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How far is too far for diversity

How far is too far for diversity

As funds continue to tune and develop their offerings to make them more appealing, investors face a seemingly unending series of choices. Funds increasingly have more complex ethical considerations. Rightly so. But how far should they go?

There are already funds that consider the gender bias of their investments, some so far as to claim they are actively influencing gender diversity.

Back as far as 2009 the expression “gender lens investment” was used to describe investment that actively considered benefits to women. Some high profile funds include the Legal and General Investment Management’s Girl fund, the Valuers Feminines fund, managed by Caroline Grinda-Kalbacher; and the UBS ETF Global Gender Equality fund.

A 2015 report by McKinsey & Company supported the principle that funds should have a bias towards companies with diverse management, as a gender balance boosts performance.

Now investors and advisers, including at retail level, can use the extended gender lens concept to boost their returns.

A recent report revealed that the gender diversity of the management team actually makes a difference. In an environment where every tenth of a percentage point counts, this sort of information could add significantly to income returns.

In the third edition of the Alpha Female study, it is concluded that a fund management tram that is of mixed gender – as opposed to single gender teams or solo managers – will produce better returns, and do so while reducing overall risk compared to a male-only administration.

And the outperformance is not just at fund level, but at single asset class level too, with returns on equities, bonds and mixed asset portfolios run by mixed gender teams producing better total returns over three years.

They found that women-only managers or teams tended to have less risk, and the mixed tams balanced it out.

In a male denominated industry mixed teams can only encourage more women to become fund managers. It makes business sense too build a team with a mixture of skills and expertise, with gender diversity a huge windfall benefit.

Wasn’t it obvious

What is perhaps more concerning is that this information has been presented as surprising, or a revelation. It must seem fairly obvious at headline level that a team with a balance in gender would make for a more balanced approach to investment.

Add that balance to a brand range of experience and ideas and it is more likely to produce a winning portfolio.

City based IFAs Holden & Partners’ say that their investment committee would not buy a fund purely on the fact it had a mixed or women-only investment team, but instead look for a management team with a relatively flat structure and diversity of opinions, providing more confidence in that team to manage a certain product.

But if there are more women on the team it shows willingness to be more diverse.

Some advisers don’t regard fund manager diversity in their investment criteria, but would consider that a combination of different views and opinions is always going to give you a more balance, rounded approach.

There is evidence also that more management groups are aware and responding to the fact that mixed teams produce better results, with a 14 per cent increase in funds managed by a mixed team since 2016.

Second only to total return performance is risk exposure. The Alpha Female report also found that mixed teams have higher risk levels than female-only teams, but lower risk levels than male-only teams. Again unsurprisingly it was concluded that women in a mixed team appear to act as a restraining influence on men.

Opinions vary as why this is, but one suggests that men have had a longer history within financial services, and are biased towards short-termism and excessive risk. Women don’t have as long a history of thinking that way.

Conclusion

Performance demonstrates the benefits of diversity. Finding the right funds has become increasingly difficult with the increased complexity of selective criteria.

These additional ways to select – or deselect – the most suitable fund provide huge choice and more headache-bringing decisions. But it would appear on the evidence that finding funds that invest in companies with diversity within their culture, and fund managers that reflect those same values may be the next investing advantage.

September 2018

Short sellers might hold clues to bad news

Short sellers might hold clues to bad news

After the death of Carillion, news abounds that its fate was foretold, and was one of the most shorted companies in the UK.

Further investigation shows that this is not just based on recent news, but a consistent trend; they had been the most shorted since before December 2015.

The 10th July 2017 warning that full year revenue guidance was slashed, the debt estimate raised and dividend suspended, resulted in a 70 per cent drop in the share value. But the short sellers for the most kept their positions open in expectation of even further falls. New short positions were being opened right into January 2018.

Some very astute investors have been caught out by the apparent rapid demise of Carillion, but there was evidently a considerable established opinion that all was not well, and that a significant price reduction was due to happen. But the information investors need is available free on the internet.

Data provides bigger picture

Having this sort of information might help investors find out if there is short selling on shares they own, or are considering adding to their portfolio. And though it does require a degree of spreadsheet knowledge, it’s actually much easier than you might imagine.

Under the Short Selling Regulation from November 2012, institutions must advise the regulator of their net short position within a day of opening it. This rule was introduced in the wake of the 2008 crisis, when short sellers were blamed for contributing to, if not actually creating the event. Subsequent reports have ruled otherwise.

These positions are logged and made available on a spreadsheet that details separately any current shorts, and all historical positions.

With a little sorting you can quickly establish which companies the hedge fund industry is expecting to falter.

There is a caveat though; this is just a record of the speculation these institutional investors are undertaking, it doesn’t provide the reasons for the shorting.

But when you see some companies on the list more than others, with multiple sellers of the same shares, you have to conclude that there must be some smoke, if not fire.

The data set is available in Excel from the FCA website – just search the web for “FCA net short positions”.

And the data provides other information too. As well as which companies are collectively thought more likely to falter, it also shows the number of institutions shorting each company, and the dates when they opened the short positions.

Those with most short positions include BlackRock, and others listed as “alternative” investment managers, notably London based hedge fund managers Marshall Wace LLC.

And by looking at those sellers whose predictions have been proved right, you can quickly see which other companies are on their radar.

The list of the most short sold companies from the 19th January 2018 data set is on page one. As you can see, there are many household names in the sights of the sellers.

Debenhams stands out as having shorting increased since a comparison last September. Aggreko is also up, as is J Sainsbury, Marks & Spencer and Pets At Home. Wm Morrisons has seen a significant reduction in short positions.

But Ocado – see below – stands out as having defied the odds. It has over 13 per cent of its shares sold short, with positions opened mostly before the share price shot up in late November 2017, and then again before the price rose to three year highs on 22nd January at 468p.

