David Nicol CEO, Stephen Ford Head of Investment Management and many Brewin Dolphin analysts welcome the rolling back of the nanny state and the freedom for savers following the 2014 Budget.
David Nicol, Chief Executive said "Today’s budget has unleashed a raft of measures that will be hugely welcomed by our industry and our clients. We have long campaigned against the iniquities of the annuity market and so we are delighted to see savers freed from those restrictions and that pensions have been underpinned as a key plank of the nations’ savings.
The reforms announced will allow us to go forward with certainty and advise our clients that pensions are no longer seen as an easy target for stealth taxes. We look forward to working with the Treasury and the industry to see how the ‘right to advice’ can be delivered.
The increased ISA allowance and the new flexibility for ISAs is significant, too, for our clients and the industry – we have nearly £5 billion in ISAs out of our £28 billion FUM – and this figure will likely increase again next year. This is a welcome commitment from the Government that ISAs, too, are a core long-term savings vehicle for UK citizens and the news that peer-to-peer lending and other investments will be permitted, will enhance their attraction and their potential.
The doubling of capital allowances to £500,000 is most welcome to Brewin Dolphin, at a time when we are expanding our business and our office base."
Most welcome roll back of the nanny state and savers set free
“Like a phoenix from the flames, Osborne’s policy sees the British pension rise from its deathbed, freed from fears over stealth taxes and over complication. This is a total game changer, and will result in the almost immediate death of the annuity – for which we have long called for. It is a huge change in the flexibility of the pension system, with lower taxes and higher lump sums. We welcome the fact that the government is willing to trust people with their own finances and await clarification on how the vast amount of necessary advice will be delivered.” - Stephen Ford, Head of Investment Management at Brewin Dolphin
But how did the market react?
The Life Insurance sector is down since the budget speech today after George Osborne said that the government would remove tax restrictions on how pensioners access their pensions, thereby effectively scrapping the requirement for retirees to buy individual annuities.
This is clearly bad news for life insurers who have annuities businesses including Legal & General, Resolution, Aviva and Standard Life and Prudential. However, this is mitigated by several factors. Investors had already expected the individual annuity market to be difficult in 2014 (due to low interest rates which makes these products relatively unattractive). L&G (and others) were already redeploying capital to more attractive areas.
The rules will not destroy the annuity market as many individuals are still likely to buy annuities to provide a predictable income for their retirement, in our view. In addition, they should still be able to benefit from the legislation by picking up some of the new business created though other savings and investment products (in particular via the growing investment management and platform businesses). - Ruairidh Finlayson, Equity Analyst
“The Chancellor has removed the nanny knows best aspect of the ISA – allowing a far broader range of products, and the ability to switch from shares to cash and back again. With a massive increase in the amount that can be sheltered in an ISA wrapper, as well as the inclusion of peer to peer lending and shorter dated retail bonds, the ISA is now a far sharper tool in the tax planning toolkit.” - Stephen Ford, Head of Investment Management at Brewin Dolphin
“The taxman used to operate on the basis that taxpayers were innocent until proven guilty, but now it is the other way round. This new adverse cashflow may mean that Clients who wish to invest in government supported schemes may now think twice and beware.” – Simon Blowey, Divisional Director of Financial Planning at Brewin Dolphin
EIS and VCTs
“EIS and VCT tweak is significant - as the majority have income streams from Government backed renewable energy subsidies - which will no longer be allowed from April 6th within a VCT or EIS structure - which previously gave a 30% income tax relief to the investor.
HMRC have also fired an opening salvo against limited life structures - which offer investors maximisation of relief and an exit strategy over the underlying investment benefits”. – Simon Blowey, Divisional Director of Financial Planning at Brewin Dolphin
Impact to betting agencies
“The betting agencies reacted badly to Osborne’s budget, for good reason. The announcement that the fixed odd betting terminals (FOBT) duty would be raised from 20% to 25% shocked the market. William Hill (£180m off its market cap so far) and Ladbrokes (down 10% and falling), both pay around £90m gaming duty so this could add another £20m to their respective tax bills. All other things being equal, this will lead to large consensus downgrades, mainly for Ladbrokes which is the most exposed to FOBT revenue as a percentage of group.
There are more than 33,000 fixed-odds betting terminals in the UK according to the Gambling Commission which goes on to explain that the average weekly profit per fixed odds betting terminals in 2012 was £825, up from £760 in 2011. The gross profit from the FOBTs in 2012 was around £1.4bn.
The number of betting shops in the UK increased from 8,862 in 2009 to 9,031 in 2013. The big three operators had plans to open hundreds of new shops although many independent operators have closed. This tax could change the profitability of many shops on a case by case basis and therefore could lead to further closures. Government has also not ruled out further changes so companies will have to make amendments. Add to this the forthcoming introduction of a Point of Consumption tax in December and the betting agencies are having a tough time!” - Ed Salvesen, Deputy Head of Equity Research at Brewin Dolphin
Frozen carbon floor
In-line with our expectations the Chancellor announced the carbon price floor will be frozen at the 2015/16 level of £18.08/t until the end of decade.
This is clearly good news for energy consumers and energy intensive industries as it will mean electricity prices will be lower than would have otherwise been the case until the end of the decade. It also improves the UK competitiveness compared to the rest of Europe, as the carbon floor tax simply increased the cost of carbon emissions in the UK over and above the EU carbon tax.
The electricity generation sector will be one of the sectors most directly affected by the change in policy. Higher carbon producing generators will see their costs reduce. Counter to this, renewable generators will be negatively impacted by this announcement.
As one of the largest coal plants in Europe, Drax, will be one of the biggest beneficiaries and with all other factors being equal we believe it could improve EBIT between 3%-5% in 2016/17. Drax’s share price has reacted positively to the news and is up 0.82% today to 794.5 (at the time of writing). – Elaine Coverley, Head of Equity Research at Brewin Dolphin
Housebuilders and Help to Buy
The Chancellor has announced that he will be extending the Help-to-Buy scheme for new-built homes until 2020. This has ended speculation that the scheme would be wound down earlier than expected.
The extension only applies to the first phase of the scheme (Help-to-Buy 1 or H2B1), which is the equity loan scheme, and not the more controversial larger mortgage guarantee scheme (Help-to-Buy 2 or HTB2). The Chancellor says that the additional £6bn of government funding would help to finance the building of 120,000 houses by the end of the decade.
The news has provided a fillip for the housebuilders which have seen their shares come back sharply recently. The extension should provide some impetus for housebuilders to build more homes outside the currently-favoured South East. Hence we believe that the main beneficiaries will be those companies with a national presence, such as Persimmon, Taylor Wimpey and Bovis Homes, rather than those with a South East bias.
What is also required to increase the number of new houses to the required level is for smaller, unquoted housebuilders to return to the market. They have, to date, been frozen out by the absence of finance from the banks.
By increasing the bank finance available to smaller housebuilders, volumes would start to increase. Competition for land would increase, labour rates would continue to accelerate and there could be a supply shortage of building materials. In short, there would be a detrimental impact on margins. We shall not be changing our stance on the housebuilding sector but believe that builders' merchants such as Travis Perkins is a better way for investors to take advantage of this Budget news. - Stephen Williams, Equity Analyst