Super Thursday for The Bank of England

The first Thursday in November – coincidentally Guy Fawkes’ Day – was a “Super Thursday” for the Bank of England.

These now occur once every three months and see an avalanche of information emerging from the Bank. The Monetary Policy Committee’s decision on interest rates is accompanied by both the meetings’ minutes and the Bank’s Quarterly Inflation Report. It all emerges at midday, leaving market professionals the rest of the day to interpret the Bank’s latest thinking on the economy and future of interest rates.

The analysts’ general consensus this time was that the Bank had turned ‘dovish’, i.e. it had put back the timing of the first interest rate rise. In July the Bank’s Governor, Mark Carney, had said that the decision to raise interest rates “will likely come into sharper relief around the turn of this year”. This comment had encouraged the markets to expect that the Bank of England would be making its first increase in rates early in 2016, following on from a move by the US Federal Reserve.

However, at the Super Thursday press conference, Mr Carney made clear that in the Bank’s view the circumstances had changed: “There have been some notable events in intervening months, including developments in emerging economies.” The net result is that a move from 0.5% base rate (originally set in March 2009) now appears unlikely in 2016. Looking further out, the implied market forecast is for a base rate of 1% not to arrive until the end of the following year.

The effect on savings rates is that it is impossible to obtain a guaranteed fixed return of 2.5% unless you are prepared to lock your cash away for at least three years. As Mr Carney has already demonstrated, much can happen in only four months, let alone three years. If your need is for income, the many non-deposit options are well worth considering, especially with next year’s changes to dividend taxation.

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.

And the winner for retirement savings is…

The Office for National Statistics (ONS) has been looking at attitudes to private savings.

Which one of the options below do you think would be the safest way to save for retirement?

 1. Paying into an employer pension scheme 5. Saving into a high rate savings account
2. Paying into a personal pension scheme 6. Saving into an ISA (or other tax-free savings account)
3. Investing in the stock market by buying stocks or shares 7. Buying Premium Bonds
4. Investing in property 8. Other

The ONS regularly carries out a “Wealth and Assets Survey” asking the above question. The most popular answer in the latest round of the survey was, somewhat predictably, 1., selected by 41% of respondents. More interesting was the winner from the same list of options to the follow up question “And which do you think would make the most of your money?”, as shown in the graph below.

Wealth & Assets Survey

Unfortunately, the ONS is not specific about the type of property, although it is a reasonable assumption that most of those replying are thinking in terms of the residential type rather than commercial buildings. Earlier surveys have produced very similar results.

Very few investment professionals would be likely to choose property, particularly if it was residential bricks and mortar, so why does the Great British Public? Some of it is down to the simple truth that many people are more familiar with the performance of house prices than other assets. Then there is the fact that when people think about how much the value of their homes has increased they tend to forget about the mortgages which had to be financed. Borrowing to boost returns is a long-standing investment technique, but it can go badly wrong – witness the negative equity problems in the mid-1990s. Selective memory also plays an important role. For example, UK property prices have on average risen by 17% in the last five years, according to Nationwide. In the previous five years the rise was just over 6%.

If you were tempted to answer ‘property’ to the second question, do talk to us about what the other options can offer and the impact of the latest planned buy-to-let tax changes announced in the Autumn Statement.

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.

Auto-enrolment: the first deferral

The Autumn Statement revealed more evidence that the government is counting the cost of tax relief on pension contributions. 

When auto-enrolment into workplace pensions started in October 2012, the legislative intention was that the level of contributions as a percentage of qualifying earnings (those between £5,824 and £42,385 in 2015/16) should rise from the current minimum total of 2% to 5% from October 2017 and then 8% from October 2018. In his Autumn Statement, the Chancellor pushed out both increase dates by six months “to help businesses with the administration of this important boost to (the) nation’s savings”.