In fact the share price gained 96 per cent since the majority of the short positions were opened, leaving short sellers well out of pocket, at least for now.

Conclusion

This tells us is that the conclusions are not always obvious, but perhaps before making a purchase of shares in a company a look at the short positions list is a good fail safe. On finding your target present there further investigation is required, rather than an outright dismissal of its potential.

January 2018

 

Update Service 2017 Autumn Budget Special

Update Service 2017 Autumn Budget Special

This SPI Update Service Budget Special summarises the impact of the main measures of the 22nd November 2017 Budget on you as an investor and taxpayer, rather than as a drinking, smoking car-driver. It includes the changes previously announced which take effect in 2018-19 affecting Lessons in the SPI course which you may already have received.

The Lessons most affected are:

  • Yes, You Can Beat The Taxman
  • Advanced Tax Planning for the Investor
  • Tax-Efficient Investing
  • Investing in UK Property
  • Planning for a Prosperous Retirement

Even before the disappointing summer election, the Chancellor had made clear that the main Budget from now on would be in the autumn. Normally the first budget after an election tries to get out of the way all the nasties early on in the life of the parliament. If the conservatives had increased their majority in the election as they had hoped, this budget might have seen a much bolder attempt to improve the lot of the young at the expense of the old. But this budget consisted of giveaways in financial terms, but not the sort which directly affect most people’s pockets.

It actually felt much more like a glorified old-style Autumn Economic Statement as originally conceived – setting out the spending plans whose financing would be revealed in the traditional Spring budget.

This year everyone who can afford it will continue to benefit from:

  • generous tax breaks on SEIS and VCT investments
  • a doubling of the EIS investment limit to £2 million for “knowledge intensive companies”
  • the 20% rate of tax on capital gains, one of the lowest since it was introduced in 1965
  • a £400 rise in the tax free capital gains tax allowance, worth £80.

But you may be hit by:

  • the renewed freeze on the amount of your assets which escapes inheritance tax, except to the extent they are in a SIPP
  • the progressive loss of the tax free personal allowance above the £100,000 threshold. This is unchanged from 2017-18.

Income Tax

Table 1 below shows the income tax bands and rates for 2018-19 compared with 2017-18.

Table 2 shows the allowances.

The Chancellor confirmed that the tax free personal allowance rises by another £350, and that the starting point for higher rate tax rises from £45,000 to £46,350.

He reconfirmed the commitment to increase the personal allowance further to £12,500 by the end of this parliament, and to raise the starting point for higher rate tax to £50,000 by 2020.

So as a basic rate taxpayer, in 2018-19 you will benefit from:

  • the further rise in the tax free personal allowance, worth £70 a year

As a higher rate taxpayer:

  • the rise in the personal allowance will leave you £140 a year better off, and
  • the increase in the starting point for higher rate tax is worth another £200
  • this more than offsets the £2.52 a week rise in National Insurance Contributions if you earn more than £46,384 and are aged under 65.

If your total taxable income is between £100,000 and £123,700, you progressively lose all the benefit of the personal allowance.  You lose £1 of allowance for every £2 of taxable income over £100,000, representing an effective marginal rate of tax of 60 per cent – increased to 62 per cent if your income comes from earnings rather than investments, and you are aged under 65 and so still paying NICs.

Once your taxable income exceeds £123,700 you will have lost all the personal allowance, meaning £4,740 in extra tax payable at 40 per cent. The point at which you start to pay the 45 per cent top rate remains unchanged at taxable income of £150,000 – another continuing stealth tax, thanks to inflation.

Savings

If you are a basic rate taxpayer, since April 2016 the first £1,000 of the interest on your savings is entirely tax free – a £200 saving.

For higher rate taxpayers the allowance is halved to £500, but this still saves £200 in tax. Top rate 45 per cent taxpayers get no tax-free savings allowance.

And a further £5,000 “savings allowance” means that if your total taxable income is under £17,850 you pain tax at all on your savings income in 2018-19. Non-savings income above £11,850 is taxed at 20 per cent.

Since April 2016 net dividends over £5,000 a year is taxed at 7.5 per cent, and in the Spring budget this was reduced to £2,000 from April 2018.

Higher rate taxpayers still pay a nominal unchanged tax rate of 32.5 per cent on dividend income above £5,000, but the abolition of the dividend tax credit since 2016 means the effective tax rate increased from 25 per cent of net dividends received to 32.5 per cent – a 30 per cent increase in tax paid.

The reduction in the allowance to £2,000 will cost basic rate taxpayers with more than £5,000 dividend income an extra £225 a year.

For anyone with substantial dividend income this further enhances the attractions of shifting your dividends into your ISAs, or those of other family members.

National Insurance Contributions

  • The employee’s contribution rate remains at 12 per cent on the “primary” bank of income.
  • The rate on earnings above this primary band remains at two per cent.
  • The primary threshold at which contributions start to be paid rises to £162 a week,
  • but the upper earnings limit (UEL), where contributions fall from 12 to 2 per cent, is raised from £866 to £892 per week, to align it with the starting point for 40 per cent tax.

This budget continues the recent trend of further undermining previous attempts to harmonise the impact of tax and National Insurance by further widening the starting points for NICs and income tax.

This year employees start paying 12 per cent NICs on earnings of £162 a week, but don’t start paying 20 per cent income tax until they earn over £227 a week.

