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October 2020 Newsletter

We hope you have been keeping safe and well throughout the pandemic which, at the time of writing, is entering a worrying new phase.

Since our last newsletter, global stock markets have recovered considerably and our topics in this issue include an article on ESG investing which continues to grow in prominence and popularity. Some sectors seem to be thriving under current conditions, although for how long, remains to be seen. We  look at the house prices boom and knock on effects for mortgage waiting times.  Lastly, as we are now halfway through the tax year, we have included a reminder to use your pension contributions strategically to reclaim allowances and benefits.

We hope you enjoy the articles and find them useful.

In this issue:-


Making Pension Contributions to Reclaim Allowances and Benefits

There are two key income thresholds above which certain allowances and benefits are lost but making pension contributions will serve to reduce your level of net income and thereby help avoid losing these valuable benefits. These limits are:

• £50,000 – the point at which the High Income Child Benefit Charge becomes applicable
• £100,000 – the point at which the personal allowance is reduced

Child benefit was withdrawn from any household where one parent earns £60,000 or more, and for those earning between £50,000 and £60,000, the benefit was reduced. This latter group must submit a self-assessment tax form each year, essentially paying the benefit back via a tax charge.

The basic personal allowance is subject to an income threshold of £100,000 which means your personal allowance is reduced by £1 for every £2 you earn above £100,000. For the 2020-21 tax year the basic personal allowance is £12,500. Therefore, the maximum reduction applies at £125,000 and above this point you have effectively lost all of your personal allowance.

The definition used to calculate income for these income limits is known as “Adjusted Net Income” and this includes taxable income from all sources – not just earnings from your employment or self-employment but also income from rental properties and dividends.

However, a pension contribution made in any form can reduce the level of Adjusted Net Income and restore part or all of the relevant allowances or benefit and avoid tax charges.

For example:

A pension contribution for someone exceeding the £100,000 income limit can achieve effective rates of tax relief of 60%. The pension contribution receives 40% tax relief and the personal allowance is restored by £1 for every £2 the Adjusted Net Income is reduced down from £125,000 to £100,000, which equates to an extra 20% tax saving for income in this band. It is possible to achieve even higher savings, for example where salary sacrifice is used.

Where income exceeds the £50,000 Child Benefit income limit, potentially even higher effective rates of relief can be obtained on a pension contribution, with the higher the number of children in the family, the higher the potential benefit. More children may well of course restrict the affordability of any contributions!

For more information or assistance please get in touch with your usual JJFS contact or email us at justask@jjfsltd.com.

Note: If you are a 40% tax payer you need to claim the additional 20% tax relief on any personal contributions via your tax return. Click here to download our factsheet on how to claim high rate tax relief.


Environmental, Social, & Governance (ESG) Investing

Historically ‘responsible investing’ was based primarily on excluding companies that didn’t meet specific criteria based on ethical values. Various terms were, and still are, used interchangeably – including ethical, green, socially conscious, ECO and sustainable – all referring to some form of socially aware investing. However, investors are now focusing more and more on the combined impact of environmental, social and governance risk factors and the potential effect on a company’s reputation, profitability and ultimately its share price.

For example, environmental issues refer to a company’s dependency and impact on renewable and non-renewable natural resources such as energy and water. How could it be impacted by climate change, how far does it contribute to waste and pollution levels, what are its carbon emissions and carbon footprint – these are all fundamental considerations.

Social factors include how the company looks after its employees, deals with its suppliers, and interacts with the communities in which it operates. Does it have measures to prevent bribery and corruption, ensure high labour standards throughout its supply chain, and ensure data security and privacy?

Governance is the process by which a company is managed and overseen so for example, are the board and management paid appropriately, are they subject to independent scrutiny and proper accountability, is there transparency over its approach to taxation.

All the above factors can cause huge reputational and financial damage when something goes wrong, and the potential to be played out on social media to an audience of millions.

But ESG investing is not just about the impact on the bottom line in environmental terms. It also encompasses stewardship – investing in companies that require improvement and engaging with them to help them get there. For example, fund managers can influence companies they invest in to encourage them to become more ethical or socially responsible. When successful, this benefits both the wider society as well as the value of the investment.

Impact funds go one step further and provide tangible results for investors by measuring and reporting back on the positive impact they have had on the environment and society. For example, they might invest in companies that save a quantifiable amount of water or avoid producing a certain amount of carbon dioxide.

For those with strong ethical views, exclusions-based funds are still an important element in ESG integration and will exclude companies that damage the environment or operate in socially unacceptable activities or against specific ethical values.

