Newsletter – March 2019

UK inflation fell below 2% for the first time in two years. 

January 2019 saw the lowest level of inflation since January 2017, with the rate recorded at 1.8%. The data was slightly better than had been expected, with the CPI rate falling to below the Bank of England’s 2% target for the first time in two years. One of the major contributors to the fall from December’s 2.1% rate was the drop in gas and electricity prices prompted by the introduction of the price cap on “standard variable” tariffs. The cap, operated by Ofgem, came into effect at the start of 2019. 

However, shortly before the January inflation figures were released in mid-February, Ofgem announced that the utility price cap would be rising by 10.3% from April due to a rise in wholesale energy costs. The unfortunate timing was partly down to the fact that the cap has a six-month summer/winter cycle, so the initial winter cycle has an abbreviated three-month lifespan. All of the big six energy suppliers have since responded with price increases to take effect from April. All other things being equal – which they are almost certain not to be – that means a blip up in annual inflation will occur in April.

A benign outlook

Despite the vagaries of the utility pricing, the outlook for inflation is relatively benign. The Bank of England’s most recent Inflation Report, also published in February, projects a slight rise in 2020, but only to 2.3% before fading to 2.1% in 2021 and 2022. Those projections are in turn derived from market expectations for base rate, which suggest it will not be until 2021 that base rate reaches 1%.

The Bank does hedge its forecast on future interest rates, with the inevitable proviso about Brexit: “The monetary policy response to Brexit, whatever form it takes, will not be automatic and could be in either direction.” This means that the Bank of England has no pre-set plans and could move interest rates up or down. Realistically, few economists believe that rates would rise, even in the most difficult scenario.

For investors, the main conclusion to draw from all this is that short term interest rates are expected to remain well below a rate of inflation that will be around 2%. As has been the case for most of the past ten years, keeping more than needed on deposit will continue to be a way of eroding wealth. 

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.

A European Court decision from 1990 is suddenly raising questions about a key element of pension taxation.  

On 17 May 1990, the European Court of Justice decided that gender equality should be applied to non-state pensions. The case, Barber v GRE, prompted a major overhaul in UK pension provisions. At the time most pension schemes had different pension ages for their male and female members, echoing the 65/60 differential that applied to state pensions. 

The Court’s judgement posed a particular problem for schemes that contracted out of SERPS, the old state earnings-related pension scheme. To contract out, the private scheme had to offer at least a guaranteed minimum pension (GMP) that, broadly speaking, matched what SERPS would have provided. This posed a classic Catch-22: the GMPs were unequal because SERPS was based on state retirement ages, but Barber said pensions had to be equal.

A problematic compromise

The fudged solution was to equalise total pension benefits. But this didn’t fully resolve the problem as pre- and post-retirement escalation rates were not the same for the GMP and non-GMP portions. As might be expected, the matter ended up in the courts and last year – 28 years after the Barber decision – the UK High Court ruled that GMP benefits had to be equalised. Equalisation will mean that some people will see their pension benefits increased, although the amounts will generally be small.

Cue a new problem, which has just emerged: if you have fixed protection (2012, 2014 or 2016) for your lifetime allowance, any benefit increase outside the normal inflationary adjustments means that the protection is lost. In extremis, for somebody with fixed protection 2012, a small GMP equalisation adjustment could cut their lifetime allowance from £1.8m to £1.03m (£1.055m from 6 April 2019). The newly unprotected sum would then potentially be subject to a tax rate of up to 55%.

HMRC is aware of the problem but has not acted so far. The situation serves as a reminder that if you benefit from one or more of the various forms of pension protection, their loss can be highly expensive and that great care is needed with any pension changes, even involuntary ones… 

The value of tax reliefs depends on your individual circumstances.

Tax laws can change. 

The Financial Conduct Authority does not regulate tax advice.  

Your April pay may look much the same as March’s, but it is worth giving your pay slip a close look.  

If you are an employee, your April pay slip is always worth checking, even if you pay little attention to the other eleven you receive over a year. The items to check include:

Salary 

Many employers change pay rates from 1 April, often coinciding with the start of their new financial year. If you were notified of a pay increase in March, it is worth making sure the number on the April pay check agrees with what you were promised.

Tax code

Your April pay check will be the first for the 2019/20 tax year and your PAYE tax code will have almost certainly changed from what was on your March pay slip. If you are entitled to a full personal allowance and have no deductions, your code number should increase by 65, reflecting the £650 increase in the personal allowance. 

If you have a company car, then it is likely to move your code in the opposite direction. For most cars (other than those with the highest emissions), the percentage of list price that is taxable rises by 3% – £300 per £10,000 of list price. A £22,000 car will therefore more than counter the rise in the personal allowance. The higher scale percentage also means a similar increase in taxable value of employer supplied fuel. In practice you might be better off paying your own fuel bills, even if your employer pays you nothing in compensation. 