For 2018-19 we have a tax regime where for all except those over retirement age:

  • the effective starting rate is 12 per cent NICs at £162 a week, £8,424 a year
  • the combined NICs plus basic income tax rate of 20 per cent on earnings between £227.88 a week, £11,850 a year, and £46,384 – £892 a week – is 32 per cent, rather than the headline 20 per cent
  • the rate on earnings between £46,384 and £100,000 is 42 per cent
  • the rate on income between £100,000 and £123,700 is 62 per cent, because the £11,850 personal tax allowance is progressively withdrawn on incomes above £100,000
  • falling again to 42 per cent on taxable earnings up to £150,000
  • finally rising to 47 per cent on taxable earnings over £150,000.

ISAs

There are no changes to the ISA regime. The amount you may contribute each year to an Individual Savings Account remains at £20,000 for 2018-19.

The Lifetime ISA launched last year allows anyone under the age of 40 to receive a £1 credit for every £4 paid in, up to a maximum credit of £1,000 a year until they are age 50.

The fund may be used for house purchase, or can be withdrawn for any purpose after the age of 60, or earlier in cases of serious illness.

Withdrawals for any other purpose than house purchase before the age of 60 lose the government bonus, plus any growth or interest on it and also attracts a 5 per cent penalty.

These plans are separate from normal ISAs, but contributions count towards the 2018-19 total annual £20,000 limit.

With an ordinary ISA you may take as much as you like out any time for any purpose, and providing you repay it within the same tax year, you can continue to shelter the income and capital gains under the ISA wrapper in future.

Pensions

The Chancellor said nothing about pensions, despite widespread speculation that he may have been considering reducing further some of the tax breaks currently available.

The Budget papers revealed that after three reductions from £1.8m in 2011-12, the Lifetime Allowance goes UP by inflation to £1.03m.

Capital Gains Tax

After last year’s surprise cut in the flat rate to 20%, the rate remains unchanged for 2018-19.

The annual tax-free capital gains tax allowance increases by £400 to £11,700, in line with inflation.

Corporation Tax

As previously announced, the rate of corporation tax remains at 19 per cent.

Inheritance tax

The £325,000 limit remains unchanged and the tax rate remains unchanged at 40 per cent.

In April 2017 a further £100,000 reduction in the taxable value of your main residence became available. This goes up to £125,000 in 2018-19 as part of a planned increase to £175,000 by 2021-22. The value of the main residence nil rate band will be the lower of the net value of the interest in the property or the maximum amount of the band.

Since 2009 widows or widowers may “inherit” their former spouse’s or civil partner’s nil rate band.

VCTs, EISs and SEISs

The Chancellor announced that the investment limit for EISs would be doubled for knowledge-intensive companies.

  • The maximum you may invest in an EIS increases from £1 million to £2 million, with the additional £1 million to be invested in knowledge-intensive companies.
  • The limit for VCT investment remains at £200,000.
  • The limit for SEIS investment remains at £100,000.
  • The up-front income tax relief for investing in both EISs and VCTs remains at 30 per cent.
  • The up-front relief for investing in a SEIS remains at 50 per cent, regardless of your actual rate of tax.The length of time for which you must own a VCT before being able to sell it free of capital gains tax remains at five years; for EISs and SEISs it remains at three years.
  • SEISs and EISs continue to qualify for roll-over capital gains tax relief, and for inheritance tax business property relief.

Taxes on perks

Since April 2002, the personal tax you pay for cars registered after January 1998 has been determined by the price of the car, and its carbon dioxide (CO2) emissions – how “dirty” it is.

For 2018-19 the bands have changed as follows:

  • 13 per cent of the car’s value for cars with less than 50kg/km CO2 emissions.
  • 16 per cent of the car’s value for the next band of clean cars – those emitting between 51g/km to 75g/km.
  • 19 per cent of the car’s value for the next band of clean cars – those emitting between 76g/km to 94g/km.
  • Above that the tax increases by one per cent for each extra 5/km of CO2 emitted, rising to
  • 37 per cent for the most polluting cars emitting 180g/km of CO2 or more.
  • Within all bands an additional supplement applies for cars using diesel. This rises from 3 to 4 per cent from April 2018 for cars (not vans or lorries) which do not meet the latest Driving Emissions Step 2 standards.

Since 2003-04 the fuel scale charges have also being aligned to the car scale charges, designed to tax you on your personal benefit from your use of a company car. Your bill is determined by the same percentage of a fixed fuel scale figure. The “fuel benefit charge” multiplier increases by two per cent more than inflation each year, rising this year to £23,400.

The budget and your investing strategies

The Chancellor appears to have found an extra £25bn over the coming years to inject into the economy without putting any taxes up, and still being able to reduce the national debt as a percentage of GDP despite miserable growth forecasts.

This in itself is no mean feat, but to do it in such a way that almost no consumer will feel any immediate benefit is truly astonishing. Financially austerity has been relaxed, but what this will mean for public sector workers is not at all clear. What is clear is that benefits will go up less than the cost of living. Most voters will not feel that austerity has been relaxed at all.

It is difficult to work out which specific sectors or companies in the private sector will benefit from the largesse. The small print of the budget revealed that £15bn of the Chancellor’s projected spending was to be paid for by sales of shares in RBS, nearly half the current market capitalisation, but the market shrugged off the news.

Big housebuilders initially took fright at the proposals to make sure existing planning consents are in fact utilised, and the government’s expressed intention to encourage smaller builders rather than “big national” firms.

Similarly it is not at all clear where or how the biggest single line item – the £3bn Brexit fund – will be spent. Enhanced border controls and non-membership of the customs union would suggest a bigger role for HMRC, but in fact their budgets are set to fall.

Logic suggests that almost regardless of how the money is spent, it should provide a Keynsian boost to the economy at a time when the growth forecasts are some of the lowest ever predicted in recent history. This is because the Office of Budget Responsibility has given up assuming the UK’s productivity will ever improve; the Chancellor is doubtless hoping on this occasion it is they who are the eeyores, not him.

Almost as important as what was in the budget is what was not.

