Monthly Archives

March 2022

Houses in bubbles representing UK housing market bubble

The UK housing market

By | Financial Planning

It was just over two years ago since Prime Minister Johnson announced the first national lockdown to combat the spread of Covid-19. Global growth slumped and a deep recession ensued, as businesses and individuals relied on Government and Central Bank support for survival. Following a sharp slowdown in property transactions during the Spring of 2020, Chancellor Sunak announced a Stamp Duty holiday, removing Stamp Duty on properties up to £500,000. This helped reflate the flagging housing market, together with a trend amongst homeowners to look for properties with gardens and home offices.

Last year saw house prices continue to post significant growth following the rebound later in 2020. According to Nationwide, the average UK house price increased by 10.4% in 2021, the highest rate of growth recorded for 15 years. Considering the further lockdown seen in the first quarter of 2021 and continued uncertainty over new Coronavirus variants, these gains appear somewhat irrational. That being said, the extension of the Stamp Duty holiday, low borrowing costs and an imbalance between supply and demand appear to have combined to drive prices higher still.

 

How sustainable is house price growth?

Fast forward to 2022, and in the first two months of the year at least, the trend appears to be continuing, with Nationwide reporting house price growth of 0.8% in January and 1.7% in February. But is this really sustainable, or are we on the verge of a rapid slowdown in the housing market?  According to the Building Societies Association (BSA) Property Tracker March survey, it would appear buyers are becoming increasingly concerned.

The BSA Property Tracker survey, which is carried out quarterly by YouGov PLC, showed just 18% of those surveyed in March thought it is a good time to buy property in the UK. This is the lowest figure reported since the survey was introduced in June 2008. Perhaps unsurprisingly, fears over the increasing cost of living generally, the conflict in Ukraine, and the impact of sanctions on Russia on global energy and fuel prices were highlighted as key concerns.

 

Higher costs squeeze affordability

We have warned clients that inflation was likely to increase since early in 2021, although our early estimate that inflation could peak in the Spring or Summer of this year now looks highly unlikely, largely due to the effect of the Russian invasion of Ukraine on global commodity prices. UK Consumer Price Inflation reached 6.2% in the 12 months to February 2022 and this is likely to go higher still as the year progresses.

Given the higher inflation numbers, the Bank of England has now raised Base interest rates at three successive meetings, from 0.10% to 0.25% on December 16th 2021, and agreeing two 0.25% increases in February and March, with the Base Rate now standing at the same level as it was before the pandemic. There are six further Monetary Policy Committee (MPC) meetings scheduled for 2022, and given the heightened inflationary expectations for the remainder of this year, we would not be surprised to see at least three more hikes in Base Rate before the end of the year.

The increase in Base Rates will, of course, feed into higher mortgage rates, both for those on variable rates and those with fixed rate deals that come to an end. Just over seven months ago, five year fixed rates could be obtained at just 0.99%, whereas the best deals in the market are almost double the rate at 1.82%.

 

Confidence on the wane

With higher costs of living impacting on household finances, it is little surprise that UK consumer confidence is starting to falter. The GFK Consumer Confidence barometer fell to -31 in March 2022, to stand just above the levels seen at the start of the pandemic, and when asked about their forecast for personal finances over the coming 12 months, respondents indicated that they were more negative now than at the height of the pandemic and also more pessimistic than they were during the Financial crisis in 2008.

 

Supply imbalance about to correct?

Much of the house price growth seen over the last decade has been a result of cheap borrowing costs, but also an imbalance between demand and supply, as housebuilding generally failed to keep up with demand for housing.

With prices potentially coming under pressure due to increased costs of living, could we see a increase of properties on the market as sellers hope to cash in before confidence weakens? It is too early to tell, although some investors with Buy to Let properties may decide to take advantage of current prices, particularly given that rental yields are likely to have fallen over time.

As a reminder to those who are considering selling second homes or investment properties, Capital Gains Tax on disposal needs to be paid to H M Revenue & Customs within 60 days of the property sale completing. This is less onerous than the 30 day payment window in place between 6th April 2020 and 26th October 2021, however sellers should be aware that tax due needs to be settled within the 60 day window to avoid penalties adding to the tax due.

 

Time to reassess property portfolios?

The UK housing market has defied gravity since the start of the pandemic, although it is becoming apparent that confidence could weaken significantly as 2022 progresses. Higher inflation and hikes in borrowing costs could see the imbalance between demand and supply ease and slow down the pace of growth. For anyone holding property investments, it may be time to reassess existing portfolios in light of the extraordinary gains seen over recent years.

 

If you are interested in discussing the above with one of our experienced financial planners, please get in touch here.

