Personal Finance Society news update from 17th to 30th August 2018.
Taxation and Trusts
TAXATION AND TRUSTS
Meeting the costs of care using ISAs.
It is estimated that in 2020/21 there will be a £5.5 billion funding gap in the costs of social care. This is set to rise to £12 billion by 2030. Meeting the potential huge future costs of care is therefore a massive headache for the Government. Originally, they were planning to release their proposals on dealing with this problem in the Summer, but this has been delayed to the Autumn.
It has been reported in the Sunday Telegraph that in its upcoming Social Care Green Paper the Government is planning to introduce a “Care ISA” as a means of dealing with the problem.
An investor could make encashments from a Care ISA to meet their care costs. Any residual value in the ISA would be free of inheritance tax on death.
Currently, the value of an ISA on death counts as part of the deceased investor’s estate and could be subject to inheritance tax if the estate:
- passes to somebody other than the surviving spouse/civil partner or a charity; and
- exceeds £325,000 in value.
Of course, ISAs that invest in AIM securities may qualify for 100% IHT business relief once they have been held for two years.
A surviving spouse/civil partner benefits from an extra ISA allowance equal to the value of the deceased’s ISA on death.
The introduction of a Care ISA is just one of the possible solutions available to the Government. Another would be to grant tax freedom on funds withdrawn from pension funds that are used to meet the cost of an individual’s care.
The introduction of the Care ISA would nonetheless be a good way of encouraging people to make investments that would cover the costs of their care. It would also mean that the Government could reduce the need to raise taxes to meet the costs of care.
However, care costs are largely an unknown quantity and it may therefore be difficult for savers to estimate how much to set aside. Restrictions would also be needed to prevent people using the Care ISA as a form of last-minute IHT planning.
All will be revealed when the Green Paper is published.
Source: Sunday Telegraph 19 August 2018
Inheritance tax interest rates
HMRC has published updated interest rates for inheritance tax. As of 21 August 2018, interest on late payments of inheritance tax has increased from 3% to 3.25%, and interest on inheritance tax overpayments has increased from 0.5% to 0.75%.
Where inheritance tax is paid in instalments, interest will not be charged on the first instalment unless it is paid late. On each later instalment interest must be paid on both of the following:
- the full outstanding tax balance;
- the instalment itself, from the date it’s due to the date of payment (if it’s paid late).
The first instalment is due at the end of the sixth month after the death (for example if the deceased died on 12 January, the first instalment would be due by 31 July). This is the due date and payments are then due every year on that date.
More information on paying inheritance tax in instalments can be found here.
HMRC also previously announced that it was raising interest rates by 0.25% for late payments of income tax, National Insurance, capital gain tax, stamp duty land tax, stamp duty and stamp duty reserve tax, but not increasing repayment interest rates for these taxes.
Source: HMRC Guidance: Inheritance Tax thresholds and interest rates – dated 17 August 2018.
New fuel rates for company cars
(AF1, AF2, JO3, RO3)
HMRC has announced the new fuel rates for company cars applicable to all journeys from 1 September 2018 until further notice.
The rates per mile are based on fuel prices and adjusted miles per gallon figures.
For one month from the date of the change, employers may use either the previous or the latest rates. They may make or require supplementary payments, but are under no obligation to do either. Hybrid cars are treated as either petrol or diesel cars for this purpose.
Rates from 1 September 2018:
1,400 cc or less
1,600 or less
1,401cc to 2,000cc
1,601cc to 2,000cc
Source: HMRC Guidance: Advisory Fuel Rates – dated 24 August 2018.
More HMRC guidance about correcting tax due on offshore assets ahead of 30 September deadline
HMRC has published further updates to its guidance ahead of the 30 September 2018 deadline for the requirement to correct tax due on offshore assets. The further guidance covers:
- penalties and other sanctions;
- ways of making a correction under the Requirement to Correct (RTC) rule; and
- information that must be supplied when making a disclosure that no tax is due.
