-tax areas by businesses, were expected.

There were changes on loss relief. Some will benefit from more flexibility but others will see restrictions to 50% of losses, for companies with profits in excess of £5m. According to AccountancyAge, hidden in the roadmap was also a reference to a review of the substantial shareholdings exemption – a valuable relief which shouldn’t be under threat.

Where is the ‘new cash’ going? Much is directed to small and micro businesses, who benefit from the reduction in the main rate of corporation tax too in due course. Permanently doubling the small business rate relief costs a whopping £1.5bn and with other changes to business rates, around 600,000 firms will benefit. Another change was around commercial stamp duty, although there’s a catch. Duty was cut in respect of purchases up to £150,000 to zero, with a 2% charge on the next £100,000 of value. But the charge has been increased over this threshold to a higher 5% charge.

These changes should help smaller businesses significantly, yet the concern is that as both of these reductions apply to landlords (if the landlord pays the business rates), there’s a risk these ‘benefits’ aren’t passed on through reduced rents.

And what about the ‘sofapreneurs’? A new £1,000 a year allowance for trading income generated by micro entrepreneurs, and a further £1,000 a year allowance for property income, will take away much complexity for those selling or renting via digital platforms, such as Airbnb. Overall, AccountancyAge believes that there is a shift from big to small, a signal perhaps to those who want to start out in business, to now get up and try.

What will the Budget of 2019 look like?

Wednesday, March 30th, 2016

The Chancellor will need to reduce borrowing by £32bn in 2019-20 – the biggest ever annual cash consolidation – in order to meet his Budget surplus target by the end of parliament, according to a new post-Budget briefing report published by the Resolution Foundation.

The Foundation’s post-Budget report shows how the Chancellor has chosen to respond to the £55bn fiscal black hole identified by the Office for Budget Responsibility. By deciding to accommodate and actually further increase borrowing in the near-term, the Chancellor has been left needing a significant consolidation in 2019-20 to meet the fiscal mandate for a surplus in that year. Such a consolidation is, as a share of GDP, comparable to the first two years of the Chancellor’s term in office.

The scale of cash consolidation needed in this pre-election year will be made even tougher by the commitment to raise the Personal Tax Allowance (PTA) to £12,500 and Higher Rate Threshold (HRT) to £50,000 by the end of the parliament. The Foundation estimates that these tax cuts will cost a further £2.5bn by 2020-21, with a third of the gains going to the richest ten per cent of households.

The briefing shows that the gains from income tax measures (raising the PTA and HRT) announced in yesterday’s Budget were similarly concentrated among the richest households. These cuts to income tax will boost the incomes of the richest fifth of households by an average of £225, compared to an average gain of just £10 among the poorest fifth of households.

A Resolution Foundation distributional analysis of all the main tax and benefit changes announced so far this parliament shows that by 2020 the poorest fifth of households will lose an average of £550, while the richest fifth of households will gain an average of £250.

The Foundation says that the Chancellor is right not to tighten further immediately in the face of forecast revisions, particularly given a worsening global economic outlook. However, it questions the ability of the government to deliver such a sharp consolidation in 2019-20, a pre-election year.

Against this backdrop it says that spending an extra £2.5bn on tax cuts that overwhelmingly benefit rich households cannot be justified, especially when lower income households are already set to fall further behind as a result of cuts to Universal Credit.

Will pension tax relief fill the Black Hole?

Wednesday, March 30th, 2016

Before the March 2016 Budget there had been much speculation that the Chancellor was planning big changes to the tax relief on pensions. However, just before the Budget, the Treasury scotched rumours of such changes and subsequently there were no changes to pension savings tax relief in the forecast Budget.

But then came the ‘Black Hole’ when the opposition to proposed welfare savings, particularly in the disability benefits area, spearheaded by Iain Duncan-Smith’s resignation, derailed the Chancellor’s fiscal plans. The connections were easily made between his proposed higher rate income tax reductions for the rich and the benefit cuts for the less well-off, clearly unpalatable to many in the House of Commons. So there was a U-turn on welfare benefit cuts, even going so far as a promise of no more raids on welfare benefits in this parliament.

So where can the Chancellor look for cash to fill the Black Hole, to get his fiscal policy back on track? Earlier this year, a lot was being said about pensions savings tax relief being unfair, favouring higher rate taxpayers and therefore making this a legitimate target. This was ignored by the Chancellor in the Budget, though, prompting many commentators to suggest that the coming EU Referendum and the need for the Government to keep Conservative EU membership supporters happy and not antagonise the ‘Brexiters’ on the Tory back benches was a priority, at least until 23rd June!

Currently, when savers pay into a pensions scheme their contributions are boosted by tax relief at the rate they pay on their earnings, which can be as much as 45%, and figures from the government show that more than two-thirds of the current £34 billion pensions tax relief goes to higher rate – 40% and 45% rate taxpayers. Such a distribution is widely perceived to be unfair and by many observers, ineffective in encouraging people to save.

After the Referendum, changes to pension savings tax relief could soon come. After all, having the Budget put comparatively more money into the pockets of the rich (according to the Institute of Fiscal Studies), it would then be politically timely and expedient to take all of that, or at least some of it, back in the formulation of a ‘fairer’ pension savings tax relief set of arrangements.

If we stay in the EU, the weighted pension savings tax incentive for higher rate taxpayers will have served its purpose, as will the little extra tax relief money in their pockets, so we can restore the balance, helping the less well off in society. Even if the Brexiters win, the money can still be taken back, perhaps with a convenient political justification that our impending exit has brought about the change.

