Bulletin – July 2017
The key issues with BREXIT
Having attended various events in the last few months, I have summarised below some of the key facts and issues we face as we progress through BREXIT.
- Financial services represent about 10% of British Tax revenue (£70bn out of £700bn).
- €215 trillion worth of transactions go through London each year. Nowhere else in the world has the rich deep pools of employees, facilities, expertise and connections that London has and Europe simply could not create these in a short period of time.
- We are the largest insurance market in the world. We are the 2nd largest transfer of Islamic finance in the world. We have the 2nd largest Renminbi transfer of funds in the world.
- London handles 2.6 times more financial transactions every day than the whole of Europe put together.
- Apparently 40% of the people living and working in financial services in London were not born in the UK!
- In two years’ time, if there is no treat then there can be no divorce bill.
- One of the most important observations, in October 2018, the EU has to have elections. How will the UK, BREXIT and Europe deal with this in relation to electing UK members? How will this affect negotiations and what likely effect will this have upon the probability of a two-year extension?
- There is legal opinion that needs to be tested in both the UK and European courts that suggests that Article 50 can be reneged within the two-year period if required and we simply cannot come to any satisfactory conclusion and/or if all the goalposts have moved so dramatically (I personally think this is quite likely).
- 60% of all legal contracts are based upon UK common law across the world and this is not going to change even if the financial centre moves from the UK to Frankfurt or Paris (highly unlikely). A simple small example is that Kazakhstan has created a financial centre in its main city which has been ring-fenced as a UK law-centred operation for anybody in the world wanting to trade and operate in Kazakhstan (particularly in the oil industry of course).
- Finally, the physicality of connections between the rest of the wold, London and moving this to Europe is simply impossible in a two-year period, i.e. just basic issues like sufficient connectivity changes that will be needed.
So, we therefore continue to watch with interest how these matters above will be addressed and many more issues. The idea of leaving seems simple, but the mechanics required will be very much harder.
Interest rates and the mortgage market
Following the credit crisis and the fall of Lehman Brothers in December 2007, we saw the Bank of England begin their response to the crisis in the markets.
From a rate of 5.75%, we swiftly saw the base rate reduce to 0.5% in March 2009. Having then remained at this level for seven years, last summer we saw a surprise reduction of a further 0.25%.
With an all-time low of 0.25% where do rates go now? The Bank of England target rate for inflation is 2% and this month we see the rate is at 2.6%. Traditionally, we would expect rates to rise to curb inflation.
But maybe not. The dilemma we face is what would a rate rise do to the economy and to households? Could they deal with a rate rise? Consumer debt is once more on the rise so should we raise rates to stem the flow of non-mortgage debt? But when we borrow, we spend and this circulates the money around the system and is good for the economy. So long as debt is affordable, then you could argue it is a good thing.
On the other hand, others such as Andrew Lilico of the Institute of Economic Affairs raised the point that if rates rose, then the pound would strengthen and this would reduce inflation of goods we import and be good for households.
The difficulty is monitoring real inflation as we have so many times written about. How d o we know what is really going on when there is far more money moving around the system that is not taxed and not counted?
The monetary policy committee have started to move in their voting towards a rate rise. So, markets are expecting to see this happen at some stage, but when? No one can be sure. We continue to believe like the markets, that rates will rise in the short-term, but that increased will be very slow and gradual.
For any of our clients or family members that have a mortgage that has finished its fixed rate, it may be nearing the time when it is appropriate to review the mortgage and look to secure a new rate deal.
For a client with a Lifetime Equity Release even with a fixed rate, it is possible to review whether a better rate deal can be found to replace the current mortgage.
These mortgages can be repaid and transferred to a new lender subject to meeting any early repayment charges. Our research so far is showing that in most cases the cost of the repayment charge is worth paying to seize the opportunity of a better rate. Particularly because this will save your estate interest charges over your lifetime.
We are actively starting to review these matters with clients, but if you would like to speak to us sooner then please do not hesitate to contact me or my colleague Nick who are authorised to discuss mortgages.
Your pension and the future
Money and finance are both incredibly important to us all. Wouldn’t it be great if the government could make things simple (we still have 10 million words of taxation law, the longest in the world) and educate people from an early age so that they understand the importance of saving? It is amazing how few people understand relatively simple mathematics and the value of saving for the future.