Fears of tougher regulation of utilities, which had been depressing the sector, proved unfounded, suggesting this sector may now be a bargain basement buy unless there is a real prospect of a Corbyn government any time soon.

Similarly not addressed were

  • the previously threatened changes to self employed National Insurance Contributions to reflect the fact that the basic state pension is now available to the self employed.
  • Social care
  • Any attempt to use taxes to redress the imbalance between the fortunes of the elderly and the young since the financial crisis.
  • Fears the VAT limit for registration might be brought down closer to the European average.

The elephant in the room – and in rooms around the world – remains what effect the reversal of quantitative easing here and in the US will have on market valuations as interest rates rise further.

Conclusion

A cynic might say it was a package of bribes or peace offerings to all Hammond’s political enemies.

The sadder, more likely, explanation is that it was the best a cautious chancellor could do with the rotten hand he had been dealt, to avoid any chance of a humiliating parliamentary defeat, in turn causing the budget to unravel as the Opposition predicted.

To the extent you consider it appropriate, consider the following as the key areas for action:

  • Make use of the full ISA, EIS, SEIS, VCT and capital gains tax allowances – you cannot carry them forward from one tax year to the next.
  • Think very carefully about withdrawing any of the funds which are within your SIPP, both from the point of view of losing the long term capital gains tax and income tax benefits of the fund, but also the future value of your estate.
  • Depending on your age, re-examine whether it makes sense to run down your assets outside your pension fund now that you can bequeath it free of all taxes to anyone you wish.
  • Consider creating matching tax losses on high yielding investments such as preference shares which you might benefit more from holding in an ISA or SIPP, by “bed and SIPP-ing” or “bed and ISA-ing”.
  • Consider adding as much to your pension plans as you can afford. The 40 year age limit for Lifetime ISAs makes logical sense only in terms of eventual plans to phase out upfront pension tax relief.
  • If you are likely to have a taxable income of more than £34,500, and even more so if more than £150,000, consider maximising the extent to which high yielding investments are sheltered in ISAs or SIPPs. Holding such assets in these wrappers is dramatically more attractive the higher your tax rate, and even more so if you have more than £2,000 in dividend income.
  • If your taxable income falls between £100,000 and £123,700, consider strategies such as pensions contributions or charitable donations to reduce the amount in that band, which is effectively taxed at 60 per cent.
  • Determine whether your portfolio contains adequate inflation protection. If the economy matches the Chancellor’s hopes for growth, rising equity dividend yields must be a better bet than the derisory returns on gilts coupled with the near certainty of capital losses when interest rates eventually rise.

November 2017

 

 

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.

Conclusion

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.

Conclusion

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

P/E ratio Is the FTSE 100 too high to buy

P/E Ratio – Is the FTSE 100 too high to buy?

One of the most basic tools for evaluating a stock or index value is the Price-Earnings ratio, or P/E.

You simply divide the current price of a share or index by the earnings per share for the previous 12 months. This provides a simple figure that makes the share price of a company you’re interested in comparable to the shares of other companies.

The rule of thumb is that the higher the P/E ratio, the more over-valued the share is. If the ratio value is 5 it means that investors are paying £5 – or whatever currency it is traded in – for £1 of earnings. So a share with a P/E of 15 is 50 per cent more expensive than a share with a P/E of 10, and twice as much as one with a P/E of 7.5.

Sometimes high P/Es mean the stockmarket is anticipating a future increase in earnings, maybe after a recent setback. For instance British American Tobacco has a record of steadily increasing earnings and dividend payouts and stands on a P/E of about 21, but Shell’s is over 70. In the US Microsoft has a P/E of 22, forecast to fall over the next two years. DJIA members GE, Disney and Boeing all have similar values. But Amazon, the online book and everything else retailer has a P/E of 171. Some companies, such as electric car innovator Tesla, have negative P/Es as they do not have any profits to report yet, and when they do the P/E will likely be sky high.

Variations may be due in part to how a company is run and reports its earnings.
But the P/E allows you to make broad comparisons between individual shares, and decide that one is more expensive than another.

In the same way each index can have a P/E ratio too, based on the monthly average of daily closing prices, divided by their previous 12 months earnings. That allows you to compare different UK markets against each other and with other international ones.

The FTSE 100 has an often quoted “historic” – established in lore, but not often a true mathematical average – P/E average value of 15 to 17.

But it goes up and it goes down just as the index does. Back in 1993 it was nearly 25. In 1999 and again in 2000 it got as high as 30. By 2008 at the height of the financial crisis it was well below ten, and again in 2011.

But Figure 1 shows that the FTSE 100 P/E ratio has risen well in excess of 30.

Figure 1 How the P/E rose throughout 2016, pausing above 37 before falling back

By comparison with the other key indices the FTSE 100 is high. The DJIA is at 20, and the S&P 500 and the Nasdaq both 24. But there are actually many unusual circumstances that have driven the FTSE 100 P/E higher since February 2016. Knowing this may settle the nerves, as can taking a longer term view through an alternative to the simple P/E.

The dramatic rise in the FTSE 100 P/E coincided with companies releasing their results at the calendar year-end. Many of these had taken a battering in 2015, with massive write-offs in the commodities sector. That continued through 2016, and while earnings fell or remained static, the index value rose.

As these numbers were calculated the P/E of the FTSE 100 rocketed. The Earnings have fallen while the Price has increased.

From June the index rose further because of the Brexit vote, in the expectation that those blue chip international companies that comprise the bulk of the FTSE 100 would benefit from the devaluation of sterling. Prices have also risen on the expectation of a rise in earnings that is yet to happen. It was not until October 2016 that the P/E ratio started to fall back to more reasonable levels. By the end of 2016 it was 33.

