Marginal Gain – November 2019
So, no BREXIT and no Budget to make comment on for this month! We now have a General Election for the 12th of December so we must now consider all possible outcomes including a Labour administration and a “hung” parliament. Also, it will soon be Christmas!
I have said it more than once, but a well-diversified portfolio which is in line with your attitude to risk and is reviewed on a regular basis is the best option to cover off any short term fluctuations and so it is a case of letting the process take its course. Obviously if you have any questions then please do not hesitate to contact us.
November marks an end of an era for Carnelian as Caroline, our first recruit, has taken a lifestyle decision to re-locate to the Suffolk coast. Commuting to Milton Keynes is therefore not an option and so we wish her good luck. We have recruited new members to the Team as replacements and over the coming months, no doubt you will be engaged with them.
Investors prefer human advice on charges and performance
The demand for face to face financial planning advice continues to be valued as investors start to appreciate the role of the planner rather than using a digital or DIY solution.
Two solicitors are now examining possible claims against Hargreaves Lansdown in the wake of the closure of Neil Woodford’s Equity Income fund. Law firms Slater & Gordon and Leigh Day are investigating whether consumers who invested in Neil Woodford’s funds through Hargreaves Lansdown’s platform, multi-manager funds or advisers have legal recourse with the courts or the ombudsman for any losses they might incur.
The Woodford Equity Income and Income Focus funds both featured on the Hargreaves Wealth 50 buylist even after concerns were first raised about the level of unquoted and hard-to-sell assets it held in late 2017. Woodford’s Equity Income fund also featured in six of Hargreaves’ own multi-manager funds, making up between 2 and 11 per cent of each portfolio.
The potential for a conflict of interests is therefore very strong considering the Woodford Equity Income fund was still on their buylist until the point at which it was suspended on June 3. The subsequent decision to wind-up the fund is expected to crystallise losses for investors.
On a separate note, robo-advisers should consider hiring human advisers to satisfy investors’ needs, particularly for the process of explaining fees and charges, latest data has suggested.
In research published by fin-tech firm Nucoro last month a survey of 1,028 UK retail investors showed more than half wanted to speak to an actual adviser when understanding the fees and charges associated with their investments.
Demand for human interaction was also high among investors who wanted to better understand the performance of their investments, with 43 per cent citing this as the stage in the investment process at which they would want to speak with an adviser.
Selecting investment products, defining investment goals and understanding tax wrappers also all featured prominently in investors’ preference for a human adviser.
But the preference to be advised by a human did not deter investors from the idea of investing digitally, with more than half, at 53 per cent, agreeing they would consider using a robo-adviser platform.
Robo-advice platforms are a relatively new development in the wealth management sector and are clearly set for strong growth, but this will be driven by younger investors with low capital values. The heartland of the independent financial planning sector remains with those clients who need holistic investment, tax and financial planning.
Impact of the Delayed State Pension Age for Women
For women born in the 1950s the rising state pension age is a harsh reality. Despite a recent challenge in courts, there are no immediate plans to reverse the announced changes. The result will probably mean more years in work, contributing more into a pension, and making sure any investments are working for their retirement goal.
Plans to increase the state pension age were first announced in the Pension Act 1995 but these changes were accelerated as part of the Pension Act 2011.
Campaign groups such as The Women Against State Pension Inequality and Backto60 have claimed these changes were implemented unfairly, with little or no personal notice. The groups, which are calling for compensation for those affected, have also claimed that changes were implemented faster than promised with the 2011 Pension Act and left women with no time to make alternative plans, leading to devastating consequences.
For female baby boomers born in the 1950s, this meant an increase in the state pension age from 60 to 65 in November 2018. Further gradual increases – for both men and women – are also planned for the next years, with the state pension age rising to 66 by 2020, to 67 between 2026 and 2028, and to 68 between 2044 and 2046.
According to Helen Morrissey, a pensions specialist at Royal London, for women in this situation the ability to be able to work for longer, even on a part-time basis, will help them to bridge the gap to state pensions age. She said: “Remaining in work also means many will be able to continue contributing to a pension – advisers should recommend that people contribute more than the auto-enrolment minimum wherever possible.
“This is especially the case if the employer offers a matching contribution where they match the employee’s contribution up to a certain level – for instance 6 per cent.” Ms Morrissey also noted that ensuring the pension is appropriately invested is also important.
She said: “If the client is six years from retirement and does not want to purchase an annuity with their fund, for instance, then advisers can ensure the pension remains invested for growth. “For those unable to keep working, then it is important that they check their benefit entitlements and plug any gaps in their national insurance contributions to ensure they can draw the maximum state pension.”
Hopes for a reverse in the government’s decision to increase the state pension age were quashed by the High Court in October, when Lord Justice Irwin and Justice Whipple dismissed claims of age discrimination, sex discrimination and lack of notice. The judicial review, which took place in June, was brought by two claimants – Julie Delve, 61, and Karen Glynn, 62 – who argued that raising their pension age “unlawfully discriminated against them on the grounds of age, sex, and age and sex combined”.