Under the RTC, taxpayers are required to correct any tax returns that fail to properly report offshore matters that would give rise to a UK tax liability by 30 September 2018 if they are to avoid new penalties which will start at 200% of the tax liability.
The RTC rules cover:
- income tax, capital gains tax and inheritance tax;
- offshore matters (broadly income, gains or assets outside the UK) and offshore transfers (transfers of UK income, gains or assets out of the UK); and
- non-compliance – whether deliberate, careless, or even an innocent mistake including incorrect returns, failure to submit returns and a failure to notify that a return should be issued.
Corrections must take place by 30 September 2018, but any disclosure should take place as soon as possible.
For more information on the RTC, please see HMRC’s guidance.
Source: HMRC updated Guidance: Requirement to Correct tax due on offshore assets – dated 21 August 2018.
The electronic execution of documents
As part of the programme of Law Reform in England and Wales the Law Commission (LC) has been looking into certain areas of contract law, especially considering the so-called "smart contracts" and the use of technology. This included two aspects of the electronic execution of documents:
- The use of electronic signatures to execute documents where there is a statutory requirement that a document must be “signed”.
- The electronic execution of deeds, including the requirements of witnessing and attestation and delivery.
Despite the various statutory provisions relating to electronic signatures, it seems that there is a lot of uncertainty about what is and what is not valid. By publishing its early findings the LC aims to remove the current uncertainty.
Unsurprisingly, the LC has confirmed that electronic signatures can be used to sign formal legal contracts under English law.
The LC then goes on to propose various steps to improve and simplify the law in this area (as well as bringing it into the 21st century) - this is the subject of the consultation launched on 21 August. The aim is to make signing formal documents more convenient, speed up transactions and get business booming, according to the statement from the LC.
The LC's proposals include the following:
(i) that electronic signatures could be witnessed via a webcam or video link instead of having someone physically present to witness a signature
(ii) that there should be a move away from traditional witnessing in person to:
- a signing platform alone, where the signatory and witness are logged onto the same programme from different locations; or
- the ability of a person to “acknowledge” that they applied an electronic signature as a witness after the event;
(iii) there should be a further project on whether the concept of deeds is fit for purpose in the 21st century; and
(iv) the formation of a Government-backed industry working group to consider the on-going practical issues around the use of electronic signatures and how these can be improved.
Given that some of the law on the execution of documents goes back to the seventeenth century it is high time that reform should take place.
Those who are involved in the setting up of trusts for their clients will be especially aware of some of the difficulties involved in ensuring that a trust deed is validly executed and the problems arising when the requirements for a valid deed have not been complied with. The proposals to look at the law of deeds is therefore particularly welcome.
The Electronic Execution of Documents consultation is available here.
The deadline for responses is 23 November 2018.
Source: Electronic execution of documents – current project status – published by the Law Commission on 21 August 2018.
FTT allows extra-statutory concession in CGT main residence relief case
In the recent case of McHugh v HMRC (2018 UKFTT 403 TC), the First-tier Tribunal were asked to consider the question of whether private residence relief from capital gains tax (CGT) should be given in respect of any part of a three-year period of ownership that preceded the taxpayer’s occupation of the property.
Gains made on the sale of a taxpayer’s main residence are usually exempt from CGT by virtue of principal private residence (PPR) relief. If, however, the taxpayer has not occupied the property as their main residence for the entire period of ownership, part of the gain may be subject to tax. In such cases, the gain is apportioned between periods of occupation and periods of non-occupation to determine how much of the gain should be relieved and what proportion should be chargeable. In this respect, certain absences will qualify as ‘deemed’ periods of occupation despite the fact that the taxpayer may have lived elsewhere during that time. These deemed periods of occupation include (inter alia) the final 18 months of ownership.
In addition, there is an extra-statutory concession (ESC D49) which allows relief where there is a delay in taking up occupation after acquisition of the property/land either because a house is to be built on the acquired land, or the purchaser was either unable to sell their old home immediately or they needed to carry out renovation or refurbishment works to the new property before they could move in. The concession allows relief for a period up to 12 months, although where there are good reasons for the period exceeding 12 months which are outside the individual’s control the period may be extended to 24 months. If the build or renovation period exceeds 24 months, so that the taxpayer does not move into the property for more than 24 months after acquiring it, HMRC’s CGT Manual states that no part of the extra-statutory concessionary period will be available to the taxpayer.
