‘News - Updates’ Articles
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Written by richard on 08 March 2010
An amazing £135 billion of retirement fund fund money is due to mature over the next few years as the BabyBoomers move into retirement. However, thousands of these Pension Investors are short-changed because they miss out on the best available pension advice.
With your Retirement Pension Options you should consider carefully what decisions you make sooner rather than later and of course remember that your Pension Options are often fixed in place once the decision is made.
You could start with the Retirement Options Manual which outlines available alternatives for your Pension.
By altering your pension savings into an income you are making one of the most important financial decision you will ever make. Nearly all company pensions will provide a Pension income routinely, but those with personal pensions and some types of employer schemes must turn these funds into an annuity or similar our Best Pension Annuity Rate service will help you find the most suitable product for you.
Retirement isn’t like buying car insurance, where you do it every year and build up expertise. Everyone’s doing it for the first time – and there is no second chance if you get it wrong. Which is why you need to consider your Pension Options.
So what you can you do to improve your situation.
Looking ahead
I suggest you start to look at your plans some 12 months ahead of the big day (retirement). You will need time to consider carefully the options. Over here at the financezone we have produced a guide to your retirement options which is available for download at nominal cost (if you decide take advice from us we will refund you the purchase price in full) however it could save you many thousands of pounds if you wanted to DIY.
The very latest time to consider your Retirement Pension Otions is about 3 months before your retirement date.
Using these deadlines (12 and 3 months) will give you time to gather information, bring together fund valuations and see how your personal pensions will complement State and workplace pensions.
In most cases, those with a personal pension will end up using the fund to buy an annuity from an insurer, exchanging capital for a guaranteed lifetime income. Our Best Pension Annuity Rate service will help you find the most suitable product for you
But savers must be on the ball, especially those with older pensions that have generous guaranteed annuity rates noting of course these are becoming fewer as years go by. However you must check,
Shop around
Many Pension Investors are not aware they do not have to buy a pension from the company that has managed their money up to retirement. Instead, they can use the open market option to find a better deal with another provider.
Tracking down the best rate can boost your income by as much as half for the rest of your life and remember it is only an Independent Financial Adviser that is able to advise you from all of the providers in the market place and of course provide Impartial Financial Planning Advice.
Usually annuity rates can vary greatly, and often by 10% or more, the actual rate offered depends on many things and often how keen an insurer is to win new business. There are some other reasons why some of you should consider shopping around.
‘Enhanced’ annuities pay better rates to those who have a shorter than average life expectancy. You might be eligible for an enhanced rate because you have been a smoker, for medical reasons, or even because of your postcode.
These are all outlined in the Retirement Options Manual which outlines available alternatives for your Pension.
To put it bluntly, if you are likely to die younger than others you could be getting more income from your Pension at retirement.
Smokers, those of you with health problems, even heavy drinkers and if you are living in certain postcode areas could qualify for a better annuity rate.
Consider the future
An pension bought now may continue for 30 or 40 years, but the income you get is dictated your personal circumstances at retirement.
One option is a fixed-term annuity. This allows you to secure an income for five or ten years then receive a lump sum back to reassess your options.
These work like this, you health could worsen between age 65 and 75 and you might then qualify for an enhanced annuity rate, changing circumstances may also help you get a better rate, e.g. death or divorce means they no longer need to provide for a spouse’s or partner’s income.
There are risks with a temporary annuity, though. Changes in financial markets mean that annuity rates could tumble. This could mean that when the plan matures, your lump sum is not sufficient to replace your existing income.
Another option might be to invest in an annuity that will increase over time. You can buy an index-linked policy that rises with inflation, or one that rises by a set rate each year, but in both cases the starting income will be lower than a conventional level annuity.
There are also investment-linked annuities where the income will be influenced by how stock markets increase over the next few decades. But there is the risk that if markets slump, so will your retirement income.
Do your homework
Before you make the final decision you should consider your options carefully and discuss these with your Spouse and Partner, after a review by an Independent Financial Adviser.
Annuities are not the only choice for those retiring. Opting for an unsecured pension (USP) allows savers to take tax-free cash but leave the rest of the fund invested in stock markets. You can then draw an income from this fund, hoping that market growth replaces the capital you have taken.