However, focusing purely on ESG investing need not be restrictive. For example, investment funds that are properly integrating ESG principles could also potentially invest in an oil company that is in the process of moving to renewable energy, but is still, nonetheless, an oil company. As you can imagine, these can sometimes be contentious decisions highlighting the fact that even within the ESG umbrella, there are different shades of green and worth bearing in mind if you are unwilling to invest in a specific sector or industry.

Please note – this article does not constitute personal advice or a recommendation to invest. The value of an investment may go down as well as up and you may not get back the money you invested. It should not be assumed that the value of investments always rises. You should ensure that you have the financial capacity to bear the risk and only invest an amount you are willing to lose.


House Prices Boom, But For How Long?

Property prices leapt 7.3% year-on-year last month as Britain’s housing market boom continues, with Halifax reporting mortgage applications at a 12-year high. Their figures show the average home sold for £249,870 in September, with the highest annual rise since 2016. Commentators noted political uncertainty had weighed on prices last September but say the market had still been “extremely strong” since the first national lockdown eased.

Prices were up 1.6% on the previous month with three consecutive months showing gains. Growth has lost less steam than expected by analysts who had predicted monthly growth of 0.6%. It comes in spite of the resurgent coronavirus, tighter lockdown restrictions and the ongoing economic crisis, with some experts calling the property boom a “paradox.”

There seems to have been a fundamental shift in demand from buyers brought about by the structural effects of increased home working and a desire for more space, while the stamp duty holiday is certainly incentivising vendors and buyers to close deals at pace before the break ends next March.

Halifax had received more mortgage applications from both first-time buyers and home-movers than at any time since 2008 over the past three months. But experts warn of significant possible downward pressure on house prices in the months to come as the economic downturn eventually dampens the market. Many believe that it is highly unlikely that the housing market will continue to remain immune to the economic impact of the pandemic. The belief is that the release of pent up demand and the stamp duty holiday can only be temporary and their impact will inevitably start to wane.

And as employment support measures are gradually scaled back beyond the end of October, the spectre of increased unemployment over the winter may well come into sharper relief.


Mortgage Waiting Times Increase

Before the pandemic started, it took two weeks to get a mortgage offer. Now it can take six weeks (and even longer in some cases). The surge in mortgage applications coupled with the fact that so many bank staff are home working has been blamed for causing a massive backlog of mortgage applications and delaying house purchases by up to a month.

Mortgage Brain, which is jointly owned by Barclays, Lloyds Banking Group, Nationwide, NatWest, Santander & Virgin Money, has now developed a report that provides mortgage brokers with a single view of lenders’ service levels and collates details of the typical length of time various processes take at multiple lenders. The report covers aspects such as average wait times to speak to different departments, typical application processing times and is updated automatically every working day.

As market activity continues at full pelt, it is hoped the report will enable brokers to be completely transparent when making recommendations and instrumental in managing expectations when supporting clients during the mortgage process.


Pensions Tax Relief – Safe For Now?

The Government has rejected the Public Accounts Committee (PAC)’s proposal that HMRC should, within 12 months, evaluate the impact of pensions tax relief. The PAC were concerned that HRMC did not understand the impact of some of the UK’s largest tax reliefs which includes pension tax relief and called for a formal review.

However the Government disagreed with this recommendation and pointed to several recent consultations on pensions tax over the last few years and stated that these investigations included gathering views and evidence from stakeholders to understand the regime’s impacts and the impacts of possible changes.

The responses to the consultation in 2015 pensions tax relief indicated there was no clear consensus for reform and it was announced during the Budget in 2016 that there would be no fundamental reforms to pension tax reliefs at that stage.

Government stated they would continue to engage with stakeholders and gather evidence through consultations, but that now was the right time for a formal evaluation. They did, however, back the PAC’s other pension related recommendations, including one stating that HMRC should publish data showing who is benefiting from pensions tax relief and that they should split this data by income, groups with protected characteristics such as gender, age, and ethnicity, people working in the public and private sectors, and people in defined contribution and defined benefit schemes.

At first glance this could be seen as suggesting there is currently no immediate appetite for fundamental pensions tax reforms but this doesn’t rule out changes – they may feel they have already gathered sufficient evidence, or they may feel this could be done via other consultations. Of course, tweaks to the annual allowance or lifetime allowance could also be made which, whilst these may not be considered fundamental, may have a significant impact on the benefits to an individual.

Clearly, savings will need to be made at some point and any significant tax break is going to be within the sights of the Chancellor. As ever, where appropriate and where funds and allowances are available to make contributions now, consideration should be given to making contributions sooner rather than later.

For more information or assistance please get in touch with your usual JJFS contact or email us at justask@jjfsltd.com.

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