0 – £10 billion in ten years

This week I have been with Nucleus in Edinburgh. We meet for one day every quarter and have been doing so for years now. Together with a few other IFA’s, we help guide the future direction of the Nucleus platform. I guess that is why I’m so passionate about the Nucleus platform. H.J.Scott & Co. along with all of the daily feedback we receive from our clients, has helped shape what the platform is today and what it will be in the future.

The chart below shows an example of some of the recent reporting work that we have been involved in which will go live to clients next year. We are hoping it will answer the eternal questions.

How are my investments performing? and Will I run out of money in the future?

Screenshot 2016-06-02 13.59.11

In the twenty years or so before we used Nucleus, never once did any Insurance Company or Investment Company ask how they could do things better, for the benefit of their customers. To this day, they continue to be far too fixed on benefitting themselves and their shareholders first.

What is Nucleus

Even after 9 years using Nucleus, its sometimes difficult to explain to a new investor exactly what Nucleus is. It’s certainly easier to describe what it isn’t.

  • It’s not an insurance company like Standard Life or Scottish Widows.
  • It’s not an investment company like Invesco Perpetual or Fidelity.
  • It doesn’t make your savings grow, it just costs money.
  • Nucleus never recommends where we invest our savings
  • Nucleus doesn’t actually hold our savings, our money is safely ring-fenced away from their money

Nucleus is simply a financial administration company. We as clients subscribe to their service, which is basically software that lives in secure data centres. Nucleus hold authorisation with the UK financial regulator and so are licensed to operate amongst other investment wrappers, a pension scheme and an ISA scheme. We could never do that ourselves. The product regulation runs to thousands of pages, £millions of regulatory capital is required to back up their promises and the cost of each product licence alone runs to six figures. To do that job requires scale.

Constantly developing but maintaining the same at heart

Since the platform began it has stayed true to it’s word. To offer clients a transparent, cost effective, safe, unbiased placed to house their savings. The Nucleus fee of just 0.35% pa of a client’s savings held on the platform remains competitive, however the offering continues to just get better and better. It has to do. Other platforms are available and it is completely free for us all to leave Nucleus. Collectively as clients, we now pay Nucleus around £160,000 per year for their service.

It’s your Birthday

I’m back up to Edinburgh with Lesley on the 27th June to celebrate the 10th Birthday of Nucleus. With my surname I should probably attend their party dressed in a kilt.

Back on the 15th November 2007 we became the 28th firm to use their services. Our first client isa was set up shortly after, with an initial investment of just £7000. Back then the total held on the Nucleus platform was just £300 million.

It could be a fitting birthday present if after 10 years in business the platform closes in on administering £10 billion of clients savings. It will be a close call; assets at the end of May stood at £9.5 billion.

Budget 2016

All the insurance companies, compliance providers, banks and other associated product floggers did themselves proud this year. Within 24 hours I received 11 Budget Updates. All pretty similar and all stating the facts but leaving me none the wiser in real terms. So with more of an eye on relevance than on exact detail here goes.

What do I need to know now?

Actually not a lot. No immediate changes that cause us problems just the usual tinkering with booze and fags. This year the third addictive evil drug to receive tax charges is sugar. Nobody will notice or change their habits. (Did I just say wine was evil? Sorry)

Income Tax

We can all earn a tax free amount of income; from next year it rises by £400 to £11000. Then income above this level is taxed at 20%. Then income is double taxed above a higher level. This level is where higher rates of tax start and this has been increased by £615 to £43000. At least now they are round numbers, we all have the chance of remembering them.

It Means Those who are currently in drawdown, but trying not to pay any income tax will become £80 a year better off. Amazing!
Whilst those in drawdown trying to avoid higher rates of income tax, and everybody who currently pays some higher rate income tax will have £203 more in their pockets. Wine anyone?
There are promises of more rises to the tax bands into the future. We can get excited about these when they arrive.

Capital Gains Tax

There is some good news here. The threshold hasn’t changed at all. An investor can make £11000 a year before any CGT is charged. A couple has double that. So I only have a handful of clients who were ever charged. However for the handful with the problem their tax bill has just been cut dramatically.
It Means For many individuals a tax bill has halved as the rate of CGT has dropped from 20% to 10%.
I could give you more detail and how the changes affect higher rate tax-payers, but most clients just don’t need to carry this information in their head. If you need to sell anything profitable then call me.

Inheritance Tax

No changes here, but help is still on it’s way. Currently a couple can leave £650,000 before their family pays any 40% Inheritance Tax. This is still set to rise in stages up to 2020 when a couple can leave £1,000,000.
It Means No changes and we are still on track. Upon second death after April 2020 an inheritance tax charge on an estate of £1 million reduces from £140,000 to nil. This is big potatoes. Let’s hope it happens and then isn’t immediately reversed if Jeremy gets in.
Again I am happy to chat to any client individually about avoiding this voluntary, eventual tax bill.

Was there anything else of interest?

Why yes there was. ISAs just took on a whole new look. Or rather they will in a little over a year. For now no changes; we can continue to invest £15240 per person. That limit rises to £20,000 from the start of April 2017. Hurrah!

