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Be ready for another pensions raid

Be ready for another pensions raid

The upcoming Budget will present an opportunity for Chancellor Philip Hammons to address the mammoth problem he faces with pension tax relief.

HMRC have revealed that in the year 2015-16 tax relief increased by £5.3bn from 2014-15, sending total tax reliefs for pension contributions beyond the £50bn threshold for the first time. This figure includes both tax relief and the reduction in NICs for employer contributions.

This comes after successive chancellors had put aside plans on the reform of pension reliefs for fear of upsetting an already disillusioned electorate, on the last occasion in March 2017 in anticipation of the election.

The overall level of relief fell for several years after the Conservative led coalition took control in 2010, in part because of the successive reductions in both the annual lifetime allowances that had both grown to absurd levels under Labour.

But with the tax relief bill growing again under the weighty success of the auto-enrollment scheme there is wide expectation that radical action will be announced. In 2016-17 the scheme attracted an extra 1 million pension savers.

Figure 1: How the numbers contributing to a pension have increased, and the rise in average contribution values.

With statutory increases in the minimum contributions for auto-enrolled pension savers due, and a general increase in the awareness of the importance of pension saving, the relief total is expected to increase further over the next few years.

The see-saw of tax out in reliefs and tax in from pension drawings results in a net liability around £25bn.

Having £25bn – plus some £13bn from reduced NICs – extra to use, in offsetting the budget deficit, paying off the EU without taxpayer pain and reducing the national debt further would certainly remove some of the pressure Mrs May is currently moving from shoulder to shoulder.

Tax relief for pensions is worth almost half as much as is spent annually on the NHS.

Unsustainable at current levels

It has also long been suspected that changes to ISA limits and rules were setting up that framework to be heir apparent for pension savings, changing the emphasis from upfront relief to encourage saving that is taxed when drawn, to a model of tax free growth and income whenever you take it. But having to administer dual systems may be too big a pill to swallow yet.

Alternatively relief may be changed to a proposed flat rate system that removes the bias of favour towards higher earners, the one third of earners who take the majority of the benefit.

SPI drew attention to this back in February 2016, with wide anticipation of its imminent announcement.

The Times reported last week that a treasury source claimed “the cost of tax relief is only headed in one direction at the moment. There is widespread recognition that the trend has to be reversed.”

That comes with news that productivity is not growing as fast as has previously been reported or expected, or may even be slowing.

And just a few months into a shaky term after a shocking election result, the Chancellor will not want to raise cash from any headline rates, including income tax, VAT or NICs.

Adopting the Robin Hood approach – redistributing a lesser amount more evenly among pension savers – might save money and also bring more of the growing number of personal pension holders on board, at the expense of higher and top-rate taxpayers.

Pension savers that are higher rate taxpayers are the main beneficiaries of the current relief system, more than two thirds of the total is paid into their funds, an average in excess of £5,000 each per annum.

It is also thought that 70 per cent of the benefit is taken by members of defined benefit schemes.

Basic rate winners

A flat rate system would at worst mean no change for pension savers that are basic rate taxpayers, or it could potentially boost their pension savings by up to £6,000.

flat rate system for pensions

But the political risk in making the all but inevitable changes is significant. It is assumed that a large majority of higher rate taxpayers are Conservative voters, and reducing their pension growth so soon after capping the annual maximum for contributions at £40,000, and the lifetime allowance at £1m, may be the final straw.

In March 2016 these plans were shelved after considerable pressure from Conservative MPs. This time they may see it as a way to bring more voters on the threshold back into the fold.

Figure 2: The cost of tax relief of registered pension schemes. This chart does not include the value of NIC reductions for company contributions. Tax relief on pension contributions has increased by 50 per cent over ten years, and more than doubled since 2002.

But it should be regarded as inevitable, because if the Tories don’t force us to take this medicine, you can be sure a future Labour government will.

Ironic really when the growth of the annual and lifetime allowances that are now considered as the levels we have been deprived of came under Labour stewardship.

So the morelikely outcome is a plan to gradually make change, what has been describe in the news as a “salami slicing” of existing allowances.

