UK Stockbroker News Bulletin – March 2023

The Financial Expert UK Stockbroker News Bulletin is our comprehensive summary of all the latest updates in the brokerage space. We’ll include news, broker trends, press releases and other notable developments like:

  • Shakes and movers
  • Product launches
  • The closure of services
  • Regulatory changes
  • Awards & ranking updates

For an industry-wide view on broker news, follow Financial Expert and keep a close eye on competitive UK firms. 

Pension industry calls for Government to update pension rules to encourage older workers back into the labour market

A group of investment managers and pension providers have called on Government to scrap an obscure pension rule that they argue is unfairly penalising older people who choose to come back into work. 

OECD data shows that overall labour market participation rate for the UK in 2021 (82.1%), is higher than the G7 average (79.9). However this disguises a marked drop in this metric. 

Unlike our continental cousins France, this metric has not rebounded now that the country has emerged from pandemic-induced lockdowns. 

This has alarmed government ministers, who are said to be scheming ways in which older workers can be tempted back into the workforce. Generous tax rules are said to be in the offering. 

However, according to brokers such as Hargreaves Lansdown, a little-known pension rule that affects only a tiny percentage of the population is acting counterproductively. 

The Money Purchase Annual Allowance (MPAA) is a little-known pension rule that restricts the amount of money that someone already in receipt of draw-down pension income can contribute to a pension before the typical tax relief on those contributions is capped. The MPAA is being lowered from £10,000 to £4,000.

Tax relief is designed to encourage long-term saving for the future. The MPAA exists because retirees who dip back into work could use salary sacrifice to divert almost all of their income into the same pot from which they are drawing income. 

This provides a very convenient mechanism for high salaries workers to avoid paying higher-rate tax, drawing upon the pension in a few years’ time instead. This is known as income recycling. 

The consortium of firms, which includes Canada Life and AJ Bell, argues that scrapping this rule would encourage workers back into the workforce, which may help ease the tight labour market which is currently helping to drive high inflation. 

Financial Expert agrees with this view. ‘Recycling’ income through a pension scheme sounds like unhealthy tax avoidance until you reflect upon the fact that any ordinary worker approaching retirement has the same opportunity to increase pension contributions to maximise the benefits in the near term upon retirement. The MPAA  that applies to workers in this scenario is a generous £40,000.

It seems unfair that one group of 50-somethings can use this approach, and one group cannot, purely decided by whether or not a pension income has been drawn yet. This feels arbitrary.

Red flags that the London stock market’s global appeal is waning

This month saw several stockbroker news events that paint a bleak picture of the future of the London market. 

Secondly, Cambridge-based tech Arm, currently owned by Softbank, announced that it will eschew the London Stock Exchange for the New York market when it is spun off and listed later in 2023. 

For such a high-flying UK-based organisation to choose a foreign stock exchange, reflects poorly upon the attractiveness of the London market as a place to raise capital.

This marks another notch on the timeline of the downward trajectory for the LSE. 

At the turn of 1990, the S&P 500 index stood at 838, a market capitalisation of approximately $2 trillion. At the time of writing, the index is 4,046, at a market cap of $34 trillion. 

The FTSE all-share, in contrast, has only grown to a market capitalisation of £2.4 trillion. This makes the UK domestic equity market a minnow in contrast to the US. 

While the UK still hosts a thriving forex, commodities and derivatives sector, its equities market continues to suffer from lower multiples and shallow investor pockets. International firms who have a free choice of listing on either side of the Atlantic are naturally eyeing the higher valuations available on the NYSE. 

On 1 March 2023, FTSE 100 stalwart Shell plc shared that it had been seriously considering a relocation to the US in the pursuit of higher valuations. Shell is currently the largest member of the FTSE 100, with an 8.6% weighting based on its market capitalisation. 

Almost as if to rebuke early claims of its death, the FTSE 100 has roared into 2023, breaking all-time highs. The FTSE 100 broke through 8,000 on 16 February, and rose higher in subsequent days, before eventually retreating to 7,947 at the time of writing. 

This won’t placate all critics, however. FT journalists point to the lack of interest from institutional investors in putting their funds into UK equities. 