In the McHugh case, the taxpayers had acquired the land in 2004 to build themselves a new house. They occupied the new build as their principal private residence from the end of 2007 until they sold it in September 2010. As the period between their acquisition and their occupation of the property was more than two years, Mr and Mrs McHugh did not meet the published terms of the concession and HMRC determined that the part of the gain corresponding to the three-year period of non-occupation was therefore chargeable to CGT.
Mr and Mrs McHugh appealed to the First-tier Tribunal who ruled that HMRC's interpretation of ESC D49 was 'absurd and unfair', and although the tax officer had followed an example set out in its CGT Manual, this example was incorrect ‘and should not be applied or followed’. Instead, in cases where a build or renovation takes longer than the 12 or 24-month period, as appropriate, the concessionary period should be limited to a maximum of 24 months – not disallowed altogether. Accordingly, the taxpayer’s appeal was allowed and the chargeable period was reduced by 24 months.
The FTT decision is surprising – not least because it has no jurisdiction to consider the application of extra-statutory concessions! If a taxpayer wishes to challenge HMRC’s refusal to apply an extra-statutory concession, this must usually be done by way of judicial review proceedings. It will therefore be interesting to see whether HMRC amends its guidance on the application of the concession or appeal against the FTT decision.
Source: McHugh v HMRC (2018 UK FTT403 TC)
New fuel rate published for electric company cars
(AF1, AF2, JO3, RO3)
HMRC has, for the first time, published an Advisory Fuel Rate for electric company cars. It will be 4p a mile.
In its August Employer bulletin, HMRC has said that it will now accept that there’s no profit, and no Class 1 National Insurance to pay, if an employer pays up to 4p per mile when reimbursing employees for business travel in a fully electric company car.
Employers are allowed to use another rate which better reflects their circumstances if, for example, their cars are more efficient, or if the cost of business travel is higher than the guideline rate. However, if they pay a rate that is higher than the advisory rate and can’t demonstrate the electricity cost per mile is higher, they’ll have to treat any excess as taxable profit and as earnings for Class 1 National Insurance purposes.
This will also help to resolve what had been an ongoing complication with fully electric company cars, as employers couldn’t previously use Advisory Fuel Rates to reimburse employees, and so the tax treatment until now has depended on the use of the car.
While electricity is not considered by HMRC as a fuel for tax and National Insurance purposes, the Advisory Electricity Rate will be published alongside its Advisory Fuel Rates. And, as with the Advisory Fuel Rates, the new Advisory Electricity Rate will be reviewed quarterly.
Source: HMRC Employer Bulletin – dated 15 August 2018.
(AF4, ER1, FA7, LP2, RO2, RO7)
In recent weeks there have been rumours, originating initially from The Sun, that the Treasury is contemplating a fresh increase in stamp duty land tax (SDLT) on buy-to-let (BTL) properties. The idea comes at a time when SDLT receipts are showing signs of flagging.
In the first three months of 2018/19, SDLT receipts were down nearly 11% on the corresponding period in 2017/18. The latest (June 2018) rolling 12-month figure for SDLT income is £12.569bn against a peak of £13.04bn in January 2018. The Office for Budget Responsibility’s projection for SDLT income in this financial year is £12.9bn, virtually unchanged on last year’s outturn. Mr Hammond could therefore find tweaking rates attractive, provided the overall result is increased revenue.
Against this background there has been some attention given to figures released on 14 August 2018 by UK Finance on mortgage lending. These showed that there were 5,400 new BTL home purchase mortgages completed in June, 19.4% fewer than in the same month a year earlier. By value this represented £0.8bn of lending, 11.1% down year-on-year. The press release accompanying the figures noted that “…though the full impact has yet to be felt, tax and regulatory changes continue to bear down on borrowing activity in the buy-to-let purchase market”.