These must be seen to be making the system more fair for everyone, if not outwardly taking from the better off and giving to the lower income-savers.


Pressure is mounting to save money without completely discarding the deficit reduction. Tax incentives that favour the well off are likely to be in the spotlight, of which pension tax relief has to be close to the top of the list. Whatever reform takes place it will be looking to save cash for the Treasury and create political capital with the legions of new pension savers.

October 2017

What the minority government may mean for your investments

What the minority government may mean for your investments

A hung parliament is what happens when the majority of the electorate want “none of the above”. Historically that has meant political uncertainty until another election is called to settle the matter; and markets are supposed to hate uncertainty above all else.

So what to make of the big yawn with which (so far) both the foreign exchange and share markets seem to have greeted the result?

Appearances are not all they seem. The pound’s apparent recent stability against the dollar is illusory because of that currency’s erratic downward path against most other currencies since the US election, magnifying the pound’s fall against the euro.

Normally that would make the stockmarket’s recent retreat from 7,500 look more alarming, since a weaker currency ought to produce higher share prices – or at least a higher FTSE 100 index – because of the huge importance of foreign currency earnings to most of the top 100 companies.

Yet even this may have a rational explanation. The broader (and much more useful) measure of the pound’s trade weighted value – its value against a basket of the currencies in which we trade – has actually been strengthening, both since its initial post-referendum all time low, and since the election and the Queen’s Speech.

And this minority government may just turn out more stable than its few predecessors in post-war Britain.

For a start, one of the Conservative manifesto promises omitted from the Queen’s Speech was the abolition of the five year fixed term Parliament, one of the prices paid for Liberal Democrat support for the Cameron Coalition. Unless the Democratic Unionist Party actually votes against the government on a finance bill, the government could technically run its full year term: even if the DUP merely abstain, Conservatives still command an overall majority – assuming they can keep their own backbenchers in line.

A Poisoned chalice

Add to that the fact that no one in the Conservative party probably actually wants to risk taking over from Mrs May the ultimate responsibility for delivering a Brexit which both the nation and both Houses of Parliament will accept, and it is quite possible to envisage 5 years of minority rule, also allowing the Tories plenty of time to get a new leader in place after the March 2019 deadline for leaving the EU has passed. Constitutionally any such new leader would no more be required to seek a personal mandate before 2022 than Mrs May was.

And in some ways the electorate’s verdict has cleared up what promised to be a festering source of constitutional uncertainty. By manoeuvring Labour into committing itself in its manifesto to leaving the EU, Mrs May is freed from doing what she asked the electorate to endorse, using her majority to force through the Brexit deal: the eventual deal will now have a clear parliamentary legitimacy which one resulting from her previous strategy could have been argued by Remainers to lack.

Of course it will still be a bumpy ride. It was always going to be. The immediate short term outlook for consumer spending is uncertain, as higher prices for imports cut into consumer spending – apart from her ephemeral 20 point leads in the poll, about the only good reason Mrs May had for calling an election when she did. But for investors the only real difference between now and the situation before the election is a result of what was left out of the manifesto, rather than what was in it.

Investors may not notice a change

So far as investors are concerned, the changes are largely benign.

The previous intention to impose a legislative cap on utility prices has been replaced by an aspiration to achieve a “fairer” market through the regulators – which is supposed to be their job anyway. What it does mean is that – unless abolished by law – the effective guarantees of an agreed rate of return on capital remain.

Similarly reputable companies should have nothing to fear from the proposals to reduce motor premiums through cutting down on fraudulent whiplash claims, and the statements of intent on encouraging specific sectors such as the electric car industry, if they are realised, can surely only provide investment opportunities, though probably high risk ones.

However of all the 27 proposed bills and drafts bills, one in particular seems possible of actually uniting a “progressive alliance” against the government. As always the first budget of a new Parliament will show the government’s true colours, and is usually used to get the difficult decisions out of the way early on. Philip Hammond’s first politically embarrassing effort ought to encourage him to lean towards consensual caution rather than brave reforms, but the very piece of the last budget which caused all the problems appears to be headed back for the statute books in the proposed National Insurance bill – the reform of contributions for the self employed.

