Newsletter – September 2017

Self-employment is the dream of many, especially as the goal of retirement seems to creep further out of reach. Being your own boss sounds great. But there are drawbacks. Around two million of the country’s self-employed workers are unable to save any money each month, leaving them vulnerable to financial shocks. 

The same body of workers spend more on bills than the UK average and only 4% enjoy the benefit of income protection insurance cover which would kick in if they were unable to work.

These worrying findings about the self-employed sector were revealed in insurer LV=’s second instalment of its Income Roulette report, a study of debt, savings and protection among 9,000 people.

The results show that four-in-ten (41%) self-employed people can’t afford to save any money each month and a further one-in-ten (11%) saves less than £50. A third of respondents said they could not survive for more than three months if they lost their income. This means they fall short of the Money Advice Service’s recommended amount of savings that should to be kept in reserve to maintain a level of financial resilience if an emergency strikes.

Looking at the barriers to saving, LV=’s figures show that monthly bills eat up the wages of nearly two-thirds (62%) of self-employed people; this compares with a national average of 56% taking employed workers into account.

Aware of the risks

Despite the lack of savings and insurance, the research confirmed that the self-employed were aware of the financial risks attached to this method of working with nearly three-in-ten (28%) respondents citing worries about having an accident and not being able to work as a result. A similar proportion (29%) said they were concerned about falling sick and being put out of commission.

There are around five million self-employed workers in the UK who made a contribution of about £250 billion to the economy last year. If you’re one of them, we may be able to help.

Inflation was in the news last month in various guises. 

August was a month when inflation hit the headlines several times trailing a cloud of acronyms:

• The Bank of England Quarterly Inflation Report (QIR) revealed that the Bank now expects inflation (as measured by the Consumer Prices Index – CPI) “to peak around 3% in October”. The Bank expects inflation will still be above its 2% central target by the end of the first quarter of 2020. This forecast assumes that interest rates will rise by 0.5% over the period, in line with market expectations. The Bank is relatively unconcerned about missing its target, saying that the overshoot “reflects entirely the effects of the referendum-related fall in sterling”.
• Shortly before the QIR was published, news emerged that CPIH, the inflation measure favoured by the Office for National Statistics (ONS), had been approved as a National Statistic by the Office for Statistics Regulation. CPIH is a variant of the more widely quoted CPI, the “H” being shorthand for the addition of owner occupiers’ housing costs (including council tax). CPIH could ultimately replace both the CPI and the now discredited RPI. The ONS view of the RPI is that it “is a flawed measure of inflation with serious shortcomings and we do not recommend its use.”
• In mid-August, the ONS issued inflation statistics for July, showing CPI and CPIH both running at an annual 2.6%, but RPI 1% higher. The July RPI is an important number, because it sets the basis for next year’s rail fare increases (although the government could change its mind and choose something below 3.6%).
• The government’s use of RPI to ratchet up revenue was also in evidence on the day the inflation data was published. Almost simultaneously the Student Loans Company confirmed that from 1 September the minimum interest rate for English and Welsh student loans started within the last five years will be based on the March 2017 RPI (3.1%), with a maximum addition of up to 3% taking the overall interest rate up to a ceiling of 6.1%.

Whatever your chosen yardstick for inflation, it is important not to forget its impact on your financial planning. At the current 2.6% CPI/CPIH rate, the buying power of £1 will be little more than 75p in 12 years’ time. Use today’s RPI and the same result arrives after just eight years.

HM Revenue & Customs (HMRC) has come closer to using its weapon of last resort against tax avoidance schemes.  

“Whack a mole” used to be a good summary of the battle between the extreme end of the tax avoidance industry and HMRC (together with its predecessor, the Inland Revenue). First, some ‘creative’ minds would dream up a scheme that weaved through the labyrinthine tax legislation to make a tax liability disappear. When the tax authorities became aware of the situation, more legislation would be produced to close the loopholes being exploited. The ‘creatives’ would then move on to another tax-evaporating idea, sometimes even exploiting the anti-avoidance laws used to block a previous scheme.

