Wealth Management Update June 2023

INTEREST RATE INCREASE
The Bank of England has increased interest rates by 25 basis points, in line with expectations
from the market, as it continues to struggle to lower inflation.
The bank’s Monetary Policy Committee (MPC) hiked interest rates from 4.25% to 4.5%, by a
vote of seven to two, with two members voting to keep interest rates unchanged.
In the MPC’s report, it said that economic forecasts had improved in recent months, with
UK-weighted world GDP now expected to grow ‘at a moderate pace’ over the next few
years.
However, the labour market still remains tight, with unemployment projected to remain
below 4% until the end of next year, the bank said.
Inflation in the UK has remained stubbornly high, coming in at 10.1% in March. The MPC
said this had been ‘higher than expected’ in its previous meetings this year, ‘with the upside
surprise concentrated in core goods and food prices’.
Looking ahead, the central bank now predicts inflation to decline to about 1% within two
years, which it noted was ‘materially below the 2% target’.

INTEREST RATES AND YOU!
What does the latest interest rate increase mean to you?
Well, firstly, it shows that our predictions from the beginning of the year are still correct, as
we said that interest rates would continue to increase and probably top out in early
summer.
Higher rates are good if you don’t have a mortgage or debt. Mortgage holders, however, are
going to start finding it very tough, especially if they are on fixed rates that come to an end.
Can you imagine being on a 1.8% rate, then it more than doubling; just imagine what would
happen if you had a mortgage and it doubled!!
This is the point of interest rate increases. It stops many people from spending. When
people spend less, demand-led inflation reduces.
The problem is that the government has too many people in the UK that do not have
mortgages and so the increases in rates has less of an effect than it used to. This means that
inflation won’t fall as quickly as the Bank of England wants.
However, if you are a saver, you can now get a better rate on your savings, so, should you
save or invest?

SAVE OR INVEST..? THAT IS THE QUESTION.
Inflation is, as we write, a little over 10%. If we look in comparison, interest rates are still
less than half of inflation. This means that if you put £100,000 into a saving bond, say fixed
for a year at 4%, you’ll earn £4,000 for the year. If inflation stays at 10% (which it won’t by
the way!) then the value in real terms means your £100,000 only buys you £90,000 worth of
goods.
This is an important point because, when money is held on deposit, it ALWAYS produces less
than inflation. BUT, it looks like you’re making money!
If you invest the money, you have no idea what it will produce. In the last three to four
years, you’ll have made hardly anything. That’s because the value of most asset classes have
made no gain in the last four years (thank you, Mr. Trump, the pandemic, and Mr. Putin!).
However, most of you will have seen growth of around 3% so far this year. If that’s repeated
for the rest of the year, then you’ll get a return of around 7% or more, wouldn’t that be
nice! The problem is that we just don’t know if this will happen.
And this is the point of investing. There is the risk of the unknown. When it works, then you
make real money, if it doesn’t, you don’t. As humans, we have to balance that against a
definite loss!

A LESSON FROM HISTORY
So, what do we know? When the Advanced Investment Strategy (AIS) started, we know that
after charges, assuming no additions or withdrawals, the lowest performing client will have
made a return of 6.3% per year and the highest produced a return of 11.2% per year with
most people somewhere in between*. That is massively above inflation! And it includes the
last few horrible years, the banking crisis, the dot com bust…
And so, if the future is like the past, all investments will do well over time. It’s like being on a
lift. The investments go up and down. The skill is having the courage not to get out on the
bottom floor.
*Returns are for the period January 1st 1995 to 31st December 2022. Net of charges and
assuming no additional investments and no withdrawals.

