April 2020 client newsletter

I have extracted several articles on various subjects as reported in the media this month for your perusal. We are currently going through unprecedented times and therefore it is not a surprise that most of the articles are pessimistic. I hope you find them of interest however you should note that certain views made within this letter may not represent my personal views or that of Aequus Wealth Management Ltd.

For Articles up to 7 April 2020

1) Women and young hurt most by business shutdown

The lockdown in response to the Covid-19 pandemic has effectively shut down a number of sectors. Restaurants, shops and leisure facilities have been ordered to close, air travel has halted, and public transport has been greatly reduced. Analysis shows:

The lockdown will hit young workers the hardest. Employees aged under 25 were about two and a half times as likely to work in a sector that is now shut down as other employees. On the eve of the crisis sectors that are shut down as a result of social distancing measures employed nearly a third (30%) of all employees under the age of 25 (25% of young men and 36% of young women). This compares to just one in eight (13%) of workers aged 25 and over. (These figures all exclude full-time students with part-time jobs)
Low earners are seven times as likely as high earners to have worked in a sector that is now shut down. Fully one third of employees in the bottom tenth of the earnings distribution work in shut down sectors versus just 5% of those in the top 10
Women were about one third more likely to work in a sector that is now shut down than men: one in six (17%) female employees were in such sectors, compared to one in seven (13% of) male employees
One mitigating factor is that the majority of the affected younger workers and lower earners live with parents or others whose earnings are likely to be less affected, so many may suffer smaller hits to their living standards than otherwise

2) Stock opportunities

This year’s stock market crash has been brutal, but now is not the time to panic, believe experts. A share price crash is not a rare one-off moment, but something that happens pretty regularly. It is also a great opportunity to buy stocks and shares, or funds, inside a Stocks and Shares ISA, for tax-free returns. The latest crash may feel like the ‘end of the world’ at this time but share prices will eventually recover. They always have in the past. If you spend a lump sum at this time it is likely you could reap the rewards when the stock market recovery begins. Look to buy shares, or funds, you intend to hold for 10 or more years. That way, even if share prices crash further, you should still make large profits in the longer run. Hopefully by 2030, as an example, the coronavirus stock market crash will be a ‘blip’, and you could be a lot richer as a result of actions you took today.

3) New tax year changes

Traditionally, the beginning of a new tax year brings changes to taxes, benefits and the cost of some essentials – and despite the extraordinary conditions we are currently living in, this year is no different. From 6 April we saw changes to junior ISAs, national insurance and inheritance tax (IHT), among many adjustments that will affect the pounds in your pocket. There were also a number of price changes that came into effect on Wednesday 1 April, dubbed by some as “national price-hike day”. Here is what has changed:

The threshold for national insurance contributions increased from £8,632 to £9,500 from 6 April. The new threshold means the average full-time worker will see their tax bill cut by £104 a year and the typical self-employed worker by £78
Junior ISAs – here the allowance doubled. There was good news for parents in the budget – the maximum amount they can save in a junior ISA for their child increased from £4,368 to £9,000 a year from 6 April. As with all types of ISAs, there is no tax to pay on interest or capital gains on growth
State pension – this rose by 3.9%. The state pension went up by 3.9% in April, the biggest rise since 2012. This means those receiving the new state pension (who reached pension age after 6 April 2016) will see an increase of £6.60 a week to £175.20. Those claiming the old state pension will see their basic payment increase by £5.05 a week to £134.25
High earners can save even more in their pensions from 6 April as the lifetime allowance (the maximum you can save into a pension before high tax charges apply) rose from £1,055,000 to £1,073,000
Inheritance tax – homes up to £1m can now avoid tax. The effective nil-rate IHT band for anyone passing the family home to their direct descendants increased to £500,000 from 6 April. The family home allowance has increased each year since its introduction in 2017. In the 2020/21 tax year the final increase will be up to £175,000. Combined with the standard threshold of £325,000, it means many families will not pay IHT on estates worth less than £500,000, while couples will be able to leave estates worth up to £1m before IHT kicks in
Buy-to-let – Mortgage tax relief for buy-to-let landlords has been gradually phased out since 2017. The new tax year marks the final phase of its removal – this will affect higher and additional rate taxpayers. Landlords can no longer deduct mortgage expenses from their rental income to reduce the tax they pay. Instead, they will receive a tax-credit, based on 20% of their mortgage interest payments. Landlords selling up will also be affected by new capital gains tax (CGT) rules, which come into effect in April

4) Coronavirus – know your rights

The coronavirus crisis has shut down many workplaces in the UK and forced the government to make major changes to the benefits system to support those who are unable to work. The self-employed and employees who have lost work are covered, as are people who are unable to work because they have the virus. Depending on which category you are in, here are your rights as things stand currently.

