Bulletin – May 2016
To BREXIT or not to BREXIT?
Let’s start with an undeniable fact: no-one knows what the eventual outcome will be should we vote to leave.
On 17th May in Reigate, KMG met the Chief Economist of the Institute of Directors, the Chief Economist at Lloyds Bank and an independent economist. And on 19th May, KMG hosted the Bank of England Inflationary Committee report meeting in Farnham, Surrey with Andrew Holder, the Bank of England agent. All are in agreement with the fact above.
Another fact is that if you look on the major betting websites, you will see that the majority of the money is betting on Britain remaining in the EU; and it has to be observed that these betting sites have been far more accurate in predicting voting outcomes than any polling survey!
KMG’s general consensus is that whether we decide to leave or stay, the European system is under massive pressure from debt, the ability to service debt and the ability to collect taxation which are causing fault lines across Europe. These fault lines cover the upcoming general election in Spain and the debt management of Greece, and include far right parties in Holland and France and even the recent referendum in Holland which indicated that the Dutch would like to leave the EU. These issues, together with the possibility that Finland may be first to break away from the EU, lead us to suggest that he process of integration in Europe will have to change quite substantially and relatively quite quickly.
So, KMG continue to consider “the scheme of things” and to diversify investment management to cope with a myriad of investment opportunities including:
- The re-engineering of the Chinese economy into a more service-led economic state
- The possibility of interest rates rising more quickly than we anticipate, possibly in the United State to begin with
- The volatility which is bound to occur as a consequence of the Trump presidential candidacy.
Fundamentally, all these issues revolve around the relationship between banks and governments and the uneconomic cost of debt which central bankers are beginning to worry about in every part of the globe.
We are also concentrating on investment opportunities arising as a consequence of disruptive technology. These opportunities are often misunderstood and incorrectly accounted for as economists typically measure today based upon the past. It is vitally important to remember that the future is always different! There are many reasons to suggest we are moving to a very low inflation, low investment-yielding world supported by a different type of economic activity based around technology. This, supported by the fantastic and dramatic way in which we are all adapting our lives is presenting many new investment opportunities.
Expect volatility both sides of the BREXIT vote, and on the assumption that we remain within the EU, we will continue with the slow and painful realisation that the EU project is in desperate need of dramatic reform. Leave or stay, the EU will be changing or collapsing.
Planning for later life
So you have worked hard all your life and reached retirement to enjoy doing all the things you never seemed to have time to do when you were working. Congratulations! You have created all your financial plans and geared your finances to take over paying an income to you as employment earnings come to an end. Or so you thought!
The good news is that we are all living longer and this is thanks to the vast improvement in health awareness, early diagnosis and medication. More and more of us survive some quite life-challenging health issues and we therefore spend a great proportion of our lives in retirement. It is estimated by the Cass School of Business that by 2040 there will be 10 million of us over the age of 75.
Living longer does, however, present a different set of challenges. As we grow old we all hope to do so with our general fitness intact, but the sad fact is that many do not live entirely independently into their twilight years. Assistance at home so we can live there for longer is often a preferred option and many face the reality of living in either sheltered accommodation or a residential home.
The challenge faced by many is where do you being when a loved one needs that little bit of help?
One critical piece of planning that you should do as soon as possible is to appoint a power of Attorney through the creation of a Financial Affairs and Health and Welfare Lasting Power of Attorney. Once you have completed this valuable document, which is relatively simple to do, you can rest at ease knowing that should you reach a time when you cannot make your own decisions, someone you trust can do so on your behalf.
We all hope to continue to live with the ability to make our own decisions, but these things can change rapidly so it is best to have a contingency plan!
When it comes to care, many do not know what they are entitled to when they suddenly need assistance of some kind.
For any person requiring assistance at home or in a care home, there is a benefit called Attendance Allowance. This benefit is not means-tested (based on your financial position), but instead is based on the level of assistance you need. More information can be found at www.gov.uk. This benefit can only be paid from the date of claim and not for historic needs.
For frequent help or constant supervision either during the day or at night, the benefit is £55.10 per week. For supervision both day and night it is £82.30 per week. This benefit is paid to the person receiving the care to meet some of the costs. If you are a person providing that care to a loved one, then you may personally be entitled to a different benefit called Carer’s Allowance. If you need to care for a person for more than 35 hours a week you could receive £62.10 per week. The person you care for must be receiving the Attendance Allowance.
