Our Views

Proposed Capital Gains Tax increase is a concern to investors

Investors, entrepreneurs and buy-to-let landlords face substantially higher rates of capital gains tax if the government accepts new recommendations for reform of the system.

The reforms, proposed by The Institute for Public Policy Research, would result in a hike in the rates of capital gains tax, all to make the UK’s tax system fairer while increasing revenue to the Treasury.

The think tank made its proposals in a report called Just Tax.

It estimated the government could raise an additional £90bn in capital gains tax over the next five years by making one simple change; taxing capital gains at the same rate as income.

Under the current tax system, capital gains are taxed based on different thresholds to income tax. Higher earners typically pay lower rates of capital gains tax than they do for income tax.

Another proposed change from The IPPR, which could raise £15bn extra in five years, would be to remove the capital gains tax exemption on death. As things stand, a deceased’s estate is not subject to capital gains tax, instead of suffering only inheritance tax.

The driving force behind the proposed reforms is the recognition that different sources of money currently result in very different tax treatments. This anomaly in the tax system means higher earners can pay lower tax, on average, than lower earners who solely derive their income from employment.

According to the IPPR, this system is “fundamentally unfair”, distorting economic behaviour and opening the doors to tax avoidance opportunities.

Capital gains tax is charged on the profit made when most personal possessions worth more than £6,000 are sold. Excluded from this tax are vehicles, investments held within the tax-wrapper of an Individual Savings Account (ISA), and principle private residences (homes).

The tax is charged at 10% or 20%, depending on the income tax band of the taxpayer. Capital gains tax on property sales is currently charged at 18% for basic rate taxpayers and 28% for higher and additional rate taxpayers.

According to the Just Tax report:

“Taken together, we believe these proposals amount to a transformation of the taxation of income which would move us towards a more economically just system and warrant serious consideration for any government interested in raising revenue in a progressive manner.”

The proposals to reform capital gains tax have come along at an interesting time, with a great deal of speculation about a snap general election.

Despite his best efforts, Prime Minister Boris Johnson has failed to force a general election ahead of the prorogation of parliament until mid-October.

Should a general election occur around the time of the UK’s scheduled departure from the European Union at the end of October, taxation is likely to form a key battleground for the parties, as well as Brexit.

But these proposals from the IPPR serve as a stark reminder that tax policy can and does change, sometimes with little notice.

Investors would be well advised to consider the consequences of any capital gains tax hike and plan by utilising available allowances today to move taxable investments into tax-free wrappers.

Jon DoyleProposed Capital Gains Tax increase is a concern to investors
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The World In A Week 35 – Inching Towards A Deal

It was a rather lively week in financial markets, from the perspective of a UK-based investor. Sterling strengthened considerably against all major currencies, as markets anticipated a break-through in the long march to a Brexit deal. As Sterling strengthened, Global Equities as measured by MSCI ACWI were down -2.7% in GBP terms and the FTSE All Share index of UK Equities rose +1.61%. On the Fixed Income side of our portfolios, Global Bonds hedged to GBP returned -0.9% – but this considerably outperformed Sterling Bonds which returned -1.75% for the week.

Market developments were primarily driven by tentative advances in negotiations surrounding two prospective deals. Of major global importance, is the ongoing trade dispute between China and the US. Markets reacted favourably to news on Friday that the US had agreed a limited “phase one”  trade deal with China which would delay tariff increases scheduled for this week. The agreement was positive, but light on detail and is widely seen as a truce in the ongoing trade war.

Closer to home, an outburst of optimism regarding the possibilities of a Brexit deal shot through financial markets towards the end of the week. The Irish Taoiseach, Leo Varadkar, met with Boris Johnson in 11th hour talks. Much was made of the reaffirmation of the possibility of a Brexit deal, even at this late stage. Sterling and UK assets rallied strongly on the news, and we expect volatility to persist into next week following the Queen’s speech on Monday.

