Panic equity selling or panic raising of precautionary cash?

Following yesterday’s unprecedented one day declines in global stock markets, there is a recovery under way today. Instead of the past day’s written update note we are today sending you a link to a short video (5 minutes) in which Lothar Mentel, Tatton’s Chief Investment Officer, briefly lays out what caused the severity of this market crash and why this ‘dash for cash’ can be seen as capital markets’ version of the panic toilet paper buying we have seen over recent days in the shops.

Click the Link below

https://www.tattoninvestments.com/tatton-media/market-update-30-march-2020

What advisers are telling clients in latest market turmoil

The sharp falls engulfing global equity markets in recent days may have caused concern among investors, leaving advisers to contain the panic.

The FTSE 100 was down 7.7% yesterday, but opened 1 per cent higher this morning, while the FTSE 250 was down 18.7 per cent in the last month.

The Dow Jones Index of US shares is down 18.5 per cent in the past month, and the Nikkei index in Japan is down 16.9 per cent over the past month.

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Alan Steel, chairman of Alan Steel Asset Management in Linlithgow, said he reassures his clients not to panic.

He said: “Having been through four [market crashes] since 1973, that’s why we built your portfolios with [defensive as well as aggressive assets] to protect you. And remind them that when utter and senseless panic is in the air, not to join in.

“The worst investment decisions, buying and selling are made when the inmates are temporarily running the asylum. Sit tight, and if you’ve got spare cash, drip it in monthly.”  

Similarly Philip Milton, who acts as both a financial adviser and a discretionary fund manager at PJ Milton and Co in Devon, has emailed all of his clients, asking them if they can defer withdrawing money “to ensure they do not take funds at a dangerous moment”.

He also wrote: “If you do force sales in the face of a market which is not enthusiastic to buy from you, you will sell holdings at lower prices than they should be valued and which you deserve. 

“Sometimes even the sale of a stock can be enough to push prices down more, as the good and the bad face the same reluctance from buyers to do much other than sit on hands. 

“Market makers are happier pushing prices lower even if in some holdings there is little activity.”

But Francis Klonowski, who runs advice firm Klonowski and Co in Leeds, said none of his clients have been in touch with him regarding the current market falls.

He added: “I don’t know if that is a function of what we always say to people, which is that we invest for the long-term. And to be honest, if someone did have any questions about the short-term I am not sure what I could tell them.

“I think if someone wants to exit the market because of current events, they probably shouldn’t have been investing anyway. One client came for a meeting this morning, and I showed him a graph showing the performance of his portfolio  since December, and the client just shrugged, he knew what these movements are.” 

For me, I would reinforce all that’s been said above. Until you actually encash something, you have lost out except on paper. Experience tells me that markets will bounce back. When I don’t know but I am sure they will.

Remember that in 1972, the FTSE 100 stood at around 460 and by 1974 it was around 340! As I write, the market stood at 6200.

Nevertheless, the last few days have been rather bruising. In peak to trough terms the sell off in the equity markets has not been all that impressive by historical measures but the speed and ferocity certainly has.

It is my belief that this has magnified the panic because the market doesn’t like uncertainty, and we have that by the bucket load right now.

Using ISAs to fund your retirement

Could ISAs overtake pensions as the UK’s retirement savings vehicle of choice? That’s the question posed by the Financial Times over the weekend. 

When they were launched back in 1999, few expected them to become a serious part of retirement portfolios, but times have changed over the last 20 years. 

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However, according to the article, as concerns over pensions and tax grows, ISAs become ever more popular. The 2017-18 tax year saw the £20,000 ISA allowance used in full by 61% of adult ISA investors earning more than £150,000, according to data from HM Revenue & Customs. 

That same group will have seen their pensions savings options whittled down by the tapered annual allowance, potentially restricting pensions savings to as little as £10,000 per year. 

General Election Comment

Over the past few weeks, one of the Investment Houses we use, have written that currency markets appear to be anticipating a softer, or perhaps more pragmatic route for Brexit after the General Election. It looks like Mister Market got it right once again.

They go on to say that the result of last night is decisive and produces a government which is capable of making and implementing decisions. This will significantly reduce the levels of uncertainty that UK businesses have faced and those who trade with them abroad, which had subdued activity levels over the past three years and led to a slowing in business investment.

