Investment Market Notes

October 2015

Herewith some market notes from an investment seminar I attended recently at which a number of fund managers were present. 

James Ashley:   Goldman Sachs Asset Management

The view is that the markets are now focussed on broadening and everywhere  is up other than China and BRICS (which is Brazil, Russia, India, China and South Africa ).

Seemingly, the country that recently recorded the highest number of economic breaches and lowest growth in DPPs is Germany

Interest Rates

Greece should be at minus 6% and this reflects the faults in the European ECB operating a system of common interest rates.  Indeed it is felt the ECB will not alter interest rates for a long, long time, perhaps years.

UK – no great increases in inflation are expected and therefore interest rates will remain as they are for a while yet and even then might only increase by ¼% .  Projected is for 3% growth in 2016.

USA – optimistic.  Still some way off another reception but interest rates will go up but FED seem reluctant to do this just yet. 

China – GDP growth has dropped from 15% to 6% since 2006.  Structural changes are taking place but the maxim is not to trust any of the data output. 

India- a really positive position

South America – still some severe challenges

Richard Buxton:   Old Mutual Wealth

Richard is one of the leading fund managers in the industry and is well respected for his views.

70% of the FTSE is made up of business and operations outside the UK.  Within the UK a total healing process is in place and will likely take 15 years; which is twice the norm in these circumstances. 

US – It is the general opinion that the FED ought to increase interest rates but only slightly and the markets are of the view that they should get on with it, but this apart, the US remains solid. 

UK – We could perhaps see bank base rate increases from 0.5% to 2% by 2018 but only by minor changes over that period.  This could then see the markets become more confident .

The UK is considered as being a haven of political and economic stability due to the labour market improving.  Corporate hiring is increasing, the housing market is considered to be steady and therefore no likelihood of a credit boom in the short term.  Spending is now more in line with incomes and further deficit reduction is unlikely to damage economic growth whilst spending cuts and tax increases will help to balance the books over time.

The increase in the minimum wage is encouraging and should be productive, as is the major attacks on Non-Doms and hedge fund taxation which the Government is looking to put in place. 

The General Election was a turning point and it would appear that the UK is well placed globally and likely to continue to be so in the next 10 years.   We are now entering a phase where we should start seeing profit growth from sales rather than companies reducing their costs and overheads because in this respect enough has been achieved and there is now nowhere to go.

It is also thought that there is nothing to fear from the 2016/17 EU referendum and the considered view is that the UK will not leave Europe; predominantly because Germany don’t want us to and therefore David Cameron might have some success with his new negotiations.

The recent volatility on world markets produces an opportunity based on the maxim that “you make most money when people are scared”.  Therefore with the markets currently quite low following the China crisis now could be a good time to invest in the hope that within the next few weeks or months we could see the FTSE growing back to the 7000 mark.

Globalisation is here to stay and this could prevent inflation getting out of hand.

Europe – recovery is real; all be it China is still a concern and having an impact. 

China – as has been reported; slowly growth is taking place and as a result some financial reform.  They are going through a painful transition to consumption and services rather than big infrastructure projects.  In the past the emerging markets have been buoyed by China’s commodity purchase but this has reduced hence the drop in commodity prices which has hit the emerging markets overall. 

 

060515 Pension Freedoms

 

From 6 April 2015 the Government is offering you new options for taking funds out of your pension. Set out below is information about these options and how they could apply to you.

Guidance on these options will also be available from the Government-backed “Pension Wise” service. 

Flexi-Access Drawdown

The first of the new options, “flexi-access drawdown”, places no limit on the amount of income you can take.  This means it is possible to take your entire pension fund in one go, although it may not be sustainable or tax efficient to do so.  If you are reliant on your pension to support you, you may need to consider taking a lower level of income that is sustainable for your lifetime.

You can take 25% of your fund as a tax-free lump sum if you have not previously used that fund for drawdown.  The rest of your fund stays in your pension to provide you with an income.

The amount of the flexi-access drawdown fund withdrawn to provide you with an income will be taxed at your marginal rate of Income Tax.  If you take too much income this may put you into the next tax bracket, meaning you pay a higher rate of tax.

Uncrystallised Funds Pension Lump Sum

The other new option introduced by the Government is the uncrystallised funds pension lump sum (UFPLS).  This provides flexibility, for funds not already in drawdown, as it allows you to take a one off payment from your pension or take a series of lump sums, keeping the remainder of your pension invested.

The first 25% of each UFPLS is tax-free, with the remainder subject to tax.  So, for example, if you withdraw £10,000 from your pension, the first £2,500 will be tax-free and the remaining £7,500 will be taxed at your marginal rate of Income Tax.

You can only take UFPLS up to the “lifetime allowance” which is currently £1.25 million, and the UFPLS is not available from any part of your pension already in drawdown. There are also restrictions on access to UFPLS if you hold certain types of protection of pension benefits.

Changes To Annuities

You will continue to have the option of using your pension fund to purchase a traditional lifetime annuity.  This will pay you an income for life and can pay a level amount or increase over time.

From 6 April 2015 new flexible annuities will also be available. The income can decrease as well as increase, provided that this is stated in the contract when you start the annuity.

How Can You Access The New Pension Freedoms

All those who are in drawdown when the new rules take effect on 6th April will either be in capped or flexible drawdown.  Access to the new pension freedoms differs depending on which option applies to you.

