Newsletter – April 2018

With Brexit now less than a year away, how insular are your investments?   

Brexit – or more accurately the start of the transition/implementation period of the UK leaving the EU – begins on 29 March 2019. By the end of the following year, the UK’s remaining links to the EU are due to be cut.

Since June 2016, when the Brexit referendum took place, the FTSE 100 has been one of the world’s poorest performing major indices. So it is perhaps no coincidence that, in March 2018, a survey by the Bank of America (BoA) of 163 global investment managers found the UK stock market was least popular of 22 wide-ranging investment asset classes.

If you live and work in the UK, then naturally enough you tend to think in terms of UK-based investments, be they shares, bonds or property. The BoA survey is a reminder that taking such a parochial view of investments may come at a price.

Diversification is one way investment professionals limit risk and potentially increase returns. For example, the most recent report from the Pensions Regulator showed that in 2017 the average UK defined benefit pension scheme had only one fifth of its total shareholdings in UK quoted shares.

International investment offers:

• Access to industries not represented on the UK stock market, such as Amazon or Daimler-Benz.
• The opportunity to benefit from different economies and different stages of the economic cycle, e.g. emerging markets. Both are especially important when UK economic growth is forecast to remain weak.
• Exposure to foreign currencies, which can provide an additional boost to returns when sterling is weak, as it was in the 12 months following the Brexit vote.

For the strategy appropriate to your circumstances, please talk to us.

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.

There are advantages to planning your ISA investments around the start of the tax year.  

With ISAs all the taxation benefits occur after investment is made, yet the focus is often on year-end contributions. Various articles on ISAs filled the weekend press in March, and are set to re-emerge like a financial sign of spring in 12 months’ time.

For other investments, such as venture capital trusts and pensions, there is a logic in waiting until the end of the tax year – you have a better idea of your income for the year and hence your tax position. The same is not necessarily true of ISAs.

Indeed, it is sensible to contribute to ISAs as early in the tax year as possible, to get the tax benefits for as long a period as possible. As a reminder these are:

• No UK tax on dividends, an important factor as the dividend allowance has been cut from £5,000 to £2,000 for 2018/19.
• No UK tax on interest earned.
• No UK capital gains tax on any profits realised.
• Nothing to report to HMRC on your tax return.
• Allowing a surviving spouse or civil partner to inherit your ISA benefits, effectively treating your ISAs as joint investments.

Making an ISA contribution does not necessarily mean paying in cash. It can include selling an existing investment you hold personally and repurchasing it within an ISA. You may crystallise some capital gains in the process, but at the start of the tax year you almost certainly still have your full £11,700 annual exemption available.

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.

For further information on ISA’s please contact one of our advisers on 01793 881602 or download our free Key Guide:

Making the most of ISA’s

Our full range of Key Guides can be found at:
www.polestarfa.co.uk/resources/key-guides

Important changes for venture capital schemes and enterprise investment have recently come into effect.   

New ‘risk-to-capital’ conditions apply to investments in venture capital trusts (VCTs), enterprise investment schemes (EISs) and seed enterprise investment schemes (SEISs). The changes took effect on 15 March 2018, when the Finance Act 2018 received Royal Assent.

Broadly speaking, an EIS or SEIS company, or a company in which a VCT is investing must both:

1. Have objectives “to grow and develop its trade in the long term”.
2. Carry a “significant risk that there will be a loss of capital of an amount greater than the net investment return”.

The changes are intended to end venture capital schemes – particularly EISs – which often did little more than return the investor’s original capital at the end of the tax relief clawback period. Such schemes were usually asset-backed, typically focusing on pubs, ship ownership/chartering or film production, where pre-sales were in place.

For many years the Treasury tried to exclude such ‘safe’ trades, only for other low-risk options to emerge. The new risk-to-capital condition, and its somewhat subjective criteria, is designed to put an end to this cycle.

The minimum percentage of ‘qualifying holdings’ (risk investments in small unlisted companies) for a VCT has also increased from 70% to 80%. This, along with other measures in the Act, aim to increase the level of risk undertaken in such schemes.

The Chancellor has also issued a consultation paper on a new form of EIS fund aimed at knowledge-intensive companies. The document suggests possible restructuring of the EIS tax incentives, with a greater backdating period and/or tax-free dividends after a minimum period.