The trend of BTL lending has been heading downwards since the extra 3% SDLT on second properties took effect in April 2016. Many BTL purchases were brought forward to March 2016, when £4.3bn was lent to 29,700 borrowers. However, there has been no recovery from the immediately subsequent drop in sales, as the graph below shows.
The SDLT figures are a good example of the difficulties Mr Hammond faces as he contemplates an Autumn Budget where he needs to explain how the NHS’s extra £20bn a year is to be financed. The law of diminishing returns is starting to bite in some areas.
Source: Sun Newspaper 4 August; UK Finance Press Release 14 August; HMRC statistics Tax Receipts published, 21 August
Scotland land and buildings transaction tax
Revenue Scotland has published its latest Land and Buildings Transaction Tax (LBTT) Technical Bulletin providing up-to-date information about first-time buyer relief, additional dwelling supplement, group relief and ‘share pledges’ and commercial leases three-yearly reviews.
In this article we highlight first-time buyer relief.
First-time buyer relief
Subject to the satisfaction of certain conditions, the relief raises the zero-tax threshold for eligible first-time buyers purchasing a dwelling from £145,000 to £175,000.
First-time buyers purchasing a dwelling above £175,000 are also entitled to relief on the portion of the price below the threshold.
It is important to note that where there is more than one buyer, the relief will be available only if each buyer is a first-time buyer. If any of the buyers do not meet all the conditions then the relief will not be available.
The relief only applies to transactions where the contract is entered into on or after 9 February 2018 and the effective date of the transaction is on or after 30 June 2018. It is therefore not available for any transactions with an effective date before 30 June 2018.
The Revenue Scotland website has also been updated with guidance, examples and also a LBTT calculator which will no doubt be very useful for those falling into this category.
Source: LBTT Technical Bulletin 4 published by Revenue Scotland on 10 August 2018.
Student loans: new interest rates and other payment factors
The interest rates on student loans is set by the Department for Education for 12-month periods beginning from 1 September. The latest rates have just been announced and posted on the Student Loans Company (SLC) website.
Plan 1 loan rates (English and Welsh students pre-September 2012; all Scottish and Northern Ireland students)
The rate is the lower of the Bank of England Base Rate +1% and the March RPI inflation rate (3.3% in 2018). The figure for the coming 12 months is thus 1.75%.
The repayment threshold will rise for 2019/20 by £605 (3.3%) to £18,935.
Plan 2 loan rates (English and Welsh students from September 2012)
The rate basis for these loans also revolves around the March RPI rate, but is more complicated:
While studying and until the April after leaving the course
RPI + 3% (ie. 6.3%)
Repayment from the April after leaving the course
Variable rate, dependent upon income.
3.3%, where income is £25,725 or less, rising on a sliding scale up to 6.3%, where income is £46,305 or more.
The repayment threshold will rise for 2019/20 by £725 (2.9%) to £25,725.
The increase in the repayment thresholds means that from next April for any given level of income, repayments will fall by a maximum of £54.45 a year for Plan 1 loans and £65.25 for Plan 2 loans. However, for many graduates their student loan repayment savings will be more than countered by increased automatic enrolment pension contributions.
Lower repayments also mean a potentially longer repayment period, even before the interest rate rise is factored in. The one saving grace is that the Government expects to write off not far short of half the total outstanding loan plus interest. Viewed another way, the Institute for Fiscal Studies calculates this means that perhaps 80% of graduates will never fully repay their loans.
Source: SLC News Release 20/8/19
New venture capital reliefs become law
A number of changes were announced in the 2017 Autumn Budget in relation to three venture capital reliefs - Enterprise Investment (EIS), Venture Capital Trust (VCT) and Seed Enterprise Investment (SEIS) schemes. The required regulations have now been made, officially bringing the following changes into force:
- Risk to capital - new rules intended to ensure that tax reliefs for EIS, VCT and SEIS businesses flow to risk-taking businesses and not those focused on delivering predominantly tax-motivated returns, apply to shares or securities issued on or after 15 March 2018.
