Efficient Wealth Update – February 2020
Coronavirus Update – Where do we stand?
On Thursday 30th January, the World Health Organisation (WHO) declared a public health emergency of international concern (PHEIC) over the new coronavirus epidemic. The WHO flagged the risk of the coronavirus (so called because of its spiky, crown-like appearance under a microscope) spreading to countries outside of China with weaker health systems which have less ability to deal with it.
As of the morning of 12th February, 44,000 cases of novel coronavirus (nCoV) had been confirmed worldwide with at least 1,018 of those outside China, Hong Kong, Taiwan and Macau (including 8 cases in the UK). Whilst the number of cases has been rising quickly, it does appear to be plateauing in China.
Should we be worried?
We should be wary, but we shouldn’t panic. So far 1,018 people have died from the disease, a far cry from the roughly 400,000 deaths a year caused by flu. nCov is, however, more deadly than flu, with an estimated mortality rate of 2-3% vs flu’s less than 0.1%. Whilst serious, that 2-3% is lower than the roughly 10% mortality rate of Severe Acute Respiratory Syndrome or SARS (another coronavirus which killed 774 people in 2003) and Middle East Respiratory Syndrome’s 34% mortality rate (a coronavirus outbreak that erupted in 2012). It is also certainly less than the 10-20% mortality rate of the last truly serious global pandemic, the 1918 Spanish Flu which infected about 500 million and killed between 50 and 100 million.
What is troubling is that nCov is obviously quite contagious, about as much as flu, with each new case infecting on average about 2.5 other people, so it’s important that it is contained. This has been made more difficult in China because it emerged in the Chinese city of Wuhan at a particularly unfortunate time, just before Chinese New Year which sees a mass migration of people back to their family homes to celebrate.
There are some important unanswered questions though which affect how easy it will be to contain, such as how long the virus incubates for and whether it can be passed along before symptoms show.
How is this affecting markets?
It’s difficult to completely disaggregate the causes of market moves, but fears about the virus have certainly been a large factor in the recent pullback in global equities. So far this is only a mild sell-off, but beneath the headline figures individual stock prices have moved more materially with defensive sectors (utilities, healthcare, tech, quality as a style in general) rallying, and more cyclical sectors (autos, resources, value as a style in general) as well as China-exposed travel and luxury goods retailers selling off.
Source: Financial Times, 31 January 2020 (measuring the Europe’s Stoxx 600 index)
This flight to safety has also been evident in bond markets, which have rallied strongly over January as fears have risen, and yields have fallen. This also briefly led to a US yield curve inversion on Thursday 30 Jan (10-year maturity minus 3 months maturity) - yield curve inversions over an extended period have historically been a reasonable indicator of recession, so they are closely monitored.
How is this likely to affect markets going forward?
We don’t know for certain. In previous outbreaks (such as SARS), economic damage wasn’t really caused by the primary effect of the disease (people getting sick & dying) but by the secondary effects of the fear of the disease (people hunkering down and not travelling, shopping, interacting with other people, all of which affects company profits and economic growth). Given China is such a strong engine for global growth and the virus is centred there, the secondary effects are particularly worrying. SARS managed to knock 2% off China’s economic growth in Q2 2003 so it’s likely that the virus will have a measurable effect on global growth in 2020, although any dip is likely to be temporary, as long as the disease is contained.
As for markets, in previous outbreaks like SARS, the market sold-off sharply but then bounced back even more strongly once the outbreak started to peter out. Selling out of the market is thus risky as it risks locking in losses but not being present for the rebound.
Source: John Authers, Points of Return, Bloomberg
Every outbreak over the last 100 years has been contained and so has had little effect on the market, so the virus petering out remains the overwhelmingly the most likely prospect here. But it’s impossible to completely rule out the incredibly serious tail risk of a global pandemic. This should definitely concern us, but careful action such as that being taken by the WHO and global governments is the correct response, rather than panic.
Source: Charles Schwab
How is this affecting PortfolioMetrix portfolios?
Coronavirus is a classic ‘black swan’ – an unexpected but high impact event. But the PortfolioMetrix portfolios are diversified precisely because although they don’t know about specific black swans in advance (or when they’ll occur) they have always believed that it’s best to prepare for them in advance by building robust portfolios, rather than trying to react after the fact. Indeed, the rebalance in December, which amongst other objectives aimed to further diversify portfolios by adding in listed infrastructure and trimming emerging markets, has proved helpful month to date. Recently added M&G listed infrastructure was up 4.15% over January.
It is likely, however, that portfolios will be volatile for the next few weeks as we learn more about how serious this strain of coronavirus actually is. They are not planning any knee-jerk reactions (which risk missing out on a rebound) but they are monitoring the situation closely.
Changes at Wealthtime
There are a few changes afoot at Wealthtime, the investment platform company that quite a few of our clients use. Founded in 2006, Wealthtime is going to be acquired by AnaCap Financial Partners, in a move we believe will enhance the experience for both you and us. In fact, one of the first things they’ll be looking at are upgrades to their system to make the processes even easier to use, something we feel should benefit you.