I am an employee and I have been sent home

Some employers have told workers they will pay them as usual, at least for the next few weeks. If you are in that position and you do not usually receive any benefits then you will not need to make a claim. Other employers are not in a position to meet the costs themselves. It is their workers who will be covered by the government’s pledge to cover 80% of wages. This will be claimed by the employers and distributed to staff, so you will not need to do anything yourself. It will be up to employers to decide whether to make up the difference.

I have been off work because I had to self-isolate

You should be eligible for sick pay. If you are an employee, your employer may have a scheme that is more generous than that offered by the government. If it does, it should pay you that. Otherwise you will be entitled to statutory sick pay. The payment is worth £94.25 a week and is paid for up to 28 weeks. The rules have also been changed so that statutory sick pay can be claimed from day one rather than day four as previously.

I am self-employed and have lost all of my work

The government has said it will pay up to 80% of earnings for self-employed people who usually make trading profits of £50,000 or less. The payment is worth up to £2,500 a month and based on your average self-employed income over the past three years. It is taxable and will be paid for at least three months. You cannot apply if you started your business after April 2019, and you need to have a tax return for the 2018-19 tax year to apply. If you have not completed that tax return, which was due on 31 January 2020, you have been given four weeks from 26 March to do so. You will need to apply to HMRC for the self-employed income support scheme and it will pay the money into your bank account in a single lump sum. It will not be available until the beginning of June, but you can claim universal credit in the meantime.

Sunak has also said he will delay the date at which self-assessment tax payments are due. If you were due to pay a second instalment by 31 July, you will not have to do so until January 2021.

5) Environmental, Social and Governance (ESG) funds out-perform market

The relative outperformance of ESG funds since the start of the coronavirus pandemic is almost entirely down to low exposure to energy companies. The past decade has seen the explosion in popularity of ESG funds. Many arguments have been made as to why investors should consider them, from the moral to the performance based. One persistent argument, however, has been that such funds will hold up better during a market sell-off. This thesis has been tested somewhat. For example, during the first week of February 2018, most major indices fell by over 10%. Yet during that week, ESG investments appeared to shine, or at least dimmed less than their peers. The general reason for this is fairly straightforward: companies that score high on ESG metrics have better governance. Better-governed companies are often those deemed to be higher quality. In times of steep market declines, there is a “flight to quality”. Has the same thing happened this time? Comparing funds is slightly harder. It is now common for many funds to claim to have an ESG philosophy built into their stock-picking process. However, as data provided by Willis Owen shows, from the start of the year to 22 March, many funds with an explicit ESG or sustainability focus have been able to produce better results than their sector average and benchmark in both the UK All Companies and Global sector.

6) Retail footfall plunges

Footfall in high streets and shopping destinations jumped last weekend as warmer weather brought more people out of their homes, according to new data. Figures from retail experts Springboard showed that footfall rose 9.5% on Saturday April 4 and 21.3% on Sunday April 5, against the same weekend a week earlier. It reported a particular spike in footfall in central London, where footfall jumped 51.4% on Sunday. Other large cities and coastal towns also saw a jump in footfall over the weekend, with coastal locations reporting a 29.6% rise in footfall on Sunday. Nevertheless, the figures reflected a significant decline against the same weekend last year, due to the government’s social distancing instructions. Springboard said the data is taken from markers by high streets, retail parks and shopping centres. It said the figures do not show what people were doing on their excursions and simply record the number of people walking through these areas. Footfall for last week – the week starting March 29 – dived 81.4% against the same period last year, while it was also 31.6% lower than the previous week.

7) Do not write off investment trusts just yet

The gap between the best and worst performing investments trusts in the first three month of the year is wide, as managers grapple with the impact of the coronavirus. By and large, the most resilient trusts in March proved to be the better performers in the first quarter of the year as a whole, and the worst performers in the month are also among the weakest year to date. Some of the most highly rated investment trusts are among the best performers – with trusts rated Gold, Silver and Bronze making it into the top 10. Just two trusts in the top 10 produced a positive return in March – no mean feat at a time when the FTSE All Share fell 26% and the S&P500 fell 20%. There is little commonality between the top-performing trusts. Ruffer has a large exposure to bonds, which have in general provided the defensive qualities investors value in a crisis while JPMorgan China has benefited from China’s quick bounce-back from the coronavirus and the resilience of its equity markets. The trusts returned 2.12% and 0.89% respectively in the first quarter of 2020, and Ruffer posted an impressive 6.74% in March. Meanwhile, Scottish Mortgage’s bias towards technology companies has helped it at a time when millions of people are having to work from home and socialise through social media and apps. The trust is up 0.4% in the first quarter of the year, and down 5.76% in March. It is, perhaps, of little surprise to see two healthcare and biotech funds among the top performers, as governments across the world race to find a cure for Covid-19. Worldwide Healthcare is down 7.41% year to date and Biotech Growth down 8.42%. Investing in certain healthcare companies, such as virtual GP service Teladoc, has boosted the performance of a number of funds and trusts in recent weeks. With the world still trying to understand the full impact of Coronavirus, commentators believe it is likely that markets will remain volatile in the coming quarter and a wide dispersion of returns for Q2 highly likely.