Jon DoyleThe World In A Week 35 – Inching Towards A Deal
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This is why your selected retirement age matters

When do you plan to retire?

Whilst that may seem like an obvious question stick with me for some wise pension guidance that may not be so obvious.

The date you select for your retirement can have a significant impact on the value of your pension pot.

That’s because the default investment option for many pension plans, and especially company pension plans, involves reducing the risk of underlying investments, the closer you get to that chosen retirement age.

In theory, it’s a sensible strategy.

Taking less investment risk as you near your chosen retirement age should, theoretically, protect you from some of the short-term volatility associated with stock market investments.

But what if you’ve told your pension provider one date, and then continue to work for several more years?

In this scenario, your pension investments could be growing more slowly in those final few years, due to taking a lower risk.

A new analysis by insurer Aviva has found that millions of workplace pension savers are exposed to this issue.

It’s important because of two factors; recent changes to the state pension age, and changes to employment law, which mean people can continue working for as long as they need or want.

Under the old state pension rules, women would receive their state pension income from age 60. Men would get their state pension paid from age 65.

The new rules mean that men and women under age 41 will not now get their state pension until at least age 68.

These changes to the state pension age and employment retirement age have led to many people deciding to work for longer. But if they failed to update their selected retirement age with their pension provider, default investment strategies could still apply.

The analysis from Aviva shows that the average earner in an automatic enrolment workplace pension could miss out on more than £4,000 in their pension pot if they keep their default retirement age at 65, but actually intend to retire at age 68.

For someone with a default retirement age of 60, an intention to retire at age 68 would cost them almost £10,000.

Women are more likely than men to be affected by this issue, due to the way in which default retirement ages were historically set.

Of course, the opposite of this issue is also a problem. If your pension provider holds a retirement age on file which is later than your intended retirement age, they could keep your pension pot invested in riskier assets in those later stages.

Aviva reported that 47% of workers are saving into defined contribution pensions, and around 90% of these savers are invested in default funds.

Looking at how returns could differ, Aviva shared performance figures from their ‘My Future’ default solution. The five-year return for these investments, as at 31st March 2019, was 3.2% higher 30 years from retirement, and 1.1% higher five years from retirement, compared to the return at retirement age.

It’s important to note that past performance is not a guide to the future, but these figures show a general effect of gradually moving to lower-risk investments in the approach to retirement age.

The retirement age recorded with your pension provider is simple to change; it only takes a phone call or letter.

But before changing your selected retirement age, check first whether it could result in any adverse product charges or a loss of guaranteed benefits.

Also, take some time to work with your Financial Planner to decide on a suitable retirement age, which will allow you to live the life you want once you stop working.

Jon DoyleThis is why your selected retirement age matters
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The World In A Week 34 – Elephant In The Room

Last week, ISM data was released, this is a measure of new orders, production, employment, supplier deliveries and inventories; in essence, a measure of productivity. The key number to be cognisant of is 50, above 50 indicates an economy is in expansionary territory, below 50 indicates contraction and potential recession. Data for US and China did not make for happy reading, with German manufacturing data especially worrying, falling to 45.7 from 47.

While contraction has been evident for several months in bond markets, it has taken some time for this to filter through to equity markets, which had a negative week; in Sterling terms, most indices fell sharply midweek, limping back towards positive territory by Friday. In the US, ISM data plumbed the lowest depths in 3-years, heightening expectations of a further interest rate cut of 25bps this month, and a fourth rate cut probability of 50-50 by year-end.

On the tedium that is Brexit, there was little news. The next key date in the Brexit calendar is 19th October, when a deal must be agreed by Parliament; MP’s are expected to agree to a no-deal Brexit, which we believe is highly unlikely and will result in the Benn Act being employed, which will anger hard-Brexiteers. The Benn Act was passed last month and requires the Prime Minister to ask for an extension to the Article 50 negotiating period, which would avoid a no-deal Brexit on 31st October.

