Monthly Archives: April 2016

Life with LISA

The new Lifetime ISA (which is the LISA I am referring to here) was introduced in the 2016 Budget and is not to be seen as the death of pensions as many people have announced.

Firstly, some facts about LISA:

  • Any UK individual aged 18 to 40 can open one from April 2017
  • The maximum contribution to LISA is £4,000 per annum, and the Government bonus will top this up by a maximum of £1,000, although the bonus will only be added until the age of 50
  • This £5,000 LISA amount is not subject to pension allowances , it is on top of the pension limits
  • Contributions into LISA will utilise part of the individual’s ISA allowance each year, although this is due to increase to £20,000 from April 2017
  • The underlying investment in LISA will grow tax free
  • The fund built up in a LISA can be accessed from age 60 with no penalty, or on purchase of a first home (subject to other restrictions)
  • Access to the funds at other times comes with a reclaim of the Government bonus, the growth on that bonus, and a 5 per cent further penalty
  • On death, the full LISA value can be inherited tax free by spouse/civil partner.

So, LISA sounds pretty fantastic, but why this isn’t the death of pensions?

  • Any UK individual from birth can have a pension, they must be between 18 and 40 for a LISA
  • Pensions give tax relief at the highest marginal rate of the individual (i.e. 20 per cent, 40 per cent or 45 per cent), whereas the Government bonus is a set amount starting at the equivalent basic rate for pensions
  • Pension tax relief is claimable up to age 75, the Government bonus is only claimable up to age 50
  • An individual can pay a maximum contribution of between £3,600 and £40,000 gross into a pension each tax year (including the tax relief); whereas LISA is only £5,000
  • Your employer cannot pay into your LISA so, for now at least, workplace pensions (as opposed to workplace LISAs) will still be around
  • National Insurance Contributions cannot be redirected to your LISA either, but they can if your employer offers Salary Exchange with their pension
  • The lifetime allowance on pensions is £1 million, which is a lot more than the majority of the UK working population will achieve.

In our opinion, whilst LISA does not signal the end of pensions, she could carve a good niche for herself as another planning tool for individuals, namely:

  • Those who have made the maximum tax relievable pension contribution
  • Those saving for their first home
  • Those who are likely to exceed the pensions lifetime allowance
  • Non-taxpayers who don’t qualify for other tax reliefs due to no, or very little, earnings
  • Non-earning spouses who have already utilised the £3,600 gross into pensions.

Whilst there are still some details that need to be confirmed before they become widely available next tax year, I am sure you will agree that LISA could become a household name.


Brexit: the financial implications

The outcome of the in/out EU referendum on 23 June is far from certain. The bookmakers still suggest that the in campaign should prove successful but, with weeks of political posturing ahead, we have been considering what the financial implications of a Brexit could be.

There have been a range of previous studies published on the subject with a wide variety of potential outcomes forecast. Capital Economics were commissioned by Woodford Investment Management to examine the United Kingdom’s relationship with Europe and the impact of Brexit on the British economy, and their report draws a measured and neutral conclusion. The report considers several of the most important elements of the Brexit debate including immigration, trade, financial services, regulation and the public sector.

Benefits for certain industries

Annual net migration from Europe has more than doubled since 2012, reaching 183,000 in March 2015 and boosting the workforce by around 0.5 per cent. Currently, labour movement within the EU is free, whereas leaving the EU could allow immigration policy to be restricted and focused on certain skill bases, which could benefit certain industries. Restriction of low-skilled worker immigration could, however, be detrimental to low-wage sectors such as agriculture, and could increase wage growth and inflation.

Free trade with EU countries would be impacted. Under the Lisbon Treaty, a country leaving the EU has two years to negotiate a withdrawal agreement and it’s very likely that a favourable trade agreement would be reached in a Brexit scenario, albeit with some potential additional costs to exporters. Indeed, the ability to negotiate our own trade agreements with other non-EU countries may be preferred to going via the bureaucratic processes of the EU, and this could potentially offset some of the additional cost of dealing with EU members.

Saving on red tape

The City’s position as a global financial hub is certainly helped by being part of the EU, allowing unfettered access of European markets to London-based firms. The City currently exports £19.4 billion of financial services to the EU and this would be significantly disrupted in the short term. Over the long term, the UK could broker deals with emerging markets to help allay this impact.

Saving on the red tape and regulation emanating out of Brussels is often cited as a potential positive of Brexit. This might, however, prove to be a smaller boost to productivity, as exporters will still need to comply in order to easily access the EU, and the UK may therefore decide to retain many EU rules.

Similarly, the UK’s significant £10 billion contribution could be saved through Brexit, but in reality, this saving may not be fully felt. The economic impact on other areas may offset some of this and indeed the Government may have additional costs in compensating certain sectors and regions that current receive EU subsidies.

