New all time highs for FTSE 100
23rd February 2015
Last Friday the FTSE 100 closed above 6,900 for the first time in 15 years. Today it opened higher and pushed to 6,940 before falling back, but still held on to the hugely psychological level of 6,900. This is the first occasion that the all time high of 6,930 of 30th December 1999 has been breached.
Having struggled in the last year to hold 6,800, getting past and staying above that threshold has given impetus for the push onward to 6,900.
Today’s trading really needs to remain above 6,900 for confidence to push onward to remain. Falling below during the trading session won’t hurt too much, so long as it stays close and finishes above that key value at the close later today. Remaining above 6,900 may be the confidence stepping stone to move on to significant new highs.
In many ways this breakthrough was unlikely, with the uncertainty of Ukraine, Greece and China weighing against the generally upbeat UK data. And the inherent pessimism of winter in UK doesn’t help. But low interest rates, lower costs generally, and now rising wages add confidence.
The UK and US economies are without doubt the world’s strongest at the moment, and it seems that we’ll be consolidating new all time highs in major indices reflecting that success. But before the FTSE 100 soars higher it is most likely to spend some time coming to terms with these levels. A fall back to the strong support at 6,800, a 1.4 per cent fall, is to be expected before we see it moving very much higher.
But a positive and clean election outcome may see us looking at new all time highs of 7,000 rather than a retreat to 6,500.
There is one dampener though. The last time the FTSE 100 index was at this level was on the eve of the millennium. So in real terms to match that figure we should allow for inflation. In order to better that momentous figure, the index — using the BoE inflation figures — would today have to reach 10726.
Peter Marshall, February 2015
What flexi-access drawdown means for you
The next pension revolution promises the best features from most investors’ wish lists. Flexi-Access Drawdown is the new all-singing pension regime that seems to promise pension freedom without the punitive taxes. But as always the devil is in the detail: might Flexi-Access Drawdown turn out to be just a FAD?
Government announcements have resulted in speculation that future pension transactions could almost be like going to the bank cash machine. You take out how much you want whenever you want it, some of it tax-free, and the rest taxed at your marginal rate. This utopia may not be unobtainable given the astonishing technical innovations that seem to appear almost daily. But when you look under the layers of information provided by the interested parties it seems that they are not all on the same page.
There are clear benefits over the previous arrangements. Until next April, before you can draw any income you have to make a once and for all decision about whether to take the full 25 per cent tax-free sum, or leave some of it there to generate a higher future income. Under the new rules 25% of anything you take out will be tax-free, and the rest taxed at your marginal rate. Previously for most people the amounts you could take out were subject to strict and complicated rules, and could result in a tax charge of 55 per cent.
Not everyone can benefit. These changes apply only to money purchase – Defined Contribution or DC – schemes. This means most public sector workers in non-funded schemes are excluded, as are employees in final salary – Defined Benefit or DB – schemes. And if you have already started drawing your pensions through an annuity, then your ship has sailed. It is in theory possible to transfer a private DB or funded public sector scheme into a DC fund, but it may be expensive and will require careful consideration of the trade-offs.
Flexi-Access Drawdown (FAD) will replace all flexible drawdown arrangements that have been made already. These originally allowed unlimited withdrawal of funds subject to a guaranteed income requirement of £20,000, which was reduced to £12,000 in 2014. The limit will be removed all together for FAD from April 2015. Most pensioners did not meet the £20,000 income requirement, but were still allowed to draw out restricted amounts, based on 120 per cent of the amounts in the government actuary’s table (GAD) for annuities. That increased to 150 per cent in April 2014, and will remain at that level for those who wish to retain their current arrangements.
If you have this sort of arrangement, called “capped drawdown”, it can be converted to FAD from April next year: subject of course to your provider being able and willing to do so. No new capped drawdown plans will be available after April 2015.
