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My PFS Technical news - 14/02/2018

Publication date:

14 February 2018

Last updated:

31 October 2018


Technical Connection

Personal Finance Society news update on taxation & trusts, investments and pensions for the period 1 - 14 February 2018.

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Taxation and trusts




OTS review of inheritance tax

(AF1, AF2, AF3, AF4, ER1, FA2, FA4, FA5, FA7, JO2, JO3, JO5, LP2, RO2, RO3,RO4, RO5, RO7, RO8)

It seems that the Chancellor has requested that the Office for Tax Simplification (OTS) carry out a review of inheritance tax.

The main directed focus appears to be on ensuring that the administration of the tax and making payments is fit for purpose and as simple as possible. The experience of taxpayers should be as smooth and clear as possible. All laudable aims.

It also seems that the OTS is to consider how the current rules for gifting interact with the inheritance tax system generally, and whether the rules as they stand cause any distortions to taxpayer decision making in relation to transactions connected with estate planning.

On-time self-assessment returns break the record again

(AF1, AF2, JO3, RO3)

In another record breaking year for the number for self-assessment returns submitted on time, HMRC reveals that 10.7 million customers submitting their self-assessment return before the 31 January 2018 deadline.

Proving increasingly popular with its handy tips and helpful advice, the department’s online service was used by 9.9 million customers – meaning more than 92.5% of total returns were completed online.

There were 758,707 people who completed their return on the last day before the deadline. The most popular hour for customers to hit ‘submit’ was from 4pm to 5pm on 31 January with 60,596 returns received and thousands of customers avoided any penalties at the last minute as 30,348 customers completed their returns from 11pm to 11:59pm.

HMRC guidance – deemed domicile rules and cleansing mixed funds

(AF4, FA7, LP2, RO2)

HMRC has recently published guidance in relation to the deemed domicile rules and the ability to cleanse mixed funds.

From 6 April 2017 those who are resident in the UK for 15 of the previous 20 tax years are deemed UK domiciled for the purposes of income tax, capital gains tax and inheritance tax. The effect of these deemed domicile rules is to tax long-term non-UK domiciled individuals on their worldwide income and gains as they arise, so there is no ability for them to claim the remittance basis of taxation.

HMRC has published guidance on the deemed domicile rules applicable from 6 April 2107 which can be found here.

In order to help long-term residents move from the remittance basis to worldwide taxation, two provisions were introduced by Finance Act 2017 - namely the ability to rebase certain foreign assets to the 5 April 2017 value and the ability for all remittance basis users to cleanse mixed funds in the two year period to 5 April 2019.

Broadly, a mixed fund is a fund of money which contains more than one type of income or capital (including ‘foreign chargeable gains’) and/or income or capital from more than one tax year.

However, it is important to note that this opportunity only extends to money. Therefore, if an individual has purchased an asset with mixed funds, the asset would need to be sold and the proceeds credited to an appropriate account(s).

The ‘cleansing’ of mixed funds enables a bank account containing untaxed unremitted income, capital gains and clean non-taxable capital to be segregated through moving the constituent parts to separate accounts. It will then be possible to remit funds from the new accounts to the UK in the most favorable manner.

In practice these rules are extremely complicated and come with a number of conditions. Broadly, the individual has to be non-UK domiciled, be able to identify the source of their mixed funds and have been a remittance basis user under the terms of the legislation (s809B, s809D, S809E of the Income Tax Act 2007) prior to 6 April 2017. In addition, for transfers made before 6 April 2008 these rules appear to have an added layer of complexity. In any event given the complex area of taxation individuals falling into this category are advised to seek professional advice from a specialist in this area prior to taking any action.

Note it is not possible to 'cleanse' mixed funds if the client was born in the UK and thus has a UK domicile of origin.

HMRC has also recently published some guidance in relation to the rules on ‘cleansing’ mixed funds which can be found here.

Scotland tweaks its income tax revamp

(AF1, AF2, JO3, RO3)

The Scottish government announced a radical change to the structure of income tax in its Budget on 14 December 2017.  At the time we noted that “The Scottish National Party does not have a majority in the Scottish government, so the proposals could change. This happened last year, when the Greens forced a freezing of the higher rate threshold”. And, to no great surprise, that is what has happened again this time around.

Instead of increasing the 2018/19 higher rate threshold in line with inflation, the Scottish government has now announced a 1% increase. The threshold will thus be £43,430 instead of the £44,273 previously proposed and the £46,350 applicable in the rest of the UK (and to the dividend and savings income of Scots).

The 2018/19 income tax system for Scotland now has these tax bands, which will receive enough votes to pass:

Taxable Income £

Band Name

Tax Rate %













Over 150,000*



*          Those with income of more than £100,000 will see their personal allowance reduced by £1 for every £2 of income earned over £100,000

The £843 shrinkage in the intermediate band adds at most another £168.60 to tax bills and raises an extra £56m revenue. It also expands to £2,920 (£43,430 - £46,350) the band in which a Scottish taxpayer faces both higher rate tax (41%) and full NICs (12% for employees), a maximum total marginal rate of 53%.

