Too embarrassed to ask: what is a share buyback?

There are two main ways for companies to return cash to shareholders. 

Dividends tend to be preferred by income investors; a dividend is a cash payout to shareholders, typically issued on a half-yearly basis. 

The other method is to use a share buyback. This means just what it says – the company buys back its own shares. 

It’s easy to see why shareholders like dividend payouts. But how do buybacks benefit shareholders? Well, when a company buys and cancels some of its own shares, the remaining shareholders are left holding a greater proportion of the company. 

Let’s say a firm has one million shares in issue, and the share price is £10 per share.  It made one million pounds profit last year. So it has earnings per share of £1. 

Let’s say it wants to return the whole one million pounds profit to its shareholders via a share buyback. It buys back 100,000 shares at £10 a share and cancels them. This leaves 900,000 shares in issue. 

That means earnings per share has increased from £1 to just over £1.11, because there are now fewer shares. In turn, assuming that investors keep valuing its earnings on a constant basis, the share price would rise to just over £11.

Fans of buybacks argue that they are more tax-efficient than dividends. For managers, buybacks are also more flexible than dividend payments. Shareholders tend to react more negatively to a dividend cut than to a reduction in buyback levels.

Critics argue that executives have an incentive to use buybacks to meet performance targets linked to share-price growth. So they may curb investment or borrow too much to fund buybacks. 

Timing can also be a problem. Some studies suggest that larger companies in particular have a bad habit of buying back shares near the top of the market, when they’re expensive, rather than nearer the bottom, when they’re cheap.

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General Motors Q2 Earnings Report

The General Motors second-quarter earnings report is due on August 4, 2021. Considering the previous quarterly report, this guide will forecast the company’s second-quarter earnings report.

On May 5, 2021, General Motors (NYSE: GM) posted earnings for its first fiscal quarter. The automaker announced first-quarter results that were fueled by exceptional price and neutral performance in the US, strong credit and residual value performance at GM Financial, and China’s industry rebound ^[1].

The company reiterated its earnings estimates for the fiscal year 2021 in the first quarter. Unadjusted net income for the first quarter was $3 billion, up from $294 million a year earlier, when automakers began closing operations to help manage early breakouts of the pandemic ^[2].

For the first quarter, the automaker earned $4.4 billion in adjusted pretax earnings, up from $1.3 billion the prior year. The automotive industry is now impacted by a global scarcity of semiconductor chips, which is affecting global output.  The chip scarcity has forced automakers to close manufacturing plants for varied lengths of time around the world, resulting in low vehicle inventories on dealer lots. Reduced supplies, on the other hand, have resulted in higher earnings per vehicle, allowing automakers to thrive despite the shortfall. These estimates take into account the likely impact of the chip shortage, which included a $1.5 billion to $2 billion drop in earnings and a $1.5 billion to $2.5 billion drop in free cash flow.

In 2021, the company expects pretax revenues of $10 billion to $11 billion, or $4.50 to $5.25 per share, with adjusted free cash flow of $1 billion to $2 billion.

The car behemoth is expected to beat revenue estimates in the second quarter, but earnings may fall short.

The company has reported higher-than-expected earnings in each of the last four quarters, as well as higher-than-expected revenue in two of the last four quarters.

The first quarter brought in $32.5 billion in revenue for General Motors. As the business continues its comeback, revenues are unchanged from the same period the prior year. In the second quarter of FY2021, the momentum established in previous quarters is projected to continue. In the fiscal year 2021, GM expects total revenue of $136.5 billion.

GM Stock Analysis

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Following its last strong breakout in January, GM stock has been trading sideways for the past six months.

The stock of General Motors fell as much as 18% to a low of 52.63 on July 19. However, that low point was within 1% of the 9-day moving average for GM stock, indicating a lack of momentum.

A seven-week consolidation has resulted in a 64.40 resistance for GM shares. However, if the GM stock breaks above its down-sloping trend line from the early June high, we may see some demand.

While the early-June breakout effort failed, GM stock has remained comfortably above the 46.81 support level, which it cleared on January 12 ^[3].

 

Click here to access our Economic Calendar

Adnan Abdul Rehman 

Market Analyst

Disclaimer: This material is provided as a general marketing communication for information purposes only and does not constitute an independent investment research. Nothing in this communication contains, or should be considered as containing, an investment advice or an investment recommendation or a solicitation for the purpose of buying or selling of any financial instrument. All information provided is gathered from reputable sources and any information containing an indication of past performance is not a guarantee or reliable indicator of future performance. Users acknowledge that any investment in Leveraged Products is characterized by a certain degree of uncertainty and that any investment of this nature involves a high level of risk for which the users are solely responsible and liable. We assume no liability for any loss arising from any investment made based on the information provided in this communication. This communication must not be reproduced or further distributed without our prior written permission.