A USP can run until age 75, appealing to those who want to work part time in retirement, but it is risky and expensive. Advisers say it typically takes a fund of at least £100,000 to make the sums add up. Advice is essential.
And you do not have to put all your eggs in one basket. You could choose to mix two different types of annuity, perhaps blending a fixed and a rising income.
Whatever you finally decide it is important you understand the decisions made in the lead up to your formal retirement will have an impact for many years. Therefore the lead in time to your final decision is critical.
I have produced a more in depth guide to your Retirement Options which is available for download. There is a small charge for this guide which is full refundable should you decide to take your formal planning advice from ourselves. You can of course contact me here, or call on 0845 226 9106
Richard Smith
http://www.thefinancezone.co.uk
Posted in Best Savings Account Rates, Equitable Life, General Financial News, Investments, News - Updates, Pensions - News | Comments Off
Written by richard on 23 February 2010
Pension Planning:
Over the past couple of weeks I have been inundated with a enquiries on two subjects relating to Pensions, and felt it would be worthwhile providing a bit more comment for you here.
Pension Charges
During recent years Pension Charges have fallen dramatically, gone are the days of old where a Pension Provider charged:-
A monthly plan fee (I have seen these as high at £5.00 per month)
An Initial Charge on Contributions – usually 5% as a minimum and can be as high as 80% during the first few years.
Ongoing Charges of 1.5% – 3.5% of the Fund Value
If we compare these with a modern Pension Contract with a single charge of 1.5% of the value of the fund initially you will understand why I urge everyone to review their plans.
Investment Fund Choices
Here is another ‘bug bear’ of mine. For many years clients only had one or sometimes 2 choices of pension fund. With Profits or Managed both of which were only just about acceptable.
During the 90’s things began to change with a far wider choice of funds being made available for individual investors to choose from.
It is now the norm for most modern pensions to have 50, 60 or up to 90 different funds available under a conventional pension plan. Now I am not saying that you should invest in this number of funds, but it does give you an extensive choice, which means your pension can be invested based on your needs and wishes and in accordance with your actual risk profile.
Now I can absolutely guarantee you, that if your plan is on one of my list of pension providers you will be invested in one fund only, this investment will not have been reviewed for many years and the overall performance will be well below expectation.
Rubbish Pension F A Q
Even when you call your provider for further information or guidance you will find that do not want to offer any help or unable to.
Thing is I am not psychic, but as an Independent Adviser having carried out thousands of Pension Reviews I have spotted a clear pattern.
Richard Smith
Abbey Life Plus Pension Review
Tags: Abbey Life, Hill Samuel, Pension Fund Choices, Pension Funds, Pension Planning, Target Life
Posted in Abbey Life, Equitable Life, News - Updates, Pensions - News | Comments Off
Written by richard on 16 February 2010
When looking for the Best Saving Account Rates you need to remember that these are at an all time low and on doing some comparisions for a client this morning can offer you some very good news indeed.
Best Saving Account Rates Rates
The panacea for risk free investments has to be:-
A guaranteed Interest Rate with no risk.
A Guarantee that the Rate Paid will be set by an Independent source.
A Guarantee that the Rate Paid will be the average of the Top 5 Best Buy Accounts in the market not only only today but on an ongoing basis, which means you can always be assured of the Best Rate.
How about an account that pays the average of the 5 highest interest rates on the market. No more shopping around or moving your money – just one top-5 rate for everyone, always.
* Tracks the 5 highest rates on the market
* Interest rate adjusted weekly
* No introductory bonuses – one market-leading rate for everyone
* £25,000 minimum deposit. 3 months’ notice for withdrawals
Best Saving Account Rates Rates
Further information.
Interest on your account is calculated daily and paid either monthly or annually, into an account of your choice, without charge*.
* Charges do not apply for BACS transfers to UK bank accounts
Withdrawing funds
When you make a withdrawal, we will send your money to any UK account free of charge*. You need to give 3 months’ notice to make a withdrawal.
