- Cash can be viewed as the most expensive asset as negative real interest rates continue to destroy its purchasing power.
- Therefore, asset allocators should resist the temptation to invest in cash in the medium term.
- Central banks must address the impact of this ultra-easy monetary policy.
Should interest rates still be at emergency levels?
Cash is not king. In fact, I think cash is the least attractive asset class at the moment and most strategic asset allocations should avoid it. For sure, many asset classes are expensive now, but I argue none more so than cash. To make my case, I ask a simple question:
“Is it acceptable for a public institution to reduce a population’s standard of living over the course of a decade or longer?”
This question is directed at the world’s big central banks: the Federal Reserve, the European Central Bank, the Bank of Japan, and the Bank of England amongst others. To be clear, I hold these institutions in high regard for their rapid and decisive response to the global financial crisis of 2008, which doubtlessly averted an even more serious outcome. Yet, a decade on, should we still be at emergency levels of interest rates?
Central bankers could retort:
“Why not, what’s the downside? Economic theory warns that an interest rate set too low can cause long term inflation; if there is little sign of excess inflation, why raise rates?”
The problem with very low interest rates
The reason is that there are other consequences of low interest rates. An unintended one, which I’ve observed over the last few years, is that a prolonged period of very low interest rates appears to affect investor behaviour.
Obviously, all of us are free to choose how much we spend versus how much we save. If the return from saving is low, then generally we will prefer to spend instead. Indeed, we may even choose to borrow to spend, as may corporations – to increase their output – all of which improves near-term economic growth. The idea behind the emergency measures the banks took in 2008 was, of course, to ensure money in the bank wouldn’t keep pace with inflation so as to encourage us to spend there and then.
Crucially, this decision to spend or save creates a link between the inflation rate and the interest rate. The real interest rate (the interest rate minus the inflation rate) must be positive in order to preserve future purchasing power. Every day it’s negative the amount of goods our money can buy is reduced. That’s bearable over short periods but not for long periods. A negative real interest rate has now prevailed in Western nations for almost 10 years and the compounding effect of this has done real damage to purchasing power. In Britain, what cost £100 in Jan 2009 now costs £119. Yet £100 in the bank has grown to just £104.
Standards of living have been affected
Chart: US cost of living
Source: Fidelity International, Bloomberg, April 2017
This is extreme. Standard economic models expect the interest rate to be close to the nominal economic growth rate in the long run. Economic growth can be decomposed into an inflation rate and a real economic growth rate, estimated to be about 2% - 2.5%. That means the real interest rate should normally be about 2%. That is significantly higher than the current, ever more negative real interest rates.
In the UK, the real interest rate is -2.0%.
Never before have real short rates been this low - as much as 4 or 5% below typical levels. And never before have they been negative for anywhere near the 9 years, and counting, of the current cycle.
Deconstructing investors’ ‘reach for yield’
Maybe if the choice was either to spend or to deposit money in the bank, people might spend when real interest rates are this low. But there are many investable assets. Since they’re all riskier than bank deposits, and investors require reward for bearing risk, these asset returns are expected to exceed the interest rate. Therefore, as people seek to maintain purchasing power, rather than save less they are investing more riskily, termed ‘reaching for yield’. Buying riskier assets comes with increased volatility and the potential for losses … which may further impact investors’ ability to meet their longer term goals. Hardly an environment to increase spending. The unintended consequence of this extended period of negative real interest rates is that it has changed investor behaviour rather than stimulating consumption.
The spectrum of investment expected return and risk are typically represented by an efficient frontier: a curve on a graph with investment risk on the horizontal axis and return on the vertical one. This efficient frontier represents the investment portfolios of maximum expected return for a given level of risk. Since we all prefer more return to less, and less risk to more, the frontier is upward sloping, with the left hand end sitting at the zero risk point which equates to a return equal to the interest rate.
Chart: risk/return spectrum
Source: Fidelity International
As an analogy, view the inflation rate as a water line, a line running horizontally across the graph, and view the efficient frontier as the profile of a boat at sea. We’ve already shown that the real short rate is typically about 2%, so the whole boat should float comfortably above the water line. However, with a -2% real short rate, our boat is sinking. At that level, a third of the efficient frontier is submerged. The only available portion that’s above sea level is the risky element. The safe haven of the bank deposit is no longer available to the investor choosing at least to maintain a standard of living. All those in the submerged cabins have made their way aft, up the risk curve.
Two key messages
The first of my two key messages is to implore central banks to address the impact of this ultra-easy monetary policy, as I suspect the situation will deteriorate shortly. Many retirees since the financial crisis had defined benefit pension plans, so haven’t borne the brunt of low interest rates. In future, most new retirees will be in defined contribution schemes and they will feel the impact: their pension funds won’t have grown enough to retire on; and annuity rates - which are related to interest rates - won’t be high enough to pay sufficient income in retirement. Furthermore, whilst defined benefit members are unaffected, the corporations and local authorities which must pay their pensions are going to find it increasingly difficult.
To put this into numbers as a case study, someone working for a local authority in the UK for 40 years will receive a defined benefit pension approximately two thirds of final salary, whereas someone making identical contributions into a defined contribution scheme will today be receiving an annual annuity of approximately one tenth of final salary. Not only is the latter too low for a comfortable retirement, but the local authority needs somehow to make up the difference between the level of income which has been promised to the defined benefit member and the rates on their own investments prevailing in the market to fund it.
