Government’s Gilt Sale – Cheap Money

What does it cost to borrow for 50 years?

In October, the government provided an answer to that question and, perhaps surprisingly, it was not “whatever the Chinese would charge.”

As part of its 2015/16 programme for borrowing £127bn (which includes refinancing maturing debt), the Treasury sold £4.7bn of government bonds (gilts) maturing in 2065. That is as far into the future as the ban on TV advertising of cigarettes in the UK is in the past. Investors willing to lend the government money for half a century will be rewarded with an interest rate of just 2.56%.

In spite of the low rate, the issue was very popular, with bids for nearly five times as much stock as was on offer. The last time the government offered a similar ultra-long bond, in summer 2013, it had to pay 3.65%, a reminder of the extent to which long term interest rates have declined over the last couple of years. Those who bought in 2013 have done handsomely, although the typical holders – pension funds and insurance companies – are unlikely to realise their profits and the bonds will have been bought to match long term liabilities.

Whether the buyers in 2015 will be as fortunate as the 2013 purchasers is hard to say. Could long term rates fall another 1.1% by 2017?  Such a scenario would suggest a depressed economy, with low/no growth and possibly the spectre of long term deflation (falling prices). “Turning Japanese”, as such economists might put it.

There are plenty of other investment opportunities which offer better immediate income and the potential for long term growth. So if you missed the chance of lending the government cheap money for five decades, talk to us about some alternatives.

The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Investing in shares should be regarded as a long-term investment and should fit in with your overall attitude to risk and financial circumstances.  

The ups and downs of National Savings

National Savings is both reducing and increasing interest rates. But its real rate challenge lies ahead.   

In September National Savings & Investments (NS&I) announced that they would be cutting the rate on its Direct Saver cash ISA from 1.50% to 1.25% from 16 November. The reduction means that NS&I will relinquish their position near the top of the instant access ISA league tables. The move was not completely unexpected: NS&I do not normally aim to be chart-toppers as they rely heavily on the Treasury-backed security message rather than offering the best rate. Equally, NS&I have no great need to haul in money, given their success in fund-raising via the 65+ bonds earlier in 2015.

Something that might also have encouraged NS&I’s action is the arrival next tax year of the personal savings allowance, which will allow basic rate taxpayers to earn £1,000 of interest tax-free and higher-rate taxpayers £500 (additional-rate taxpayers receive no allowance). Bank and building society accounts will pay interest gross from next April, obviating the need for a tax reclaim, so the appeal of the cash ISA will be much reduced.

In October, NS&I took a step in the opposite direction and raised rates for its guaranteed income and growth bonds. These are not on public offer, but are available for re-investment by existing maturing bondholders. The rates are much more in line with the traditional market positioning of NS&I. Even after a 0.2% increase they can easily be beaten by shopping around.

A more challenging test for the NS&I rate setters is what to do in January 2016, when the one-year version of the 65+ bond starts to mature.  This paid 2.8% – well above market rates then and now – and was widely seen as a pre-election offering to the part of the population most likely to vote. Together with a three-year version, in total the 65+ Bond raised over £13bn, a useful contribution to the government’s borrowing requirement. Will the Chancellor again force NS&I to offer unbeatable rates to keep the cash or, post-election, will he decide it is cheaper to use the gilts market, even over 50 years?

If, as seems likely, he chooses the latter and you are left with an unexciting NS&I reinvestment option, please do contact us to discuss the alternatives.

The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.   

An autumn reprieve on pensions?

This month’s Autumn Statement will not reveal and major pension tax reforms.

Parliamentary questions are sometimes no such thing. Instead, they are mechanisms by which the government can reveal a decision on which it would prefer not to make a formal announcement. A good example (see below) occurred in late October in an exchange between Richard Graham, the Conservative MP for Gloucester, and the Chancellor.

Hansard 27 October 2015

“Richard Graham (Gloucester) (Con): The coalition government freed pensioners from mandatory annuities and encouraged saving through ISAs and auto-enrolment. However, tax relief on contributions to pensions is expensive and favours higher-rate taxpayers much more than others. Does my right hon. Friend agree that that is an area in which sensible reform could be considered, in order to help to balance the budget without disincentivising saving?