For more information please use the form below to send us a message.
or call on 0845 226 9106
Tags: Investment Planning, Investment Returns, ISA Investments, Poor Investments, Savings and Investments
Posted in Important, Investments, News - Updates | Comments Off
Written by richard on 07 December 2009
Anyone born on or between April 7 1955 and April 5 1960, will see the minimum age at which they can retire increase with effect from April 2010. The effect of this is that you will only be able to draw pension benefits in 5 years time at the minimum age of 55.
So if you are approaching this retirement age you have a limited window in which to get some advice, make some decisions and move your planning forward. It is likely of course that any future change in government will move this retirement age out even further.
You must therefore take advice as soon as possible. The shocking number of people affected by this (some 4 million) will not able to obtain advice between now and April so sooner rather than later seems to be call from me.
The next question is should you look to take your pension benefits ahead of the rule change? Clearly there is no hard and fast answer here, except to say that probably yes for many that will be the right action. Securing early access to your pension savings.
You will need to take action and get some Pension Advice advice.
For those of you with Personal Pensions have a look at this list “Poor Pension Providers” Is yours on it? Please contact me immediately to discuss the options. There is some further information for you, along with a Free Report “Free Personal Pension Review“
Or you can contact me here [Contact-1]
Richard Smith http://www.thefinancezone.co.uk
Advice on Pension Planning Matters
0845 226 9106
Tags: Abbey Life Pension, Colonial Mutual Pension, Mortgages Advice in Copthorne Crawley and East Grinstead, NPI Pension, Pearl Assurance, Pension Transfers
Posted in Abbey Life, NPI News, News - Updates, Pearl Pension, Pensions - News, Royal Sun Alliance, Scottish Provident, Windsor Life | Comments Off
Written by richard on 24 November 2009
I have been busy of late helping many of you with very poor pension providers. Doing the things that they should be doing for you, and with this in mind I have just published a mini article which you may find of interest.
The link to this is here >>
Richard Smith
0845 226 9106
For those of you with Personal Pensions With Natwest or other High Street Names you may want to see this post.
Or any one on this list (Abbey Life Pensions included)
My Free Pension Report is still available
Tags: Abbey Life Pension, Investment Planning, Mortgages Advice in Copthorne Crawley and East Grinstead, NPI Pension, Pearl Assurance, Pension Transfers
Posted in Abbey Life, Equitable Life, NPI News, News - Updates, Pearl Pension, Pensions - News, Royal Sun Alliance, Scottish Provident | Comments Off
Written by richard on 10 November 2009
Equitable Life Personal Pension Plans Some further Guidance Richard Smith – Independent Financial Adviser
Following some further work I have carried out for some policy holders of Equitable Life Pension and Investment Plans I am pleased to provide an overview and a brief guide to your options.
Equitable Life closed to New Business in 2000, prior to this they were not one of the greatest providers of Investment and Pension Products, investment performance was just about acceptable, and the level of charges within the plans was on the high side of higher than average, but certainly not the worst.
If we compare the find information and statsistics (source FT.com/Lipper) you will see that the overall level of Ranking (this source Lipper) puts Equitable Life somewhere between 1 and 2 based on a good score of 4 or 5. This is based on the Managed Fund Performance. There is similar data and supporting evidence for the rest of the Equitable Life Funds.
Other reasons to consider:-
Charges – Most of the Equitable Life Pension Plans reviewed by us in recent months carry a policy fee (a monthly non refundable fee) of £3.00 per month, however we have seen some of these as high as £5.00 per month or more.
When compared with a modern Pension Contract these charges are certainly not the norm.Very few providers now charge a policy fee at all – likely saving £40 per year or so (x 20 years £800 give or take a few pennies).
What about other charges? There are many that may apply and these are dependent on the specific contract,
some of these are outlined below.
Equitable Life Pension Contracts made great play of Capital Units on some of their contracts. These are designed to confuse and obfuscate the real level of charges within a Pension Plan
Capital Units which were commonly used by many Life Assurance and Pension Providers during the 70’s and 80’s are now virtually outlawed by the regulator and certainly would not be allowed to be used in a modern Pension Plan.
Capital Units could account for up to 80% of your first 5 years Pension Contributions which of course means you will have suffered guaranteed losses on these plans during this period, combined with poor investment returns you could expect your retirement to be substantially worse with a plan that levies Capital Units.
