Falling housing demand

The housing market appears to have had a relatively weak start in 2011 – although viewings are apparently up on this time last year.

This could be a positive, because low demand tends to reduce prices, which is good for first time buyers as well as anyone intending to ‘trade up’ to a more expensive home.

However, those wishing to downsize – or needing to move to be nearer a new job, or because current accommodation is simply no longer adequate – face difficulties if there are too few potential purchasers.

What does this mean for mortgages?
In some respects, mortgage lenders are part of the problem, rather than a possible solution. They have, ever since the credit crunch started, made it difficult for first time buyers to borrow, by withdrawing many of the high loan-to-value mortgages that were previously available. This means that young people have to save a much higher proportion of the purchase price than was once the case and even slightly lower prices are insufficient to help.

The fact is that on a £175,000 home, most buyers will need a deposit of anything from £17,500 to £35,000 – and that is before you allow for legal costs, removal and furniture (well there are always orange boxes to start off). If you are earning £25,000 a year and living in rented accommodation, this could take a long time to build up.

No wonder so many people are turning to the Bank of Mum & Dad, or even grandparents.

The threat of rising interest rates
But there is another issue that is likely to affect homebuyers, whether they are just starting out, or are already on the ladder and want to move – or simply rearrange their borrowings.

The poor growth figures for the end of 2010 appear to have prevented the Bank of England from using a rise in base rate (which has been at 0.5% for not far short of two years, now) to try and bring down inflation from its current frighteningly high level. But there is a strong possibility that the adverse movement in gross domestic product was a bad-weather-induced aberration and that there will soon be scope for the Bank to increase its rate.

While mortgage lenders take more account of five-year swaps to determine what they charge borrowers, it is inconceivable that they would forego the opportunity of a modest rise in base rate to push up their charges by as much, or more.

Should you be considering your position?
Whatever your position on the housing ladder, you should be thinking carefully about what type of mortgage is most suitable for you. While some people like the idea of a mortgage that tracks base rate – because this prevents lenders from hiking their rates without a movement at the Bank of England – others may feel more confident with a fixed-rate deal that determines precisely what their outgoings will be for an agreed period.

There are, of course, other forms of mortgage, including offset and variable rate mortgages. With the market so very difficult at the moment, it is important to seek professional advice before making any decisions relating to your personal finances.

Your home may be repossessed if you do not keep up the repayments on your mortgage. A fee may apply for mortgage advice and you must ask your adviser for details before making any decision relating to a new mortgage as the actual amount will depend on your personal circumstances, but in most cases is unlikely to exceed 0.5% of the loan value (on a typical £100,000 mortgage, this would be £500).

NOTHING CONTAINED IN THE ARTICLE SHOULD BE CONSIDERED AS GIVING INDIVIDUAL FINANCIAL ADVICE. PLEASE NOTE THAT THERE MAY BE VARIATIONS FOR THOSE LIVING IN OR BUYING AND LETTING PROPERTY IN SCOTLAND AND NORTHERN IRELAND.

Shifting sands for women’s pensions

Phased plans are in hand to raise the age at which women are entitled to receive their state pension from the 60 that it used to be, to 66, by April 2020.

Those affected will know that the process of moving from age 60 to 65 was already under way, in any case. What has changed is that it is now being accelerated.

Effectively, the rate of change is set to speed up in April 2016 and will therefore reach 65 by April 2018 and 66 by April 2020, alongside the age for men.

What this means in practice
The important point to note is that women will, if the plans are approved, start to receive their state pension later than they had originally expected, on a faster timetable than had previously been announced. This could throw into confusion existing personal and occupational pension plans that aim to produce an income that assumes the basic state pension will also be available from age 60 – and there are many women for whom that was a realistic prospect until not so long ago.

fter all, with a basic state pension currently worth just over £5,000 a year, a personal pension of £10,000 a year would represent only two thirds of a person’s total income. So if you have to wait another year, or two – or six – for one third of your income to arrive, then it will be important to have alternative plans in place.

What are your options?
Of course, for some people, working longer is an option; indeed, many may prefer to carry on for a variety of reasons. However, there are also likely to be a large number of us who would prefer to give up work and do something else without the need to generate an additional income to make up for a delayed state pension.

For those who wish to increase their retirement planning in advance, so that there is extra money available to ‘fill the gap’ before the state pension starts, there are a number of options. 

