Wealth Management Update – September 2016
Interest rates actually fall!
Well, rates have fallen to 0.25%. What impact will this have on your savings?
Probably not very much. The returns on your savings accounts are so low that any fall will be very small also. To put it into perspective, if you have £10,000 on deposit with, say, Yorkshire Building Society at a rate of 1.24%, the return following the reduction in rate to 1% is only £24 for the year.
The problem of low savings rates is affecting most people, and there is no real solution. When the Bank of England rate is 0.25%, consumer rates will fall because the government wants you to spend and not save!
With rates so low, people are looking for other ways to generate interest. But remember, when a rate looks too good to be true, it usually is (remember Iceland’s bank!). This is the case with the recently launched London Capital & Finance Bond.
The LC&F bond IS NOT the same as a bank deposit. It is a bond, which means that there is NO capital guarantee. With bank and building society accounts, they take the risk of default. With this type of bond YOU take the risk. Both the interest return and the security of the capital depends on borrowers repaying their loans. There is no FCA investor protection for this type of bond, because it is not a deposit. Any interest that you receive is subject to tax at your marginal rate and must be declared on your tax return.
This does not mean that you shouldn’t use these types of bond, but it does mean that you should NOT use them instead of putting money on deposit. Money on deposit is on deposit for a reason, and that reason is capital protection. Therefore, do not put money that needs capital protection where there is no protection.
Do big houses mean big problems?
If you have a house with four or more bedrooms and you are planning on selling in the near future, you may need to wait a while for a sale. All homes are taking longer to sell since the Brexit announcement because people are uncertain how the housing market will react in the longer term, but larger homes seem to be suffering the most and are remaining on the market longest.
The struggle to sell means that many homes are being reduced in price, by as much as 5% from the original asking price, to try to generate interest in a sale. I suppose this is a tale of two halves as while this is bad news for those with property to sell, those looking to ‘upsize’ are in a strong market position.
Property has always been subject to a seasonal slowdown around this time of year, with the demand for homes picking up again in the autumn. So don’t despair, trends would suggest that demand will increase again later in the year but, as we know, past events are not a guide to the future.
Lifetime ISA – revisited
You may recall we sent out a budget summary earlier in the year that included the Lifetime ISA (LISA). To recap the details, this is an ISA for those under 40 years of age and can only be used for retirement (after the age of 60), or for the purchase of a first home. The LISA offers a 25% bonus on savings up to a maximum of £4,000 per year. In some ways it is similar to the Help to Buy ISA, which is now available for first-time buyers and which also offers a 25% bonus on savings up to £3,400 in the first year and £2,400 each following year.
The LISA is not intended to replace the pension by any means, but it could offer a useful holding account for those who have maximised their annual pension allowances or those who want a guaranteed amount of growth per year on a small cash holding. The tax relief on pensions still outweighs the benefits of the LISA, especially for higher or additional rate tax payers, who receive 40% or 45%, respectively, on contributions, whilst basic rate tax payers still get 20%. You can only invest a maximum of £4,000 into the LISA per year, but by investing the maximum you will receive £1,000 for basically doing nothing other than giving them your money – not bad really!
The LISA may be particularly useful for anyone trying to buy their first home. You can hold one LISA per person and a couple can use more than one for a first-time house purchase if buying a house together, so in a year you can save £8,000 between you and have this topped up to £10,000 by the government.
The LISA is due to come into play in April 2017 but the big market providers are concerned about the mechanics of how the product will work and this has slowed approval for the launch of the LISA. Standard Life has already said they will delay the launch of the LISA on their platform until 2018 when all of the details have been clarified, but the Treasury are standing firm and saying it will definitely be with us by April 2017.
So interest rates are down but inflation is up, and it’s because of petrol again. Petrol and oil prices have been up and down like a yoyo over the past couple of years and they have a huge impact on the price of pretty much everything.
Inflation is now at its highest point in two years, but it is still only 0.6%. Inflation is so low that, when we talk about a rise, we are talking in terms of 0.1% or 0.2% – nothing drastic. However, economists believe that this is the beginning of a slow and steady rise in inflation, so we can probably expect to see our day-to-day expenses increasing.