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Disasters, bunkers and financial collapse: a little not-so-light holiday reading

Usually when I think of you reading the books I suggest for the summer I picture you on a plane and a beach, so I try to make them not too heavy and not too traumatic.

This year I feel less constrained. 

A history of disaster

• SEE MORE Niall Ferguson: why we'll never be prepared for disaster

First up is Niall Ferguson’s general history of disaster: Doom, The Politics of Catastrophe. Think of something terrifying – pandemics, volcanic eruptions, nuclear accidents, tsunamis – and you’ll find it here. The key thing to pull out of Doom is that while we might be great believers in human ingenuity, incompetence is equally impressive.

That makes the distinction between man-made and natural disasters something of a “false dichotomy”. Famines are the obvious example. Think of the Irish famine of the late 1840s, Mao’s Great Hunger, two Soviet famines (1921-1923 and 1932-1933) and Bengal in 1943.

Failed harvests played their part, but mass starvation was a result of government or market failure. The same is true of everything from floods – floodplains and bad drainage – to the Hindenburg airship – you could blame the lightning for it burning from “nose to tail in 34 seconds” but the pilot’s risky “high landing” did not help.

Covid, too, is perhaps in the same category. Natural or not, says Ferguson, the response to it has been a classic example of “bureaucratic sclerosis”. Despite being technically prepared for a pandemic, civil servants everywhere served up a catalogue of mistakes, including testing, tracing, pointless panics over the wrong bits of equipment and ill thought out lockdowns. These errors mostly made things worse. History is mostly about progress but it is punctuated by “unexpected disruptive events” we just aren’t good at preparing for.

What next? Ferguson’s final chapter dwells on the miseries that might be yet to come: a more lethal pandemic, alien invasion, environmental collapse or “tiny black holes that would swallow up the planet”. Then there’s unfriendly AI: what if we tell machines to stop climate change and they decide the best way is to eliminate people?

A bit of bunker tourism

Enjoying your holiday? How about a nice underground bunker next year? Just in the nick of time comes “urban explorer” Bradley Garrett’s Bunker: Building for the End Times, a glorious yomp through the “disaster architecture” fantasies of the parts of the global population living with constant existential anxiety.

This includes governments (Switzerland has bunker capacity for 8.6 million people), the US’s “preppers” and the super-wealthy, some of whom see “survival of the richest” as a perfectly reasonable part of the endgame. Garrett takes us to panic rooms in gated communities, refurbished wartime ammunition stores, New Zealand estates (before the pandemic, the country was considered the best place to sit out even the worst Ferguson can think of) and plans for whole communities to live for years underground.

I’m not mad for the basic options, although I am getting a survival bag so that I live for five days longer than you do. But I am keen on The Survival Condo – once a Cold War missile silo, now an “opulent” bunker complete with apartments, one done as a log cabin complete with fake fire. They will come complete with supermarkets and yoga classes. Oh, and guns. Lots of guns. If I need a bunker to participate in the “survival and rebirth story” (yes, prepping does have religious overtones) I’ll take this over a buried shipping container any day.

You don’t need to ask what’s driving this urge to dig down. Just see Ferguson’s list! But it is interesting that money looms large. “I think the economy goes down first” one US prepper told Garrett. “The country is $23-something in debt. How do you recover from that?” Well quite.

How the Asian financial crisis set up our current crop of bubbles

• SEE MORE Russell Napier: Asia, financial repression and the nature of capitalism

And so we turn to Russell Napier’s The Asian Crisis: Birth of the Age of Debt. Napier was working in Hong Kong in 1997, and the book is partly a compilation of the excellent notes he wrote during this “collapse of the entire financial system” and partly an explanation of how the crisis set us on our current financial path. It gave us the deflationary impulses that gave us the low rates that caused the Great Financial Crisis, that then gave us quantitative easing, asset bubbles and of course the inflation we now see – the inflation that will eventually crash markets.

The past decade has been good to investors – the endless easy monetary policy Napier writes about has given us long and happy bull markets. Preppers worry about YOYO (you are on your own – so be resilient). For this cycle’s equity investors it has been more YOLO (you only live once – so bet big).

• For 30% off a copy of The Asian Crisis, order direct from the Harriman House website and put in the code AFC30.

A history of market speculation

Some would have you believe that this is a new dynamic. It is not. For evidence you will need Playing the Market: Retail Investment and Speculation in Twentieth Century Great Britain by Kieran Heinemann. It turns out that investment and speculation (there is a “hazy line” between them) have long been “mass activities” in the UK.

In 1850 about 250,000 people owned shares. By the 1930s it was 1.3 million and The Economist was happily noting the “great increase in the investment habit among classes in which it was formerly uncommon”. By the 1950s everyone was at it. A study by the Acton Society Trust found factories with “gambling groups” of workers, one of whom reported that “a man in my shop who used to back horses told me that he had found a better method – industrial shares – and now he has got me doing it too”.

