The Chancellor, George Osborne, delivered his budget statement for 2016 yesterday with an emphasis on savings and retirement. The headline announcement saw the introduction of a new tax-efficient savings product for consumers, one that closely resembles the flexible retirement ISA we have called on the Government to create.
Here is our summary of the key changes for savers:
From April 2017, under 40s were be able to save up to £4,000 per year in the Government’s new savings scheme, the Lifetime ISA’. Those who save into this ISA will receive a Government top up for £1 for every £4 contributed until they reach 50. When withdrawn, the cash will be free from tax, provided certain terms are met. Only those who use the ISA to buy a house or for retirement, however, will get the full value of their savings as well as the Government bonus. On the other hand, those who have already taken out a Help to Buy ISA will be able to transfer their savings into a Lifetime ISA.
The Chancellor stated that the scheme benefited those younger workers who receive poorer pension contributions. The chancellor delivered both a top-up ISA to help to fill the savings gap and a higher annual limit from April 2017.
Contributions into ISAs are limited to the annual allowance of £20,000.00 in the 2021/22 tax year and this can be split between stocks and shares ISAs, cash ISAs, innovative finance ISAs and a Lifetime ISA. Please note that the annual allowance for a Lifetime ISA is currently set at £4,000.00 per tax year and £9,000.00 for Junior ISAs.
Any returns made within an ISA are currently not liable to Income Tax or Capital Gains Tax.
The Chancellor announced the cut of Capital Gains Tax from 28% to 20% which will ‘put rocket boosters on the backs of enterprise and productive investment’, the Chancellor told MPs. The basic rate of Capital Gains Tax will also fall from 18% to 10% on 6th April.
We are pleased to see that the Chancellor is in tune with our vision of a Retirement ISA and introduced the Lifetime ISA to help thousands save for their future. This, along with the newly increased ISA limit, will help facilitate an economy that is more aware of the need to save and invest for their future.
This article is based on True Potential LLP’s interpretation of the 2016 Budget Statement published on 16th March 2016. It is a broad summary and cannot cover every nuance, you should not take or refrain from taking any action based solely on this article.
Since the new pension freedoms announced last April, there has been a lot of discussion around how much you should save, where to invest and what to do with your pension pot once you retire.
Your retirement plan is one of the most important investments you will ever make. You will likely be making decisions on your pension’s investment strategy for the rest of your life, but it doesn’t have to be daunting.
To start saving, you first need to set yourself a goal; how much money will you need when you retire? The truth is there is no ‘magic number’. How much you need depends entirely on your personal financial situation and there are a number of things to consider when planning your retirement:
* What age do you plan on retiring?
* How many years of retirement do you think you will have?
* If you have one, wil your mortgage have been paid off?
* Do you have any dependents that will require further financial support?
* How do you want to spend your retirement?
* How much are your current bills?
According to research from TP’s ‘Tackling the Savings Gap‘ campaign, Britons believe they need an average of £23,457 per year to live comfortably in retirement. A 35 year old starting to save a pension today and aiming to retire at 60, would therefore need to save approximately £1,000.00 a month to receive this pension.
Of course, pension products aren’t the only way to save for their retirement. ISA’s are becoming an increasingly popular way to close the retirement savings gap, with savers putting £20 billion more into their ISA in 2015 compared to the previous year. However, it has taken legislation to get people to put money into workplace pensions.
We’ve spent a lot of time recently researching and writing about what we call the ‘Deep State’. This is something you’re likely to hear more about. The Deep State describes the way the US government really works, rather than the way it’s supposed to work. Over the years – hardly noticed by press or public – a group of insiders has taken control of Washington. Some are familiar government hacks and politicians. Some, largely anonymous, are in the private sector. And some represent foreign governments, foreign businesses (notably banks), and foreign organisations.
These zombies and cronies – who number in the thousands – have far more power and authority than 100 million voters. If they want legislation, they get it. Voters, on the other hand, get what they want only rarely – and probably only when the insiders want the same thing. The insiders get the money, too. The tens of trillions of dollars diverted into boondoggle bailouts, quantitative easing (QE), and zero-interest-rate policy (ZIRP), for example – they had to go to someone. And now the Deep State is setting itself up to get even more.
We noted the news, covered here in MoneyWeek last week, that a small Swiss bank has become the first retail bank in the world to charge customers negative interest on their deposits. A number of central banks – including the Swiss National Bank – have already taken benchmark interest rates below zero. But, beginning next year, Alternative Bank Schweiz (ABS) will pass those negative rates on to customers. In a letter to its customers, ABS said it would charge account holders 0.125% a year to hold their ‘cash’ deposits to protect its profit margins. And anyone with 100,000 Swiss Francs $97,316) or more on deposit will have to pay 0.75% a year.