This is starting to feel a little like boiling a frog. At what point do high earners in Scotland decide to leave for pastures less taxing? Someone with earnings at the higher rate threshold in England (£46,350) will pay £787.50 less in tax than their Scottish counterpart.

The FCA consults on giving more small businesses access to the Ombudsman

(AF2, JO3)

Following a review of the protections available, the Financial Conduct Authority (FCA) has launched a consultation on plans to give more small and medium-sized enterprises (SMEs) access to the Financial Ombudsman Service (the Ombudsman).

At present only individual consumers and around 5.5 million micro-enterprises (the smallest type of business) can access the Ombudsman if they have a dispute with a financial services firm. Businesses that cannot access the Ombudsman would need to take the firm to Court. However, the FCA believes that many smaller businesses within this group struggle to do so in practice.

Under the changes proposed by the FCA, approximately 160,000 additional SMEs, charities and trusts would be able to refer complaints to the Financial Ombudsman Service. This would be done by changing the eligibility criteria to access the Ombudsman, so businesses with fewer than 50 employees, annual turnover below £6.5 million and an annual balance sheet (i.e. gross assets) below £5 million would become eligible.

As long as a complainant is eligible, the Ombudsman can consider complaints about any regulated activity; it can also consider complaints about some unregulated activities, such as lending to companies or the activities of business turnaround units.

The FCA also proposes to extend eligibility to personal guarantors of corporate loans, provided the borrowing business also meets the eligibility criteria.

This consultation paper will be of interest to all:

  • providers of regulated and unregulated financial services, including advisers to SMEs, credit providers and intermediaries dealing with SMEs
  • consumers who are self-employed, own or manage SMEs, provide guarantees for SME loans, or contribute to a family business
  • those who provide business support to SMEs and to organisations that represent businesses and self-employed individuals

The FCA is asking for responses to the consultation by 22 April 2018 and intends to publish a Policy Statement making final rules in Summer 2018.

The latest HMRC trust statistics

(AF1, JO2, RO3)

HMRC recently published its Trusts Statistics January 2018. It has been reported that the number of UK family trusts and estates which are required to complete a full self-assessment return has fallen from 164,500 in 2014/15 to 158,500 in 2015/16. 

HMRC states that the decrease in the number of trusts and estates covered by these statistics may be a result of gradual changes in behaviour following an increase in the trust rate in 2004 which could have made trusts less attractive.

Currently, the rate of tax payable on the non-dividend income of discretionary trusts is 45% (above the £1,000 standard rate band).  Dividends received by the trustees of discretionary trusts do not qualify for the current £5,000 dividend allowance (which will decrease to £2,000 in 2018/19) and are taxed at 38.1% (above the £1,000 standard rate band).  Capital gains on investment gains are taxed at 20% beyond the trust’s annual exemption (normally half that for individuals).

Interestingly, even with increased income tax rate(s), the total income reported by trusts and estates increased over the year whereas capital gains tax liabilities decreased. But it’s not all about tax, because trustees have other reporting obligations which need to be satisfied and, of course, in some cases day-to-day administration which needs to be carried out can be onerous.

For this reason, many trustees favour life assurance-based investment bonds (UK and offshore) as they are non-income and non-capital gains producing assets.  This means that the trust administration is simplified as it keeps them out of assessment until a chargeable event gain arises – and, in many cases, segment/cluster assignment is chosen as a means of passing the income tax liability on to a beneficiary. Note, however, that the assignment could generate an IHT charge where the trust is discretionary or flexible in nature.

The Contract (Third Party Rights) (Scotland) Act 2017

The Contract (Third Party Rights) (Scotland) Act 2017 ("the ACT") will come into force on 26 February 2018.

The Act implements the recommendations of the Scottish Law Commission to replace the old case law on the subject with a new statutory set of rules.

The new Scottish regime is similar to, but differs in certain important respects from its English equivalent, namely the provisions of the Contracts (Rights of Third Parties) Act 1999. 

Under the new provisions in Scotland it will be easier for businesses to make contracts on a group wide basis, simplifying contracts and reducing uncertainty. For example, one company will be able to enter into a contract that will benefit other companies within its group.

In relation to financial services, and particularly insurance, it will be possible to make contracts for the benefit of third parties.  For example, a travel insurance policy can be taken out by a parent for the whole family.  Under the Act, beneficiaries should be able to make a claim even if they are not the contracting party.

In relation to life assurance contracts and, in particular, to certain employee benefit schemes, the ability to make contracts for third parties should be attractive in some circumstances.  For example, employer-funded health insurance can be done on the basis that an employee himself can make a claim rather than relying on the employer making a claim. 

There are, of course, other possibilities including, for example, utilising methods favoured in certain European countries of writing life assurance policies for the benefit of family members or other named individuals.  In the UK, typically, life policies are written subject to trust, which brings with it the complex and misunderstood law of trusts into play.  If, instead of using a trust, the intended beneficiary can be given a contractual right as a third party under the policy, the objective of a speedy claim payment to the intended recipient could be achieved without a trust. 