Sound familiar? Thousands of new investors have entered the markets in the past two years. When it all comes crashing down (impossible to time, but inevitable) they may find they feel a bit YOYO.

With that in mind, here is one bit of prepper advice. “Three is two, two is one, one is done,” meaning always have a back-up plan. You might not always make it to your bunker when disaster strikes – ask the Russian oligarchs who left leaving for New Zealand too late and spent lockdown in Moscow. Look at alternatives. Translate that to money and the advice is similar – diversify.

A dreich novel to end with

Finally, a bestselling novel – Summer Water by Sarah Moss. Some will want you to read it for its intense depictions of family relationships. But I offer it to you (in particular to readers in the travel industry) for its relentless rain. The characters are on holiday in Scotland.

They are never really dry. “What’s got into you?” says Mum, “Cheer up, it can’t rain much longer.” It does. This year you might be convinced you need to buy a domestic holiday home. But let’s not forget one of Napier’s core rules for analysts – no extrapolation allowed. Next year you probably won’t want one.

• This article was first published in the Financial Times

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Tencent shares dive as China targets video games industry

China’s ongoing crackdown on different segments of the economy took yet another twist on Tuesday. 

Hong Kong-listed shares in internet company Tencent – which makes 30% of its revenue from its online games business – fell as much as 12% on Tuesday after China released an article likening the video games industry to “spiritual opium” and “electronic drugs”. 

The article was written by the Economic Information Daily, a newspaper backed by the state-backed Xinhua Agency, and said that minors were addicted to virtual games and called for sweeping reforms to the industry. 

The article, which has now been deleted, did not explicitly name Tencent but made references to the Chinese video gaming’s flagship game, the “Honour of Kings”. 

"No industry, no sport, can be allowed to develop in a way that will destroy a generation," the newspaper said, likening online video games to "electronic drugs,” according to Reuters. 

Shares in rival video game firms also took a hit, with the likes of NetEase dropping as much as 15%, XD Inc falling more than 20%, and GMGE Technology Group, a mobile-game publisher down 16%. 

How did Tencent react? 

Tencent was quick to respond to the indirect criticism, introducing curbs on Tuesday on how long minors can play its “Honour of Kings”  game. Video game hours for holiday periods were slashed from 1.5 hours to one hour. For holiday periods, hours were reduced from three to two hours. This helped the company’s share price pare some losses, but it was still down by around 6%. 

This is not the first time Chinese regulators have attacked the gaming industry, and appears to be the latest move in a series of recent crackdowns launched by China. 

China’s recent crackdowns 

Investors were already reeling from China’s crackdown on internet companies in recent days. 

But at the end of July, a leaked memo proposed radical changes to the country’s $100bn private-sector education industry, including banning companies from accepting foreign investments, banning them from being acquired, prohibiting them from raising funds via the stockmarket and outlawing them from providing tutoring services on weekends and holidays. That sparked a sell-off in both education companies and tech companies in the last week.

China’s crackdown on private tutoring came days after Didi Chuxing, a minicab app in the vein of Uber, was removed from domestic app stores shortly after its $4.4bn blockbuster listing on the New York Stock Exchange. The Cyberspace Administration of China (CAC) launched a cybersecurity review into the firm last month to conclude whether it illegally collects and uses its customers’ personal data, something Didi denies. 

And last November, China suspended billionaire Jack Ma’s Alibaba-backed Ant Group’s $34.5bn IPO in Shanghai and Hong Kong. Chinese regulators imposed a $2.8bn fine on the Alibaba affiliate earlier this year in April. 

Since then, China has been attacking one sector after another. 

Why is China doing any of this?

There are multiple theories. Some small education firms went bust as a result of the Covid pandemic, while other larger online education platforms thrived and attracted widespread funding. So part of the reason, perhaps, may be the government trying to bridge the gap in a socialist society.

And it could be argued that Chinese firms embracing big tech abroad and people receiving private education could somehow “Westernise” the country. That’s something that would not be well received by the Chinese Communist Party. 

What does this mean in practice?

China’s latest move has sparked fears that its crackdown is affecting all industries, and online entertainment appears to be the next casualty. 

“There is speculation that Chinese healthcare stocks might be next in the firing line,” says Richard Allen, investment manager at investment services group Ravenscroft. 

Chinese tech stocks suffered the biggest monthly contraction in July, since 2008 at the depths of the global financial crisis. 

China’s multiple crackdowns has left many investors in doubt, including clients of Goldman Sachs, who are pondering whether China’s stockmarket has become too risky to invest in, according to Bloomberg. 

Other analysts think China’s stringent regulatory environment is overshadowing Asia’s economic growth prospects. 

“This is turning out to be one of the big stories of 2021 for global markets, overshadowing what many people thought would [be] the key focal point for Asia – namely a year of strong economic growth,” says Russ Mould, investment director at AJ Bell. 

