July 2016 Bulletin - MPFSL

July 2016

A volatile first half for 2016 investments The first half of 2016 has been marked by volatility – especially in the final week.

June, or to be more accurate, the final five working days of June, proved to be a volatile time for share markets around the world. After two of the four constituent parts of the UK voted for Brexit, markets far away from the UK reacted with knee-jerk falls to the prospect of continued uncertainty. The headlines were dire: “£45 billion wiped off shares” was one example (from a paper that supported Leave).

At such times the investment ‘noise’ can be as deafening as it is distracting. It pays to step back a little and gain some more perspective. As 30 June marked the half way stage through the year, a look at how the first six months of 2016 panned out is a good starting point. The results may be a surprise: Index FTSE 100 FTSE All-Share Dow Jones Industrial Standard & Poor’s 500 Nikkei 225 Euro Stoxx 50 (€) Shanghai Composite MSCI Emerging Markets (£)

H1 2016 Change +4.2% +2.1% +2.9% +2.7% -18.2% -12.3% - 17.2% +15.8%

The fact that over the six months the FTSE 100 has increased is not what the casual observer would have expected. While there was considerable volatility immediately after the Brexit result emerged, the FTSE 100 rebounded strongly, regaining its 23 June level by close on 28 June. That reflects the international nature of its constituents – one recent estimate is that the average Footsie company obtains only about 20% of their revenues from the UK. That fact, combined with a weakening pound translating into stronger sterling profits, helps explain the resilience of the FTSE 100. The FTSE 250, covering the next 250 listed companies, is much more heavily oriented to the UK and suffered accordingly. By the end of June, the FTSE 250 had fallen 6.1% from its pre-vote level, even after a strong recovery in the final couple of days of the month.

July 2016

Page 2

The reaction of overseas markets is not captured by the indices alone. Sterling tumbled after the Brexit vote, with the most notable fall against the dollar. Having almost reached $1.50 on 23 June, by the end of the month the pound would buy only $1.337, a drop of over 10%. The corollary of the pound’s fall is that falls in foreign markets were often more than countered by the rise in their related currencies.

The first half of 2016 was by no means as dire as it might have seemed from recent press reports. It is a fact of life that markets go up and down and trying to time entry and exit perfectly is impossible. While keeping nerves steady may be a challenge, the panicked investor who sold out when pessimism was at its worst is probably feeling distinctly upset now. Please get in touch if you’d like to discuss your investment options.

Retirement choices shrink as annuities withdrawn One of the UK’s biggest insurance companies has withdrawn from the advisory annuity market.

The pension freedom reforms revealed in the 2014 Budget claimed another victim last month as the Prudential announced it would no longer provide annuities via financial advisers.

Earlier in the year two specialist annuity providers merged in the face of declining business levels and stricter solvency rules.

The reduction in competition, leaving little more than a handful of companies actively seeking pension annuity business, comes at an unfortunate time. One of the perhaps surprising consequences of the Brexit vote has been a fall in long term UK government bond yields. The drop reflects a ‘flight to safety’ and has already had a knock-on effect in reducing annuity rates still further.

The post-Brexit economic outlook suggests that there is little prospect of yields recovering in the near future. In some economists’ scenarios the Bank of England may soon resort to more quantitative easing (QE) in an effort to stimulate growth, a move which would force gilt yields down another notch. As the experience of Japan, Switzerland and the Eurozone shows, long term gilt yields of about 1.75% still have plenty of room to decline.

All of which means if you are considering when and how to convert your pension pot into a retirement income, it is vital to seek advice before taking any action. There is a strong case for building in as much flexibility as possible, so that any longer term favourable changes in market conditions can be exploited. The wrong decision made today could prove very costly in terms of lost income over the rest of your lifetime.

July 2016

Page 3

Chinese shares almost in from the cold An important decision on the leading emerging markets index has been announced.

Which country has the second largest set of stock markets after the US? Is it: A. UK B. Japan C. Germany D. China The answer is that China ranks number two, which might come as a surprise. However, at present the shares listed on China’s mainland stock exchanges – so-called A Shares – are subject to various constraints on foreign ownership. As a result, China’s onshore market has not figured in many stock market indices, including the all-important MSCI Emerging Markets Index.

