Wealth Management Update – September 2015

07 Sep 2015 | Wealth Management Update |

Markets fall across the world – great news for everyone!

This is not the headline that you saw last month, and for understandable reasons. The billions that were wiped off the stock markets meant that investors lost thousands, if not millions.

Of course, you can argue that now is a good time to invest. If you invest when the market reaches the bottom, you will benefit from the coming bounce and rise. But that rarely helps those people who have existing investments, and behavioural economics teaches us that virtually no one (except Warren Buffet) does this. That said, now is an excellent time to invest, and if you have been putting off that investment decision, make it now before it is too late.

However, this is not why the fall in the world’s stock markets is good news.

It is good news because there is now a small chance that the world will change in a very positive way. For the last 50 years the economies of the world have focused on growth. Growth in an economy creates wealth; wealth is what people believe makes them happy; happy people vote for politicians, which keeps them in power and keeps them happy. Growth reduces a country’s debt (as a proportion of its size) and therefore allows the country to provide more services to its people, which makes them happy. Happy people vote for politicians, which makes them happy.

But there is a problem with this virtuous circle. The world cannot physically sustain the present levels of growth.

We all knew that China could not maintain growth of 10%, 8%, or even 7%, each year. And so growth had to slow. But even growth of 3%, which is what most developed economies dream of, cannot be sustained. If you hadn’t noticed, there is only so much ‘stuff’ in the world; the world is only so big and can only sustain so much. This means that, inevitably, growth must slow. It means that we must learn to live in a world where 2% growth is high and where 1% growth results in a sustainable future.

In a world with 1% growth, interest rates will never exceed 3% or so. In a world with 1% growth, inflation will rarely exceed 2%, or even 3%. And in a world of 1% growth, investment returns of 5% will be the superstar.

We have been approaching the point where the world must move towards lower growth (this is already evident in developed countries) and perhaps the events in China, and the ripples they caused across the world, will mark the start of the move to a more sensible world. This will not please politicians, but I think we could all live with that.

It is hard to think of the greater good when your pension loses 10% of its value. It is hard to think of the long term when your ISA returns fall below what you invested. But, if we can understand how this might make all our lives better, then perhaps we can be a little happier and sleep easier.

More about interest rates

Last month we discussed the possibility of a rise in interest rates. We think that the anticipated rise in interest rates will not happen this year. As things stand, interest rates are most likely to rise in February of next year.

Mr Carney is a very clever man. Making the smallest suggestion in his Mansion House speech that interest rates would rise in the short term had the effect of increasing rates! Hence the clever Mr Carney was able to have a soft impact on the economy without actually increasing rates. Of course, the press say he has been making wrong predictions, but that is because most commentators cannot see how clever the man is.

So, what will happen when rates increase next year, and what should you do about it now?

The Bank of England’s calculations regarding lending and the growth of home ownership show that virtually all increases in lending since 2006 have come from buy-to-let mortgages. There has been hardly any increase in mortgages to home owners since that time. Nearly 20% of the mortgage market is now buy-to-let mortgages. In 2006 it was less than 5%, and in 2000 it was only 1%.

Very few buy-to-let mortgages are fixed rate. This means that when rates increase landlords will see a sharp increase in payments. Remember, if interest rates rise from 0.5% to 1%, this is a 100% increase! Many landlords will suddenly find that they have negative cash flow and this will result in the sale of a vast number of properties. This will happen at just the same time as the supply of houses increases because of the present building boom.

But remember – next year’s rate rise will be the first of many. It is likely that rates will increase to 2.75% or so by 2019. That is a six-fold increase in interest rates – just think what this will do to the supply of houses.

So what should you do?

If you have a rental property that is mortgaged, you should consider selling now at the top of the market. If you don’t sell, you should fix the mortgage rate now, for at least 5 years.

If you’re looking to buy a property, it may be best to hold back for nine months or so. Unless you’re in an area that is starved of supply, good deals will almost certainly be around next summer.

Pension transfer mailshots: Scam or legitimate?

Many of you have asked how to determine if offers received in the post are legitimate or part of a scam. Such offers have ranged from investments offering very high returns very quickly, to releasing cash from your pension ahead of your pension age, to how to invest to avoid income tax. Generally we advise steering clear of anything that sounds too good to be true. If a company is authorised and regulated by the Financial Conduct Authority they are usually a bona fide company offering some sort of promotion. However, when is it ok to respond to such correspondence or take action?

One of our team recently received a mailing from Hargreaves Lansdown. This mailing asked recipients to consider transferring their pensions to a self-managed pension with Hargreaves, and included application forms to proceed with the transfer and their terms of business.

