Interest Rates held at 0.5%

Interest rates have been held at 0.5%, which have now been at this level for 9 months, since March, which coincidentally was the bottom of the stockmarket dip in the current recession.

For those with debt this is of course continued welcome news – but now really is the time to make those overpayments to reduce your debt. Never has the impact of interest been so modest of your total debt. The news is less welcome for those reliant upon cash deposit savings or approaching retirement and possibly considering buying an annuity. The city seems to be of the mind that interest rates are likely to remain at this level for a further 12 months with very little change. If this forecast becomes reality, 2010 should be the year that you reduce debt and seek alternatives to cash to improve income.

Politically, we have an election to come in 2010 and I imagine that if there is a change of Government, as many expect, some of the detail of the hard facts of the current Government spending will be published. Depending on who and what you believe, this will create two possible outcomes. Panic (at the numbers), or relief (that they are not as bad as feared). How the markets interpret this remains to be seen, but my own view is that caution should be exercised.

Here’s one for the statisticians – only 12 months ago the Bank base rate was 2.0% some 400% higher than it currently is at present. Our media loves this sort of mathematical frightener – imagine a 400% increase in interest rates now as a headline…. Still only 2.0% which is frankly “as cheap as chips”!

Pre-Budget Report 2009

I have had a look at the 216 page pre-Budget report from the Chancellor today. This will certainly help me sleep tonight.

In short, there is little that we did not know, or more accurately expect. I am of the view that whatever one’s political persuasion, the announcements made today may never come into effect with a change of Government. It is very difficult to remove the political manoeuvring from the detail with much success.

The key points that will impact our clients are as follows:

^· The personal allowance is frozen at £6,475 however from April 6^th 2010 those with a taxable income over £100,000 will see the personal allowance reduce by £1 for every £2 over £100,000. In other words once your income is £112,950 you will lose your personal allowance entirely. Remember the personal allowance is the amount of income that can be earned before you pay any income tax¹.

· Those earning £130,000 or more will have a pension contribution restriction of £20,000 which includes all payment from both employees and employers. This comes into effect from April 2011 but the Government announced².

· Those earning over £150,000 have the same restriction but also pay income tax at 50%

· VAT will return to 17.5% from 1^st January 2010³. Our invoice for services which is issued before 31^st December will be charged at the current rate of 15%. We agree a monthly payment facility with our clients to pay this over 12 months. So even though VAT will rise this will not apply to anyone invoiced before 1^st January 2010.

· Public sector workers (doctors) will be expected to pay more into their employers pension scheme (no detail was provided)⁴.

· National Insurance contributions will rise by 0.5% for employees, self employed and employers from April 2011⁵.

· 50% tax on bonuses over £25,000 to bank employees⁶.

· The inheritance tax nil rate band is frozen at £325,000 until 2011⁷.

· ISAs have a £10,200 allowance for all (not just the over 50’s) from April 6^th 2010⁸.

· Public sector pay awards are likely to be restricted to up to 1% a year from 2011 to 2013⁹.

Tomorrow I will provide a guide to the Budget which I hope you will find of use.

¹: Section 5.4, p74 & B5, p175

²: Section 5.28 & 5.49

³: Section 5.20, p74

⁴: Section 6.51, p113 & Annex B82 p196

⁵: Section 5.20, p74

⁶: Section 3.38, p50

⁷: Section 5.92, p94

⁸: Section 5.38, p83

^9: Section 6.49, p112

Student Loans

Money Week reported that at the start of September many students will see their loans actually reduce. This is due to the fact that the interest rate on loans before 1998 have turned negative. Each September the interest rate is set for the coming academic year and has been historically based on RPI each March. Money Week note that it was -0.4%. This will not benefit current students or those that took out loans after 1998 due to a clause allowing the Government to act if such an event occurred. The rate is then set to 0%. Regardless of what one thinks of student loans, this is a very cheap form of finance.

Final Days For Final Salary

A recent report conducted by Watson Wyatt suggests that about half of employers with final salary schemes expect to close them within the next 3 years, with only 2% of such schemes remaining open to new members.

The big public sector schemes such as local Government, Teachers and NHS Pension Scheme are gradually evolving, restricting new membership, but are unlikely to be closed to existing members due to the political fall-out that would inevitably follow. Businesses in the private sector are plainly running for the door. Regrettably little can be done to turn this around - King Canute comes to mind – the days of the final salary scheme in the private sector are certainly numbered, as for those within the public sector, at some point, there is likely to be a significant battle on this one, but none of the political parties have the appetite for the inevitably sanguine chaos that would occur. Public sector schemes will live to fight another day, but for how much longer is anyone’s guess. Mine is in about 19 years (2028).

