N E W S L E T T E R
December 2011
Bruce & Co. By Referral!
Merry Christmas and a prosperous New Year!
| It’s been a big year for pensions; the government has been putting its take on pensions into the pot which was left by the previous government. This resulted in the abolition of the annuity rules, which was a good thing. It resulted in the abolition of the Alternatively Secured Pension, also a good thing. And it also resulted in the return to “drawdown’s” in pensions, another good thing. The reduction of the Lifetime Allowance, which is due to come into effect next April, is however a very bad thing. |
Consider protection now on BIG pension
In a world where we are concerned with how much income people will have in retirement; where in the future the state will not be able to support the level of pensions; in a world where the retirement date is being pushed further and further back, does it make any sense at all to restrict the amount that people can save in their pension?
The change to the rules means that if you have over £1.5m in your pension pot (taking all pensions added together) then there will be a penalty tax of 55% applied to any amount over that level.
It may sound like a large amount to have in pensions, but it is easy to reach that level if you are diligent. If you started saving £150 per month into a pension at age 18, and increased the saving by only 5% a year, and it earned only 7% a year, by age 65 you would have about £1.8m!
If you do have a pension pot that is close to the new £1.5m limit, you need to apply for “Fixed Protection” on the fund. With fixed protection, the amount you have over £1.5m will not be hit by the new tax charge. Of course, as is usual with these ‘things’, the rules are very woolly and unclear and so HMRC can change its interpretation easily, but nonetheless it makes sense to get the protection in place. BUT, one thing to bear in mind, once you have protection, you can no longer put more money into your pension pot! Wouldn’t you just know there’s a downside.
Go to www.hmrc.gov.uk/pensionschemes/apss227.pdf to download the application, which cannot be completed online!
The world has gone mad, and it will all end in tears
Things go wrong when we forget the past, because we are then prone to repeat it.
You will remember the so-called dot com bubble when the stock markets came tumbling down. It all happened because stupid valuations were given on stupid companies, most of which don’t exist any more. None of these companies made any money, and had little real prospect of doing so. So you would think we should have learned from that unfortunate piece of history, but regrettably not.
In November the website company Groupon floated in the US. A flotation is when the owners sell their shares, or some of them, to the public. We say public, but it is usually institutional investors such as pension funds that buy the shares. So here is the big question: if you have a company that has turnover of little more than $400m, which this year made a $100m loss and has never made a profit, how much would you pay for it? Well, if you have any sense at all you would not buy it, or if you did, you would not pay much unless you knew that the business model was set to make a huge amount of profit soon. Would you pay $14bn? Now, we are talking about American billions here, which is a thousand million. So 14-thousand-million, for a company that has a turnover of $400 million and is making a $100 million loss!
Why?
It’s all down to behavioural economics. This fascinating subject, when combined with the work of the Chicago professor, Robert Cialdini, gives us an insight into why people make decisions, and how sometimes they can get it wrong.
You, like many of us, will think that a great deal of research goes into buying stocks when you run a massive pension fund, and it often does. But the people who run the funds are only human, and can get wrapped up in not thinking objectively. Cialdini lists one of the main forms of influence as scarcity. If we think something will be scarce, we will want it – just look at what happens when there is a shortage at the petrol stations; people who don’t need petrol buy it, causing a self-perpetrating problem. Also, Cialdini cites social compliance as a motivator, meaning that we want to do the same things as other people. Put these two things together and we can see why people will pay billions for something that is actually worth probably less than 1% of its supposed value. In 2002 and 2003 it all came crumbling down, and if the markets don’t remember the past they will repeat it.
How does this affect you?