For Articles up to 21 April 2020

1) Furlough scheme opens

A government scheme to pay the wages of those out of work because of the coronavirus pandemic received 67,000 claims within half an hour of going live. Under the coronavirus job retention scheme, employers can put workers on furlough – a leave of absence – up to the end of June with the government covering 80% of their wages up to £2,500 per month. An HM Revenue & Customs system to process the claims started operating on Monday morning with payments to be made by the end of the month before many firms’ payroll deadlines. Here is the top-line:

If you are furloughed then your employer is keeping you on the payroll while the business has less work than normal. While on furlough you cannot undertake work for or on behalf of your employer. Any employer with a UK payroll and a UK bank account will be able to claim on their employees’ behalf.
Employees must have been on their employer’s payroll scheme and had this notified to HMRC on or before 19 March 2020.
Employees can be on any type of contract, including zero-hours or temporary
If you were employed as of 28 February and on the payroll, but were made redundant or stopped working before 19 March, you can qualify for the scheme if your employer rehires you and puts you on furlough.
Businesses will be able to pay their employees 80% of their regular monthly wage, or £2,500 a month, whichever is lower. If on the scheme, your employer must pay you at least the 80% of your usual income, however, they are also free to top this up if they wish.
Once an employer has claimed, they will receive a claim reference number. HMRC will then check that the claim is correct and pay the claim amount by Bacs into the employer’s bank account within 6 working days.

2) Avoiding bear traps

Bear markets can present amazing opportunities for long-term investors. Those who buy stocks while the market is down, tend to be rewarded in the long run. That said, investing during a bear market is not as straightforward as investing during a bull market. If you are thinking of buying stocks in the current bear market, there is one thing you should know. It is no secret that in a bear market, the general trend of the stock market is down. What many investors do not realise, however, is that stocks do not fall in a straight line. Every now and then, the stock market will bounce a little (as selling activity temporarily weakens), before resuming its downward trend. This ‘false reversal’ pattern is called a ‘bear trap’, and it can be dangerous for investors. The reason bear traps are dangerous is that they lure investors back into the market at higher prices, right before the next down-leg of the bear market. Stocks rise a little, and investors think the worst is over. As fear is replaced by greed, they scramble to get back into the market. Then, the market suddenly takes another dive and those who bought at higher prices get crushed. Analysis of the four previous downturns in 1987, 1998, 2000 – 2003 and 2007 – 2009 show that those bear markets were actually littered with sharp rallies which cruelly turned out to be nothing more than bear traps for the unwary, who were tempted into a ‘buy-on-the-dip’ strategy, only to quickly find themselves in trouble. Looking at the FTSE 100‘s movements in the last few days, most commentators believe that we may be seeing a bear trap right now. The coronavirus situation is far from over, yet the FTSE has rebounded roughly 15%. That kind of bounce seems a little premature and most experts would not be surprised to see another down-leg from here before the market generates a sustained recovery.

3) A good time to invest for children

The Junior ISA limit has gone up to £9,000 for the new tax year 2020/21 – almost double what it was previously. The new limit, up from £4,368, was announced in the Budget last month and is the highest increase we have seen since Junior ISAs were launched in November 2011. Junior ISAs are long-term savings accounts for children, which allow parents and legal guardians to put money away in a tax efficient way. Here is what you need to know about Junior ISAs:

Just like adult ISAs, you can save into either a cash Junior ISA or an investment one
With a cash ISA, you will earn interest on your money. Interest rates are currently very low, so it is important to hunt around for the best possible rate
You can also put money into a Stocks and Shares ISA, which would potentially give you better growth. Stock markets go up and down, but these are long-term investments, which gives your investments time to grow
If you invested last year’s full Junior ISA allowance of £4,368 in a stocks and shares ISA every year for 18 years, your child’s junior ISA could be worth £125,295. If you put away £9,000 every year for 18 years, your child would have a savings pot worth of £258,495
The account can be opened by and controlled by the parent or legal guardian, but anyone can pay into it for your child
Once the money is put into a Junior ISA, it belongs to the child and only they can access it once they are 18