These rules apply a new condition to the EIS, VCT and SEIS rules to exclude investments where the tax relief provides most of the return for an investor with limited risk to the original investment (that is, preserving an investor’s capital).
- Knowledge-intensive companies (KICs) – enhanced relief limits for KICs apply for shares issued, and investments made, on or after 6 April 2018, including:
- the doubling of the amount that can be invested by individuals through EIS, from £1 million to £2 million; and
- an increase in the amount that can be invested in total in KICs, through EIS or VCT, from £5 million to £10 million.
The enhanced £2 million investment limit applies where the amount, or the sum of the amounts, subscribed for qualifying shares that are KIC shares is £1 million or more. Otherwise, it is £1 million plus the amount, or the sum of the amounts, subscribed for qualifying shares that are KIC shares.
- Various provisions in relation to VCTs, including where a VCT makes a further issue of shares after its first issue – a VCT must invest at least 30% of the money raised by the further issue within 12 months of the end of the accounting period in which the further issue was made. This applies in relation to such a share issue made in an accounting period beginning on or after 6 April 2018.
Source: HM Treasury Statutory instrument; 2018 No. 931 (C. 71) – dated 8 August 2018.
Help to buy ISAs
According to a recent Government press release, more than 1.2 million people have opened a Help to Buy ISA account. Latest Government statistics show that:
- the average Help to Buy bonus claim has reached £800, a new record; and
- 146,753 property completions have been supported by the scheme, which has helped to finance the purchase of properties worth £25.3 billion in total.
The Government introduced the Help to Buy ISA in the 2015 Budget. It’s available to UK residents over the age of 16 for a temporary period of four years, which started in December 2015 and ends in November 2019.
Savers can open accounts with an initial deposit of up to £1,200 and are then able to save up to £200 a month. They can receive a tax-free Government bonus equal to 25% of the amount saved (including interest) when funds are paid on completion of the purchase of a first home costing up to £250,000 (£450,000 in London).
The Government bonus is capped at an overall maximum of £3,000 (ie. on £12,000 of savings) and subject to a £400 de minimis amount, meaning that savers must save a minimum amount of £1,600 to receive any bonus.
Savers can’t have another active cash ISA in the same tax year. If they have opened a cash ISA in the same tax year, they can still open a Help to Buy ISA but will have to transfer £1,200 from their cash ISA to their Help to Buy ISA, and the balance of their cash ISA to another account.
First-time buyers (and others saving for the long term) can also save through the Lifetime
ISA, which enables those between the ages of 18 and 40 to save up to £4,000 in each tax year with the added benefit of the Government providing a 25% bonus on the contributions paid in a tax year at the end of that tax year.
With 1.2 million investors, the Help to Buy ISA seems to be faring somewhat better than the Lifetime ISA.
The Government’s original Tax Information and Impact Note for the Lifetime ISA estimated over 200,000 accounts would be opened in the first year to 5 April 2018. However, in May, John Glen, Economic Secretary to the Treasury, confirmed that initial reports to HMRC for the 2017/18 tax year showed approximately 170,000 accounts were opened. Although he did add that the Government expected the final figure for 2017/18 to change as a result of the receipt of late or amended returns from providers.
In answer to a call from one Labour MP to make an assessment of the potential merits of closing the Lifetime ISA to new entrants, Mr. Glen simply said
“The Government keeps all aspects of the tax system under review. Where appropriate, future changes may be made through the annual Budget process.”
Source: HM Treasury Help to Buy: ISA scheme Quarterly statistics – dated 16 August 2018
Government borrowing figures improve
(AF4, FA7, LP2, RO2)
As thoughts start to turn towards the Autumn Budget, more attention will be focused on the Government borrowing figures. The Chancellor is due to explain in the next Budget where he will find the extra funding that the Prime Minister has promised for the NHS. The lower the borrowing figures come in for 2018/19, the less the Chancellor will have to push through tax increases (however disguised) in the coming years.