Let’s stop here for a moment and clarify. There are ‘cash deposits’ and there is cash. Cash deposits are an oxymoron. If you say you have cash in the bank, you are mistaken. The bank doesn’t really hold ‘your’ cash. It owes you money. If it goes broke, you’ll stand in line with other creditors to get it (subject to whatever guarantees may be in place … and however well they may work).
Cash in hand is different. It is physical. Paper. You can do what you want with it. And you don’t pay a negative interest rate – which is why the feds want to ban cash. They say it will make it easier for them to stimulate the economy. As long as you can hold physical cash, you have an easy way to escape negative interest rates: you just take the money out of the bank and put it in your home safe. But if physical cash is illegal, you have no choice. You have to keep ‘your money’ on deposit t the bank … and take whatever negative rate the bank imposes on you.
Of course, the idea that taking away your money will stimulate economic growth is ridiculous. As former banker and hedge fund manager Warren Mosler recently told us: ‘Central bankers have got the interest rate thing backward. They think lowering rates will somehow stimulate the economy. But negative interest rates are just a tax. You start off with a certain amount of money – say, $100. If the rate is negative 1%, then you have $99 at the end of the year. Isn’t there some theory that says when people’s money goes away, and they have less, they spend less?”
If negative rates don’t really encourage spending, why bother? This brings us to the real danger of banning cash … and perhaps the real reason the feds want to do it – more control. Here is William N. Grigg at The Free Though Project under the headline “Drone Pilots have Bank Accounts and Credit Cards Frozen by Feds for Exposing US murder”: For having the courage to come forward and expose the drone programme for the indiscriminate murder that it is, four veterans are under attack from the government they once serviced. The US government failed to deter them through threats of criminal prosecution, and clumsy attempts to intimidate their families. Now, four former Air Force drone operators turned whistleblowers have had their credit cards and bank accounts frozen, according to human rights attorney Jesselyn Radack. ‘My drone operators went public this week and now their credit cards and bank accounts are frozen, ‘Radack lamented on her Twitter feed. This was done despite the fact that none of them has been charged with a criminal offence, but this is a trivial formality in the increasingly Sovietesque American National Security State’.
If we are force to keep our money in the bank . . . and cash is outlawed . . . the Deep State will have total economic control over us all.
There’s been much excitement about Britain’s return to the top of the international growth league. Its economy was 3.2 per cent bigger in the second quarter of 2014 than it had been a year earlier. Over the same period, Germany was up 1.3 per cent, France a measly 0.1 per cent and Italy down 0.3 per cent. Even the supposedly dynamic US economy was unable to keep up with the UK, posting a 2.4 per cent gain. Japan was totally stagnant. From Britain’s point of view, this all sounds rather wonderful. An economy that had been on the ropes for many years is coming out fighting, stronger than all the other leading industrialised nations but not, it should be noted, the strongest in Europe: both Latvia and Hungary are doing better.
Many a sin, however, can be disguised through the misleading use of statistics. Yes, Britain is doing better than it was. Yes, it is growing more quickly than some of its key competitors. Yet the UK economy today is only a tiny bit bigger than it was in 2008, just before it was engulfed in its bespoke version of the global financial crisis. The American and German economies, in contrast, are now much larger than they were then. Even if the present league position is encouraging, people up and down the country will be wondering why their wage packets are still shrinking, at least when allowance is made for inflation. Perhaps, in time, these problems will go away — after all, continued economic expansion at current rates would make most people better off — but growing this quickly when other countries are struggling to expand will be no easy task. The problem is peculiarly British. It’s called the balance of payments. It’s not impossible for a country to grow more quickly than others without eventually sucking in imports at a ferocious rate. Rapid productivity growth — more outputs from given inputs, the alchemy of economic progress — will do the trick. Countries lucky enough to experience rapid productivity gains may not only be able to raise living standards at home but also, via strong, technology-led export gains, living standards abroad. In the 1960s and 1970s, both Japan and Germany pulled off this trick. More recently, China has managed much the same. In all three cases, rapid gains in living standards were associated more often than not with balance of payments surpluses.
Postwar Britain has not been quite so lucky. All too often its position at the top of the growth league has been fleeting, not so much because the economy eventually has drowned in a sea of inflation but, instead, because rapid expansion has been associated with an equally rapid deterioration in the UK’s balance of payments position.