Conventional pensions
Because of the flexibility introduced to pensions in April 2006, it is possible to use the tax-free pension commencement lump sum as a way of providing money from a pension scheme without having to actually start drawing an income at the same time. This may mean, for some, that increasing pension contributions now could make sense, leaving a potentially larger pot for use during the ‘gap’ period.

From April 2011, it will be possible to contribute as much as £50,000 a year (provided you have sufficient earnings) and receive tax relief at your highest marginal rate on what you put in.

Alternatives
Those who would prefer greater flexibility may wish to consider using alternative investments such as Individual Savings Accounts. These can accept as much as £10,200 a year (this figure may be increased in the Budget) into a highly tax-efficient savings plan using cash and/or equity based investments. One benefit is that, although there is no tax relief on money put in, there is virtually no tax within the fund and the money is totally free of tax on the way out, whether taken as a lump sum or an income.

The least good option is to do nothing! 

It is important always to seek independent financial advice before making any decision regarding your finances. The value of investments is not guaranteed; you may get back less than you put in.

NOTHING CONTAINED IN THE ARTICLE SHOULD BE CONSIDERED AS GIVING INDIVIDUAL FINANCIAL ADVICE. PLEASE NOTE THAT THIS ARTICLE IS BASED ON OUR CURRENT UNDERSTANDING OF LEGISLATION, WHICH CAN BE SUBJECT TO CHANGE IN FUTURE; THERE MAY BE VARIATIONS FOR THOSE LIVING IN SCOTLAND AND NORTHERN IRELAND.

The impact of inflation on savings

According to data from the Bank of England, the average savings rate at the end of last year was just 2.58%. With Consumer Prices Index inflation at 4% (and the Retail Prices Index rising at 5.1%) the numbers do not stack up.

On the basis of Consumer Prices Index inflation at 4% a year, a basic rate taxpayer needs to earn 5% before tax if the impact of inflation at the CPI rate is not to erode their savings; try to beat the RPI figure and it is even more difficult. For many savers, this may be unachievable, especially while the Bank of England maintains base rate so low, in an attempt to avoid stifling fragile economic growth. 

The danger is that this situation will encourage investors to adopt higher risk strategies, in order to secure a better return.

Is risk a bad thing?
Risk, of itself, is an integral part of investment; as a general rule, the greater the risk, the higher the potential reward. But it is essential to remember that the value of investments really can go down as well as up; if you accept greater risk in return for the prospect of larger profits, you must be aware that you could lose part or all of your money.

But as we have already demonstrated, leaving your cash on deposit can simply mean that its value withers, over the years, in any event.

Unacceptable risk
What is unacceptable, in terms of risk, is taking on the potential for losses that you are not aware of. This can happen with some forms of derivative-backed investments that look as if they are guaranteed; but the protection evaporates under certain circumstances. 

Acceptable risk
On the other hand, ‘nothing ventured, nothing gained’. In other words, you cannot afford to go through life in cotton wool; you must accept some degree of risk if you are to gain any form of reward at all. The way to do this successfully is to understand – with the help of an investment specialist – what risks you are exposed to with different types of investment, and to consider an asset allocation strategy that gives you the best chances of success.

When we talk about ‘asset allocation strategies’, what we really mean is thinking about where your money is invested and ensuring that you do not have all your eggs in one basket. Of course, if you know in advance which horse will win the Grand National, you could put all your money on it to win. But in reality, the future is a closed book to us so we need to consider ways of investing that give the best chance of seeing our money grow. If we cannot put all our money on a ‘sure winner’, we are also likely to avoid putting it all on a ‘loser’. Looking for different types of share or ‘collective investments’ such as unit trusts, for example, means that you have a greater chance that, if one share or sector performs less strongly, another might shine.  

Various strategies will suit different people, but looking at separate business sectors, company sizes and geographical locations could be a good start. For those with larger sums to invest, it may also be worth considering including a wider range of assets such as commodities and property. These, however, have different risk profiles compared with more traditional assets such as shares and most collective investments, so individual advice is essential.

It is important to take professional advice before making any decision relating to your personal finances. As ever, the value of investments is not guaranteed and will fluctuate; you may get back less than you put in.

