Content Plus November 2017

Content Plus November 2017

 

Almost but not quite – near miss on inflation helps boost interest rate

September inflation was just low enough to spare Mark Carney writing to the Chancellor. And helped spur the first interest rate rise in a decade.

 cpi inflation

Source: National Statistics

Each year the Chancellor of the day gives the Bank of England an inflation target to meet. Ever since Gordon Brown changed the inflation index used to the Consumer Prices Index (CPI), that target has been 2%. The Bank is given a leeway of 1%, so provided the annual CPI figure is between 1% and 3%, it is deemed to be meeting its target.

Once either boundary is crossed, the Governor of the Bank of England must write a letter to the Chancellor explaining why inflation is off target. Three months’ later the Governor must repeat the process unless inflation has returned to its allotted corridor.

Some economists thought that last month that the Governor, Mark Carney, would be picking up his pen to explain to Philip Hammond why inflation was running at over 3%. It would not have been Mr Carney’s first letter – as the graph shows, he has also had to exercise his correspondence skills in explanation of a sub-1% rate: the last of those letters was sent at the end of 2016.

Not over yet

In the event, Mr Carney’s pen was unused, but by the thinnest margin possible as the figure hit 3%. Even the Governor now thinks that the next CPI number will see his letter-writing resumed. That is one reason why the Bank decided on a 0.25% interest rate increase at the beginning of November. What happens next is less clear. The Bank expects inflation to decline gradually as the impact of the pound’s post Brexit fall disappears from annual comparisons. However, the Bank’s latest Quarterly Inflation Report sees inflation only back at close to 2% by mid-2020, conditioned on a gently rising path of Bank Rate”.

The November rate increase was accompanied by a statement that the “any future increases in Bank Rate would be expected to be at a gradual pace and to a limited extent” In other words, should you be hoping that deposit interest rates are going to catch up with inflation, you could have a long wait. If you are holding larger sums on deposit than required for your rainy day needs, talk to us about your other options.

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.


A pensioners’ bonanza?

State pensions will rise by 3% next April, but it’s not all strictly good news.

On the day that a CPI inflation rate of 3% was announced, the BBC website covering the rise had a picture of pensioners “dancing for joy”. The supposed reason for their jollity was that the 3% September inflation figure was the one that would be used to fix state pension increases from April 2018.

The BBC’s response was understandable, but simplistic. Pensioners will be no better off because their increased income is, in theory, matched by increased prices. In practice they may be marginally better or worse off, depending upon how their spending pattern compares with the “shopping basket” used to calculate the CPI. The twelve components of that index showed annual inflation ranging from 4.3% (alcoholic drinks and tobacco) to 1.4% (miscellaneous goods and services).

…and on private pensions?

At least state pensions have inflation linking. Such protection is by no means certain among private pensions. Most large occupational final salary schemes offer inflation-proofing to their pensioners, although outside the public sector schemes increases may be capped. In the past, many people drawing benefits from personal pensions and similar arrangements have chosen to buy an annuity with no inflation protection. While the initial (level) income was much higher, its real value was steadily eroded by inflation. For example, £1 in September 2007 now has a buying power of 78.7p, based on CPI inflation.

Have your retirement plans allowed for retirement inflation? In today’s annuity market, an inflation linked annuity for a 65-year old costs about 60% more than its non-increasing counterpart. You may well choose not to buy any form of annuity at retirement, but the costs of providing enough to be ‘dancing for joy’ will still be substantial.

Occupational pensions are regulated by The Pensions Regulator. 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.

 


Rise in popularity for venture capital trusts

New figures from HMRC show a large jump in VCT investments in 2016/17. 

In September HM Revenue & Customs (HMRC) issued updated statistics on the funds raised by venture capital trusts (VCTs). These showed that investment during last tax year reached £570m, an increase of over 28% on 2015/16. This was the highest level of VCT capital raising since the 2005/06.

The rising popularity of VCTs, despite their high risk nature, is due to a variety of factors:

  • The reductions in the both the lifetime allowance and the annual allowance in recent years have made pension contributions no longer a tax-efficient option for a growing number of high earners. At worst a contribution could attract no income tax relief, but still produce a retirement benefit that suffers up to 55% tax.

