After a week of noise, increased restrictions on the populations and revelations that someone with a vast business empire paid accountants and solicitors (and hairdressers) huge sums to reduce their tax bill, markets have continued to plod on.
To be clear this is not a ‘photoshopped’ image but is a genuine one of his >10,000 tweets – we checked. So, this week we look behind the noise and bring you:
-Don’t settle for average
-Would you like a £50 Amazon voucher?
-What to do if you are being made redundant
-The Second Wave
-Forecasting vs Adapting
- Don’t settle for average
Following last week’s announcement of across the board interest rate cuts from NS&I, we’ve been busy finding suitable alternatives for clients. Our standout pieces of advice:
- Don’t rush – NS&I rates won’t change until the 24th November
- Don’t accept less than you should – a recent survey found the average rates for instant access cash accounts are 0.07%pa gross rising to 0.44% pa gross for a 1-year fixed rate. However, with research instant access rates above 1% are available.
- Don’t forget FSCS protection – Financial Service Compensation Scheme. Whilst NS&I investments were 100% backed by the Government, most bank accounts have a personal limit of £85,000 protection (£170,000 for a couple). Remember this is per banking institution not per bank account, above these levels and your cash is 100% at risk.
- Don’t forget why you have cash. Hold it for the right reasons – peace of mind, short term security, emergency funds, liquidity, ready for a specific need/purchase in 2 years’ time. Not for the long term (5 years+). In real terms cash will lose you money over time versus inflation and the longer the time period the more certain and pronounced this effect becomes.
- Would you like a £50 Amazon voucher?
September saw the Rightmove House Price Index rise another 0.2%, meaning it has risen 5.0% over the last 12 months. The housing market at first glance appears to be defying gravity, but when you consider the number of transactions that have been delayed due to the pandemic, the tax break of a stamp duty holiday, the Help to Buy scheme and the desire to move after months of lockdown it begins to make sense. Then add into the mix all time low interest rates and the reason is clear: Broadly, it has never been cheaper for the average person to borrow money to buy a house.
Likewise, for those with existing mortgages it’s a good time to review the interest rate you are paying. Typical mortgage lender standard variable interest rates are around 4% depending on the lender. Whereas a new 5-year fixed rate can be secured at 1.42% depending on your personal circumstances. As an example, a £100,000 mortgage that benefited from a 2% reduction in interest rate would see savings of £2,000 a year.
What does this have to do with an Amazon voucher? Well, we reward anybody who refers anyone to us who completes a mortgage or remortgage with us with a £50 voucher. You win and they win.
- What to do if you are being made redundant
The latest data from the Office of National Statistics (ONS) suggests that around three million workers – around 12% of the workforce – were still on furlough or partial furlough in early September. Whilst Rishi Sunak has announced a new support scheme to enable companies to save viable jobs, he has acknowledged that he cannot save every job. Indeed, looking at the details of the new scheme it is difficult to see many jobs being saved and whole industries seem to have been left behind – events, sports & nightclubs being the most obvious.
It will be no surprise if there are substantial redundancies nationwide over the coming weeks and months. If you or someone you know is affected by this it can be a stressful time and there are some key pitfalls to watch out for:
- Loss of Child benefit payments – if your taxable income increases because of a taxable redundancy payment above £50,000 you will begin to lose this benefit – with it fully unavailable if your taxable income increases above £60,000.
- Loss of Personal Allowance – If your taxable income increases above £100,000 you will lose £1 of your personal allowance for every £2 of additional income creating an effective 60% rate of income tax.
- MPAA – the Money Purchase Annual Allowance – If you are made redundant and are over the age of 55 it could be tempting to raid your pensions savings. However, apart from meaning you’d have less saved for your retirement, taking an income from your pension could dramatically reduce your ability to fund a pension in the future. If you trigger the MPAA you may only be able to contribute £4,000 a year into your pension regardless of future earnings or allowances you may have accrued. If withdrawing money from your pension is the only option there are different ways of doing this and it’s important to take advice as you may be able to avoid the MPAA restriction depending on your needs and circumstances.
Depending on your circumstances you may receive a redundancy package that includes an element of salary, bonus, pay in lieu of notice or holiday pay entitlement as well as the termination payment itself. Each of these constituents has its own tax treatment and therefore could affect your ongoing tax and benefit positions differently.
Pitfalls aside, whilst it may seem counter-intuitive, being made redundant can be an opportunity to maximise your tax efficiency and make any redundancy payment you receive work harder for you. Depending on your circumstances a pension contribution could reduce your taxable income for the tax year and mean you could reclaim your personal allowance or indeed entitlement to child benefit. It could also be an opportunity to use your pension annual allowance that would otherwise have been tapered away due to your higher level of earnings.
