SPRING / SUMMER 2009
Meanwhile, the recession
The recent elections and subsequent political events made sure the economic news was completely overshadowed early in June. However, just as our Prime Minister earned another reprieve, Lloyds TSB announced the closure of the Cheltenham & Gloucester, resulting in 1,600 job losses; the economic downturn was back on the front page and reminding us that any tentative 'green shoots' are still very fragile. Buried behind the political posturing, there have been some mixed messages coming out of the economy. Retail sales were down in May, with the British Retail Consortium indicating consumers were steering clear of the big ticket items – furniture and large electricals. We were, however, treating ourselves to more gardening and outdoor products. Meanwhile, the Royal Institute of Chartered Surveyors suggested that house prices were stabilising and that sales per surveyor have hit their highest level since August 08. However, supply has reduced, with new instructions falling for three months running, and those same sales figures are still 30% down on a year ago. If the National Institute of Economic and Social Research is right, GDP may have ceased its decline in April and the worst of the recession could be over. However, the downturn has been very severe and even if growth has resumed, as figures from the Office of National Statitics on industrial production show, levels may well have gone up 0.3% in April, but they are still down over 12% on a year ago. There is a way to go yet. Welcome to the latest edition of News & Views, our update on developments in the world's stockmarkets.
In this issue, we bring you the latest on the economy and an update on how changes in the Budget might affect you.
Tips on surviving recession
NO 7: THINK LONG TERM 'Recession' is commonly defined as two consecutive quarters of negative growth (in the Gross Domestic Product or GDP). Six months in the average lifetime of a portfolio is not long – and even if you take into account the negative behaviour of markets both in anticipation of and in the aftermath of such data, it is still only a short time compared with the 20 plus years over which we plan for our retirements. If your portfolio meets your personal criteria and is well diversified, a recession should not cause you to change plans: sometimes doing nothing is best.
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Struggling to cope with debt
2009’s Budget was never likely to provide much in the way of good cheer. As the Treasury struggles to cope with the cost of the recent bank bailouts, the rising cost of social security and falling tax revenue, public borrowing is set to soar to record levels. In an attempt to help the UK balance its books, Chancellor of the Exchequer Alistair Darling intends to cut growth in spending on public services by almost half from 2011 and, in a surprising move, he announced that that those earning more than £150,000 per year will be taxed at a new high rate of 50% from April 2010. The Budget also included a reduction in tax relief on pension contributions paid by high earners. Tax relief for those earning more than £150,000 per year will be tapered off, disappearing completely for those earning £180,000 or more. Meanwhile, those earning more than £100,000 per year will see the withdrawal of their personal allowances from April 2010. Fuel duty will rise by 2p per litre in September, while duty on alcohol and tobacco rose by 2%. Darling announced £2 billion-worth of help for the unemployed, and measures intended to boost the housing market and the motor industry. The Budget included some help for businesses, although the Confederation of British Industry criticised the Budget, commenting that it did not set out a "credible and rigorous path for restoring the public finances to health." Pensioners will see the basic state pension increase by at least 2.5%, regardless of inflation, and current winter fuel allowances will be maintained for another year despite the recent fall in energy prices. The limit on savings that pensioners can possess before their Pension Credits are reduced will rise to £10,000 in order to help those negatively affected by low interest rates. Meanwhile, the annual limit for ISA contributions will rise this year to £10,200 per year for those aged over 50, and for everybody from next year. Darling expects Britain’s economy to shrink by 3.5% during 2009, and return to growth the following year. However, the International Monetary Fund expects the UK to contract by a rather more drastic 4.1% in 2009, and does not expect Britain to return to growth during 2010. Darling appears to be gambling on a relatively swift economic recovery for the UK; only time will tell whether this gamble will pay off.
Time to get started
Higher-rate tax relief for top earners on pension contributions was one of the biggest stories from this year’s Budget, but the news should prompt everyone to look at their pension arrangements. There are a number of knock on effects which could eventually trickle down and affect everyone. The level of tax relief to date has made it attractive for top executives to support expensive defined benefit schemes. The removal of these reliefs at the highest level, however, is bound the change the balance. Defined benefit schemes have been under threat for some time as companies find them increasingly expensive to run. Barclays, Morrisons and Royal Mail are just the latest to announce changes which will reduce some of the benefits, at the very least for new employees. However, it is not just the loss of defined benefits which needs to be considered. In removing full tax relief for high earners on their pension contributions, the Chancellor has demonstrated that these benefits are not necessarily something any of us can rely on. Equally, just as pension income is becoming less certain, the cost of living for pensioners is rising. This leads to one inescapable conclusion – to ensure yourself a healthy, wealthy retirement, you need to start planning. Starting early is always a good idea because the longer the period over which you make contributions, the more you benefit from the compounding of interest. However, as an added bonus, if you start now, you also ensure you make the most of the current tax reliefs available, just in case.
