• ARCHIVE – Newsletter 2022

Three prime ministers and three chancellors in as many months, certainly feels chaotic, possibly a bit embarrassing, as well as a little depressing.

There is no doubt that the UK could do with some stability, fiscal rectitude and general leadership. Let’s hope that Rishi Sunak can deliver some. Let us think about the magnitude of what has just happened. The Conservative party decided, whether rightly or wrongly depending on one’s opinion, that Boris Johnson had to go, fearful of its increasingly appalling polling numbers with the electorate. A prolonged and uninspiring leadership contest over the long hot summer, ushered in Liz Truss for a fleeting moment before the markets, and again the fear of even worse polling figures, forced her to fall on her sword. That is all well documented but misses a key point.

What we should be reflecting on is not this mess but the fact that we live in a free, democratic nation, where the government is, as described by Abraham Lincoln in his Gettysburg Address of 1863, ‘of the people, by the people, for the people’. Living in a society where the ability of the Conservative party to serially partake in the regicide of its leader, in fear of the will of the people, and for voters and opposition parties to freely voice their own opinions, without fear or violence, is a privilege, whatever your political hue.

Contrast that with scenes from the recent Chinese Communist Party Congress of President Xi, a dictator reneging on the established term limits, having an ex-leader humiliated and dragged from proceedings and filling the Politburo with ‘yes’ men, sits in stark contrast. Political opponents are not just miffed, as they are in the UK, they live in fear of their lives. Arguing over a pint as to whether there should be a general election, or whether the Conservatives still have a valid mandate, given that it won a majority of 80 at the last election and the UK has a system of parliamentary democracy, is a luxury for those living in a free, stable and open society.

The will of the market, like the people, is a strong democratic force. Its role is to set prices by incorporating all known information, without fear or favour, to reach an equilibrium price, allowing investors to allocate their capital efficiently. Liz Truss certainly understood pretty quickly the power of the bond market, as it evaluated her vision for growth against the risks of unfunded tax cuts. The market did not like what it saw and the yield it expected to be paid to lend to the UK government rose, impacting mortgage and other borrowing rates, which in turn was reflected in peoples’ views on her policies.

In an open society the value of a free press is also immeasurable, providing access to information quickly and generally accurately – or at least at risk of fact checking or criticism by other media outlets and commentators – which feeds into both market prices and national opinion. It looks into dark corners and drives accountability. For sure, news is a self-selected sub-set of what is going on in the world and more likely to reflect disasters, acts of violence, and thus at risk of portraying a more negative outlook than perhaps truly exists. We can see in Russia and China what the harmful consequences are of a state-controlled media. You may not like the Daily Telegraph or the Guardian, depending on which side of the political fence you sit, but to have the choice is, again, something to be valued.

For sure we are in for some tough times economically but remember that at least we live in a society where we are free to express our views, where markets work and the media – however annoying it can sometimes be – helps to hold our politicians’ feet to the fire.  Stay positive!

Annual CPI inflation hit 10.1% in September, but that does not mean every price is showing a double-digit increase.

The September Consumer Prices Index (CPI) inflation reading is probably the most important inflation metric in a given year. Traditionally, this number is the one used by the Government as the basis for increasing tax allowances and bands, as well as benefits – including the state pension.

In recent years the significance of September’s CPI reading has waned, as the Government has chosen to freeze or restrict increases to limit the cost to the Exchequer of these benefits. The most obvious recent example is the freeze to the personal allowance (£12,570) and higher rate threshold (£50,270 outside Scotland), which would be £14,270 and £57,170 from April 2023 had the first two years of a four-year freeze not happened.

This year, the September 2022 annual inflation rate of 10.1% is more significant and not all it seems. The graph above shows the annual inflation rate in the 12 categories that make up the CPI ‘shopping basket’ of goods and services.

Only a third of those categories registered inflation above 10%. And another third recorded rises of no more than 5%. All the categories experienced higher inflation in September 2022 than September 2021, when the annual inflation rate was a more modest 3.0%, but the changes brought about over the intervening twelve months have had significantly varied effects across the different categories:

• Housing, water, electricity, gas and other fuels inflation has increased from 1.9% to 20.2%, due to the war in Ukraine, resulting in soaring energy bills.. This category is shortly expected to see another jump, as the Government’s new energy price guarantee took effect from 1 October.
• Food inflation jumped from 0.8% in 2021 to 14.5% in 2022. This can also be largely attributed to war in Ukraine. Not only has the war affected the production of grain and sunflower oil, directly increasing their prices, but the higher cost of fossil fuels – used in transportation and in fertiliser manufacture – has exacerbated the price increase.
• At the other end of the scale, however, the communications category, primarily telecoms, is experiencing only 2.4% inflation (albeit in 2021 the corresponding figure was 1.5%). Health (medical, hospital and outpatient services) has also seen a modest rise, from 1.3% to 3.5%.