In a double whammy day for Chinese stocks, companies that make semiconductors for the vehicle manufacturing sectgor also fell on Tuesday after the government launched an inquiry into potential market price manipulation, although no firms were named. 

There’s clearly no dull moment when it comes to regulation and China at the moment. Investors may want to wait until China’s crackdowns are fully over before snapping up any stocks. But on the flipside, Chinese regulators could also surprise markets with positive news. Bejing called for calm last week after it held a call with senior international executives to reinstate investors’ faith after the brutal market rout. 

So if you own Chinese stocks via funds, there is less reason to worry, but investing in Chinese stocks directly requires a lot more caution and risk appetite to weather any shock losses.

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What does ISM Manufacturing data tell us about July NFP?

The latest CFTC data showed that investors continued to build up USD longs ahead of the Fed meeting in August. Given the downside in USD last week, this dynamic was quite unexpected. It can be assumed though that by selling dollars after the Fed, market participants were either taking profits or pursuing short-term speculative goals. The data also showed that more long positions of speculators were closed in CAD and NZD futures, i.e., in currencies that have a relatively high correlation with the recession-recovery cycle of the world economy. This fact, of course, does not inspire optimism.Aggregated data on the currencies of the G10 countries showed that net long position on the dollar increased in the week ending July 27 from 1.5% to 3.0% of open interest. The dollar increased its advantage against all G10 currencies except for the CHF.The changes in the CFTC positioning data indicate an increase in bullish sentiment for the dollar, despite the negative reaction of the US currency to the July Fed meeting. This may indicate that underlying drivers of the weakness could be short-lived as Fed tightening is in cards despite relatively dovish message last week, which should offer broad support to USD.The July ISM Manufacturing Activity Report showed improvements in two key components - prices and employment. The purchasing managers said that hiring of workers increased compared to the previous month while the situation with high prices for raw materials also changed for the better. The hiring sub-index rose from 49.9 to 52.9 points:At the same time, the prices sub-index fell from an extremely high reading of 92.1 to 85.7 points:Despite the broad indicator fell short of forecasts, the details of the report pointed to the dynamics favourable for a strong NFP report on Friday, and hence the stronger dollar. Recall that the major constraint in the expansion of US jobs was the labor shortage. It is clear from the ISM report that the manufacturing sector has begun to see positive shifts for job growth.The leading ISM new orders declined for the first time in several months (from 66 to 64.9), which may be an early sign that activity in the sector will soon plateau.

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BoE in the spotlight

The BoE decision tomorrow is coming into view with the UK expected to join Fed and ECB and signal cautious patience for now.

After the inflation scare over the spring, attention has turned to growth dynamics, and particularly the downside threat from the spreading Delta covid variant along with headwinds from various constraints including labor and materials shortages, supply chain disruptions, and rising prices. Covid cases are continuing to fall sharply in the UK, while the link between new cases and serious illness and death has clearly been smashed. Even normally pessimistic experts in the UK have been admitting that the country is nearing herd immunity, even against the delta variant. Well over 90% of the adult population in the UK have a level of immunity, whether from vaccination, natural infection or both. Those impacts were highlighted in last week’s slower than expected US and German GDP reports. And while many of those drags should be seen in upcoming data, they are expected to dissipate into the end of the year.

In UK, the final June PMI surveys are due, although final readings are not normally of too much interest for markets. The preliminary manufacturing and services PMIs showed an unexpectedly sharply correction from series or near-series record highs that were seen in June, though still showing an overall robust level of continuing expansion. The data didn’t stop the IMF this week from raising its 2021 UK growth forecast to 7.0%, which is their joint fastest growth projection out of the major advanced economies.

The BoE’s Monetary Policy Committee meeting will gain attention after ECB and Fed have already signaled a cautious wait and see stance over the summer and the BoE is likely to follow suit on Thursday. The Old Lady will also release is latest quarterly Monetary Policy Review, which is likely to come with upward revisions to both GDP and inflation projections. But, despite this and that fact that two MPC members (Saunders and Ramsden) have lately turned relatively hawkish, the consensus expectation is for unanimous 9-0 votes at the nine-member committee to leave both the repo rate and QE total unchanged.

The phasing out and upcoming ending of the government’s pandemic wage support scheme is a particular near-term worry for the BoE, given the risk of higher unemployment. The ongoing evolution in the pandemic is also a concern, both globally and domestically. The UK last week saw a pronounced decline week-on-week levels in new Covid cases, although the prognosis remains tentative.

In FX market ahead of the BoE, the Pound has traded modestly firmer so far today, though has remained within Monday’s ranges versus the USD, EUR and JPY, among other currencies.

The GBP despite already being an outperformer on the year so far, may have further to rally, with the currency remaining at relatively weak historical levels by the measure of the inflation-adjusted broad trade-weighted index. This will depend on the Covid situation remaining under control and global sentiment holding up, as the UK currency has an underperforming tendency during sustained periods of risk-off positioning in global markets (being the currency of an open economy with high deficits).