Although the English Contracts (Rights of Third Parties) Act mentioned above has been in force since 1999, no life office, to our knowledge, has yet ventured into writing insurance contracts for the benefit of third parties. Indeed, it is typical in any insurance contract under English law for this particular Act to be excluded.  It remains to be seen whether companies and practitioners in Scotland will take up the challenge of exploring a new way of writing insurance contracts under the new Scottish legislation.

Fee refunds and powers of attorney

(AF1, JO2, RO3)

The Ministry of Justice is offering partial refunds to those who registered a lasting power of attorney or an enduring power of attorney between 1 April 2013 and 31 March 2017.

Last year, the Office of the Public Guardian cut fees for registering a lasting power of attorney or an enduring power of attorney from £110 to £82 on 1 April 2017. The reason for the reduction was that the increasing volume of applications meant the registration fee income the Office received exceeded the cost of the service, which is meant to be on a not-for-profit basis.

The Ministry of Justice has now taken a further step and is offering to make partial refunds of fees paid between 1 April 2013 and 31 March 2017. These only apply if the power of attorney (enduring or lasting) was made in England or Wales and the claim must be made by either the donor (the person who made the power of attorney) or the attorney. The level of refund (including an alleged 0.5% interest) is based on when the fee (£110, or £55 for the reduced fee) was paid:

When the fee was paid

Refund for each power of attorney*

April 2013 to September 2013


October 2013 to March 2014


April 2014 to March 2015


April 2015 to March 2016


April 2016 to March 2017


* The refund is halved if a reduced fee was paid.

Claims can be made online or by phone (0300 456 0300 choose Option 6). Unfortunately, if the donor is dead, a claim can only be made by phone. 

Reports suggest that over one million people may be able to make a claim – another small hole for Mr Hammond to fill.

Long-term care and cash gifts

(AF1, RO3)

There has been an interesting Ombudsman decision recently on whether gifts to family made by someone in care constitute deliberate deprivation of capital.

When individuals give away assets when there is an expectation of them going into care or while they are in care, the gifts may be considered as a deliberate deprivation of assets. In such a case the local authority will treat the assets given away as notional capital for the purposes of assessment. However, the deprivation of capital must be deliberate in that it is carried out with the intention of putting assets beyond the reach of the local authority.

In the case in question, the Local Government and Social Care Ombudsman has criticised a local authority that refused to pay for an elderly woman's residential care fees after it learned that she had made regular cash gifts to her family after being admitted to the care home.

The woman, referred to as Mrs Y, suffered a stroke in 2007 and, aged 80, had to go into residential care. At the time, she had assets of about £250k, including her home. As a result she was not eligible for local authority financial assistance under the Charging for Residential Accommodation Guide (CRAG) rules. Mrs Y’s daughter sold her mother’s house, and used the proceeds to pay her care home fees.

By January 2015 the money had nearly all been used up, and Mrs Y's assets had fallen to the £23,250 threshold for local authority assistance in England. At this time, her daughter applied to North Yorkshire County Council (the “Council”) for financial help and, pending completion of a full financial assessment, was granted it.

From January 2015, the Council began paying the care home fees including a special extra rate charged by the home on top of the standard local authority rate. However, when the Council came to do the financial assessment, it had been revealed by Mrs Y's daughter that she, and other family members, had been receiving annual cash gifts from her mother since she had been admitted into the care home until 2014, at which point her money had run out. The daughter said that the gifts had been recommended by an independent financial adviser. They amounted to nearly £75,000 in total.

The Council took the view that this was deliberate deprivation of capital under the CRAG rules, which state that gifts to family can be treated as deprivation of capital if they are made with the intention of reducing the amount the person is charged for their care. As a result the Council immediately stopped paying Mrs Y's care home fees and demanded repayment of the nearly £7,000 it had already paid. While Mrs Y's family paid the money back they complained to the Ombudsman about the Council's behaviour.

The Ombudsman decided that Council took its actions without ever completing a full financial assessment and simply assumed that the gifts amounted to deliberate deprivation of capital. In addition, the Council’s calculations on the amount of deprived capital were not supported by any evidence. The Council had not properly taken into account that Mrs Y had already established a pattern of gifting before she went into care and there was no evidence of any haste to dispose of her assets. Even though the amount of the gifts increased after she went into care, the Council did not provide any other evidence to show why it had decided the gifts were made with the intention of avoiding care costs. Mrs Y had paid the full amount of her care for nine years, and more than 70 per cent of her money had been spent on care home fees.

The Ombudsman ordered the Council to apologise, reassess Mrs Y's situation properly, and repay her any fees to which she is entitled.

Mrs Y is still in the same care home, and pays all her monthly income towards the fees, but cannot cover the full cost. The care home has said that it will take 'further action' if the debt is not paid.

The outcome of this case is interesting to say the least and goes to show that each case will be assessed based on the specific facts. In this particular case, the fact that Mrs Y had established a pattern of gifting and such gifts - while increased when she went into care – had started prior to her going into care went in her favour.