Gem Durham, independent financial adviser at Obsidian, argued that the “real difficulty for these women were that they were not given sufficient time to plan for these changes – and that is where the change in state pension age is unfair on them”. She said: “The change itself had to happen, but they were not given insufficient warning. I am afraid for the majority of them the answer will be to remain working for longer.”
Tom Selby, senior analyst at AJ Bell, noted that while not everyone sympathises with the WASPI cause, it is important to acknowledge that “a significant number of women were genuinely caught cold by hikes in their state pension age and left in a dire financial position as a result”.
He said: “Some will have been lucky enough to be able to cover the financial black hole – in many cases tens of thousands of pounds – either from private savings, investments or both income sources, or from a spouse. Others will have needed to carry on working in order to bridge the gap.”
He argued that those women who took financial advice should have been made aware of the changes and been able to work through a plan to ensure they could still retire as planned.
Someone who needed to recover £40,000 of lost state pension income, for example, could have achieved this by saving an extra £3,000 a year, or just shy of £60 a week, over 10 years, he explained.
This assumes they enjoyed real investment growth of 5 percent a year, so if growth was lower they would have needed to set aside more money.
Mr Selby noted that there is no magic solution for those caught out by a rising state pension age, and this situation just emphasises the importance of people taking responsibility and building their own retirement fund.
He said: “For those who have a private pension, they could draw on this at a faster rate while they wait for the state pension to kick in. For many, a combination of income sources will be used to plug the gap.”
“However, investors need to be careful not to store up problems for later by withdrawing from their private pot at an unsustainable rate. This problem could be compounded if large income withdrawals are taken when markets are falling – so-called ‘pound-cost ravaging’.
“Others may choose to convert some of their private pension into a guaranteed income stream to replicate the state pension payment, although with annuity rates remaining persistently low this might not be the most attractive option.”
For those impacted by this change, financial advice is going to be essential. This is especially true if the decision is taken to delay taking a private pension and work up until the new, higher state pension age. In that situation, a review of investment strategy and asset allocation would be a sensible idea to make sure it remains appropriate.
Tax Change Rumours
The last 3 years of political paralysis has had one surprising benefit. As the political bandwidth has been eaten up by Brexit there have been far less time available for other things. This has meant a period of relative stability in terms of changes in financial regulation.
However, a new government with, potentially, a parliamentary majority might unblock the pipes and we could be looking at a torrent of changes over the next 12 months. At this point some of the upcoming changes are only rumours but, in this article, we’ll take a look at which we think are the most credible in relation to inheritance tax and capital gains tax.
Inheritance Tax Changes
Inheritance tax has long been a feature of political campaigns and the current rules are widely felt to be too complicated and unfair.
More than 5000 inheritance tax investigations are opened by HMRC every year which represent about 25% of the approximately 22,000 estates that pay IHT. 5,537 investigations were carried out in 18/19 which is down 9% on the peak in 13/14 but up 6% on 2015/16.
In April 2017 the Residence Nil Rate Band (RNRB) was introduced. This adds an additional nil rate band when you are leaving your main residence to your direct descendants. The introduction of the RNRB coincided with a 7.8 per cent increase in the number of investigations.
In a recent interview Gordon Andrews, from Quilters outlined what he felt were the problems.
Mr Andrews said: “Inheritance tax is infamous for being not only disliked, but complex and at times deeply unfair. On top of everything, there is almost a one in four chance HMRC will investigate your estate.
“Over the past number of years politicians have been keen to show they are cracking down on tax-dodgers and IHT is one of the departments that HMRC has been throwing its resources at.”
He added: “More often than not people aren’t deliberately trying to defraud HMRC and given the current complexity of the IHT system it’s really no surprise if things go awry.”
“All the complications surrounding IHT means getting financial advice is crucial to mitigate the chances of an investigation. It’s also vital to choose the right executor because the onus is on them if there is an investigation.
“Equally, if you are asked to be an executor of the Will you need to understand the responsibilities that come with it. This is not just another piece of admin; it can be an involved and time-consuming process.”
A review of IHT rules is already underway in order to simplify the system. In January 2018 the Office of Tax Simplification made some recommendations that may or may not make it into legislation. These include tighter rules on eligibility for business property relief. Business property relief grants an exemption to inheritance tax if the assets are held for 2 years. The direction of travel seems to be to align the test for business property relief with the stricter test for entrepreneur’s relief.
There was also some criticism of the rules around agricultural property relief which it is felt are unnecessarily complex and would benefit from simplification. A specific issue was felt to be the case of farmers who go into care and then are unable to return to work. At the moment this is dealt with on an adhoc basis leading to uncertainty and stress.
