While the UK economy achieved a useful return to growth in 2013, a trend which will be also reflected in the GDP figure for the first quarter of 2014 (the first estimate of which will be released in a few weeks’ time), much remains to be done both in terms of dealing with imbalances across the economy (for example raising export levels to better match imports) while Government finances have a long way to go before they can be said to be healthy.

Putting this into context, the Government deficit has roughly halved from 11% of national income in 2009/10 but the current 5.5% remains poor by international standards and austerity will need to continue, irrespective of the general election result in a year’s time, for, in our view, another five years or so.  In the meantime, the level of Government borrowing continues to fall but it may be that spare capacity in the economy (broadly, the ability to produce more without taking on large extra costs) is more limited than previously thought and this has cut into potential for future faster growth, hence the Office for Budget Responsibility slightly reducing their projections for growth over the next few years.  Coupled with reducing levels of savings, it is clear to us that a combination of further public spending cuts and tax increases remains on the cards.

To conclude on this introductory section, some encouraging progress has been made on the broad issues affecting “UK Plc” but there remains plenty more to do if longer term stability is to be restored.

We comment briefly at the end of this newsletter on the outlook for UK investors but in the meanwhile we would like to draw your attention to the following budget specifics:


Useful steps were announced in the budget that will lead to greater ISA flexibility.  These include enabling investors to switch from Stock & Share ISAs into Cash ISAs (in the past they have only been able to switch from Cash ISAs into Stock & Share ISAs).  As from July this year, the annual allowance rises to £15,000.  From 6th April to July, the allowance rises to £11,880.

The increase in the allowance represents a clear benefit to savers, providing larger than expected potential benefit in terms of both income tax and capital gains tax savings.

VAT 20%

This remains unchanged.


The personal allowance for those born after 6th April 1948 rises from £9,440 to £10,000 in 2014/15 and is set to rise to £10,500 in the following year.  For those born prior to 6th April 1948, the personal allowance remains at £10,500, reducing to £10,000 by £1 for each £2 of income exceeding £27,000.

The basic rate band falls from £32,010 to £31,865 in this coming year and to £31,785 in 2015/16 to compensate for the increase in the personal allowance.  The higher rate remains unchanged at 40% except for those with incomes of over £150,000 where the rate of 45% applies.


There are no changes in terms of the rate of 40% with the first £325,000 being tax free.  The Annual Allowance remains at £3,000 and small gifts at £250.


The annual exemption rises from £10,900 to £11,000 in 2014/15, as previously announced.  It is set to be increased to £11,200 in 2015/16.


The maximum that can be held by an individual in premium bonds rises from £30,000 to £40,000 in August and to £50,000 in April 2015.

A new form of “pensioner bond” will be launched in January 2015 for those aged over 65, taxable in line with all other savings income.  While interest rates and individual investment limits will be confirmed at the time of this year’s Autumn Statement, the indicative suggestion is that National Savings will launch a one year bond paying 2.8% gross and a three bond paying 4% gross, with an investment limit of £10,000 per bond.  Our initial view on this is that using one’s ISA allowance should be the first priority (as ISA interest is not subject to income tax), supplemented by use of the new pensioner bond where appropriate.


Significant changes have been announced which offer those with Defined Contribution schemes potentially much greater flexibility as to how and when benefits are taken.

With effect from April 2015, pensioners will have a much wider range of options open to them, including, as at present, the annuity route while as an alternative, the current drawdown rules are being significantly relaxed and individuals will be able to make withdrawals which will be taxed at their marginal income tax rate.  Further, the ability to take the 25% tax free lump sum remains.

In the interim, those in capped drawdown will face reduced restrictions on the amount that can be withdrawn and the minimum income threshold for flexible drawdown is being dropped from £20,000 to £12,000.

Against the background of the immediate change, and that due in April 2015, investors in Defined Contribution schemes may wish to give careful consideration to the enhanced range of options available to them and we will be happy to advise accordingly.

