The Daily Telegraph - Saturday - Money
The star fund managers on sale – should you invest? Looking for income? Go global
Investors are ditching ‘growth’ stocks and placing top trusts on rare discounts. Is the sale too good to be true? By Sam Benstead Britain’s income crisis could take years to fix but others will recover, finds Jonathan Jones
British investors seeking income should look further afield than the struggling domestic market, according to analysis by Telegraph Money, with America, Japan and Asia all potential dividend hotspots over the next decade.
The US stock market is likely to offer the fastest- growing dividend payments between 2020 and 2030 according to the research, which uses 10 years of dividend data from Janus
Henderson, the fund group. The data covers the 1,200 largest companies in the world.
If the past 10 years’ 9.3pc average growth rate continues at the same pace until 2030, dividends would more than double. At present, the largest North American (the US plus Canada) stocks pay $549bn (£394bn) but by 2030 this could jump to more than $1.3 trillion, a 144pc rise.
North America was the only market unaffected by the 2020 dividend bloodbath but according to research from Schroders, the asset manager, dividends in Asia, Japan and Europe are expected to recover to 2019 levels by the end of this year.
Sean Markowicz, of Schroders, said: “Profits and therefore payout ratios will go back up after the big fall last year, supported by a positive economic backdrop.”
On this basis, Japan would also present an enticing option for investors. The largest Japanese companies have increased payouts by 7.2pc on average each year over the past decade. This rate would almost double dividends from $81bn in 2020 to $161bn in 2030.
Income paid from companies across the rest of Asia is also forecast to double by 2030. Using historic growth rates between 2010 and 2019 – excluding last year’s falls – dividends have risen 6pc per year on average.
In Europe, the income growth rate between 2010 and 2019 of 3.9pc leaves it some way off those above. However, if dividends from European firms do bounce back to 2019 levels this year, and continue to grow at the average rate for the rest of the decade, the amount paid out would still be more than double the $172bn paid in 2020.
Mr Markowicz said: “If you think that vaccines will open the door to a more normalised way of living, then these markets should all do well.”
Investors commonly rely on the yield – the total amount paid out in dividends divided by the value of the market – rather than forecasting future growth.
Mark Baker of 5i Research UK, a data firm, said: “High yields can be seductive because they mean more income in the short run, but they usually mean some of the companies within a market have feeble growth prospects.”
Conversely, a market with low dividends now, but which grows payouts significantly every year, can quickly catch up with today’s big payers.
At present, Britain is the highestyielding country of all major markets, paying out 3.3pc, while others, such as America, Japan and Asia, all pay less than 2pc.
However, it will take years for domestic firms to recover from the pandemic, according to Link Group’s Dividend Monitor report, which estimates British dividends will not return to 2019 levels until 2025 at the earliest.
Susan Ring, of Link Group, said: “It will take some time for dividends to fully recover, as UK payouts have in many cases been permanently reset at lower levels.”
Jane Shoemake, of Janus Henderson, said investors who needed their portfolios to provide valuable income should take a global approach to smooth out the risks.
“A globally diversified approach to income investing has shown in this crisis how well it can mitigate risks for investors,” she said.
Inheritance tax is a “voluntary bill” according to Richard Fisher, 73, from Worcester. Mr Fisher, who is planning to pass down hundreds of thousands to his children, said he wanted to minimise the death duties owed on the money he leaves.
The retiree and his wife Liz, 66, both receive the full state pension each year, draw £12,000 from their £550k self-invested personal pension and receive £35,800 from their occupational pensions. This has provided them with a more than comfortable retirement, and they have £1,600 in cash spare every month. With £25,000 in Premium Bonds and a property worth more than £500,000, the couple want to see any leftover money go to their children. The Fishers have four children and six grandchildren.
Mr Fisher said: “We have no plans to cash our pensions in or spend large chunks of it in one go.
“We are looking to leave as much as we can to the children and grandchildren and we want to enjoy time with them, like holidays to Portugal and other trips away. It’s important that we avoid as much inheritance tax as we legally can.”