That’s good news for investors, both inside and outside the UK.

UK stocks, across the board, have already risen this morning by 2% in early trade, partly aided by President Trump indicating that a US-China phase-1 trade deal would be signed imminently.

£-Sterling has rallied by about 2% against both the US-$ and the €-Euro. This is also good news, for overseas purchases, in that the buying power of £1 has increased. Holidays, and imports will cost less in Sterling terms. On the other hand, it does mean that the rise of foreign stock markets overnight looks less impressive when translated back to sterling. Still, even in £-Sterling terms they are up. Our return from a UK underweight position in our investment portfolios last year to being invested to target level ensures a positive performance contribution from the election outcome bounce in the UK’s stock market.

The outlook for portfolios also looks more positive this morning. The UK domestic picture now has less risk for investors and business leaders which should help stabilise business revenues and their appetite to resurrect mothballed capital investment projects. That is also helped by the improving global outlook, which took a big leap forward last night with the US and China finally agreeing a trade deal ‘in principle’. This news will have has mostly been buried in the UK by the election news flow but will be extremely important to the large number of UK businesses exporting goods and services. Incidentally, it also explains the bounce in Asian stock markets overnight than the UK’s election outcome.

The Investment House comments above confirm what we, ourselves have always said, that Markets don’t like uncertainty. Whether you agree or disagree with the Election outcome, the Markets know that decisions will be made and can price the outcome accordingly

Investing in your child’s future

For clients wanting to invest for their children’s future in something more adventurous than a child savings account, there are three main options: a Junior Isa, a Junior pension or a Bare Trust investment account.

The purpose of these accounts varies significantly, and there are considerable differences in how they can be accessed, tax treatment, limits on investments and how the accounts are managed.

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Jisa

Jisas are often the first option that springs to mind when we talk about investing for children. Like all Isas, Jisas benefit from tax-free growth, with no income or capital gains tax to be paid.

This includes when the account is funded by parents, and, unlike some other accounts, even when the income for the year exceeds £100.

Children can have a cash Jisa and a stocks and shares Jisa. It is possible to hold one of each type, and transfers can be made freely from one to the other.

However, unlike adult Isas it is not possible to open a new account of the same type each year and leave the old one open.

If a stocks and shares Jisa is held and you want to pay into one with a different provider then the existing Jisa must be transferred to them first.

Accounts can be opened by the parent or legal guardian of any child resident in the UK aged under 18.

Remember that children born in the UK between September 1 2002 and January 2 2011 were eligible for child trust funds and although these accounts can no longer be opened they can continue to be held until the child reaches age 18.

It is not permitted for a CTF and a Jisa to be held for the same child, however since April 2015 it has been possible to transfer a CTF to a Jisa if the transfer is made as part of the Jisa account opening process.

Subscription limits for both Jisas and CTFs are £4,368 for the 2019-20 tax year.

Junior pensions

Turning to pensions now and the option of setting up a scheme for a child.

This is definitely one for the long game, and primarily used by wealthy clients who have exhausted the Jisa allowance for their offspring.

It is possible to pay in £2,880 a year, which will be topped up to £3,600 under relief at source, even when there are no earnings.

As a registered pension scheme, the investments can grow tax-free and the benefits of compounding will be substantial, given the funds cannot be accessed for a time frame of potentially 50 year or more.

It would usually be the parent or legal guardian who would set up the pension and make the investment decisions, but some providers may allow grandparents or other adult family members to do so.  

Another use for junior pensions is where a child is a beneficiary after a family member’s death and has funds designated to flexi-access drawdown in their name.

Bare trust investment accounts

A child cannot legally own shares, so the easiest way to open an investment account for them is to have a bare trust account.

A bare trust document can be very simple, setting out the initial donor, trustees and who the beneficiary is.

Unlike the other type of accounts we have looked at, a bare trust does not have to be managed by the child’s parents.

They are therefore a popular option for grandparents setting up accounts for the benefit of their grandchildren that they can invest and manage.

Bare trusts also allow withdrawals at any age, as long as it is for the beneficiary’s benefit, so grandparents could invest and make withdrawals to pay school fees as appropriate.