Currently the GBPUSD is resuming northwards move after the corrective dive from 1.4000 to 1.3870. Significant is the fact that is retesting for a second week in a row the midpoint of 2021’s range (1.3560-1.4280). The daily RSI indicator is presenting the latest 10-day rebound but remainsclose to 50, suggesting lack of direction in the medium term. The MACD lines  eventhough they remain below 0, reflect decisive icrease of buying interest since the mid of July as they try to surpass enter the positive terittory.

The asset needs to process into a decisive break id 1.4000 (61.8% Fib. level for 2021 and June-July resistance), in order to prompt further positive bias, with next Resistance at  year’s highs, i.e. 1.4250. A break of the latter could triggered attention to 5-year peak.

In the flipside, a drift down to 1.3815, which confluence the 20-day SMA and 38.2% Fib. retracement level, could attract sellers. That said, such a downleg could bring 23.6% Fib. level at 1.3715 and July’s floor at 1.3570 back into play.

 

Click here to access our Economic Calendar

Andria Pichidi 

Market Analyst

Disclaimer: This material is provided as a general marketing communication for information purposes only and does not constitute an independent investment research. Nothing in this communication contains, or should be considered as containing, an investment advice or an investment recommendation or a solicitation for the purpose of buying or selling of any financial instrument. All information provided is gathered from reputable sources and any information containing an indication of past performance is not a guarantee or reliable indicator of future performance. Users acknowledge that any investment in Leveraged Products is characterized by a certain degree of uncertainty and that any investment of this nature involves a high level of risk for which the users are solely responsible and liable. We assume no liability for any loss arising from any investment made based on the information provided in this communication. This communication must not be reproduced or further distributed without our prior written permission.

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Weekly Market Outlook 02-08-21

In this Weekly Market Outlook 02-08-21, our analyst looks into the trading week ahead, possible market moving data releases across the globe and the technical analysis to accompany it!

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Where to find data on investment funds

In this column I cover a wide range of investment trusts and exchange-traded funds (ETFs), which might prompt some readers to wonder where I get my data from. I have access to fund research produced by established analysts such as Numis, Winterfloods, Liberum and Jefferies. It is not available to private investors. But don’t despair. There are some excellent sources of information out there, completely free and accessible to everyone.

Information on investment trusts

One of the newest sources of information on investment trusts is a website called Doceo.tv. It refers to the Latin verb meaning to teach, inform, or show. You will have to register for this site, but its biggest selling-point is that it features videos from hundreds of investment-trust managers. 

There have always been plenty of videos on fund managers’ websites but Doceo collects them all together on one website. Doceo also features useful data such as price returns, information on discounts and premiums, gearing, dividend history, performance data, and fees. You can also connect easily to monthly fact sheets form all the featured managers. I tend to focus on the most recent fact sheet for my own research. 

If you are looking for detailed and comprehensive data on investment trusts, the place to start is the Association of Investment Companies (AIC) website, notably their Interactive Statistics section. 

QuotedData offers a slightly more digestible alternative. On the home page, click on “data” in the top menu and then the sector you are interested in. You’ll soon reach the “snapshot key data”, which includes information on returns (short and long-term), discounts and risk. A useful feature here is that if you click on a single fund you’ll also pull up the relevant Morningstar fund report, which details everything from a fund’s top-ten holdings to its main shareholders. 

QuotedData also offers its own research-report portal, although it is worth remembering that these are usually paid for by the fund manager. Nevertheless, over the last few years the quality of this “independent” research has improved markedly and the main players in this area, such as QuotedData and Edison, now provide investors with interesting, detailed analysis. Coverage of funds is of course limited – to those that pay – but I especially rate analysis from Edison, Kepler (via its Trust Intelligence website), QuotedData and Hardman & Co in this context. In terms of running news and analysis, the hands-down winner for me – apart from MoneyWeek of course – is Citywire’s Investment Trust Insider, although Trustnet and Financial Express aren’t too far behind.

Exploring ETFs 

What about data on exchange traded funds (ETFs)? These are also listed funds traded on the stock exchange, and they provide a low-cost, passive index-racking alternative to the actively managed investment trust sector. 

The good news here is that nearly all the ETF providers provide incredibly detailed quantitative information on their funds – iShares’ ETF website is especially simple to use – but what happens if you want to compare a bunch of ETFs in a subsector– the dozens of different S&P 500 trackers on the market, for instance? 

Two websites stand out. The first is the German based JustETF.com. On their home page, head to its ETF screener and you’ll be able to launch a search for every ETF listed in Europe. The filters are on the left hand side and very easy to use. Within just a few clicks you’ll be able to compare multiple ETFs tracking individual indices. But in the filters section (look for the grey buttons on the left) make sure you select only ETFs listed on the London Stock Exchange. Otherwise you will be presented with Europe-listed alternatives. 

