Wealth Management Update – March 2016

03 Apr 2016 | Wealth Management Update |

Inflation increases – So what!

Last month, UK inflation increased to 0.3%. This is a 0.1% rise on the previous month.

It is important to remember that the inflation rate (RPI in this case) is a reflection of a year-on-year increase. In other words, the inflation rate reflects only the last 12 months’ figures – as the new month is included, the “oldest” month’s figure drops out. Because of this, changes in the speed of rises and falls can influence the inflation rate.

For example, petrol prices at the pumps are falling, and have done for over a year. However, the speed at which they are falling is slowing. This has the effect of actually increasing inflation as measured by RPI, even though prices are still falling! I know this makes little sense, but that is the way it is done. Therefore, even though inflation has increased to 0.3%, the prices you and I are paying are still falling.

All of that said, a 0.3% rate of inflation is so low that it makes no real difference. Those old enough to remember the 1970’s will realise that 0.3% might as well be zero.

With such a low inflation rate, it is obvious that investments do not need to grow as fast. In the 1970’s, when inflation was probably averaging 8% or so, your investments needed to earn 8% just to stand still. A return of 12% sounded great, but was actually only 4%. In the same way, with inflation at 0.3%, you cannot expect returns of 8%, 9%, 10% or 11%. A return of 5% is pretty much a real return of 5%, which would equate to a return of 13% in the 1970’s.

Of course, with the stock-markets around the world crashing this year, any return would be a lovely thing.

Trump and the USA – what will it mean?

It is looking increasingly likely that Trump must be taken seriously and may get the Republican nomination. It would be totally mad if he did because all he can do is cause trouble. Here’s why…

Donald Trump’s argument is this:

Politicians are a bunch of useless, ineffectual corrupt individuals, more interested in lining their pockets than doing anything else. Most have never done a real day’s work in their lives and just don’t know how to get things done. What the country needs is someone who knows how to make things happen, someone who is not a politician, someone who knows business and can make the country great again.

Sounds good… very similar in some ways to what Nigel Farage says.

BUT, running a country is not the same as running a company. When you run a company you have total control over what is done and, because you pay people, they do what you say. You only need to make a profit to be successful, and who cares about the competition? A country is not the same. You do not have total control. Certainly in the USA you need control of both the House and the Senate, and the agreement of every other country you deal with to get things done.

Take, for example, one of Trump’s main “policies”: to build a wall between the USA and Mexico to stop immigrants and drug dealers, paid for by the Mexicans. How will this work? When Donald calls Enrique Peña Nieto, the Mexican president, and says “Hey Enrique, I’m building this wall and I need you to send me £50m to pay for it… I’ll take American Express if that helps”, does anyone with half a brain think this will work?

Of course, Donald says he is rich, very rich in fact, because he is a great businessman. I am sure that if you were given US$10m in cash by your dad, and then given a US$40m tax-free loan, you could probably do quite well too!

The uncertainty of the US elections is a serious issue for the world as a whole. But this is insignificant when compared with the idea of Trump as President of the United States. However, following the results in Carolina and Nevada it is looking increasingly likely that Trump may be the Republican runner. If that does happen, all we can hope is that he turns out to be a Ronald Reagan!

The race is on – Brexit?

So the date is set, and it is 27th June. On that date the nation will decide whether or not we will still be a member of the European Union.

Have you made up your mind? Apparently 80% of people have. This seems to be 40% that say “yes” and 40% that say “no”. These people will not be swayed, no matter what, so it will really be down to the 20% that are currently undecided.

On balance, a move out of the EU will be neutral from a business point of view, as the people with whom we do business will probably still want to do business with us if we leave. The farmers who survive on Common Agricultural Policy payments will probably receive similar payments from the UK government if we leave. The House of Commons will probably pass similar laws to those the EU has in place.

The issue is the disruption that leaving the EU will cause. The renegotiation of 52 trade agreements will not happen overnight. The loss of business that will result from this intermediate period will probably affect company profitability and thus dividends, which in turn will affect share prices. But, after a couple of years, things will settle down.

It is all about this interim period, and so it will be interesting to see how discussions about any exit will progress.

Death fees to rise?

Currently, when someone dies an application for probate has to be filed and granted before executors have the right to distribute a deceased’s estate. The fixed fee for such an application on estates worth over £5,000 is either £155 or £215.

The Ministry of Justice is proposing new rules (the consultation will take place between now and April) that will levy a higher charge on larger estates, and will raise the threshold for fees from £5,000 to £50,000. If the threshold is increased, only 43% of estates will have to pay probate fees. The proposed fees are, however, significantly more than current fees: estates worth between £50,000 and £300,000 will pay fees of £300, increasing to £20,000 for estates worth over £2million.

This is a disappointing proposal, and more in line with most solicitors who, we feel unfairly, charge a percentage of an estate when applying for probate on an executor’s behalf. What is most disappointing is that it is likely that a married couple’s estate will pay the fees twice – totalling £40,000 for an estate worth over £2million. As ever, the government gives with one hand (introducing an additional Nil Rate Band for residential property to reduce the inheritance tax payable) and takes with the other (increasing probate fees).

If you want to learn more about the new Residential Nil Rate Band(RNRB) then register to attend our special Client Events on April 19th and 21st at the Village Hotel. Email rhianydd@penguinwealth.com to reserve a space.