An interesting start to the year…

(AF4, FA7, LP2, RO2)

We have remarked earlier in looking at UK equity market performance during 2017 that “The Footsie closed 2017 at an all-time high of 7687.77, having not fallen below 7,100 all year. Whether 2018 can be as quiet is hard to tell: the absence of volatility is an increasing concern for some market watchers.” As if on cue, January proved to be a more volatile month, with the US markets taking the lead in defying and then rediscovering gravity.

Although other developed markets appear to have done better than the UK, this is largely illusory, as pound has been on a roll in January, especially against the dollar. Thus the 5.62% rise in the S&P 500 falls to a mere 0.5% when converted into sterling. The strongest markets have once again been the emerging markets.

What has prompted the change in the developed equity markets is open to debate, but one factor that cannot be ignored is the rise in bond yields. While negative bond yields can still be found at the short end – witness the 2-year German Bund – they are disappearing. German 5-year Bund yields have now moved into positive territory for the first time since the end of 2015.

The rise in US yields has spooked some investors, with some big names, including the former PIMCO ‘bond king’, Bill Gross, calling the end of the bond bull market. The 10-year US Treasury bond is now trading on a yield last seen in April 2014. Janet Yellen’s parting shots as chief of the Federal Reserve increased expectations that the Fed would add another 25 bips to interest rates soon, staying on schedule for three rate rises in 2018. On this side of the Atlantic, the latest remarks from Mark Carney have raised the possibility that even the UK could experience two rate rises in 2018, although the consensus remains for a solitary increase.

The return of volatility is long overdue, but rising bond yields need to be watched. Part of the high valuation equities enjoy is down to low discount rates.

The growth in dividend payments was strong in 2017, but 2018 will see a slowdown

(AF4, FA7, LP2, RO2)

UK dividend growth once again benefited from the post-Brexit weakening of the pound in 2017, although the outlook for 2018 is now reflecting sterling’s recent recovery.

Link Asset Services (formerly Capita) has published its latest quarterly dividend monitor, showing strong growth for dividends in 2017. The figures confirm the picture contained in earlier data, highlighting that sterling’s post-Referendum decline until around the middle of 2017 was good for UK investors:

  • In 2017, total dividends payouts were 10.5% higher (£8.9bn) than in 2016 at £94.4bn.
  • However, the fourth quarter of 2017 saw UK dividends rise by just 1.1% year-on-year to £17.0bn. Nevertheless, this was a record payout for the final quarter.
  • Special dividends accounted for £6.7bn of payouts in 2017, of which nearly half (£3.2bn) was attributable to National Grid.
  • Underlying dividend growth (excluding special dividends) was 10.4%, the fastest underlying rate of growth since 2012.
  • The fall in the value of the pound boosted underlying dividend growth but, unlike 2016, was not the dominant factor. Link Asset Services estimate that on a constant-currency basis underlying dividend growth was 7.9%.
  • The financial sector accounted for the largest share of dividend payouts, as it has since 2012, although the sector’s dividend growth was a modest 4%.
  • A major boost came from mining companies, with an increase of 162%. FTSE 100 constituents Glencore, Anglo American and EVRAZ all restarted dividend payments, while Rio Tinto and BHP both increased their payouts sharply.
  • 13 out of 19 sectors increased payouts in 2017, while the remainder saw a fall.
  • Payouts from the top 100 companies rose 10.0% year-on-year on an underlying basis, accounting for 86.3% of total dividend payments.
  • The more UK-focused Mid 250 registered a 14.6% underlying dividend increase, but accounted for only 11.5% of total payouts.
  • The concentration of dividend payouts in a handful of companies remains a serious issue. The top five payers (Shell, HSBC, BP, National Grid (thanks to that special dividend) and GlaxoSmithKline) accounted for 36% of total payments. The next 10 companies accounted for 24%, meaning that just 15 companies were responsible for 60% of all UK dividends in 2017.
  • Link Asset Services expects 2018 to herald much less buoyant dividend growth, as indicated by the low Q4 2017 figure. For 2018 it estimates dividends will rise £2.7bn to £90.4bn on an underlying basis, an increase of 3.1%. Without an adjustment for the strengthening of the pound, that growth estimate would have been 5.0%. Special dividends, which are hard to predict, are forecast to fall by nearly 20%.

The UK’s top three dividend payers all declare their dividends in dollars. The leading dividend payer, Royal Dutch Shell, declares quarterly dividends (as do the other two) and has been paying 47c a share since June 2014. In March 2017 its dividend payment was worth 38.64p a share to a sterling-based shareholder. From that peak it dropped so that by December 2017 the same 47c dividend had a sterling value of 35.02p. The next dividend payment, due in March 2018, will be worth about 33.3p, based on current exchange rates – a decline of nearly 14% over the year and, coincidentally, much the same as the payment made in June 2016, the month of the Brexit vote.