Last year MSCI examined the rules and practices in China and decided it was not yet time to add A-Shares to its leading index. Twelve months on there has been another review and, despite some progress by the Chinese authorities, MSCI again said no, not yet. MSCI’s next review will be in June 2017, but the index provider gave itself some wriggle room by saying that it did not rule out an earlier introduction of China to its indices if significant positive developments occurred earlier.

The general feeling remains that it is just a matter of time before Chinese A-Shares come in from the unindexed cold. When they do, the move will be gradual because to give full weight to China immediately would be too disruptive. The current estimate is that China could eventually account for about 40% of the MSCI Emerging Markets Index.

Although Chinese A-shares are outside the MSCI indices for now, it is still possible to gain investment exposure to the world’s second largest equity market by a variety of funds. To learn more about the ways to enter the world’s second largest stock market, talk to us.

Going for gold with your SIPP The Royal Mint is offering gold bars to SIPP investors.

The rules on what investments can be held within a self-invested personal pension (SIPP) are simple: you can choose anything. However – and it is a very significant however – certain assets, such as art and residential property, are classed as “taxable property” and attract such large tax charges as to make them unviable.

One surprising specific exclusion from the list of taxable property is investment grade gold bullion – gold that is at least 99.5% pure and in the form of bars or wafers. Hitherto if you wanted to add gold to your SIPP – and your SIPP manager permitted such investments – purchases had to be made via bullion dealers. Now the Royal Mint has announced that some of its gold products (not coins) have been approved by HM Revenue & Customs as eligible for SIPP investment.

July 2016

Page 4

You, or more accurately, your SIPP provider, will not physically hold any gold purchased: it will remain in “The Vault”, a secure storage facility at the Royal Mint, at a cost of between 0.6% and 1.2% a year. That fee underlines one of the disadvantages of gold investment: not only does bullion not produce any income, but it incurs an ongoing cost for the investor.

Directly holding gold bars is not the only way to gain exposure to the movement in the gold price. Many professional investment managers now prefer to use funds which themselves hold physical gold. These funds offer economies of scale which can make them more costeffective than direct ownership of the yellow metal. To learn more, please contact us.

Single-tier or No-tier pensions?

The Department for Work & Pensions (DWP) is writing to over 100,000 people with bad news about their state pension.

The new single-tier state pension was launched in April of this year, but the way in which it was introduced has drawn much criticism. The heavy emphasis given in DWP publicity to the flat amount of about £155 a week in DWP publicity meant that some of the downsides of the new pension system received little, if any, attention. This prompted the House of Commons Work and Pensions Select Committee to say in a recent report that government communications were “contributing to confusion about the new system.”

The DWP has now announced that it will be sending individual letters to over 100,000 people telling them that they will not qualify for any state pension, never mind £155 a week. Their loss is the result of a change to the qualifying requirements for a state pension. Under the previous system, only one full year’s National Insurance contributions/credits was required to accrue some (albeit small) entitlement to state pension. Under the single-tier system, there is no entitlement until ten years’ contributions/credits have been clocked up.

The ten year qualifying period is just one example of how some people have been disadvantaged by the move to the single-tier system. If you were a member of a final salary pension scheme between 1978/79 and 1987/88 you could also be on the losing side because under the old rules your guaranteed minimum pension (GMP) would have been inflationproofed by the state, but it is not under the single-tier.

These two examples are a reminder of the importance of obtaining a state pension projection – particularly if you are 50 or over – and understanding what it means. There may be ways to counter any loss, but as ever in the world of pensions, expert advice is necessary to avoid potentially costly pitfalls.

July 2016

Page 5

Your bank rewards may be less than interesting Not everything your bank pays you counts towards the personal savings allowance.

When the personal savings allowance (PSA) was first announced in the March 2015 Budget, it all sounded quite straightforward: 

If you were a basic rate taxpayer, you had a £1,000 allowance to set against savings income;



If you were a higher rate taxpayer, your allowance was halved, but your potential tax saving was still the same; and



If you were one of the 333,000 additional rate taxpayers, you had no allowance.

