Another non-allowance for personal savings

More details have emerged about the forthcoming personal savings allowance. 

Draft clauses of the Finance Bill 2016 were issued in December, helping to keep tax aficionados amused over the festive season. They were accompanied by a raft of explanatory material, but there were still plenty of questions left unanswered.

One change to tax from 6 April did become clearer: the introduction of the new personal savings allowance (PSA). This was announced in the March 2015 Budget, but very limited information was given about how it would work in practice. The draft clauses and background notes have now told us:

  • If you pay no more than basic rate tax, the allowance will be £1,000, allowing you to earn up to £1,000 of interest (and certain other savings income) in 2016/17 with no tax liability.
  • If you pay any higher rate tax, then the allowance will be £500. This cliff edge approach will leave a small number of just-higher-rate taxpayers worse off than those with greater or smaller incomes.
  • If you pay any additional rate tax, then the allowance will be nil – another cliff edge, but arguably with less impact.
  • Despite its name, the allowance is not an allowance, but more like a 0% tax band. To quote HMRC, “income that is within an individual’s saving allowance will still count towards their basic or higher rate limits”.
  • HMRC reckon that “around 95% of taxpayers will not have any tax to pay on their savings income”. If you are in the other 5% then HMRC will be introducing automatic coding out through the Pay As You Earn (PAYE) system, based on “information supplied by account providers”.

The new allowance could be worth a tax saving of up to £200 a year, but with interest rates so low, do talk to us about how – or even whether – the allowance is worth using to the full.

The value of tax reliefs depends on your individual circumstances. Tax laws can change. The Financial Conduct Authority does not regulate tax advice.

The 65+ Guaranteed Bond matures

National Savings & Investments (NS&I) has announced reinvestment terms for the 65+ bonds that were so popular a year ago.

In his March 2014 Budget, the Chancellor promised that in January 2015 NS&I would launch “market-leading savings bonds for people aged 65 and over” When the rates were eventually confirmed, they were indeed market-leading – 2.8% for one year and 4% for three years. Some commentators saw the offering as being more influenced by pensioners’ propensity to vote in elections than the need to raise government finance as cheaply as possible.

The one year bonds are now starting to reach maturity. This time around the Chancellor has said nothing about providing “certainty and a good return for those who have saved all their lives and now mostly rely on their savings for income”. Instead he has left NS&I to reveal that anyone wanting to reinvest for another year can choose a Guaranteed Bonus Bond, paying 1.45% – just over half the 65+ bond rate. There is the option to invest for longer terms, up to five years, but half a decade will only fix an interest rate of 2.55%. Even in an environment of very low interest rates, the returns offered by NS&I are uncompetitive: the market leaders pay at least 0.5% more.

If you have one of these bonds reaching maturity, do talk to us before deciding what to do. There are many other options that offer more attractive income rates, albeit without the security of backing from HM Treasury.

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. 

Selling your pension annuity

The government has set out further details about the secondary annuity market.  

In last March’s Budget the Chancellor launched a consultation considering how existing pension annuity holders would be able to sell their annuity in return for a taxable lump sum.  The logic behind the idea was to give existing pensioners the same flexibility as is available to those now reaching retirement.

The creation of a secondary annuity market raised some complex issues and by the second Budget of 2015 the Chancellor had decided that implementation would be delayed until April 2017. Even then, the most obvious purchasers – the original annuity providers – will face restrictions on buying back their own annuities. In most instances sales will have to be arranged through intermediaries, adding to the costs.

The government will legislate to require that anyone planning to sell an annuity “above a certain [unspecified] value” will have to take advice first. One reason for this is that in the government’s view, “For most people, retaining an annuity will still be the best choice – it provides a regular, guaranteed income for life…”.  Another reason is that the value placed on an existing annuity is likely to be relatively poor: any prospective buyer will be looking to cover their expenses and then receive a return better than current annuity rates imply. In any event, the option of a sale is not assured, as there will be no obligation on insurance companies to allow their policies to be traded.

One interesting aspect of the government’s proposals is that the sale option will apply to new annuities, not just those in being before pension flexibility was introduced. However, that could prove an expensive lifeline. If you are nearing retirement, it is far better to take advice before drawing benefits rather than hoping to unscramble an error at a later date.

The value of your investment can go down as well as up and you may not get back the full amount you invested.

US interest rates: we have lift off

A long-awaited event happened in mid-December.

The mid-December front pages of the national press were pre-occupied with the launch of a rocket from Kazakhstan containing Tim Peake, the UK’s first European Space Agency astronaut. At virtually the same time, the business pages were pre-occupied with another fanfare-laden lift off: a rise in US interest rates.

The transatlantic interest rate rise was the first increase since June 2006 and the first change in rates since the US Federal Reserve brought them down to a 0%-0.25% range in December 2008. The market had originally been anticipating a rise in September, but the Fed stayed its hand, worried about the ructions in Chinese financial markets. In December there were no such concerns.

The Fed’s move does not mean a UK interest rate rise is any more imminent. Unusually, global interest rates are out of sync, so in December, shortly before the US increase, the European Central Bank (ECB) cut one of its main interest rates. Further ECB cuts have not been ruled out, while at the same time many pundits are predicting another 0.25% will be added to US interest rates in March. The market’s current expectation for the UK is that it may be almost another year before base rate moves off the 0.5% where it was parked in March 2009. However, it has to be said that there are many people – including the Bank of England’s governor – who have been embarrassed by their predictions of when UK interest rates would pick up.

Stock markets were initially buoyed up by the end of the wait for the US rate rise, but very quickly second thoughts and volatility set in. It remains the case that the average dividend yield of shares in most major markets is well above the level of short term interest rates – in the UK the gap is between a 0.5% base rate and about 3.7% average for the 640 constituents of the FTSE All-Share.

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.

Another mixed year for world stock markets

There were mixed results from the world’s main share markets in 2015, with the US and UK very little changed.

Index 2015 Change
FTSE 100 – 4.9%
FTSE All-Share –  2.5%
Dow Jones Industrial – 2.2%
Standard & Poor’s 500 – 0.7%
Nikkei 225 + 9.1%
Euro Stoxx 50 (€) + 3.9%
Hang Seng –  7.2%
MSCI Emerging Markets (£) -12.2%

Drilling into the raw numbers reveals a few interesting insights:

  • Although the FTSE 100 fell nearly 5%, this was mainly due to the dominance of the index by multinational commodity and energy companies. The FTSE250, which covers medium sized companies with more of a domestic focus, rose by over 8%.
  • Once dividends are taken into account, the FTSE All-Share – the broadest measure of UK shares – produced a positive return of about 1%.
  • Sterling had a mixed year, which reduced the returns for UK investors in some foreign markets, but enhanced them in others. The pound was down 4.3% against the Japanese Yen, but up 5.5% against the Euro. The dollar rose by 5.1% against sterling, helped by the Fed’s long-awaited first interest rate rise in December.
  • Emerging markets turned in widely different returns, particularly once currency movements were taken into account. For all the summer trauma, the main Chinese markets were up on the year.

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.