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.

Pension freedoms are a hot topic

Wednesday, March 23rd, 2016

Google searches during 2015 in the UK for the term ‘pensions freedoms’, including other variants with and without plurals, have increased more than ninefold, according to the latest data gathered from the search engine. The vast increase appears to present evidence that pension freedoms have resonated with people in the UK, as well as making many more aware of pensions in general. However, industry commentators have wisely pointed out that this doesn’t necessarily equate to more positive outcomes.

As well as naturally catching the attention of those close to retirement, pension reform has an additional audience made up of those still a long way off retiring looking to cash in their pension because they have the ability to do so. What this will mean for the latter group in terms of their capacity to retire later in life is currently unknown, as is the potential impact for their employers.

The risk exists that the search trend shows that there is a large group of people who are more aware, but less well informed about pension freedoms and the way the system works. The danger also exists for many individuals to be caught by malicious companies, whilst searching for pension freedoms.

This remains a ‘chicken and egg’ equation for both the UK government and individual UK businesses. Whilst systems such as auto enrolment have made it easier for people to save, and pension freedoms have made it easier for people to use their pensions as they wish, the new group of savers could now engage with the new systems, without knowing exactly how to use them to their advantage.

If you are one of the many who Googled ‘pensions freedoms’ or something similar last year, and you still have questions, get in touch and we’ll be happy to provide you with some answers.

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.

What is diversification?

Wednesday, March 23rd, 2016

If you’re new to the investment world, or even if you’re not, it’s likely that you’ve heard the term ‘diversification’ used in relation to your investments. However, you’re certainly not alone if you don’t have a clear idea of what the word actually means for your investments. Read on, and learn everything you ever wanted to know about diversification, but were afraid (or didn’t have the time) to ask!

As a starting point, you’re most probably aware of the proverb that warns you about putting all of your eggs in one basket. In essence, that’s what diversification is all about. Diversifying means creating a portfolio that includes multiple investments, which in turn reduces risk. Think about it: if you invest only in stock issued by one company, your portfolio is liable to sustain serious damage should that company’s stock suffer a major downturn. Splitting your investment between stocks from two or more different companies reduces that risk.

A second method of diversification is including both cash and bonds in your portfolio. This reduces the risk by giving you a short-term reserve of cash investment. Ensuring that a segment of your assets is in either cash or short-term money-market securities is a good way of reducing the risk to your portfolio. Cash can be used in emergencies, and short-term money-market securities are useful if an investment opportunity crops up or if you need more cash for payments than usual, as they can be liquidated straight away.

Don’t forget that asset allocation and diversification are interlinked, as diversifying your portfolio is achieved through allocating assets in a particular way. If you’re looking to invest aggressively, you might opt for 80% stocks and 20% bonds, for example, and vice versa for a more conservative investment.

Whilst diversification might seem like a simple goal, there are still pitfalls which need to be avoided. Any decisions you make about diversifying should be well judged, and many investors are careful not to over-diversify their portfolio. Too much diversification (or ‘diworsification’ to use a recently coined term) means your investments are unlikely to have an impact, leading to a negative effect on your returns.

We’ve only scratched the surface of diversification here though and, when all’s said and done, there’s no one-size-fits-all method of achieving a diversified portfolio. Each investor will need to look at their time horizon, tolerance for risk, investment goals, means of finance and experience in investment to work out how to best diversify your portfolio to suit your needs. If you feel overwhelmed at the choices available, or if you’re just someone who prefers to delegate such decisions, then we can, of course, help with formal guidance and advice.

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.

Lifetime ISA announced

Thursday, March 17th, 2016

Under a new Lifetime ISA announced in the Budget millions of adults under 40 will receive a 25% bonus from the government. From April 2017 they will be able to put in up to £4,000 a year, with the annual bonus of up to £1,000 paid until the age of 50. The Chancellor said that savers would be able to withdraw money from a Lifetime ISA at any time, and would not pay any tax on it. He also revealed that from April 2017 all savers will be able to put up to £20,000 a year into ISAs, up from £15,240 at the moment.

CGT rates cut

Thursday, March 17th, 2016

The higher rate of Capital Gains Tax (CGT) will be cut from 28% to 20% this April. In addition, the basic rate of CGT will be cut from the current 18% rate to 10% at the start of the new tax year on 6 April. Budget documents show that the government estimates the changes to CGT will cost it more than £600m a year from 2017-18 onwards. However, the old higher rates will still apply to gains on the sale of a residential property that is not a main home (such as a second home or a buy-to-let property), and also to “carried interest”.

Stamp duty overhaul announced

Thursday, March 17th, 2016

Commercial stamp duty will be overhauled with the introduction of a 0% rate on purchases up to £150,000, a 2% rate on the next £100,000 and a 5% top rate above £250,000. A new 2% rate for high-value leases with net present value above £5m will also take effect from today. The overhaul introduces a “slice” system, in which stamp duty is payable on the portion of each transaction that falls within the relevant price band. Large-scale professional landlords will also face a three percentage point stamp duty surcharge when buying rental properties, after George Osborne rejected proposals for an exemption for bigger investors.

2016 Budget Report

Thursday, March 17th, 2016

George Osborne delivered his eighth Budget on Wednesday 16 March 2016.

Although the changes affecting private pension scheme provision weren’t nearly as great as they could have been, there are still a number of important changes.

Read our summary of the Budget 2016