The reality has turned out to be rather different. For a start, the allowance is not a true allowance at all, but a nil rate band. Now another glitch has emerged as the relevant Finance Bill legislation works its way through parliament.

If you have one of those bank or building society accounts that give you regular reward payments, then those sums cannot be offset against your PSA. To be offset against the PSA, what you need the bank to pay you is interest, which counts as ‘savings income’, not a reward, which is an ‘annual payment’, not ‘savings income’. Alternatively, income from fixed interest unit trusts and OEICs can be offset against the PSA. However, for the current tax year, such interest is paid after deduction of 20% tax, meaning a reclaim may be necessary.

From 6 April 2017, fixed interest fund distributions will be paid gross – as bank and building society interest is in 2016/17.

It remains to be seen whether the banks and building societies that pay rewards will revise their accounts to make them more tax-friendly. In the meantime, the PSA serves as a reminder that what looks like a simple tax change is often not so.

July 2016

Page 6

Are your children eyeing up their inheritance already?

Recent research shows that UK household savings are forecast to fall to their lowest rate in over 50 years.

Savings Ratio: 2000-2015 14 12 10

%

8 6 4 2 2015 Q4

2015 Q1

2014 Q2

2013 Q3

2012 Q4

2012 Q1

2011 Q2

2010 Q3

2009 Q4

2009 Q1

2008 Q2

2007 Q3

2006 Q4

2006 Q1

2005 Q2

2004 Q3

2003 Q4

2003 Q1

2002 Q2

2001 Q3

2000 Q4

2000 Q1

0

Source: ONS A report produced by the Centre for Economics and Social Research (CEBR) has forecast that UK household savings will fall to just 3.8% of disposable income this year, its lowest level since 1963. The ratio was nearly 12% as recently as 2010, as the graph above shows.

The same research found that nearly two thirds of the over-55s felt “confident and supported”, while just over a third of 35-44 year-olds felt the same way. The corollary was that 61% of the younger age group thought they were not saving enough for their future while 45% of the 55+ baby boomers took the same view.

The falling savings ratio has a variety of causes including the low/no wage growth many have experienced since 2008 and the increasing cost of housing. It helps to explain government initiatives, such as the Lifetime ISA, aimed at encouraging the under-40s to save.

If you are a member of the lucky baby boomer generation, then one reading from the research is that your children (and grandchildren) are relying more heavily than ever on an inheritance to bolster their finances. Increasingly, that is being accelerated to mean lifetime gifts ̶ witness the importance of the bank of Mum and Dad in many first time buyer housing transactions.

All of which means that your estate planning has also assumed more importance earlier than you might have expected.

July 2016

Page 7

Offshore funds and onshore myths The ‘Panama Papers’ have created a media frenzy about offshore investment. Not everything you read was necessarily accurate.

Offshore investment made front page headlines last month, with the leak of 11.5 million documents from a law firm in Panama. The fact that there was link to the Prime Minister gave the story legs, but unfortunately that also meant more opportunity for misinformation and outright error.

One trap that too many commentators (and a few politicians) fell into was to conflate offshore investment with tax avoidance (or evasion) by the wealthy. While it is almost certainly probable that some names on the Panamanian list had this in mind, offshore investment has a much wider and often less tax-driven appeal.

For example, one of the biggest areas of fund growth in recent years has been index-tracking exchange traded funds (ETFs). These are used by both institutional and individual investors to gain exposure to a wide range of share and bond markets, as well as some commodities, such as gold. Many of the ETFs purchased by UK investors are based in the offshore centres of Dublin or Luxembourg. These locations were originally chosen because they were established centres for fund management and offered administrative and other advantages for continent-wide sales over, for example, setting up in the UK. According to one leading investment data provider, Morningstar, over two thirds of the largest actively managed funds marketed in the UK are based offshore, with more registered in either Dublin or Luxembourg than the UK. If you think you could benefit by learning more about investing offshore, please talk to us.