Hands up who is under 40?

None of us. That’s not strictly true, we do have a handful of lucky clients who aren’t as old as the rest of us. For you guys there is some good news for you and some bad news that affects not just you, but many other of my clients trying to save as much higher rate income tax as they possibly can.

The Lifetime Individual Savings Account
The LISA debuts in a year from now. How are we going to say this? Will it be Lisa as in the girls name or will it be ISA with an L on the front, which sounds like your head itches due to tiny parasites?

Anyway pop 4 Grand in this boyo and the good old Government will add a further Grand to it, making 5 Grand in total. (Terms and Conditions will apply) Let’s not get too excited just yet, we need to read the small print. That’s the good news now here is the bad.

If you want to make a pension contribution and receive 40% Income Tax relief, then you are on borrowed time. The LISA is the Pension ISA George was banned from announcing due to the must win, European Referendum. George went ahead anyway but used the back door. “It truly was a plan so cunning you could pin a tail on it and call it a weasel.”

R.I.P

Higher rate tax relief on pensions 1921-2017
Higher rate income tax relief passed away quietly today at the age of 96. It was loved by those who received it and loathed by all socialists as an unfair helping hand to those wealthy enough to not need the help. It’s demise was long expected but few would have guessed a Conservative Government would have been the murderer.

Ernie

Nostalgia ain’t what it used to be

Benny Hill bagged the Christmas number one with “Ernie” who drove the fastest milk cart in the West. The song was a personal favourite of mine at the time and it still makes me smile to this day. My excuse for liking it so much then? I was only 10, but now I’m approaching 54.

If any of you hanker to see the video again, then I have added a link to the youtube video below. WARNING: For those of you who are very politically correct, please look away now.

Anyway, Benny Hill has nothing to do with investment, but when I hear Ernie……

E.R.N.I.E

Yesterday I attended a meeting presented by the Director of National Sales, the NS&I. The old National Savings. Promoters of Premium Bonds and such. Long sold by the Post Office, but no longer. NS&I are reaching out to Financial Planners to recommend more of their products as part of a well balanced investment portfolio. They have got all trendy and digital now. Ernie, short for Electronic Random Number Indicator Equipment is currently at iteration 4, no longer does it look like Joe 90’s lab, it’s a state of the art computer. The link above will take you to the new website and a fabulous old film about Ernie. I feel I have now played my part in directing you to the products available from NS&I. Please don’t consider this a recommendation to buy their products, as you know my blogs are never to be seen as sound Financial Advice.

buy premium bonds

On Budget day, 17 April 1956, Harold Macmillan announced the launch of Premium Bonds. His intention was to reduce inflation and offer an alternative way to save.

What’s in it for them?

Interestingly the primary role was to reduce inflation. So, created by Government you have to ask, what’s in it for them? NS&I products currently hold £120 billion, their target is to increase that total by £2 billion a year. In reality £10 billion a year leaves NS&I products, which means they have to find £12 billion annually. They are prevented from gathering more, as they would literally close down the banks. Try to find me a bank that doesn’t have an outrageously poor offering currently. It seems NS&I are forced to let them get away with it.

820,000 individuals own £30,000+ of NS&I products. 4,000 individuals have £1 million+ It’s not hard to see why. All money is backed by the Treasury. Safe as houses. After all as a country we only owe £1.3 trillion in total. Good old Blighty would never default on it’s debt mountain 🙂

The bit that caught my eye

The annual budget to run NS&I is £150 million. That just about covers the usual business stuff; marketing, admin, salaries etc. A slide in the presentation boasted that last year National Savings created a saving to the UK tax-payer of £330 million. At the end of the presentation I had to ask the question “How did you work out that £330 million figure?”

The answer was simple. Money raised by NS&I goes towards servicing the National Debt. £120 billion borrowed has been given to the Treasury. It costs the Treasury £150 million each year in expenses to maintain. If the Treasury was forced to borrow the £120 billion from other sources, e.g. Government issued Gilts, they would be forced to pay additional interest to the tune of £480 million. So net £480m-£150m means they had saved UK tax payers £330 million by borrowing the public’s money. I was delighted by the tax saving. If I personally held any National Savings products myself, I would feel diddled…

Has anybody ever met a Premium Bond millionaire?

Death and Taxes

My job is equally split between absolute certainties and utter uncertainties.

The Certainties

“In this world nothing can be said to be certain, except death and taxes.” – Benjamin Franklin

The Uncertainties

Strangely the uncertainties also include death and taxes.

Nobody will ever get out of this world alive, we are certain to face death at some point. But exactly when we will die is anybody’s guess. UK life expectancy is increasing. One of my first ever blogs talked about this, which included a reference to that icon of English motor manufacturing, The Austin Allegro.

Nobody escapes taxation. Not even Lester Piggott, Take That or Jimmy Carr. UK taxation continually changes over time, depending on both political ideologies and just how skint we are as a nation. Tax increases in one area and tax reductions in another.

My job as a Financial Planner can best be described as helping our clients to plan for the two great certainties in life, against a backdrop of ever changing uncertainties.