Capped Drawdown

Under capped drawdown you have a maximum level of income that you can take from your pension each year.  This is reviewed every 3 years until you are 75 and annually thereafter.  From 6 April you can continue taking capped drawdown and your review dates will remain unchanged. You also have the option of moving to the new flexi-access drawdown, which will mean the amount of income you take is unlimited and there are no maximum income reviews.

To move to flexi-access drawdown you can take income above your current ‘income cap’ or you can write to us requesting the move and then take any income payment.

Although there is no limit on the amount of income you can take under flexi-access drawdown, it may not be tax efficient to draw significantly higher levels.  If you are reliant on your pension to support you, you may need to consider taking a lower level of income that is sustainable for your lifetime.

If you move from capped drawdown to flexi-access drawdown the amount you can contribute to your pension each year will be reduced - see below (Accessing The Pension Freedoms And Contributions).

Flexible Drawdown

If you have been taking flexible drawdown you will automatically be moved to flexi-access drawdown on 6 April 2015.

Accessing The Pension Freedoms And Contributions

The Government is concerned that people do not abuse the new freedoms by taking higher levels of income to fund further pension contributions which attract tax relief.

Restrictions are being put in place on the amount you can contribute to your pensions once you have flexibly accessed your pension benefits.

Existing Annual Allowance

The annual allowance is the maximum amount you can contribute to all your pensions for tax relief purposes each tax year.  This is currently set at £40,000.

It is also possible to make use of any unused annual allowance from the previous three years, provided you were a member of a pension scheme in those tax years.  This is known as ‘carrying forward’ your annual allowance.

Money Purchase Annual Allowance (MPAA)

Once you have flexibly accessed your pension benefits the amount you can contribute to all money purchase pensions each tax year is restricted.  The lower limit is called the money purchase annual allowance (MPAA).

The MPAA is set at £10,000 and it is not possible to use MPAA from previous tax years.

The existing annual allowance of £40,000 still applies to final salary schemes (also known as a defined benefit scheme) so you can contribute to accrue benefits up to £40,000 per tax year in total without facing tax charges, as long as the amount you contribute to all your money purchase pensions does not exceed £10,000

Triggering The MPAA

The MPAA is triggered:

*        When you take an uncrystallised funds pension lump sum (UFPLS).

*        When you take any income under flexi-access drawdown.

*        When you exceed your income cap in capped drawdown.

*        When you take an income payment after you have told your scheme administrator you want to move from capped drawdown to flexi-access drawdown.

*        When you purchase a flexible annuity that allows income to decrease.

*        On 6th April 2015 if you have previously been taking flexible drawdown.

 

The MPAA is not triggered:

*        When you take a pension commencement lump sum (PCLS) only.

*        If you contribute to take income below your income cap in capped drawdown.

*        When you purchase a traditional lifetime annuity.

*        When you take lump sum death benefits as a beneficiary of some else’s pension.

*        When you take flexi-access drawdown as a beneficiary of someone else’s pension.

 

New Death Benefit Rules

Who can receive the death benefits?

You can nominate whoever you like to receive your death benefits.  This could be your spouse, children or grandchildren, or you can nominate someone unrelated to you, if you wish.  You can also leave some, or all, of your pension fund to charity.

If you do not tell us who you want to leave your fund to we will normally pay it to your dependant(s), if you have any.  You may wish to discuss reviewing your death benefit nomination with your financial adviser.

How are death benefits paid?

Beneficiaries of your pension can choose to take the fund as a lump sum or leave the fund invested and take an income under the new flexi-access drawdown rules.

If they choose drawdown they can take income as and when required, or leave the funds invested indefinitely.  Any funds left invested will continue to benefit from being in the tax-advantaged pension.

How will death benefits be taxed?

The tax treatment of your death benefits depends on two factors:

*        your age when you die; and

*        whether or not the funds are designated to your beneficiary within two years.

If you die before your 75th birthday and your pension funds are designated to your beneficiaries within two years they will be paid tax-free.  Designating the funds just means moving them into the beneficiaries’ names; they do not have to take the money out within the two-year period.

If you live beyond your 75th birthday, or if you die earlier but your pension funds are not designated within the two-year period, then the death benefits will be taxed.

The funds will typically be taxed at the beneficiaries’ marginal rate of Income Tax.  One exception will be if they choose the lump sum option and it is paid before 6th April 2016, when it will be taxed at 45%.

What happens to the fund when the beneficiary dies?

If your beneficiary has not withdrawn the entire fund before their death then the funds can be passed on again.  Your beneficiary will be able to nominate successors who they want the funds to go to following their death.

The successors will have the option of taking the funds as a lump sum or taking an income under flexi-access drawdown.

The tax treatment of the death benefits will depend on the age of the beneficiary at their death, not on how old you were at your death.

It is possible to have unlimited successors, so your pension fund could be passed on for generations if it is not all taken out.

Important note

This information is based on our current understanding of the pension changes.  This is provided for information only, we do not provide advice.  If you have any questions regarding this information, please speak to your financial adviser.  Tax rules can change in the future and the tax treatment depends on your personal circumstances.  The value of investments and any income from them, can go down as well as up, and you may not get back your original investment.

 

The value of pensions, and the income they produce, can fall as well as rise.  You may get back less than you invested.