NOTHING CONTAINED IN THE ARTICLE SHOULD BE CONSIDERED AS GIVING INDIVIDUAL FINANCIAL ADVICE. THE VALUE OF INVESTMENTS IS NOT GUARANTEED AND WILL FLUCTUATE. YOU MAY GET BACK LESS THAN YOU INVEST. PLEASE NOTE THAT THERE MAY BE VARIATIONS FOR THOSE LIVING IN SCOTLAND AND NORTHERN IRELAND.

SME pension provision

News that two-thirds of small firms do not offer employees any form of pension should raise alarm bells for everyone, in view of the rapidly approaching launch of the National Employment Savings Trust (NEST) pension scheme.

Starting from 2012, employers who do not have a suitable pension scheme that auto-enrols employees and provides a minimum level of contributions will have to auto-enrol everyone who earns above the tax personal allowance into the NEST instead. (Some others can join if they wish to.)

Employees have the ability to opt out and research undertaken by the Association of Consulting Actuaries (ACA) suggests that as many as 35% of employees will do so.

Will NESTs be enough?
Being without any pension provision is something that nobody should have to suffer, but the total contribution level under NESTs, which will be 8% of income in excess of the National Insurance threshold, is unlikely to be adequate, according to the ACA. The association believes that the contribution level should be at least 15%, if employees are to achieve a reasonable level of retirement income – more for older people who are only just starting to make provision.

Why provide pensions?
Although plans are in train to increase the basic state pension, even if it reaches £140 a week it will still be inadequate to provide a reasonable level of retirement income, so some degree of personal planning is essential.

But apart from government compulsion, why should employers be involved? The problem has historically been that setting up a company pension could involve considerable administration time and cost – not to mention, in the case of defined benefit pensions, an open ended financial commitment. 

But new types of pensions, particularly group personal pensions, have dramatically reduced the financial and administrative burden – which it is to be hoped the introduction of NESTs will not increase back to previous levels – and these will continue to be available as an alternative to the new state scheme.

The benefit to an employer of offering a pension scheme is that it can be seen as part of an integrated remuneration package that makes the company stand out from the crowd as a good employer. This is far from altruism; if employees and others see you as a good employer, they will work harder and have greater respect that can pay dividends in terms of productivity and profitability over the longer term.

Making pension contributions more cost-effective
Nevertheless, all businesses have to ensure that they are not spending money unnecessarily, especially in the current economic conditions, so finding ways of making pension contributions that do not increase costs can be attractive. 

One such method is the so-called ‘salary sacrifice’ under which employees agree to give up part of their salary in return for pension contributions from the employer. This is ‘neutral’ in terms of tax for the employer and employee, because the employer will usually continue to be able to charge this as a business expense, just the same as salaries, and the employee will receive a smaller salary, and thus pay less tax. However, there is an immediate National Insurance ‘benefit’ to both employer and employee, because each will pay their NI contributions based on lower income, because contributions to a pension scheme are not subject to NI. 

With NI rates rising in April, this could be of considerable interest, although some employers actually pass on the NI saving as an additional pension contribution, so this aspect could remain ‘neutral’ for the employer, while the employee benefits even more.

As with any form of financial decision, it is important always to seek independent financial advice before making any decision regarding pension planning or investments. For further information, please contact your usual independent financial adviser.

NOTHING CONTAINED IN THE ARTICLE SHOULD BE CONSIDERED AS GIVING INDIVIDUAL FINANCIAL ADVICE. PLEASE NOTE THAT THERE MAY BE VARIATIONS FOR THOSE LIVING IN SCOTLAND AND NORTHERN IRELAND.

Protecting your savings and investments

While nobody can be fully protected against the vagaries of investment markets, there is protection against many forms of default by banks and similar institutions.

The Financial Services Compensation Scheme (FSCS) was established in December 2001 to ensure that investors are protected should a product provider let them down. This covers businesses regulated by the Financial Services Authority (our own regulator) and includes banks and building societies, insurance companies, investments, pensions and endowments.

This protection does not apply simply to fluctuations in the market value of an investment.

Level of compensation
For investments and mortgages, the maximum level of compensation available is £50,000, while for insurance there is no limit, but the cover is only for 90% of the loss (third party motor insurance protection is paid in full).

It is in the area of bank deposits that a change has recently been made. Until recently, the limit for deposits was £50,000 (before the credit crunch it was even less). However, thanks to a recent ruling from the EU, this limit has now been increased to €100,000, which is expressed by the FSCS as £85,000. It is important to be aware that, should the pound strengthen against the euro, this limit may fall. 