 

  • HMRC’s successful campaigns against artificial tax avoidance schemes and a changing public attitude have discouraged the use of aggressive, loophole-seeking arrangements.

 

  • The VCT market has matured, with a steady pattern of fund mergers creating larger, more liquid VCTs with fixed costs spread more thinly. The sector now has assets under management of over £3.6bn.

 

  • The VCT tax reliefs are attractive:

 

  • Income tax relief of 30% on up to £200,000 investment per tax year, provided the shares are held for five years and you have paid enough income tax to match the relief you claim.

 

  • Tax-free dividends – a saving of up to 38.1%.

 

  • No capital gains tax – a saving of up to 20%.

In the run up to the Autumn Budget there has been a large crop of VCT share issues, partly driven by expectations that the Budget will alter VCT investment rules. If you want to know which VCTs are still available to new investors, 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.


Has your income risen by 14.3% over the past year?

Statistics show that dividends from UK shares are still rising rapidly.

 

Source: Capita Asset Services. Overall 2017e figure is Capita estimate

The latest quarterly ‘UK Dividend Monitor’ from Capita Asset Services paints a rosy picture for income-seeking investors in UK shares. As Capita noted, “Companies are very cash-generative, which is strongly supporting dividend payments... The easy gains from the pound’s devaluation, where dividends declared in dollars or euros were translated at much more favourable exchange rates, are now behind us, but the profits of those companies with a UK cost-base and overseas markets for their goods and services can continue to benefit.”

Capita’s number crunchers calculated that in the third quarter of 2017:

  • Total dividends from UK shares were 14.3% higher than in the third quarter of 2016.

 

  • Special (one-off) dividends rose by two fifths, year-on-year.

 

  • Stripping out the special payments, underlying (regular) dividends were 13.2% higher.

 

  • Whereas sterling’s weakness boosted dividend increases in the first two quarters, it made virtually no difference in the latest figures. Adjusted for currency, underlying dividends were up 12.9%, the fastest quarterly rise since 2012.

In July Capita was projecting 2017 annual underlying dividend growth of 7.4%, but it has now pencilled in a figure of 11.1%. For 2018 it sees dividend growth as “unlikely to be as dramatic”, mainly because “the froth of exchange rate gains will be gone”.

Capita notes that “Equities remained comfortably the most attractive of the main asset classes for income, as they have for several years now.” If your goal is to generate income from your investments, why not talk to us about your routes into UK shares?

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.

 


A different ending for Japan’s election gamble

Not all snap elections turn out the same way...

A right of centre Prime Minister calls an election before the end of the government’s term to take advantage of rising poll numbers and seeming disarray amongst the opposition parties. What could possibly go wrong?

In the UK, the answer was close to everything. Japan, as often happens, is a different matter. Last month, Prime Minister Shinzo Abe went to the polls a year early, seeking a mandate to continue his tough stance to North Korea and “Abenomics”, his three-part economic policy (which includes a sales tax hike in 2019).

Initially, it looked as if Abe had miscalculated, but by the time the polls closed on 22 October, he and his coalition partners had secured a “super majority” – more than two thirds of the seats in the House of Representatives. Abe could now become Japan’s longest-serving prime minister, as the next election is four years away, after the Tokyo Olympics.

The news of Abe’s victory was welcomed by the Japanese stock market, which is relieved that “Abenomics” will continue. Economists expect this will mean more financial stimulus, with ultra-low interest rates for the foreseeable future. Such a backdrop ought to be good news for Japanese shares, which have risen over the past five years that Abe has been in power.

However, research suggests that that most investors, both inside and outside, have so far been unenthusiastic about Japanese companies. The lack of interest is even more surprising given that Japan represents about 8% of global stock markets and has marginally outperformed the world average over the past five years. Abe’s victory and the certainty it brings could mark a rekindling of interest.

If you are one of those who has paid little attention to Japan in recent years, why not talk to us about your options on investing in the world’s fourth largest stock market?

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.