We believe that we will see growth in technology stocks again, as happened in 2000 and 2001. Not small levels of growth, but massive levels. But then these stocks will come crashing down. Therefore, if you are an investor who may consider investing in technology stocks, make it a short-term investment. If you make a gain, pull out your original capital as soon as you can; do not risk losing the capital, and certainly do not hold it in the investment beyond 2012, because if you do you may seriously lose your shirt.
| The Treasury has advised that for the next tax year (2012/13) the ISA limit will increase to £11,280, half of which can be held in cash. Junior ISAs, released last month, will remain static at £3,600. |
ISA limits to increase
The Junior ISA will apparently be indexed from April 2013; why this must wait a year is a bit of a mystery, but then so are most of the decisions that come out of the Treasury.
What’s the problem with Greece?
Previously we set out the basis of the Greek problems, but here is an illustration of the issues that the wider world is having to deal with for Greece.
In Greece there is an additional property tax if you have a swimming pool. In Athens, in the last tax year 392 people claimed to have a swimming pool. When a satellite photo of the area was examined, 16,974 swimming pools were found. This means that 97.8% of people failed to disclose this on their tax return.
| Following the publication of the latest growth forecast from the Office for Budget Responsibility (OBR), the chancellor George Osborne has given his Autumn Statement to Parliament. |
Autumn Statement – more of what we expected?
You may already be bored with the information overload, but just in case you want to know the important points, here they are.
Economic growth
As predicted by many commentators, the growth forecasts for 2011 have been revised down to 0.9%, and further revision for 2012 also is down to 0.7%. Perhaps surprisingly, the forecasts for 2013 to 2015 are all much higher at 2.1%, 2.7% and 3% respectively. This is the second time in 18 months that Mr Osborne has had his growth forecast reduced by the OBR.
| Whilst this government will insist that it is working towards reducing the current deficit, this clearly does not negate the need for additional borrowing going forward. There will be an extra £112 billion borrowed over the next four years. |
Government borrowing
Debt-to-GDP ratio will peak at 78% in the 2014/15 tax year and is predicted to fall after that.
Further changes in the public sector
Following the biggest strike actions in recent years there is more “bad” news for the public sector as Mr Osborne has announced that there will be a cap of 1% on pay rises in the public sector. This will last for two years following the end of the current freeze.
State pensions
The state pension age is due to increase to age 67. In a move to save a predicted £59 billion, the chancellor has announced that this will be brought forward and will now be introduced in 2026. (Around the time Mr Osborne will be thinking about retirement!)
Basic state pension will rise by £5.30 per week and there will also be a rise for pension credit to the tune of £5.35 per week.
Taxes and allowances
| There was some good news for motorists; after much lobbying the fuel duty rise planned for January has been scrapped and a 3p rise in fuel duty will now go ahead in August. Originally, the duty would have gone up by 3p in January with a further 5p rise in August. |
The chancellor also stated that he is encouraging local authorities to put a freeze on council tax to ease the pressure on lower-income households.
Business support
There seemed to be a substantial focus on helping the UK’s small to medium-sized businesses. Approximately £42 billion is to be put aside for low-interest loans, through partnerships to secure funding for companies and for regional growth. In addition, a further £250 million will be available as a support package for energy-intensive firms.
The current rate relief holiday for small firms will be extended until April 2013, and there will be a capital gains tax waiver for individuals investing £100,000 in start-up companies. There will also be further benefits for those individuals as they will receive 50% tax relief on their investment regardless of their personal tax status.
| You only need to pick up a paper or switch on the television to see that one of the biggest issues facing people at the moment is unemployment. This is obviously going to impact to a greater extent on the younger generation and school leavers. |
Jobs and training
To help alleviate this the government has announced that £1 billion will be set aside to help 410,000 young people through implementation of a youth-contract scheme for subsidised six-month work placements.
Education and families
Money has been set aside for school buildings, 100 additional free schools are to be built and childcare places for the most deprived two-year-olds will be doubled to 260,000.