The second message is to investors: Ultimately I suspect a continued deterioration of a population’s standard of living will put pressure on governments, who in turn will no longer tolerate independent central banks. To avoid a loss of independence, and also in acknowledgement that the emergency levels of interest rates set in 2008 won’t stimulate the economy for much longer, central banks will raise rates. Only then, as our sunken boat is raised, and investors return to safer assets, will the risk increase of an asset price fall. Until then, do something with your money – anything but putting it on deposit. To move into cash guarantees a return which will fail to keep up with inflation by an-ever increasing margin - it’s akin to moving back into the flooded cabins as the boat slips beneath the waves.
Equity release is growing in popularity across the UK as more and more homeowners over 55 look to access some of the wealth tied up in their property. As house prices have increased, so has the amount of equity in your home. Now could be the perfect time to see how much equity you could release from your home, and how you could use that tax-free cash. So why should you consider releasing equity from your home?
- You could have access to tax-free cash – when you need it. With a Lifetime Mortgage you can release as little as £10,000 tax-free initially, and leave funds in reserve for when you need it. You retain full ownership of your home, you’ve just borrowed against it.
- You could become repayment mortgage-free. Reduce your monthly outgoings by clearing any remaining mortgage balance. Without the drain on monthly mortgage payments you are free to use your funds as you wish.
- You could use it to help your loved ones. Releasing some of the equity from your home could allow you to gift an early inheritance to your heirs. See your inheritance in action and help your family financially when they need it. Equity Release can also be used as part of a comprehensive inheritance tax strategy, reducing the inheritance tax paid on your estate. The Financial Conduct Authority do not regulate Inheritance Tax planning.
- You could be more financially secure. Releasing some of the equity from your home could make a big difference to your day to day life, by helping with travel, food, bills and other living expenses that are increasing.
- You could pay for your dream retirement. Why not use some of the money you release to have the holiday of your dreams? Or to afford those luxury purchases such as a new car?
- You could fund your home improvements. With the funds release from your property you could finally be able to make those home improvements, such as putting in a conservatory, installing a more modern kitchen, landscaping the garden or extending the home to accommodate friends and family.
- You know what you are being charged. With an interest rate that is fixed for life you know exactly what the costs are.
- You home remains your own – for as long as you like. With a Lifetime Mortgage you retain full ownership of your home and the mortgage, along with any accrued interest, is only repaid when the property is no longer your primary residence.
- You will never owe more than the value of your property. Regardless of what happens in the future, you can never owe more than the value of your property, and no debt will ever be passed down to your heirs.
Emmanuel Macron has vowed to “turn a new page” on Europe after a decade of crisis and stagnation in which Eurosceptic sentiment has been on the rise, both in France and around the continent.
On the campaign trail, the young president-elect has promised to rebuild the links between the European Union and its citizens, both economically and politically.
He has promised a “Buy European Act” and EU ‘citizens conventions’ - and supports EU-wide constituencies for the European Parliament.
Here, with the help of leading analysts, EU diplomatic sources, and Mr Macron’s own policy guru Jean Pisani-Ferry, we look at five obstacles that lie between Mr Macron and the realisation of his new European dream.
1. All is not quiet on the eastern front
No-one should doubt the extent of Mr Macron’s belief in Europe. In his victory speech the young president-elect promised to “defend Europe” noting that “it is our civilisation that is at stake”.
That is a statement which puts Mr Macron on a direct collision course with the EU’s recalcitrant eastern states like Poland and Hungary whose leaders revel in the tag of “illiberal democracies” that celebrate national identity and what they call Europe's “Christian” culture.
Mr Macron’s vision for newly integrationist Europe pits him squarely against the angry east
The migration crisis of 2015 brought these dormant divisions exploding to the surface, as the eastern states openly rejected the liberal, multi-cultural, globalising values espoused by western Europe and typified by Mr Macron.
At one point on the campaign trail Mr Macron likened Poland’s hardline conservative government to the "regimes" of Russia's Vladimir Putin and the Hungary’s prime minister Viktor Orban, who is accused by Brussels of systematically attacking the freedoms of the academia and the press.
These tensions have been immediately evident, with Poland’s president Andrzej Duda saying in his congratulation message to Mr Macron that he looked forward to “fruitful cooperation on rebuilding the trust of Europeans” – clearly implying that that trust has broken down.
The EU’s east-west relations are already deeply strained, not least by Brexit and the €10 billion hole that leaves in the next seven-year EU budget. Mr Macron’s vision for newly integrationist Europe pits him squarely against the angry east.
2. Not to mention trouble on the home front
Mr Macron made all the right conciliatory noises in his victory speech at the Louvre, reaching out to the 10.5 million French who cast their vote for Marine Le Pen, describing them as “angry” and “anxious” and promising to listen to them.
But no-one should be under any illusion how profoundly Mr Macron’s view of the world is opposed to those who voted for Ms Le Pen. Mr Macron in his Programme for Europe could not be more explicit.
The consequences of so profoundly alienating what Ms Le Pen’s people call the new 'patriotic front' in France are potentially explosive
“True sovereignty is based on European action in a renewed democratic framework,” he writes.
Or as he tweeted: “Europe makes us bigger. Europe makes us stronger.” For Le Pen voters, and the many millions more French who made up the 49 per cent who voted for anti-EU parties in the first round, that is simply not the case.
For them, sovereignty is located not in “European action” but in the nation state.
We will see what kind of majority Mr Macron can win next month in France’s legislative elections, but whatever he manages, it will not be able to conceal this absolutely fundamental division.
The consequences of so profoundly alienating what Ms Le Pen’s people call the new “patriotic front” in France are potentially explosive.