Here are the key points:
• From April 2015, retirees aged 55 or over are able to crystallise lumps of cash from their pension fund leaving the rest invested. These are called
Benefit Crystallisation Events, or BCE.
• This offers the potential for the rest of the fund to continue to grow, ready to be taken as and when needed. But it also has the potential to
decline, depending on the performance of the investment assets.
• FAD replaces existing Flexible Drawdown, which requires retirees to have an inflation linked income of at least £12,000 for the current tax
year. There is no minimum income requirement from April 2015.
• If you already have a flexible drawdown pension, it will automatically become a FAD pension in April 2015.
• For capped drawdown, the drawdown limit increased from 120 per cent to 150 per cent of an equivalent annuity (GAD level). This can also be
converted to FAD from April 2015, but new capped drawdown schemes will not be available. Once converted, the amount of further contributions is limited by the new £10,000 Money Purchase Annual Allowance.
• The Money Purchase Annual Allowance (MPAA) is the cap on funds being invested after drawdown commences. The £10,000 limit prevents
recycling of drawdown cash back into the pension fund, and stops abuse of the tax benefits of pension investment.
• You cannot make further contributions to your pension in the same year that you start taking any drawdown. But if you are under 75 years
old you can resume contributions up to the amount of the the annual allowance – subject to having equivalent earnings – for capped drawdown, and up to the MPAA for FAD in future tax years. These go to your uncrystallised fund, or another fund you set up. You can contribute up to £3,600 even if you have no earnings.
• FAD allows you to make regular withdrawals from your fund, with 25 per cent tax-free on each occasion. The remaining 75 per cent of each withdrawal or BCE will be taxable at your marginal rate.
• If you don’t take your 25 per cent tax-free from each BCE, then that benefit is lost and cannot be used against future crystallisations.
• The cumulative limit of tax-free withdrawals is 25 per cent of the lifetime allowance at your date of retirement (currently £1.25m x 0.25 = 312,500).
• From April 2015 all retirees will be given a “guidance guarantee”, free independent face-to-face advice from the industry as to your best choices.
The potential snag for many is the fact that you can’t do FAD on your own. You need someone else to oversee and administer your account. That will normally be the life assurance company with whom you have built up your pension. The majority of mainstream providers offer plans, the exception being Legal & General.
But the administration of the scheme is quite complex, and charges may vary hugely as the selection in Table 1 shows.
|Annual Management Fee*||Service fee||Ongoing charge||Set up fee||Regular Income payments||Alter payment amount / frequency||One-off payments|
|Hargreaves Lansdown||0.45%||n/a||n/a||£295.00 + VAT||No charge||£10 + VAT||£25 + VAT|
|Fidelity||n/a||0.20 – 0.35%||0.95%||Included||Included||Included||Included|
|AXA Wealth||variable||No||No||£240 per annum||No charge||No charge||Not currently|
|Standard Life||1-2% per annum||n/a||n/a||£208 one-off fee||Not disclosed||Not disclosed||Not disclosed|
|Ascentric||£150||n/a||n/a||£75 per annum||Included||Included||£50|
|AJ Bell||0.20%||n/a||n/a||£150 +VAT||£100 + VAT||Not disclosed||£25 + VAT|
Most important is whether your current pension provider actually provides what you want. The prospect of moving your fund is daunting, and may well cost as much as the highest fees. So if you have a pension provider that has high charges, you may be stuck, because it will cost you as much or more to move to a lower cost provider. That is a conundrum.
Each time you make a withdrawal it has to be recorded and HMRC duly notified. As the policy holder you’ll be paying a fee for this service, probably as an annual amount plus transaction costs. Each different provider has a variation on how to charge, which makes comparison difficult in many cases.
But with the cost of a bank letter at £25 you can imagine that the withdrawal process will not be cheap, and that implies that each payment out of the fund will have to be cost effective. This in turn implies that there has to be a fund value threshold at which level FAD is cost effective. So the larger the fund is, the more likely it is that withdrawals will be viable.