Chinese equity markets reopen this week following celebrations marking the 70th anniversary of the Popular Republic. Investors will be keenly focussed on US-China statements ahead of their meeting on 10th-11th October in Washington, where trade talks will recommence.

Jon DoyleThe World In A Week 34 – Elephant In The Room
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Are you throwing away your pension savings?

Opting out of your workplace pension might seem like a good idea in the short term.

After all, by opting out, you get a little more in your pay packet each month, which will undoubtedly help with the ever-rising cost of living.

But opting-out comes at a significantly high cost in later life.

According to new research, the over 60s are throwing away as much as £1.75bn in pension savings, through this simple act of opting out of a workplace pension.

Often due to a misunderstanding of what can be done with the money they are saving.

According to insurer Royal London, who found that opt-out rates rose sharply for older savers, with almost one in four over 60s making this decision.

The figure, which is based on workplace pension opt-out rates for Royal London’s auto-enrolment business, shows rates remain below 10% across all other age groups.

The opt-out rates are in line with those disclosed by other auto-enrolment providers, including NEST.

But what impact could opting-out of a workplace pension have on your standard of living in retirement?

If someone age 60 on the average wage was auto-enroled into a pension scheme, paying the minimum of 8% contributions, they could build a pension pot of just under £14,000 by the time they reach their 65th birthday.

Pension contributions made to a workplace pension are made up of an employee contribution, employer contribution and tax relief from the government. These three sources of contribution mean pension scheme members only need to contribute a little over £6,000 of their own money to gain the illustrated outcome.

Opting-out of a workplace pension at age 60, therefore, could result in a loss of £7,000.

Royal London highlighted data from the ONS Labour Force Survey, which shows there are around 1.1 million people aged 60 and over in full-time employment. This means that more than 250,000 people could be affected by this loss of pension wealth.

If each of these 250,000 people are missing out on £7,000 each, that’s a collective £1.75bn in lost pension wealth as a result of opting-out.

There are lots of reasons why older employees decide to opt-out of their workplace pension. These reasons could include the perception that they have already saved sufficient amounts in a pension, or that they are too close to their planned retirement age for further savings to make a meaningful difference.

But opting-out of a workplace pension, at any age, means missing out on employer contributions, tax relief and investment growth, all three of which can significantly improve their income in retirement.

“It is understandable that someone at the age of 60 might think it is too late to save enough to make a difference to their retirement income but they are wrong. Our figures show older workers are throwing away thousands of pounds on retirement income by opting out of their scheme. We would urge anyone thinking of opting out of their auto-enrolment scheme to think twice before doing so.”

Helen Morrissey, pension specialist at Royal London, said:
Jon DoyleAre you throwing away your pension savings?
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The World In A Week 33 – Getting Our Priorities Straight

The UK Supreme Court ruled that the prorogation of Parliament by Boris Johnson was unlawful, which resulted in a swift restarting of Parliament last week.  It would appear the battling forces within British politics are becoming more entrenched and the cross-party support needed to strike a deal with the EU fading.  A request to extend the deadline for Article 50 is now most likely, after which we can expect an election or fresh referendum.

Politics escalated even further in the US, with an announcement of the start of an impeachment enquiry into the actions of President Trump.  This is centred around a telephone call with President Zelensky of Ukraine, in which it is alleged that Trump asked for an investigation into the activities of the son of Joe Biden, who just happens to be one of the front runners for next year’s Presidential election.

The process is as much political as it is legal, with proceedings needing to pass through both the House and the Senate; the latter being controlled by the Republicans, with a two-thirds majority.  It is worth remembering that a President has never actually been impeached; although it was a close shave for President Nixon, who resigned before Congress could vote him out of office.

So, with global data suggesting that growth is slowly dissipating and in much need of both fiscal and monetary stimulus, the governments either side of the Atlantic seem to currently prefer the distraction of playing politics.

Jon DoyleThe World In A Week 33 – Getting Our Priorities Straight
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Do you live in one of these income tax hotspots?