3. And Germany’s Swabian housewife still won’t pay
Mr Macron says he is determined to pursue France’s longstanding vision of deeper Eurozone integration, ultimately with plans for a Eurozone budget and finance minister as well as common backstops for Eurozone depositors and unemployed.
The problem is that Germany has shown deep reluctance to buy into such schemes, fearing that it will set a bad example to Europe on the need for more fiscal discipline and – ultimately – that it will leave the prudent German “Swabian” housewife on the hook for the bills.
How long before the Franco-German relationship sinks back into the simmering sulky stand-off of the past decade?
Mr Macron’s senior policy advisers believe the time is right for Germany to show some flexibility in order to head off the populist threat embodied by Marine Le Pen and – perhaps even more seriously – the Italian Five Star Movement.
Jean Pisani-Ferry, the founder of the Bruegel think-tank who is Mr Macron’s policy guru, believes that Germany needs to wake up to the fact that Europe’s crises are now as much political as financial - before it is too late.
“The Germans were rightly very scared by the French election and the performance of Marine Le Pen. If she had won, that would have been massively destructive for everyone, including Germany which sits at the core of EU value-chains,” he tells me.
“These times are not business as usual. The Eurozone debt crisis [2011-12] was fundamentally a financial crisis, not a geopolitical crisis. Now we are in a very different type of environment where risk is as much political as it is economic - just look at Italy. We cannot just wait and hope for the best.”
Mrs Merkel greeted Mr Macron’s election with warm words, as was to be expected, but if the Franco-German alliance is to really be re-booted, Germany is going to have to give ground on a structural issue on which it has hitherto shown only instransigence.
Charles Grant, director of the Centre for European Reform, a pro-EU think tank thinks that Mrs Merkel, assuming she is re-elected in the Autumn, will have to give Mr Macron “at least some of what he wants”.
But how much? And if it’s not enough, as many analysts fear, how long before the Franco-German relationship sinks back into the simmering sulky stand-off of the past decade.
4. And claims on defence co-operation will ring hollow
In the absence of meaningful movement on Eurozone integration, both Berlin and Paris have set some store of late on defence co-operation as a symbol of the ‘new’ EU, issuing several joint papers on the subject.
It is hoped in Brussels that the UK’s departure in March 2019 could also accelerate Franco-German defence co-operation since the UK has been a constant brake on such ambitions, insisting that EU defence ideas never impinge on the primacy of Nato.
Once again the big European vision will have disappointed
The problem for Mr Macron is that on defence – as on so many issues – the French and the Germans don’t really agree. While Germany wants to focus on “institution building” and creating more European integration through “permanent strategic co-operation”, France wants actual capabilities that can be deployed to the field and lighten its own burden internationally.
France also wants more European Commission money to go on defence, but the reality that after Brexit, EU budgets are going to be under intense pressure, and in the current economic climate pouring cash into joint EU military procurement projects is going to be a tough ask.
The risk for Mr Macron is that after taking office, much of the new Franco-German defence co-operation will not add up to a row of tin soldiers. Once again the big European vision will have disappointed.
5. The Brexit blowback
Mr Macron has – quite literally – been flying the flag for Europe during his campaign and has promised to defend his ideal of Europe in the coming Brexit negotiations.
He has set a fierce tone, describing the British electorate’s choice as a “crime” against Europe and civilised western values, and vowing Brexit will bring “servitude” to Britain, not freedom or control.
Mr Pisani-Ferry tells the BBC that this does not mean Mr Macron intends to “punish” the UK, but to make it clear that “Europe is part of the solution”, not going-it-alone, like Britain.
If Mr Macron stands his ground, a true clash of values lies ahead
Whether or not you call it punishment, this puts France and Mr Macron on course for imposing an absolutely uncompromising Brexit settlement on Britain.
That, in turn, when the talks get down to brass tacks, could pit Mr Macron and France against other free-trading members states – like the Netherlands, Denmark, Ireland and the Flemish parts of Belgium – who prefer to prize trade ties over the theological orthodoxy of the European Union.
Today, Mr Macron wraps himself in the European flag, marching to his victory rally to the strains of the EU’s anthem, the Ode to Joy.
Tomorrow he must face the fact that his vision for Europe is no longer shared in many corners of the continent, indeed it is being overtly rejected. If Mr Macron stands his ground, a true clash of values lies ahead.
A massive €100bn Brexit bill is "legally impossible" to enforce, the European Commission’s own lawyers have admitted.
The Telegraph has seen minutes of internal deliberations circulated by Brussels’s own Brexit negotiating team, which had warned against pursuing the UK for extra payments.
But member states appear to have ignored the Commission's own advice by demanding €100bn (£85bn) from the Government, a sharp hike in the original demand of €60bn.
The inflated bill deepened the rift between Brussels and Downing Street. A leaked report of a Downing Street dinner with European Commission president Jean-Claude Juncker accused Theresa May of living in “another galaxy”, prompting the Prime Minister in turn to accuse EU politicians and officials of seeking to disrupt the General Election.
The row over extra payments demanded by Europe arises from a refusal to offset any final bill against the value of EU assets, acquired by the UK during its 43 years of EU membership. Brussels is also demanding that Britain continues to pay farm subsidies up until the end of 2020, almost two years after Brexit.
But both of these moves fly directly in the face of European Commission warnings to EU member states that such demands could undermine the legal foundation for their final bill demand.
The Commission’s initial position – now apparently overruled by EU leaders – would appear to support British contention that the European demands on what Britain owes Brussels are legally flimsy and wildly overstated.