We may be approaching one of those unfortunate moments now. The recovery so far has been associated with a hopeless productivity performance, while the deficit on the balance of payments is already running at a disturbingly large £20 billion per quarter, or thereabouts. Relative to the size of the British economy, it’s not far off the biggest on record.
Some argue that none of this needs matter. Ben Broadbent, deputy governor of the Bank of England, suggested in a speech at Chatham House last month that the balance of payments deficit didn’t pose any kind of “independent, existential threat to UK growth”. His view is based on the observation that the payments we have to make to our foreign creditors typically are lower than the receipts we receive on our own investments overseas. Put another way, the UK is acting like a giant version of a successful hedge fund: it raises funds cheaply from its creditors and re-invests some of that money in much higher returning assets elsewhere. The remainder can be spent on imports. On this basis, apparently we can live beyond our means forever.
It’s hardly a novel argument. Many American economists made similar claims about their economy before the onset of the sub-prime crisis. Yet the argument has its flaws. If growth elsewhere in the world is persistently lower than in Britain, it’s difficult to believe that those foreign assets will continue to deliver superior returns. It’s equally difficult to believe that foreign creditors will continue to pour their money into the UK if we are unable ultimately to turn that money into productive investments that will lead to higher exports. Without the support of foreign creditors, we simply won’t be able to support our addiction to cheap imports.
At this point, it’s worth thinking about Britain’s export performance compared with its nearest competitors. It doesn’t make for happy reading. Despite a huge fall in sterling in 2008, British exports have struggled to make headway. One oft-quoted explanation is our dependence on exports to the eurozone. That, however, hardly explains why our export performance has been so miserable. Germany and France have done better, even though they, too, are intimately tied to the eurozone. And as for our ambitions in the emerging world, they have hardly been met: since the beginning of the 1990s, our exports to the most dynamic parts of the world have made a lot less headway than those of our leading European competitors.
The UK’s recovery would be a lot more encouraging if, first, there was clear evidence of a sustained pickup in productivity and, second, if our exports were even close to matching those of our peers. In reality, we are neither productive nor, it seems, particularly export-focused.
Enjoy the recovery while it lasts. There’s a good chance that, like previous periods of economic outperformance, eventually we’ll find ourselves succumbing to a balance of payments crisis. It’s one British tradition that we seem unable to shake off.
Written by Stephen King is Global Head of Economics and Asset Allocation HSBC Bank plc
“You only find out who is swimming naked when the tide goes out.” – Warren Buffett, Letter to Berkshire Hathaway Shareholders, February 2002
The last five years have been great for financial assets. UK equities have enjoyed a prolonged bull run, as have equities more generally across the developed world. It isn’t just equities that have risen however; returns across practically any asset class you care to look at have had a terrific run – bonds, real estate, gold, fine art. It has been an unusually broad-based bull market.
Why? It’s a direct result of the unprecedented monetary policy that has been in place since the financial crisis, in my view. Quantitative Easing (QE) was explicitly designed to raise asset prices and, in this, it has succeeded. The policy has helped divert the course of the economies that have pursued it away from what may have become a full-blown depression towards something somewhat less severe. This has, by no means, been a benign economic environment, but not as bad as it could have been.
It is easy to argue that we could have been worse off without QE, but are we any better off? Policymakers had hoped that by increasing asset prices, they could engineer some sort of “trickle-down” effect, whereby increased wealth would lead to increased spending, the creation of jobs, and rising business investment, and that a virtuous cycle would ensue. This hasn’t happened, primarily because the assets that have increased in value are not broadly held by all members of the economy.
The asset-rich have got richer, but the asset-poor have not. An unintended consequence of QE, therefore, has been for the distribution of wealth in the UK to become even more unbalanced.
Policymakers have rightly started to become more concerned about this redistributive side effect of QE, not to mention the risk of inflating asset price bubbles to an increasingly dangerous extent. This explains why we haven’t seen further QE from the Bank of England since the end of 2012, and the US Federal Reserve is now tapering its own QE programme. I expect the Fed to have completely withdrawn its extraordinary liquidity support by the end of this year.
The big question is, what will happen to financial markets without the support of QE? How will markets cope without the drug to which they have become addicted? I don’t know the answer, only time will tell, but I suspect that the gap that has opened up between valuations and fundamentals will start to close.