The long road

Another way to look at it is that the index is undervalued. Look back over the last 20 years; there were lots of volatile swings but no gains. This is because the index was overvalued, starting back as far as 1995. Since the highs of 1999-2000 while it has been moving sideways we have been waiting for profits to catch up with those valuations.

Figure 2 shows how the FTSE 100 has taken a long and tortuous path to get to where it is now. On the way there were good days and bad, rather than just good it might have experienced if it had grown more slowly and steadily.

Figure 2 How the FTSE has taken the long route to current valuation

The straight line path suggests what values the index should have had over the last 20 years if it were not for boom and bust.

Smooth out the bumps

Or you could consider another measure of value, one that perhaps is not so reactive as P/E has shown itself to be. Nobel Prize-winning economist Robert Shiller – of Irrational Exuberance fame – perfected the concept of a long moving average of earnings. It is called the Cyclically Adjusted Price to Earnings ratio, or CAPE.

This average smoothes out the short-term volatility of both earnings and business cycles. It may be better, but it’s not foolproof; it fails to consider changes in reported earnings through changes in accountancy procedure, for example.

Figure 3 shows recent CAPE values are well below the long-term CAPE average between 15 and 16.

Figure 3 CAPE smoothes out the volatile short-term effects that have sent the P/E ratio so high

As with the P/E, the CAPE long-term average is not absolute, but often a broad centre line. You’ll see variations of what is claimed to be the CAPE average.

Values extending beyond 24 and into the “red zones” are warning signs that the market is too high, as they were in 1995 to 1999 before declining through 2003. Figure 4 shows the CAPE for the overall UK market.

Figure 4 CAPE of the overall UK market. The late 2016 valuation of 15.2 is below the average of 20.4.

An analysis by Schroders in Figure 5 suggests that under or overvaluation is not actually market wide, and some sectors offer better value than others.

Figure 5 Under-and over-valued sectors of UK markets

Technology is over priced, but the Oil & Gas, Materials and Financials sectors remain bargains. What’s more, they may benefit should inflation start rising, as it inevitably will for a short period at least.

Conclusion

The high nominal P/E for the market as a whole may at first suggest that “we’re all doomed”. But a closer look at other measures reveals that the UK stock market still has more to offer investors than might be seen at first.

Ways to exploit the remaining upside include simple index trackers, offering the easiest “no thinking required” approach and no selections to consider. Alternatively consider sector funds that may be undervalued. Or drill down further into sectors for the particular bargains within each.

February 2017

 

 

The Santa Claus rally and other market myths

The Santa Claus rally and other market myths

We’re approaching the time of good will to all, and the much-vaunted Santa Claus rally. But how much of its reputation is based on fact?

And how much is more attributable to the fact that more of the population have now heard of it, whereas they may never have done even 20 years ago; and how many now have easy access to markets while they are bored during the Christmas-New Year break. They may still have been bored 20 years ago, but now can trade discretely from a smartphone while the family watch Home Alone and eat mince pies.

A December rise is also explained by many as the result of fund managers rebalancing portfolios for next year, or City bonus payments being staked with confidence and absolutely no inside knowledge.

In separating fact from fiction, a review of data is required. Much is available on the web, with convincing conclusions that over time December is the best month of the year for stockmarket returns, and the last two weeks of the year are often best too.

Reviews in The Stockmarket Almanac and What Investment conclude that December is best over multiple years.

Where to start?

But the 1970s and 1980s were different from now. When it became different is hard to say, but faster internet access was key. That came with ISDN in the late nineties, followed by ADSL broadband a few years later.

So the year 2000, the new millennium, seems a reasonable place to start.

Then is the question of what data set to use, the FTSE 100 or broader All-Share index.

So here are the results from both. Remember that they are presented with no agenda and no wish to burst bubbles or dampen optimism – we need as much of that as we can get.

santa claus rally

Table 1

The data was sourced from Investing.com, now one of the few easy to access free historical index data download providers – Google and Yahoo having either stopped offering index data or been unreliable. The LSE website seems to be complex for the sake of complexity, making it hard to find, let alone download.

One of the other key factors in determining the published results was that the figures were averages, and is perpetuated here for consistency.

The data shows that on average December is a great month to be invested in the FTSE 100, but not the best. The monthly breakdown in Table 1 shows that the average is dragged down by poor performance in 2002 and 2014-15.

santa claus rally

Table 2 & Table 3

This is echoed in the FTSE All-Share data.

Likewise, the chart in Figure 1 shows how April and July have more positive than negative months, in both the FTSE 100 and All-Share data.

October and February are also good performers.

The Table 1 data set analysis also confirms another commonly held adage, “sell in May and go away, buy again St. Legers day”.

Sell in May…

The data reveals that in the years featured – on average – it would indeed have been wise not to be long on equities.

July is the only month between May and September that bucked the trend. A close look at Figure 1 reveals it to be slightly more hit than miss, and more binary. If it went up, it went up strongly, and vice-versa.

santa claus rally

Figure 1

The monthly rises and falls for July aligned again perfectly, confirming that it mattered not if your portfolio was broader across the All-Share or FTSE 100 blue chip oriented.

And so in answer to the question “should I buy the Santa Claus Rally”, the answer seems to be that recent history backs you. But you must bail out by January, when the odds turn distinctly against you. But you’ve still got more chance of winning with UK shares in January than by buying a lottery ticket.

Taking the monthly averages data from Table 1 into chart form in Figure 2 below, you can see clear patterns, and may be able to interpret best times to enter or exit the market.

Figure 2

But such a strategy would apply only to broad brush portfolios, such as index tracker funds, ITs or ETFs; the data is meaningless at an individual company level.

Finally, before making your investment decisions, remember that past performance is not a guide to the future; and these other sensible observations:-

Mark Twain “Facts are stubborn things, statistics are pliable”
and
Benjamin Disraeli “There are three types of lies – lies, damn lies and statistics”.
Merry Christmas.