If you are considering making a pension contribution timing is also important. If it is made in the tax year after redundancy it may not have the same tax saving benefit and may be limited by changes in your income.
Over the last few weeks, we’ve seen various examples away from redundancy where a pension contribution has also been the right answer – whether it’s due to an unexpected profit in a business, long term protection from creditors, income/corporation/inheritance tax efficiency, or indeed simply to boost retirement savings effectively.
It’s led to without doubt our favourite quote from a client this week – “I’d better stuff it in a pension then!”.
- The Second Wave
When an earthquake hits it is not clear if it is ‘The Big One’ or if there will be aftershocks. Earthquakes reflect the tectonic plates of Earth colliding with huge force and are a good analogy for what is happening in investment markets, as the force of an economic collapse collides with unprecedented fiscal and monetary stimulus. March certainly did experience earthquakes in markets, and we are all keen to understand if the current second wave of CoVid infections will be an aftershock or ‘The Big One’.
Like earthquake watchers, Royal London know nothing about the future with any real certainty. They do however think this is more likely to be an aftershock than ‘The Big One’, which they belive happened in March. The main reason they think this will prove to be an aftershock for markets, relates to their belief that the only risks that really matter in investing are the ones no one knows about. As soon as something is known as a risk (like an aftershock) behaviours and expectations adjust to accept and then minimise the impact of that risk: This provides a natural buffer should the risk occur.
This is what has happened with respect to a second CoVid wave. We have all been aware this was a highly likely event and societies and healthcare systems have adapted. We are in a much better position to manage the second wave than the first. Equally investor expectations have already discounted a second wave, through falling share prices in those industries most affected by CoVid. As a result, they and others think the second wave will be something of a brake on the economic recovery, but not as serious as in March, and that equity markets have already discounted this.
Brewin Dolphin added to this by commenting this week that CoVid has clearly had a devastating effect on the profits of many companies and 2020 and 2021 are expected to be heavily impacted. But the difference between March and now is that the volatility which took place earlier in the year occurred because investors suddenly had to recognise the loss of the next few years’ earnings. Furthermore, policymakers were at the time trying to tighten monetary policy, whereas now they recognise they need to loosen it. It was what Donald Rumsfeld would call an unknown unknown – the significance of which dawned on investors very rapidly indeed. That kind of abrupt adjustment is hopefully behind us.
- BroVid/Skinny Brexit
Time appears to be running out on a Free Trade Agreement (FTA) between Britain and the EU. However, there is rumoured political will on both sides to ensure unnecessary economic damage is not done to either side in the midst of the pandemic. It’s for that reason Michael Gove has been dispatched to Brussels to try and form some agreement.
Given the time scales involved and the work required it is almost impossible to see a full deal being hammered out before the transition period ends. However, it now wouldn’t be a surprise to see a Brexit/CoVid (BroVid or Thin Brexit) compromise that allows key trade to continue without agreement on some of the thornier issues. Nonetheless, to even get to this skinny position, compromises will need to be made by both sides.
- Forecasting vs Adapting – the Future
There are two schools of thought with respect to investing. The first, traditional school of thought is that investing is about forecasting. It is about looking at all the variables in front of us, taking a view as to how the future looks and investing behind it. There is another view however, that markets and economies are so complex and dynamic that forecasting is almost impossible and often damaging to attempt. As UBS put it in their marketing “the future … is hard to predict, especially when it comes to risk”. This year, of all years, has demonstrated that. Consequently, investing must also be about adapting.
So, we favour investment companies that are adapting and engaging with initiatives such as the UN’s Principle of Responsible Investment and we see this as a core corporate driver that is already impacting markets and alongside the UN Sustainable Development Goals and regulatory frameworks across the EU, Canada and even China, will force all companies to adapt over time.
Whilst there are many examples of companies adapting their products to new circumstances, such as Apple removing the need for FaceID authorisation on contactless device payments on TfL (thus stopping the need to remove a mask in a crowded tube station), or Quantas managing to sell out a flight to nowhere in 10 minutes (seats on the 7 hour round trip including flyovers of Uluru, the Great Barrier Reef and other landmarks costed between £445 and £2,145). This transition to sustainability of decision making across all business decisions will drive fundamental change.
This doesn’t mean ripping investments up and starting again, but it does focus the mind on which companies are embracing change and which aren’t. This week Baillie Gifford echoed our thoughts reminding us that investing isn’t about speculating over the short term, it’s about understanding the long-term opportunities for companies and investing in the ones prepared to adapt, evolve, and thrive. And they should know, ignoring the fortune they have made from investing in Tesla, they also invested in (amongst others) Tencent in 2003, Hermes in 2001, Rightmove in 2006 and Amazon in 2004.
As always, please do not hesitate to contact one of our Financial Advisers at our Leamington Spa or Coventry offices if you wish to discuss this in further detail.