Mr Hammond will therefore be pleased with the latest borrowing figures, which showed that, in July, there was no borrowing. The Exchequer enjoyed that rare experience, normally confined to Januaries, of a surplus. In this instance the excess income amounted to £2bn, the largest July surplus since 2000 and £0.9bn above market expectations. July is traditionally a good month for tax receipts for the same reason as is January – the payment of self-assessment income tax. In July 2018 self-assessment delivered £9.0bn, almost £1.0bn more than last year.
The better than expected July receipts and a downward revision from the Office for National Statistics (ONS) for the first quarter mean that the borrowing figures for the first four months of 2018/19 paint a relatively healthy picture. Total net borrowing in the first third of the year amounted to £12.8bn, a chunky £8.5bn less than in the corresponding period for 2017 and the lowest for this stage of the financial year since 2002.
If – and it is a major if – the rest of the year follows a similar pattern to 2017/18, the Chancellor could end 2018/19 with borrowing of around £24bn. That would be £15.4bn below the latest (revised) estimate for 2017/18 and £13.1bn less than the Office for Budget Responsibility (OBR) projected at the time of the Spring Statement.
Income tax receipts in the first four months of 2018/19 rose by 6.5% year-on-year, much faster than the rate of earnings growth (most recently recorded at 2.4% by the ONS). The gap is a reminder of how the inflow to the Exchequer is being boosted by fiscal drag (the non-indexation of many elements of the system).
Source: Government Borrowing issued Figures – ONS Statistics 21 August 2018
Venture capital trusts - a straw in the wind?
(AF4, FA7, LP2, RO2)
Very recently Mobeus Income and Growth 4 VCT released its half-year results. At the same time the Company announced that it had decided to suspend its dividend reinvestment scheme until further notice. The reasons given were “the Company's recent successful fundraising and current relatively high cash position”. In fact, the half yearly results revealed the Company had 42.6% of its net assets (£24.4m) in “cash or near cash” resources. The last dividend reinvestment had raised less than £0.6m – over 75% of the shareholders took the dividend rather than reinvest.
The logic behind the Mobeus decision is likely to be repeated elsewhere. According to the Association of Investment Companies (AIC), VCTs raised £728m in 2017/18, an increase of 34.3% over the previous year and a record beaten only when income tax relief was 40%. Many VCTs successfully rushed to raise funds ahead of expected changes in the Autumn 2017 Budget. The changes that did emerge in that Budget are now being digested. Anecdotal evidence suggests that for some VCTs it has meant a slowing down in the number of deals and more competition to provide funds for VCT-eligible companies.
One aspect of the new Finance Act 2018 rules, which Mobeus Income and Growth 4 VCT highlighted, was the requirement to invest at least 30% of funds raised in qualifying securities within 12 months of the end of the accounting period following that in which the money is raised. For VCTs with 31 March financial year ends, that can mean tax year end fundraising will have to be 30% invested in little more than a year. The restriction applies for accounting periods commencing on or after 6 April 2018, so not all trusts are yet within its scope, a factor which might influence fundraising in the short term.
This tax year’s VCT fund raising round promises to be a challenging one for all sides. Advisers should take note of the level of liquidity already held by any trust seeking fresh funds as well as the way in which fees are applied to cash holdings.
Source: VCTs – AIC statistics published 10 April 2018
The July inflation numbers
(AF4, FA7, LP2, RO2)
The CPI for July showed an annual rate of 2.5%, up 0.1% from the previous month and the first rise since last November, when CPI peaked at 3.1%. Across July prices were flat, whereas they fell 0.1% between June 2017 and July 2017. The market consensus had been for an increase to a 2.5% annual rate, driven by rising oil and utility prices. The CPI/RPI gap narrowed by 0.3% to 0.7%, with the RPI annual rate falling from 3.4% to 3.2%. Over the month, the RPI was up 0.3%. July’s year-on-year RPI figure is important as it currently sets the basis for increases in regulated rail fares (although the Transport Secretary, Chris Grayling, is talking about moving to the use of CPI).