Brexit Brave new world or foolish little britain

Brave new world or foolish little britain Brexit

Something unexpected happened last week. Not England’s exit from Euro 2016 – no surprise there. Or the Brexit vote; 50/50 after all. What was never foreseen was that the FTSE 100 would make its largest weekly gain since 2011.

What the last 8 years has shown us is that markets don’t like uncertainty. And the advancement of news and trading technology means that anyone can hear news and make a decision in the markets almost instantly.

So long as there is a stream of consistent news the apple cart trundles along. What the UK has done is unwittingly set the cart on the bumpiest track, and thrown in a few boulders for good measure.

Consider first the UK uncertainty after the UK vote to exit the EU. Will we-won’t we actually leave the EU? The final decision rests with parliament, and – after a lacklustre and complacent campaign – the Remain camp are way more vocal now than the Leave campaign were prior to the vote.

Law firm Mischon de Reya reports on its website that it has “taken legal steps to ensure that Article 50 is not triggered without an Act of Parliament”.

Some comments by the Leave camp made before the vote have returned to the mouths whence they came in the form of a large foot; Farage had said that if the vote was close, say 48-52 in favour of Remain, it would be unconstitutional and invalid, and a new referendum would be needed.

One activist, William Oliver Healey, set up an online government petition calling for a new referendum should either side have less than a 60% win and 75% turnout. He has now disassociated himself from it, as it has effectively been hijacked and turned against the Leave camp, becoming – by a considerable margin – the largest government petition since the e-petition system was launched in 2011. By 30th June there were over 4 million names registered. There is also a growing mass, in excess of one million people, that have declared that they regret voting to leave. This is too little too late, as was, it turns out, much of the Remain campaign.

Lies, damned lies or Statistics?

And there is the truth dawning on many voters as the promises, or “suggestions” made that £350m a week saved in EU contributions would be available to the NHS – something most could see from the start was fiction – have now been dismissed as a “mistake”.

Anyone involved in agriculture or fisheries and has been reliant upon EU subsidies will have wondered all along how the Leave campaign maths was going to work.

The UK is also under threat from within; the SNP or in particular its leader, is of the opinion that some regions, notably Scotland – because the votes were counted separately – can make their own decision regarding EU membership. That idea was promptly dismissed by Brussels, saying that even if Scotland was independent it would still have to re-apply for membership, and probably adopt the euro as currency.

However, having stated that she was “determined that Scotland’s voice be heard” the SNP can still make the exit difficult. It’s not so much her voice but its echo from SNP supporters that don’t yet realise they are swimming against the tide. If ever there was a non-starter that is it, except perhaps for the campaign now rising calling for an independent London. As if.

Then there is Ireland, and what appears to be a sensible all round solution, except for those living there that don’t want it. With the Republic of Ireland forming the only land border between the EU and the UK, the merger of Northern Ireland with the Republic would certainly ease worries on the direct and local trade and movement that has developed in the last 20 years, and form a natural break for immigration purposes. It does on paper have more legs than any ideas for Scottish independence or EU membership.

EU has its own opinion

Now consider the rest of the EU, where there will be parliamentary and presidential elections in Germany, and one or other in France, Hungary and the Czech Republic. Each of these countries has a strong and vocal anti-immigration and anti-EU population, whom may use their strength to demand change or even their own referendum on EU exit.

The UK financial industry has built itself on providing service across Europe. But French President François Holland has already stated that the clearing of euro trades cannot continue in the UK once separation happens.

The ongoing status of ex-pats throughout the continent will affect many thousands of British citizens that rely on the EU membership for basic healthcare and the free or easy movement across borders, currently taken for granted. These may be restricted or removed in the future.

The ugly side is the opportunity created for far right groups to target immigrants. The police already confirm increasing occurrences of “hate” offenses. What we see in the UK may well be reflected by right wing groups in Europe against British overseas; Brits have just put themselves in the sights of all those that feel their futures are uncertain because of the UK vote.

Instability will create volatility

These “instability events” are or would be comparatively minor, and at first glance many would seem not to affect us directly. But each would have the opportunity to create market mayhem that affects a large number of us.

More worryingly any combination of them from the UK, Europe or the wider globe may combine or interact in unexpected and unpredictable ways.

Analysis in the FT, Telegraph, Times and Guardian of vote demographics suggest broadly that those in favour of leaving the EU may not feel any direct pain from volatile markets, or the ever lengthening list of events that could kick start or add to existing volatility, but they may eventually feel the effects through rising prices or lower pensions.

Those that have any invested funds in equities – bearing in mind that for six years or so there has been little alternative even for income investors – or ISAs or personal pensions will feel a shudder every time an event in or even affecting Europe flashes on their TV news screen. French National Front leader Marine Le Pen said that the vote was “the end of the EU as we know it”. For those that voted to Remain it may yet be much more than that.

Investors might want to take a look back at 2013 when volatility really showed itself in the UK, and consider a strategic balancing of assets to limit exposure while maximising gains.

Gold has already shown itself to be the haven of choice, that in addition to a technical outlook that suggested a big increase in value. Gold was the RMS Carpathia passing quietly in the night as the UK’s RMS Titanic foundered. Apart from the effects of a round of profit taking by long patient gold investors the price looks certain to rise, with a potential upside of a further 15 per cent towards $1,550 per troy oz.

The other major recipient of last week’s cash movement was US treasuries.

Asset allocation will be crucial

The UK exit should not have much effect on the global economy – though the value of european markets may bring that idea into question. The slide in the value of sterling should make overseas equities more attractive. Finding funds that have a broad global stance that can weather any local storm are favourite. There are articles on gold and global income funds in The IRS Report this month, and are available on the website at TheIRSreport.co.uk.