These large variations help explain why your experience of inflation may seem, at different times, better or worse than the headline figure.

The Office for National Statistics (ONS) recognises this fact and has recently introduced an online personal inflation calculator which is worth exploring: https://www.ons.gov.uk/economy/inflationandpriceindices/articles/howisinflationaffectingyourhouseholdcosts/2022-03-23

It is important to build the impact of inflation into your financial plans, and wise to seek professional advice to better understand how these figures affect you personally. 

By clicking on one of these links you are departing from the regulatory site of Polestar. Neither Polestar nor Quilter Financial Planning is responsible for the accuracy of the information contained within the linked site.

Child Trust Fund money continues to be forgotten.

Nearly all children born between 1 September 2002 and 2 January 2011 were the lucky recipients of a government handout – usually £250 or £500 – which was locked away in a Child Trust Fund (CTF). CTFs were introduced by the Chancellor at the time, Gordon Brown, with the worthy idea that every child would have some savings to their name when they reached the age of 18. It was hoped that parents and others would make regular top ups to the modest government payment to increase these coming-of-age funds.

Like so many other well intentioned resolutions, the CTF scheme was far from successful. The initial government payment was sent as a voucher to the child’s parent or guardian. If the vouchers were not used to open a CTF within 12 months, HMRC was left to open a default CTF for the child, with the CTF provider selected at random from an accredited list. No less than 30% of CTFs were opened this way.

In 2010, the poor take up of CTFs encouraged the new Chancellor George Osborne to make a significant cut to payments. Eventually, from the beginning of 2011, the scheme was closed, albeit payments into existing CTFs, by parents for instance, were allowed to continue. By then there were 6.3 million children with CTFs.

The latest detailed data from HMRC (from April 2021) revealed the total investment in CTFs, at that time, as nearing £10.5 billion, with more than four in five of them having a value of under £2,500.  (The average value in April 2021 was £1,911 and is currently sitting around £2,100).

HMRC now faces the opposite problem to the one it encountered at the start, when parents overlooked this new investment opportunity: CTF pots are not being claimed by 18 year olds. To quote a recent HMRC press release, “Tens of thousands of teenagers in the UK who have not yet claimed their matured Child Trust Funds savings could have thousands of pounds waiting for them”. It is likely that many teenagers (and their parents) have forgotten or were unaware of the CTF’s existence, especially if it was set up by default.

To trace a CTF, go to www.gov.uk/child-trust-funds/find-a-child-trust-fund.

CTFs were replaced by Junior ISAs, which stand more chance of being remembered at age 18 as they must be established by parents or guardians and do not involve any direct government contributions. 

The value of investments and the income they produce can fall as well as rise. You may get back less than you invested.

Past performance is not a reliable indicator of future performance.

Established in 2017 to digitalise the trust registration process, the Trust Registration Service (TRS), recently required modification so HM Revenue & Customs (HMRC) can fulfil its obligations under new anti money laundering regulations.

The rules require all UK express trusts and some non-UK trusts (including most non-taxable trusts) to register with HMRC. The TRS began accepting registrations from non-taxable trusts last September, with an initial deadline of 10 March 2022. However, due to delays in preparing the TRS, the deadline was subsequently amended to 1 September 2022.

The September deadline is applicable to all trusts in existence on or after 6 October 2020, even if they are now closed. After this deadline, all new trusts (and any changes to the details of existing trusts) must be registered within 90 days. So that trusts set up close to the September deadline are not penalised, the 90-day rule will also apply to trusts set up on or after 2 June 2022.

Exemptions

Some trusts are exempt from registration unless they pay UK tax. Examples include trusts holding life insurance, trusts used to hold money or assets of a UK-registered pension scheme and other policies that pay out upon a person’s death, charitable trusts and will trusts.

Rules relating to trusts are complex, please get in touch with your financial adviser if you are unsure. 

