Welcome to the April 2019 newsletter from Chamberlains

So, we’re into a new tax year, and it doesn’t feel much different so far…  However, there are a whole new set of personal allowances etc – I’ve sent tax cards out to some people, but you can also see one on our website, here.

The main change for most people is that the personal allowance (ie. the amount of tax-free income you can receive in each tax year) has increased to £12,500, and the basic rate band (the part of your income above this that’s taxed at 20%) has increased to £37,500.  That gives a total of £50,000 that you can receive as income without straying into 40% higher rate tax, up from £46,350 last year. 

The annual exemption for capital gains tax has increased from £11,700 to £12,000, but apart from that there’s not much change – so I won’t waste any more time!  If there are particular points you’d like to check, you know where to come…

PENSIONS AND ISAs – further thoughts

Last month’s newsletter about these was generally well received.  Two follow-up points:

I said that ISA’s are part of your estate if you die and are subject to Inheritance Tax.  This is true, but you can invest in things that receive Business Property Relief – which are then exempt from IHT (whether in an ISA or not.)  These include investments in AIM shares or funds – various investment advisors are able to direct you towards assets that qualify despite not being unduly risky.

The other point is to emphasise that it’s not generally recommended to move investments from a pension into an ISA – largely because the pension fund usually remains outside your estate, no matter what type of investments are involved.  However, if you’re taking more income from a pension than you need, you could put some into ISAs – although ideally you could cut back on the income and leave the pension investments to grow.

LUMP SUMS OR DRIP FEED?

If you or I could predict whether and when particular investments would increase or decrease in value, we’d probably be richer than we are!  In the medium or long term, most “sensible” investments increase in value (or so history tells us) – and they do so faster than your money would do if you left it getting interest in even the best bank or building society account.  Ideally, you want to buy an investment cheaply and sell it when it’s worth more – so you make a profit, a capital gain (and capital gains tax is cheaper than income tax.) 

Sometimes you may have a hunch that some particular share is undervalued (I had clients who made money out of Lloyds shares back in 2007, when they collapsed to nearly nothing and then recovered just a little, for example) but most often it’s guess-work.  One IFA who I know is telling me to keep money in cash to take advantage of bargains if we crash out of Europe without a deal – maybe he’s right, but who knows? 

Because not many of us are able to judge the right time to buy or sell, you may be better drip-feeding funds into investments.  If the market goes up, your investment will increase in value but you’ll be buying fewer shares, but if it falls, your investment will go down but you’ll be able to buy more shares for the same amount.  In this way, things are balanced out – hence the terms “unit cost averaging” or “pound cost averaging.” 

I’ll try to explain with a simple example.  Let’s say that you have £480 to invest, either now or over the course of a year.  The investment fund you’re looking at costs £10 per unit now, £12 in three months, back down to £8 the next quarter, and then up to £15 the quarter after.  If you use the drip-feed method and spend £120 each quarter, you’ll buy different numbers of units, depending on the value that quarter, and you’ll end up with 45 units which, at quarter 4 will be worth £675.  Se the table below…

If you spend the whole £480 at any one of the four points, you may or may not be lucky.  If you wait until quarter 4, and spend your £480 then, at current values it’s obviously only worth £480.  If you spend it all before then, you’ll have bought at less then the quarter 4 price, so you’ll make a profit – which will vary according to timing.  Quarters 1 and 3 give better results than the drip-feed method (£720 and £900 respectively) but quarter 2 would be less good.  See the next table below.  But guess what?  Add up the four possible end-values and divide by four – and you get £675, the same as the pound cost averaging result. 

The conclusion is that higher profits can be made if you time the market well – but this is normally just a matter of luck.  Perhaps the IFA is right and it’s worth keeping some cash back in hope of bargains (if you can judge correctly that the values will go back up) – but I think that there’s a lot to be said for the smoother ride of drip-feeding.  The debate will go on…

KEEPING THINGS SIMPLE

I’ve always been a fan of the KISS principle (keep it sweet and simple or, less politely, keep it simple, stupid!) but it’s hard to keep to it.  Many people find that they accumulate a number of different bank accounts, investments or even pensions – and the more you have, the harder it is to keep track of them.  In a business context, some people get distracted onto various different activities, some of which are probably not worthwhile.

Earlier this year there was a lot of interest in “the Marie Kondo” method of decluttering your home.  (It was a Netflix show.)  We were urged to pile our clothes onto the bed and decide which to keep – if they didn’t “give you joy”, they should go out.

To some extent we can apply this to our investments and businesses.  To reassess what you’ve got, you need to gather things together, perhaps on a sheet of paper or a spreadsheet, rather than a bed.  Your tax return can be useful in summarising income from different sources – but it won’t include ISAs or untaken pension funds, nor assets that are growing in value rather than producing an income. 