As a finance bill, failure on this would constitute a vote of no confidence in Mrs May, and so long as the fixed term Parliament act remains unchanged, Mr Corbyn would then be required to attempt to fulfil his desire to form a government and sustain it in office.

The maths means this would only happen through a rebellion by Conservative MPs, so the government must be working on the assumption that turkeys do not usually vote for Christmas. The previous furore was headed off with the excuse that higher contributions would be matched by widening the benefits available to the self employed, to be revealed at a later date. Any such proposals this time should accompany some illustration of the proposed benefits; but even so, it will be very easy for Labour and the Scottish Nationalists to portray any increase in anyone’s tax burden (except the “rich”) as a continuation of austerity by the back door.

Coming back to bite

Be prepared too for the resurrection of one nasty for wealthy investors contained in Hammond’s first budget which failed to make it into legislation because of the early dissolution of the last parliament: the reduction from £5,000 to £2,000 in dividends exempt from the 7.5% surcharge introduced by Osborne effective from last year.

But the real test of his budget will be how he juggles the need to present the impression of a more austerity-light approach with the extra money required to address the public’s heightened concerns with security and safety issues in the wake of the summer tragedies, and their suspicion that reduced spending must have been a contributory factor. And that’s before factoring in the extra cost of trying to keep the DUP members sweet.

He had previously pencilled in his first full year autumn budget for November. Ultra-cautious investors may already have decided to “Sell in May and go away” the moment the election was called, even though a coronation was assumed inevitable for Mrs May.

Given the uncertainties, those who are out of the market now may judge that this year, the advice to stay away until St Leger’s day – September 16th – does not necessarily mean that will be the day to start buying again. Mr Hammond may be wishing he had in fact been a casualty of Mrs May’s reshuffle after her expected coronation.

Whatever else Jeremy Corbyn’s amazing electoral result achieved, it got the young out to vote and in so doing effectively restored a two party electoral choice.


If there were to be another election soon on the same manifesto and there were to be a chance of Labour getting 25 more seats, those who actually believe that 95% of the population can enjoy everything which he promised in terms of public services, infrastructural spending, housing, free university education and all the rest with only the top 5 per cent of the population paying for it, should be investing heavily not only in housebuilders and construction companies but in all those sectors likely to benefit from a significant shift in spending power to the young. Those who believe borrowing on the scale proposed will mean sharply rising interest rates, recession and eventual tax rises for all will be sitting the next cycle out.

July 2017

Is crowdfunding the next financial services scandal

Is crowdfunding the next financial services scandal

Crowdfunding has been hailed as the 21st century solution to raising capital without the City overhead, or loans which banks won’t make. But the reality of this utopian ideal may not be as neat and clean as it suggests. Sceptics have described crowdfunding sites as little more than “unregulated pop-up stockmarkets”, but the concept is far from new.

The plinth for the Statue of Liberty was funded by 120,000 New York citizens donating $100,000 under a campaign organised by Joseph Pulitzer. Each donation bought a miniature replica statue.

What is new about modern crowdfunding is the use of the internet to provide exposure.

It is thought that one of the first online crowdfunded projects happened in 1997 when the band Marillion couldn’t afford to tour following their seventh album, so American fans used the early internet to raise $60,000, allowing them to play in the US. Although the band wasn’t directly involved in the first round of fundraising, they since used the same techniques to successfully fund the production of three albums.

Crowdfunding is a method of raising money. It expands the concept of funding by friends, family and close connections by exposing the proposition to potential customers and investors. This uses the collective efforts of a large pool of individuals all of whom may contribute smaller sums than might otherwise be needed for a more traditional investment. Funds are raised through social media and crowdfunding platforms online, and leveraging entrepreneurs’ personal networks to extend reach and exposure.

The funding propositions are many, from new product innovations and business expansion, to covering a deserving individual’s healthcare costs. It’s often not clear precisely to whom you’re pledging your money.

