published by NEWTON SMITH CONSULTING LLP - CAMBRIDGE
In this issue It appears that the worst of the financial storm has passed but there is potentially some trouble still ahead. As before it remains difficult to predict when things will return to normal and, crucially, when confidence will be restored to the markets and consumers alike. One of the main problems seems to be the availability of money, not the price of it. There is without doubt enough credit in the system but new credit still flows like cold treacle. The credit crisis originated in the United States and no one has escaped the effects. What started as a virus in the United States mortgage market spread to infect the whole global financial system. The banking sector went into cardiac arrest and the aftermath of the Lehman Brothers collapse crippled the financial markets of the world. The central banks of the United States & Europe have injected huge cash transfusions into troubled banks and provided emergency funding to improve inter bank lending to overcome the trauma. Further monies have been injected into the US and UK economies, which will have to be repaid at some point via higher taxes or reduced government spending in the future. Meanwhile, most consumers have stopped spending, companies are de-leveraging and banks are trying to reduce or flush out toxic debt. The scale and speed of the economy’s slide into recession has taken everyone by surprise.
Quantative Easing Pension Fund Transfers ISAs - Cash to Stocks and Shares The State Pension
There’s no magic pill to cure the economy, but there is the magic of time. You can’t control the markets but you can control your reaction to the turbulent values of recent months. Investing when valuations are low as they have been in the past has proven to be a successful strategy. Here in the UK , interest rates are at a record low and the use of interest rates as a monetary weapon has been largely ineffective, therefore the bank of England has implemented ‘Quantative Easing’ as a final assault to solve the problem. As you will read in our feature article, this raises the fear of inflation in the long term while short term annuity and savings rates suffer. In conclusion, the world economy seems to be responding to low interest rates and today's investors will have to be tactical and patient. Current market values offer an attractive entry point from which to start building a portfolio or add to existing ones. Recovery is a process not an event and eventually stability will start to overcome volatility and those prepared to take a medium term view should profit from this current uncertainty. I trust that you will find the information contained in this issue informative and beneficial. If you would like to discuss any of the topics featured or discuss your personal financial situation please contact me at your convenience.
Jason Smith IFA Senior Partner
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Quantative Easing The flow of credit around the economy can be likened to water on a water wheel. When the flow is weak, the wheel slows, when the flow stops so does the wheel. Quantative easing is the process adopted by the Bank of England that is intended to increase the supply and flow of money in the economy and ease the credit drought. In the past, interest rates have regulated the flow, turning the wheel faster or slower. This only works if there is money in the system. Because interest rates cannot fall below zero, the Bank of England has had to find another way to stimulate the economy. To create pressure in the system the Bank of England has used quantative easing. It is sometimes incorrectly referred to as printing money but the bank will not expand the supply of money by making new bank notes. It is creating money electronically to purchase mainly government gilts from private and institutional investors. The Bank of England is pumping ÂŁ125 billion into the economy this way at the rate of around ÂŁ25 billion a month (www.bankofengland .co.uk June 09). By doing so it will swap financial assets for cash, which it hopes, will flow back into the economy. www.newtonsmithconsulting.co.uk
There are no guarantees that this radical approach will work as it is uncertain what the precise impact of these measures will have. Some vendors may simply retain the cash and not push it back into the economy, but hopefully it will encourage spending and reduce the risk of deflation. In normal circumstances, an injection of extra money of this magnitude might be expected to result in too much money and increased spending in the economy and therefore encourage inflation. When the banks start contributing to the flow of credit again, the Bank of England will withdraw its support and hopefully the wheel will keep on turning. There is a danger that the timing of the withdrawal could be misjudged. If the Bank of England raises interest rates and reverses its quantative easing program too slowly, it risks high inflation returning. If it is too quick to withdraw quantative easing it may stifle the recovery process altogether. The Bank of England believes it can prevent hyper inflation by turning the money supply off before the economy is flooded with cash. Rising inflation may force investors away from cash and gilts into real assets such as shares, property and gold. Whilst the Bank of England can create money, it cannot create confidence. To work properly, capitalism needs confidence. In the short term quantative easing will help keep the economy afloat, but in the long term the intervention may cause a listing effect that may take some time to correct.
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Individual Savings Accounts The Bank of England has cut interest rates six times since October 2008 (www.bankofengland.co.uk June 09) and they are now at their lowest level since the bank began 315 years ago. This has been great for some borrowers but, clearly, bad news for prudent savers with funds on deposit. Some of the largest deposits are held within Cash ISAs. Many people who have invested into Cash ISAs over the past few years realise they are now not delivering the income expected of them. Those relying on income from savings have had to consider stepping up the risk ladder to find alternative sources of income from shares or property as interest rates are expected to remain low for the foreseeable future. The only return from a deposit account is the interest being paid; there is no capital appreciation and the capital is at risk of inflation devaluing it’s purchasing power. There is, however, the option of immediately higher income that can rise along with the potential of long-term capital growth by investing in Stocks & Shares ISA’s.