There are of course a range of other charges levied on your fund, Bid Offer Spread paid on new investments (every premium you pay will have this charge levied) in the main it is usually around 5% .
As the Business is now operated as Closed Fund we can expect the investment performance to start to worsen as the Funds Under Management Contract. A small fund, and reducing is harder to manage than a large investment fund.
Do you want me to go on more, look the reality is this Equitable Life are one of the poorest performing, highest charging Pension providers in the UK. There some others that also need to be considered but that is not for here.
By taking some action now you could be increasing your Pension at Retirement by several thousands of points (often 10’s of thousands) by moving your plan to another provider, reducing charges and increasing investment performance. Potentially the direct cost you will be nothing, importantly there
You will also benefit from a more flexible contract along with a good level of advice from ourselves – Independent Financial Advisers.
The initial cost to you for a formal review of your Pension Plan will be Nil or Nothing. We need to fully review the plan before we can provide any advice in any case, this is always Free Of Charge.
I promised not to go on and on about Equitable Life Pension, however they are SO bad, and they really don’t care about you, if they did they would do better.
Please contact me today for a formal review of your options, no charge or obligation.
Please use the form below to obtain some details, to send me an email click here.
Free Pension Review
A list of Poor Pension Providers (Including Equitable Life)
High Charge Pensions
For further information without obligation please use this box below and we will email you some important information and our Free Pension Report. We hate spam more than, therefore do not share or loan your details with any third party provider.
Tags: Abbey Life Pension, Barclays Life, Colonial Mutual Pension, Equitable Life Pension, Pearl Assurance
Posted in Abbey Life, Equitable Life, News - Updates | Comments Off
Written by richard on 10 November 2009
Pearl Personal Pension Plans Some further Guidance Richard Smith – Independent Financial Adviser
Following some further work I have carried out for some policy holders of Pearl Pension and Investment Plans I am pleased to provide an overview and a brief guide to your options.
Pearl closed to New Business in 2000, prior to this they were not one of the greatest providers of Investment and Pension Products, investment performance was just about acceptable, and the level of charges within the plans was on the high side of higher than average, but certainly not the worst.
If we compare the find information and statsistics (source FT.com/Lipper) you will see that the overall level of Ranking (this source Lipper) puts Pearl somewhere between 1 and 2 based on a good score of 4 or 5. This is based on the Managed Fund Performance. There is similar data and supporting evidence for the rest of the Pearl Funds.
Other reasons to consider:-
Charges – Most of the Pearl Pension Plans reviewed by us in recent months carry a policy fee (a monthly non refundable fee) of £3.00 per month, however we have seen some of these as high as £5.00 per month or more.
When compared with a modern Pension Contract these charges are certainly not the norm.Very few providers now charge a policy fee at all – likely saving £40 per year or so (x 20 years £800 give or take a few pennies).
What about other charges?
Pearl Pension Contracts made great play of Capital Units on some of their contracts. These are designed to confuse and obfuscate the real level of charges within a Pension Plan
Capital Units which were commonly used by many Life Assurance and Pension Providers during the 70’s and 80’s are now virtually outlawed by the regulator and certainly would not be allowed to be used in a modern Pension Plan.
Capital Units could account for up to 80% of your first 5 years Pension Contributions which of course means you will have suffered guaranteed losses on these plans during this period, combined with poor investment returns you could expect your retirement to be substantially worse with a plan that levies Capital Units.
There are of course a range of other charges levied on your fund, Bid Offer Spread paid on new investments (every premium you pay will have this charge levied) in the main it is usually around 5% .
As the Business is now operated as Closed Fund we can expect the investment performance to start to worsen as the Funds Under Management Contract. A small fund, and reducing is harder to manage than a large investment fund.
Do you want me to go on more, look the reality is this Pearl are one of the poorest performing, highest charging Pension providers in the UK. There some others that also need to be considered but that is not for here.
By taking some action now you could be increasing your Pension at Retirement by several thousands of points (often 10’s of thousands) by moving your plan to another provider, reducing charges and increasing investment performance. Potentially the direct cost you will be nothing, importantly there
You will also benefit from a more flexible contract along with a good level of advice from ourselves – Independent Financial Advisers.