However, Mr Fisher said he was concerned about making sure the money reached his stepson. He said: “My stepson is autistic and lives in special accommodation, currently funded by the local authority. I would like to know what arrangements nts we can make to protect his inheritance ritance from clawback.”
Toby Bentley
Financial adviser at Lathe & Co The most important t thing for Mr and Mrs s Fisher to consider is s the order in which they y withdraw and spend money from their various sources of income.
The income from their occupational pensions and state pensions (£ 51,400 a year combined) will die e with them, so while they y are fantastic guarantees to live on, they are not inherheritance friendly and thereerefore should be used to meet their cost of living before efore accessing the Sipp. The £12,000 Sipp drawdowns are unnecessary if they have £19,200 spare every year.
Mr Fisher’s current Sipp drawdown will leave him with a pot size of £724,593 at age 87, the estimated life expectancy of a man born in 1948. This assumes an annual growth rate of 5pc and annual charges of 1pc.
However, with no IHT due on a Sipp and as their most inheritance-friendly asset, if Mr Fisher were to stop withdrawing £12,000 per annum, the pot size would be £ 947,247 at 87, leaving more for his children and lowering his own annual income tax.
Mr Fisher needs to ensure he has an up-to-date will and has nominated beneficiaries for his Sipp, electing for the money to stay within the Sipp on his death, rather than paying directly into his beneficiaries’ own estates. If he dies before 75, his beneficiaries will pay no tax on pension. In the more likely scenario that he dies after age 75, there will be no IHT, but any money withdrawn would be subject to income tax at their own marginal rate. This gives the children control over when they take the money, and how much income tax they pay. The Sipp could be drawn three ways, with a fourth share in trust for their son so he can still access state funded accommodation.
By leaving the extra £12,000 in the Sipp each year, this still leaves them with £600 a month in spare income. Mr andM and Mrs Fisher can then make the mo most of their IHT- exempt allow allowances each year to start get getting money out of their es estate as soon as possibl ble. Their children and s six grandchildren could each be given £ 250 in IHT-exempt small gifts.
Chartered C G Georgina financial Fry planner p at Saunderson House
It seems the income that Mr Fisher and his wife receive from their occupational pensions is sufficient to meet their expenditure requirements for the remainder of th their lifetime. F For the non-pension element of their savings ( cash
Premium Bonds), it is vital they decide on a suitable emergency cash buffer for them. I would recommend somewhere in the region of six to 18 months’ worth of expenditure, held in an accessible cash savings account.
Their annual expenditure is in the region of £44,000 per year and so this would require an emergency cash fund of £22,000 to £66,000. While the monies in the Premium Bonds are not instant access, they provide a (virtually) risk-free element to their cash savings, being government-backed.
The other large asset on death will be their family home. On the surviving partner’s death, the estate will have both nil- rate bands ( currently £325,000 each), plus both residential nil-rate bands to make use of (currently £175,000 each), both frozen at this level until 2026. Given that pension assets are outside of the estate on death, the estate will fall entirely within the nilrate bands and there will be no inheritance tax liability on death.
The best way to protect any money gifted to their son would be to place the monies into a discretionary trust for his benefit on their deaths.
By putting the funds into a discretionary trust, you can appoint trustees to manage the funds and use it for the benefit of their son. As the funds in the trust will not be directly owned by their son, this will not affect any benefits that he may be entitled to.
If the son qualifies for a disabled discretionary trust, he is able to be the sole beneficiary. However, if he does not, it may be that a wider range of beneficiaries, such as the other siblings, will need to be included.
If Mr Fisher has any available taxfree cash in his pensions, there is also the option to withdraw this and immediately gift it; this would not be immediately exempt from IHT, but it would start the “seven-year clock” ticking and at the very least he could benefit from IHT taper relief on the gift.
Given that they have a number of grandchildren, expenditure on the maintenance, education or training of a child under 18 is usually also immediately exempt.