Changes to ISAs (From 6th April 2008) Mini & Maxi ISAs no longer exist and have been replaced by Cash ISAs & Stocks and Shares ISAs. The total annual investment allowance into an ISA has been increased from £7,000 to £7,200 per tax year. This can now be divided between a Stocks & Shares ISA and a Cash ISA in any proportion subject to a maximum investment in a Cash ISA of £3,600. For example, you could mix and match by saving £1,000 in a Cash ISA and £6,200 in a Stocks and Shares ISA with the same or a different provider. Money already saved in previous years Cash ISAs can now be transferred in part or whole into Stock & Shares ISAs without affecting the current years allowance. All PEPs have also been reclassified as Stocks & Shares ISAs. The new rules will not permit the transfer of a Stocks and Shares ISA into a Cash ISA.
(From 6th October 2009) The annual ISA limit will go up from £7,200 to £10,200 from 6th October 2009 for people aged over 50years old. For everyone else this new limit will apply from 6th April 2010. The cash limit in the overall allowance will rise from £3,600 to £5,100. The remainder of the allowance can be invested in shares as before.
Transfer out of cash Due to changes in the ISA rules, it is now popular to consider transferring money already saved in Cash ISAs into Stocks & Shares ISAs which include corporate bonds. Now could be an ideal opportunity to review your existing ISAs and rebalance your portfolio. This leaflet is Issued by Newton Smith Consulting Llp which is authorised and regulated by the Financial Services Authority. The content of this news letter does not contain advice and should not be taken as a recommendation to purchase or invest in any of the products mentioned. Before taking any decisions, we suggest you contact us for professional financial advice. The Financial Services Authority does not regulate taxation advice. All figures and data contained within this document were correct at time of writing.
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100 years of State Pensions David Lloyd George 1863- 1945
A brief history
How is it paid for ?
The State Pension celebrates its 100th anniversary this year after being introduced in 1909 by Lloyd George the Chancellor of the Exchequer under Herbert Asquith’s Liberal government of the time.
The system still operates on a pay-as-you-go basis; this means no State pension fund actually exists. You are not saving for your own State pension when make your national insurance contributions instead you are paying for the current pensioners to receive their pension.
His main aim was to guarantee an income for people who were too old to work. To pay for these pensions Lloyd George had to raise government revenues by an additional £16 million pounds a year, which he did through increasing income and estate taxes. Initially these pensions were only payable to the over 70’s and were means tested. The maximum payment was five shillings per week and provided minimal help for the very poor who had no savings and little or no family support to rely on. Since its inception the State pension has evolved to include a change in the retirement age to 65 for men and 60 for women and the introduction of SERPS in 1978. The Labour government at the time was set on providing a second tier pension in addition to the basic state pension for those in employment.
Recent changes for women The State pension age for women will rise gradually from 60 to 65 between 2010 and 2020. Those born on or before 5th April 1950 will get the state pension at 60, those born between 6th April 1950 and 5th April 1955 will get the State pension between 60 and 65. Those women born after 6th April 1955 will get the state pension at 65.
Proposed changes for all The State pension age for men and women will increase to 66 in 2024, to 67 in 2034 and 68 in 2044. These proposed changes will have little impact on anyone currently over the age of 47. The number of years it will take for people to qualify for a full basic pension will be cut to just 30.
When people working today come to draw their State pension, hopefully this will be paid for by the people working at that time. Herein lies the biggest challenge for future governments trying to meet their promise.
Increasing costs There are currently 11 million people of pensionable age, which means more pensioners than children (Office for National Statistics Mid 2007). By 2020 the total number in retirement is predicted to reach 14 million. When the State pension was first introduced, few people lived beyond the age of 70 and if they did it was just for a few years. Now the cost of sustaining the number of elderly people who are living 20 or even 30 years after retirement has become prohibitive.
Conclusion The State pension is essentially an unfunded promise made by the Government. Future politicians will have no choice but to continue to alter the terms, especially given the extra burden on the Government finances to pay the public sector worker pensions, estimated at £650 billion. The message is as clear as it was 100 years ago; the State pension alone cannot provide adequate benefits to satisfy the needs of the average person. People will need to make their own additional provision for retirement since relying on the State to provide a meaningful State pension could prove fool hardy. The information contained in this leaflet is based on current law and Government proposals, which could change at any time. It does not represent personal advice.
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