Our usual communication seems somewhat untimely following the very sad passing of Queen Elizabeth. She has been a constant in our most of our lives and has always been faithful to her duty, consistently honourable yet caring. Queen Elizabeth has been a superb ambassador and role model and will be greatly missed.
We think that she would want her people to ‘carry on’ especially in these very dynamic times and so although we will be closed on Monday September 19th it is business as usual for us.
It’s been a busy summer with investment markets moving up and down as much the temperature changes we’ve experienced. With Autumn approaching, we look ahead to the coming months and the issues that might arise for clients over that period.
A new face at Number 10
Following the election of Liz Truss as the new Prime Minister, it will be interesting to see if she holds true to what she offered the country during the numerous debates over the summer and her acceptance speech. Below is a reminder of some of the financial pledges made, as at the time of writing this article:
- aims to cancel the forthcoming rise in corporation tax next year, keeping the tax rate at the current 19%, rather than increasing it to 25% for businesses making profits of over £250,000.
- plans to immediately reverse the recent National Insurance rate rises. Our Spring newsletter detailed those increases. Liz Truss plans to move the main rate for employees back to 12% from 13.25% and the higher rate back to 2% from 3.25%. The self employed rates and employer rates would follow the same 1.25% reversal.
- no plans to cut public spending unless it can be done without affecting the future
- will spread the “cost” of covid over a longer period, to reduce pressure on the country to repay the debt quicker during difficult times
- immediately apply a freeze on energy bills (as at the time of publication of this article, this appears to be a cap on a typical household’s energy bill at £2,500 per annum until 2024)
The initial stock market reaction to her announcement as Prime Minister was positive, but the real test will be when the details of her policies are known.
The impact of interest rates rises
Interest rates in the UK have started to move upwards sharply. Until 16 December 2021, the Bank of England’s Base Rate was 0.1%. By early August 2022, after six consecutive increases, it was 1.75%. Across the Atlantic, over the same period, the USA central bank, the Federal Reserve, moved its main rate four times, from 0.00%-0.25% to 2.25%-2.50%.
Why are interest rates rising so fast?
There is a one-word explanation of why the Bank of England and its counterparts around much of the world are raising interest rates: inflation. In the UK, inflation reached 10.1% in July 2022; a year earlier it had been 2.0%, which just happens to be the Bank’s central target. In the US the corresponding figures were 5.4% and 8.5%, while in the Eurozone they were 2.2% and 8.9%.
Those jumps in the rate of inflation caught the central banks by surprise. At first the Bank of England, like its US and European counterparts, thought that the higher inflation would be ‘transitory’, a result of the supply chain difficulties that came with the end of COVID-19 restrictions. By the end of 2021 it became clear that waiting for the transitory spike to disappear was the wrong strategy and talk turned to interest rate increases, with the Bank of England making its first move just before Christmas.
The mistaken belief in transitory inflation explains why rates are now rising so rapidly. Had the central banks made the right call in summer 2021, they would have started pushing up rates back then. Now they are, to use a well-worn phrase of the economic commentariat, behind the curve. That means larger than normal rates increases are now needed to regain lost ground.
How high will rates go?
The Bank of England is avoiding any forward guidance on rates, preferring to adopt a common central bank mantra that it will be guided by the data. In part that is down to experience when guidance had to be abandoned when events did not unfold as expected.
Although the Bank is not offering any forecasts, in August the money market’s view was that the base rate will peak at 3% around the end of the year and then decline by 0.5% over the next two years. Whether or not the Bank thinks that picture is correct, it uses those market numbers as assumptions for its economic projections. At first sight 3% looks like a low peak, especially when The Bank of England forecasts that inflation will reach over 13% in the final quarter of 2022. However, economists are generally agreed that, after more than a decade of near-zero rates, the days of double-digit rates have long since passed. A further factor is that the Bank’s central projection is that inflation will fall sharply after 2023 and be back at 2% in two years’ time.
How higher interest rates affect your finances
The Bank of England’s action is focused on short term interest rates, but longer-term interest rates have also risen. For example, the benchmark ten-year UK Government bond offered a return of 0.97% at the end of 2021. By early August 2022, the same bond had seen its price fall to the point where the yield was just over 2%. Rising interest rates at all terms have the following effects:
- The most obvious is that mortgage rates are rising. If you have a fixed rate mortgage, like five out of six borrowers, you will be unaffected until your fixed rate expires. As most fixed rate mortgages have terms of two and five years, one estimate is that, within the next two years, about 40% of borrowers will have to replace their fixed rate loan, probably at a higher rate, or fall back on their lender’s standard variable rate (SVR). SVRs have already followed the base rate upwards – for example, Halifax’s SVR is now 5.24%.
- Deposit rates are rising, with the best instant access accounts now paying around the current base rate. Unfortunately, many deposit takers have seen the higher rates as an opportunity to increase their profit margins. You can still find High Street names offering a miniscule 0.01% on easy access deposits of less than £50,000 (and only 0.1% above). National Savings and Investments have also increased their rates, which the article below covers in more detail.