The VCT, EIS and SEIS offerings in 2018/19 are likely to differ from earlier years. They may also be thin on the ground as promoters acclimatise to the new higher-risk regime and digest the heavy flow of fresh capital in 2017/18.

More than ever, if you want to invest in this area, expert advice will be vital.

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.

The Chancellor’s Spring Statement on 13 March was, as promised, a low-key event.  

Last autumn, Mr Hammond announced he would have only one ‘fiscal event’ each year – an autumn Budget. The Spring Statement would become a response to revised projections from the Office for Budget Responsibility (OBR).

The Treasury has had to provide an economic commentary at least twice a year since the Industry Act 1975 was passed. Many Chancellors have taken this to mean they can have two Budgets a year – one formal Budget and another informal mini-Budget.

On 13 March the Chancellor stuck firmly to the principle of one annual fiscal event and did not announce any new spending or tax measures. It still took Mr Hammond 25 minutes to deliver his speech, however, owing to 13 new consultation papers.

Amongst the consultations were several focusing on the digital economy and the loss of tax revenue, particularly from traders based outside the UK. One paper will also review “the future role of cash”, with hints that copper coins and the £50 note may not survive much longer.

The OBR’s economic projections were marginally better compared to the Autumn Budget, but much worse than two years ago, before the Brexit vote. Unsurprisingly, the OBR’s calculations suggest there will be very little scope for tax cuts. The government is forecast to borrow £21.4 billion in 2022/23, ending the period with a total debt of just under £1.9 trillion.

With so much red ink, if you want to cut your tax bill, acting yourself is more likely to deliver savings than waiting for the chancellor.

The value of tax reliefs depends on your individual circumstances. 

Tax laws can change. 

The Financial Conduct Authority does not regulate tax advice.

To be successful, investors need an attitude of healthy optimism. This idea is based on simple logic which is backed by evidence. Securities have delivered positive returns in the past and it’s reasonable to expect that they will continue to post positive returns in the future. However, it is not reasonable to expect returns to be positive every day. We should expect good days and bad days, with the average being good. And because we don’t know which days will be good or bad, we should act as though all days will be good because we can’t predict them and don’t want to miss them when they occur.

This attitude is helpful both when markets are high, because it reminds us that they can go higher, and equally when markets have fallen, for exactly the same reason.

David Jones,
Head of Financial Adviser Services, EMEA and Vice President, Dimensional

It is worth looking at what your pension pot could buy for your retirement. 

The importance of pension contributions has been bolstered by the rollout of auto-enrolment pension schemes. However, it is not as clear what your savings will give you when you come to retire.

For example, Louise, a healthy, non-smoking 65-year-old, reaches retirement with £1,000,000 in her pension plan. If she uses the entire fund to buy herself an inflation-proofed income, what will be her first monthly pension payment before tax is deducted?

A. £2,500
B. £3,000
C. £3,500
D. £4,000

The answer is A, based on current pension annuity rates. After tax, if Louise has no other income, her monthly payment will be about £2,200. Include a 2/3 widow’s pension and the gross amount drops by about £400 a month (roughly £320 after tax).

This may be a surprise as the National Living Wage is nearly £1,200 a month for a 35-hour week. Especially when you remember Louise forgoes a tax-free lump sum of up to £250,000 in favour of a higher income.

The income of £2,500 a month (£30,000 a year) is only 3% of the pension pot, but it is RPI-linked. Importantly, because it is an annuity payment, it is also guaranteed throughout life – however long that may be.

Whilst annuities have gone out of fashion, the rates set a base line for retirement planning. Alternative retirement incomes, such as income drawdown, all carry some form of investment risk, meaning the potentially higher income available does not have the same degree of security.

This means the rise in automatic enrolment contributions from April is a necessary start on the way to building up adequate retirement funds. However, a realistic level of contributions will still be much higher for most people. Why not ask us what yours should be?

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. 

The value of tax reliefs depends on your individual circumstances. 

Tax laws can change. 

The Financial Conduct Authority does not regulate tax advice.

Last autumn, the Financial Conduct Authority unveiled its Financial Lives Survey¹, a study that tells us much about the financial arrangements made by adults of all ages in the UK.

One of the findings was that 31% of UK adults, around 15 million people, have made no pension provision to supplement their state pension entitlement and therefore could be facing a bleak future in retirement.

The report highlighted the number of people aged over 50 who are not contributing to a pension and only have a few years left to build one up before they reach their 60s.