While Hargreaves Lansdown is a legitimate company and is authorised and regulated by the Financial Conduct Authority, we feel that offering pension transfers by post does not demonstrate the most professional approach. Of course, an approach that offers a pension analysis to determine if a transfer is appropriate would be understandable, and one that would be more in the recipient’s best interests. However, they are doing their potential clients a disservice by addressing a complex area of financial planning in such a relaxed way. Indeed, many pensions have enhancements and guarantees that can easily be lost upon transfer. The four-page letter from Hargreaves addressed this point with just one line of warning.

We launched Get Financial Advice two years ago to help people get ADVICE over the phone and internet without leaving their home to make sure they don’t get caught out by things like this. People need to get advice with big decisions like this! Self managing your pension is not likely to be a good thing for 95%+ of people. If someone you know has had these mailings, or similar ones, feel free to tell them to call us, or Get Financial Advice, for a full review of what they have and what they should consider.

Therefore, the fact that some seemingly legitimate mailings may originate from reputable companies does not mean that their offering is in your best interests, so they are generally best avoided. It is preferable to deal with companies you know and trust. Any investment decision should be made only after careful analysis and consideration, not as a result of a simple letter.

New IHT rules – Some details released

One of the successes of the election was the Conservatives’ promise to move the family home out of IHT. This policy really helped them to win the election.

We now know some of the policy’s detail, although more is being withheld until a consultation paper is issued and reviewed. This is what we know so far:

  • There will be a new allowance, called the Residential Nil Rate Band allowance (RNRB).
  • The RNRB will start in April 2017 at £100,000 and increase by £25,000 each year until it reaches £175,000 in April 2020.
  • As the RNRB is an individual allowance, a married couple will have a total allowance of £350,000 (from 2020).
  • The RNRB will be added to the existing two Nil Rate bands (NRB), giving a total of £1m free of IHT – providing your home is valued at a minimum of £350,000.
  • The RNRB comes before the NRB.
  • If your estate is worth more than £2m, the RNRB will reduce at a rate of £1 for every £2 in excess of £2m. This means that a couple will lose all the new RNRB if their estate is worth more than £2.7m (£2.35m for a single person).
  • The RNRB can be carried forward between spouses.
  • The RNRB can only be used against your home, not investment properties. However, if you have lived in your rental property at some point you can nominate this as your home. BUT, you can only ever have one home that will use the RNRB.
  • You MUST leave the home to a child or grandchild (which includes step- and foster children).

There are a number of other regulations and rules in the Finance Act 2015 that we have not gone into here as the points above are enough to take in. When the new rules come into effect in 2017, it is likely that a large number of Wills will need to be amended to take account of them. If we have written your Will we will be in contact to advise on the changes that need to be made.

Deposit protection falls to £75,000

In line with EU requirements, every five years the PRA must review the protection given to deposit fund holders to ensure that there is a 100,000 Euro cap. The review means that from the end of December the current protection level of £80,000 will reduce to £75,000. UKIP will no doubt use this to demonstrate that being in the EU is not a good idea … and in this case, they are probably right.

Deposit protection increases to £1m

While the PRA is reducing the protection to £75,000 they are also launching a new ‘temporary’ protection level of £1m, which will apply for a maximum of six months. This is to protect those people who temporarily have a large bank balance, for example when moving house.

There are rules in place to prevent the money from being moved from account to account to gain the protection. In this way it really is just a temporary protection.

Best Savings Selections

 Top Three No Notice Accounts without Bonus

Name Contact £1 Gross % £500 Gross % £1k Gross %
ICICI Bank UK Via branch 1.39 1.39 1.39
Virgin Money 0845 600 4466 1.51 1.51 1.51
 RCI Bank UK


1.65 (min £100) 1.65 1.65


Top Three Monthly Interest Accounts


Name Contact £1k Gross % £5k Gross % £25K Gross %
Charter Savings Bank www.chartersavingsbank.co.uk 1.93 1.93 1.93
RCI Bank UK  www.rcibank.co.uk 1.64 1.64 1.64
GE Capital Direct  www.gecapitaldirect.co.uk 1.64 1.64 1.64


Top Three Cash ISA’s

Name Contact £1 Gross % £10 Gross % £100 Gross %


Virgin Money



0845 600 4466 1.51 1.51 1.51
Earl Shilton BS 01455 844422 n/a 1.55 1.55
Al Rayan Bank 0845 6060 786 n/a n/a 2.00 (min £250)


Please check with the terms and conditions before opening any account. If in doubt consult with your financial adviser directly as the above are for information only.

Source: Moneyfacts Magazine September 2015 Edition

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