The ONS’s favoured CPIH index was flat for the month at 2.3%. The ONS notes the following significant factors across the month:
Recreation and culture: The largest upward effect on the CPIH measure came from this category, where prices rose by 0.5% between June and July this year compared with a fall of 0.1% between the same two months a year ago. Once again, the ONS blamed the move on the volatility of games prices and changes in the composition of the bestseller charts. For example, last month games provided one of the main deflationary pressures.
Transport: This category also produced an upward contribution. Transport fares rose and, while fuel prices fell across the month, the drop was less than a year ago.
Miscellaneous goods and services: The largest downward contribution came from this rag bag sector, with the ONS highlighting insurance and the initial charges for unit trust investments. The ONS notes “some companies have recently removed their initial fees for these investments”.
Clothing and footwear: This category produced a small downward effect, with prices of clothing falling by 3.7% between June and July this year compared with a fall of 2.9% between the same two months a year ago. The effect came mainly from women’s clothing and footwear.
In five of the twelve broad CPI categories, annual inflation increased, while six categories posted a decline. Transport remains the highest category with an annual inflation rate now of 5.7%, the next highest being alcoholic beverages and tobacco at 3.5%.
Core CPI inflation (CPI excluding energy, food, alcohol and tobacco) was stable at 1.9%. Both goods inflation, at 2.6%, and services inflation, at 2.3%, were also unchanged.
Producer Price Inflation was 3.1% on an annual basis, down 0.2% on the output (factory gate) measure. However, input prices rose for the fifth consecutive month to 10.9%, up 0.6% on June. The main driver here was oil prices.
These figures emerged the day after Labour Market statistics which showed a 0.1% fall in the growth of average weekly earnings (including bonuses) to 2.4%. Ironically, one of the reasons the Bank of England put forward for this month’s base rate increase was an expectation of accelerating pay growth because of the tight labour market.
Source: Office for National Statistics statistical bulletin ‘Consumer price inflation, UK: July 2018 published 15 August 2018
The longest bull run ever
(AF4, FA7, LP2, RO2)
On 22 August, the main US stock market index, the S&P 500, dipped marginally but still managed to set a new record. 22 August 2018 marked 3,453 days of bull market, which many commentators hailed as the longest ever for the index. That period topped the previous record, set between 1990 and 2000, when the US market enjoyed an internet-led technology boom, ending with the dot-com bust.
The latest bull market arguably started on 9 March 2009 when share prices bottomed out in the wake of the 2007/08 financial crisis and the demise of Lehman Brothers in the previous September. At its low, the S&P 500 hit the devil’s number – 666 – a memorable floor from which it has since risen to a new closing high. As the graph above shows, there were a few hiccups on the way, such as the 2010 flash crash, the drop caused by concerns about China in the second half of 2015 and the sudden return of volatility at the start of this year. Nevertheless, since March 2009 the S&P 500 has achieved annual growth of 16.7%. UK investors in the US market would have done marginally better as the pound has fallen 6.6% against the dollar since March 2009.
The S&P 500’s record run has thrown up a number of interesting facts, which may (or may not) give comfort to those worried about the continued longevity of what has been described as the most-hated bull market of all time:
- The generally accepted definition of a bear market, which puts an end to any bull market measurement, is a fall of 20% from the previous peak. However, the start date of the previous longest run (1990 to 2000) began after a market drop of 19.92%, not 20%. Stick precisely to the 20% threshold and the tech-bust of 2000 ended a bull market which started in December 1987 – a 4,494 day stretch.
To add a further twist, the market sell-off in 2011, prompted by political dispute over the US debt ceiling, was also over 19%, but under 20%.
- The 1990-2000 run produced a higher gain over the shorter period – 417% over 3,452 days against 323% over 3,453 days for 2009-2018.
- Look at the performance of the S&P 500’s components since March 2009 and three sectors stand out. Consumer Discretionary posted gains of over 610% and Information Technology over 530%. Together those two sectors cover the FAANGs (Facebook, Apple, Amazon, Netflix and Google/Alphabet). Coming up third was Financials, a reflection of the recovery of the banks from the 2007/08 financial crisis.