Senior UK officials have described the new Brexit bill as “ludicrous”. At a Brexit seminar in February held by Michel Barnier, the EU’s chief Brexit negotiator, three member states – Ireland, France and Germany – all demanded that the UK’s share of EU assets should not be included in calculations of the Brexit financial settlement.
According to detailed minutes of the meeting seen by The Telegraph, Nadia Calvino, the director-general in charge of the budget, rebutted the idea.
EU assets are listed in its annual accounts, which the Commission believes is the legally watertight basis for calculating Britain’s final bill.
At the seminar, she warned that if the Europe side began “cherry-picking” which parts of the EU annual accounts it wanted to base its own calculations upon, then Britain would be justified in doing exactly the same.
“Calvino was very clear. The only ‘legally defensible’ approach was not to ‘cherry-pick’ the annual accounts,” said a senior EU diplomatic source. “She could not see how the EU could justify taking into account all the UK’s commitments, but not a share of the assets.”
Separately, officials at the Barnier task force warned a month ago that it would be "legally impossible" to insist that Britain keeps paying for farm subsidies after March 2019.
Senior Commission officials explained that because farm payments only become legal obligations when the annual EU budget is agreed, Britain cannot be forced to pay them after departure from the EU.
Team Barnier also warned internally that if member states – led by France and Poland – demanded the farm payments after Brexit, it would give the UK the “perfect excuse” to walk away from the budget talks because the European side was breaking its own rules. That argument now appears to have been overruled.
“It was the clear view of the Commission that it would be legally impossible to defend the idea that the entire seven-year budget plan was a binding commitment on the UK, and that insisting the UK pay after Brexit would give them an excuse to walk,” the senior EU source said.
The EU lists some €22.5bn worth of assets – everything from buildings to satellites – at book value in its annual accounts, but these items are worth considerably more at market rates.
Taking into account the value of loans and other cash holdings, total EU assets have been valued at €153.7bn by the Bruegel think-tank.
Although not owned by member states, the UK, as a contributor to the EU over the past 43 years, expects to be able to "net off" its share of those assets against any Brexit bill.
This could be worth up to €10bn to the UK. John Springford, director of research, working on economic issues, at the Centre for European Reform in London, said the member states were undermining the Commission's attempts to stick to a “principles-based” approach.
“The Commission is trying to make the Brexit bill legally coherent so that, if negotiations fail, it has a defensible case at the International Court of Justice in the Hague,” he said.
“The Commission is defending a principles-based approach to the UK’s Brexit bill. It thinks that the UK does not legally have to pay for spending decisions made after it has left the EU – only those made when it was a member.”
This is why the new demand by some member states to include annual farm payments until 2020 also presents serious legal problems.
Savers are being thwarted from cashing in their “final salary”-style pensions because financial advisers are refusing to work with them over fears of compensation claims.
Millions of people with final salary pensions, where income is based on salary and length of service, have the right to move their savings into other pension arrangements.
Thousands have chosen to do this because, while the schemes offer guaranteed, inflation-linked income paid by their former employers, they do not allow lump sum withdrawals and are less tax efficient on death. The terms that savers are offered are often very generous.
It is not unusual to be offered a “cash equivalent transfer value” of 40 or 45 times the projected annual income that a final salary pension would pay. So £6,000 of annual income could become £250,000 once moved into a personal pension.
Under rules set down by the City watchdog, financial advice must be sought before the pension can be moved if the transfer value is £30,000 or more. Charges vary, but are typically thousands of pounds.
For me, it’s about control. If I pop my clogs tomorrow, my two boys will get nothing
However, savers are finding that firms are wary of advising them if they suspect they will not be able to recommend a move. At the same time, the path is blocked by personal pension providers that will refuse to accept a transfer from a final salary scheme without a “positive recommendation”.
The industry calls people who want to move their pension against the wishes of an adviser “insistent clients”. Advisers say they won’t help this group quit final salary pensions when they don’t think it’s the right thing to do.
Many cite the “pension review” of the Eighties and Nineties, which led to billions of pounds being paid in compensation after advisers were judged to have wrongly recommended people to give up company schemes for personal pensions.
As a result, dozens of Telegraph Money readers are being prevented from taking control of their money. Transfer values are unusually high at the moment and there are fears that the delay in finding advisers and firms willing to help will mean savers lose out.
Richard Austin, 65, said the “crazy” regulations had left him feeling like his future is “in the lap of the gods”. He retired last summer and now lives on a canal boat. Mr Austin said his state pension covered his modest costs.
But after months of phone calls and emails he has not found an adviser willing to speak to him about transferring two final salary pensions he has with a former employer. Combined, they would pay around £5,000 a year, or give him a lump sum of £100,000 if moved into a personal pension.
He has other savings and will continue to work part-time but said he didn’t feel that advisers were taking his circumstances into account.
“Every financial adviser has told me it’s going to be a no. They won’t touch it,” he said.
“For me, it’s about control. If I pop my clogs tomorrow, my two boys will get nothing. If I can transfer it into a personal pension, at least they’ll get what I leave behind.
“I know at the moment the income is guaranteed and I’m quite prepared to give up that guarantee to get more control. It is my money at the end of the day.”
Members of final salary schemes can receive a transfer value free of charge once a year. But the offers are only guaranteed for three months, meaning that savers have to pay for new valuations if they can’t arrange a transfer quickly enough.
That is what happened to Mr Austin while he was searching for an adviser.