Uncertainty will dominate

In summary, the effect on the UK economy of a Brexit may not prove to be too significant in the long term. However, much will depend on how an unprecedented exit is handled and how the UK can then independently negotiate with other parts of the world.

As the vote draws ever closer, it will be interesting to see whether economic impacts draw more headlines than the current focus on political issues. However, it is hard to currently see how the debate will be dragged too far away from the emotive issue of immigration.

Until the outcome is clear, uncertainty will dominate – something which will not be beneficial for financial markets. In the event of an out vote, the uncertainty will continue for some time, whereas a vote to remain in will provide some quicker clarity. This suggests that financial markets may continue to demonstrate volatility in the weeks ahead.


All figures sourced from Capital Economics report, published February 2016 –

Tales of the Unexpected

All investors know that risk and return are related – taking on more sensible risk should provide higher returns over time, however, there are no guarantees.

We, as advisers, will often talk to you, about target or expected returns from portfolios needed to deliver your financial goals, but these forward looking assumptions are best based on a term of 20 years or more.

It is almost impossible to make short-term guesses as to market returns over the next year or two, as that would be speculation. Putting it simply, the expected rate of return of an investor’s portfolio is the sum of the expected returns of each asset class in the portfolio weighted by the allocation made to it. It is not any form of guarantee or promise that this level of return will be delivered consistently, year on year.

The hard part is deciding what long-term returns are likely to be achieved but fortunately, investors can look at data going back to the beginning of the last century – more than 100 years’ worth of insight into the long-term investment returns of shares and bonds (fixed interest). This data shows that the long-term real returns for bonds as being 2 per cent and 5 per cent for equities (source: Credit Suisse Global Investment Returns Yearbook 2015).

Based upon these expected real rates of return, it is therefore reasonable to assume that financial planning decisions can be made using these numbers and any decisions made based upon returns materially higher than these should be viewed with caution. Sadly, it is not unusual to hear stories of less scrupulous advisers and product providers tempting investors with promises of spectacular investment returns. A good rule of thumb is that if it sounds too good to be true, then it probably is.

By and large, a return of 1 per cent to 2 per cent above inflation for bonds and 5 per cent to 6 per cent for equities is a sensible litmus test. Returns higher than these imply a material increase in the level of risk being taken. It is important to remember that nobody has a crystal ball and expected returns come with a high degree of uncertainty in the short-term, and maybe even longer. As financial planners, that is why we often run a number of return scenarios to establish what lower returns would mean to them and halving expected returns is not a bad starting point for a basic stress test.

As a result of this, please remember not to be too hard on your adviser because the portfolio has not delivered its expected return since you last met – it is not expected to!


Reasons to be Cheerful

If you’re like me, you often listen to the news or read the papers and think the world is going to the dogs! The depressing headlines appear to be endless but, if you look beyond the media, there are a lot of things that are going right.

There are many challenges to be faced in the world, as there always will be. The legacy of the financial crisis is still with us, Europe is grappling with the refugee crisis, China faces a difficult transition and we cannot ignore the entertainment that the US election is providing!

It’s easy to overlook the massive advances made in many areas, which don’t grab media attention, but they are worth keeping in mind when you are overwhelmed by grim headlines.

So, here are a number of reasons to be cheerful:

  1. Over the last 25 years, 2 billion people globally have moved out of extreme poverty according to the latest UN Human Development Report
  2. Over that same period, mortality rates among children under the age of 5 have fallen by 53 per cent, from 91 deaths per 100 to 43 deaths per 1000
  3. The world’s largest economy, the US has been recovering and unemployment has halved in 6 years from nearly 10 per cent to just below 5 per cent
  4. Global oil prices have fallen by more than 70 per cent in 2 years. Not great news for the oil companies, but great for consumers and decreases production costs to help boost profits
  5. Renewable energy sources are now accounting for 23 per cent of global electricity generation. A figure that’s expected to rise to 26 per cent by 2020
  6. We live in a world of rapid innovation and one report estimates that digital economy accounts for 22.5 per cent of global economic output, which will continue to grow
  7. Mortgages continue to be cheap and are likely to remain so for some time. It is predicted that for consumers, this year will be one of the happiest since the mid-2000s
  8. The football premier league is likely to be won this season by a team with more than 3 British players
  9. Global bank regulators recently announced that, since the global crisis, they have implemented reforms to reduce risk within the global banking system
  10. Summer is on its way!

The world is far from perfect and it faces many challenges but, just as it is important to be realistic and aware of the downsides, we must also recognise the advances we are making. So, just as much as there is reason for caution, there is always reason for hope and you only have to return to Leicester City for the inspiration for that. Keep the good things in mind when you feel overwhelmed by the bad news and besides, I would prefer Leicester City or Tottenham to win the league rather than some others. There are plenty of reasons to be cheerful and looking on the bright side of life!