The big rival of JustETF.com is France’s TrackInsight. It is a much more colourful and concise way of tracking indices and ETFs and contains an enormous amount of information .

You’ll find lots of useful information not only on fees and performance data but also on tracking error: the degree to which an ETF’s performance diverges from the underlying index. I think that once you have selected a specific ETF to investigate, TrackInsight’s fund pages are much more colourful and concise, although I find JustETF easier when it comes to comparing a group of ETFs. 

The news website ETF Stream – which I founded – also has its own ETF search engine, which you’ll find via a link in the top right-hand corner (Screener). The service is based on a US platform called Logicly. The trick here is to click on the “quick filters” to find the ETFs you want. 

One useful feature is a button called Fund Overlaps, which tells you to what extent a particular ETF overlaps in its holdings with peers. Sticking with the ETF-news theme, I would also highlight ETF Express and ETF Strategy for analysis and commentary on the ETF market. 

One final thought: if you are looking for a powerful data-driven platform that tracks both investment trusts and ETFs, consider SharePad. This is an outgrowth of the technical analysis-driven ShareScope software. The developers behind the SharePad product have spent a vast amount of time upgrading their funds data, and it is really very powerful indeed. I use it all the time. The only drawback, however, is that it is not cheap at £30 a month.

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Inheritance tax planning: how a pension can shield your estate from inheritance tax

Today, we come to one of the most potentially useful inheritance tax planning tools – the humble pension.

Most people know that private pensions are highly tax efficient. But their inheritance tax advantages are less widely recognised. This is a shame – the fact that your pension savings fall outside your estate for inheritance tax purposes means they can be a great way to pass money on to heirs, and even to mitigate a potential tax bill.

The bottom line is that pension pots are not subject to inheritance tax when you die – they do not count as part of your estate. That said, not all pension savings can be passed on to heirs. 

If you have a defined benefit or final salary pension, where your employer guarantees a set amount of pension in retirement, you will not have a fund of savings to bequeath; your heirs may receive benefits such as dependants’ benefits, but they will not inherit any of the savings you have made.

By contrast, defined contribution or money purchase pension savings can be passed on in certain circumstances. These include savings you have made through a workplace defined contribution pension scheme and savings in individual plans such as self-invested personal pensions (Sipps) or stakeholder pensions.

How a pension can help you to plan your legacy

In a defined contribution plan, once you reach retirement and want to start drawing an income, you have a choice to make. You can use the pension fund you have saved to buy an annuity – guaranteeing a set amount of pension for life – or you can opt for an income drawdown arrangement, where you leave your fund invested and take income directly from it. (Or you can do a bit of both). 

Money spent on an annuity is gone for good (though you can arrange for a contract with dependants’ benefits). However, unused savings in an income drawdown arrangement can be passed on to heirs. So too can your defined contribution pension fund if you have yet to choose between an annuity and drawdown. 

Either way, if you die before age 75, whoever inherits your savings pays no inheritance tax and can also draw on the money with no income tax to pay. If you die after 75, your heirs still pay no inheritance tax, but there will be income tax charges on withdrawals.

The exemption of pensions from inheritance tax gives rise to several types of planning opportunity. Most obviously, if your non-pension assets (such as the cash in your Isas) are likely to leave your heirs facing an inheritance tax bill, it may make sense to prioritise pension plans for your future savings. You may even be able to move existing savings and investments into your pension plan to take them out of the inheritance tax net.

Equally, if you reach retirement with significant savings and investments outside of your pension plan, it may make sense to draw on these before you cash in your pension fund. That way, you will be reducing the size of your estate for inheritance tax purposes before you start using up savings that fall outside of your estate.

Be aware of the risks

However, it is important to consider inheritance tax in the context of your broader needs and circumstances. Contributing too much to a pension, for example, can leave you with a tax headache, since there are strict limits on how much you may invest tax-efficiently in pensions both each year and over a lifetime (the so-called lifetime allowance – another tax threshold that seems unlikely to rise much in the next few years). 

Similarly, while income drawdown plans make it easy to leave savings to heirs, you need to manage them carefully to ensure you have enough income to live on and that your money lasts for as long as you need it.

For the majority of people, it therefore makes sense to take professional advice on how to plan your retirement savings from every angle, including potential inheritance tax liabilities. 

This definitely applies if you are considering transferring money out of a defined benefit pension scheme. Some people are so keen to pass pension savings on to an heir that they are prepared to give up a guaranteed pension in a defined benefit scheme – even if this means receiving less pension income themselves from a defined contribution arrangement. 

This is not a step to take lightly. Financial regulators advise against such transfers in most circumstances and there is a legal requirement to take professional advice on transfers of funds worth more than £30,000. 