Aside from state benefits, the Dilnot Report in 2011 set out guidance to the government on funding care in later life. There are estimated to be 130,000 people entering a care home each year of whom 41% completely fund the costs themselves. The average cost in the South East for a residential care home is £682 per week and this does not include any nursing requirements which could see the costs rise to as much as £933 per week!
The Dilnot Report is to be introduced in two parts with the anticipated cap to fees currently deferred for now. The Care Act 2014 brought in the recommended changes in respect of assessing care. It delivered better assessment of those in need of care, but also better recognition of those members of family and friends who provide the care focussing on wellbeing and preventative measures.
So for now, the cost of care continues to be met by those having more than £23,250 of capital, savings and income. It remains that funds held in an investment bond wrapper are disregarded from the assessment of wealth and your home cannot be sold when a dependent or spouse remains living there.
When it comes to paying for care there are a number of solutions and it is imperative to explore all of them to ensure you choose the best option for you. These can include drawing income from your portfolio, raising income from your pension, income from any trusts you have or even arranging a long-term care annuity. Depending on your health these annuities can provide good value for money providing the needed income for your care and leaving the majority of your estate for your beneficiaries.
Nick Matthews and Jenna Duffett at KMG are both Later Life specialists and will be pleased to explore your options with you, or for more information take a look at www.ageuk.org.uk or www.gov.uk
Yet more tax changes!
This April the new Dividend Allowance was introduced and has completely changed the taxation of dividends received from companies. The creation of this new allowance now changes the way in which you will pay tax on your portfolio and we need to consider the interplay of this with your whole financial affairs. As we meet you over the coming year we will be considering this new planning issue with you in more detail.
If you have any urgent concerns on how dividends are taxed then please do not hesitate to contact the team.
Pensions – again
Let us start with the acknowledgement that pensions are terrific. They are immensely tax efficient, allow capital to pass through the generations without IHT (inheritance tax) and when needed for either income or capital, money can be available pretty quickly. From retirement in your mid-50s, there are few limits on how much access you can have.
Yes there are all sorts of complications, and I d not suppose it will stay this way for too much longer as pensions are too easy a target for governments around the world who are looking at ways to save money.
It is too good to be true. We know this. The government certainly knows it too, but hey, make the most of it while you can. And it could be worse. In Australia, they are bringing down the total lifetime contributions limit to just £250,000. That really is not much for modestly successful people over a 40-year career. But at least this is a limit on how much you pay in and not on growth, which is what we have in the UK.
Okay, there are fees involved, and the effect of these has, quite rightly, been highlighted in the media again recently. For the unscrupulous adviser, the gravy train of commission (money for nothing) has come to an end, and where you, the investor gets no benefit from any service, the effect of compound costs can be very large indeed. But where advice leads to tax efficiency and sensible investment returns, the costs are vastly outweighed by the benefits.
Overall, the cost of running an investment portfolio is moving downward, and it will not be long before the investment industry is dramatically changed by advancing technology, just as we are seeing across banking.
So private pensions are still hugely worthwhile for most people. What about the State pension? It changed again in April and we can break it down into three areas:
- If you reached State pension age before 6th April 2016, there is no difference to what you will receive.
- For those who joined the work force this April, they will not have to worry about what happened before, they simply accrue benefits under the new system.
- For those who have worked under the old system, but continue to do so now, it is mish-mash of the two, and as equally incomprehensible as the original system.
There is no means-testing, but in the future it will be the wealthiest who lose out in favour of the poorest, generally, and perhaps this is the purpose of the State pensions. Bear in mind, while trying-to-make-things-easier is something we are all looking for, the government needs to save money and pensioners of the future are another easy target.
I find it difficult to do anything but come back to the incredibly worrying situation of the public finances. We need something like $200m per day to be invested from abroad to match our current expenditure, with the largest deficit since World War II.
We can print money to finance the debt, and we can take money from abroad. We are doing both, but eventually it needs to be paid for or written off. The cost of the State pension and welfare more widely is such that it simply has to be addressed. Whether leaving Europe makes this easier or harder, I will leave you to decide.
And if you are interested, you can check your National Insurance record online at NIDirect.gov.uk you will have to register of course, but I am reliably information it is not too onerous to do.