 

The value of investments and the income they produce can fall as well as rise. You may get back less than you invested. Past performance is not a reliable indicator of future performance. Investing in stocks and shares should be regarded as a long term investment and should fit in with your overall attitude to risk and your financial circumstances.

Sign reading Work one way and Retirement the other way

Can I afford to retire early?

By | Pensions

At FAS, we meet clients at various stages of life, from those who are working age and looking to plan for the future, through to clients who have already retired and need later life planning. Perhaps the biggest cohort of clients that approach us for advice are those where retirement is beginning to move into focus, and many ask a similar question – when can I afford to retire? Whilst the answer for each individual is different, we look at some of the common themes that anyone in this situation needs to consider.

 

The cost of early retirement

Under current legislation, the earliest you can access personal or workplace pensions is age 55 (which rises to age 57 from April 2028). For some individuals, it can be tempting to look to take pension income at the earliest opportunity. However, this is rarely a good option, irrespective of the type of pensions an individual holds.

For those that hold a Final Salary pension, the scheme will have rules as to when the pension can be accessed. Often this is set at age 65, although some schemes offer access at 60. Taking benefits early will usually lead to a reduction in benefits for each year the pension is taken early – typically this will be a reduction of around 5% per annum.

For individuals who hold Money Purchase or Defined Contribution Workplace pensions, an option may be given to either purchase an annuity or receive a scheme pension (both of which are progressively less attractive the earlier the pension is drawn, as they will, on average, need to be paid for a longer period of time) or generate a retirement income via Flexi-Access Drawdown. The same applies to personal pensions, and in the case of individuals selecting a Drawdown approach, drawing benefits early will mean that the retirement pot will need to fund retirement for a longer period of time, increasing the potential that the pot becomes exhausted.

 

Increasing life expectancy

Despite the coronavirus pandemic slowing the pace of increase in UK life expectancy over the last two years, the Office for National Statistics still expects longevity to increase over time. A female who is 40 now is expected to live until an average of 87.3 years, whereas a male at the same age now expected to live until an average of 84.2 years, though many will live for years beyond the expected average age. Along with increasing life expectancy, medical advances may enable people to stay healthier and active for longer, therefore pensions will need to potentially fund lifestyle choices for a greater number of years.

 

Relying on State Pension provision

The gradual increase in the age at which State Pension becomes payable leads many to consider whether they can afford to retire before they are entitled to their State Pension.

In 2018, the State Pension age for men and women was set at 65; however this has now jumped to 66 for anyone born between 6th December 1953 and 5th April 1960, 67 for anyone born between 6th March 1961 and 5th April 1977, and 68 for anyone born after 6th April 1978. However, according to research undertaken by Moneyfarm, the average retirement age in the UK is lower than the current statutory age of 66, at 64 for women and 65.1 for men, which suggests that despite the increasing State Pension age, many will continue to take the opportunity of retiring earlier. Of course, this assumes that individuals are able to fund their lifestyle in the intervening period before they receive their State Pension.

Currently, the basic State Pension is £179.60 per week, for an individual with 35 or more qualifying years of National Insurance contributions, which rises to £185.15 per week from 6th April 2022. State provision on its own is only going to provide a very basic standard of living in retirement, and may well prove insufficient,  particularly in the early stages of retirement, when many are active and want to enjoy the additional time at their disposal to enjoy hobbies, travel and leisure activities. That is why it is crucial to begin to make your own provision for retirement to make life more comfortable.

 

How to begin planning ahead

A good way to approach retirement is to start planning as early as you can. Firstly, look to establish a pension and fund this consistently through your working life. When you begin to consider your future plans, and how retirement may look, engage with an independent planner who can assist in looking at the options, seeing where improvements can be made to existing pension arrangements and reviewing investment performance to maximise returns on pension savings.

Individuals can also start considering the amount of income they will need during retirement, in today’s money, to begin to assess the feasibility of early retirement. All regular outgoings and costs need to be taken into account, such as household bills, groceries, transport costs and any outstanding loan or mortgage. In addition, a margin needs to be factored in for additional expenditure, which often arises after retirement. Holidays and travel expenditure, hobbies and leisure and home improvements need to be considered, together with the costs of replacing vehicles and household items over time.

Inflation is also an important consideration and one that is rarely out of the news at the moment. We have been living through a decade or more when inflation has been close to or below expectations; however, with the cost of energy, food and petrol rising substantially, individuals would be wise to place greater emphasis on the impact of increased costs when considering their ability to successfully fund retirement.