If you are self-employed or work via a company the winding back of many of the proposals in September’s mini-Budget have altered tax planning.   

The  range of tax and other changes proposed in September affecting companies and employment, included:

1. Freezing the rate of corporation tax at 19% for all companies.
2. Reducing the basic rate of tax to 19% from 2023/24 (outside Scotland).
3. Ending the 2017 and 2021 reforms to off-payroll working rules (often called IR35).
4. Abolishing the additional rate of income tax (outside Scotland).
5. Scrapping both the 1.25 percentage point increase in National Insurance Contributions (NICs) from 6 November 2022, and the Health and Social Care Levy, which had been due to start in 2023/24.

Less than a month later, the new Chancellor, Jeremy Hunt, culled the first three on this list, the fourth having been already scrapped by Mr Kwarteng. Mr Hunt might also have buried the fifth, too, were it not for the fact that the necessary legislation was just about to become law.

Mr Hunt’s reworkings of his predecessor’s plans has several implications for shareholder directors:

• If you are wondering whether to pay yourself a bonus in this tax year or next year, you and your company will still both save NICs by waiting until after 5 April 2023.
• If you are considering a dividend instead of a bonus, there is now no point in delaying until 2023/24 as your dividend will still be taxed at the same rate, assuming your other financial circumstances do not change.
• If you are considering an investment in plant and machinery, there may now be less rush to take advantage of the 130% super-deduction, due to end on 31 March 2023. With the annual investment allowance staying at £1 million after March 2023, and the main corporation tax rate changing to 25% in April 2023, the mathematics have changed. You could even benefit from greater tax relief by delaying investment.

If you are self-employed and considering becoming a director by incorporating your business, you may also want to think again. The higher rate of corporation tax from next April, for businesses with gross profits above £50,000, has reduced the tax attractions of operating as a company.

Yet again, this autumn has highlighted the need for advice in keeping abreast of tax developments and their consequences. 

Tax treatment varies according to individual circumstances and is subject to change.

The Financial Conduct Authority does not regulate tax advice.

The rapid unwinding of most of September’s so-called mini-Budget has important implications.

Gone are the days when a Chancellor made only two set piece announcements each year and, for the remaining days of the year, tax remained generally out of the headlines. 2022 has seen four Chancellors (at the time of writing) and plenty of parliamentary statements, but no formal Budget. September and October contained a plethora of announcements and un-announcements that left even the tax nerds struggling to keep up. If you are not one of those nerds, the following list of what is and is not happening may be helpful:

• The 1.25 percentage point reduction in National Insurance Contributions (NICs) and the abolition of the Health and Social Care Levy have survived.
• Basic rate income tax (outside Scotland) will now stay at 20% ‘indefinitely’. The previous Chancellor Kwasi Kwarteng’s plan to cut the rate to 19% from 2023/24, and former plans to make the same change from 2024/25, have both been abandoned.
• The additional rate tax (45% outside Scotland) will remain.
• Dividend tax rates will stay at their current levels (8.75%, 33.75% and 39.35% for the basic, higher and additional rate bands) and will not be cut by 1.25 percentage points from next tax year as previously stated.
• The corporation tax rises legislated for in 2021 will go ahead, meaning that the main rate will rise in April 2023 from 19% to 25%, and companies with profits between £50,000 and £250,000 will face a marginal rate of 26.5%.
• The 2017 and 2021 reforms to off-payroll rules (often referred to as IR35) will not be scrapped. All but the smallest employers will continue to be responsible for determining the employment tax status of their workers and meeting the potentially large costs of making the wrong judgement.

Away from the tax arena, but nevertheless relevant here because of its cost, the Energy Price Guarantee, which originally capped average domestic utility bills at £2,500 a year until October 2024, will now end in March 2023. From April 2023, a more targeted scheme will be introduced, which Chancellor Jeremy Hunt says ‘will cost the taxpayer significantly less’.

As we have observed over the last few turbulent months, tax rules can be dizzyingly complex, making sound personal tax planning all the more crucial. 

The value of investments and the income they produce can fall as well as rise. You may get back less than you invested.

Past performance is not a reliable indicator of future performance.

tracts much less attention than the share markets. This is partly because over 60% of gilts are owned by the Bank of England, insurance companies and pension funds, all of which tend to be long term holders. The Bank of England features prominently because until recently it had been the largest buyer of gilts under its quantitative easing (QE) programme, which it is now beginning slowly to unwind.