In July 2013 the then Chancellor George Osborne took what was seen as a controversial step to end this merry-go-round by introducing the general anti-abuse rule (GAAR). As its name suggests, the aim of the GAAR was to prevent the letter of the law being manipulated to prevent the spirit of the law applying.

The GAAR incorporates a “double reasonableness” test which basically required HMRC to show that the arrangement undertaken could not be “reasonably regarded as a reasonable course of action”. The question of what represented a ‘reasonable course of action’ is determined by the GAAR Advisory Panel, which consists of three tax experts.

A dormant threat?

Once the GAAR was introduced, it seemed almost to disappear, as HMRC did not refer any cases to the panel. This was thought to be because the mere existence of the GAAR meant that there was the Sword of Damocles was hanging over any scheme that might be considered “abusive”. There was certainly a noticeable drop off in new schemes being reported under the disclosure of tax avoidance scheme (DOTAS) rules.

In 2016 a GAAR penalty was introduce for newly caught schemes of 60% of the tax avoided, adding further power to HMRC’s armoury. Then finally, last month, over four years after GAAR came into being, a first decision emerged from the GAAR Advisory Panel. The case involved a convoluted payment-by-gold-bullion scheme which some experts thought would anyway have been defeated in the Courts, given their current stance on artificial avoidance arrangements. In the event the Panel decided the arrangement was not reasonable.

Rather than a necessity, HMRC’s use of the GAAR may have been a warning that they are prepared to use the GAAR weapon, particularly now it has a large penalty attached to it. The HMRC move is another reminder that, while there are plenty of legitimate ways to reduce your tax bill, something that looks too good (and/or convoluted) to be true is best avoided. To discuss the many GAAR-free tax planning opportunities, 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.

National Savings & Investments (NS&I) have launched their first Junior ISA.       

The Junior ISA (JISA) was introduced in 2011 as a replacement for the Child Trust Fund. It had a slow start, but momentum has built and, according to the latest figures from HM Revenue & Customs (HMRC), JISAs now hold over £2,750 million of investments for children under age 18.

While long a player in the main cash ISA market, NS&I never offered a junior version until last month, with its new launch. The plan’s main features are:

• A variable interest rate of 2% (against 0.75% for NS&I’s Direct ISA);
• Transfers in (from JISAs and Child Trust Funds) are allowed (again a difference from the new contributions-only Direct ISA);
• No penalties on transfer out (although access to cash is normally not possible before age 18);
• Online operation only.

NS&I sometimes top the ISA tables with their interest rates, but the new JISA runs no risk of doing so, as the top variable rates currently are around 3%.

According to the latest HMRC statistics, as at April 2016 almost two thirds of JISA money is invested in cash accounts, with stocks and shares accounts making up the remainder. This is a higher proportion than for adult ISAs, where stocks and shares are just in the majority. The logic behind this difference is puzzling: many JISA owners are young enough to have an investment horizon that makes stock and shares look a more sensible option than cash. For more details on stocks and shares JISAs, 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. The value of tax reliefs depends on your individual circumstances. Tax laws can change. The Financial Conduct Authority does not regulate tax advice.

Stocks and shares ISAs invest in corporate bonds; stocks and shares and other assets that fluctuate in value. Investors do not pay any personal tax on income or gains, but ISAs do pay unrecoverable tax on income from stocks and shares received by the ISA managers.

August provided a reminder that even in seemingly quiet times, the value of individual shares can be volatile.

August is traditionally a month when the turnover on stock exchanges slows down because many people are on holiday. In the jargon, trading can be “thin”.  That doesn’t mean, however, that nothing much happens, as the graph above shows. While the FTSE 100 (top line in blue) merely wobbled, there were some major movements going on for individual companies, both within and outside the index.

The bottom line in red on the graph shows the dramatic fall of one FTSE 100 constituent, Provident Financial Group, best known for its doorstep lending business. Provident released its second profit warning in August and scrapped its dividend payment which, as the graph indicates, had not been widely expected. This month the company will be ejected from the FTSE 100 because its value has fallen so much.