The December inflation numbers

(AF4, FA7, LP2, RO2)

The CPI for December showed an annual rate of 3.0%, down 0.1% on the previous month, and the first drop since June. Across the month prices rose by 0.4% against 0.5% between November 2016 and December 2016. The market consensus had been for a 3.0% annual rate, the same as in September and October. The disappearing 0.1% from November’s measure does not spare the Bank of England Governor an exchange of letters with the Chancellor. These will appear in February, along with the Bank’s Quarterly Inflation Report. The CPI/RPI gap widened by 0.3% to 1.1%, with the RPI annual rate rising from 3.9% to 4.1% on the back of mortgage rate increases following the Bank’s November 0.25% addition to its base rate. Over the month, the RPI was up 0.8%.

The ONS’s favoured CPIH index was also down 0.1% to 2.7%. The ONS notes the following significant factors across the month:

Transport:  Overall this category supplied the largest downward contribution, particularly air fares and, to a lesser extent, coach and rail fares. As is usually the case in December, air fares rose sharply, but because air fares account for a smaller proportion of the basket of goods and services in 2017, the effect was smaller than in 2016. These downward contributions were partially offset by prices for motor fuel, which increased between November and December 2017, having fallen a year ago.

Recreational and culture: There was a smaller downward effect from this category with overall prices falling between November and December 2017 having been unchanged in the same period a year ago. This fall follows three successive months of relatively large increases in prices when compared with previous years. The largest effects came from prices for games and toys, which fell between November and December 2017 by more than they did a year ago, along with audio-visual products, for which prices fell between November and December 2017, having risen in the same period last year.

Alcoholic beverages and tobacco: The move to an Autumn Budget meant tobacco duty increases coming through between November and December 2017 where there were none in 2016 (alcoholic duties were frozen). Over the month this category saw price rises of 0.5% against a fall of 0.5% a year ago.

The disparity between the CPIH at 2.7% and CPI at 3.0% is largely down to the “H”. Owner-occupiers’ housing costs (the “H”) are over a sixth of the CPIH and have seen a falling level of annual inflation in recent months, with a drop from 1.5% to 1.3% between November and December.

In four of the twelve broad CPI categories, annual inflation increased, while seven categories posted a decline. Only one category – alcoholic drinks and tobacco – now has an annual inflation rate of above 4%, mainly due to the Budget timing which has lifted the annual figure to 5.6%. Food and non-alcoholic beverages inflation is running at 3.9%.

Core CPI inflation (CPI excluding energy, food, alcohol and tobacco) fell 0.2% to 2.5%. Goods inflation rose 0.1% to 3.4%, while services inflation dropped 0.3% to 2.5%.

Producer price inflation (PPI) numbers were mixed, reflecting timing factors and movements in commodity prices and currency rates. The input PPI figure was 2.2% lower than November at 4.5%. Output price (aka factory gate price) inflation increased, by 0.2% to 3.3%.

The Old Lady has a busy day

(AF4, FA7, LP2, RO2)

Thursday 8 February was a busy day for the Bank of England, resulting in some new guidance on interest rates.

The Bank of England revamped its website recently, making it slightly harder to see what is going on – you now need to scroll down the page, nearly half of which on opening is a picture of the Bank and Mark Carney. It is therefore not as easy to spot all that happened on the 8th:

  • An exchange of letters. The Chancellor and the Governor have written their formal letters to each other, in response to the November 2017 CPI increase to 3.1% - more than 1% above the central target. The December figure fell back to 3.0%, as Mr Carney notes. He also says the inflation overshoot is “…almost entirely due to the effects of higher import prices that resulted from the depreciation of sterling following the vote to leave the European Union”. Looking ahead, the Governor indicates that the Bank will place greater emphasis on controlling inflation than supporting jobs and activity, given that it reckons there is now little or no slack in the UK economy.
  • The quarterly inflation report. This 101st edition of the Quarterly Inflation Report (QIR) proved to be more hawkish than had been expected, although it ties in with the Governor’s comments in the letter to the Chancellor. The Bank is now emphasising that the impact of sterling’s fall will “…slowly dissipate over the forecast [3 year period], while domestic inflationary pressures are expected to rise.” The Bank has consistently said that it cannot counter import (external) price inflation, but the corollary is that it can – and will – put the squeeze on domestic inflation arising from a tightening UK labour market.

The result is that, as Mr Carney said in his opening remarks at the QIR presentation, “….monetary policy would need to be tightened somewhat earlier and by a somewhat greater extent over the forecast period than it anticipated at the time of the November Report, in order to return inflation sustainably to the target”. That is Bankspeak for the possibility of a rate rise in May, when the next QIR is issued.

  • The interest rate decision The Monetary Policy Committee’s (MPC) regular meeting on interest rates was somewhat overshadowed by the QIR. The MPC left base rate at 0.5% and the QE level fixed at £435bn. Interestingly, the vote in favour of no-change was unanimous, despite some predictions that two MPC members would call for a rate rise. The implication is that five members will need to change their minds by 10 May, when the next QIR is published. There is one intervening meeting, with the minutes due on 22 March.