Probably Wealthtime’s only weakness over the years was their size; so being acquired by a well-established European financial services specialist will, I am sure, help them. It's early days for now, and the acquisition is still subject to FCA approval, but we look forward to this continuing to enhance what is already a market leading offering. If you have any questions or would like to know more information, please just ask us.
Is your overdraft about to make you more overdrawn?
Whilst you may try to avoid being overdrawn, it can be comforting to know that you have access to an overdraft should you need it. However, it might be time to rethink your borrowing as the fees connected to overdrafts are changing and could give you an unpleasant surprise if you're not prepared.
The changes arise from the implementation of new rules from the Financial Conduct Authority that allow banks to increase the interest rate on overdrafts to a huge 40%! The new fees are the banks' response to no longer being able to fine you for going over your overdraft limit.
According to money-saving-expert, Martin Lewis, Nationwide has already changed their 50p per day charge to 39.9% interest and, from 14th March 2020, HSBC, M&S and First Direct will make similar changes.
Therefore, it may save you money to shop around for a bank that still offers a 0% overdraft, or even to consider using some of your savings to pay off or reduce what is currently in your overdraft. Act now and avoid getting caught out.
Inheritance - will your loved ones get what you want them to?
You have probably heard it before and you will no doubt hear it again: it is important to make a Will. Not only does it give you peace of mind but it also keeps things simple for your loved ones while ensuring that your estate is divided amongst the people you want.
As the law currently stands, the estate of anyone who dies without a Will is governed by statutory provisions. Unless you leave a surviving spouse or civil partner, your estate will normally be distributed to one class of beneficiaries, e.g. any surviving children. This includes any illegitimate children known to the administrators of your estate. For your surviving spouse or civil partner to receive anything, they must survive you by 28 days. If they don't, they will be excluded from your estate.
BREAKING NEWS: The amount that is assigned to a surviving spouse when the deceased also leaves behind children has increased from £250,000 to £270,000 as of 6th February 2020.
A simple way to explain these rules is shown below:
Within those categories the estate will be divided equally; for example, if you have two surviving parents they will each get half. However, your estate can only go to one group of people - it cannot be divided equally between any surviving parents and siblings, for example. If you are not survived by anyone in the above categories the Crown will take the whole estate.
There may also be examples of partial intestacy, so if there is any part of your estate that isn't covered under your Will the above rules of intestacy will apply to the portion that hasn't been accounted for.
Although rules are set out to distribute your estate in a fair way, without a valid Will there will be no way of explicitly determining who your estate goes to, what exactly they should receive and when they should receive it. If you want to write a Will or if you want to make sure your current Will is up to date, one of our advisers will be happy to help.
High earners' tax break under discussion
The tax situation of high earners in the NHS has been a hot topic over the last few months because of the negative tax implications to which they have been subject. There has been much speculation about how the government is going to solve this ongoing issue.
Whilst previous solutions have been considered "sticking plasters" rather than long-term fixes, the Treasury has recently announced a proposal to raise the threshold for the tapering of the Annual Allowance from £110,000 to £150,000 for everyone, something they seem to consider to be a longer term solution.
This further tinkering with the already complex taxation system around pensions has raised concerns across the industry, with many people calling for the tapering of the pension Annual Allowance to be completely scrapped to simplify things going forward.
There is no doubt that raising the threshold income limit by £40,000 will allow a large percentage of NHS high earners to work extra shifts without being penalised with large tax bills, but whether this is the final solution to such a complex problem is yet to be seen. What probably should happen is an overhaul and simplification of the pension and taxation process, which will take a huge amount of time and resources.
The outcome and final decisions on proposals to resolve this issue are due to be confirmed in the Budget, set for 11th March this year, which does not allow enough time for the overhaul needed, so I am sure this issue will raise its head again in the not so distant future.
Individual Protection 2016 - could be your last chance
There are two types of pension protection you can currently apply for: Individual Protection 2016 and Fixed Protection 2016. Each type provides a different form of protection and therefore requires different information in order for you to apply.
You can apply for Individual Protection 2016 (IP16) if your pension savings were worth more than £1 million at 5 April 2016. In order to apply you will need to contact all of the pension providers with whom you held policies as of 5th April 2016 to obtain their value on that particular date. The total of all amounts is the "relevant amount". Where this is greater than £1.25m, the protection is capped at £1.25m. Where the relevant amount is between £1 million and £1.25m, it becomes the personalised protection amount. Where it is less than £1 million, IP16 is not available.
Whilst there is no official closing date for this pension protection, it is worth noting that the statutory obligation on pension scheme administrators only applies for four years. This means that administrators are only obliged to provide the information you need until 5th April 2020, after that it's at their discretion and they can't be made to do so.
To be eligible for Fixed Protection 2016 (FP16) it is a condition that no individual or employer contributions have been made to your pension arrangements since 5th April 2016. Whilst there may be data gathering required to find out this information, it should be much less onerous to access than IP16.