Survey Says… UK not saving for retirement

A recent survey of 9,000 consumers across Europe found that 72% of Britons surveyed do not hold any pension savings. The survey suggests that this is therefore higher than the global average (69%).

For those that know me, you will be aware of my scepticism of surveys and statistics in general. My first question would probably be – who was surveyed? Followed by “when?” Whilst I would certainly concede that the UK is not saving enough – most data would indicate this, such surveys are prone to error and I am rarely convinced about the reliability of responses from those surveyed. I would not wish to dismiss the survey out of hand, but I would certainly warn against making too many assertions from the results.

It is fairly clear that very few people that I meet are saving “enough”. Even the term “enough” is somewhat spurious… few people budget, so it is reasonable to assume that they would not have a clear idea of what enough would be in retirement. The pension industry is full of unhelpful jargon and the reality is that few people are up to speed with what they have in pensions or what they need. This is where good planning is required.

Banking Roundup

The FSCS (Financial Services Compensation Scheme) has announced that the industry (which includes IFAs) will be asked to stump up £406m as their initial contribution towards the cost of bank defaults in 2008. The key word being initial. The FSCS paid claims of nearly £21bn from October 2008 until March 2009, this compares to a total of £1bn paid in claims since the scheme was set up in 2001.

Santander, one of the few Banks to be relatively unscathed from the credit crunch recently announced half-year profits of £790m, an increase of around 41%. The Bank recently “acquired” Abbey, Alliance & Leicester and Bradford & Bingley. The theme seems to be an alphabetical collection of UK Banks… next beginning with the letter C?

Barclays meanwhile have announced an increase in profits of around 8% for the first half of 2009 to £2.98bn. It is also interesting to note that they have increased their number of mortgage accounts by around 40,000. HSBC announced half-year profits of £2.98bn, largely due to the growing profitability of its Investment Banking operations. It remains the 3rd largest Bank in the world. Northern Rock on the other hand, continue to push borrowers away once a fixed or discounted rate mortgage has come to a natural end. The result being a reported loss of £724m, compared to a smaller loss for the same period last year of £585m. However, there are indications that the UK taxpayer is being repaid as the level of indebtedness to the Government reduced to £8.9bn. RBS announced profits of £15m, which are of course tiny in comparison to the other banks, the vast majority of profit was also generated from Investment Banking activities with high street style banking services continuing to suffer. Lloyds announced a £4bn loss, most of which it claimed was the result of taking over HBOS (Halifax Bank of Scotland).

So what does all this mean? In short the Banks continue to struggle; most of the good news generated by them is a result of Investment Bank activities. The high street banking sector remains in the doldrums. This is the part of Banking that most of us are familiar with. In practice, small businesses continue to struggle, High street banks are very reluctant to lend or even retain current levels of commercial and consumer borrowing. Their own continued pressure is likely to be passed to branch and regional managers who will be closely monitoring credit arrangements. So be warned.

Place Your Bets

I was fortunate enough to attend the Goodwood horse racing festival last week. I confess that I am a horse racing virgin and had never placed a bet in my life. I had an enjoyable day off with a few colleagues. Having confessed my inexperience at a very early stage I was shown the ropes and the logic behind betting odds was explained. It was a salutary reminder of what many people feel about the investment world, full of jargon and the unenviable task of finding the right adviser and the right investments.

The task of selecting the right horse, involved viewing the horses, their form guide and reading the event guide and if so desired, the relevant newspaper. I regret that on a table of 10 people, only one person picked a winner from the 6 races… you guessed it - that was me (twice!). This was a good case of beginners luck and whilst I went with a small budget, I ended the day with a smaller one.

It was fascinating to hear the excuses given about the jockey not doing the right thing, the horse being boxed in, a suggestion that perhaps the race was not entirely fair. Everyone was wise after the event, yet willing to take yet another punt on the next race. I am sure that the professionals or experienced horse racing crowd could demonstrate added advantage from their knowledge, but I could not help feeling that there was a significant degree of luck involved.

My suspicions about gambling (for me) were confirmed – I really shouldn’t. I also should not attempt to guess the outcome of things I know very little about. I am heartened by the fact that whilst selecting investment funds is no “walk in the park” I do have considerably more expertise and find it very different from gambling. Gamblers can lose a fortune, in the funds that I select, certainly the value can depreciate, but I never place someone in the position of being able to lose all their money. The rules of the game are completely different, ones with which I am thankfully very familiar.