The initial cost to you for a formal review of your Pension Plan will be Nil or Nothing. We need to fully review the plan before we can provide any advice in any case, this is always Free Of Charge.
I promised not to go on and on about Pearl Pension, however they are SO bad, and they really don’t care about you, if they did they would do better.
Please contact me today for a formal review of your options, no charge or obligation.
Please use the form below to obtain some details, to send me an email click here.
Free Pension Review
A list of Poor Pension Providers (Including Pearl)
High Charge Pensions
For further information without obligation please use this box below and we will email you some important information and our Free Pension Report. We hate spam more than, therefore do not share or loan your details with any third party provider.
Pearl as a Pension Provider causes concerns on several levels, in terms of charges they are just not competitive, in terms of short and medium term investment returns they are a long way off what would be considered good. In simple terms if you have an Pearl Pension or Investment Contract you should review it immediately. You can call today on 0845 226 9106 for a no obligation review.
Posted in Pearl Pension, Pensions - News | Comments Off
Written by richard on 10 November 2009
Abbey Life Personal Pension Plans Some further Guidance Richard Smith – Independent Financial Adviser
Following some further work I have carried out for some policy holders of Abbey Life Pension and Investment Plans I am pleased to provide an overview and a brief guide to your options.
Abbey Life closed to New Business in 2000, prior to this they were not one of the greatest providers of Investment and Pension Products, investment performance was just about acceptable, and the level of charges within the plans was on the high side of higher than average, but certainly not the worst.
If we compare the find information and statsistics (source FT.com/Lipper) you will see that the overall level of Ranking (this source Lipper) puts Abbey Life somewhere between 1 and 2 based on a good score of 4 or 5. This is based on the Managed Fund Performance. There is similar data and supporting evidence for the rest of the Abbey Life Funds.
Other reasons to consider:-
Charges – Most of the Abbey Life Pension Plans reviewed by us in recent months carry a policy fee (a monthly non refundable fee) of £3.00 per month, however we have seen some of these as high as £5.00 per month or more.
When compared with a modern Pension Contract these charges are certainly not the norm.Very few providers now charge a policy fee at all – likely saving £40 per year or so (x 20 years £800 give or take a few pennies).
What about other charges?
Abbey Life Pension Contracts made great play of Capital Units. These are designed to confuse and obfuscate the real level of charges within a Pension Plan
Capital Units which were commonly used by many Life Assurance and Pension Providers during the 70’s and 80’s are now virtually outlawed by the regulator and certainly would not be allowed to be used in a modern Pension Plan.
Capital Units could account for up to 80% of your first 5 years Pension Contributions which of course means you will have suffered guaranteed losses on these plans during this period, combined with poor investment returns you could expect your retirement to be substantially worse with a plan that levies Capital Units.
There are of course a range of other charges levied on your fund, Bid Offer Spread paid on new investments (every premium you pay will have this charge levied) in the main it is usually around 5% .
Abbey Life have been owned by Deutsche Bank since 2007 and the actual management of the funds within Abbey Life have been outsourced to Scottish Widows, who are well placed to do a better job than Abbey Life could. I have an interesting question for you. Why would a major European Bank want to purchase a Closed Life Assurance Business ( closed means that it no longer accepts new business) for a sum of £977 million? If you want the answer here it is:-
The business does not need to be serviced properly
It takes no management time to run.
It has very light touch in terms of regulation.
It is fantastically profitable given the level of charges levied within these plans.
The last sentence tells you all you need to know, by they way Lloyds TSB also badly needs the money (well it did then and more so now).
As the Business is now operated as Closed Fund we can expect the investment performance to start to worsen as the Funds Under Management Contract. A small fund, and reducing is harder to manage than a large investment fund.
Do you want me to go on more, look the reality is this Abbey Life are one of the poorest performing, highest charging Pension providers in the UK. There some others that also need to be considered but that is not for here.
By taking some action now you could be increasing your Pension at Retirement by several thousands of points (often 10’s of thousands) by moving your plan to another provider, reducing charges and increasing investment performance. Potentially the direct cost you will be nothing, importantly there
You will also benefit from a more flexible contract along with a good level of advice from ourselves – Independent Financial Advisers.
