Bulletin October 2016
Chancellor aims to launch LISA next April The previous Chancellor’s plans to launch a Lifetime ISA (LISA) have been given a fresh breath of life. In his final Budget last March, one of the surprises George Osborne produced was the Lifetime ISA, known as the LISA to everyone except HM Treasury. As a reminder, LISA’s main features were to be: •
It would only be available for those aged between 18 and 39;
The maximum contribution would be £4,000 a year;
Contributions made before 50 would attract a 25% government bonus;
Returns would be free of UK income and capital gains tax, as with a normal ISA; and
Funds could be withdrawn penalty-free for either the purchase of a first home or from age 60 onwards. Otherwise a penalty would normally apply, equal to a 5% charge plus the government bonus.
LISA was meant to start life in April 2017, but potential providers quickly criticised its complexity and the lack of firm detail. Some said they would not make the April 2017 start date. Everything then went very quiet. LISA revival It was therefore a surprise when in early September the government published a Bill to legislate for LISA bonuses and then a few days later issued an “updated design note” setting out a number of technical changes to Mr Osborne’s original idea. The aim remains to launch LISA next April, although how many financial services companies will have something on their shelves is a moot point. The LISA has been seen as a stalking horse for pension reform as the government bonus is akin to flat rate contribution relief. The Bill before parliament creates a very broad framework
– it does not impose any age or contribution limits. It’s an interesting question as to whether the lack of detail has something to do with plans that Mr Osborne’s successor has for the Autumn Statement. 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.
The Autumn Statement: the date’s been set The Treasury has confirmed that the Autumn Statement will be on 23 November. When George Osborne was replaced as Chancellor in July, his successor, Philip Hammond, deliberately avoided taking any action. He left the immediate economic response to Mark Carney and the Monetary Policy Committee at the Bank of England, which duly cut interest rates to 0.25% and announced £70bn more quantitative easing (QE) in early August. Mr Hammond did say that he would consider a “fiscal reset” in the Autumn Statement if data available by then suggested it was necessary. We already know that the new Chancellor has abandoned his predecessor’s goal of a budget surplus by 2019/20, but beyond that what form a ‘reset’ could take is unclear. Shifting the target The latest UK public finance figures show that government borrowing in the first five months of the year was £4.9bn below the level in 2015/16. Given that Mr Osborne’s spring Budget forecast represented a cut of £21bn from last year, it looks most unlikely his successor will reach next April on target. It is arguable that the higher than planned borrowing is effectively a “reset” in itself, leaving Mr Hammond little additional room for manoeuvre. However, that might not prove to be the case. The “not just the privileged few” rhetoric of Theresa May has prompted some suggestions that her new Chancellor may take a different line on tax. For example, a more egalitarian approach to pensions could be to introduce the flat rate of contribution tax relief which Mr Osborne shied away from in March. Depending upon the rate chosen, such a move could also generate additional funds for the Treasury to use in boosting the economy, e.g. via spending on infrastructure and housing. The Autumn Statement looks set to be the most important for some time and we’ll be covering the key outcomes.
What role does property play in retirement planning? There has been a difference of opinion on the role of property in retirement planning between the Bank of England’s Chief Economist and a former Deputy Governor. Andy Haldane, Chief Economist at the Bank of England, caused a few raised eyebrows recently when in a Sunday Times interview he suggested that “property is a better bet for retirement than a pension”. His argument was largely based on the notion that if demand for housing continues to outstrip supply, as it has done for many years, then house prices are “relentlessly heading north”. By coincidence, not long after Mr Haldane’s comments were published the new Chief Executive of the Financial Conduct Authority, Andrew Bailey, gave a speech which covered the same topic. Mr Bailey was previously a Deputy Governor at the Bank of England, but he disagreed with the Bank’s Chief Economist: “There is an argument that pension saving would be assisted by people holding more housing in their stock of pension assets, based on the real appreciation in the value of housing. I don’t subscribe to this argument.” One of the reasons he gave was that “…given the scale of uncertainty over long-run real [inflation-adjusted] returns on assets, I would not favour over-weighing to any one asset class, while recognising that a balanced investment portfolio can be exposed to property.” In other words, do not put all, or most, of your eggs in one basket. You probably already have considerable exposure to the residential property market through the ownership of your home. Mr Haldane’s view will certainly be shared by many people, but Mr Bailey’s reservations make sound investment sense. It is easy to forget after the past few years of rising house prices that property values do not always rise. Nationwide’s figures show that for the UK as a whole, it was not until the second quarter of 2014 that the average house price overhauled the peak set in the third quarter of 2007. Adjust for inflation and the date moves out even further.
Nationwide UK House Prices The Last 10 Years £210,000 £200,000 £190,000 £180,000 £170,000 £160,000 £150,000 £140,000 £130,000 £120,000
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.
Cash defies low interest rates New statistics from HMRC show that cash is still a popular ISA investment, despite ultra-low interest rates. In early summer the Financial Conduct Authority published a report looking at easy access cash interest rates for savings account and cash ISAs. The regulator surveyed the lowest rates on offer from 32 major providers and summarised its findings in the following table: Range of lowest interest rates available on easy access cash ISAs at 1 April 2016
No branch access
As these figures are now six months and one base rate cut out of date, the current numbers are likely to be even lower. In spite of these low rates, recently released statistics from HMRC show that in the last tax year nearly £3 out of every £4 of ISA subscriptions were placed in the cash component. Overall total investment in ISAs is about 50/50 between the cash component and the stocks and shares component, but that reflects the fact that until July 2014 there were lower limits for cash investment. If you hold cash ISAs, ask yourself: •
What interest rate am I currently earning? Be warned this might be going down soon because of the August base rate cut.
Do I need an ISA to get tax-free interest on my cash? The personal savings allowance, introduced in this tax year, allows you to receive £1,000 of tax-free interest if you are a basic rate taxpayer (£500 if you are a higher rate taxpayer). At current interest rates, that represents a substantial deposit.
You can switch from a cash ISA to a stocks and shares ISA (and vice versa) and making the move now could significantly increase the income your ISA produces.
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. The value of tax reliefs depends on your individual circumstances. Tax laws can change. The Financial Conduct Authority does not regulate tax advice.
A better quarter The third quarter of 2016 was not the meltdown it threatened to be after the referendum. The final days of the second quarter of 2016 were dominated by the fall-out from the outcome of the referendum on 23 June. It was, to put it mildly, a volatile time for investment markets. However, for all the gloom and uncertainty around at the end of June, the third quarter of 2016 has treated investors kindly, as the table below shows: Index
Q3 2016 Change
Dow Jones Industrial
Standard & Poor’s 500
Euro Stoxx 50 (€)
MSCI Emerging Markets (£)
The FTSE 100 ended the September over 10% above its starting level for the year, an outturn few would have predicted on the back of a Brexit vote. The performance reflects the
international nature of its constituents and the continued weakening pound. After reaching nearly $1.50 on 23 June, the pound was worth about 20c less by the end of the third quarter. As you may know from a recent holiday, it has been a similar story for the pound against the euro. The corollary of the weak pound has been that it has boosted returns from overseas markets for sterling based investors. The third quarter of 2016 once more proved how difficult it is to predict short term market movements with any accuracy. The panicked investor who sold out when pessimism was at its worst on 24 June will have paid a high price for their attempt at market timing. On the other hand, the long term investor will have been satisfied by the returns from their inaction. 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.