INTEREST RATES ARE CONTINUING TO RISE – ACT NOW!
Due to the persistent high inflation rate of 7.8%, the Bank of England has raised its base rate
from 0.1% to 5% in the past 18 months in an attempt to address this significant increase.
As previously mentioned, when interest rates increase, lenders typically adjust their rates
almost immediately, directly impacting their customers either immediately or when their
existing agreement expires.
According to the Citizens Advice Bureau, a quarter of individuals with mortgages will
struggle to afford a monthly payment increase of £100, while nearly half are expected to
face difficulties with a £250 rise.
How will the end of your mortgage agreement affect you?
Many lenders permit borrowers to secure a new rate three months before their current
agreement expires. However, given the recent frequency of rate hikes, is three months
sufficient?
It is worth noting that you have the potential to secure the most competitive rate and
reserve it up to six months before your agreement ends. A mortgage offer can remain valid
for six months, and your solicitor (often providing their services free of charge, including a
valuation, courtesy of the lender) can arrange completion on the day following the
expiration of your current agreement, if necessary.
This approach offers peace of mind, knowing that you have secured the best possible deal,
while also allowing time to evaluate the market and secure a more favourable option should
one become available.
The following example illustrates the difference in monthly costs between a currently
competitive residential 2-year fixed-rate mortgage and a competitive rate from October
2021. It is based on a £150,000 mortgage over 25 years with repayment terms:
• 20/10/2021: 2-year fixed rate at 75% Loan to Value – 0.97%. Monthly payment:
£563.
• 29/06/2023: 2-year fixed rate at 75% Loan to Value – 5.59%. Monthly payment:
£942.
Any increase in payment when switching agreements is unpleasant. However, given the
significantly higher increases we are currently witnessing, as demonstrated in the example
above with a monthly payment increase of £379, can you afford to wait?
If you or your family are nearing the end of a mortgage agreement with favourable terms, it
may be advisable to act in advance. With substantial increases in house prices over the past
five years and a rise in unsecured debt, it is essential to explore your options well in advance
to maintain affordable payments. Surprisingly, many individuals fail to switch their mortgage
rates or select the most suitable option.
Please inform us if you would like to schedule an appointment with our Penguin Mortgage
Team, even if your current agreement is more than six months away from expiration. This
will allow us to assess your options and ensure the most favourable outcome possible.

GOOD NEWS FOR PENSIONS
The last budget was good news for those with pensions as we have said in previous
messages.
We will be running a seminar covering all of the changes; if you would like to come along,
please do give the office a call.

Changes in Lifetime Allowance rules:
The increased contributions means that you can now put 50% more into your Pension.
Very few people maximise their Pension levels, so this is not a big deal in our view.
However, anyone contributing should pay more now while they can – as we tell all our
clients under 76.
The second point is more important.
A friend of Penguin was on a parliamentary advisory committee. They wrote a report to the
committee saying that the reduction of the Lifetime allowance (The maximum that you can
put in a pension without a penalty tax) will cause people to leave the NHS. This is because
most doctors have been in the NHS since they left medical school, therefore have MASSIVE
pension rights. At the age of 55, many will hit the Lifetime Allowance, simply because they
have been there for so long and they are on good salaries by the time they are older.
If you were a doctor, who MUST be in the NHS scheme, and you know that every day that
you worked your pension tax increased, why would you bother? You might as well retire
early, go into private practice, and stop your pension from being taxed more.
At the time they were thanked for their contribution, and then ignored. At least the treasury
could say they had ‘consulted’ with experts.
Well, their and our predictions came true and hundreds of senior doctors and consults were
leaving the NHS. And so, at last we are delighted that the penalty tax rule has been
removed. Well done Government…. It only took you five years!
What does this mean to you?
It really depends on politics. (Yes, again, the politicians mess things up). Kier Starmer has
said if he comes to power then he will reverse the changes!
Therefore, everyone who has a pension pot (including your final salary pensions) that is
above, or close to £1m, should think about taking benefits now, while there is no penalty
tax.
All our clients who are affected will have a discussion with someone during the course of the
year, so there is nothing to do now other than think about the implications of the next
election.

INFLATION FALLS IN THE USA
Inflation in the US has fallen for the tenth month in a row to 4.9%. This is good news for
everyone because what happens in the US inevitably affects the UK. More importantly, it
shows the direction of travel.
Of course, the US does not have to deal with inflation which has been generated by Brexit,
something that is often forgotten. Brexit has had a dreadful impact on the UK economy,
which we predicted in many articles prior to the vote. It will take a few more years for the
labour market to correct and for the supply chain to right itself to remove the Brexit driven
inflation. However, supply-led inflation caused by the war in Ukraine will start to fall away.
The US were not as exposed to this as Europe, obviously, which helps explain the significant
difference between UK & US inflation.

TOP THREE CASH ISAs
Please check the terms and conditions before opening any account. If in doubt, consult with
your financial adviser directly, as the above is for your information only.

Source: Moneysavingexpert.com 25/05/2023