Otherwise, now is the time to pay attention to how markets react to good, bad or catastrophic news.

The UK FTSE 100 opened on 24th June 8.7 per cent lower than it closed the previous day, and then rose to close just shy of three per cent lower. Some sectors took significant and sustained battering, providing buyers of banks or builders with discounts of 30 per cent or more. The whipsaw action was an opportunity for the value investor and those looking for income. HSBC was already yielding nearly eight per cent, and though it did not fall as Barclays did, there was a chance to buy a solid stock yielding over nine per cent, though the exchange rate movement may reduce that.

Central bank action to stabilise markets, and assurances of more to come, have spurred markets as they did with QE previously. By 4th July the FTSE 100 had touched 6,600, a new high for the year, and the highest it had been since April 2015.

Conclusion

Volatility will be back, and will provide bargains for those looking to add to positions slowly, thereby increasing yield or lowering average cost. What happened in the markets in late June was nothing compared to the January-February routs, so prepare to use them to your advantage when they come – for they will come.

Don’t let the clamour for equities blindside you. The currency fluctuations mean that inflation is likely to rise – JPM suggest 4% in 2017 – so safeguarding should be a priority. Consider gold, inflation linked gilts and overseas equities alonside equities to protect against the volatility.
For investors, asset allocation and being contrarian will be more important than ever.

July 2016

The moving target of emerging markets

The moving target of emerging markets

What exactly is an emerging market? There are various definitions from organisations such as the IMF and OECD, and also the FTSE.

The FT Lexicon defines emerging markets as those that are developing their economy and infrastructure, and so therefore might be expected to deliver higher returns. But the category includes some quite wealthy countries that cannot be defined as developed because their regulatory controls are not satisfactory.

Over the last two years those responsible for many of the indices we use have made some changes, and for the first time reclassified a developed country as an emerging economy.

That downgrade really sums up the political and economic catastrophe that has consumed Greece over recent years.

But by some measures Greece has been an all out winner. Back in 2012 their benchmark 10 year bond peaked at over 40 per cent before falling to less than seven by early 2014. And again in 2015 it soared back over 14 per cent before falling back to just under nine per cent. As the yield falls the price of the bond increases. Few assets have appreciated to the same degree over the same period.

Key to recent performance was the election of Syriza on its anti-austerity ticket – something everyone watching from this side of the fence knew was never going to work. But Alexis Tsipras convinced a desperate population that it could. Many high profile detractors – including George Soros and Alan Greenspan – echoed similar opinions, all essentially that Greece was going to default and the euro would collapse when the inevitable Grexit happened.

After a referendum in July 2015 rejected the creditors’ terms – when the coupon on the bonds was 19.2 per cent – investors bought Greek debt as an investment, and as a sign of confidence in the forward plans and the austerity plans forced upon Greece.
100% gain in just three months

By September 2015 those bonds had more than doubled in value.

The Greek population wanted to remain within the eurozone, and maintain its stable currency rather than revert to the drachma. The official line of the heads of the eurozone was also that it wanted Greece to remain.

Meanwhile the stock market was suffering through poor liquidity and lack of investment. MSCI downgraded Greece from a “developed” economy status to “advanced emerging”. On the face of it that might be negative, but does in fact open the Greek market to more investment through index based funds.

As a developed economy it had a weighting of just 0.019 per cent in the MSCI developed market index. But as an advanced emerging economy the bigger Greek listed companies will have more exposure within funds, with a weight of four per cent in the MSCI EM index, and 3.8 per cent in the MSCI EM Europe index.

The potential inflows should help to ease liquidity on the Greek stock exchange, and the overall efficiency of the market.

Late in 2015 FTSE indices also downgraded Greece with effect from March 2016, but for different reasons. MSCI had concerns about failures regarding borrowing, lending and short selling. The FTSE downgrade is based on market inefficiencies, including the reduced market capitalisation which excludes many funds from investing. The irony is that an advanced emerging economy should experience low unemployment, high growth and positive prospects for the economy, all of which are still absent in Greece.

Greece is unique though, as emerging market economies often come with associated currency risk, whereas Greece has a “zero” currency risk as long as it remains in the eurozone.

A long road to recovery

Greece is still a basket case, and is the worst performer in the MSCI Emerging Market index. But the likely effects of the downgrades should be positive if Greece remains politically stable and within Europe, as money starts to get back to cash starved companies.

We are just starting to see Greece feature more regular in the news, with worry over the looming July repayments that it can’t make without further bailout funds, the second tranche from the third bailout. And in order to secure those funds further sacrifices will be demanded from the Greek population.

However they got into this situation, the effects of such dramatic changes to income and hence living conditions will hurt. And there are already demonstrations about these further potential austerity measures that will increase taxes and further reduce pension payments.

To recap, Greece now has four creditors; the European Commission, European Central Bank, International Monetary Fund and the European Stability Mechanism. They agreed terms with Greece and put in place a review policy. But from day one that was in jeopardy as Tsipras says he does not believe in the policies he has agreed to implement. The November 2015 review is still to be completed. The worry that the lack of progress brings is reflected in Standard & Poor’s rating of Greek bonds as CCC+, which suggests there is a “substantial risk of default”.

Conclusion

Against all the odds and mad ideas that it could survive without austerity Greece has survived, and not exited the euro. The Greeks have shown that they can rebuild – by 2014 banks had recapitalised and investment was pouring in – but must accept that it has been their own policies that have stopped the recovery, and even set it back further.

And history has shown that when they create turmoil markets react. The periphery of that turmoil will create oppor-tunities in the UK and Europe, and may stretch into the US and Asia. But most of all it will affect Greek markets, and the increased number of funds that now have exposure to them. And it will affect bonds, where a well-timed purchase has proved to be an excellent investment.

