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January 2022

Market Update – January 2022

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We are now in the midst of another volatile period in investment markets and the inevitable questions are starting to come through from clients as to what is going on. Global stock markets have undergone a correction in recent weeks, while the FTSE 100, which consists of the UK’s largest companies, is moving higher and is back to pre-pandemic levels. What is causing this divergence?

The answer behind this behaviour is two-fold: (1) inflation and interest rate expectations, and (2) the way in which global stock markets are constructed.

Looking at point (1) first. Coming into 2021, inflation in the UK was running close to zero, driven down by lower levels of spending during the third Covid lockdown. However, an increase in consumer spending following the easing of lockdown restrictions in summer, rising wholesale energy prices, global supply chain issues (and, specific to home, increased trade friction between the UK and EU due to Brexit) has pushed up prices, such that inflation is now at its highest levels for many years. This spike (not just in the UK but also in the US, Europe and elsewhere) has caused concerns that central banks worldwide will have to step in and raise interest rates to bring it under control.

Now onto point (2). No two markets are constructed in the same way in terms of the sectors within them, meaning each one moves differently depending on market conditions.

Simplistically, sectors within a stock market can be split into two buckets: ‘value’ and ‘growth’. Value stocks typically operate in ‘old economy’ industries (e.g. miners, oil & gas companies), that consequently tend to pay out more of their earnings to investors as dividends, rather than reinvesting back into the business. On the other hand, ‘growth’ stocks are those in rapidly expanding industries with strong future earnings potential (e.g. technology) – to generate these returns and stay ahead of their competitors, they tend to reinvest their profits into the business and pay less in the way of a dividend (if at all), and some may have borrowed money for future expansion.

Increases in interest rates (and expectations thereof) are a catalyst supporting a positive outlook for value stocks, as investors place more emphasis on the earnings they generate today (i.e. the dividend), so they are relatively immune from higher interest rates. Conversely, growth stocks traditionally underperform in these conditions as more emphasis is placed on their long-term prospects, which could be eroded by inflation (and, if they have borrowed money, higher borrowing costs).

Notably, the UK’s FTSE 100 predominantly has more ‘value’ businesses, with Materials (e.g. miners Rio Tinto and BHP Group), Energy (e.g. BP and Royal Dutch Shell) and Financials (particularly high street banks) making up a large chunk of the index. On the other hand, the S&P 500 in the US is more of a ‘growth’ market, with technology (e.g. Facebook, Apple, Netflix) representing about a quarter of the index.

The table below shows the breakdowns of the FTSE 100 and the S&P 500 indices in percentage terms, and the differences between them in the right-hand column. The subsequent performance chart shows how the Materials, Energy, Financials and Technology sectors have performed over the past five years.

Sector FTSE 100 S&P 500 Difference
Consumer Staples 18.4 6.7 11.7
Materials 13.4 2.3 11.1
Energy 11.0 3.3 7.7
Financials 17.0 13.6 3.4
Utilities 3.5 2.6 0.9
Industrials 8.8 8.4 0.4
Real Estate 1.3 2.7 -1.4
Healthcare 11.9 13.3 -1.4
Communication Services 6.6 10 -3.4
Consumer Discretionary 7.3 11.7 -4.4
Information Technology 0.1 25.4 -25.3

Importantly, though, our portfolios are not – and never have been – the FTSE 100. Rather, they are diversified geographically, by sector, asset class, investment style, company size, fund house and other considerations, in order to reduce the amount of risk that our clients are exposed to, while aiming to provide them with optimum long-term investment returns. This means that our portfolios have exposure to the UK, as well as the likes of the US, Asia and Emerging Markets (all of which are more ‘growth’ oriented areas).

Following on from this, it is worth noting that it was the US/technology, Asia and Emerging Markets that powered the returns of 2020. While they have had a more difficult time of late, and there is likely to be heightened volatility in the months ahead (primarily linked to expectations around inflation and interest rates), we remain positive on the outlook from current levels. Firstly, the growth of technology companies over the past decade or so has been incredible, and the digital transformation of many sectors (e.g. electronic payments, online shopping, cybersecurity, among many others) seems to be far from over. We have also identified Asian and Emerging Markets (where the middle/consumer class continues to increase considerably in size) for strong potential returns over the next 5+ years. More generally, the funds within our portfolios are invested in high-quality companies with strong brands and pricing power, which puts them in strong positions to pass on price rises to consumers/their suppliers, thus providing a degree of inflation protection over the long term.