At each budget, we see opportunities that seem so positive, but end in more complexity. At this point, after another budget was curtailed because of the indecisive election result, we see one more complication added, albeit one that will affect almost no one at all. It is a change that aims to stop company earners recycling money through their pension, avoiding various taxes along the way. It will also stop the double helping of tax relief by drawing money out of pension, and reinvesting, then immediately drawing it back out again. Remember there is tax relief on the contribution in and 25%$ of the money is available completely free from tax, resulting in double tax savings.
So, from now on, if you are drawing a taxable income from any pension, any future contribution will have tax relief on pension contributions capped at £4,0900 each year, down from £10,000 last year and from 3255,000 only a few years’ ago. You can still draw out tax-free cash, and continue to make pension contributions, but as soon as you draw any taxable income from any pension, you will be more restricted on any contributions you make thereafter.
The government, through the regulator, the Financial Conduct Authority, is worried about two things in the immediate future:
- Pension transfers out of old fashioned final salary pension schemes and loss of benefits.
- The use of more flexible pension rules to take a higher income than in the past, causing people to run out of money.
Transferring a pension or drawing income both offer fantastic opportunities, be it for greater income, for inheritance planning, or for easing into retirement over a number of years. However, with a lack of education the very real concern is that many people make decisions in haste, run out of money or simply do not understand the risks that are attached to their decisions.
The benefit of people spending their money earlier and faster than they would otherwise have is great for the treasury as it helps the economy and therefore revenues received by them but this could be a short-term hit. So, what might happen in the future?
- Will the government close the opportunity of moving out of final salary pensions, as is the case for many public-sector schemes already?
- Will the government change the tax status, reducing tax reliefs making it less attractive to save into such schemes?
They will almost certainly need to raise taxes before too long and this could be a way in which to do so.
It is easy to image now the generous way in which pensions can be passed to your children, friends or family, free from inheritance tax via your pension, to be a target, as the savings in inheritance tax do not benefit the treasury.
A change in the House of Commons, with a more left-wing leadership, could bring some substantial changes to pensions. For now, make the most of the opportunities that do exist today. Our advice is always based on current rules which frequently change. Therefore, it is vital we continue to work with you on pension planning to maximise the opportunities for you.
If you have a pension outside of your KMG portfolio you would like us to review, please get in touch.
Accessing the 7IM website
For clients that have this platform in their portfolio with us, we wanted to remind you about registering with their website for access to your accounts.
As an investor, you can register with their website directly to view your accounts and valuations as well as receive information electronically rather than via post. We appreciate for many that the numerous amounts of paper that arrives through your door can be frustrating.
Regulation changes are about to increase the level of paper you receive even more with the implementation of MIFID II. MIFID II requires the platforms to send to you a valuation of your investment every quarter rather than the current six-monthly reports. This will not be an option but mandatory and cannot be avoided even though here at KMG we also report to you direct every six months.
We would therefore encourage all of our clients to register on the website for electronic access to your portfolio and to opt out of paper mailing. In that way, you can choose when to access the reports and information.
If you would like to register then please let us know and we will arrange for your log-in details to be sent to you. Should you need any assistance, as always, do not hesitate to contact the team here at KMG.
KMG’s seminars are coming to town!
On 4th and 9th October 2017, we look forward to welcoming many of you to our annual seminars at the National Liberal Club and Denbies Vineyard in Dorking.
We are always interested to hear views from our clients and would be delighted to know what topics or areas you would like to hear about from our speakers?
The content will be relevant to the current political and economic climate, but we would love to cover any particular questions you may have. Therefore, if you would like to submit a question or topic to us in advance of the event, please send your thoughts to Kate – [email protected]
With thanks in advance for your input to the agendas!
We trekked the night!!
Earlier in the year we let you know that we had entered ourselves into a team challenge called Trek the Night to raise money for Action Medical Research.
On the eve of 15th July, ten of the team sacrificed their good night’s sleep for a walk of endurance on the South Downs Way and I am pleased to say ten of the team crossed the finish line! Our team clocked in at 7.10am and the current total raised for the charity is over £3,000. Whilst some of us did look a little like the walking wounded for the following few days we have started talks about next year tackling the 40-mile version! We had a great time, worked together and succeeded in what we set our minds to. Watch this space for what we do next!