Wealth Management update – June 2018
Interest rates – not rising!
There was much speculation that interest rates would rise in May. Even with inflation falling, the consensus was still that rates would rise, but it is not to be so.
Poor weather in March and poor service sector activity in April have stopped further speculation and it looks as if interest rates will remain unchanged at 0.5% for the time being. This does not rule out a rate rise later in the year, which is still under the “likely” umbrella.
No increase in interest rates is good news for those with tracker mortgages as these will not increase as soon as was expected. However, it is bad news for those with cash in the bank, as the returns will remain as gloomy as they have been so far, this year.
Financial basics – need to know!
A hot topic at the moment is the fact that many adults are not able to carry out basic financial calculations and do not have the knowledge to understand everyday banking and financial matters. It is estimated that 49% of working-age individuals find the idea of managing their money daunting and have a numeracy level equal to that of primary school age children.
It is thought that this is at the root of the PPI scandal – extra charges that were added to loans and credit cards were missed by those who could not calculate what the overall or monthly interest rate charges should be..… as well as the fact that the companies were not forthcoming with the information, obviously.
After much campaigning, the government added finance to the National Curriculum but failed to support this with sufficient funding. Consequently, it has not been properly implemented and therefore will not be effective.
So, here are some basic terms and concepts you and your family should know:
Compound interest
If you have £1,000 in a savings account that pays 3% per year then in the first year you will earn £30. Assuming the £30 is left in the savings account, 3% on £1,030 will be £30.90. By the tenth year the interest would be £52.61 per year.
You are effectively earning interest on your interest.
Fees and costs
Make sure fees and costs are as clear as they can be and do not be fooled by what sounds like a good deal. Ensure that comparisons are like for like: if product 1 has a fixed fee and product 2 a percentage fee, convert the percentage fee to a fixed fee before comparing the products.
For example, you have £100,000 to invest in a savings account. Product 1 charges a flat rate of £100 per year, therefore the cost would be £100 per year. Product 2 charges 0.25% per year, therefore this would be £250 per year. Product 2 is therefore much more expensive than product 1.
ISAs & Pensions
For a more in-depth look at the pros and cons of ISAs and pensions, check out the April edition of the Wealth Management Update, but basically, if you don’t use your annual ISA allowance and annual pension allowance you are missing out on valuable tax-efficient benefits (depending on your circumstances of course!).
Switch providers
Don’t get caught out when fixed-term deals come to an end. Most providers automatically transfer accounts to their standard tariffs, which are normally at least three times more expensive than the best deals, in the hope that either you won’t notice or you won’t have the time or inclination to do anything about it. This applies to energy suppliers, mobile phone tariffs, tv packages and mortgages.
Inflation
Inflation must be taken into consideration when looking at your “real returns”. A 2% interest rate from the bank is all well and good, but if inflation is 3% per year then you are actually losing money at a rate of 1% per year – not so good.
Wills – things to consider
Wills are much more important than people think, yet 60% of the UK adult population still do not have a Will!
Writing a Will forces us to think about our own mortality, which is not something that most of us want to do. This is usually why the task is postponed – as well as people believing that they are not wealthy enough to warrant one in the first place.
Now is the time to stop putting off the inevitable. We will all need a Will one day, so why not bite the bullet and put one in place? It creates peace of mind for you and will likely make things considerably more straightforward for those you leave behind.
Here are some tips and considerations to keep in mind
1. Get a professional to do it.
You wouldn’t perform surgery if you weren’t a surgeon, so while you may think that it is straightforward, it is best to seek out someone who really knows what they are doing. This will help to avoid any issues in the future.
2. Make sure you get the right type.
Surprisingly, there are different types of Will. Which is the correct one for you will depend on your circumstances, so ask the person who is putting it in place to make sure you have the right kind.
3. Avoid silly mistakes.
Having a professional draw up your Will will ensure that silly mistakes are avoided that could cause complications in the future or could even make your Will invalid. Things such as spelling mistakes are annoying but not disastrous if they don’t change your intentions, but things such has not having two witnesses make your Will completely invalid
4. Make Lasting Powers of Attorney.
It is all well and good sorting out what happens when you die, but what about sorting things out while you are still alive? Lasting Powers of Attorney allow someone to act on your behalf if you do not have the physical or mental capacity to attend to your own affairs.
There are two different types – one to deal with your property and affairs and one with your health and welfare.
5. Keep them up to date.
There is little point in having a Will if it is not updated with your changing circumstances. Things such as marriage completely invalidate a Will, so be aware of any changes in your life that may mean your Will needs to be changed. If you store your Will with a company they sometimes offer a free rewrite, so if you need to make changes contact them first.
Do you or someone you know need help with their legal work? Here at Penguin we can take this pressure off you by helping you write your will, appointing a power of attorney and probate. Get in touch with Penguin Legal by clicking here.
Italian dilemma
It took weeks of negotiations for a populist coalition to take shape in Italy after the recent elections ended in deadlock, but now the president has controversially vetoed it Italy is back to square one – an interim government (not yet in office) before fresh elections. These political developments have rocked Italy’s stocks and bonds, as well as rippling outwards into the wider European market. We may not yet have seen the end of this adjustment and increased market volatility is likely to persist. The uneasy position of the Italian market within Europe as a whole has been widely recognised for a while now, especially after their banks were the biggest failures of the ECB’s stress testing a couple of years ago. We may look back on the current turmoil as a great buying opportunity but, for now, it is difficult to choose the best time to catch the proverbial “falling knife”. As it stands, we are not heavily exposed to the Italian market, and the ECB’s ongoing policy of QE lends a measure of protection to the small amount of exposure we do have. We will be keeping an eye on the situation as it develops, and will make further changes to the portfolio if we feel that the situation deteriorates and causes unacceptable risk levels.
Notes on Brexit
The focus for all Brexit watchers over the last month has been the remarkable outcome of the Withdrawal Bill passing through the House of Lords. In all, 316 amendments were tabled for consideration and, across the multiple readings of the Bill, a staggering 201 amendments were made.
The main changes include: ensuring that EU laws around employment rights, equality, consumer standards, health and safety standards, and environmental standards can be amended, repealed or revoked only by primary legislation; ministers can make regulations to correct deficiencies in retained EU law and consequential regulations only when it is “necessary” rather than “appropriate”; Parliament should have a meaningful vote on the outcome of the negotiations; a fixed “exit day” was removed from the Bill; a provision was made for the continuation of North–South cooperation and the prevention of new border arrangements in Northern Ireland; and a ten-year sunset clause has been included in the delegated power to make consequential provisions after the Withdrawal (meaning further changes to laws cannot be made over an unspecified amount of time).
We now enter into a House-to-House ping-pong, where each considers the amendments or objections made by the other, until all is agreed or there is a deadlock; if a deadlock is reached then the Bill will fail. We continue to watch the action as it unfolds.
Book of the month
This month’s book is something very different. When Violence is the Answer by Tim Larkin will get you thinking, if nothing else. As a former military intelligence officer his knowledge of and involvement with violence is unique, certainly when compared with those of us in normal life.
In the book he asks the questions “what if” and “when” should violence be used. His real-life examples will make you think deeply about the subject, although it may be hard to come to conclusions yourself.
A thought-provoking read.
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Source: Moneyfacts Magazine June 2018 Edition |