Another area of concern was the different classes of lifetime gifts. Many are familiar with the £3,000 annual gift allowance but the additional allowances for things like children’s marriages are needlessly confusing and are set so low that they probably aren’t achieving anything meaningful. One impressive and I suspect unlikely proposed change is reducing the 7-year rule for gifts to pass out of the estate to a 5-year rule. This would be combined with the removal of taper relief which means that assets caught within the 7-year period pay a partially reduced level of tax. The method of calculation is complex, and this would be a welcome simplification.
Capital Gains Tax
A think tank has urged the government to hike the rate of capital gains tax to match income tax levels in a bid to make the UK’s tax system fairer and increase government revenue.
Just Tax, a report from The Institute for Public Policy Research published in September, estimated the government could raise an extra £90bn over the next five years by taxing capital gains at the same rate as income.
Capital gains tax is subject to different thresholds than income tax and is generally lower for higher earners.
The think tank also thought an additional £15bn could be raised over the same period by removing the exemption of capital gains upon death, which currently means a deceased’s estate is not liable for capital gains tax.
On top of the potential benefits of reform, the current capital gains tax causes economic inequality and is unfair, according to the IPPR.
The report claimed two people who earned the same amount of money but from different sources could make very different contributions in tax, and those on larger incomes from a mixture of sources could have a lower average tax rate than those on lower incomes who received their income solely through employment.
The IPPR stated this was “fundamentally unfair”, claiming it distorted economic behaviour and created opportunities for tax avoidance.
Alan Chan, director at IFA Wealth & Pensions, said the IPPR’s proposals would be a “poor move” which “sent out the wrong message”.
He said: “We want to encourage more people to save and invest. By increasing the tax rates, it would reduce the incentive for savers.
“Significantly hiking up capital gains or dividends taxes to the same rates as income tax rates would be disproportionate to the level of risk taken for the investor.”
Mr Chan added capital gains were not guaranteed, highlighting that investors took risks to get such returns and changes to the tax would make investing outside of any tax wrappers unattractive.
He also thought such proposals could hurt those heavily reliant on savings and investments, such as retirees.
Sarah Coles, personal finance analyst at Hargreaves Lansdown, said the report underlined how tax allowances and rates could change overnight and she stressed the importance of wrapping savings and investments in ISA wrappers to protect money from tax regardless of policy change.
She added: “The think tank says its proposals are fairer than the current system. It underplays the fact that in reality, the vast majority of savers and investors pay tax on their income from work, they save and invest diligently for their future, and may pay a second round of tax on their investment income or gains.”
The think tank also proposed a fundamental reform of the income tax system, stating the current system of tax bands dated from the “pre-computer age” and was “no longer fit for purpose”.
We have been going through a period of market volatility and may be approaching a similar period of legislative volatility. There is no way to completely future proof a financial strategy against the whims of politicians. However, taking advantage of tax efficient vehicles such as ISAs and pensions and keeping in contact with your professional advisers is the best way to adapt to the changes.
Business Lasting Power of Attorney
A Lasting Power of Attorney is a legal document which allows another person (your attorney) to make decisions on your behalf should you lose the ability to make decisions for yourself due to accident or illness.
For example, if you own a business what would happen if you lost your mental capacity? If you did not already have a Lasting Power of Attorney in place, someone would need to apply to the Court for a Deputyship Order to enable them to act on your behalf.
The disadvantages to this would be that the process is expensive, lengthy (typically taking between 3-6 months) and the applicant may not be someone who you would have chosen.
In the meantime, nobody would be able to make decisions on your behalf and business accounts can be frozen even if they are held jointly with spouse, business partners or directors, risking the business failing due to lack of funds.
Having a Business Lasting Power of Attorney in place allows a person you have chosen and trust to take over the day-to-day running of your business straight away. These powers may include paying staff and suppliers, managing bank accounts and handling contracts.
There are different considerations for making a Business Lasting Power of Attorney, depending on what kind of business you own:
Sole Traders run their businesses as individuals therefore the business is not legally separate from the business owner and a lack of an LPA in these circumstances exposes your business to unnecessary risk.
Partners (general and limited) – will be subject to a Partnership Agreement together with the provisions of the Partnership Act 1890 or the Limited Partnerships Act 1907. If there was a provision to remove a partner due to mental capacity, this may be in breach of anti-discrimination legislation. A Business Lasting Power of Attorney would reduce the risk of such a claim.
Company Directors – similarly a removal of a director due to mental capacity could also result in discrimination claims. Directors need to check their articles of association for clauses in order to protect the company’s interests and avoid possible claims of discrimination. They should also check to see if any provisions of your articles may be considered discriminatory under the Mental Health (Discrimination) Act 2013 and amend by special resolution as necessary. It makes sense for all Directors to execute a Business Power of Attorney
It is possible to appoint more than one attorney, and specific attorneys can act jointly in some matters but separately in others.
Before your attorney accepts the role, you should ensure they fully understand and accept the responsibilities asked of them. They should also take out their own personal liability insurance to ensure they are protected whilst acting on your behalf and be committed to following the health and safety regulations and company policies.
In conclusion, if the worst were to happen your business would be able to continue to operate effectively and therefore makes good business sense.