There had been no clamour for an April alignment from business groups – the greater concern has been the impact of the huge increase in the number of employers registering in the next year. The real reason for Mr Osborne’s administrative simplification was to be found in the Autumn Statement ‘scorecard’ which showed the deferral would save the Exchequer nearly £850m in employer and employee tax relief over the two tax years involved.

Auto-enrolment has always been a double-edged sword for the Treasury: while it should mean less state support for the retired in the long term, the immediate impact is negative because of the rise in pension contributions and hence tax relief.  Already the process has brought over five million people into workplace pensions. As the government’s decision on the future of pension taxation has been deferred until the March 2016 Budget, this latest tweak could be seen as a pre-emptive grab of future benefits. Whether or not that proves to be the case, the argument for maximising your pension contributions before the Chancellor’s next set piece has been reinforced.

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 value of tax relief depends on your individual circumstances. Tax laws can change. 

State pension increases and non-increases

The basic state pension will rise by nearly 3% next April.

The Autumn Statement confirmed that the basic state pension will rise by £3.35 a week to £119.30 a week from next April. The increase of 2.9% is the result of the ‘triple lock’, which requires the basic state pension to increase each April by the greater of inflation (as measured by the Consumer Prices Index – CPI), earnings growth and 2.5%. However, other existing state pensions (such as the State Second Pension) will be unchanged next year because their increases are linked to the CPI, which fell by 0.1% in the year to September.

The Chancellor also announced the rate for the new single tier pension, which will apply if you reach state pension age after 5 April 2016. At £155.65 a week, it is slightly higher than had been expected and 2.9% above the notional figure for 2015/16. The new pension will also be subject to the ‘triple lock’, although how long that will continue is a moot point. In a recent hastily withdrawn report, the Government Actuary’s Department said that the triple lock has already added £6bn a year to the welfare bill, compared with the cost of a simple earnings link.

To put the newly increased single tier state pension into context, from next April it will represent less than two thirds of what somebody working a 35-hour week on the new National Living Wage will earn. No wonder the government remains anxious to encourage private pension provision.

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.

Buy-to-let hit again

Last month’s Autumn Statement marked another future tax increase for buy-to-let.

“Frankly, people buying a home to let should not be squeezing out families who can’t afford a home to buy.”

Those words from Chancellor George Osborne, heralded the announcement in the Autumn Statement of an increase in Stamp Duty Land Tax (SDLT) for the purchase of “additional properties like buy-to-lets and second homes”. The rise will take place from 1 April 2016 and, while full details are subject to consultation, looks set to add three percentage points to the SDLT cost of property purchase. For example, it appears that SDLT on a flat costing £200,000 will cost you £1,500 as a home buyer but £7,500 as a buy-to-let investor.

That was not the only fresh blow to buy-to-let investors. The Chancellor also announced that from April 2019, any capital gains tax (CGT) due on the sale of residential property (typically buy-to-let and second homes) will be payable on account within 30 days of the disposal date. At present, CGT is payable on 31 January in the tax year following sale, which means a deferral of up to nearly 22 months.

These changes come on top of the two measures announced in the July Budget:

  • The phased reduction in tax relief to basic rate for mortgage interest paid by individual buy-to-let investors, starting in 2017/18; and
  • The replacement from next April of the 10% wear and tear allowance with a new expenditure-based allowance.

It is unclear what the long term effect on the housing market of Mr Osborne’s reforms will be. However, nobody would doubt that the Chancellor is making buy-to-let a more heavily taxed investment than in the past. Meanwhile, he has eased tax in other investment areas – such as next year’s personal savings allowance and the new dividend allowance. Perhaps Middle England’s love of buy-to-let will start to wane over the next few years. (In theory, Middle-Scotland will be unaffected by the SDLT increase as Scotland levies its own Land and Buildings Transaction Tax (LBTT). However, it is quite possible that the Scottish Finance Secretary will choose to copy his English counterpart’s idea, if only to stop a flood of cross-border purchases.)

The value of your investment can do 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.