National insurance contributions (NICs) 

The primary threshold (that is, the starting point) for NICs rises by £4 a week while the upper earnings limit (the top level of earnings on which you pay full 12% NICs) jumps by £70 a week. As a result, if your annual earnings are more than £46,600 a year, you will be paying more NICs from April. If you earn over £50,000 a year, your extra NICs will be just over £28 a month. 

Pension contributions 

These are generally linked to salary, although not necessarily your full pay, so should increase if you have an April pay increase. If you are in an automatic enrolment pension scheme, your contributions are usually based on “band earnings”, which were £6,032–£46,350 in 2018/19 and are £6,136–£50,000 in 2019/20. The contribution rate will rise, too. How much will depend upon your employer’s contributions: you might see the rate increase by two thirds to 5% of band earnings (4% after basic rate tax relief). If your pay in April is lower than in March, the auto enrolment change could be the culprit.

For more insight on the tax, NICs and pension deductions from your pay and options to limit their impact, please talk to us. 

The value of tax reliefs depends on your individual circumstances. 

Tax laws can change. 

The Financial Conduct Authority does not regulate tax advice.

Buy-to-let investors will be hit by another notch up of the tax ratchet. 

When George Osborne announced in his summer 2015 Budget a variety of tax changes aimed at discouraging buy-to-let (BTL) investment, they came as a surprise. To ease their impact, the then Chancellor phased in the most significant reform, a revised treatment of interest relief, over four years and deferred its start date to April 2017. Anecdotal evidence suggests some BTL investors did not know what had happened until they found a larger than expected tax bill in January.

April 2019 will see the start of the third year of the phasing process, which will mean in 2019/20:

• Three quarters of any interest paid on BTL borrowing will be eligible for a 20% tax credit; and
• The balance of interest is deductible from rental income, meaning it is fully tax relievable.

If that all sounds rather arcane, the impact becomes more obvious when you look at a simplified example. Suppose a higher rate taxpayer had rental income of £12,000 and interest on a BTL mortgage of £8,000. The investors’ net income position is as follows:

In practice, the situation might be worse than the table suggests if, for example, the disappearance of the deduction for interest increases the investor’s gross income to the point that it trips over the £100,000 threshold, at which the personal allowance is phased out.

Sales by BTL investors could pick up this year due to the interest relief changes and poor short-term prospects for capital growth. There is another tax incentive to sell on the horizon, too. From April 2020, capital gains tax on residential property (at 18% and/or 28%) will have to be paid within 30 days of sale, whereas the current rules effectively give a minimum of nearly ten months’ grace.

If you are a BTL investor and are considering leaving the market, please talk to us about your options, on both the tax planning and reinvestment fronts. 

The value of tax reliefs depends on your individual circumstances. 

Tax laws can change. 

The Financial Conduct Authority does not regulate tax advice.  

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.

We can all be forgetful on occasions, we’re only human after all. However, when it comes to our finances, losing track of what we have can be a costly mistake to make. It’s been estimated that a staggering figure of £15bn is tied up in old bank accounts, pensions, life assurance and investments¹.

Bank Accounts 

Tracing old bank accounts can be done by searching a website called My Lost Account. This site is maintained by UK Finance, the Building Societies Association and National Savings & Investments (which covers Premium Bonds too).

Pensions

People change jobs more frequently nowadays, meaning that they can often have small pension pots with past employers that they fail to keep track of. Incredibly, there are around 1.6m² pensions that have been forgotten about by UK workers. If you’ve lost track of a pension from a previous employment, then the Pension Tracing Service will help you find an up-to-date contact for the scheme.

Child Trust Funds

These were available for babies born between September 2002 and January 2011. Parents received a government voucher for £250 to invest (up to £500 for lower income families) and could add further funds within limits. Figures from HMRC estimate that around 700,000 Child Trust Fund accounts are dormant. HMRC has a dedicated page for those looking to track down these accounts.

Other assets

For help in tracking down lost investments in unit trusts, the Investment Association can provide help. Experian run an Unclaimed Assets Register which allows you to search the 4.5m records it holds from 75 different providers covering insurance policies, pensions or shareholdings.  

1 MSE, Nov 2018
2 Research carried out by Pensions Policy Institute on behalf of ABI, Oct 2018

I get cover at work – I don’t need more

The amount you’re covered for might not be sufficient for your needs, and if you change jobs, that will change too. Plus, with your own policy the cover can be tailored to your specific needs.

I’m not a breadwinner, so I don’t need insurance

The bill for replacing all the services homemakers provide – like cooking, cleaning and childcare – can amount to a hefty sum. If you weren’t around to provide these, then your partner could face considerable additional costs. Many people hope their wider family would rally round, but raising a young family is costly, and relatives won’t have planned for the added expense.