This isn’t simply a pension allocation issue. Consider the fact that the Vanguard Lifestrategy 100% Equity fund offered by Vanguard to UK investors, includes only a 22% allocation to UK equities, versus a 48% allocation to US equities. This means that a UK investor using a very standard approach to investing in stocks & shares is only putting £1 in every £5 invested into the UK stock market.

This goes way beyond UK investors wishing to diversify away from domestic risks. In fact, many UK investor portfolios broadly resemble that of a US domestic investor, with a small allocation of the UK to diversify away from the US market. It is no wonder that the LSE struggles to match the liquidity of the US market. 

The 2022/2023 tax year-end approaches

The 5 April marks the end of another UK personal tax year. With this in mind, the best UK stockbrokers have been contacting their client bases to inform them of deadlines to take advantage of any remaining ISA or pension withdrawal allowances in time. 

Those allowances in more detail: 

A UK resident can contribute up to £20,000 into a stocks & shares ISA each tax year. Those with sufficient capital will want to maximise this allowance in each tax year, and therefore may wish to make a lump sum deposit to reach that £20,000 cap before the allowance is reset. Someone who hasn’t contributed to their ISA so far in this tax year and is aware of these deadlines could theoretically deposit £20,000 on 5 April and a further £20,000 on 6 April. 

For those in receipt of income from a drawdown pension, the timing of income is very important because pension withdrawals are generally taxable. For example, a general rule of thumb is that it makes sense to withdraw enough to make full use of any remaining income tax personal allowance (£12,571) each year. This cash needn’t be spent – it could be put to work in a similar investment once drawdown. The important point to note is that by withdrawing this money within the personal allowance, it has been earned tax-free, whereas if withdrawn in a future year on top of state pension benefits and other drawdowns, the same lump sum may trigger income tax at the basic rate of 20%. 

For wealthier pensioners, similar consideration might be given to the threshold between the basic rate and higher rate tax. The strategy here would be ensuring that the maximum income is drawn each year at the basic rate, to avoid having to draw more income in the higher rate tax band in the future. 

Each individual’s personal circumstances will differ, and tax rates may change. Pensioners may find it useful to consult with an independent financial advisor for advice tailored to them. 

To help investors time their decisions properly, AJ Bell has shared the following key dates:

  • Last contribution into a stocks & shares ISA: 11:59pm on 5 April 2023
  • Last Bed & ISA request: 5:00pm on 31 March 2023. 
  • In order to draw down income from a pension within the current tax year, the following deadlines:
    • 13 March 2023 – if you want a tax-free lump sum payment.
    • 17 March 2023 – if you want to convert to flexi-access from capped drawdown before taking an income payment, or you want to take an uncrystallised funds pension lump sum (UFPLS) payment.
    • 28 March 2023 at 10am – if you’re already accessing your pension and want a one-off income payment by BACS.

Taking processing times into account, brokers will set a clear timetable to ensure that clients don’t miss out. Still, it’s always worth clients aiming to beat these dates by a margin to allow for issues with the payment transfer that results in cash being received by the broker after the deadline. 

Hargreaves Lansdown has a similar midnight 5th April ISA contribution deadline. Meanwhile, interactive investor highlighted in their tax year update that investors using bank transfers to contribute to their ISA in April 2023 would need to deposit one day earlier by midnight on 4 April instead. ii clients paying by debit card or an internal transfer between accounts can wait until midnight 5 April. 

AJ Bell ups the interest rates it pays on client cash

AJ Bell have recently increased their cash interest rate, to 1.5% for balances over £10,000. Relative to other long-term savings options, this isn’t a market-leading rate but is helpful for an investor who may contribute a large lump sum into a stocks & shares ISA to use their allowance, but who will drip feed this cash steadily into the stock market over the coming year.

One of the most generous brokers is Freetrade, who offer an interest rate of 3% on a maximum of £4,000 cash to ‘Plus’ members. A plus account carries a monthly charge of £9.99 (annually £119.88), which would be conveniently offset to nil by the £120 interest income paid on a £4,000 lump sum over the course of the year.

With other instant access accounts offering rates around the 3% mark, this is a competitive rate for a broker to offer on cash. Retail investors often allow pots of cash to languish in their accounts while waiting for an investment opportunity, so it will comfort Freetrade clients to know that their cash is also producing a reasonable risk-adjusted return while it waits.