LG Investment News

Welcome to our latest issue of Lyon Griffiths’ Investment News.

We aim to communicate the key current topics in the world of financial advice and highlight the up and coming issues in an understandable and digestible format.

In this Edition:

  • The ageing population
  • Missing out on ISA returns?
  • Lifetime ISAs v pensions
  • Reasons for setting up a trust
  • Pension transfer caution
  • Premium bonds improved
  • Reclaiming expenses
  • Thank you for small mercis


The ageing population

Government statistics are projecting that by the year 2020 there will be 12% more people in the UK aged 65 and over than there were in 2015. This compares with an overall population growth of just 3%.

Another prediction is that the number of retired people will have increased by 1.1 million in the three years after 2015, making this the fastest growing sector of the population.

Meanwhile we have become accustomed to the assumption that improvements in medical science will result in ever-increasing lifespans, with consequent pressure on family finances. 

However, this assumption has been cast into doubt by research undertaken by the actuarial profession (actuaries are the number-crunchers who are said to have found accountancy too exciting).

Figures produced by the Continuous Mortality Investigation of the Institute and Faculty of Actuaries suggest that for a number of reasons lifespans may not be increasing as fast as had been thought.

What are the messages of these various statistics for retirees wondering how long their finances will last? Very often, the answer will depend on the type of pension scheme to which they belong.

Members of occupational pension schemes have the great benefit of certainty as to the income they can expect to receive. The investment risk in funding undefined periods of retirement falls on the employer, and many occupational schemes are suffering from massive financial deficits.

The employers who fund these schemes are offering what appear to be extremely attractive terms to employees who transfer to personal schemes, in which the investors bear the investment risk.

However, personal schemes enjoy the benefit of much greater flexibility as to the times at which and the ways in which benefits can be drawn.

Comparing the benefits of the two types of scheme is a complicated exercise and requires specialist professional advice.

The twin dilemma facing many personal pension holders is how long they will live and how long their funds will last. In this respect the actuaries’ conclusions may give rise to mixed feelings

Missing out on ISA returns?

HM Revenue & Customs has reported that in the tax year 2015/16 80% of the 12.7 million people who invested in Individual Savings Accounts put their money into cash ISAs - a similar figure to that for 2014/15. This, despite historically low returns and with little current prospect of beating inflation.

Insurers Royal London have calculated that the consequence of investing in cash ISAs rather than stocks and shares ISAs is that investors have missed out on £100 billion of returns.

The term ‘stocks and shares’ ISA is somewhat misleading, because for most people the alternative to a cash ISA is to use the ISA allowance to invest in managed funds, rather than individual stocks and shares.

These can invest in widely diversified portfolios of stock and shares and bonds and thereby greatly reduce the risk of investing in individual shares.

For those wishing to switch their cash ISA to a stocks and shares ISA, it is important not simply to sell the ISA but to make a formal ISA transfer request, so as not to lose the ISA’s tax-efficient status. If lost, this cannot later be reclaimed.

Lifetime ISAs v pensions

Lifetime ISAs became available as from 6 April 2017, though there are as yet few providers.

The government had two objectives in introducing the LISA – to assist would-be home owners to accrue sufficient funds to enter the housing market, and to provide an alternative or additional means of saving for retirement. In the latter context, some people will be wondering about the respective merits of personal pensions and LISAs.

Personal pensions offer tax relief on contributions, but apart from the 25% tax-free cash entitlement, withdrawals are subject to tax. LISAs, by contract, offer both a 25% up-lift on contributions and tax-free withdrawals. Provided that the conditions are satisfied, the government will contribute £1,000 for every £4,000 invested.

The conditions attaching to LISAs are that the funds must be used either to purchase a first home for less than  £450,000 or, if encashed for any other purpose, that this is not before the age of 60. In addition, investors must be aged between 18 and 40. However, anyone who starts a LISA before the age of 40 can continue contributing until the age of 50.

Limits on maximum contributions still favour pensions. The £4,000 p.a. maximum which can be invested in a LISA compares with £40,000 for pensions (reduced to £10,000 for people who have already started drawing benefits)

So, who should be considering investing in LISAs? Certainly, first-time house buyers Also people wishing to provide for retirement and who do not have access to workplace pensions.

The self-employed are a principal target audience for LISAs. However, the current maximum age restriction of 40 is seen as inappropriate and may be one of the reasons why more providers have not yet entered the market.

An influential lobby group of banks and asset managers has been formed which has pointed out that according to the Office for National Statistics, 43% of the self-employed are aged over 50, compared with only 27% of those in employment. And significantly, one of the few providers already offering LISAs reported that nearly one fifth of applicants in the weeks following the launch were aged 39.

LISAs are unlikely to be attractive to higher rate taxpayers, who currently enjoy the great benefit of tax relief on pension contributions at their highest marginal rate. However, proposals for the equalisation of tax reliefs have been discussed and remain on the cards.

To complete the picture, we must not forget standard ISAs, for which the maximum annual contribution is now the very meaningful £20,000 p.a. per individual.

If, as suggested, the market for LISAs is the first-time home buyer and the self-employed, it is equally clear that other categories of taxpayer should be seeking to maximise their pension contributions while current limits are in force; and at the same time, taking their cue from the government’s wish to reduce the cost of pension reliefs, to build up meaningful portfolios of stocks and shares ISAs.

Reasons for setting up a trust

A trust is a legal arrangement which enables a person (‘the settlor’) to transfer the legal ownership of property, shares or cash to another person (‘the trustee’) to hold on behalf of a third person or persons (‘the beneficiary”).