If you have a number of small pensions from previous endeavours or previous employers, it may be worth consolidating them into one place, one “platform”.  You’d need to consult with an IFA to see if this is feasible (there may be restrictions or different benefits from the various schemes), but it certainly helps visibility and understanding to have them brought together.

Similarly, you may have a number of small bank or building society accounts that you’ve accumulated over the years – is there any point in keeping things complicated like this?    Perhaps at one time you liked to have cash in different building societies in the hope of getting shares when they demutualised, but that no longer seems relevant now.

Or again, perhaps you have a number of small-ish shareholdings – maybe inherited, or the result of privatisations, temporary enthusiasms or hope of shareholder benefits.  Even if you want to retain these, it can be practical to keep them all in the same place – perhaps with an investment manager or on a self-managing platform such as Hargreaves Lansdown, FundsNetwork, AJ Bell YouInvest, Charles Stanley Direct, etc. – you can find plenty on the internet.

A useful longer-term benefit of rationalising your assets in this way, in addition to making things simpler for yourself, is that those who have to sort out your estate when you’re no longer able to enjoy it – will thank you for transparency and simplicity.

What about the “joy” principle?  Maybe it gives some people the “spark of joy” to hug a treasured share certificate to themselves (perhaps they inherited it, or maybe they can gloat that they got it at such a bargain price), but most of us don’t react in this way!  And indeed, from a financial point of view, it can be counter-productive to allow emotion to dictate investment decisions.

However, there may be some point in reviewing assets for their tax-effectiveness or the net income or growth that they’re providing.  Perhaps an investment fund has lost its star manager, or perhaps the charges seem excessive.  Ideally, you’d perhaps review these with an IFA, and you need to bear in mind the possibility of capital gains tax or losses if assets are sold. But don’t ask me for any detailed advice (except in calculating capital gains)!   As you’ll have gathered, I find the area interesting (I have my own small pot to play with) but I’m not qualified to give anything other than generic advice.  However, I know a few people who could help – and I remain completely independent and don’t get anything from them for mentioning their names!

The main change for most people is that the personal allowance (ie. the amount of tax-free income you can receive in each tax year) has increased to £12,500, and the basic rate band (the part of your income above this that’s taxed at 20%) has increased to £37,500.  That gives a total of £50,000 that you can receive as income without straying into 40% higher rate tax, up from £46,350 last year. 

The annual exemption for capital gains tax has increased from £11,700 to £12,000, but apart from that there’s not much change – so I won’t waste any more time!  If there are particular points you’d like to check, you know where to come…

PENSIONS AND ISAs – further thoughts

Last month’s newsletter about these was generally well received.  Two follow-up points:

I said that ISA’s are part of your estate if you die and are subject to Inheritance Tax.  This is true, but you can invest in things that receive Business Property Relief – which are then exempt from IHT (whether in an ISA or not.)  These include investments in AIM shares or funds – various investment advisors are able to direct you towards assets that qualify despite not being unduly risky.

The other point is to emphasise that it’s not generally recommended to move investments from a pension into an ISA – largely because the pension fund usually remains outside your estate, no matter what type of investments are involved.  However, if you’re taking more income from a pension than you need, you could put some into ISAs – although ideally you could cut back on the income and leave the pension investments to grow.

LUMP SUMS OR DRIP FEED?

If you or I could predict whether and when particular investments would increase or decrease in value, we’d probably be richer than we are!  In the medium or long term, most “sensible” investments increase in value (or so history tells us) – and they do so faster than your money would do if you left it getting interest in even the best bank or building society account.  Ideally, you want to buy an investment cheaply and sell it when it’s worth more – so you make a profit, a capital gain (and capital gains tax is cheaper than income tax.) 

Sometimes you may have a hunch that some particular share is undervalued (I had clients who made money out of Lloyds shares back in 2007, when they collapsed to nearly nothing and then recovered just a little, for example) but most often it’s guess-work.  One IFA who I know is telling me to keep money in cash to take advantage of bargains if we crash out of Europe without a deal – maybe he’s right, but who knows? 

Because not many of us are able to judge the right time to buy or sell, you may be better drip-feeding funds into investments.  If the market goes up, your investment will increase in value but you’ll be buying fewer shares, but if it falls, your investment will go down but you’ll be able to buy more shares for the same amount.  In this way, things are balanced out – hence the terms “unit cost averaging” or “pound cost averaging.”  I’ll try to explain with a simple example.  Let’s say that you have £480 to invest, either now or over the course of a year.  The investment fund you’re looking at costs £10 per unit now, £12 in three months, back down to £8 the next quarter, and then up to £15 the quarter after.  If you use the drip-feed method and spend £120 each quarter, you’ll buy different numbers of units, depending on the value that quarter, and you’ll end up with 45 units which, at quarter 4 will be worth £675.  Se the table below…