The story behind the middle black line is similar. It shows the fate of Dixons Carphone, which was a member of the FTSE 100 until demotion in March of this year. Dixons Carphone, the High Street electronics retailer, revised down its profit forecast, bemoaning the reluctance of smartphone owners to update their handsets as regularly as they once did. The announcement was again off the radar, with the inevitable result on the share price.

Broaden the spread

The performance of these two well-known companies serves as a useful reminder of the potential dangers in holding a handful of shares, perhaps acquired via an inheritance or employer share schemes. Whereas a broad holding of shares (the FTSE 100 being a useful example here) spreads your risk, concentrated holdings can have the opposite effect. You may be happy to accept the potential rollercoaster ride, but if you are not or are just unsure about the risks in your current holdings, talk to us about bringing diversification into your investment portfolio.

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 Pensions Regulator (TPR) is warning people about rogue pension websites that are carrying anti-scam messages to try to trick consumers into believing that they are legitimate businesses. 

These websites have been flagged to TPR because they are designed to look like legitimate pension scheme investments.

Some of the reported websites suggest they are regulated by carrying warning messages designed to prevent people falling victim to fraud, such as making reference to the tax implications over accessing your pension before the age of 55 and the danger of cold-callers.

They also carry Project Bloom campaign material without TPR’s consent. This is a taskforce set up to tackle pension scams, which is led by TPR. It includes the Department for Work and Pensions (DWP), HM Treasury, the Financial Conduct Authority, HM Revenue & Customs, the Serious Fraud Office, City of London Police (Action Fraud) the National Fraud Intelligence Bureau, The Pensions Advisory Service, and the National Crime Agency.

Wolves in sheep’s clothing

This warning comes after the DWP announced that it will bring in legislation for a cold-calling ban, tighter rules to prevent the opening of fraudulent pension schemes and restrictions to prevent transfers into scam schemes.

TPR Chief Executive Lesley Titcomb said: “These sites are wolves in sheep’s clothing, lying in wait for unsuspecting victims by portraying themselves as being beyond reproach.

“The truth is that this next generation of scam sites poses a real threat to people’s financial futures and should be avoided.

“We welcome the Government’s tough new measures, which will strike a significant blow to pension scammers who devastate people’s lives by duping them out of their life savings.

“We are working closely with government, enforcement agencies and key financial service bodies to bring scammers to justice and, through our Scorpion campaign, to help the public protect themselves from scams.”

Anyone considering transferring their pension from their current provider should get advice from TPR first. There you can read tips on how to make sure you are not putting your financial future at risk by transferring your funds to a risky investment or scam. Visit the TPR website at: www.thepensionsregulator.gov.uk/pension-scams

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

Taking out a life insurance policy is a great first step in ensuring that those who depend on you would be taken care of financially if you were to die. However, over the years, your circumstances are likely to change, meaning that you may need to increase your life insurance, or take out a different type of policy to match your new needs. 

Many people don’t think about reviewing their policy, but forgetting to do so could mean that your family won’t have enough money to pay the mortgage or meet the bills if you were to die. It could also mean that you’re paying more for your premiums than perhaps you need to, as there may now be more cost-effective policy options available to you.

Over the years, your life will change. For example, your family may grow, you might move to a bigger house with a larger mortgage, or you could find yourself taking on financial responsibility for ageing parents. All these life stages, and many more, bring with them the need to review the cover you have in place.

Critical illness

You may also want to think about additional forms of insurance that protect you against specific risks. One of these is critical illness cover which pays out if you are diagnosed with a serious illness. It’s a sad fact that a major illness can strike at any time. More than a thousand people are diagnosed with cancer every day, and every seven minutes someone has a heart attack.

Critical illness cover means that if you were to be diagnosed with a serious medical condition specified in your policy, you would receive a tax-free lump sum payment. No-one would want to be worrying about their financial responsibilities when they were seriously ill, so having this type of cover in place can provide valuable reassurance for you and your family. Many people buy a combined life and critical illness policy. In this case, a payment would be made on either diagnosis of a critical illness as defined in the policy, or death, whichever is the sooner.

If it’s been a while since you  took out your existing policies, now could be a good time to arrange a review to ensure you have the cover in place that meets your needs.