There’s an extraordinary gap between the richest and poorest in society, with the new analysis of official tax figures highlighting the extent of this issue.

According to the research, if you have a pre-tax income of around £50,000, then you can count yourself in the top 10% of taxpayers. To make it into the top 1% takes more than three times as much, with the top 0.1% of taxpayers earning more than £650,000 a year.

What’s interesting about these groups of highest taxpayers is their tendency to be male, middle-aged and living in London or the South East. Since the early 2000s, the geographic concentration of top taxpayers has become even more focused on London. Between 2000/01 and 2014/15, the proportion of the top 1% of taxpayers living in London rose from 29% to 35%.

The analysis of taxpayers comes from the Institute of Fiscal Studies (IFS) and is based on HMRC administrative data. One of the key findings of this data was that more than half of the top 1% live in London and the South East of England. Half of the top taxpayers lived in 65 parliamentary seats, down from 78 in 2000/01, suggesting a further geographical concentration of the wealthiest in society.

It takes an income of more than £300,000 a year to enter the top 1% of taxpayers living in London. To join that elite group in Wales, the North East of England or Northern Ireland required an annual income of around a third of that level.

According to the analysis, there is still a big gender disparity when it comes to earnings. Men form 83% of top 1% taxpayers, and 89% of the top 0.1%. A 50-year-old man in London with an income of £160,000, enough to be in the top 1% nationally, would not even be in the top 5% of men in London in his age group. He would need an income of over £700,000 a year to be among the top 1% of men aged 45-54 living in London.

Looking at the origin of highest earners, around a third in the top 1% are business owners, including 14% who are partners, disproportionately working in hedge funds, law firms and the medical sector.

In addition to earning more, business owners and partners tend to pay less tax than employees. This lower tax treatment for the self-employed is the result of government policy, giving tax advantages to higher earners.

The highest-income people are very over-represented in the country’s south east corner, most of them are men, and many are in their 40s and 50s. This geographic and demographic concentration may be one reason why many of those on high incomes don’t realise quite how much higher their incomes are than the average.

The sheer scale of the gap between the top 1% and the top 0.1% may also help explain that.

It is also important to realise that many more than 1% of the population will at some point in their lives have incomes that will place them in the top 1%. Very few will be in the top 1% all their lives.

What many people will want to know is how some people have such high incomes. For example, do those earning hundreds of thousands of pounds a year derive such rewards from innovations and activities that benefit all of us, or are they exploiting market power at the expense of workers on lower incomes?

These are among the key questions that the IFS Deaton Review of inequalities, which we recently kicked off, will look to address.

Robert Joyce, Deputy Director at the IFS and an author of the report

An essential part of the Financial Planning process is to consider tax and consider ways to reduce or mitigate tax bills. By making use of available allowances and reliefs to pay less in tax, you can retain more money to put towards your financial objectives.

Jon DoyleDo you live in one of these income tax hotspots?
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How well are you prepared for death?

Are you well prepared for death?

It sounds like an alarming question. Death is still a taboo topic for many people in the UK; it’s not especially comfortable to discuss our mortality, even with our family or closest friends.

But because death is an inevitable part of life, and one which has financial consequences, it is essential to discuss. Preparing for death should be one part of the agenda you cover with your financial planner.

New research has found that people in the United Kingdom are better prepared than ever for death.

The research, based on a survey carried out by Will Aid, found an increase in those who have their affairs in order. 

Asking over 18s whether they have made a will, the researchers found that 50% now have. This is up from 47% last year.

Will Aid is a charity will-writing campaign which takes place in November each year. The campaign encourages people to write a will, donating their solicitor fee to charity.

Graham Norton, a Will Aid patron, said he had come face-to-face with death on two occasions.

“On the first, my own life was threatened after I was stabbed during a mugging in Queen’s Park and lost nearly half my blood.

“The second involved the loss of my father Billy who died shortly after being diagnosed with Parkinson’s disease.