As a contrarian investment it must be close to top of the pile.

Is the Chancellor playing Robin Hood with your pension

Is the Chancellor playing Robin Hood with your pension?

In little over five weeks the Chancellor is expected to announce further adjustments to the way we save for retirement in what is effectively his third budget in under 12 months.

Speculation online and in the press suggests that he may further the transition to a pension tax regime which sees little or no tax relief upfront on payments into pension funds, and no tax later when money is withdrawn – like ISAs.

This would follow the steady reduction in annual and lifetime allowances since 2010.
First in line are likely to be higher rate taxpayers, with the relief on their contributions reduced or even removed.

The motive for curtailing this saving incentive is the current £30 bn annual cost of pension contribution tax relief, the majority going to higher rate taxpayers. This could transform the government’s spending projections before the end of the current term.

It is also being presented as an egalitarian move on the grounds the current system is unfair. The 4.5 million or so taxpayers who pay 40 or 45 per cent tax claim nearly three quarters of the tax reliefs paid, clearly favouring those who can more easily afford to save.

The pensions industry is expecting a universal flat rate tax relief to be introduced. The precedent is already there with the progressive restriction of tax relief on borrowings for buy-to-let to 20 per cent by 2020. As with such guesswork ahead of budgets in previous years, what no-one can foresee is exactly the level it will be set, or when it will come into effect. Any slowing of the economy – through domestic or global influence – is likely to make the need more urgent.

After all, George Osborne is not going to let his deficit reduction target fall entirely by the wayside, as it will be the foundation of his claim to be party leader and potentially PM.

Surveys of pension professionals show they think the new across the board rate of relief will be 25 per cent at the low end and 30 per cent at best.

Changes such as these would likely take some time to implement, but there is every chance that further contributions to maximise the benefits available under the dying regime would be capped.

Who is affected?

Additional rate taxpayers already know that they will have contributions capped from April 2016. The transitional rules mean that the annual allowance becomes £80,000 for the pension input period (PIP) from July 2015 to April 2016. PIP is the timeframe over which your annual allowance can be invested, and a measure taken of what has been used.

Contributions cannot exceed employed earnings for the year, regardless of allowances.

The details of the new regime from April 2016 are complex but generous, reflecting the restrictions high earners will face moving forward.

The annual allowance will be reduced by £1 for every £2 of taxable income in excess of £150,000. Someone earning £210,000 would see their annual allowance reduced from £40,000 to just £10,000. As usual any overpayment would be taxed at the marginal rate, suggesting that employees may seek to adjust their remuneration to reflect the inability to use the pension payments – after all, there is no point having pension contributions as part of a remuneration package that can’t be used.

Additional rate taxpayers – especially those affected by the eroding of their annual allowance – should maximise their contributions before the deadline of April 5th.

Higher rate taxpayers have to consider the possible reduction in relief from an effective 67 per cent to 33 per cent. Even if it is likely to be drawn upon in a few years – now the age to access funds is just 55 – it must be worth adding in virtually anything extra now in the hope of being able to draw it as a pension under a more favourable tax regime.

If so, anyone paying higher rate tax should consider funding to the maximum – if they can afford to do so. Any unused allowance from the previous three years (PIPs) can be paid into a pension fund before the deadline of April 5th.

There are calculations on some websites that demonstrate how a loan or credit card transfer can be used in a strategy to successfully make additional payments if ready cash is not available.

Basic rate taxpayers are the winners, with any increase in the “flat rate” providing a boost to their pension savings.

A change to 30 per cent would represent a 50 per cent hike in the relief available. Because the most likely change won’t be to their detriment, and potentially to their advantage, basic rate taxpayers should not be in any hurry to make further contributions.

Table 1 below shows how redistribution might work at rates of 25, 30 and 35 per cent, reducing the benefit for higher earners, while Table 2 on page 3 shows how it increases for basic rate taxpayers.

This in itself represents a significant incentive to make pension savings. Along with the changes made to income tax bands and minimum wage, it seems George Osborne really must believe that the way to election victory in 2020 is to play the role of a latter day Robin Hood.

There is no real idea when this could happen, but the Chancellor has imposed other such changes very quickly, sometimes with immediate effect. The only thing that might delay it is the complexity and its effect on businesses; for example, they may well need time to implement payroll adjustments for a flat rate of tax relief.

Further changes come into effect on 6th April. The Lifetime Allowance (LTA) is reduced again to £1m from £1.25m. Those with pension pots already beyond that should apply for protection with HMRC.

Those who already have a subtantial fund which might exceed £1.25m before they want to draw anything can also apply for protection, but may have to stop making any more contributions.

This obviously presents the investor with a gamble: will the fund grow beyond £1.25m with no further contributions?

This is a calculation that can be made by your pension provider based on your fund’s current value and likely growth.

Conclusion

Potential changes in relief on pension contributions will affect higher earners, and especially those with longer to wait until retirement.
The pensions industry believes these changes will happen, and urge anyone affected to top up as much as possible before the deadline.

But remember the same industry experts have been predicting the end of the 5 per cent annual tax free concession for life assurance funds for decades now; and that in general terms it is unwise to undertake any financial transaction for the tax reasons alone. And the younger you are, the greater the dangers. Who knows what the situation will be when you come to take your pension? Lower tax relief now might be offset by promises of lower taxes on the pension you draw in the future – but while governments can legislate for the future, no government can actually ensure a future one of different hue might not completely overturn anything promised today.

Of course these thoughts are still speculation, and George Osborne may yet postpone these ideas. So far he has not faltered when grasping the nettle. And remember the advice not to invest for tax reasons alone. Especially not perhaps for speculative tax reasons.

February 2016