4) Final salary transfer lockdown

Transfers out of final salary or defined benefit (DB) pensions have notably declined following the steep market falls that have taken place over the past two months in response to the coronavirus pandemic. Analysis of data from company pension schemes by pension consultancy LCP found that member interest in transfers out of DB pension schemes is at its lowest level since early 2014, before the introduction of the pension freedoms. According to LCP’s analysis, volumes of requests for transfer value quotations were already markedly down in 2019 compared with 2018, but the first quarter of 2020 has seen further declines. According to LCP, possible explanations for the most recent decline in requests for transfer values include pension savers delaying decision-making in light of steep market falls. Another key driver is that the coronavirus has disrupted the work of financial advisers, which might have otherwise led to inquiries about transfer values. On this front, in order to help financial advisers, the Financial Conduct Authority (FCA) has stepped in to reduce their workload by relaxing for six months a regulatory requirement that requires advisers and wealth managers to notify clients when a portfolio suffers a 10% or more drop in a three-month period. In addition, a significant number of DB schemes have decided to put a temporary hold on providing transfer quotations to allow market volatility to settle down and give them time to review their transfer value calculations. In turn, this is likely to reduce overall transfer activity further for a period of time.

5) HMRC pauses investigations

HMRC has put a string of investigations into tax-dodging on hold as the authority scrambles to free up resources so it can focus on the coronavirus pandemic. It has written to taxpayers to ask them not to request information or documents or press for responses to requests that have already been made. In some cases enquiries are being suspended completely. HMRC said it is prioritising work to support businesses and individuals, while still tackling the most serious criminal attacks and those who exploit the situation by promoting tax avoidance.

6) Good news for Premium Bonds

National Savings & Investments (NS&I) has reversed plans to water down Premium Bond rates to support savers during the coronavirus pandemic. Premium Bonds currently pay an average return of 1.4% a year, and this was due to be watered down to 1.3% from 1 May. This means that the chance of any £1 bond winning a prize will remain at 1 in 24,500 and not change to 1 in 26,000. NS&I is also not cutting interest on its variable-rate savings deals. It originally planned to trim rates on its Direct Saver account from 1% to 0.7%, on its Income Bonds from 1.15% to 0.7%, and on its Investment Account from 0.8% to 0.6%. The state-backed savings firm is telling customers to ignore any letters or notifications that they have received but will not say if it will bring back the cuts after the coronavirus outbreak is over. However:

10 year fixed-term product interest rate reductions will go ahead as planned from 1 May.
Guaranteed Growth Bonds and Guaranteed Income Bonds will see cuts of between 0.15 percentage points and 0.40 percentage points
Two-year Fixed Interest Savings Certificates will drop from 1.3% to 1.15%, while the five-year option will fall from 1.9% to 1.15%

7) Help for the self employed

Self-employed workers can receive up to 80% of their profits lost due to coronavirus-related disruption to their business paid by the government. Average monthly profits from the last three years of up to £2,500 a month will be used to calculate how much self-employed workers can claim. The scheme is similar to that promised to workers on the PAYE payroll last week by Mr Sunak. But it will only be available to people whose majority of their income comes from self-employment and they must have been working for themselves for the past two years in a bid to cut back on fraudulent claims. Anyone who missed the January self-assessment deadline is also being given a four week extension to file their tax return. Here is what help has been promised to self-employed workers during the coronavirus crisis:

The government is to pay up to 80% of wages for self-employed workers based on their average monthly profits over the last two years
This will be up to a limit of £2,500 a month. It is only available to those with profits of up to £50,000
Average monthly pay-outs are thought to be about £940 each per month. For example, a freelancer with average trading profits of £18,000 a year over the last three years would be able to get £1,200 per month
You would not get paid until the first week in June but payments will be backdated until 01 March.
It will only be available to those “adversely affected” by the coronavirus shutdown and half of their income in these periods must come from self-employment
HMRC will contact you directly, ask you to fill in form and pay into your bank account
Those who pay themselves a salary and dividends through their own company are not covered by the scheme but will be covered for their salary by the Coronavirus Job Retention Scheme if they are operating PAYE schemes

8) Child benefit claims and tax credits

Child Benefit will pay monthly payments which are dependent on the number of children being claimed for. Payments for Child Tax Credit will also depend on how many children are being claimed for but will also be affected by the context of the claim. The payments will change depending on if the claimant is making a new claim or if they are already receiving Child Tax Credit. While Child Tax Credit has been replaced by Universal Credit it still can be claimed, albeit under very specific circumstances. The government state that a new claim can only be made if the claimant is:

Getting the severe disability premium, or are entitled to it
Gets or was entitled to the severe disability premium in previous month and they are still eligible for it.

There are a few things that will affect a person’s eligibility for Child Benefit but there are a couple rules to note.

Only one person can receive the payment for a child so the parents will need to decide which among them will get it.
Children under 16 can be claimed for but it is possible to claim for children up until the age of 20 in certain circumstances.

There are only two things which severely impact eligibility rules and they are if the child goes into hospital/care or if they live away from the parents.

Summary

I trust you have found this Newsletter to be of interest and if you would like to discuss any of the subjects detailed please do not hesitate to contact me.