The main reason for setting up trusts is the protection of family interests. For example:

To protect wife and children

If a settlor wished to ensure that their spouse and children were adequately provided for in the event of their death, they might create a trust in their Will giving the spouse the right to live in the family home for the remainder of their life, while at the same time ensuring that the house would go to the children of the marriage on the death of the surviving spouse. By doing this, the settlor would be able to prevent the spouse cutting the children out of their Will in the event of the spouse’s subsequent re-marriage.

• To provide for individual children

A parent or grandparent might wish to set up a trust to provide for the financial needs of one or more of their children, such as their education or the maintenance of a child with disabilities.

• To protect vulnerable children

A settlor might alternatively wish on their death to put inheritance money into the hands of trustees to prevent an immature or irresponsible child from extravagantly dissipating a gift. Similarly the interests of a son or daughter could be protected against the risk of assets being lost as a result of bankruptcy or divorce.

• To provide for long term care

A trust could be created to hold sufficient funds to provide for the long term care of an aged dependant, such as a widowed mother, with provision that on the death of the beneficiary the trust capital would revert to the family or settlor.

• Generation skipping

If a wealthy settlor was confident that their spouse had ample funds for their own needs, and wished to avoid adding to those funds and thereby creating an unnecessary tax liability, he or she could set up a trust for the primary benefit of the children, while permitting access for the surviving spouse if needed.

• Personal injury trusts

People who have received Court awards as compensation for personal injury can benefit from having the award held in a personal injury trust, because money held in the trust and any payments made from the trust are generally disregarded for the purposes of the means testing of Social Security benefits.

Pension transfer caution

There is an on-going decline in the number of final salary pension schemes. Many of the companies which have provided these schemes for their employees have found the open-ended liability insupportable, and have introduced schemes under which their contribution is defined by reference to the amount contributed rather than the pension which is to be paid

Providers of on-going occupational schemes are being assisted by low interest rates to increase the size of the transfer payments which are available to members wishing to transfer to other schemes, particularly personal pension schemes which offer the benefit of George Osborne’s ‘pension freedoms’.

In some cases, payments have been offered of up to 50 times the annual income from the occupational scheme, so that someone whose pension would have started at £12,000 could receive as much as £600,000.

However, comparing the benefits of defined benefit and defined contribution schemes is fraught with difficulty and the Financial Conduct Authority has warned of the dangers in making the wrong decision. One of the steps the FCA has taken is to require that anyone wishing to transfer pension rights worth over £30,000 must take financial advice.

Premium bonds improved

The total pool of money from which premium bond ‘prizes’ are paid has  been reduced, but a greater proportion of the pool from which ‘prizes’ are paid is now allocated to £25 prizes than to £50, £100 or larger prizes and consequently the chances of winning a £25 prize have increased.

Interestingly, the laws of mathematics suggest that the chances of winning increase according to the number of bonds which are held, and the best chances will apply to investors with the maximum £50,000 holding.

The chance of winning a £1,000 prize is estimated at once in 87 years, while you would have to wait 2,361 years to win a £5,000 prize and 4,825 years to win £10,000. The odds on anything higher are so remote as to be totally hypothetical.

For the £50,000 bond holder, the effective rate of return based on £25 prizes is 0.98%, tax-free and guaranteed by the government. For the basic rate taxpayer this equates to 1.22% and for the higher rate taxpayer, 1.63%.

Conclusion: for those able to invest in larger holdings, premium bond can provide a reasonable income and a useful means of diversifying investment portfolios.

Reclaiming expenses

Despite the fact that, according to HM Revenue & Customs, “the general rule for employees’ expenses is very restrictive”, there is scope for obtaining tax relief of which some people may be unaware.

The condition for company directors and employees obtaining relief is that expenses must be incurred wholly and exclusively for the purposes of business (the rules for the self-employed are less restrictive).

The cost of business travel can be claimed, but not for the journey between home and work. If it is necessary to stay overnight, the cost of accommodation can be claimed, as also can subsistence, congestion charges and tolls and parking charges.

The cost of subscriptions to professional organisations can usually be claimed and those working from home can claim the cost of phone calls, gas and electricity attributable to their work. However, it is not permissible to claim relief in respect of expenses which are incurred partly for business and partly for personal purposes, such as everyday clothing.

Thank you for small mercis

An exception is made to the new provisions for benefits in kind which are classified as ‘Trivial Benefits’. To qualify, these must satisfy three conditions:

The value must be no more than £50 per recipient, or an average of £50 if the benefit is provided to a group of employees and the exact value to each employee cannot be calculated precisely.

The benefit must not take the form of cash or cash voucher, though shop vouchers are allowed.

The benefit must be gratuitous and not provided in consideration of a service which the recipient is employed to provide.

Any other benefits, except for staff functions, will be taxable; and if the value of a Trivial Benefit exceeds £50 the whole amount will be taxed, not just the excess over £50.

For employees who are not directors, there is no limit to the number of Trivial Benefits which can be provided in any tax year. So an employee could receive 6 benefits with a total value of £300 in the same tax year. But this flexibility would not apply to directors.

Being non-taxable, Trivial Benefits need not be reported to HMRC on form P11D.

 Past performance is not a guide to the future. We would always stress that the value of an investment as well as any income derived can go down as well as up. This document does not constitute personal advice; please contact us if you wish to discuss the suitability of any of the investments outlined.