It’s too expensive

Not so. Life insurance is far less expensive than many people imagine. We can help you find a deal that fits your budget, and you can always take out additional cover later on.

I don’t have kids, so it’s not relevant to me

Whilst it’s true that there’s less need if you don’t have a family, how would your partner manage if you weren’t around to contribute to the bills?

I’m too young to need cover

Protection policies aren’t just for older people, and the younger and fitter you are when you take out a plan, the cheaper the premiums will be. Leave it too long and you could find yourself paying a much higher price.

There’s too much choice

It’s true there are lots of different types of policy, each designed to provide cover for specific risks. That’s where we can help. We can find the right type and level of cover to meet your insurance needs and your budget. 

Action Fraud is warning the public that fraudsters are posting advertisements for non-existent animals and pet accessories online. Paws for thought: fake pet adverts lead to over £3 million in losses. 

Fraudsters are advertising pets and pet accessories on online marketplaces at a lower than expected price in an attempt to attract victims. The fraudsters are then demanding full payment or a deposit for the animal via bank transfer or electronic wire.

To prevent requests to visit the animal, fraudsters will tell victims that it is located in a remote or faraway location, which stops them from travelling to see it.

In some cases, the fraudsters are telling victims that they need to pay further fees for animal travel insurance, documentation or special travel cages. Victims are promised that some or all of these extra fees will be refunded when they receive the animal, however once these funds have been transferred, the fraudster will stop all communication, leaving victims out of pocket and with no pet.

A report from Action Fraud and the National Fraud Intelligence Bureau (NFIB) shows that 61% of victims were female and 22% of victims were 20 – 29 years old. It also shows that 31% of people said falling victim to this type of fraud had a significant impact on their health and financial wellbeing.

The report suggests that fraudsters are targeting victims who wish to buy popular breeds. The highest number of reports related to pugs – 224 reports were made between January 2012 and May 2018, with victims losing £76,451.

Fraudsters are also offering pet-related products for sale which don’t exist or are not as described. Equine accessories accounted for 92% of monetary losses. Between January 2012 and May 2018, 368 reports were made which concerned a horse box or trailer. The total reported loss was £1,145,369 with an average loss of £3,112 per victim.

Don’t get ripped off:

• If you’re purchasing goods and services from a company or person you don’t know and trust, carry out some research first, or ask friends and family for advice before completing a purchase. Remember, if an offer seems too good to be true, it probably is.
• Avoid paying for good and services by bank transfer as that offers you little protection if you become a victim of fraud. Instead, use a credit card or payment services such as PayPal.
• Ask for photographs or videos of the animal; a responsible seller will understand why the buyer wants photographs and more information before making a purchase.
• Use the online marketplace’s ‘report’ function if you come across suspicious adverts or sellers.
• Sellers offering to meet you ‘halfway’ seems generous but you should only buy the puppy directly from the place where he/she was born and raised.
• When buying a puppy, you must insist on seeing the puppy interacting with its mother and littermates in the location where they were bred and reared – Make sure you visit the puppy more than once too.

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

By clicking on one of these links you are departing from the regulatory site of Polestar. Neither Polestar nor Positive Solutions is responsible for the accuracy of the information contained within the linked site.

Dividend payments from UK companies in 2018 once again outpaced annual inflation.  

Your income could have increased by more than double the rate of CPI inflation in 2018.

Link Asset Services, a leading share registrar, reported a 5.1% growth in total dividend payments of UK companies last year. Their January dividend monitor showed that in 2018 UK companies paid out £99.8bn in dividends, £4.8bn more than in 2017.

As the graph shows, since 2012, total dividend payments have comfortably outpaced inflation. The dividend line is not as smooth as the inflation line for two reasons:

• To a degree, what companies will pay in dividends depends upon financial conditions. The graph’s dip in 2009 and 2010 calendar years reflects the fallout from the great recession of 2007/08 when some major companies, e.g. clearing banks, suspended dividend payments completely.
• Total dividend payments represent the addition of regular dividends – what companies pay each year – and special dividends, which are one-off payments. From year to year, the ‘specials’ vary much more than regular dividends. A good example is 2014, when Vodafone sold out its US business interests and made a one-off dividend payment of nearly £16bn.   

In its latest monitor, Link notes that rising dividends and falling share prices in 2018 meant that the yield on UK shares in December 2018 hit the highest level since March 2009. The 4.8% yield recorded by Link compares with an average over the last 30 years of 3.5%. In Link’s view, that level of dividend seems ‘’overly pessimistic” and is more likely to represent an undervaluation of UK stocks due to Brexit uncertainty as well as difficulties in the global market. It is hard to disagree. 

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.