Merely to set up your “account” will cost anywhere between £300 and £750. Some pension providers charge a percentage of the fund value, others as a fixed fee, or a scaled fixed fee.
Charges for withdrawals vary greatly between providers, from £30 to an eye watering £300. But if that sum were based on a once a year withdrawal of, say £15,000, then £300 represents 2 per cent. But if the payments were instead taken as £1,250 a month, the £300 fee on each occasion amounts to almost 25 per cent.
Some providers offer better rates for planned withdrawals, and penalise ad-hoc ones. It would appear that a scheduled arrangement of regular drawdown will be best to minimise costs.
Each time money is crystallised from your pension fund, you can – if you choose to – take up to 25 per cent of that money taxfree, up to the limit implied by the lifetime allowance (LTA). The LTA is currently £1.25m, so the maximum tax-free amount allowable is £312,500. The remainder is charged at your marginal rate as you take it. Someone with no other income who took £100,000 in the tax year 2015-16 will have a tax bill
of £17,283, or 17.3 per cent.
Taking £25,000 as a tax-free lump sum, and the remaining £75,000 over more than one tax year would significantly reduce the tax bill, and if spread over seven years no further tax would be due.
A major benefit of setting up an income drawdown plan is that from next April the fund can be passed to your heirs without any tax charge. But there are catches.
If the plan holder is less than 75 years old, then the fund can pass on to any nominated beneficiary, with no tax to pay. But if they are over 75, the beneficiaries will pay tax at their marginal rate on continuing flexible drawdowns, or a flat 45 per cent if the entire fund is taken as a lump sum. Even this 45 per cent rate reverts to marginal rates from April 2016.
This tax structure will apply to any un-crystallised pension funds from April 2015.
There are still many ifs and buts to resolve, but Flexi-Access Drawdown will be advantageous to investors if they have a larger fund, certainly in excess of £100,000; and they take planned withdrawals of more substantial amounts rather than regular smaller amounts. Or if you planned to make the fund work for you for longer through further contributions or investment strategies.
Budget Bulletin December 2014
FTSE 100 Have we touched the bottom yet?
The last two months have seen the primary UK stockmarket benchmark drop from near all time highs to 16 month lows. The FTSE 100 had not been as low since the reversals of June 2013. But how low will it go?
Back then it was fear of a Chinese credit crunch, slowing growth, that the eurozone debt problems would not be going away fast and where would the next bailout go. Now it’s fear of slowdown in emerging market growth, particularly China; worries that the eurozone debt crisis will be extended by slowing growth or default, and now the latest global terror and health threats.
The common denominator is fear. Previously in the Update Service Bulletin we described some of the factors that may lead to this eventuality. One of them is also fear of heights; every time the market finds the motivation to move up there is something holding it back like one of those fairground elastic ropes. 6,900 and what it represents – the highs produced by the excesses of the dotcom period up to 2000 – has acted as the strongest of ceilings.
Investors want to know when it will turn, and some chart tools can offer an insight. The first steps are to establish points of solid resistance – 6,900 – and support. There are several factors that may provide support, as shown in figure 1. They are:
• Moving averages, a most useful tool, that can often become points of psychological support. Figure 1 shows how the 50-day simple moving average has provided support for some time, but the writing was on the wall when it was pierced in September. The next stop was the 200-day level of just over 6,100.
• Previous levels of support or resistance, or points where a decisive change in direction has occurred. Having passed everything set in 2014, the next level was that of April 2013, at 6,250. Now that has been breached, the next stop is that last seen in June 2013, close to 6,100. Beyond that are the late 2012 resistance levels around 5,900.
• Next are the levels defined by the Fibonacci sequence. This has been in the charting armoury for a long time, but is not used so much now because there are so many alternative indicators available. In its basic form it uses three levels set between the chart high and low. These are the lines at 38.2, 50 and 61.8 per cent of the range. In figure 1 the 38.2 per cent line approximates to the low of April 2013, and the 50 per cent picks out the 6,100 line, very close to the low of June 2013 and the level of the 200-day simple moving average. Below there is the 61.8 per cent marker, at 5,900.