The initial cost to you for a formal review of your Pension Plan will be Nil or Nothing. We need to fully review the plan before we can provide any advice in any case, this is always Free Of Charge.
I promised not to go on and on about Abbey Life Pension, however they are SO bad, and they really don’t care about you, if they did they would do better.
Please contact me today for a formal review of your options, no charge or obligation.
Please use the form below to obtain some details, to send me an email click here.
Some more links are here
Free Pension Review
A list of Poor Pension Providers (Including Abbey Life)
High Charge Pensions
For further information without obligation please use this box below and we will email you some important information and our Free Pension Report. We hate spam more than, therefore do not share or loan your details with any third party provider.
Posted in Abbey Life, Pensions - News | Comments Off
Written by richard on 30 October 2009
CHANGE TO MINIMUM RETIREMENT AGE Important Update For Abbey Life Pension Holders (and others).
Some Abbey Life Personal Pensions have a very limited options in relation to the way that Retirement Benefits can be taken, effectively this means that if you do not make the choice to move your Pension on the Selected Retirement date you could end up with a Pension that is considerably worse than you could expect had you taken the benefits elsewhere.
The affected Abbey Life Pension Plans are:-
- Abbey Life Personal Pension Plan
- Abbey Life Retirement Plan
- Abbey Life Executive Pension Plan
- Abbey Life Pension Annuity Plan
- Abbey Life Personal Retirement Account.
There is a some action you can take in order to move forward with your Pension Plans, and an urgent review should be carried out with immediate effect.
Firstly you only have until 6/4/10 in order to draw benefits “earlier than 55” as the minimum retirement age is increasing to age 55 with effect from then 55 is the minimum age at which you can draw benefits after 6th April 2010.
This is important for many reasons, however given the level of charges under all of the Abbey Life Pension Plans, the almost dire investment returns from the available funds under management and this new change it is vitally important that you at least review your options with a suitably qualified Financial Adviser.
Key points to review are:
The level of charges within the plan.
Options at normal retirement date
Overall investment returns.
These areas need to be compared with the available plans in the market place currently and if appropriate a transfer of benefits made to another provider.
There are of course several other providers of Pension Plans that are equally as bad and some of these are detailed here.
For those of you reading that would like see my other posts on the subject of Abbey Life Pensions these are below.
Abbey Life Pension Plan Review Service
General Pension Review Service
Abbey Life | Allied Dunbar Pension | NPI Pension | Pearl Pensions | And others important action!
Please contact me should you wish to discuss any of your Pension Planning, in particular if your provider is on the list.
You can contact me here or call on 0845 226 9106
Richard Smith
Independent Financial Adviser
Want to be updated when this page changes send us your details below
Tags: Abbey Life Pension, Barclays Life, Colonial Mutual Pension, NPI Pension, Pearl Assurance, Pension Transfers
Posted in Abbey Life, NPI News, Pearl Pension, Pensions - News, Royal Sun Alliance, Scottish Provident, Windsor Life | Comments Off
Written by richard on 24 September 2009
Richard Smith – The Finance Zone – Market Commentary – September 2009
Equity markets have rallied sharply since early July, during what is usually a quiet time of year (whatever happened to “sell in May and go away”?), encouraged by a better than expected earnings on both sides of the Atlantic and by signs that most developed economies were emerging from recession. The rallies continued to be confined mostly to the “up and down” sectors which had both plunged and bounced fastest in the past year, financials, mining stocks and industrials. More recently, however some of the more defensive sectors have also joined the party.
Central banks have been at pains to say that monetary policy will not be tightened prematurely, which, given their role as guardians against inflation, underlines the strong desire to avoid repeating last winter’s brush with the risk of a full blown economic depression. They have also emphasised the many risks to the recovery. These include too much personal debt, too little bank capital and too much public borrowing. Central bankers clearly believe that domestic inflation pressures will remain contained by the spare capacity created by the recession. It is less certain whether the same applies for imported inflation, since commodity prices may be more sensitive to the rapid growth rates in emerging economies and therefore accelerate before growth is buoyant in developed economies. There could come a time when inflation from this source forces tighter policy in developed economies while they still have spare capacity, one of the downsides of globalization.