But there are concerns that many people enter crowdfunding without full knowledge, and on many occasions are drawn in by the social buzz, something some sites unashamedly exploit. Back in October 2015 MP Chris Philp suggested that “it might be the next big financial services scandal”.

Some types of crowdfunding are regulated by the Financial Conduct Authority, but even so this does not give you the investor protection you get from the Financial Services Compensation Scheme when you invest through the stockmarket in shares, or deposit money with a bank.

The crowdfunding menu

There are three types of crowdfunding which are entirely unregulated:

1. Donation crowd funding
People donate because they want to support some cause. This might be medical treatment for an individual, help after a disaster such as the Grenfell Tower fire, or some social cause. Although akin to charitable giving, it is entirely unregulated. This means promoters can say virtually anything which is not fraudulent to solicit donations.

2. Reward crowdfunding
People give money in return for a service or a product, such as concert tickets, an innovative product or a computer game. Rewards are often no more than trinkets such as acknowledgements on an album cover, tickets to an event, regular news updates or free gifts. No financial return in the conventional sense is expected or offered.

3. Prepayment crowdfunding
Any future return is simply to receive the product the company is launching, plus some bonus that future purchasers would not otherwise get. An example was Slug ski goggles, launched on Kickstarter. Besides the goggles, initial investors received an enhanced value pack including ski hat and extra lens.

UK sites include: banktothefuture.com, fundit.buzz, crowdfunder.co.uk, justgiving.com, pleasefund.us, kickstarter.com

The FCA does regulate the following two types of crowdfunding, but in reality the regulation is of little help to investors. There is no automatic protection even if you lose all your money as a result of fraud.

1. Debt
Companies unable to get loans from a bank offer tempting rates of interest to people prepared to lend to them directly. The intention is that investors receive their money back, plus interest. This is known as Peer-to-Peer (p2p) lending, matching up borrower and lender directly, bypassing traditional banks. Returns are financial, but investors also have the benefit of having contributed to the success of an idea they believe in. In the case of microfinance, where very small sums of money are loaned to the very poor, often in developing countries, no interest is paid on the loan and the lender is rewarded by doing social good. Sites include: abundanceinvestment.com simplebacking.co.uk, fundingknight.com, trillionfund.com

Although this may look safe, the FCA warns that because most start ups fail, you are more likely to lose all the money you lend, rather than get it back with interest.

2. Equity
This is like buying shares through the stockmarket, but without the compensation arrangements which protect you from fraud, or mismanagement of funds.

Typically they offer equity involvement in exchange for relatively tiny amounts of investment. All the risks of debt crowdfunding apply, without the kicker of any interest. Of course if the venture succeeds, then investors reap capital rewards.

The problem is that unlike the stockmarket, crowdfunding sites offer no mechanism for investors to sell their shares to others – the “secondary market”, so the investments are essentially illiquid.

Sites include: kickstarter.com, crowdcube.com, seedrs.com, propertypartner.co.uk

The FCA only allows illiquid investments to be promoted to particular types of experienced or sophisticated investors, or to ordinary investors who will not invest more than 10% of their net investable assets through crowdfunding platforms. But there are no effective mechanisms in place to prevent investors disregarding these prudent guidelines.

The FCA summarises its crowdfunding advice as “never invest more than you can afford to lose entirely”.


In 2015 Droplet raised £500,000 through Crowdcube, but it floundered soon after launch, never managing to reach the scale of operation to make it profitable.

The founders pledged to return balances to customers, and as much as possible to investors.

But they also remarked that raising money was almost too easy, and the investment risks, particularly in early stage technology companies, were not understood by investors. “You can’t stop stupid people from investing,” said one co-founder. “The sheer chance of failure needs to be hammered home.”

And the FCA agrees. In December 2016 they announced plans to consult on additional rules in a number of areas, including protecting investors from being given incorrect information in financial promotions, ensuring investment risks are made very clear, adequate wind-down measures should an investment platform fold and the need for more stringent money handling standards, similar to those applied to the mortgage industry.