Elsewhere within pensions, the trivial commutation lump sum has increased from £18,000 to £30,000 while the maximum that can be taken from a small pension pot as a lump sum will increase from £2,000 to £10,000.  These moves will add significant flexibility to those with smaller pension funds.  In addition, the 55% tax charge on certain lump sum death benefits is to be reviewed as the government believes that the flat rate of 55% is too high but on the other hand, the lifetime allowance will, from 6th April, be reduced from £1.5 million to £1.25 million.

In summary, the pension changes are complex and require careful attention particularly by those with large pension funds who are approaching the time that they wish to take benefits.  We will, of course, be very happy to advise in this area.


A number of measures were included in the budget aimed at increased business investment, including corporation tax changes, a doubling of the Annual Investment Allowance, and an extension of the Enhanced Capital Allowance.  The rate of tax credit for loss making Small Medium Enterprises (SME’s) has been increased and there are various changes to Seed Enterprise Investment Schemes and to Venture Capital Trusts.  Lending under the export finance scheme will be doubled to £3 billion and the interest rate will be cut by a third while apprenticeship grants to small businesses will be extended.  In the round, a number of useful benefits for business and industry have been announced.


Our aim with the commentary set out above is simply to highlight some of the more important and interesting budget changes which, particularly in respect of ISAs, pensions and some of the detailed boosts for manufacturing, are the most significant changes for many years, targeted to increase saving and encourage business.


Equity markets have drifted back in recent weeks in part reflecting political tensions surrounding the Ukraine which clearly have the potential to disrupt international relations in a way that most of us thought had been consigned to the history of the Cold War.  How this will play out over coming months remains to be seen and some investors will argue that political uncertainty, causing markets drift lower, provides a good time to be accumulating assets.

Other factors at work include company results and, with some exceptions, results announced for 2013 were reasonable if not spectacular in the UK, Europe and in North America.  Notably, many companies announced dividend increases and while not on the scale of those seen a year ago, they nonetheless generally matched, and in many cases, exceeded current inflation levels.

Markets will continue to be driven by moves to unwind economic stimulus measures put in place in the aftermath of the financial crisis seen at the end of the last decade.  It looks increasingly likely that the quantitative easing programme in the USA will continue to be reduced and may conclude towards the end of this year.  It is also possible, depending upon the strength of the US economy, that interest rates in the USA may begin to rise as early as the summer or early autumn of 2015.  We think it not unreasonable to suggest that a similar timescale may be appropriate for the UK although if recovery continues apace the Base Rate may rise rather earlier than that.  As a consequence, both Sterling and the Dollar have to an extent appreciated in foreign exchange markets which in turn helps to keep inflation lower but also makes an export led recovery harder to achieve.  The Eurozone may also be showing tentative signs of recovery but in my view, interest rates within the Eurozone are likely to lag behind the UK and the USA.

In the Far East, the Chinese economy continues to grow although the pace of that growth is moderating somewhat while in Japan, economic stimulus remains very much the order of the day in an attempt to kick start the Japanese economy.

In our view, the gradual tightening of monetary policy now unfolding in the USA should be regarded as an opportunity for, rather than a threat to, equity investors who are prepared to look beyond the immediate period of adjustment.  Increasingly, fixed interest investors will be unable to expect capital growth: rather, they will have to rely for their return just on the interest being paid.  This represents a change as compared with the last decade, when interest rates have been falling, but nonetheless for longer term investors, and those where the interest accrued without deduction of income tax (for example in ISAs and pension funds) reasonable value is still to be found.  Thus at this stage we continue to advise that our clients should underweight fixed interest within their portfolios (where income constraints allow) and focus rather more on equity and, where appropriate,  equity income funds, as we believe that it is in these areas that greater total returns can be achieved.

Finally, this Autumn the Office for National Statistics plan to introduce new global accounting standards impacting the calculation of Gross Domestic Product and other key statistics, in line with the methodology now adopted in North America and Australia.

On the positive side, it is anticipated that the result will provide a material boost to GDP and savings ratios, while on the negative side, Government debt is set to increase because certain items currently off balance sheet will be included.  Our first thoughts are that this reinforces the conclusions in the final paragraph of the Market Commentary section above.