His transfer value expired and his scheme is asking for around £800 to produce new valuations for his two pensions. Other readers have reported similar problems.
David Rowe, a 55-year-old engineer, wants to transfer three final salary pensions but found that the advisers he spoke to “weren’t interested unless I let them manage my money afterwards”.
A seasoned investor with around £250,000 in a Hargreaves Lansdown stocks and shares Isa, he has become frustrated with the time it has taken to move his pension.
For one of my pensions the offer fell from £67,000 to £60,000 in three months – it’s putting me under a lot of stress
“I’m retired now and want to spend more time doing what I enjoy, dancing and rock climbing,” he said.
“For one of my pensions the offer fell from £67,000 to £60,000 in three months – it’s putting me under a lot of stress.”
Combined, his pensions would pay £12,000 annually or £500,000 if transferred. Hargreaves Lansdown, Britain’s biggest broker, said it would not accept a transfer from a final salary scheme unless an adviser recommended the move.
However, AJ Bell, a rival, confirmed that it would accept transfers irrespective of the adviser’s recommendation. Prudential and Aviva said they had no way to know whether an adviser had made a positive or negative recommendation.
Fiona Tait of Intelligent Pensions, a firm of advisers specialising in pension transfers, said her company would not facilitate a transfer unless it judged it to be the right thing to do.
She said: “If advisers are saying no, they are professionals and they will be coming to that conclusion for very good reasons. Those reasons will be all to do with protecting the consumer.”
The firm charges £1,200 for a report, plus 1pc of the pension being moved, reducing on a sliding scale for sums of more than £500,000.
Deciding when to invest is one of the most important decisions investors face. One universal rule is not to try to time the market, as choosing the wrong moment can prove costly in the long run.
A £10,000 investment in the FTSE All-Share in 1986 would have grown to £36,752 by the end of 2015 if it was left invested for the entire period.
However, missing the 10 best days of the market in that period cuts that return almost in half, dropping it to £19,888, according to JP Morgan Asset Management.
The conventional way to avoid market timing issues is to invest regularly, “drip feeding” money in, rather than investing in one-off chunks.
When a fund or other asset falls in value, this regular contribution buys more units. Conversely, fewer units are bought when prices are higher.
This is known as “pound cost averaging”, and in theory reduces the amount your investments yo-yo up and down, while also boosting returns.
We have put this to the test over the past two decades, using figures compiled exclusively for Telegraph Money by data firm Morningstar.
We looked at the past 20 years, using investments into a FTSE 100 tracker fund, global tracker fund, and an emerging markets fund.
There was no emerging market tracker fund with a 20-year history, so an active fund that mirrored an emerging market index was used.
We also looked at a portfolio evenly split between the three funds and “rebalanced” once a year.
For each of these we looked at how investing a lump sum compared with a drip-feeding approach.
In one scenario £12,000 was invested in a lump sum on April 6, the beginning of the tax year, while in the other £1,000 was invested at the start of every month. The total investment over the period was £240,000.
What the figures show
Initially it looks like there is no benefit to drip feeding. After 20 years all scenarios have generated returns that are within a few percentage points of each other.
The FTSE 100 tracker grows to £436,000 for the monthly investor, and £440,000 for the annual investor, while the global tracker reaches £495,000 and £497,000 respectively.
The emerging markets fund returns the most, reaching £647,000 for the monthly investor and £642,000 for the annual investor. The split portfolio reaches £527,000 for the monthly investor, and £531,000 for the annual investor.
The annual progress of each investment can be seen in the chart below, apart from the global tracker fund due to the overlap with the FTSE 100.
Russ Mould, of fund shop AJ Bell, said: “It is surprising to me that the returns all finish close together. The annual contributions benefit from the stock market rally that began in 2009 following the financial crisis, as money is invested earlier, providing greater exposure to a rising market.”
However, there are still benefits of drip feeding. By spreading the contributions across 12 months the monthly investor has less money at risk at any one time, compared with the annual investor who has put everything into the market at the start of the year.
If the figures charted the daily totals, rather than annual, the monthly investments would also follow a smoother path.
For investors with a time horizon of less than 20 years, that is valuable.
Brian Dennehy, of Fund Expert, the fund shop, said that aside from the money generated, “investing monthly is a great idea because it creates discipline, which is arguably the biggest problem for investors”.
In our scenarios, the annual investor still sticks to a regular habit.
However, if a lump-sum investor picked the wrong years to invest larger amounts, they would suffer drastically worse performance than a monthly investor.
“One other consideration here is fees,” said Mr Mould. “How and what your broker charges could have a bearing on how much each strategy would cost to implement. For instance, 12 dealing fees a year instead of one could have an impact on returns.”
Overall, Mr Mould said that the data highlighted the benefits of patient, long-term investing, using the stock market as “a get-rich-slowly scheme rather than a fruit machine in search of an elusive jackpot”.
The split portfolio
In terms of how much they have at the end of each year, the monthly and annual investor follow very similar paths.
But the three-way split portfolio outperforms both the global tracker fund and FTSE 100 by a significant margin, due to a combination of the emerging market exposure and annual rebalancing.
The rebalancing dampens the worst of the emerging market falls, reallocating profits from this portion in good years and buying more in years where markets have fallen.
Many times we hear “my property is my pension”, where people are talking about their home or buy-to-let portfolio, but combining property and pensions can achieve greater tax efficiency.
First, the money used to buy the property will have received tax relief on it; this makes saving for the property a lot easier, especially if employer contributions are involved. The employer contributions will have received corporation tax relief, which can be a real benefit for owner-managed firms.
