May 2012 Newsletter | It's the economy, stupid

The following content is put forward strictly for general consideration only. Accordingly no action should be taken or refrained from based on it alone. We cannot therefore take any responsibility for any loss arising from any such action or inaction. Advice in relation to the particular circumstances of each case is essential.

It’s the economy, stupid

Late last month the long-awaited preliminary estimate for UK economic growth in the first quarter of 2012 emerged from the Office for National Statistics (ONS). According to that august body, the economy contracted by 0.2%. This follows on from a 0.3% shrinkage in the last quarter of 2011 and compares with an average market prediction for the past quarter of 0.1% growth. Cue press headlines ‘UK returns to double dip recession’ and general gloom and doom across the front pages.

Before joining the queue to sell up and emigrate, there are a few points to bear in mind:

The 0.2% fall is a first estimate, released less than four weeks after the quarter ended. The early delivery means it is based on only about 40% of the data that will eventually be available. The ONS will continue to review and revise the number as the years pass. Past experience suggests that by 2015 the ONS could conclude the correct figure was 0.0% or higher, which would mean not a second recession.
This largely technical recession is nowhere near the severity of the decline suffered by the UK in 2008/09. In the first quarter of 2009, the economy contracted by 2.5% (against a preliminary estimate of 1.7%). Between the third quarter of 2008 and third quarter of 2009, the overall contraction was 6.2%, whereas over the last 12 months the economy has basically been flat.
There are some doubts about whether the ONS has got its calculations correct. The Bank of England is notably sceptical. A few days before the ONS numbers appeared the Bank’s Monetary Policy Committee said that ‘the economy appeared likely to be expanding, albeit only modestly, in the first half of the year’.
The state of the UK stock market is not directly linked to the UK economy. On the day that the recession news broke, the FTSE 100 actually rose modestly. Many of the companies that make up the Footsie are global businesses for which the UK is just another sales territory. It is reckoned that about 70% of the profits of FTSE 100 companies originates from overseas.
The UK still has an AAA rating in the eyes of the all-important, if no longer highly regarded, credit-rating agencies. It may seem bad here, but you need only look across the Channel to see several countries with much greater economic difficulties.

The news that the UK has fallen back into recession does not mean the world – or investment in UK shares – is coming to an end.

Over 50 and not yet retired?

Last month the Supreme Court (the House of Lords, as was) ruled that a firm of solicitors was within its rights to force the retirement of a partner on reaching age 65. The case had been rumbling on for some years – the individual concerned is now over 70 – but the decision was still seen as significant. However, it was very specific to the circumstances involved and was not seen as overturning the general abolition of mandatory retirement ages which took effect last October.

Co-incidentally, on the day that the judgement was handed down, the Pensions Policy Institute (PPI) published a paper looking at the retirement provisions of people aged over 50 who had not yet reached State Pension Age (SPA – 65 for men and, currently, about 61 for women). The PPI’s main focus was on the level of income that this sector of the population would receive at SPA. In doing so it set two measures of income adequacy:

The Minimum Income Standard, which is the income required to meet a ‘minimum acceptable standard of living’. This was determined by asking focus groups of pensioners and, surprisingly, emerged as just under £11,000 pa, before housing costs, for a single pensioner and around £15,700 pa for a couple.
The Working Life Replacement Rate, which is the income an individual pensioner might need ‘to achieve a similar standard of living to the one they had in working life’. The PPI found replacement rates were typically in the range of 50%-80% of gross working life income. The difference is mainly due to lower costs, eg no commuting, and the impact of taxes and NICs. A median-earning man with income just before retirement of £26,000 pa might need a gross retirement income of around £17,400 pa to ‘recreate working life living standards’ on the PPI’s calculations.

The PPI says that around 85% of those aged between 50 and SPA in 2011 and still in work ‘might have sufficient state and private pension income’ to meet the Minimum Income Standard by their SPA, provided that they continue to work and save until that date and claim any means-tested benefits to which they are entitled’. In other words roughly five in six will manage to scrape through retirement, provided they keep their nose to the grindstone until SPA.

The more worrying statistic is the proportion that will achieve the replacement rate – probably what you would hope for in retirement. The PPI reckons that only around 40% of those aged 50+ will reach this by SPA, again assuming that they continue working and saving until that age and claim their benefit entitlements. Another 10% will reach their replacement rate if they work for a further one to five years beyond SPA. 5% will need six to ten years post-SPA employment, while the remaining 45% would need eleven or more years to reach the target.

Are you in that 45% that will still need to be working in their 70s? If you are not sure of the answer, now is the time to have a retirement planning review.

Year beginning planning

Now that the end of tax year rush is over and the unwelcome tax returns have started to drop through letterboxes, now is the time to consider tax year beginning planning. This is largely neglected in favour of the March-time frenzy, but in many respects it can make more sense. After all, if you can invest in tax-efficient way today, why wait almost another year to do so?

The changes announced in this year’s Budget have added to the importance of planning early in the tax year. The list to consider includes:

Additional rate tax The top rate of tax will fall from 50% this tax year to 45% in 2013/14. If you pay tax at 50% this year, then at the margin:
- It will generally be worth trying to defer income into next tax year. So you might want to delay bonuses or private company dividends until after 5 April 2013. You may also want to arrange deposit accounts to pay interest after that date.
- As far as tax relief is concerned, the opposite may apply. The net cost of maximising pension contributions is lower with 50% tax relief than 45%.
ISAs An ISA can start saving you tax as soon as you invest. Thus the time to make your ISA contributions to gain the greatest benefit is now, not March 2013. Remember you can always invest up to £5,640 in a cash ISA today for tax-free interest and then transfer into a stocks and shares ISA at a later date.
Child benefit tax This starts on 7 January 2013, so the tax charge in 2012/13 will be 25% of the tax year’s child benefit if your or your partner’s income is £60,000 or more. In 2013/14 in the same circumstances the loss will be 100%. There are two areas that are worth examining:
- Is it worth bringing forward income into 2012/13 to reduce the impact of the charge in 2013/14? For example, it might be worth closing deposit accounts just before the end of the tax year.
- Can the two of you now start rebalancing your income to reduce the impact of the tax? A joint income of £100,000 would mean a 100% tax charge if one of you has a share of 60% or more, but a straight 50/50 split would mean no charge.
Personal allowance The personal allowance rose to £8,105 this tax year and will jump to £9,205 in 2013/14. If you and your partner do not both fully use this allowance, you should start considering whether to transfer investments (and thus their income) between the two of you. If you are in business you might be able to employ your partner to provide them with some of the necessary income. The sooner the arrangements are in place, the more of the allowance that can be covered.