Transport and infrastructure
January’s rail fare increases will be capped at 6.2%, which is 1% above inflation; this is a reduction from the scheduled 8.2%.The chancellor also announced that £5 billion will be spent over the next three years on road and rail projects. This will include £1 billion specifically for the rail network.
| For those of you who live anywhere near construction sites you will no doubt have noticed a slow down in building progress. The government has highlighted this and will be investing £400 million in a scheme to help kick-start stalled projects. |
Housing
There will also be help for 100,000 people looking to buy a home, through the creation of a mortgage indemnity scheme which will allow them to put down just a 5% deposit. For those individuals who currently are social tenants and want to buy their home, there will be a 50% discount.
As always with the Autumn Statement, it is intended as an indication of what will take place in the following year’s Budget, a halfway statement to let us know how the chancellor’s previous plans and forecasts have fared. In an ever changing political and economic environment there could easily be many more changes before the next Budget. We will of course keep you up to date.
The FTSE 100: a rock amid eurozone chaos – ‘Rule Britannia’
Britain’s FTSE 100 is likely to continue outperforming other European stock indices next year as the eurozone is wracked by its unending debt woes, according to Gary Baker of Bank of America Merrill Lynch.
The index of UK blue-chip shares has fallen 8% in the year to date, compared with a 15% drop by the FTSEurofirst 300 and an 11% fall by the FTSE All-World index.
‘The UK looks to be a relative winner from the current turmoil at this point,’ Baker, head of European equities strategy at the US bank, wrote in a note on the outlook for global markets in 2011.
Speaking at a press briefing in central London today, Baker added the index was essentially a bet on the world’s fast-growing economies, as some 50% of its exposure is ‘emerging markets-driven’, amid a darkening outlook for developed economies.
But he said that the FTSE’s exposure to the more robust US economy, and defensive stocks such as pharmaceuticals, also gave it a strong defensive quality. The index is dominated by other sectors Baker likes: energy, telecoms and basic materials.
Baker added that the bond market had continued to back Britain’s mix of ‘strong government leadership’, an accommodative central bank and currency devaluation and pronounced the UK as a ‘safe haven’ – despite sluggish UK economic growth.
The key risks the FTSE faces, the strategist said today, are a ‘more concerted problem’ within eurozone government bond markets, or within the gilts (UK government bonds) market, which he branded a ‘source of enormous stability’.
‘Any challenge to that consensus view of gilts being a safe haven… will obviously be the start of a rather different process – when the UK starts to look like Europe,’ he warned. ‘But we certainly do not expect that in our base scenario at this point.’
On mid-sized and smaller UK companies, Baker was less bullish, however, citing ongoing deleveraging across the developed world and the poor outlook for mergers and acquisitions activity.
‘Like a skydiver without a parachute’
Economists at the US bank expect Britain to fall into a ‘minor recession’ over the next few months, dragged down by the effects of the eurozone debt crisis, according to their recent global economic outlook report. They also believe the global economy can handle a modest European recession, but see a high risk of a more adverse outcome. Athanasios Vamvakidis, head of G10 foreign exchange strategy at the bank, said the likelihood of the euro extending its losing streak depended on how far the debt woes deteriorated before the European Central Bank is forced to intervene decisively, and ‘core’ eurozone nations give a ‘strong commitment to save the euro.
‘At this point, the eurozone is like a skydiver without a parachute. And we do expect that eventually, the ECB will provide a parachute,’ he said at the same event.
This article has been directly taken from Citywire, one of our research providers.
Going Green in January
| In January 2012 Bruce & Co. will be going completely green with our newsletter. We will only be emailing the newsletter as of January. Therefore, please can I ask all those who have not already contacted us with their email addresses to do so if they wish to continue receiving the newsletter. Thank you. |
End of year Office News
Christmas Opening Hours
Please note our office will be closed from
Thursday 22nd December 2011
and will re-open after Christmas & New Year on
Tuesday 3rd January 2012
We would all like to take this opportunity to thank you for your continued support and the trust you place in us as your Independent Financial Adviser / Planner.
Bruce & Co would like to wish everyone a very Merry Christmas and a Prosperous New Year.
This newsletter is for information purposes only and is not advice. Speak to an Independent Financial Advisor for advice before making any decisions.