Mr Osborne: My hon. Friend is right to say that we have taken significant steps to encourage saving, not least by giving pensioners control over their pension pots in retirement and by trusting those who have saved all their lives with the money that they have earned and put aside. He is an expert in these matters, and he will know that we are open to consultation on the pensions taxation system at the moment. It is a completely open consultation and a genuine Green Paper, and we are receiving a lot of interesting suggestions on potential reform. We will respond to that consultation fully in the Budget.”

What the Chancellor subtly stated here is that there will be no announcement on the outcome of July’s pension tax reform consultation until the next Budget proper, in March 2016. The delay can be read in a variety of ways. Either Mr Osborne needs extra time to refine another major overhaul, or the grand idea of an ISA pension is heading for the long grass after meeting more resistance and implementation problems than anticipated.

Alas, the statement does not guarantee there will be no changes to pension tax in the Autumn Statement. There have already been suggestions that one way the Chancellor could provide some funds to help out with his tax credit problems is to cut pension tax relief again. So what looked like a fresh period of grace to undertake some pension planning may not be so…

The value of your investment can go down as well as up and you may not get back the full amount you invested. The value of tax reliefs depends on your individual circumstances. Tax laws can change. The Financial Conduct Authority does not regulate tax advice.  

A December US interest rate rise?

The United States Federal reserve has moved closer to an interest rate rise next month.

In September the USA’s central bank, the Federal Reserve (the ‘Fed’) surprised a fair few investment ‘experts’ by deciding not to increase short term interest rates. The Fed’s Chair, Janet Yellen, had earlier been dropping hints that September could see ‘lift-off’, thereby wrong-footing some pundits.

In a statement issued after the September decision, the Fed said that “Recent global economic and financial developments may restrain economic activity somewhat and are likely to put further downward pressure on inflation in the near term.” Decoded from Fedspeak, this was interpreted as Yellen & Co being concerned about the international impact of China’s falling trio of growth, share prices and currency.

The Fed’s last meeting, at the end of October, dropped the reference to global issues and made one other important change. It removed the usual vague references about the timing of rate rises and specifically highlighted a timescale with the phrase “In determining whether it will be appropriate to raise the target range at its next meeting…”

All eyes are now on 16 December and the press conference after that next meeting. If interest rates stay on hold, there could be some difficult questions for Ms Yellen to answer. On the other hand, if rates do rise, the reaction of the markets could be quite volatile in the run up to Christmas.

The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Investing in shares should be regarded as a long-term investment and should fit in with your overall attitude to risk and financial circumstances.

Automatic enrolment: are you ready?

More employers are failing to meet their obligations.

The latest report on ‘compliance and enforcement’ from the Pensions Regulator shows that the recent batches of employers due to auto enrol have not been as prompt as their predecessors in meeting their responsibilities.

In the third quarter of 2015, the regulator issued 469 ‘compliance notices’ requiring employers to “remedy a contravention”, whereas in the second quarter 119 were issued. 85 Unpaid Contribution Notices were sent out, against 50 in April-June. Further up the infringement scale, there were 107 Fixed Penalty Notices of £400 served “for failure to comply with a statutory notice or some specific employer duties” against 68 in the second quarter.

What will happen in the next 12 months is causing some concern to the regulator and many others. Since October 2012, over 60,000 employers have had to deal with auto enrolment. In the next 12 months the regulator says that more than 500,000 employers will go through auto enrolment. No wonder the regulator’s latest press release, accompanying those compliance figures, stresses “the importance of all employers knowing how workplace pensions law applies to them and of acting in a timely manner”.

If your business has not yet started preparing for auto-enrolment, the escalating number of interventions by the regulator is a reminder that procrastination is becoming increasingly dangerous. To discuss your options and avoid unwelcome regulatory attention, talk to us about your options as soon as possible.  Do not delay: those half a million employers which have to auto-enrol over the next year could well create an advisory bottleneck.

The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.