The current rules on crowdfunding platforms date from April 2014. They aimed to create a proportionate regulatory framework that provided adequate investor protection whilst allowing for innovation and growth in the market.

But when you can see ads on the London tube offering what looks like a safe 6% return from investing in property, there is a clear danger of such marketing attracting unsuitable investors, as most of those who are not as informed as Successful Personal Investing subscribers will be.

Can you actually make a profit?

There are few solid statistics that demonstrate the success of crowdfunded business opportunities. A recent report by AltFi Data reviewed fundraising on 5 major sites. It concluded that one in five projects had failed, suggesting 80 per cent continued. Of those, only one – E-Car Club – had made a return to investors, thought to be about 150 per cent.

But 15 per cent of the operations went on to raise further funds, presumably with a positive stance and suggesting a promising start.

They concluded as the FCA has that transparency was wanting.

Tax efficient

If crowdfunding is an alternative investment for you, then consider an Innovative Finance ISA. These offer much higher returns than a high street cash ISA, but are limited to peer-to-peer lending, and don’t expose your money to crowdfunding equity investments. The downside that it would have to be your only ISA investment for that year, restricting exposure elsewhere, so no equity, cash or Lifetime ISA investments. This makes it a viable alternative for those who have previously only opened cash ISAs or perhaps those that had so far not judged the return on a cash ISA to be worthwhile.

A list of providers can be found at InnovativeFinanceISA.org.uk.


The best protection lies in the old warning: buyer beware. Make sure you understand the proposition, if possible the people behind it, the cost and most importantly the risks. Realistically most of these investments, if made for a financial return, probably lie on the risk scale close to putting coins into a slot machine, and expectations of loss should be measured similarly.

September 2017

When predictable meets unstable

When predictable meets unstable

Both Successful Personal Investing and The IRS Report have repeatedly warned of signs of instability since Donald Trump won his party nomination, let alone since he actually became President. And those warnings centre around four key strategic defences that can be used to guard against uncertainty.

But the unlikely market rally based on his direct approach seemed to have rendered those concerns invalid. But that decisive attitude may yet come back to haunt markets as he decides that global bullies need putting in their places.

And in the UK after Article 50 was served, uncertainty at home is just as high. The announcement of a snap election on 8 June and the market reaction testify to that.

The four elements to watch and understand are the Fear Index or VIX, gold, long-term options as a defensive position, and ETFs.

Government bonds could also be considered as a defence, but the returns are derisory, and certainly below inflation.

The cause of the angst is the same now as it has been for some time: Syria, North Korea, Russia and right wing politics rearing its head in Europe. Brinkmanship with Syria and Russia may be one thing – no-one thinks any response would be military let alone nuclear – but North Korea is another matter altogether. Impressions are that a military response would be the first reaction of Pyongyang if threatened.

Whether it is nuclear or not seems only to depend on whether they have a capable weapon available.

And the message from Trump of “gotta behave” is likely only to throw gasoline onto an already burning fuse.

So while these leaders play “who has a bigger pair”, and markets guess, there are a few things you can do to prepare for the uncertainty. Bear in mind that the uncertainty could come regardless of anything real actually happening.

Show me a sign

One signal comes from the VIX, the S&P 500 volatility index otherwise known as the Fear Index. Recently at its highest level since Trump actually won the election, in mid-April it was up almost 50 per cent in a month.

Figure 1 shows the current level of 10.7, reflecting quite how volatile the market is; a few days previously it was at 6 month highs over 16, last seen at this level on 8 November 2016. The average through February and March was below 12. It declined rapidly after round one of the French presidential vote.

Gold also offers clear signals. Still the traditional safe haven asset, and the price has been creeping up with steady buying since President Trump. As you can see in Figure 2 below, since the Syria strike it’s risen significantly, only to fall back.

But key to a longer term increase are the technical signals that are now close once again.

The 50-day moving average crossing upwards over the 200-day line with the price trading comfortably ahead of it will stimulate additional interest. This is the confirmation that the trend does have some strength, and could happen any day now.