All in all, we therefore believe that our portfolios are well-positioned to benefit from these longer-term trends.

Retiring happy

Retire Happy

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Retiring happyPlanning your future has arguably never been more important.

10 tips to enjoy the retirement you want

  1. Review your spending habits and consider if you have the scope to save a little more each month.
  2. Look up your annual benefit statements – you may have saved with more than one employer’s pension scheme.
  3. Think about what financial milestones you’d need to reach in order to increase your pension contributions and review your investment choices.
  4. Find out more about your current pension plan. If you pay in more, does your employer match your contributions?
  5. Track down old pension schemes using the government’s finder service https://www.gov.uk/find-pension-contact-details. Or request contact details from the government’s Pension Tracing Service on 0800 731 0193 or by post.
  6. Check that your Expression of Wish form is up to date. This is a request setting out whom you would like to receive any death benefits payable on your death.
  7. Check your State Pension entitlement. To receive the full State Pension when you reach State Pension age you must have paid or been credited with 35 qualifying years of National Insurance contributions. Visit the Government Pension Service https://www.gov.uk/contact-pension-service for information about your State Pension.
  8. Add up the savings and investments that you could use for your retirement. A pension is a very tax-efficient way to save for your retirement but you might also have other savings or investments that you could use to increase your income when you retire.
  9. If you’re getting close to retirement and the amount you’re likely to retire on is less than you’d hoped, consider ways to boost your pension.
  10. Decide when to start taking your pension. You need to set a target date when you want to start drawing an income from your pension – and remember, you don’t have to stop working to take your pension but you must be aged at least 55 (you might be able to do this earlier if you’re in very poor health).

Please contact us if you require any further information or guidance on your retirement.

Family playing in the snow after discussing tax planning

New Year’s Tax Planning Opportunities

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Family playing in the snow after discussing tax planningMake full use of your relevant tax planning opportunities

With the tax year end (5 April) on the horizon, taking action now may give you the opportunity to take advantage of any remaining reliefs, allowances and exemptions.

We have provided some key tax and financial planning tips to consider prior to the end of the tax year. Now is also an ideal opportunity to take a wider review of your circumstances and plan for the year ahead.

Check your paye tax code

It’s important to check your tax code. Your tax code is based on the amount of tax you should be paying and the amount you can earn before tax applies. The tax code is the identifier that tells your employer how much tax should be deducted from your salary each time you get paid. If you have multiple employers or pension providers, you may get more than one tax code. If you’re on the wrong one, you could be paying HM Revenue & Customs (HMRC) more than you ought to be. On the other hand, you risk getting penalised if you’re paying too little.

Transfer part of your personal allowance

Married couples and registered civil partners are permitted to share 10% of their personal allowance between them. The unused allowance of one partner can be used by the other, meaning an overall combined tax saving.

The amount you can transfer is £1,260 for 2021/22 and a transfer is not permitted if the recipient partner pays tax at a rate higher than the basic rate of 20% (higher than the intermediate rate of 21% for Scottish taxpayers).

Contribute up to £9,000 into your child’s junior ISA

The fund builds up free of tax on investment income and capital gains until your child reaches age 18, when the funds can either be withdrawn or rolled over into an adult ISA. Relatives and friends can also contribute to your child’s Junior ISA, as long as the £9,000 limit for 2021/22 is not breached.

Tax-free savings and dividend allowances

For 2021/22, savings income of up to £1,000 is exempt for basic rate taxpayers, with a £500 exemption for higher rate taxpayers. The tax-free dividend allowance is £2,000 for all taxpayers. Married couples and registered civil partners could save tax by ensuring that each person has enough of the right type of income to make use of these tax-free allowances.