The QIR and MPC minutes both repeat the Bank’s mantra that “any future increases in Bank Rate are expected to be at a gradual pace and to a limited extent”. However, it seems that now the expectation is of an approach which is a little less gradual and marginally more extensive.

That was the week that was

(AF4, FA7, LP2, RO2)

Last week was a tumultuous one in the world’s equity markets.

We remarked in taking a look back at the performance of world markets in January that “The return of volatility is long overdue, but rising bond yields need to be watched. Part of the high valuation equities enjoy is down to low discount rates.” Viewed from the end of first full week of February, January’s volatility now looks a mere teaser for the real event.  Here is what has happened in the markets last week and, to give a little perspective, since the start of 2018:






YTD Change

Week Change

FTSE 100






FTSE 250






FTSE 350 Higher Yield






FTSE 350 Lower Yield






FTSE All-Share






S&P 500






Euro Stoxx 50 (€)






Nikkei 225






MSCI Em Markets (£)






2 yr UK Gilt yield






10 yr UK Gilt yield






2 yr US T-bond yield






10 yr US T-bond yield






2 yr German Bund Yield






10 yr German Bund Yield
























UK Bank base rate






US Fed funds rate






ECB base rate






Gold ($)






Iron Ore ($)






Copper ($)






Brent Crude ($)






A few comments are worth making:

  • The initial fall in the USA occurred during the Friday before last (2 February), so is not in these figures which are based on closing levels. Similarly, the US market jumped about 1.5% last Friday (9 February), which largely missed the European markets as the USA was still deeply in negative territory when Europe closed for the weekend.
  • For all the focus on the USA, the S&P 500 is only down 2% since the start of the year and is now back to the level it first reached at the end of November 2017. It may seem distant today, but the US market had a very strong January, with the S&P 500 rising over 5.6%.
  • The focus on the Dow Jones Index has probably added to the sense of drama, as 1,000 point falls make good headlines. However, in simple percentage terms the Dow’s movements have echoed those of the S&P 500, which is the professional’s choice of US index.
  • As the table shows, 10 year government bond yields have risen in the USA, UK and Germany. The USA rise since the start of the year is 0.45%, a significant jump which has seen the benchmark T-bond drop nearly 4% in value.
  • While the FTSE 100 has fallen more than the S&P 500 this year, it has not yet reached the 10% correction level, which based on a peak close of 7,778.64 (on 12 January) needs the index to reach 7,000.
  • Given that the Dow’s initial (beastly) 666 point drop on Friday 2 February was blamed on fears of wage-driven inflation, it is worth noting that the traditional safe haven of gold fell in value last week and the oil price dropped over 8%.

Contrarians can be forgiven for having a wry smile at the IA’s press release, issued on 8 February, which proudly noted “2017 was a record breaking year with net sales into UK authorised funds reaching £63 billion”.

December 2018 IA statistics

(AF4, FA7, LP2, RO2)

The Investment Association (IA) statistics for the final month of 2017 show net retail sales for the year of £46.883bn, nearly £40bn up on 2016’s referendum-depressed figure. Buoyant markets added to the strong inflow to raise funds under management by 14.7%.

As stock market volatility hit the front pages, the IA published its monthly statistics for December 2017 and thus provided data for the calendar year. More than ever, the delay in publication meant that the information seemed history rather than news.

December marked the end of a year that had seen positive net retail inflows each month, a far cry from the difficulties of 2016.  The month’s highlights include:

  • Net retail sales for the month were £3,732m, down £636m on November. While gross retail sales were down £3,415m on November’s figure, at £20.676bn, redemptions fell less significantly – from £19.723bn to £16.944bn – a reminder once again of the vagaries of net sales numbers.

For the year as a whole, net retail sales were £46.883bn, a largely theoretical 577% increase on 2016 and the highest level in the last ten years.

  • Net institutional inflow for December was £2,130m, against an outflow of £432m in November (the first for the year). For the year as a whole, net institutional sales were £16.039bn, 84% up on 2016 and the highest since 2010.
  • The net inflows combined with positive market movements across the month saw total funds under management rise 1.9% to £1,217.4bn, yet another new record. Across the year, the increase was 14.7%, again mostly due to market movements.
  • Mixed Asset was the best-selling asset class in December, with net retail sales of £1,719m. Fixed income came second, at £979m. Equity funds recorded a modest inflow of £426m, barely ahead of the £414m recorded for the IA’s “Other” category, which includes the Targeted Absolute Return, Volatility Managed, Protected and Unclassified sectors.

Across 2017 there was a net retail inflow of £14,265m to fixed interest funds, and £13,521m to Mixed Asset funds. Equity funds came third in the pecking order, with a net inflow of £10,457m.

  • Property saw a net outflow over the year of £150m, for which August can take the entire blame (with net outflow spiking at £524m).
  • Global (equity) was the most popular sector in terms of monthly net retail sales (£382m). £ Strategic Bond was second (£333m), having spent the previous four months as the top net seller. Europe (ex UK) was third, Mixed Investment 20-60% Shares fourth and £ Corporate Bond fifth.