In most cases, individuals will be far better off sticking with the defined benefit scheme.

One final point. Since your pension is not legally part of your estate, it is not covered by your will. You therefore have to make separate arrangements with your pension provider to specify who you want to inherit pension savings. You will typically need to complete a form – this may be described an “expression of wish” form or a “nomination of beneficiaries” form, or something similar. 

Make sure you keep paperwork up to date as your circumstances change – and that you have made arrangements for each of your pension pots if you have a number of different plans.

from Moneyweek RSS Feed https://moneyweek.com/personal-finance/tax/inheritance-tax/603653/inheritance-tax-planning-with-a-pension
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Daily Market Outlook, August 3rd, 202

Daily Market Outlook, August 3rd, 2021 Overnight Headlines RBA Sticks With Taper Plan Even As Economy Expected To Contract China Quietly Sets New ‘Buy Chinese’ Targets For State Companies NZ To Further Limit Mortgages Amid Relentless Housing Boom Tokyo Shows An Inflation Pulse For The First Time In A Year Korea’s Inflation Quickens As Central Bank Mulls Rate Hike Fed's Waller: Sees Reduction In QE Possibly Starting In October IMF Allocates $650Bln To Boost Pandemic-Hit Economies German Warships Heads For South China Sea Amid Tension With Beijing Dollar On Back Foot Vs Safe-Haven Peers As Delta Virus Spreads U.S. Treasury Cash Pile Fell To $459b Before Debt Cap Return Asian Stocks Slip As Global Delta Spread Spooks Investors Chinese Media Brand Online Games ‘Spiritual Opium’ Fanning Crackdown SocGen Raises 2021 Forecasts On Lower Bad Loan Provisions Amazon Union Vote Should Be Re-Run, U.S. Labor Official Says The Day Ahead Today’s data calendar is light with nothing of note in the UK. In the Eurozone, the June PPI will provide an update on inflationary pressures. July CPI data for the region were mixed as annual headline inflation rose by more than expected to a near 9-year high of 2.2% but the ‘core’ measure seemed to indicate that underlying inflation is still relatively tame. Nevertheless, Eurozone companies are complaining about the same sort of cost increases that are being seen elsewhere, so another rise in producer prices seems likely. The US factory sector has looked strong of late and another rise in orders is expected for June. However, already released durable goods orders were weaker than expected, which suggests that the increase in overall orders may be much slower than in May. That may be a sign that demand is waning after an initial post-lockdown surge but could also be an indication that supply chains issues and other bottlenecks are having an impact. US Federal Reserve policymaker Bowman is scheduled to speak today although she may only talk briefly at the start of a conference. Her previous statements suggest that she is one of the Fed officials that wants to take a cautious approach in reining back on the high degree of support that monetary policy is currently giving to the economy. In Congress this week, the Senate seems set to have a final vote on the President’s infrastructure package. Overnight Australian retail sales data will be watched for a negative impact form the latest lockdown measures imposed as a result of the rise in Covid-19 cases. Meanwhile, after other July PMI measures for China pointed to a slowdown in activity, it is hoped that the unofficial Caixin services indicator may provide more positive news.G10 FX Options Expiries for 10AM New York Cut(Hedging effect can often draw spot toward strikes pre expiry if nearby) USDJPY - 110.00 875m. EURUSD - 1.2000 869m. 1.1880/90 790m. 1.1840/50 1.66bn (1.08bn P). AUDUSD - 0.7330 591m. USDCAD - 1.2540 468m. 1.2480 1.28bn (845m P). USDCHF - 0.9050/60 470m. USDCNH - 6.50 1.54bn (1.05bn P). 6.47 505m Technical & Trade ViewsEURUSD Bias: Bearish below 1.1950 Bullish above EUR/USD opened 1.1871 and traded in a narrow 1.1869/78 range Option strikes around 1.1860 and 1.1880 helped contain the price action Support is found at the 10-day MA at 1.1828 and 21-day MA at 1.1823 Sellers are tipped ahead of 1.1900 with resistance at Friday's 1.1907 high A break above 1.1910 targets the 38.2 of 1.2266/1.1752 at 1.1948 EUR/USD starting a short-term trend higher - valid while 1.1820 holdsGBPUSD Bias: Bearish below 1.40 Bullish above. +0.05% in the middle of a tight 1.3885-1.3899 range with only light flow Summer holiday season in full swing in the UK and Europe weighs on interest Charts; 5, 10 & 21 daily moving averages climb - momentum studies crest Net bullish signals, but 1.4000 test needed soon to sustain bullish view 1.3846 10 DMA is initial support - 1.3820 21 DMA is the pivotal level 1.3985 upper 21 day Bollinger and 1.3991 61.8% June July fall cap at present 1.4000 break would initially target 1.4090 76.4% of the June-July fall No significant data of scheduled BoE activity today- USD, risk to lead cableUSDJPY Bias: Bullish above 109 Bearish below USD/JPY heavy in Asia, 109.19-34, mostly below 109.29-110.12 Ichi cloud Managing to hold above 109.00 - 109.07 EBS low July 19, Japanese bids Offers from Japanese exporters, others eyed from @109.50 now Few large nearby option expiries today - 109.25 $332 mln, 110.00 $775 mln Soggy US yields weigh, Treasury 10s @1.181%, after 1.151% low yesterday Risk off in Asia too, Nikkei -0.8% @27,559, AXJ mostly in red, E-minis +0.1% JPY crosses heavy, EUR/JPY 129.68-82, GBP/JPY 151.66-90, AUD/JPY 80.37-56 Tokyo Jul core CPI weak, +0.1% y/y, overall -0.1%AUDUSD Bias: Bearish below .75 Bullish above AUD/USD pushed to 0.7400 from 0.7368 after the RBA decided not to delay taper Market was expecting RBA to delay tapering bond purchases as of September RBA statement upbeat on prospects of bounce back after lockdowns end AUD/USD was holding up despite global growth concerns and Sydney COVID spread Speculation of AUD-positive M&A flows helping to underpin AUD/USD for now AUD/USD resistance is at the 21-day MA at 0.7406