“Both made me realise that life is too short. And both made me accept that death is very, very final. There are no comebacks, revivals or retaliations.

“A will is therefore a vital document that allows you to pass on your final wishes to the people you love most.”

Fellow Will Aid patron Dame Judi Dench said: 

“Death is always devastating but it is also inevitable.

“Making a will is a way to confront this certainty in the knowledge that, by completing the paperwork, you will be making the experience less traumatic for your loved ones.”

While 50% of surveyed over 18s having a will in place is a good improvement on a year earlier, it still means that half of UK adults have failed to get their act together.

Dying without a will, known as dying intestate, can have devastating consequences for our loved ones, as assets are distributed in line with the law, rather than our wishes.

Jon Jacques, Chairman of Will Aid, said: 

“When we think of the considerable assets celebrities have, we assume that because of the large sums of money involved, they would have their affairs in order, but this isn’t always the case.

“There is a misconception that if you die intestate, your relatives decide how the assets are split. But when a person dies without leaving a valid will, the estate must be shared out according to the rules of intestacy. Only married or civil partners and some other close relatives can inherit under these rules. 

“Failing to make a will can mean that your wealth could go to people you did not intend it to and leave your family and loved ones without the provisions that you wanted.”

The research found that some parts of the UK are doing better than average, including adults in East Anglia, where 58% have a will in place.

Regions falling behind the average include Northern Ireland, with 63% of those surveyed admitted they don’t have a valid will in place. In the North West of England, 58% of adults said they don’t have a will.

Mr Jacques continued: 

“Events such as becoming a parent, grandparent, losing a partner, getting divorced or separated, inheriting assets and getting married are all life events that we should update our wills to reflect.

“Buying a house, large investments, the acquisition of additional properties or businesses and retirement plans should all be kept current in terms of the contents of your will.

“Failure to update changes in your circumstances can leave the loved ones you leave behind financially unprotected.” 

Will Aid Month in November should act as a good prompt to get a professionally written will created, with the help of a solicitor who specialises in this service.

Law firms are volunteering their time and expertise during November to write wills, with fees waived so the equivalent can be donated to Will Aid instead. Donations to Will Aid support the vital work of nine partner charities.

The suggested voluntary donation for your basic Will Aid will is £100 for a single will and £180 for a pair of mirror wills.

Those who wish to make a will can book their November appointments from September onwards via the Will Aid website at https://www.willaid.org.uk/ or by calling Will Aid on 0300 0309 558.

Last year Will Aid raised more than £1million for its charity partners – ActionAid, Age UK, British Red Cross, Christian Aid, NSPCC, Save the Children, Sightsavers, SCIAF (Scotland) and Trocaire (Northern Ireland).

Jon DoyleHow well are you prepared for death?
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The World In A Week 32 – Judgement Day

Geopolitical tensions escalated last week following the attack on Saudi Arabia’s oil production facilities. It has been estimated that the attack destroyed c.50% of Saudi production, although there were assured statements from the capital that oil exports would be maintained, and lost capacity would be expediently rebuilt. Following a huge initial jump in the oil price, volatility in the commodity subsided towards the end of last week. However, while the volatility in the oil price subsided, new US sanctions against Iran meant that tensions in the Middle East increased markedly with the US also pledging military support to Saudi Arabia to boost their air and missile defences. Iranian-backed Houthi rebels have claimed responsibility for the drone and missile attacks although Iran denies any involvement. We expect tensions to remain elevated.

The Federal Reserve moved in line with consensus last week, cutting interest rates by 25bps; Trump was quick to lambast Chairman Powell for lacking “guts”. While a twitter outburst from Trump is of little surprise, what is a surprising is how the decision to cut interest rates has caused division with the Federal Open Market Committee; seven members voted to cut, two members voted to maintain, and one member voted to cut further. Powell cited that a second cut was necessary due to slowing political growth and worsening trade tensions however, the dissent within the committee will make it more difficult to decipher the trajectory of interest rate policy, resulting in polls for further rate cuts falling from 100% to 80%.