Over the whole of 2017, the net retail sales sector winner was £ Strategic Bond.

  • At the opposite end of the popularity stakes, the Unclassified sector recorded the worst net retail sales in December, with an outflow of £145m, closely followed by North America at a £139m outflow. The worst performer in the year was UK All Companies, its fourth successive year at the bottom and the seventh out of the last ten. Even so, the sector still accounts for 15% of IA funds under management.  
  • ISA net flows were again negative at -£36m: only six months of 2017 saw net inflows.
  • The total value of tracker funds rose 2.4% over the month to £164.9bn, meaning that they now account for 13.5% of the industry total. The corresponding figure for December 2016 was 13.0%.  Tracker fund net retail sales amounted to £103m, a fall of £68m from November. Net retail sales for tracker funds were £9,079m in calendar 2017, against £4,869m in 2016.

It will be interesting to see what the next few months IA figures show. Figures from EPFR says that there was an outflow of $30.6bn from global equity funds over five days.

The January inflation numbers

(AF4, FA7, LP2, RO2)

The CPI for January showed an annual rate of 3.0%, unchanged from the previous month. Across the month prices fell by 0.5%, the same as between December 2016 and January 2017. The market consensus had been for a 2.9% annual rate, making it the second month in a row in which the forecasters had undershot. The CPI/RPI gap narrowed by 0.1% to 1.0%, with the RPI annual rate falling from 4.1% to 4.0%. Over the month, the RPI was down 0.8%.

The ONS’s favoured CPIH index was also unchanged at 2.7%. The ONS notes the following significant factors across the month:

Transport:  Overall this category supplied the largest downward contribution, particularly petrol and diesel prices, which rose less than they did a year ago.

Food and non-alcoholic drinks: This category provided a smaller downward effect, with prices falling slightly between December 2017 and January 2018, having risen in the same period a year ago. This stemmed from declining prices for a wide range of types of food and drink, with the largest contribution coming from a fall in meat prices. The ONS notes that food prices tend to fall in January, meaning that the change in January 2018 is more in line with historic trends. The ONS says the rise in January 2017 was unusual and reflected an increasing trend in food prices that began in late 2016, probably related to the weakening of sterling.

Food and non-alcoholic beverage inflation is now running at 3.7%, whereas a year ago it was nil.

Recreational and culture: There was an offsetting upward effect from this category with overall prices falling less rapidly than a year ago. The main culprit was admission prices for attractions, such as zoos and gardens, with prices falling by less than they did last year.

The disparity between the CPIH at 2.7% and CPI at 3.0% remains largely down to the “H”. Owner-occupiers’ housing costs (the “H”) are over a sixth of the CPIH and have seen a falling level of annual inflation in recent months, with a drop from 1.3% to 1.2% between December 2017 and January 2018. OOH does not directly measure mortgage costs.

In three of the twelve broad CPI categories, annual inflation increased, while five categories posted a decline. Only one category – alcoholic drinks and tobacco –  now has an annual inflation rate of above 4%, mainly due to the Budget timing which has lifted the annual figure to 5.6% in December, where it has remained for January.

Core CPI inflation (CPI excluding energy, food, alcohol and tobacco) was rose 0.2% to 2.7%. Goods inflation fell 0.2% to 3.2%, while services inflation rose 0.3% to 2.8%.

Producer price inflation (PPI) numbers both fell. The input PPI inflation figure was 0.7% below December’s figure at 4.7%, the lowest since July 2016. Output price (aka factory gate price) inflation decreased by 0.5% to 2.8%.

January marks the third consecutive month in which the CPI number has started with a “3”. The recent Bank of England Quarterly Bulletin contained hints that interest rates might rise faster than previously expected, a suggestion reinforced by comments from the Governor, Mark Carney. The Bank’s concern that inflation was starting to be driven by internal pressures rather than external ones (import costs) appears to be supported by the differing movements of services inflation (mainly domestic) and goods inflation (more import-oriented).

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PPI briefing note 105: the impact on future generations

(AF3, FA2, JO5, RO4, RO8)

The Pensions Policy Unit have published Briefing Note 105 which looks at the impact of AE on younger generations.

In summary their findings established:

  • Millennials make up around 40% of the target group for automatic enrolment.
  • Automatic enrolment has almost doubled the participation of 22 to 29 year olds in pension schemes.
  • A 22 year old median earning man in 2017 may be able to achieve a pension fund of £108k under AE minimum contributions.
  • Removing the triple lock on State Pensions could reduce the retirement income of a 22 year old low earner by 5%.
  • A median earning 18 year old automatically enrolled under the AE Review recommendations, at age 18, with the lower earnings limit removed, could achieve a fund of £146k at their SPa, 32% higher than under the current AE policy.