Although there are risks to the steepness and persistency of the recovery, central bankers appear set to continue to fund the overall strategy until it is clear that the recovery in confidence is sustainable. Given that there is still a significant lack of certainty over the outlook, it is fair to ask if equity markets are too easy-going in their “everything back to normal” approach. At the very least, greater care will be needed, now that the bargain basement prices have all been mopped up.
EQUITY MARKETS
United Kingdom
The UK has been slower to recover from the steeper than expected fall in output last year and early this. This has prompted the Bank of England to extend its quantitative easing policy, in turn meaning that they take a more cautious view of the recovery than the equity markets. Partly this is due to the equity market expecting recovery in 2010, and pricing that in in advance. The markets clearly expect that the reflationary policies put in place by the Bank of England will work. A revival in hopes for global growth have been reflected by forecasts for the UK, albeit slightly later for UK plc, which expect a turnaround from this year’s fall to a modest, but improving, growth rate in 2010.
The spectre at the feast remains the enormous gap in public finances which even politicians have had to acknowledge as they furiously attempt to defer difficult decisions until after the election. The markets must have their confidence maintained in the government’s commitment to sustainable fiscal policies or they will stop making money available to fund the recovery. That is forcing all parties to admit that significant cuts in public spending, and tax rises, will be needed to close the fiscal gap in a reasonable timeframe. The ratings agencies have warned that the UK will put its AAA status at risk if it does not announce significant public spending cuts in the pre-Budget report. Economic recovery and the natural ending of fiscal easing measures will not alone be sufficient to stabilise and reduce public debt burdens over the medium-term.
Given the inevitability of such fiscal policy tightening at a time when consumers are also trying to reduce personal debt and rebuild savings, the UK seems likely to be less buoyant than the global economy generally. The current competiveness of Sterling should help the usual sectors able to take advantage of this (exporters, tourism etc.).
USA
The US economy is responding to the mind-bogglingly enormous fiscal and monetary stimulus put in place over the past year. This has been helped by the fact that parts of the economy, in particular housing and the motor industry, have effectively been in recession since 2006 and may have reached the absolute low point of the cycle. Like in the UK, the absence of any real controlling process for managing ongoing budgets is likely to cause problems to investors as the economy recovers. The US political system remains open to lobbying and shows little inherent commitment to fiscal restraint, in fairness this is fully representative of US consumers, who seem to believe that the new president is installing a communist state ! The emphasis, and the easier “sell” from the Democrat-dominated Congress, remains focused on increasing spending.
The financial system appears to be rapidly weaning itself off the special support measures put in place last year, with the main remaining vulnerability being to real estate lending. This suggests that the special measures and low interest rates will remain in place for some time yet. The signs of the housing market turning up are important and, as in the UK, have the potential to be confidence inducing and self-fulfilling, as those who have waited to buy now see the market near its bottom and banks can afford to be more patient with borrowers in difficulty. Although the remaining consumer debt overhang remains a similar barrier to the UK’s problem, recovering house prices would enable savings to be rebuilt and allow a faster rate of economic growth while this was maintained.
Europe
Some European economies including, most importantly, France and Germany emerged from recession in the early summer, while others, in particular Spain and Ireland have remained weak. It is notable that both Spain and Ireland were effectively economic “one-trick ponies”, with both economies built primarily on property development and the finance thereof. There remains some concern that job losses in France and Germany have been delayed by their relatively inflexible labour laws and possibly also by the imminent German election. Rising unemployment could therefore be more of a drag on growth and output in 2010 than in countries where employment responded more rapidly to the downturn and where the worst might soon be over. If recovery arrives more rapidly in the exporting economies, such as Germany, than those that are struggling to remain competitive, such as Italy, or those whose economies grew on a financial bubble, such as Spain and Ireland, there could be renewed significant strains on the Euro. The most likely outcome of such strains is probably even greater fiscal and monetary easing rather than the end of the Euro.