When questioned about their lack of provision, 32% of respondents said they feared they had left it too late, 26% said they were unable to afford one, and 12% said they were relying on their partner’s pension to provide an income in retirement.

Confusion surrounding pensions 

Despite nearing retirement, around a quarter of those in defined contribution pension schemes didn’t know how much they had in their pension pot. Worryingly, 18% of those who have accessed a defined contribution pension in the last two years weren’t able to confirm what they had done with their money, so didn’t know if they had taken an annuity or gone into income drawdown.

Everyone approaching retirement deserves the best and most comprehensive advice which looks not only at their pension requirements, but at their wider financial planning needs. This should include a review of existing investments and savings, and financial goals such as passing money on to future generations.

Help is at hand

Whatever stage of your working life you’ve reached, it’s important to take professional advice about your pension. More and more people are realising that it’s never too late to act on their retirement planning, or too early to get their pension arrangements on track. After all, retirement should be an enjoyable and fulfilling stage of life, not a time spent worrying about money.

If you’re self-employed, an employee, work part-time, run your own business or have accumulated pension pots with past employers, your adviser can offer you the right advice to help you build up your pension pot in a tax-efficient way. And when you reach retirement, taking advice can help you make the best choices for your pension savings, and help ensure that your money lasts throughout your later years.

If you’re making plans for your retirement and would like some professional advice, then please get in touch. ν

1 FCA, Financial Lives Survey, Oct 2017

The value of pensions and the income they produce can fall as well as rise. You may get back less than you invested.

For further information on Financial Planning please contact one of our advisers on 01793 881602
or download our free Key Guide:

The financial planning journey

Our full range of Key Guides can be found here

Members of the public are being warned not to fall for a telephony scam which asks you to make premium-rate calls to the Insolvency Service. 

The Insolvency Service is a Government agency that supports people in financial distress, tackling financial wrongdoing and maximising returns to creditors.

They have been made aware of a scam where members of the public are receiving telephone messages to make unscheduled and unnecessary calls to the Insolvency Service.

Not only are unsuspecting members of the public being asked to make unnecessary calls but they are being asked to dial a telephone number that although does connect to the Insolvency Service, is not one of their official numbers and is premium-rate that costs a lot of money.

According to the Government agency the scam appears to be instigated by a website based outside of the UK.

They Insolvency Service has given the following advice;

• If you’re being asked to call the Insolvency Service but you are not going through a bankruptcy or insolvency matter – be careful as it could be a scam phone call.
• Take a look at the number you’re being asked to call – if it looks like it’s a premium rate number then it might not be legitimate.
• If you’re still unsure about the number, check the official Insolvency Service website to see if it is one of our numbers.
• You can also check numbers using a standard search engine as if it is a legitimate number you will be taken to an official website.

Read more on the Insolvency Service website:

https://www.gov.uk/government/organisations/insolvency-service

If you think you have been a victim of fraud you should report it to Action Fraud by calling 0300 123 20 40 or by using the online reporting tool.

If you have been affected by this, or any other scam, report it to Action Fraud by calling
0300 123 2040, or by using the online reporting tool at www.actionfraud.police.uk

Please note: Polestar is not responsible for the content on external websites.

Thinking about your life insurance needs may not be the most cheerful of tasks, but arguably it’s one of the most important financial products anyone can take out, and one of the best ways of leaving loved ones provided for financially.

Life insurance provides a lump sum on death, often optionally including diagnosis of a specified critical illness, whilst wider protection cover can help provide an income for families hit by an accident or sickness.

What do you need to cover?

There is no one-size-fits-all answer to this question; the answer will depend on your personal circumstances, but there are some common scenarios. As it’s often their single biggest outgoing, many people are concerned to protect their mortgage, and provide funds to help their loved ones maintain a good standard of living if they were to die.

Parents undertake many unpaid responsibilities, including childcare, cooking and cleaning, and often want to ensure that there would be money available to provide these vital services if they were no longer around. Then there’s education – an insurance payout could ensure that children are able to continue at the same school, or can afford to go to university.

Critical illness insurance can provide a cash sum on the diagnosis of a serious illness during the policy term, and can often be combined with life insurance. Income protection insurance is a popular choice too. These policies are designed to payout if the policyholder is unable to work and earn money due to illness or injury, and, in some cases, forced unemployment.

There’s a wide range of policies and benefits available; talking to us will help you make the right choice.