Prepare for maybe

The problem we all face is “what if it does, what if it doesn’t”; why move into another asset “just in case”, only for it not to happen. It’s no different to any other day in most ways, except that in this scenario there are various warnings and clues. If nothing happens and the market doesn’t react adversely you may lose a little. But compare that to the crushing feeling of a 10 or 20 per cent – or worse – drop and the time it might take to recover.

Your choices are to move to cash, to balance your portfolio with more gold or gold related stocks, or leverage any downside with traded options or ETFs. Some of these make sense, but some could leave you significantly worse off.

It may not be the worst decision ever to have some more cash to hand in case of a decline. Take some profits and be ready to buy again on any dips. Don’t just put it under the mattress.

All that glisters may just be paper

There really is no longer any reason for not having an exposure to gold. It is so easy to buy gold through a collective now, with many currencies or domiciles to choose from. ETFs provide the easiest route, and can be synthetic, replicating the gold price movement with derivatives and swaps, or physical, with the gold stored at HSBC in the City of London.

In the UK iShares Physical Gold, Source Physical Gold, ETFS Physical Gold and DB Physical gold are your main choices, all listed on LSE. Somewhat misleadingly the ETFS Gold, with ticker BULL, is synthetic and backed by swaps.

There is still much made of counterparty risk with both physical and synthetic ETFs: that there is someone else in the chain who may default so you lose your assets. It’s true there are, but is that any different to the counterparties involved in managing your pension fund? Overall synthetic ETFs in theory carry more risk – there is more that could go wrong – than a physical fund.

There are also choices in funds and investment trusts, which were described by Chris Gilchrist in early March in The IRS Report. That issue is available for Update Service subscribers to read or download at TheIRSReport.co.uk.

Whichever way you go, an investment in a gold fund or collective can be fairly set-and-forget.

The price of gold has become more aligned to general market movement recently, and so unless the fear is real the price movement may just mimic the general market. A consensus is to add between 5 and 10 per cent of your fund to gold or gold influenced assets, as ever, buying when the price dips.

Watch out for good news when bad news is expected. As was the case when French voters went to the polls last week, equity markets reacted positively as cash was switched out of gold.

The options seesaw

Options in the form of Puts offer the chance to make hay when the sun isn’t shining, as their value increases when the price of the underlying asset decreases. Long dated Put options on major indices such as the S&P 500, DJ Industrial Average or Nasdaq 100 will increase as the indices themselves retreat. And they will increase more rapidly as volatility increases: so in theory, the worse the situation that alarms the market, the faster the increase in the value of Put options.

And the larger US listed gold oriented ETFs will also have options available, meaning you can hedge your hedge, combining ETFs, options and gold to leverage your intentions should you feel strongly enough about the direction of the handcart.

There are downsides to Put options, in that they have a finite life, so are not a buy and forget asset.

And they will decrease in value if the market goes up and not down as you expect. Your loss could potentially be total as the expiry date is approached. And so they need to be managed through difficult phases, and not bought willy nilly.

Other ETFs

There are other ETFs that on the face of it look like they will be the answer to your portfolio prayers. ETFs that go up when the market goes down. Except that inverse or leveraged inverse ETFs are very short term solutions, and may actually lose you money in anything but a straightforward decline. An up and down market is not suitable for inverse assets, and a leveraged choice just amplifies the problem. This was described in Update Service Bulletin BN151 in October 2016.


Increasing concerns about global stability, be they political and economic, will continue to have an effect on markets. The unpredictable nature of some of the key players means that even though economic arguments are sound, there could be events that cause major shocks. Remember how unlikely it was that Brexit would happen, many banked their careers on a win. Remember how mad it was that Donald Trump actually got his party nomination, let alone became President of the USA.

The strangest things have happened. Even stranger are those events still waiting. What if the electorate of France does not kick out Ms Le Pen, and what if Labour can actually get enough of the vote to see Mr Corbyn at No. 10, even through some convoluted coalition?

Have something to back up your long portfolio in the form of an asset that will appreciate if equities suffer, just in case.

May 2017