Who is covered?
Deposits made by private individuals and small businesses to any authorised firms are protected by the FSCS.

The limit applies to each individual with each regulated institution and this is very important, because with banks and building societies merging, it is essential to be aware that some may no longer be separately authorised, but included in one overall authorisation.

Where this is the case, a couple with, for example, £200,000 equally between them invested (either in joint or separate accounts) between two banks within the same group that are covered by one authorisation could lose £30,000 should both default. Conversely, if the banks were separately authorised, there would be no loss.

Claims are normally expected to be paid out within seven days.  

How can you check authorisation?
Consulting a professional independent financial adviser can help you check the authorisation status, but as a starting point, it might be a good idea to check the Financial Services Authority’s website and ensure that the banks have different registered numbers. You can also ask the bank or building society to confirm its regulatory status.

You should take individual professional advice before making any decision relating to your personal finances.

NOTHING CONTAINED IN THE ARTICLE SHOULD BE CONSIDERED AS GIVING INDIVIDUAL FINANCIAL ADVICE. PLEASE NOTE THAT THIS ARTICLE IS BASED ON OUR CURRENT UNDERSTANDING OF LEGISLATION, WHICH CAN BE SUBJECT TO CHANGE IN FUTURE; THERE MAY BE VARIATIONS FOR THOSE LIVING IN SCOTLAND AND NORTHERN IRELAND.

Where now for investments?

Now that we are firmly entrenched in the new year, many commentators believe that we are in for a good 2011 from a share value perspective.

Of course, there are no guarantees in investments, but at the end of 2010, the FTSE100 was still some 7.8% below its long-term trend, counted from April 1984, when it was launched. In fact, it has been below trend since January 2008 – by as much as 45% in March 2009, so clearly markets have recovered significantly since then.

While there is no ‘statistical’ reason why markets should continue to grow until they move above trend, there are economic and market reasons for some degree of confidence.

Why might shares grow?
One reason why we might expect 2011 to be a good year for shares is that interest rates are unlikely to rise for some time to come. Investors are already tired of earning less than inflation on their deposits – which means that the actual value of their money is falling – and are therefore likely to be keen to move more into share markets. This demand is inevitably likely to push prices up.

But this is not operating in a vacuum; many businesses have actually come out of the recent recession fitter and leaner than they were at its start and are therefore in a position to start generating increased profits. These will swell dividends and make shares even more attractive.

Exporters will also be helped by a relatively weak pound (at least against the US dollar) and it appears that growing consumer demand in China – probably the world’s biggest potential market – could well increase opportunities for UK exporters.

On the downside
It should, of course, be recognised that 2011 has started with a hike in VAT – although the impact is only to increase some costs by just over 2%, so businesses are unlikely to be affected adversely for long – and an increase in National Insurance contributions for employers and employees comes into effect from April. This is all part of seeking to help the country repay its massive borrowings which, if it succeeds, should also help businesses over the longer term. 

Certainly it is to be hoped that a strong private sector will be able to absorb public sector job losses, which again augurs well for businesses.

Don’t forget your ISA
Thanks to a fairly recent change in the rules for Individual Savings Accounts (ISAs), it is now possible irrevocably to move money from a cash ISA into a stocks and shares ISA without affecting your annual investment allowance for this highly tax-efficient form of saving. So those who have been adopting a cautious investment strategy and putting up to half their annual allowance into cash can now move part of the money into shares. 

And please don’t forget that your annual ISA allowance (set at £10,200 for 2010/11 for those over 18 years of age) will be lost for ever if you do not get it in by close of play on Tuesday 5th April 2011 (preferably earlier to allow for delays).

It is important to take professional advice before making any decision relating to your personal finances. As ever, the value of investments is not guaranteed and will fluctuate; you may get back less than you put in.

NOTHING CONTAINED IN THE ARTICLE SHOULD BE CONSIDERED AS GIVING INDIVIDUAL FINANCIAL ADVICE. THE VALUE OF INVESTMENTS IS NOT GUARANTEED AND WILL FLUCTUATE. YOU MAY GET BACK LESS THAN YOU INVEST. PLEASE NOTE THAT THERE MAY BE VARIATIONS FOR THOSE LIVING IN SCOTLAND AND NORTHERN IRELAND.