The briefing note makes interesting reading. The impact of changes made to the AE structure will have a significant positive impact on the funds that can be achieved for future generations. Notably in the 2017 Automatic Enrolment Review the recommendations made were:

  • Removing the lower limit on eligible salary – so contributions based on first £1 of salary
  • Reducing the age limit to 18
  • The ability to continue contributing post SPA

The AE space has made significant changes to the pension savings landscape with 9.3m eligible workers having been automatically enrolled.  Now the process is business as usual for employers, it’s inevitable that the structure will be amended to maximise its impact. There is no shortage of research showing that low earners are being disadvantaged by the minimum contributions not being based on first £1 of income – rather from  £5876 and then the question of tax relief for those not in a relief at source scheme will need addressing.

AE numbers now exceeds £9.3m

(AF3, FA2, JO5, RO4, RO8)

The latest (Feb 2018) Compliance bulletin published by the Pensions Regulator confirms the number of employers meeting their workplace pension duties has hit one million and there are now 9.3m people saving into a pension.

TPR’s Director of Automatic Enrolment, Darren Ryder, said:  “I am delighted we have reached this important landmark, which shows how far we have come since the start of automatic enrolment.

“By successfully meeting their responsibilities, employers have helped reverse the downward trend in workplace saving so that putting earnings into a pension has now become the norm.

“The continued support of the pensions industry, including pension and payroll providers and business advisers has been crucial to the success of automatic enrolment.  The industry has helped us ensure employers have the tools, information and services they need to comply with the law.  We are now focused on the challenges ahead so that employers continue to understand what they need to do so that staff receive the pensions they are entitled to.”

Pension schemes newsletter 95 published

(AF3, FA2, JO5, RO4, RO8)

HMRC has recently published Newsletter 95 which covers:

  • Pension’s flexibility statistics
  • Scottish Relief at source
  • New pensions online service
  • Information powers & Schedule 36 of Finance Act 2008
  • Reporting non-taxable death benefits
  • Postal address changes

Pensions flexibility statistics:

From 1 October 2017 to 31 December 2017 HMRC processed:

  • P55 = 5,310 forms
  • P53Z = 3,597 form
  • P50Z = 1,024 forms

Total value repaid: £20,562,071.

Scottish Income Tax and Relief

Notification of residency status report

HMRC explained in the relief at source for Scottish Income Tax newsletter that they would send notification of residency status reports to scheme administrators of relief at source pension schemes. This information will allows you to apply the correct rate of relief to your scheme members in the tax year 2018 to 2019.

HMRC started to release the notification of residency status reports on 29 January 2018. You can now log into the Secure Data Exchange Service (SDES) to access your report as soon as it’s available.

Annual return of individual information for 2017 to 2018 onwards

As explained in pension schemes newsletter 94, when submitting your annual return of individual information for 2017 to 2018 onwards, you must not do this on paper.

Between April 2018 and April 2019 you can still submit your return by email, USB, CD or DVD. If you’re sending your information by post, make sure the media is securely packaged, password protected and sent by tracked post. You can find more information in pension administrators: relief at source annual information returns.

Over the next few months HMRC will be working with scheme administrators to improve the format of the data submitted on the 2017 to 2018 annual return of individual information. This means they can match more members when HMRC send the next notification of residency status report in January 2019.

Scottish Income Tax newsletter

A further newsletter on relief at source for Scottish Income Tax is planned in mid-February 2018.

Scottish Budget

Her Majesty’s Government and HMRC are working closely with the Scottish Government and pension providers to explain how providing tax relief will operate for Scottish pension savers. This will depend on the Scottish Rate Resolution being agreed later in February by the Scottish Parliament.

Information Powers

HMRC have received questions about their information powers for pension schemes. Paragraphs 34B and C of Schedule 36 Finance Act 2008 allow HMRC to issue third parties with an information notice about pension matters in specific circumstances. Approval from the tribunal or taxpayer isn’t needed.

Reporting of non-taxable death benefits

HMRC are working to resolve the problem of P6 tax coding notices being issued in error for death benefit payments that are entirely non-taxable. You should continue to follow the guidance in pension schemes newsletter 78 until further notice.

Guidance from Newsletter 78:

  1. If possible, stop reporting these non-taxable death benefit payments for 2016. You should continue to keep appropriate records to show that the payment was entitled to be made tax-free and further guidance will be issued once investigations are completed.
  2. Continue reporting and if a P6 coding notice is issued that will be applied against future non-taxable payments to the beneficiary, email: and put ‘reporting non-taxable death benefit payments’ in the subject line. Please provide a contact name and telephone number in the email and HMRC will contact you to review the coding. In circumstances where the P6 has not been applied to the customer record, there will be no need to take any further action.

Postal address reminder

Pension Schemes Services
HM Revenue and Customs

This document is believed to be accurate but is not intended as a basis of knowledge upon which advice can be given. Neither the author (personal or corporate), the CII group, local institute or Society, or any of the officers or employees of those organisations accept any responsibility for any loss occasioned to any person acting or refraining from action as a result of the data or opinions included in this material. Opinions expressed are those of the author or authors and not necessarily those of the CII group, local institutes, or Societies.