 

Take the first step

Every individual’s circumstances are unique and when it comes to planning for retirement, one size doesn’t fit all. At FAS, we take the time to fully understand your expectations, needs and objectives in retirement, with the aim of providing a plan of action designed to determine your likely income in retirement and whether you can afford to retire early. Speak to one of our experienced advisers to discuss your existing pension arrangements and plans for the future.

 

If you are interested in discussing the above with one of our experienced financial planners, please get in touch here.

 

The value of investments and the income they produce can fall as well as rise. You may get back less than you invested. Past performance is not a reliable indicator of future performance. Investing in stocks and shares should be regarded as a long term investment and should fit in with your overall attitude to risk and your financial circumstances.

Environment social and governance in sustainable and ethical business. Hands holding crystal globe.

ESG in action – the invasion of Ukraine

By | Investments

There is now a growing importance placed on Environmental, Social and Governance (ESG) factors and the risks that these can pose to both businesses and investors. From adapting to climate change to avoid pollution, promoting employee rights and health and safety to considering executive remuneration, ESG considerations can have a range of impacts on an organisation’s financial performance and it’s ability to deliver shareholder value.

More often than not, the environmental impact is the focus on investors’ minds, driving businesses to be more sustainable, with a focus on efficiency, use of renewables, and avoidance of waste. Governance is also a key consideration, in particular when it comes to investments in emerging markets, where corruption and political interference is more likely to occur.

However, recent global events have seen social factors take on ever greater importance. One outcome of the very sad events happening in Ukraine has been to see ESG factors take centre stage, with firms racing to distance themselves from doing business with Russian firms, and close down operations in Russia. From automotive firms such as Ford, to airlines, energy firms such as BP and Shell and food and beverage companies such as Heineken, businesses have generally taken swift action to sever ties with Russia, whether being forced into action as a result of sanctions imposed by the West on the Russian economy, or more often than not, as a matter of choice and ethical stance.

For some, the costs of the withdrawal from the Russian market will be limited. Take Disney for example, who have pulled new releases of its’ films from Russian cinemas. This is likely to have a minimal effect on profitability. For others, such as BP –  who offloaded it’s 19.75% stake in Russian firm Rosneft in the wake of the invasion –  the impact on profits is likely to be more profound and long lasting. Likewise Apple, who announced on the 1st March that they were withdrawing their products from sale in Russia. Whilst Russia is not Apple’s biggest market by any means, the company expects to lose $3m of sales of iPhones per day alone, equating to a cost of $1.14bn annually.

Many companies reached a swift conclusion that the social implications of continuing to provide goods and services to Russian consumers, or trade with Russian firms, would be damaging from a brand perspective, or lead to other companies whom they trade with to question whether the business relationship is right for them. Others have taken a stronger stance, and have been more outspoken, publicly shaming Russia for it’s actions, and aligning their values with a more activist stance.

Where firms have initially been reluctant to take decisions themselves, investor action and negative social media exposure (including #BoycottMcDonalds and #BoycottCocaCola trending on Twitter) have forced the Boards of McDonalds and Coca-Cola to announce their suspension of operations in Russia. Both companies have significant exposure to the Russian market – in the case of McDonalds, this accounts for 9% of it’s annual revenue – not an insignificant amount.

Rarely has investor and consumer activism been seen on such a scale and we wonder whether this marks new ground, where companies will be forced to be more focused on their ethical position and the need to take action quickly in the future to avoid reputational damage or indeed take a stronger moral stance in light of global events.

The outrage at the action taken by Russia, and steps taken to help Ukraine defend itself, have also prompted some to re-consider the definitions of what represents an ESG-friendly industry. Given the role companies have played in aiding Ukraine with weapons and counter-measures, could aerospace and defence companies conceivably be included under the ESG umbrella? Quite clearly, companies with activities in these areas have historically been off limits when ESG-focused portfolios are constructed. However, some ESG managers are now re-considering this broad-brush approach, and questioning whether those companies who help a country defend itself from aggression are, in fact, promoting a positive social impact.

It is clear that from an investment perspective, ESG factors have never been as prominent as they are today, with the response to the Russian invasion of Ukraine spreading the influence of ESG far beyond targeted investment strategies. The ESG metrics used to score investments and funds are however, arbitrary, and as can be seen from the debate over defence stocks, can be open to interpretation.

At FAS, we consider ESG factors when choosing funds we are happy to recommend to clients, and through our Socially Responsible Investment (SRI) portfolios, take this further by looking to recommend a portfolio where the majority of funds pass further qualitative filters. If you hold an existing portfolio of investments, and are unsure as to whether this meets your personal ethical preferences, then please contact one of our experienced Financial Planners who will be happy to review the portfolio for you.

If you are interested in discussing the above with one of our experienced financial planners, please get in touch here.