Individual Savings Account (ISAs)

You can put the entire amount into a Cash ISA, a Stocks & Shares ISA, an Innovative Finance ISA, or any combination of the three (or up to £4,000 out of the overall £20,000 allowance into a lifetime ISA if aged between 18 to 39). Usually when you invest, you have to pay tax on any income or capital gains you earn from your investments. But with an ISA, provided you stick to the rules on how much you can pay in, all capital gains and income made from your investments won’t be taxed. Every tax year you have an ISA allowance, which is currently £20,000 for the 2021/22 tax year.

Utilise any capital loses

If you realise capital gains and losses in the same tax year, the losses are offset against the gains before the capital gains tax exempt amount (£12,300 in 2021/22) is deducted. Capital losses will be wasted if gains would otherwise be covered by your exempt amount. Consider postponing a sale that will generate a loss until the following tax year, or alternatively realising more gains in the current year.

Maximise pension contributions

The annual allowance for 2021/22 is £40,000. To avoid an annual allowance tax charge, the pension contributions made by yourself, and by your employer on your behalf, must be covered by your available annual allowance. If you haven’t used all your allowances in the last three tax years, it might be possible to pay more into your pension plan by ‘carrying forward’ whatever allowance is left to make the most of the tax relief on offer, though bear in mind that your own personal tax-relievable contribution amount is still capped at 100% of your earnings.

However, different rules apply if you’ve already started to take money flexibly out of your pension plan and you’re affected by the Money Purchase Annual Allowance, or if your income when added to your employer’s payments are more than £240,000 and your income less your own contributions is over £200,000.

Pay pension contributions to save NICs

If you pay pension contributions out of your salary, both you and your employer have to pay National Insurance Contributions (NICs) on that salary. When your employer pays a contribution directly into your pension scheme, the employer receives tax relief for the contribution and there are no NICs to pay – a saving for both you and your employer.

You could arrange with your employer to cover the cost of the contributions by foregoing part of your salary or bonus. You must agree in writing to adjust your salary before you become entitled to that salary or bonus and before the revised pension contributions are paid for this arrangement to be tax-effective, although pension contributions are not caught by the clampdown on salary sacrifice arrangements.

Make a Will and review it

If you die without making a Will, your assets will be divided between your relatives according to the intestacy rules. Your surviving spouse or registered civil partner may only receive a portion of your estate, and Inheritance Tax will be due at 40% on anything else above £325,000 (up to £500,000 if the Residence Nil Rate Band is available).

Leave some of your estate to charity

Where you leave at least 10% of your net estate to charities, as well as the gift to charity being free from Inheritance Tax, the Inheritance Tax on your remainder estate is charged at 36% instead of 40%. The exact calculation of your net estate is quite complicated, so it’s important to receive professional advice when drawing up or amending your Will.

Make regular IHT-free gifts

As long as you establish a pattern of gifts that can be shown to be covered by your net income, without reducing either your capital assets or your normal standard of living, these gifts will be free of Inheritance Tax. The recipients of the gifts need not be the same people each year.

Use the IHT marriage exemption

If your son or daughter is about to marry, you and your spouse can each give them £5,000 in consideration of the marriage, and the gift will be free of Inheritance Tax. The marriage exemption can also be combined with your £3,000 a year Inheritance Tax exemption to allow you to make larger exempt gifts. You can make an Inheritance Tax-free gift of £2,500 for a grandchild’s wedding. Registered civil partnerships attract the same exemptions.

Make IHT-free gifts each tax year

These gifts are free of Inheritance Tax and, if you forget to make your £3,000 gift one year, you can catch up in the next tax year by giving a total of £6,000 but you can only carry forward the £3,000 allowance for one tax year and must fully use the current year’s allowance as well. Remember, you and your spouse or registered civil partner can each give £3,000 out of your capital every tax year, in addition to gifts you make out of your regular income.

Do I need personal tax planning advice?

It is crucial that year-end tax planning reviews are undertaken as soon as possible, as you will need time to consider all the options available. Many of the allowances and reliefs cannot be applied retrospectively after 5 April 2022. We can provide a comprehensive review, tailored to your individual needs and circumstances. Don’t delay, please contact us if you require further information.

Information is based on our current understanding of taxation legislation and regulations. Any levels and bases of, and reliefs from, taxation are subject to change. The value of investments and income from them may go down. You may not get back the original amount invested. Past performance is not a reliable indicator of future performance.