Of course, Brexit has only added to this situation; the slump in the pound since Brexit was announced has caused imports to become more expensive, with companies passing on that extra expense to consumers – in other words, us! As companies buy their foreign currency to pay for their imports in advance, we probably won’t see the full effect of this until late this year or early next year. In fact, it has been reported that inflation is predicted to be at 3% by the end of 2017, quite a rise from the current 0.6%.
The cost of care
It has been reported that the average annual care home fee is now in excess of £30,000 – way beyond what the average pensioner can realistically expect to receive (which is actually about £14,456!). The average length of stay in a care home is 2.5 years. Therefore £75,000 is needed to cover the total costs, and for most this is just not feasible.
The rise in fees has been attributed to the increase in the wages of the care workers and nurses who staff the care homes, something that cannot really be avoided. The cuts to social care have added increased pressure on those needing care to meet the payments themselves, as resources and funding are reduced by the state. Basically we are all living far too long for the government to be able to afford to look after us.
Looking after you is the number one priority, and so having a plan on how to fund long-term care is a necessity. If you aren’t already putting money aside for this then you need to be! The majority of you reading this will not be entitled to state help because you have far too much money! So, make sure you don’t eat away at what you have carefully ring-fenced for your family, and start thinking about what you may or may not need in the future.
University fees hit the roof
So university fees seem to be going in only one direction … and that’s up!
From September 2017 fees will rise to £9,250 per year, and that is purely for the education element of the experience – it does not include the cost of living per student per year. So before considering how they will maintain themselves, a student on a three-year course is already in £27,750 of debt.
Maintenance loans are means tested, but currently stand at a maximum of £8,430 per year outside of London and £11,002 in London itself. So, for the full shebang over three years you are looking at a total £53,040 for universities outside of London and a staggering £60,756 in London.
Now, it used to be that those already enrolled were not subject to the annual increases, but news reports back in July suggested that existing students will also be subject to the increase in fees. A bit of a liberty really!
The tuition and maintenance loans start to be repaid when the student earns above £21,000 and are subject to inflation as well as a maximum of 3% interest.
Today, your children’s education is just one more thing to start saving towards, so if you want to put money aside for future education needs and have it protected, then please get in touch with us to see what we can do to help you.
Book of the month
This month’s book is quite a big read, even for avid readers, but if you have any interest in history and politics it is worth the effort. Walter Issacson wrote the excellent biography on Steve Jobs that we recommended a couple of years ago but, long before Steve Jobs, there was Benjamin Franklin. Issacson’s biography of Franklin, Benjamin Franklin: An American Life, is a monster of a book, but one that tells you everything you need to know about the man, and the times in which he lived.
You may know Franklin as the man who flew a kite in a storm to show that lightning was made of electricity, but there was much more to the man than that. He was a very successful businessman and publisher, as well as an author. He virtually developed the postal system in the USA and ran it for almost 20 years. He negotiated with parliament for the repeal of the stamp tax, invented the lighting rod and a revolutionary convection oven, and recorded accurately the temperature all over the Atlantic (NASA still have his charts on their website). The list really does go on and on.
If you have a month or so free to dig into this book you will find out more about the 1700s than from almost any history book you can find.
Best Savings Selections
Top Three No Notice Accounts without Bonus
|Name||Contact||£1 Gross %||£500 Gross %||£1k Gross %|
|RCI Bank UK||www.rcibank.co.uk||1.20 (min £100)||1.20||1.20|
|Virgin Money||Via branch||1.05||1.05||1.05|
|ICICI Bank UK||Via branch||1.14||1.14||1.14|
Top Three Monthly Interest Accounts
|Name||Contact||£1k Gross %||£5k Gross %||£25K Gross %|
|Charter Savings Bank||www.chartersavingsbank.co.uk||1.35||1.35||1.35|
|RCI Bank UK|| www.rcibank.co.uk
|Buckinghamshire BS||01494 879500||1.34||1.34||1.34|
Top Three Cash ISA’s
|Name||Contact||£1 Gross %||£10 Gross %||£100 Gross %|
|Paragon Bank||www.paragonbank.co.uk||n/a||n/a||1.50 (min £500) Fixed Rate|
|Yorkshire Bank||0113 807 2000||n/a||n/a)||1.50 (min £15,000)|
|Al Rayan Bank||0845 6060 786||n/a||n/a||1.55 (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 2016 Edition