Several weeks ago, we wrote about the suspension of parliament, titled “Prorogue” and in the UK, parliament remains suspended as a result of the invocation of prorogation. In the week ahead, we expect a decision from the Supreme Court over whether Boris Johnson acted unlawfully by suspending parliament; to be clear, this is not about Brexit, it is a legal argument. After all, there is no one place where all the rules of government are written down, which means the Supreme Court must decide between the competing legal arguments, providing a stress-test of another kind, that of our unwritten constitution.

Jon DoyleThe World In A Week 32 – Judgement Day
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Did we get it all wrong about baby boomers?

Post-war baby boomers were once labelled the ‘selfish generation’. With boomers benefiting through the years from free education, rising property prices, booming investment markets, and gold-plated final salary pensions, it’s perhaps a reasonable accusation to make.

But new data has challenged the long-held assumption that members of the baby boomer generation get an unfair share of benefits in society, relative to younger people.

According to the Office for National Statistics, younger people tended to receive higher state benefits than older people did when they were young. Younger people today are also paying less in tax than their older relatives did at the same age.

More recent younger generations have enjoyed faster income growth in their twenties, compared to older generations. However, inequality in property wealth remains a big issue, with the baby boomers sitting on vast fortunes tied up in their homes.

The data shows that, in general terms, house income tends to increase at the fastest pace during our twenties, across all generations. Average household income then falls again in our mid-50s. So this appears to show that younger people have it better today than previous generations when it comes to taxes, benefits and income progression. Despite this, younger people do find it much harder now to get a foot onto the property ladder.

The difficulty in becoming a first-time buyer is one source of intergenerational unfairness. That was the conclusion of a House of Lords committee, which found that 60% of potential first-time buyers could not access property wealth without some external support.

That committee urged the Financial Conduct Authority to intervene, to encourage more innovation in the sector, which could result in younger people buying their first homes.

Some different research has found that baby boomers are becoming increasingly peeved at being on the receiving end of blame around home hogging and the resulting intergenerational unfairness.

According to the research from over 50s membership organisation Saga, more than two-thirds of its members feel their generation is unfairly criticised for having a disproportionate share of society’s advantages.

The members polled for this survey said their motivation for buying a property and consistently saving was to help provide for future generations. As a result of regular press commentary reinforcing the perception of intergenerational unfairness, six in ten Saga members feel the relationship ‘divide’ is increasing the gap between older and younger generations.

The idea that the older generations are somehow depriving their younger counterparts of wealth and opportunity is not only damaging but completely false. Many have built up their wealth, often limiting their own spend, to ensure they’re in a position to financially help younger family members.

With eight in ten feeling the strain from this inter-generational conflict we hope that people start to see through the headlines to the facts – that the overwhelming majority want to use their financial security to help their wider family prosper.

Lisa Harris, Group Head of Communications at Saga

Baby boomers who are often accused of ‘hoarding homes’ had little direct control over the economics that resulted in property price growth during their lifetimes. When they were younger, boomers were encouraged to buy property, with homeownership an aspirational message around becoming self-sufficient and providing for future generations.

80% of those surveyed said they are saddened by intergenerational conflict, and 85% said they would financially support children and grandchildren if they were in a position to do so. This pledged financial support includes helping with childcare, buying a home, and lending money.

The story of the generational divide has become so ubiquitous that people now believe it, and these divisions are being capitalised upon by policy-makers to find a rationale for clawing back benefits for older people.

In fact, the whole idea that there’s a generation of greedy people sitting on the nation’s assets is insulting and wrong. I’m concerned about how vicious this debate is becoming.

Findings such as these from Saga indicate that older and younger generations are not at war with each other, and I hope this can help to counteract the stereotypes and scaremongering.”

Dr Jennie Bristow, a lecturer at Canterbury Christ Church University and author of books on inter-generational issues
Jon DoyleDid we get it all wrong about baby boomers?
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