from Tickmill Expert Blog - Forex Traders Blog https://www.tickmill.com/blog/daily-market-outlook-august-3rd-202"
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Dollar Edges Lower; U.S. Economic Recovery Key

from Forex News https://www.investing.com/news/forex-news/dollar-edges-lower-us-economic-recovery-key-2576923
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Market Update – August 3 – USD, Equites & Yields Pressured on weak data & Virus surge

Market News Today – USD pressured again (USDIndex struggles @ 92.00) on weak data yesterday, and virus surge in Southern low-vaccination rated states. JPY & CHF benefit – Yields lead – down again; 10yr 1.74%. Equities flat into close (USA500 4387). Oil dumps -3.5% (CAD sinks). 

RBA more Hawkish than expected – AUD rallied – September taper looks set. Although cautious undertones remains and concerns over housing market and virus & vaccination situation. Chinese & Asian stock markets very mixed after more Chinese clampdowns this time on Gaming and virus surge in China. Fed’s WALLER (Hawk) suggests taper announcement in September. Overnight data mixed better CPI for Tokyo weaker Housing approvals for AUD. Gold holds at 1808 but USOil also down significantly to test 70.00, yesterday 30 cents higher now. 

European Open – The September 10-year Bund future is fractionally higher, US futures marginally lower, while in cash markets the 10-year Treasury rate is struggling at 1.176%. The real 10-year Treasury yield remains close to a record low. DAX and FTSE100 futures are down -0.2% and -0.1% respectively, US futures up 0.2-0.3% after a largely weaker session in Asia. With little on the European calendar to distract markets those will likely also be the themes for the European AM session, alongside earnings reports. The BoE decision tomorrow is also coming into view with the UK expected to join Fed and ECB and signal cautious patience for now.

Today – US Factory Orders, Fed’s Bowman, – Earnings: Generali, Societe Generale,  BMW, Infineon, BP, Standard Chartered, Alibaba, Phillps 66, Eli Lilly, ConocoPhillips.

Biggest FX Mover @ (06:30 GMT) NZDCAD (+0.19%) Has moved up from 0.8680 (14 day low yesterday) as Oil prices tumbled and NZD got a lift from Hawkish RBA. Significant breach of 21 EMA yesterday, Faster MA’s aligned higher, MACD signal line & histogram over 0 and moving higher, RS 78 and well into OB zone. H1 ATR 0.0011, Daily ATR 0.0060.

Click here to access our Economic Calendar

Stuart Cowell

Head Market Analyst

Disclaimer: This material is provided as a general marketing communication for information purposes only and does not constitute an independent investment research. Nothing in this communication contains, or should be considered as containing, an investment advice or an investment recommendation or a solicitation for the purpose of buying or selling of any financial instrument. All information provided is gathered from reputable sources and any information containing an indication of past performance is not a guarantee or reliable indicator of future performance. Users acknowledge that any investment in Leveraged Products is characterized by a certain degree of uncertainty and that any investment of this nature involves a high level of risk for which the users are solely responsible and liable. We assume no liability for any loss arising from any investment made based on the information provided in this communication. This communication must not be reproduced or further distributed without our prior written permission.

from HF Analysis /259209/
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Dollar Down, Falls Against Yen Over Growing COVID-19 Recovery Concerns

from Forex News https://www.investing.com/news/dollar-down-falls-against-yen-over-growing-covid19-recovery-concerns-2576849
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Dollar on back foot vs safe-haven peers as Delta virus spreads

from Forex News https://www.investing.com/news/forex-news/dollar-on-back-foot-vs-safehaven-peers-as-delta-virus-spreads-2576809
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