On turning age 16 (18 in the rest of the UK) the child-turned-adult has absolute entitlement to all the capital and income, but it is not an automatic handover to take over managing the assets.

The trustees can continue looking after the fund indefinitely,  but what changes is the now-adult beneficiary can demand the capital and/or income at any time. If they are comfortable looking after their own affairs then the trust effectively ends and it becomes an adult investment account.

As it is not a tax wrapper like a pension or Isa, there is no limit on the amount that can be invested in a bare trust account.

Income and capital gains within the account are chargeable to tax, but are treated as belonging to the beneficiary.

A child has the same personal allowances as an adult, that is personal allowance, personal savings allowance and a starting rate for savings of 0 per cent, meaning up to £18,500 of income a year could be tax free plus a capital gains allowance of £12,000.

One crucial point to be aware of though is that if a parent puts money into the bare trust account and the income exceeds £100 a year (or £200 if both parents pay in), then the income is taxed on the parents.

This is why bare trust dealing accounts are most commonly used for grandparents to make gifts, rather than parents.

If you would like more information on any of the above options, please give us a call.

The Five Main Types of ISAs


THE ISA FAMILY

  1. The Basic ISA 6 – April 1999

The original ISA has two investment components: stocks and shares or cash. These are now interchangeable, so you can transfer from a stocks and shares ISA to a cash ISA, or vice versa. 

Available from age 18 (16 and 17-year-olds may start one but only choose the cash component.)

2. The Junior ISA (JISA) – November 2011

Available to children under 18 who do not already have a Child Trust Fund (CTF) account. Both cash and stocks and shares variants are available.

Available from ages less than 18. Investors cannot also have a Child Trust Fund (CTF). JISAs are available to any child born before 1 September 2002, after 2 January 2011, or born between those dates and whose CTF funds have been transferred into a JISA.

3. The Help to Buy ISA – Dec 2015

In practice this is a variant of a cash component basic ISA. Aimed at first-time buyers, its main benefits revolve around home purchase. It has now been overshadowed by the Lifetime ISA (see below) and will be withdrawn from 1 December 2019, although existing investors will be able to continue making contributions.

Available from age 16 and over. No new plans can be started after 30 November 2019. Help to Buy bonus must be claimed by 1 December 2030.

4. The Innovative Finance ISA – April 201

These relatively new ISAs are limited to investments in cash and two specialist, higher risk lending areas (peer-to-peer loans and ‘crowdfunding debentures’).

Available from age 18 and over.

5. The Lifetime ISAs (LISA) – Apr 201

The LISA is aimed at encouraging saving for first home purchase or retirement by adults under the age of 40. It provides a government bonus, but comes with penalties if funds are withdrawn before age 60, other than for a first home purchase. To date few providers have chosen to offer LISAs.

Available from age 18 to 39. Contributions cannot be made after age 50.

INVESTMENT LIMITS

The maximum overall investment across all ISAs in 2019/20 is £20,000

There are sub-limits for Help to Buy ISAs and LISAs:

 1. The maximum Help to Buy subscription is an initial £1,000, plus £200 a month for the duration of the tax year in which it was opened.

2. For LISAs the maximum subscription is £4,000 in each tax year.

3. For JISAs, the maximum contribution is £4,368 in 2019/20. In addition, a 16- or 17-year-old can subscribe £20,000 to a cash component basic ISA (including a Help to Buy ISA)

 Subscribers may only open one of each type of ISA in any one tax year. This means in 2019/20, subject to eligibility:

  1. A basic ISA with a stocks and shares component
  2. A basic ISA with a cash component or a Help to Buy ISA (a small number of providers incorporate both types within the one ISA wrapper)
  3. An Innovative Finance ISA
  4. A LISA

If an ISA is transferred in full, the one-ISA-per-type-per-year rule still applies.

PASSING IT ON

ISA rules were amended in 2014 to allow the value of any ISA to be inherited and used as an ‘additional permitted subscription’ (APS) by a surviving spouse or civil partner.

Since April 2018, generally the ISA tax benefits remain during the administration period and all investments, plus any subsequent growth or return, form part of the APS.

So the ISA’s tax advantages can outlive the original ISA owner, with their ISA holdings and tax benefits normally being transferable in full to the survivor.

If you would like any further information about ISAs please give us a call