Monthly Archives: August 2016

Just how much are(n’t) you earning?
August 2016

The Bank of England may have finally ended speculation and dropped the interest rate from 0.5% to a new low of 0.25%, but there are plenty of savings accounts already paying less.

Last month the Financial Conduct Authority (FCA) published “sunlight remedy” data, showing the lowest interest rates (as at 1 April 2016) offered by 32 providers of easy access cash savings accounts and easy access cash ISAs – typical homes for rainy day money. The tables largely tell their own story:

Range of lowest interest rates (%) available on easy access cash savings accounts at 1 April 2016

Just how much interest arent you earning chart 1

Range of lowest interest rates (%) available on easy access cash ISAs at 1 April 2016

Just how much interest arent you earning chart 2

The regulator noted that at least half of the providers in their sample offered a lowest interest rate of 0.10% or less on branch-based closed easy access cash savings accounts. That means no more than £1 of interest each year (before tax) for every £1,000 invested. For the corresponding ISA accounts, at least half of the providers paid no more than 0.5%.

The tables are not only a painful reminder of how low savings rates have fallen; they are also a wake-up call if you have money in closed accounts, which with few exceptions pay less than accounts still being marketed – a penalty for loyalty.

These low rates – many below the current 0.5% CPI inflation – mean that generally you should avoid retaining anything more than an adequate rainy day reserve on deposit.  For how much that reserve should be and your options on any excess, please talk to us.

The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Investing in shares should be regarded as long-term investment and should fit in with your overall attitude to risk and financial circumstances.

It’s not all bad news on the pound
August 2016

The Brexit-induced decline in the value of the pound has brought some good news for investors.

its not all bad news on the pound chart

“The Brexit vote has completely changed the picture for dividends this year and beyond.”

So said Capita, one of the UK’s main share registrars in its second quarter Dividend Monitor.  In the first quarter edition, Capita had forecast a decline for 2016 of 1.7% in the underlying dividends of UK listed companies, i.e. dividends other than one-off special payments.  The drop in the value of the pound has made Capita revise its forecast to a 0.5% increase for the year.  In terms of total dividends, it now sees these rising by 3.8%.

The reversal in fortunes reflects the fact that many of the largest UK-listed companies, such as HSBC, BP and Royal Dutch Shell, report their results in US dollars and set dividends in the same currency.  Thus if the dollar rises about 10% against the pound, an unchanged dividend becomes worth 10% more when it’s converted into sterling.

This currency effect also helps to explain why the FTSE 100 has performed reasonably well since the Brexit vote.  The index includes many multinationals whose overseas earnings have, almost overnight, become more valuable to a sterling-based investor.  The same currency boost to dividends and values also applies to nearly all foreign shares, given that since 23 June sterling has dropped against almost all the world’s currencies.

Thus the Brexit vote has served as a useful reminder of the importance of diversifying investments globally.  If your investments are heavily focussed on the UK, the last couple of months should prompt you to review your holdings.

The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Investing in shares should be regarded as a long-term investment and should fit in with your overall attitude to risk and financial circumstances.

Single-tier or No-tier pensions?
August 2016

The Department for Work & Pensions (DWP) is writing to over 100,000 people with bad news about their state pension.

Money Jar GREEN+PURPLEThe new single-tier state pension was launched in April of this year, but the way in which it was introduced has drawn much criticism. The heavy emphasis given in DWP publicity to the flat amount of about £155 a week in DWP publicity meant that some of the downsides of the new pension system received little, if any, attention. This prompted the House of Commons Work and Pensions Select Committee to say in a recent report that government communications were “contributing to confusion about the new system.”

The DWP has now announced that it will be sending individual letters to over 100,000 people telling them that they will not qualify for any state pension, never mind £155 a week. Their loss is the result of a change to the qualifying requirements for a state pension. Under the previous system, only one full year’s National Insurance contributions/credits was required to accrue some (albeit small) entitlement to state pension. Under the single-tier system, there is no entitlement until ten years’ contributions/credits have been clocked up.

The ten year qualifying period is just one example of how some people have been disadvantaged by the move to the single-tier system. If you were a member of a final salary pension scheme between 1978/79 and 1987/88 you could also be on the losing side because under the old rules your guaranteed minimum pension (GMP) would have been inflation-proofed by the state, but it is not under the single-tier.

These two examples are a reminder of the importance of obtaining a state pension projection – particularly if you are 50 or over – and understanding what it means. There may be ways to counter any loss, but as ever in the world of pensions, expert advice is necessary to avoid potentially costly pitfalls.

The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.

Retirement choices shrink as annuities withdrawn
August 2016

One of the UK’s biggest insurance companies has withdrawn from the advisory annuity market.

crying piggy squareThe pension freedom reforms revealed in the 2014 Budget claimed another victim last month as the Prudential announced it would no longer provide annuities via financial advisers. Earlier in the year two specialist annuity providers merged in the face of declining business levels and stricter solvency rules.

The reduction in competition, leaving little more than a handful of companies actively seeking pension annuity business, comes at an unfortunate time. One of the perhaps surprising consequences of the Brexit vote has been a fall in long term UK government bond yields. The drop reflects a ‘flight to safety’ and has already had a knock-on effect in reducing annuity rates still further.

The post-Brexit economic outlook suggests that there is little prospect of yields recovering in the near future. In some economists’ scenarios the Bank of England may soon resort to more quantitative easing (QE) in an effort to stimulate growth, a move which would force gilt yields down another notch. As the experience of Japan, Switzerland and the Eurozone shows, long term gilt yields of about 1.75% still have plenty of room to decline.

All of which means if you are considering when and how to convert your pension pot into a retirement income, it is vital to seek advice before taking any action. There is a strong case for building in as much flexibility as possible, so that any longer term favourable changes in market conditions can be exploited. The wrong decision made today could prove very costly in terms of lost income over the rest of your lifetime.

The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.