The results can be uncanny, and as you’d have noted, can often be very similar to levels shown by other indicators. A level shown by two or more indicators is very strong.
The 6,100 level of support combined with the Fibonacci 50 per cent retracement, and the 200-day moving average provides a formidable barrier. Figure 2 shows how it held on 16 October. If that level is breached there is nothing to stop a decline until the combination of previous resistance and 61.8 per cent retracement at 5,900. That would be a drop close to 15 per cent from the 2014 highs.
The overall trend line – in figure 3 – over a longer term or just a year, has unmistakenly been broken. But it’s all very well having a clue to what level the bottom might be, but that does not actually tell you it’s safe to be back in the water.
There are some tools that can show when bulls are back in control. The Residual Strength Indicator (RSI) spans a band of 0-100, but mostly 30-70. Any cross above the 70 level is deemed overbought, and so the market may retract. The line crossing below 30 is deemed to be oversold, and so bargains may be had. That tells you the status, but it is the reversal of the line back over the threshold that is the signal to make your move. So if the line falls below 30, and then crosses back above it’s a “buy” signal. If the line passing over 70 is followed by it crossing back below, it’s a “sell”.
But these signals are not guaranteed on their own, so should be used in combination with another one or two indicators. One of the best is the MACD, or Moving Average Convergence/Divergence indicator, that uses the crossing of two lines to provide the signal. Figure 1 shows a black line crossing a red line; downwards as confirmation of a downtrend, and crossing upwards is an uptrend.
Finally the addition of a momentum indicator. Figure 1 uses the Coppock Curve, named after the economist Edwin Coppock, widely thought to have the best insights into the timing of bull and bear markets. This simple indicator pinpoints a buying opportunity when it moves from negative values to positive. And though he did not use the reverse principle himself, many consider that a move from positive to negative is a sell sign. Looking retrospectively, you’d have to agree.
Figure 3, shows FTSE 100 weekly prices and several alternative trend lines, all of which have been broken, confirmation of significant turnabout. The blue line reflects the weekly change as a percentage, and builds into a picture of the volatility. Up until 16 October it was still rational, the reactions each spread over several weeks, rather than the narrow spikes that are more akin to panic seen back in August 2011. For whatever reason, fear turned to panic on the 16th, and triggered a landslide.
SIGNS OF CHANGE
The things to look for are:
• In figure 3, a narrowing of the volatility band and more of the line in positive territory.
• In figure 1, a bounce off a support line at either 6,100, or a more robust one at 5,900.
• These need to be tested, and hold before they can be relied upon. These events will occur in combination with: • The RSI crossing positively from below 30 to above, and
• the MACD black line will move upwards across the red line, and at the same time the blue histogram bars will close toward zero, or move into positive values.
• A faster moving average, for example, the 20-day, will cross up above the slower 50-day moving average. If the FTSE 100 fails to hold at 6,100 it looks like being a long way down, to 5,900 and possibly all the way to 5,600.
It is easy to build your own charts for free at a number of websites. Stockcharts.com offers a comprehensive free chart facility. Or create your own in Excel with data available from Yahoo and Google.
We can look at global events and form an opinion on them individually; some may affect markets, some may not. But while our own economy is doing pretty well, as is that of our now second tier trading partner the US, the concerns over the major economies in mainland Europe –
historically our major partners – mean that doubts over them will cause more jitters in the UK markets.
The performance of the UK and US economies and stockmarkets is built on positive action and solid results. But any decline could be on the basis of rumour and worry. Charts can throw some light on what is really happening.
Investors don’t have to sell at the absolute top, or buy at the absolute bottom, but wait for a combination of clues that says it’s either safe to join the next phase of the market journey, or that it may be so sometime soon.
Budget Bulletin October 2014