What is a pension?
Funding a decent income
When making plans to start any pension plan, the first thing to consider is how much income you think you will need. Few people need as much income in retirement as they do while working – the mortgage may be paid off, children will likely have left home and day-today expenses will probably fall. However, with more leisure time available, you may have some ambitious plans for travel. All this needs to be considered so you can set some realistic expectations. Once this target figure has been determined, you can then begin to decide how much needs to come from a pension and how much can come from other means. For example, the state pension is £95.25 a week (for 2009/10), plus you may have money in ISAs or from rent on second properties. You may also decide to work part time or take some other type of temporary paid employment. Pension plan savings are then the first step in working out how to generate the difference - and this can be complicated. You may have some form of work pension from previous or current employment, but it is unlikely they are sufficient on their own so some form of continued saving will be required to meet your target. At current annuity rates, with interest rates at very low levels, £10,000 worth of annual income for a male aged 65 will require a pension fund valued at over £140,000. For females - or for those wanting to retire earlier - the fund required will be even higher. Hence the need to start planning. The earlier you start, the easier reaching that target will be.
The doom mongers keep repeating that an impoverished retirement lies ahead for us all unless we get saving now. But how many of us really understand what a pension is and what we need to do? A pension is a long-term savings plan and its sole purpose is to provide a secure income in retirement. Essentially, a little money goes in each month throughout your working life - then by retirement, it should have built into a tidy sum. This sum is then commonly used to purchase an annuity, which will pay a regular fixed amount, usually each month and thereby supports you in your dotage. To encourage you to start saving, the Government provides tax breaks on contributions. For example, basic rate tax payers take home £80 for every £100 earned. However, if that £80 is then placed in a pension, the Government refunds the other £20 to give £100 invested. Higher rate taxpayers get £100 invested for laying out only £60 of their take home pay. There are two basic types of pension - a personal pension, started by an individual, and an occupational scheme, organised by an employer. The latter then breaks down further to 'defined contribution', where a set amount goes into the scheme and the payout depends on the growth of assets, and 'defined benefit' (now increasingly rare), where contributions vary but the amount the scheme pays out is agreed in advance.
The rules of investing
No 8: DON'T BELIEVE EVERYTHING YOU READ Headlines in newspaper finance sections and throwaway lines from friends can be just as misleading as any frontpage story about celebrities if you do not check them out properly. Further investigation is therefore highly recommended before you act on third party opinion. Investment decisions require a clear head and a focus on your objectives. Seeking help from a qualified professional can help you take a step back from all the hype, get feedback from across the market and make the most appropriate investment decisions for the long term.
Changes in the housing market
A combination of exceptionally low interest rates and plummeting values has made house prices more affordable now than they have been in years. The latest figures from the Halifax show that, despite a small pick up in May this year, UK house prices are still over 16% down on a year ago. Speculation that 'panic selling' by buy-to-let investors could send house prices down did nothing to boost morale in the market. However, these concerns were probably overstated as new instructions to sell are falling back. On the other side, the latest survey from the Royal Institute of Chartered Surveyors (RICS) suggests that the number of potential buyers registering with estate agents has now increased every month for the last seven, with those in London reaching the highest levels since October 2006. Nevertheless, there are still some issues holding back a proper rebalancing. Cautious mortgage lenders are still managing to derail the hopes of first-time buyers by insisting on high deposits and perfect credit scores. Indeed, one South East surveyor suggested this is 'the key factor stifling recovery'. Coupled with the ongoing lack of consumer confidence, caused mostly by the threat of job cuts, many potential buyers are still being put off. However, whilst the number of new instructions to sell is falling, driven partly by prices but also, RICS suggests, by the impact of Home Information Packs, prices have stabilised and confidence, to en extent, has improved. Looking ahead, there are some tentatively encouraging signs. The combination of increased demand and reduced supply led to the Halifax reporting a surprise 2.6% increase in prices in May. One number on its own does not make a trend and it needs to be considered in the context of a 3.1% fall overall for the three months to May compared with the previous three months, but it is still the first positive move in a while. At the same time, the Council of Mortgage Lenders has suggested that mortgage approvals for house purchase were up 16% in April over March. Levels from which these increases are being measured are very low, but, as one surveyor in London pointed out, there is at least 'light at the end of the tunnel'.
The contents of this update are based on market conditions and opinion as 10 June 2009 and are subject to change. The Budget was held in April 2009. The contents of this newsletter do not constitute advice and should not be taken as a recommendation to purchase or invest in any of the products mentioned. Before taking any decisions, we suggest you seek advice from a professional financial adviser.