Higher interest rates are not necessarily a reason to increase the amount you hold on deposit. The hard truth is that, at a time of high and rising inflation, deposits are a guaranteed way to lose buying power.
What this means for your financial planning
Although it is sensible to keep a little more in cash than normal to cover the cost of living increases, the difference now between inflation and interest rates is larger than it has been for a generation. There is therefore a balance between having enough cash to live on and investing spare cash with the aim of inflation proofing for the longer term. This is something we are covering at our meetings with clients and if you would like to discuss this sooner rather than later, please contact your adviser.
Finally, the rise in long-term interest rates has also led to a marked increase in annuity rates, which are underpinned by long term fixed interest securities. The mathematics of annuities means that the increases have been significant. For example, based on a 65-year old, today’s rates are nearly a third higher than those available early last year. This is another area we are discussing with clients, although in many cases the existing pension drawdown plans remain appropriate to keep for flexibility and death benefits.
Interest rate rises for National Savings & Investments
From July, the interest rates paid on Direct Saver, Direct ISA, Junior ISA and Income Bonds have increased at National Savings and Investments (NS&I). These apply to new accounts.
For existing accounts, no longer available to open, the Guaranteed Income Bonds, Fixed Interest Savings Certificates and Guaranteed Growth Bonds all had interest rate rises from August. The rates will apply to people with maturing investments if they roll them over for another period. NS&I will write to you directly about this if your plan is maturing soon.
These recent changes follow the earlier increase in the Premium Bond prize fund rate, which improved the odds of winning from 34,500-1 to 24,500-1.
NS&I estimate that more than one million people will see a boost to their level of savings due to these increases.
Don’t cancel your protection policies as living costs increase
As the article above covers, the cost of living is affecting all of us and many people are looking to cut back on costs where they can. One area that may be looked at is long term financial protection plans that have been quietly in place in the background for several years. As they are not at the forefront of people’s minds, the importance of them may have been forgotten somewhat.
Rather than be tempted to cancel premiums to cut back on costs, remind yourself of the reason for the policy first. A valuable life assurance plan may be in place to help pay off a large mortgage on your death, which would put even greater financial strain of your family if you pass away after cancelling the policy. Income protection plans too are very useful tools for peace of mind to help with rising costs if you lose your job.
Remember that these plans are in place to help lessen the impact of a catastrophe to your life and therefore the monthly premium remains an essential cost to you, rather than a luxury cost.
If you have protection plans and your circumstances have changed, eg you have now paid off your mortgage or your children have left home and are financially independent, it is still worthwhile talking to us first before you decide whether to retain the protection plan or not.
The Pensions Regulator unveils scam-fighting plan as cost of living rises leave savers more vulnerable
A new scam-fighting plan from The Pensions Regulator (TPR) aims to protect savers as increases in the cost of living may leave them potentially more vulnerable to scammers.
TPR is warning that savers may be lured by offers to access their pension savings early to cover essential household bills or be attracted by fake investments offering high returns that never materialise.
In the plan, published by TPR, it says it will continue to improve the co-ordination of intelligence between scam-fighting partners to better disrupt and prevent fraud and scams and bring scammers to justice.
The strategy follows a joint assessment of the threat from pensions scams carried out by TPR and the National Fraud Intelligence Bureau. TPR published a summary of that threat assessment last month.
TPR’s plan will complement the work of Project Bloom, the multi-agency taskforce created in 2012 to tackle pension scams, which is to be renamed as the Pension Scams Action Group.
It is therefore essential that you take qualified financial advice before making decisions around your pensions and other financial products. We are happy to talk to you at any time.
At Headley, we strive to always increase the technical expertise of our staff. From joining us straight from sixth form college at the end of 2018, James Bryan is now just one exam away from his Diploma in Financial Planning. Chris Hinchcliffe is awaiting the results of his latest advanced exam which should then leave him one advanced exam away from becoming Chartered. Last but not least, Rob Barnes who is already Chartered and aiming to achieve Fellowship, is one exam away this highest level qualification. We wish them all good luck over the next few months.
We do hope that you have seen our request for sponsorship sent this week and that you can help us raise money for a local youth charity. Our ‘Headley Triathlon’ is taking place on September 17th so we are praying for the rain to hold off on that day. Please click here if you have missed this and would like to sponsor us – we’d be very grateful.
We look forward to continuing to work with you and help you enjoy life enriched
Past performance is not a reliable guide to the future. The value of investments and the income from them can go down as well as up. The value of tax reliefs depend upon individual circumstances and tax rules may change. This newsletter is provided strictly for general consideration only and is based on our understanding of current law and HM Revenue & Customs practice. No action must be taken, or refrained from, based on its contents alone. Accordingly, no responsibility can be assumed for any loss occasioned in connection with the content hereof and any such action or inaction. Professional advice is necessary for every case.
Sources for some of the topics in this newsletter – Threesixty and Techlink