Japan
The Japanese economy has begun to recover from the absolute cliff-fall in output last winter, which wiped out 25 years of output growth. The popular discontent with this crash which, let us not forget, came after nearly 20 years of stagnation, led to a political sea-change, with the opposition DPJ winning by a landslide and ending 51 years of almost exclusively one-party LDP rule. Markets are still unsure what to make of this. The new government’s policies are determinedly reflationary and are focused on reviving the domestic economy rather than targeting and relying on export growth. If they can pull this plan off, whilst still addressing the enormous legacy high-debt and high-deficit public finances, the prospects would be bullish for Japanese equities. The key issue is whether their policies can actually revive growth, which in turn would make the fiscal tightening more acceptable and politically feasible or whether they are forced by a lack on international confidence to tighten first, in which case the recovery could fail to start, yet again.
Far East Ex Japan / Emerging Markets
Emerging markets have contributed their positive growth this year, as developed economies have shrunk and, not surprisingly, they seem set to contribute the majority of recovery in 2010. In that respect, decoupling has taken place to some extent, as they have moved on being dependent on the prosperity of western markets to taking on an increasing role in actually driving the global economy. In addition to generally having a younger workforce, confidence has been boosted by general improvements in corporate governance, which has helped to attract inward investment from more conservative investors. The Asian crisis of the 1990’s led to more conservative financial policies, so emerging markets are much less dependent on foreign capital than they were before and in some cases, the dependence has actually reversed. They (in particular China) have the assets and it is the G7 countries that have the debts. The transfer of economic power from the West to the East appears increasingly inevitable.
Bonds
The last few months have seen gilt prices being pulled in opposite directions. On one hand, prices have fallen when investors have focused on the strength of the economic data suggesting that recovery will occur earlier than previously expected. On the other hand, prices have risen over the past month as investors are once again reviewing the possibility of deflation occurring over the next few years, which would clearly benefit fixed interest products. To cloud the issue further, the Monetary Policy Committee recently extended their programme of purchasing government bonds, which in turn boosted the gilt market. The money market’s perception of risk has declined substantially since earlier this year. The yield spread between 3 month LIBOR (the rate at which banks lend to each other) and Bank of England base rate has fallen back to the levels recorded before the financial crisis (about 0.15%). At the height of the financial crisis in September 2008, banks were afraid to lend to one another, fearing bank failures, and the spread widened to nearly 2%.
The performance of corporate bonds has been lively since their low point earlier in the year. In March 2009 the average difference between the returns on bond and gilts was at its widest point for eighty years at 4.4% p.a. This difference has now narrowed to 2.2%, effectively providing a total return from corporate bonds of more than 20% in 6 months. Because of this clearly corporate bonds no longer offer such exceptional value although the yields on offer are still relatively attractive when compared to those available prior to the financial crisis.
Commercial Property
UK commercial property is about to become very attractive to foreign buyers, if it isn’t already. Real values have fallen by up to 50% in some cases and the pound by nearly 30%. Norway’s sovereign wealth fund has stated its intention to invest in UK property as has the US fund manager LaSalle investment, the Australia Future Fund (who recently spent £210m on 1/3 of the Bullring shopping centre in Birmingham). These investors alone will have the potential to arrest the fall in the commercial property markets but, in addition, the major UK house-builders and property developers are looking to raise big money through the stock market in the next few months to ensure they are ready to benefit from any upturn. Although there are still major obstacles for the sector to overcome, not least the shortage of affordable finance, the sector looks sensibly priced at least.
CONCLUSION
Investors correctly understand that, over the long run, equities have delivered, and should continue to deliver, superior returns to those generated by any other asset class. They also appreciate that these returns come with much higher levels of uncertainty in any given period. During the unprecedented period we have just experienced, it is not surprising that inexperienced investors bailed out until “things settled down”. Have they “settled down” now ?
The answer is No. Things never “settle down”. The investment environment remains difficult for investors, because that is the nature of the beast. The key factor is not to have all your eggs in one basket (that inevitably lead to “bubbles”) regardless of what the experts say, and to take a long term view.
Things may well look better now than they did 6 months ago (what wouldn’t !) but in the same way that investors should not be tempted to sell what they wish they had sold a year ago, they should not be looking to buy now what they wish they had bought six months ago.
Tags: Investing, With Profit Bonds, With Profit Investments
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