- Studying just the index numbers does not give a full picture of market value. The price/earnings ratio for the S&P 500 is currently around 24 whereas at the peak of the dot-com boom it was over 46. However, the S&P 500 index is 85% above its March 2000 level.
- For most of the current bull market, dollar interest rates have been ultra-low and there has been no shortage of cash, thanks largely to quantitative easing. The Federal Reserve kept its main rate at 0%-0.25% for seven years from December 2008 and only crossed the 1% barrier in June 2017. By the end of 2019 the Fed consensus is that the rate will be 3.25%-3.50% and quantitative easing is now running in reverse and accelerating.
- The current dividend yield on the S&P 500 is 1.77%, whereas the drumbeat of rising interest rates means that 2-year US Treasury bonds offer a yield of 2.62%. Holding cash and near cash is now a viable alternative for income-seeking investors.
- In global terms, the USA market appears expensive. As at the end of July 2018, MSCI’s World Ex USA Index had a price/earnings ratio of 16.29 and a dividend yield of 3.10%.
However you measure it, the USA stock market has enjoyed a long, strong run in this decade. How much further it has to go is a question which seems to have been around almost since the rally started.
Source: FT, Wall Street Journal, New York Times, Federal Reserve, MSCI
TPR and FCA launch a campaign to combat pension scams
(AF3, FA2, JO5, RO4, RO8)
Following a poll run by YouGov Plc a campaign has been launched by TPR and FCA targeting those aged 45-65. This age group are deemed the most at risk from pension scams. The advertising campaign is called SmartScam and shows the contrast between the impact on the victims of pension scams and the lifestyles enjoyed at their expense by the criminals.
The poll revealed:
- Almost a third (32%) of pension holders aged 45 to 65 would not know how to check whether they are speaking with a legitimate pensions adviser or provider.
- Victims of pension scammers lost an average of £91,000 each in 2017.
- One in eight 45-65-year-olds surveyed (12%) said they would trust an offer of a ‘free pension review’ from someone claiming to be a pension advisor
The FCA and TPR are urging the public to be ScamSmart with their pension and always check who they’re dealing with. The regulators recommend four simple steps to protect yourself from pension scams:
- Reject unexpected pension offers whether made online, on social media or over the phone.
- Check who you’re dealing with before changing your pension arrangements. Check the FCA Registeror call the FCA contact centre on 0800 111 6768 to see if the firm you are dealing with is authorised by the FCA.
- Don’t be rushed or pressured into making any decision about your pension.
- Consider getting impartial information and advice.
Copies of the posters and leaflets are available from the FCA.
Pension’s ombudsman publishes corporate plan 2018-21
(AF3, FA2, JO5, RO4, RO8)
The Pensions Ombudsman Service has published its Corporate Plan for the years 2018 to 2021. The document sets out high level strategic aims and underlying key deliverables. The strategic aims are:
- Providing one centre for the resolution of workplace and personal pension complaints
- Supporting and influencing the pensions industry and the wider alternative dispute resolution sector to deliver effective dispute resolution
- Transforming and improving services and processes
Each of these are then broken down into commitments for the next three years and key deliverables needed to achieve this.
The plan also looks back at the current case load as well as the finances of the Ombudsman.
PPF publishes updated PPF 7800 index – August 2018
(AF3, FA2, JO5, RO4, RO8)
Since July 2007 the Pension Protection Fund has published the latest estimated funding position, on a s179 basis, for the defined benefit schemes in its eligible universe.
August 2018 Update Highlights
- The aggregate deficit of the 5,588 schemes in the PPF 7800 Index is estimated to have decreased over the month to £62.8 billion at the end of July 2018, from a deficit of £85.6 billion at the end of June 2018.
- The funding level increased from 94.9 per cent at end of June 2018 to 96.3 per cent.
- Total assets were £1,621.4 billion and total liabilities were £1,684.2 billion.
- There were 3,537 schemes in deficit and 2,051 schemes in surplus.
The PPF 7800 index is published on the second Tuesday of every month, and the PPF publishes The Purple Book each year.