Over the last five years, the rising tide of QE has lifted all boats. It has been an unusually indiscriminate rally with the individual strengths and operational performance of companies largely being ignored. With the tide now turning, I would expect the market to become more discriminate with fundamentals playing a much more significant role in determining the performance of individual stocks. In other words, over the next five years, I expect to see a stock picker’s market – an environment which ought to favour a fundamental investment approach and a cautious investment strategy.
Written by Neil Woodford
The views expressed in this article are those of the author at the date of publication and not necessarily those of Woodford Investment Management LLP. The contents of this article are not intended as investment advice and will not be updated after publication.
2013 was a year dominated by high-profile moves. Undoubtedly the biggest manager news came in October when star manager Neil Woodford announced he was to leave Invesco Perpetual in April, after spending 26 years with the firm. Ever since news broke that Woodford was leaving to start up his own asset management firm and would be handing his funds over to colleague Mark Barnett, there has been speculation over what will happen to the huge amount of assets in his two high-profile funds. Chelsea Financial Services managing director Darius McDermott says: “Woodford leaving was the biggest news in my 18 years in the industry. It has been a huge year for fund manager changes and big-name moves. “As advisers, hopefully it shows we can add value. The key challenge is the post-Woodford challenge. How good will Mark Barnett’s performance be once he does not have Neil Woodford sitting next to him?” To put the Woodford outflows into context, the Investment Management Association UK Equity Income sector was the worst-selling sector in October with a net retail outflow of £298m. Woodford’s Invesco Perpetual Income fund and the Invesco Perpetual High Income fund saw £663m and £423m pulled out respectively in October, according to FE Analytics.
But despite the fall in October, equities have been the favoured asset class in 2013 as the strong bull run drew investors back to the asset class, with bonds receiving the sharp end of the stick and seeing significant outflows. The year has been marked by the US stockmarket reaching record highs and developed markets outpacing emerging markets.
Another star manager departure came in June when Schroder UK Alpha Plus manager Richard Buxton left the firm to join Old Mutual Global Investors as head of UK equities.
As Buxton was settling into his new role, his old employers were busy acquiring Cazenove Capital, with the Cazenove Capital managers moving over to Schroders in July. Included in the move were Cazenove UK Opportunities manager Julie Dean and multi-managers Marcus Brookes, Robin McDonald and Joe Le Jehan although head of pan-European equities Chris Rice chose to leave after a decade with the company.
Miton Group bought PSigma Asset Management in July, gaining the equity income expertise of Bill Mott and his team. In October, Liontrust acquired North Investment Partners as a way to move into the multi-asset market.
November saw Aberdeen Asset Management buy Scottish Widdows Investment Partnership in a deal worth £550m, with Lloyds Banking Group taking a 10 per cent stake in Aberdeen.
2013 also saw some changes for Standard Life Investment’s Global Absolute Return Strategies fund. Global head of multi-asset investing and fixed income Euan Munro was poached by Aviva Investors to become its new chief executive in 2014. Invesco Perpetual launched a rival product for former GARS members David Millar, Dave Jubb and Richard Batty, who were hired in late 2012.
September saw Sanjeev Shah step down from the Fidelity Special Situations fund and hand management duties to Alex Wright. Meanwhile, Anthony Bolton, who returned to fund management in 2010 with the Fidelity China Special Situations fund, also announced plans to retire. Dale Nicholls will assume control of his fund in April.
Jupiter Absolute Return fund manager Philip Gibbs announced his retirement with M&G Global Basics fund manager Graham French also taking the decision to retire, handing the reins to Randeep Somel.
Other notable fund manager departures include Mark Lyttleton leaving BlackRock after 12 years with the firm, Mary Chris Gay leaving Legg Mason Capital Management and Robert Siddles leaving F&C Investments. Also, James Sullivan decided to leave Miton Group and Robert Anstey left Hermes Fund Managers.
A number of popular funds were closed during 2013, with two powerhouses of emerging market investment – First State Investments and Aberdeen Asset Management – taking the decision to soft-close their most popular funds. Size was an issue in other sectors as Henderson closed the Henderson Credit Alpha fund and Cazenove closed the Cazenove UK Smaller Companies fund and the Cazenove Absolute UK Dynamic fund.
Hargreaves Lansdown senior investment manager Adrian Lowcock says: “It is important to look at what the up and coming managers will be doing, they have a great opportunity to create and cement their reputations. It is a huge opportunity for the new generation of fund managers.”
Over the past 25 years, Andrew has held several key positions with major financial organisations including international life companies and asset management organisations.
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