On the purchase of the property the usual taxes apply, such as stamp duty land tax and VAT, although in many cases the VAT can be reclaimed by the pension scheme.
The real benefit comes when the rental money is received into the pension scheme, as it is tax free rather than subject to income tax if it has been received personally.
These funds can be used to pay off a mortgage if there is one, or to build up additional funds for retirement and invested accordingly. If and when the property is sold, there will be no capital gains tax to pay on the increase in value.
All this makes for very efficient investing, but as it is a pension there are other issues to consider.
Only commercial property is allowable in a pension without incurring tax charges. Commercial, in this context, isn’t quite the same as some people might think.
Some buildings such as a bed and breakfast or a holiday let, which are technically used as a business, are not classed as commercial when thinking about pension schemes. A good rule of thumb is if you can live in it, it is residential.
As with most pensions legislation there are exceptions to the rule. Take a pub, for example: most of these will have a flat above for the manager, so you would think it would be classed as residential. This isn’t the case where the flat is occupied by the manager of the pub who isn’t connected to the scheme member and has to occupy it for their job. This sort of exception applies in many cases.
The impact of the tapered annual allowance for high earners, and the money purchase annual allowance (MPAA) for those who have flexibly accessed their pensions, means pension savings are significantly restricted for many. This may impede the amount that can be saved to purchase the property, but contributions may not be necessary once the property is in the scheme.
Rental income from properties held within a pension is treated as growth in the fund, so won’t be impacted either by the taper or the MPAA. This can be a great way to continue to build your pension or create an income stream when you are restricted on what you can pay in each year.
There are often concerns about the liquidity of property investments when a member wants to retire, but if managed well this issue can be mitigated. There is always the option to sell the property at the point of retirement, but this could be at a bad time in the market, or it may be a property linked to a business the member still retains into retirement.
The pension freedoms enacted in 2015 offer greater flexibility on the timing and amount of income that can be withdrawn from a pension. Hence drawing out the rental income that has built up as and when it is needed can be done easily, and missing a few income payments will not restrict what can be accessed.
Investing in property can be a specialist area, although investing in a property locally that you understand and is occupied by your own business or one that you know can help a lot.
The main thing is finding the appropriate pension scheme in the first place that can deal with such an investment.
Defined benefit transfers are regularly topping 40 times the value of their annual entitlement, making them many members' most valuable asset, according to Drewberry Wealth.
Neil Adams, head of pension planning at the firm, said record transfer values - a result of low bond yields - meant many people's pensions were now worth more than their houses.
"I’ve recently had clients come across my desk with pension transfer values in excess of 40 times their annual entitlement from the scheme," Mr Adams said.
"If you’re in a final salary scheme, in today’s environment it’s definitely worth calculating how much your final salary pension could be worth if you decide to leave.
"I’ve worked with a number of clients who’ve found that their largest asset is now their defined benefit scheme value, which is currently worth significantly more than the house they’re living in."
However, he stressed that defined benefit pension transfers should "never be taken lightly", and urged members to seek financial advice before leaving a final salary pension scheme, no matter how much your pot is worth."
Currently, members with a pot worth less than £30,000 do not need to take financial advice. Only those with a pot worth more than £30,000 must seek advice from a specially-qualified adviser.
But he went on: "Still, where it has proved to be the right option for my clients to leave their final salary schemes in exchange for an attractive transfer value, they now have a whole host of retirement funding options open to them that they wouldn’t have had before."
Since pension freedoms came in two years ago, defined benefit (DB) transfers have exploded in popularity, as people looked to take advantage of the new flexibilities - in particular the inheritance tax advantages of defined contribution (DC) pensions.
Record low gilt yields following the Brexit vote pushed up the value of DB transfers, prompting even more people to transfer to DC schemes.
Yesterday (6 April), Xafinity revealed transfer values had appeared to steady at around £235,000 for a pension worth £10,000 a year at age 65.
That was £25,000 more than the same pension was worth on 1 June 2016, before the UK voted to leave the European Union.
Transfer values have been hovering around that level now since January, after peaking at almost £245,000 in October.
Paul Darlow, head of proposition development at Xafinity, said: "March 2017 was pretty unremarkable from the point of view of transfer values which stayed fairly stable.
“With Article 50 having now been triggered we may see some additional volatility in financial conditions. If so, this period of stability could prove to be relatively short-lived.”
VouchedFor has revealed the UK’s most well-liked IFAs, based on those with the highest number of positive reviews from clients on its website.
Taking the top spot was Anthony Villis, managing partner at London-based First Wealth, who secured the most favourable feedback to pull away from the rest of the top IFAs with positive reviews within the last two years.
Advisers had to receive at least 28 reviews of 4 stars or more to qualify for entry in the list of top 250 UK advisers. They were also required to be using VouchedFor’s paid-for service, Professional Plan.
This is a membership plan costing £45 per month, with the Lite plan allowing advisers to be contacted up to five times a quarter, and the Professional plan incurring an additional charge each time an enquirer makes contact, with no limit how many times the adviser can be contacted.
Hearing the news through FTAdviser just before leaving on holiday on Friday, Mr Villis, who works with a staff of 17 including five advisers, said he was delighted his clients had recommended him.
“Great financial planning can change your life! We exist to inspire ideas, create confidence and give you the freedom to live,” he said.
Another well-known name in the top 10 was Jeremy Askew, managing director of Town Close Financial Planning.
He commented: “It’s testament to the excellent service the team has provided. We’re looking forward to getting even better.”