 

The value of investments and the income they produce can fall as well as rise. You may get back less than you invested. Past performance is not a reliable indicator of future performance. Investing in stocks and shares should be regarded as a long term investment and should fit in with your overall attitude to risk and your financial circumstances.

Mature woman reviewing business finances

Business planning

By | Business Planning

Why business owners need to find time to focus on financial planning

As anyone who runs a business will appreciate, time is a precious commodity. Making strategic decisions, effectively managing staff, and building relationships with customers and suppliers mean that business owners rarely have time to consider the important role that sensible financial planning can play in both the success of the business and the long-term financial security of key individuals.

 

Profit extraction via pensions

Whilst the long-term goal is to make the business more successful over time, business owners need to make sure that they don’t ignore their personal finances and in particular their retirement plans. By making regular pension contributions, business owners can save for retirement in a tax-efficient manner. Depending on how the business owners are remunerated will determine the most tax-efficient way that pension contributions are made, and we recommend business owners seek independent investment and accountancy advice to choose the most appropriate route. Pension planning can be particularly useful when business owners near retirement, providing a tax-efficient method of extracting profits from the business.

 

Protecting your interests

In our experience, many business owners, shareholders, and key personnel are running huge risks by not holding adequate protection against the worst-case scenario. The death or serious illness of a business owner or key individual in the business could have devastating consequences for the future success of the business and its employees.

A situation we commonly come across is where a shareholder in a small business leaves shares in the business to their spouse on death. However, the spouse may not have any interest in being a shareholder in the business, and would prefer to sell the shares in the business to other shareholders. This would involve other shareholders needing to raise finance to buy the shares, which often can be prohibitive. By arranging shareholder protection in an appropriate manner, life assurance would be arranged in a tax-efficient way to provide the necessary funds for the surviving shareholders to buy the shares from the spouse.

Another common risk that is often ignored is the potential for death or serious illness of a director, owner, or key member of staff, without whom the business would face significant risks to profitability and success in the future. By arranging appropriate cover, in the event of ill-health or death of the key employee, policy proceeds are paid directly to the business to help replace the key person and help cover any profit loss.

 

Benefits to retain key staff

A crucial component of any successful business is the ability to recruit and retain key staff. As an indirect result of the pandemic, some industries have faced an imbalance between vacancies and applications, exacerbating the need for employers to stand out from the crowd. One method of achieving this is to offer key employees a strong package of employee benefits, which can be arranged in such a way that they are tax-efficient for the business. Death in Service, essentially a group life policy, is a cost-effective way of providing life assurance for key staff. Additionally, arranging a Group Private Healthcare policy is another attractive benefit that can work to the benefit of the employee, and also the employer, as a way of ensuring that staff return to work as quickly as possible after suffering ill-health.

Another valuable benefit is for business owners to arrange enhanced pension arrangements for key personnel. Whilst many firms choose to use a Master Trust arrangement such as NEST or People’s Pension to provide their employees with a pension under the auto-enrolment legislation, these schemes tend to offer employees limited choice and can be expensive. By providing key staff with bespoke pension advice, and setting up a Group Personal Pension or Individual Pensions, this can provide staff with a greater range of options and competitive terms.

 

Making company cash work harder

Many successful firms tend to carry large balances in cash, and if these accumulated funds are not earmarked for any business purpose, leaving surplus funds on a company bank account will mean that funds are left unproductive. In particular, given the current levels of inflation at present, cash is generally producing a negative real return (i.e. taking inflation into account) of around -5% per annum. Business owners should consider funds that truly are surplus to immediate requirements (but might be required in the longer term business strategy) and consider alternative options that aim to keep funds productive. This can be in the form of term deposits or other interest-bearing cash, or a cautiously managed investment portfolio, aiming to produce positive returns over time, with lower levels of volatility. Business owners should always seek advice before proceeding, as investing significant sums could have implications in respect of the trading status of the company; however, we will be able to work with your company accountant to avoid any adverse consequences.

 

How we can help busy business owners

It is our experience that business owners generally appreciate the benefits that independent financial planning can bring, but rarely have the luxury of time to consider these options in more detail. That’s where FAS can assist. As a Chartered practice, we can provide a comprehensive service, considering a company’s protection needs, implementation of employee benefits packages, and reviewing business owners’ personal finance, thus avoiding the need for business owners to deal with these aspects individually.

If you are interested in speaking with one of our experienced financial planners to review your business needs, please get in touch here.

 

The value of investments and the income they produce can fall as well as rise. You may get back less than you invested. Past performance is not a reliable indicator of future performance. Investing in stocks and shares should be regarded as a long term investment and should fit in with your overall attitude to risk and your financial circumstances.