As you can imagine, this restriction on data release could prevent you from being able to apply for the protection you may be eligible for in the future. So, if you think you might qualify then please get in touch and we can help you put together your application.
Financial wellbeing scheme in pipeline
The government is launching an initiative to focus on making Britain a nation of savers by 2030 and cutting the number of households relying on credit cards for everyday spending.
Studies report that 11.5m people have less than £100 saved as emergency funds, often having to rely on credit to cover unexpected costs and everyday living expenses. In light of this, the government is setting up a plan to improve the situation over a ten-year period that will see an extra 2m people saving and 2m fewer relying on credit cards by 2030.
Although not all credit card spending is bad, providing you have the reserves to cover the debt and as interest rates are currently so low, it may be that the money works harder and better for you if it was invested than it would if you used it to clear your credit card debt. Everyone's individual circumstances are different, and advice should be sought on what is best for you, but relying on credit cards for everyday expenses with no back up is less than ideal.
The initiative will also focus on education in schools about finances and how they apply to the real world, as well as debt advice to adults who may be struggling.
This plan fills the gap left by the Money Advice Service, which was scrapped in 2016 and which had a similar enterprise in the pipeline that never came to fruition. Let's hope this endeavour has more success.
Self-assessment scammers
Many of you are well versed in the tax return system and will likely just have submitted your own return by the online deadline of 31st January. The facts and figures involved can really make your head spin and can cause us to be more susceptible to any scams surrounding tax and HMRC.
With so many emails, letters and general communications between tax- payers and HMRC the scammers see this as an opportunity to send their own communications to try to catch you out. Scammers are producing more convincing communications than ever before, using official-looking logos, gateway account numbers and even calling from similar phone numbers to HMRC.
The general process is that they send you something that looks official (usually promising you a tax rebate or threatening penalties for tax fraud for unpaid tax), then ask you to click on a PDF which asks for your bank details for the rebate to be paid. With so many official-looking communications and HMRC moving towards more digital avenues, the scams are getting increasingly difficult to spot.
Top tip: HMRC will never contact you via social media.
Please stay vigilant and, if you are suspicious, we recommend contacting HMRC before taking any action, either from letters, email or speaking to anybody who calls you directly.
Notes on Brexit
The end has arrived. The Withdrawal Agreement Bill received Royal Assent and was ratified into UK law. The final steps were a vote in the EU Parliament on 29th January and written approval from the European Council. As of 11pm on Friday 31st January the UK is no longer a part of the European Union.
Now that we have crossed that particular hurdle, which has been almost four years in the making, it is all eyes on trade talks between the UK and the EU in March. Because leaving is just the beginning. As it stands, trade talks seem to be starting off with strong opposition. The UK government is firmly declaring a desire for zero tariffs, while the EU is adamant that in order to have that the UK will need to be fully aligned with EU regulations. Chancellor Sajid Javid has ruled out capitulation in this, stating that the UK will not be a "rule-taker". Don't assume you'll be hearing any less about Brexit going forward.
Charlie’s Mini Blog
On Tuesday morning of this week, we were hosting a monthly event we organize for business owners and professionals called The Breakthrough Business Breakfast. Each month we spend roughly 1/3 of the time networking, 1/3 learning about a concept for our business and the final 1/3 working on this principal as a group. The aim is to help business owners improve what they do, getting closer to what I call Entrepreneurial Happiness, whilst they expand their network.
This month’s theme was delegation; something that all business owners need to master if they are to be successful. Delegating more and more of your jobs inside your business has many benefits; you end up with a more sustainable business, one that can grow more without the constraints of one person and one that is ultimately more valuable.
Afterwards, it occurred to me, that the same applies to your finances. Many of you are bright enough to spend your time researching the ins and out of the pension legislation, portfolio contraction, taxation and financially planning your future, but is that best? In the same was as delegating as a business owner, when you have the help of a professional managing your money, your financial wellbeing is more sustainable, it will more than likely grow more and you are able to explore more opportunities.
As someone that has numerous tax qualifications, I have no doubt that I could do my own tax return, and even that of Efficient Portfolio. That said, I employ an accountant as I know he will save me tax and time. If you know someone that isn’t delegating this part of their life, it might just be worth introducing them to us to see if we can do the same.
Finally, if you are a business owner or a professional and would like to attend our Breakthrough Business Breakfast, please just email [email protected].
Book
This month’s book recommendation is Nudge: Improving Decisions About Health, Wealth and Happiness by the well-known social economist Richard H Thaler. The Times summed it up pretty well when it said ‘Nudge has changed the world. You may not realise it, but as a result of its findings you're likely to live longer, retire richer and maybe even save other people's lives’. Not a bad review, and one that is difficult to improve on.
The key to this book is that it looks at how you can stack the odds in your favour to make good financial decisions. For example, it is difficult to save more money into a pension today, but immediately after a pay rise it is much easier; so set your pension increase ahead of time to come out of money you aren’t used to spending yet.
A book that can teach you how to be smarter with all decisions, not just those that involve money.