Mr Askew said the company is moving to larger premises in Loughton as part of expansion plans which has seen it take on a compliance director and office manager, with a fully-qualified adviser and trainee next on the agenda.
He said: “From a back bedroom and zero clients 30 months ago, we’ve expanded to £50m under advice and four permanent, including me, one part-time staff and three contractors. Revenue is up 50 per cent in the last 12 months.”
Also in the top ten were Neil Gilbourne from 3R Financial Services; Peter Emery from Emery IFA; Philip Hanley from Philip James Financial Services; Carl Melvin from Affluent Financial Planning; Andrew Finnie from Border Finance; Alan Powell from Elite Wealth Management; Paolo Standerwick from MLP Wealth Management; and Phil O’Connor from Whitewell Financial Planning.
VouchedFor said its top 250 list heralded a new era of transparency within the financial industry, giving great advisers the chance to demonstrate their value.
The full VouchedFor list, featured in the Sunday Times yesterday (10 April), gives details of the advisers’ local area, specialisms and number of reviews for a total of 875 professionals, including 250 IFAs, 250 mortgage advisers, 200 accountants and 175 solicitors.
Adam Price, founder of VouchedFor, said: “For years prospective clients have been in the dark about the quality of a professional’s work from their clients’ perspective. With the VouchedFor guide, both consumers and advisers can discover which professionals have the happiest clients.”
A mortgage that enables families to raise funds from their existing property to help relatives buy a home has been launched by Nationwide.
The family deposit mortgage is available to family members who want to help their children onto the property ladder, as well as home movers and those wishing to help older parents to move.
New borrowers can choose from a two-year fixed rate, five-year fixed rate and two-year tracker rate mortgage deals with a £999 fee or no fee, available direct from Nationwide or through brokers.
Rates start at 1.15 per cent for the two-year tracker and 1.2 per cent for the two-year fixed rate, both with a £999 fee - a discount of 0.09 per cent on the core product range.
Existing Nationwide mortgage members and those remortgaging to the building society from another lender can apply for the Family Deposit Mortgage, on condition that the buyer receiving the funds takes out a loan from the building society’s standard mortgage range.
All of the additional sum raised must be provided as a fully gifted deposit, with those gifting the money able to access up to a total mortgage borrowing of 80 per cent loan-to-value.
The scheme is also open to those with no current mortgage on their homes and those in receipt of retirement income.
With the average first-time buyer deposit currently stood at £28,200 in the UK as a whole and £65,600 in London, the product will help the growing number of buyers relying on other family members for assistance when purchasing a property.
Nationwide’s head of mortgages Henry Jordan said: “Our Family Deposit Mortgage range has been launched in recognition of customer demand for a flexible and accessible way to use the wealth tied up in people’s homes.
"The aim is to help not only first-time buyers but also home movers to secure their own property.
"We know that trying to raise a deposit can be the most significant barrier to becoming a home owner.
"This Nationwide range will enable families to give mutual support to each other and provide new options for home ownership.”
Tony Salentino, director at Southampton-based Complete FS, said: “Anything that helps first-time buyers get on the property ladder is a good thing.
“We have a nation now of people in their 50s that have high equity and good assets, but their poor kids can’t even get on the ladder - so anything ‘out of the box’ has to be encouraged.
“We need to get away from the old style of thinking about deposits. We are in a different world now and have to think outside the box.”
Financial advisers predict they will, on average, continue to receive defined benefit pension transfer enquiries for a further nine years.
According to research carried out by Investec, which involved 108 advisers, two thirds of those surveyed expect client enquiries about transfers from DB to defined contribution schemes to increase over the next 12 months, with almost one fifth expecting a significant increase.
Only 2 per cent of advisers surveyed expected a fall in enquiries.
The survey also sought to find out why many advisers decline to give DB transfer advice.
The Investec data show 71 per cent of advisers consider the risks associated with historic advice are too high while 47 per cent say the process is complex and clients do not like paying the necessary fees.
Nearly half (45 per cent) of advisers consider there is a lack of regulatory support.
Investec Wealth and Investment intermediary services head Mark Stevens says: “DB scheme transfers have increased the opportunities for IFAs to advise new clients on their pensions and broader financial needs. However, it’s a fast-changing market and the complexities and risks involved mean that in many cases discretionary investment managers are integral to the effective management of client portfolios.”
Now the UK has started the legal process to divorce from the European Union, investment professionals and economists have outlined what this could mean for investors.
Prime minister Theresa May has triggered Article 50 today (29 March), which sets the ball rolling for the UK to unravel from the European Union.
Investment veterans have given their view on what the Brexit negotiations could mean for currency and assets.
Richard Stone, chief executive of the Share Centre, said he thought the value of the pound would continue to sag over the next two years, particularly if the Bank of England is tempted to keep interest rates low to support the economy.
He said keeping interest rates low should boost asset prices, including housing, as investors try to prevent the erosion of their cash.
Personal investors, Mr Stone said, should identify businesses likely to benefit from weaker sterling, such as FTSE firms that have large-scale overseas operations and which earn revenues in other currencies.
“For investors, now is the time for calm heads and a clear sense of purpose as we strive for the best deal possible with the EU and new beneficial deals with partners around the world.”
Michelle McGrade, chief investment officer of TD Direct Investing, said investors need to stop being blinkered by politics and should instead focus on the fundamentals, such as market confidence, unemployment, and inflation.
She pointed out that the recovery in Europe is gaining momentum and questioned whether the Dutch election is the catalyst European markets needed.