This brings me neatly to pension taxation and inheritance taxation; I do understand that at this point many of you are now contemplating early death rather than reading on. But please bear with me as this is important.

The taxation of pension benefits on death

We currently manage some £30 million of our savings held within pensions. The rest of what we manage is in Individual Savings Accounts etc. So you can see that the bulk of our collective savings are held in pension accounts.

Pension funds left over after our death are now free of Inheritance Tax

If we don’t purchase an annuity with our pension savings, we now get the chance to leave a legacy to our kids tax-free. It means that maybe we should spend those other savings we have that could be taxed at 40% on death. It means many individuals will consider saving into pensions again.

Any beneficiary can receive the residual balance left in our pension pots after our death, either in a one-off payment, or as an ongoing income, starting from any age

Income tax is paid by the person receiving the lump sum or ongoing income, based solely on the age of the person who died. Die before age 75, there will be no income tax due for ever more. Die after age 75 and the person receiving the lump sum or income adds it to their other income and is then taxed accordingly.

Keeping abreast of the changes

We will all be certain that death will come and that taxation will continue to change. You can be certain that I will keep abreast of all the legislative changes and help you to plan accordingly. I have just become one of the first to pass the Chartered Insurance Institute’s latest exam, “Pensions Update”. It demonstrates that I still have the capacity at age 53, to learn and hold really boring, mind numbing facts.

Many of us won’t yet be certain of whether our loved ones will currently face income tax on our left over pension funds, because we have not reached age 75 yet.

Those clients above age 75 possibly don’t need to worry about inheritance tax anymore. Those clients below the age 75 possibly don’t need as much life assurance now. We have this government for 5 years now so at least some short-term tax planning is possible. Everybody’s situation is different. We will explore all your new options at our next review. If you feel a review now would help, contact Melissa and she will put some time in my diary for you.

Dedications

This blog is dedicated to
Thomas Greenwood 18th July 1940 – 9th September 2015.
A client and friend of 13 years. Died suddenly age 75 years, 1 month & 28 days.

Graham Warren 13th July 1954 – 12th June 2015
A client and friend of 28 years. Died suddenly age 60 years, 11 months.

UK Deflation

Nostalgia isn’t what it used to be

We received a letter from a client this week. Nothing strange in that you might say, but “eagle-eyed Melissa” noticed that it had several stamps on it and one of them was a 5.5p stamp. Being married to a postman she notices these things and chuckled. She had not seen anything with an halfpenny on it for a while and a quick Google search confirmed the client must have had this stamp at the back of his drawer since at least 1975!

Now in 1975 5.5p was enough to send a second class letter. Today it’s 54p. Just 40 years later on the price is 10 times higher almost.

Deflation – That’s bad isn’t it?

Beautifully by coincidence, this week we hear inflation has turned negative for the first time since the 1960’s. Prices are falling. Normally that’s a bad thing because we will just delay making purchasing decisions if we feel that by waiting, the things we want to buy will become cheaper. I’m not talking about food and essentials like that, but cars, clothes, electrical items. Put up with your old stuff for now, because next year you can replace them for bright shiny new stuff – and cheaper than today. Economies go nowhere when people don’t spend.

You say Deflation, I say Dis-Inflation

It looks like a play on words but it isn’t. Dis-Inflation is what we have now. Stuff is cheaper because of;

  • Cheap oil (a combination of over-supply due to the technology of fracking and other cheap energy sources due to the accelerating technology being created in Solar cells)
  • Amazing Technology (Witness the productivity breakthroughs with computers, the labour saving due to robotics)
  • The market size (It looks like we are no longer alone in the developed world, the whole of Asia wants to tote an iPhone and a Burberry handbag whilst driving a huge 4×4)
Blink and you will miss it

But enjoy dis-inflation whilst you can, it won’t be here for long. Soon it will be business as usual and back to good old inflation. I have written about what inflation does to cash isas here before with my blog all about Green Shield Stamps

For those retiring Inflation is important

Someone retiring today at age 55 could live for 40 years. Granted they would need a slightly better than average life expectancy. That same 55 year old today was 15 years old in 1975. For a 5.5p stamp to reach 54p over those 40 years required total inflation of 831.67% (I wrote that to two decimal places so you would believe me). Or put another way inflation over the last 40 years has run at an average rate of 5.88%. If that continues a second class stamp could reach £5.00 or more by the time the 55 year old dies. I doubt inflation will run at 5.88% on average again, but the bods at the Bank of England feel 2% per annum on average is reasonable, with our regulator preferring 2.5% per annum.

You cannot reach retirement and stand still because prices will overtake you fairly quickly. That’s why the investment return uncertainty of Flexible Drawdown, is a risk that usually has to be considered and taken. A level annuity just can’t keep up over the long term. An annuity that rises with inflation just starts too low today to make ends meet, unless you have an absolutely humongous pension fund. You can’t live for 40 years without keeping your pension fund invested.

The good news is that investment returns received over the last 40 years have trounced inflation and odds are they will continue to do so in the future.