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What do the latest financial developments mean for you?
Interest rates are on the rise, while inflation is squeezing savers, Bitcoin is big news, stock markets stay unpredictable and pensions are under the spotlight. We explore what all this means for financial planning in 2018.
2017 was the year interest rates rose for the first time in a decade. Good news for savers, especially since the Bank of England is predicted to continue this course of action with gradual rate rises.
However rates are still near record lows at just 0.5%, meaning investors will need to look beyond cash if they want to boost their portfolios and will have to accept risk of losses by doing so.
The stock markets provided a profitable ride for investors last year. Thanks to a plummeting pound in the wake of the Brexit vote, the FTSE 100 had a strong year and, on 21 December, the index closed on a record high. Yet if you look more closely at the long-term history of stock prices relative to company earnings, they are somewhat boringly in the middle of their range, neither particularly cheap nor exceptionally expensive. Next year stock market investors should expect a bumpy ride as Brexit negotiations and other global political events create volatility.
However there will be opportunities outside of the domestic market and investors should take advice on global equity investments as US, European and Japanese stock markets have outpaced the FTSE 100. However this does introduce an element of currency risk.
At the same time, investors who take income from shares in the form of dividends will need to think carefully about their strategy next year. The tax-free dividend allowance of £5,000 will fall to £2,000 a year in April 2018. Above this, basic rate taxpayers will pay 7.5% tax on dividends, higher rate taxpayers 32.5% and additional rate taxpayers 38.1%.
This will hurt sole traders and the directors and shareholders of small businesses operating as a limited company who pay themselves through a tax-efficient combination of salary and dividends.
It will also hit investors with share portfolios of around £70,000 or more, held outside an ISA, who receive over £2,000 a year in dividends. Please note that tax rules can change in future and that their effects depend on individual circumstances. We don’t offer personal tax advice. If you’re unsure seek independent advice.
Given stubbornly low interest rates coinciding with a risking stock market meant it was no surprise that cash ISAs fell out of favour. More investors bought stocks and shares ISAs, seeing these overtake cash ISAs in number of new accounts opened for the first time ever.
The number of cash ISAs opened fell by 1.6 million in the tax year 2016/17 to 8.5 million, while the amount subscribed to those ISAs fell by £19.5 billion, to £39.2 billion1. In 2018 we can the same direction of travel, yet it is worth bearing in mind both the unpredictability of the stock market and the possibility of rising interest rates benefiting cash savers. Savers should shop around for the best deals as providers offer more attractive rates in 2018.
2017 was a year of transfers for pension savers, too. The advent of pension freedom and choice in 2015 allows defined contribution scheme members aged 55 or over (and this is set to rise to 57 in 2028 as the state pension age increases) to selectively access lump sums from their pensions without waiting until their scheme’s normal retirement date. Not so for defined benefit members who must transfer out of the relative safety of their employer-sponsored plan into a personal or DC alternative where they bear the investment risk.
The Pensions Regulator estimates as many as 80,000 DB members have transferred to DC in the year to end of March 20172, and there is growing concern members were in receipt of poor advice.
Anyone who has made a transfer may need to revisit the decisions, and while they cannot normally reverse the move, they may be able to switch into a more suitable fund than one that charges high fees or is in risky investments.
The same is true of DC savers who have taken advantage of freedom and choice. Research from the Financial Conduct Authority (FCA) found over half of retirees had withdrawn their pots since 2015 but said many ‘followed the path of least resistance’ by accepting drawdown from their current pension provider without shopping around, which resulted in poorer deals.
Next year the regulator says it will introduce new protections for consumers to help them shop around and invest wisely. Now is the time for anyone in this boat to consider a pensions review.
Where investors are concerned about inflation eroding their investments, there are opportunities to try to protect returns in the real estate market. Long income property funds, which invest in commercial property freeholds with very long leases, offer index linked returns. While these funds tend to underperform their traditional commercial property counterparts in rising markets, their long-term nature tends to mean they are less volatile overall.
Long income funds also offered competitive returns last year3. Previously the preserve of large institutional investors, long income is now available to individuals, but these are seen as high risk investments and require professional advice before going ahead.
2017 was all about Bitcoin and some investors in this peer-to-peer payment technology have become millionaires overnight. At the end of December 2017, the Bitcoin market capitalisation had reached $268.9bn4. As with any potentially over-hyped financial instrument there is real danger the bubble may burst, but who knows if that will be in 2018.
Interest rates saw their first rise for a decade, but they are only at 0.5% so income is still hard to find. This year, the Bank of England has hinted there will be more rises but investors are looking away from cash and traditional bonds to alternative sources and accepting the risk of capital loss.
The FTSE 100 had a breakthrough year, reaching new highs. But 2018 could be a volatile year for equities if central banks make changes to policy. We have already seen some ups and downs in February on the developed markets. Bitcoin also enjoyed huge investor attention in 2017, but the cryptocurrency’s future is uncertain and many predict the bubble may be about to burst.
To learn more about your wealth planning opportunities, please speak to your Wealth Manager.
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