Autumn Update

Much has happened since I last sent one of these so I have prepared a few points under the headings below:

Budget

Rishi Sunak has confirmed he is not holding his budget this November which for some will come as a relief. This is particularly good news for some clients who are planning to retire in the next few months who have one eye on changes to the Lifetime Allowance.

This also hopefully means the more generous pension contribution rules will be in place until the end of the tax year next April. This means there is a window for higher earners to top up their pensions with all this extra cash they are apparently saving on lunches in Pret and season tickets.

The window is still open for Buy to Let landlords to pick up a new property before the end of the tax year and pay a lower rate of Stamp Duty. Anecdotally I have some clients with rental properties that are planning to sell at the first opportunity as the prospect of having bad tenants that cannot be removed is too much. I have always had the view that a Buy to Let or two is a good way to spread risk once all of the conventional savings avenues have been used up (pension/ISA etc). I do believe that running a rental property is actually running a business and not a pure investment per se. My main worry for this type of venture is what new taxes may be dreamed up in future. Landlords are generally believed to be well off people who can shoulder the burden of higher taxes and nobody will be shedding any tears for them if new taxes reduce their returns so they are quite an easy target politically.

Speaking of future tax rises we are obviously going to have to pay for the recent generosity of the Government but will probably not be finding out how until next year. Attacking capital gains tax to bring this more into line with income tax is an obvious choice, so rinsing out any significant taxable gains before the next budget may be a prudent bit of planning.

Pensions tax relief may also be a target as the tax relief ‘costs’ the Government around £40bn a year. I say cost but this is not strictly true as the Government are simply letting the public keep this money in their pension rather than taking it off them in tax. The chancellor may view this as low hanging fruit but changing pension tax relief sounds simple in theory for individuals saving into defined contribution pots but it is devilishly complicated for those in defined benefit (final salary schemes). There aren’t many in the private sector in defined benefit schemes any more so any changes would largely affect the public sector. If the chancellor was feeling bold reforming public sector pensions would also save gargantuan sums of money. Most people do not realise that most public sector pensions are unfunded which means there is no pot of money waiting to pay out for civil servants and these pensioners simply have a promise of a pension from future tax payers. I won’t repeat the potential costs of providing these pensions to future tax payers as I would not want to upset you but I can assure you it is enormous.

It would be a bold chancellor that tells civil servants that their gold plated pensions will be stopped and they will have to join joe public in joining a defined contribution scheme. I suspect MPs would need to lead the way on such a change…

It won’t have escaped the Governments notice that most technology firms have been doing very nicely despite all of the upheaval we have faced, so I would not be surprised if the Amazons, Facebook’s etc of this world find themselves on the receiving end of higher taxes post budget. In reality, all of this gets passed on to us as consumers as extra costs in any case.

Another potential option is to go for some form of mammoth tax simplification where income tax and National insurance are merged and everyone pays the same rate of tax for everything (30%?). This would likely involve some stealth taxes rises for those in the middle if history is anything to go by. If the UK Government does want to make us into a super competitive new Singapore post Brexit some form of tax reform will probably need to be on the cards if they want to attract the world’s best as they often claim.

Markets

Most savers will be worried about the interest rates they are receiving or not as the case may be. Even National Savings Income Bonds have cut rates to 0.01% after being a good option for a number of years. They are still fully backed by the UK Government whereas everyone else has protection capped at £85,000. I have seen some rates above 0% but would caution clients not to put more than £85,000 with any institution and would steer anyone away from overseas deposits and names which you have never heard of.

Sadly, I believe the prospect of interest rates going up in the next 5 years are very low and I expect us to be in for another decade very much like the last, i.e. low interest rates and low inflation.

It is interesting to note though that the last decade was still good for markets. Someone buying a FTSE 100 tracker for £100,000 on 1 January 2010 would have probably seen their investment rise to c£200,000 by the start of 2020. Someone buying a S&P500 tracker would have seen their

£100,000 grow to £400,000. Interestingly if they had held onto these funds to today’s date the FTSE 100 fund would be worth £165,000 and the S&P fund would be worth £450,000! (source: Financial Express below)

This neatly illustrates that UK Plc has been having a torrid time since the Brexit vote. Regardless of the way anyone voted the effect has been seen in a fall in the value of the pound but more damaging is the uncertainty and the huge amount of underinvestment from outside the UK. Whether UK plc is due to stage a strong comeback post Brexit has been on my mind of late. I cannot help thinking that at some point in the next 18 months when we are post Brexit and post Covid, the UK will be due a super quarter or two where both markets and the economy stage a strong recovery. The UK is only 4% of the global market so some have chosen to simply spread their investments globally which has paid off handsomely over the last decade. Which will prevail over the next 5 years UK plc or global markets, answers on a postcard…

Low interest rates are not all bad news, if you are working and have a steady income you should be able to rapidly pay down your mortgage over the next 5-10 years.

What may cause a rise in interest rates in future is likely to be substantially increasing prosperity and a significant rise in the cost of living (inflation). I can’t really see strong case for either in the next 3-5 years.

I won’t comment too much on the US election other than to say markets are likely to be tumultuous either side of it. I would not assume a win for Biden will automatically mean markets increase as there is significant investor concern around the cost of his proposals. It would probably mean a reduction in the negative rhetoric between the US and China, although Chinese relations with the rest of the world have also dipped since the start of the crisis.

The dreaded Brexit will also dominate headlines in the next few months and there may be a few more twists and turns yet.

Trying to position your portfolio towards a future potential outcome is a fools errand and doing nothing is often the better choice. Nobody has any superior knowledge of what may happen and I would urge you to give a wide berth to anyone that claims to.

Investing is a marathon and not a sprint so please resist the urge to focus to much on the very short term of what is an endeavor that will last the rest of your lifetime.

I think we are in for a decade of lower growth so for me that means being very focused on costs as these only serve to reduce returns. I still expect a broad investment approach to offer good growth prospects over the next 10 years.

There will undoubtedly be lots of financial planning opportunities to take advantage of and I am looking forward to working with my clients to make the most of these and keep their plans on track.

As always, please do drop me a line to let me know if you have any questions or concerns, even if you are getting cabin fever and just fancy a chat.