Research from TD Direct found investors were divided on whether triggering Article 50 will have a positive impact on their portfolios.
Ian Ormiston, fund manager of Old Mutual’s European Smaller Companies fund, said: “Investing in European equities is not the same as investing in Europe."
This comes as figures published yesterday (28 March) revealed that European equity funds had suffered the worst outflows in the nine months since the Brexit vote.
“No one knows how key political events are going to transpire, just as no one knows what the stock market’s reaction to those events is likely to be," Mr Ormiston said.
"As investors, let’s try to stick to the knitting and focus on company fundamentals.”
John Bennett, head of European equities at Henderson Global Investors, said a market shift towards value rather than growth stocks could work in Europe’s favour, particularly as the Continent is home to many value stocks.
He said he accelerated this tilt towards value in the second half of 2016.
Mr Bennett, who also runs the Henderson European Selected Opportunities fund, said he was particularly keen on European banks, despite the sector being “very easy to dislike”.
“History shows that investing in European banks would have been a spectacularly wrong call from 2008 until recently, but we feel a combination of vastly improved capital ratios and a turning point in interest rate expectations has made the industry once again investable.”
Hetal Mehta, European economist at Legal & General Investment Management, said: “So far, Brexit has not been so bad for the UK economy.”
She said she thought it was unlikely that initiating the formal process would cause a material economic downturn, adding: “The main danger is around the nature of the negotiations, and the shifting risks around the UK.
“However, if the discussions are well-mannered and make good progress, the risks should diminish and we believe that the BoE could turn markedly hawkish as a result.”
Yet Michael Stanes, investment director at Heartwood Investment Management, said the start of the negotiations means the hard work now begins for the UK.
“Triggering Article 50 no doubt marks a period of ongoing uncertainty for UK business and markets, but perhaps there is also some relief that the process is finally underway.”
Mr Stanes said his firm continues to be cautious on UK assets and expects higher inflation to weigh on real income growth this year.
The residence nil rate band (RNRB), which comes into force over the next three tax years from 6 April, in a nutshell will enable couples with a home to pass on up to £1 million to their direct family free of inheritance tax.
But a survey by Old Mutual Wealth found an alarming level of ignorance about the RNRB. Seventy per cent of respondents knew nothing about the new rule, and even among those who considered themselves knowledgeable got some of the details wrong.
As things stand, the first £325,000 of someone’s estate is free of inheritance tax – an allowance known as the nil rate band (NRB). The new allowance will mean that someone who owns a home has an extra chunk of tax-free allowance. For estates worth more than £2 million the new allowance will be gradually tapered away.
However, it’s not a straightforward increase, and the survey revealed confusion over a number of aspects of the RNRB. ‘The lack of understanding around the new rules could result in people not structuring their will or their financial affairs in the most effective way,’ commented Old Mutual Wealth financial planning expert Rachel Griffin.
Here are the five areas of greatest misunderstanding:
1. YOU CAN SELECT WHICH PROPERTY THE ALLOWANCE IS SET AGAINST
Forty-five per cent of respondents did not realise the RNRB can be applied to any property (in or outside the UK) that has been used as a home by the deceased. ‘However, it does have to be within the scope of IHT, and the property or the value from the property must be included in the person’s estate,’ says Griffin.
2. THE ALLOWANCE WILL STILL APPLY EVEN IF THE PROPERTY HAS ALREADY BEEN SOLD
Forty-five per cent did not know the RNRB can be set against the value of a home that has previously been sold. That means people who have downsized or sold out of the market altogether are not penalised, as the allowance can be used within their estate against the value of their former family home.
3. OUTSTANDING MORTGAGE BORROWING IS DEDUCTED BEFORE THE ALLOWANCE IS APPLIED
‘The value of the home for RNRB purposes is the open market value of the property minus any liabilities secured on it, such as a mortgage,’ explains Griffin. Two fifths of respondents were not aware of this.
4. THE ALLOWANCE ONLY APPLIES WHEN THE PROPERTY (OR ITS VALUE) IS LEFT TO DIRECT DESCENDANTS
More than a third (36 per cent) did not understand that the property must be inherited by the child, grandchild or other direct descendant of the person who has died, or a direct descendant’s spouse or civil partner. ‘It’s important to note that direct descendants don’t include siblings, nieces and nephews or other relatives,’ adds Griffin.
5. THE ALLOWANCE WILL RISE PROGRESSIVELY OVER THE NEXT FOUR YEARS
Almost a third were not aware that the RNRB is set to increase from £100,000 per person in 2017/18, rising by £25,000 per tax year to £175,000 in 2020/21.
Given the potential for confusion over the new allowance, and the amount of tax that could potentially be saved by applying it correctly, the finding suggest expert advice makes sense for anyone thinking about estate planning, writing a will or restructuring their financial affairs.
Advisers are being warned to brace themselves for another year of disruptive pensions policy which could see the idea of long-term savings turned on its head.
Reform of pension tax relief is thought to be “almost inevitable” as the Government looks for substantial cost savings against the backdrop of Brexit negotiations and the potential impact on the UK’s growth prospects.
The Bank of England no longer thinks Brexit is the largest domestic risk to UK financial stability, according to governor Mark Carney.
Carney told the Commons Treasury Committee yesterday that the main threat came from four areas: growing consumer credit, a weaker commercial real estate market, the fall in sterling and the deficit in current accounts.
Labour has pledged to uphold the state pension triple lock until 2025.
The commitment comes on the back of Office for National Statistics figures earlier this week showing that pensioner incomes rose significantly more than working population households since the financial crisis.