But in late September gilts hit the headlines, when the market became spooked by the level of fresh borrowing implied by the former Chancellor Kwasi Kwarteng’s mini-Budget. The concerns prompted gilt prices to fall and thus gilt interest yields to rise and the selling snowballed. Suddenly there were many sellers of gilts but no buyers, a situation which forced the Bank of England to intervene and start buying gilts once again. The Bank’s actions, combined with the reversal of several contentious aspects of the mini-Budget, eventually stabilised the market. However, gilt yields settled at higher levels than had been seen for over a decade.

The bad news is that government borrowing now costs more, which could lead to higher taxes (or yet more borrowing…). The good news is that higher gilt yields mean improved annuity rates and make investment in gilts and other fixed interest bond funds potentially more attractive for income seekers. 

The value of your investment and any income from it can go down as well as up and you may not get back the full amount you invested.

Past performance is not a reliable indicator of future performance.

While everyday financial pressures can make saving challenging, it’s imperative not to neglect your pension and retirement plan. Diligent planning at the earliest opportunity can make all the difference between enjoying a comfortable retirement and enduring a regretful one. After all, you reap what you sow.

Avoiding retirement regrets 

Over the years, research has highlighted how people have tendencies to leave retirement planning too late and harbour regrets at not saving more diligently across their working lives. A recent survey¹ revealed that one in five people expect to leave planning for their retirement until they are aged at least 60. Another study² found almost half of over-50s regret not saving into a pension sooner, and nearly two thirds wished they had made larger contributions at an earlier stage. These findings vividly highlight the need for more people to take control and prioritise retirement planning earlier.

Blind spots 

Research³ has laid bare the cost of being kept in the dark on key pension details, with over three quarters of people not knowing how much they pay in pension fees. While one third of pension holders are unaware of their pension’s risk profile, a similar proportion of them are invested in low-risk funds. This lack of awareness regarding investment choices, fees and investment has been estimated to cost an average pension holder around £120,000 over their working life.

Engagement gap 

The lack of engagement has led the Pensions and Lifetime Savings Association and the Association of British Insurers to launch an industry campaign aimed at improving people’s understanding of pensions. Due to run this autumn and winter, the campaign will attempt to raise awareness of various pension-related issues so that more people can enjoy a better standard of living during their retirement.

Reap what you sow 

We can help you take control to ensure you are able to enjoy the happy and fulfilling retirement you deserve. 

1) HL, 2022, 
2) Aviva, 2022, 
3) interactive investor, 2022

The latest data from the Office for National Statistics (ONS) reveals that more people than ever are working beyond age 65.   

One of the stranger economic statistics of recent times has been the strength of employment markets on both sides of the Atlantic. For all the talk of an impending recession and the upward march of interest rates, employment has remained buoyant in both the UK and the US. The unemployment rate in both countries is under 4.0%, which is about as close to full employment as can be reached. The latest estimate for the UK is that unemployment numbers are 42,000 less than job vacancies, whereas in the US, job openings are double the unemployed numbers. 

A notable feature of the UK employment market has been the increase in the population aged 65 and over who are in work. The latest data from the ONS – covering the period April to June 2022 – showed both a record quarterly increase and a record total of close to 1.5 million, of whom nearly three quarters were employed. Viewed another way, 15.5% of men and 9.2% of women aged 65 and over were in work during this period. 

The longer-term ONS figures show that over the last ten years, while overall employment has risen by about a tenth, employment among those aged 65 and over is up by a little over a half. These senior workers are not labouring all week, but they are, on average, putting in nearly 22 hours. The recent joiners of the 65-and-over workforce are predominantly part-timers, both employed and self-employed, according to the ONS. 

What the ONS statistics do not reveal is why employment is growing so rapidly in this sector of the population. There is a clue in the fact that, to quote the ONS, “The industries where informal employment is more common, such as hospitality and arts, entertainment and recreation, saw some of the largest increases.” 

The combination of sharply rising inflation and the increase in state pension age to 66 is likely to be forcing some former retirees back into work to make ends meet. It does not help that the April 2022 increase in the state pension was 3.1%, less than a third the current (August) rate of CPI inflation. 

If the idea of joining that growing band of those still working at 65 and over does not appeal, then make sure your retirement planning provides you with enough income when you need it. 

The value of pensions and investments and the income they produce can fall as well as rise. You may get back less than you invested.
Past performance is not a reliable indicator of future performance.