Dispatches – How the rich avoid tax?

In a recent Channel 4 Dispatches documentary, “How the rich avoid tax”, the actor Greg Wise carried out an investigation into how so many people seem to avoid paying tax.

Part of the documentary focused on such schemes as Enterprise Investment Schemes (EIS).  Such schemes, in their most basic format, are perfectly acceptable to HMRC; in fact, as the documentary explains, in recent years the government has increased the tax benefits of such schemes to encourage further investment.  When used correctly, and as intended, they are no more disreputable than investing in an ISA or making a pension contribution to reduce your tax exposure.

The documentary went on to demonstrate how easy it is to find organisations that offer “too good to be true” tax-planning schemes that allow you to pay little or no tax. The schemes discussed were legitimate – offshore trusts and EIS, as noted above – but had been applied in such a way as to be, as described by a barrister, ugly and aggressively tax avoiding.

While such schemes appear to allow the investor to choose how much or how little tax to pay without fear of repercussions, it is debatable whether their use could be seen as ethical or responsible.  The decision to invest in such schemes will surely depend on your “moral barometer”.

We believe that it is acceptable to use legal schemes to reduce tax liabilities – be it income tax, capital gains tax or inheritance tax – provided these schemes are permissible by HMRC.  What is clear from the documentary, however, is that there are so-called ‘advisers’ out there who are willing to manipulate legitimate arrangements to create schemes that fall outside what is deemed to be appropriate, and these should be avoided. If it sounds “too good to be true”, it usually is.

You can view this documentary on All 4, Channel 4’s catch-up service. It is only 30 minutes long, so worth a watch.

Budget March 2016

As you probably already know, the Budget announcement is due on 16th March. We are sure you will be tuning in with great anticipation. We have a Penguin Future Day off site that day so we will be catching up with events later in the day – please note the office will be closed on this day.

As mentioned in last month’s Wealth Management Update, George Osborne is planning a “flat rate” for pension tax relief that could be introduced almost immediately. This has obviously resulted in a huge increase in people adding as much as possible to their current pension pots to take advantage of the higher rate of tax relief while it is still available.

We have also been aware for some time that the current lifetime allowance for pensions will reduce, as of April 2016, from £1.25m to £1m, so this will not be a shock to anyone.

Unlike other protections that have been introduced there will be no deadline for putting protection in place for your lifetime allowance, but you will be able to apply online from April 2016. There are due to be two different types of protection, both Fixed and Individual, and each comes with its own set of rules and restrictions so be careful what you enter into. If in doubt then just get in touch!

We are sure there will be more than a few surprises thrown in to the Budget, and no one really knows what will be announced anyway. We will have to wait and see!

Loss of tax free cash

You will have read in the Mail and Sunday Times last week of Steve Webb’s shock news that the tax-free cash on pensions may be removed. Steve Webb is the former pensions minister who lost his seat in last year’s election and so should know his stuff. And indeed he does – we have met with him many times and he has even spoken at one of our training events for other advisers. The problem is that what was reported is not quite what he said.

As mentioned above, the Chancellor wants to change the way that tax relief works on pensions. One of the ways of doing this is to charge a level income tax on pensions when the pension is taken, as well as having a level tax relief when the money is invested in the pension. This would, by definition, mean that pension income would be taxed and there would be no tax free amount.

However, this would apply only to new pension contributions – a pension that has already been accrued would not be affected. Therefore, those with pensions today need not worry. It is only new pension contributors that would lose out.

Keep reading the Wealth Management Update as we think we may run a Pension Briefing for you later in the year to let you know how changes may affect you.

Book of the month

This month’s book is a recommendation from a client. It is an excellent read but, be warned, it will take even a fast reader several weeks to get through. The Silk Roads: A New History of the World, by Peter Frankopan is a fabulous look at history from an Eastern point of view. So often, our picture of the world is based on what we learned at school and this history is inevitably biased to a Western perspective. Imagine taking the map of the world and rotating it, so that the eastern Mediterranean is at the centre, not the Atlantic. If we consider history with this area as our base, we see the world very differently.

If you want to gain a better understanding of the world, this is the book for you.

Best Savings Selections

Top Three No Notice Accounts without Bonus
Name Contact £1 Gross % £500 Gross % £1k Gross %
Virgin Money Via branch 1.31 1.31 1.31
ICICI Bank UK Via branch 1.39 1.39 1.39
 RCI Bank UK www.rcibank.co.
1.55 (min £100) 1.55 1.55


Top Three Monthly Interest Accounts
Name Contact £1k Gross % £5k Gross % £25K Gross %
Charter Savings Bank www.chartersavingsbank.co.uk 1.69 1.69 1.69
Charter Savings Bank  www.chartersavingsbank.co.uk 1.59 1.59 1.59
Charter Savings Bank www.chartersavingsbank.co.uk 1.54 1.54 1.54


Top Three Cash ISA’s
Name Contact £1 Gross % £10 Gross % £100 Gross %
State Bank of India 0800 532 532 n/a n/a 2.60 (min £5,000 – fixed rate)
Teachers BS 0800 783 2367 n/a n/a 1.50
Al Rayan Bank 0845 6060 786 n/a n/a 2.00 (min £250)


Please check with the terms and conditions before opening any account. If in doubt consult with your financial adviser directly as the above are for information only.

Source: Moneyfacts Magazine March 2016 Edition

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